EXECUTIVE SUMMARY

The principal reason banks are chartered by the government and the central bank is to make loans to their customers. Banks are expected to support their communities with an adequate supply of credit for all legitimate business and consumer financial needs and to price that credit reasonably in line with competitively determined interest rates. Indeed, making loans is the principal economic function of banks to fund consumption and investment spending by businesses, individuals, and units of government. How well a bank performs its lending function has a great deal to do with the economic health of fits region, because bank loans support the growth of new businesses and jobs within the banks trade territory and promote economic vitality. Moreover, bank loans often seem to convey positive information to the marketplace about a borrower’s credit quality, enabling a borrower to obtain more and perhaps somewhat cheaper funds from other sources.

For most banks, loans account for half or more of their total assets and about half to two-thirds of their revenues. Moreover, risk in banking tends to be concentrated in the loan portfolio. When a bank gets into serious financial trouble, its problems usually spring from loans that have become uncollectible due to mismanagement, illegal manipulation of loans, misguided lending policies, or an unexpected economic downturn. No wonder, then, when examiners appear at a bank they make a thorough review of the bank’s loan portfolio. Usually this involves a detailed analysis of the documentation and collateral for the largest loans, a review of a sample of small loans, and an evaluation of the bank’s loan policy to ensure that it is sound and prudent in order to protect the public’s funds

The Trust Bank Ltd. started their operation more than 6 years ago. They gained success from the very beginning of their operation and were capable enough to hold the success year after year. They gained success very early because they have a very strong backup to provide them financial support and they are the Army Welfare Trust. Total loans & advances of the bank as on December 31’2005 was Tk. 9,738.32 million as against Tk. 6,804.45 million in FY2004, showing an increase by 43.12% over the preceding year. The credit portfolio of the bank is a mix of scheme loans, namely Micro credit, Consumers durable scheme loan (CDS), Marriage Loan, Car Loan, HBF Loan and Commercial Loans. Commercial Loans comprise Trade financing in the form of working Capital and industrial loans (both large and medium scale industries) in the form of Term loans and other funded & non-funded credit facilities. Term financing indicates the participation in the industrial development of our country while by extending small loans TBL has fulfilled the borrowing needs of the low and medium income groups of our society. The classified loans & advances accounted for only 3.16% of the total Loans & Advance of Tk. 1897.63 million in FY 2002. The bank as a matter of priority in its the policy wants to ensure quality of its Loan Portfolio by strengthening post disbursement recovery measures as well as by prioritizing on Early Warning System (EWS) to check the growth of non-performing assets.

INTRODUCTION

“Credit” it is a very similar word for the bank. It contents a huge meaning. A bank’s main earning source is credit. If bank’s credit management is not good then the bank will never ever achieve its proper goals. Question may arise what are the proper goals for the bank? The proper goals for the banks are profit maximization and shareholder’s wealth maximization. The fundamental nature of credit is that an element of trust exists between buyer and seller whether of goods or money. The main use of bank fund is to collect money from surplus unit and lend it to deficit economic unit. The Trust Bank Limited is a newly established bank, which is incorporated in 1999. The TBL has been established with the objective of providing efficient and innovative banking services to the people of all sections of our society. One of the notable strengths of this bank is that it is backed by the disciplined and strongest Institution of Bangladesh i.e. Bangladesh Army and there is a synergy of welfare and profits in the dynamics of this institution. Towards attainment of its goals and objectives, the bank pursues diversified credit policies and strategic planning in credit management. To name a few, the bank has extended micro credit, consumers durable scheme loans, house building loans etc. to cater to the needs of the individuals, which in turn has helped thousands of families. The bank also extends loan in the form of trade finance, industrial finance, and project finance, export & import finance etc. The bank’s credit polices aimed at balanced growth and harmonious development of all the sectors of the country’s economy with top most priority to ensure quality of lending by averting growth of non-performing assets.

Origin of the report

Now a days, education is not just limited to books and classrooms. In today’s world, education is the tool to understand the real world and apply knowledge for the betterment of the society as well as business. From education the theoretical knowledge is obtained from courses of study, which is only the half way of the subject matter. Practical knowledge has no alternative. The perfect coordination between theory and practice is of paramount importance in the context of the modern business world in order to resolve the dichotomy between these two areas. Therefore, an opportunity is offered by Dept. of Accounting & Information Systems, University of Dhaka, for its potential business graduates to get three months practical experience, which is known as “Internship Program”. For the competition of this internship program, the author of the study was placed in a bank namely, “The Trust Bank Limited”. Internship Program brings a student closer to the real life situation and thereby helps to launch a career with some prior experience.

This paper is entitled “Credit Operations and Performance Evaluation of The Trust Bank Limited” originated from the fulfillment of the internship program. For the internship program, each student is attached with an organization. My internship was at The Trust Bank Ltd., Sena Kalyan Bhaban Branch, Dhaka. During my internship, I had to prepare a report under the supervision of Begum Khaleda Khanam, Professor, Dept. of Accounting & Information Systems, University of Dhaka.

Objectives of the Study

 To present an over view of The Trust Bank Ltd.

 To analysis the Lending procedures maintained by the TBL

 To observe principal Lending activities of The Trust Bank Ltd.

 To evaluate Lending performance of The Trust Bank Ltd.

 To measure the actual position in classified Loan and provisions maintained by the TBL

 To appraise the actual Recovery position of the TBL

 To compare the classified conditions of the NCBs vs. PCBs vs. FCBs in Bangladesh.

 To evaluate the success of credit operations compare with other Banks.

 To identify problems in credit operations of The Trust Bank Ltd.

 To recommend suggestions for the successful Lending Operations of the Trust Bank Ltd.

Methodology

For preparing this paper, I used both Secondary and Primary data.

Collection of Primary Data:

Many of the data and information were collected from my practical experience and queries from the executives while doing my internship at The Trust Bank Ltd. Information and data regarding Overview of the TBL, interest rates & charges, credit operations, performance measurement in Lending, SWOT Analysis, credit policies, Loan Agreement etc. were collected from these sources.

Collection of Secondary Data:

Data regarding the Credit operations and Performance Evaluation of The Trust Bank Ltd. were collected from secondary sources like: Annual Reports, Brochures, Manuals and Publication of The Trust Bank Ltd., Bangladesh Bank Library, BIBM Library, DSE Library, News paper etc. were the major sources of secondary date.

Limitation of the study

The main problem faced in preparing the paper was the inadequacy and lack of availability of required data. This report is an overall view of Credit Operations of The Trust Bank Ltd. But there is some limitation for preparing this report. Firstly this bank is very new so they do not have enough data, that’s why I did not make vast compare this bank with other banks. Secondly when I was doing my internee then there internal and Bangladesh Bank auditing is going on that’s why I did not get the after closing data that is available data of 2005. With all of this limitation I tried my best to make this report as best as possible. So readers are requested to consider these limitations while reading and justifying any part of my study.

An Over View of The Trust Bank Limited

The Trust Bank limited (TBL), a private commercial bank sponsored by the Bangladesh Army Welfare Trust, started its operations in November 29, 1999.The authorized capital of the bank is Tk. 2,000 million. The Army Welfare Trust (AWT) is the major shareholder of the Trust Bank Ltd. Total shareholders’ equity at the end of December 2005 stood at Tk.991.97 million, where Paid-up capital is Tk 500 million, statutory reserve is Tk 113.14 million and Retained Earnings is Tk. 178.83 million and share money deposits Tk 200 million. The Paid- up capital is indicative of the face value of 5,000,000 ordinary shares of Tk.1,00/-each fully subscribed by the shareholders.

Status of The Trust Bank

The Trust Bank Limited is a scheduled commercial bank established under the Bank Companies Act, 1991 and incorporated as a Public Limited Company under the Companies Act, 1994 in Bangladesh on June 1999 with the primary objective to carry on all kind of banking business in and outside Bangladesh. The Bank had twenty one (21) branches operating in Bangladesh now. It renders all types of personal, commercial and corporate banking services to its customers within the purview of the Bank Companies Act, 1991 and in line with the directives and policy guidelines laid down by Bangladesh bank.

Objective of the Bank

The Trust Bank Limited has been established with the objective of providing efficient and innovative banking services to the people of all sections of our society. One of the notable strengths of this bank is that it is backed by the disciplined and strongest Institution of Bangladesh i.e. Bangladesh Army and there is a synergy of welfare and Profits in the dynamics of this institution.

Bank is service-oriented industry and we on our part are committed to ensure customized, qualitative and hassle free services in our banking operations along with the focus to broaden the clientele base. The bank has extensively in the country’s industrial and agricultural sectors in the coming days. The bank is committed to contribute as such as possible within its limitations for the economic growth and for ensuring value of its available resources

Performance of the TBL

TBL a blend of expertise and technological excellence is in place to meet varied needs of modern customers. The bank aims at mobilizing untapped money of the country and prudent deployment for productive activities in the form of lending at a competitive interest rates/loan pricing. Towards attainment of its goals and objectives, the bank pursues diversified credit policies and strategic planning in credit management. To name a few, the bank has extended micro credit, consumers durable scheme loans, house building loans etc. to cater to the needs of the individuals, which in turn has helped thousands of families. The bank also extends loan in the form of trade finance, industrial finance, project finance, export & import finance etc. The bank’s credit polices aimed at balanced growth and harmonious development of all the sectors of the country’s economy with top most priority to ensure quality of lending by averting growth of non-performing assets.

Reserve

The policy of the Trust Bank Ltd is to keep statutory reserve at 20% on profit before tax. The Bank raised its Statutory Reserve from Tk 43.26 million in FY 2004 to Tk. 45.26 million in FY 2005

Profit and Operating Results

Total operating income of the bank in FY 2005 was Tk. 511.45 million against a total operating expenditure of Tk. 215.19 million. Total profit before provision stood at Tk. 296.26 million during FY 2005. After keeping Tk. 69.97 million as provision against classified loans & advances, and Tk. 105.00 million as provision for income tax, the net profit stood at Tk. 121.29 million during FY 2005. Net profit after income tax in the year 2004 posted by the bank was Tk. 216.38 million. There is a significant increase in profit in 2005 over the preceding FY 2004. The earning per share was Tk. 24.26 in FY 2005. The retained earning increased by 174% to Tk 178.33 million in FY 2005 compared to Tk. 102.80 million in FY 2004.

Deposits

In FY 2005, the deposits of TBL shot up to Tk. 12704.90 million from Tk. 9314.65 million as recorded in FY 2004. During this period, the deposit base was increased by 36.40% compared to the preceding year. The combination of competitive interest rates, depositors’ trust in the bank and mobilization efforts of the bank resulted in this growth of deposits. Efforts are a foot being made to further increase deposit base of the bank through promotion of business and exploring of potential scope.

Deposits of the TBL during the year

2000-2005 (in million)

1,111.18

2,478.82

2,975.73

4,483.25

9,314.65

12,704.90

A(2000)

B(2001)

C(2002)

D(2003)

E(2004)

F(2005)

Loans & Advances

Total loans & advances of the bank as on December 31, 2005 was Tk. 9,738.32 million as against Tk. 6804.45 million in FY2004, showing an increase by 43.12% over the preceding year. The credit portfolio of the bank is a mix of scheme loans, namely Micro credit, Consumers durable scheme loan (CDS), Marriage Loan, Car Loan, HBF Loan and commercial Loans. Commercial Loans comprise Trade financing in the form of working capital and industrial loans (both large and medium scale industries) in the form of Term loans and other funded & non-funded credit facilities.

Term financing indicates the Bank’s participation in the industrial development of our country while by extending small loans the TBL has fulfilled the borrowing needs of the low and medium income groups of our society. The bank in the year 2005 is not extended repair & reconstruction of dwelling house. The classified loans & advances accounted for only 1.32% of the total Loans & Advance of Tk. 9,738.32 million in FY 2005. The bank as a matter of priority in its policy wants to ensure quality of its Loan Portfolio by strengthening post disbursement recovery measures as well as by prioritizing on Early Warning System (EWS) to check the growth of non-performing assets.

Branch Expansion

The TBL has taken up a programmed to expand its branches. The bank has already 21 branches in many different places in Bangladesh; most of them are inside the different cantonments. The management is filling that they need more branches all over the Bangladesh. So very recent they will open a branch in Gulshan, Dilkusha, Chittagong and Sirajgonj. As per Bangladesh Bank circular that if any banks open a branch in Dhaka then they have to be open a branch in out side Dhaka.

Information Technology (IT) & Automation

All the branches of the TBL are fully computerized. New software is now in use to provide faster, accurate and efficient service to the clients. The bank is continuously striving for better services through extensive automation of its branches. We are soon going to launch “One Branch Banking” through on-line connectivity. The bank has set up a full-fledged IT division to keep abreast of the latest development of IT for better service in the days to come.

Foreign Correspondents

Foreign correspondent relationship facilities foreign trade operation of the bank, mainly in respect of export, import and foreign remittance. The number of foreign correspondents and agents of the bank in the year 2005 stood at more than 300, which covers important business and trade centers of the world. The bank maintains excellent relationship with the leading international banks, for handling all foreign correspondent and maintaining all foreign business there is an International Division, which is called ID.

SWOT Analysis of the TBL

SWOT Analysis is an important tool for evaluating the companies Strengths, Weaknesses, Opportunities and Threats. It helps the organization to identify how to evaluate its performance and can scan the macro environment, which is turn would help the organization to navigate in the Turbulence Ocean of competition. Following is given the SWOT analysis of The Trust Bank:

Strengths

1. Top Management:

The top management of the bank, the key strength for The Trust Bank has contributed heavily towards the growth and development of the bank. The top management officials are army’s highest position holder, so they have a good idea about the current situation.

2. Company Reputation:

The Trust Bank has created a good reputation in the banking industry of the country. Their main customers are army persons. The popularity of this bank is increase day by day also in the general public area.

3. Sponsors:

The Trust Bank has founded by The Army Welfare Trust. The main sponsors for this bank are Sena Kalyan Sangstha. The chairperson of this bank is Chief of Army Staff and directors are also appointed by the sangstha, that’s why the sponsor does not have any problem for the fund.

4. Modern Facilities and Computer:

From the very beginning The Trust Bank tries to furnish their work surroundings with modern equipment and facilities. For speedy service to the customer, The Trust Bank had installed money-counting machine in the teller counter. The bank has computerized banking operation under software called PC banking. More over computer printed statements are available to internal use and occasionally for the customers. The Trust Bank is equipped with telex and fax facilities.

5. Stirring Branches:

From the formative stage of The Trust Bank tried to furnish their branches by the impressive style. Their well-decorated branches gets attention of the potential customer, this is one kind of positioning strategy. The Sena Kalyan Bhaban Branch is also impressive and is comparable of foreign banks.

6. Interactive Corporate Culture:

The corporate culture of The Trust Bank is very much interactive compare to other local organization. This interactive environment encourages the employee to work attentively. Science the banking jobs is very much routine work oriented and lovely environment boots up the work capability of the employees.

Weaknesses

1. Limitation of Information System (PC Bank):

PC bank is not comprehensive banking software. It is desirable that a more comprehensive banking system should replace PC bank system.

2. Hierarchy Problem:

The hierarchy problem treated as a weakness for The Trust Bank, because the employee will not stay for a long. So there will be a chance of brain drain from this bank to other bank.

3. Advertisement Problem:

There is another weakness for The Trust Bank is advertisement. Their media coverage is so much low that people do not know the bank thoroughly.

Opportunities

1. Diversification:

The Trust Bank can pursue diversification strategy in expanding its current line of business. They do not serve not only the army but also the general people.

2. Business Banking

The investment potential of Bangladesh is foreign investors. So EBL has opportunity to expand in business banking.

3. Credit Card

There is an opportunity to launch Credit Card in Bangladesh by EBL. Beside this, EBL can acquire services for cards like VISA, MASTER CARD etc. So that they can enhance the market based card service

Threats

1. Contemporary Banks:

The contemporary banks of The Trust Bank like: Dhaka Bank, Dutch Bangla Bank, National Bank, Mutual Trust Bank, Mercantile Bank are its major rivals. They are carrying out aggressive campaign to attract lucrative clients as well as big time depositors. The Trust Bank should remain vigilant about the steps taken by these banks, as these will in turn affect The Trust Bank strategies.

2. Multinational Bank:

The Rapid expansion of multinational bank poses a potential threat to new PCB’s. Due to the booming energy sector, more foreign banks are expected to operate in Bangladesh. Moreover, the existing foreign banks such as HSBC, AMEX, CITI N.A, and Standard Chattered are now pursing an aggressive branch expansion strategy. Since the foreign banks have tremendous financial strength, it will pose a threat to local bank to a certain extant in terms of grabbing the lucrative clients.

3. Default Culture:

Default culture is very much familiar in our country. For a bank, it is very harmful. As The Trust Bank is new, it has not faced it seriously yet. However as the bank grows older it might become big problems.

Types of Credit made by the TBL

Modern banking operation touches almost every sphere of economic activity. The extension of bank credit is necessary for expansion of business operations. Bank credit is a catalyst bringing about economic about economic development. Without adequate finance there can be no growth or maintenance of a stable output. Bank lending is important to the economy, for it makes possible the financing of commercial and industrial activities of a nation. The credit facilities are generally allowed by the bank may be in two broad categories. They are as follows:

A. Funded Facilities:

Funded facilities can also be divided into the following categories

Term Loans:

The term of loan is determined on the basis of gestation period of a project generation of income by the use of the loan. Such loans are provided for Farm Machinery, Dairy, Poultry, etc. It is categorized in three segments:

Types of Term Loan	Time (Period)
Short Term	1 to 3 years
Medium Term	3 to 5 tears
Long Term	Above 5 years

Over Draft (OD):

OD is some kind of advance. In this case, the customer can over draw from his/her current account. There is a limit of overdraw, which is set by the bank. A customer can with draw that much amount of money from their account. For this there is a interest charge on the over draw amount. This facility does not provide for every one, the bank will provide only those who will fulfill the requirement. It means that only real customer can get this kind of facility.

Cash Credit (Hypo):

It allows to individuals or firm for trading as well as whole-sale purpose or to industries to meet up the working capital requirements against hypothecation of goods as primary security fall under this type of lending. It is a continuous credit. It allowed fewer than two categories:

1. Commercial Lending

2. Working Capital

Cash Credit (Pledge):

Financial accommodation to individual/firm for trading as well as whole sale purpose or to industries as working capital against pledge of goods primary security falls under this head of advance. It also a continuous credit and like the above allowed under the categories:

1. Commercial Lending

2. Working Capital

SOD (General):

Advance allowed to individual/firm against financial obligation (i.e. lien of FDR/PS/BSP etc.) and against assignment of work order for execution of contract works fall under this head. This advance is generally allowed for allowed for definite period and specific purpose. It is not a continuous credit.

SOD (Imports):

Advances allowed for purchasing foreign currency for opening L/C for imports of goods fall under this type of leading. This is also an advance for a temporary period, which is known as preemptor finance and falls under the category ‘Commercial Lending’.

PAD:

Payment made by the bank against lodgment of shipping documents of goods imported through L/C falls under this type head. It is an interim type of advance connected with import and is generally liquidated shortly against payments usually made by the party for retirements of documents for release of import goods from the customer authority. It falls under the category “Commercial Lending”.

LTR:

Advances allowed for retirement of shipping documents and release of goods imported through L/C without effective control over the goods delivered to the customer fall under this head. The goods are handed over the importer under trust with arrangement that sales proceed should be deposited to liquidate the advances within a given period. This is also temporary advance connected with import that is known post-import finance under category ‘Commercial lending’.

IBP:

Payment made through purchase of inlands bill to meet urgent requirements of customer fall under this type of credit facility. This temporary advance is adjusted from the proceeds of bills purchased for collection. It falls under the category ‘Commercial Lending’.

FDBP:

Payment made to a party through purchase of foreign documentary bills fall under this head. This temporary advance is adjustable from the proceeds of negotiable shipping/export documents. It falls under category ‘Export Credit’.

LDBP:

Payment made to a party through purchase of local documentary bills fall under this head. This temporary liability is adjustable from proceeds of the bill.

Bank Guarantee:

The exporters pay of the imported goods on behalf of the importer through bank guarantee. If the exporter fails to make the fulfill payment at the moment the bank will take the liability and pay to the exporter. This type of guarantee is also needed to attend in any tender.

Micro Credit:

Loan has given only to the Army Person for the purpose of Repairing and Reconstruction of dwelling Houses.

CDS:

A credit facility is available for Armed Forces officials (Major and above or equivalent Ranks and Status with minimum length 12 years of services). Car loan and Marriage loan are also included as CDS.

HBL:

A credit facility is available for the retired Armed Forces officials.

B. Non Funded Facilities:

Non funded facilities are divided into the following categories:

Bank Guarantee:

A credit facility in contingent liabilities from extended by the banks to their clients for participation in development work, likes supplies goods and services.

Letter of Credit:

A credit facility in contingent liabilities from provided to the clients by the banks for import/procurement of goods and services.

Components of the Lending operations

Maintained by the Bank

Written Loan Policy

One of the most important ways a bank can make sure its loans meet regulatory standards and are profitable is to establish a written loan policy. Such a policy gives loan officers and the bank’s management specific guidelines in making individual loan decisions and in shaping the bank’s overall loan portfolio. The actual make up of a bank’s Loan portfolio should reflect what its loan policy says. Otherwise, the loan policy is not functioning effectively and should be either revised or more strongly enforced by senior management.

1. A goal statement for the bank’s loan portfolio (i.e., statement of the characteristics of a good loan portfolio for the bank in terms of types, maturities, sizes, and quality of loans)

2. Specification of the lending authority given to each loan officer and loan committee (measuring the maximum amount and types of loan that each person and committee can approve and what signatures are required).

3. Lines of responsibility in making assignments and reporting information within the loan department.

4. Operating procedures for soliciting, reviewing, evaluating, and making decisions on customer loan applications.

5. The required documentation that is to accompany each loan application and what must be kept in the banks credit files (required financial statements, security agreements etc.).

6. Lines of authority within the bank, detailing who is responsible for maintaining and reviewing the banks credit files.

7. Guidelines for taking, evaluating, and perfecting loan collateral.

8. A presentation of policies and procedures for setting loan interest rates and fees

and the terms for repayment of loans.

9. A statement of quality standards applicable to all loans.

10. A statement of the preferred upper limit for total loans outstanding (i.e. the maximum ratio of total loans to total assets allowed).

11. A description of the bank’s principal trade area, from which most loans should come.

12. A discussion of the preferred procedures for detecting, analyzing, and working out problem loan situation.

Steps in the Lending Process

 Most bank loans to individuals arise from a direct request from a customer who approaches a member of the bank’s staff and asks to fill out a loan application. Business can requests, on the other hand, often arise from contacts the bank’s loan officers and sales representatives make as they solicit new accounts from firms operating in the banks market area. Sometimes loan officers will call on the same company for months before the customer finally agrees to give the bank a try by filling out a loan application.

 Once a customer decides to request a loan, an interview with a loan officer usually follows right away, giving the customer the opportunity to explain his or her credit needs. That interview is particularly important because it provides an opportunity for the bank’s loan officer to assess the customer’s character and sincerity of purpose.

 If a business or mortgage loan is applied for, a site visit is usually made by an officer of the bank to assess the customer’s location and the condition of the property and to ask clarifying questions. The loan officer may contact other creditors who have previously loaned money to this customer to see what their experience has been.

 If all is favorable to this point, the customer is asked to submit several crucial documents the bank needs in order to fully evaluate the loan request, including complete financial statements and, in the case of a corporation, board of directors’ resolutions authorizing the negotiation of a loan with the bank. Once all documents are on file, the credit analysis division of the bank conducts a thorough financial analysis of them aimed at determining whether the customer has sufficient cash flows and backup assets to repay the loan. The credit analysis division then prepares a brief summary and recommendation, which goes to the loan committee for approval.

 If the loan committee approves the customer’s request, the loan officer or the credit committee will usually check on the property or other assets to be pledged as collateral in order to ensure that the bank has immediate access to the collateral or can acquire title to the property involved if the loan agreement is defaulted. This is often referred to as perfecting the bank’s claim to collateral. Once the loan officer and the bank’s loan committee are satisfied that both the loan and the proposed collateral are sound, the note and other documents that make up a loan agreement are prepared and are signed by all parties to the agreement.

Credit Analysis:

The division of the bank responsible for analyzing and recommendations on the fate of most loan applications is the credit department. Experience has shown that this department must satisfactorily answer three major questions regarding each loan application:

1. Is the borrower creditworthy? How do you know?

2. Can the loan agreement are adequately protected and the customer has a high probability of being able to service the loan without excessive strain?

3. Can the bank perfect its claim against the assets or earnings of the customer so that, in the event of default, bank funds can be recovered rapidly at low cost and with low risk?

Let’s look in turn at each of these three key issues in the “yes” or “no” decision a bank must make on every loan request.

Is the Borrower Creditworthy?

The question that must be dealt with before any other is whether or not the customer can service the loan-that is, pay out the credit when due, with a comfortable margin for error. This usually involves a detailed study of six aspects of the loan application- character, capacity, cash, collateral, conditions, and control. All must be satisfactory for the loan to be a good one from the lender’s point of view.

Character. The loan officer must be convinced that the customer has a well-defined purpose for requesting bank credit and a serious intention to repay. If the officer is not sure exactly why the customer is requesting a loan, this purpose must be clarified to the bank’s satisfaction.

Responsibility, truthfulness, serious purpose, and serious intention to repay all monies owed make up what a loan officer calls character.

Capacity. The loan officer must be sure that the customer requesting credit has the authority to request a loan and the legal standing to sign a binding loan agreement. This customer characteristic is known as the capacity to borrow money. For example, in most states a minor (e.g., under age 18 or 21) cannot legally be held responsible for a credit agreement; thus, the bank would have great difficulty collectors on such a loan.

Cash. This key feature of any loan application centers on the question: Does the borrower have the ability to generate enough cash, in the form of cash flow, to repay the loan? In general, borrowing customers have only three sources to draw upon to repay their loans: or (a) cash flows generated from sales or income, (b) the sale or liquidation of assets, or (c) funds raised by issuing debt or equity securities. Any of these sources may provide sufficient cash to repay a bank loan.

Collateral. In assessing the collateral aspect of a loan request, the loan officer must ask, does the borrower possess adequate net worth or own enough quality assets to provide adequate support for the loan? The loan officer is particularly sensitive to such features as the age, condition, and degree of specialization of the borrower’s assets.

Conditions. The loan officer and credit analyst must be aware of recent trends in the borrower’s line of work or industry and how changing economic conditions might affect the loan.

Control. The last factor in assessing a borrower’s creditworthy status is control which centers on such questions as whether changes in law and regulation could adversely affect the borrower and whether the loan request meets the bank’s and the regulatory authorities’ standards for loan quality.

Can the Loan Agreement Be Properly Structured and Documented?

The six Cs of credit aid the loan officer and bank credit analyst in answering the broad question: Is the borrower creditworthy? Once that question is answered, however, a second issue must be faced: Can the proposed loan agreement be structured and documented to satisfy the needs of both borrower and bank?

A properly structured loan agreement must also protect the bank and those it represents- principally its depositors and stockholders- by imposing certain restrictions (covenants) on the borrower’s activities then these activities could threaten the recovery of bank funds. The process of recovering the bank’s funds- when and where the bank can take action to get its funds returned-also must be carefully spelled out in a loan agreement.

Needs for Collateral

Most Borrowers at one time or another will be asked to pledge some of their assets or to personally guarantee the repayment of their loans. Getting a pledge of certain borrower assets as collateral behind a loan really serves two purposes for a lender. If the borrower cannot pay, the pledge of collateral gives the lender the right to seize and sell those assets designated as loan collateral, using the proceeds of the sale to cover what the borrower did not pay back. Secondly, collateralization of a loan gives the lender a psychological advantage over the borrower.

The goal of a bank taking collateral is to precisely define which borrower assets are subject to seizure and sale and to document for all other creditors to see that the bank has a legal claim to those assets in the event of nonperformance on a loan.

Sources of Information about Loan Customers

The bank relies principally on outside information to assess the character, financial position, and collateral of a loan customer. Such an analysis begins with a review of information supplied by the borrower in the loan application. The bank may contact other lenders to determine their experiences with this customer. Were all scheduled payments in previous loan agreements made on time? Were deposit balances kept at high enough levels? How much was borrowed previously and how well were those earlier loans handled? Is there any evidence of slow or delinquent payments? Has the customer ever declared bankruptcy?

Sources of Information about the Loan customers

 Physical Investigations

 CIB of Bangladesh Bank

 Customer financial statements

 Experience of other lenders with this customer

 Customer Annual Report

 Local or regional credit bureaus

 Local Newspapers

 Local chamber of commerce

Mechanism of Credit Distribution of the TBL

The primary factor determining the quality of the bank’s credit portfolio is the ability of each borrower to honor, on a timely basis. All credit comities made to the bank. The authorizing credit personnel prior to credit approval must accurately determine this. If the report of the project appraisal is very satisfactory to approve the loan proposal, than the following steps furnish the approval procedure:

 Make a proposal by the client to the bank

 Give all the necessary documents

 Bank will send the parties statement to the Bangladesh Bank, their CIB (Credit Information Bureau) will inquiry that whether this party is defaulter or a new one.

 Bank will take the collateral from the party and analysis that how much it will cover the total loans.

 Bank will send this proposal to the head office. In the head office the Board of Directors and Managing Director will approve the loan.

 Head office will send the approval to the branch office.

 Branch office will give the sanction letter to the party.

 Bank will take the security and make it in their favor.

Loan Disbursement

After completing all the necessary steps for sanctioning loans bank will create a loan account by the name of the party and deposit the money to that account. Bank will give cheque books to the party and advise them to draw the money and use it as soon as possible, because whenever the money will transfer to the account interest will count from that time.

Analyzing the Year Wise Loan Disbursement by the TBL

YEAR	AMOUNT OF LENDING(in million/Tk.)
2000	525.75
2001	1,603.95
2002	1,897.63
2003	4,358.31
2004	6,804.45
2005	9,738.32
TOTAL	24,928.41

From the graph we can say that in the year 2005 the total loan disbursement is 39% (Tk 9738.32 million) to compare with other financial years. In the year 2004 the loan disbursement was 28% (Tk 6804.45 million) and in the year 2001, 2003 & 2003 the loan disbursement was 7% (Tk 1603.95 million), 8% (Tk 1897.63 million) & 18% (Tk 4358.31 million). So according to this graph we can easily say that the bank’s loan disbursement is increasing day by day. It is a positive sign for the bank. After establishing the bank, disbursement of loan is not so high because of their inexperience and inadequate loan disbursement policy. Now the bank has an attractive loan policy which attracts the customers. If we see the percentage increase by the year then in the loan disbursement is 39% and in the previous year it was 28%. So the percentage increases by 11% only. In the year 2003 & 2004 the percentage increased by 10%. In compare, the increasing percentage is about to same that is in 2005 the increasing percentage was 11% which is more then 1% in the previous year. It may be the good sign for the bank because the loan disbursement is increasing or steady not decreasing. Bank’s main earning source is loan disbursement, like: interest earning. It is a big part of the bank’s total earning. So the bank should take care in this loan side.

Analyzing the Sector-wise Lending

By the TBL (million/Tk)

SECTOR	2003	2004	2005
Cash Credit	179.92	165.83	257.06
Cash Collateral	148.59	199.53	220.66
Overdraft	355.07	529.89	736.52
SOD	1,676.17	2,153.63	3,011.33
Marriage Loans (ML)	87.35	81.90	74.03
Car Loan (CL)	17.00	26.26	28.28
House Building Loan(HBL)	89.16	100.23	397.73
Term Loans	284.34	834.56	1,744.04
Staff Loans	11.23	20.94	46.16
Consumer Durable Scheme (CDS)	33.04	25.70	25.87
Repair & Recon. of Dwelling House (RRDH)	247.38	233.35	222.08
Loan Against Trust Receipts (LTR)	987.85	2,044.41	1,823.81
Payment Against Documents (PAD)	209.01	257.49	114.46
Bill Purchased & Discounted	30.49	114.04	354.86
Other Loans	1.72	16.69	681.42
Total Loans & Advances	4,358.31	6,804.45	9,738.32

Analyzing the Sector-Wise Loan Disbursement

Of the TBL in the year 2003

In the year 2003, The Trust Bank Ltd. only passes three years experience with loan disbursement. This is not enough experience for lending loan disbursement. From the graph, we can say that the TBL was not able to maintain a good lending operation in the year 2003, though it was the fourth year of the TBL Banking operations. The maximum portion of the lending has disbursed in the sector of Overdraft. About 43.63% of total has given in this sector. The second position of loan disbursement was 22.67% on Loans against Trust Receipts (LTR). Repair & Reconstruction of Dwelling House which another name is Micro Credit has given up a big portion of total loan disbursement. More than 19% of total loans have disbursed as other Loans (SOD, RRDH, ML, CL Letter of Credit etc.). About 6.52% loans has given in the sector as Long Term Loan and 7.54% loans have given as cash credit.

Analyzing the Sector-Wise Loan Disbursement

Of the TBL in the year 2004

SECTOR WISE LENDING IN 2004

365.36

2683.52

233.35

25.7

81.9

26.26

100.23

2044.41

257.49

114.04

834.56

20.94

16.69

500

1000

1500

2000

2500

3000

Amt. Of Lending (million/Tk)

Cash Credit

Overdraft

RRDH

CDS

HBL

LTR

PAD

IBP

Term Loan

Staff Loan

Other Loan

In the year 2004, from the graph we can say that the maximum portion of lending has disbursed to the Overdraft sector which was 39.45% of total loan disbursement. The total loan disbursement amount of Overdraft was increased but the percentage was decreased. In the year, loan disbursement of RRDH (Micro Credit) was decreasing. The second highest percentage of lending was 30% of the total in Loans against Trust Receipts. Term Loans has maintained the third position in loan disbursement by the TBL. The amount of loan was 834.56 million, which was about12.26% of the total lending. A large amount of loans was also disbursed as Cash Credit. Loan has also disbursed as short-term loans, cash credit, House-building loans, Staff loans etc.

Analyzing the Sector-Wise Loan Disbursement

Of the TBL in the year 2005

In the year 2005, from the graph we can say that the maximum portion of lending has disbursed to the Overdraft sector. Total percentage of Overdraft was 38.49%. Though total amount of this sector was continue to increase but the percentage of the sector was decreasing. RRDH or Micro Credit was highly decreased. Loan against Trust receipt and Term Loan are the second and third position in this year. The percentage of lending in LTR was 18.73% of the total in this sector. This year long term Loans have maintained the third position in loan disbursement by the TBL. The amount of loan was 1744.04 million which about 17.91% of the total lending. Loan has also disbursed as Cash credit, House building loans, Marriage loan, Car loan, Consumer Durable Scheme etc.

LOAN-PRICING POLICY USED BY THE TBL:

In pricing a business loan, Bank management must consider the cost of raising loan able funds and the operating costs of running the Bank. This means that Banks must know what their costs are in order to consistently make profitable, correctly priced loans of any type. There is no substitute for a well-designed management information system when it comes to pricing loans.

The Trust Bank Limited is generally used the simplest loan-pricing model which assumes that the rate of interest charged on any loan includes four components: (1) the cost to the Bank of raising adequate funds to lend, (2) the Bank’s no funds operating costs (including wages and salaries of loan personnel and the cost of materials and physical facilities used in granting and administering a loan), (3) necessary compensation paid to the Bank for the degree of default risk inherent in a loan request, (4) Bank’s desired profit margin.

LOAN Marginal cost of raising No funds loanable funds to lend + operating costs

INTEREST = Bank to the Borrower (including wages and

Salaries of Bank Personnel)

RATE

Estimated margin to Bank’

+ Compensate the Bank + desired

For default risk profit margin.

Chart of Interest rate of The Trust Bank for Lending

SL		Sector-Wise Lending				Rate of Interest
01		Agriculture/ Agro-Based Industry
		a		Loan to Primary Producer		10 – 11%
		b		Loan to Agriculture input Traders/FertilizerDealers/Distributors		10%
		c		Agro Processing Industries / Firms		10%
02		Large & Medium Scale Industry (Term Loan)				16%
03		Working Capital
		a		Jute		11%
		b		Other than Jute		16%
04		Export Financing
		a		Jute and Jute Products		7%
		b		Other Exports		7%
05		Commercial Lending
		a		Loan against work order & brick manufacture		16%
		b		Commercial Loan (Garments)		15%
		c		Commercial Loan (Others)		16%
		d		Small and Medium Scale Enterprise		17%
06		Term Loan
		a		Small and cottage industries		14%
		b		Urban Housing (Residential)		15%
		c		Urban Housing (Commercials)		16%
		d		Loan for dwelling house repair & reconstruction ( Bank’sscheme loan for low income bracket)		12%
		e		Transport Loan		17%
	f		Customer durable scheme		17%
	g		Car and Marriage Loan		12%
h		House building scheme loan for in service Army Officers		11%
07		Loan against FDR issued by TBL			2.5% above FDR rate but not less than 12%
08		Loan against Lien/ Pledge on saving certificates WEBD & other financial assets issued by TBL.					12%
09		Loan against lien/ pledge on FDR , Saving Certificates, WEBD &Other allowable financial assets issued by TBL/ Financial Institution.				14% against FDR &Financial Assets iss-ued by Banks/Fina-ncial Institution

Revised on May, 2006

These sector-wise interest rates have been introduced by the Head Office of the Trust Bank Limited. They use cost-plus pricing method in case of pricing the loans. The Head office and the twenty (21) branches of the Trust Bank Limited have maintained these rates strictly except in case of some quality and credit-worthy lenders. After judging the lenders’ credit-worthiness, the Trust Bank Limited gives some beneficiary to this kind of lenders. They can enjoy a decreasing interest rate, which maintained by the Trust Bank Limited’s branches internally. Other wise, the scheduled rates are maintained by all the TBL branches. In case of Micro Credit, as the loan amount is not so large that’s why the scheduled rate is maintained by the Bank. Actually, the Lending rate is based on the prescription, which is given by Bangladesh Bank. Recently TBL has revised their lending interest rate on April, 2006. The revised lending interest rates have been effective from May 01, 2006 for all existing and fresh sanction of credit facilities.

Sector-wise Interest Income of the TBL During the year 2003-2005(million/Tk)

INTEREST INCOME SECTOR	2003	2004	2005
Interest on Consumer Durable Scheme	6.76	3.02	2.87
Interest on Over Draft	5.79	11.72	15.30
Interest on SOD (Industrial )	75.27	236.45	351.35
Interest on Cash Credit	27.29	17.85	24.68
Interest on Marriage Loan	13.76	9.93	8.55
Interest on Car Loan	2.98	3.00	3.94
Interest on Payment Against Document (PAD )	15.52	32.61	33.05
Interest on Reair&Recon. of dwelling House(RRDH)	31.43	24.55	22.51
Interest on House Building Loan	9.08	11.34	24.37
Interest on Term Loan	28.24	58.34	157.48
Interest on Time Lone	–	1.35	27.38
Interest on Inland Bills Purchased & Other Loan	109.17	5.20	23.35
Interest on Cash Collateral	6.58	17.32	31.60
Interest on Other Loans	0.95		235.99
Interest from Banks & Other FinancialInstitutions
Interest on FDR	66.92	112.37	122.40
Interest on Bangladesh BankForeign Currency Accounts	0.12	1.04	2.59
Interest Received From Local Banks	1.39	0.75	4.71
Interest on Call deposits	2.30	1.57	5.38
Interest Received from Foreign Bank	0.26	0.42	2.74
Total Interest Income	403.82	749.03	1,100.21

Analyzing the Year-Wise Total Interest Income

Of the TBL

From the graph we can say that in the year 2005 the total interest income is 1100.21 million to compare with other two financial years. In the year 2004 the interest income was 749.03 million and in the year 2003 the total interest income was only 403.83 million which is more than the interest income year 2000 &2001. So according to this graph we can easily say that the bank’s total interest income is increasing day by day. It is a positive sign for the bank. But there is one thing that if we see the percentage increase by the year then in the interest income is 76.16% in year 2005 and in the previous year 2004 it was 71.00%. So the percentage increases by 5.17% only. The total interest income was 75.40% in year 2003. In the year 2005 to 2004 the percentage increased but in compare with year 2003 to 2004, the total percentage of interest income decrease. It may be not a good sign for the bank, because bank’s main earning source is interest earning. So the percentage of total interest income should be steady & increase year after year. It is a main part of the bank’s total earning. So the bank should take care in this interest income sectors.

Analyzing the sector-wise Interest Income of

The TBL in the year 2003

According to the graph, we see that in the year 2003, the total interest income was Tk 403.83 million. In this year, the highest interest income was come from the Overdraft & SOD which was Tk 81.06 million. Next position for the interest income was held from the Local financial institution & banks. Cash credit and Repair & Reconstruction of Dwelling House (RRDH) which another name is Micro credit were about to same contribution of the total interest income in this year. Interest income from consumer durable scheme, IBP, Foreign exchanges also influence strongly on the TBL’s total interest income in this year.

Analyzing the sector-wise Interest Income of

The TBL in the year 2004

According to the graph, we see that in the year 2004, the total interest income was Tk 749.03 million. In this year, the highest interest income was come from the Overdrafts and Loan against Trust Receipts (LTR) & Payment Against Document (PAD) which was Tk 248.18 & Tk 232.26 million. In this year, the interest income of RRDH that means Micro Credit was continuing to decrease. Next position for the interest income was held from the local financial institution & banks. Interest on Term loans & Cash Credit also has the large impact on the total interest income in this year. Interest income from Marriage & Car Loan, IBP, Foreign exchanges etc also influence strongly on the TBL’s total interest income in this year.

Analyzing the sector-wise Interest Income of

The TBL in the year 2005

According to the graph, we see that in the year 2005, the total interest income was Tk 1100.21million. In this year, the highest interest income was come from the Overdraft & SOD which is Tk 366.65 million that was 33.23%. In this year, Micro credit sector continue decrease the interest income. Next position for the interest income was held from loans against trust receipts (LTR) & payment against document (PAD) and local financial banks & financial institution and the amount were Tk 234.61 & Tk 136.05 million. Interest on Term loans also has a large impact on the total interest income in this year. Interest income from Cash credit, IBP, Foreign exchanges and other loans also influence strongly on the TBL’s total interest income in this year.

Loan Classification and the TBL Bank

Signs for Classification

First and foremost requirement for any credit managers is to identify a problem credit in its earliest stages by recognizing the signs of deterioration. Such signs include but not limited to the following:

01. Non-payment of interest or principal or both on due dates or past dues beyond a reasonable period or recurring past dues.

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

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

04. A shortfall in collateral coverage, particularly if the collateral was a key factor in the decision-making.

05. Death or withdrawal of key owner(s) or management personnel.

06. Company filing for bankruptcy or voluntary dissolution.

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

Steps to follow for Classification

Steps to follow in such situations would be:

01. Recheck the account, for all outstanding, including any outstanding in allied or sister company or in owner’s or partners’ or directors personal names.

02. Thoroughly review loan documentation to confirm, “We have what we need”, documents are in proper from, properly executed and current (i.e. not time barred).

03. If possible take current market value of the securities according to liquidation basis. And take a close look at the assets and liabilities to determine who has the prior right on those assets.

04. If Grantors are involved, look closely at the net worth statement and send demand notice.

05. Once the account is classified Sub-Standard, credit lines must be frozen.

Classification Process

For the purpose of determining the “Classified” status of an account, following guidelines are to be observed

01. The process of classification of an account will start with strict application of the risk rating assessment that is

i. Sub-standard

ii. Doubtful

iii. Bad or Loss

02. However unpaid interest or Principal or Expired Limit for a period of 180 days or more or recurring past dues will remain the most significant rules for classification.

CLASSIFICATION AS SUBSTANDARD:

A loan is classified as substandard if any one of the following conditions is met:

(a) If an advance or any portion of an advance or interest thereon remains overdue for 180 days or more but less than 270 days then the advance is classified as substandard.

(b) For an advance of a continuing nature, even if the loan is not overdue as much as 180 days, but the limit stands overdrawn by move than 50% for a period of 45 continuous days preceding the reference date for the classification, then it is classified as substandard.

(c) If a loan has been renewed or rescheduled at least three times but is not overdue, and any of the required payments for the required period have not made when they fall due, then the loan is classified as substandard.

CLASSIFICATION AS DOUBTFUL:

A loan is classified as doubtful if any one of the following conditions is met:

(a) The advance or any portion of the advance or interest thereon remains overdue

for 270 days or more but less than 360 days.

(b) A loan classified as substandard per clause 6 (b) above has remained substandard

for 180 days or more.

(d) Legal action has been initiated.

(e) Qualitative criteria based on judgment.

CLASSIFICATION AS BAD.

A loan is classified as bad if any one of the following conditions is met:

(a) The advance or any portion of an advance or interest thereon remains overdue for

360 days or more.

(b) A loan classified as doubtful per clause 6 (b) above has remained doubtful for

180 days or more.

(d) A loan classified as doubtful per clause 6 (c) above has remained doubtful for

180 days or more.

(e) If legal action has been initiated and no court decision has been obtained within

360 days of initiation of action then the loan is classified as bad.

(f) Qualitative criteria based on judgment.

Classified Loan conditions of the TBL (million/Tk)

Particulars	2000	2001	2002	2003	2004	2005
Unclassified Loans & Advances	525.74	1583.21	1837.63	4,271.20	6,704.10	9,609.36
Sub-Standard Loans & Advances	–	14.95	29.86	40.75	33.43	48.85
Doubtful Loans Advances	–	4.42	23.63	21.22	8.28	5.00
Bad/Loss Loans & Advances	–	1.37	6.51	25.14	58.64	75.11
Total	525.74	1603.95	1897.63	4,358.31	6,804.45	9738.32

Ratio of classified Loans to Total Loans of the TBL

PARTICULARS	2000	2001	2002	2003	2004	2005
Classified Loan	0%	1.29%	3.16%	2.00%	1.48%	1.32%
Unclassified Loan	100%	98.71%	96.84%	98.00%	98.52%	98.68%
Total	100%	100%	100%	100%	100%	100%

The Trust bank Limited recorded a satisfactory level of performance in all the areas of its operations in the year 2001- 2005. The success due to the combined and concerted efforts of the management and staff of the bank under the able guidance, support and patronage of the members of the Board. But these were not enough in case of the Lending operations.

The graph shows that the percentage of classified Loan in the year 2001 was 1.29% (Tk 20.74 million), but in the year 2002, it was vastly increased and went up to 3.16% (Tk 60.00 million). After that TBL decreased their classified loan. In the year 2003, the classified loan was 2.00% (Tk 87.11 million). Then in the year 2004 & 2005, the classified loan was 1.48% (Tk 100.35 million) & 1.32% (Tk 128.96 million). According to international rules, a bank may have a maximum limit of classified Loans as 5% of the total Lending. Though TBL did not pass this limit, but it is not a good sign for the Bank. In year 2002 TBL’s CAMEL rating was 3, which means the Bank was only in a fair position. The main problem of the TBL was that it was not able maintain a good Loan policy. As a result, classified loans of this Bank have increased. After that TBL took some good loan policy which improves percentage of classified loan that is decrease the percentage. It may notice that though the percentage of classified loan decrease every year but the total amount of classified loan increase every year. TBL must have to improve in this area and has to decrease the amount of classified Loans by a well-designed recovery policy.

What are the main reasons behind classification

of the TBL?

01. New Banker or lacking of experience.

02. Most of the time bankers have to relay on the documents provided on the client. But what is the purity of these data. Although the CA firm certifies the dates but financial jugulating is practicing around the world.

03. Client’s over confidence about the project.

04. Change in National and International Political scenery.

05. Sometimes borrower talks about some other repayment source out of the proposed project but they don’t keep the source as security to the bank.

06. Sometimes other than land or building banks also keep furniture and machinery as security. Later on when bank come to sell those, they found that the market value of those assets is much lesser than the book value.

07. Sometimes bankers don’t go through the financial figures properly.

08. Most of the cases clients have done some financial jugulating on their data.

09. Sometimes Client caught by some unavoidable circumstances like- ship sink,

10. Sometimes bank don’t take appropriate security from the client or grantor.

11. Sometimes bank don’t put concentration about the insurance.

12. Most of the cases the bankers fail to forecast the future business condition of the clients.

Provision for Loans and Advances maintained

By the TBL

Loan Loss Provision Procedure

As pert of pragmatic and conservative approach to sustain the quality of the Bank’s loan portfolio, Loan Loss Provision exercise made mandatory for all Line of Business. Such exercise is decided by: a) generally accepted banking practice, b) conservative approach to assess the quality of Risk Assets whereby the most accurate health of the Loan Portfolio is reflected on the books of the Bank and c) to be guided by Bangladesh Bank instructions on provisioning.

Following guidelines are to be observed:

i. The prudential Provision Practice dictates that rather that wait until the close of the fiscal year; provision exercise would be an on-going one, with the needed provision created, when an account is classified and continues to remain classified. The provision exercise is to be carried out by each quarter end, based on reports on Classified Accounts related to previous quarter.

ii. Bangladesh Bank instructions are to be followed for the purpose of Loan Loss Provision exercise.

iii. Unless otherwise enhanced by Bangladesh Bank regulatory body, Loan Loss Provision Policy as per the matrix given below is to be adopted and followed by the Bank:

Past Due O/SExpired Credit(CRITERIA)	ClassificationStatus	Maximum Provision to be held against Net Loan Value
 180 days 270 days 360 days	SubstandardDoubtfulBad / Loss	20%50%100%

iv. Following formula is to be applied in determining the required amount of provision:

1. Gross Outstanding XXX

2. Less: (I) Cash margin held or fixed

Deposit (XXX)

(II) Interest in Suspense Account ( XXX )

3. Loan Value

(For which provision is to be created before

considering estimated realizable value of other

security/collateral held) XXX

4. Less: Estimated salvage value of security / collateral held (XXX)

Net Loan Value XXX

Provisions for Loans & Advances maintained

By the TBL

PARTICULARS	2003	2004	2005
Provision held at the beginning of the year	39.95	60.23	108.12
Fully provided debts written off	–	–	–
Provisions on classified Loans & Advance	11.12	8.52	16.71
1% General provision for Unclassified Loan	9.16	39.37	50.77
Provision Against Special Maintenance Account	–	–	2.50
Balance at the end of the year	60.23	108.12	178.10

Trust Bank limited is made provision for loans and advance on the basis of period-ended reviewed by the management on the basis of instruction contained in Bangladesh Bank BCD circular No.34 of 1989, BCD circular No.20 of 1994, BCD circular No. 12 of 1995, BRPD circular No.16 of 1998 and BRPD circular No.9 of 2001.

According to the graph, we see that the amount of provision for loans and advances of the TBL has increased gradually over the years. We know that provision for loans and advances depends both on classified and unclassified loans. As the amount of classified & unclassified loans of the TBL has increased gradually, it shows an increasing rate also in the maintaining provisions. In the year 2002, the percentage of total classified loan has gone up 3.16%. After that the next three years classified loan amount was decreasing and the percentage was 2%, 1.48% & 1.32%. Though the percentage of classified loan was decreasing but the total amount of classified loan increased as the loan amount every year increased. In the year 2004, total provision of loans have created Tk 108.12 million where provision of classified loan Tk 8.52 million & unclassified loan Year 2003 as Tk 60.23 million. In the year 2005, the classified loan increased to double as Tk 16.71 million which is the bad sign for the bank. In this year provision against special maintenance account was Tk 2.5 million. And provision against unclassified loan created 1% of total unclassified loan amount.

Provisions can be positive for the Bank

Although provisioning is associated with classified loans but it has a positive effect on the banks. The Income Statement shows net profit after deduction of provisioning fund. As a result tax goes down. But the most important thing is, it doesn’t affect the dividend. Although naturally banks pay dividends from net profit but some times they pay dividends from previous retained earnings. Moreover banks don’t keep money as idle fund for provisioning. Money circulates among the operations. They just show this fund to cover actual loss. So the bottom line is nothing is wrong to provision though it is associated with classified loans.

Recovery Policy of the TBL

Recovery Performance:

The recovery performance of the bank was not so good during the period 1999-2002. Because the bank was recently established and the management was new & inexperienced in the banking sector. Also the credit administration and monitoring of this bank was inexperienced. This bank is monitoring and all the loans are sanction by the high authority whose are high officials of Bangladesh Army. This Bank has a common thinking that the people who taking loan from this bank always think that this is an army bank so if I failed to pay then it will be a very big problem for me. But this thinking did not work properly. That’s why the management have to think about a well-designed Recovery Policy.

TBL Introduces A New Recovery Policy In 2003

TBL has introduced a new department called Early Warning System Department (EWSD). The bank as a matter of priority in its policy wants to ensure quality of its Loan Portfolio by strengthening post disbursement recovery measures as well as by prioritizing on Early Warning System (EWS) to check the growth of non-performing assets.

The secondary task of this department is to collect money from the classified clients. But in the other banks the Branch Manager does this job. Other than that the recovery criteria are more or less same for the banks. At the very begging they send reminder letter. Then they send letter to inform them that they (bank) are going to sue against the client. Finally the banks sue against the client.

Early Warning System Department (EWSD)

TBL has a special department called EWSD who are responsible for all accounts classified in the bank’s portfolio. Actually they have work like CID officers. However EWSD’s responsibility will cover the areas of

01. Monitoring and controlling the classified accounts through monthly reporting and quarterly review.

02. Actively follow the borrowers for recovery.

03. Negotiate and reschedule the debts.

04. If the client don’t utilize the new offer than it is the EWSD’s responsibility to file suit against the client.

EWSD will also prepare a Consolidated Report of all bad loans written-off on a quarterly.

TBL’s Recovery Probability Categories to be Assigned To All Classified Loans

Foreign Commercial Banks

Now let’s put our attention to the FCBs. Currently twelve foreign banks operates in the country. Among them Standard Chartered Bank takes the leading role. Whatever maybe the case, again here we try to find out why these banks hold less classified loans.

Firstly, out of twelve only five are effectively engaged in corporate banking, one is newly established and others are basically doing foreign transactions job. As a result their amount of classified loans becomes smaller then the other two types of banks.

Secondly, their cost of fund is less than others banks. So they can charge less interest against the loan. As a result the demand for their loan is high and they have more options to choose clients than other banks.

Finally and most importantly because of their organization structure their employees are more efficient and responsible to their activities. The ultimate result is that they hold less classified loans.

Private Commercial Banks

At last, let’s put our concentration to the PCBs. Among the three types of banks, these banks have about 26.10% classified loans because of two reasons.

First of all, their cost of fund is not cheaper than the FCBs. So they can’t compete with them.

Secondly and finally, the employees of these banks are not Govt. employees. They should to be responsible for their activities. Moreover the borrowers have to wait long to get loans. But because of the efficient employees the PCBs hold less classified loans than the NCBs.

In a nutshell, we can say that the FCBs and NCBs enjoy better facilities than the PCBs. The elite customers, who look for cheaper source of money, nock the FCBs doors. The customers, who looks for quick source of money looks for the NCBs. PCBs have to deal with the rest of the clients. Another point is that the numbers of PCBs are several times higher than the FCBs and NCBs. So a strong competition is moving around in the market and the competition is not equal.

A COMPARATIVE STUDY TO EVALUATE THE LENDING PERFORMANCE THE TRUST BANK LIMITED VS. PRIME BANK LIMITED

PBL vs. TBL

At the end of each year there a rating is done by Bangladesh Bank called CAMEL rating. CAMEL i.e. five components are considered at the time of rating. Example C for Capital, A for Asset, M for Management, E for Earning and L for Liquidity. Those who are stronger on these categories, their given number is 1 (one), satisfactory is 2 (two), fair is 3 (three), marginal is 4 (four) and unsatisfactory is 5 (five). CAMEL rating determines all banks positions.

Now the reasons for which these two banks are selected for this comparison is their position in the CAMEL rating. PBL (only PCB) located in the 1 category and TBL holds the 2 or satisfactory position in the rating. Here I try to put our attention the reasons for which PBL holds number 1 position and what are the wrongs with the TBL management that they hold only number 2 or satisfactory position.

Prime Bank Limited

Prime Bank Limited is a fast growing private sector. And the Bank is already at the top slot in terms of quality service to the customers and value addition for the shareholders. The Bank made satisfactory progress in all areas of business operation in 2005. In 2005, the percentage of lending to deposits was about 88.60%, which increased in 2004 as 82.72%. The amount of total operating income of the PBL shows it different from the other Banks. In 2005, the amount of total operating income was Tk 2,406.43 million, which was in 2004 about Tk 1,970.37 million which was slightly increased and the amount was Tk 436.06 million.

Prime Bank Limited at a glance (million/Tk)

Particulars	2004	2005
Deposits	28,069.24	36,022.46
Loans & Advances	23,219.67	31,916.11
Total Operating Income	1,970.37	2,406.43
Profits	1,064.24	1,200.83
Loans as (%) of total deposits	82.72%	88.60%
Provisions	58.35	20.28
Unclassified Loans	22,866.94	31,402.58
Classified Loans	246.23	308.21
Ratio of classified Loans to total Loans	1.25%	0.96%

Prime Bank Limited, it is the only private commercial bank in the 1st position in the CAMEL rating. At the same time it holds negligible number of classified loans because of two reasons.

First of all, their loan sanction system is simple and easier then other banks. If anybody wants to take loan than he or she would contract with the branch manager. The managers took the necessary documents form the client and send it to the Credit division located at Head Office. The credit division verifies the documents and the client and sends the proposal to the Board of Directors for approval or rejection. If the board approved the loan then Branch Manager will proceed next and continue to communicate with the client. And he has to take all responsibility against the client, none else. As a result, he becomes conscious about his job.

Secondly and finally, Prime Bank Limited put more concentration on the consumer client than corporate client. Here consumer client means the borrower is a person rather than limited or proprietor based business organizations. And it is easy task to handle those consumer clients. Moreover their client selection is better for which they are able to take this position.

The Trust Bank Limited

The Trust Bank Limited at a glance (million/Tk)

Particulars	2004	2005
Deposits	9,314.95	12,704.90
Loans & Advances	6,804.45	9,738.32
Total Operating Income	427.43	511.46
Profits	216.38	226.29
Loans as (%) of total deposits	73.05%	76.65%
Provisions	47.89	69.97
Unclassified Loans	6,704.10	9,579.68
Classified Loans	100.35	128.97
Ratio of classified Loans to total Loans	1.48%	1.32%

The Trust Bank Limited is one of the latest names in the PCBs. It started its operation just five years back. In 2000, the percentage of lending to deposits was 48%, which increased in 2005 as76.65%. In 2004, the amount of total operating income was about Tk 427.43 million but in 2005 it was vastly increased by Tk 84 million and the amount was Tk 511.46 million. In the year2004 total loan & advances and the deposits was Tk 6804.45 & Tk 9314.90 million which increased in year 2005 to Tk 9738.32 & Tk 12704.90 million. These are too difficult to make a comparison with the PBL. Here I tried to find out the reasons for the difference with PBL.

First of all, their organization structure. Here basically the branch manager seeks the clients and sends documents to the Head Office Credit Division. Then credit division verifies those papers and send proposal to the Board of Directors. If the proposal approved then the client communicate with the head office to continue their facility and for money contract with the nearest branch. It is a time consuming procedure. As the branch and the credit division dose not located at the same place, they don’t enjoy facility at right time.

Finally and most effectively, their Recovery policy was not so good and which needed a compulsory change and that happened in the year 2003.

Findings and Analysis

If we compare the above two banks then we’ll find that the easiest credit facility is provided by PBL. As a result they get more options to choose clients and select the bests. Moreover their branches are more or less autonomous. Because of this, the branch managers take risk on their own shoulder and become responsible for their activities. The TBL is caught because of their inexperienced management and the way of their credit facility.

There is a universal truth in the business world is business is a game of profit and loss. If anybody things that he or she will only enjoy profit rather loss then he or she will make the mistake. This is also true in the Banking sector. Whenever they give loan they have to put this thing in their mind is that some of the loan will become classified. But they should give their best effort to minimize the figures of classified loans. Prime Bank Limited starts their operation in 1995. And even after eleven years they are successfully able to rush their classified loans at such a marginal level by doing an excellent job. The Trust Bank Limited established five years back. And as a latest bank their classified loan are not that much (more than PBL) but because of inexperience in lending their amount of classification increases suddenly in year 2002. But in the year 2003, their improvising ability has increased by changing the management in lending and they are able to introduce the EWS Department. So the TBL’s expectation increases that they will be able to rush their classified loans at a marginal level.

Problems of the Trust Bank

In the middle of twenty first century here we are facing a heavy competition with each other. Here everyone is competing with each and every single point. So today’s business institution are moving forward to remember this concept. If any one has a week point than the rival party will take the opportunity and make a problem for the week institution.

After complete my internship in The Trust Bank I realized that there are many problems and this may be a cause of huge loss or create a barrier for the future prospect. So the bank should take care it’s problem very seriously.

The Problems for Trust Bank’s are:

 Advertisement Problem: Today’s world is very much depend on the media, so if the institutions are not think about the advertisement or any kind of activities which is related some kind of advertisement then it will not earn so much popularity. A media can rise or fall an institution within very short time. So if we see to other developed country then we can find that every business institution has a huge budget for the advertisement purpose. They do not take this expense as an expense; they always take it as a huge investment, because if the people do not know about my organization then how they will do business with us (it dose not matter which type of organization is this), it may be big manufacturing company or a bank. Here I realized for The Trust Bank that they do not have any kind of vast advertisement or any kind of social activities, so most of the people do not have any idea about The Trust Bank. In this case when any one asks that “where are you working?” then if any one say that in The Trust Bank then people reply at first that “is this Mutual Trust”. So for his or her kind information they have to say no there is a bank called The Trust Bank and it is a bank for the army. This bank is also serving the general people but it is not so much popular, because of advertisement. People thought that this bank’s purpose is to serve only army people. That’s why the bank is not go for a vast banking.

Absence of Online Banking: Today’s world is modern world, so here every one wants that they will do banking from their own house. The Trust Bank does not have this kind of facilities. So if they implement online banking than they will gain huge popularity.

 Limited Number Of Branches: The Trust Bank has only 21 branches allover the Bangladesh. So if they want to do a vast business then they have to increase the number of branches.

 Limited Power To The Managers: The managers and other high officials have inadequate power for decision-making. The branch managers have no power to sanction loans. In every bank there is a certain amount that a branch manager can sanction, but in this bank if anyone wants to take a single Taka for loan then the manager has to for the head office approval. Some times it may be the cause of losing customer, because it will take time to sanction a loan.

Suggestions for the Trust Bank

For improve their performance and remove the problem The Trust Bank has to do some thing and these are:

 Vast Advertising: Firstly the bank has to increase their advertisement and also increase their social activities. They have to go with the people’s needs and demands. They have to explore their name to the people that every one can know about The Trust Bank.

 Implement Online Banking: The bank may implement the modern online banking for meet-up the current modern banking system.

 Increase Number Of Branches: In this time there is so much competition between each other that a single step can change the all direction. Today’s people are very much willing to do banking, which one is near to them. So if the number of branches will not increases than it can lose the customer.

 To Establish an Effective Management System: including planning, organizing and supervision culture in the branches as well as at the head office. A strong internal control & compliance division has been formed with a view to establish compliance culture & full control.

 Continuous monitoring & evaluation on application Of internal & external control system, audit policy, policy of financial risks, existing rules & regulation (internal & external), and International Financial Reporting Standards (IFRSs) and Bangladesh Bank relevant circulars have been followed.

 Formulation of Human Resource Management (HRM) policy and other operating procedures.

Concluding Remarks

The Trust Bank Limited is a very modern bank in the banking business area. It established in June, 1999 and it was incorporated from November 29, 1999. So within this short time the bank already get the popularity in the people and the attractiveness of the bank increase day by day. When this bank starts its operation, their first target customer was the army person, but with the demand of general people the bank is also doing business with the general people.

The bank is spreading its operation through all over the Bangladesh. Recently this bank has 21 branches in all over the Bangladesh. So very recent it will increase their branches to meet up the people’s demand and the process is continuing.

In its lending operations, the Bank has learnt a lot from its past experiences. Hopefully the TBL is able to improve in all its areas especially in the lending operations. The EWS department has brought a colorful variation from the year 2006, which will be surely reflected in their 2006’s Annual Report. In the comparison with the PBL, we see that the TBL is badly away from the PBL. It happened only for the cause of lacking in experiences. With the passes of time the TBL will be able to maintain same success in all its credit areas like the PBL.

We hope that this bank will compete with the first class bank of Bangladesh very soon.

Appendix-A

Abbreviations

 SOD = Secured Over Draft

 PAD = Payment Against Documents

 LTR = Letter of Trust Receipts

 IBP = Inland Bill Purchase

 FDBP = Foreign Document Bill Purchase

 LDBP = Local Document Bill Purchase

 CDS = Consumer Durable Scheme

 RRDH= Repair & Reconstruction of Dwelling Houses

 HBL = House Building Loan

 TBL = Trust Bank Ltd.

 PBL = Prime Bank Ltd.

 NCB = Nationalized Commercial Bank

 FCB = Foreign Commercial Bank

 PCB = Private Commercial Bank

Bibliography

 Commercial Bank Management by Peter S. Rose

 Annual Reports of the TBL

 Annual Reports of the Prime Bank Ltd.

 Brochures of the TBL

 Annual Reports of the Bangladesh Bank

 Bangladesh Bank Bulletin

 Journals of Bangladesh Bank

 BIBM Library

 DSE Library

 News papers