Introduction:
Purpose of the Report:
In this report, I have tried to furnish all sorts of practical implementations of credit policy that are conducted to handle risks adhered with credit operation of the Bank. Hence, the purpose and objectives of this report can be summarized as follows:
Broad:
To analysis the pros and cons of the conventional ideas about credit operation of a Bank.
To have better orientation on credit management activities
Specific:
To have knowledge about –
Credit policy and practices,
Credit appraisal,
Credit-processing steps,
Credit management,
Financing in various sector and recovery,
Loan classification method and practices of Prime Bank limited (PBL).
Scope of the Report:
The report is highlighting the major functional area of credit department and procedure of credit assessment & approvals it could minimize the default credit risk. It is not possible to pinpoint the each & every aspects of credit due to this short span of time.
Methodology of the study:
The methodology of this report is very different from conventional reports. I have emphasized on the practical observation though this report has to need some primary and secondary data. Nevertheless, eventually almost the entire report consists of my practical observation. While preparing the report, I have taken information from the following sources:
Primary Sources:
Direct Observation of banking activities,
Conversation with the in-charge officers of the Credit department,
Customer dealing while internship program,
Dealing with some credit approvals directly.
Secondary Sources:
Daily diary (containing my activities of practical orientation in Prime Bank Ltd),
Various publications on banking operation,
Website of Bangladesh Bank,
Website of Prime Bank Limited,
Annual Report of the Prime Bank Ltd,
Different prospectus about the credit products,
Retail banking credit policy of PBL,
Personal investigation with bankers,
Different circulars issued by Head Office and Bangladesh Bank.
Background of the Report:
This report is originated having three months long internship program originated after completing the BBA program from Department of Accounting at Stamford university of Bangladesh. During the internship a student has to undertake an arena of acquiring practical knowledge based on a topic under any organization. This report is the outcome of the assigned internship, suggested by the Human Resource Department of Prime Bank Limited, elephant road Branch.
Limitations of the Report:
This report is subject to the following limitations;
The study was limited only to the Prime Bank Limited, elephant road Branch.
The branch was so busy that I could not get information as required for my study although they have good intention to provide.
Three-month time is not sufficient to have practical knowledge and prepare such a report on Credit Risk Management.
While colleting data they did not disclose much information/data due to the secrecy of the organization.
Limited access to the observation of credit activities at the branch
Report Organization:
This report has basically focused on credit risk management by Prime Bank Limited. However, the whole report will have the following overlooks-
Overview of Prime Bank Limited
Retail banking credit policy by prime bank limited
Credit risk management by prime bank limited
OVERVIEW OF PRIME BANK LIMTED (PBL)
Development of Banking in Bangladesh:
Since early British rule, the history of banking in Bangladesh territory shows that the traditional trade-networks developed before the banks invaded rural areas. And the banking services have slowly flourished in Bangladesh territory. Even today, in many places, moneylenders provide credit services. Small shopkeepers and businessman use informal credit at high interest rate, traditional Mahajan’s money lending business gradually declined due to expansion of bank and the micro credit programs of NGOs, Cooperative banks and government agencies
Modern banking system plays a vital role for a nation’s economic development. Over the last few years the banking world has been undergoing a lot of changes due to deregulation, technological innovations, globalization etc. These changes in the banking system also brought revolutionary changes in a country’s economy. Present world is changing rapidly to face the challenge of competitive free market economy. It is well recognized that there is an urgent need for better, qualified management and better-trained staff in the dynamic global financial market. Bangladesh is no exceptions of this trend. Banking Sector in Bangladesh is facing challenges from different angles though its prospect is bright in the future.
Bangladesh is one of the developing countries in the world. The economy of the country has a lot left to be desired and there are lots of scopes for massive improvement. In an economy like this, banking sector can play a vital role to improve the overall social – economic condition of the country. The banks by playing the role of an intermediary can mobilize the excess fund of surplus sectors to provide necessary finance, to those sectors, which are needed to promote for the sound development of the country.
Commercial banks in Bangladesh economy are to face an increasing competition for their business in coming days, like any other emerging market economies. Their business is no longer remaining easy as they earlier. The real change in the banking business has started to come with the government’s decision to allow the business in the private sector in the middle of the Eighty’s.
Background of Prime Bank Limited (PBL):
Prime Bank started its journey in the year 1995 with the firm commitment of providing superior customer service with a difference. Its vision remained to be the best private commercial bank in Bangladesh in terms of efficiency, capital adequacy, asset quality, sound management and profitability. Having recorded progress in all areas PBL has now established itself as the leading and strongest among private commercial banks in Bangladesh.
PBL was formally launched in April 1995 with one branch at Motijheel Commercial Area, Dhaka. It started its Islamic Banking operations in December of the same year. It was listed with both the bourses of Bangladesh viz. Chittagong Stock Exchange and Dhaka Stock Exchange in 1999 and 2000 respectively through initial public offering. It was registered as Merchant Banker with the Securities and Exchange Commission, Bangladesh in 2000 for starting its Investment Banking and Advisory services.
In 2003 PBL became primary dealer for buying and selling securities under the license issued by Bangladesh Bank.
The Bank has also expanded its services cross border with a view to providing banking services globally. It has opened its first fully owned subsidiary – Prime Exchange Co. PTE Ltd. in Singapore, which started its operation from 8th July 2007 to offer remittance service to Bangladeshi nationals living in Singapore. This is the first ever fully owned Exchange Company of a Private Sector Bank of Bangladesh established in Singapore with the approval of Bangladesh Bank and the Monetary Authority of Singapore. Opening of a fully owned subsidiary in Singapore has added a new dimension to the Bank’s remittance operation widening its global reach for remittance services.
Offshore Banking is a unique solution for Banks across the globe to carry out international banking business involving Non-resident foreign currency denominated assets and liabilities taking the advantages of low or nonexistent taxes/levies and higher return on investment. With the aim to offer innovative banking service to the Non-resident customers, PBL opened its first Offshore Banking unit in 2008 at DEPZ, Savar, and a new dimension in its customer friendly business activities. The bank has already received license from Bangladesh Bank for opening of three more OBUs at CEPZ, Chittagong; Comilla EPZ and Adamjee EPZ, Narayangonj, which will be opened in 2008.
Mission, Vision & Core Values of Prime Bank Limited:
Vision of PBL:
To be the best private commercial bank in Bangladesh in terms of efficiency, capital adequacy, asset quality, sound management and profitability having strong liquidity.
Mission of PBL:
To build prime bank limited into an efficient, market driven, customer focused institution with good corporate governance structure.
Continuous improvement in our business policies, procedures and efficiency through integration of technology at all levels.
Corporate Operation:
Prime Bank’s corporate business provides tailored services to corporate and institutional clients. The financing is based on both conventional and Islami Shariah mode. While proving large loans to our customers, the policy of Bangladesh bank is strictly followed. The customer relationship program has been strengthened and frequent interaction has been ensured to care the growing needs of our customers. Corporate finance in both modes – conventional and Islami Shariah showed steady growth. PBL has been a dominant player in arranging syndicated loan for its customers. PBL already proved itself as a trusted partner of both syndication participants and large loan borrowers and it is expected that demand for structured projects. The sectors of financing include pharmaceuticals, chemicals, cement, ceramic, steel micro finance, food and allied industry, power station, infrastructure. It raises funds from the market fir financing term loans, working capital at the most competitive rates under secured terms and condition.
Corporate Governance and ICS of PBL:
The bank has given proper importance to the compliance of all the rules, regulations and guidelines of Bangladesh bank, Securities and Exchange Commission and other regulatory bodies. The board approves the bank’s budget and review the business plan of the bank on monthly basis so as to give direction as per changing economic and market environment. The board reviews the policies and operating procedures of the various segments of business in order to effective risk management in credit and other key areas of operations. Board meetings are held regularly at least once in each month. Board/EC reviews the compliance of their directives by the Management. The Board, EC and the Audit Committee are updated on new regulation and statutory requirements. The External Auditors are given absolute freedom to conduct audit and to verify the compliance, risk management and preparation of accounts as per prescribed standard. Audit Committee discusses with the external Auditors regarding the financial statements etc. To improve awareness on corporate governance the members of the Board and the Management are encouraged to join seminar, workshops and other programs. We have taken steps for rating of the Bank every year in order to give a level playing field for the investors. We have taken steps to give more disclosures to our shareholders and it will be evident from the financial statements and notes to accounts for the year 2008.
Products and Services of PBL
Prime Bank Limited offers various kinds of deposit products and loan schemes. The bank also has highly qualified professional staff members who have the capability to manage and meet all the requirements of the bank. Every account is assigned to an account manager who personally takes care of it and is available for discussion and inquiries, whether one writes, telephones or calls.
Deposit Products
Monthly Contributory Savings Schemes (CSS)
Monthly Benefit Deposit Receipt (MBDR)
Special Deposit Receipt Scheme (SDR)
Education Savings Scheme (ESS)
Fixed Deposit Receipt Scheme (FDR)
Current Account
Savings account
Short Term Deposit
Loan Schemes:
General Loan Scheme
Consumer Credit Scheme
Lease Finance
House Building Loan & Apartment Loan Scheme
Advance against Shares
Custodial Services for investors (both individual & institutional) investing in through Stock exchange.
One stop services for payment of utility bills.
Credit card
Payment and Transaction Product of PBL:
PBL’s firm commitment to excellent customer service delivery has resulted to remarkable progress in all areas of operation during 2008. PBL adopted various payment and transaction products and services for smooth payments and transactions for the customers. These include both traditional and modern products. Traditional products still dominate the lion share of the payment and transaction of the country as the NCBs are still lagging behind modern technology application. As such the traditional products remained main product for semi urban and rural areas where PBL operates.
Payment and Transaction
Product of PBL
Customer service improvement program and related activities are continuously being developed, reviewed and implemented with the objective of providing excellent service to our customers. In order to give easy access to our products and to give best possible services at the doorstep of our existing and potential customers, the Bank introduced Direct Selling Services by recruiting highly trained and customer focused professionals. Locker service is provided to the customers for keeping their valuables under safe custody. Special counters are usually opened to meet the service demand of customers during heavy customer flow, especially during IPO offering, Bill collection, Eid holidays etc.
The financial position for the last five years of Prime Bank Limited at a Glance (Taka in million):
| Particulars | 2004 | 2005 | 2007 | 2008 | 2008 |
| Total Deposits | 20483 | 28069 | 36022 | 54724 | 70544 |
| Loans and Advances | 16492 | 23220 | 31916 | 45010 | 57782 |
| Investment | 2750 | 3084 | 3940 | 7844 | 12698 |
| Foreign Exchange Business | 41931 | 56249 | 69185 | 94440 | 121933 |
| Operating Expenditure | 591 | 824 | 886 | 1108 | 1574 |
| Operating Profit | 1001 | 1146 | 1520 | 3235 | 4829 |
| Profit after tax | 375 | 612 | 568 | 1048 | 1399 |
| Total Assets | 24249 | 32362 | 41506 | 60898 | 79618 |
| Market value per share | 374.25 | 879.5 | 618.50 | 528.75 | 924 |
| No of Branches | 30 | 36 | 41 | 50 | 56 |
| No of Employees | 777 | 894 | 1024 | 1172 | 1400 |
| No of Shareholders | 1993 | 2620 | 4467 | 5262 | 7368 |
| No of Foreign Correspondences | 441 | 501 | 517 | 528 | 553 |
Growth of PBL:
| Outstanding | ||
(In million Tk.)Growth of PBLIndustry Average 20082007%%Assets79,58860,89930.6917.81Deposits70,51254,72428.8515.50Loans57,68345,01028.1818.34
Loans and Advances under Broad Categories:
| Loans and advances | 2008 (in million) | 2007 (in million) |
| Loans | 34,113 | 27,472 |
| Cash credits | 9,192 | 7,881 |
| Overdraft | 10,510 | 5,954 |
| Total | 53,815 | 41,307 |
Loans and Advances under Broad Categories
Loans and Advances/ investment to customer groups:
| Customer Groups | 2008 (million) | 2007 (million) |
| Commercial lending | 12,476 | 12,102 |
| Export finance | 3,699 | 3,061 |
| House building loan | 1,416 | 978 |
| Consumers credit scheme | 2,747 | 1,356 |
| Small & medium enterprises | 1,022 | 437 |
| Special program loan | 135 | 174 |
| Staff loan | 2.00 | 253 |
| Other loans & advances | 7,357 | 7451 |
| Total | 28, 853 | 25,814 |
Loans and Advances/ investment to customer groups
Industrial Loans and Advances/ Investment:
| Industries | 2008 (million) | 2007 (million) |
| Agricultural | 3564 | 1988 |
| Textile | 6237 | 4513 |
| Food & allied | 878 | 1039 |
| Pharmaceuticals | 2109 | 1672 |
| Leather, chemical & cosmetics etc. | 499 | 563 |
| Tobacco | 481 | 18 |
| Cement & ceramic | 1660 | 1947 |
| Service | 2285 | 750 |
| Transport & communication | 2465 | 1381 |
| Other | 8223 | 5,252 |
| Total | 28,404 | 19,126 |
Industrial Loans and Advances/ Investment
Classification of Loans and Advances/ Investments:
| Loans and advances | 2008 (million) | 2007 (million) |
| Unclassified loans | 56,906 | 44,643 |
| A) standard including staff loan | 55,677 | 44,012 |
| B) Special Mention Account (SMA) | 1,289 | 631 |
| Classified Loans | 777 | 367 |
| A) Sub Standard | 386 | 109 |
| B) Doubtful | 122 | 32 |
| C) Bad & Loss | 269 | 225 |
|
Classification of Loans and Advances/ Investments
Details of pledged collaterals:
| Collaterals | 2008 (million) | 2007 (million) |
| Movable/ immovable assets | 37,593 | 32,464 |
| Local financial institutions’ guarantee | 597 | 179 |
| Government guarantee | 37 | – |
| Foreign bank’s guarantee | 273 | – |
| Export documents | 3,462 | 2,566 |
| FDR (fixed deposit receipts) | 2,137 | 3,537 |
| FDR of other banks | 1,032 | 224 |
| Government bonds | 182 | 9.45 |
| Personal guarantee | 4,367 | 1,774 |
| Other securities | 8,000 | 4,256 |
| Total | 57,683 | 45,010 |
|
597 37 273
2007 (million) 32,464
Value of Detailed Pledged Collaterals
Provisions for Loans/ Investments & off Balance Sheet Items:
| Provisions for | 2008 (million) | 2007 (million) |
| Bad and doubtful loans | 350 | 210 |
| Unclassified loans | 350 | 180 |
| Off balance sheet items | 210 | 000 |
| Total | 910 | 390 |
|
Provisions for Loans/ Investments & off Balance Sheet Items
SWOT Analysis of PBL:
| Strength |
Robust monitoring systems
Sound internal control system
Enthusiastic key personnel
Job friendly environment
Trained human resources
Online banking system
T 24 of Temenos Holdings
Proper customer care
Continuous R & D for value additionOpportunity
Swift service package
Introduction of new products and services
Customers’ potential approach to banking based operation
Proper telecommunication channel
World wide banking operation
Revolution of internet banking
Global economic views to banking
Upcoming facilities to the operationWeakness
Insufficient number of branches
Delay in ATM service
Improper marketing strategy
Improper job rotation policy
Unconnected T 24 due to Load sheddingThreat
Active and strong competitors in the market
Market volatility
Information floats in the market
Social responsibility concern
Retail Banking Credit Policy by PBL
Introductory:
Retail lending is one of the core businesses for Prime Bank Limited and has been targeted for significant further growth. This reflects the potential of retail lending to produce high levels of economic profit and perceived demographic trends toward an expanded middle class and higher income levels. Prime Bank is a conservative lender in retail credit as part of its corporate philosophy. The Bank’s overriding goal is not only to increase total shareholder return but also to contribute to the socio economy by improving the life style of the limited income segment of the country and that can be best achieved optimizing profits, rather than just minimizing losses by –
Good-planning and control of approval process,
Well designed products with appropriately focused marketing
The use of statistical techniques and decision support systems that permit risks to be-managed predictably
Gathering high quality management information, this is then read and used.
Credit:
The word credit means the sum of money that a trader allows a customer before requiring payment. It also means the ability of members of the public to purchase goods with money borrowed from finance companies, banks and other money lender.
Banks are important for channeling money from savers to the investors. They should not therefore concentrate their energies to serve only the wealthy class of customers. For a balanced development in the economy loans should be given in the urban and rural areas and to the rich as well as poor.
The credit portfolio of the PBL includes loans and advances provided under conventional terms and investment provided as per Islamic Shariah of profit sharing basis. The credit portfolio increased by Tk.12.67 billion during 2008.The coverage of overall Credit portfolio has been developed for a balanced development in the economy with the following core areas:
Corporate,
SME,
Retail
Credit Card,
Investment Banking (Portfolio Margin Finance)
Corporate Credit of PBL:
PBL’s corporate business provides tailored services to corporate, institutional clients. Commercial lending comprises of major type of corporate credit and continued to remain the major segment of the business. Our strategy is to provide comprehensive service to the clients of this segment who are the large & medium size corporate customers. Corporate clients include sole proprietors, partnerships, incorporated businesses and publicly quoted companies. The financing is based on both conventional and Islamic Shariah mode. The products based on Islamic Shariah are disbursed through Islamic Banking Branches. In order to comply with the risk management, exposure in particular sector is closely monitored to remain within the approved limit set by the Board. Concentration of loans
is given at Corporate loans include the following:
| Commercial loans | Syndicate financing | Credit card |
| Export financing | Infrastructure financing | SME Lending |
| Industrial financing | consumer credit | Financing women entrepreneurs under SME |
Commercial loans:
PBL provides a complete range of services to its corporate clients that include trade financing services like traditional documentary credit, and post import finance etc.
Export Financing:
A complete range of export financing like back to back documentary credit, packing credit, bills discounting and collection of bills are provided to the corporate clients.
Industrial Financing:
Under this product a complete service is provided which includes term loans, working capital, import financing for capital machinery and raw materials and other receivable financing, infrastructure financing, leasing etc.
Syndicate Financing:
PBL is maintaining a leading role in syndication market. The Bank so far concluded 15 syndicated deals of near to Tk.9, 000 million as Lead Arranger and Agent for its corporate clients. The sectors of financing through syndication now include Textiles, Pharmaceutical, Chemical, Cement, Ceramic, Steel, Float Glass, Micro Finance, Food and Allied Infrastructure. Besides, to serve its corporate clients and to expand the base of its corporate clients PBL participated in syndication deal arranged by other banks and financial institutions. The Syndication Unit also arranged 27 visits program for participating lenders to observe the operational status and monitor the implementation of the projects.
Infrastructure Financing:
Underdeveloped infrastructure is one of the major obstacles for private sector development in Bangladesh. Lack of efficiency in public sector services has imposed significant cost and hindered the growth of country’s economy. To encourage private sector in infrastructure financing and Development, Government of Bangladesh has already taken up a project namely Investment Promotion and Financing Facility (IPFF). Through this facility funds will De provided by Bangladesh Bank for the infrastructure =financing by banks and financial institutions. PBL has already been qualified as an eligible financial institution to participate under IPFF project and is currently in the process of executing Master Facility Agreement with Bangladesh Bank.
During 2008, PBL has played a significant role in infrastructure development. It has financed the implementation of a number of important bridges, namely: Dapdpia Bridge on Kirtonkhola River, Barisal, 2nd Shitalakkhya Bridge, Teesta Bridge, and 3rd Karnaphuli Bridge, among others. Moreover, the Bank also took part in financing of various national roads and highways. The Bank has also provided working capital and extended other financial supports to various power projects and telecommunication companies.
Retail banking/ consumer credit:
Retail Banking / Consumer Credit:
Retail banking has immense potentialities in Bangladesh. In view of the potentials PBL is focusing on expansion of Retail Loans /Consumer Credit during last couple of years. PBL achieved a very strong growth of 110 percent during the year 2008. There are 11 products for the customers viz. Home Loan (Swapna Neer), Consumer Loan (house hold durables), Car Loan, Doctor’s Loan, Loan against salary, Education Loan, Marriage Loan, CNG conversion Loan, Hospitalization Loan and any purpose Loan. Out of these products Car Loan, House hold durables and Swapna Neer constituted 41 percent, 32 percent and 17 percent respectively of the total retail portfolio. In view of the growth potentials separate division was created for managing the retail business.
To expand the customer base existing products were re-launched with better pricing structure and repayment periods. Road shows, customer meeting, branding and merchandising program were undertaken. The Bank arranged presentation of the products viz education loans etc at different universities which attracted lot of enthusiasm. The Bank has developed strategic alliance with trade partners with renowned real estate, auto dealers, hospitals, corporate houses and telecommunication companies and took joint marketing drive with them for Bank’s products and services across the country. PBL branded selected auto show rooms in city to promote PBL Car Loan and merchant point with POP materials for optimum visibility. It took part in MEGA Loan Expo Fair 2008 and Furniture Utshob 2008 for popularizing retail banking products and improving its brand image. In order to give easy access to its products and to give best possible services at the doorstep of its existing and potential customers, the Bank introduced Direct Selling Services by recruiting highly trained and customer focused professionals and this facility is going to be expanded further by recruiting more sales executives. Their functions and responsibilities are closely managed and supervised by in-house banking officials. Call center for retail customers have been established for monitoring overdue loan accounts and initiating recovery actions.
Credit card:
Very stiff competition prevails in credit card market. Many players have entered the market and competition is growing. PBL started its credit card operation in 1999 by introducing Master Card and is now principal member of both worldwide accepted plastic money network i.e. Master card and VISA, thus positioned itself with strong footing within the industry. It extends various services to the credit card customer viz. issuance of supplementary card, free insurance coverage, longer interest free period, etc.
PBL expanded its merchant activities resources to push the growth of credit card and merchant acquiring business in this challenging environment. PBL is alert to the potential risk of credit card fraud and unauthorized use of card. Procedures and policies to combat credit card fraud are regularly reviewed and updated to minimize the risk of loss to credit card customers. Call center of the Bank provides 24 hours service to the credit card customers.
SME Lending:
Despite growing focus about small and medium enterprises in Bangladesh and consequent policy efforts in this directions, limited access to financing still forms the crux of the problem of this sector. The overriding vision of PBL is to offer congenial lending products and services so that SMEs can aspire to opportunities of growth and wealth creation. Keeping this in view, PBL has formulated a comprehensive policy on SME financing during 2008 and made significant progress in financing this sector. During 2008, PBL’s strategy was focused on marketing the products to wider range of customers and provided working capital and term loan to different manufacturers, traders and service providers including backward and forward linkage industry that fall into SME universe. Bank’s exposure is thus well diversified among 791 customers to different sectors viz. light engineering, cottage, handicraft, CNG station, power loom, CNG, garments accessories etc.
Outstanding loan of SME is Tk.1021 million. Out of this 33% exposure accounts for manufacturing sector, 54% accounts for trading sector while balance 13% accounts for service sector.
Financing women entrepreneurs under SME:
Another notable idea in SME financing is the development of women entrepreneurs. Bangladesh bank has earmarked 10% of SME related fund women entrepreneurs. With the help of R&D, a consultative meeting was arranged with the leaders of women entrepreneurs. In the new framework of SME, PBL will give top priority in developing and harnessing women entrepreneurs.
General Credit Principles
Purpose:
The sole purpose of the credit policy of PBL is to set out yardsticks for and spell out standard operating procedures for management of retail credit risk of the Bank. As such, it specifically addresses the following areas:
Establishing an appropriate credit risk environment
Setting up a sound credit approval process
Maintaining an appropriate credit administration and monitoring Process, and
Ensuring adequate control over credit risk.
Scope:
PBL maintains the policy documents applicable for issues related to retail lending operation and also to be read in conjunction with the Credit Risk Management Policy with respect to both direct and indirect credit products of traditional and Islamic banking products.
Credit Principles of PBL:
Fundamentally, no credit policies and procedures can ever sufficiently capture all the complexities of the product. However, PBL has developed and maintain the following credit principles as the ultimate reference points for all concerned executives & staff-making consumer financing decisions:
Assess the customer’s character for integrity and willingness to repay
Only lend when the customer has capacity and ability to repay
Only extend credit if bank can sufficiently understand and manage the risk
Use common sense and past experience in conjunction with thorough evaluation and credit analysis.
Do not base decisions solely on customer’s reputation, acceptedpractice, otherlender’s risk assessment or the recommendations other officers
Be proactive in identifying, managing and communicating credit risk
Be diligent in ensuring that credit exposures and activities comply with the requirement set out in Product Program Guidelines.
Products and Services:
The Bank shall sell suitable credit products and services in the market. For this purpose, bank will design new product from time to time, reengineer the existing ones to keep the competitive in the market while designing new products and/ or customers’ demand and product innovation and/or reengineering shall be a continuous process.
Types of Products:
A basic product program guideline has been developed for the following retail lending products;
Types of Credit Facilities:
Depending on the various nature of financing, all the credit facilities have been brought under two major groups:
(a) Funded Credit and
(b) Non- funded Credit.
Under Non-funded Credit, there are basically two major products namely letter of credit and Letter of Guarantee.
Under Funded Credit, there are the following products:
Loan (General):
Short, Medium & Long term loans allowed to individual, firm/ industries for a specific purpose but for a definite period and generally repayable by installments fall under this type. These are mainly allowed to accommodate financing, under the categories-
(i) Large & Medium Scale Industry and
(ii) Small & Cottage Industry.
Very often term loans for-
(i) Agriculture &
(ii) Others are also included here:
Housing Loan (Commercial):
Loans allowed to individual/enterprises for construction of house for commercial purpose only fall under this type. The amount is repayable by installments within a specified period.
Home Loan:
Loans allowed to individuals for purchase of apartment or construction of house for residential purpose fall under this type. The amount is repayable by monthly installments within a specified period.
House Building Loan (staff):
Loans allowed to the Bank employees for purchase of apartment/ construction of house is under this scheme known as House Building Loan (staff) HBL staff.
Other Loans to Staff:
Loans allowed to employees other than House Building Loan are grouped under – Staff Loan (Gen).
Cash Credit (Hypo):
Advances allowed to individual/firm for trading as well as wholesale purpose or to industries to meet up the working capital requirements against hypothecation of goods as primary security fall under this type of lending. It is a continuous credit. It is allowed under the categories-
(1) “Commercial lending when the customer is other than an industry and
(2) “Working Capital” when the customer is an industry.
Cash Credit (Pledge):
Financial accommodations to individual/firms for trading as well as for wholesale or to industries is working capital against pledge of goods as primary security fall under this type of advance. It is a continuous credit and like cash credit (Hypo) allowed under the categories (i) “Commercial Lending” and (ii)”working Capital”.
Hire purchase:
Hire Purchase is a type of installment credit under which the customer agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of principal as well as interest for adjustment of the loan within a specified period.
Lease Financing:
Lease Financing is one of the most convenient sources of acquiring capital machinery and equipment whereby a customer is given the opportunity to have an exclusive right to use an asset usually for an agreed period of time against payment of rental. It is a term financing repayable by lease rental.
Consumer Credit Scheme (CCS):
It is a special credit scheme of the Bank to finance purchase of consumer durable by the fixed income group to raise their standard- of living. The loans are allowed on soft terms against personal guarantee and deposit of specified percentage of equity by the customers. The loan is repayable by monthly installments within a fixed period.
SOD (Financial Obligation):
SOD (Financial Obligation) is allowed to individuals/firms against financial obligations (FDR, MBDR, and Scheme Deposits of our Bank or similar products of other banks). This is a continuous loan having usual maturity period of 1 (one) year and renewable for further periods at maturity.
SOD (General):
SOD (General) is allowed to individuals/firms for miscellaneous purpose. This is a continuous loan having usual maturity period of 1 (one) year and renewable for further periods at maturity.
SOD (Work Order):
Advances allowed against assignment of work order for execution of contractual woks falls under this type. This advance is generally allowed for a definite period and specific purpose. It falls under the category “Others”.
SOD (export):
Advance allowed for purchasing foreign currency for payment of back to back L/C liability where the exports do not materialize before due the date of import payment. This isan advance for temporary period and categorized “Export Finance”.
PAD:
Payment made by the Bank against lodgment of shipping documents of goods imported through L/C falls under this type. It is an interim advance connected with import and is generally liquidated against payments usually made by the customer for retirement of the documents towards release of imported consignment from the customs authority. It may fail under anyone of the category “Agriculture/ Export Finance/Commercial Lending/ others.”
LIM:
This is funded credit facility allowed for retirement of shipping documents and release of goods imparted through L/C taking effective control over the goods by pledge in good owns under Bank’s lock & key. This is a temporary advance connected with import which is known as post-import finance and falls under the category “Commercial Lending”.
LTA:
Advance allowed for retirement of shipping documents and release of goods imported through LC falls under this type. The goods are handed over to importer on trust with the arrangement that sale proceeds will be deposited liquidate the loan account within the stipulated time. This is a temporary advance connected with import and known as post-import finance and falls under the category “Commercial Lending”.
IBP:
Payment made through purchase of inland bills/ checks denominated in local currency to meet urgent requirement of the customer of other than export Sector falls under this type. This temporary advance is adjustable from the proceeds of bills/checks purchased and sent for collection. It may fall under any of the categories.
Export Cash Credit (ECC):
Funded credit facility allowed to a customer for export of goods falls under this type and is categorized as “Export Cash Credit”. The advances must be liquidated out of export proceeds within 180 days.
Packing Credit (P.C.):
Advance allowed to a customer against bills under BTBL/C and/or firm contract for processing/packing of goods to be exported falls under this categorized as “Packing Credit”. Packing Credit must be adjusted from the proceeds of the relevant exports within 180 days. It falls under the category “Export Credit”.
FDBP:
Payment made to a customer through purchase/ negotiation of a foreign Documentary bill falls under this type. This temporary advance is adjusted from the proceeds of the shipping/export documents. It falls under the category “Export Credit”.
DBP:
Payment made against documents representing sell of goods toLocal export oriented industries which are deemed as exports and denominated in foreign Currency falls under this type. This temporary liability is adjustable from the proceeds of the Bill.
FBP:
Payment made to a customer through Purchase or foreign currency Cheques/ Drafts fall under this type. This temporary advance is adjustable under the proceeds of the cheque/ Draft.
Loan to Deposit Ratio:
Loans and advances shall normally be financed from customers deposit and sometimes from capital fund of the Bank. Usually loans and advances shall not be extended out of temporary fund or borrowing from money market. The loan to Deposit ratio in 2008 is 78.56% which indicates the sound maintenance of assets’ quality.
Credit Quality:
Quality of assets is one of the strong areas of operation of PBL. Hence the Credit facilities be allowed in a manner so that credit expansion goes on ensuring optimum asset quality i.e. Bank’s standard of excellence shall not be compromised. Credit facilities will be extended to customers who will complement such standards.
Compliance:
All credit extension must comply with the requirements of Bank’s Memorandum and Articles of Association, Banking Companies Act, 1991 as amended from time to time, Bangladesh Bank’s instruction circulars, guidelines and other applicable laws, rules and regulations, Bank’s Credit Risk Management Policy, Credit Operational, the officer originating a credit proposal specifically declares that it complies with all above mentioned rules, regulations, policy etc.
Deviation:
Any deviation from the internal policy of the Bank must be justified and well documented. Specially, all credit assessment form shall invariably include the deviations from the policy, if any. However, no external regulations shall be compromised.
Return:
Credit operation of the Bank should contribute at optimum level within the defined risk limitation. In other words, credit facilities should be extended in such a manner that each deal becomes a profitable one so that Bank can achieve growth target and superior return on capital. Besides, credit extension shall focus on the development and enhancement of customer’s relationship and shall be measured on the basis of the total yield for each relationship with a customer.
Repayment Capacity:
Credit facilities will be extended to those customers who can make best use of them thus helping maximize Bank’s profit as well as economic growth of the country. To ensure achievement of this objective the Bank bases its lending decision mainly on the borrower’s ability to repay.
Diversification:
The portfolio shall always be well diversified with respect to sector, industry, geographical region, maturity, size, economic purpose etc. Concentration of credit shall be carefully avoided to minimize risk.
Proper Staffing:
Proper credit assessment is complex and requires high level of numerical as well as analytical ability of the concerned officer. To ensure effective understanding of the concept and thus to make the overall credit portfolio of the Bank healthy, proper staffing shall be made through placement of qualified officials having appropriate background, right aptitude, formal training in credit risk management, familiarization with Bank’s credit culture and required experience as well.
Name Lending:
The Bank carefully avoids name lending. Credit facility is allowed absolutely on business consideration after conducting due diligence. No credit facility shall be allowed simply considering the name and fame of the key person or corporate image of the borrowing company. In all cases, viability of business, credit requirement, and security offered, cash flow and risk level are meticulously analyzed.
Single Consumer Exposure Limit:
PBL always tries to give effort to comply with the prevailing banking regulation regarding Single Customer Exposure Limit set by Bangladesh Bank from time to time. As per prevailing regulation, Bank takes maximum exposure (outstanding at point of time) on a single customer (Individual, Enterprise, Company, Corporate, Organization, Group) for the amount not exceeding 35% of Bank’s total capital subject to the condition that the maximum outstanding against funded facilities does not exceed 15 percent of the total capital. However, for single customer of the export sector maximum exposure limit shall be 50 percent of the total capital subject to the condition total funded facility shall not exceed 15 percent of the total Capital of the Bank at any point of time.
Large Loan:
Credit facility to a single customer (Individual, Enterprise, Company, Corporate, Organization, and Group) is treated as Large Loan if total outstanding amount against the limit at a particular point of time equals or exceeds 10 percent of the total capital of the Bank. Prime Bank’s total Large Loan Portfolio exposure shall not exceed 56 percent of the total outstanding loans and advances at any point of time.
Security:
Security taken against credit facilities are properly valued and affected in accordance with the laws of the country. An appropriate margin of security is taken to reflect such factors as the disposal costs or potential price movement of-the underlying assets.
Credit Assessment and Approvals
This section provides high level policies and guidance for the delivery of an effective and consistent methodology for the assessment and approval of retail credit. The primary factor determining the quality of the Bank’s credit portfolio is the ability of each borrower to honor, on timely basis, all credit commitments made to the Bank i.e. repayment of loan installments on time. The authorized Credit Officers/ Executives accurately determine this prior to approval. Therefore a thorough credit risk assessment is conducted prior to the sanction of any credit facilities. While assessing a credit proposal more emphasis shall be given on repayment potential of loans out of funds generated from borrower’s business (cash flow) instead of realization potential of underlying securities.
Credit Assessment Principles:
Each credit assessment is-
1. Based on the sound ethical practices, which are consistent with all banking rules and legislation, and
2. Consistent at a product level, with Product Program Guideline.
Application:
The first stage of credit assessment and approval process is a customer application. The application must provide adequate information to enable the Bank to assess tie Credit as a minimum, the application must request for sufficient information to verify the existence of the individual and to facilitate the collection effort, including skip tracing and security checks. The information in the application establishes “Know Your Customer” (KYC). Specific information that is required to include –
Telephone and address contact details
Employment/business details
Income details
Income & Expenditure Statement
Personal Net worth Statement
Residence details
Credit references and guarantors details
Contact Point Verification:
Verification is a key part of application process. The level verification details must be documented in PPG. Contact Point Verification is done for all applicants except for the High Net Worth individuals or the customers having good account relationship with the bank. The objective is to confirm the declared/undeclared information of the applicants. CPV includes:
Applicant’s Residence,
Business/Office address,
Phone,
Status.
Guarantors Information Verification
Bank Statement & other Income Documents Verification.
Guarantee:
One of the fundamental perquisites for securing retail lending is to obtain guarantee acceptable to the bank by way of social status and perceived creditworthiness. The following must be adhered to while obtaining guarantee for securing the loans:
1. No loans shall be allowed against the guarantee of an existing guarantor of any other loan.
2. Existing borrowers of the bank are not eligible to beco