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Factors of standard credit management procedures of Pubali Bank Ltd.
1.1BACKGROUND OF THE PROJECT
The principal reasons of banks are chartered by the government and the central bank is to make loans to their customers. Making loans is the principal economic function of banks to fund consumption and investment spending by businesses, individuals, and units of government. How well a bank performs its credit function has a great deal to do with the economic health of fits region, because bank loans support the growth of new businesses and jobs within the banks trade territory and promote economic vitality.
For most banks, loans account for half or more of their total assets and about half to two-thirds of their revenues. Moreover, risk in banking tends to be concentrated in the credit portfolio. When a bank gets into serious financial trouble, its problems usually spring from loans that have become uncollectible due to mismanagement of credit, illegal manipulation of loans, misguided lending policies, or an unexpected economic downturn. When examiners appear in a bank they make a thorough review of the bank’s credit portfolio. Usually this involves a detailed analysis of the documentation and collateral for larger loans, a review of a sample of small loans, and an evaluation of the bank’s credit policy to ensure that it is sound and prudent in order to protect the public funds.
The proper goals of the banks are profit maximization and shareholder wealth maximization. If bank’s credit management is not good, the bank will never ever achieved its proper goals. The main use of bank funds is to collect money from surplus unit and lend it to the deficit economic unit. The Pubali Bank Limited has been established with the objective of providing efficient and innovative banking services to the people of all sections of our society. Towards attainment of its goals and objectives, the bank pursue diversified credit policies and strategic planning in credit management. To name a few, the bank has extended micro credit, consumers scheme loans, house building loans etc. to meet the needs of the individuals, which in turn has helped thousands of families. The bank also extends loan in the form of trade finance, industrial finance, and project finance, export & import finance etc. The bank’s credit policies aimed at balanced growth and development of all the sectors of the country’s economy as well as credit management of a bank is the key factor to achieve an organizational goal.
1.2 Problem Statement of credit management
“Do more with less” is the target of efficient management. To achieve this, inevitably PUBALI BANK LTD should focus more on the effective and efficient practice of credit management. There are many credit management problems a bank may face including having too much debt, not paying debt and not collecting debt. A bank must implement strategies to manage its credit effectively, or it could face financial and operational problems including downsizing or closure. Another credit management problem a bank may face is not paying back the debt, or credit. Borrowing on credit usually has fees and interest associated with it. If credit is not paid back on a timely basis, a bank could have additional expenses that will affect its cash flow. A bank can avoid this problem by establishing a system of monitoring its debt payments, and having extra cash to make debt payments in emergency situations.
The absence of testing and validation of new lending techniques is another important problem in credit management. Any new technique involves uncertainty about its effectiveness. That uncertainty should be reflected in somewhat greater conservatism and corroborating indicators of credit quality. Some credit management problems arise from subjective decision-making by senior management of the bank. This includes extending credits to companies they own or withwhich they are affiliated, to personal friends, to persons with a reputation for financialacumen or to meet a personal agenda, such as cultivating special relationships with celebrities.
In some cases, the failure to perform adequate due diligence and financial analysis and to monitor the borrower can result in a breakdown of controls to detect credit-related fraud. For example, banks experiencing fraud-related losses have neglected to inspectcollateral, such as goods in a warehouse or on a showroom floor, have not authenticated orvalued financial assets presented as collateral, or have not required audited financialstatements and carefully analyzed them. An effective credit management department andindependent collateral appraisals are important protective measures, especially to ensure thatcredit officers and other insiders are not colluding with borrowers.
1.3 SIGNIFICANCE AND RATIONALE OF THE STUDY
Major source of income of a bank is the earning from credit. Borrower selection is the main and the prime task of the credit department. Advancing loans are the primary function of the commercial banks. Without loans country’s industrial and commercial development is not possible. Therefore, smooth loan system in the banking sector is a catalyst for economic development of a country.
The word credit 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.
Credit management process is the tool, which helps the bank to predict the risk and return on the proposed project for credit disbursement. Therefore, from the above definition it is clear that credit management is a very important factor for banks. To get a clear idea about credit appraisal process we need to know the key factors of credit management procedures. Here, will give a brief idea on the key factors of standard credit management procedures of Pubali Bank Ltd.
Loans or credits comprise the most important asset as well as the primary source of earning for the Banking institutions. On the other hand, loan/credit is also the major source of risk for the bank management. A prudent bank manager should always try to make an appropriate balance between its return and risk involve with the loan portfolio
1.4 Objectives of the Study
The broad purpose of the study was to gain further knowledge of credit management procedure, policies, and practices in a financial institution like Pubali Bank Ltd. Specifically, the objectives of the study were:
· To evaluate credit management with special emphasis on advance and lending risk analysis (LRA) of Pubali Bank Ltd.
· To explore credit functions including rules, provisioning policies and practices.
· To identify a standard procedure of credit followed by Pubali Bank Limited
· To verify the differences between bank’s policies and practices.
· To recommend for the effective credit management of Pubali Bank Ltd.
1.5 Scope AND LIMITATION
1.5.1 SCOPE:
To evaluate about credit functions including rules, policies and practices with some analysis of loan classification, reservation of provision, and rate of recovery. To identify the procedure of lending risk analysis (LRA) including its elements and influencing factors and end of the report, it focused on standard procedure of credit followed by Pubali Bank Limited and the differences between bank’s policies and practices and finally some recommendations for the effective credit management of Pubali Bank Ltd.
1.5.2 LIMITATION:
1. Every organization has its own secrecy that is not revealed to others. While collecting data i.e. interviewing the credit officials they did not discuss much information for the sake of confidentiality of the Bank.
2. Due to lack of experience, there is a chance of having some mistake in the report though best effort has been applied to avoid any kind of mistake.
3. Limitation of time was one of the most important factors to collect data. A longer time period would have ensured a much better result for the study findings.
4. Have to offset with quality due to time constraint, which apparently seems to be the most severe limitation.
5. Another limitation of this report in non-availability of the most recent data & information about different activities of Pubali Bank policy of not disclosing any data & information for any reasons, which could be very much useful.
2.1 MEANING of Methodology
We can easily say that methodology is a way to systematically solve the research problem. Broadly saying that methodology is the undertaking and rules of organization of a philosophical system of inquiring procedure. The identifying the relevant sources of data application of appropriate data collection method and the using of proper statistical test and techniques for analyzing the collected data etc. are concerning methodology of the study.
2.2 Sources of Data
To complete this report data was collected from primary and secondary sources. The primary data were gathered by taking interview of the credit officials and borrowers. Some data were collected from advance officer who are in charge of credit management of our Pubali Bank limited in credit division. Data were also collected by interviewing the responsible officers and from some documents & statements printed by the bank and the website of Pubali Bank Ltd. There have been used some statistical tools and graphical representation to find out different types of analytical results and interpretations.
2.3 METHOD OF DATA COLLECTION
2.3.1 Collection of Primary Data:
Many of the data and information were collected from my practical experience and queries from the executives of Pubali Bank Ltd. Information and data regarding an overview of the Pubali Bank Ltd., interest rates & charges, credit operations, performance measurement in Lending, credit policies, Loan Agreement etc. were collected from these sources.
2.3.2 Primary information of data:
The primary data are those, which are collected afresh and for the first time and thus happen to be original in character. The primary sources are as follows:
a) Official records over credit management of Pubali bank Ltd.
b) Interviews , observations and group discussion
c) Face to face conversation with the in charge credit officers and borrowers.
d) Practical desk work
e) Data collection of own supervision.
f) Informal conversation with the clients.
g) Study of the relevant files as instructed by the officers concerned.
h) Practical work exposures from the different desks of the three departments of the Branch like credit department, loan section & loan approval section.
i) Last but not the least, my practical work experience as a bank employee.
2.3.3 Collection of Secondary Data
Data regarding the Credit management of The Pubali Bank Ltd. were collected from secondary sources like: Annual Reports, Brochures, Manuals and Publication of The Pubali Bank Ltd., Bangladesh Bank web site, BIBM Library, DSE Library, News paper etc. were the major sources of secondary debt.
2.3.4 Secondary information about data
The secondary data are those which have already been collected by someone else and which have already been passed through the statistical process. The secondary sources are as follows:
a) Annual Reports of Pubali Bank Ltd. published so far.
b) Academic journal, accounting manual, internal control and compliance manual
c) General banking manual and bank report.
d) Selected books on credit management and Bangladesh Bank website
e) Financial Statements existing brochures, documents and database
f) Various books and articles regarding general banking functions, foreign exchange operations and credit policies & practices.
g) Memo and circular related to credit management
h) Periodicals circular published by the Bangladesh Bank credit department.
2.4 Data processing and analysis
The following tools to analyze the data –
1. Tabular representation.
2. Graphic representation through bar diagram
3. Pie graph
4. Chart etc.
2.4.1 Techniques of Analysis
After collecting the data, it is necessary to analyze or process the data to get meaningful information. Under this study the collected data were analyzed. To analyze the collected data scrutinized, a person has to require following and applying some techniques. Accordingly, I have used some important techniques for analyzing the required data, so that I can get fruitful result from my study. The techniques that have applied to prepare the report are as follows:
1) Processing of data
2) Analyzing of data
1) Processing of data: Processing of data includes four steps:
a) Editing
b) Coding
c) Classification
d) Tabulation
a) Editing: Editing of data is a process of examining the collected raw data to detect errors and omissions and to correct these when possible. Editing is done to assure that the data are accurate, consistent with other facts gathered, uniformly entered, as complete as possible and have been well arranged to facilitate coding and tabulation.
a) Coding: Coding refers to the process of assigning numerals or other symbols to answer so that responses can be put into a limited number of categories or classes.
b) Classification: Most research studies result in a large volume of raw data, which must be reduced into homogenous groups if we want to get meaningful results.
c) Tabulation: When a mass of data has been assembled, it becomes necessary for the researcher to arrange the same in some kind of concise and logical order. This procedure is referred to as tabulation.
2.5 Sample Design
A sample design is a definite plan for obtaining a sample from a given population. It refers to the technique or the procedure the researcher would adopt in selecting items for the sample. Sample design may as well lay down the number of items to be included in the sample, i.e. the size of the sample. Sampler design is determined before data are collected. There are many sample designs from which a researcher can choose. Some designs are relatively more precise and easier to apply than others. The researcher must select/prepare a sample design that should be reliable and appropriate for his research study. Have completed my project paper within a limited time and scope. That is why the size of the sample has determined and used is not so large but it is reliable to find out the real fact of sample form
2.5.1 Sampling Procedure:
The sampling procedure was conducted on the deliberate sampling method, where the respondents and the interviewees are considered on my convenience and priority.
a) Population:
The study will be mainly conducted on the credit assortment of Pubali Bank Limited. Therefore, for the purpose of the study credit management of all the branches of Pubali Bank Limited would be constraints of population of the study.
b) Sampling Units:
In order to carry out the research work, focused on taking the personnel involved in the different departments, especially in credit management department’s manager and senior level employees and business clients who are involved in credit management activities. Only on branch of Pubali Bank Limited would be the sampling unit for the study, i.e., Laboratory Road Branch, Dhaka.
2.5.2 Selection of the Respondents:
Time and cost almost invariably leads to selection of respondents. The respondents selected should be representative of the total population as possible in order to produce a miniature cross-section. During the project paper program have collected various information and data from different officers and manger who are very much responsible to the institution and they are involved with the key activities of the bank like General Banking, Credit Management and loan & advance activities. All of them are very much co-operative and they behaved with me so much cordially.
The Respondents are:
1) Assistant General Manager (AGM), Pubali Bank Ltd. laboratory Road Branch, Dhaka.
2) Senior Officers and Officers of
a) General Banking Department.
b) Credit management Department.
c) Credit Recovery Department.
3) Other Officials of Pubali Bank Ltd. laboratory Road Branch, Dhaka.
3.1 Overview of Pubali Bank Limited
Pubali Bank Limited is a scheduled private commercial bank established on May 1959. Licensing no Bl/DA/1/84. In exercise of the powers conferred on the Bangladesh Bank under section 28(1) of the banking companies’ ordinance 1962 as adopted in Bangladesh Pubali Bank Limited; Bank authorized to open the branch at 26 Dilkusha commercial area (Local Office) P.S Motijheel district Dhaka. Condition mention in this office letter no. BCD (D) 200/42(a)/145. The bank has been widely acclaimed by the business community from small entrepreneurs to large traders and industrial conglomerates within this very short period of time it has been able to create an image for itself and has earned significant reputation in the country’s Banking sector as a bank of vision. Presently it has 400 branches in operations Principal branch is one of the big and important branches of PUBALI BANK LTD. This intended to ensure the trust and confidence of the customers through focused customer’s orientation qualities of services and state of art technology. The company philosophy-A Bank for the 21st century has been precisely the essence of the legend of the Bank success.
3.2 Historical Background of the Pubali Bank Ltd
The Bank was initially emerged in the Banking scenario of the then East Pakistan as Eastern Mercantile Bank Limited at the initiative of some Bengali entrepreneurs in the year 1959 under Bank Companies Act 1913. After independence of Bangladesh in 1972 this Bank was nationalized as per policy of the Government and renamed as Pubali Bank. Subsequently due to changed circumstances this Bank was denationalized in the year 1983 as a private bank and renamed as Pubali Bank Limited. The Government of the People’s Republic of Bangladesh handed over all assets and liabilities of the then Pubali Bank to the Pubali Bank Limited. Since then Pubali Bank Limited has been rendering all sorts of Commercial Banking services as the largest bank in private sector through its branch network all over the country.
3.3 mission and vission of Pubali Bank Ltd
3.3.1 MISSION of Pubali Bank Ltd
(A) To get recognition as a dynamic, innovative and customer supportive Bank.
(B) To maintain continuous & steady growth with utmost transparency and to diversify development of resources.
(C) To enhance continuous development of information & technology to meet the demand and challenges of the time.
3.3.2 Vision of Pubali Bank Ltd
To excel as best private commercial Bank in Bangladesh with meticulous observance of rules and regulations and commitment to corporate social responsibility.
3.4 Present Status of PUBALI BANK LTD
PUBALI BANK LTD is one of the largest private sectors Bank in Bangladesh with years of experience. Adaptations of modern technology both in terms of equipment of banking practice ensure efficient service to clients.
3.4.1 Capital structure of PUBALI BANK LTD
The bank was incorporated as a public limited company under the companies’ act 1994. The authorized capital and paid up capital of the bank stood at Tk. 10,000 million and Tk. 4,968 million respectively in 2010. Out of total 86200 shareholders,
Figure:3.1
Year
Paid-up Capital (Tk. In Million)
2006
1200
2007
2100
2008
2940
2009
3822
2010
4968
Source: PUBALI BANK LTD Annual Report, 2010
Table: 3.1 Paid-up Capitals
3.4.2 Statuary and other reserve:
At the close of 2010, the statutory reserve and other reserves of the bank stood at Taka 9,411.27 million, out of which statutory reserve was Tk. 4148.74 million, other reserve was Tk. 5262.54. Total reserves were Tk.5687.25 million at the end of 2010.
Figure:3.2
Years
Reserve (Tk. In Million)
2006
3327
2007
3832
2008
4606
2009
5687
2010
9411
Source: Annual Report, 2010
Table: 3.2 Reserves
3.4.3 Deposit:
The deposit trend was positive in 2010. At the end of 2009, total Deposit was Tk. 88466.46 million that came to Tk. 98850.50 million at the end of 2010 showing 11.74% increase. Out of total deposits, Time Deposits and Demand Deposits were Tk. 68198.04 million and Tk.30652.46 million i.e. 68.99% and 31.01% respectively.
Figure:3.3
Years
Deposit (Tk. In million)
2006
48,675
2007
57996
2008
73,016
2009
88,466
2010
98,850
Source: Annual Report, 2010
Table: 3.3 Deposits
3.4.4 Advances:
Total advances of the bank as on 31st December 2010 stood at Tk. 89106.21 million showing an increase of Tk.14902.88 million at 20.08% growth. In line with national economic development, the Bank made advances mainly as commercial Loan, Import & Export Business, Term Loan to large & medium scale Industries, House Building Loan, Working Capital Loan, consumers’ credit and Syndication Loans etc.
Figure:3.4
Years
Advances (Tk. In Million)
2006
40386.65
2007
50549.17
2008
61788.15
2009
74203.33
2010
89106.21
Source: Annual Report, 2008
Table: 3.4 Advances
3.4.5 Investment
Total investment of the Bank was Tk.16516.39 million during 2010. In comparison the previous year total investment was increased by Tk.4347.34 million @ 35.73% growth. The Bank mainly invested in Government Bonds, Treasury Bills, Approved debentures, Shares and Debentures of private institutions.
Figure:3.5
Year
Investment (Tk. In Million)
2006
4982
2007
5556
2008
8375
2009
12168
2010
16516
Source: Annual Report, 2008
Table: 3.5 Investments
3.4.6 Import Business:
The total import business handled by the Bank during the year 2010 was Tk. 8568.35 million as compared against Tk. 6049 million in the previous year showing a growth rate of 41%. The main items of import were industrial raw materials, consumer goods, machinery, fabrics and accessories etc.
Fig. 3.6: Import of Pubali Bank Ltd
Year
Import (Taka in Million)
2008
58009
2009
60493
2010
8568.35
Table 3.6: Import of Pubali Bank Ltd
3.4.7 Export Business:
The total export handled by the Bank during the year 2010 was Tk. 3391 million compared to Tk. 2474 million in the previous year showing a growth rate of 37.07%. The main export items were Jute, Jute goods, readymade garments, leather and leather goods etc.
Fig. 3.7 Export of Pubali Bank Ltd
Year
Export (Taka in Million)
2008
24795
2009
24739
2010
33909
Table 3.7: Export of Pubali Bank Ltd
3.5 Performance of Pubali Bank Ltd at a glance
(Figure in million taka)
SL No.
Particulars
2007
2008
2009
2010
01.
Authorized Capital
5000
500
5000
10000
02.
Paid-up-Capital
2100
2940
3822
4968
03.
Reserve fund
3832
4606
5687
9411
04.
Deposits
57996
73016
88466
98850
05.
Advances
50549
61788
74203
89106
06.
Investment
5556
8375
12168
16516
07.
Import Business
48345
58009
60493
85683
08.
Income
7087
9009
10663
12828
09.
Expenditure
4145
5563
6824
7343
10.
Fixed Assets
1367
1383
1443
3330
11.
Earnings per share
6.45
5.15
5.47
6.51
12.
Export Business
19907
24795
24739
33909
14
Net profit
1353
1515
2092
3233
Table: 3.8
3.6 Loan Approval Procedure by the Head Office
3.6.1 Head Office Credit Committee:
The Committee include executives of Head office Credit department, inspection Department, Financial analyst, Account Department and Investment Department and also 2/3 senior managers of large branches.
3.6.2 Head Office Approval:
After analyzing and judging the credit risk Branch Credit Committee send the loan proposal to head office Credit Committee. Because branch office has no authority to disburse a single amount of loan. Before giving a loan branch office must propose the head office for the sanction of the loan. If the branch office is satisfied with the proposed application of loan, they forward the proposal to head office for further procedure. If the amount of the loan is above the 8%, of the bank’s paid-up capital it will be treated as a big loan and bank has to send the proposal for Bangladesh Bank consideration. But if it is bellow than the amount bank can disburse it with approval of the Board of directors and Managing director of Head office. Generally, Branch office send their credit proposal mentioning the branch current asset-liability situation and the credit analysis of the proposed loan.
1. Head office approves loan proposals receive from branches after proper examination of the same as per credit policy and credit procedures.
2. It reviewed the overall positions of loans and advances of the branches and suggest measures for fulfilment of objectives of loan procedure.
3. It prepares schedules of loan sanctioning powers for delegation to the managers and supervisor subject to approval by board or managing director.
Thus the way Head office undertakes the necessary steps to sanction a particular loan.
3.7 Existing Credit Policy of Pubali Bank Ltd
3.7.1 Credit Policy:
Credit policy is the guideline for the bank’s credit division. It generally aims at firstly creating healthy loan assts to ensure good interest earnings for the bank, secondly ensuring ultimate safety through good selection of assets based on its saleability and thirdly improving discipline on use of resources. It providing limit to total loan of a bank in relation to its deposit funds, limits of its exposure to different sectors, limits of risk assets on types of security, limits of loans to single borrower entity and limits of loan approval authority at different tiers is the single most important document of guidance to managers and executives of a bank. However, Pubali Bank Ltd is a largest private commercial bank in Bangladesh, it successfully run their business through a standard credit policy. From the very beginning, the initiator of the Bank decided not to encourage the defaulters to obtain credit from this esteem bank. On the other hand, they want to deal with limited customer who has established their business with integrity. With this view, the board of directors and the higher executives of the Bank structured their credit policy, which covers the following important aspects:
Loan limits
Sectoral allocation of loan
Loan pricing
loan approval Authority
Restrictions of loans.
Loan Renewal and Follow-up.
Loan Classification
3.7.2 Loan Limits:
As Bangladesh Bank requires the banks to keep 6% deposit in cash reserve ratio and 18% in investment against eligible securities towards statutory liquidity reserve, in the absence further guidelines Pubali Bank Ltd can extend credit up to 80% of deposits.
3.7.3 Sectoral allocation of Loans:
After determining the total extendable limit of loan in the policy, it becomes essential for Pubali Bank Ltd to fix limits of loans for disbursing the loans in the different sector to diversify the risk. Pubali Bank Ltd emphasis in the following sector to disbursement of their loan.
Table 3.9: Sectoral Allocation of Loan
Name of the Sector
Investment (in Crore Tk.)
Investment (In %)
Advance against Hypothecation of Vehicles
10.96
20
Real Estate
1.9
3
Ready Made Garments
12.89
24
Shipping
1.71
3
Executive Loan
0.22
0
Import Financing
6.02
11
Export Financing
4.52
8
Trading
6.41
11
Cement Industry
3.07
5
Others
8.71
15
Total
56.41
100
Source: Annual report 2010
Fig. 3.8 Sectoral Allocation of Loan
3.7.4 Loan Pricing:
Another important aspect of credit policy is pricing of loans. Pubali Bank Ltd’s management determine rate of interest through considering the cost of their allocated fund. Bank’s management proves their skill by determining their loan pricing which reflects on their high rate of profitability. Comparing to the newly established Bank’s, Pubali Bank Ltd’s loan pricing is competitive.
3.7.5 Loan Approval Authority:
At the initial stage, Concerned Branch manager has the Authority to consider whether the bank is going to give loan to the particular borrower. After submitting the proposal to the Head office, it is their responsibility to take the final decision to disburse the loan.
3.7.6 Different Parties Involved in Credit Process:
In Pubali Bank Ltd I have seen mainly three parties are involved in total credit procedure. One is the Customer himself, second is the Branch and the last one is the head office. The total procedure of a credit is initiated from the customer. PUBALI BANK LTD follows this procedure in their credit appraisal. Customer, Branch Credit Committee and the head office credit committee are involved in the credit disbursement procedure.
3.7.7 Restrictions of Loans:
Pubali Bank Ltd follows some restriction to disburse the loan according to the Bangladesh Bank’s rules and regulation. For example:
Bank does not provide loan against security of its own share.
Bank does not provide loan to a minor or a company where a minor is holding majority share.
Bank does not make loans against accommodation bills.
Bank does not approve loan in favour of customers who have unpaid loans with another bank with out no objection certificate from the later.
Bank does not make loan to borrowers whose integrity is questionable.
Bank does not allow any unsecured loan to its Directors or family members exceeding amount of Tk. 10.00 (ten) lac without approval from Bangladesh Bank and without approval of it’s Board of Directors
3.7.8 Required information for loan application
Previously have mentioned that the loan procedure started from the customer. Generally, customer came with a written loan application form where he stated the following things:
· Name of the Person / company
· Business Address
· Permanent Address
· Constitution/ status of the Company (sole proprietorship/ partnership/ private limited company/ public limited company.)
· Date of establishment and place of incorporation.
· Background and business experience.
· Particular of Assets
o Land/ Building
o Bank Deposit
o Stock/ Shares
· Nature of Business
· Amount of loan requested and purpose of loan.
· Financial Statements for the last three years explaining the following terms:
a) Capital Funds/ Net Worth
o Paid up Capital
o Retained Earnings
b) Balance Sheet Statistics
o Current Asset
o Fixed Assets
o Current Liabilities
o Term Liabilities
o Capital/Equity
c) Working Capital
o Annual Production
o Annual sales
o Sources of raw materials
o Cash flow statements
After getting the above information Branch credit committee analyze that information, which is known as credit analysis. Like other banks Pubali Bank Ltd do two types of credit analysis. One is Quantitative Analysis (Financial Statement Analysis) and other is Qualitative Analysis (Evaluating the credit worthiness of the borrower). Quantitative Analysis reflects the past performance of the organization but the Qualitative Analysisreflects the future of the business.
3.7.9 Types of Charges or Securities against Advances
Pubali Bank Ltd takes the following asset as collateral.
a) Guarantee:
Pubali Bank Ltd improves their security by having a third party guarantee (the guarantor) the payments. When the personal security of the borrower is not considered sufficient, or when the risk involved is a boarder line case and the borrower is not in a position to offer sufficient collateral to support the loan, the Bank ask for a guarantee of a third party whose financial ability and credit standing is acceptable to the Bank. The bank also notes that such security for the loan depends on the continued solvency of the guarantor. To safeguard the Bank’s interest the Bank obtain a continuing guarantee standard form.
b) Margin:
The difference between the market value / assessed value of the goods, merchandise and produces pledged / hypothecated to secure a loan / advance and the amount of the loan / advance is know as margin. The margin to be retained for each type of loan / advance will be in accordance with instructions issued from time to time by Bangladesh Bank / Head office of the Bank. In case where minimum margin is specified, the percentage may be increased according to market conditions, sale ability / durability/ storage capacity and inspection facility of the goods.
3.7.10 Loan Documents
The following documents are needed in the credit management process
A) Demand Promissory Note:
It is an unconditional written promise of the borrower made to the Bank, to repay debts on demand or at fixed or determinable future date along with interest at a stated rate. The signature of the Borrower must be properly verified by an Authorised officer. Where the Borrower is a corporate body, the relevant corporate resolution must be scrutinized to see that the person signing the D.P. Note on behalf of the corporate body has been fully authorized to do so.
B) Borrowing Resolution
This is a certified copy of a resolution adopted by the Board of Directors of a corporate body authorizing designated officer(s) to borrow and pledge, hypotheticate, mortgage, etc. The assets of the corporate body for the purpose of securing the loan / advance granted to them in accordance with borrowing power laid down in the Memorandum and Articles of association of the organization.
C) Letter of Hypothecation
A “Hypothecation Agreement” obtain when the collateral is in the name of a person (more than one) other than the borrower. Under Hypothecation agreement the borrower agree to Hypothecate to the Bank goods and merchandise or any other securities in consideration of credit facilities granted to them. Under this agreement they give the Bank the right to sell the securities without notice to them and to adjust their outstanding and other expenses from the sale proceeds.
D) Subordinate Agreement
“Letter of Subordinate” is an agreement on the part of any one party not to collect or enforce an indebtedness of a second party until certain obligations of such second party to a third party (Bank) are fully met.
E) Power of Attorney
This document authorizes the Bank to sign or endorse document on behalf of the party executing the power
F) Letter of Continuity
In consideration of the Bank allowing credit facilities, the Borrower agrees to execute all relevant documents and to remain liable for repayment of all outstanding.
G) Letter of pledge
When securities are pledged to the Bank in consideration of credit facilities extended to the borrowers, these remain in possession of the Bank and can be sold in case of default and the sale proceeds is adjusted towards borrower’s liabilities.
H) Counter Guarantee
In consideration of the Bank issuing guarantees from time to time, the borrower agrees to keep the Bank indemnified from all liabilities, costs and legal actions that may arise from the guarantee.
3.7.11 Other Loan Documentations
The minimum requirements for loan or other facility documentation of a Bank are:
a) Copies of the relative Sanction letter indicating that the transaction has been approved by properly authorized officers of the Bank.
b) A copy of the letter of sanction addressed to the customer and his acceptance thereof.
c) All necessary documentation required to meet the terms and conditions of the facility in the manner in which it was approved.
d) Before disbursement, it should be satisfied that all legal formalities have been completed.
e) Disbursement of all facilities shall be made on an Offering Sheet basis to ensure that all additional requests are duly approved by two authorized Officers one of which must be the Manager or Sub-Manager.
f) Securities offered should also be thoroughly verified/inspected once in a month and stock report prepared.
g) Where the loan agreement calls for restrictive covenants and ongoing conditions, the Manager must not only satisfy himself that these are adhered to at the outset of the transaction (i.e. date of initial takedown) but assure himself, at regular intervals, that these are not being violated.
h) Since the Manager together with the Credit Officer is fully responsible for documentation, they will formally sign a check list. Under no circumstances may anyone permit drawings under any facilities, until they have signed off the check list.
I) The Manager/Sub-Manager should ensure that appropriate steps are being taken to keep loan documentation current for all assets Of the Bank. The loan documentation check-list, should, therefore, be reviewed at regular intervals.
.J) Lines of credit should, as a rule, be confirmed in writing to the borrower. A Specific expiration date for the line should be included. Moreover every letter of sanction must contain the Bank’s standard clauses.
K) The borrower must explicitly undertake that all information supplied by him to Bank in connection with the approved lines Of credit is correct.
L) Any material or adverse change in business conditions will cause the amount due to Bank from the client immediately repayable. The Bank reserves the right to call back the facilities extended at any time without assigning any reason whatsoever.
3.7.12 Collateral:
Collateral is the lender’s secondary source of repayment or security in the case of default. Having an asset that the bank can seize and liquidate when a borrower defaults reduces loss, but does not justify lending proceeds when the credit decision is originally made.
3.7.12.1 Characteristics of Good Collateral:
The following five items determine the suitability of items for use as collateral. The suitability depends in varying on standardisation, durability, identification, marketability and stability of value.
a) Standardization:
The standardisation leaves no ambiguity between the borrower and the lender as to the nature of the asset that is being used as collateral.
b) Durability:
Durability refers to the ability of the assets to withstand wear. or it can refer to its useful life. Durable goods make better collateral than non-durable. Stated otherwise crushed rocks make better collateral than fresh flowers.
c) Identification:
Certain types of assets are readily identified because they have definite characteristics or serial numbers that cannot be removed. Two examples are a large office building and an automobile that can be identified y make, model and serial number.
d) Marketability:
In order for collateral to be of value to the bank, the collateral must be marketable. That is the borrower must be able to sell it. Specialised equipment is not as good as collateral as are dump trucks, which have multiple uses.
e) Stability of value:
Bankers prefer collateral whose market values are not likely to decline dramaticallyduring the period of the loan such as common stock.
3.7.13 Different Kinds of Collateral:
Secure loans have a pledge of some of the borrower’s property behind them (such as home or an automobile) as collateral that may have to be sold if the borrowers have no other way to repay the bank. Some of the most popular collaterals are:
1. Account Receivable: The banks take a security in the form of a stated percentage of the borrower’s balance sheet. When the borrowers credit customers send in cash to retire their debts this cash payments are applied to the balance of borrowers loans. The bank may agree to lend more money as new receivable arise from the borrowers sells to its customers thus allowing the loan to continue as long as the borrower has need for credit and continuous to generate and adequate volume of sales
2. Factoring: bank can purchase a borrowers account receivable based upon some percentage of the book value because the bank takes over the ownership of the receivable, it will inform the borrowers customers that hey should send their payments to the purchasing bank.
3. Inventory: A bank will lend only a percentage of the estimated market value of a borrower’s inventory in order to leave a substantial cushion in case the inventories value begins to decline. The inventory pledged may be controlled completely by the borrower using a so-called floating line approach.
4. Real Property: A bank may take a security interest in land and / or improvements on land own by the borrower and records its clime-a mortgage-with a government agency in order to define against successful claim by others.
5. Personal Property: Bank takes a security in jewellery, securities and other forms of personal property owned by a borrower.
6. Personal Guarantees: A pledge of the stock deposits or other personal assets held by the major stock holders or owners of a company may be required as collateral to secured a business loan
3.7.14 Recovery and follow up
If a borrower fails to make rep