Background of the study
This report is based on the internship program. Janata Bank Limited arranges internship program provide practical knowledge about banking activities for university students as universities conducted with different organization after the completion of theoretical courses of program of Bachelor of Business Administration (BBA). A group of interns must carry out a specific project, which is assigned by Janata Bank. In this particular report, I am an internee of the previously mentioned program and the concerned organization is Janata Bank Limited which is a prominent Bank of Bangladesh. Hence I am placed in Shantinagar Corporate Branch of Janata Bank Limited from December 11, 2008 to March 12, 2009.
Objectives of the Study
There are mainly two objectives behind the preparation of this report- primary objective and secondary objective.
The primary objective of preparing this report is to fulfill the partial requirement of the BBA program and to represent the “Credit Management” of Janata Bank Limited.
The secondary objectives of the report are as below:
To co-ordinate between theory and practice and to make a bridge between theoretical and practical knowledge in fulfillment of the internship program.
To know about the banking system.
To identify the formalities maintained by both the bank and the client in processing and receiving deposit.
To identify the major problems of the bank encounters in handling banking activities.
The word method comes from the Greek word ‘Meta’ and ‘Hoods’ meaning a way. Broadly, a method or methodology is the underlying rules of a philosophical system of inquiry procedure. A method involves a process or technique in which various stages or steps of collecting data/information are explained and the analytical techniques are defined. In simple a method is the way of doing something.
Sources of data/ Information
I have collected the information/data from both primary and secondary sources.
Primary sources include interviews and conversation with officers and executives of the bank of different divisions and departments.
Secondary sources of information include annual report, general report, project profile, journals, periodicals, bank manual, selected books and other publications.
Analysis of data:
Two approaches have been mainly used in this report-
- Conceptual approach
- Empirical approach
A theoretical section is given in this report to give an insight to the various information concerning about the financial functions. A background of Janata Bank Limited is given in order to facilitate the understanding of this report. Every single portion is discussed in order to understand the empirical section.
This refers to the information that has been directly collected and interpreted from the survey of Janata bank Limited. The report is prepared by interviewing the officials of Janata Bank Limited.
Rationale and Scope of the Study
There are three types of schedule commercial banks are in operation in our economy. They are Nationalized Commercial Banks, Local Private Commercial Banks and Foreign Private Commercial Banks. JBL has discovered a new horizon in the field of banking area, which offers different General Banking, Investment and Foreign Exchange Banking system. So I have decided to study on the topic “Credit Management of JBL”. Because the Internship program of the university is an integral part of the BBA program. So it is obligatory to undertake such task by the students who desirous to complete and successfully end-up their BBA degree. This also provides an opportunity to the students to minimize the gap between theoretical and practical knowledge. Students are required to work on a specific topic based on their theoretical and practical knowledge acquired during the period of the internship program and then submit it to the teacher. That is why I have prepared this report.
This Internship report covers the overall activities performed by “Janata Bank Limited”, such as General banking, Loans and Advances, Foreign exchange and Trades.
This report has been prepared through extensive discussion with bank employees and with the customers. While preparing this report, I had a great opportunity to have an in depth knowledge of all the activities practiced by the “Janata Bank Limited”. It also helped me to acquire a first hand perspective of a leading private bank in Bangladesh.
Limitations of the Study
The time period for this study was short.
The staffs of the branch were some times so busy that they could not help us all time.
Preparing internship report is really troublesome.
This type of report preparation is expensive.
Collection of data was not smooth.
Analyzing with financial data is much more confusing and complicated than any other data.
Secrecy of management.
Lack of knowledge and experience among the officials.
Chapter-II: OVERVIEW OF JANATA BANK
History of Janata Bank Limited
Janata means people. This is a progressive Bank. Janata Bank Limited has been incorporated as a Public Limited Company on 21May 2007 vide certificate of incorporation # C 66933 (4425)/07. The bank has taken over the business of Janata Bank Emerged as a Nationalized Commercial Bank in 1972, Pursuant to Bangladesh Bank (Nationalization) Order No, 1972 (President Order No. 26 of 1972) on a going concern basis through a vendor agreement signed between the Ministry of finance of the Peoples Republic of Bangladesh on behalf of Janata Bank and the board of directors on behalf of Janata Bank Limited on 15 November 2007 with a retrospective effect from 1 July 2007. The Bank’s current shareholdings comprise Government of the People’s Republic of Bangladesh and other 7 shareholders nominated by the Government. The Bank has eight hundred forty eight (848) branches including four (04) overseas branches and a 100% owned subsidiary Janata Exchange Company srl. Italy as of 31 December 2007.
Janata Bank Limited has an authorized capital of Tk. 800 crore (approx. US$ 116.79 million), paid up capital of Tk. 259.39 crore (approx. US$ 37.87 million) and reserve of Tk.292.67 crore (approx. US$ 42.73 million). The Bank has a total asset of Tk. 24406.11 crore (approx. US$ 3562.94 million) as on 31st December 2007.
The principal activities of the Bank are providing of all kinds of commercial banking services to its customers and the principal activities of its subsidiaries are to carry on the remittance business and to undertake and participate in any or all transaction, and operations commonly carried or undertaken by remittance and exchange houses.
Mission of Janata Bank Limited
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.
The accounting policy comprises principles and basic assumptions, concepts, rules, practices, and procedures adopted by the Management for reporting the activities of the Bank and financial statements preparation and presentation. The purpose of accounting policy is to provide the necessary organizational and methodological directions in carrying the accounting activity of the Bank.
Management of JBL
The management of the bank is vested on a Board of Directors, subject to overall supervision and directions on policy matters by the Board which is constituted in terms of Bangladesh Bank (Nationalization) Order 1972. Board of Directors, constituted by seven members, has authority to organize, operate and manage its affairs on commercial consideration within the board policy of the Government. There are Directors appointed by the Government. Other members of the board including MD are also Government appointed out of that at least three have the experience in the field of Finance, Banking, Trade, Commerce, Industry and Agriculture.
The managing Director is the Chief Executive of the Bank. He executes all the activities under the direction of the Board. All line and staff personnel of the Bank’s are own recruitment except member of the Board of Directors.
Board of Directors
The Board of Directors is composed of 11 (eleven) members headed by a Chairman. The Directors are representatives from both public and private sectors. The name and position of directors as of 31 December 2007 are as under.
|No.||Name of Directors||Position|
|1.||Mr. Suhel A. Choudhury||Chairman|
|2.||Mr. Mohammad Al Maruf Khan, FCA||
|3.||Commodore Mohammad Zarzeul Islam||Director|
|4.||Mr. Masud Ahmed||Director|
|5.||Mr. Azizur Rahman||Director|
|6.||Mr. Habib Abu Ibrahim||Director|
|7.||Mr. Md. Mukter Hussain||Managing Director|
HIERARCHY OF POSITION
Chapter-III: THEORITICAL CONCEPT OF THE PERFORMANCE
Definition of Credit
Credit is the institutional arrangement of lending funds mainly to the traders and industrial entrepreneurs by the banking company. The major portion of bank’s funds is employed by various ways of loans and advances, which is the most profitable employment of its funds. The major part of bank income is earned from interest and discount on the funds so lent. The job in this department starts from the application made by the client; approve the same, which is disbursed to customers.
As Janata Bank is providing credit facility out of its total available funds, it has to manage these credits very efficiently. An efficient credit management system comprises many things and this cover the pre-sanction activities to post-sanction activities. Credit management is important as it helps the banks and financial institutions to understand various dimensions of risk involved in different credit transactions.
At the pre-sanction stage, credit management helps the sanctioning authority to decide whether to lend or not to lend, what should be the loan price, what should be the extent of exposure, what should be the appropriate credit facility, what are the various facilities, what are the various risk mitigation tools to put a cap on the risk level.
At the post-sanctioning stage, the bank can decide about the depth of the review of renewal, frequency of review, periodicity of the grading, and other precautions to be taken.
Having considered the significance of credit risk, it becomes imperative for the banking system to carefully develop credit management. For this reason, the bank is maintaining a new division which is well-known as credit division.
PROCESS OF CREDIT MANAGEMENT
Credit Management Policy for any commercial bank must have been prepared in accordance with the Policy Guidelines of Bangladesh Bank’s Focus Group on Credit and Risk Management with some changes to meet particular bank’s internal needs.
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:
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:
- Military equipment/ weapons finance
- Highly leveraged transactions
- Finance of speculative investments
- Logging, mineral extraction/ mining, or other activity that is
- ethically or environmentally sensitive
- Lending to companies listed on CIB black list or known
- Counter parties in countries subject to UN sanctions
- 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.
n Approvals must be evidenced in writing. Approval records must be kept on file with credit application
n The aggregate exposure to any borrower or borrowing group must be used to determine the approval authority required.
n 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.
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
- 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.
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.
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.
Functions of Credit Risk Grading
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.
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 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.
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.
- A Financial Spread Sheet is an important tool in a discipline of organized approach to credit analysis.
- The historic financial reports of a company area primary indicator of its future financial position. Spread sheets allow proper analysis of financial statements.
Chapter-IV: CREDIT MANAGEMENT OF JANATA BANK LIMITED
Meaning of Credit Policy
Policy entails projected course of action. Janata Bank Limited has 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.
Objective of Credit Policy
There are some objectives behind a written credit policy of Janata Bank Limited that are as follows:
v To provide a guideline for giving loan.
v Prompt response to the customer need.
v Shorten the procedure of giving loan.
v Reduce the volume of work from top level management.
v Delegation of authority of work from top level of management.
v To check and balance the operational activities.
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.
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 out, the best conceived loan policy will not function and inevitable, problems will develop.
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.
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, IT, ceramics, others as decided from time 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, whole sale/ retail, others as dedicated from time to time.
18.104.22.168 Types of credit facilities
Bank will go for –
a) Term financing for new project had BMRE of existing projects(large, medium, SME,SCI)
b) Working capital for industries, trading services and others(large, medium, SME,SCI).
c) Trade finance for import and export.
d) Lease finance.
e) Small loan for traders, micro enterprise and other productive small venture.
f) Consumer finance.
g) Fee business.
Fund Invested by JBL
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’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.
Economic Sector wise Distribution of Fund
Janata Bank is engaged in extending long, medium and short term loans to various economic sectors in the country. As Janata Bank 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.
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:
- Bills purchase and discounted
Janata Bank 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.
Maturity Grouping of Distribution of Loans and Advances
At the very beginning of taking decision for giving credit, Janata Bank Limited 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. We can classify the bank loan and advances under the following maturity stage:
- 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.
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.
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 BB 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 follows:
v Goods and Commodities
v Real Estate
v Stock Exchange Securities
v Life Insurance Policies
v Gold and gold ornaments
v Documents of title of goods
v Book Debts
v Supply Bills
Janata Bank keeps sufficient security before final sanctioning of loans and advances.
LOAN DISBURSEMENT PROCEDURE OF JBL
Getting Credit Information
Janata Bank 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:
v Personal investigation.
v Confidential report from other bank Head Office/Branch/chamber of the commerce.
v CIB Report from Central Bank.
The loans and advances department gets a form filled by the party seeking a lot of information. The information is listed below:
v Name and address of the borrower (present and permanent).
v Constitution or status of the business.
v Data of establishment and place of incorporation.
v Particulars of properties, partners and Directors.
v Background and business experience of the borrowers.
v Particulars of personal assets, name of subsidiaries, percentage of share holding and nature of business.
v Details of liabilities in name of borrowers, in the name of any directors.
v Financial Statement of the last three years.
v Nature and details of business/products.
v Details of securities offered.
v Proposed debt equity ratio.
v Other relevant information.
Analyzing these Information
Janata Bank 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 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.
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 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)
a) Industry Risk:
- Supply Risk- What is the risk of failure to disruption in the supply of input?
- Sales Risk- What is the risk of failure due to disruption sales?
b) Company Risk:
1. Company Position Risk:
- 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?
- 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?
c) Security Risk:
- Security Control Risk- What is the risk that the bank fail to realize the security?
- Security Cover Risk- What is the risk that realized security value is less than the exposure?
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:
- Ø 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.
Janata Bank 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.
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.
Proper Supervision of the Project
If such provision is kept in the sanction contracts, the Janta Bank officials 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.
Documentation on 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.
- 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
- 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.
Creation of Charges for Securing Loan
For the safety of loan, Janata Bank 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:
v Protection of interest.
v Ensuring the recovery of the money lent.
v Provision against unexpected change.
v 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 advances.
RECOVERY PERFORMANCE OF JANATA BANK
Programs for Loan Recovery
When Janata Bank 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. To overcome the problem of overdue loan, the bank need take particular loan recovery program.
Recovery Programs to be taken by JANATA BANK
- 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.
Recovery Patterns and Loan and Advances
Generally Janata bank 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.
- Overdue: Demand for recovery minus recovery.
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:
- Changing in the management pattern: Changing of management patterns may delay the recover of mature loan.
- 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.
- 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.
- 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:
- External pressure: Janata Bank has also faced many problems in the loan recovery process as a part of continuous pressure from various interested groups.
- Loan to government organization: Janata Bank is bound to sanction loan to government organization, though these are losing concern. For this reason, banks faced problems in loan recovery.
- 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.
- 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:
- Lack of analysis of business risk.• Before lending, Janata Bank does not properly analyze the business risk of the borrowers and the bank cannot forecast whether the business will succeed or fail. If it fails to run well, the loan becomes classified.
- 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 under study in the loan recovery process. These are:
- 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.
- Lack evaluation of technical and economic feasibility of the program.
- Delay in disbursement of credit.
- Credit is not allowed to actual entrepreneurs.
- Lack of proper supervision.
- Illiteracy of borrowers.
- Negative attitude of borrowers to repay the loan.
- Deterioration of the value system of the borrowers.
- 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.
- 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.
- 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.
- 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:
- 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. Besides these, there are some specific reasons for loan recovery problems faced continuously by Janata Bank. 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.
CLASSIFIED LOANS AND BANK’S PERFORMANCE
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 fora large burden of default loan. Every year Janata Bank 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.
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:
- Non payment of interest or principal or both on due dates or past dues beyond a reasonable period or recurring past dues.
- In case of Overdraft no movement in the account beyond a reasonable period.
- Deterioration in financial condition of the client, as gathered from client’s latest financial statement.
- A shortfall in collateral coverage, particularly if the collateral was a key factor in the decision-making.
- Death or withdraw of key-owners or management personnel.
- Company filing for bankruptcy or voluntary dissolution.
- Adverse market report about the company itself or its principal owners.
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 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 Overdue
Status of Classification
Rate of Provision
Frequency of Classification
All loans except Agricultural loans:
Less than 1 year
Loan overdue for 1 year but less than 3 years
Loan overdue for 1 year but less than 3 years
|Loan overdue for 5 years or more||
For Agricultural loans: Loans not overdue for 5 years or more
Loan overdue for 5 years or more
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 inl995 (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.
Performance fo JANATA BANK
From my analysis it is found that during first phase (19996-2000) total loan of Janata Bank was TK 51285 crore of which classified loan was TK 8055 crore. That is, 15.71% of total credit is classified. During second phase (2001-2005), 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.
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.
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.
Chapter-V: DISCUSSION and FINDINGS
Discussion and Findings
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 Limited, 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.
If we look at historical background of JBL, we can see that, the objective of JB is to earn profit as well as to improve the economic welfare of the people as a whole.
Janata Bank Limited has a significant role in long term project financing in both agriculture and industrial sectors. Again JBL has a deep concern for rural farmers. Private sector usually concentrates in the urban areas where as public sector i.e. JBL spread their banking network all over the world.
With a view to implementing government policies, JBL has been maintaining its position in extending credit to government bodies, sector corporations and private enterprises.
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.
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 Limited 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.
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.
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 Limited 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.
JBL distribute loans without sufficient security in some cases. This is violation of the Bangladesh bank order.
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.
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.
JBL does not keep enough provisions against classified loans and advances.
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.
The Credit Management of JBL are not fully conformity with the guidelines prescribed in the Bank Companies Act 1991 and International Accounting Standard-30(IAS-30).
SWOT analysis is planning exercise in which managers identify organizational strengths (S), Weakness (W), Opportunities (O), and Threats (T). The SWOT analysis of Janata Bank Limited are discussed below-
Strong base in reserve.
Strong base in equity.
Strong base in deposit.
Goodwill in market.
Modern Technology & Equipment.
Stable source of fund.
Largest network among private commercial Banks.
Strong liquidity position.
Low cost of fund.
The organization is going to start highly skilled technical service and On-line banking software, which will help customers with some of the most difficult existing computing application systems.
Strong net work (Total 848 no. of Branches).
The Bank employs more than 13(Thirteen) thousand persons.
In the organization, decision-making is more or less centralized at the top of the organization. The organization’s long centralized structure slowed decision making and its conservative orientation made managers reluctant to change.
Lack of skilled manpower.
There is no proper money market in the country and for that idle fund can not be utilized in the market.
Lack of proper Rules & regulations for the governance of the bank.
Lacks of modern money market instrument.
IT and E-Banking status does not match with Bank’s of conventional types.
As a Nationalized commercial bank it get a lot of opportunities to serve banking activities. In the organization, one opportunity is sufficient fund management.
A lot of branches. This will attract customers to the Bank.
Most of our people want to be risk free. They want to deposit their fund with interest in risk free organization. For this reason people initiate to deposit in Janata Bank, which can help to achieve more profit and poverty elevation.
Increasing awareness of Banking.
Opportunities to develop Investment Instruments.
Being large Bank it can provide large investment.
Branches are situated all over the country as well as in abroad.
In the Banking sector, the main threats for an organization is the rise of global organizations, that operate and compete in more than one country, has put severe pressure on many organizations to improve their performance and to identify better ways to use their resources.
There are more new Commercial Banking services are come forward to operate their business activities and some conventional Banks also opening their ATM booth in every area. So, increased competition in the market for public deposits.
Market pressure for lowering the profit /interest rate.
Dissatisfaction Pay-package of JBL employees is less enough in comparison to other private commercial Banks. As a result efficient manpower may switchover from the Bank which is also a threat for the Bank.
Chapter-VI: CONCLUSION AND Recommendations
During the three months internship program at Janata Bank, Shantinagar Corporate Branch, almost all the desks have been observed more or less. This internship program, at first, has been arranged for gaining knowledge of practical banking to compare this practical knowledge with theoretical knowledge. Comparing practical knowledge with theoretical involves identification of weakness identified. Though all departments and sections are covered in this program, it is not possible to go to the depth of each activities of branch because of time limitation. However, highest effort has been given to achieve the objectives the internship program.
I have discussed so far about the different aspects of Credit Management of Janata Bank. For my report, I have selected Janata bank. JB 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. The bank also provides General banking service, which renders a significant treatment to that locality. Janata Bank, Shantinagar Corporate Branch is playing an important role in the banking system and in the payment system of Bangladesh.
- Central bank should take proper actions for ensuring equivalent distribution of loan and advances.
- Lending policies in our country should be geared to growth potential rather than being determined by the pre-existing collateral.
- 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.
- 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.
- For developing a reliable credit management system for the commercial banks specially Janata Bank, 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.
- The security must be valued properly by the independent values and constantly watched so that the value of mortgage property becomes sufficient to recover the default loan.
- 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.
- 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.
- 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.
- Prompt legal actions be taken against willful loan defaulters
- The new entrepreneurs should be encouraged in disturbing loans and those who have the records of regular payment, should be given preference.
- Steps should be taken so that guarantors cannot avoid their responsibility.
- 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.
- 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.
- The attempt to encourage banks to require borrowers comply with banking laws and regulations and clear up industrial properties prior to granting a loan.
- JB should follow some straight ward mechanical procedures in assessing the risk of a borrower.
- The formulation of a sound credit policy in the possibility of default loans.
- 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.
|AGM||Annual General Meeting|
|ATM||Automated Teller Machine|
|BAB||Bangladesh Association of Banks|
|CIB||Credit Information Bureau|
|EXP Form||Export Form|
|IMP Form||Import Form|
|JBL||Janta Bank Limited|
|L/C||Letter of Credit|
|TIN||Tax Identification Number|
- Annual report of Janata Bank Limited.
- Several booklets from Janata Bank limited.
- Several newsletters from Janata Bank Limited.
- Website: http://www.janatabankbd.com
- Managing Core Risk in Banking: Credit Risk Management, Janata Bank, Head Office, Dhaka.