“Credit Management of Prime Bank Ltd”
Overview of Prime Bank Limited
Prime Bank Limited
Prime Bank Limited is a scheduled commercial Bank under private sector established within the ambit of Bank Company Act, 1991 and was incorporated as a Public Limited Company under Companies Act, 1994 on February 12, 1995. The Bank started commercial banking operations from April 17, 1995 with the inauguration of the Bank’s Motijheel Branch at 119-120, Motijheel Commercial Area. A huge public response has enabled the Bank to keep up the plan of expanding its network. Within a span of fifteen years the bank has been able to deliver services to its customers through seventy one branches. In terms of profitability the bank has outperformed its peer banks. . Prime Bank Ltd remained market leader in terms of deposits and loans among the conventional commercial banks.
The bank has consistently turned over good returns on Assets and Capital. During the year 2008, the bank has posted an operating profit of tk. 3847 million. Its authorized capital is 10000 million and paid up capital is 2844 million. Deposits of the Bank increased by a growth rate of 24.83% during the year. Loan and advances, which are well diversified, have grown by 30.29% and foreign trade business grew by 33% during the year. The bank’s current capital adequacy ratio of 10.88% is in the market. In spite of complex business environment and default culture, quantum of non performing loan ratio is 1.76% which much below the industry average
Prime Bank Ltd. offers all kinds of Commercial, Corporate and Personal Banking services covering all segments of society within the framework of Banking Company Act and rules and regulations laid down by our central bank. Diversification of products and services include Corporate Banking, Retail Banking and Consumer Banking right from industry to agriculture, and real state to software.
Prime Bank Ltd., since its beginning has attached more importance in technology integration. In order to retain competitive edge, investment in technology is always a top agenda and under constant focus. Keeping the network within a reasonable limit, its strategy is to serve the customers through capacity building across multi delivery channels. The Bank is better placed and poised to take customers through fast changing times and enable them compete more effectively in the market they operate.
Mission and vision of Prime Bank Limited
The efforts of Prime bank Limited are focused on delivery of quality service in all areas of banking activities with the aim to add to increased value to shareholders investment and offer highest possible benefits to the customers.
Ø Continuous improvement in the business policies and procedures.
Ø Cost reduction through integration of technology at all level.
To be the best Private Commercial Bank in Bangladesh in terms of
Ø capital adequacy
Ø asset quality
Ø sound management, and
Ø Profitability having strong liquidity
Field of operation
PBL, being one of the best financial intermediaries in the country, blended its operations in conventional banking, Islamic banking and investment banking. The blending has been done with the objective of diversifying the operations for catering to the needs of the customers of the different strata of the society from one viewpoint and for having sustainable growth in profitability and business with the least possible risk. The bank’s operations were diversified into the following areas of activities as a dynamic financial intermediary.
ü Conventional Banking Operation
ü Islamic Banking Operation
ü Lease Finance Operation
ü Merchant Banking
ü Retail Banking
In order to carry out the above operations PBL has set up the following divisions, departments and units in its Head Office:
a. Corporate/Relationship Operation Department
b. Credit Risk Management Department
c. Credit Administration department
d. Credit Monitoring and Recovery Department
e. Export Finance Division
f. Small & Medium Enterprise (SME) Credit Cell
g. Credit Operation & Management Unit
h. International Division
i. Card Division
j. Retail Credit Division
k. Merchant Banking & Investment Division
l. Islamic Banking
m. Treasury Division
n. Leasing Unit
o. Card Division
p. Retail Credit Division
q. Islamic Banking Division
r. Merchant Banking & Investment Division
Financial Highlights of last five years
(In Million tk.)
|Loans and advances||9074.94||12686.85||16492.22||23219.67||31916.11|
|Net Profit before tax after provision||705.09||696.84||769.91||1064.24||1200.83|
|Debt equity ratio||7%||7%||7%||7%||6.45%|
|Nonperforming loans (NPLs)||352.73||308.21||367.15||777||1322.6|
|% of NPLs to total loans and advances||1.52%||0.96%||0.82%||1.35%||1.76%|
|Earnings per share (Taka)||96.6||59.73||37.55||43.71||40.59|
|Capital Adequacy Ratio||17.50%||12.43%||11.90%||11.50%||10.88%|
|No of Branches||36||41||50||61||70|
|No of employees||894||1024||1172||1400||1550|
From the table we can see that Prime banks net profit has increased from 705.09 million taka to 1200.83 million taka from 2004 to 2008. In 2004 there were only thirty six branches of Prime Bank, by 2008 number of branches increased to seventy.
TYPES OF CREDIT FACILITIES OF PBL
CREDIT CATEGORIES BY TENURE
Loans and advances may primarily be divided into two groups:
a) Fixed term loan: These are the advances made by the Bank with fixed repayment schedules. The term of loan are defined as follows:
Short Term : Up to 12 months
Medium Term : More than 12 and up to 36 months
Long Term : More than 36 months
b) Continuing Credits: Theses are the advances having no fixed repayment schedule, but have an expiry date at which it is renewable on satisfactory performance.
Depending on the various nature of financing, all the lending activities have been brought under the following major heads:
Short, medium & long term loans allowed to individual/firm/industries for a specific purpose and for a definite period and generally repayable by installments fall under this head. This type of lending is mainly allowed to accommodate financing under the categories of Large & Medium Scale Industry and Small & Cottage Industry. Very often term financing for Agriculture & Others are also included here.
OVERDRAFTS, DEMAND LOANS AND CASH CREDITS
Overdrafts and demand loans are granted mostly to private individuals & firms. So far as the operation of accounts is concerned, there is little difference between a Cash Credit and Overdraft as in both these cases banks place at the disposal of the borrowers a certain limit for certain period and interest is charged quarterly on the outstanding daily balance. The borrower enjoys the convenience of drawing as and when necessary and repaying the amounts thus overdrawn as and when he is in funds.
In the case of a demand loan, however, the drawing is only made at the time advance is sanctioned/disbursed and thereafter no further drawings are allowed, but debits are raised only in respect of interest and other charges till the entire loan is liquidated by partial or on lump sum repayment. On demand Loans interest is charged on daily balance periodically- usually on quarterly basis.
CASH CREDIT (HYPO)
Credits allowed to individuals/firms for trading as well as wholesale purpose or to industries to meet the working capital requirements against hypothecation of goods as primary security fall under this type of lending. It is a continuing credit. It is allowed under the categories of “Commercial Lending” when the borrower is other than an industry and “Working Capital” when the client is an industry.
CASH CREDIT (PLEDGE)
Financial accommodations provided to individuals/firms for trading as well as wholesaling or to industries for working capital against pledge of goods as primary security fall under this head of advance. It is also a continuous credit and is allowed under the categories of ‘Commercial Lending” and ‘Working Capital”.
SOD (Financial Obligation)
Advances allowed to individuals/firms against financial obligations (i.e., Lien on FDR/PSP/BSP/ Insurance Policy/Share etc.). This may be or may not be a Continuous Credit.
Advances allowed to individuals/firms against stocks and business reputation of the firm. This may/may not be a Continuous Credit.
Advances allowed against assignment of Work Order for execution of contractual works fall under this head. This advance is generally allowed for a definite period and specific purpose. It is not a continuous credit
Lease financing is one of the most convenient sources of acquiring capital machinery and equipment whereby a client is given the opportunity to have an exclusive right to use an asset usually for an agreed upon period of time against payment of rent. It is a term financing repayable in installments.
Hire purchase is a type of installment credit under which the hire purchaser agrees to take the goods on hire at a stated rental, which is indusive of the repayment of principal as well as interest for adjustment of the loan within a specified period.
HOUSE BUILDING LOAN (GENERAL)
Loans allowed to individuals/enterprises for construction of house (residential or commercial) fall under this type of advance. The amount is repayable by monthly installments within a specified period. Such advances are known as loan (HBL-GEN).
HOUSE BUILDING LOAN (STAFF)
Loans allowed to the bank employees for purchase/construction of house are known as staff Loan (HBL-STAFF).
LOANS TO STAFF
Loans allowed to employees other than for House Building are grouped under the head of staff Loan (General).
INLAND BILLS PURCHASED (IBP)
Payment made through purchase of inland bills/cheques to meet urgent requirement of the customer falls under this type of credit facility. This temporary advance is adjustable from the proceeds of bills/cheques purchased for collection. It falls under the category “Commercial Lending”.
INLAND DOCUMENTARY BILLS PURCHASE (IDBP)
Here an advance payment is made to a customer by way of purchase of inland documentary bills. This temporary liability is adjustable from the proceeds of the bill on collection.
CONSUMERS CREDIT SCHEME (CCS)
It is a special credit scheme of the bank to finance purchase of consumer durables to the fixed income group. The customers are allowed the loans on soft terms against personal guarantee and deposit of specified percentage of equity. The loan is repayable by monthly installments within a specified period.
Consumer Credit Products of Prime Bank is as follows:
- Household Durable Loan
- Car Loan
- Doctors Loan
- Advance Against Salary
- Any Purpose Loan
- Education Loan
- Travel Loan
- Marriage Loan
- CNG Conversion Loan
- Hospitalization Loan
FOREIGN BILL PURCHASE (FBP)
Payment made to a customer by way of purchasing of foreign currency cheques/drafts falls under this head. This temporary advance is adjustable from the proceeds of cheques/drafts etc.
LOAN AGAINST IMPORTED MERCHANDISE (LIM)
Advances allowed for retirement of shipping documents and release of goods imported through L/C, taking effective control over the goods by pledge in godowns under Bank’s lock & key, fall under this type of advance. This is also a temporary advance connected with import, which is known as post-import finance and falls under the category “Commercial Lending,”
LOAN AGAINST TRUST RECEIPTS (LTR)
Advances allowed for retirement of shipping documents and release of goods imported through L/C fall under this head. The goods are handed over to the importer under trust with the arrangement that sale proceeds should be deposited to liquidate the advance within a given period. This is also a temporary advance connected with import and known as post-import finance and falls under the category of “Commercial Lending.”
PAYMENT AGAINST DOCUMENT (PAD)
Payment made by the Bank against lodgment of shipping documents of goods imported through L/C falls under this head. It is an interim advance connected with import and is generally liquidated against payments by the client
Advances allowed for purchasing foreign currency for payment against L/Cs (Back-to-Back) where the exports do not materialize before the date of import payment. This is also an advance for temporary period, which is known as export finance and falls under the category of “Commercial Lending.”
EXPORT CASH CREDIT (ECC)
Financial accommodation allowed to a customer for export of goods falls under this head and is categorized as “Export Credit”. The advances must be liquidated out of export proceeds within 180 days.
PACKING CREDIT (PC)
Advances allowed to a customer against specific L/C or to a firm contract for processing/packing of goods to be exported fall under this head and is categorized as “Packing Credit”. The advances must be adjusted from proceeds of the relevant exports within 180 days. It falls under the category of “Export Credit”.
FOREIGN DOCUMENTARY BILLS PURCHASE (FDBP)
Payment made to a customer through purchase/negotiation of a foreign documentary bill falls under this head. This temporary advance is adjustable from the proceeds of the shipping/export documents. It falls under the category of “Export Credit”.
Payment made against documents representing sale of goods to local export oriented industries which are deemed as exports and are denominated in local currency/foreign currency falls under this head. This temporary liability is adjustable from proceeds of the bill.
SMALL AND MEDIUM ENTRPRISE (SME):
Prime Bank Limited is committed to play positive role in the overall socioeconomic development of the country. The objectives are as under:
Ø To advance or lend money to the unemployed persons for
Self-employment and rehabilitation in the Society.
Ø To finance the Small and Cottage Industries for Industrialization and also to create employment opportunities.
For small enterprise : Maximum Tk.2, 50,000/-
For medium enterprise : Maximum Tk.75, 00,000/-
Mode of Finance:
Cash Credit (Hypo/Pledge);
Hire purchase/ Lease Finance;
ADVANCES AGAINST SHARE
In order to contribute to the development of the Capital Market of the country Prime Bank Limited extends credit facilities against pledge of Shares to the individuals as well as to the Member of DSE & CSE. Credit facilities in the form of Secured Overdraft (SOD) Limit may be allowed up to 50% of the Value of shares pledged calculated on the basis of current market prices or previous 6 months’ average market prices, whichever is lower. Credit facility is extended only against Shares which are in market lots.
Issuing Of Bank Guarantee:
Bank Guarantee is a profitable product of a bank. Sometimes customers need bank guarantee for their business purposes. PBL offers three types of guarantee –
i. Bid bond: This guarantee is given to the business people. This guarantee is given for the purpose of participating in the tender.
ii. Performance guarantee: This guarantee is in favor of the client for assuring that the client will perform some specific works.
iii. Advance payment security: By this guarantee, PBL gives assurance of payment in case of advance payment.
Interest Rates Charged By PBL:
|Type of advances||Range ( in %)||Average|
|Working Capital Recruitment||7||11.50|
|Pre shipment export credit||10-13||–|
|Other special Projects loan||According to BB/Govt.||–|
|Loan against deposits in PBL||2-3.5 % above the deposit rate||–|
|Loan against deposits in other banks||13-16||14.50|
|Loan against share||10-13||11.50|
|Continuous credit (CC)||15-18||16.50|
|Loan to NBFIs||13-16||14.50|
CREDIT OPEATION OF PRIME BANK LTD
The word credit is derived from the Latin word “credo” which means “I believe” and is usually defined as the ability to buy with a promise to pay. It consists of actual transfer and delivery of goods and services in exchange for a promise to pay in future. It is simply the opposite of debt. Diversification of banking service has accelerated the use of credit in the expansion of business operation. It is a fundamental precept of banking everywhere that advances are made to customers in reliance on his promise to pay rather than the security held by the banker.
[Reference: L.R. Chowdrury, “Credit Investigation”, National Bank Training Institute]
For sound lending, the following points should be kept in view:
Judicious selection of customers
Adequate return (Profitability)
Credit Control Policy of Bangladesh Bank
It is to be always remembered that the Bank is the custodian of public money and as such the credit officers must be judicious, careful and selective while lending out the depositors’ money to ensure timely recovery. The deciding factors for recovery of loans are- selection of right type of borrowers, end-use of credits, effective follow-up and proper supervision.
[Reference: Qureshi A A, “Higher Management in Banks”, 1st edition, The Pioneer Printing press Ltd, 1997]
When a customer requests a loan, bank officers analyse all available information to determine whether the loan meets the bank’s risk-return objectives. Credit analysis is essentially default risk analysis in which a loan officer attempts to evaluate a borrower’s ability and willingness to repay. The banker has to identify three distinct areas of commercial risk analysis related to the following questions:
1. What risks are inherent in the operations of the business?
2. What have managers done or failed to do in mitigating those risks?
3. How can a lender structure and control its own risks in supplying funds?
Bankers look into key risk factors or Qualitative analysis which has been classified according to the five Cs of credit:
Character refers to the borrower’s honesty and trustworthiness. A banker must asses the borrower’s integrity and subsequent intent to repay. If there are any serious doubts, the loan should be rejected.
Capital refers to the borrower’s wealth position measured by financial soundness and market standing. It helps cushion loses and reduces the likelihood of bankruptcy.
Capacity involves both borrower’s legal standing and management’s expertise in maintaining operations so the firm or individual can repay its debt obligations. Under capacity an individual must be able to generate income to repay the cash.
A condition refers to the economic environment or industry specific supply, production and distribution factors influencing a firm’s operations. Repayment sources of cash often vary with the business cycle or consumer demand.
Collateral is the lender’s secondary source of repayment or security in the case of default. Having an asset that the bank can seize and liquidate when a borrower defaults reduces loss, but does not justify lending proceeds when the credit decision is originally made.
[Reference: S. Scott Macdonald, “Bank Management”, 4th Edition 2000]
Under credit analysis Bank also does Quantitative analysis which refers to the analysis of financial statement ratios to know the past performance of a company. Some of the key ratios which serve as a tool for financial analysis are classified as
1) Financial Ratio
2) Turnover Ratio
3) Profitability Ratio
[Reference: L.R. Chowdhury, “A Textbook On Banker’s Advances”, 2nd Edition 2002]
GUIDELINE FOR LOAN AND ADVANCES SANCTION
The followings are the main guidelines for sanctioning of loans and advances:
- Proposals for loans and other facilities in the name of clients are generally initiated from the branches of the bank. Proposals are also initiated from the Corporate Marketing Division of Head Office.
- All loan proposals must be sent to the Credit Division at Head Office in proper Credit Line Proposal (CLP), giving required information, evidenced by documents. In case of industrial loan proposals, proper feasibility report must accompany CLP. In case of Working Capital to industrial clients, full work-sheet showing working capital requirement of the industry must accompany the CLP.
- Branches shall send proposals to Head Office within lending ceiling of the branch, which is determined by its deposit position and manpower capacity. Generally, Branches shall lend only up to 70% of their total deposit.
- All loan proposals must be discussed at Branch Credit Committee (BCC) before they are forwarded to Head Office and shall bear signatures of all members of BCC.
- Before sending any proposal for any facility the following additional conditions must be fully satisfied by the branches and Head Office Credit Committee (HOCC) must also see that these conditions have been fulfilled:
a Report from all other banks about liability situation of the proposed borrower and the report must be satisfactory.
b. No Objection Certificate from the concerned bank/banks should be obtained if the borrower is in debt with those bank/banks.
c. Report from Credit Information Bureau of Bangladesh Bank.
d. Copies of statements of all types of accounts, i.e., C.C.(Hypo), C.C.(Pledge) and Current Accounts maintained by the borrowers shall accompany CLP and will be critically examined to determine the behavior of the accounts and volume of business to justify the quantum of proposed loan..
e. In case of proposals for Tk. 10.00 lac and above, site inspection report of a Senior Officer from Head Office should be examined before sanction/renewal.
- Loan supervision capacity of the branch proposing the loan and their capability to manage crisis should be also taken into account by HOCC.
- Usual lending risks must be analyzed by the branch before initiating the proposal and HOCC shall verify these risks and put them to tests.
- Head Office shall sanction or place proposals to the Board for sanction of loans strictly if it meets the criteria under credit policy.
- Letters issued from Head Office sanctioning/approving loans and advances must clearly state all the terms and conditions in detail. The sanction letters shall state:
Ø Limit of loans/advances/facilities
Ø Nature of loans/advances
Ø Validity period of limit for utilization
Ø Rate of interest/commission/fees on loans/advances/facilities
Ø Margins to be held
Ø Details of Securities to be obtained against the loans/advances/facilities and instructions about creating legal charges on the securities
THE LENDING PROCESS
The lending procedure starts with building up of relationship with customer through account opening. The stages of credit approval are done both at the branches and at the Head Office levels.
The lending procedure as observed in Prime Bank Ltd. is described below in sequential order:
· APPLICATION FROM THE CREDIT APPLICANT
A loan procedure formally starts with a loan application from a client who must have an account with the Bank. At first it starts from the branch level. Branch receives application from client for a loan facility. In the application client mentions what type of credit facility he/she wants from the bank including his/her personal information and business information. Branch Manager or the Officer-in-charge of the credit department conducts the initial interview with the customer.
· OBTAINING CIB REPORT
After receiving the loan application from the client, the bank sends a letter to Credit Information Bureau of Bangladesh Bank for obtaining a credit inquiry report of the customer. This report is called CIB (Credit information Bureau) report.
· COLLECTION OF DOCUMENTS
If Bangladesh Bank sends positive CIB report on that particular borrower and if the Bank thinks the prospective borrower to be a good one, then the bank scrutinizes the documents.
Required documents are:
Ø Incase of corporate client, financial documents of the company for the last three to five years. If the company is a new one, projected financial data for the same duration is required.
Ø Personal net worth of the borrower(s).
Ø In this stage, the bank will ensure that the documents are properly filled in and duly signed. Credit-in-charge of the relevant branch is responsible for enquiring about the ins and outs of the customer’s business through discussing with him/them.
· SCRUTINIZING DOCUMENTS
Bank officials of the credit department inspect the project for which the loan is applied. Here project existence, its distance from the bank, monitoring cost and possibilities etc. are examined. If the proposed amount exceeds Tk. 10.00 lac, a Senior Officer from Head Office performs a on-site inspection of the project.
· ANALYSIS OF COLLECTED INFORMATION
Any loan proposal needs to be evaluated on the basis of financial information provided by the loan applicant. Financial spread sheet analysis which consists of a series of quantitative techniques is employed to analyze the risks associated with a particular loan and to judge the financial soundness and worthiness of the borrower. Besides, Lending Risk Analysis is also undertaken by the bank to measure the borrower’s ability to pay considering various risks associated with the loan.
· LEGAL OPINION
Obtaining legal opinion on the collateral provided by the applicant, whether those are properly submitted and are regular and up-to-date. Else, those documents will be asked to regularize by the applicant.
· CREDIT PROPOSAL
The branch starts processing the loan at this stage. Based on the analysis (credit analysis) done by the branch, the branch prepares a loan proposal. The proposal contains following important and relevant information:
Ø Name of the borrower(s)
Ø Nature of credit
Ø Purpose of credit
Ø Extent of credit
Ø Collateral Margin
Ø Rate of interest
Ø Repayment schedule
Ø Validity, etc.
· SANCTIONING OF CREDIT AT BRANCH LEVEL
If the proposal meets Prime Bank’s lending criteria and is within the manager’s discretionary power, the credit line is approved. The manager and the sponsoring officer sign the credit line proposal and issue a sanction letter to the client.
If the value of the credit line is above the branch manager’s limit then it is send to Head Office for final approval with detailed information regarding the client(s), credit analysis and security papers.
· HEAD OFFICE MANAGEMENT COMMITTEE
Head office processes the credit proposal and afterwards puts forward an office note if the loan is within the discretionary power of the Head Office Management Committee or a memo to the Board/Executive Committee if the loan requires approval from the Board of Directors.
· SANCTION ADVICE
If Head Office Management Committee or the Board approves the credit line, an approval letter is sent to the branch. The branch then issues a sanction letter to the borrower with a Duplicate Copy. The duplicate copy duly signed by the borrower is returned to the branch of the bank. This proves that the borrower agrees with the terms and conditions of the credit line offered by the bank.
· COLLECTION OF CHARGE DOCUMENTS
After issuing the sanction advice, the bank collects necessary charge documents. Charge documents vary on the basis of types of facility, types of collateral etc. (A list of required charge documents is furnished in the subsequent sections of this chapter).
Finally loan is disbursed by the branch through a loan account in the name of the borrower and monitoring of the loan starts formally
The entire process can be shown in the following flow chart:
|Application from the Credit Applicant|
|Obtaining CIB Report|
|Collection of Documents|
|Analysis of Collected Information|
|Sanctioning of Credit at Branch Level|
|Head Office Credit Committee|
|Collection of Charge Documents|
|Disbursement of Loan|
Figure 3.5: The Lending Process
EVALUATION OF CREDIT PROPOSALS AND SAFEGUARDS POWERS AND RESPONSIBILITIES
1. Head Office is responsible for formulating Credit Policy for the Bank, for proper conduct of advances in the Branches and for the system of control over them. They will delegate business powers to Branch-in-charges, devise methods of forwarding credit proposals to Head Office for sanction and instructions regarding submission of periodical returns.
2. Branch Manager is primarily responsible for all advances at his Branch. His responsibility for proper conduct and safety of the advances of his branch is enormous. So he must exercise common sense, wisdom, prudence and judiciousness in the use of powers delegated to him and in recommending proposals to Head Office for sanction. In all cases, he must ensure that Bank’s interests are fully safeguarded. The fact that an advance sanctioned by Head Office does not, in no way, lessens the responsibilities of the Manager as proposals are initiated and recommended by him.
3. Selection of the prospective borrower is the most vital point. The Branch Manager must see that the selection of borrowers is judicious, the accounts of the borrowers are properly conducted, the security is sufficient and in order, effective and constant follow-up and supervision is made and the position of the borrowers have not deteriorated. He must supervise the end-use of the Credits.
4. In respect of returns of Credits, even though the details are checked by a subordinate officer, remains a primary responsibility of the Manager.
PROCESSING OF LOAN PROPOSALS
- A secured credit facility may be allowed to a customer only after getting a limit sanctioned by the authorized officials.
- The customer seeking a credit facility against acceptable security must make an application in bank’s printed form “Request for Credit Limit” enclosing necessary papers/documents to his nearest Branch of the Bank where he maintains his operative account.
- Make a preliminary study of the affairs of the intending borrower by consulting the followings:
Ø Borrowers application
Ø Reports in confidence collected through all feasible means regarding the state of the business of the intending borrower
Ø Borrower’s own mode of dealing
Ø Statement of accounts of the borrower with own and other Banks
Ø Statement of assets and liabilities
Ø Financial statements for the last 3(Three) years
Ø Income tax statement
Ø Trade and other reports
- Arrange an interview with the intending borrower to know the following points:
Ø Present and future prospect of the customer’s business
Ø Total investment required in the business
Ø Borrower’s stack in the business
Ø Amount of advance required
Ø Experience in the line
Ø Purpose & Period for which the advance is required
Ø Source & Terms of repayment
Ø Securities offered & Type of charge to be created against the proposed security
Ø Proposed margin & Rate of interest
- Before finally selecting the borrower, be satisfied that:
Ø The customer possess sound character, capacity and capital
Ø The account is a remunerative one
Ø Dealing items and primary security of the customer possess the quality of easy marketability, durability and storability
Ø Collateral security offered possesses the quality of easy marketability and is not encumbered and its valuation is judiciously assessed
Ø Repayment arrangement is satisfactory
Ø Means, standings and respectabilities of the applicant and the guarantor (if any) are satisfactory.
Ø Creditworthiness of the applicant is reasonable & Location of the business is good
6. If the proposed facility is beyond the delegated business power of the Branch Manager, the proposal shall be submitted to Credit Division, Head Office duly recommended in the specified Format.
The following Papers/Documents are to be submitted by the Branch Managers along with the proposals:
a. Request for Credit Limit of Customers
b. Project Profile or Profile of Business
c. Copy of Trade License duly attested & TIN Certificate
e. Certified copy of Memorandum and Articles of Association, Certificate of Incorporation, Certificate of Commencement of Business, Resolution of Board of Director, Partnership Deed, (where applicable)
f. Personal Net-Worth Statement of the Owner(s) /Directors/ Partners/ Proprietor in the format provided by the Bank
h. Valuation Certificate in Bank’s format along with photocopies of Collateral Security with detail particulars on the back duly authenticated by the Branch Manager
i. Three Years Balance Sheet and Profit & Loss A/C
j. CIB Inquiry Form duly filled in
k. Lending Risk Analysis for Credit facilities of Tk. 1.00 Crore and above.
l. Inspection/Visit Report of Factory/Establishment/Business premises of the customer
m. Stock Report duly verified (where applicable)
n. Credit Report from other Banks
o. Indent/Performa Invoice/Quotation (where applicable)
s. In case of renewal/enhancement of credit facility Debit turnover, Credit turnover, highest drawing, lowest drawing, Total income earned, Detailed position of existing liabilities of the customer etc.
t. Declaration of the customer on the names of sister/allied concerns and liabilities with other Banks, if any, and an undertaking to the effect that they have no liability beyond that declaration
u. In case of L/C proposal, detailed performance of L/C during the last year, L/C value, date of creation of PAD, date of retirement, Mode of retirement etc. For LIM & LTR facility past performance shall also be submitted mentioning date of facilities, due date and date of adjustment
v. In case of BTB L/C proposal- Detailed list of machinery, production capacity, working capital (BTB L/C) assessment, existing export L/C in hand mentioning date of shipment, detailed position of outstanding BTB L/C, accepted bills, progress of production and expected date of shipment, statement of outstanding FDBP/IDBP etc.
w. Whether the applicant is Shareholder/Director of Prime Bank Limited as per definition of Banking Company Act.
x. Financial Analysis to be prepared by the Branch Manager based on the financial performance of the company & should show trends in sales/profitability, liquidity, leverage etc. It should also contain an assessment of the competence and quality of the business management, the general economic & competitive environment of the borrower’s industry and any other pertinent factors which are relevant for the bank’s credit decision.
CREDIT ANALYSIS PROCESS OF PRIME BANK LTD.
Credit analysis is an integral part of the lending process in The Prime Bank Limited. Credit analysis is of utmost importance for the lending process to be successful. Proper credit analysis helps avoid risks in the lending process and brings transparency. Credit analysis is generally done at the branch level of lending process and the results and findings are evaluated in the head office.
The Prime Bank Limited uses a multiple of methods or techniques to assess the prospective borrower as well as the project in question. These techniques include analysis of –
- CIB Report
- Appraisal of Project Feasibility
- Lending Risk Analysis
- Financial Spreadsheet Analysis (“Y” score and “Z”-score).
These methods are discussed in the following sections.
· EVALUATION OF CIB REPORT
Bangladesh Bank provides Credit Information Bureau (CIB) Report to banks and other financial institutions. It contains the following information:
Ø Debtor/borrower information (outstanding loan balance and loan classification status), Owner’s information
Ø Group/related business information
Ø Credit Exposure Matrix/financial information
Ø Third party guarantors information
Prime Bank uses CIB Report as part of its credit appraisal procedure. It serves as a useful tool to assess borrower’s credit standing and loan repayment behavior.
· ANALYSIS OF PROJECT FEASIBILITY
In order to obtain a credit, the prospective borrower has to apply through a request for credit limit form in the format provided by Prime Bank. This form, in effect, serves as a project feasibility report. It covers the following aspects of the project:
i. Identification of the Project and the Promoters:
ii. Project Organization and Management
iv. Technical & Marketing Aspects of the Project
v. Project costs and Financial Aspects of the Project i.e. BEP & financial ratio analysis
vi. Socio-economic Aspects of the Project:
· Lending Risk Analysis
Lending comprises a very large portion of a Bank’s total assets and forms the backbone of the Bank. Interest on lending constitutes the highest proportion of income of a bank. As such, credit quality remains the prime indicator of a bank’s success. Good lending practice is very important for the profitability and success of a bank.
The Financial Sector Reform Project (FSRP) designed a Lending Risk Analysis (LRA) package which provides a systematic procedure for analyzing and quantifying the potential credit risk. Bangladesh Bank has made it mandatory for commercial Banks to use LRA for evaluating credit proposals amounting to Tk. 1.00 Crore and above. LRA has divided the various risks into two groups namely, Business Risk and Security
1. Business Risk
A. Industry Risk:
i) Supplies Risk
ii) Sales Risk:
B. Company Risk:
i) Company position Risk:
(a) Performance Risk:
(b) Resilience Risk:
ii) Management Risk:
(a) Management Competence Risk:
(b) Management Integrity Risk:
2. Security Risk:
A. Security Control Risk:
B. Security Cover Risk:
[Reference: MD. Saidur Rahman, “Implementation of Lending Risk Analysis (LRA) in lending operation of Banks”, Bangladesh Bank Porikrama, BIBM]
· FINANCIAL SPREADSHEET ANALYSIS
This is a computer-based credit risk analysis technique. It uses a number of financial ratios to arrive at two different scores, namely: the ‘Z-score, and the “Y-score Then, these two scores are used to indicate levels of risks associated with lending to a particular business organization. The “Z”-score is generally applied to the large manufacturing companies. The “Y” –Score is applied to all trading companies and also small manufacturing companies
3.10 Organization of Head Office and Branch level Credit Management:
Head Office: Figure 3.10: Structure of Credit Management at H.O.
Figure 3.10: Structure of Credit Management at Branch
Credit Risk Management:
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. Hence Bank’s risk management has been designed to address various important points. Its main functions are:
Figure 3.11: Credit Risk Management
Credit Administration Department:
This department is engaged in works from proper documentation to loan disbursement. It ensures that all security documentation complies with the terms of approval and is enforceable.
Figure 3.12: Credit Administration Unit
COMMON METHODS OF CHARGING SECURITY AND NATURE OF SECURITY:
|Mode||Name of security & its characteristics|
|Lien||a. Cash, cash collateral and documents of the title to the goods
b. It is the right of banker to hold the debtor’s property until the ‘ debt is discharged – generally retained by the bank in its own custody or to the hands of third party with lien marked.
c. The third party cannot discharge it without the permission of: the bank.
d. In case of need, bank requires the permission from the court to sell the property.
|Assignment||a. Borrower transfers the right of property or debt to the bank. Life insurance policies, supply bills, book debt of the borrower can be assigned|
|Pledge||a. Moveable stock of raw materials, finished goods, merchandise
b. Pledge is also lien but here bank enjoys more right.
c. Physical transfer of goods to the bank is must.
d. Bank can sell the property without the intervention of any court, in case of default on loan.
|Hypothecation||a. Moveable stock of raw materials, finished goods, merchandise
b. Goods remain in the hands of debtor, but documents of title to goods are handed over to the banker. This method is also called ‘equitable charge’.
c. Bank inspects the goods regularly to judge it’s the quality and quantity for the maximum safety of its loan.
|Mortgage||a.Mortgage is the transfer of specific immovable property – like land, building, plant etc.
b.Most common type of mortgage is legal mortgage in which ownership is transferred to the bank by registration of the mortgage deed.
c. Another method called equitable mortgage is also used in bank for creation of charge. Here mere deposit of title to goods is sufficient for creation of charge. Registration is not required. In both the cases, the mortgaged property is retained in the hand of: borrower.
|Trust receipt||a. Intangible asset (goodwill) used in foreign exchange business.|
A document is a written statement of facts of proof or evidence arising out of particular transaction, which on placement, may bind the parties liable to the court of law for satisfaction of the charge in question.
That’s why all approval procedure and proper documentation shall be completed prior to the disbursement of the facilities.
Charge documents as required by the different types of advances are mentioned below:
a. DP Note signed on revenue stamp (Annexure-4).
b. Letter of arrangement. (Annexure-5).
c. Letter of disbursement.
d. Letter of partnership (partnership farm) or Board of resolution (limited companies).
e. Letter of pledge.
f. Letter of hypothecation.
g. Letter of lien and ownership / share transfer
h. Letter of lien for packing credit.
i. Letter of lien (in case of advance against FDR)
j. Letter of lien and transfer authority. (in case of advance against P S P, B S
k. Legal documents for mortgage of property (As draft by legal adviser)
1. Copy of sanction letter mentioning details of terms and condition duly acknowledge by the borrower.
CREDIT MONITORING, SUPERVISION & CONTROL
Supervision keeps track on proper utilization of fund lent. It includes adequate arrangements by Bank for maintain close contact with the borrower in order to remain well informed about the position and progress of the purpose financed to offer appropriate guideline to the borrower
It involves timely collection and analysis of data and information on the progress of the lending activities with the aim of identifying constrains which impede successful implementation of the credit scheme.
It includes efforts to ensure that the terms and conditions of the advance at pre-disbursement, disbursement, post disbursement and recovery stages are complied with and money lent is repaid as per schedule of repayment. Recovery of loans largely depends on the effective follow-up.