Bank is committed to provide high quality financial services/products to contribute to the growth of the country through stimulating trade and commerce, accelerating the pace of industrialization, boosting up export, creating employment opportunity for the youth, poverty alleviation, raising standard of living of limited income group and overall sustainable socio-economic development of the country. In achieving the aforesaid objectives of the Bank, Credit Operation of the Bank is of paramount importance as the greatest share of total revenue of the Bank is generated from it, maximum risk is centered in it and even the very existence of Bank depends on prudent management of its credit portfolio. The failure of a commercial Bank is usually associated with the problem in credit portfolio and its less often the result of shrinkage in the value of other assets. As such, credit portfolio not only features dominant in the assets structure of the Bank, it is crucially importance to the success of the Bank also.
Bank can lend upto 84% of the total amount of its total time and demand liabilities. The rest 16% is kept as Statutory Liquidity Reserve (SLR) with Bangladesh Bank. But in practice banks do not lend the whole 84% and a certain portion is set to meet up the day-to-day banking operations and also meet up the liquidity requirement of the depositors. Bank can lend upto 15% of its paid up capital without the approval of Bangladesh Bank but above that level approval from Bangladesh Bank is required.
1.2 Origin of the Report
The internship report is a basic requirement for the BBA program. The proposed topic is “Credit Policy And Risk Management A Case Study On Bank Asia Limited”. The topic is assigned by Mr. Azharul Islam, Asst. Vice President & Sub Manager of the Corporate Branch and supervised by Dr. Laila Anjuman Ara assistance professorSoutheastUniversity.
1.3 Objectives of the Report
The objectives of the study are as follows:
* The broad objective of the report is to have an overview on credit approval and risk management techniques adopted by Bank Asia.
* To develop knowledge about credit risk management of Bank Asia.
* To identify the strengths and weaknesses of the credit approval and monitoring process in Bank Asia.
* To make recommendations regarding the Bank’s credit risk management activities.
1.4 Scope of the Report
This report consists of the writer’s observation and on the job experiences during the internship period in the credit department of Corporate Branch, Bank Asia. The report mainly emphasizes the sequential activities involved in credit approval process, analytical techniques used by Bank Asia for credit analysis as an integral part of the credit approval process. The report also focuses on the loan risk management techniques adopted by Bank Asia both in pre-sanction and post-sanction period of a credit. Finally the report incorporates an evaluation of the different aspects of the lending process and monitoring techniques and findings problems and makes some recommendations.
Sources of Data Collection
Information used in this report has been collected from both primary and secondary sources. Primary data were collected mainly through the writer’s observation of the approval process and monitoring techniques, informal interviews of executives, officers and employees of Bank Asia.
Majority of the information were collected from the secondary sources, which include books, publications, reading materials and various circulars and reporters published by Bank Asia.
This is a descriptive report mainly aiming to depict the credit approval process and monitoring techniques of Bank Asia. The data gathered from both primary and secondary sources were arranged orderly to get a clear picture of the Bank Asia’s credit management policy regarding lending process and monitoring. The study includes both qualitative and quantitative analysis of loan approval process and monitoring tools. Based on the observational information writer also tries to evaluate and analyze the problems involved in various phases of the credit approval process and Risk management techniques.
Presentation of Results and Recommendations
Recommendations are made based on the critical evaluation of the different phases of process and techniques involved in credit approval and monitoring.
1.6 Limitations of the Study
There were certain limitations regarding the study that is summarized below:
* Deficiencies in data required for the study.
* Inaccurate or contradictory information.
* Field practice varies with the standard practice that also created problem.
* Time provided for conducting the study is another important constraint.
1.7 Report Preview
This report is divided into two parts. These are:
* Part-A: The organization Part of Bank Asia Limited.
* Part-B: Job rotation during internship.
* Part-C: The Project Part “Credit Policy And Risk Management A Case On BankAsiaLimited”.
The Part-A focuses on different services, management structure and practices, and financial conditions of Bank Asia. Part-B mainly focused on the job rotation during internship. Part-C, The Projected Part discusses credit functions of the Bank, products, policy, strategy, lending process, credit analysis using Financial Spread sheet Analysis, Lending Risk Analysis and quantitative and qualitative techniques of credit approval, evaluation of the various components of the lending process.
Bank Asia Limited is a schedule Bank under private sector established with in the ambit of Bank Company Act, 1991 and was incorporated as a Public Limited Company Under Company Act, 1994 onSeptember 28, 1999. The Bank started commercial banking operations fromNovember 27, 1999with the inauguration of the Bank’s Corporate Office at the Rangs Bhaban. A huge public response has enabled the Bank to keep up the plan of expanding its network. The opening of the principal office was the big leap forward and successively the opening of Gulshan andChittagongbranch expanded the horizon of Bank Asia to bring its services to valued clients more effectively. Within a short period, the bank has opened four more branches inDhakaand two branches in Sylhet and Kishorgonj. In February 2001, Bank Asia took over theBangladeshoperation of The Bank of Nova Scotia, the first acquisition of a foreign bank by a local bank in the banking history ofBangladesh. Later, Bank Asia took over theBangladeshoperation of Muslim Commercial Bank ofPakistanin December 2001. These courageous moves were possible for some visionary decision makers and also dedicated team of professionals who are constantly putting their best efforts to establish the bank as one of the leading concerns in the industry.
Bank Asia has so far been highly successful in keeping its customers satisfied with its high quality service, while continuing its expansion to reach more people around the country. Bank Asia conducts all types of commercial banking activities. The Bank is involved in most of the areas of commercial banking operations. The core business of the Bank comprises of trade finance, term finance, working capital finance and corporate finance. Bank Asia has acted as the lead arranger in raising term loan for a number of projects under syndicated finance and also participated in some cases under such financing arrangement. The Bank is also providing personal credit, service related to local and foreign remittances and several other products. The “Personal Credit” scheme of the Bank, which is designed to help the fixed income group in raising standard of living is competitively priced and has been widely appreciated by the customers. Bank Asia’s program under “Poverty Alleviation Scheme” delivered through rural branches in the form of micro credit is playing an important role towards socio economic development of the poor people in the rural areas.
The management of Bank Asia is determined to maintain and upgrade the quality of these resources through continuous training and upgrading technology to keep pace with market demands, new developments and practices of the competitors. Bank Asia entered the market at a time when economic policy environment of the country is poised for higher level of business activities and growth. The prevailing macroeconomic management and the government’s determination to carry on reforms in the banking sector provide a supporting and encouraging environment.
2.2 Structure of the Corporate Office
Figure-2.1: Structure of the Corporate Office
Deputy Managing Director
Board of Directors
Implementation of Board Decisions
Development & Planning
Product Development & Marketing
2.3 Directors’ and Key Persons’ Profile
The Board of Directors of Bank Asia Limited consists of 13 Directors including one Chairman, one First Vice Chairman and one Second Vice Chairman. The list of Directors is given below:
Figure-2.2: Structure of Board of Directors
Mr. M. Syeduzzaman
Md. Anwar Hussain
Mr. Faisal Samad
Mr. M. Shamsul Alam
Mr. Fariduddin Ahmed
Mr. Rumee A. Hossain
Ms. Sohana Rouf Chowdhury
Mr. A. Rouf Chowdhury
First Vice Chairman
Mr. Arifur Rahman Sinha
Second Vice Chairman
Dr. Md. Shafiuddin Chowdhury
Mohd. Safwan Choudhury
Md. Sirajul Haque
Mr. Jahir Uddin
2.4 Mission Statement of Bank Asia
* To assist in bringing high quality service to their customers and to participate in the growth and expansion of our national economy.
* To set high standards of integrity and bring total satisfaction to their clients, shareholders and employees.
* To become the most sought after bank in the country, rendering technology driven innovative services by their dedicated team of professionals.
2.5 Corporate Objectives
Bank Asia’s objectives are reflected in the following areas:
* Highly personalized service.
* Customer-driven focus.
* Total commitment to quality.
* Contribution in the economy.
* Quality of human resources.
* Commitment to its clients at each level.
The company believes that communication with, and feedbacks from its clients help it achieve its goal of providing world-class product and services. Bank Asia regularly conducts client satisfaction surveys and make immediate accommodations and adjustments where needed. It also constantly monitors its standards, and strives to meet clients’ requirements.
2.6 SWOT Analysis of Bank Asia
Every organization is composed of some internal strengths and weaknesses and also has some external opportunities and threats in its whole life cycle. The following will briefly introduce the customer to the Bank Asia’s internal strengths and weaknesses, and external opportunities and threats as I have explored in the past ten weeks.
* Superior Quality: BankAsia provides its customers excellent quality of service. It gives the first priority to customer satisfaction.
* Dynamism: BankAsia draws its strength from the adaptability and dynamism it possesses. It has quickly adapted to world class standard in terms of banking services. Bank Asia has also adapted state of the art technology to connect with the world for better communication to integrate facilities.
* Financial Strength: BankAsia is a finally sound company backed by the enormous resource base of the mother concern Rangs Group. As result customers feel comfortable in dealing with the company.
* Efficient Management: All the levels of the management of Bank Asia are solely directed to maintain a culture of the betterment of the quality of the service and development of a corporate brand image in the market through organization wide term approach and open communication system.
* State of the Art Technology: BankAsia utilizes state-of-the-art technology to ensure consistent quality and operation. The corporate office is equipped with SWIFT (SWIFT is a banking software, used by Bank Asia). All other branches are also equipped with SWIFT system.
* Experts: The key contributing factor behind the success of the Bank Asia is its employee, who are highly trained and most competent in their own field. Bank Asia provides their employees training both in-house and out side job.
* In-House Utility: BankAsia is free from dependence on ever disruptive power supply of our public sources. The company generates the required power through generator fed on diesel. Water generation is done by deep tube wells on site and in abundance.
* Excellent Working Environment: BankAsia provides its workforce an excellent place to work in. Total complex has been centrally air conditioned. The interior decoration was done exquisitely with choice of soothing colors and blend of artistic that is comparable to any overseas bank.
* Limited Workforce: BankAsia has limited human resources compared to its financial activities. There are not many people to perform most of the tasks. As a result many of the employees are burdened with extra workloads and work late hours with out any overtime facilities. This might cause high employee turnover that will prove to be too costly to avoid.
* Problem in Delivery: Few of the Bank Asia’s products offered to its clients like “Personal Credit (PC)” is lying idle due to proper marketing initiative from the management. These products can easily be made available in attractive ways to increases its client base as well as its deposit status.
* Government Support: Government of Bangladesh has rendered its full support to the banking sector for a sound financial status of the country, as it has become one of the vital sources of employment in the country now. Such government concern will facilitate and support the long-term vision of Bank Asia.
* Evaluation of E-Banking: Emergence of e-banking will open more scope for Bank Asia to reach the clients not only in Bangladesh but also in the global banking arena. Although the bank has already entered the world of e-banking but yet to provide full electronic banking facilities to its customer. A proper blend of Banking and information technology might give the bank leverage to its competitors. Nevertheless there are ample opportunities for Bank Asia to go for product innovation in line with the modern day need. The bank has yet to develop credit card facility, lease financing and merchant banking.
* Merger and Acquisition: The worldwide trend of merging and acquisition in financial institution is causing concentration. The industry and competitors are increasing in power their respective areas.
* Poor Telecommunication Infrastructure: As previously mentioned, the world is advancing e-technology very rapidly. Though Bank Asia has taken effort to join the stream of information technology, it is not possible to complete the mission due to poor technology and infrastructure of our country.
* Frequent Currency Devaluation: Frequent devaluation of Taka exchange rate fluctuations and particularly South-East Asian currency crisis adversely affects the business globally.
* Emergence of Competitors: Due to high customer demand, more and more financial institutions are being introduced in the country. There are already 52 banks of various types are operating in the country. Many banks are entering the market with new and lucrative products. The market for banking industry is now a buyer dominated market. Unless Bank Asia can come up with attractive financial products in the market, it will have to face steep competition in the days to come.
2.7 Values Considered as Guiding Factors
All the activities and decisions of Bank Asia are based on, and guided by, these values:
- Placing the interests of clients and customers first.
- A continuous quest for quality in everything the company does.
- Treating everyone with respect and dignity.
- Conduct that reflects the highest standards of integrity.
- Teamwork- from the smallest unit to the enterprise as a whole.
- Being good citizens in the communities, in which they live and work.
2.8 Equity Formation
12,000,000 Ordinary Shares of Tk. 100.00 each Tk. 1,200,000,000.00
PAID UP CAPITAL
3,000,000 Ordinary Shares of Tk. 100.00 each have already
been subscribed for and fully paid up by the Sponsors.
To be Issued
3,000,000 Ordinary Share of Tk. 100.00 each are being hereby
offered to the General Public for Subscription in cash.
1,000,000 Ordinary Shares of Tk. 100.00 each at par have been
subscribed by investors under private placement arrangement
2,000,000 Ordinary Shares of Tk. 100.00 each at par are being
hereby offered to the general Public for Subscription in cash.
TOTAL Tk. 600,000,000.00
2.9 Performance of the Bank
2.9.1 Profit and Operating Results
The Bank earned as operating profit Tk. 705.69 million during 2005 after all provisions including the 1% general provision on unclassified Loans and Advances. Provision for income tax for the year amounted to Tk. 168.81 million resulting into a net profit after tax of Tk. 293.74 million. The growth in net profit over the previous year was 215.86 million.
A strong deposit base is necessary for the success of a Bank. During the year 2005 the Bank mobilized a substantial amount of deposits from mid-level income group people under Deposit Savings Scheme. After critical handling the Bank mobilized total Deposit of Tk. 14,884.91 million as atDecember 31, 2005, thus recording an increase in comparison with Tk. 13,470.98 million as atDecember 31, 2004. The significant growth in deposit enabled the Bank to expand its business, performing assets and also had an impact on the profit position of the Bank.
The Bank’s Loans and Advances portfolio also indicates an impressive growth. Total Loans and Advances amounted to Tk. 17,897.15 million in 2006 up to July against Tk. 11,861.19 million in 2005. Bank Asia’s Advance portfolio is well diversified and covers a wide range of businesses and industries. The sectors financed include Manufacturing, Trading, Construction, Transport, Agriculture, Fishing and Forestry, Edible Oil, Pharmaceuticals, Information Technology, and Consumer Credit amongst others. Advances constitute the most significant indicator of the health of a Bank. The Bank has formulated its policy to give priority to SME (Small and Medium Enterprise) and at the same time the Bank is financing large-scale enterprises through consortium of Banks. Bank Asia is committed to maintain a very high quality of assets. Close monitoring and efficient asset management has resulted in minimal creation (1.50%) of classified loans to total Loans and Advances.
2.9.4 Foreign Exchange Business
International Trade constitutes the main stream of business activities of Bank Asia. They offer a full range of trade finance and services namely, issue, advise and confirmation of Documentary Credit, arranging forward exchange coverage; pre-shipment and post shipment finance; negotiation and purchase of export bills; discounting bill of exchange; collection of bills, inward and outward remittance etc.
- Import Business: The Bank established Letters of Credit amounting to Tk. 21,747.60 million during 2005; showing over the volume of Tk. 18,942.40 million in the year 2004.
- Export Business: The total export handled by the bank amounted to Tk. 7,103.50 million for the year 2005 compared to Tk. 5,996.48 million for 2004.
- Foreign Correspondents: The number of foreign correspondents and agents of Bank Asia in 2005 stood at 150 covering most of the important business centers in different countries of the world. The Bank has maintained excellent relationship with leading international Banks and has successfully established credit lines with major banks to support global Foreign Trade Business.
Investment stood at Tk. 4,048.58 million at the end of 2005. This consists of Tk. 3,240.51 million in Treasury Bills and Prize Bonds, Tk. 529.75 million in Debentures and Tk. 202.34 million in Shares.
Bank Asia has distributed a substantial amount of dividend in the preceding years and also strengthened the platform of the Bank. The percentages of distribution of dividend are as follows.
Table-2.1: The percentages of distribution of dividend
|Year||Cash Dividend (%)||Bonus Dividend(%)||Total(%)|
2.10 Special Features of the Bank
- Bank Asia is engaged in conventional commercial banking. It is also in the process of introducing banking functions on Islamic Banking Principles.
- It is the pioneer in introducing and launching different customer friendly deposit schemes to tap the savings of the people for channeling the same to the productive sectors of the economy.
- For uplifting the standard of living of the limited income group of the population, the Bank has introduced Consumer Credit Schemes by providing financial assistance in the form of loan to the consumers for procuring household durables, which have had encouraging responses.
- The Bank is committed to continuous research and development so as to keep pace with modern banking.
- The operations of the Bank are computer oriented to ensure prompt and efficient services to the customer.
- The Bank has introduced camera surveillance system (CCTV) to strengthen the security services inside the Bank premises.
- The Bank has introduced customer relations management system to assess the needs of various customers and resolve any problem on the spot.
2.11 Products and Services
Bank Asia launched several financial products and services since its inception. Among them are Monthly Savings Scheme, Monthly Benefit Scheme, Special Savings Scheme, Consumer Credit Scheme, Small Loan Scheme, Rural Finance Scheme and E-cash (ATM). All of these have received wide acceptance among the people.
- Monthly Savings Scheme (DG+): The Prime objective of this scheme is to encourage people to build up a habit of saving. In this scheme, one can save a fixed amount of money every month and receive substantial lump sum of money after three to five years.
- Monthly Benefit Scheme (MB+): MB+ is a five (05) years scheme that lets Depositors earn monthly benefit of Tk. 1000 or its multiple by minimum initial deposit of Tk. 100,000 or its multiple and after maturity depositors will get refund of his/her principal amount.
- Special Savings Scheme (DB+): DB+ is a 7 (seven) or 10 (ten) year’s scheme. The Deposit doubles in 7 years and triples in 10 years.
- Bonus Savings Scheme: A savings Account with a minimum balance of Tk. 50,000 will attract not only the usual savings interest but also a further 10% bonus on interest.
- Personal Credit: Personal credit is a relatively new field of collateral-free finance of the Bank. People with fixed income can avail of these credit facilities to buy household goods, consumer items, or to renovate existing house, etc.
- Credit Loan: If customers are in possession of BSP (Bangladesh Sanchay Patra), which will mature within the next 5 years, but they are in dire need of funds now, this scheme can come to their rescue.
- Rural Development Scheme: Rural Development Scheme has been evolved for the rural people of the country to make them self-employed through financing various income generating activities. This scheme is operated through the rural branches of the Bank.
- E-Cash Banking Facility: The E-cash card is an ATM card. It can be used as a combination of debit facility. The E-cash card network offers all banking requirements without ever setting foot in a bank. It’s more than just an ATM service for quick cash withdraws or account enquiries. E-cash card provides round the clock banking.
- Credit Card Facilities: BankAsia introduced credit card which name is Master card.
Acceptance: BankAsiacredit card is accepted more than 4,800 merchant outlets around the country. Our wide range of merchants include hotels, restaurants, airlines& travel agents, shopping malls and departmental stores, hospital & diagnostic centers, Jewellery shops, electronics’ & computer shops, leather goods, mobiles & internet service providers, patrol pumps and many more.
Credit facility: BankAsiacredit card offers free credit facility up to 45 days & minimum 15 days without any interest.
Cash advance: BankAsiamaster card gives facility to draw cash up to 50% of the credit limit against local master card and can enjoy this facility by using any ATMs across the country which shows “Master Card” logo. Besides this can also withdraw cash from any of our branches.
2.12 Correspondence Relationship
On the eve of launching, Bank Asia established local correspondent arrangements with Uttara Bank’s sixty four branches, National Bank Limited and Agrani Bank Limited, thus covering almost the entire country and facilitating the ability to meet taka transaction requirement for the customers.
The bank established correspondent relationships with a number of foreign banks, namely CITI Bank N.A, Bank of Tokyo, Standard Chartered Bank and AB Bank Limited. The bank is maintaining foreign currency accounts inNew York,Tokyo,CalcuttaandLondon. During this period the Bank has set up letter of credit on behalf of its valued customers using its correspondents as advising and reimbursing banks. The bank maintains a need based correspondent relationship policy, which is gradually expanding.
JOB ROTATION DURING INTERNSHIP IN BANK ASIA LTD.
A feeling of completeness runs through my veins when I identify myself working with the brilliant professionals of the country’s leading financial institution.
To give an insight into the operational activities of the Bank, especially in the areas of Accounts, General Banking, Advance and Foreign trade, the management decided to continue a job rotation program.
Table 3.1: Job Rotation Period
|August 01 –2006 to August 15 – 2006||Customer Service|
|August 16 –2006 to August 22– 2006||Cash|
|August 23 –2006 to August 29 – 2006||Accounts & Clearing|
|August 30-2006 to September 30-2006||Credit|
|October 01-2006 to October 31– 2006||Foreign Trade|
During the job rotation period level best efforts was given to be acquainted with the operational activities of Bank.
August 01 –2006 to August 15 – 2006
Functions of the department:
- Account opening
- Giving information about different products
- Chequebook issue
- Demand draft / Pay order issue
- Fulfill customer queries on the desk and over phone
- Issuance of different documents for the customers
- Locker service
- ATM service
Customer service is the department that firstly and directly contracts the customer. In case of account opening the policy of “Know Your Customer (KYC)” must have to be followed & required documents as per instructions must be obtained in due course. Special concentration is required to deal with transaction profile. As per contract bank is liable to protect every customer’s accounts information secret. So in case of information transmittal bankers of this dept must have to be sure that this is the right person to know the information.
August 16 –2006 to August 22– 2006
Functions of the department:
- Cash Management
- Receive cash from the customers
- Receive Cheques / other instruments for clearing
- Receive Cheques / other instruments for transfer
- Receive different bills & fees for the clients
- Payments to the customers against instruments
- Cash transaction report / Susceptive transaction report.
The personnel in the cash department must have to be very careful and mindful in doing their daily job, receiving and disbursing cash and other instruments. Management of cash has to be done efficiently so that the best possible utilization of money is possible. They also should have to be careful about unusual cash transaction, if so occurs then they should have to report that to the concerned authority.
August 23 –2006 to August 29 – 2006
Functions of the Departments:
- Consolidation of all daily transactions
- Month closing
- Works related to income, expenditure and establishment of the branch
- Clearing of cheque and other instruments
- Transfer of cheque and other instruments
- Stationary maintenance of the branch, Etc.
In absence of clearing department Accounts department is responsible for both clearing and accounts departments works. As my observation this department is the heart of the bank and the all other departments is moving around this department. It is also responsible for all consolidation of all departments. Working related to branch income, expenditure and establishment is maintained under this department.
September 02-2006 to September 30-2006
Functions of the Department:
- Process the proposal for credit.
- Proper analysis of the credit proposal.
- Measuring the risk.
- Loan disbursement.
- Credit documentation.
- Monitoring of credit.
- Follow up and recovery of credit.
- CIB report. Etc
AS credit department is concerned the main point is they in all respect the must be careful about the safety of bank’s fund. The policy of KYC is also conducted duly. In measuring the risk, along with Credit Risk Grading (CRG) individual judgment is necessary to be applied. For doing so extensive visit to customer is a must.
Department: Foreign Trade
October01-2006 to October 31– 2006
Functions of the Departments:
Activities related to:
- L / C opening
- Lodgment of L / C
- Retirement of L / C
- Inward Remittance
- Outward Remittance
- Distributions of export incentives
- Submission of report to Bangladesh Bank, etc.
Foreign exchange means any financial transaction made in foreign currency. In other word foreign exchange means the exchange of foreign currency among countries. In general we termed the financial transaction relating to export, import and foreign remittances.
Dealing with international trade (Export & Import) as issuing or negotiating Letter of Credit Foreign Trade department should have to be careful and quick in receiving and disseminating information. As this department earns much for the bank so there is the possibility of loosing much.
At the time of starting this Job Rotation period I was in doubt about the result, I want to mean learning about the departments in such a shout period. But after completing this now I am confident to comment on that may be other planning will be as effective as this Job Rotation to give an insight into the operational activities of bank.
Finally it is extremely enjoyable and I think it is due to friendly and helpful people working here. This has been a most incredible experience for me and whenever I work in the future, I’ll never forget the joy I had being part of the Bank Asia family. Bank Asia has provided me an ideal working environment and has created such an impression on my mind that I would like to continue my involvement by working for this well-reputed financial institution.
Credit facilities, principals, procedures and lending guidelines should provide a clear and consistent point of reference for all employees and prevent misunderstanding, confusion or omission by personal dealing with credit issues. Additionally, credit policies help prevent deviation from the overall lending principles and credit culture.
Credit procedures support the delivery of credit products, help to avoid undue process and serve as an efficient mechanism in granting of facilities and the administration of the risk asset portfolio.
Figurer-4.1Different Types of Credit Facility
Industrial Finance and Other Project Loans
Different Types of Overdrafts
Advance Against Import Bills (BLC)
Advance Against Imported Merchandise (LIM)
Advance Against Trust Receipt (TR)
Advance Against Export Bills Purchased / Discounted
Advance Against Work Order
Letter of Credit
Letter of Guarantee
4.2 Types of Credit Facility by Bank Asia
Bank Asia offers both funded and non-funded credit facilities. Among all the funded and non funded facilities Bank Asia does not provide all but those, which are commensurate with the Bank’s policy and strategy. The various funded and non funded credit facilities that Bank Asia provides to its borrowers are:
4.2.1 Funded Facilities
The funded credit facilities are those, which involve direct cash. In other words any type of credit facility, which involves direct outflow of Bank’s fund on account of borrower is termed as, funded credit facility. The following funded credit facilities are provided by Bank Asia:
Industrial Finance and Other Project Loans
Project loan normally has fixed maturity and it relates to term investment. As such it requires appraisals of those proposals to have a rational decision. Appraisal may be termed as assessment of viability over a period of time.
These loans are usually made for:
- Setting up of industries and to meet working capital
- Balancing, Modernization, Replacement and Expansion (BMRE) of existing industries.
- Construction of commercial / Residential Building / Warehousing etc.
Over draft facility is also a continuous loan arrangement on a customer’s current account permitting him/her to overdraw up to a certain approved limit for an agreed period. Here the withdrawal of deposits can be made any number of times at the convenience of the borrower, provided that the total overdrawn amount does not exceed the agreed limit. Customer can return any amount at any time within the pre-fixed time of the facility. Turn over of an Over Draft facility is the most important phenomenon on which renewal of the facility depends. Over Draft facility is given to the businessmen for financing working capital requirement and high net worth individual to overcome temporary liquidity crisis.
Secured Over Draft
This is a type of over draft facility given to the borrowers keeping sufficient collateral from the customer in the most liquid form. This facility provides specific right to a client to overdraw within a pre fixed limit for a certain period of time. Secured Over Draft is normally granted against the security of tangible asset such as lien of Fixed Deposit Receipt (FDR), Bonds, Sanchaya Patra but currently Secured Over Draft is given only against Fixed Deposit Receipt because Bangladesh Bank has recently prohibited Secured Over Draft against Bonds and Sanchaya patra. Interest charged on the Secured Over Draft is calculated on the basis of the security lined.
Terms loans are given to finance the acquisition of capital assets. Loan agreements often contain restrictive covenant and loan is repayable in accordance to amortization schedule. Collateral is must for term loan. Under term loan there are three categories:
* Short term loan- loans having maturity less than one year falls under this category.
* Midterm loan- this loan facility is extended for loans having maturity more than one year but less than three years.
* Long term loan- tenure of long term loans is more than three years.
Bank Asia also offers personal credit facility to its customers for buying household appliances. No securities are kept for such type of credit facility but a guarantee from third party is required who ought to be a prominent person or government service holder. Anyone with continuous employment for a reasonable length of time in an organization is entitled to enjoy this facility. A quotation needs to be submitted on the office pad from where the goods will be purchased. Limit of personal credit ranges from Tk. 50,000 to Tk. 3, 00,000 and interest rate is 16.25%, which is subject to change.
The objective of this loan is to provide essential Household durables to the fixed income group (Service holders) and other eligible borrowers under the scheme.
Items of Investment
- Refrigerator / Deep Freeze
- Television / VCR / VCP / Dish Antenna
- Motor Car / Motor Cycle
- Air –Cooler / Air – Conditioner
- Personal computer
- Washing Machine
- Household Furniture & Fixtures
- Sewing Machine
- Kitchen appliances like Oven, Toaster, Pressure Cooker, Blender etc.
- Any other item not specified above but considered essential.
The criteria to become eligible for availing the facility under the scheme are given below. The borrower must be confirmed official of any of the following organizations:
a) Government Organization.
b) Semi-Government Organization / Autonomous body.
c) Multinational Organizations.
d) Banks & Insurance Companies.
e) Reputed Commercial Organizations.
Loan against Trust Receipt (LTR)
Loan against trust receipt is given on good faith on the importer. This is a loan facility up to a satisfactory limit to the traders/customers by Bank Asia against security of the value of the imported goods. Customer holds the goods or their sales proceeds in trust for the bank for certain period of time till the loan allowed against such trust receipt is fully paid. The duration of LTR ranges from thirty days (30 days) to three hundred and sixty days (360 days).
4.2.2 Non-Funded Facilities
Non funded facilities are also known, as contingent facilities are those where bank’s fund is not required directly. A non-funded facility can be turned to a funded facility as per situation creates. Bank receives commission rather than interest income by providing non-funded facilities. Following non-funded facilities are provided by Bank Asia:
Letter of Credit (L/C)
A letter of credit can be defined as a Credit Contract whereby the buyer’s bank is committed (on behalf of the buyer) to place an agreed amount of money at the seller’s disposal under some agreed upon conditions. Since the agreed upon conditions include, amongst other things, the presentation of some specified documents, the letter of credit is called Documentary Letter of Credit. The Uniform Customs & Practices for Documentary Credit (UCPDC) published by International Chamber of Commerce (ICC, 1993) Revision, Publication No. 500 defines Documentary Credit.
Any arrangement however named or described, whereby a bank (the “issuing bank”), acting at the request and on the instructions of a customer (the “applicant”) or on its own behalf,
1) Is to make a payment or to the order of third party (the Beneficiary), or is to accept and pay bills of exchange (Drafts) drawn by the Beneficiary, or
2) Authorized another bank to effect such payment, or to accept and pay such bills of exchange (Drafts),
3) Authorizes another bank to negotiate, against stipulated document (s), provided that the terms and conditions are complied with.
Bank Asia provides only irrevocable letter of credit (L/C) facility.
Bank Asia offers guarantee for its reliable and valuable customer as per requirements. This is also a credit facility in contingent liabilities.
Features of Bank Guarantee
- It is a written document on non-judicial stamp.
- Expiry date is mentioned specifically with other terms and conditions.
- Bank Asia receives commission quarterly @ 0.50% of the guaranteed amount.
A Bank can lend upto 15% of its paid up capital without any approval by Bangladesh Bank. If the loan amount exceeds 50% of the paid up capital then Bank goes for Syndicate loan. Lead Bank makes the arrangement and Head Office makes the facility agreement by the Bank’s lawyer. All terms and conditions such as security sharing, mode of creating charges, mode of repayment, covenants of the loan are written on the facility agreement.
4.3 Principles of Lending
Banks are profit oriented organization for which a bank invests its funds in many ways to earn income. At the same time bank runs the risk of default in repayment. As such the banks are required to follow certain basic principles of lending. The lending principles of Bank Asia govern its extension of credit facilities. These principles are strictly followed to shape and define the acceptable risk profile of Bank Asia. These principles are:
* Know Your Customer: Know Your Customer (KYC) is the most important guiding principle of Bank Asia for extending credit facilities to its prospective borrowers. Complying with this principle helps the bank to avoid money laundering crime and adverse selection of borrowers.
* Safety: Safety depends first upon (i) the security and its value offered by the borrower and (ii) the repaying capacity and willingness of the borrower to repay the loan with interest.
* Liquidity: It refers to the ability of an asset to be converted into cash without loss and within a short time to meet depositor’s demand for cash.
* Profitability: BankAsia must employ its fund in such a way that they will bring adequate return for the bank, which should be more than cost of the funds.
* Purpose: The purpose for which Bank Asia will provide loan should be productive so that the money not only safe but also provides a definite source of repayment.
* Spread: It refers to the diversification of advance. So far Bank Asia could maintain considerable margin on its disbursed loan but recently Bangladesh Bank has imposed restriction on lending rate and to comply with Bangladesh Bank policy guidelines, Bank Asia lowered its lending rate.
4.4 Strategies of Lending Procedure
A loan policy gives loan officers, relationship managers and the Bank’s management specific guidelines in making individual loan decisions and in shaping the Bank’s overall loan portfolio. One of most important ways a Bank can make sure its loans meet regulatory standard and are profitable is to establish a written loan policy.
Bank Asia also has a good loan policy and the most important elements of the policy are stated below:
- A goal statement for the Bank’s loan portfolio (in terms of types, maturities, sizes, and quality of loans).
- Specification of the lending authority given to each loan officer and loan committee (measuring the maximum amount and types of loan that each person and committee can approve).
- Lines of responsibility in making assignments and reporting information within the loan department.
- Operating procedures for soliciting, reviewing, evaluating, and making decisions on customer loan applications.
- The required documentation that is to accompany each loan application and what must be kept in the Bank’s credit files (required financial statements, security agreements etc).
- Lines of authority within the bank regarding who is responsible for maintaining and reviewing the Bank’s credit files.
- Guidelines for taking, evaluating and perfecting loan collateral.
- A presentation of policies and procedures for setting loan interest rates and fees and the terms for repayment of loans.
- A statement of quality standards applicable to all loans.
- A statement of the preferred upper limit for total loans outstanding (i.e. the maximum ratio to total loans to total assets allowed).
- A description of the Bank’s principal trade area, from which most loans should come.
- A discussion of the preferred procedures for detecting, analyzing and working out problem loan situations.
A written loan policy statement carries a number of advantages for the bank adopting it. It communicates to employees working in the loan department what procedures they must follow and what their responsibilities are. It helps the Bank moves forward a loan portfolio that can successfully blend multiple objectives such as promoting the bank’s profitability, controlling its exposure and satisfying regulatory requirements.
4.5 Classification of Loans and Provisioning
Loan classification is a process by which the risk or loss potential associated with the loan accounts of the Bank on a particular date is identified and quantified. It is done to determine the level of reserves to be maintained by the Bank for the probable loss on that risky loan account.
Figure 4.2 Classifications of Loans
4.5.1 Unclassified Loans
An unclassified loan or commitment is one that is set by Bangladesh Bank or the Head Office of the Bank. Unclassified loans are those loans in which repayment is regular.
4.5.2. Classified Loans
A classified loan or commitment is one that is classified as substandard, Doubtful or Loss as per policy of loan classification set by Bangladesh Bank or Head Office of the bank.
Loan Classification means to categorize the debt information in a systematic manner. But in true sense it is defined in terms of degree of risk associated with these loans. The objectives/importance of loan classification are:
- To find out Net Worth of a bank;
- To assess financial soundness of a bank;
- To calculate the required provision and the amount of interest suspense;
- Strengthen credit discipline;
- To improve loan recovery position and
- To put the bank on sound footing in order to develop sound banking practice inBangladesh.
Position of classified loans and advances and other assets should be placed before the Board of directors of the bank.
4.6 Evaluation of the Bank Asia’s Loan Products, Principals and Strategies
4.6.1 Loan Products Evaluation
Now is the period of innovations. There are 52 commercial banks operating in the country excluding other non banking financial institutions. In this competitive banking arena a bank must come up with new and easily accessible customer focused loan products. Bank Asia offers a limited number of loan products to its customers. Bank Asia has been operating in the market for the last five years starting from mid 1999 and yet to develop new and innovative loan products.
The loan mix of the bank is very conventional. It has been observed that the existing loan products are insufficient to meet up the existing borrower’s need. The bank has no loan products for the religious Muslim borrowers. It has caused the bank to lose a large segment of the potential borrowers. The bank has yet to establish credit card facility which could pull a large number of borrowers because due to safety need, increasing number of people are being interested in having this facility. Bank Asia is still lagging behind the other private commercial banks in terms of product diversity in credit.
But Bank Asia has promised to incorporate new loan products in its loan mix portfolio. Lease financing and credit card are under processing. The bank has established WAN (Wide Area Network) to bring all the branches under online banking system. The bank can use its online system for easy access of the customer to the loan products like personal credit and credit card.
4.6.2 Evaluation of Lending Principles
Bank Asia follows well constructed lending principles starting with KYC or Know Your Customer and ending with Spread. KYC is getting increasing emphasis in the banking arena because loan default rate is high in our country. Proper compliance with KYC can help the banks to avoid bad loans. The Bank Asia still maintains adequate safety in its loan portfolio, which is reflected in its low default rate. The bank was able to establish confidence in the minds’ of the customers regarding maintaining adequate liquidity to meet up the borrowers’ requirement.
At the same time the bank was able to remain profitable in terms of interest income maintaining a higher spread. So far Bank Asia was able to perform well in its loan portfolio but the scenario is changing very rapidly. Lending rate is being decreased under the policy guidelines of the Bangladesh Bank and the bank has to adopt necessary strategy to maintain its profitability from the loan portfolio.
4.6.3 Strategy Evaluation
Strategy provides guidelines to Bank Asia to device a smooth lending procedure. As mentioned earlier, Bank Asia does not have a very diverse loan products but it provides short term, mid term and long term loans. Size of the credit varies from fifty thousand taka for personal credit to several crores for syndicated loans. Bank Asia has a preference for corporate customer and loan mix is mostly provided for working capital financing.
Bank Asia also finances SME (Small and Medium Enterprise), provides personal credit, export and import finance. Bank Asia is in constant search of profitable business sector for extending credit line. Bank has also taken safe guard against predicted alteration in the world trade policy. As MFA (Multi Fiber Agreement) was phased out from December 2004, many of the country’s garments factories were under the threat of lay off. The experts of the bank are anticipating that the situation after last year were seriously jeopardize the banking sector because most of the banks have heavily financed in the export oriented RMG (Ready Made Garments) sector. Bank Asia, keeping in mind the impact of the phasing out of MFA has reduced its reliance on RMG sector.
Lending is the main profit generating activity of Bank Asia. Every bank should possess a lending procedure that provides correct borrower selection, quick processing, assurance of repayment and effective monitoring and supervision. Bank Asia is yet to develop its written operational lending procedure.
The lending procedure followed by Bank Asia consists of a set of sequential activities. In these sequential activities, both bank officials and potential borrowers play significant role.
5.2 Different Activities in Lending Process
The lending procedure starts with building up relationship with customer through account opening. The stages of credit approval are done both at the branches and at the corporate office level. The lending procedure as observed in Bank Asia is described below in sequential order:
* Step-1: A loan procedure formally starts with a loan application from a client who must have an account with the Bank. At first it starts from the branch level. Branch receives application from client for a loan facility. In the application client mention what type of credit facility he/she wants from the bank including his/her personal information and business information. Branch Manager or the Officer-in-charge of the credit department conducts the initial interview with the customer.
* Step-2: After receiving the loan application from the client, the bank sends a letter to Credit Information Bureau of Bangladesh Bank for obtaining a credit inquiry report of the customer from there. This report is called CIB (Credit Information Bureau) report. This report is usually collected if the loan amount exceeds fifty thousand taka. The purpose of this report is to be informed that whether or not the borrower has taken loans and advances from any other banks and if so, what is the status of those loans and advances i.e. whether those loans are classified or not.
* Step-3: If Bangladesh Bank sends positive CIB report on that particular borrower and if the Bank thinks that the prospective borrower will be a good one, then the bank will scrutinize the documents. Required documents are:
- Incase of corporate client, financial documents of the company for the last three to five years. If the company is a new one, projected financial data for the same duration is required.
- Personal net worth of the borrower(s).
- In this stage, the bank will require whether the documents are properly filled up and duly signed. Credit in charge of the relevant branch is responsible enquire about the ins and outs of the customer’s business through discussing with them.
* Step-4: Bank officials of the credit department will inspect the project for which the loan is applied. Project existence, its distance from the bank originating the loan, monitoring cost and possibilities are examined.
* Step-5: Any loan proposal needs to be evaluated on the basis of financial information provided by the loan applicant. Financial spread sheet analysis, which consists of a series of quantitative techniques, is employed to analyze the risks associated with a particular loan and to judge the financial soundness and worthiness of the borrower. Besides lending risk analysis is also undertaken by the bank to measure the borrower’s ability to pay considering various risks associated the loan. These quantitative techniques supported with qualitative judgment are the most important and integral part of the credit approval process used by Bank Asia. This is the credit analysis phase.
* Step-6: Obtain legal opinion on the collateral provided by the applicant, whether those are properly submitted- regular and up to date or else those documents will be asked to regularize by the applicant.
* Step-7: The branch starts processing the loan at this stage. Based on the analyses (credit analysis) done by the branch, the branch prepares a loan proposal. The proposal contains following important and relevant information:
- Name of the borrower (s).
- Nature of credit.
- Purpose of the credit.
- Extent of the credit.
- Rate of interest.
- Repayment schedule.
* Step-8: If the proposal meets Bank Asia’s lending criteria and is within the manager’s discretionary power, the credit line is approved. The manager and the sponsoring officer sign the credit line proposal and issue a sanction letter to the client. If the value of the credit line is above the branch manager’s limit then it is send to head office or zonal office for final approval with detailed information regarding the client (s), credit analysis and security papers.
* Step-9: Head office processes the credit proposal and afterwards puts forward an office notice if the loan is within the discretionary power of the head office credit committee or board memorandum if the loan requires approval from the board of directors.
* Step-10: If the zonal office, credit committee of the head office or the board as the case may be approves the credit line, an approval letter is sent to the branch. The branch then issues a sanction letter to the borrower with a duplicate copy. The duplicate copy duly signed by the borrower is returned to the branch of the bank. This duplicate copy returned by the applicant proves that the borrower agrees with the terms and conditions of the credit line offered by the bank.
* Step-11: After issuing the sanction advice, the bank will collect necessary charge documents. Charge documents vary on the basis of types of facility, types of collateral.
* Step-12: Finally the branch through a loan account in the name of the borrower disburses loan and monitoring of the loan starts formally.
Figure-5.1: Lending Procedure Followed by Bank Asia
5.3 Role of Different Organizational Levels in Lending Process
Bank Asia’s organizational structure has two levels- Branch and Head Office. The credit proposal moves through different management approval levels according to the amount of risks associated with the loan. There are four approval levels in Bank Asia with regards to credit lending process:
- Branch Manager and Branch Credit Department.
- Zonal Head of the Bank.
- Credit Committee of the Corporate Office.
5.2.1 Branch Level
- Adherence to the policy guidelines of the Head Office and the supplementary policy guidelines of the Regional Office.
- Analysis of the command area.
- Determination of the requirements of incremental loan able funds.
- Allocation of the said funds to different sector and client groups during the budget period.
5.2.2 Zone Level
- Analysis and settlement of the branch credit plan in a branch managers’ meeting in a democratic way.
- Transmission of the regional credit plan to the Head Office.
5.2.3 Regional Level
- Adherence to the policy guidelines of the Central Bank regarding deployment of credits.
- Correction of zonal as well as sectoral imbalances if any.
- Settlement of credit plan of the bank for the budget year.
5.4 Loan Process Schedule with PERT Network
The total duration of time required to complete the lending process varies with the nature of credit, collection of information, nature of information, analysis of information, preparation of proposal, corporate office scrutiny, board approval, preparation of sanction advice, creation and collection of charge documents, actual disbursement of loan.
Some times in case of emergency need of the borrower, Bank approves the credit proposal within a very short period. For example, secured over draft are sometimes approved within a day provided that the bank has satisfactory security coverage. Sometimes Letter of Credit is also approved within a week depending on the banker-customer relationship. In general the time taken to complete a lending process (term loan) takes one week to around 90 days but not more than that except some unusual case.
5.4.1 Loan Process Scheduling with PERT Network
Table-5.1: Calculation of Expected time for PERT task
|Activities||Activity code||Optimistic time (Days)||Pessimistic time (Days)||Most likely time (Days)||ImmediatePredecessor|
|Submission of Application||A||1||3||2||–|
|Preparation for analysis||C||2||4||3||B|
|Preparation of Credit Proposal||E||1||3||2||A, D|
|Scrutiny of the proposal||F||1||3||2||E|
|Head office scrutiny||G||3||7||5||F|
|Head office credit committee approval||H||3||7||4||G|
|Sanction letter and charge creation||J||5||10||7||I|
Table-5.2: Calculation of Expected time for PERT task
|Activities||Activity code||To||Tp||Tm||Te||Variance||Standard Deviation|
|Submission of Application||A||1||2||3||2||0.028||0.17|
|Preparation for analysis||C||2||3||4||3||0.028||0.17|
|Preparation of Credit Proposal||E||1||2||3||2||0.028||0.17|
|Scrutiny of the proposal||F||1||2||3||2||0.028||0.17|
|Head office scrutiny||G||3||5||7||5||0.11||0.33|
|Head office credit committee approval||H||3||4||7||4||0.028||0.17|
|Sanction letter and charge creation||J||5||7||10||7||0.11||0.33|
Figure-5.2: PERT Network Diagram
2 5 3
2 2 5 4
Note: Activity on
|Serial No.||Paths||Time (days)||Remark|
Critical path is 69 days. The minimum days required to complete a term loan process is 69 days
Credit Risk Management (CRM) analysis is an integral part of the lending process in Bank Asia. CRM analysis is of utmost importance for the lending process to be successful. Proper credit risk management analysis helps avoid risks in the lending process and brings transparency. The analysis of financial statements of the prospective borrower(s) carried on for the purpose determining the past financial health of the borrowing unit and judging whether any future loan commitment to the unit is secured or not is known as credit analysis. Credit analysis is generally done at the branch level of lending process and the results and findings are evaluated in the corporate office.
The basic financial statements required for credit analysis are:
* Balance Sheet.
* Income statement (Profit and Loss Account).
* Cash Flow Statement.
The credit analysis starts with the financial spread sheet analysis using the financial statements provided by the borrowing unit.
6.2 Financial Spread Sheet Analysis
Financial spread sheet is a means of presenting the main Balance Sheet and Profit and Loss categories in a form whereby a comparison can be made between similar figures on different dates.
6.2.1 Importance of Financial Spread Sheet
1. Financial spread sheet provides a quick method of assessing business trends and efficiency.
- Assess the borrowers’ ability to repay.
- It realistically shows business trends.
- It allows comparisons to be made within industry.
2. Borrowers that provide information for financial spread sheets are more like to be good borrowers.
- At two of the client banks the FSRP (Financial Sector Reform Project) consultants could not find ten bad loans with three consecutive years of financial statements available.
- The willingness of the customer to provide detailed financial information and to answer question regarding that information, is indication of the cooperation the bank will receive in the future.
3. Financial spread sheet is an important tool in a disciplined organized approach to credit analysis.
4. The historic financial reports of a company are a primary indicator of its future financial position. Spread sheet allows proper analysis of financial statements.
6.2.2 Breakdown of Financial Spread Sheet
The financial spread sheet is split into four sections. These are:
* The Balance Sheet and Profit and Loss Account provide a quick and easy source of identifying trends in similar categories over a number of years.
* The Cash Flow Statement indicates the company’s ability to generate cash inflow in excess of cash outflow.
* The ratio analysis demonstrates in the form of accounting ratios and percentages, the relationship between significant figures on different dates. This provides a quick and reliable method of
- measuring trends of profits;
- identifying the growth or correction of the business;
- Identifying strengths and weaknesses of the business.
The following ratio analyses are undertaken in the financial spread sheet:
- Current Ratio
- Quick Ratio
- Receivable Turnover Ratio
- Inventory Turnover Ratio
- Accounts Payable Turnover Ratio
- Sales to Working Capital
- Debt to Equity
- Sales to Fixed Ratio
6.2.3 Requirement of Financial Spread Sheet
The financial spread sheet is required in the following cases:
* For customers where total facilities exceed taka five lack.
* For all government owned and quasi government companies.
* For all companies listed on the Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE).
* For facilities over taka two and half lack where no security is taken.
- Company name: National Pharmaceutical Co. ltd. (NPCL)
- Industry: Pharmaceutical Industry.
- NPCL’s stock holding policy is to maintain 180 days stock at hand (in line with industry norm). Its operating cycle (Debtors + Stocks – Creditors) is between 5-6 months.
|Current ratio (%)||211||252||200||188|
|D/E ratio (%)||35||60||70||80|
|Interest cover (x)||–||–||–||–|
- Despite stiff competition and increase in the manufacture of generic products in the local market, sales for 2005 increased by 20% to BDT1.34Bn, exceeding projection by 5% mainly due to launching of new higher margin generic drugs and strong marketing efforts.
- With the prudent utilization of the existing capacity and due to the increase in per unit price of some major products (Vials/Drops by 75% & Inhalers by 13%), NPCL was successful in achieving the above sales growth, despite the overall decrease in sales volume by 8% in 2003.
- GPM and OPM remained stable around 28% and 7% respectively because of high value added items.
- Despite the increase in PBT from BDT101M to BDT102M, tax liability decreased 46% to BDT15.5M due to payment of tax @20% instead of @30% on account of declaration of dividend more than 20% of paid up capital.
- The cumulative impact of the above resulted in NPAT to increase by 21 to BDT90in 2005.
- CR is acceptable at 188%. Major components of the current asset were BDT474M stock, BDT198M cash and BDT132M other debtor. Other debtor mainly represents advance from suppliers (BDT94M) and VAT (17M).
- Stock turnover period improved by 20 days to 190 days and in line with the industry norms (around 6 months) owing to heavy reliance on imported raw materials products taking port congestion, strikes, and various factors into consideration.
- Trade debtor collection period remained low at 13 days as most (96%) of NPCL’s sales are on cash basis. Trade creditor mainly represents payable to supplier against procurement of raw materials on deferred basis. The turnover period of 50 days is within the maturity profile of the import bills.
- Tangible net worth strengthened (by 7.3%) due to increase in retained earnings resulted from long-term sales growth and retention of profit at an average rate of 40%.
- Gearing remained nil in absence of any funded bank borrowing. DER, even though increased slightly due to increase in to support the sales growth, remained low at around 80%.
- NPCL has been following a stable dividend payout policy as reflected in growth in dividend payment at a stable rate by adjusting the dividend payout ratio with earning per share. In 2005, despite the increase in EPS by 35% to BDT9.21/-, NPCL has declared dividend @40% by reducing dividend payout ratio by 10% to 55%. A very prudent strategy of supporting the business growth from retained profit instead of debt financing.
- NPCL is a cash rich company. NCFO was more than adequate to pay interest (BDT2.5M), investment in fixed assets (BDT70M) and dividend (BDT50M).
- Commensurate with the sales growth, moderate dividend payout policy, and efficient working capital management, NPCL’s cash balances increased significantly by BDT190M to BDT214M in 2005.
6.2.4 Credit Risk Grading Manual (CRGM) Used in Credit Evaluation
Credit risk is the primary financial risk in the banking system. Identifying and assessing credit risk is essentially a first step in managing it effectively. In 1993, Bangladesh Bank as suggested by Financial Sector Reform Project (FSRP) first introduced and directed to use Credit Risk grading system in the Banking sector since then has changed a lot as credit culture has been shifting towards a more professional and standardized Credit Risk Management approach.
Credit Risk Grading system is a dynamic process and various models are followed in different countries & different organizations for measuring credit risk. The risk grading system changes in line with business complexities. Amore effective credit risk grading process needs to be introduced in the Banking Sector of Bangladesh to make the credit risk grading mechanism easier to implement.
Keeping the above objective in mind, the Lending Risk Analysis Manual (under FSRP) of Bangladesh Bank has been amended, developed and re-produced in the name of “Credit Risk Grading Manual”. Bangladesh Bank has set a deadline for implementation of Credit Risk Grading byMarch 31, 2006.
6.3 Definition of Credit Risk Grading (CRG):
- CRG is a collective definition based on the pre-specified scale and reflects the underlying credit-risk for a given exposure.
- A Credit Risk Grading deploys a number/alphabet/symbol as a primary summary indicator of risks associated with a credit exposure.
- Credit Risk Grading is the basic module for developing a Credit Risk Management system.
6.3.1 Use of Credit Risk Grading:
- The Credit Risk Grading matrix allows application of uniform standards to credits to ensure a common standardized approach to assess the quality of individual obligor, credit portfolio of a unit, line of business, the branch of the bank as a whole.
- As evident, the CRG outputs would be relevant for individual credit selection, wherein either a borrower or a particular exposure/facility is rated. The other decisions would be related to pricing (credit-spread) and specific features of the credit facility. These would largely constitute obligor level analysis.
Number & Short Names of the Grades Used in the CRG
The proposed CRG scale consists of 8 categories with short names and numbers are provided as follows:
|Bad & Loss||BL||8|
6.3.2 Credit Risk Grading Definitions:
A clear definition of the different categories of Credit Risk Grading is given below:
- Credit facilities which are fully secured I,e fully cash covered
- Credit facilities fully covered by Government Guarantee
- Credit facilities fully covered by the guarantee of a top tier international bank.
Good- (GD)- 2
- Strong repayment capacity of the borrower
- The borrower has excellent liquidity and low leverage
- The borrower demonstrates consistently strong earnings and cash flow
- Borrower has well established, strong market share
- Very good management skill & expertise
- All security documentation should be in place
- Credit facilities fully covered by the guarantee of a top tier local bank.
- Aggregate score of 85 or greater based on the Risk Grade Score Sheet
- These borrowers are not as strong as good grade borrowers, but still demonstrate consistent earnings, cash flow and have a good track record
- Borrowers have adequate liquidity, cash flow & earnings
- Credit in this grade would normally be secured by acceptable collateral (1st charge over inventory/receivables/equipment/property)
- Acceptable management
- Acceptable Parent/sister Company guarantees
- Aggregate score of 75-84 based on the risk grade score sheet
Marginal/Watch list- (MG/WL)-4
- This grade warrants 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
- Weaker business credit and early warning signals of emerging business credit detected the borrower incurs a loss
- Low repayments routinely fall past due
- Account conduct is poor, or other untoward factors are present
- Credit requires attention
- Aggregate score of 65-74 based on the risk grade score sheet
Special Mention- (SM)-5
- This grade has potential weaknesses that deserve management’s close attention. If left uncorrected, these weaknesses may result in a deterioration of the repayment prospect of the borrower
- Severe management problems exist
- Facilities should be downgraded to this grade if sustained deterioration in financial condition is noted (consecutive losses, negative net worth, excessive leverage
- An aggregate score of 55-64 based on the risk grade score sheet.
- Financial condition is weak and capacity and inclination to repay is in doubt
- These weaknesses jeopardize the full settlement of loans
- Bangladesh Bank criteria for sub-standard credit shall apply
- An aggregate score of 45-54 based on the Risk Grade score sheet
- 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 Bad & Loss
- Bangladesh Bank criteria for doubtful credit shall apply
- An aggregate score of 35-44 based on the Risk Grade Score Sheet
- Credit of this grade has long outstanding with no progress in obtaining repayment or on the verge of wind up/liquidation
- Prospect of recovery is poor and legal options have been poor and legal options have been pursued
- 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
- The classification reflects that it is not practical or desirable to defer writing off these basically valueless assets even though partial recovery may be affected in the future. Bangladesh Bank guidelines for timely write off of bad loans must be adhered to. Legal Procedures/suit initiated
- Bangladesh Bank criteria for bad & loss credit shall apply
- An aggregate score of less than 35 based on the risk grade score sheet.
Bad & Loss- (BL)-8
6.4.How to Compute Credit Risk Grading
The following step-wise activities outline the detail process for arriving at credit risk grading.
Identify all the Principal Risk Components
Credit risk for counterpart arises from an aggregation of the following:
- Financial Risk
- Business/Industry Risk
- Management Risk
- Security Risk
- Relationship Risk
Each of the above mentioned key risk areas require be evaluating and aggregating to arrive at an overall risk grading measure.
a) Evaluation of Financial Risk:
Risks that counter parties will fail to meet obligation due to financial distress. This typically entails analysis of financials I,e. analysis of leverage, liquidity, profitability & interest coverage ratios. To conclude, this capitalizes on the risk of high leverage, poor liquidity, low profitability & insufficient cash flow.
b) Evaluation of Business/Industry Risk:
Risk that adverse industry situation or unfavorable business condition will impact borrowers’ capacity to meet obligation. The evaluation of this category of risk looks at parameters such as business outlook, size of business, industry growth, market competition & barriers to entry/exit. To conclude, this capitalizes on the risk of failure due to low market share and poor industry growth.
c) Evaluation of Management Risk:
Risk that counter parties may default as a result of poor managerial ability including experience of the management, its succession plans and teamwork.
d) Evaluation of Security Risk:
Risk that the bank might be exposed due to poor quality or strength of the security in case of default. This may entail strength of security and collateral, location of collateral and support.
e) Evaluation of Relationship Risk:
This risk area covers evaluation of limit utilization, account performance, condition/covenants compliance by the borrower and deposit relationship.
Figure-6.1: Components of Credit Risk
Allocate weight ages to Principal risk components
According to the importance of risk profile, the following weight ages are proposed for corresponding principal risks:
Principal Risk Components: Weight
Financial Risk 50%
Business/Industry Risk 18%
Management Risk 12%
Security Risk 10%
Relationship Risk 10%
Creation of charges on securities is an important and essential part of lending approval process. To make a loan legally sound, charge should be created properly on the security taken and in a lawful manner.
7.2 Security for Loans and Advances
Security is a Cover against loans and advances. It ensures recovery of loans and advances. Though now-a-days greater emphases are put on the purpose of the loan rather than securities, nevertheless the securities play an extremely important role to take a decision. Security is an insurance or cushion to fall back upon in emergency if borrower fails to repay the loan amount. Importance of charging security is :
- Protection of Interest
- Ensuring the recovery of the money lent
- Provision against unexpected change
- Commitment of the borrower.
7.3 Types of Security
The types of securities offered vary from place to place. In metropolitan cities, it may be Govt. bonds / share / assignment of Book debt / Bills receivable etc. whereas, in the industrial area raw materials & finished goods etc. may be offered as securities. Again agricultural produce is the principal securities in the agricultural centers. Further, a bank also accepts moveable & immovable properties, life insurance policy etc. as securities.
Securities are classified into three broad categories
Figure 7.1 Categories of Securities
The tangible securities pledged / assigned by the borrower to the bank and additionally held by the bank to secure a loan are called Collateral Securities. In case of advances against pledge / hypothecation of goods, bank may insist on immovable properties as collateral.
Good collateral security must have the following characteristics:
- Transferable / negotiable
- Easily marketable
- Price stability
- Durability (not perishable)
- Ascertain ability of market value
- Genuineness of title (free from encumbrance)
At times when the personal security of the borrower is not considered sufficient or when the risk involved is a border line case and the borrower is not in a position to offer sufficient collateral to the loan, the bank may ask for a guarantee of a third party whose financial ability and credit standing is acceptable to the bank. A guarantee is an undertaking given to the bank by a third party, called the guarantor to be answerable to the bank for the debt of the borrower upon his default in repayment of the loan. It should be remembered that such security for the loan depends on the continued solvency of the guarantor. To safeguard the bank’s interest a continuing guarantee in the bank’s standard form should be obtained.
The difference between the market value / asset valued of the goods, merchandise and produces pledged / hypothecated to secure a loan / advances and the amount of the loan / advance (normally the drawing power) is known as MARGIN. The margin to be retained for each type of loan / advances will be in accordance with instructions issued from time to time by Bangladesh bank / Head office of the bank. In case where minimum margin is specified, the percentage may be increased according to market conditions, salability / durability / storage capacity and inspection facility of the goods.
7.4 Attributes of Good Security
Bank Asia ascertained some attributes that a good security must possess. These are:
- Easy ascertainment of value
- Stability of value
- Low cost of labor and supervision
These attributes are very important for liquidating the security when necessary.
The legal definition of charge means, where in a transaction for value both parties evidence an intention that property existing or future shall be made available as security for payment of a debt and that the creditors shall have a present right to have it made available, there is a charge, even though the present legal right which contemplated can only be enforced at some future date, and though the creditor gets no legal rights to property, either absolute or special or any legal right to possession but only gets the right to have the security made available by an order of the court.
In simple words, charge means establishing legal rights on the property of the debtors so that the creditor can realize such property to repay the loan in case of default.
Types of Charges
Bank Asia exercises two types of charges, which are:
* Fixed Charge: It is a charge that is made specially to cover definite and ascertained assets of permanent nature or assets capable of being ascertained and defined, e.g., charges on land and building or heavy machinery.
* Floating Charge: It is a charge on a property, which is constantly changing, e.g., stock-in-trade.
7.6 Documentation against Advances
Document is the written statement of facts or evidence in regard to a particular transaction, which on placement may bind the parties answerable and liable to the court of law.
7.6.1Types of Documentation
Documents related to securing loans and advances are classified into the following 2 (Two) categories:
- Charge documents are preformatted and printed required to create charge on securities against loans and advances and the documents are provided by the Bank to the client for execution.
b. Legal documents are legal papers provided by the client certifying the legal status of the borrower, borrowing power, title to goods and property; legal deeds and power of attorney related to creation of charge on securities.
Figure7.2: Types of Documentation
10. Memorandum of deposit of title
deed (For Equitable mortgage).
11. Registered mortgage deed (For
Registered / Legal mortgage).
12. Certified copy of original title
deed(in case of new purchase)
13. Original money receipt duly
endorsed in favor of the bank(in
case of new purchase).
7.7 Modes of Creating Charges on Security
Bank Asia creates charges on security by the following method:
Bank Asia does not exercise pledge as means of creating charges on security, which is used by some banks and by overseas banks.
Hypothecation is a charge against property for an amount of debt where neither ownership nor possession is passed to the creditor. Though the borrower is an actual physical possession but the constructive possession remains with the bank as per the deed of hypothecation. The borrower holds the possession not in his own right as the owner of the goods but as the agent of the bank.
Features of Hypothecation
- Charge against a movable property for an amount of debt.
- As ownership and possession of the goods remains with the borrower, the bank has no effective control over the securities.
- Floating charge/equitable charge creates on the movable properties.
- Borrower binds himself under the hypothecation agreement to give possession of the hypothecated goods to the bank when called upon to do so. After the possession is handed over to the banker the charge is converted from hypothecation into pledge.
- In the case of hypothecation advance to a limited company the charge has to be compulsorily filed for.
Precautions Taken by BankAsiaon Hypothecation
The position of the banker under hypothecation is not as safe as under a pledge. The borrower may fail to give possession of the goods hypothecated to the bank, or sells the entire stock or borrows from another banker on the security of the same goods.
- This facility should be given only to persons or business houses of high reputation and sound financial standing.
- The banker must periodically inspect the hypothecated goods and the account books of the borrower should be checked to ascertain the position of stocks under hypothecation.
- The borrower should be asked to submit a statement of stock periodically giving incorrect position about the stocks and its valuation and declaration that the borrower possesses clear title to the same.
- An undertaking should be taken from the borrower that he/she shall not charge the same goods to some other bank or persons.
- A nameplate of the bank mentioning that the stocks are hypothecated to it, must be displayed at a prominent place in the business premise of the borrower for public notice.
- Stocks should be fully insured against fire, dacoit, riot, strike, theft and other risks.
Documents Required for Hypothecation
The following documents are needed in case of a loan approved against hypothecation of goods and produces.
- Demand promissory note
- Letter of continuity
- Deed of hypothecation
- Letter of guarantee if any
- Certificate for registration of charge (Limited Company)
- Mortgage of property as collateral security (if any)
- Latest stock report
- Any other documents required by sanction letter
As per Transfer of Property Act-1882, section 58 (a), a ‘mortgage’ is the transfer of an interest in specific immovable property for the purpose of securing:
- The payment of money advanced or to be advanced by way of loan,
- An existing or future debt or,
- The performance of an engagement, which may give rise to a pecuniary liability.
The transferor is called “mortgagor” and the transferee is called “mortgagee”, the principal money and the interest of which payment is secured for the time being are called “mortgage money” and the instrument by which the transfer is effected called “mortgage deed”.
Bank Asia exercise only two types of mortgage which are:
* Legal Mortgage: Where without delivering possession of the mortgaged property, the mortgagor bind himself personally to pay mortgage money and agrees expressly or impliedly that in the event of his failing to pay according to his contract, the mortgagee shall have a right to cause the mortgaged property to be sold and the proceeds of sale to be applied so far as may be necessary in payment of the mortgage money, the transaction is called a simple or legal mortgage. But the mortgagee has no power to sell the property without the intervention of the court. Therefore when an interest of the specific property under such mortgage is transferred by registration of deed i.e. mortgage deed is termed as registered mortgage or legal mortgage.
* Equitable Mortgage: According to section 58 (f) of the Transfer of Property Act, where a person delivers to a creditor or his agent documents of title to immovable property, with the intention to create a security thereon the transaction is called a “mortgage by deposit of title deeds” or “equitable mortgage”.
Documents Required for Legal Mortgage
- Chain of documents regarding title (if available)
- Original title deed of the mortgager (if available)
- C.S, S.A., & R.S. Parcha
- Up to date rent receipt
- Valuation certificate from concerned authority
- Clearing certificate from local body/development authority
- Non-encumbrance certificate
- Legal opinion from legal adviser
- Power of attorney authorizing the bank to sell the mortgaged property
- Site plan/location map
- Certified copy of mortgage deed along with receipt
Documents Required for Equitable Mortgage
In case of equitable mortgage all the documents that are required for legal mortgage are also required for equitable mortgage. In addition the following documents are required for equitable mortgage:
- Original title deed
- Memorandum of deposit of title
- A registered power of attorney
- Any other documents as stated in the sanction letter
Lien implies right of the creditor in possession of goods or securities belonging to a debtor to retain until a debt due from the letter is paid. Lien is different from other forms of charges on the ground that it does not require any specific agreement, written or oral to support it. The right of lien arises in law out of business dealings between parties- the person in possession of the goods of securities and the owner.
Exceptions to the Right of Lien
The right of lien can not be exercised under the following situations:
- Valuables lying in safe deposit vault
- Bills of exchange or other documents for special purpose
- Money deposited for special purpose
- Documents or valuables left in the bank’s hands inadvertently
- Securities deposited before loan sanctioned
- Trust account
- Left in his hand after an advance against them has been declined
An assignment means a transfer by one person a right, property or debt (existing or future) to another person. The person who assigns the right, property or debt is called the assignor. The person to whom the right etc. is assigned is called the assignee.
Bank Asia practices only legal assignment where:
- An assignment deed is in writing duly signed by the assignor and the intention to pass by assignment is very clear.
- The transfer of actionable claim is absolute.
- The assignee informs the assignor’s debtor about the assignment and also gets the confirmation of the notice and debt.
The most common assignments handled by Bank Asia are:
- Book debts
- Contract money due from government or semi government bodies
- Supply bills
- Life insurance policies
Set-off means the total or partial merging of a claim of one person against another in a counter claim by the letter against the former. It is in effect the combining of accounts between a debtor and a creditor so as to arrive at the net balance payable to one or the other. It is a right, which accrues to the bank as a result of the banker customer relationship.
Ingredients of Set-off
- Mutual debts for sum certain
- Debts must be due immediately
- Debts must be in the same right
- No agreements to the contrary
Right of Set-off
The decision and judgment in different cases reveal that the following cases where branches can exercise the right of set-off:
- To combine two or more accounts of the same customer in the same branch of Bank Asia.
- To combine two or more accounts of a customer maintained in different branches of the same bank.
- To adjust the surplus amount of the sale proceeds or realization of the securities held as cover for one particular debt for liquidation of any other debt after realization of that particular debt.
Bank Asia implemented Credit Risk Management Techniques for remove from loss of bank’s interest. Credit risk is the risk that a customer or counterparty of the group will be unable or unwilling to meet a commitment that it has entered into. It arises from lending, trade finance, treasury and leasing activities. The primary and the most important risk associated with a loan is default risk or the failure of the borrower to repay the loan with interest. To protect loan assets from being non performing assets effective supervision and monitoring is done by Bank Asia both in the pre-sanction and in the post-sanction stage or for ongoing credit. In simple words, supervision and monitoring of a loan denotes continuous checking and assessing the borrower, his business and his willingness to repay the loan based on some predetermined manners. Supervision generally starts immediately after the selection of the borrower and monitoring starts when the project/activity enters implementation although these terms are also interchangeably used. Proper supervision and monitoring act as a substitute of collateral.
8.2 Purpose of Credit Risk Monitoring in Bank Asia
The purposes of credit monitoring are pointed out below:
* To prevent loan classification
* To return flow of fund
* To ensure compliance of terms and conditions
* To obtain feedback from the borrowers
* To take timely corrective action regarding a particular loan
8.3 Credit Administration as a Tool for CRM
* To ensure that all security documentation complies with the terms of approval and is enforceable.
* To monitor insurance coverage to ensure appropriate coverage is in place over assets pledged as collaterals and is properly assigned to the bank.
* To control loan disbursement only after all terms and conditions of approval have been met, and all security documentation is in place.
* To maintain control over all security documentation.
* To monitor borrowers compliance with covenants and agreed terms and conditions, and general monitoring of account conduct/performance.
* To minimize credit losses, monitoring procedures and systems should be in place that provides an early indication of the deteriorating financial health of a borrower.
- 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 needs timely actions
- Timely corrective action is taken to address findings of any internal, external or regulator inspection/audit.
- An Early Alert Account is one that has risks or potential weaknesses of a material nature requiring monitoring, supervision, or close attention by the management
- Despite a prudent credit approval process, loan 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 legal advisor when appropriate
- Banks should take immediate measure to EXIT-Strategy implementing recovery strategy
- 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 bad accounts.
8.4 Risk Grading as a Tool of Credit Monitoring
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 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. 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.
Table-8.1: Risk Grading
|i)||Superior-Low risk||1||Facilities are fully secured by cash deposits, government bonds or a counter guarantee from a top tier international bank.|
|ii)||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.|
|Iii)||Acceptable-Fair Risk||3||Adequate financial condition though may not be able to sustain any major or continued set backs, but should still demonstrate consistent earnings, cash flow and have a good track record.|
|iv)||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, their cash flow and/or inconsistent earnings.|
|v)||Special Mention||5||In this grade assets have potential weaknesses that deserve management’s close attention. If left uncorrected, these weaknesses may result in a deteriorating of the repayment prospects of the borrower.|
|Vi)||Substandard||6||Financial condition is weak and capacity or inclination to repay is in doubt. These weaknesses jeopardize the full settlement of loans. Still may not be considered non-performing as the correction of the deficiencies may result in an improved condition and interest can still be taken into profits.|
|Vii)||Doubtful and Bad(Non performing)||7||Full payment 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. Loan loss provisions must be raised against the estimated unrealizable amount of all facilities.|
|Viii||Loss(Non performing)||8||Assets under this category are long outstanding assets with no progress in obtaining repayment 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.|
8.5 Early Warning System in Credit Risk Monitoring
Bank Asia uses early warning system for effective monitoring of its loans and advances. Early warning system consists of a watch list, which addresses problems while adequate alternative actions are available.
8.5.1 Early Warning Signals
The components of early warning system consist of current or anticipated alternations in the followings:
- Industry patterns or structures
- Management composition or succession
- Impact of national or international political and economic trends
- Nature of the lender/borrower relationship
- Borrower performance versus budget or forecast
- Nature of joint venture arrangements or relationships
Any undesirable alternations in the above act as precaution for Bank Asia to take corrective or preventive action before the situation get worsened.
8.5.2 Preventive Measures in Early Warning System
When early warning system signals about a situation that might cause alteration in the credit relationship with the borrower, Bank Asia undertakes and reviews the following preventive measures:
- Understand clients’ business
- Analyses clients’ financial statements
- Frequent visit to client so that he becomes alert regarding the loan
- 100% security cover for bank’s risk
- Investigate market rumors
- Use of credit bureau checklists
8.5.3 Corrective Measures
When it becomes inevitable to face an adverse situation regarding a particular loan, Bank Asia takes corrective measure to mitigate the situation as much as possible. The following corrective measures are taken in this regard:
- Reviewing the documents and situation from legal point of view
- Working out strategy and action to face the problem
- Loss is evaluated against the security realization value
- Deciding on whether to stay or leave the project and reclassification is done accordingly
- Visiting the client continuously to find any way out
- Then all efforts are put forward for negotiation
- Ultimately legal actions are taken when all measures fail
8.6 Failure Prediction Model
Failure prediction model is another monitoring tool used in Bank Asia. This model is based on the following parameters:
Table-8.2 Failure Prediction Model
|C.E.O is an autocrat||8|
|C.E.O is also the chairman||4|
|Passive Board of Director||2|
|Weak Finance Director||2|
|Poor Management Depth||1|
|No Budgetary Control||3|
|No Cash Flow Plan||3|
|Poor Response to Change||15|
|Big Project Gone Wrong||15|
|Financial Signs Weak||4|
|Rumors/Staff Turn Over/Low Morale/Untidy Offices/Frozen Salaries||4|
This model helps loan officers to predict the possibility that a particular might fail in different time intervals. The loan officers collect data from a particular loan project in different time frames and using this model predict how well the project is running.
8.7 Loan Monitoring Through Continuous Reporting
Bank Asia also monitors its credit portfolio through continuous reporting to Bangladesh Bank. For this purpose Bank uses six forms (CL-1, CL-2, CL-3, CL-4, CL-5 and CL-6) in accordance with the nature of loan and advances.
- Cl-1 is the compilation of the 5 other reports, which covers different loan categories including the staff loan.
- CL-2 is used to report continuous loan.
- CL-3 is used to report demand loan.
- CL-4 is used to report for loan repayable within maximum 5 years.
- CL-5 is used to report term loan of over 5 years.
- CL-6 is used to report short term agricultural
The lending process of Bank Asia starts with a customer who has an account with the bank or is intended to open account with the bank. The lending generally starts at the branch level. The relationship manager plays an important role in the initiation of the lending process. The critical evaluation of the lending process has been done taking various components and phases of the lending process into consideration.
9.2 Borrower Selection
* Borrower selection is the most important part of lending process, because the subsequent success largely depends on the right selection of the potential borrower. Generally any body that is an employee of Bank Asia can bring credit customer for the bank or the customer can present himself for the approval of credit line for him. Bank’s officers and employees are especially encouraged to bring customer for the bank especially in Bank Asia because it is still new in the banking sector and wants to grow its credit portfolio.
* While selecting borrower the loan officers are instructed to take utmost care so that adverse selection is not made. In this connection Bank Asia can be said conservative lender because it carefully chooses its borrowers.
* The most important guiding rule for selecting the right borrower is the KYC or Know Your Customer. This KYC methodology is designed by Bangladesh Bank to select right customer for the bank. It has been observed by the Bangladesh Bank that most of the financial crimes arise from the selection of wrong customers. The KYC guideline is so designed that it helps to generate a clear picture of the bank’s customer.
9.3 Problems in Borrower Selection
* Though Bank takes protective measures so that wrong customer selection is not made but in reality often adverse selection is made. The major problem that the loan officers face in selecting borrower is the availability of information about a particular borrower. There are instances that customers provide fabricated information to prove him/her a worthy and financially viable customer. Buyers often manipulate their financial statements so that it provides a healthy picture to the bank. Borrowers’ speculative behavior and non co-operation in providing data is acute inBangladesh.
* Bangladeshis a small country but there are 52 commercial banks operating here. Therefore the credit market is a borrower dominated market. Number of potential borrowers is insufficient as compared to the number of banks operating. Therefore an unhealthy competition has occurred in capturing customers.
* Bank can not keep its deposit idle because deposit is entitled to give interest to the depositors. That’s why bank is in constant search for potential borrowers to mobilize its deposits. Therefore sometimes adverse selection is made arising out of emergency need for rotating the bank’s deposit.
9.4 Evaluation of the Branch Activities
* Branch plays the key role in lending process. Usually branch credit department targets the potential borrowers, generates the credit relationship and complete the credit analysis and prepares a well written credit proposal. The approval of a loan depends on how well proposal is prepared supported with relevant information and analysis.
* Bank collects information through pre-designed form filled up by customer. These forms include PNW (Present Net Worth) form, bank facility application form, and personal credit information form. It’s very easy to provide false and distorted information in these forms. Therefore the bank officials must not depend only on the information collected through questionnaires but also should visit the customers’ work place, house, seek information from the customers’ peer groups and enquire about the customer so that he or she does not get insulted.
* If the information collected by the branch does not represent the real picture of the borrower, then all the subsequent lending activities will carry risks. Particularly credit analysis based on wrong information might prove very dangerous.
* Branch main purpose regarding a credit application is not to create obstacle for the customer but to depict the clear and real picture from an unbiased position.
* Branch generally can not sanction credit except in the case of Over Draft lined with Fixed Deposit Receipt (FDR). The manager of any branch can approve 85% of the value of FDR as Over Draft limit and requires zonal head approval if the amount exceeds 85%.
* The success of a credit approval largely depends on how well and how quickly branch can prepare the credit proposal. Based on the proposal prepared on the basis of qualitative and quantitative analysis, the head office takes decision whether to sanction the loan or not.
9.5 Evaluation of the Corporate Office Activities
* Corporate office credit committee and board of directors play key role in the final sanction of the lending process. If the amount of credit exceeds Taka one crore, board approval is necessary.
* Credit committee of the corporate office reviews all the credit proposals sent by different branches of Bank Asia. If any drawbacks are found the proposal is either sent to the branch or rectified by the credit committee itself.
* The time required for the approval of a particular credit proposal largely depends on the level coordination between branches and the corporate office credit committee.
* Besides credit committee also over views the whole credit process of Bank Asia and if any intervention is required at any stage, they play the required role. At the corporate office each officer of the credit department is assigned to supervise few branches to facilitate better communication and smooth functioning of the lending process. Currently credit committee of Bank Asia is working out for a written credit manual, which can be of great help to the operational level credit practices.
9.6 Evaluation of the Credit Analysis (Financial Spread Sheet Analysis)
* Credit analysis is one of the most important components in the lending process. To minimize the risk lending financial information of the borrower is calculated with the scientific method named Spread Analysis. Financial spread sheet analysis consisting of balance sheet, income statement and cash flow statement proved very effective in judging the financial health of the borrows.
* Some times credit analysis fails to remove the bridge between the selection of borrower and the final approval of the loan due to lack of valid information provided by the borrower. In such case financial spread sheet analysis generates faulty results. Therefore it is suggested that the quantitative credit analysis should be supplemented with subjective judgment.
9.7 Evaluation of the Credit Risk Grading (CRG)
* The Credit Risk Analysis package provides a systematic procedure for analyzing and quantifying the potential risk. Bangladesh Bank has made it mandatory for commercial banks to use CRG for evaluating credit proposals amounting Tk. One crore and above. The main problem with CRG is that it is manipulated as per the requirement of the borrower. Sometimes CRG is not even conducted at the loan processing stage. After approval of the credit CRG is done just to maintain the office record and to meet the Bangladesh Bank Credit Policy. Fortunately such instances are almost absent in the case of Bank Asia or at least the writer did not find such cases during his internship period.
* CRG Format is mainly designed for all type of loans except micro credit & agricultural credit. But it is really impossible to represent all needs in a single format. So, credit officer judgment is needed in this case.
* CRG at the initial stage relies too much on subjective judgment and Financial Risk has been given the maximum weight. Therefore there is always a chance to manipulate the ultimate risk grading.
* Another major impediment to the successful Credit Risk Analysis is that the information provided by the borrower often does not suit to feed into the CRG format. Therefore the credit officers need to employ extra time and effort to collect the relevant information from the borrower.
* Credit Risk Analysis is a lengthy process requiring sometimes even more than a month due to the lack of information and its subjective nature.
9.8 Evaluation of the Charge Creation
* Charge creation is very important in the lending process in that it establishes the legal right on the property of the borrower so that the bank can get the repayment by selling the property in case of default.
* Bank Asia does not create charge through pledge, which is strong mode charge creation. The security obtained through pledge is much safer than hypothecation, which is a weaker mode of creating charge.
* Negligence in creating proper charge might seriously jeopardize the bank’s interest as far as the credit is concerned.
* Charge documents can never be sent to the borrower but such instances have been found to occur in Bank Asia.
9.9 Evaluation of the Loan Monitoring Techniques
Bank Asia employs several techniques for loan monitoring. It is usually done through physical verification of the borrower’s work place, mortgaged property or hypothecated stocks. So far Bank Asia’s loan monitoring has been done very effectively which is evident from its zero default rates.
Although the bank maintains standard monitoring technique, it has some internal deficiencies in conducting the loan monitoring process. Bank Asia faces occasional problem in loan monitoring due to the shortage of manpower. Loan monitoring is a continuous task requiring reasonable number of manpower. But it is not always possible for the bank to involve its credit officers to monitor loan. Proper monitoring requires the establishment of separate loan monitoring cell.
Lending policy is one of the most important aspects of modern banking system. Majority portion of the total profit of a bank is generated from this segment. As lending to organizations involves various types of risk, a very careful analysis of the borrower, industry and economic condition are essential to ensure high asset quality standards. Apart from introducing various important aspect of corporate lending, this report will therefore focus on risk analysis techniques.
10.2 Major Findings of the Project
- With a view to improving the quality and soundness of loan portfolio, credit risk management methods were updated. The Bank is now applying a new system of credit assessment and lending procedures by stricter separation of responsibilities between risk assessment and lending decisions.
- The Bank provide incentive bonus to its employees on the basis of profit earned during the year. This year the Bank provides several times’ basic salary as the incentive bonus to its employees and two festival bonuses which motivates employees to perform effectively and efficiently.
- The employees of the Bank are young, energetic, cooperative and friendly. Their dealings with the client are cooperative and friendly which creates attractive perception about the client and interest to do business with the Bank
- Bank Asia also gives preferences to local customer through its marketing efforts.
- Bank Asia started operation inBangladesh in 1999. By following prudent corporate marketing and risk management policy, Bank Asia recognized as one of the leading bank in the country. Bank Asia group has well-established corporate lending and credit risk management process which involves analyzing customers’ need prudently and carefully, analyzing local culture and economy, periodic analysis of industry, offering products in line with customer’s needs and maintaining good asset portfolio.
- KYC, “Know Your Customer”, is a very important term that is gaining importance day by day. In lien with this principle, Bank Asia carries out a details analysis before entering onto a relationship. Understanding business type is therefore very important as it assist the bank to structure credit facilities in line with customer’s need. For example, Loan tenor and type for a manufacturing concern should be different from that of the retailers.
- Bank Asiahas a full service capability for corporate operating. The Bank Asia is proud to bring its global capabilities to the customers inBangladesh. Through analyzing the local market and industry, Bank Asia offering full range of corporate products such as working capital loan, long term loan, project loan, import & export loan, treasury etc. in line with local needs.
- Bank Asia’s credit evaluation process for corporate customers involves an assessment of the customer’s business operations and strength in order to identify and understand the current and potential operating and financial risks. Before approving any credit proposal, the bank carry out a very detailed financial analysis as it helps to identify and quantify the customer’s financial risks and prompt questions about possible operating risk.
- A doctor whose patient complaint of a severe headache does not prescribe paracetamol on the theory that all headaches are the same. A doctor determines the cause of the headache and treats the ailment found. In lending, banker plays the role of doctor when the customer complains of a “cash ache”. Bank Asia has a well-defined products structuring policy. According the needs and on the basis of business cash cycle, the bank structure and offer the products to the customer. In report, we have seen number of reasons for borrowing such as borrowing caused by sales growth(both short and long term), borrowing caused by slowdown in the operating cycle, borrowing caused by purchase/replacement of fixed assets.
- The most common finance that the bank grants is for the short term working capital of a business. This finance is usually provided by way of overdraft. However, it is always difficult to identify precisely how funds are being used from an overdraft because the customer can easily divert them to take advantage of other opportunities which the original facility was not designed to meet.
- Import, Export finance and related products, by contrast, provide a means of tailoring facilities to specifically meet a customer’s working capital requirement. From the bank’s viewpoint, by relating finance to the goods which move through company’s trade cycle, trade finance facilities provide the bank with greater control over the use to which its facilities are put by the company. Bank Asia is known as one of the best trade banks inBangladesh.
- Understanding industry is indeed a very crucial aspect of corporate lending. Bank can identify potential area of lending through analyzing various industries. Apart from identifying prospective sector, industry analysis also assist a bank in detecting opportunity and risk associated with specific borrower Bank Asia’s corporate banking department carry out industry analysis on a regular basis and set strategy accordingly.
- Economic conditions, political stability, government policy, demographic statistics, social aspect, regulatory framework, ethnic mixes are the major issues that mainly evaluated by Bank Asia. In line with changes of these environmental issues the bank change its lending policy. Due to recent growth rate of GDP and improvement in investment conditions, Bank Asia fells more comfortable to expand its operations.
10.3 Identification Some Problems regarding Credit Risk Management
Proper Credit Management is the most important function of any Bank. But the credit management activities suffer from some kinds of problems that are learnt from discussion with officers, clients and also problems identified from the job observations. The problems are as follows:
10.3.1. Lack of Deposit for Credit Extensions
Discussion with officers of the Head Office revealed that if the Bank collects more deposit, it would be able to advance credit to more viable projects.
10.3.2. Mentally of not to repay the loan
A culture has been developed among the common people that Bank loans need not to be repaid.
10.3.3. Defective Legal System
Existing bad legal system is another greatest blow and curse to the credit management system and alarming factor recovering loan from defaulter. In reality it is very difficult, lengthy and expensive to have a verdict in favor of the Bank.
10.3.4 Delay in Loan Sanction
Lengthy process of loan sanction or delay is a common problem of credit management.
10.3.5. Higher Rate of Interest for Credit
Clients generally complain that rate of interest for various type of credit are quite high. In many cases productivity from loaned investment is inadequate that borrower become incapable in repaying loan.
10.3.6. Changes in Policies
Due to changes in the export, import, foreign exchange policy as well as monetary and fiscal long term financing suffer a lot.
10.3.7 Irregularity in Providing Loan
Usually Banks are responsible to provide loan to those who are eligible for the loan. But in reality, small investors do not get the loan easily. They have to fulfill more terms and conditions than those who have greater influence in the business community.
Based on the evaluation of different aspects of the credit process of Bank Asia, the following recommendations have been made:
* In the face of competitive and borrower dominated credit scenario Bank Asia must come up with innovative loan products to meet up the demand of time. In this connection Bank Asia can focus on some more loan products like:
- Apartment loan
- Marriage loan
- Education loan
- Credit card
* To combat the problem of mobilizing deposit in the form of credit, Bank Asia should focus on intensive marketing effort.
* Entrepreneurship lending should be given due emphasis.
* As borrower selection is the key to successful lending, Bank Asia should focus on the selection of true borrower. But at the same time it must be taken into account that right borrower selection does not mean that Bank Asia has to adopt conservative lending policy but rather it means that compliance with the KYC or Know Your Customer to ascertain the true purpose of the loan.
* Care should also be taken so that good borrowers are not discarded due to strict adherence to the lending policy.
* At the branch level credit department must be adequately capable of collecting the correct and relevant information and analyzing the financial statements quickly and precisely.
* Credit officer must be skilled enough to understand the manipulated and distorted financial statements.
* Credit committees at all levels must work in co-ordination with each other for quick approval of loans and to reduce the loan processing cost.
* To expedite the lending process, board credit committee meeting should be held twice a month instead of once a month.
* Monitoring of a loan should be conducted at regular interval to enhance the borrower is properly maintaining the mortgage property and utilizing the borrowing money. The bank should benchmark the monitoring techniques practiced by the successful and established banks inBangladesh. It should take the counseling service from the experienced expatriate to further improve the monitoring techniques. Furthermore it should also aware of the monitoring techniques adopted by the established banks around the world.
* In case of mortgage, care must be taken to accept collateral on second charge.
* In case of assignment the bank must ensure that the assignment debtor has given undertaking.
* Reporting of all loans should be periodically made to Bangladesh Bank
* Loan monitoring is a continuous task and requires expert manpower. Therefore it is suggested that Bank Asia should set up a separate loan monitoring cell, which will be responsible for monitoring its total loan portfolio with special care to the problem loan.
During 2005, the entire economy’s growth was increased to 5.5%, which helped the banking industry to widen their business at different sectors. The success of banks depends on how effectively they can deliver their services to the customers and earn maximum amount of profit. Hence, to achieve the objective of credit services the monitoring techniques should be updated and the assessment financial information provided by the customers should be done carefully.
Most of the Banks inBangladeshare offering a wide array of financial services including new types of loans and advances and some whole new services are being launched every year. Bank Asia, a bank of difference, also has discovered new avenues to reach its goals. For the brand name, it is gone to people’s heart through updating various services. Bank Asia should diversify its credit portfolio Bank Asia so that in near future when competition among Banks will serve, it can stand with its own identity. The Credit Risk Management method that may seem fit today may not work tomorrow. So all the Financial Institutions must find their own method in order to sustain in the changing world. Central focus in this regard would be to have a comprehensive Information Technology system, sufficient expertise and above all very relaxed management to adopt new idea to update Credit Risk Management method. Now Bank Asia is continuing business operation successfully inBangladeshthrough developing an image and goodwill among its clientele by offering its excellent services. The success has been resulted from the dedication, commitment and dynamic leadership of its management. During the short span of time of its operation, has s Bank Asia successfully grabbed a position as a highly progressive and dynamic financial institution in the country. By proliferation of new advance services, expanding use of automated equipment and electronic transfer of financial inform Bank Asia action, will be the country’s first largest institution in the near future.
Annual Reports, BankAsiaLtd.2005
Annual Reports, Bank Asia Ltd. 2004
Credit Manual-Bank Asia Ltd.
“Financial Terms” (Magazine) Bank Bima , February 2003.
Koch W Timothy. Banking Management (4th Edition) – 2002
Rose S Peter “Commercial Bank Management” (5th Edition)- 1999
Zikmund G Willium “Business Research Method”-3rdEdition 2001