Internship Report on Credit Policy of Brac Bank ltd.doc

8/9/2019 Internship Report on Credit Policy of Brac Bank ltd.doc

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Chapter: 1

Introductory Aspects

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1.1 Introduction

Banking system in Bangladesh has evolved from the British banking in undivided India. Banking as

such, however, was not unknown to this part of undivided India, and then called East Bengal.

Indigenous banking in Bangladesh is as old as banking in other parts of the world. Money used to be

accepted on deposit and advances used to be given. During Mughal period, indigenous banking

flourished. he !ubrana baniks, a bulling tradipg community used to do banking in the then Bengal.

!ubse"uently, larger banking was gradually taken over by the upcountry bankers who were known as

!heth, !hah etc. But !ubrnabaniks continued to operate in rural Bengal. #ith the British gradually

coming over to Bengal and setting here, banking in the form of $gency %ouses started flourishing in

&alcutta. Entry of the Bengalees into banking started in the early part of this century, especially in

the wake of !wadeshi movement.

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1.2 Methodology of the study:

he main source of information for developing these pro(ect activities has been collected from

banking day)to)day operations.

he details of the work plan are furnished below*

Data collection method

• +elevant data for this report has been collected primarily by direct investigations of different

records, papers, documents etc. operational process and different concerned personnel.• o structured "uestionnaire has been used.• Information regarding office activities of the bank has been collected through consulting

bank records and discussion with office personnel.

Data sources• Information and data for this report have been collected from both the primary and

secondary sources.

Primary Sources:

• -rom personal observation during direct working e perience with officials of Brac Bank

/imited.

Secondary Sources:

• 0rocedure Manual published by Bank.• $nnual report of Bank.• arious documents provided by Brac Bank /imited.• #eb site of Bank.

Data Processing

• Data collected from secondary sources have been processed manually and "ualitative

approach has been used throughout the study.

1. Scope

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I3ve tried to ac"uire knowledge about the overall banking system at Brac Bank &heragi pahar

branch. I3ve worked with all of sections to ac"uire knowledge about the operations, procedures of

the work followed by the bank.

$naly4ing the different deposits, loans and advances, customer services, profitability of the bank is

one of the ob(ectives of the study.

In addition of the principal ob(ective, the following are some of the common but significant

ob(ectives of the study*

1.4 imitations

his study of a short course of time is not free from harriers. I have faced some obstacles while

conducting the study, these are*

a. /ack of sufficient knowledge*!. ime limits*c. &ollection of data*d. /ack of financial assistance*e. 5nwillingness in giving full information*f. More formalities*g. 5nwillingness of &ustomers*h . Difference between actual and budgeted figure*i. he data re"uires for sufficient analysis for report writing could not be collected due to

e cessive workload.

6fficially it is restricted to supply the outsider any necessary documents of the Bank, which

is so confidential. !o I used conversation method to collect data and write on it. &ertainly it hindered

the process of collecting data. he officials used to remain very busy with their day)to)day tasks and

hence it becomes very difficult to find out the re"uired data according to my re"uirements.

Despite all of my efforts, here may remain some errors.

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Chapter: 2

"heoretical Aspects

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2.1 Credit Risk

Credit ris# refers to the risk that a borrower will default on any type of debt by failing to make payments which it is obligated to do. he risk is primarily that of the lender and includelost principal and interest , disruption to cash flows , and increased collection costs . he loss may becomplete or partial and can arise in a number of circumstances. 9 -or e ample*

• $ consumer may fail to make a payment due on a mortgage loan , credit card , line of credit, or other loan

• $ company is unable to repay amounts secured by a fi ed or floating charge over the assetsof the company

• $ business or consumer does not pay a trade invoice when due• $ business does not pay an employee:s earned wages when due•

$ business or government bond issuer does not make a payment on a coupon or principal payment when due• $n insolvent insurance company does not pay a policy obligation• $n insolvent bank won:t return funds to a depositor • $ government grants bankruptcy protection to an insolvent consumer or business

o reduce the lender:s credit risk, the lender may perform a credit check on the prospective borrower,may re"uire the borrower to take out appropriate insurance, such as mortgage insurance orseek security or guarantees of third parties, besid

Mitigating credit ris# /enders mitigate credit risk using several methods*

• $is#%!ased pricing * /enders generally charge a higher interest rate to borrowers who aremore likely to default, a practice called ris#%!ased pricing . /enders consider factors relating tothe loan such as loan purpose , credit rating , and loan)to)value ratio and estimates the effect onyield ; credit spread


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the lender to the seller ;insurer< in e change for payment. he most common credit derivative isthe credit default s'ap .

• "ightening * /enders can reduce credit risk by reducing the amount of credit e tended, eitherin total or to certain borrowers. -or e ample, a distributor selling its products to atroubled retailer may attempt to lessen credit risk by reducing payment terms from net 30 to net

15.• Di&ersification * /enders to a small number of borrowers ;or kinds of borrower< face a highdegree of unsystematic credit risk, called concentration ris# . /enders reduce this risk

bydiversifying the borrower pool.• Deposit insurance * Many governments establish deposit insurance to guarantee bank

deposits of insolvent banks. !uch protection discourages consumers from withdrawing moneywhen a bank is becoming insolvent, to avoid a bank run , and encourages consumers to hold their savings in the banking system instead of in cash.

>

http://en.wikipedia.org/wiki/Credit_default_swaphttp://en.wikipedia.org/wiki/Distribution_(business)http://en.wikipedia.org/wiki/Retailerhttp://en.wikipedia.org/wiki/Systematic_risk#Unsystematic_riskhttp://en.wikipedia.org/wiki/Concentration_riskhttp://en.wikipedia.org/wiki/Diversification_(finance)http://en.wikipedia.org/wiki/Deposit_insurancehttp://en.wikipedia.org/wiki/Bank_runhttp://en.wikipedia.org/wiki/Credit_default_swaphttp://en.wikipedia.org/wiki/Distribution_(business)http://en.wikipedia.org/wiki/Retailerhttp://en.wikipedia.org/wiki/Systematic_risk#Unsystematic_riskhttp://en.wikipedia.org/wiki/Concentration_riskhttp://en.wikipedia.org/wiki/Diversification_(finance)http://en.wikipedia.org/wiki/Deposit_insurancehttp://en.wikipedia.org/wiki/Bank_run


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Chapter%"hree

C(MPA)* P$(+I ,

-.1 rac an# td.

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B+$& Bank /imited, with institutional shareholdings by B+$&, International -inance &orporation

;I-&< and !horecap International, has been the fastest growing Bank in '@@7 and '@@8. he Bank

operates under a Adouble bottom lineA agenda where profit and social responsibility go hand in hand,

as it strives towards a poverty)free, enlightened Bangladesh.

$s an operational &ommercial Bank, B+$& Bank focuses on pursue une plored market niches in

the !mall and Medium Enterprise Business, which hitherto has remained largely untapped within the

country. In the last five years of operation, the Bank has disbursed over BD 18@@ crore in loans to

nearly 8@,@@@ small and medium entrepreneurs. he management of the Bank believes that this

sector of the economy can contribute the most to the rapid generation of employment in Bangladesh.

!ince inception in uly '@@1, the Bank:s footprint has grown to '' branches, 2'> !ME unit offices

and 1= $ M sites across the country, and the customer base has e panded to '@@,@@@ deposit and78,@@@ advance accounts through '@@=. In the years ahead B+$& Bank e pects to introduce many

more services and products as well as add a wider network of !ME unit offices, +etail Branches and

$ Ms across the country. 6ver the years, the bank is e panding its service coverage through

introducing new branches at different strategically important areas of the country. It is

sponsored by a number of entrepreneurs representing various business groups with e posure in

Carments, e tile, !teel Engineering, -inancial, Insurance, Electronics, and &ement and

&onstruction !ectors. he bank has its authori4ed capital k. ',@@ cores. It provides a wide

range of commercial banking services. $s a whole, corporate loans account for 7@ of the

bank:s loan portfolio, while retail loans account for the rest =@ as on 21st December '@@7.

he bank has '' branches, with staff strength of F'8 as on 21st December '@@7.

-.2. (!/ecti&e 0 oals

BB/3s main ob(ective is to ma imi4e profit through customer satisfaction, which very much refle es

the idea of marketing concept. Its ob(ective is to remain competitive. he Bank will support allconstructive reforms that are in the national interest and encourage more competition and choice for

the people. Besides investment in trade and commerce, the Bank will participate in the socio)

economic development of the priority sectors like agriculture, industry, housing and self)

employment in the country. It also wants to ensure high return on investment, sound growth and

profit and service with different service products.

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-.- Mission of • !ustained growth in :small Medium Enterprise: sector

• &ontinuous low cost deposit growth with controlled growth in +etained $ssets

• &orporate $ssets to be funded through self)liability mobili4ation. Crowth in $ssets through

!yndications and Investment in faster growing sectors

• &ontinuous endeavor to increase fee based income.

• Geep our Debt &harges at ' to maintain a steady profitable growth

• $chieve efficient synergies between the bank:s Branches, !ME 5nit 6ffices and B+$& field

offices for deliver of +emittance and Bank:s other products and services• Manage various lines of business in a fully controlled environment with no compromise on

service "uality

• Geep a diverse, far flung team fully motivated and driven towards materiali4ing the bank:s

vision into reality

-.4 ision of

HBuilding a profitable and socially responsible financial institution focused on Markets andBusiness with growth potential, thereby assisting B+$& and stakeholders build a A(ust, enlightened,

healthy, democratic and poverty free BangladeshA..

-.3 )ature of the usiness

Brac bank is a progressive commercial bank in privet sector)in Bangladesh. It creates new

opportunities for its clients. It gives customi4ed service and harmonious banker)client relationship.

It contributes towards formation of national capital, growth of saving and investment in trade,commerce and industrial sectors. It provides different types of commercial banking and services

to the customer of all strata in the society with in the stipulation laid down in the Bank &ompany $ct

1FF1. +ules and regulations framed by the Bangladesh bank from time to time.

-. Products 0 Ser&ices

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he bank offers a wide range of products and services. 5nder conventional deposit schemes it

renders savings account, current account, fi ed deposit, short)term deposit account, special savings

and fi ed deposit scheme etc and it also renders consumer financing, lease financing, small

business loan, house renovation loan, personal loan, foreign remittances etc. he Bank finances in

pro(ect loan, working capital loan, trade financing, house building financing, contractors financing,

cash credit, overdraft, trust receipt, guarantee, letter of &redit etc. In '@@7 the bank

introduced some new products such as -estival Business /oan, -estival 0ersonal loan, %ousing

/oan !cheme)'@@7 etc. he BB/ has plans to launch credit card ; isa card< and reintroduce

!D! ; !pecia l -i ed Deposit !cheme< in '@@8.

-.5 Departments of

If the (obs are not organi4ed considering their interrelationship and are not allocated in a particular

department, it would be very difficult to control the system effectively. If the department is not fit

for the particular works, there would be hapha4ard situation and the performance of a particular

department would not be measured. Brac Bank /imited has does this work very well. Different

departments of BB/ are as follows*

%uman +esources Department

Marketing

reasury Division

Ceneral !ervices division

&omputer and Information echnology Department

&redit Division

$ccounts Division

rade -inance Division

-.6 +eatures of

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an# is an intermediary institute. i#e other commercial !an# also has some special

features. "hey are as follo's:

• egal ,ntity: It is compulsory matter for a bank to achieve legal entity. he stronger legal

entity leads to effective banking program. BB/ has a strong legal entity.

• (rgani7ational Structure: BB/ has a well)set organi4ational structure. 6rgani4ational

structure is a precondition of effective banking activities.

• +inancial Sol&ency: hough BB/ is a new bank its ratio of li"uidity is well and strong.

!o, the clients get greater confidence in the bank.

• ocation of "he an#: /ocation is very useful for bank. he %ead 6ffice and the branches

of BB/ are located in the central point of the capital and the other district towns.

• $elation 'ith the Central an#: $s the BB/ is the government)registered bank, so it

maintains a friendly behavior with the Bangladesh Bank.

• Security: the BB/ is totally a secured bank. he clients of the bank get a heavy security on

their deposit.

• Management of the an#: he e ecutives and the officers of BB/ are very e perienced.

Ma imum e ecutives are e )government bank officers.

• +oreign ,8change: BB/ operates foreign e change business promptly. here are 12

branch deals with foreign e change.

• Security: the BB/ is totally a secured bank. he clients of the bank get a heavy security on

their deposit.

-.9 )et'or# of ranches

he BB/ has '' branches located at different areas of Bangladesh. 6ut of these, 12 branches are

located in Dhaka Division, 2 branches in &hittagong division, = branches in !ylhet division and

they has the plan of opening 7 branches at different prime locations of the country like +a(shahi,

essore, &omilla and &hittagong ;%alishahor< during JE '@@=.

-.1 (rgani7ational +lo'

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oard (f Directors

+igure: (rgani7ation Chart of rac an# imited

-.11 Corporate Profile

12

Managing Director

, P; +0AD S P;(perationsDi&ision

S P; +inancialinstitutionDi&ision

P; Personalan#in Di&ision

+A P;

Deputy Managing Director=Credit 0 ris# management>


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$ddress B+$& Bank /imited

1 Culshan $venue ,

Culshan )1

Dhaka 1'1'0hone K??@)')??'7@81)7-a K??@)')??12872E)Mail [email protected]#eb !ite www.bracbank.com&hairman -a4le %asan $bedManaging Director Imran +ahman$uditors +ahman +ahman %u". &hartered $ccounts

F Mohakhali &L$ Dhak)1'1'.

17

mailto:[email protected]:[email protected]


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Chapter%+our

C$,DI" $IS? MA)A ,M,)" I)

4.1 C$,DI" $IS? MA)A ,M,)" I)

he word credit comes from the /atin word H&redo meaning HI believe . It is a lender3s trust in a

person3sL firm3sL or company3s ability or potential ability and intention to repay. In other words,

credit is the ability to command goods or services of another in return for promise to pay such goods

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or services at some specified time in the future. -or a bank, it is the main source of profit and on the

other hand, the wrong use of credit would bring disaster not only for the bank but also for the

economy as a whole.

Brac Bank /imited is a third generation bank, which is committed to provide high "uality financial

servicesLproducts to contribute to CD0 through stimulating trade commerce, accelerating the pace

of industriali4ation and boosting up e port by allowing credit facilities. he failure of the

commercial bank is mainly occurs due to bad loans, which occurs due to inefficient management of

the loan and advance portfolio. he ob(ective of the credit management is to ma imi4e the

performing asset and the minimi4ation of the non)performing asset as well as ensuring the optimal

point of loan and advance and their efficient management. &redit management is a dynamic field

where a certain standard of long)range planning is needed to allocate the fund in diverse field and tominimi4e the risk and ma imi4ing the return on the invested fund. &ontinuous supervision,

monitoring and follow)up are highly re"uired for ensuring the timely repayment and minimi4ing the

default.

herefore, while analy4ing the credit management of BB/, it is re"uired to analy4e its credit

policy, credit procedure and "uality of credit portfolio. hese three aspects of credit management are

now discussed in the following section.

4.2 Credit Policy of

6ne of the most important ways, a bank can make sure that its loan meet organi4ational and

regularity standards and they profitable is to establish a loan policy. !uch a policy gives loan

management a specific guideline in making individual loans decisions and in shaping the bank3s

overall loan portfolio.

4.- Credit Principles

In the feature credit principles includes the general guidelines of providing credit by relationship

manager. In Brac Bank /imited they follow the following guideline while giving loan and advance

to the client.

&redit advancement shall focus on the development and enhancement of customer relationship.

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e change, bank e tends demand loan to the clients at stipulated margin. o specific repayment date

is fi ed. %owever, as soon as the /L& documents arrive, the bank re"uests the clients to ad(ust their

loan and to retire the /L& documents. Demand loans mainly include A/oan against imported

merchandise ;/IM


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• Loan

In case of loan the banker advances a lump sum for a certain period at an agreed rate of interest.

he entire amount is paid on an occasion either in cash or by credit in his current account, which he

can draw at any time. he interest is charged for the full amount sanctioned whether he withdraws

the money from his account or not. he loan may be repaid in installments or at e piry of a certain

period. /oan may be demand loan or a term loan.

,ligi!ility * /oans normally allowed to those parties who have either fi ed source of income or

who desire to pay it in lump sum.

Interest $ate * 17 )1= per annum ;Ouarterly paid


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necessary for en(oying such facility. 6verdraft facility is given to the businessmen for increasing

their business activity.

,ligi!ility * overdraft facilities are generally granted to businessmen for e pansion of their

business, against the securities of stock)in)trade, shares, debenture, Covernment promissory notes,

fi ed deposit, life policies etc.

• Bills purchased and discounted

Banks grant advances to their customers by discounting bill of e change or pro)note.

• Consumer Credit Scheme

(!/ecti&es

he ob(ectives of this loan are to provide essential household durable to the fi ed income group

;!ervice %olders< and other eligible borrowers under the scheme. he abbreviated name of thescheme will be H&onsumer . In &&!, the work involves giving the clients loans on various schemes,

such as car loan, household items, office e"uipment and entertainment products. he otal amount

of loans along with the duration in which these loans taken, need to be repaid is given below*

"ype of Product oan Amount ="#> ac "enure1. ehicle =.@@ 2 years'. %ousehold items 1.@@ ' years2. 6ffice E"uipments '.@@ ' years

7. Entertainment items 1.@@ ' years8. 6thers !pecial &onsiderations !pecial &onsiderations

4. Credit $atification Authority of

&redit decisions are heart of all credit works. he person who is held responsible for appraising

a loan proposal is called the relationship manager. he customer re"uest for credit limit and the

relationship manager must decide whether to accept or refuse proposal. Making this decision is the

most important credit activity all other activities of the credit Department are supportive to this

decision. o ensure the proper and orderly conduct of the business of the bank, the Board of

Directors authori4ed the Managing Director and other top)level e ecutive, that is, DMD and E 0 tosanction the credit. It is mentionable that principal branch operates the credit division under the

supervision of 0. he relationship manager of principal branch furnishes the credit proposal with

the re"uired information and sends it to the final authority, i.e. E 0, DMD MD, of head office for

final approval.

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4.5 Credit ,&aluation Principles

In order to get the optimum returns from the deployed funds in different kinds of lending, more

emphasis shall be given on refund of loans and advances out of fund generated by the borrower from

their business activities instead of reali4ation of money by disposing of the securities held against the

advance which is very much uncertain and time consuming . !ome principles or standards of

lending are maintained loans in order to keep the risk to a minimum level and for successful banking

business. he main principles of lending are*

4.7.1 Liquidit

/i"uidity means the availability of bank funds on short notice. he li"uidity of an advance

means it repayment on demand on due date or after a short notice. herefore, the banks must have to

maintain sufficient li"uidity to repay its depositors and trade off between the li"uidity and

profitability is must.

4.7.2 Safet

!afety means the assurance of repayment of distributed loans. Bank is in business to make

money but safety should never be sacrificed for profitability, to ensure the safety of loan. he

borrower should be chosen carefully. %e should be a person of good character capacity as well as

bank must have to maintain eligible number of security from borrower,

4.7.! "rofita#ilit

Banking is a business aims at earning a good profit. he difference between the interest received

on advances and the interest paid on deposit constitute a ma(or portion of the bank income, besides,

foreign e change business is also highly remunerative. he bank will not enter into a transaction

unless a fair return assured.

4.7.4 $ntent

Banks sanction loans for productive purpose. o advances will be made by bank for

unproductive purposes though the borrower may be free from all risks.

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4.7.5 Securit

he security offered for an advance is an insurance to fall bank upon incases of need. !ecurity

serves as a safety value for an une pected emergency. !ince risk factors are involved, security

coverage has to be taken before a lending.

4.7.% &ational interest

Banking industry has significant roll to play in the economic development of a country. he bank

would lend if the purpose of the advances can contribute more to the overall economic development

of the country.

4.6 oan Administrationhe functions of /oan $dministration start after the sanction of a credit. BB/ /oan

$dministration covers mainly maintenance of credit files and charge documents. Broadly /oan

$dministration of BB/ engulfs the work of documentation and monitoring. /oan $dministration of

BB/ follows some principles to deal with documentation, supervision, follow)up and monitoring.

4.9 Security Against Ad&ances

he different types of securities that may be offered to a banker are as follows*

;a< Immovable property

;b< Movable property

0ratiraksha !anchaya 0atra, Bangladesh !anchaya 0atra, I&B unit certificate, wage earner

development bond.

0ledge of goods

%ypothecation of goods, produce and machinery

-i ed assets of manufacturing unit.!hipping documents.

4.'.1 (odes of Charging Securit

$ wide range of securities is offered to banks as cover for loan, in case of borrower inability to

repay, the banker can full upon the securities. In order to make the securities available to banker, in

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case of default of customer, a charge should be created on the security. &reating charge means

making it available as a cover for advance. he following modes of charging securities are applied in

the Brac Bank.

• Lien

$ lien is right of banker to hold the debtor3s property until the debt is discharged bank generally

retain the assets in his own custody but sometimes these goods is in the hands of third party with lien

marked. #hen it is in the hand of third party, the third party cannot discharge it without the

permission of bank. /ien gives banker the right to retain the property not the right to sell. /ien can

be made on moveable goods only such as raw materials, finished goods, shares etc.

• "ledge

0ledge is also like lien but here bank en(oys more right. Bank can sell the property without the

intervention of any court, incase of default on loan, But for such selling proper notice must be given

to the debtor. o create pledge, physical transfer of goods to the bank is must.

• ) pothecation

In this charge creation method physically the goods remained in the hand of debtor. But

documents of title to goods are handed over to the banker. his method is also called e"uitable

charge. !ince the goods are in the hand of the borrower, bank inspects the goods regularly to (udge

it s "uality and "uantity for the ma imum safety of loan.

• (ortgage

Mortgage is transfer of interest in specific immovable property. Mortgage is created on the

immovable property like land, building, plant etc. Most common type of mortgage is legal mortgage

in which ownership is transferred to the bank by registration of the mortgage deed. $nother method

called e"uitable mortgage is also used in bank for creation of charge. %ere mere deposit of title to

goods is sufficient for creation of charge. +egistration is not re"uired. In both the cases, the

mortgage property is retained in the bank of borrower.

• Trust *eceipt

Cenerally goods imported or bought by bank:s financial assistance are held by bank as security.

Bank may release this lien L pledge these goods against trust receipt. his means that the borrower

holds goods in trust of the bank, trust receipt arrangement is needed when the borrower is going to

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sell this goods or process it further but borrower has no sufficient fund to pay off the bank loan.

%ere proceeds from any part of these goods are deposited to this bank.

• +d,ance against -or /0rder

$dvances can be made to a client to perform work order. he following points are to be taken

into consideration.

he client3s management capability, e"uity strength, nature of scheduled work and feasibility

study should be (udiciously made to arrive at logical decision. If there is a provision for running

bills for the work, appropriate amount to be deducted from each bill to ensure complete ad(ustment

of the liability within the payment period of the final bill besides assigning bills receivable,

additional collateral security may be insisted upon. Disbursement should be made only after

completion of documentation formalities and fulfillment of arrangements by the client to undertakethe contract. he progress of work under contract is reviewed periodically.

he lien assets generally are held in the bank3s go)down. !ometimes it is held in the go)down of

debtor with control of the bank. he debtor can take goods from it only with the permission of bank.

-or such taking, bank created another charge documents called rust +eceipt. By rust +eceipt,

debtor holds the goods in favor of bank and when any cash flow comes from these goods, it must be

deposited in the bank

4.1 Credit Monitoring and $e&ie'

It is the last step in credit policy and procedure framework of BB/. &redit monitoring and

review is very important, because it ensures proper utilities and repayment of bank fund. &redit

monitoring and review feature of BB/ is concerned was assessing the "uality of different type of

loan. 0eriodic review and follow up should, inter)aria aims at ensuring*

hat conduct ; urnover, regularity of repayment etc< of the borrowing accountis during the

period under review has been satisfactory or as e pected.

he account is not having e cess over limit

he terms and condition of the sanctioned letter are strictly followed.

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he value of the collateral security is ade"uate.

here is not any unfavorable situation in market, economy and political conditions, which may

endanger the reliability of the borrower account.

he analysis of the borrowers business performance and comparison of the pro(ected and actual

to find any deviations.

$pparent profitability from the loans

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Chapter%+i&e

C$,DI" APP$AISA P$(C,SS (+

3. C$,DI" APP$AISA P$(C,SS (+

he function of commercial bank is to accept deposit from the common people and to invest

deposited money in different sectors for overall development of the economy of the country. !o the

banks have to be very much careful in credit appraisal. he person who is held responsible for

appraising a loan proposal in Brac Bank /imited is called the relationship manager. he customer

re"uest for credit limit and the relationship manager must decide whether to accept or refuse

proposal. Making this decision is the most important credit activity all other activities of the credit

Department are supportive to this decision. o ensure the proper and orderly conduct of the business

of the bank, the Board of Directors authori4ed the Managing Director and other top)level e ecutive,

that is, DMD and E 0 to sanction the credit. It is mentionable that principal branch operates the

credit division under the supervision of 0. he relationship manager of principal branch furnishes

'=


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the credit proposal with the re"uired information and sends it to the final authority, i.e. E 0, DMD

MD, of head office for final approval.

he most important measure of appraising a loan proposal is safely of the pro(ect. !afety is

measured by the borrower and repaying capacity of him. he attitude of the borrower is also an

important consideration li"uidity means the inflow of cash into the pro(ect in course of its operation.

he profit is the blood for any commercial institution. Before approval of any loan pro(ect the bank

authority has to be sure that the proposed pro(ect will be a profitable venture. 0rofitability is

assessed from the pro(ected profit and loss statement. he security is the only tangible remains with

the banker. !ecuring or collateral it is accepting is accepting is easy to sell and sufficient to cover

the loan amount. Bank cannot sanction loan by only depending on collateral. he sources of

repayment of the pro(ect should be a feasible one. During sanctioning any loan bank has to beattentive about diversification of risk. $ll money must not be disbursed amongst a small number of

people. In addition any pro(ect must be established for the national interest and growth.

&ommercial banks and financial institutions intermediate between lenders and borrowers. hese

financial intermediaries collect deposit and disburse it as loan and advance to the individual people,

business, commercial, industrial entity. he loan and advance should be given to them who has the

certain and predicted cash flow to repay the credit. If the relationship manager fail to analy4e the

clients viability of repaying the loan and the pro(ects cash flow possibility of default may arise due

to the fact. !o the importance of $00+$I!$/, in sanctioning the loan, is the key to identify the

borrower3s ability, e pertise, efficiency, industry analysis, and business performance to ensure the

recovery of the credit along with the good supervision, monitoring and the relationship. In a word it

can be said that the purpose of appraisal is to be sure that the proposed advance will be safe, li"uid,

profitable and for acceptable purpose covered by ade"uate security. $t the time of credit proposal the

bank has to come to an acceptable compromise between over caution and under caution.

3.1 uiding Principle of Credit appraisal of

he main ob(ective of the relationship manager is to establish long)term relationships with

clients with the e pectation for on going commercial business. his type of business is e pected to

provide stability and growth in earnings in the short run as well as to continue in the long run, and

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therefore, also, should be diversified to avoid over reliance on any particular client group L industry

segment.

o determine the worth of a client for such a relationship and thereby decide on development of

the relationship, the following conceptual e ercises should be undertaken. here are no fi ed and set

methods to perform credit)marketing (ob, and scope for application of individual (udgmentL

perception always plays over set rules in such work. -or e ample, drop in revenue of a contractor

may indicate the clients3 failure to get work, or it may be due to adaptation of policy to do higher

margin, "uality (obs.

3.2 Steps In&ol&ed In Credit Processing

here are several steps involved in credit processing in BB/. he steps are as follows*

5.2.1 +pplication for loan

$pplicant applies for the loan in the prescribed form of bank. he purpose of this forms is to

eliminate the unwanted borrowers at the first sight and select those who have the potential to utili4e

the credit and pay it back in due time.

5.2.2 etting Credit information

hen the bank collects credit information about the borrower from the following sources*

1. 0ersonal Investigation

'. &onfidential report from other bankL %ead officeLBranchL&hamber of commerce

2. &IB report from central bank

5.2.! Scrutini ing and $n,estigation

Bank then starts e amination that whether the loan applied for is complying with its lending

policy. If comply, than it e amines the documents submitted and the credit worthiness. &redit

worthiness analysis, i.e. analysis of financial conditions of the loan applicant is very important.

hen bank goes for /ending +isk $nalysis ;/+$< and spreadsheet analysis, which are recently

introduced by Bangladesh Bank. $ccording to Bangladesh Bank rule, /+$ and !$ is must for the

loan e ceeding one core. If these two analyses reflect favorable condition and documents submitted

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

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5.2.4 The C3s of ood Bad Loan

he relationship managers of BB/ try to (udge the possible client based on some criteria. hese

criteria are called the &3s of good and bad loans. hese &3s are described below*

• Character

he outcome of analy4ing the character is to have overall idea about the integrity, e perience,

and business sense of the borrower. wo variables, InteractionLinterview and Market +esearch are

used to analy4e the character of the borrower.

a) Interaction/interview: the indicators are

a< 0rompt and consistent information supply, information given has not been found false

b< &IB also reveals business character.

c< #illingness to give owns stakeLe"uity collateral to cover.

d< a payer.

b) Market Research:

a< Information on business is verified.

b< Dealing with supplier and or customer as supplier is also a kind of lender the payment

character can also be verified.

• Capital

-or identifying the capital invested in the business can be disclosed using the following

indicators.

a< -inancial !tatements

b< +eceivable, 0ayable, statements to practically assess the business positions. et worth

through financial statements or from declaration of $ssets /iabilities.

• Capacit Competence6

&apability of the borrower in running the business is highly emphasi4ed in the time of selecting a

good borrower. $s the management of the business is the sole authority to run the business that is

use the fund efficiently, effectively and profitably. he indicators help to identify the capacity of the

borrower.

a< Entrepreneurship skills i.e. risk taking attitude shown by e"uity mobili4ation.

b< Management competencies both marketing and products detail, ability to take decision.

'F


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c< +esilience or shock absorption* &onnection, Back up ;if first time falls second lines come to

help.<

• Collateral

Make sure that there is a second way out of a credit, but do not allow that to drive the creditdecision.

• Cash Follo

&ash flow is the vital factor that is used to identify whether the borrower will have enough cash

to repay the loan or advance. &ash keeps the li"uidity to ensure repayment. he relationship

managers try to identify the annual cash flow from the submitted statements.

• Conditions

5nderstanding the business and economic conditions can and will change after the loan is made.

• Complacenc

Do not rely on past history to continue. !tay alert to what can go wrong in any loan.

• Carelessness

+emember that documentation, follow)up and consistent monitoring are essential to high "uality

loan portfolios.

• Communication

!hare credit ob(ectives and credit decision making both vertically and laterally within the bank.

• Contingencies

Make sure that you understand the risks particularly the downside possibilities and that you

structure and price the loan consistently with that understanding.

3.- ending $is# Analysis = $A>: Modern "echni@ue of Credit Appraisal

he -inancial !ector +eform 0ro(ect ;-!+0< has designed the /+$ package, which provides a

systematic procedure for analy4ing and "uantifying the potential credit risk. Bangladesh Bank has

directed all commercial bank to use /+$ techni"ue for evaluating credit proposal amounting to k.

1@ million and above. he ob(ective of /+$ is to assess the credit risk in "uantifiable manner and

2@


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then find out ways means to cover the risk. %owever, some commercial banks employ /+$

techni"ue as a credit appraisal tool for evaluating credit proposals amounting to k. 8 million and

above. Broadly /+$ package divides the credit risk into two categories, namely ))))) Business risk

and !ecurity risk.

$ detail interpretation of these risks and the procedure for evaluating the credit as follows

Business ris

It refers to the risk that the business falls to generate sufficient cash flow to repay the loan.

Business risk is subdivided into two categories.

$ndustr ris

+isk that the company falls for e ternal reason. It is subdivide into supplies and sales risk.

Supplies ris

It indicates that the business suffers from e ternal disruption to the supply of imputes.

&omponents of supplies risk are as raw material, /abor, power, machinery, e"uipment, factory

premises etc. !upply risk is assessed by a cost breakdown of the imputes and then assessing the risk

of disruption of supplies of each item.

Sales ris

his refers to the risk that the business suffers from e ternal disruption of sales. !ales may be

disrupted by changes to market si4e, increasing in competition, and change in the regulation or due

to the loss of single large customer. !ales risk is determined by analy4ing production or marketing

system, industry situation, Covernment policy, and competitor profile and companies strategies.

Compan ris

his refers to the risk that the company fails for internal reasons. &ompany risk is subdivided

into company position risk and Management risks .

Compan position ris

#ithin an industry each and every company holds a position. his position is very competitive.

Due to the weakness in the company:s position in the industry, a company is the risk for failure.

hat means company position risk is the risk of failure due to weakness in the companies3 position in

the industry. It is subdivided into performance risk and resilience risk.

21


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"erformance ris

his risk refers to the risk that the company3s position is so weak that it will be unable to repay

the loan even under -avor able e ternal condition. 0erformance risk assessed by !#6 ;!trength,

#eakness, 6pportunity and hreat< analysis, rend analysis, &ash flow forecast analysis and credit

report analysis ;i.e. &IB repot from Bangladesh Bank


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(anagement integrit ris

his refers to the risk that the company fails to repay the loan amount due to lack of management

integrity. Management integrity is a combination of honesty and dependability. Management

integrity risk is determined by assessing management honesty, which re"uires evaluating the

reliability of information supplied and then management dependability.

Securit control ris

his risk refers to the risk that the bank falls to reali4e the security because of bank:s control over

the security offered by the borrower3s i.e. incomplete documents. he risk of failure to reali4e the

security depends on the difficulty in obtaining favorable (udgement and taking possession of

security. -or analy4ing the security control risk the credit office is re"uired to verify documentationto ensure security protection, documentation completeness, documentation integrity and proper

insurance policy.

Securit co,er ris

his refers to the risk that the reali4ed value of security is less than e posure. !ecurity cover risk

depends on speed of reali4ation and li"uidation value. -or analy4ing security cover risk, the official

re"uires the assessing power of the customer to prolong the legal process and to analy4e the market

demand for the security.

Before completing the /+$ form, the relationship manager collects data specially industry

specific from published sources and company specific data that not usually published by personally

visiting the company. $fter collecting the necessary data heL she prepares financial spreadsheet.

his spreadsheet provides a "uick method of assessing business trend efficiency and helps to

assess the borrower ability to pay the loan obligation. -inancial spreadsheet includes balance sheet,

income statement, cash flow statement and ratios for the purpose of financial statement analysis.

hrough analy4ing data and collected information, the concerned official completes the /+$ formand all scores are transferred to the scoring matri to find the overall risk of lending. he overall

matri provides four kinds of lending risk for decision)making vi4.));I< Cood ;ii< $cceptable ;iii<

Marginal and ;iv< 0oor. he bank does not provide any credit re"uest having an over all risk as

HmarginalA and A 0oorA without (ustification. $ll credit application rated A0oorA shall re"uire the

22


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approval of the Board of Directors regardless of purpose tenor or amount. herefore)bank can

minimi4e the dangers regarding the bad loan and advances through using the /+$.

3.4 Credit Appraising 0 Presentation of Credit Proposal +or +inal Appro&al

#hen relationship manager is satisfied with applicant:s credit worthiness, financial capability,

management ability and feasibility of the pro(ect through credit appraisal on the basis above guiding

principle, the applicant may hope for credit from the bank. hen relationship manger sent this credit

proposal ;&redit Memorandum< to higher authority ;E 0, DMD MD< for final approval.

3.3 Credit Issue Procedure +lo'chart

27

Application receivedfrom customer

Sales / branch scrutinizesthe application

Application

Meets basic

PPG

criteria ? Sales officer/Manager recommends

the loan and sends to credit

Application is received at

credit and assessed

Credit Approved?Jes

Documentsin order?

Jes

Jes o


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3. Case Study on Sanctioning of D" -.9 Crores "o Sil# ine Pari!ahan nder

arge oan Scheme

Md. !alauddin, proprietor of MLs. !ilk /ine 0aribahan, is the pioneer in introducing /u ury $ir)

conditioned Bus !ervice in Bangladesh in the year 1FF7 with 1@ %ino buses. MLs. !ilk /ine

0aribahan is the only company, which is operating bus services from its own terminal located at

$rambag, Dhaka.

Mr. !alauddin is running his world)class air)conditioned coach service with '= /u ury $ir)

conditioned Buses in Dhaka)&hittagong)&o 3sBa4ar)Dhaka, Dhaka)Benapole)Dhaka Dhaka)

!ylhet)Dhaka routes. %e is also the pioneer in introducing /u ury $ir)conditioned Buses in

Bangladesh.

-or the first time in Bangladesh, MLs. !ilk /ine 0aribahan is going to introduce #6+/D &/$!!

!I C/E DE&G $I+ &6 DI I6 I C B5! 9!weden 6rigin -abricated in MalaysiaP.

imit Bustification

he term loan facility will enable the client to procure the said @7 nos. buses. he client has

re"uested to allow him repaying the loan within a period of 7F months ;including 1)month grace

period


36/54

DEB ;>8 < EO5I J ;'8 <BD 2.F@ &rore BD 1.2@ &rore

Pro/ected Cash +lo' of S P +or "he 1st *ear

Summery (f Cash +lo' Analysis

R$nnual !ales +evenue Q 2>8.@@ per seat BD 2,=@,@@,@@@.@@R$nnual E penses BD 1,7F,>@,@@@.@@Jearly Installments including amount of interest during grace

period of 1)month ;BD 1@,'>,@'@.@@ 11,''@.@@

E cess of Income over E penditure /oan Installments ;p.a.< BD F2,7',>?@.@@R-igures obtained from the client

Assumptions

5tili4ation of capacity is ??.?F i.e. 7@ out of 78 seats ;per trip<

'8 operating days per month

2@@ operating days per year

Details of Daily Sales $e&enue Per us

)ature =2% ay Per us Day> Daily Sales $e&enue +rom ,ach us

=In D">icket 9?@ seats ;Both #ay< Q BD 2>8.@@P

;0er trip seat utili4ationST78U??.?F VS7@<

;-air per seat per tripSBD 2>8.@@<

BD 2@,@@@.@@

Details of Daily ,8penses Per us

)ature (f ,8pense E2% ay Per us DayF Daily ,8pense +or ,ach us in D"Driver L%elper ;1@@@K2@@< 1,2@@ .@@!upervisorLCuide 8@@.@@

yre 1,@@@.@@

2=


37/54

-uel ;Diesel ''8 liters Q BD '2.@@< 8,1>8.@@oll ',@@@.@@

Insurance 91st 0artyP 8@@.@@Maintenances 1,@@@.@@6ther E penses 1,@@@.@@

otal 1',7>8.@@

Daily ,8cess of ,arning (&er ,8penses: Single us

Daily !ales +evenue Daily E pense E cess of Earning over E pensesBD 2@,@@@.@@ BD 1',7>8.@@ BD 1>,8'8.@@

Daily ,8cess of ,arning (&er ,8penses: 4 uses

Daily !ales +evenue Daily E pense Daily E cess of Earning over

E pensesBD 1,'@,@@@.@@ BD 7F,F@@.@@ BD >1,@@@.@@

Monthly ,8cess of ,arning (&er ,8penses: 4 uses =23 Days Month>

Monthly !ales +evenue Monthly E pense Monthly E cess of Earning over

E pensesBD 2@,@@,@@@.@@ BD 1',7>,8@@.@@ BD 1,>>,8@@.@@

*early ,8cess of ,arning (&er ,8penses: 4 uses =- Days *ear>

Jearly !ales +evenue Jearly E pense Jearly E cess of Earning over

E pensesBD 2,=@,@@,@@@.@@ BD 1,7F,>@,@@@.@@ BD ',1@,2@,@@@.@@

)et ,8cess of ,arning (&er ,8penses after Deduction of Installments of

Monthly Installment

$mount

Jearly Installment

$mount of Interest

during @1)month

grace period

;1st Jear<

Jearly E cess of Earning over

E penses W Jearly BB/ Installment

$mount

2>


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BD 1@,'>,@'@.@@ BD 1,1=,?>,''@.@@ BD F2,7',>?@.@@

&ash flow shows that the @7 Buses 9to be procuredP will generate BD ',1@,2@,@@@.@@ only ;as

e cess of income over e penditure< per annum and the client will be able to repay the loan along

with interest through 7? E"uated Monthly Installments "uite comfortably.

C$,DI" A)D $IS? A)A *SIS

-I $ &I$/ %IC%/IC% ! * %I! 6+I&$/

$5DI 6+ * I!/$M 5+5/ &6M0$ J

M S. SI ? I), PA$I A


39/54

M S. SI ? I), PA$I A?,@@@.@@ 18,1?,2',1F=.@@

IA I I"I,S:MediumL/ong erm +eceived from BankL ) +I F,?1,'2,'F>.@@/ess* +efund ',7?,=1,1=>.@@ >,2',=',12@.@@!hort) erm 2,??,7>8.@@

"("A 22;34;62;6 1.

P$(P,$"* 0 ASS,"S&ash in %and 1?,>8,7'8.@@&ash at Bank*!tandard &hartered ',8>,>8>.@@

anata Bank 1,7=@.@@

!outh East Bank 1>,FF'.@@ ',>>,'@F.@@&urrent $ssets 11,F2,>?@.@@-i ed $ssets '','7,12,8F=.@@

"("A 22;34;62;6 1.

$is# +actors and their Mitigation

$is# Issues Mitigates

2F


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+inancial $is# !ince the ticket sell is made on cash basis ;daily


41/54

Chapter%Si8

(A) C ASSI+ICA"I()S A)D P$( ISI()I)

S*S",M (+

.1 Introduction

Banks may fall into engulfing crisis or may wind up with consumption of capital if they do not

practice proper loan classification and provisioning system on their advances. he &entral bank, as a

controller of financial discipline, usually issues guidelines on classification and provisioning system

71


42/54

and supervises the same for making the credit discipline strong and confident. his paper attempts

to discuss the guidelines of loan classification and provisioning system prescribed so far by

Bangladesh Bank with a view to ensuring financial soundness of the banking sector. $n e pectation

has also been made to see the status of classified loans by years with the changing scenario of

classification guidelines. It is observed that Bangladesh Bank has issued a number of circulars on

loan classification system from 1F?F. But the "uestion of ensuring robust banking system through

proper application of classification rules on the non)performing loans is yet to be established.

.2 oan Classification

/oan classification means giving each and every loan case a status like unclassified, substandard,

and doubtful or badLloss through verification of borrower3s repayment performance on a particular

date ;at present, the "uarter ended date < while provisioning means setting aside fund from the profit

against possible loan loss, his is done for safeguarding the depositor:s money, protecting owners,

e"uity and ensuring proper recycling of funds so as to accelerate the economic growth of a country.

Besides, a proper loan classification and provisioning system ensures credibility of the financial

system that in turn restores trust and confidence in the minds of the depositors. Being a developing

country, banking sector in Bangladeshi also took the responsibility of enhancing economic growth

by way of e panding bank branches in the rural Bangladesh and disbursing credit both in the

agricultural and industrial sector in relatively easier term. -urther, it also took the burden of state

owned enterprises that was indiscipline and loss making at that time. $gain, the banking sector was

assigned the task of developing a new Bangladeshi entrepreneurial class to complement the

government efforts of productive investments through the state run economy.

(a8or +ims of Loan Classification

he ob(ectives of loan classification and provisioning are as follows*

o regulari4e follow)up and monitoring activities.

o strengthen the credit discipline and to bring trust and confidence in the financial system.

7'


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o improve recovery position and to transfer necessary amount from the income as interest

suspense.

o raise a fund ;reserve for provision< gradually, may help the bank to lessen the burden of

loan loss in a single year.

o comply with Bangladesh Bank:s instructions.

o consolidate and provide necessary data, which will help the concerned authority of the

bank as well as the government, and Bangladesh Bank in formulating and activating

necessary policies.

$ccording to the "ualitative (udgment, a bank can classify any loan if it forecasts the uncertainty

of recovery, of the loans due to the following reasons*

&redit e tended without the approval of competent authority or without any logical basis;under pressure


44/54

Continuous oan:

;6D L&&, 0&, /IM,

/ + etc.< 6verdue

period will be

accounted from the

day following the date

of e piry of such loan.

/ess than = months 5nclassified 1= months or more but less than F

months

!ub)!tandard '@

F months or more but less than 1'

months

Doubtful 8@

More than 1' months BadL/oss 1@@

Demand oan:

;-orced /IM,

B&/L0$D, IB0 etc.<

6verdue period will beaccounted from the

day following the date

of e piry of such loan.

/ess than = months 5nclassified 1= months or more but less than F

months

!ub)!tandard '@

F months or more but less than 1'

months

Doubtful 8@

More than 1' months BadL/oss 1@@

"erm loan paya!le

'ithin 3 years

6verdue period will be

accounted from the

day following the

e piry of the due date

of payment of

installment of such

loan.

If default amount of installment is

e"ual to installment payable of =

months

!ub)!tandard '@


e"ual to installment payable of 1'

months

Doubtful 8@



months

BadL/oss 1@@

"erm loan paya!le

more than 3 years



months

!ub)!tandard '@

77


45/54

6verdue period will be

accounted from =

months following the

e piry of the due date

of payment of

installment of such

loan.


e"ual to installment payable of 1?

months

Doubtful 8@


e"ual to installment payable of '7

months

BadL/oss

1@@

.- Hualitati&e Budgment

Beside the above)mentioned ob(ective criteria, Brac Bank /imited has other few "ualitative

(udgment for classifying the loan and advance. his (udgement totally depends on the +elationship

Manger and or the %ead office credit division. #hether any continuous credit, demand loan, fi ed

term loan are classified or not on the basis of the above mentioned ob(ective criterion but if there is

any doubt or uncertainty as regarding their recovery then the loan can be classified on the basis of

the Oualitative udgment. he "ualitative factors that are considered in Brac Bank /imited are as

follows*

Borrower sustains a loss of capital.

!ignificant decrease in the value of the security.

#eakening of bank3s position as creditor due to any reason whatsoever.

Diversification of the funds to uses other than the facility for which the credit was approved.

Incorrect information supplied by the borrower or bankruptcy of the borrower.

&redit is rescheduled fre"uently or the rules of rescheduling are violated or a suit is filed for the

recovery of the credit.

.4 Status of Classified oans; Su!%standard oans and ad oss oans for all an#s

; aka in billion<

*ear "otal "otal Classified Su!standard Dou!tful ad oss

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46/54

oansClassified

oans

loans as

of

"otal

oans

oan as

of "C

loan as

of "C

loan as

of "otal

"C

1FF8 21@.'F FF.7' 2'.@7 12.@? 1'.2= >7.8=1FF= 281.@@ [email protected] 21.7F 12.7' 1'.'> >7.211FF> 7='.'> 1>2.2' 2>.7F >.?? 11.>@ [email protected]'1FF? 21'.F8 1FF.@2 2F.1? 7.== >.>' ?>.='1FFF 27'.@7 '2?.>F 71.11 8.'= ?.'> ?=.7>'@@@ 88'.=8 1=7.?7 'F.?2 7.2> =.=' ?F.@1'@@1 =71.=7 1=F.28 '=.2F 8.=@ 8.?> ??.82

!ource* Banking +egulation 0olicy Department, Bangladesh Bank, '@@1

.3 oan Pro&isioning system of ; 2 1

$fter getting list of the classified accounts where no loss is anticipated, partial or total loss is

anticipated, audit report by $udit division and Bangladesh bank, previous and current portfolio by

e ternal auditors and branch managers comments on the classified accounts, %ead office credit

division prepares a list of credit accounts which are considered to be totally or partially be

unrecoverable.

Brac Bank /imited in the time of loan provisioning to get the real picture of the income mainly

follow the Bangladesh Bank guide line. he rate of provisioning used in BB/ is summari4ed in the

following table.

ength of (&erdue Status of

Classification

$ate of

Pro&ision

+re@uency of

Classification/ess than = months nclassified 1 Huarterly/oans overdue for = months but less than F

monthsSu!standard 2

/oans overdue for F months but less than

1' monthsDou!tful 3

/oans overdue for 1' months or more ad oss 1

!ource* $nnual +eport of BB/, '@@8

7=


47/54

7>


48/54

Chapter%Se&en

+I)DI) S; $,C(MM,)DA"I() 0 C()C SI()

5. +I)DI) S; $,C(MM,)DA"I() 0 C()C SI()

he study is on H&redit $ppraisal, /oan &lassification and 0rovisioning !ystem of Brac Bank /td. .

6n the basis of e cellent success and performance, skillful management of its credit portfolio and

keeping the classified loan at a very lower rate, it was considered that credit appraisal system and

credit management of Brac Bank /imited is good one. herefore) the aim of the study was to

e plore the credit appraisal system and credit management of Brac Bank /imited.

he study on credit appraisal system and credit management of Brac Bank limited has given

e posure to few problems. hese problems impede the effectiveness of credit appraisal system and

7?


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credit management by hindering the achievement of investment banking ob(ectives and these are the

main findings of this pro(ect, which are analy4ed in the following part.

5.1 +indings o provide the loan it need appropriate loan security and its proper valuation. But as the

organi4ation that performs the valuation of those securities is paid by the banks, they are not

independent in providing proper valuation of security. !ometime they do valuation by forcing of

some credit officers and these are happening because of the lobbing from upper management.

0roper loan classification and provisioning system ensures operational soundness and

li"uidity of the bank. But enforcement of laws is essential for bringing credibility in the

financial system. If a borrower knows that the e isting laws will not be able to touch him within

1@ years of hisL her loan defaults, the entrepreneurs will simply loot the capital and dissolve the

business willingly leaving no hope for the bankers. In this case loan classification system will

not bring desired results.

here is no provision of trend analysis in the e isting proposal format of BB/. rend analysis

is an analysis of a firm3s financial ratios over time used to determine the improvement or

deteriorate in its financial situation. rend analysis provides information about whether the

firm3s financial position is more likely to improve or deteriorate in the future. rend analysis is

done by changing the percentage and comparing the current year with the previous years. BB/,

at present does not do trend analysis.

o appraise the credit proposal, the credit application form re"uires several financial

information from the clients. But the clients disclose those rarely. $gain, most of the business

concern does not maintain proper records of transaction and financial statement. herefore the

inade"uate financial data hinder the credit appraisal system.

$ccording to the standard and Bank3s credit procedure &redit operation started from the

customer application to the branch for the loan. But in most of the cases many customers go

directly to the directors of the bank and directors send them to the branch offices with hisLher

reference. In these cases proper appraisal is not possible as directors are the owner of the bank

7F


50/54

and bank management must give priority towards the decision of the directors. his

phenomenon is very common in the bank which hampers the spontaneous procedure of credit

appraisal.

he loan officers of banks hardly remain in touch with the borrower beyond routinecorrespondence after the loan is approved and disbursed. It is very common scenario that the

loan officers are remaining busy with their day to day work, especially in loan disbursing. But it

is also true that after getting the loan clients are loosing their interest in repaying the installment.

In this case it very necessary to keep continuous persuasion with those clients, which is not

present in this organi4ation.

$s disbursement of a loan banks re"uired both "uantitative and "ualitative analysis but for big

loans bank emphasi4es on the lending risk analysis. But /+$ is not a perfect measure of credit

analysis. Because businessmen in our society are usually tempted to take resort to window)

dressing.

5.2 $ecommendation

his study suggests that some development)oriented steps can be considered to make the credit

appraisal system and credit management more effective further. hese steps will help to keep the

appraisal system and credit management ready to meet any possible challenge and to grab any

further opportunity as well as to remove the problems lying with the e isting credit appraisal system

and credit management currently can be as follows*

8@


51/54


52/54

banks, so the individual top level employees should value law and order of the banks. he top

level employees should use their power properly and should not illegally relate with the

borrower3s in sanctioning loans.

!ensitivity analysis shows how the value of criteria ;say 0 , I++ etc.< changes with the

changes in the value of any variable in the analysis. his analysis is applicable only in pro(ect

finance. -or e ample $ is a pro(ect and the bank is going to finance in that pro(ect. #e have

seen earlier that the bankers do forecasted cost of good sold, financial ratios etc. but if later

increase in raw material costs or decrease in sales revenue or increase in manufacturing overhead

how sensitive will be the pro(ect3s profitability and debt service coverage capacity that is

calculated in sensitivity analysis. !o BB/ should include sensitivity analysis in proposal format

to analy4e pro(ect finance.

0revention is better than cure. his should be the watchword for monitoring and supervising

loan accounts of a bank. Making &lassifications and pursuing borrowers to regulari4e the

accounts rarely meet successes. he cost of such e ercise is also heavy. herefore the banks

should evolve appropriate system to detect deficiencies in the management of credit operations

well before it call for classification. In this regard an effective supervision system should be in

place both in the scheduled the central bank.

5.- Conclusion

$ banker cannot sleep well with bad debts in his portfolio. he failure of commercial banks

occurs mainly due to bad loans, which occurs due to inefficient management of the loans and

advances portfolio. herefore any banks must be e tremely cautious about its lending portfolio and

credit policy. !o far BB/ has been able to manage its credit portfolio skillfully and kept the

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classified loan at a very lower rate, thanks goes to the standard and stringent credit appraisal policy

and practices of the bank.

But all things around us are changing at an accelerating rate. oday is not like yesterday and

tomorrow will be different from today. Civen the fast changing, dynamic global economy and the

increasing pressure of globali4ation, liberali4ation, consolidation and disintermediation, it is

essential that BB/ robust credit risk management policies and procedures that are sensitive to these

changes. o improve the risk management culture further, BB/ should adopt some of the industry

best practices that are not practiced yet.

he effectiveness of the credit appraisal system depends not only the on the well) defined

documents but also on the well)structured administration, proper application and continuous feed

back and monitoring system. he ma(or tasks for banks are to survive in this competitive

environment is by managing its assets and liabilities in an efficient way. o make the assetsespecially loan and advances banks must have to more cautious and otherwise this asset will become

a burden for the bank. o have fruitful deal bank must to do the credit review rightly.

$eferences

$dhikery, B.G. ;'@@2


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ournal of the Institute of Bankers Bangladesh, 8@ ;'