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Chapter One

INTRODUCTION

1.1 Introduction

1.2 Origin of the report

1.3 Rationale of the study

1.4 Objectives of the report

1.5 Scope of the study

1.6 Methodology of the study

1.7 Limitations of the study

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1.1NTRODUCTION

Now a day, education is not just limited to books and classrooms. In today’s world,

education is the tool to understand the real world and apply knowledge for the

betterment of the society as well as economy. From education the theoretical

knowledge is obtained from courses of study, which is only the half way of the subject

matter. Practical knowledge has no alternative. The perfect coordination between

theory and practice is of paramount importance in the context of the modern business

world in order to resolve the dichotomy between these two areas. Therefore, an

opportunity is offered by Dept. of Accounting & Information systems, University of

Dhaka, for its potential business graduates to get three months practical experience,

which is known, is as “Internship Program”. For the competition of this internship

program, the author of the study was placed in a bank namely, “Janata Bank

Limited”internship Program brings a student closer to the real life situation and thereby

helps to launch a career with some prior experience.

1.2 ORIGIN OF THE REPORT

This paper is entitled “Credit Management of Janata Bank Limited” originated from

the fulfillment of the internship program. For the internship program, each student is

attached with an organization. My internship was at Janata Bank Ltd., Nawaubpur

branch Dhaka. During my internship, I had to prepare a report under the supervision of

Taslima Nasreen, Assistant Professor, Dept. of Accounting & Information systems,

University of Dhaka.

1.3 RATIONALE OF THE STUDY

Due to the increased competition of the increased number of commercial banks and the

growing economy, the expectations of the customers have also increased than ever

before. Realizing the present condition, banks, especially the commercial banks are

trying to elevate their loan giving service as much as reachable to their customers. The

most serious difficulty facing the financial sector is the high level of interest rate and

inflation rate. So it is the duty of the top management of the commercial banks to work

with the situation.

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1.4 OBJECTIVES OF THE REPORT

The objectives of the report are to determine how credit policy applied in sanctioning

and recovering loans and advances. Credit policy varies in terms of loan sector, status

of the organization, government policy, fiscal budget and guidelines etc.

Specific objectives:

To present an overview of Janata Bank Limited(JBL)

► To assess the credit structure of the JBLin practice.

► To measure the effectiveness of the bank in the utilization of available resources.

► To identify the recovery performance of JBL.

► To point out the problems in fund utilization and recovery thereon.

► To make a critical reasoning in respect to the treatment of provision for bad and

doubtful credit.

► To assess and highlight on the legal actions followed by the JBL.

► To find out the extent of similarities and dissimilarities in the course of action

followed by Janata Bank.Limited.

► To compare the credit supervision of. JBL

► To compare the quantitative change from phase-1 (1998-2002) to phase-2 (2003-

2007).

► To find out problems and suggesting recommendations for further improvement.

1.5 SCOPE OF THE STUDY

Janata Bank Limited is the second largest commercial Bank in Bangladesh. Janata

Bank Limited operates through 848 branches including 4 overseas branches at United

Arab Emirates. It is linked with 1221 foreign correspondents all over the world. I am

assigned to learn practical knowledge from Janata Bank Limited, at Nobawabpur

Branch. In this study I would try to concentrate on the theoretical aspect of credit

management, that is, the definition of credit management, policy of credit management,

tools for managing credit etc. I would analyze the data on the bank and various

programs for loan recovery, problems in loan in loan recovery, pattern of loan recovery

and the performance of the bank under study in loan recovery, the information in

respect to the classification of unsound credit and provision thereon and also

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concentrates on the performance of the bank. And finally I would conclude with the

critical evaluation of the credit management under the guidelines of the Bank

Companies Act 1991, IAS#30 and a discussion on the major findings and

recommendations.

1.6 METHODOLOGY OF THE STUDY

The study is performed based on the information extracted from different sources

collected by using a specific methodology. To fulfill the objectives of this report total

methodology has divided into two major parts:

A) Data Collection Procedure:

In order to make the report more meaningful and presentable, two sources of

data and information have been used widely.

The “Primary Sources” are as follows:-

I have made questionnaire survey of both managers of credit department and the

customers who have taken loans from Janata Bank Limited.

Relevant file study as provided by the officers concerned.

Sharing practical knowledge of officials.

In-depth study of selected cases.

The “secondary Sources” are as follows:-

Annual report of Janata Bank Limited

Periodicals Published by Bangladesh Bank

Office files and documents

Study related books and journals

Web sites

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b) Data Processing & Analysis:

Collected information have then processed & compiled with the aid of MS Word,

Excel & other related computer software. Necessary tables have been prepared on

the basis of collected data and various statistical techniques have been applied to

analyses on the basis of classified information. Detail explanation and analysis have

also been incorporated in the report.

1.7 LIMITATION OF THE STUDY

To prepare a report on the topic like this in a short duration is not easy task.From the

beginning to end,the study has been conducted with the intention of making it as a

complete and truthful one. In preparing this report some problems and limitations have

encountered which are as follows:

a) The main constraint of the study was insufficiency of information, which was

required for the study. There are various information the bank employee cannot

provide due to security and other corporate obligations.

b) As the data, in most cases, are not in organized way, the bank failed to provide

all information.

c) Due to time limitation, many of the aspects could not be discussed in the present

report.

d) Since the bank personnel were very busy, they could not pay enough time.

e) Lack of opportunity to access to internal data.

f) I had to base on secondary data for preparing this report.

g) Legal action related information was not available.

h) Lack of in-depth knowledge and analytical ability for writing such report.

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Chapter Two

LITERATURE REVIEW

2.1 CREDIT MANAGEMENT

2.2 PROCESS OF CREDIT MANAGEMENT

2.2.1. Policy guidelines

2.2.2 Management structure and responsibilities

2.2.3. Program guidelines

2.3 TOOLS OF CREDIT MANAGEMENT

2.3.1 Definition of Credit Risk Grading (CRG)

2.3.2 Functions of Credit Risk Grading

2.3.2 Functions of Credit Risk Grading

2.3.3 Use of Credit Risk Grading

2.3.4 Number and short name of grades used in the CRG

2.3.5 Financial Spread Sheet in Credit Management

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2.1 CREDIT MANAGEMENT

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 management should always

try to make an appropriate balance between its return and risk involved with the loan

portfolio. Credit appraisal process is the tool, which helps the bank to predict the risk

and return on the proposed project for credit disbursement.. To get a clear idea about

credit appraisal process we need to know the key factors of credit appraisal procedures.

Credit:

The word credit is derived from the Latin word “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.

. Principles of Credit A prudent Banker should always adhere to the following general

principles of lending funds to his customers.

Background, Character and ability of the borrowers

Purpose of the facility,

Term of facility,

Safety,

Security,

Profitability,

Source of repayment,

Diversity.

2.2PROCESS OF CREDIT MANAGEMENT

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Credit management must be organized in such a process that the bank can minimize its

losses for payment of expected dividend to the shareholders. The purpose of this

process is to provide directional guidelines that will improve the risk management

culture, establish minimum standards for segregation of duties and responsibilities, and

assist in the ongoing improvement of concerned bank.

The guidelines for credit management may be organized into the following sections:

2.2.1 Policy guidelines:

a. Lending guidelines

b. Credit assessment and risk grading

c. Approval authority

d. Segregation of duties

e. Internal control and compliance

2.2.2 Management structure and responsibilities

2.2.3. Program guidelines:

a. Approval process

b. Credit administration

c. Credit monitoring

d. Credit recovery

Now the guidelines are discussed in the following:

2.2.1. Policy guidelines

a. Lending guidelines: The lending guidelines include the following:

Industry and Business Segment Focus

Types of loan facilities

Single borrowers/ group limits/ syndication

Lending caps

Discouraged business types

As a minimum, the followings are discouraged:

o Military equipment/ weapons finance

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o Highly leveraged transactions

o Finance of speculative investments

o Logging, mineral extraction/ mining, or other activity that is ethically or

environmentally sensitive

o Lending to companies listed on CIB black list or known

o Counter parties in countries subject to UN sanctions

o Lending to holding companies.

b. Credit Assessment and Risk Grading:

A thorough credit and risk assessment should be conducted prior to the granting of

loans, and at least annually thereafter for all facilities.

Credit Applications should summaries the results of the risk assessment and include, as

a minimum, the following details:

Environment or social risk inputs

Amount and type of loan (s) proposed

Purpose of loans

Loan structure ( tenor, covenants, repayment schedule, interest)

Security arrangement

Any other risk or issue

Risk triggers and action plan-condition prudent, etc.

Risk is graded as per Lending Risk Analysis (LRA), Bangladesh Bank’s Guidelines of

classification of loans and advances.

c. Approval Authority:

Approval authority may be as the following:

Credit approval authority has been delegated to Branch Manager, Credit

Committee by the MD/ Board

Delegated approval authorities shall be reviewed annually by MD/

Board.

MD/ Board:

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Approvals must be evidenced in writing. Approval records must be kept

on file with credit application

The aggregate exposure to any borrower or borrowing group must be used

to determine the approval authority required.

Any credit proposal that does not comply with Lending Guidelines,

regardless of amount, should be referred to Head Office for approval.

d. Segregation of Duties:

Banks should aim at segregating the following lending function:

Credit approval/ risk management

Relationship management/ marketing

Credit administration

e. Internal Control and Compliance:

Banks must have a segregated internal audit/ control department charged with

conducting audits of all branches.

2.2.2. Management structure and responsibilities

The following chart presents an example of credit management structure:

Managing Director

HO Business Development / Corporate

Banking / MarketingCredit Committee HO Credit / Risk

Branch Manager

Marketing Credit Officer Credit Admn. Loan Recovery

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2.2.3. Program guidelines

a. Approval process: The following diagram illustrates an example of the approval

process:

b. Credit administration: The credit administration function is critical in ensuring that

proper documentation and approvals are in place prior to the disbursement of loan

facilities.

c. Credit monitoring: To minimized credit losses, monitoring procedures and systems

should be in place that provides an early indication of the deteriorating financial health

of borrower.

d. Credit recovery: The recovery unit of branch should directly manage accounts with

sustained deterioration (a risk rating of sub-standard or worse). The primary functions

of recovery unit are:

▪ Determine account action plan/ recovery strategy

Credit application recommended by Branch Manager / Relationship Manager / Corporate

Head Office, Credit Division

Head Office Credit Committee

Executive Committee of Board of Directors

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▪ Pursue all options to maximize recovery, including placing customers into

receivership or liquidation as appropriate.

▪ Ensure adequate and timely loan loss provisions are made based on actual and

expected losses.

2.3 TOOLS OF CREDIT MANAGEMENT

For credit management, a firm may use tools available to them. Such tools include

Credit Risk Grading (CRG) and Financial Spread Sheet (FSS). Credit risk grading is an

important for credit risk management as it helps the banks and financial institutions to

understand various dimensions of risk involved in different credit transactions. The

aggregation of such grading across the borrowers, activities and the lines of business

can provide better assessment of the quality of credit portfolio of a bank or branch.

The Lending Risk Analysis (LRA) manual introduced in 1993 by the Bangladesh Bank

has been in practice for mandatory use by the banks and financial institutions for loan

size of BDT 1.00 crore and above. However, the LRA manual suffers from a lot of

subjectivity, sometimes creating confusion to the lending bankers in terms of selection

of credit proposals on the basis of risk exposure. Meanwhile in 2003 end, Bangladesh

Bank provided guidelines for credit risk management of banks wherein it

recommended, interalia, the introduction of Risk Grade Score Card for risk assessment

of credit proposals.

Bangladesh Bank expects all commercial banks to have a well defined credit risk

management system which delivers accurate and timely grading. In practice, a bank’s

credit risk grading system should reflect the complexity of its lending activities and the

overall level of risk involved.

2.3.1 Definition of Credit Risk Grading (CRG)

◘ the Credit Risk Grading (CRG) is a collective definition based on the pre-

specified scale and reflects the underlying credit-risk for a given exposure.

◘ A Credit Risk Grading deploys a number/ alphabet/ symbol as a primary

summary indicator of risks associated with a credit exposure.

◘ Credit Risk Grading is the basic module for developing a Credit Risk

Management system.

2.3.2 Functions of Credit Risk Grading

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Well-managed credit risk grading systems promote bank safety and soundness by

facilitating informed decision-making. Grading systems measure credit risk and

differentiate individual credits and groups of credits by the risk they pose. This allows

bank management and examiners to monitor changes and trends in risk levels. The

process also allows bank management to manage risk to optimize returns.

2.3.3 Use of Credit Risk Grading

◘ The Credit Risk Grading matrix allows application of uniform standards to credits

to ensure a common standardized approach to assess the quality of individual

obligor, credit portfolio of a nit, line of business, the branch or the bank as a

whole.

◘ As evident, the CRG outputs would be relevant for individual credit selection,

wherein either a borrower or a particular exposure/ facility is rated. The other

decisions would be related to pricing (credit-spread) and specific features of

credit facility. These would largely constitute obligor level analysis.

◘ Risk grading also be relevant for surveillance and monitoring, internal MIS and

assessing the aggregate risk portfolio level analysis.

2.3.4 Number and short name of grades used in the CRG

The proposed CRG scale consists of 8 categories with short names and numbers are

provided as follows:

Grading Short Name Number

Superior SUP 1

Good GD 2

Acceptable ACCPT 3

Marginal/ Watch list MG/ WL 4

Special Mention SM 5

Sub Standard SS 6

14

Doubtful DF 7

Bad and Loss BL 8

2.3.5 Financial Spread Sheet in Credit Management

1. Financial Spread Sheet provides a quick method of assessing business trends and

efficiency

▪ Assess the borrowers ability to repay

▪ realistically show business trends

▪ Allow comparisons to be made within industry

2. Borrowers that provide Financial Spread Sheets are more likely to be good

borrowers

At two of the client banks the FSRP consultants could not find 10 bad loans

with 3 consecutive years of financial statements available.

Out of 25 good loans reviewed by the FSRP consultants, at two of the client

banks, 3 consecutive years of financial statements were available on all of

them.

The willingness of the customer to provide detailed financial information

and to answer question regarding that information, is indication of the

cooperation the bank will receive in the future.

3. A Financial Spread Sheet is an important tool in a discipline of organized approach

to credit analysis.

4. The historic financial reports of a company are a primary indicator of its future

financial position. Spread sheets allow proper analysis of financial statements.

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Chapter Three

JANATA BANK LTD: AT A GALANCE

3.1 History of Janata Bank Ltd.

3.2 Mission of Janata Bank Ltd.

3.3 Services provided by Janata Bank Ltd.

3.4 Credit program

3.5 Performance of Janata Bank Ltd.

3.6 Loans and advances

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3.1 HISTORY OF JANATA BANK LTD

.

Janata means people. This is a progressive Bank. Immediately after the emergence of

Bangladesh in 1971, the erstwhile United Bank Limited and Union Bank Limited were

nationalized and renamed as Janata Bank. It has been operating since it's inception in

1972 both in Bangladesh and overseas. Janata Bank Ltd. has been playing a significant

role in the economic development of the country by mobilizing savings and

channelizing funds into different productive sectors. It is also a major player in the

fields of micro-credit and software development.

Janata Bank Ltd, the second largest commercial Bank in Bangladesh, has an authorized

capital of US$ 145.45 million, paid up capital of US$ 47.16 million and reserve of US$

6.67 million . The Bank has a total asset of Tk. 24406.11 crore (approx. US$ 3562.94

million) as on 31st December 2007.

Janata BankLtd. operates through 848 branches including 4 overseas branches at

United Arab Emirates. It is linked with 1221 foreign correspondents all over the world.

The Bank employs more than 15(fifteen) thousand persons. The corporate head office

is located at Dhaka with 35 (thirty five) Divisions. As a part the conscious development

of existing Human Resources, Janata Bank through its three training institutes during

the year 2003 imparted training to 4699 officers and staffs. It computerized 90

important branches; non stop services introduced in 88 branches; ONLINE Banking in

60 important branches under important branches under implementation; ATM, EFT

facilities.

The Board of Directors is composed of 7 (seven) members headed by a Chairman. The

Directors are representatives from both public and private sectors. The Bank is headed

by the Managing Director (Chief Executive), who is a reputed banker.

3.2 MISSION OF JANATA BANK LTD.

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The mission of the bank is to actively participate in the socio- economic development

of the nation by operating a commercially sound banking organization, providing credit

to viable borrowers, efficiently delivered and competitively priced, simultaneously

protecting depositor’s funds and providing a satisfactory return on equity to the owners.

3.3 SERVICES PROVIDED BY JANATA BANK LTD.

Janata Bank Ltd. offers all the major banking facilities and services to its customers.

The Bank with it's network spreading throughout the country has a unique feature of

ploughing back savings from those places and then investing them into different loan

portfolios.

Janata Bank Ltd. with its wide ranging branch network and skilled personnel provides

prompt and personalized services like issuing:

a. Demand Draft

b. Telegraphic Transfer

c. Mail Transfer

d. Pay Order

e. Security Deposit Receipt

f. Transfer of fund by special arrangement,

i) Normal transfer

ii) Electronic transfer through Ready Cash Card.

The Bank provides the following Internet facilities:

Current/Savings/STD account status

FDR account status

Advance account status

Loan account status

Remittance services are available at all branches and foreign remittances may be sent to

any branch by the remitters favoring their beneficiaries. Remittances are credited to the

account of beneficiaries instantly or within shortest possible time. Janata Bank Ltd. has

correspondent banking relationship with all major banks located in almost all the

countries/cities. Expatriate Bangladeshis may send their hard earned foreign currencies

through those banks or may contact any renowned banks nearby ( where they

reside/work) to send their money to their dear ones in Bangladesh.

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Janata Bank Ltd. has already established a world wide network and relationship in

international Banking through its 4 (four) overseas branches and 1221 foreign

correspondents. The Bank has earned an excellent business reputation in handling and

funding international trade particularly in boosting export & import of the country. The

Bank finances exports within the frame-work of the export policy of the country.

3.4 CREDIT PROGRAM

General and Industrial Credit:

Janata Bank Ltd. has formulated its policy to give priority to small and medium

business while financing large scale enterprise through consortium of banks total loan

and advance of the bank stood at BDT 121204.45 million as of December 31, 2007as

compared to BDT 138492.5127 million in 2006. Increase rate is 6% compared to 2007.

Following the guideline of Bangladesh Bank, credit facilities have been extended to

productive and priority sectors. In extending credit facilities, the Bank has given due

importance to sectoral needs and requirements of both public and private sectors. Major

sectors include Jute, Textile Ind. & trade, Steel & Engineering, Food & Allied, and

Export & Import etc.

Year Advance

2004 107786

2005 99748.7

2006 101461.9

2007 121204.4549

Rural Credit, Micro Ent. & SP. Program Financing:

Loan is provided to the rural people for agricultural production and other off-farm

activities.

Loan pricing system is customer friendly.

Prime customers enjoy prime rate in lending and other services.

Quick appreciation, appraisal, decision and disbursement are ensured.

Credit facilities are extended as per guide-lines of Bangladesh Bank (Central Bank of

Bangladesh) and operational procedures of the Bank.The rates may, however, change

from time to time depending on the level of competition in the financial sector.

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As a nationalized Bank it has a social responsibility to improve the financial condition

of the poor/unemployed people. With a view to perform that social responsibility, Bank

has initiated rural credit program since 1974. Now under this rural portfolio there are

33 products.

Information related to important products under this program are shown below:

Table: different products under the program

Taka in million

Sl.

No.Name of product

No of

loanees

Outstanding

Amount

2006

%

1 Cyber-café loan 36 8.6 .15

2Credit for forestry/

horticulture nursery754 19.7 .25

3Credit program for

employees46312 1002.00 10

4Financing “ women

entrepreneurship”225 44.5 .50

5Financing goat and

sheep farming21109 131.8 1.00

6 Gharoa project 2321 35.3 .40

7 Crop loan program 335075 5073.8 52

8 Doctor’s loan 55 20.8 .35

9Small business Dev.

Loan93 18.0 .35

10 Others 159335 3374.0 35

total 565315 9728.6 100

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A vast majority of the Bangladeshis live in the rural areas and their main source of

income is agriculture and agro-business. Janata Bank Ltd. has opened branches in rural

areas to cater to the banking needs of rural people. Apart from accepting deposits from

the rich and moderately well-off villagers, Janata Bank Ltd. encourages the poor people

to make small savings through different mechanisms.

So far lending in rural area is concerned, Janata Bank Ltd. has been financing

agricultural production and poverty alleviation programs since 1977. It also lends to the

poor landless so that they can make a living. The average loan size is about Taka

10,000.00 (around US$ 200) and the number of borrowers under rural credit scheme is

more than 500,000.

1. Short Term Crop Production Loan

2. Irrigation and Agricultural equipment

3. Fish/Shrimp Production

4. Horticulture Development

5. Agro-based Industry

6. Rural Transport

7. Weavers Credit

8. Agri-business Loan

9. Tea Production & Processing Loan

10. Different Micro Credit Programs

SME Financing Scheme:

Small and Medium Enterprise (SME) Financing Scheme has been introduced to assist

new or experienced entrepreneurs to invest in small and medium scale industries. Small

business development loan, Gharoa project, credit for forestry/Horticulture/Nursery,

crop loan project all are designed for this purpose.

Doctors’ Credit Scheme:

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Doctors’ credit scheme is designed to facilitate financing to fresh medical graduates

and established physicians to acquire medical equipments and set up clinics and

hospitals.

Women Entrepreneurs Development Scheme:

Women Entrepreneurs Development Scheme has been introduced to encourage women

in doing business. Under this scheme, the bank finances the small and cottage industry

projects sponsored by women. Total loan outstanding in 2007 was Tk 3552.07 crore

The no. of loaned were 31

3.5 PERFORMANCE OF JANATA BANK LTD.

Janata Bank Ltd. is the second largest commercial bank in Bangladesh. The aim of the

Bank is to actively participate in the socio-economic development of the nation by

operating a commercially sound Banking system. It provides credit to deserving

borrowers and at the same time, protects depositor’s interest.

Deposits:Janata Bank Ltd. mobilized total deposit of BDT 198,635.89 million in

2007 as compare of BDT 182946.5359 million in 2006 . Comparative interest rates

deposit mobilization efforts of the bank and confidence reposed by the customer in the

bank contributed to the notable growth in deposit. The bank evolved a number of

attractive deposit schemes to care to the requirement of small and medium services.

This improved not only the quantum of deposits, it also brought about qualitative

change in the depositors structure.

Deposit and Deposit Mix:

Break-up of Deposit and Deposit Mix

Taka in million

Type As on 31-12-06 As on 31-12-07

Current and others account deposits 28388.2688 35510.83478

Bills payable 1558.985159 1880.79648

Savings Bank Deposit 59817.08979 62723.70393

Term Deposit 93182.1912 98520.55685

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Deposit Mix

32%

52%

16%

Savings Terms C.D.& Others

Total 182946.5359 198635.892

Investment:

To earn profit, the Bank Prudently invests its fund to different sectors. The investment

portfolio of the Bank is comprised of Treasury bill, other bonds, Debenture, Shares etc.

The Bank earns a handsome profit from this investment portfolio. Year wise investment

of the Bank is shown in the following table:

Year Investments (Tk. in million)

2004 20455.8

2005 28375

2006 24785.38603

2007 55862.93039

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Portfolio wise investment is described below:

(Taka in million)

2007 2006

1. Govt.securities 17.889622 24253.04462 2. Other bonds 94.689602 532.341418

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3. Pre-lib debentures 20.473602

4. Shares 22.985151

Total =156.037739 24785.386038

Import Business:

For the very beginning the Bank has embarked on extensive foreign exchange business

with a view to facilitating international trade transactions of the country. The Bank has

provided BDT 84065.40 million loan as of December 31, 2007. Import mainly confined

to consumer goods, capital machineries and industrial raw materials.

Percentage Wise Investment-2006-07

34%

63%

2%

1%

Other Bonds Treasury Bill Debentures Shares

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Export Business:

Export growth of Janata Bank Limited (2002-2006):                                                                                                 (Taka in Core)

Year Target Achievement Achievement Rate Growth

2002 4000.00 3445.46 78.84% +6.38%2003 4000.00 4286.49 107.16% +24.40%2004 4800.00 5462.33 113.80% +27.43%2005 6825.00 5839.48 85.56% +6.90%2006 7000.00 7089.66 101.28% +21.40%

Jan-June/2007 7,798.38 3492.20 44.78%(June) +5%(June)

Operating income:

The operating revenue of the bank stood to the BDT4656.0042December 2007

against8340.84 million as 2006.y provision net profit stood at BDT 15.4764 million as

of December 31,2007.

Year Operating Profit (Tk. in million)

2004 2120.9

2005 2312.9

2006 8340.84

2007 4656.00

3.6 LOANS AND ADVANCES:

The main focus of Janata Bank Ltd. Credit Line/Program is financing business, trade

and industrial activities through an effective delivery system. Janata Bank Ltd. offers

credit to almost all sectors of commercial activities having productive purpose. The

loan portfolio of the Bank encompasses a wide range of credit programs covering about

25

200 items. Credit is also offered to 15 (fifteen) thrust sectors, as earmarked by the

govt., at a reduced interest rate to develop frontier industries. Credit facilities are

offered to individuals, businessmen, small and big business houses, traders,

manufactures, corporate bodies, etc.

Following the guidelines of Bangladesh Bank, credit facilities have been extended to productive and priority sectors. The outstanding advance of the bank is

Tk121,204.45 million on 31st December 2007.In credit facilities, the Bank has given due importance

to sectoral needs and requirements of both public and private sector.

Sector wise Advances are shown below:

Credit constitutes 50% of banks assets and this portfolio is the

most important objective of the Bank of which 16.38% is

classified. The elaborate status is as follows:

(Figure in TK)

BL DF SS SMA Standar

d

Total

1577.

30

108.2

0

300.31 293.90 9840.74 12120.45

13.01

%

.89% 2.48% 2.43% 81.19% 100.00%

(Taka in crore)

Sl Name of sector Total

1 Bangladesh PC 1545.15 2 BJMC 727.023 Steel & Engineering 51.36

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4 Food & allied 156.19

5 Export credit2140

6 Import credit1434

7 Industrial credit1596

8Rural, ME & SP

Financing

983

9 Staff loan843

10 General cerdit6,720

11 BCIC 1020.66Grand total 17216.38

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Chapter Four

CREDIT POLICY

4.1 MEANING OF CREDIT POLICY

4.2 OBJECTIVE OF CREDIT POLICY

4.3 FORMULATION OF CREDIT POLICY

4.4 ESSENTIAL COMPONENTS OF A SOUND CREDIT

POLICY

4.5 LENDING GUIDELINES:

4.5.1 Industry and business segment focus

4.5.2Types of credit facilities

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4.1 MEANING OF CREDIT POLICY

4.1 MEANING OF CREDIT POLICY

Policy entails projected course of action. Janata Bank Ltd. have its own policy granting

credit although credit is always a matter of judgment applying common sense in the

light of one’s experience.

A sound credit policy includes among other things safety of funds invested vis-à-vis

profitability of the bank. Encouraging maximum number of small loans is better than

concentration in a particular type of advances, which ensures sufficient liquidity with

least incidence of bad debts.

It has to be borne in mind that a good loan allowed to a properly selected borrower is

half collected. In order to make a good loan there should have a good loan policy.

4.2 OBJECTIVE OF CREDIT POLICY

There are some objectives behind a written credit policy of Janata Bank Ltd. that are as

follows;

To provide a guideline for giving loan.

Prompt response to the customer need.

Shorten the procedure of giving loan.

Reduce the volume of work from top level management.

Delegation of authority of work from top level of management.

To check and balance the operational activities

4.3 FORMULATION OF CREDIT POLICY

One of questions that should arise in a discussion of credit is who should formulate the

policy. Although the ultimate responsibilities lay at the highest level in the organization

i.e. the board of directors. Yet the actual drafting shall have to be done by the senior

lending office in consultations with the chief executive officer and with contribution

from senior officers, associates and subordinates. Obviously the level of origin will

vary with the size and structure of the organization. The matter then referred to the

board for approval after careful examination consideration and discussion.

30

4.4 ESSENTIAL COMPONENTS OF A SOUND CREDIT POLICY:

There can be some variations based on the needs of a particular organization, but at

least the following areas should be covered in any comprehensive statement of credit

policy and JBL’s policy also covers these areas:

1. Legal consideration: The bank’s legal lending limit and other

constraints should be set forth to avoid inadvertent violation of banking

regulations.

2. Delegation of authority: Each individual authorized to extend credit

should know precisely how much and under what conditions he or she

may commit the bank’s funds. These authorities should be approved, at

least annually, by written resolution of the board of directors and kept

current at all times.

3. Types of credit extension: One of the most substances parts of a loan is

a delineation of which types of loans are acceptable and which type are

not.

4. Pricing: In any profit motivated endeavor, the price to be charged for

the goods or services rendered is of paramount without it, individuals

have few guidelines for quoting retag or fees, and the variations

resulting from human nature will be a source of customer

dissatisfaction.

5. Market Area: Each bank should establish its proper market area, based

upon, among other things, the size and sophistication of its organization

its capital standpoint, defining one’s market area is probably more

important in the lending function than in any other aspect of banking.

6. Loan Standard: This is a definition of the types of credit to be

expended, wherein the qualitative standards for acceptable loans are set

forth.

7. Credit Granting procedures: This subject may be covered in separate

manual, and usually is in larger banks. At any rate, it should not be

overlooked because proper procedures are essential in loan establishing

policy and standards. Without proper procedure for granting credit and

constant policing to ensure that these procedures are meticulous carried

31

out, the best conceived loan policy will not function and inevitable,

problems will develop.

4.5 LENDING GUIDELINES:

As the bank have a high rate of non-performing loans. Banks risk taking applied

should be contained and our focus should be to maintain a credit portfolio keeping in

mind of bank’s capital adequacy and recovery strength. Thus bank’s strategy will be

invigorating loan processing steps including identifying , measuring , containing risks

as well as maintaining a balance portfolio through minimizing loan concentration ,

encouraging loan diversification , expanding product range , streamlining security ,

insurance etc. as buffer again unexpected cash flow .

4.5.1 Industry and business segment focus

Industry segment focuses on Textile, Pharmaceuticals, Agro-based, Food and allied,

Telecommunication, Power generation and distribution, Health care, Entertainment

Services, Chemicals, Transport, Infrastructure development, Linkage industry,

Information technology, Ceramics, Others as decided from tome to time. And business

segment focuses on Distribution, Brick field, Rice mill/ flour mill/ oil mill, Work order,

Yarn trading, Cloth merchant, Industrial spares, Hardware, Electronic and electrical

goods, Construction materials, Fish trading, Grocery, Wholesale/ retail, Others as

dedicated from time to time

4.5.2 Types of credit facilities: Bank will go for

Term financing for new project had BMRE of existing projects (large,

medium, SME, SCI).

Working capital for industries, trading services and others (large ,

medium, SME, SCI).

Trade finance for import and export

Lease finance

Small loan for traders, micro enterprise and other productive small

venture.

Consumer finance

Fee business

32

Chapter Five

FUND INVESTED BY JANATA BANK LTD.

5.1 INTRODUCTION

5.2 ECONOMIC SECTOR WISE DISTRIBUTION OF FUND

5.3 NATURE WISE DISTRIBUTION OF LOANS AND

ADVANCES

5.4 MATURITY GROUPING OF DISTRIBUTION LOANS

AND ADVANCES

5.5 SECURITIES IN CREDIT MANAGEMENT

33

5.1 INTRODUCTION

The principal function of a bank is to lend. Lending is a dynamic activity. It is through

the medium of lending the banking industry promotes economic activity, instills and

encourages, at the individual level, the principal of self-reliance, and yield earnings for

the bank. It is lending alone that brings banking into a more meaningful and purposeful

contract with public and, therefore, has the greatest impact upon them.

Proper utilization of fund is an essential pre-requisite of successful bank management.

The procurements of funds supported by an efficient deployment of that procured fund

lead a bank to the highest point of profitability. I would try to concentrate on Janata

Bank Ltd.’s nature, pattern, and allocation of invested resources in this chapter. The

bank under study has divergence in its investment portfolio, loan programs, advances

and recovery rate etc.

5.2 ECONOMIC SECTOR WISE DISTRIBUTION OF FUND

Janata Bank Ltd. is engaged in extending long, medium and short term loans to various

economic sectors in the country. As Janata Bank Ltd. extends its credit programs all

over the economy such as agricultural credit program, industrial credit program and

commercial financing, the bank tries to achieve significant profit from its operations

and also to improve the economic conditions of the general public of the country.

Table: economic sector wise distribution of loans and advances during 1998-2007

Economic

sectors

Phase-1 Phase-2

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Jute industries 718.52 719.41 747.87 778.28 870.36 837.10 8,997.

34

50

Jute trade 23.69 19.18 16.30 1.32 12.36 12.50 75.40

Tannery 419.38 509.03 423.96 444.65 439.60 361.604,150.

60

Textile 349.01 367.51 372.76 369.95 351.66 360.104,725.

00

Transport 32.27 29.17 30.27 24.54 24.04 36.00 40.20

Steel &

engineering474.72 212.98 231.01 208.58 265.70 99.80

1,484.70

Tea 15.90 14.00 14.02 13.99 12.16 12.20 85.80

Sugar mills 88.46 80.01 97.17 99.50 113.24 138.201,561.

90

House building 379.34 428.82 522.59 584.09 659.82 736.401,264.

90

Rural credit 556.28 602.81 667.28 778.50 658.12 831.309,825.

30

Bricks .45.02 41.52 79.64 88.20 90.95 85.90

Cold storage 5.03 8.45 10.38 9.54 12.32 8.60 157.00

Food 74.28 80.07 160.15 216.20 124.28 116.70 1,209.60

Export credit 751.30 856.38 1016.50 1019.20 1220.78 1295.00 14,835.90

Import credit 634.76 964.98 1273.06 1154.98 1507.85 1614.40 14,216.50

Industrial credit 782.62 894.72 1099.82 1146.35 1403.78 1381.90 15,963.90

Others 1990.42 2266.15 2566.61 3036.99 2379.17 2850.90 41,467.20

35

Total 7341.00 8095.29 9329.39 9974.8710146.1

9

10778.5

0121,204.40

5.3 NATURE WISE DISTRIBUTION OF LOANS AND ADVANCES

Sanctioning advances to customers and others is one of the principal services of a

modern bank. Advances by the commercial banks are made in different forms:

Loans

Overdrafts

CC

LIM

LTR

Bills purchase and discounted

Janata Bank Ltd. sanctions loans under the above mentioned category. It usually grants

short term advances which are utilized to meet the working capital requirements of the

borrower. Only a small portion of the bank’s demand and time liability are advanced on

long term basis where the banker usually insists on a regular repayment by the

borrower in installments. While lending fund, a banker, therefore, follows a very

cautious policy and conduct his business on the basis of well-known principles of

sound lending in order to minimize the risk.

5.4 MATURITY GROUPING OF DISTRIBUTION LOANS AND ADVANCES

At the very beginning of taking decision for giving credit, Janata Bank Ltd. mainly

concentrates mainly on liquidity. As it is doing business by public deposits, it is bound

to pay the money when people want. A sizable portion of bank advances are, therefore,

granted to meet the working capital requirements of the borrower rather than to meet

the fixed capital requirement, i.e., construction of building or purchase of fixed

deposits. A banker would be failing in his duty to safeguard the interest of his

depositors and shareholders if his credit policy does not provide a method of gradual

repayment and final recovery of the money advanced.

For liquidity reasons, Janata Bank Ltd.is giving credit on short period basis and against

security. Short term loans ensure liquidity to a greater extent than long term loan. We

can classify the bank loans and advances under the following maturity stage:

36

► Payable on demand

► Payable within 3 months

► Payable within 3 months to 12 months

► Payable within 1 year to 5 years

► Payable in more than 5 years

5.5 SECURITIES IN CREDIT MANAGEMENT

One of the most important functions of a bank is to employ its fund by way of

loans and advances to its customers and a bank’s strength depends considerably on the

quality of its loans and advances. In order times, when the bankers knew the customers

personally and intimately and had complete confidence in the integrity and honesty of a

customer, they used to allow loans and advances without a security. The position is

quite different today. Banks having a large number of officers over a wide area cannot

allow loans and advances without retention of security in one form or the other.

Though the banks are now expected to lay greater emphasis on the purpose for

which the borrower needs rather than security he can afford to give, security continues

to be one of the most important factors which determines to a significant extent the

banker’s willingness to lend money.

Security is obtained as a line of last defense to fall back upon. It is meant to be

an insurance against emergency. But taking security, bank acquires a claim upon the

assets of the borrower if repayment is not made as planned. But what should be the

significant securities of loans depends in the guidelines prescribed by the Bangladesh

Bank through BCD circular no. 17/1977 and also the negotiation of the respective

branch to its borrowers. The most significant categories of security lodged are as:

Goods and commodities

FDR

Real estate

Stock exchange securities

Life insurance policies

Gold and gold ornaments

Documents of title of goods

Supply bills

Janta Bank Ltd. keeps sufficient security before final sanctioning of loans and

advances.

37

Chapter Six

LOAN DISBURSEMENT PROCEDURE OF JANATA BANK LTD.

6.1 GETTING CREDIT INFORMATION

6.2 INFORMATION COLLECTION

6.3 ANALYZING THESE INFORMATION

6.4 LENDING RISK ANALYSIS (LRA)

6.5 PROPOSAL ANALYSIS

6.6 COLLATERAL EVALUATION

6.8 PROPER SUPERVISION OF THE PROJECT

6.7 FINAL DECISION ABOUT THE PROJECT

6.9 DOCUMENTATION OF THE LOAN

6.10 CREATION OF CHARGES FOR SECURING LOAN

38

6.1 GETTING CREDIT INFORMATION

Janata Bank Ltd. collects credit information about the applicant to determine the credit

worthiness of the borrower. The bank collects the information about the borrower from

the following sources:

Personal investigation.

Confidential report from other bank Head Office/Branch/chamber of the commerce.

CIB Report from Central Bank.

6.2 INFORMATION COLLECTION

The loans and advances department gets a form filled by the party seeking a lot of

information. The information is listed below:

Name and address of the borrower (present and permanent).

Constitution or status of the business.

Data of establishment and place of incorporation.

Particulars of properties, partners and Directors.

Background and business experience of the borrowers.

Particulars of personal assets, name of subsidiaries, percentage of share

holding and nature of business.

Details of liabilities in name of borrowers, in the name of any directors.

Financial Statement of the last three years.

Nature and details of business/products.

Details of securities offered.

Proposed debt equity ratio.

Other relevant information.

6.3 ANALYZING THESE INFORMATION

Janata Bank Ltd. then starts examination whether the loan applied for, is complying

with its lending policy. If comply, then it examines the documents submitted and the

credit worthiness. Credit worthiness analysis, i.e. analysis financial conditions of the

loan applicant is very important. If loan amount is more than 50, 00,000, then bank

goes for Lending Risk Analysis (LRA) and Spreadsheet Analysis (SA) which are

39

recently introduced by Bangladesh Bank. According to Bangladesh Bank Rules, LRA

and SA are a must for the loan exceed of one crore.

If these two analyses reflect favorable condition and document submitted for the loan

appeared to be satisfactory, then bank goes for further action.

6.4 LENDING RISK ANALYSIS (LRA)

LRA is a very important and vital analysis for deciding whether the loan proposal is

potential or not. Many types of scientific, mathematical, statistical and managerial tools

and devices are required to perform this analysis. Janata Bank Ltd. maintains a

prescribed format for Lending Risk Analysis, which includes a spreadsheet to analyze a

lot of things. It is not possible to discuss the entire LRA in this report.

Lending Risk Analysis (LRA)

b) Industry Risk:

i. Supply Risk- What is the risk of failure to disruption in the supply of

input?

ii. Sales Risk- What is the risk of failure due to disruption sales?

c) Company Risk:

1. Company Position Risk:

i. Performance Risk- What is the risk if the company position is so

weak that it can not perform well enough to repay the loan, given

expected external condition?

ii. Resilience Risk- What is the risk of failure due to lack of

resilience to unexpected external condition?

2. Management Risk:

i. Management Competence Risk- What is the risk of failure due to

lack of management competence?

ii. Management Integrity Risk- What is the risk of failure due to

lack of Management Integrity?

d) Security Risk:

i. Security Control Risk- What is the risk that the bank fail to realize the

security?

40

ii. Security Cover Risk- What is the risk that realized security value is

less than the exposure?

6.5 PROPOSAL ANALYSIS

The Project Proposal is analyzed and decision about the project is taken. The loans and

advance department is responsible for the analysis. After preliminary appraisal of the

loan project the final approval is obtain from the manager. If the loan amount crosses a

certain amount (no found), managers send the loan project to the principal office for

final approval. The experts in principal office find out different projected ratios and

developed and understanding about the potentiality of the project. Bank evaluates a

loan proposal by considering few predetermined variables. These are:

Safety

Liquidity

Profitability

Security

Purpose of the loans

Sources of repayment

Diversification of risk etc.

The most important measure of appraising a loan proposal is safety of proposal. Safety

is measured by the security offered by the borrower and repaying capacity of the

borrower. The attitude of the borrower is also important consideration. Liquidity means

the inflow of cash into the project in course of its operation. The profit is the blood of

any commercial institution. Before approval of any loan project the bank authority has

to ensure that the proposed project will be profitable venture. Profitability is assessed

from the projected Profit and Loss Statement. The security is the only tangible asset

remains with the banker. Securing of collateral is the only weapon to recover the loan

amount. So bank has to see that the collateral is easy to sale and sufficient to recover

the loan amount. Bank can not sanction loan by only depending on collateral.

The sources of the payment of the project should be a feasible one. During sanctioning

any loan Bank has to be attentive about diversification of risk. All money must not be

disbursed amongst a small number of people. In addition any project must be

established for the national interest growth.

41

6.6 COLLATERAL EVALUATION:

Janata Bank Ltd. is very cautious about valuation of the collateral. The bank officials

simultaneously evaluate the collateral of the party offered by the private firm. The

valuation of the collateral increases the accuracy of its value estimated. Three types of

value of the collateral are assumed:

Current market price

Distressed price

Price after five years

The legal officers of the bank check the document ascertain their impurity.

6.7 FINAL DECISION ABOUT THE PROJECT

If the loan decision remains with the branch level, that branch sanctions the loan and if

the approving authority is Head Office then the decision comes to the branch by telex

or fax.

6.8 PROPER SUPERVISION OF THE PROJECT

If such provision is kept in the sanction contracts, the Janta Bank officials Ltd. go to the

project area to observe how the loan is utilized. If no such clause to supervise the loan

is added, even then the bank can see the performance of the project.

6.9 DOCUMENTATION OF THE LOAN

These are the most frequently used and common documents of above mentioned

charged and for other formalities for sanctioning the loan:

Demand Promissory Note: Here the borrower promises to pay the loan as and

when demanded by the bank to repay the loan.

Letter of Arrangement: Here the written amount of the loan sanctioned to the

borrower is specified.

Letter of Continuity: It is used to take continuous facilities as providing

continuous securities.

Letter of Hypothecation: It is the written document of the goods hypothecated

thus to put in case of need.

Stock Report: This report is used for SOD and CC. In this report information

about the quality and quantity of goods hypothecated have furnished.

42

Personal guarantee: It is the additional confirmation of the borrower to repay.

Guarantee of the Directors of the company.

Resolution of the board of directors: It is used to borrow the fund to execute

documents and complete other documents.

Letter of disclaimer: By this letter, the borrower withdraws his all claim on

the property/mortgaged.

Letter of Acceptance: Letter indicating the acceptance of the sanction

proposal by the borrower.

Letter of Pledge: It is the written document of the goods pledge thus the

legality of holding the goods.

Letter of Disbursement: This is the document through which the payment of

sanctioned loan indicates.

Letter of partnership: In case of partnership firm, the partnership deeds are to

be provided.

Letter of Installment: The amount of installment that is to be paid at certain

intervals.

Tax Paying Certificate.

Any document if described, as essential in the sanctioned advice sanctioned

by the Head Office.

6.10 CREATION OF CHARGES FOR SECURING LOAN

For the safety of loan, Janata Bank Ltd. requires security from the loaner so that it can

recover the loan by selling security if borrower fails to repay. Creation of a charge

means making it available as a cover for an advance. The method of charging should be

legal, perfect complete. Importance of charging securities is as:

Protection of interest.

Ensuring the recovery of the money lent.

Provision against unexpected change.

Commitment of the borrower.

Securities are of two types:

a) Primary Security-Security deposited by the borrower himself to cover the loan

such as FDR, cash, PSS, PSP, easily cashable items.

b) Collateral Security-Any type of security on which the creditor has personal

right of action on the debtor in respect of advance.

43

Chapter Seven

RECOVERY PERFORMANCE OF JANATA BANK LTD.

7.1 PROGRAMS FOR LOAN RECOVERY

7.2 RECOVERY PROGRAMS TO BE TAKEN BY JANATA BANK

LTD.

7.3 RECOVERY PATTERNS AND LOAN AND ADVANCES

7.4 PROBLEMS IN LOAN RECOVERY

44

7.1 PROGRAMS FOR LOAN RECOVERY

When Janata Bank Ltd. sanctions loans and advances to its customers, they clearly state

the repayment pattern in the loan agreement. But some credit holders do not pay their

credit in due period. The nationalized and private sector commercial banks have to face

this sort of problems. This situation is, especially severe in Janata Bank Ltd. To

overcome the problem of overdue loan, the bank need take particular loan recovery

program.

7.2 RECOVERY PROGRAMS TO BE TAKEN BY JANATA BANK LTD.

To establish credit supervision and monitoring cell in the bank

To re-structure the loan sanctioning and distributing policy of the bank

To sanction loans and advances against sufficient securities as best as

possible

to give more powers to the branch manager in credit management decision

making process

To offer a package of incentives to the sound borrowers

To give more emphasis on short term loans and advances

To impose restrictions on loans and advances for sick industries

To take legal actions quickly against unsound borrowers as best as possible

within the period specified by the law of limitations.

7.3 RECOVERY PATTERNS AND LOAN AND ADVANCES

Generally Janata bank Ltd. sanctions loans and advances to every sector of an

economy. Before going into details of recovery performance, we have to be familiar

with some terms used in recovery performance:

Disbursement: highest outstanding balance on any date during the reporting

period minus outstanding balance at the end of the preceding period.

Demand for recovery: overdue at the end of the reporting period plus recovery

during the reporting period.

Recovery: highest outstanding balance on any date during the reporting period

minus outstanding balance at the end of the recovery period.

Outstanding: Outstanding figures in the ledger at the end of the reporting

period.

45

Overdue: Demand for recovery minus recovery.

Table: Recovery performance of Janata Bank Ltd.(Tk in crore)

ParticularsPhase-1 Phase-2

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Total

disbursement1821 2310 2468 3145 3214 3546 3632 5476 5925 6542

Demand for

recovery4257 4365 4825 5154 5796 5986 6475 6849 7214 7544

Recovery 1618 1921 2127 2371 2492 2933 2590 3288 3607 3,794

Overdue 2639 2444 2698 2783 3304 3053 3885 3561 3607 3847

Recovery as a

percentage of

DFR

38% 44% 47% 46% 43% 49% 40% 48% 50% 49%

Overdue as a

percentage of

DFR

62% 56% 53% 54% 57% 51% 60% 52% 50% 51%

Outstanding 5875 5295 5733 7341 8095 9329 9975 10146 10779 12447

7.4 PROBLEMS IN LOAN RECOVERY

There are a lot of reasons for which the loan recovery of the bank is very defective. In

most cases, problems may be raised from sanctioning procedures of loan, investigation

of the project, and investigation of the loans etc. that is, the problem in loan recovery

proves the outcomes of the default process in loan disbursement. The main reasons of

poor loan recovery are categorized in four broad types as follow:

A. Problems created by economic environment

The following problems arise from the effect of economic environment:

46

1. Changing in the management pattern: Changing of management patterns may

delay the recover of mature loan.

2. Changing in industrial patterns: The nationalized banks sometimes sanction

loan to the losing concern for further improvement of the respective sector, but

in most cases, they fail to achieve progress.

3. Operation of open market economy: In our country mainly industries become

sick and also close their business on account of emerging of open market

economy. The cost of production is high and the quality of goods is not of

required of standard. As a result, they become the losing concerns and the

amount of bad loan increases.

4. Rapid expansion of business: There are many companies which expand their

business rapidly, but the expansion is for short time. In the long run, the amount

of classified loan increases.

B. Problems created by government

The following problems are arisen by the government:

1. External pressure: Janata Bank Ltd. has also faced many problems in

the loan recovery process as a part of continuous pressure from various

interested groups.

2. Loan to government organization: Janata Bank Ltd. is bound to sanction

loan to government organization, though these are losing concern. For

this reason, banks faced problems in loan recovery.

3. Legal problems: Existing rules and regulations are insufficient to cover

the legal aspects of loan recovery. As a result, defaulters can get release

easily from all charges against them.

4. Frequent changes in government policies in regard to recovery of loan.

C. Problems created by the bank:

The following problems are created by the banks:

1. Lack of analysis of business risk: Before lending, Janata Bank Ltd. does

not properly analyze the business risk of the borrowers and the bank

47

cannot forecast whether the business will succeed or fail. If it fails to run

well, the loan becomes classified.

2. Lack of proper valuation of security or mortgage property: In most

cases, bank fails to determine the value of security against the loan. As a

result, if the loan becomes classified, the bank cannot recover its loan

through the sale of mortgage.

D. Other general causes of poor loan recovery:

Apart from the specific reasons creating problems to recoup loan, there exists some

other general causes which have a great impact on creating the problems which are

faced by the Janata Bank Ltd. under study in the loan recovery process. These are:

1. Early sanction and disbursement of loan to the borrowers without proper

inspection of the project by the bank on account of pressure from

lobbying group.

2. Lack evaluation of technical and economic feasibility of the program.

3. Delay in disbursement of credit.

4. Credit is not allowed to actual entrepreneurs.

5. Lack of proper supervision.

6. Illiteracy of borrowers.

7. Negative attitude of borrowers to repay the loan.

8. Deterioration of the value system of the borrowers.

9. Money borrowers use their loan-money other than specified project, i.e.,

if the loan is sanctioned for industrial purpose; they use the money in

house building or purchase of land for their own purpose.

10. Sometimes borrowers invest their money outside the country. Many

borrowers transfer loan money to abroad where they deposited this

money in their own account or spent some other purpose.

11. Sometimes local borrowers are found to be so much compelled to grant

them loan without proper study due to some unexpected reasons. Since

these borrowers are capable of getting loan by exercising their influence,

they can also escape the repayment liability.

12. Problems responsible for non-implementation and delayed

implementation of project for which the entrepreneurs of the project

cannot repay the loan. The causes of failure may be:

48

▫ Failure to ascertain the economic availability of the projects

▫ Time lag between approval and sanctioning of the projects

▫ Import of machinery and raw materials both are the problems of

paucity of foreign exchange and procedures of licensing.

All of these reasons discussed above are general reasons for problems loan recovery of

Janata Bank Ltd. Besides these, there are some specific reasons for loan recovery

problems faced continuously by Janata Bank Ltd. They are as:

Loans are given under fictitious names and enterprise

Loans are given without sufficient securities

Approval of the loans in excess of the branch manager’s power

Improper monitoring and supervision of credit

Political misuse if loan programs operated by the public sector banks

Lack of timely action against willful defaulter

Loans are sometimes for economically unsound project.

Problems in loan recovery are the outcome of the default on loans disbursements in the

earlier period.

49

Chapter Eight

CLASSIFIED LOANS AND BANK’S PERFORMANCE

8.1 INTRODUCTION

8.2 SIGNS FOR CLASSIFICATION

8.3 LOAN CLASSIFICATION-GUIDELINES FROM

BANGLADESH BANK

8.4 PERFORMANCE OF JANATA BANK LTD.

8.5 IMPACT OF PROVISION FOR LOAN ON BANK’S PROFIT

50

8.1 INTRODUCTION

Banks are financial service firm, producing and selling professional management of the

public’s funds as well as performing many other roles in the economy. But now- a-days

commercial banks are not performing their activities smoothly for a large burden of

default loan. Every year Janata Bank Ltd. distributes thousand crore taka among

individuals, organizations etc. but a large sum of these distributed fund cannot be

recovered in due time. The Bank has to classify this loan. In this chapter I would like to

concentrate on classification procedure, provision making for particular classification,

performance of the bank regarding classified loan and recovery of such classified loan.

8.2 SIGNS FOR CLASSIFICATION

First and foremost requirement for any and all credit managers is to identify a problem

credit in its earlier stages by recognizing the signs of deterioration. Such signs include

but not limited to the following:

1. Non payment of interest or principal or both on due dates or past dues beyond a

reasonable period or recurring past dues.

2. In case of Overdraft no movement in the account beyond a reasonable period.

3. Deterioration in financial condition of the client, as gathered from client’s latest

financial statement.

4. A shortfall in collateral coverage, particularly if the collateral was a key factor in

the decision-making.

5. Death or withdraw of key-owners or management personnel.

6. Company filing for bankruptcy or voluntary dissolution.

7. Adverse market report about the company itself or its principal owners.

8.3 LOAN CLASSIFICATION-GUIDELINES FROM BANGLADESH BANK

Classification of overdue loans and advances opened a new era in the credit

management of commercial banks in Bangladesh. Before 1989 no specific guidelines

51

were followed by the commercial banks for this purpose. In 1989, Bangladesh Bank

issued BCD circular No.34/1989 stating specific rules and conditions of loan

classification.

After that each schedule banks except BKB, RAKUB, and BSB would be responsible

for its own loan classification according to the guidelines are presented in the following

table:

TABLE: LOAN CLASSIFICATION SYSTEM*

Length of overdueStatus of

classificationRate of provision

Frequency of

classification

All loans except

Agricultural loans:Annual provision

Less than 1 year Unclassified 1%

Loans overdue for 1 year but

less than 3 yearsSubstandard 10%

Loans overdue for 3 years

but less than 5 yearsDoubtful 50%

Loans overdue for 5 years or

moreBad/loss 100%

For agricultural loan:

Loans not overdue for 5

years or more

Classified,

substandard,

doubtful

5%

Loans overdue for 5 years or

moreBad/ loss 100%

*Source: BCD Circular no. 1989

According to this circular loans and advances were classified on a loan by loan basis

rather sample classification. This process was continued till 1994. Bangladesh Bank

further issued a circular in1995 (BCD circular#20/1994). The title of the circular was

“Revised rules of classification and provisioning of loans and advances,” which came

into implementation from January 1, 1995.

52

Table: schedule of loan classification and provision program*

a. types of

classification1st stage 2nd stage 3rd stage 4th stage 5th stage

Period

overdue

Period

overdue

Period

overdue

Period

overdue

Period

overdue

UnclassifiedLess than

18 months

Less than

12 months

Less than

19 months

Less than 6

months

Less than 3

months

Substandard

18 months

or more but

less than 36

months

12 months

or more but

less than 24

months

9 months or

more but

less than 24

months

6 months or

more but

less than 12

months

3 months or

more but

less than 6

months

Doubtful

36 months

or more but

less than 48

months

24 months

or more but

less than 36

months

12 months

or more but

less than 24

months

9 months or

more but

less than 12

months

3 months or

more but

less than 6

months

BadMore than

48 months

36 months

or more

36 months

or more

24 months

or more

12 months

or more

b. rates of

provision

Unclassified 1% 1% 1% 1% 1%

Substandard 10% 10% 15% 15% 20%

Doubtful 50% 50% 50% 50% 50%

Bad 100% 100% 100% 100% 100%

c. period of

classification

Annual

basis

Half yearly

basis

Half yearly

basis

Quarterly

basis

Quarterly

basis

*Source: BCD circular no. 20 of 27/12/1994

53

For loan classification Bangladesh Bank also issues circular time to time after

27/12/1994 like BPRD circular no 16,9,2,9 and 17 of 6/12/1998, 14/5/2001, 15/3/2005,

25/8/2005, and 5/07/2006 respectively. Some of these are as follows:

Table: status, type and definition of classification*

Status loan type Definition of status

Unclassified . all current loan all current loans with

required eligible security

Sub standard (SS)

When degree of risk for

non-payable is high but

there is reasonable respect

that the loan condition can

be improved

Continuous/demand/ term

loan

(less than 5 years)

more than 5 years

short term agri. credit and

micro credit

overdue is more than 3

months but less than 6

months if default amount

of installment is equal to

installment payable in 6

months

If default amount of

installment is equal to

installments payable in 12

months.

overdue is more than 12

months but less than 36

months

Doubtful (DF)

When chance of recovery

is uncertain

Continuous and demand

Term loan less than 5

years

More than 5 years

overdue is more than 6

months but less than 9

months

If default amount of

installment is equal to

installments payable in 12

months.

If default amount of

installment is equal to

54

Short term agri. credit and

micro credit

installments payable in 12

to 18 months.

Overdue is more than 36

months but less than 60

months.

Bad/ loss (BL)

No security held, borrower

not traceable, time barred

loans, no hope of recovery

Continuous and demand

Term loan

(up to 5 years)

more than 5 years

Short term agri. credit and

micro credit

overdue is more than 12

months

If default amount of

installment is equal to

installment payable in18

months.

If default amount of

installment is equal to

installment payable in 24

months.

overdue is more than 60

months

Source: Bangladesh Bank, BRPD Circular No. 16 of 1998*

Table: loan classification system, 2006*

Standard: RateGeneral provision maintained on unclassified Loans and Advances ( all other credit)

1%

General provision maintained on House Finance (HF) and Loan for Professional (LP)

2%

55

General provision maintained on other than (HF) & (LP) 5%General provision maintained on Short Term Agriculture Credit & Micro Credit

5%

General provision maintained on Small Enterprise financing 2%Special Mention Account:Special Mention account Loans & Advances 5%

Classified loan and advances Substandard Loans & Advances 20%Doubtful Loans & Advances 50%Bad /Loss Loans & Advances 100%

*Source: Bangladesh Bank, BRPD Circular No. 5 of 2006

Table: loan classification system (international standard)

Length of overdueStatus of

classificationRate of provision

Frequency of

classification

Less than 3 months Unclassified 1%-5%

Loans overdue for

3 months but less

than 6 months

Sub standard (SS)10%-25%

Loans overdue for

6 months but less

than 9 months

Doubtful (DF)50%-75%

Loans overdue for

9 months or moreBad/ loss 100%

*Source: Studies in Bangladesh Banking, BIBM, 2005

8.4 PERFORMANCE OF JANATA BANK LTD.

From my analysis it is found that during first phase (1998-2002) total loan of Janata

Bank Ltd. was TK 51285 crore of which classified loan was TK 8055 crore. That is,

15.71% of total credit is classified. During second phase (2003-2007), total loan of the

bank was TK 52676 crore of which classified loan was TK 12163 crore. That is 23.09%

of total credit is classified.

56

Table: Classified loan of Janata Bank Ltd.

Year 2002 2003 2004 2005 2006 2007

Total 8095 9329 9975 10146 10779 12447

Unclassified 5145 6497 7031 7881 8981 11023

Loan (64) (70) (70) (78) (83) (89)

Classified 2950 2832 2944 2265 1798 2887.3

Loan (29) (30) (30) (22) (17) (31)

Source: annual report of Janata Bank Ltd. 2002, 2003, 2005,2007

8.5 IMPACT OF PROVISION FOR LOAN ON BANK’S PROFIT

Provisioning by the bank has not been isolated action, but represents one component in

an ongoing set of negotiations and relationships between borrowers and the banks,

while the borrowers wish to minimize their servicing obligations without damaging

their prospect of future market access, the lending bank wish to maximize their

receipts. Such maximization may involve agreeing to terms which are not so stringent

as to encourage borrowers to opt for all out default. Provisioning has the effect of

bringing the bank’s actual balance sheet more in line with the market perception of

what they should look alike.

Bangladesh Bank provides specific guidelines for loan provisioning and bases for

calculating such provisions. Provisions for unclassified as well as classified loan are as

follows:

Table: rates loan provision

Unclassified loan Provision Classified provision

Small enterprise

financing2% Substandard 20%

Consumer 2% Doubtful 560%

57

financing

Except SEF, CF

and SMA1% Bad or loss 1000%

Special account Mention 5%

Bank and financial sector may be termed as the vital complementary power of the

economy. But the uncertainty in respect to effectiveness of this sector in the economy

continuously increases over time. Now a days it open secret that JBL is under direct

control of the Finance Ministry. Credit management of JBL was so meaningless and

corrupted as it is now assumed that more than Tk 30000 crore have become

unrealizable within the last 10 years.

58

Chapter Nine

GUIDELINES FOR CREDIT MANAGEMENT

9.1 INTRODUCTION

9.2 THE COMPANIES ACT 1991

9.3 THE INTERNATIONAL ACCOUNTING STANDARDS (IAS)- 30

9.4 GUIDELINES FOLLOWED BY BANK UNDER STUDY

59

9.1 INTRODUCTION

Commercial banks of Bangladesh are incorporated under Companies Act 1994 and

Bank Companies Act 1991. But none of this act clearly mentions guidelines for

managing credit in commercial banks. Central bank is the controller of money market

in any country. As central bank, Bangladesh Bank controls money market in our

country. Bangladesh bank, time to time, issues some guidelines and regulations for

operation of a banking concern. These guidelines are general in nature. Besides these,

every commercial bank sets credit guidelines for these operations. Whatever be the

guidelines, the aim of it is to reduce the total amount of unsound credit as well as

improve the overall performance of the banks.

9.2 THE COMPANIES ACT 1991

According to the Bank Companies Act 1991, the following rules must be followed by

any commercial bank in our country:

Section Contents

22(1)(a)

22(2)(c)

27

Any bank other than new or specialized

bank will not declare dividend on its

share until the bank as written off its

previous losses preliminary expenses and

other deferred revenue expenses.

Bank will declare dividend whatever be

stated elsewhere if and only if bank will

take proper steps for their bad and

doubtful credit in accordance with the

satisfaction of their auditors.

Discuss on some limitations and

restrictions on the distribution of loans

and advances

60

29 Without prior approval of the

Bangladesh Bank, commercial banks will

not extend its credit policy any way.

37 Bangladesh Bank can disclose

collectively or in any other form the

information about the overdue loans and

advances which fall due to the BB that

those information are required to be

disclosed only in public interests.

9.3 THE INTERNATIONAL ACCOUNTING STANDARDS (IAS)- 30

In our country Institute of Chartered Accountants of Bangladesh (ICAB) has so far

adopted 21 IASs out of 40 issued so far. The original IAS 30 was issued in January

1995. IAS 30 is a Generally Accepted Accounting Standard intended for application in

the financial statements of the bank and similar financial institutions. It is a special

purpose; disclosure based accounting standard catering to the need for proper

presentation of disclosures in the financial statements of bank. It enumerates the

accounting principles and disclosure requirements of published financial statements of

banking companies. It thereby provides definitive guidance to corporate management

with regard to the preparation and to independent auditors for audit of financial

information of banks.

Bangladesh Bank issued a circular entitled Amendment of First Scheduled Forms of the

Bank Companies Act 1991, (BRPD Circular No. 03 dated 18 April 2000). Under this

circular, newly amended forms have been made mandatory for all concerned banks and

financial institutions since 30 March 2000 in Bangladesh. The new forms have been

introduced with a view to ensuring the discipline in the banking sector, to minimize the

unforeseeable risk, to provide true, relevant and reliable information to the depositors

and shareholders and to meet the financial disclosures in compliance with the

International Standards. However, the financial institutions should be easy to

understand, informative and transparent. The new forms will reflect all these aspects in

reporting financial information.

The features of the newly introduced formats of IAS 30 are as follows:

61

a. To provide vertical form of financial statements. This form complies with

the international accounting standards though the heads of accounts are

same as those of the previous forms;

b. To disclose the assets and liabilities according to their relative liquidity;

c. To bring more transparency in reporting financial position of banks and

financial institutions, it is required to disclose gross loans and advances and

bills discounted and purchased after charging the necessary provisions

thereon. The new format of balance sheet provides the relevant policies for

this practice;

d. To disclose the required provisions on securities investments under the new

system;

e. To disclose the loan loss provisions on the profit and loss account separately

and then show the earning per share (EPS) of the banks;

f. To show the contingent and contra items (i.e off balance sheet items) on

separate statement and enclose with the balance sheet;

g. To make comparison between the performance of two financial years, the

immediate previous year’s financial statements to be furnished along with

the current year’s financial statements in the annual report; and

h. To furnish one additional statements viz. cash flow statements as per

international accounting standards.

9.4 GUIDELINES FOLLOWED BY JANATA BANK LTD.

Janata Bank Ltd. usually prepares its financial statements as per IAS 30 and forms

prescribed by the bank Companies Act 1991 after 2000. Before 2000 they usually

follow the old format for preparing statements. JBL violates the regulations prescribed

in Bank Companies Act 1991.

Generally public bank’s performance is worse than of private banks. Public banks

specially, Janata Bank Ltd. shows in its profit and loss account but it is found that if

they make actual provisions on their unsound loan they will incur loss.

Janata Bank Ltd. is concerned about the unsound credit. They started to maintain credit

risk management division for managing risk of default lo

62

Chapter Ten

CREDIT RATING OF JANATA BANK LTD.10.1 INTRODUCTION

10.2 CREDIT RATING

10.3 FACTORS OF CREDIT RATING

63

10.1 INTRODUCTION

Bangladesh Bank has made mandatory from January 2007 for all banks to have

themselves credit rated by a credit rated agency vide BRPD Circular no. 6 of July 2006

for all banks. The first rating by an external independent rating agency will have to be

completed by June 2007. Accordingly Janata Bank has appointed Credit Rating

Agency of Bangladesh (CRAB) to conduct Credit Rating of the bank which completed

invariably by 30th June 2007. With this end and view a memorandum of understanding

has been signed in between Janata Bank and CRAB on 14th May 2007.

10.2 CREDIT RATING

Credit Rating of Banks provides opinion on the types of risks associatesd with the

relative ability of a bank for timely servicing its debts and other obligations. The rating

exercise is done through a quantitative cum qualitative approach following a structured

methodology.

10.3 FACTORS OF CREDIT RATING

The major factors considered in rating analysis are as follows:

A.Quantitative Factors:

i.Capital adequacy

ii.Assets Quality

iii.Funding & Leverage

iv.Liquidity Requirements

v.Earning Quality

vi. Market Sensitivity

B. Qualitative Factors

i.Owership

ii.Management Quality

iii.Risk Management

iv.Compliance with the Statutory

v.Accounting Quality

vi.Size & Market Pressure

vii. Govt. Support etc.

64

Evaluation of credit management of Janata Bank Ltd. from the

customers’ point of view:

During my internship period in Janata Bank Ltd, I asked a number of customers

regarding the credit management of the bank. The interpretation of the data (at a

glance) is given below:

Subject of asking questions:

1. Image of the Janata Bank Ltd. to the customers is satisfactory.

2. Bank’s relation with customers is good.

3 The formalities followed by the bank providing loan are necessary.

4. The processing of providing loan is quick.

5. The bank keeps customers informed about when loans and advances are provided.

6. The bank’s authority tries to provide its services at the same time it promises to do so.

7. You feel safe in your loan-transaction with JBL.

8. When problems arising from loan facilities the JBL authority shows sincere concern on it.

9. The terms and conditions are flexible regarding loan sanction.

10. The loan interest rate is competitive

11. The amount of security against loan amount is tolerable.

12. Circumstances arising from loan default are strict.

Total number of sample is 10 in every subject.

In this table all the attributes are having specific points.

The table ratings are as follows:

Strongly agree 5

Agree 4

Neutral 3

Disagree 2

Strongly disagree 1

65

Image of Janata Bank

10%

70%

10%10% 0%

Strongly Agree Agree Neutral

Disagree Strongly Disagree

Table-1

Image of Janata Bank Ltd. to the customer is satisfactory

SL No. Parameters No. of respondents Percentage

1 Strongly agree 1 10

2 Agree 7 70

3 Neutral 1 10

4 Disagree 1 10

5 Strongly disagree 0 0

Source: survey of primary data

Calculation:

Total points = 10*5+70*4+10*3+10*2+0*1 = 380

The weighted average is 380/15 = 25.33

Interpretation of the data:

In the point “Image of the Janata Bank Ltd. to the customers is satisfactory”, 10% of

the sample customers strongly agree, 70% agree, 10% neutral, 10% disagree with this.

Table- 2

Bank’s relation with customers is good

66

10%

80%

0% 10% 0%

Strongly Agree Agree NeutralDisagree Strongly Disagree

SL No. Parameters No. of respondents Percentage

1 Strongly agree 1 10

2 Agree 8 80

3 Neutral 0 0

4 Disagree 1 10

5 Strongly disagree 0 0

Source: survey of primary data

Calculation:

Total points = 10*5+80*4+0*3+10*2+0*1 = 390

The weighted average is 390/15 = 26

Interpretation of the data:

In the point “Bank’s relation with customers is good” as answer of this question, 10%

of the sample customers strongly agree, 80% agree, and 10% disagree with this.

Table- 3

The formalities followed by the bank providing loan are necessary.

67

10%

20%

60%

10% 0%

Strongly Agree Agree Neutral

Disagree Strongly Disagree

SL No. Parameters No. of respondents Percentage

1 Strongly agree 1 10

2 Agree 2 20

3 Neutral 6 60

4 Disagree 1 10

5 Strongly disagree 0 0

Source: survey of primary data

Calculation:

Total points = 10*5+20*4+60*3+10*2+0*1 = 330

The weighted average is 330/15 = 22

Interpretation of the data:

In the point “The formalities followed by the bank providing loan are necessary” as

answer of this question, 10% of the sample customers strongly agree, 20% agree, 60%

neutral, 10% disagree with this.

Table- 4

The processing of providing loan is quick.

SL No. Parameters No. of respondents Percentage

68

0% 10%10%

70%

10%

Strongly Agree Agree Neutral

Disagree Strongly Disagree

1 Strongly agree 0 0

2 Agree 1 10

3 Neutral 1 10

4 Disagree 7 70

5 Strongly disagree 1 10

Source: survey of primary data

Calculation:

Total points = 0*5+10*4+10*3+70*2+10*1 = 220

The weighted average is 220/15 = 14.67

Interpretation of the data:

In the point “The processing of providing loan is quick” as answer of this question,

10% of the sample customers agree, 10% neutral, 70% disagree, and 10% strongly

disagree with this.

Table- 5

The bank keeps customers informed about when loans and advances are provided.

SL No. Parameters No. of respondents Percentage

1 Strongly agree 0 0

69

0% 20%

70%

10% 0%

Strongly Agree Agree NeutralDisagree Strongly Disagree

2 Agree 2 20

3 Neutral 7 70

4 Disagree 1 10

5 Strongly disagree 0 0

Source: survey of primary data

Calculation:

Total points = 0*5+20*4+70*3+10*2+0*1= 310

The weighted average is 310/15 = 20.67

Interpretation of the data:

In the point “The bank keeps customers informed about when loans and advances are

provided” as answer of this question, 20% of the sample customers agree, 70% neutral,

and 10% disagree with this.

Table-6

The bank’s authority tries to provide its services at the same time it promises to do so.

SL No. Parameters No. of respondents Percentage

1 Strongly agree 0 0

2 Agree 2 20

70

0% 20%

70%

10% 0%

Strongly Agree Agree Neutral

Disagree Strongly Disagree

3 Neutral 7 70

4 Disagree 1 10

5 Strongly disagree 0 0

Source: survey of primary data

Calculation:

Total points = 0*5+20*4+70*3+10*2+0*1 = 310

The weighted average is 310/15 = 20.67

Interpretation of the data:

In the point “The bank’s authority tries to provide its services at the same time it

promises to do so” as answer of this question, 20% of the sample customers agree, 70%

neutral, and 10% disagree with this.

Table-7

You feel safe in your loan-transaction with JBL.

SL No. Parameters No. of respondents Percentage

1 Strongly agree 2 20

2 Agree 7 70

3 Neutral 1 10

71

20%

70%

10% 0%0%

Strongly Agree Agree Neutral

Disagree Strongly Disagree

4 Disagree 0 0

5 Strongly disagree 0 0

Source: survey of primary data

Calculation:

Total points = 20*5+70*4+10*3+0*2+0*1= 410

The weighted average is 410/15 = 27.33

Interpretation of the data:

In the point “You feel safe in your loan-transaction with JBL” as answer of this

question, 20% of the sample customers strongly agree, 70% agree, and 10% neutral

with this.

Table-8

When problems arise from loan facilities, the JBL authority shows sincere concern on

it.

SL No. Parameters No. of respondents Percentage

1 Strongly agree 0 0

2 Agree 0 0

3 Neutral 7 70

72

0%0%

70%

30%0%

Strongly Agree Agree Neutral

Disagree Strongly Disagree

4 Disagree 3 30

5 Strongly disagree 0 0

Source: survey of primary data

Calculation:

Total points = 0*5+0*4+70*3+30*2+0*1=270

The weighted average is 270/15 = 18

Interpretation of the data:

In the point “When problems arise from loan facilities, the JBL authority shows sincere

concern on it” as answer of this question, 70% is neutral, and 30% disagree with this.

Table-9

The terms and conditions are flexible regarding loan sanction.

SL No. Parameters No. of respondents Percentage

1 Strongly agree 0 0

2 Agree 8 80

3 Neutral 2 20

4 Disagree 0 0

5 Strongly disagree 0 0

73

0%

80%

20% 0%0%

Strongly Agree Agree Neutral

Disagree Strongly Disagree

Source: survey of primary data

Calculation:

Total points = 0*5+80*4+20*3+0*2+0*1 = 380

The weighted average is 380/15 = 25.33

Interpretation of the data:

In the point “The terms and conditions are flexible regarding loan sanction”, as answer

of this question, 80% of the sample customers agree, 20% neutral with this.

Table- 10

The loan interest rate is competitive

SL No. Parameters No. of respondents Percentage

1 Strongly agree 2 20

2 Agree 8 80

3 Neutral 0 0

4 Disagree 0 0

5 Strongly disagree 0 0

Source: survey of primary data

74

20%

80%

0%0%0%

Strongly Agree Agree Neutral

Disagree Strongly Disagree

Calculation:

Total points = 20*5+80*4+0*3+0*2+0*01= 420

The weighted average is 420/15 = 28

Interpretation of the data:

In the point “The loan interest rate is competitive” as answer of this question, 20% of

the sample customers strongly agree, and 80% agree with this.

Table- 11

The amount of security against loan amount is tolerable.

SL No. Parameters No. of respondents Percentage

1 Strongly agree 0 0

2 Agree 0 0

3 Neutral 0 0

4 Disagree 6 60

5 Strongly disagree 4 40

Source: survey of primary data

Calculation:

75

0%0%0%

60%

40%

Strongly Agree Agree Neutral

Disagree Strongly Disagree

Total points = 0*5+0*4+0*3+60*2+40*1 =160

The weighted average is160/15 =10.67

Interpretation of the data:

In the point “The amount of security against loan amount is tolerable” as answer of this

question, 60% of the sample customers disagree, and 40% strongly disagree with this.

Table- 12

Circumstances arising from loan default are strict.

SL No. Parameters No. of respondents Percentage

1 Strongly agree 2 20

2 Agree 5 50

3 Neutral 3 30

4 Disagree 0 0

5 Strongly disagree 0 0

Source: survey of primary data

Calculation:

Total points = 20*5+50*4+30*3+0*2+0*1 = 390

The weighted average is 390/15 = 26

76

20%

50%

30%0%0%

Strongly Agree Agree Neutral

Disagree Strongly Disagree

Interpretation of the data

In the point “Circumstances arising from loan default are strict” as answer of this

question, 20% of the sample customers strongly agree, 50% agree, and 30% neutral

with this.

From the survey, we can conclude that sometimes without proper investigation, the

management values the security randomly which is less than the actual value of the

security. The customers also criticize the margin rate of the bank.

From my survey, I also find that the customers, who are also involved in getting loan

from another private bank, complain the loan giving procedure of Janata Bank Ltd.

They comment that the procedure of getting loan is slower than the private bank. And

the cooperation of the private banks is comparatively better. Sometimes the customers

need lobbying with top management to get loan.

Though the customers complain the valuation process of security, which is pledged

against the loan, they choose Janata Bank Ltd. to get loan and advances because of its

competitive interest rate. Though the problems are faced by the customers, they prefer

Janata Bank Ltd. for its comparative lower interest rate, safety of their security, and

availability of the branches of the bank.

77

So the decision-making body, i.e. BOD/ Top Management should take proper steps in

all aspects of loan giving procedures and overall banking systems. The security

valuation system must be transparent and accurate and verified by the independent and

the efficient persons. The terms and conditions must be flexible from now. The

authority may arrange different programs and publish bulletin for the loan providing

procedure and which sectors are emphasized more as most of the people do not know

the loan procedure of the Janata Bank Ltd. In fine, all the employees must be more

amicable and cooperative.

78

Chapter Eleven

Findings and Analysis

79

Findings and analysis

Every bank has its own credit procedure. Bank under study possesses a standard credit

procedure. As the objective of my study is to make a comment on the credit

management of Janata Bank Ltd, I try my best to collect data for the study and find out

the reality. Based on the data generated during my study period I will sum up my

findings here and I think this will help me to achieve my objectives.

1. If we look at the historical background of Janata Bank, we see that, the

objective of JBL is to earn profit as well as to improve the economic welfare of

the people as a whole.

2. Janata Bank Ltd. has a significant role in long term project financing in both

agriculture and industrial sectors. Again JBL has a deep concern for rural

farmers.

3. Private sector usually concentrates in the urban areas where as public sector i.e.

JBL spread their banking network all over the world.

4. With a view to implementing government policies, JBL has been maintaining

its position in extending credit to government bodies, sector corporations and

private enterprises.

5. Though bank required both quantitative and qualitative analysis but for big

loans bank emphasizes on the lending risk analysis (LRA). But LRA is not a

perfect measure of credit analysis. Because businessmen in our society are

usually tempted to take resort of window- dressing that means accounts are so

manipulated that the vital facts are concealed and facts presented are superficial.

So banks have to go through both quantitative and qualitative analysis.

6. According to the standard and bank’s credit procedure, credit operation is

started from the customer application to the branch for the loan. But in most

cases, many customers go directly to the directors of the bank and directors

send them to the branch offices with his/her reference. In these cases, proper

appraisal is not possible as directors the most powerful persons and bank

management must give priority towards the decision of the directors. This

phenomenon is very common in the bank which hampers the spontaneous

procedure of credit appraisal.

80

7. Bangladesh Bank monitors all the policies of all the private and nationalized

banks of the country. According to the Bangladesh Bank’s strategy, all banks

must possess the standard policies which are designed by the central bank.

Janata Bank Ltd. also possesses a standard credit proposal form. In that form all

necessary information are required to fill up. But in practice credit officers do

not fill up the proposal form properly. Most of the cases, they use assumption

rather than exact figure. This practice might end up with bad or classified one.

8. A standard policy starts from the customer’s direct application for the loan in

the branch office. But it’s a common phenomenon that most of the customers

directly contact with Head office and Head office choose the branch offices to

disburse the loan. It hampers the normal procedure. Branches always stay under

pressure when they get order for disbursement from Head office. When

branches get order from the head office, then appraisal system loses its formal

track. So Head office should not send any order to the branch office without

prior appraisal.

9. Every bank has its own budget and plan regarding loan portfolio. This loan

portfolio must be diversified so that bank could diversify its risk. A proper and

preplanned portfolio can eliminate the risk of huge classified loan or bad loans

as this aspect is very much sensitive toward many external and internal factors.

The bank under study i.e. Janata Bank Ltd. does not have any proper guide line

where to invest; moreover they do not do any future plan to maintain a well

structured portfolio to decrease the possibility of classified loan. This type of

practice is working as an obstacle in smooth credit disbursement as well as in

credit appraisal system.

10. Most of the loans that JBL distributes are as cash credit hypothecation and JBL

emphasizes less on demand loan.

11. JBL distribute loans without sufficient security in some cases. This is violation

of the Bangladesh bank order.

12. In many cases bank face this problem because bank’s credit officer fails to

value collateral property. Proper valuation means collateral will exactly cover

the risk of bad loan. Officials must do it with due care.

81

13. The recovery performance of JBL is not in a satisfactory level at all and the

position of those in that respect deteriorated heavily during last two phases. The

recovery performance in agriculture is worse than in other sectors. On the other

hand, as private sector banks distribute more loans on short term basis and

relatively better than public sector. But if we compare it from the efficiency

point, then it is clear that they are not still efficient in credit management as

they are unable to recover half of their distributed loan in different sectors.

14. During first phase 15.71% of the total loan of JBL became classified and this

classified loan came down to 23% in the second phase.

15. JBL does not keep enough provisions against classified loans and advances.

16. Private sector banks are relatively efficient in processing and executing legal

actions against defaulters for their nonpayment of loans and advances in due

time that of public sector bank.

17. The credit management of JBL are not fully conformity with the guidelines

prescribed in the bank companies Act 1991 and International Accounting

Standerd-30(IAS-30)

82

Chapter Twelve

Conclusion and recommendation

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Conclusion and recommendationI have discussed so far about the different aspects of credit management Janata Bank

Ltd.. For my report, I have selected Janata bank Ltd. JBL plays an important role in the

banking sector as well as in our economy. The success of a bank depends largely on the

efficient credit management. A successful credit management is not only need for a

bank’s own performance but also it is needed for the smooth development of an

economy. In any strategy of economic development, therefore, it is essential to

emphasize the evaluation of a sound and well integrated credit management system

from the view point of both resources mobilization and efficient allocation of funds. In

conclusion it can be suggested a number of recommendations in order to overcome the

problems and how to remove the causes of problem in credit management.

Since this an exploratory research, hence the recommendation given are not decisions

rather they are only suggestions to improve the default rate. The recommendations are

made on the basis of survey findings.

1. Central Bank should take proper actions for ensuring equivalent distribution of loans

and advances.

2. Lending policies in our country should be geared to growth potential rather than

being determined by the pre-existing collateral.

3. Changes in lending policies will not suffice the purposes unless it is followed by a

change in the attitude and out look of both the borrowers and the bankers.

4. Improvement of credit management depends on the development of relevant,

adequate, proper and reliable data base at the public sector banks as well as private

sector banks in Bangladesh.

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5. For developing a reliable credit management system for the commercial banks

specially Janata Bank Ltd, it should require to introduce as improved information

system within bank as well as among the borrowers. Because ultimately it is what a

borrower does with money that should guide the credit plan, the borrowers also have to

know exactly where they are going, what their opportunities and how fast they can

move.

6. The security must be valued properly by the independent valuers and constantly

watched so that the value of mortgage property becomes sufficient to recover the

default loan.

7. Publishing the names of defaulter as well as good and regular payers in various

dailies and granting various sorts of facilities to good borrowers will create a moral

persuasion on the borrowers. This may decrease the number of defaulters and the

volume of large outstanding loan amounts as well.

8. Pressure from outsider and influence extorted by borrowers are also a great

impediment in the smooth functioning of loan recovery process. The role of

government in this case is the most important factor required to solve these sorts of

problem.

9. More and more competent personnel must be recruited to reduce the weakness of

credit management. Competent executives will ensure the reduction of wrong appraisal

and evaluation of projects.

10. Prompt legal actions be taken against willful loan defaulters

11. The new entrepreneurs should be encouraged in disturbing loans and those who

have the records of regular payment, should be given preference.

12. Steps should be taken so that guarantors cannot avoid their responsibility.

13. It is observed that the defaulters generally get various sorts of exemptions as

declared by the government from time to time. Government must not show any kind of

mercy to the defaulters in any way which may encourage the default culture. This type

of action may discourse the borrowers to become willful defaulters.

14. The existing huge amount of classified loans demand for special and corrective

attention for example:

By obtaining suitable reduction on amount.

Additional security.

More complete financial data concerning the obligor’s condition or

Other such action as the specific circumstances may require.

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15. The attempt to encourage banks to require borrowers comply with banking laws

and regulations and clear up industrial properties prior to granting a loan.

16. JBL should follow some straight ward mechanical procedures in assessing the risk

of a borrower.

17. The formulation of a sound credit policy in the possibility of default loans.

18. The formulation of a sound credit policy in the banking sector as a whole has to

take into account all these factors and each bank has to attempt to work out for itself

what it is capable of doing so as best as possible.

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Bibliography

Annual Report of Janata Bank Ltd. 2000-2007

Bangladesh Bank BCD &BPRD circulars

Chowdury, L.P; “A Textbook on Banker’s Advances”; 2nd Edition; Paradise Printer;

2002

Managing Core Risk in Banking: Credit Risk Management, Janata Bank Ltd, Head

Office, Dhaka.

Md. Maksudur Rahman Sarder & Prashanto Kumer Banerjee (December 1996);

Janata Bank Ltd., Head Office Circularss

Journal of Business Studies; “Break Even Point: A Project Appraisal Technique used in

Banking Sector.”

Md. Maksudur Rahman Sarker, “Credit Management of Commercial Banks: A

Comparative study of Public and Private Sector Banks”, The Bureau of Business

Research, University of Dhaka, August 1996

Rose, Peter. S; “commercial Bank Management”; Fourth Edition; Irwin-McGraw-Hill;

1999

Zikmund William, G., “Business Research Methods”; 7th Edition; Thomson South-

Western; 2003

WWW.janatabank-bd.com

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APPENDIX

Questionnaire for Managements of Janata Bank:

1. What is the main objective of credit program?

a) Only profit motiveb) Profit motive as well as social welfarec) Others

2. What kind of loans is provided by Janata Bank Ltd.?a) General creditb) Rural creditc) Foreign commercial loan d) Special program financing

3. Is there existence of delegation of authority in case of sanctioning loan?a) Yesb) No

4. Do you think that the credit policy is flexible to attract the customer?a) Yesb) No

5. Who are the target customers of Janata Bank Ltd.?a) Business manb) Farmersc) Entrepreneursd) Others

6. At what point / points will you give more emphasis in case of loan disbursement procedure?

a) Credit information of the customersb) Nature of the security of the customersc) Lending risk analysis

7. Would you think that the procedure is more familiar with the customers?a) Yes b) No

8. What are the basic tools of credit management?a) GRGb) Financial spreadsheetc) Others

9) Is there any provision to calculate “N” score and “Z” score in case of choosing business or firm for giving loan?

a) Yesb) No

10. Is there any option to sanction personal loan?a) Yesb) No

11. What are the sectors in which JBL gives more priority?

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a) Industrial Financing Programb) Import and Export Financing Programc) Agricultural financing programd) General Credit Program

12. In what maturing stages JBL classifies the bank loans and advances?a) According to Bangladesh Bankb) Own procedure

13. Does Janata Bank Ltd. permit any loan without any collateral security?a) Yesb) No

14. Does the credit department supervise and monitor recovery performance of the distributed loans and advances?

a) Yesb) No

15. What are the main reasons to default loan?a) Loan given to fictitious nameb) Loan given without sufficient securitiesc) Political misuse of loan program

16. Is IAS # 30 strictly followed in preparing financial statements?a) Yesb) No

17. Are the forms of financial statements prescribed by Bank Companies Act 1991 followed?

a) Yesb) No

18. Do you think that enough provision against classified loans and advances are kept?

a) Yesb) No

19. Is there any latest loan program?a) Yesb) No

20. Standard Credit Proposal Forms designed by Central Bank are filled up Credit Officer with…

a) Exact figureb) Assumed figure

21. May the loan disbursement procedure be hampered arising from any situation?

a) Yesb) No

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Table 01: Rate of Interest for Different Sector as on 1.10.2007

Sl Name Details Rate01 AGRO

CREDITAll crops, sugarcane, shrimp cultivation, cattle raising, poultry, banana cultivasion, paan cultivasion

8.0%

Euipment for irrigation, Agro-equipment, Salt production

10.0%

Dal, Spices, Oil seed, Maize 2.0%02 PROVERTY

ALLIVITIONMuli-purposes based credit 11.0%SFDF 11.0%Credit for Self employment 11.0%Credit for Trained Unemployed Young 10.0%Credit for EducatedUnemployed Young 10.0%Self employment skill 11.0%NGO Linkage) 11.0%Ghoroa Credit (Agri)/ Ghoroa Credit (Non Agri) 10.0%Other personal Micro Credit 11.0%

03 EPECILIZED CREDIT PROJECT

Credit for Strong crops 10.0%Credit for flower Cultivation and Markeeting 10.0%BGSDP 10.0%Goat raising Project 10.0%Credit for production of HERBS 10.0%Credit for Genetically Modified cow rasing 10.0%Credit for Fisherish 10.0%Credit for Hadicaps / Disables 10.0%ATDP 10.0%

04 OTHER PROJECT

Consumer credit 14.0%Cyber café credit 12.0%Specials credit for Job holder 13.5%Doctors Loan 13.0%Wemen Entrepreneurs’ Credit 10.0%Small business development scheme 11.0%

05 RURAL PROJECT

Rural transportation 10.0%Land Mortgage Loan 10.0%

06 INDUSTRIAL CREDIT

Daily, Poultry, Fisherish (above 3 core Taka) 12.5%Term loan for Agri based Industry 11.0%Export Oriented Business 11.0%Cold storage for Potatoes 11.0%Other Industry 12.5%Lasing companies 12.5%

07 SME PROJECT

Industry having capital less than 3 core 12.0%Orher SME Loan 12.0%Loom Industry 10.0%

08 CURRENT Agro based Industry 12.0%

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CAPITAL

LOAN

Cold stroage 12.0%

Other current Capital Loan 13.5%

Husking Loan 12.0%

09 IMPORT

CREDIT

Readymade garments, Frozen foods, Agro products, Leather made products

7.0% + 1.0%

sevice charge

Packing credit 7.0% + 1.0%

sevice charge

Other export credit 7.0%+ 1.0%

sevice charge

LTR 14.0%

Export oriented project 13.5%

Intermidate term 12.5%

Cash credit 13.5%

PAD Cash FC 14.0%

PAD (UF) 14.0%

PAD (GMT) payable within 3 months 14.0%

PAD (GMT) payable after 3 months

10 OTHER

COMMERCIA

L LOAN

Other Commercial Credit 14.0%

Demand Loan 14.0%

11 OTHERS Transportation 13.5%

Brick Field 14.0%

Work Order 14.0%

BADC/ BRTC 13.5%

Loan Againest FDR 13.0%

Loan Against FDR in Other Banks 14.0%

Loan Against National Investment Bonds, ICB Unit, Insurance policy, Debenture

13.5%

Loan Against Wage, Honors Bond 13.0%

Food industry 13.0%

Service Industry 13.0%

Loan Against DPS 17.0%

Commercial Home Loan in Urban Areas 15.0%

Residential Home Loan in Urban Areas 14.0%

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Jute Business 13.0%

Commercial Credit for the project supported by

USA

13.0%

Diagonstic Business 15.0%

Travel Agency 15.0%

House Reconstraction Loan 14.0%

Miscellaneous 14.0%