Internship Report On Capital Management

Chapter – 1: Introduction

Background of the Report:

After completing all the semesters in BBA from Department of Accounting & Information Systems I have been placed in BASIC Bank Limited for my internship program which is a degree requirement for the BBA students. The primary goal of internship is to provide the job revelation and an opportunity to implement theoretical knowledge in real life situation with the changing eve of banking industry. I have decided to prepare my report on the Credit Management Procedure of BASIC Bank Limited. It is prepared based on my practical experiences through internship at the BASIC Bank Limited, Mirpur Branch, Dhaka.

Objectives of the Study:

The main objective of the study is to explore various features and analyze the Credit Management system of BASIC Bank Ltd., and to have an overall idea on how it operates in the competitive markets to comply with the customers’ satisfaction and to retain them. So the primary objectives of this report are as follows-

  • To identify the lending activities of BASIC Bank Limited.
  • To identify the requirements and the eligibility criteria for the bank’s borrowers.
  • To identify the credit proposal initial, assessment and approval/declining process, credit risk grading procedure for potential borrowers, management of collateral & financial securities against lending, as well as the process of monitoring bank finances.
  • To evaluate the quality of services of the bank.
  • To identify the strengths, weaknesses, opportunities, threats of BASIC Bank Ltd.
  • To ascertain the overall quality of the bank’s assets.
  • To develop skills about the techniques of early alert system in downgrade of loan quality and strategies for managing non-performing loans.

Scope of the Study:

I have collected data from the local branch of BASIC Bank at Mirpur, Dhaka. I have mainly tried to cover all the information needed to know about the functions played by the bank related to credit as well as the various loan schemes and deposit schemes offered by the bank. I have called upon various interviews with the Managers and Credit Officers and other officials of the bank, which have been my primary source of data.

Limitations of the Report:

Though I am lucky to get the chance to prepare this report but unfortunately I have faced some difficulties. I tried to overcome the difficulties and gave my best effort. When preparing this report, some difficulties that I faced are:

  • Some essential data could not be gathered because of confidentiality concerns. So it becomes a problem working within branch office.
  • This extensive type of report needs too much time to prepare it. But we had to prepare this report within a very short span of time. 6 weeks time duration was not sufficient for preparing a report of this magnitude.
  • The managers are also very busy, so it was hard to bring their concentration on the matter.
  • Frequent power outages affected and prolonged the compilation and composition of this computer-aided work.

Methodology:

1.5.1  Sources of collecting data:

In order to make the Report more meaningful and presentable, two sources of data and information have been used widely. It is based on data & information. They are stated below:

  • Short interviews and discussion session.
  • Various books and websites related to banking policies and practices.
  • BASIC Bank Annual Report 2010.
  • Bangladesh Bank Credit Policy.
  • Loan application
  • Net Worth statements (Declaration of Liabilities & Assets)
  • Financial Statements
  • Related reports from other banks/FIs
  • Credit Information Bureau (CIB)  reports

Chapter – 2: About the Organization

About BASIC Bank:

The BASIC Bank Limited (Bangladesh Small Industries and Commerce Bank Limited) established as a banking company under the erstwhile Companies Act 1913 launched its operation in 1989. It is governed by the Banking Companies Act 1991. The Bank started as a joint venture enterprise of the BCC Foundation with 70 percent shares and the Government of Bangladesh with 30 percent shares. The BCC Foundation being nonfunctional following the closure of the BCCI, the Government of Bangladesh took over 70 percent shares of the BCC Foundation on 4th June 1992 and became 100 percent owner of the Bank, Adjudged as one of the soundest banks in Bangladesh, BASIC Bank is unique in its objectives. It is a blend of development and commercial banking functions. Coping with the competitive and rapidly changing financial market of the country, BASIC Bank maintains close connections with its clients, the regulatory authorities, the shareholders (the Government of Bangladesh), other banks and financial institutions.

 

The total assets of the Bank stood at Taka 45308.31 million at the end 2009 against Taka 46651.53 million in the previous year. Deposit decreased from Taka 38368.23 million in 2008 to Taka 34501.69 million in 2009 registering a decline of 10.08 percent. Loans and advances, however, increased to Taka 29261.53 million as on December 31, 2009 against Taka 27269.13 million at the end of 2008, recording a growth rate of 7.31 percent compared to 22.48 percent in the previous year. All-out efforts were made to improve the recovery rate and control non-performing loans and advances. The proportion of non-performing loans to total loans stood at 4.83 percent in 2009 compared to 4.59 percent in 2008. Emphasis on the maintenance of quality of assets remained the centerpiece of the Bank’s business strategy.

Growth of industrial finance was moderate and loans to small industries were 19.95 percent of total loans and advances, which registered a growth of 1.72 percent. The Bank was quite successful to utilize its fund satisfying all conditionality and national priorities. The Bank also successfully utilized a soft term fund of Asian Development Bank under Bangladesh Agribusiness Project and special agro-based industrial development fund provided by the Government of Bangladesh. Since the inception of the Micro-credit Scheme in 1994, the Bank has been providing funds to NGOs for on–lending to their members. Total outstanding in micro-credit of the bank increased by 40.23 percent to Tk. 1072.10 million during the year under review. The Bank’s financing of import business increased from Taka 27359.77 million in 2008 to Taka 33976.60 million in 2009 registering growth rate of 24.18 percent. On the other hand, Bank’s export finance decreased to Taka 19887.70 million in 2009 from Taka 22270.90 million in 2008.

Profit before provision of the Bank rose to Taka 1568.34 million in 2009 against Taka 1534.11 million in 2008. Profit after provision for loan loss and investment increased to Taka 1321.97 million in 2009 against Taka 1250.89 million in 2008. After tax net profit stood at Taka 648.85 million in 2009 compared to Taka 549.95 million in 2008.

Business Philosophy of BASIC Bank:

The philosophy of BASIC Bank is to develop into an ideal, excellent and unique financial institution in the banking regime.

¨      It is therefore evident that BASIC Bank would seek fair return on owner’s equity as of its one prime goal.

¨      The profit-earning goal is ought to be achieved by rendering maximum possible satisfaction to clients through quick and efficient services. Therefore, quality service to the clients is another important goal of BASIC Bank.

¨      Balance Sheet composed of quality assets.

¨      Steady & sustainable growth.

¨      Cautious Investment.

¨      Adoption of new banking technology.

¨      To take active part in Social Welfare activities.

¨      Exert Risk Management as per Bangladesh Bank Guideline.

¨      Ensure implementation of Basel-ΙΙ in required banking arenas.

 

Aims & Objectives:

  • Priority is in promoting and financing for the development of small and medium scale entrepreneurs, as well as micro industries and cottage industries of the county.

 

  • Full range of commercial banking services including collection of deposits, such as current, savings, STD, and FDR etc. on the other hand it provides services like short term trade financing, handling of import and export business and so on.

 

  • Offering Micro credit to the urban poor through linkage with NGO’s with a view to facilitating their access to the formal financial market.

 

  • To employ 50% of loanable funds shall be invested in financing small and medium industries sector.

 

  • Contract or negotiate all kinds of loans, aid or assistance, private or public, from any source, local or foreign and to take all such steps as may be required to complete and effectuate such deals.
  • Issuing Bank Guarantees/Performance Guarantees or become liable for the payment of money or for the performance of any obligation and generally to transact all kinds of guarantee business and also transact all kinds of agency business.

 

  • Establish branches and offices to carry on all or any of the above business abroad and within the country and conduct the business of banking in all its branches and to transact and do all matters and things.

Company Vision:

  • Sustained growth in SME sector.
  • Continuous low cost deposit growth with controlled growth in Retained Assets.
  • Achieve efficient cooperation/understanding between the bank’s branches, SME Unit Offices and BASIC field offices for delivery of remittance and Bank’s other products and services.
  • Manage various lines of business in a fully controlled environment with no compromise on service quality.
  • Keep a diverse, far flung team fully motivated and driven towards materializing the bank’s vision into reality.

 

Company Mission:

  • To continue our support for expansion of activities at home and abroad by adding new dimensions to our banking services which have been ongoing in an unabated manner.
  • To serve the society through which we want to go close to the people of all concerns of the society.
  • Winning an everlasting seat in the hearts of the people as a caring companion in uplifting the national economic standard through continuous up gradation and diversification of our clientele services in line with national and international requirements is the desired goal we want to reach.

Organizational Structure

To achieve its organizational goals, the bank conducts its operations in accordance with the major policy guidelines laid down by the Board of  Directors, the highest policy making body. The management looks after the day-to-day operation of the Bank.

 

Chairman

 

 

Director    Director    Director    Director            Company Secretary

    Managing Director                                            Company Auditor

Deputy Managing Director                                              Convener

      General Manager                                                       Member   

            Deputy General Manager                                              Member

                    Manager

           Assistant General Manager                                                                  

                    Deputy Manager    

      Assistant Manager

                       Officer

                Assistant Officer

                     Staff/Others

Board of Directors:

As stated earlier the Government holds 100 percent ownership of the Bank. The Government of Bangladesh appoints all the Directors of the Board. The Secretary of the Ministry of industries is the Chairman of the Bank. Other Directors of the Bank are high Government and central Bank executives.

The Managing Director is an ex-office member of the Board of Directors. There are at present 7 Directors including the Managing Director.

The Board of Directors is a bridge between shareholders and the executive body. Its activities concerned with policy formulating, strategic planning, board control over executive functions etc.

There are three committees of the Board of Directors.

  1. Finance Committee: Looks after various credit proposals submitted for   approval and look after related financial issues.
  2. Administrative Committee: Acts for supervision and review of overall executive’s functions of the bank. This committee also looks promotion of senior executives as well as appointment of the Management Director and the Deputy Managing Directors.
  3. Technical Committee: Which functions are analyzing and approving various technical aspects of the Bank emphasizing for particular sectors for business branch expansion organization subtraction computerization etc.

Management:

The management is headed by the Managing Director. He is assisted by the Deputy Managing Directors, General Managers and Departmental Heads in the Head Office. BASIC Bank is different in respect of hierarchical structure from other banks in that it is much more vertically integrated as far as reporting to the Chief Executive is concerned.

 

The Branch Managers of the Bank report direct to the Managing Director and, for functional purposes, to the Heads of Departments. Consequently, quick decision making in disposal of cases is ensured.

 Audit Committee of the Board of Directors:

 

It consists of three directors namely, Mr. Shakhawat Hossain, Mr. Bijoy Bhattacharjee, Mr. Md. Anwarul Islam, FCMA and Mr. Fakhrul Islam. The Committee reviewed the financial statements of the Bank from time to time and made significant contribution to the development of internal control system for conducting banking operations efficiently and in a disciplined manner. The Committee met four times during the reporting year.

 

Utilization of Fund:

BASIC Bank utilizes its funds in accordance with its organizational goals and corporate strategy. Main use is for lending to industrial and trade sectors. Maintenance of cash and statutory liquidity reserve with the Bangladesh Bank covers 20 percent demands and time liabilities. Placement of funds in Nostrums Accounts to handle foreign trade and investment in money market is also done as usual.


 Dividend:

In maintaining the competitive edge and creating a strong financial base the Board of directors decided to improve its equity by issuing bonus shares to its existing shareholders and accordingly, pleased to propose to its sole shareholders, the Ministry of Finance, subject to approval of the Annual General Meeting, 7 (seven) bonus share against each 20 (twenty) shares amounting to Tk. 509.36 million subject to approval of the Bangladesh Bank.

 

Resources & Capabilities:

BASIC Bank Limited is well prepared to and capable of meeting the demand for a broad range of banking services. It has got adequate resources, both human and physical, to provide the customers with the best possible services.

 

Physical and technological resources:

At present, there are thirty five conveniently located branches throughout Bangladesh. Ten branches in the capital city of Dhaka, six in Chittagong and one each in Gazipur, Sylhet, Narayanganj, Gopalganj, Bangshal, Narsingdi, Rajshahi, Rangpur, Sirajganj, Saidpur, Bogra, Khulna, Jessore, Chowmuhana, Moulvibazar, Comilla, Barisal, Khatunganj and Kushtia.

 

Major features of these branches are:

 

  • Fully computerized accounts maintenance.
  • Well decorated air conditioned facilities.
  • A fully operational computer network which is currently being implemented.
  • Have reliable and secured communication between the branches and the Head Office.
  • Money counting machine for making cash transactions easy and prompt.

Fifteen out of thirty five branches are authorized dealers of foreign exchange. This facilitates speedy disposal of transaction of export and import trade.

 

 Strategic Priorities

BASIC Bank has been strongly positioned in recent years to take up the opportunities of a growing and transforming Bangladesh marketplace. High standards of customer service must rank as the ultimate differentiator in the banking industry with great commitment to this important task in 2010. Apart from this, the strategic priorities would include:

 

  • Total Business Banking;

 

  • Technological Advancement

 

  • Operational Excellence

 

  • Trust and Team Spirit

 

  • Profitable Growth.

 

 Human Resources:

Human Resources Division plays a key partnership role in supporting the overall business direction of the Bank. Accordingly, they have recognized competency-based recruitment, training and performance management systems, and have a strong focus on providing leadership skills and succession planning to build a solid foundation for the future. The Bank’s ongoing success speaks to the excellence of its team. BASIC Bank has a well-diversified pool of human resources with high academic background. There is also a positive demographic characteristic – most employees are comparatively young in age yet rich in experiences. BASIC values its employees’ strong work ethic, deep loyalty to the Bank, and dedication to helping their customers, communities and each other.

The Bank is focusing on providing a stimulating corporate environment and attractive compensation packages. This facilitates challenging career opportunities and avenues for improvement. The Bank attaches a great importance to human resources and recruits regularly fresh graduates with outstanding academic achievements. At the end of the year under review total employee strength was 777.

Typical Departmentalization at the Branches:

The analysis of basic function of each department of BASIC BANK Ltd is mainly covered by the Head office. As I was in Mirpur Branch, I have mentioned only about the Mirpur Branch.

 Departments

 

 

General Banking    Loans & Advance   Foreign Exchange

 

Chapter – 3: Credit Management Scenario


Origin of Credit:

Imagine the very first credit transaction in history. It certainly took place hundreds of years ago, before the existence of bank, credit bureaus, or credit departments. Perhaps a farmer asked his neighbor for some seeds to grow a crop promising to give the lender some of his produce. Perhaps a family breadwinner simply needed food for his or family and promised to repay with a bonus to compensate the lender for this generosity. The prospective lender would have been surprised and apprehensive. An element of trust would be needed, of course, and some guarantee of repayment would be nice.

 

If a farmer or businessperson obtains the means to produce employment opportunities and products, certainly the community would benefit. Loans and other credit programs have provided these opportunities throughout history. Financial institutions developed to put funds from savers into the hands of borrowers who used this value to create economic value. Credit has contributed to economic growth of countries throughout the world as it makes goods and services available to consumers, businesspersons, and governments.

 

Although the basic tasks of evaluating risk, extending credit, and collecting payments have not changed, the mechanisms for marketing and conducting credit programs have changed dramatically over the years. Computers using sophisticated credit scoring systems speed up the disbursement and collection of account balances. Credit bureaus maintain vast database of information about borrowers available online through computer networks. Lenders continue to find more ways to offer more credit options to businesses and consumers.


Meaning of Credit:

The word credit is derived from the Latin word “Credo”, meaning I believe. It is usually defined as one’s ability to but with a promise to pay. From the banker’s point of view, Credit is the confidence of the lender on the ability and willingness of the borrower to repay the debt as per schedule of repayment. For this, banking is termed as business of confidence.

Credit is a contractual agreement, in which a borrower receives something of value now, with the agreement to repay the lender at some date in the future. One of the basic functions of bank is deposit extraction and credit extension. It helps this kind of organizations to earn around 80% of the total revenue. Managing credit operation, thus, is the crying need for any bank.

Before allowing credit facility a banker should be satisfied that the applicant qualifies the following five essentials which may be termed as 5 C’s namely,

  1. Character       – Borrowers Integrity, Honesty and Intention to repay the loan money.
    1. Capacity        – Borrower’s business ability, particularly profit making report.
    2. Capital           – Financial strength to cover a business risk.
    3. Conditions    – It is general business condition.
    4. Collateral      – Borrower’s ability to produce additional securities.

Importance of Credit:

 

Credit plays a very vital role in national economy in the following ways-

 

  1. It provides Capital Investment opportunities and working capital support for industrialization.
  2. It helps to create employment opportunities.
  3. Credit controls almost all kinds of production activities of the country.
  4. People’s purchasing power increases for it.
  5. It brings social equity.
  6. Cash generation occurs for its successful performance.
  7. Business cycle can run well only by the help of lending system.
  8. Economic Stabilization
  9. Raise standard of living

Factors Related to Credit:

 

  • Risk
  • Time
  • Interest rate
  • Security or Collateral
  • Operating Expense
  • Legal Considerations
  • Inflation
  • Finance Charge

 

Loans and Advances:

 

The loan portfolio of BASIC Bank Ltd. consists of industrial term lending and working capital support, commercial loans, Short Term Loans & Work Order financing, micro credit scheme, special loan scheme (BASIC Kalyani) for women entrepreneurs, and trade financing, import financing such as L/C opening, Loan against Imported Merchandise (LIM) and Loan against Trust Receipts (LTR) etc, and exporting financing such as Back-to Back L/C, local & foreign purchase, Packing Credits (PC), Export Cash credits (ECC) and so on.  The size of BASIC’s loan portfolio increased by 15.84% to Taka 46,341.513 million in 2010 compared to Taka 29,261.534 million in 2009.

 

Industrial Credit:

BASIC Bank’s services are directed towards the entrepreneurs in the small industries sector. A small industry, as per Industrial policy 1999 approved by the Cabinet, has been defined as an industrial undertaking whose total fixed investment is less than Tk.100 million.

The industrial loan reflected a significant growth of 23.91 percent over the previous year. Total outstanding industrial loans including term and working capital stood at Taka 17,226.40 million at the end of 2008 compared to Taka 13,901.40 million of 2007. Total outstanding term loan stood at Taka 6,206.75 million as on December 31, 2008 compared to Taka 5,055.58 million in 2007 reflecting a growth of 22.77 percent. The outstanding working capital finance extended to industrial units stood at Taka 11,784.08 million at the end of the reporting period compared to Taka 9,525.98 million in 2007. Growth rate here was 23.70 percent. BASIC Bank’s services are specially directed towards promotion and development of small industries. Its exposure to small and medium industries sector accounted for 56.52 percent of the total loans and advances. During the year total of 87 projects were sanctioned term loan. Out of which 26 were new and the rest were under BMRE of the existing projects. As on 31 December 2008, 801 projects were in the portfolio of the bank. The textile sector including garments being one of the major contributors to national economy dominated the loan portfolio of the Bank. Other sectors financed include engineering; food and allied industries; chemicals, pharmaceuticals and allied industries; paper, board, printing and packaging; glass; ceramic; and other non-metallic goods and jute products. Recovery rate of project loan was 90.81 percent.

 

Year

Million Taka

2006

12243.56

2007

13901.40

2008

17226.40

2009

17816.54

2010

26356.53

2011

Outstanding at year end

 

Commercial Credit:

The Bank also supports development of trade, business and other commercial activities in the country. It covers the full range of services to the exporters and importers extending various facilities such as cash credit, export cash credit, packing credit, short term loans, local and foreign bills purchase facilities. As on December 31, 2010, total outstanding commercial loans stood at Taka 13,439.17 million compared to Taka 10877.17 million in 2009.

Micro Credit:

BASIC Bank also provides micro credit to the poor for generation of employment and income on a sustainable basis, particularly in urban and suburban areas. At the end of 2010, total amount of Taka 1926.05 million remained outstanding as against Taka 1072.05 million in 2009. Recovery rate during this period remained at a highly satisfactory level of 97.00 percent (approx).

 

Year

Million Taka

2006

359.24

2007

680.13

2008

764.46

2009

1072.05

2010

1926.05

2011

Outstanding at year end

 

Foreign Trade:

The bank achieved substantial growth in export in 2010 and the performance of the bank in import business was also satisfactory. The Bank handled total export business of Taka 19887.70 million and import business of Taka 33976.60 million in 2010. The export and import business decreased by (10.70) percent and grew by 24.18 percent respectively. Major items of exports were garments, jute products, textile, leather etc. Items of import included mainly industrial raw materials, garments accessories, capital machinery, food items and other essential commodities.

The Bank became a proud member of SWIFT (Society for Worldwide Interbank Financial Telecommunication) that would pave the way to achieving uninterrupted communication related to banking for international trade business and fund transfer

 

Year

Import Finance

Export Finance

2006

11097.23

4094.96

2007

17804.27

15463.74

2008

21266.57

16794.96

2009

27359.77

22270.87

2010

33976.60

19887.70

2011

Outstanding at year end

Outstanding at year end

 

Classified Loan:

Classified (non-performing) loans and advances was 4.83% at the end of the year under review which was 4.59% in 2009. In absolute term classified loans and advances stood at Taka 1,412.34 million in 2010 from Taka 1,251.21 million in 2009.

Additional provision made in 2010 was Taka 231.70 million against classified and unclassified loans and advances and off-balance sheet exposure. Total cumulative provision made for loans and advances amounted to Taka 1,048.86 million as on December 31, 2010. During the year 2010 no loan was written off. However, an amount of Taka 0.07 million was recovered against written-off loans.

 

Income:

The Bank’s total income was Taka 5,162.30 million in 2011 compared to Taka 5,060.29 million in 2010. Interest income from loans and advances increased to Taka 3,877.17 million in 2010 from Taka 3,829.43 million in 2009. Average yield on lending was 11.72%.

 

Income on investment increased to Taka 761.82 million in 2010 against Taka 674.07 million in 2009 while other operating income increased to Taka 68.09 million in 2010 against 67.61 million in 2009. Besides, investment in higher rates long term Treasury bond and increased amount of investment attributed to such growth. The amount of commission was Taka 455.22 million in 2010 compared to Taka 489.18 million of previous year.

 

Loan Products & Services of Basic Bank:

  • Term loans to industries especially to small-scale enterprise.
  • Full-fledged commercial banking services including collection of deposit, short-term trade finance, working capital finance in processing and manufacturing units and financing   and facilitating international trade.
  • Technical consultation and/or financial support to Small Scale Industries (SSIs) I order to enable them to run their enterprise successfully.
  • Micro-credit to the urban poor linkage with Non-Government Organizations (NGOs) with view facilitating their access to the formal financial market for mobilization of funds.
  • In order to perform the above tasks, BASIC works closely with the clients, the regularly authorities the shareholders Government of Bangladesh (GOB), banks and other financial institution.
  • To empower the women the bank provide ‘BASIC KALYANI’ that sanction the loan to woman entrepreneurs, as it’s a part of SMI but it’s specially designed for women.

Credit Policy:

BASIC was established to provide term loan, working capital support and other financial assistance (including all kinds of banking facilities) to accelerate the pace of development to small industry of Bangladesh. It is mandated in the Memorandum & Articles of Association of Bank to advance a minimum of 50% of the loanable fund to the small industry sector. As a broad policy objective in respect of small industry financing the Bank undertakes the following tasks:

  • Extend financial assistance to small industries in private sector.
  • Extend financial assistance to micro enterprises and collaborate with other institutions engaged in financing and developing such enterprises.
  • The financial assistance shall include short term working capital loan, medium term and long term capital finance to viable new SSI projects and BMRE of SSI.
  • Undertake project promotion to identify profitable area of investment.
  • Cooperate and collaborate with institutions entrusted with the responsibilities of promoting and aiding SSI sector.

At the time of extending credit BASIC Bank Limited follows certain principles. Main principles of loans and advances are as follows:

i.            50% of total loans and advances will be made to small & medium industry sector. All lending will be adequately secured with acceptable security and margin requirements as laid down by the Head Office Credit Committee.

ii.            Single borrower exposure of the bank will be limited to 10% of its paid-up capital.

iii.            The Bank will not incur any uncovered foreign exchange risk (currency exposure) in the lending of funds.

iv.            No term loans will be approved for the commercial sector. Exceptions will be rare and will require approval of the Head Office Credit Committee.

v.            End use of term loan and working capital facilities will be closely monitored to ensure that the funds are used for the purpose for which they were advanced.

vi.            Loans and advances shall be normally funded from customers’ deposits of permanent nature, and not out of short term temporary funds or borrowings from other banks or through short term money market operations.

vii.            The aggregate outstanding loans and advances (excluding loans and advances covered by specific counter finance arrangements) will be dispersed according to the following guidelines (subject to item 10 above ) whereby 50% of lending being to small industry section):

  • Short term commercial lending. This category includes working capital to hotel and tourism.
  • Facilities to Shipping and Transport (facilities for the purchase and construction of ships / vessels and other modes of transport both by land and air).

viii.   Spreads over cost of funds on loans and advances and commissions and fees on other transactions should be commensurate with the rating of the borrower, quality of risk and the prevailing market conditions.

Credit Evaluation will include:

  • Prevalent credit practices in the market place.
  • Credit worthiness, background and track record of the borrower.
  • Financial standing of the borrower supported by financial statements and other documents.
  • Legal jurisdiction and implications of applicable laws.
  • Effect of any applicable regulations and laws.
  • Purpose of the loan / facility.
  • Tenure of the loan / facility.
  • Viability of the business proposition.
  • Cash flow projections of the project.
  • Quality and adequacy of security, if available.
  • Debt servicing capacity of the borrower.
  • Risk taking capacity of the borrower.
  • Entrepreneurship and managerial capabilities of the borrower.
  • Reliability of the sources of repayment.
  • Volume of risk in relation to the risk taking capacity of the Bank.
  • Profitability of the proposal to the Bank or company concerned.
  • No credit shall be extended to a Customer Entity that exceeds in total commitment more than 10% of the Bank’s paid-up capital and free reserves. Exception will require approval of the Board of Directors.

Principles of Lending:

Banks are profit oriented organization for which a bank invests its funds in many ways to earn income. They are required to follow certain basic principles of lending such as-

  1. Safety – “Safety is the First” which depends upon

i.            The security and its value offered by the borrower and

ii.            The eligibility of the borrower to repay the loan with interest.

  1. Liquidity – Ability of an asset to convert in to cash without loss and within a short time to meet depositor’s demand for cash.
  2. Profitability – A Bank must employ its funds in such a way that they will bring adequate return for the bank which should be more than cost of the funds.
  3. Purpose – The purpose should be productive so that the money not only safe but also provides a definite source of repayment.
  4. Spread – Diversification of advance.

Lending Criteria of BASIC Bank:

The entrepreneurs of small industry concern/project requiring financial assistance from BASIC need to fulfill the following criteria:
  • Standard loan application form is issued only after the promoter is found credit worthy and acceptable after evaluation of information submitted in First Information Sheet.
  • Viability of each and every project recommended for financing is subjected to thorough scrutiny and detailed appraisal. The report must cover the basic areas of project viability.

Viability of the project:

The project should be viable from organizational, technical, commercial, financial and economic points of view.

  • In appraisal foremost importance is attached to the capability, earnestness, and financial conduct past, present and expected future.
  • A project in crowded sector to be avoided. Innovative projects and projects having both domestic and export market shall get preference.
  • Bank shall make out list of preference sectors of investment every year.
  • Project location should have necessary infrastructural facilities and environment aspect shall be carefully examined.
  • Project land should be free and unencumbered, Leasehold land should have sufficiently (at least 15 years) long tenure of lease.
  • Building should be well planned, well laid to withstand weathering condition of Bangladesh.
  • Project should be designed with appropriate and balanced machinery.
  • Technology transfer in case of borrowed know how should be ensured.
  • Market prospect and potential should be fully assured at competitive prices.

Technical Viability:

  • Technology transfer in case of borrowed know-how ought to be ensured.
  • Building should be well planned and well constructed.

Commercial Viability:

  • Market prospect and potential for the product has to be fully assured at competitive prices.
  • Marketing channel for the product should be accessible to the entrepreneur.

Financial Viability:

  • Return on Average Capital and Equity at the optimum level of production should not ordinarily be less than 15% to 20% respectively.
  • There should be reasonable debt equity ratio as determined by the Bank on individual case basis.
  • Debt service coverage ratio should be at least 2.5 times at the optimum level of production. IRR should preferably be not less than 20 percent.

Economic Viability:

The project should ensure benefit to the national economy and create sufficient employment opportunity and be environment friendly.

Pricing of Loan

 

Pricing of loan is a great important element in banking business. Because through pricing, bank usually create margin/profit. So it is to be determined carefully. In pricing, four components are to be calculated prudently otherwise pricing of that loan will create a definite loss for the bank. The components are:

 

i.      Interest Expense or Cost of Fund: The interest to be given to the depositor and to central banks for borrowing.

ii.      Administrative Cost

iii.      Cost of Capital: Return expected by the investors for their capital invested in the Bank.

iv.      Risk Premium

 

Addition of the first three elements will provide the “Prime rate” beyond which a bank can never go for lending. Magnitude of the risk premium creates margin for the bank. And this rate of risk premium may vary from person to person and even from sector to sector depending upon the value or importance of the client and the prospective priority of the sector. Once upon a time, it was dictated by the Central bank but now a day, in compliance with the open market operation this power has been delegated to the enlisted commercial Banks.

 

Credit Design:

Credit planning implies efficient utilization of scarce (loan able fund) to generate earning for the bank. Constituents of credit planning are: forecasting of loan able fund likely to be available in a particular period of time and allocation of the same amongst alternative avenues in a prudent way.

 

Credit planning has got a serious importance because –

Loan able fund comes out of deposit mobilized from the people. So safety of people’s money should be ensured carefully. Unplanned lending may create harm in two ways; firstly, excess lending may create liquidity crisis for the bank. Secondly, too much conservative lending may make the loan able fund idle. Idle but cost bearing fund again incurs operating cost for the bank.

 

Excess liquidity led by unplanned inadequate lending push the profitability to decline. Planned credit helps to maintain conformity with the national priority. Unplanned credit may upset the total economic stability from macro point of view either by making inflation or deflation.

 

Nature and Purposes of Various Credit facilities:

As the bank mobilizes savings from the general people in the form of deposit, the most important task of it is to disburse the said deposit as loan or advance to the mass people for the development of commercial, industrial, who are in need of fund for investment.

 

The profitability of the banks depends on the efficient manner and avenues in which the resources are employed. The BASIC Bank Limited has made so far efficient use of the deposit and has the classified rates under control. The Bank disburses loan in different form. It varies in purpose wise, mode wise and sector wise.

 

Depending on the various nature of financing, all the lending activities have been brought under the following major heads

Loan

Long Term                                        Short Term

Industrial Loan                                  Commercial Loan

 

The varieties used by BASIC Bank are briefly described below with the common terms and condition and performance in each mode. BASIC offers loans and advances to projects including RMG projects in the following mode:

 

  • Overdraft (OD): It is a continuous advance facility. By this agreement, the banker allows his customer to overdraft his current account up to his credit limits sanctioned by the bank. The interest is charged on the outstanding amount not on the sanctioned amount. OD is of two types practiced in BASIC Bank Limited.

 

  • Secured Overdraft (SOD): BASIC sanctions SOD against different securities like FDR, Sanchaypatra and Work Orders.

 

  • Temporary Overdraft (TOD): It is given to the valued customers only. It is not that much secured. Usually it forwards without any security or sometimes exercise lien against the instrument, deposited in the bank. It is given by the branch manager discretionary power.
  • Cash Credit (CC): By this arrangement, a banker allows his customer to borrow money up to a certain limit. CC is a favorite mode of borrowing by traders, industrialists, etc. for meeting their working capital requirements. It is operated like overdraft account.

 

Based on charging securities, there are two forms of cash credit:

 

  • Cash Credit (Hypothecation): Hypothecation is a legal transaction whereby goods are made available to the lending banker as security for a debt without transferring either the property in the goods or possession. The banker has only equitable charge on stocks, which practically means nothing. It is given against registered mortgage of land and building, hypothecation of goods and personal guarantee of directors.
  • Cash Credit (Pledge): Pledge is the bailment of goods as security for payment of a debt or performance of a promise. Transfer of possession in the judicial sense. In case of pledge goods the bank acquires the possession of the goods or a right to hold goods until the repayment for credit with a special right to sell after due notice to the borrower in the event of non repayment.

 

  • Loan (General): It is given against personal guarantee, hypothecation of goods and land and building.

 

  • Bills Portfolio: Branch purchases demand bills of exchange that are called ‘Draft’ accompanied by documents of title to goods such as bill of lading, railway receipt, and truck receipt. The purchase of bill of exchange drawn at an issuance, i.e. for a certain period maturing on a future date and not payable on demand or sight.

 

  • Term Loan: BASIC bank is advancing both short and medium term credit to the industrial sector on the basis of their capital structure, constitution and liquidity consideration. It is given against land and building along with machinery, personal guarantee of directors and hypothecation of raw materials.
  • Export Cash Credit: Advance allowed as cash credit for processing goods for export. The advance is usually adjusted form export proceeds. The term PC (Packing Credit) is also used for such advance.

 

  • Loan Against Imported Merchandise (LIM): Loan allowed against imported merchandise and storing the same in bank’s custody. The bank through its approved clearing agent clears the merchandise. The advance is adjusted by delivering the goods against payment by the importer.

 

  • Local Bill Purchase (LBP): Advance allowed against bills drawn under an inland L/C opened and accepted by a local bank. Such local L/C is usually opened as back to back L/C against export L/C.

 

  • Payment against Documents (PAD): The bank that establishes the L/C is bound to honor its commitment to pay for import bills when these are presented for payment, if drawn strictly in terms of the letter of credit. In fact, the amount stands as advance to the importer, which is adjusted by delivery of documents against payment or by allowing post import finance such as LIM or LTR.

 

  • Foreign Bill Purchase (FBP): Post export credit allowed against export bills. If the bills are drawn as per terms of the L/C, the bank purchases the same and pay equivalent amount of the bill to the credit of the client’s account. The advance is adjusted on realization of export proceeds through foreign agent.

 

All credit proposals which are in excess of the Branch Managers Credit approval authority require prior approval of the Managing Director / Head Office Credit Committee. If the amount is not within the approval authority the Managing Director / Head Office Credit Committee the proposal required to be placed before the Board of Directors for approval.

 

Credit Appraisal Procedure of BASIC Bank:

 

There is no hard and fast procedure of managing credit, yet is should follow the instructions of the Bangladesh Bank, Central Bank of Bangladesh and the Circular of Head Office from time to time. The first step of credit proceedings is the request for credit from the clients. Then scrutinizing and collection of information from primary and secondary sources take place. Credit appraisal and evaluation is the most important part of credit management. On the basis of evaluation approval is given by the higher-authority with certain conditions to be fulfilled. Sanction of credit is done by the sanctioning officer, who has the authority to sanction the Credits. After fulfilling the conditions the credit is disbursed. Necessary steps should be taken to minimize the risk and increase the return of the Bank. Lending risk analysis is also done in case of credit above Tk.50 lac.

Selection of Borrower:

Selection of borrower is a very significant part of a credit decision. The borrower should be diagnosed prudently. Degree of risk has an inverse relationship with the selection of borrower. Selection of right borrower reduces the risk of non-repayment of the loan. To the contrary, degree of risk of non-repayment increases with the selection of wrong borrower. In our country, the huge volume of non-performing loan is mainly the result of failure in selecting right borrower. So, if it is found that, line of business is prospective and profitable but the potential borrower is not right one, the proposal should not be entertained. There are some parameters for selection of a borrower. Some ‘C’s commonly expresses the parameters. And thus the criteria for selection of a borrower are popularly known as 4 C’s such as:

 

Character: Market reputation, morality, family background, and promptness in repayment.

 

  1. i.     Capacity:  Ability to manage the business, ability to employ the fund in the right way, ability to overcome unforeseen problems

 

  1. ii.   Capital: Equity strength, assets & properties.

 

iii. Collateral: The easy marketability of the property given as security

 

  1. iv.  Condition: Overall business condition

Credit Risk Grading Manual:

 

Based on all the information as listed in the preceding section, the credits department prepares a Credit Risk Grading (CRG) Score sheet for the borrower. Credit Risk Grading is a standardized tool for the banker to grade the risk of a potential borrower, in orther to determine their credit worthiness. The CRG is calculated on an overall score of 98. Based on a  CRG calculation,  a score of 75 or more is regarded as “Acceptable“, in which case the loan proposal of the potential borrower is considered for further processing.

The thematic details of a typical CRG Manual are as follows:

Risk Rating

CRG Score

Grade

Definition

Superior – Low Risk

Fully Cash Secured

1

Facilities are fully secured by cash deposits, government bonds or a counter guarantee from a top tier international bank. All security documentation should be in place.
Good – Satisfactory Risk

85+

2

The repayment capacity of the borrower is strong.The borrower should have excellent liquidity and low leverage. The company should demonstrate consistently strong earnings and cash flow and have an unblemished track record. All security documentation should be in place
Acceptable – Fair Risk

75-84

3

Adequate financial condition though may not be able to sustain any major or continued setbacks. These borrowers are not as strong as Grade 2 borrowers, but should still demonstrate consistent earnings, cash flow and have a good track record. A borrower should not be graded better than 3 if realistic audited financial statements are not received. These assets would normally be secured by acceptable collateral (1st charge over stocks / debtors / equipment / property). Borrowers should have adequate liquidity, cash flow and earnings.
Marginal – Watch list

65-74

4

Grade 4 assets warrant greater attention due to conditions affecting the borrower, the industry or the economic environment. These borrowers have an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and/or inconsistent earnings. Facilities should be downgraded to 4 if the borrower incurs a loss, loan payments routinely fall past due, account conduct is poor, or other untoward factors are present.
Special Mention

55-64

5

Grade 5 assets have potential weaknesses that deserve management’s close attention. If left uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower. Facilities should be downgraded to 5 if sustained deterioration in financial condition is noted (consecutive losses, negative net worth, excessive leverage), if loan payments remain past due for 30-60 days, or if a significant petition or claim is lodged against the borrower. Full repayment of facilities is still expected and interest can still be taken into profits.
Substandard

45-54

6

Financial condition is weak and capacity or inclination to repay is in doubt. These weaknesses jeopardize the full settlement of loans. Loans should be downgraded to 6 if loan payments remain past due for 60-90 days, if the customer intends to create a lender group for debt restructuring purposes, the operation has ceased trading or any indication suggesting the winding up or closure of the borrower is discovered. Not yet considered non-performing as the correction of the deficiencies may result in an improved condition, and interest can still be taken into profits.
Doubtful and (non-performing)

35-44

7

Full repayment of principal and interest is unlikely and the possibility of loss is extremely high. However, due to specifically identifiable pending factors, such as litigation, liquidation procedures or capital injection, the asset is not yet classified as Loss. Assets should be downgraded to 7 if loan payments remain past due in excess of 90 days, and interest income should be taken into suspense (nonaccrual). Loan loss provisions must be raised against the estimated unrealizable amount of all facilities. The adequacy of provisions must be reviewed at least quarterly on all non-performing loans, and the bank should pursue legal options to enforce security to obtain repayment or negotiate an appropriate loan rescheduling. In all cases, the requirements of Bangladesh Bank in CIB reporting, loan rescheduling and provisioning must be followed.
Bad & Loss(non-performing)

<35

8

Assets graded 8 are long outstanding with no progress in obtaining repayment (in excess of 180 days past due) or in the late stages of wind up/liquidation. The prospect of recovery is poor and legal options have been pursued. The proceeds expected from the liquidation or realization of security may be awaited. The continuance of the loan as a bankable asset is not warranted, and the anticipated loss should have been provided for. This classification reflects that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future. Bangladesh Bank guidelines for timely write off of bad loans must be adhered to.

 

[A sample CRG score sheet of one of the most valued clients of BASIC Mirpur branch, M/S. National Tubes Limited – a public listed company, is enclosed in the annexure.]

 

Earning Asset:

Earning Asset portfolio of the Bank consists of the followings:

a. Loans and Advances

b. Investment in Government Securities

c. Investment in Equity Shares

d. Investment in other approved Securities

e. Investment in Call and Term Placement with Banks and Financial Institutions

f. Balance with Other Banks (STD account, FC account)


Chapter – 4: Procedure of Credit Approval


Procedures for the Applicant:

 

Credit Application:

 

Bank provides credit facilities to the people who are credit worthy to the bank. Credit worthiness depends on the credibility, financial capability, and feasibility of the project and management ability of the credits to earn profits. When bank is satisfied with all these then the client is provided with the requested credit. At this point it should be mentioned that the client has to go through an interview where his credit potentiality is justified through critical observation. When credit officer is satisfied with the customer he is asked to submit an application and to fill up a form with specific details.

 

Guidelines for Submission of Loan Application Form:

 

The borrower is provided with an instruction paper, which help him or her to prepare the loan proposal properly. Information on loan proposal should be furnished in prescribed:

  • Information Sheet (FIS) in triplicate properly typed and each page / set should be duly sealed and signed by the applicants (s) / sponsor (s).

 

  • Complete information should be furnished in respect of each item supported by documentary evidences, wherever necessary, to avoid further reference / delay rejection of the application.

 

  • The Bank reserves the right to reject the application forthwith if the information given in the form is incomplete and not fully documented in all respects.

 

  • Information may be provided in additional sheets of papers, if required. However ensure that all the pages and annexure are signed under official seat. Also ensures that all the facts / evidences have been enclosed properly including three feasibility reports detailed study reports on loan proposal.
  • The clients are required to deposit with the application the project examination fee and also a portion of the equity at the following rate either by cheque or pay order or demand draft drawn in favor of BASIC and payable in any of the scheduled Banks within the country. Project examination fee:

 

Tk. 10,000 only in respect of projects having fixed costs above Tk.40.00 lac.

Tk. 4,000 only in respect of projects having fixed cost upto Tk. 40.00 lac

 

  • Memorandum and Articles of Association together with the certificates of registration incorporation and commencement of business of the company duly certified by the managing director of the company should be submitted. In case of partnership, the deed duly certified by the managing partners of the firm should be submitted.

 

  • No objection certification from the appropriate authorities for setting up the project on land, wherever required, should be submitted. Title deed of land, together with non encumbrance certificate from the District Registrar or Sub Registrar should be submitted.
  • Certificates from the surveyor for determining the price of land of the proposed project price of adjacent land sold during last 3 years should be submitted. Also to be submitted are site / mouza map.

 

  • Machinery layout plan, price quotation of 3 suppliers’ together with illustrated brochures and literatures should be submitted for both imported and local machinery.
  • Consent letter from Power Development Board / Rural Development Board / Gas Authority / Pollution Control Board should be submitted wherever required.

 

  • Soil test / water test report (if required).

 

  • Nationality certificate along with attested photographs of the directors / partners proprietor should be submitted.

 

  • Declaration of assets and liabilities of the proposed directors / partners / proprietor. Declaration about payment of income tax should be submitted.
  • Letter addressed to the prime banker of the company firm / person should be issued with a copy to the BASIC as per given annexure.

 

  • Give reasons for seeking additional loan for expansion balancing / replacement / of the existing unit. Also provide information relating to the existing line of products, rated and actual annual production capacity for the past operating years, sales performance and financial position of the company/firm.

 

Procedures for the Bank:

Procedure for Processing Loan Application:

In setting up procedures for the evaluation / approval of small projects the length of processing time becomes a significant factor. Compared to other financial institutions’ usual two months average processing time for its medium and large loan program, the processing / approval time for small industry loans remains well below the above processing time because of its lesser detailed studies as well as the bank considers that small entrepreneurs look for their sources of credit at their time of need.

  • The processing / approval time for small industry loan is not more than two months from the date of receiving complete application form.
  • Application in prescribed form is received in triplicate, duly filled in, and sealed and signed by the sponsoring directors along with their attested photographs duly affixed in the space provided for.
  • Draft layout plan of the proposed building and the estimate for construction cost is obtained.
  • In case of the project to be located in any BSCIC Industrial Estate, BSCIC’s letter of consent, particulars of the land, copy of lease deed is obtained.
  • For location of industry in other areas, permission / no objection for setting up the small industry is obtained from the appropriate authorities.
  • Utility agency’s letter of consent for providing necessary utility services to the unit to be obtained.
  • Detailed credit report on the sponsors / project is prepared i.e. the bank shall carry out detailed credit investigation on the promoters.
  • Tentative list of machinery / work with detailed specification should be obtained supported by 3 price quotation.
  • The individual project appraisal report for Small Scale and Cottage industry may not be very elaborate and exhausted. However it covers the basic areas of project viability.
  • Joint report between the Bank and the borrower is prepared for informal sector. The bank sometimes seeks advice from a panel of experts whose services may be hired by the bank as and when required in specific cases.

Scrutinizing and Collection of Information:

In case of clients who have previous record of taking credit facilities, their in-file records are examined to see whether the client has a good record of payments in time.

    I.  Information gathered through direct inquiry:

Direct inquiry one of the common methods of obtaining information to verify facts presented on the application of during the interview of an applicant for an initial credit transaction. A careful distinction is made between obtaining credit information directly from sources having such facts and between buying somewhat similar credit data in the form of prepared reports from the credit reporting bureaus (CIB, BB) and credit rating agencies.

 

  II.        Information gathered through in-file ledger fact:

In-file ledger facts are one of the most important sources of information available to credit committee whether to accept or reject a larger amount of credit from an established credit customer. From the in-file records, credit analysts have at their disposal the experience of the concern with the customer. They know the customer’s payment habits, the complaints registered, and the collection efforts, if needed to keep the customer in line with the established terms.

 

Preliminary Screening of a Credit Proposal:

 

Screening means critical diagnosis of a credit proposal at the very initial stage. It should be made carefully just after the proposal comes to the bank. At the time of screening of a credit proposal the preliminary screening should be done on the following premises:

  • Quality of management and the entrepreneurial background of the sponsors
  • Equity strength i.e., the own capital positions
  • Position of assets & properties
  • Line of business, it’s future prospects and the existing position of the respective industry
  • Required technology, machinery, equipment and their availability
  • Location, whether the infrastructural facilities are available
  • Potential contribution to the overall economic development of the country
  • Security proposed to be given and the originality of the title of documents

Analyzing the above matters, it is to be convinced that the credit proposal satisfies all the key elements of a sound lending policy such as:

 

  1. Safety of fund
  2. Security (easy marketability of the property given as security)
  3. Liquidity (the tenure of the loan)
  4. Profitability
  5. Diversity
  6. National interest

 

Credit Appraising & Presentation of Credit Proposal for Approval:

 

When credit officer is satisfied with his credit worthiness, financial capability, management ability and feasibility of the project through credit appraisal of clients in a prescribed form, he can hope for credit from the bank. Credit appraisal is done through ‘credit appraisal form’. Ratio analysis is given importance in case of project finance. But most of the medium quality loans are given on the basis of financial capability of repaying and credit worthiness of the client. Lending risk analysis is done in a prescribed form in case of large amount of loan, above 50 Lac.

 

Credit officer prepares a credit proposal along with the prescribed ‘Credit Proposal Form’. Credit officer measures the risk associated with the credit facility. No credit proposal can be put for approval unless there has been a complete written analysis. It is absolute responsibility of the Proposing Officer to ensure that all necessary proposal documentation have been collected before the facility request is sent to the Sanctioning Officer.

Approval of Credit by Higher Authority:

Branch Credit Committee:

Branch credit committee to be headed by the Branch Manager, other members to be selected by the manager in consultation with Head Office.

 

Head Office Credit committee:

Head office credit in accordance with authority established and delegated by the Board of Directors.

  • Reviewing, analyzing and approving extension of credit in accordance with authority established and delegated by the Board of Directors.
  • Evaluate the quality of tending staff in the bank & take appropriate steps to improve upon.
  • Recommending credit proposal to the Executive Committee/Board of Directors which are beyond the delegated authority.
  • Ensuring, that all elements of Credit application i.e. Forms, Analysis of statements and other papers have been obtained and are in order.
  • Confirming that the transaction is consistent with existing loan policy and Bangladesh Bank guidelines & if not the Committee may prepare a recommendation from an exception to or change in policy for consideration by the Executive Committee/Board of Directors.

 

Sanction of Credit:

After getting the approval from the Head Office, the branch issues the sanction letter to the borrower. A sanction letter contains the following particulars amongst other details: name of the borrower, managing partner, and nature of facility, amount, and expiry, rate of interest, purpose, security and the following terms and conditions:

  • Before availing the loan all documentation formalities must be completed. Registered power of attorney in favor of BASIC Bank to sell the mortgaged property without the consent of the court or owner of the lender.
  • DP note and other usual charge documents / undertakings etc. duly stamped must be signed and submitted to the authority before the disbursement of loan.
  • The loan shall be governed by all other terms and conditions as per policy and practices of the bank that will be applicable for the sanction to safe guard the interest of the bank.
  • The bank reserves the right to amend, modify or withdraw any or all the terms of the loan at any time without assigning any reason whatsoever or to terminate / call back the loan facility at any time for which bank or its official cannot be held responsible for any loss for such cancellation of the loan.
  • The borrower receives the letter and returns a copy of this letter duly signed by him as a token of having understood and acceptance of the terms and conditions above.

 

Norms maintained in sanctioning of credits are described below:

 

  • Credit will be sanctioned and disbursed strictly in terms of the approved Credit Operational Manual of the Bank and Head Office Circulars issued from time to time.
  • All norms informed through the Circulars of Credit Division in particular and all other relevant circulars in general, which are to be followed meticulously while exercising power.
  • Credits will be subject of Bangladesh Bank restriction.
  • The party to whom credit will be allowed should be as far as possible within the command area i.e. Area of operation of the Branch. Deviations, if any are to be explicitly explained in the proposal.
  • No Sanctioning Officer can sanction any credit to any of his near relations and to any firm/company where his relations have financial interest. Such cases should be sent to the Head Office.
  • All Sanctioning Officers maintain a Sanctioned Register for recording serially all the credits sanctioned by him. Sanctioning officer will accountable for non-recovery due to his injudicious decision.
  • All approval of credit facilities must be conveyed under dual signature. Ideally both the signatories must have the required lending authority. If however, two lending officers of the required lending are not available, one of the signatories must have the required authority.

 

Credit File Maintenance:

The credit file for each facility shall contain all information necessary to facilitate ready monitoring of that facility. Primary items in Credit File include:

  • Credit application and Credit approval notes/analysis. Evidence of credit approval and data upon which approval was granted together with any comments, if appropriate.
  • Copy of sanction and loan agreement. A checklist along with copies of all legal & banking documents obtained / to be obtained.
  • All supporting data such as financial statements and analysis, references, credit investigation results, CIB & other Bank reports and notes of all discussions with the borrower and other relevant parties with paper clipping.
  • Correspondences call reports, site visit reports, stock report etc. each credit file shall be maintained in a secured location and where access restricted to authorized personnel’s only. Copies of the information may be kept where regular access is required.

 

Credit Monitoring and Follow up:

 

Monitoring is tracking the risk aspect of the loan and advance portfolio to be sure that the portfolio is complying with the criteria set down in the credit policy. For analyzing and monitoring the loan portfolio branch manager is the main responsible authority.

Periodic Review and Follow-up should aim at ensuring:

  1. Terms of approval has been maintained.
  2. Conduct (turnover, regularity of repayment etc.) of the borrowing accounts during the period under the review has been satisfactory or as expected.
  3. Continuing value of the collateral is adequate.
  4. There are no adverse trends in market, economic and political conditions which may endanger the reliability of the facility.
  5. Business reciprocity offered and received is commensurate with the facilities allowed.
  6. Earning from the account is cost effective (i.e. adequate to meet business cost of funds and leave sufficient margin for adequate risk reward, overheads and profits).
  7. Borrowers business is being satisfactorily conducted as reflected through a review and analysis of the financial and operating statements.
  8. Terms of approval has been maintained.
  9. Conduct (turnover, regularity of repayment etc.) of the borrowing accounts during the period under the review has been satisfactory or as expected.
  10. Continuing value of the collateral is adequate.
  11. There are no adverse trends in market, economic and political conditions which may endanger the reliability of the facility.
  12. Business reciprocity offered and received is commensurate with the facilities allowed.
  13. Earning from the account is cost effective (i.e. adequate to meet business cost of funds and leave sufficient margin for adequate risk reward, overheads and profits).
  14. Borrowers business is being satisfactorily conducted as reflected through a review and analysis of the financial and operating statements.

 

Factors Analyzed in Loan Monitoring:

 

Credit policy of the BASIC Bank Limited has set forth the guidelines that must be followed in the time of loan review. After getting the review of the loan portfolio from the branch level the assigned officer of the head office credit department starts analyzing and preparing the report. The following factors are taken into consideration at the time of monitoring the loan and advance.

  • The account is not having excess over limit
  • The terms and condition of the sanctioned letter are strictly followed.
  • The value of the collateral security is adequate.
  • There is not any unfavorable situation in market, economy and political conditions, which may endanger the reliability of the borrower account.
  • The analysis of the borrowers’ business performance and comparison of the projected and actual to find any deviations.

 

Records maintenance:

 

  • Credit File Maintenance

The credit file for each facility shall contain all information necessary to facilitate ready monitoring of that facility. It should contain a through history of the customer relationship to help credit officer’: track any problems, assist a newly assigned credit officer in understanding the customer and make the lending process transparent. Primary items in Credit File include:

  • Evidence of credit approval and data upon which approval was granted together with any comments, if appropriate.
  • Copy of sanction and loan agreement. A checklist along with copies of all legal & banking documents obtained / to be obtained. Details and 6 monthly updated information of all related facilities to the name customer group,
  • All supporting data such as financial statements and analysis, references, credit investigation results, CIB & other Bank reports and notes of all discussions with the borrower and other relevant parties with paper clipping.
  • Correspondences call reports, site visit reports, stock report etc. each credit file shall be maintained in a secured location and where access restricted to authorized personnel’s only. Copies of the information may be kept where regular access is required.

 

  • Facility Evidence Maintenance:

All charge documents as prescribed by the bank & local laws, for the relevant credit facility, signed credit agreement, signed guarantees or other evidence of credit security or collateral agreement shall be kept in fire proof safe under the custody of Branch manager or alternative and another officer. A register of charge and security documents should be maintained under the supervision of the Branch Manager.


  • Documentation of Loans and Advances  

In spite of the fact that banker extends credit to a borrower after inquiring about the character, capacity and capital of the borrower, he obtains proper documents executed from the borrower to protect him against willful defaults. Documents contain the precise terms of granting loans and they serve as important evidence in the law courts if the circumstances so desire. The documents for loans and advances can be classified into two categories:

  • Charge documents
  • Security documents.

A Loan Documentation Checklist is prepared by the credit officer which contains the details of security papers/documents held/pending or proposed against any sanctioned credit facilities. A sample loan documentation checklist is enclosed in the annexure.

 

Mode of Charging Securities:

 

BASIC Bank practices following 2 types of securities.

  • Primary Securities   Cash or cash equivalent that is easily liquidated or convertible into cash. Example FDR, Sanchaypatra, DP Notes, etc.
  • Secondary Securities   These securities are tangible securities that can be realized from sale proceeds or transfer of property. Example immovable properties.

 

Disbursement of Credit

 

A proper disbursement procedure is essential for implementing a project, small or big, within the estimated time and cost. However constant monitoring of the projects on the one hand and timely mobilizing the equity on the other hand cannot be under estimated for efficient implementation of a project. The following factors are taken into account.

 

  • After machinery contract is finalized the Bank will open irrevocable letter of credit on behalf of the borrower in the joint names of the Bank and the borrower.
  • Disbursement of foreign currency loan is made automatically as soon as irrevocable letter of credit for import of machinery is established and the foreign suppliers make shipment of machinery.
  • The local currency loans are to be made available to the project after satisfactory and full utilization of equity by the borrowers by creating required physical facilities (tangible assets) for the project.
  • The sponsors have to request for release of local currency loan to the Bank supported by papers like progress report, statement of account, documents.
  • The local currency loan of the Bank to be disbursed in one or more installment according to nature of the project.
  • The borrower must use the loan for the purpose for which the advance is extended.
  • The borrower shall apply the proceeds of the loan exclusively to finance the cost of the goods and services required to carry out the project. Foreign currency shall be disbursed only for goods and services that have neither been paid for in Bangladeshi currency nor were produced.
  • If the completion of the project or its successful operation is hindered or delayed because the funds available are inadequate to ensure its completion, it shall be the responsibility of the borrower to make prompt arrangements in accordance with financial plan approved by the bank to provide the necessary funds.

 

Disbursement of credits presupposes observance of all norms and procedures, which are conveyed through different Circulars of Head Office, issued from time to time

 

Supervision Procedure

 

The supervision of projects includes adequate control procedures in the disbursement of loan and the continuous monitoring of project operations during its period of construction and implementation through report requirement as well as plant visits. A project under implementation is visited every month and progress report is submitted to the management. Bank official on project supervision keeps watch over the estimation made and notes the deviation for taking quick remedial measures.

 

An entrepreneur is encouraged to come to the Bank and talk about his project and problems. It is emphasized for taking up comprehensive insurance policy covering the properties of the project. All sorts of papers, reports, received from the borrowers is promptly reviewed / scanned for some signals that may need special close attention of Bank Management. Branches of the bank are effectively utilized for project supervision including disbursement of local currency loan in their respective areas.

 

Recovery is the recurring worry for the bank officials. Moreover, recycling of advances is important, without which the bank’s liquidity is in jeopardy, besides that the community doesn’t get benefit unless new advances and new borrowers are encouraged. Strategic supervision of the loan and advance can ensure the timely recovery of the loan and advances along with the interpersonal relationship with the client. In the time of my attachment in the BASIC Bank Limited, it was observed that the credit officers are timely preparing the report and taking the following supervision techniques.

 

Loan Account Statement Check to Find Out:

 

  • Whether the limit is within that has been sanctioned.
  • Satisfactory transaction has been made.
  • Whether the borrower has sustained a loss of capital.
  • Significant decrease in the value of the security.
  • Weakening of bank’s position due to any reason.
  • Uses of the credit other than the purpose for which it was approved.
  • Incorrect information supplied by the borrower or bankruptcy of the borrower.
  • Credit is rescheduled frequently or the rules of rescheduling are violated.

 

Collection of the financial statements of the client and analyzing them and comparing the actual performance with that of projected. If actual is less than projected then the credit officers take the following measures:

  • Meet the owner and discuss to identify the reason.
  • Analyze the business strategy regarding the price, quality, and competitors.
  • Whether the amount disbursed was used properly
  • Whether the management has given its full effort in managing the business.

No banker wants the loan to be turned into bad; at least they are not bad at the time they are made. However, banks find that invariably a small portion of the loan become delinquent and eventually must be written off.

­

The loan review process is a crucial tool in reducing losses and in monitoring loan quality. It consists of a periodic audit of the ongoing performance of some or all of the active loans in a bank’s loan portfolio. Other than its basic objective of reducing loan losses, some intermediate objectives of the loan review of BASIC Bank are as follows:

  • To detect actual or potential bad loans as early as possible.
  • To ensure that the loan policy is followed.
  • To inform management and the board of directors about the overall condition of the loan and advance portfolio.

 

At the time of loan review BASIC Bank follows the Bangladesh bank guidelines and its credit policy set by the board of directors. The frequency of the review of individual loans is determined by the size and quality of the loan; large and poor loan is reviewed frequently than others.

All the schedule banks in Bangladesh are required to submit the loan review report and the state of the loan portfolio to the Bangladesh Bank credit cell. For maintaining this schedule BASIC has set forth a due date for its all branches to send the loan review report to Industrial Credit Division, The concerned officer sends the report to the Bangladesh.

 

Taking Precaution/Legal Action against Delinquent Clients

 

When a problem loan is detected the responsible loan officer takes the corrective action and tries to minimize the loan losses by allowing different facilities to the client. The steps followed by BASIC Bank to manage the delinquent clients are:

 

Persuasion

  • Open discussion with the borrower about the problem he is facing.
  • Discussion with third party to find out the underlying reasons.
  • Issuing “First Reminder” letter to inform the due date and due installments.

If the party doesn’t response issuing “2 nd Reminder” and then “3rd Reminder” letter-

 

Negotiation:

  • Revise loan agreement
  • Concession of interest (if the client is difficult to manage)
  • Rescheduling of the loan and giving installment facility to repay the overdue amount beside the regular installment.

 

Litigation

  • Filing case against the client
  • Assigning the loan officer for assisting the lawyer.


Management of Classified Accounts (Non-Performing Assets)

 

 NPL Account Management

 

All NPLs are be assigned to the Relationship Manager or the Credit In-charge, who is responsible for coordinating and administering the action plan/recovery of the account, and should serve as the primary customer contact after the account is downgraded to substandard.

 

Account Transfer Procedures

 

Within 7 days of an account being downgraded to substandard (grade 6), a Request for Action (RFA) and a handover/downgrade checklist is completed by the RM/Credit In-charge and forwarded to HOCC for acknowledgment.

 

The Credit In-charge should ensure that the following is carried out when an account is classified as Sub Standard or worse:

 

§ Facilities are withdrawn or repayment is demanded as appropriate. Any drawings or advances should be restricted, and only approved after careful scrutiny and approval from appropriate executives within HOCC.

 

§ CIB reporting is updated according to Bangladesh Bank guidelines and the borrower’s Risk Grade is changed as appropriate.

 

§ Loan loss provisions are taken based on Force Sale Value (FSV).

 

§ Loans are only rescheduled in conjunction with the Large Loan Rescheduling guidelines of Bangladesh Bank. Any rescheduling should be based on projected future cash flows, and should be strictly monitored.

 

§ Prompt legal action is taken if the borrower is uncooperative.

 

NPL Provisioning and Write Off:

 

The guidelines established by Bangladesh Bank for CIB reporting, provisioning and write-off of bad and doubtful debts, and suspension of interest are followed in all cases. Regardless of the length of time a loan is past due, provisions are raised against the actual and expected losses at the time they are estimated. The approval to take provisions, write offs, or release of provisions/upgrade of an account is restricted to the HOCC or MD/CEO based on recommendation from the Recovery Division. The Request for Action RFA or CL reporting format is used to recommend provisions, write-offs or release/upgrades.

 

Bank determines Specific Provision on Non-Performing assets as per relevant circulars of Bangladesh Bank and maintains adequate provision as required which is quarterly reported to Bangladesh Bank.

 

As per instruction of Bangladesh Bank specific provisions is calculated and maintained under the following categories of classified assets:

 

Unclassified Loans

Percentage of Specific Provision

Standard/Regular

1%

Special Mention Account (SMA)

5%

Substandard (SS)

20%

Doubtful (DF)

50%

Bad and Loss (BL)

100%

 

Apart from above quantitative loan provisioning system bank also applies qualitative judgments to determine the quality of loans and advances and makes appropriate specific provision if necessary.

 

Major Requirements of Bangladesh Bank’ guidelines for

 

Pillar-I:

Bank maintained minimum capital against potential risks which will be at least 10% of total risk weighted assets. At present all banks operating in Bangladesh is instructed to follow Standardized approach for Credit Risk and Market Risk and Basic Indicator Approach for Operating Risk. Capital Adequacy Assessment and Maintenance shall be submitted to Bangladesh Bank on Quarterly basis.

 

Pillar-II:

Supervisory Review: The banks shall have a process for assessing overall capital adequacy in relation to their risk profile and a strategy for maintaining their capital at an adequate level. Adequate capital shall be more than or equal to 10% of risk weighted assets. Bank should develop an Internal Capital Adequacy Assessment Process (ICAP) for assessment and maintenance of adequate capital.

 

Pillar-III:

Market Discipline: Purpose of Market discipline is to establish more transparent and disciplined financial market so that stakeholders can assess the position of a bank regarding holding of assets and to identify the risks relating to that assets and capital adequacy to meet the probable loss of assets.

 


Annexure- A

Lending Rate(s) of BASIC Bank Limited

 

Category

Interest Rate

1. Agriculture :a. Primary Products

10.00%

2. Industrial Term Lending:a. Agro based industriesb.Micro industries with project cost up to taka 50.00 lac

11.50%

11.50%

c. Other Small scale Industriesd. Medium Scale Industriese. Large Scale Industriesf. Credit to NBFI for small and medium scale Industries

12.50%

13.00%

13.00%

13.00%

3. Working Capital (Industrial)a. Agro based Industriesb. Micro Industries with project cost up to taka 50 lacc. Other Small scale Industriesd. Medium Scale Industriese. Large Scale Industries

f. Credit to NBFI for small and medium scale Industries

12.00%

13.00%

13.00%

13.00%

13..00%

13.00%

4.  Exporta. Export(Direct)a.( i)PCa.( ii)ECCb. Advance against inland documentary bills accepted by banksb.( i) Payment in foreign currency

b.(i i) Payment in local currency

7.00%

7.00%

12.00%

13.00%

5.  Commercial lending(a) Small Enterprise(b)Medium Enterprise(c)Large Enterprise(d)Trade financing (import financing)/other short term and demand loan

13.00%

13.00%

13.00%

13.00%

6. Advance against Work order (Contractor Finance)

14.75%

7. OD against(a) Bank’s Own Fixed Deposit(b) Other Bank’s Fixed Deposit Receipt(c) Govt. Bonds and securities(d) Unit Certificate/share 2.00% above FDR rate

14.755

13.00%

14.00%

8.Consumer Finance(a)House Loan(b)Transport Loan(c)Others

13.00%

14.75%

14.75%

Wholesale finance to NGO’s/NBFI etc for Micro credit and other special programs

11.50%

 

Annexure- B

Credit Risk Grading Manual

CREDIT RISK GRADING SCORE SHEET

Reference No.:

 

Date:

3-Mar-11

Borrower NATIONAL TUBES LIMITED
Group Name (if any)    Aggregate Score:

81

Branch: MIRPUR
Industry/Sector Steel Pipe Manufactures  Risk Grading:     

Acceptable

Date of Financials 30-Jun-10
Completed by Md. Nazmul Islam
Approved by Branch Credit Committee

Number

Grading

Short

Score

1

Superior

SUP

Fully cash secured, secured by government guarantee/international bank guarantee

2

Good

GD

85+

3

Acceptable

ACCPT

75-84

4

Marginal/Watchlist

MG/WL

65-74

5

Special Mention

SM

55-64

6

Substandard

SS

45-54

7

Doubtful

DF

35-44

8

Bad/Loss

BL

<35

 

Criteria                        Weight

Parameter

Score

Actual Parameter

Score Obtained

A. Financial Risk                  50%
1. Leverage: (15%) Less than 0.25×

15

0.17

15

Debt Equity Ratio (×) – Times 0.26× to 0.35 x

14

 

Total Liabilities to Tangible Net worth       0.36× to 0.50 x

13

 

  0.51× to 0.75 x

12

 

All calculations should be based on 0.76× to 1.25 x

11

 

annula financial statements of the 1.26× to 2.00 x

10

 

borrower (audited preferred) 2.01× to 2.50 x

8

 

  2.51× to 2.75 x

7

 

  More than  2.75×

0

 

2. Liquidity: (15%) Greater  than 2.74×

15

2.29

13

Current Ratio (×) -Times 2.50× to 2.74 x

14

 

Current Assets to Current Liabilities 2.00× to 2.49 x

13

 

  1.50× to 1.99 x

12

 

  1.10× to 1.49 x

11

 

  0.90× to 1.09 x

10

 

  0.80× to 0.89 x

8

 

  0.70× to 0.79 x

7

 

  Less than  0.70×

0

 

3. Profitability: (15%) Greater  than 25%

15

12.67%

12

Operating Profit Margin (%) 20% to 24%

14

 

(Operating Profit/Sales) X 100  15% to 19%

13

 

  10% to 14%

12

 

  7% to 9%

10

 

  4% to 6%

9

 

  1% to 3%

7

 

  Less than 1%

0

 

4.  Coverage: (5%)

 

Interest Coverage Ratio (×) – Times

 

Earning before interest & tax (EBIT)

More than 2.00×

5

23.84

5

Interest on debt

More than 1.51× Less than 2.00×

4

 

 

More than 1.25× Less than 1.50×

3

 

  More than 1.00× Less than 1.24×

2

 

 

Less than 1.00×

0

 

Total Score- Financial Risk  

50

 

45

   

 

 

 

B. Business/ Industry Risk  18%

 

1. Size of Business (in BDT crore) > 60.00

5

51.75

4

  30.00 – 59.99

4

 

The size of the borrower’s business 10.00 – 29.99

3

 

measured by the most recent year’s 5.00 – 9.99

2

 

total sales. Preferably audited numbers. 2.50 – 4.99

1

 

  < 2.50

0

 

2. Age of Business > 10 Years

3

21

3

  > 5 – 10 Years

2

 

The number of years the borrower 2 – 5 Years

1

 

engaged in the primary line of business < 2 Years

0

 

3. Business Outlook Favorable

3

Stable

2

Critical assesment of medium term Stable

2

 

prospects of industry, market share Slightly Uncertain

1

 

and economic factors. Cause for Concern

0

 

4. Industry Growth Strong (10%+)

3

Moderate (1%-5%)

1

  Good (>5% – 10%)

2

 

  Moderate (1%-5%)

1

 

  No Growth (<1%)

0

 

5. Market Competition Dominant Player

2

Dominant Player

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