Chapter One: Introduction
1.1 Origin of the Report:
The research paper has conducted on “Credit Policy and Performance Analysis of Agrani Bank Limited”. This report is a partial requirement of Research Paper of MBA program. Before preparation this report I am more experienced in my Bank’s practical activities & on the job training at Agrani Bank Limited, Ramna Corporate Branch,Dhaka. Practical problems have arranged me for preparing this type of Research.
Throughout the last few yearsBangladeshhas been experiencing a rapid and significant change in the banking sector. Not only in our country, all over the world the dimension of banking has been changing rapidly mainly due to the technological innovation, globalization and deregulation. This change all over the world has significantly affected the banking industry of our country, the result of which is the change in this sector in our country. Now the condition is such that banks must compete in the market place both with local institutions as well as foreign ones.
Agrani Bank Limited, in pursuance of Bangladesh Banks (Nationalization) order 1972 ( PO No. 26 of 1972) came into being in 1971 taking over the assets & liabilities of the erstwhile Habib Bank Ltd. & Commerce Bank Ltd, functioning in the then East Pakistan. Now it is one of the four NCB’s performing inBangladeshand fully owned by the Government. The bank started operation with 249 branches with its head office inDhaka. Now Agrani bank is operating with 866 branches and total work force of it 11793.
Credit risk management needs to be a robust process that enables banks to proactively manage loan portfolios in order to minimize losses and earn an acceptable level of return for shareholders. Given the fast changing, dynamic global economy and the increasing pressure of globalization, liberalization, consolidation and dies-intermediation, it is essential that banks have robust credit risk management policies and procedures that are sensitive and responsive to these changes. So it is very much helpful to me to work my internship is such an area.
1.3 Objectives of the report:
The objectives of the report are:
- To critically analyze the credit policy of Agrani Bank Limited.
- To evaluate the credit performance.
- To conclude whether the credit policy compliances with present situation.
The report is an attempt to state the credit policy of Agrani Bank Limited as compared to Bangladesh Bank Credit Policy Guidelines and to evaluate credit performance. A detailed credit policy including borrower selection, credit worthiness analysis, credit approval process, credit disbursement & monitoring, credit administration etc. has been explained and compared. The credit performance of bank has analyzed with implementing credit policy. After completion of research, it is helpful to me to understand a total loans and advanced related works of a bank.
1.5 Sources of Information:
The sources of information are both primary and secondary
– Practical Deskwork
– Conversation with credit officers and managers
– Conversation with clients.
– Practical case problems.
– Manual of Credit division.
– Bangladesh Bank Circulars
– Annual reports of Agrani Bank Limited
– Different manuals, books, existing soft information.
Sample Design: The study represents comprehensive data of Agrani Bank Limited and Bangladesh Bank credit management guidelines.
Collection of information: To conduct this study considerable information and expert opinion will be collected from primary as well as secondary sources.
Processing of information: A careful and systemic processing of information facilitates comparison and evaluates performance to make decision whether the policy compliances with present situation.
Analysis and interpretation: The information has been collected will be duly analyzed and interpreted as to achieve the desired objectives. Credit policy data has analyzed by comparison and credit performance evaluation is done by trend analysis
Final Report Preparation: The final report has been prepared on the basis of presentation, analysis and interpretation of the information.
To conduct research, there are many problems arisen, which has the purpose of the report. The limitations are:
- Difficult to collect information as concern people are reluctant to disclose information.
- Access to only a number of information sources.
- Non-availability of secondary data.
AGRANI: Agrani Bank Limited
BB: Bangladesh Bank
RM: Relationship Manager
CRM: Credit Risk Management
KYC: Know Your Customer
ZCO: Zonal Credit Officer
HOC; Head of Credit
RU: Recovery Unit
CLR: Classified Loan Review
NPL: Non-Performing Loan
Chapter Two: Agrani Bank Limited
2.1 Background of Agrani Bank Limited:
Agrani Bank Limited, in pursuance of Bangladesh Banks (Nationalization) order 1972 ( PO No. 26 of 1972) came into being in 1971 taking over the assets & liabilities of the erstwhile Habib Bank Ltd. & Commerce Bank Ltd, functioning in the then East Pakistan. In 17th May 2007 it has incorporated as public limited company with vendor agreement conducted in 15th November 2007. Now it is one of the four SCB’s performing inBangladesh and fully owned by the Government. The bank started operation with 249 branches with its head office inDhaka. Now Agrani bank Limited is operating with 866 branches and total work force of it 11793.
To provide client services all overBangladeshit has established a wide correspondent banking relationship with a number of local banks. To facilitate international trade transactions, it has arranged correspondent relationship with large number of international banks which are active across the globe.
2.2 Vision Statement:
Agrani Bank Limited dreams of betterBangladesh, where arts and letters, sports and athletics, music and entertainment, science and education, health and hygiene, clean and pollution free environment and above all a society based on morality and ethics make all our lives worth living. Agrani Bank Limited’s essence and ethos rest on a cosmos of creativity and the marvel-magic of a charmed life that abounds with spirit of life and adventures that contributes towards human development.
2.3 Mission Statement:
Agrani Bank Limited engineers enterprise and creativity in business and industry with a commitment to social responsibility. “Profit alone” does not hold a central focus in the Bank’s operation; because “man does not live by bread and butter alone”
2.4 Goals of Agrani Bank Limited:
- Build up a realistic deposit mobilization plan.
- Develop appropriate lending risk assessment system.
- Develop capital plan.
- Develop a system to make good advances.
- Develop a recruitment, compensation, training and orientation plan.
- Develop a plan for offering better customers services.
- Develop appropriate management structure, systems, procedures and approaches.
- Develop scientific MIS to monitor Bank’s activities.
2.5 Core Objectives:
Agrani Bank Limited believes in its uncompromising commitment to fulfill its customer needs and satisfaction and to become their first choice in banking. Taking cue from its pool of esteemed clientele, Agrani Bank Limited intends to pave the way for a new era in banking that upholds and epitomizes its vaunted marques “Your Trusted Partner.”
2.6 Business Objectives:
– Build up a low cost fund base.
– Make sound loans and investments.
– Meet capital adequacy requirement at all time.
– Ensure 100% recovery of all advances.
– Ensure a satisfied work force.
– Focus on fee-based income.
– Adopt appropriate management technology.
– Install a scientific MIS to monitor Bank’s activities.
– Synchronized and steady growth of the bank.
– Utilize all available resources to develop various plans, policies and procedures in each of the objective and goals area.
– Implement plans, policies and procedures.
– Draw upon the connections, advice etc. of the foreign partners.
– Utilize a team of professional employees.
– Search for a customized solution of IT for the purpose of full automation step by step.
2.8 Business Philosophy of Agrani Bank Limited:
The objectives of Agrani Bank Limited remain to offer modern & innovative products & services to its clients inBangladesh. The partnership with FMO is optimistically scene to offer scopes opportunities to draw on modern tools & techniques of banking from western world which could be blended with the currently prevalent local customs & practice.
The Bank is committed to being a sophisticated prominent and professional institution, providing a one window service to its customers. During the first five years Agrani Bank Limited Bank’s strategy was focused on continuing in provident of internal procedures and operating structures, to have a greater control on the quality of our business and to provide better management direction. After five years of working on the Banks structure, its culture and controls, the management is confident that the Bank can move forward on a rapid growth path. The Agrani Bank Limited’s corporate philosophy is to build its non-funded fee and commission income stream, thus reducing its reliance on interest income alone. Agrani Bank Limited’s focus is to provide one counter service to the clients covering:
a) Commercial Banking ( Deposit Accounts), b) Consumer Banking (Retail Baking ), c) Traveler Cheque, d) Foreign & Inland Remittances, e) Foreign & Inland Remittances, f) Financial Services, g) Corporate Banking, h) Asset & liability management , i) Liquidity & capital Resources Management, j) In formation technology and l) Human Resources.
2.9 Strength of Agrani Bank Limited:
– Agrani Bank Limited is the first Bangladeshi-European joint venture Bank inBangladesh.
– Agrani Bank Limited directors and /or their family members do not maintain any sort of bank account with Agrani Bank Limited, since its inception.
– Agrani Bank Limited’S directors do not avail of any facility or even any fee/remuneration from the bank for attending the meetings of the Board/Executive Committee/Audit Committee.
– Agrani Bank Limited’s sponsoring shareholders did not take any dividend for the initial 5 years in order to increase the capital base of the bank.
– Agrani Bank Limited allows all local remittances such as TT, DD, PO etc. free of cost.
– Agrani Bank Limited’s classified loan as onDecember 31, 2004is only 0.16% of total loans and advances.
– Agrani Bank Limited’s regulatory capital as onDecember 31, 2004stood at Taka 1.43 billion.
– Agrani Bank Limited’s capital adequacy ratio (CAR) as onDecember 31, 2004stood at 10.13% as against Bangladesh Bank’s minimum requirement of 9.00%.
– Agrani Bank Limited maintains general provision on unclassified loans and Advances @3% instead of minimum requirement of 1% as set forth by Bangladesh Banks loan provisions.
– Agrani Bank Limited expands free medical facilities under its “Rural Health Service Program” to the members of the general public around the rural branches.
– Agrani Bank Limited support humanitarian and philanthropic activities and causes and spends a substantial amount from its income for these purposes.
– Agrani Bank Limited promotes different socio-culture and sports activities.
– Agrani Bank Limited awarded 500 scholarships to meritorious students of the country till this year. From the year 2007, the number of scholarships will be 1250 for which the Bank will need to provide taka 3.75 core each year.
– Agrani Bank Limited provides 27% of its total advances as Term loan and a substantial amount as working capital loan to support industrial development and boost up export earnings of the country.
– Agrani Bank Limited has set up the Agrani Bank Limited Bank Foundation for carrying out social and philanthropic activities. From the last year, 5% of the Bank’s annual operating profit is earmarked for the Foundation which was 2.50% earlier.
– Agrani Bank Limited distributes up to 2.50% of its annual profit among its employees as profit sharing.
– Agrani Bank Limited’s objective is not only to make profit, but also simultaneously contribute towards social and human development through various altruistic activities.
2.10 Board of Directors:
|Chairman||Mr. Siddiqur Rahman Choudhury Former Secretary, Ministry of Finance|
|Director||Mr. A K M Shamsuddin Former Secretary, Ministry of Primary & Mass Education|
|Director||Mr. Nasiruddin Ahmed Secretary & Member, Privatisation Commission|
|Director||Mr. Ranjit Kumar Chakraborty, Joint Secretary,Finance Division, Ministry of Finance|
|Director||Air Commodore Syed Imtiaz Hussain, ndu, psc,|
|Director||Captain Jamilur Rahman Khan ( Retd.) Former Joint Secretary|
|Director||Mr.Md.Aftab Uddin Khan Former Additional Secretary|
|Director||Mr. A.S.M Nayeem, FCA Former President TheInstituteofChartered AccountantsofBangladesh|
|Director||Mr. Muhammed Farhad Hussain,FCA Former President TheInstituteofChartered AccountantsofBangladesh.|
|CEO & Managing Director||Mr. Syed Abu Naser Bukhtear Ahmed, MBA|
2.11 Capital Position:
The Authorized Capital of the bank is Tk.8.00 billion. As per vendors agreement dated15 November, 2007the Agrani bank limited has paid Tk.2.48 billion by issuing shares to the government. The equity of the bank stood at tk. 3.34 billion on 31 December, 2007 along with reserve and undistributed profit of tk. 0.86 billion.
2.12 Product and Services:
Agrani Bank Limited Bank’s aims are to provide services to the clients like friends. For that reasons, the bank offers different products and services for its clients, Agrani Bank Limited has never compromised the quality of services. Agrani Bank Limited believes customers are the heart of the banking business. To provide better services, Agrani Bank Limited offers different product for its clients
Agrani Bank Limited is now offering the following depository products for mobilizing the deposits from the people.
|1. Fixed Deposit||6. Foreign Currency Deposit Account|
|2. Saving deposit Account||7. Non Resident Taka Account|
|3. STD Account||8. NFCD Non Resident Foreign Currency Account|
|4. Multi Currency Account||9. Non Residents Investors Account|
|5. Residence Foreign Currency Deposit||10. Bank Money Scheme|
|1. Small & MediumEnterprise||6. Import Financing|
|2. Lease Finance||7. Export Financing|
|3. Working Capital Financing||8. Emergency Staff Loan|
|4.HouseBuildingFinance Scheme||9. Staff car Loan|
|5. Industrial Financing|
2.13 New Product and Services:
The Bank has its concentration for new product and developed service for satisfying its customer and increasing its customer base. They prefer now faster service with least cost. For delivering faster service the bank has introduced online banking service. There are other new products and services that Agrani Bank Limited has introduced. They are:
i) Truly Online Banking Services, ii) Internet Banking Services, iii) SWIFT services, iv) L/C Delivery Services, v) Locker Services, vi) ATM services.
2.14 Correspondent Banking Relation:
To deliver prime services to the valued clients, Agrani Bank Limited has continued its efforts to reach every corner of the world with the establishment of an effective correspondent relationship across the globe. At present Agrani Bank Limited has coverage in more than 110 countries through more than 100 world class banks. Agrani Bank Limited maintain adequate number of nostro accounts with key players in the world money market to facilitate export and import payment needs of the clients. Agrani Bank Limited also achieved another milestone by installing SWIFT to channel remittance flow in a fast and effective way. Agrani Bank Limited is also considering establishment of exchange houses in some prospective locations abroad and/or Taka Drawing Arrangement with internationally reputed exchange houses to support governments effort of a building a comfortable foreign exchange reserve through channeling inward remittance.
2.15 Corporate Social Responsibility (CSR):
The Agrani Bank Limited) is the first Euro-Bangla Joint Venture Scheduled Commercial Bank in the private sector inBangladesh. The Bank commenced operation from3rd June, 1996with equity participation from FMO, The Netherlands. Since inception besides progressive banking activities, Agrani Bank Limited Bank has been taking part in different national activities promoting sports, culture, social awareness, etc. With this end in view, Agrani Bank Limited Bank rendered contribution to Mini World Cup Cricket Tournament-1999, National Youth Fair-1999, National Olympic Day Run, 3 Day Cricket Match betweenBangladeshandWest Indies, etc.
In the global corporate world Corporate Social Responsibility is a new buzz word and is much talked about and practiced by big and small corporate bodies alike, throughout the world. Agrani Bank Limited believe that only profit can not be the last word for the business entity as neither society without business nor business without society is like to bring about any sort of development in true sense. There must a confluence and harmony of social and corporate goals and strategies. Agrani Bank Limited since its inception was active in various social activities, which increased manifold over the period of time with its growth. In this backdrop, Agrani Bank Limited Board of Directors in order to discharge its corporate social responsibilities in a greater perspective increased its contribution to Agrani Bank Limited Bank Foundation (DBBF) from 2.50 to 5.00 percent of Bank’s profit after changing loan loss provision.
Apart from contributing to provide blankets to the cold stricken needy people, scholarship to meritorious students, ‘Smile Brighter Program’ for cleft lip operation, donation of Taka 40.00 million to Ahsania Mission Cancer Hospital the first full-fledged Cancer Hospital in Bangladesh, donation of Tk.5.00 million to Prime Minister’s Relief Fund for rehabilitation of flood affected people, DBBF for the frost time has taken a program of supporting 23 HIV positive patients by providing medicines, clinical supports, food supplements and other necessary essentials. Other notable areas where DBBF extended its helping hands are:
Donation of Tk.75000/- per month toNarayanganjDiabeticHospital.
– Donation to Blind Education and Development Organization.
– Donation forLactationManagementCenterofSirSalimullahMedicalCollegeand Hospitals.
– Donation to purchase machinery & equipments for Sandhani Blood Bank atBangladeshMedicalHospital.
– Donation to nature center for Disabled and Paralyzed to purchase machinery and equipment.
– Donation to Endangered Health for treatment of obstetrical fistula patients.
– Donation to Special Education for the Intellectually Disabled Trust to help intellectually disabled children.
– Donation of tk.10000.00 each to 223 dowry victims and 100 acid victims for helping them to set up small scale business for their batter living. A massive plan in this regard has been planned to extend soft term financial assistance to the prospective and successful recipient of such donation.
– Besides , Agrani Bank Limited also actively participated in scores of other social activities arising from the its sense of responsibility to the need of society it belongs. Some of the important events are:
– Cooked foods were supplied to flood affected people ofDhakaand adjoining areas of for seven days in some designated relief camps.
– 750 bundles of GCI sheets were provided to the tornado affected people.
– Gannit Olympiad (Bangladesh Mathematical Olympiad) were co-sponsored at a cost of Tk.3.00 million with Prothom Alo for the second time in which students from different educational institutions all over Bangladesh participated.
– Agrani Bank Limited sponsored Foreign Hockey Coach and Physical trainer for Bangladsh Hockey Federation.
2.16 SWOT ANALYSIS
|Strengthsî Cost advantages competitive of products,î Competitive advantages in Branch in terms of geographical coverage,î A distinctive competence in Deposit mobilization,||Weaknessî No clear strategic directionîLack of management depth & talentî Absence of formal marketing strategiesî Plagued with internal operating problem|
|OpportunitiesîServe additional customer groups,îOffering & pricing of fee- based productsî Ability to offer better customer services in the banking sectorîIntroducing computer techniques in banking activities.||ThreatsîGrowing competitive pressures,îDeclining credit qualityîNarrowing interest marginîUncertain national economyîAdverse Govt. policies.|
2.17 Agrani Bank Limited: Online Banking:
The year 2004, is a landmark in the history of Agrani Bank Limited, as the Bank successfully implemented its online system. Online Banking system provides better services for the customers and makes the bank cost effective. After implementing online system, customers can enjoy the following world class banking services at a reasonable and affordable price through the full automated real-time any where any branch banking services covering 24 hours a day:
– A customer can avail services with any branch of Agrani Bank Limited.
– Customer can withdraw or deposit money in any branch of Agrani Bank Limited.
– International financial transactions can be carried out by the on-line SWIFT interface of the banking software.
– Customer can enjoy facilities of loan installment payments from savings/ current accounts, Fund transfer to other accounts.
– Sweep-out facility, enabling to transfer the money from any account when it exceeds pre-defined amounts.
– Sweep-in facility, enabling to bring money from another account when the first account balance falls below a pre-defined amount.
– By using Agrani Bank Limited’s own ATM pools any where in the country, the valued customers of the Bank can perform the following functions at any time:
– Account balance enquiry
– Cash withdrawal 24 hours a day, 7 days a week, 365 days a year.
– Cash deposit to some designated number of ATM’s at any time
– Mini statement printing.
– Statement request.
– Personal Identification number change
– Request for cheque book
– Fund transfer within his/her own account.
– Payment of mobile/T&T phone, gas, electricity, water, internet, credit card bills from the customer’s savings and current account.
– Payment ofSchool/College/Universityfees by debiting one’s savings a/ current account.
– Purchase of activation number for Mobile/Internet pre-paid card.
Through Point of Sale (POS) terminals: Bill settlement at any Agrani Bank Limited POS terminals installed at strategic locations.
Through internet banking of Agrani Bank Limited, the following can be performed:
– Checking of account balance
– Print-out of account statement for a particular period.
– Transfer of fund within the customer’s own accounts
– Payment of mobile/T&T phone, gas, electricity, water, internet bills from the customers account.
– Payment ofSchool/College/Universityfees by debiting one’s own account
– Purchase activation number of Moblie/Internet pre-paid cards.
– Deposit of loan installments
– Stop cheque payments.
– Opening of an FDR account by debiting one’s savings/current/STD account
– Submission of L/C application online
– Foreign currency exchange rates and interest rates enquiry.
The deposit base of the bank continued to register a steady growth and stood at Tk.21067.56 million as on December, 2004 as against Tk.17133.81 million in December 2003, which is an increase of 22.96%.
|Deposit (in billion)||114.57||159.75||171.33||210.67||130.48||128.92||135.92|
Figure 1: Deposit Mobilization Trend
All activities relating to credit of the bank are being carried out as strictly and cautiously as before with proper risk management strategy starting from the selecting credit worthy quality borrowers followed by a well-defined credit appraisal and approval process, again carried out by the competent personnel at different level. Agrani Bank Limited is in the forefront in implementing the guidelines for managing five core risks in banking. Due to this, the classified loan reduced to 0.16% in 2004 from 0.36% in 2003. Loan and advances at different level are shown in the following:
|Advance (in billion)||80.44||91.91||89.31||95.92||99.40||105.87||118.49|
The bank investment during the year 2004, were made in government securities and in call money market only, which stood at Tk.2034.97 million as on December 31, 2004 as against 2537.62 million in 2003. Out of total investments of Tk.2034.97 million, Tk.2027.82 million were in government securities.
3.21 Operating Profit:
The operating profit of the bank has been increased each year. For the year 2004 was Tk. 632.41 million as against Tk. 453.79 million in 2003. Income performance of the Bank shown below:
|Operating Profit (billion)||0.39||0.42||0.26||(0.75)||2.4||3.58||5.26|
Figure 2: Operating Profit trend
2.22 Human Resources:
Agrani Bank Limited, since its inception, has always laid emphasis on Human Resource Development. Agrani Bank Limited believes in the factor that helps the banks survive is closely interlinked with the quality of service and satisfaction of the requirements of the clientele and that directly depends on the qualification and efficiency of the employees. With this objective in view, Agrani Bank Limited excels the performance of its member of the staff by creating opportunities through providing proper training, rewards and recognition. To attract and retain qualified and efficient staff
Agrani considers human resources to be an essential ingredient of success for Bank. The Bank is committed to effective management and development of human resources, go through the process of stabilization, reform and modernization.
In view of the importance of the management of human resources, internal structures were changed. The accountabilities of the General Manager, Administration were changed to provide greater emphasis on HR Management and development plans are under way for more radical change in the various divisions responsible for managing human resources.
The General Manager– Human Resources Management and Development, is also leading various activities to modernize HR polices and procedures under the guidance of the HR Advisor. These improvements reflect changing pressures on the Bank and are designed to bring HR practices more in line with good practice in international banks Agrani Bank Limited has formulated a number of well thought policies for the welfare of its employees, in the form of gratuity funds, Superannuating fund, employees House Building Loan Scheme, Cycle/ Motorcycle / Car loan scheme, etc.
2.23 Agrani Bank Limited’s Six Years’ Financial Positions:
(Amount in billion)
|Total Loans & Advances||80.02||88.96||89.31||95.92||99.40||105.87||118.49|
|Foreign Exchange Business|
|Net Profit/ (Loss)||0.0020||0.02||0.0014||(21.72)*||1.63||1.94||0.86|
|Number of Branches||901||891||872||870||864||866||866|
|Number of Employees||13058||12901||12514||12208||11938||11793||11345|
|Number of Correspondent Banks with NOSTRO A/c.||37||37||37||41||41||38||39|
|Number of Foreign Correspondents||390||390||391||399||410||416||416|
|Return on Equity||7.25%||8.87%||7.78%||N/A||N/A||N/A||29.55%|
|Return on Assets||0.18%||0.21%||0.19%||(0.50%)||1.38%||2.32%||0.92%|
|Loans as % of Deposits||74.98%||77.04%||76.06%||76.50%||75.98%||82.12%||87.18%|
|Classified loans to total loans||37.49%||35.34%||29.57%||28.07%||28.31%||26.27%||26.83%|
*Loss incurred owing to charging of cumulative provision shortfall for loans and advances as well as super annuation fund for Bank employees to comply with IAS-30 since 1972.
Chapter Three: Credit Policy of Agrani Bank Limited
3.1 Credit Overview in Agrani Bank Limited:
In a financial system of any economy, we know, financial surpluses mobilized from surplus economic unit and transferred to the deficit economic unit. In the banking world, the bank acts as an intermediary in between deficit economic unit & surplus economic unit. Bank mobilizes the fund from surplus economic unit as deposit & makes the fund available to the deficit unit. The style of making the fund available to the deficit unit is nothing but creation of credit. Credit is in true sense, making provision of fund by one party to another party under certain terms & conditions.
3.2 Types of Advances:
The credit facilities granted by the bank are classified under different account heads as under:
- Loan (like short/ mid/ long term in nature)
- Overdrafts (allowing frequent debit/credit transactions within an agreed limit)
- Trade related credit facilities (like bills port folio)
- Short Term Advances (like continuing facilities)
- Contingent facilities (like Letters of Credit, Letters of Guarantee)
Generally all facilities, except term loans are repayable on demand. Trade related credit facilities are self-liquidating in nature. Cash Credit /Overdrafts are reviewed annually or at regular intervals in case a closer monitoring of the accounts is necessary.
Secured Overdraft (including Collateralized overdraft one)
Cash Credit (Hypothecation)
Loan against Trust Receipts (LTR)
Loan against Imported Merchandise (LIM)
Export Cash Credit (ECC)
Loan General (usually short term in nature)
Term Loan (Industrial/project financing)
Term Loan (others)
Loan against Accepted Documentary Bill (local/ foreign)
Loan against Bills Discounted/Purchased (local/ foreign documentary)
Payments against Documents (PAD)
Own Accepted Bills Purchased (Forced Loan)
Letters of Credit (sight/ Usance/ Back to Back)
Letters of Guarantee
3.3 Portfolio Management of Credit:
Portfolio Management of Credit implies the deployment of loanable fund among alternative opportunities through proper allocation. The objective of portfolio management of credit is the best and efficient management of loan to ensure profitability. A prudent loan portfolio management can be done by careful consideration of the factors mentioned in the following:
i) Bank’s Capital position, ii) Deposit mix (Tenure of deposit), iii) Credit environment, iv) Influence for monetary and fiscal policies v) Credit needs of the respective commanding area and vi) Ability & experience of the bank personnel to handle the loan portfolio. In designing a loan portfolio, three things should be decided: first- the type of customers the bank wants to serve, second– involvement of risks with various kinds of loans, and finally– the relative profitability of various kinds of loans. Diversification of credit can be made by extending credit to different sectors, to different geographical area, to different line of product or business and allocating the loanable fund into different type of credit. Secondly, the concentration of credit into a particular sector or area, product or business should also be observed carefully. If credit is already been concentrated to a particular streamline mentioned earlier that should be avoided. Finally, the type & tenure of deposit should be analyzed carefully in determining the loan portfolio of a bank. How much quantum of fund will be earmarked for long term lending and how much for short term, depends to a large extent on the deposit structure.
3.4 Selection of Borrower:
Selection of borrower is a very significant part of a credit decision. The borrower should be diagnosed prudently. Degree of risk has an inverse relationship with the selection of borrower. Selection of right borrower reduces the risk of non-repayment of the loan. To the contrary, degree of risk of non-repayment increases with the selection of wrong borrower. In our country, the huge volume of non-performing loan is mainly the result of failure in selecting right borrower. So, if it is found that line of business is prospective and profitable but the potential borrower is not right one, the proposal should not be entertained. There are some parameters for selection of a borrower. Some ‘C’s commonly expresses the parameters. And thus the criteria for selection of a borrower are popularly known as 5 C’s such as:
i. Character: Market reputation, morality, family background, and promptness in repayment,
ii. Capacity: Ability to manage the business, ability to employ the fund in the right way, ability to overcome unforeseen problems,
iii. Capital: Equity strength, assets & properties,
iv. Collateral: The easy marketability of the properly given as security,
v. Condition: Over all business condition,
If the borrower’s found satisfactory in terms of all C’s only then it is suggested to entertain the borrower.
3.5 Processing of Credit:
Credit proposals must be prepared for all credit facilities. The processing of a credit proposal falls into mainly two stages as under:
- Obtaining due approval of the competent authority (Discretionary Powers) of Agrani Bank Limited
- Steps for allowing the client to avail the credit facility.
Management approval levels splits into following authority:
Head Office Credit Committee: The Credit Executive & Recommendation Committee (CRECOM) is responsible to review, and approve or reject any credit limit proposals on the basis of approval lending policy, criteria of lending, sectorial exposure, group exposure and/ or on other genuine grounds. Credit Committee usually sits on every week or more frequently as the need may arise. The proposals after thorough discussion/ deliberation if found suitable is recommended for approval by the Executive Committee of the Board through the Managing Director:
Delegated authority to the Managing Director: Under delegated lending authority to the Managing Director, credit proposals, one time or specific gets approval after scrutiny is done by Head Office Credit Division. From time to time the Managing Director may delegate the branch managers discretionary powers with due approval from the competent authority.
Executive Committee of the Board: If the facilities required further approval from the executive committee of the Board, then the proposal send. The credit proposal has been sent to the executive committee of the Board if the credit committee thinks to require further approval.
Credit limit proposal originates in the branch. Proposal after due checking, analysis is sent with recommendation signed by the manager and the credit officer in-charge. After the credit proposal has been finally approved by the competent authority as the case may be, the resolution /decision thereof are sent to the branch for further action as follows:
- Convey offer to the borrower and obtain acceptance there against.
- Branch credit /loan administration perfect the security and charge documents considering the nature and the terms of the facility.
- Setting –off client file account record.
3.5.1 Credit Report:
The branch manager should ensure preparation of credit report on the client to determine its past record, business performances, market reputation etc. The credit report should contain the following:
- The nature of client’s business.
- The names of owners and details of their associated business concerns.
- Net worth of the individual person owing the firm /company (obtain through declaration at the time of submission of loan application).
- The financial health of the business concern.
3.5.2 CIB Report:
For processing credit proposals (both funded & non-funded) Banks and Financial Institutions need to obtain mandatory satisfactory CIB report from Bangladesh Bank. Present criteria for obtaining mandatory CIB report may be changed from time to time at the discretion of Bangladesh Bank. Branch manager must obtain satisfactory CIB report prior to processing of credit proposals and mention the status of the client and its allied concerns /persons of the borrower in the credit line proposal as it is revealed in the latest CIB report. In CIB report there is any classified loan, no farther credit proposal is processed.
3.5.3 Visiting Client:
The visit and meeting the client at their door-step may help to confirm the business decision reach by the manager with regard to the client’s financial status, management efficiency and technical details about the good sense and services in which the client deals. This will also help to judge its quality and acceptability as a reliable security. A set of question, which may be asked, should be prepared before hand.
3.5.4 Credit Line Application Form:
A credit proposal is its funds or non-funds based at the stage of primary scrutiny, credit officers prime consideration is to ascertain with reasonable accuracy, due date liquidation of loan /credit exposure. There are different sections covered in the credit proposal format which is explained below:
01. Client introduction: Giving the exact name and style of the client as per registration in case of company. Also indicate the nature of the proposal “Fresh” or “Renewal/ Revision”. Use figures in denomination of Taka in million, state exact nature of business/description of the project. Provide business capital /equity capital of the owner based on financial statements.
02. Particulars of owners: State whether proprietor, partners or directors. Show the percentage of the shareholdings of the directors as per record. Provide declared assets / net worth as the case may be by individually.
03. Allied concerns: Provide name of allied business concern of the owners/ client, their nature of business and their investment / interest in the business.
04. Credit facility from other banks: Obtain declared statement from the client. Also refer to CIB report of Bangladesh Bank.
05. Account maintained with Agrani Bank Limited: State all accounts including Fixed Deposit, if any, showing average deposit/ current deposit.
06. Existing credit lines(s): Give details and nature of facility. The amount of respective limit and the outstanding are on the date of the proposal, state validity/ maturity state primary and collateral security in brief.
07. Proposed credit line(s): In case of renewal /revision, this section should be completed only after careful review of the conduct of the account, Client’s financial requirement, managing of business affairs in terms of available facility (ies). In case of fresh proposal, and after having a preliminary discussion with the client to have a clear view of client’s account, his future plans and financing requirements, the size of limit, period and proposed security to be structured.
08. Analysis of credit proposal: In this section, provide general background of the client, business profile, project details and management aspects of the business house/industry.
09. Third party information: Provide status of up to date CIB report, Credit checking with other sources such as previous banks account transaction.
10. Financial information: This section reflects the financial soundness of the business concern and information to be collected / prepared from spreadsheet analysis on the basis of client’s management certified financial statements or audited financial reports. Furnish comments on the liquidity, profitability and leverage position of the client. This exercise / assessment should be done carefully pinpointing the strong and weak areas.
11. Prospects: Here business prospects market outlook of the product to be given. Salient features of the products, pricing, market strategy to be provided in case of manufacturing products.
12. Assessment of financing requirement: Client’s financing requirement to be assessed on the basis of business cash flow / working capital assessment / future plans. Exact requirement is to be assessed and recommended after preliminary discussion with the client.
13. Inadequacy in the documentation: Mention non-fulfillment of any documentation / mortgage perfection etc. Also indicate audit objection on client’s account.
14. Collateral security: Give details of security in the form of land, building, machinery, it’s written down value or surveyed value. Also show nature of marketable securities, its face value and average market value.
15. Risks Analysis: Furnish comments on Credit Risk Grading exercise, if done, and indicate the CRG rating. Indicate possible risks in the business and its mitigation.
16. Accounts/ Business performance: Give details of client’s deposit/ loan accounts performance last 12 (twelve) months. Show debit/ credit summation, minimum/ maximum balances, L/Cs opened, export documents negotiated during last 12 months.
17. Bank’s earning: Give break-up of earnings from the relationship last 3 (three) years.
18. Recommendation: Give meaningful comments, consideration of the business line with clear recommendation.
19 Proposed facility (ies): Give facility wise proposed/renewed/restructured loan/ credit limits, purpose of the facility, source of repayment, pricing of the facility, security support and validity of the facility, other conditions/ special conditions including requirement of Bangladesh Bank approval to be highlighted.
3.5.5 Supporting Documents:
The branch manager while processing a credit proposal for Head Office approval, he must see that the proposal recommended is based on following supporting documents:
i)at least 90 days before Credit report on the client, ii) Financial statements, iii) Spreadsheet analysis, iv) Net worth analysis and v) Acceptable security details & vi) CRG report.
This report should be updated when renewal of credit facilities are considered. Third party credit report / CIB report along with credit report on the client should be kept in the file at the branch. Business/ financial performance is being analysis base on audited accounts if they are available.
3.5.6 Analysis of Client’s account:
The objective of analyzing financial statements from the point of view of the bank is to understand the manner in which client’s own resources are employed, its liquidity position, the ratios of net worth to borrowing and of current assets to current liabilities. The analysis should provide answers to following areas:
1. Borrower’s net worth: To see if the borrower’s net worth justifies the level of credit facilities being requested. Net worth is calculated by total debt liabilities from total assets. From another point of view, the net worth is the owners’ total interest in the business made up of paid up capital and accumulated surplus consisting of written earnings and reserves.
2. Working capital: To see whether the current assets are sufficient to meet the client’s current commitments and liabilities. Working capital is arrived at by deducting the current liabilities from the current assets.
3. Profitability: To see whether sufficient earnings from the operation of the business are there to repay the bank debts living sufficient balance /return on equity.
4. Capital Gearing: To see how much amount of equity is in the business compare with the borrowed funds. As a good banking proposition substantial equity investment should be insured.
5. Cash flow: When assessing the client’s liquidity position and profitability, the timing of client’s commitment must be considered. His commitments must be spread in such a way that the business would never face a cash shortage in the foreseeable future.
3.6 Project Financing Evaluation:
Systematic analysis is required to be undertaken to provide a rational basis for decision making. Socio-economic objectives of the country needs to be considered in addition to the soundness of the project in terms of technical, commercial, financial and management considerations while making investment decision.
3.6.1 Project Evaluation
The proposal may be for a new project or an existing project requiring Balancing, Modernization, Replacement and Expansion (BMRE). The project appraises in terms of technical, commercial, financial, management and socio-economic aspects while making investment decision.
The proposal to be developed in the following areas:
a) Cost of the project: The cost of the project represents all fixed capital expenditures incurred or to be incurred for acquisition of its fixed assets and the net working capital to run the project. Proper assessment of the cost of the project is very important for fixation of debt/equity contribution of the Bank. After determining cost of the project, financing plan shall have to be worked out realistic basis.
b) Means of financing/ Debt-equity ratio: Contribution from the sponsors in the form of paid up capital, director’s loan etc. form part of the equity. Contribution from the bank is considered as debt. Debt equity ratio should be set in a manner that the sponsors have reasonable stake in the project. In case of BMRE project, debt equity ratio shall be fixed on incremental cost of the project.
c) Working Capital: A portion of working capital remains tied up in the business over the years, called net working capital, requires funding from long term source. The other portion of working capital varies from time to time, generally met from short-term sources like commercial bank borrowing and creditors.
While computing working capital requirement, Banks policy and Bangladesh Bank’s instruction from time to time to be kept in mind. Following are the generally accepted guideline for calculation of working capital:
a) Existing unit : 5% above the last year’s actual capacity utilization
b) New unit : 60% of attainable capacity/rated capacity
d) Credit investigation and selection of sponsors: The credit investigation conducted by a banker seeks to evaluate the entrepreneurial ability, managerial experience, business acumen, integrity, reputation and financial worth of promoters applying for Bank’s financial assistance for setting up industries or BMRE of a project. The credit investigation of the clients also look for their individual liabilities for a realistic assessment of their worth.:
e) Balance sheet and statement of accounts: The analysis of financial statements of a concern would provide information on liquidity, activity and profitability position of the concern. The financial soundness of a business can be determined by using different indicators from the Balance Sheet and Profit and Loss Account which is known as the ratio analysis.
f) Bank’s past experience: In many cases, the applicant may have already availed loans either for the project or for some other purposes from Agrani Bank Limited LIMITED or from different financial institutions. In such cases, the credit inquiry will provide valuable information about their worth, dealings and present status of the liabilities. Credit Investigation Report should be obtained from other Banks as well as from other divisions of the same bank.
g) Govt. report publications; There is another documentary source of information namely the official gazette, press reports regarding suits by or against persons and parties insolvency and liquidation of particular individual or enterprise, black listing and/or similar punitive action against individuals, firms etc. by the Govt./Autonomous bodies etc. which are very valuable.
h) Banking Transaction: Clients carry on normal business, maintain deposits and also avail overdraft facilities. A detailed review of these accounts will give very valuable information about the financial standing of the clients.
i) Report from Trade Circle: More information relating to sponsor’s worth, size of business, turnover, integrity, reputation, honesty, business morality conduct etc. of the clients can be obtained from other traders in the same line. A client engaged in a manufacturing business must invariably have constant trade links with the wholesale market.
j) Source of equity: It may be necessary to raise cash either rising of equity through borrowing on the security of the sponsor’s property or through sale of property. Borrowed fund will be discouraged, if the borrowed fund thus raised is to be paid back out of earnings of the new project. The sponsors may have several other sources of mobilizing equity e.g., cash in hand, bank deposits, dividend income, marketable securities, internal cash generation of the existing business etc. All these sources should be thoroughly examined.
3.6.2 Technical Appraisal:
Following areas to be looked into during technical appraisal:
a) Product, process and the capacity: Product to be identified, production process to be chalk down and capacity of the project to be determined.
b) Land and location: Location of the project should be suitable with all infrastructure facilities,. other relevant issues like proximity to market, availability of raw materials and worker, environmental issues to be looked into before selecting of location.
c) Building: The area and nature of construction should be determined as per requirement of the project. The estimates should be based on quantitative analysis in respect of various building materials rather than on a flat rate basis.
d) Machinery and equipment: The cost of machinery, spares etc. constitute the largest component of total cost of the project. All costs related to machinery including duty, tax, insurance, freight, installation etc. should be taken into consideration. The value of machinery and equipment should generally be determined on the basis of three competitive genuine price quotations.
e) Other fixed assets: The project should include furniture, fixture, office equipment etc. as per requirement. Preliminary expenses, cost for trial production, interest during construction period should also be included in the cost of project. It should be kept in mind that no item is left out and if there is any requirement of contingencies.
f) Pre-operating expenses: Initial costs like survey, plan, drawing, salary allowances of the employees during implementation, promotional fee, legal documentation fee, consultant fee, commission and interest during construction period etc. are the part of project cost and to be included during preparation of project cost.
g) Requirement of raw materials: Item wise requirement of raw materials to be quantified and the price and duty structure to be mentioned to arrived at the actual cost of raw materials, sources of raw materials whether imported or local to be mentioned. Requirement of packing materials should also be taken care of.
h) Requirement of utilities: Requirement of utilities, source and the cost thereof are to be attended.
i) Waste disposal: Wastage of raw materials during processing and handling are to be determined with utmost care. Impact of wastage during calculation of raw materials and finished goods needs to be addressed properly. Necessary arrangement for disposal of wastage is also to be made.
j) Environmental impact and pollution control: Effect on environment and pollution hazards may be taken into consideration. Measures must be prescribed regarding negative effect on environment. Steps required to control the possible pollution should be identified and mentioned in the report.
3.6.3 Market Appraisal:
Market in a broader sense, is termed as the sum of contracts between buyers and sellers of a product or service, the price and quantity exchanged and which are determined by the forces of demand and supply. Following areas need to attend in the market appraisal:
i) Application of product and services, ii) Target market – Local/Export, iii) Demand/Supply analysis
Substitute and competitors, iv) Proposed marketing/Distribution Arrangements, v) Proposed Buyers
vi) Price competitiveness, vii) Promotional Aspects.
3.6.4 Financial Projections and analysis:
a) Earning forecast: The earning forecasts measure cost of production and profitability relating to a particular period or a number of periods as may be used for the purpose of forecasts. A three-year period is needed to be seen by the Bank to arrive at an investment decision. The earning forecast involves the estimation of sales and estimation of associated costs that shall have to be incurred to achieve the projected sales.
b) Estimation of sales: In estimating sales, the quantity to be sold is to be determined first and then the selling price to be applied to estimate the sales in monetary terms.
c) Estimation of cost of sales: Major items of costs should be identified and highlighted in estimating the total cost of sales. Some cost items such as those relating to raw materials, rent, tax, insurance, water, power, fuel, interest etc. can be estimated at actual with great deal of accuracy. On the other hand many of the administrative and sales expenses can be estimated only with rough approximation.
d) Cash flow: One of the major tasks in financial forecasting is to assess the requirement of funds and to find out how those requirements can be met. It involves estimation of cost and sources of fund, estimation of income from future operation, liabilities that shall have to be incurred and the proposed investment in future assets.
e) Analysis: In case of BMRE loan proposal, the project will have relevant operating past. The analysis of the past operation of an existing concern is of great usefulness in predicting, with a fair degree of accuracy, the future results of business activity and the future ability of an enterprise to meet its credit obligation. In such cases, the financial statement of the concern for the past three consecutive years should be reviewed to form a correct opinion.
f) Ratio analysis: The financial statement of an existing concern or future projections for a proposed investment may be analyzed through calculation of a number of financial ratios. Many types of financial ratios may be calculated and used. But the purpose for which the analysis is made will suggest emphasizing one set of ratios in preference to another.
g) Sensitivity Analysis: Sensitivity analysis provides the picture of relative changes in overall profitability due to change in any variable. Usually changes (increase) in material and other variable cost or changes (decrease) in selling price are being taken into consideration for making sensitivity analysis.
h) Break-even analysis: The basic strength of a project lies in its overall profitability. But it is equally important to know the point of sales, capacity utilization, level of production or price to cover the expenses and starts profit earning. The point of activity at which the project would neither earn profit nor incur loss is called Break-even point.
i) Financial Internal Rate of Return (FIRR): Financial rate of return measures the potential earning power of a project considering time value of money covering entire life of the project.
FIRR = Lower discounting rate + (NPV at lower discounting rate/ (NPV at lower discounting rate minus NPV at higher discounting rate) X (Difference between Higher discounting rate minus lower discounting rate))
3.6.5 Managerial Aspect:
This is another important aspect of the appraisal. Managerial feasibility refers to the assessment of ability of management personnel in managing a project efficiently. The following managerial skills should be analyzed:
– Technical skill to use knowledge, method and Techniques (acquired from experience, education and training) to perform the job.
– Human skill to maintain interpersonal relationship within or outside the organization.
– Conceptual skill to understand the complexities in overall organization.
3.6.6 Socio-economic Aspect:
The observation of this aspect is to see whether the project is socially desirable. How much contribution will be made by the project to the G. D. P. and how many numbers of employment will be generated by the project should be ascertained.
3.7 Pricing of Loan:
Pricing of loan is a great important element in banking business. Because through pricing, bank usually create margin/profit. So it is to be determined carefully. In pricing, four components are to be calculated prudently otherwise pricing of that loan will create a definite loss for the bank. The components are:
i. Interest Expense or Cost of Fund: The interest to be given to the depositor and to central banks for borrowing
ii. Administrative Cost
iii. Cost of Capital: Return expected by the investors for their capital invested in the bank
Iv. Risk Premium
3.8 Approval Process:
In order to fully understand Agrani Bank Limited’s procedures relating to sanctioning and control of advances a necessary first step is to examine the Bank’s organization structure.
The organization structure has three levels – Branch, Head Office, CRECOM and Executive Committee of the Board (in lieu of Board of Directors).
Branch: The first level of organization in Agrani Bank Limited LIMITED is the branch. Function of the branch have been split into four main categories; Advances, Foreign Exchange, General banking, and Accounting & Establishment. The size of the advance function depends on the number of borrowers and the size and complexity of their accounts.
The work of the advance department at the branch is to prepare all the detailed schedules in the Credit Line Proposals. To ensure that the security for the advance is perfected and to provide all information required on the creditworthiness of the customer the department also monitors the advances accounts regular basis.
The branch manager or officer-in-charge of advance department should conduct the initial interview with the customer. If the proposal meets Agrani Bank Limited’s lending criteria and is within the manager’s discretionary powers, the credit line should be approved by the Manager.
Head Office: The second level of Agrani Bank Limited’s organization is the Head Office under Managing Director’s discretionary power and /or the Credit Committee (CRECOM) formed at Head Office level. The Credit Committee is headed by its Chairman who is at present ex-officio Deputy Managing Director. Other members of the Credit Committee are the departmental heads relating to credit, credit administration and fund management. Normally Credit Committee is a recommending forum. Credit line proposals recommended by the Credit Committee are either sanction under discretionary power of the Managing Director or anything beyond the capacity of the M.D. is sent to the Executive Committee of the Board for approval.
It is the responsibility of the Credit Committee to review, and approve or reject all credit line proposals above the branch managers’ discretionary powers. Using the powers delegated to it by the Board of Directors, Credit Committee can finally recommend all credit line proposals up to the approved limit of M.D. and Executive Committee of the Board.
In the Head Office organization structure the reviewing departments are known as the Credit Division and Loan Administration and Monitoring Division. This department’s deals with all the detailed work of reviewing credit line proposals and controlling overdrafts and loans on a continuous basis.
Executive Committee of the Board:
The third organizational level within Agrani Bank Limited LIMITED is the Executive Committee of the Board comprising of the members from the Board of Directors and the Managing Director as an ex-officio member of the committee. This Committee has the power to approve all other credit line proposals beyond the capacity of branch in-charges and the Managing Director. The Executive Committee of the Board is responsible for sanctioning, reviewing large credit line proposals and monitoring credit policy of the bank as determined by the Board of Directors.
3.9 Post sanctions process:
After the credit Line Proposal has been finally approved by the appropriate sanctioning authority in the Bank’s credit organization structure it enters the post sanction processing stage. At this stage the signed credit line proposals is returned to the branch/ credit officers, following four further steps are to be taken by the branch manager before the borrower can use the credit lines that have been sanctioned to him. These steps are as follows:
– Convey offer /sanction letter to the borrower.
– Branch credit officers perfect the security and charge documents considering the nature and the terms of facility and the securities and in accordance with the laws of the land.
– An account number is allocated to the new credit facility.
– The account record is set up and borrower’s file is prepared.
When these four steps have been complied with, the post sanctioning process is completed and the borrower can draw on his account.
Documentation of Loans & Advances: Immediate after sanctioning of loan, documentation is to be made properly before disbursement of loan. Documentation formalities are commonly known as completion of ‘Charge document’ in the banking world. Type of documents to be signed by the client varies depending upon the nature of loan and advances given. Some common documents are listed below:
i) Demand Promissory (DP) Note, ii) Letter Arrangement, iii) Letter of Agreement, iv) Letter of continuity (in case of continuous loan), v) Letter of pledge (in case of Pledge), vi) Letter of Hypothecation (in case of Hypothecation), vii) Letter of Undertaking, viii) Letter of Debit Authority, ix) Letter of Installment (in case of term loan to be paid in installment) and x) Letter of Guarantee (Personal Guarantee)
|Type of advances||Securities|
|Loans||Lien of various kinds of Sanchay Patra, Govt. Securities, and Shares quoted in the Stock Exchange, Debenture, Fixes Deposit Receipt, hypothecation of vehicles, hypothecation of machinery, hypothecation of other moveable assets, hypothecation of book debts and receivables, Collateral of immovable properties.|
|Over draft||Sanchay Patra, Non-resident Foreign currency deposits (NFCD), Shares, debenture, government promissory notes, fixed deposit receipts, life insurance policies.|
|Cash credits||Pledge or hypothecation of stock-in-trade, stock-in-process, goods-in-transit, produce and merchandise, machinery collateral of land & building on which machinery are installed and collateral of third party mortgage of immovable property|
|Inland bills purchased||Bill itself|
|PAD||Shipping documents for imports having title to the bank|
|T R||Trust receipt obtained in lieu of import documents|
|Export||Pledge or hypothecation of goods or export Trust Receipts|
|Foreign bills Purchased||Shipping documents for exports|
3.11 Creation of Charges over Securities:
As a safety measure, bank has to create charges over the securities against the risk of non-repayment of loan. The most common modes of charge creation are defined below in a very brief from:
1. Pledge: According to the section 172 of the Contract Act, when a borrower surrenders his business goods to the banker’s custody as the security of loan given by the bank then it is called pledge. The pledged goods remain with the possession and control of the bank and the client draw the goods in case of need with the permission of the bank by repaying adequate amount of loan. Bank usually permits drawing power (DP) to the borrower to draw the goods from its custody after checking the stock report.
2. Hypothecation: When loan is given to the borrower against hypothecated possession of goods then it is called Hypothecation, The physical possession & control remain with the borrower’s custody. Bank creates charge over the hypothecated goods in case of default. For creation of this charge bank takes the letter of hypothecation from the borrower.
3. Lien: Lien is the right of the creditor to retain the goods or properties given by the borrower to the creditor as the security against the loan. The creditor deserves the right of lien until the debt is paid.
4. Assignment: Assignment is the transfer of a right, property or debt, existing or future by one person to another person. In banking the usual subject of assignment is “auctionable claims”.
5. Set-off: Right of set-off is the right of a banker to combine all the accounts of a customer to realize the debt. Set off accrues to the banker as a result of banker-customer relationship. If a customer maintains more than one account with the bank, usually bank obtains a prior letter of set-off so that bank can combine them at its discretion without giving any notice to the customer.
6. Mortgage: As per the declaration of the Transfer of Property Act 1882 under section 58 (a) mortgage is the transfer of an interest in specific immovable property for the purpose of securing the repayment of money advance or to be advanced by way of loan, existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability. The transferor is called the mortgagor and the transferee is called the mortgagee. The mortgagor gets back all his rights to the mortgaged property on repayment of loan due three on. The most two common types are:
a. Registered or Simple Mortgage: Where without delivering possession of the mortgaged property, the mortgagor binds himself personally to repay the debt. The mortgage (Bank) can sell the property by obtaining decree from the court.
b. Equitable Mortgage: Where mortgagor delivers the documents of title of immovable property with intention to create a security thereon, the transaction is called mortgage by deposit of the deeds or equitable mortgage.
3.12 Securities and Advances:
The following securities are to be obtained by the branches depending on the nature of advances while allowing secured advances to the clients.
– Wage Earner Development Bond, Bangladesh Bank Investment Bond and other approved securities that can be marked lien.
– Fixed Deposit Receipt issued by any branch of Agrani Bank Limited Limited .
– Fixed Deposit Receipts issued by other banks (Normally, Agrani Bank Limited LIMITED should not encourage this security against our loan).
– Shares quoted in the Dhaka Stock Exchange, Chittagong Stock Exchange Ltd., and Sylhet Stock Exchange Ltd.
– Pledge of goods and produce
– Hypothecation of goods, produce and machinery.
– Immovable property
– Fixes assets of manufacturing unit.
– Cheques, Drafts, Pay order, Railway Receipts, Steamer Receipts, Burge Receipts of the Government or Corporations.
– Shipping documents.
– All other moveable and floating assets such as, book debts, receivables etc.
Loans: Advance made in a lump sum repayable either on fixed installment basis or in lump sum having no subsequent debit except by way of interest, incidental charges, etc. is called a loan. After creation of loan, there will be only repayment by borrower. The whole amount of loan is debited to the customer’s name on a loan account to be opened in the ledger and is paid to the borrower either in cash or by way of Credit to his current or savings account.
Over drafts: Advance in the form of over draft is always allowed on a current account operated upon by cheque. Within the sanctioned limit, the borrower can overdraw his account within a stipulated period. Here, withdrawals or deposits can be made any number of times at the convenience of the borrowers, provided that the total amount overdrawn does not, at any time exceed the agreed limit. Interest is calculated and charged only on the actual debited balances on daily products basis.
Cash Credit: Cash credit as a form of advance is a separate account by itself and is maintained in a separate ledger. The borrower may operate the account within stipulated limit as and when required. The drawings are subject to drawing power. Cash credit is an active & running account to which deposit and withdraws may be made frequently. The debit balance of the account on any day cannot exceed the agreed limit.
Inland Bills purchased: Sometimes banks are to purchase bill of exchange of businessmen to facilitate commercial transactions. Besides bills, banks also purchase cheque drawn by Government, Semi- Government institutions, local authorities, or any first class parties for extending accommodation to the parties requiring funds. In case of purchase and discounting of bills, the banker credits the customer’s account with the amount of the bill after deducting his charges or discount. In case of purchase of cheque, amount of the cheque is credited to the party’s account to the debit of bills or cheque purchased account and on receipt of the proceeds of the cheque, after collection, bill or cheque purchase account is liquidated.
Payment against documents (PAD): PAD is associated with import and import financing. The bank opening letter of credit is bound to honor its commitment to pay for import bills when these are presented for payment provided that it is drawn strictly in terms of letter of credit.
The foreign correspondent, which negotiates the documents; debits the account of the opening bank and in fact, the amount thus stands advanced on behalf of the importer. The opening bank on receipt will lodge the shipping documents to their book and will respond to the debit advice originated by foreign correspondent to the debit of “Payment against documents (PAD)” account and present the bill to the importer for payment/ acceptance.
Trust Receipts: Advance against a Trust Receipt obtained from the customer, are allowed when the documents covering an import shipment are given without payment. The customer holds the goods or their sale proceeds in trust for the Bank, till such time, the loan allowed against the Trust Receipt is fully paid off.
Long Term loan: Long-term loan is meant for setting up of a project/ industrial undertaking, i.e. financing for the development of the infra structural facilities including procurement of machinery, either from abroad or from local market. Disbursement may be made in one installment depending on the item for which financing is being offered or more than one installment matching with the equity investment of the borrower.
Disbursement of equity and loan shall be made strictly in accordance with the disbursement schedule incorporated in the loan sanction advice for implementation of the project within the stipulated period. Disbursement of each phase is always subject to satisfactory utilization of previous phase. Utilization of phase wise disbursement must be verified by an Officer and Engineer of the Bank. In addition, branch must closely supervise the utilization of disbursement amount from time to time.
Monitor/ Control of Credit Operations:
Advance allowed should be very closely watched to see whether the same are being conducted in accordance with the terms and conditions under which the limits were sanctioned or not. The result of the inspection should be an effective guide in sorting out the measures to be adopted in respect either of correcting the unsatisfactory operation of the advances or recovery of the same.
In order to ensure safety of advances, all advances shall be kept under supervision and thereby under control. This will include supervision at the time of disbursement to ensure proper utilization of bank credit, to supervise end use during the tenure of advance and to ensure that the repayment is regular. The control of credit operations falls into two main parts, namely: Regular monitoring of all accounts and review of all EOLs and Monitoring of delinquent accounts
Monitoring/controlling contains the following main sections:
3.14.1 Control of overdrawn accounts:
For Agrani Bank Limited Limited, the procedures for controlling overdrafts is explained in two parts: Branch control of overdrafts; & Central control of overdrafts.
Branch control of over drafts: The branch control of over draft has the following five main elements:
i) Sanctioning the overdraft limit:When an overdraft limit is first sanctioned a Loan Account Input Form for input of details in the computer records must be completed at the branch. The form has three parts: Customer record, Account record, and Credit line record.
All three parts must be completed if the borrower is a new customer who has no other accounts with the bank. The customer record is transcribed from the account opening form, which is completed by the borrower at the branch. If the borrower has an account with the bank, then only the account record and credit line record need to be completed. When the Loan Account Input Form has been completed, it is checked and signed by two authorized officers at the branch.
Ii Control of cheque and other debits posted to overdrawn accounts; The next step in the control system after the sanction of the over draft limit is the monitoring of cheque and other debit items drawn on the account against the limit. The following information on each cheque received at the branch is input daily via the terminal to the central computer: Account Number, Amount of Cheque & Cheque Number.
iii) Periodic review of overdraft accounts; The third stage in branch control is the periodic review of over draft accounts by the branch manager and the officers responsible for credit operations at the branch. The checks and control reports used at the branch are as follows:
a. Up date Customer & Account Data Daily
b. Authorized Withdrawals Daily
c. Secured over drafts weekly
d. Clean over draft weekly
e. Excess over limit/ Excess Over drawing Power Weekly
f. Unused facilities weekly
g. Temporary facilities weekly
h. Statement of Interest-Overdraft Accounts Monthly
iv) Preparation of requests for authorizing EOLs, temporary over draft (TOD) or other non- recurring transactions: EOLs and TODs require authorization. Posting of debit transactions to accounts, which are over the limit, requires the authorization of the branch manager in the first instance. This also be the final authority if the branch manager has the authority and EOL or TOD is within the branch manager’s authority level. If it is not, then a request for approval of the EOL/TOD must be prepared and submitted to HO who will consider the request and, if they agree with it, progress it to final approval.
v) Periodic monitoring of security values;The monitoring procedures for tracking the value of the Bank’s security require elaboration. The periodicity of review depends on the nature of security. The guidelines to be observed by all branch managers are as follows:
Head Office control of overdraft:
The controls operated by Head Office are as follows:
– Weekly review of reports sent by the branches;
– Random examination of reports, if required, twice a month whenever requested by the authority;
– Review of weekly reports sent to the Head Office on all EOLs and TODs which have not been authorized correctly;
– Regular branch/ project visits by officers from Loan Administration and Monitoring Division to review, on the spot, large and / or irregular advances.
– Each of the officers in Loan Administration and Monitoring Division is responsible for reviewing the advance portfolios of the branches.
Concerned division of Head office operates a program of regular branch visits. The visits are at random so that the branch does not know in advance when the visit will take place. The officer can ask the branch manager for any information on specific accounts..
3.14.2 Control of loans:
Branch control of loans: Branch control of loans has three main elements as follows:
(i) Setting up of the loan accounts: The setting up of the loan accounts proceeds in the same way as the overdraft account. A loan account form as described in the case of overdraft account is filled in at the branch level for each new loan after the signed Credit line proposal is received from the Head office. In addition, the following information is required for loans: Installment amount, Installment frequency, First installment due on, and First repayment- Maturity date.
(ii) Review of loan accounts: After the loan has been set up, it is reviewed monthly by the branch. The purpose of the review is to ensure that the monthly interest charges are being paid up and that repayment of principal are being made on time. Interest is charged on the unpaid installment and also on the payable but unpaid loan and interest amount during the overdue period and is included in next month’s interest charge.
(iii) Periodic assessment of security values: Periodic review of security is essential for proper valuation of the security. It is needed as the value of the security is changing day by day.
Head office control of loan: The controls exercised by Head Office are as follows:
– Monthly review of the Loan Statement by officers in concerned division;
– A program of regular branch/project visits by officers from concerned division.
Each of the officers in concerned division of Head office is responsible for reviewing the loan portfolios of branches. By comparing the statements with previous month’s statement they check the progress/ deterioration in repayment of loans and report to the competent authority.
In cases where there are apparent defaults on capital repayments or interest payments, the monitoring officer of HO should contact the branch to find out the reasons for the apparent defaults.
2.14.3 Control of other Credit facilities:
This section deals with the controls over the following other types of credit facilities which form an important part of the Bank’s advances port folio:
Bills purchased: The term “bills purchased” is used to describe short-term loans granted against documentary or clean bills. Thus the branch “buys” the bill, its “price” being the amount of the loan granted against the bill. The term “bills discounted” is used to describe short-term loan granted against the security of bills where interest amount on loan is deducted from the face value of the bills at the time of discounting the bill. Thus net amount is credited to the borrower’s account. The loan is liquidated through the proceeds of the bill. Interest is charged on the loan at a rate linked to either LIBOR or base rate.
A bill purchased / discounted facility is subject to an approved limit, which is reviewed annually through the Bank’s sanctioning system. The Bank will purchase / discount bills from the drawer up to the limit approved by the credit line proposal. The bills can be denominated in any of the major trading currencies.
The controls over the bills purchased / discounted exercised by the branch manager are as follows:
– report on the creditworthiness of the drawer;
– report on the creditworthiness of the drawees;
– consideration as to the type and quality of the goods, if any, covered under the bills;
– level of margin allowed on bills: the higher the margin, the lower the Bank’s assessment of the risk of the lending to the customer against the security of the bill;
– comparison of the value of bills outstanding within the approved limit;
– investigation of bills that are outstanding for an unreasonable period or have matured but have not been paid; &
– Verification of the Bank’s legal title to the goods.
The branch manager must follow up on all overdue bills by writing to the borrower each month, listing all bills, which have not been paid on their due date.
Letters of credit: The documentary Letter of Credit (LC) is an important method of setting debts in international trade and is a main source of short term import finance for many of the Bank’s customers. This section concentrates on the various controls over the opening and settlement of LCs that are operated by the Bank at branch and Head office levels.
Documents supporting the debit to PAD account should be kept in the Bank’s custody. Adequate follow up should be made with the customer to retire the bill as soon as he can. The branch should also ascertain the expected date of arrival of goods. This date should be desired. If the customer fails to retire the bill before the arrival and delivery of goods, arrangement may be made to clear and store the goods safely. Arrangement for insuring the goods should also be made. Such cases should be immediately reported to Head Office for necessary instructions. Documents must not be parted with until the customer pays in full for the bill.
Control at Head Office: At monthly intervals, the branch manager provides the following reports to Head Office: Outstanding LC liabilities, Outstanding Acceptance liabilities and Outstanding PAD liabilities.
In each case the position is summarized customer-wise and then individual LCs and acceptances are listed. The concerned officers of Head Office should examine the monthly reports from the branches and carry out the following checks:
– Agree the branch reports with the monthly Statement of Affairs.
– Examine the long standing items and due dates shown in the reports
Letter of guarantees: It is customary for the bank to execute guarantees / counter guarantees on behalf of customers favoring third parties in the normal course of business. Proposals for issue of guarantees should be submitted, with complete details, for sanction at the appropriate levels.
Control at Head office
At monthly intervals the branch manager should provide the Statement of Letters of Guarantees issued and Outstanding to Head Office. Control procedures for LC as given earlier are followed by Head office for guarantees.
Cash Credit: The procedures for controlling cash credits are two parts:
Control at Branch :The control procedure for cash credit at the branch level is similar to control procedure for overdraft accounts. An account is set up and its details are checked through the relatives’ reports. Daily control is essential while posting in cheques; similar to overdraft accounts. Debit balance is matched with the drawing power available in the account. The branch should do proper control of security and its periodical checks.
Control at Head office:At monthly intervals the branch manager should provide the Statement of Cash Credit facilities which will include, among others, the following:
– Name of the client,
– Limit sanctioned with sanction and expiry date,
– Details of security held with present value,
– Account performance (including debit balance, credit balance, average balance etc.
The concerned division of Head office will analysis/ review the above statements and report to the competent authority with findings.
3.15 Handling of Delinquent Loan/Advance:
Despite the extreme care exercised in the sanctioning and control procedures, it is still possible that some advances may become doubtful because of adverse changes in economic conditions seriously affecting the borrower’s business or his personal financial position. All lending decisions involve an element of risk to the Bank, because future economic conditions cannot be predicted exactly. Therefore, an important area in advances control is-
– Identification of delinquent advances, and
– Monitoring of the delinquent accounts.
3.15.1 Identification of Delinquent Advances:
The identification starts with the branch manager. As part of the control mechanism, the branch manager is monitoring advances regularly during the week; he or his assistant may check on large accounts daily and review the smaller accounts at weekly intervals. The branch manager will be looking at the health of the account and will use the following criteria:
In the case of overdrafts: i) turnover, ii) conduct of the account against the limit sanctioned by the Bank at the last credit line review.
In the case of loans: adherence to the repayment schedule agreed with the borrower, either when the loan was sanctioned, or at the last rescheduling.
In the case of bills purchased and letters of credit: Payment of the bill by the drawee at the destination on the maturity date or in the event of non-payment by the drawee, by recovery from the drawer of the bill (borrowed).
In the case of contingent facilities: Letters of credit should be checked to ensure the reliability of the seller of the goods and the legality of the transaction and
In the case of letters of guarantee: the details of the contact and the period over which the guarantee is valid should be checked: performance bonds and bid bonds also involve additional checks to ensure that the contractor has carried out similar work previously.
In addition the branch manager should also keep a watch on declining sales, reducing profits and profitability, deterioration in the financial ratios, if any. He should remain vigilant of external factors such as non-availability of a particular raw material, delays in payment by Government Agencies, declining market for a particular product, financial weakness of a guarantor etc. These factors have a direct bearing on the health of a borrowing account.
3.15.2 Monitoring of the delinquent accounts:
After a delinquent advance has been identified by the branch manager and confirmed by Head Office, it must then be monitored through monthly and quarterly reporting to Head Office. The first stage in the monitoring system is to meet the borrower and give him the opportunity to regularize his account. Normally he will be given a time limit to regularize his affairs and to provide plans for solving his financial problems. Branch office, in consultation with the borrower and with the permission of the Head office, will make a recovery plan. This recovery plan and/ or restructuring of the facilities may be either accepted or rejected.
If the recovery plan is rejected or if the recovery plan previously accepted by the Bank does not work, then the borrower may be given some more time to solve his financial problems if they appear to be temporary and if extra time is all that the borrower needs to develop a practical solution. However, if the problems appear intractable, then either of the two things may happen:
3.16 Loan Classification- Provisioning:
The detailed information concerning classification, provisioning and interest Suspense Account will be required to be submitted to Bangladesh Bank within 30 days from the date of reference.
Basis for Classification:
All loans and advances will be divided in four categories: (a) Continuous Loan; (b) Demand Loan; (c) Fixed Term Loan; and (d) Short-term Agricultural and Micro-Credit.
a) Continuous Loan: The Loan, which has no particular repayment schedule, but contains date of expiry, credit limit etc. will be termed as Continuous Loan e.g., CC, OD etc.
Basis of Classification Irregular: Next day after the date of expiry, if not adjusted/renewed at expiry date:
Substandard: Un-recovered for more than 6 months but less than 12 months.
Doubtful: Un-recovered for more than 12 months but less than 18 months.
Bad/Loss: Un-recovered for more than 18 months.
b) Demand Loan: The loan, which is considered repayable only after it is claimed by the banks, will be termed as Demand Loan. If contingent or any other liability is converted to Compulsory Loan and Forced Loan then it will be termed as Demand Loan e.g. Forced LIM, PAD, FBP, IBP etc. These are Same as Continuous Loan
c) Long / Mid Term Loan: The loan, which is repayable within a particular period of time as per repayment schedule, will be termed as Long / mid term loan.
Basis of Classification: If any installment is left un-recovered within the scheduled date, the amount falling due on account of un-recovered installment will be classified as “Overdue Installment”. Term Loan , which is repayable within a maximum period of 5 years:
Substandard: Overdue installment equals or exceeds the amount repayable within 6 months.
Doubtful: Overdue installment equals or exceeds the amount repayable within 12 months.
Bad/Loss: Overdue installment equals or exceeds the amount repayable within 18 months.
Fixed Term Loan which is repayable above 5 years
Substandard: Overdue installment equals or exceeds the amount repayable within 12 months.
Doubtful: Overdue installment equals or exceeds the amount repayable within 18 months.
Bad/Loss: Overdue installment equals or exceeds the amount repayable within 24 months.
If any term loan is repayable in monthly installment then the amount of recoverable installment will be equal to the sum of 6 installments (monthly). Similarly, in case of quarterly repayable installment total amount repayable within 6 months will be equal to the amount of the total of 2 quarterly installments.
d) Short-term Agricultural and Micro-credit: Short-term Credit will include credit extended to Agricultural sector and it is repayable within a period not exceeding 12 months. The short Term Micro-Credit will be that which will not exceed an amount of Tk 10,000.00 and will be repayable within a period not exceeding 12 months.
Irregular: If not recovered within the scheduled date as per contract of the credit.
Substandard: After exceeding 12 months as irregular credit.
Doubtful: After exceeding 36 months as irregular
Bad/Loss: Overdue installment equals or exceeds the amount repayable within 60 months.
If any improvement achieved in the accounts classified it will again be declassified. However, the credit once classified by inspection team of Bangladesh Bank, that will be treated as final classification and before any subsequent inspection is conducted by Bangladesh Bank or without prior approval of Bangladesh Bank the credit will not attain any merit of declassification.
3.17 Reservation of Provision:
Provision for reserve will be kept at the following scale:
Standard : 01%
Special Mention A/c : 05%
Sub-Standard : 20%
Doubtful : 50%
Bad/Loss : 100%
After adjustment of Interest Suspense and value of Eligible Securities from outstanding balance of classified credit-the reservation of provisions will be kept on the calculated balance. Qualitative Judgment: If the recovery of the credit becomes uncertain resulting from change of circumstances under which credit was extended or the borrower sustains loss of capital or the value of security decreases or any adverse situation arises then the credit will be classified on the basis of Qualitative Judgment. Besides, if the credit is extended without any logical basis or the credit is frequently rescheduled or the rules of rescheduling are violated or the trends of exceeding credit limit observed frequently or a suit is filed for recovery of the credit is extended without the approval of the competent authority, then the loan will be classified on the basis of Qualitative judgments. Under these judgments the loans will be classified as under:
Substandard: Due to reasons stated above or for any other reason if in spite of possible loss of any credit, there is any probability of changing the present situation through taking proper steps.
Doubtful: Even after taking proper steps, if the full recovery is not ensured.
Bad/Loss: If the probability of recovery becomes totally impossible.
If any improvement achieved in the accounts classified it will again be declassified. However, the credit once classified by inspection team of Bangladesh Bank, that will be treated as final classification and before any subsequent inspection is conducted by Bangladesh Bank or without prior approval of Bangladesh Bank the credit will not attain any merit of declassification.
3.18 Treatment of Interest Suspense:
Generally when a credit is classified as Substandard, Doubtful or Bad according to prevailing classification rules, the entire interest that has been accrued/charged in the account since last “Reference Date” (the date on which previous classification exercise was done) is suspended. Subsequently, all interest charged in the account is also suspended till the account remains classified. However, the classification rule provides that any actual recovery made, after such classification is applied first to interest in suspense and then to the interest overdue or currently due Therefore, interest suspense is booked into income to the extent the actual recovery takes place.
3.19 Identification of Possible Recourses for Recovery of Delinquent Debts:
When an account turns delinquent in spite of all-out efforts, it becomes necessary on the part of the Bank to initiate appropriate actions to recover the debt. Possible recourses, depending on situation, can be as follows:
– Issuing Notices/ Legal Notices
– Goods under Pledge
– Goods under Hypothecation
– Unsecured Advances
3.20 Litigation and Costs:
While recommending institution of legal proceedings in any case, branches are generally required by Head Office to indicate the chances of recovery of the amount involved the estimated cost of the litigation (court fees, Legal Advisor’s fees, and miscellaneous expenses) and the appropriate time that would be required for getting a decree. On the basis of information supplied, Head Office decides whether it would be worthwhile to take legal action or to write off the amount.
If it is decided ultimately to file a suit, it has to be done against all parties, the principal or his heirs, successors or assignees, and the guarantor or his heirs etc., if any, as the case may be. After a decree is obtained, it has to be executed through court process by attachment and sale of the judgment debtor’s property. If in the meantime, the borrower is declared an insolvent, the provisions of relevant Act in this case shall apply.
3.21 Loan Loss Provision:
When an account turns delinquent and stands classified as “Substandard”, “Doubtful” or “Bad” depending on the degree of delinquency, Loan Loss Provision, at prescribed rates, applicable for each of the category of classification, should be made.
Usually, the Loan Loss Provision is centrally handled at Head Office, on quarterly basis, based on detailed loan classification exercises undertaken and provision requirement assessed by branches, as per Central Bank’s rules in force. The rate for provision requirement on each of the category of classified loans is the minimum prescribed by Central Bank and Banks are free to make increased provisions.
3.22 Write Off:
When all the avenues of recovery of a debt stands exhausted, or had to be abandoned for genuine reasons, the question of writing off a debt arises, Branches to approach Head Office for such writing off, reasonably establishing that no other avenue is left to recover the dues. Now Bangladesh Bank fixes up some criteria’s for which loan is to be write off.
a) Having no eligible security in the classified loan report,
b) It must be suit filed
c) And it will be Bad & Loss type classified loan.
Credit Management Guidelines by Bangladesh Bank
Risk is inherent in all aspects of a commercial operation; however for Banks and financial institutions, credit risk is an essential factor that needs to be managed. Credit risk is the possibility that a borrower or counter party will fail to meet its obligations in accordance with agreed terms. Credit risk, therefore, arises from the bank’s dealings with or lending to corporate, individuals, and other banks or financial institutions.
Credit risk management needs to be a robust process that enables banks to proactively manage loan portfolios in order to minimize losses and earn an acceptable level of return for shareholders. It is essential that banks have robust credit risk management policies and procedures that are sensitive and responsive. The guidelines have been organized into the following sections:
4.1 Policy Guidelines:
This section details fundamental credit risk management policies that are recommended for adoption by all banks inBangladesh. The guidelines contained herein outline general principles that are designed to govern the implementation of more detailed lending procedures and risk grading systems within individual banks.
4.1.1 Lending Guidelines:
All banks should have established Credit Policies (“Lending Guidelines”) that clearly outline the senior management’s view of business development priorities and the terms and conditions that should be adhered to in order for loans to be approved. The Lending Guidelines should be updated at least annually to reflect changes in the economic outlook and the evolution of the bank’s loan portfolio.
Any departure or deviation from the Lending Guidelines should be explicitly identified in credit applications and a justification for approval provided. Approval of loans that do not comply with Lending Guidelines should be restricted to the bank’s Head of Credit or Managing Director/CEO & Board of Directors. The Lending Guidelines should include the following:
a) Industry and Business Segment Focus: The Lending Guidelines should clearly identify the business/industry sectors that should constitute the majority of the bank’s loan portfolio. For each sector, a clear indication of the bank’s appetite for growth should be indicated (as an example, Textiles: Grow, Cement: Maintain, Construction: Shrink). This will provide necessary direction to the bank’s marketing staff.
b) Types of Loan Facilities: The type of loans that are permitted should be clearly indicated, such as Working Capital, Trade Finance, Term Loan, etc.
c) Single Borrower/Group Limits/Syndication: Details of the bank’s Single Borrower/Group limits should be included as per Bangladesh Bank guidelines. Banks may wish to establish more conservative criteria in this regard.
d) Lending Caps: Banks should establish a specific industry sector exposure cap to avoid over concentration in any one industry sector.
e) Discouraged Business Types: Banks should outline industries or lending activities that are discouraged. As a minimum, the following should be 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 defaulters
– Counter parties in countries subject to UN sanctions
– Share Lending
– Taking an Equity Stake in Borrowers
– Lending to Holding Companies
– Bridge Loans relying on equity/debt issuance as a source of repayment.
f) Loan Facility Parameters: Facility parameters (e.g., maximum size, maximum tenor, and covenant and security requirements) should be clearly stated. As a minimum, the following parameters are adopted:
– Banks should not grant facilities where the bank’s security position is inferior to that of any other financial institution.
– Assets pledged as security should be properly insured.
– Valuations of property taken as security should be performed prior to loans being granted.
g) Cross Border Risk: Risk associated with cross border lending. Borrowers of a particular country may be unable or unwilling to fulfill principle and/or interest obligations. Distinguished from ordinary credit risk because the difficulty arises from a political event, such as suspension of external payments
– Synonymous with political & sovereign risk
– Third world debt crisis
4.1.2 Credit Assessment:
Credit Assessment:: A thorough credit and risk assessment should be conducted prior to the granting of loans, and at least annually thereafter for all facilities. The results of this assessment should be presented in a Credit Application that originates from the relationship manager/account officer (“RM”), and is approved by Credit Risk Management (CRM). The RM should be the owner of the customer relationship, and must be held responsible to ensure the accuracy of the entire credit application submitted for approval. RMs must be familiar with the bank’s Lending Guidelines and should conduct due diligence on new borrowers, principals, and guarantors.
It is essential that RMs know their customers and conduct due diligence on new borrowers, principals, and guarantors to ensure such parties are in fact who they represent themselves to be. All banks should have established Know Your Customer (KYC) and Money Laundering guidelines which should be adhered to at all times.
Credit Applications should summaries the results of the RMs risk assessment and include, as a minimum, the following details:
– Amount and type of loan(s) proposed.
– Purpose of loans.
– Loan Structure (Tenor, Covenants, Repayment Schedule, Interest)
– Security Arrangements
In addition, the following risk areas should be addressed:
Borrower Analysis: The majority shareholders, management team and group or affiliate companies should be assessed. Any issues regarding lack of management depth, complicated ownership structures or inter-group transactions should be addressed, and risks mitigated.
Industry Analysis: The key risk factors of the borrower’s industry should be assessed. Any issues regarding the borrower’s position in the industry, overall industry concerns or competitive forces should be addressed and the strengths and weaknesses of the borrower relative to its competition should be identified.
Supplier/Buyer Analysis: Any customer or supplier concentration should be addressed, as these could have a significant impact on the future viability of the borrower.
Historical Financial Analysis: An analysis of a minimum of 3 years historical financial statements of the borrower should be presented. Where reliance is placed on a corporate guarantor, guarantor financial statements should also be analyzed. The analysis should address the quality and sustainability of earnings, cash flow and the strength of the borrower’s balance sheet. Specifically, cash flow, leverage and profitability must be analyzed.
Projected Financial Performance: Where term facilities (tenor > 1 year) are being proposed, a projection of the borrower’s future financial performance should be provided, indicating an analysis of the sufficiency of cash flow to service debt repayments. Loans should not be granted if projected cash flow is insufficient to repay debts.
Account Conduct: For existing borrowers, the historic performance in meeting repayment obligations (trade payments, cheques, interest and principal payments, etc) should be assessed.
Adherence to Lending Guidelines: Credit Applications should clearly state whether or not the proposed application is in compliance with the bank’s Lending Guidelines. The Bank’s Head of Credit or Managing Director/CEO should approve Credit Applications that do not adhere to the bank’s Lending Guidelines.
Mitigating Factors: Mitigating factors for risks identified in the credit assessment should be identified. Possible risks include, but are not to: margin sustainability and/or volatility, high debt load (leverage/gearing), overstocking or debtor issues; rapid growth, acquisition or expansion; new business line/product expansion; management changes or succession issues; customer or supplier concentrations; and lack of transparency or industry issues.
Loan Structure: The amounts and tenors of financing proposed should be justified based on the projected repayment ability and loan purpose. Excessive tenor or amount relative to business needs increases the risk of fund diversion and may adversely impact the borrower’s repayment ability.
Security: A current valuation of collateral should be obtained and the quality and priority of security being proposed should be assessed. Loans should not be granted based solely on security. Adequacy and the extent of the insurance coverage should be assessed.
Name Lending: Credit proposals should not be unduly influenced by an over reliance on the sponsoring principal’s reputation, reported independent means, or their perceived willingness to inject funds into various business enterprises in case of need. These situations should be discouraged and treated with great caution. Rather, credit proposals and the granting of loans should be based on sound fundamentals, supported by a thorough financial and risk
4.1.3 Risk grading:
All Banks should adopt a credit risk grading system. The system should define the risk profile of borrower’s to ensure that account management, structure and pricing are commensurate with the risk involved. Risk grading is a key measurement of a Bank’s asset quality, and as such, it is essential that grading is a robust process. All facilities should be assigned a risk grade. Where deterioration in risk is noted, the Risk Grade assigned to a borrower and its facilities should be immediately changed. Borrower Risk Grades should be clearly stated on Credit Applications.
The following Risk Grade Matrix is provided as an example. The more conservative risk grade (higher) should be applied if there is a difference between the personal judgment and the Risk Grade Scorecard results. It is recognized that the banks may have more or less Risk Grades, however, monitoring standards and account management must be appropriate given the assigned Risk Grade:
|Superior– Low Risk||1||Facilities are fully secured by cash deposits, government bonds or a counter guarantee from a top tier international bank. All security documentation should be in place.|
|Good – Satisfactory Risk||2||The repayment capacity of the borrower is strong. The borrower should have excellent liquidity and low leverage. The company should demonstrate consistently strong earnings and cash flow and have an unblemished track record. All security documentation should be in place. Aggregate Score of 95 or greater based on the Risk Grade Scorecard.|
|Acceptable – Fair Risk||3||Adequate financial condition though may not be able to sustain any major or continued setbacks. These borrowers are not as strong as Grade 2 borrowers, but should still demonstrate consistent earnings, cash flow and have a good track record. A borrower should not be graded better than 3 if realistic audited financial statements are not received. These assets would normally be secured by acceptable collateral (1st charge over stocks / debtors / equipment / property). Borrowers should have adequate liquidity, cash flow and earnings. An Aggregate Score of 75-94 based on the Risk Grade Scorecard.|
|Marginal – Watch list||4||Grade 4 assets warrant greater attention due to conditions affecting the borrower, the industry or the economic environment. These borrowers have an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and/or inconsistent earnings. Facilities should be downgraded to 4 if the borrower incurs a loss, loan payments routinely fall past due, account conduct is poor, or other untoward factors are present. An Aggregate Score of 65-74 based on the Risk Grade Scorecard.|
|Special Mention||5||Grade 5 assets have potential weaknesses that deserve management’s close attention. If left uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower. Facilities should be downgraded to 5 if sustained deterioration in financial condition is noted (consecutive losses, negative net worth, excessive leverage), if loan payments remain past due for 30-60 days, or if a significant petition or claim is lodged against the borrower. Full repayment of facilities is still expected and interest can still be taken into profits. An Aggregate Score of 55-64 based on the Risk Grade Scorecard.|
|Substandard||6||Financial condition is weak and capacity or inclination to repay is in doubt. These weaknesses jeopardize the full settlement of loans. Loans should be downgraded to 6 if loan payments remain past due for 60-90 days, if the customer intends to create a lender group for debt restructuring purposes, the operation has ceased trading or any indication suggesting the winding up or closure of the borrower is discovered. Not yet considered non-performing as the correction of the deficiencies may result in an improved condition, and interest can still be taken into profits. An Aggregate Score of 45-54 based on the Risk Grade Scorecard.|
|Doubtful(non-performing)||7||Full repayment of principal and interest is unlikely and the possibility of loss is extremely high. However, due to specifically identifiable pending factors, such as litigation, liquidation procedures or capital injection, the asset is not yet classified as Loss. Assets should be downgraded to 7 if loan payments remain past due in excess of 90 days, and interest income should be taken into suspense (non-accrual). Loan loss provisions must be raised against the estimated unrealisable amount of all facilities. The adequacy of provisions must be reviewed at least quarterly on all non-performing loans, and the bank should pursue legal options to enforce security to obtain repayment or negotiate an appropriate loan rescheduling. In all cases, the requirements of Bangladesh Bank in CIB reporting, loan rescheduling and provisioning must be followed. An Aggregate Score of 35-44 based on the Risk Grade Scorecard|
|Bad & Loss(non-performing)||8||Assets graded 8 are long outstanding with no progress in obtaining repayment (in excess of 180 days past due) or in the late stages of wind up/liquidation. The prospect of recovery is poor and legal options have been pursued. The proceeds expected from the liquidation or realization of security may be awaited. The continuance of the loan as a bankable asset is not warranted, and the anticipated loss should have been provided for. This classification reflects that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future. Bangladesh Bank guidelines for timely write off of bad loans must be adhered to. An Aggregate Score of 35 or less based on the Risk Grade Scorecard|
The risk is grading by giving different weight to the followings:
1. The ratio of a borrower’s Total Debt to Tangible Net Worth: 20%
- Liquidity : 20%
- Profitability: 20%
- Account Conduct : 10%
- Business Outlook: 10%
- Management: 5%
- Personal Deposit: 5%
- Age of Business : 5%
- Size of Business 5%
Risk Grade Scorecard
|Borrower / Group: Industry Code: Date of Grading: Date of Financials: Completed by:||
Score Risk Grade
95+ 2 75-94 3 65-74 4 55-64 5 45-54 6 35-44 7 < 35 8
Aggregate Score: ________
Risk Grade: ________
The authority to sanction/approve loans must be clearly delegated to senior credit executives by the Managing Director/CEO & Board based on the executive’s knowledge and experience. Approval authority should be delegated to individual executives and not to committees to ensure accountability in the approval process. The following guidelines should apply in the approval/sanctioning of loans:
- Credit approval authority must be delegated in writing from the MD/CEO & Board (as appropriate), acknowledged by recipients, and records of all delegation retained in CRM.
- Delegated approval authorities must be reviewed annually by MD/CEO/Board.
- The credit approval function should be separate from the marketing/relationship management (RM) function.
- The role of Credit Committee may be restricted to only review of proposals i.e. recommendations or review of bank’s loan portfolios.
- Approvals must be evidenced in writing, or by electronic signature. Approval records must be kept on file with the Credit Applications.
- All credit risks must be authorized by executives within the authority limit delegated to them by the MD/CEO. The “pooling” or combining of authority limits should not be permitted.
- Credit approval should be centralized within the CRM function. Regional credit centers may be established, however, all large loans must be approved by the Head of Credit and Risk Management or Managing Director/CEO/Board or delegated Head Office credit executive.
- The aggregate exposure to any borrower or borrowing group must be used to determine the approval authority required.
Board of Directors
CEO / MD
Head of Corporate Banking
Head of Credit
Manager Credit Admin(North)
Manager Credit Admin(South)
Manager Credit Admin(West)
Manager Credit Admin(East)
Recovery Manager (South)
Recovery Manager (West)
Recovery Manager (East)
Relationship Management Team
Relationship Management Team
Relationship Management Team
Relationship Management Team
Credit Manager (West)
Credit Manager (East)
- Any credit proposal that does not comply with Lending Guidelines, regardless of amount, should be referred to Head Office for Approval
- MD/Head of Credit Risk Management must approve and monitor any cross-border exposure risk.
- Any breaches of lending authority should be reported to MD/CEO, Head of Internal Control, and Head of CRM.
- It is essential that executives charged with approving loans have relevant training and experience to carry out their responsibilities effectively.
4.2 Preferred Organizational Structure & Responsibilities:
The appropriate organizational structure must be in place to support the adoption of the policies. The key feature is the segregation of the Marketing/Relationship Management function from Approval/Risk Management/Administration functions. Credit approval should be centralized within the CRM function. Regional credit centers may be established; however, all applications must be approved by the Head of Credit and Risk Management or Managing Director/CEO/Board or delegated Head Office credit exe
The key responsibilities of the above functions are as follows:
– Credit Risk Management (CRM)
– Credit Administration
– Internal Audit/Control
4.3 Procedural guideline:
The approval process must reinforce the segregation of Relationship Management/Marketing from the approving authority. The responsibility for preparing the Credit Application should rest with the RM within the corporate/commercial banking department. Credit Applications should be recommended for approval by the RM team and forwarded to the approval team within CRM and approved by individual executives. Banks may wish to establish various thresholds, above which, the recommendation of the Head of Corporate/Commercial Banking is required prior to onward recommendation to CRM for approval. In addition, banks may wish to establish regional credit canters within the approval team to handle routine approvals. Executives in head office CRM should approve all large loans.
The recommending or approving executives should take responsibility for and be held accountable for their recommendations or approval. Delegation of approval limits should be such that all proposals where the facilities are up to 15% of the bank’s capital should be approved at the CRM level, facilities up to 25% of capital should be approved by CEO/MD, with proposals in excess of 25% of capital to be approved by the EC/Board only after recommendation of CRM, Corporate Banking and MD/CEO. The following diagram illustrates the preferred approval process:
|Functions of Credit Administration Department|
|Approval from CRM|
Completion of Security Documentation
Limit Creation &Complying Disbursement Check List
Obtaining Security Documentation as per approval
Safely Storing Loan/Security Documents (fire-proof)
Periodic Review of Documentation *
Conditions & Covenant Breach Monitoring
Monitoring of Past Due, Limit, Expiry &Documents Deficiency
Audit, Internal/BB Inspection Compliance
Ensure Collateral is Insured & ProperlyValued.
Returns to BB, CIB Reporting, default list circulation.
Maintain BB Circulars & ensure compliance by all Depts.
Ensure all values, lawyers, insurers are approved, enlisted & their performance are reviewed periodically
Ensure adherence to approved terms & other requirements before disbursement.
- Application forwarded to Zonal Office for approved/decline
- Advise the decision as per delegated authority (approved /decline) to recommending branches. A monthly summary of ZCO approvals should be sent to HOC and HOCB to report the previous months approvals sanctioned at the Zonal Offices. The HOC should review 10% of BCO approvals to ensure adherence to Lending Guidelines and Bank policies.
- BCO/ZCO supports & forwarded to Head of Corporate Banking (HOCB) or delegate for endorsement, and Head of Credit (HOC) for approval or onward recommendation.
- HOC advises the decision as per delegated authority to BCO
- HOC & HOCB supports & forwarded to Managing Director
- Managing Director advises the decision as per delegated authority to HOC & HOCB.
- Managing Director presents the proposal to EC/Board
- EC/Board advises the decision to HOC & HOCB
4.4 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. For this reason, it is essential that the functions of Credit Administration be strictly segregated from Relationship Management/Marketing in order to avoid the possibility of controls being compromised or issues not being highlighted at the appropriate level. Credit Administration procedures:
Security documents are prepared in accordance with approval terms and are legally enforceable. Standard loan facility documentation that has been reviewed by legal counsel should be used in all cases. Exceptions should be referred to legal counsel for advice based on authorisation from an appropriate executive in CRM.
Disbursements under loan facilities are only be made when all security documentation is in place. CIB report should reflect/include the name of all the lenders with facility, limit & outstanding. All formalities regarding large loans & loans to Directors should be guided by Bangladesh Bank circulars & related section of Banking Companies Act. All Credit Approval terms have been met.
4.4.2 Custodial Duties:
- Loan disbursements and the preparation and storage of security documents should be centralised in the regional credit centres.
- Appropriate insurance coverage is maintained (and renewed on a timely basis) on assets pledged as collateral.
- Security documentation is held under strict control, preferably in locked fireproof storage.
4.4.3 Compliance Requirements:
- All required Bangladesh Bank returns are submitted in the correct format in a timely manner.
- Bangladesh Bank circulars/regulations are maintained centrally, and advised to all relevant departments to ensure compliance.
- All third party service providers (values, lawyers, insurers, CPAs etc.) are approved and performance reviewed on an annual basis. Banks are referred to Bangladesh Bank circular outlining approved external audit firms that are acceptable.
4.5 Credit Monitoring:
To minimize credit losses, monitoring procedures and systems should be in place that provide an early indication of the deteriorating financial health of a borrower. At a minimum, systems should be in place to report the following exceptions to relevant executives in CRM and RM team:
- Past due principal or interest payments, past due trade bills, account excesses, and breach of loan covenants
- Loan terms and conditions are monitored, financial statements are received on a regular basis, and any covenant breaches or exceptions are referred to CRM and the RM team for timely follow-up.
- Timely corrective action is taken to address findings of any internal, external or regulator inspection/audit.
- All borrower relationships/loan facilities are reviewed and approved through the submission of a Credit Application at least annually.
Early Alert process:
An Early Alert Account is one that has risks or potential weaknesses of a material nature requiring monitoring, supervision, or close attention by management. If these weaknesses are left uncorrected, they may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date with a likely prospect of being downgraded to CG 5 or worse (Impaired status), within the next twelve months.
Early identification, prompt reporting and proactive management of Early Alert Accounts are prime credit responsibilities of all Relationship Managers and must be undertaken on a continuous basis. An Early Alert report should be completed by the RM and sent to the approving authority in CRM for any account that is showing signs of deterioration within seven days from the identification of weaknesses. The Risk Grade should be updated as soon as possible and no delay should be taken in referring problem accounts to the CRM department for assistance in recovery.
Despite a prudent credit approval process, loans may still become troubled. Therefore, it is essential that early identification and prompt reporting of deteriorating credit signs be done to ensure swift action to protect the Bank’s interest.
Moreover, regular contact with customers will enhance the likelihood of developing strategies mutually acceptable to both the customer and the Bank. Representation from the Bank in such discussions should include the local legal adviser when appropriate. An account may be reclassified as a Regular Account from Early Alert Account status when the symptom, or symptoms, causing the Early Alert classification have been regularized or no longer exist. The concurrence of the CRM approval authority is required for conversion from Early Alert Account status to Regular Account status.
4.6 Credit Recovery:
The Recovery Unit (RU) of CRM should directly manage accounts with sustained deterioration (a Risk Rating of Sub Standard (6) or worse). Banks may wish to transfer EXIT accounts graded 4-5 to the RU for efficient exit based on recommendation of CRM and Corporate Banking. Whenever an account is handed over from Relationship Management to RU, a Handover/Downgrade the RU’s primary functions 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.
- Regular review of grade 6 or worse accounts.
The management of problem loans (NPL’s) must be a dynamic process and the associated strategy together with the adequacy of provisions must be regularly reviewed. A process should be established to share the lessons learned from the experience of credit losses in order to update the lending guidelines.
4.6.1 NPL Account Management:
All NPLs should be assigned to an Account Manager within the RU, who is responsible for coordinating and administering the action plan/recovery of the account, and should serve as the primary customer contact after the account is downgraded to substandard. Whilst some assistance from Corporate Banking/Relationship Management may be sought, it is essential that the autonomy of the RU be maintained to ensure appropriate recovery strategies are implemented.
4.6.2 Account Transfer Procedures:
Within 7 days of an account being downgraded to substandard a Request for Action should be completed by the RM and forwarded to RU for acknowledgment. The account should be assigned to an account manager within the RU, who should review all documentation, meet the customer, and prepare a Classified Loan Review Report within 15 days of the transfer. The CLR should be approved by the Head of Credit, and copied to the Head of Corporate Banking and to the Branch/office where the loan was originally sanctioned. This initial CLR should highlight any documentation issues, loan structuring weaknesses, proposed workout strategy, and should seek approval for any loan loss provisions that are necessary. Recovery Units should ensure that the following is carried out when an account is classified as Sub Standard or worse:
– Facilities are withdrawn or repayment is demanded as appropriate. Any drawings or advances should be restricted, and only approved after careful scrutiny and approval from appropriate executives within CRM.
– CIB reporting is updated according to Bangladesh Bank guidelines and the borrower’s Risk Grade is changed as appropriate.
– Loan loss provisions are taken based on Force Sale Value (FSV).
– Loans are only rescheduled in conjunction with the Large Loan Rescheduling guidelines of Bangladesh Bank. Any rescheduling should be based on projected future cash flows, and should be strictly monitored.
– Prompt legal action is taken if the borrower is uncooperative.
4.6.3 Non Performing Loan (NPL) Monitoring:
On a quarterly basis, a Classified Loan Review (CLR) should be prepared by the RU Account Manager to update the status of the action/recovery plan, review and assess the adequacy of provisions, and modify the bank’s strategy as appropriate. The Head of Credit should approve the CLR for NPLs up to 15% of the banks capital, with MD/CEO approval needed for NPLs in excess of 15%. The CLR’s for NPLs above 25% of capital should be approved by the MD/CEO, with a copy received by the Board.
4.6.4 NPL Provisioning and Write Off:
The guidelines established by Bangladesh Bank for CIB reporting, provisioning and write off of bad and doubtful debts, and suspension of interest should be followed in all cases. These requirements are the minimum, and Banks are encouraged to adopt more stringent provisioning/write off policies. Regardless of the length of time a loan is past due, provisions should be raised against the actual and expected losses at the time they are estimated. The approval to take provisions, write offs, or release of provisions/upgrade of an account should be restricted to the Head of Credit or MD/CEO based on recommendation from the Recovery Unit.
The RU Account Manager should determine the Force Sale Value (FSV) for accounts grade 6 or worse. Force Sale Value is generally the amount that is expected to be realized through the liquidation of collateral held as security or through the available operating cash flows of the business, net of any realization costs. Any shortfall of the Force Sale Value compared to total loan outstanding should be fully provided for once an account is downgraded to grade 7. Where the customer in not cooperative, no value should be assigned to the operating cash flow in determining Force Sale Value.
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
Deposits/SP under lien. ( 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 )
(See Note below)
Net Loan Value
4.7 Single Borrower Exposure Limit:
In order to enable the banks to improve their credit risk management further, Bangladesh Bank is issuing this Master Circular by consolidating all the instructions issued so far and incorporating some amendments to the previous circulars.
01. As a result of increase in capital of almost all the banks, now it has been decided to reduce the single borrower exposure limit from 50% to 35%. Thus-
(a) the total outstanding financing facilities by a bank to any single person or enterprise or organization of a group shall not at any point of time exceed 35% of the bank’s total capital subject to the condition that the maximum outstanding against fund based financing facilities (funded facilities) do not exceed 15% of the total capital. In this case total capital shall mean the capital held by banks as per section-13 of the Bank Company Act,1991.
(b) Non-funded credit facilities, e.g. letter of credit, guarantee etc. can be provided to a single large borrower. But under no circumstances, the total amount of the funded and non-funded credit facilities shall exceed 35% of a bank’s total capital. However, in case of export sector single borrower exposure limit shall remain unchanged at 50% of the bank’s total capital. But funded facilities in case of export credit shall also not exceed 15% of the total capital. In addition, the banks shall follow the following prudential norms, where applicable:
02. (a) Loan sanctioned to any individual or enterprise or any organization of a group amounting to 10% or more of a bank’s total capital shall be considered as large loan.
(b) The banks will be able to sanction large loans as per the following limits set against their respective classified loans:.
|Level of classified loans||The highest rate fixed for large loan against bank’s total loans & advances|
|More than 5% but upto 10%||52%|
|More than 10% but upto 15%||48%|
|More than 15% but upto 20%||44%|
|More than 20%||40%|
(c) In order to determine the above maximum rates of large loans, all non-funded credit facilities e.g. letter of credit, guarantee, etc., included in the loan shall be considered as 50% credit equivalent. However, the entire amount of non-funded credit facilities shall be included in determining the total credit facilities provided to an individual or enterprise or an organization of a group.
03. (a) A public company, which has 50% or more public shareholdings, shall not be considered as an enterprise/organization of any group.
(b) In the cases of credit facilities provided against government guarantees, the aforementioned restrictions shall not be applicable.
(c) In the cases of loans backed by cash and encashable securities (e.g.FDR), the actual lending facilities shall be determined by deducting the amount of such securities from the outstanding balance of the loans.
04. (a) Banks should collect the large loan information on their borrowers from Credit Information Bureau(CIB) of Bangladesh Bank before sanctioning, renewing or rescheduling large loans in order to ensure that credit facilities are not being provided to defaulters.
(b) Banks must perform Lending Risk Analysis (LRA) before sanctioning or renewing large loans. If the rating of an LRA turns out to be “marginal”; a bank shall not sanction the large loan, but it can consider renewal of an existing large loan taking into account other favorable conditions and factors. However, if the result of an LRA is unsatisfactory, neither sanction nor renewal of large loans can be considered.
(c) While sanctioning or renewing of large loan, a bank should judge its borrower’s overall debt repayment capacity taking into consideration the borrower’s liabilities with other banks and financial institutions.
(d) A bank shall examine its borrower’s Cash Flow Statement, Audited Balance Sheet, Income Statement and other financial statements to make sure that its borrower has the ability to repay the loan.
(e) Sanctioning, renewing or rescheduling of large loans should be approved by the Board of Directors in case of local banks. Such decisions should be taken by the Chief Executives in case of foreign banks. However, while approving proposals of large loans, among other things, compliance with the above guidelines must be ensured.
05. For the loans that have already been disbursed with the approval of Bangladesh Bank, and that have exceeded the limit as stipulated in Section 01 (mentioned above), banks shall take necessary steps to bring down the loan amounts within the specified limit. In order to accomplish this condition, banks may, if necessary, arrange partaking with other banks. However, for continuous loans, the limit has to be brought down as per Section 02 withinJune 30, 2005. For term loans, the deadline is June, 2006.
06. Banks shall submit the quarterly statement of large loan in the specified format (Form L) to Department of Off-site Supervision of Bangladesh Bank within 10 days after the end of respective quarter.
07. This circular is issued by Bangladesh Bank in exercise of its power conferred to it by section 45 of the Bank Company Act, 1991. This circular shall be effective immediately. The chief executives of all the banks are advised to place this circular in their next Board meetings.
Chapter Five: Policy Comparison with Bangladesh Bank
5.1 Portfolio Comparison:
Agrani Bank Limited policy:
- to different sectors, to different geographical area, to different line of product or business
- different type of credit
- credit into a particular sector or area, product or business should also be observed carefully
- analyzed carefully in determining the loan portfolio of a bank
The Lending Guidelines should clearly identify the business/industry sectors that should constitute the majority of the bank’s loan portfolio. For each sector, a clear indication of the bank’s appetite for growth should be indicated (as an example, Textiles: Grow, Cement: Maintain, Construction: Shrink
Agrani Bank Limited LIMITED has followed the Bangladesh Bank guideline. Bangladesh Bank gives special attention to disburse loan in different sectors, especially thrust sectors approved by the government. The recent thrust sector is textile sectors and agro-based industry. Agrani Bank Limited LIMITED has disbursed majority of advances in the textile sectors but there is little exposure in the agro-based sectors. Bangladesh bank has recently decided to reduce the single borrower exposure limit from 50% to 35%. Agrani Bank Limited is followed the Bangladesh Banks rules.
Agrani Bank Limited has also the rules to disburse loans in the discouraging sectors. Facility parameters (e.g., maximum size, maximum tenor, and covenant and security requirements) should be clearly stated.
5. 2 Single Borrower/ Group Limits:
Single borrower exposure limit is now 35%. The maximum outstanding against fund based financing facilities (funded facilities) do not exceed 15% of the total capital. In case of export sector single borrower exposure limit shall remain unchanged at 50% of the bank’s total capital. But funded facilities in case of export credit shall also not exceed 15% of the total capital
At present, Agrani Bank Limited is trying to reduce the single borrower exposures limit.
5.3 Credit Assessment:
Credit department in Agrani Bank Limited try to asses their customers and conduct due diligence on new borrowers, principals, and guarantors to ensure such parties are in fact who they represent themselves to be. Agrani Bank Limited has established “Know Your Customer (KYC)” and Money Laundering guidelines which should be adhered to at all times.
To assess the credit worthiness, Agrani Bank Limited‘s Applications summaries the results of the risk assessment and include:
– Amount and type of loan(s) proposed.
– Purpose of loans.
– Loan Structure (Tenor, Covenants, Repayment Schedule, Interest)
– Security Arrangements
In addition, Agrani Bank Limited assesses the following areas during credit assessment:
i) Borrower analysis, ii) Buyer/ Supplier analysis, iii) Industry analysis, iv) Financial analysis, v) Projected financial requirement etc.
In case of BB: The following should be analyzed during credit assessment
– Borrower Analysis
– Industry Analysis
– cash flow, leverage and profitability must be analyzed
– Future Financial Performance
– Mitigating Factors
– Security should be proper
– Loan Restructure
5.4 Risk grading:
Risk grading is a key measurement of a Bank’s asset quality, and as such, it is essential that grading is a robust process. All facilities are assigned a risk grade. Where deterioration in risk is noted, the Risk Grade assigned to a borrower and its facilities will be immediately changed. The Risk grading process in Agrani Bank Limited is not quite up to date.
In BB, Risk grading is done by considering different weight to the following parameters:
– The ratio of a borrower’s total debt to tangible net worth: 20%
– Liquidity : 20%
– Profitability: 20%
– Account Conduct : 10%
– Business Outlook: 10%
– Management: 5%
– Personal Deposit: 5%
– Age of Business : 5%
– Size of Business 5%
5.5 Approval Authorities:
In Agrani Bank Limited , the approval authority is centralized to Head Office where the authority to sanction/approve loans must be clearly delegated to senior credit executives by the Managing Director/CEO & Board based on the executive’s knowledge and experience. In Branch level, only credit proposals, documentation, disbursement, monitoring is conducted. Branch has no power to approve a credit facility.
Approval Authority at Agrani Bank Limited:
Head Office Credit Committee
Executive Board of Director
Step to avail the credit facility
5.6 Credit Process:
Credit Line Application
After branch processing, Proposal send to Head Office for Approval
5.7 Segregation of Duties:
Credit Approval, Credit Risk Management (CRM), Credit Administration, Credit Monitoring, Internal Audit/Control all is concentrated in the Head Office. Branch only conducts the Head Office Guideline. The segregation of the Marketing/Relationship Management function from Approval/Risk Management/Administration functions is in Agrani Bank Limited. Credit approval should be centralized within the CRM function. Branch credit centers are established, however, all applications must be approved by the Head of Credit and Risk Management or Managing Director/CEO/Board or delegated Head Office credit executive.
5.8 Preferred Organizational Structure:
The Credit Division separates from the corporate division in Agrani Bank Limited. Agrani Bank Limited follows the organizational structure. The people at all the levels have the following key responsibility
– Credit Risk Management (CRM)
– Credit Administration
– Internal Audit/Control
– Credit Monitoring & Control
5. 9 Approval Process:
The approval process in Agrani Bank Limited is as follows:
Credit Application By Borrowers
Branch Credit Officer investigates and make proposal for Head Office approval (ZCO)
Credit Approval Committee (HOCB)
In BB guidelines, The facilities are up to 15% of the bank’s capital should be approved at the CRM level, facilities up to 25% of capital should be approved by CEO/MD, with proposals in excess of 25% of capital to be approved by the EC/Board only after recommendation of CRM.
5.10 Credit Administration:
The Credit Administration function Agrani Bank Limited is strictly followed. The credit administration in BB is as follows:
Disbursements under loan facilities are only be made when all security documentation is in place. CIB report should reflect/include the name of all the lenders with facility, limit & outstanding.
Custodial Duties: Loan disbursements and the preparation and storage of security documents should be centralised in the branch. Appropriate insurance coverage is maintained (and renewed on a timely basis) on assets pledged as collateral. Security documentation is held under strict control, preferably in locked fireproof storage.
Compliance : All required Bangladesh Bank returns are submitted in the correct format in a timely manner. Agrani Bank Limited send the following reports Bangladesh Bank:
a. Up date Customer & Account Data Daily
b. Authorized Withdrawals Daily
c. Secured over drafts Weekly
d. Clean over draft Weekly
e. Excess over limit/ Excess Over drawing Power Weekly
f. Unused facilities Weekly
g. Temporary facilities Weekly
h. Statement of Interest-Overdraft Accounts Monthly
Agrani Bank Limited follows the above rules
5.11 Credit Monitoring:
There is strong monitoring team in Agrani Bank Limited. There are two monitoring teams at Agrani Bank Limited; i) Head Office Monitoring Team and ii) Branch Monitoring teams. The two teams combined works to reduce the bad loan.
Control of Overdrawn Account:
Branch Control: Sanctioning the overdraft limit, debited cheque control, periodic revive of the overdraft account, Periodic review.
-Head Office Control: Weekly review of reports sent by the branches;
- Random examination of reports, if required, twice a month whenever requested by the authority;
- Review of weekly reports sent to the Head Office on all EOLs and TODs which have not been authorized correctly;
- Regular branch/ project visits by officers from Loan Administration and Monitoring Division to review, on the spot, large and / or irregular advances.
- Each of the officers in Loan Administration
Branch Control: Setting up loan accounts, review of loan account, periodic assessment of security value
Head office control
– Monthly review of the Loan Statement by officers in concerned division;
– A program of regular branch/project visits by officers from concerned division.
Control of other credit facilities:
L/C control, LG control, Bill Purchased, Cash credit are controlled by both at Head Office and Branch.
5.12 Credit Recovery:
The recovery team at Agrani Bank Limited does the followings:
- 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.
- Regular review of grade 6 or worse accounts
In BB policy, the Head of Credit should approve the CLR for NPLs up to 15% of the banks capital, with MD/CEO approval needed for NPLs in excess of 15%. The CLR’s for NPLs above 25% of capital should be approved by the MD/CEO, with a copy received by the Board.
5.13 Account Transfer Procedures:
Agrani Bank Limited follows the facilities withdrawn, CIB reporting, Loan loss provision, loan rescheduling, prompt legal action etc approved by Agrani Bank Limited.
Provision for reserve will be kept at the following scale:
Standard : 01%
Special Mention A/c : 05%
Sub-Standard : 20%
Doubtful : 50%
Bad/Loss : 100%
I % for regular loans
After adjustment of Interest Suspense and value of Eligible Securities from outstanding balance of classified credit-the reservation of provisions will be kept on the calculated balance.
5.14 Non-performing Loan Account Management:
At BB, on a quarterly basis, a Classified Loan Review (CLR) prepared by the RU Account Manager at Agrani Bank Limited to update the status of the action/recovery plan, review and assess the adequacy of provisions, and modifies the bank’s strategy as appropriate. The Head of Credit approves the CLR for NPLs up to 15% of the banks capital, with MD/CEO approval needed for NPLs in excess of 15%. The CLR’s for NPLs above 25% of capital should be approved by the MD/CEO, with a copy received by the Board
At Agrani Bank Limited, it is done by Identification: check large account daily and small account weekly. Monitoring: The first stage in the monitoring system is to meet the borrower and give him the opportunity to regularize his account. Normally he will be given a time limit to regularize his affairs and to provide plans for solving his financial problems
Chapter Six::Operational Performance of Agrani Bank Limited
6.1 Amount of Loans and Advances:
All activities relating to credit of the bank are being carried out as strictly and cautiously as before with proper risk management strategy starting from the selecting credit worthy quality borrowers followed by a well-defined credit appraisal and approval process, again carried out by the competent personnel at different level. Agrani Bank Limited is in the forefront in implementing the guidelines for managing five core risks in banking. Total Loan and advances at different period are shown in the following:
Figure 3: Loan and Advances amount at different Financial Year
The financial year 2007 is most successful year in respect of loan disbursement. The growth rate is 12% in this year.
6.2 Type-Wise Loans & Advances Portfolio:
Agrani Bank Limited loans and advances with types are shown below:
Figure 4: Type-Wise loan Disbursement
6.3 Maturity wise Loans and Advances:
(Amount in Million)
|Within Three Month||3810.28||2000.18||3676.46||1533.38|
|More than three month but less than one year||6414.77||4592.63||2794.29||4161.07|
|More than one year but less than five year||2331.80||1320.41||1305.28||725.49|
|Above Five Year||1038.48||1120.54||994.00||1146.14|
Figure 4: Maturity-wise loans & advances
6.4 Sector-wise Concentration of loans & Advances:
Amount in Core
|Agriculture, fisheries and forestry||184.2||12.3%||193.13||16.89%|
|Water Works & Sanitary services||–||–||–||–|
|Transport & Communication||14.59||0.97%||21.44||1.88%|
Figure 5: Sector-wise Loans portfolio (2007)
6.5 Location-Wise Loans & Advances:
(Amount in Million)
6.6 Classified, Unclassified, Doubtful & Bad Loans & Advances:
Amount in Million
6.7 Measuring Returns of Agrani Bank Limited.:
Interest Margin: Interest margin indicates the net interest income into earning assets. Bank’s main earning source is its interest income. The higher the interest income, the higher the possibility for the bank to survive. Interest margin for the bank has increased for years, which is a good sign for a bank. In the year 2004 it was about 2.24%.
Net Margin: Net margin is the net income for the bank after covering all the expenses. Agrani Bank Limited made an exclusive profit in 2004. From the progress of interest margin, it is quiet clear that they made such a huge profit not from interest income rather from other sources of income.
|Net Interest margin||0.89%||(0.45%)||1.73%||2.96%||3.56%|
|Gross Classified loans to total loans||29.57%||28.07%||28.31%||26.27%||26.94%|
|A. D. ratio||76.06%||76.50%||75.98%||82.12%||87.18%|
|Return on assets (ROA)||0.19%||(0.50%)||1.05%||1.26%||1.43%|
|Return on equity (ROE)||7.78%||–||–||–||29.55%|
Return On Assets (ROA): Bank did not have good-looking return on assets in 2006 & 2007, which is only 1.26% and 1.43%
Return On Equity (ROE): Agrani Bank Limited had an exclusive return on equity on equity in 2007 which may be due to their new accounting procedure.
Chapter Seven: Conclusion
From the above discussion, it can be shown that Agrani Bank Limited has both positive and negative aspect in loans & advances disbursement & monitoring policy. The Agrani Bank Limited is playing pivotal role in providing necessary finance to the different industrial sectors and other sectors. For social activities, Agrani Bank Limited creates a good image in the society, But the number of branch is less than any other same generation banks. The Agrani Bank Limited competent authority should expand the banking markets by establishing new branch at different areas all over the world.
With a view to improving the quality and soundness of loan portfolio, credit risk management methods are continuously updated in Agrani Bank Limited. The Bank is applying a system of credit risk assessment and lending procedures by striker separation of responsibilities between risk assessments and lending decisions and monitoring functions. The Bank monitors its exposure to particular sectors of economy on an ongoing basis. The Bank has undertaken the changes in policy of credit risk management, credit risk administration and credit monitoring and recovery in line with the guidelines of Bangladesh Bank and in some cases Agrani Bank Limited followed strictly.
Compliance of Policy between Agrani Bank Limited and Bangladesh Bank Are shown below:
|Particulars||BB||Agrani Bank Limited|
|Loans Portfolio||Loan Portfolio should be proper||Agrani Bank Limited concentrated only few sector (i.e. textile sector:50%)|
|Single Borrower/ Group Limit||Bank must follow the BB specified limit||Bank is taking the necessary step to reduce limit|
|Credit Assessment||Banks should follow the credit assessment procedures||Agrani Bank Limited assessment is more strict in assessing credit|
|Risk Grading||BB has given a guideline for risk grading||Agrani Bank Limited does not strictly follow the Risk grading of BB|
|Approval Authority||Top management should delegate some authority to branch level||At Agrani Bank Limited , approval authority entirely on the head office.|
|Credit Processing||BB has given a guideline||Agrani Bank Limited follows the guideline|
|Credit Administration||Functions are: Disbursement, custodial duties, compliance, monitoring||Monitoring, compliance and custodial duties|
|Credit Monitoring||BB has given a guideline||Agrani Bank Limited implements a new approach in addition to BB guidelines.|
|NPL A/C maintenance||BB has given a guidelines||Agrani Bank Limited strictly followed the guideline|
From the performance evaluation of Agrani Bank Limited, it has shown that the credit disbursement, loans & advances growth rate, loans portfolio, loans classified amount are quite in good position in comparison to BB guidelines.
Suggestions: In credit management, it is conventional that proposals of credit facilities must be supported by a complete analysis of the proposed credit. More importance should be given on refund of loans out of funds generated by the borrower from their business activities (cash flow) instead of realization of money by disposing of the securities held against the advance, which is very much uncertain in present context ofBangladesh, where a number of creditors are willful defaulters.
Credit officer measures the risk associated with the credit facility. He should not be liberal in this respect; he should strictly follow the credit evaluation principle setup by the bank. The analysis should contain information about the borrower, credit purpose, credit repayment sources, details of collateral security with valuation and guarantee. It should also contain an assessment of the competence and quality of the borrower’s management ability, the general economic and competitive environment of the borrowers industry and other pertinent factors, which may affect the borrower’s ability to repay the facility, should be given much importance. It should improve in file management system to faster the dealings with the client’s proposal.
Bank should introduce more customer friendly loan products. At present Agrani Bank Limited does not offer consumer credit, car financing, etc. It is a good challenge that Prime Bank is catering both conventional and interest based banking. It should introduce more Islamic Branches as soon as possible to compete the Islamic Banking Sector.
- Bangladesh Bank circular
- Cole, Robert H, Consumer and Commercial Credit Management, Irwin Publisher, 5th edition, 1976.
- Hempel, George H. & Simonson, Donald G., Bank Financial Management, John Willy & Sons Publisher, 1st Edition, 1991.
- Activities of Bank and Financial Institution (1996-1997), Banking Sector, Ministry of Finance,Govt.RepublicofBangladesh.
- Annual Report for the year 2002 and 2007 of Agrani Bank Limited.
- Agrani Bank Limited manual.
- World Wide Web