Background of Banking System

Background of the study

The main product of bank is Loans and Advances. The price of a loan is determined by the cost to make the loan plus a profit or risk premium on it. Lending is the primary business of a bank and profit is a measure of its success. So the main objective of lending is to earn profit on loans for the ongoing viability of a bank.

According to Michael C. Dennis (2001), most of the banks use objective and subjective data interpretation to evaluate a borrower’s financial condition from their financial statements. Objective analysis involves traditional methods of number and data analysis. Such as, review of unusual accounting methods used by the client, unusual information in the notes in the financial statement. Review of CIB (Credit Information Bureau) Report of client including financial ratios, trend analysis and financial profitability analysis of his business has been done before disbursement of a loan. Financial profitability, leverage liquidity and efficiency analysis of the client and its business considered as key denominator of a prospective client. Subjective analysis involves the overall evaluation of how a borrower is doing financially and whether extending the borrower’s credit would pose any acceptable or unacceptable risk.

To extend credit facilities (or to continue the credit facilities) to an applicant, bank can make a decision only after an objective analysis and subjective evaluation. This analysis combined with information about applicant’s payment history, trends in the client’s industry, changes in the overall economy, and changes in demand for the client’s products and services are used to develop an intuitive understanding of the opportunities and challenges the client faces.

 As a developing country, Bangladesh follows analytical tools recommended by BRDP (Banking Rules and Development Policy) of Bangladesh Bank. Bank mainly has to depend on judgment and their confidence whether borrower will pay or not. AB Bank Limited sanctions loan first by seeing the client’s reputation in the market. Secondly, past information helps to analyze the business pattern and industry trend. Thirdly, uses the CRG (Credit Risk Grading) scorecard to evaluate the credit risk. From the CIB report bank can identify whether the client is classified or not

 Origin of the thesis work

This report has been made for the partial fulfillment of the “Credit risk management of AB Bank Ltd”, with the specified time duration. I had to study on certain topics of “Credit Risk management”, of different organization to prepare the report.

The report was originated to make a study on, “Credit control management of AB Bank and as a part of the fulfillment of thesis report required for the completion of the BBA program of the Department of Business Administration of Stamford University, Bangladesh.

As a part of my study and completion of the BBA degree, the thesis and project work was assigned by “Tazrina Flora” Lecturer of Stamford University, Bangladesh. Under the Project and thesis, during this research, I have gathered a lot of knowledge regarding the Credit risk management in different organization in our country and also whole the world.

Objective of the report

The study has been undertaken with the following objectives:

General objective:

  Achieve experience about credit risk of banking system and theoretical application of knowledge in the real life

  To observe the general banking and advance operation f ABBL, and their services

  To get an overall practical knowledge concerning banking activities as a financial institution.

  How a bank operates their activities in different areas being a single organization.

  What a bank is doing for Bangladesh to develop national economy.

Specific objective:

  How Credit control authority work inside the bank, to know about that

  Details about Credit risk management of banking system.

  Framework of credit risk management.

  To analysis the pros and cons of the conventional ideas about credit operation of a Bank.

  To have better orientation on credit management activities specially credit policy and practices, credit appraisal, credit-processing steps, credit management, financing in various sector and recovery, loan classification method and practices of AB Bank Limited.

  To compare the existing credit policy of AB Bank limited with that of best practices guideline given by Bangladesh Bank, the central bank of Bangladesh.

  To identify and suggest scopes of improvement in credit management of ABBL

  To get an overall idea about the performance of AB Bank Ltd.

  To fulfill the requirement of the thesis report under BBA program.

Scope of the study

The study would focus on the following area of AB Bank limited:

  Overall activity of AB Bank Ltd

  Credit appraisal system of AB Bank limited.

  Procedure for different credit facilities

  Portfolio of loan or advances management of AB Bank limited

  .Organization structure and responsibilities of management.

  The report concerns about the Credit Division of AB Bank Limited.

  different products and services of Credit Division

  Credit operating system and procedures of loan supervision, and monitoring of AB bank. Management system

 Each of the above areas would be critically analyzed in order to determine the efficiency of ABBL’s Credit appraisal and

Methodology of the study

Methodology indicates that from where I gathered data about my topics. There have no primary sources of data to prepare this report. The secondary sources of data are only use to prepare this report.

Secondary sources of data:

•   Searching information through the internet.
•   Using some of the text book.
•   Some international articles.
•   Annual report of AB Bank and national bank.
•  Bangladesh institute of bank management (BIBM).
•   Web site of AB bank.

Limitations of the study

To prepare this report I have faced the following limitations:

  It was one of the most important factors that shortened the present study. Due to time constraints, the sample size had to be restricted.

  Another limitation is lack of knowledge about these topics, which could be very much useful.

  It is a theoretical practice not practical so we do not skilled enough to cover the total information.

  Confidentiality of data was another important barrier that was faced during the conduct of this study.

  Rush hours and business was another reason that acts as an obstacle while gathering data.

  To prepare this report I have faced the following limitations:

  Most of the time ABBL’s employee was very busy. So they can’t provide enough time to get information for preparing this report

  .Few officers sometime felt disturbed, as they were busy in their job. Sometime they didn’t want to supervise me out of their official work.

  The most functions of ABBL are manual and lengthy though it is trying to upgrade.

  Some desired information could not be collected due to confidentially of business.

  Library management and functioning is not satisfactory at many places and much of the time and energy of us are spent in tracing out of Books, Journals, and Reports etc.

History of banking

When money became an accepted medium of exchange, the need arose to keep the money safe. In addition, some people needed to borrow money. These needs led to the development of banks. The earliest banking records, dated around 2000 B.C., indicate that Babylon had a highly developed banking system. Babylonian banks were not unlike the banks of today, except that you might say they had a monopoly. Many years later, in the sixth century B.C., the first private bank emerged-the Igibi bank.

Like today’s bank, it accepted for deposit money on which it paid interest. It also lent money to persons who needed the money for worthwhile purposes and who repaid the borrowed funds with interest. By the fourth century B.C., Greece was the dominant nation in the world. Private and city-state-owned banks existed in the outlying lands of the Greek Empire, but only privately owned banks were allowed in Greece. Government to a great extent regulated those banks; however, Rome then became the dominant empire. Under early Roman law, banks could only be privately owned, but they were regulated by law. With the fall of the Roman Empire, banking became essentially illegal until the third century A.D. By the fourteenth century, when trade routes were being developed, privately owned banks were once again allowed. And by the fifteenth century, banks were needed to advance the huge sums of money required to send out ships to bring back valuable commodities such as spices, silk and gold. At this time in history, banking was big business

 Banking system of Bangladesh

The banking system at independence consisted of two branch offices of the former State Bank of Pakistan and seventeen large commercial banks, two of which were controlled by Bangladeshi interests and three by foreigners other than West Pakistanis. There were fourteen smaller commercial banks. Virtually all banking services were concentrated in urban areas. The newly independent government immediately designated the Dhaka branch of the State Bank of Pakistan as the central bank and renamed it the Bangladesh Bank. The bank was responsible for regulating currency, controlling credit and monetary policy, and administering exchange control and the official foreign exchange reserves. The Bangladesh government initially nationalized the entire domestic banking system and proceeded to reorganize and rename the various banks. Foreign-owned banks were permitted to continue doing business in Bangladesh. The insurance business was also nationalized and became a source of potential investment funds. Cooperative credit systems and postal savings offices handled service to small individual and rural accounts. The new banking system succeeded in establishing reasonably efficient procedures for managing credit and foreign exchange. The primary function of the credit system throughout the 1970s was to finance trade and the public sector, which together absorbed 75 percent of total advances.

The government’s encouragement during the late 1970s and early 1980s of agricultural development and private industry brought changes in lending strategies. Managed by the Bangladesh Krishi Bank, a specialized agricultural banking institution, lending to farmers and fishermen dramatically expanded. The number of rural bank branches doubled between 1977 and 1985, to more than 3,330. Denationalization and private industrial growth led the Bangladesh Bank and the World Bank to focus their lending on the emerging private manufacturing sector. Scheduled bank advances to private agriculture, as a percentage of sectoral GDP, rose from 2 percent in FY 1979 to 11 percent in FY 1987, while advances to private manufacturing rose from 13 percent to 53 percent.

The transformation of finance priorities has brought with it problems in administration. No sound project-appraisal system was in place to identify viable borrowers and projects. Lending institutions did not have adequate autonomy to choose borrowers and projects and were often instructed by the political authorities. In addition, the incentive system for the banks stressed disbursements rather than recoveries, and the accounting and debt collection systems were inadequate to deal with the problems of loan recovery. It became more common for borrowers to default on loans than to repay them; the lending system was simply disbursing grant assistance to private individuals who qualified for loans more for political than for economic reasons. The rate of recovery on agricultural loans was only 27 percent in FY 1986, and the rate on industrial loans was even worse.

As a result of this poor showing, major donors applied pressure to induce the government and banks to take firmer action to strengthen internal bank management and credit discipline. As a consequence, recovery rates began to improve in 1987. The National Commission on Money, Credit, and Banking recommended broad structural changes in Bangladesh’s system of financial intermediation early in 1987, many of which were built into a three-year compensatory financing facility signed by Bangladesh with the IMF in February 1987.

One major exception to the management problems of Bangladeshi banks was the Grameen Bank, begun as a government project in 1976 and established in 1983 as an independent bank. In the late 1980s, the bank continued to provide financial resources to the poor on reasonable terms and to generate productive self-employment without external assistance. Its customers were landless persons who took small loans for all types of economic activities, including housing. About 70 percent of the borrowers were women, who were otherwise not much represented in institutional finance.

 Collective rural enterprises also could borrow from the Grameen Bank for investments in tube wells, rice and oil mills, and power looms and for leasing land for joint cultivation. The average loan by the Grameen Bank in the mid-1980s was around Tk2, 000 (US$65), and the maximum was just Tk18, 000 (for construction of a tin-roof house). Repayment terms were 4 percent for rural housing and 8.5 percent for normal lending operations.

The Grameen Bank extended collateral-free loans to 200,000 landless people in its first 10 years. Most of its customers had never dealt with formal lending institutions before. The most remarkable accomplishment was the phenomenal recovery rate; amid the prevailing pattern of bad debts throughout the Bangladeshi banking system, only 4 percent of Grameen Bank loans were overdue. The bank had from the outset applied a specialized system of intensive credit supervision that set it apart from others. Its success, though still on a rather small scale, provided hope that it could continue to grow and that it could be replicated or adapted to other development-related priorities. The Grameen Bank was expanding rapidly, planning to have 500 branches throughout the country by the late 1980s.

Beginning in late 1985, the government pursued a tight monetary policy aimed at limiting the growth of domestic private credit and government borrowing from the banking system. The policy was largely successful in reducing the growth of the money supply and total domestic credit. Net credit to the government actually declined in FY 1986. The problem of credit recovery remained a threat to monetary stability, responsible for serious resource misallocation and harsh inequities. Although the government had begun effective measures to improve financial discipline, the draconian contraction of credit availability contained the risk of inadvertently discouraging new economic activity.

Foreign exchange reserves at the end of FY 1986 were US$476 million, equivalent to slightly more than 2 months worth of imports. This represented a 20-percent increase of reserves over the previous year, largely the result of higher remittances by Bangladeshi workers abroad. The country also reduced imports by about 10 percent to US$2.4 billion. Because of Bangladesh’s status as a least developed country receiving concessional loans, private creditors accounted for only about 6 percent of outstanding public debt. The external public debt was US$6.4 billion, and annual debt service payments were US$467 million at the end of FY 1986.

 Background of AB Bank Limited

 Limited, the first private sector bank was incorporated in Bangladesh on 31st December 1981 as Arab Bangladesh Bank Limited and started its operation with effect from April 12, 1982. AB Bank is known as one of leading bank of the country since its commencement 28 years ago. It continues to remain updated with the latest products and services, considering consumer and client perspectives. AB Bank has thus been able to keep their consumer’s and client’s trust while upholding their reliability, across time.

During the last 28 years, AB Bank Limited has opened 77 Branches in different Business Centers of the country, one foreign Branch in Mumbai, India and also established a wholly owned Subsidiary Finance Company in Hong Kong in the name of AB International Finance Limited. To facilitate cross border trade and payment related services, the Bank has correspondent relationship with over 220 international banks of repute across 58 countries of the World. In spite of adverse market conditions, AB Bank Limited which turned 28 this year, concluded the 2009 financial year with good results. The Bank’s consolidated profit after taxes amounted to Taka 3300 cr which is 43.44% higher than that of 2008. The asset base of AB grew by 27.20% from 2008 to stand at over Tk 10691 cr as at the end of 2009.

The Bank maintained its sound credit rating in 2009 to that of the previous year. The Credit Rating Agency of Bangladesh Limited (CRAB) awarded the Bank an AA₃ rating in the long term and ST-1 rating in the short Term.

AB Bank believes in modernization. The bank took a conscious decision to rejuvenate its past identity – an identity that the bank carried as Arab Bangladesh Bank Limited for twenty five long years. As a result of this decision, the bank chose to rename itself as AB Bank Limited and the Bangladesh Bank put its affirmative stamp on November 14, 2007.The Bank decided to change its traditional color and logo to bring about a fresh approach in the financial world; an approach, which like its new logo is based on bonding, and trust. The bank has developed its logo considering the contemporary time. The new logo represents our cultural “Sheetal pati” as it reflects the bonding with its clientele and fulfilling their every need. Thus the new spirit of AB is “Bonding”. The Logo of the bank is primarily “red”, as red represents velocity of speed and purity. Our new logo innovates, bonding of affiliates that generate changes considering its customer demand. AB Bank launched the new Logo on its 25th Anniversary year.

AB Bank commits to nation to take a lead in the Banking sector through not only its strong financial position, but also through innovation of products and services. It also ensures creating higher value for its respected customers and shareholders. The bank has focused to bring services at the doorstep of its customers, and to bring millions into banking channels those who are outside the mainstream banking arena. Innovative products and services were introduced in the field of Small and Medium Enterprise (SME) credit, Women’s Entrepreneur, Consumer Loans, Debit and Credit Cards (Local & International), ATMs, Internet and SMS Banking, Remittance Services, Treasury Products and Services, Structured Finance for Corporate, strengthening and expanding its Islamic Banking activities, Investment Banking, specialized products and services for NRBs, Priority Banking, and Customer Care. The Bank has successfully completed its automation project in mid 2008. It envisages enabling customers to get banking services within the comfort of their homes and offices.

AB Bank has continuously invests into its biggest asset, the human resource to drive forward with its mission “to be the best performing bank in the country.” The bank has introduced Dress Code for its employees. Male employees wear designed ties and females wear Sharee or Salwar Kamiz, all the dresses are consisted with the unique AB Bank logo. AB is recognized as the people’s choice, catering to the satisfaction of its cliental. Their satisfaction is AB’s success.

Company profile:

Name of the company: AB Bank limited

Sub Industry Group: Private Commercial Bank

Company Form: Public Limited Company

Corporate Office: BCIC Bhaban 30-31, Dilkusha C/A, Dhaka, Bangladesh

Date of Incorporation: 12 April 1982

President & Managing Director: Mr. Kaiser A. Chowdhury

Auditors: ACNABIN

Sponsors of AB Bank

Table-2.1: Sponsors of AB bank

Authorized Capital: 600, 00, 00, 000/

Capital structure of AB Bank Limited:

Bangladeshi sponsors/ Directors: 50%

Bangladeshi General Public: 49.43%

Govt. of Bangladesh: 0.57%

 Objective:

The objectives for which the bank is established are as follows:

  To carry on, transact, undertake and conduct the business of banking in all branches of ABBL.

  To receive, borrow or raise money on deposit, loan or otherwise upon such terms as the company may approve.

  To carry on the business of discounting and dealing in exchange and securities and all kinds of mercantile banking.

  To provide for safe-deposit vaults and the safe custody of valuables of all kinds.

  To carry on business as financiers, promoters, capitalists, financial and monitory agents, concessionaires and brokers.

  To act as agents for sale and purchase of any stocks, shares or securities or for any other monetary or mercantile transaction.

  To establish and open offices and branches to carry on all or any of the business

 Vision statement

“To be the trendsetter for innovative banking with excellence & perfection”

 Mission statement

“To be the best performing bank in the country”

Corporate governance

Good Corporate Governance practices enhance an entity’s corporate image and market Credibility, which attract capital and increase its borrowing power. These can be reflected in the quality of financial  reporting and disclosures; strength of internal control system and internal audit function; induction of  professionally competent, independent non-executive Directors on corporate Board; formation of Audit Committee; delegation to executives and staff; protection of shareholder rights; redress of stakeholder complaint; etc. AB Bank has addressed the issues of corporate governance for strengthening organizational strength.

Board of Directors

 ABBL’s Board of Directors (BODs) consisted of 10 members where Mr. Faisal M. Khan is designated as the Chairman of the Board. During 2009, the BODs met 9 times. Normally Bank’s Board of Directors meets monthly; but may hold more meetings in case there are special needs.  Board is involved in policy formulations, strategic direction setting, business plan approval and review of various activities and also providing necessary direction to the management for conducting businesses in a competitive and profitable manner. Board also ensures effective risk management across the Bank as per the central bank’s guidelines.  The Board has two sub committees, namely, Executive Committee and Audit Committee. Functions of those committees are described below:

 Executive Committee

 The Board’s Executive Committee, which has 5 members (including Chairman), headed by Mr. Sajedur Seraj, Vice Chairman ABBL, and reviews all the proposals for loans and advances that do not fall within the power of the Managing Director. The committee is also responsible for administration, investment aspect, expansion of business, property purchase of the Bank rescheduling of the loans etc. The Board confirms the decision of all Executive Committee meetings and assesses the operational results.

Audit Committee    

 The Board constituted an Audit Committee in 2006 comprising of three members of the Board in terms of Bangladesh Bank’s BRPD Circular No. 12 of 23 December 2002. The Committee comprising of Mr. M. Wahidul Haque as Chairman and Mr. Sajedur Seraj and Mr. Golam Sarwar as members, meets at regular intervals to review and monitor regulatory compliance, financial reporting, internal control & internal audit functions, and other operational activities, particularly emphasizing on such areas as risk management system, Bank’s computerized system and its use etc. The committee met five (7) times during the year 2009.

Delegation of Authority

 To ensure efficient and prompt services to its clients, delegation of power is important. However, the principle should be, ‘safety first, business next’. ABBL envisages delegation certain powers to its executives at different level of operations. The BOD has empowered the Executive committee with decisions relating to operational and approving activities. The Board has also empowered the Managing Director in specific areas through power of attorney.

 Internal Control and Internal Audit System     

 With the strategy of business expansion in the year 2006, ABBL had to integrate preemptive risk management plan to satisfy compliance requirements and also to address the operational risks associated thereto. From 2006, the Bank started Risk Based Audit all across the Bank. For the first time, risk based audit reports of all branches and divisions of the HO were submitted to the BOD. Such parameterized health report lead to an overall risk rating of the Bank thereby contributing towards the Risk Management Plan of the Bank. During 2007, 26 branches were audited through new risk based audit system, the Bank hope that, all of the branches will be audited through new system in current year. ABBL re-energized its Risk Management Tools like Departmental Control Function Checklist, Quarterly Operations Report, Loan Documentation Checklist, etc.

 ABBL’s Internal Control & Compliance Division conducts internal audit of every branch once a year. The team also undertakes audit if any special incidence occurs. The Audit and inspection division enjoys full independence and works without any influence. The team can audit any branches/department any time without prior consent. Throughout the year, such division conducted sessions for Branch Managers and other employees on various Risk Management and Compliance issues like Anti Money Laundering matters etc. Last year the Internal Control and Compliance Division performed following jobs:

  Audit of 77 branches,

  Surprise visit more than 100 times of various branches;

  Audit of all divisions of Head office.

Accounting and Auditing

 For accounting purposes, ABBL uses Misys Equation Banking System as accounting software developed by renowned software developer, covering various operational aspects and the general ledger. According to the Auditor of the Bank, the financial statements appear to contain the relevant mandatory disclosures under the regulatory framework, including compliance with the provisions of Bangladesh Accounting Standard (BAS), as indicated in the concerned BRPD circular. The annual financial statements were audited by reputed Chartered Accountants firm M/S ACNABIN and obtained unqualified Audit Report for the concerned year.

 Management   

 ABBL’s management is headed by its President & Managing Director Mr. Kaiser A. Chowdhury. Mr. Chowdhury is one of the senior bankers of the country having a long banking career. He started his banking career with ANZ Grind lays Bank Ltd (Presently Standard Chartered Bank) in 1975 as trainee officer and served till 1999.

He then joined One Bank Limited in the same year as Executive Vice President and served till 2004 (as DMD). In 2005 he joined the Arab Bangladesh Bank Limited (now AB Bank Ltd) and continued his service with ABBL. Mr. Chowdhury is aided by other top level management team to perform Bank’s day to day functions.

 For smooth functioning of the Bank the following committees have been formed:

 A.  Management Committee (MANCOM); comprising of senior members of the management (10 members) headed by Managing Director meets weekly to discuss relevant matters of the business of the Bank. Responsibilities of MANCOM are to determine and review management policies, business targets and operational initiatives, ensure smooth roll out of all business plans and review these from time to time in the light of changing environment, linkage between all Functional activities at HO and branches, periodical review of management activities etc.

 B.  Credit Committee; headed by the Managing Director, is responsible for review of all credit proposals originated by the CRM Division and accord decision and recommend as per delegation guidelines, review business strategies and performance, status of loans and advance, furnish credit related MIS to Board or EC for review etc. The committee consists of 5 members.

 C.  Asset Liability Management Committee (ALCO); headed by the Managing Director, is responsible for balance sheet risk management. The committee consists of 7 members.

Branch Network

As on 31th December 2009, AB Bank had 78 branches including 1 (one) Islamic branch in Kakrail, Dhaka and 1 (one) overseas branch in Mumbai, India.77 branches were located at different areas of Bangladesh.

Division wise branches location of AB bank

Table- 2.2: Division wise branches location of AB bank

 Human Resources Management      

The valuable contributions made by the employees for the continuous growth of the Bank have always been acknowledged. Human Resources Division of ABBL worked with the business as the core strategic partner through performing the job of recruitment, training, placement, and through introduction of the performance management tools. The Bank has its own Training Institute for training of its staff internally. The Bank has planned to restructure the Training Institute to a fully fledged Training Academy within this year. The Bank also sends its employees to the Bangladesh Institute of Bank Management (BIBM), Bangladesh Bank and other professional institutions in home and abroad for training purposes.

In 2009, total numbers of employees were 1952. Total 185 were recruited in that year, of which 147 were at entry levels, 30 in mid levels and 8 in management level. The recruitment examination is managed by both internal and external agencies. The Bank has Employees’ Service Rules followed from 1991.

According to the HR division, the Bank is the top player in the industry for the SVP & above rank. And for Probationary to VP rank, the Bank provides salary according to industry practice.  The employees also get other facilities like gratuity, provident fund, festival bonus, incentive bonus, medical facilities etc from the Bank. Employee turnover at mid and executive level is very low. Lower mid level employee turnover is little high.

Credit Management     

 In October 2003, Bangladesh Bank advised all banks to put in place an effective risk management system focusing on five core areas. In response to that, ABBL developed a Core Risk Manual on the five core risk areas approved by the Board. During 2004, as per BB guidelines, Credit Risk Management was given a new shape. A new CRM Division was created in June 2005 with identified responsibilities for managing credit risks.

Products and services

AB Bank currently provides the following product and services to its customer:

 Depository product

 AB Bank Limited is now offering different types product for mobilizing the savings of the general people.

  Current Deposit

  Saving deposit

  Foreign Currency Deposit

  Fixed deposit

 Current deposit:

Current account is an account where a customer can deposit money and withdraws several times in a working day. In this account there is no interest rate. Customers are just maintaining this kind of account for transaction. This account is open for the industrials or for the business purpose. Individuals are not interested to open this kind of account. Customer can withdraw money by the cheque. For the current account there are 2 types of cheque book. Those are:

  20 leafs cheque book and

  50 leafs cheque book.

Savings deposit:

Savings accounts are open for the purpose of savings. Generally, Customer can deposit and withdraws money one time in a single working day. Now a days in the savings account deposit and withdraws money more than one time by the permission. Customers receive the interest against their savings. They get the rate of interest of 6% in an economic year. For the maintaining of savings account the AB Bank deduct Tk.250 in half yearly, if the balance falls below 10,000.For open a savings account customer will have to deposit at least Tk.10,000. To closing the account, bank charges Tk.300 of the account holder.

Table 3.1: Interest Rates of Deposit Accounts

 Foreign currency:

Following the liberalization of exchange controls Bangladesh Bank has authorized the banks to maintain different types of foreign currency accounts and convertible taka accounts. The following are the regulations laid down by Bangladesh in respect of these accounts.

Who can open the accounts?

Branches of AB Bank limited may open Foreign Currency Accounts in the names of:

• Bangladesh nationals residing abroad
• Foreign nationals residing abroad or Bangladesh and foreign firms operating in Bangladesh or abroad.
• Foreign missions and their expatriate employees.

 Fixed deposit:

Fixed Deposit account or FDR accounts are open for certain amounts of money are fixed for a certain period of time. The time period or tenure should be for a month, 3months, 6 months, 1 year or 2 years. The interest rate for the (FDR) tenure is the following:

Table 3.2: Fixed Deposit Rates

From the chart of the rate sheet we can see the frequent decrease in the rate for FDR account. After the maturity 10% income tax are deducted from the interest amount

Services of AB Bank

AB Bank Provide the following services to its customer

  Retail Banking

• Unsecured loan
• Secured loan

  Corporate banking

  SME banking

  Loan syndication

  Islami banking

  Other Services

• AB investment banking
• Card service
• Money Transfer (western Union)Locker service
• Remittance service
• ATM service
• Foreign trade
• Internet Banking

Retail banking:

In the point of view of AB Bank retail banking are divided into two broad categories. Those are given bellow as detail:

1. Unsecured loans

AB Bank provides the following types of unsecured loan to its customer:

a) Personal loan:

Target Customer:

Employees of reputed Local Corporate, MNCs, NGOs, Airlines, Private Universities, Schools and Colleges, International Aid Agencies and UN bodies, Government Employees, Self-employed Professionals (Doctors, Engineers, Chartered Accountants, Architects, Consultants), Businessmen.

Purpose:

Marriages in the family, Purchase of office equipment / accessories, Purchase of miscellaneous household appliances, Purchase of Personal Computers, Purchase of audio-video equipment, Purchase of furniture.

Loan Amount: Minimum Tk. 25,000.00, Maximum Tk. 5, 00,000.00

Charges: Application fee: Tk. 500.00Processing fee: 1% on the approved loan amount or Tk. 2000.00 whichever is higher.

Tenor: Min 12 months, Max 36 months

Rate of Interest:  14.50% p.a-17.50% p.a

Security: Hypothecation of the product to be purchased. Two personal guarantees (as per our list of eligible guarantors)

 b) Auto loan

Target Customer:

Employees of reputed Local Corporate, MNCs, NGOs, Airlines, Private Universities, Schools and Colleges, International Aid Agencies and UN bodies, Government Employees, Self-employed Professionals (Doctors, Engineers, Chartered Accountants, Architects, Consultants), Businessmen.

Purpose:

To purchase Brand new vehicle, non-registered reconditioned vehicle. Loan Amount:70% for the brand new car60% for the reconditioned car but must not exceed BDT 10, 00,000.00

Charges: Application fee: Tk. 500.00 Processing fee: 1% on the approved loan amount or Tk. 5000.00 whichever is higher.

Tenor: For Reconditioned Car: Max 36 months For Brand new Car: Max 60 months.

Rate of Interest: 14.50% p.a -17.50% p.a.

Security: Hypothecation of the vehicle to be purchased. Two personal guarantees (as per our list of eligible guarantors)

c) Easy loan (for executives)

Target Customer:

The loan is specially designed for salaried people who are employed in different reputed companies

Purpose: Marriages in the family, Purchase of office equipment / accessories, Purchase of miscellaneous household appliances, Purchase of Personal Computers, Purchase of audio-video equipment, Purchase of furniture, Advance rental payment, Trips abroad, Admission/Education fee of Children etc.

Loan Amount: Minimum Tk. 50,000.00, Maximum Tk. 3, 00,000.00

Charges: Application fee: Tk. 500.00, Processing fee: 1% on the approved loan amount or Tk. 1000.00 whichever is higher.

Tenor: Min 12 months, m ax 36 months

Rate of Interest: 16.00% p.a

Security:

 Letter of confirm at ion from the employer. One personal guarantee (as per our list of eligible guarantors)

 d) Gold grace Jewellery loan:

Target Customer:

Both female & male employees may apply viz. employees of reputed Banks & Leasing companies, reputed Local Corporate, MNCs, NGOs, Airlines, Private Universities, Schools and Colleges, International Aid Agencies and UN bodies. Government Employees, Self-employed Professionals(Doctors, Engineers, Chartered Accountants, Architects, Consultants) businessmen with a reliable regular source of income.

Purpose: To purchase ornaments/ Jewellery for personal use.

Loan Amount: Minimum Tk. 50,000.00, Maximum Tk. 3, 00,000.00

Charges: Application fee: Tk. 500.00, Processing fee: 1% on the approved loan amount or Tk. 1000.00 whichever is higher.

Tenor: Min 12 months, Max 36 months

Rate of Interest: 16.00% p.a

Security: Letter of confirmation from the employer. Personal guarantee from the parents and spouse (if married)

e) House / Office furnishing / Renovation loan:

Target Customer:

Expatriate Bangladeshi nationals who are in business or service holders .Employees of reputed Banks & Leasing companies, reputed Local Corporate, MNCs, NGOs, Airlines, Private Universities, Schools and Colleges, International Aid Agencies and UN bodies, government Employees, Self-employed Professionals (Doctors, Engineers, Chartered Accountants, Architects, Consultants).Reputed and highly respectable Businessmen with a reliable source of income.

Purpose: House/Office Furnishing/ Renovation, for interior decoration / Titles Stones, Electrical fittings, wooden cabinets / Overall furnishing and all types of House/Office Renovation, purchase/furnishing of apartments etc.

Loan Amount:  Minimum Tk. 1, 00,000.00, Maximum Tk. 10, 00,000.00

Charges: Application fee: Tk. 500.00, Processing fee: 1% on the approved loan amount or Tk. 2000.00 whichever is higher

Tenor: Min 12 months, Max 48 months

Rate of Interest: 16.50% p.a

Security:  Title deed of the House/Office to be furnished/renovated along with memorandum of deposit of title deed duly supported by a notarized power of attorney to be kept by the bank as a matter of comfort. Two personal guarantees (as per our list of eligible guarantors) Registered mortgaged of the property if the loan amount is more than Tk. 5.00 lac

 f) Staff loan

Target Customer: All permanent employees of ABBL

Purpose: Marriages in the family, Purchase of office equipment / accessories, Purchase of miscellaneous household appliances, Purchase of Personal Computers, Purchase of audio-video equipment, Purchase of furniture

Loan Amount:

According to the debt burden ration and other criteria

Charges: Processing fee: 1% on the approved loan amount

Tenor: Min 12 months, Max 36 months

Rate of Interest: 15.50% p.a

Security: Hypothecation of the product to be purchased

g) Education loan

Target Customer: Student criteria: Students of reputed educational institutes, such as Public Private Universities, Medical Colleges & Engineering Institute. Undergraduate & Post graduate Level Professionals degrees (Chartered Accountants (CA), Cost & management Accountants (CMA), Marine, MBM, MBA) Doctorate degree (PhD), FCPS etc. Occupation: Student Minimum Age: 17 years Maximum Age: 40 years

Educational Qualification:

Minimum HSC/A level pass.

Parents Criteria: Service Holder:

Individuals with ranks equivalent to Senior Assistant Secretary or higher would qualify guarantor Bank officials (Equivalent to Senior Principal Officer of NCBs, AVP / Branch Manager of Local and Foreign banks) and Department Head of Multinational Company or established Local Corporate. Guarantors must be accepted by the Branch Manager / Head Office

Businessman:

Well reputed and widely respected Se employed professionals

Purpose: To Financially Assist the Parents: Admission/Education Fees, Semester Fees, and Study abroad

Loan amount:

Minimum Tk. 50,000.00, Maximum Tk. 3, 00,000.00

Charges: Application fee: Tk. 500.00, Processing fee: 1% on the approved loan amount or Tk. 1000.00 whichever is higher

Tenor: Min 12 months, max 36 months

Rate of interest: 14.50% p.a. – 16.00% p.a

Security: One personal guarantee (as per our list of eligible guarantors)

2. Secured loans:

Secured Loans are divided into the following type:

a) Personal loan

Target Customer: All Clients of ABBL

Purpose: To meet personal requirement of fund

Loan Amount: Maximum 95% of the present value of the security

Charges: Processing fee: Tk. 1000.00

Tenor: Min 12 months, Max 36 months

Rate of Interest: 13.50% p.a.- 16.50% p.a. (subject to type of the security). 2% spread must be maintained in case of own bank FDR

Security: Lien over FDR, BSP, ICB Unit Certificate, RFCD, NFCD, and CD account(s) etc. One personal guarantee in case of third party cash collateral (as per our list of eligible guarantors)

b) Personal overdraft

Target Customer: All Clients of ABBL

Purpose: To meet personal requirement of fund

Loan Amount: Maximum 95% of the present value of the security

Charges: Processing fee: Tk. 1000.00

Tenor: Revolving with annual review

Rate of Interest: 13.50% to16.50 % p.a. (subject to type of the security).2% spread must be maintained in case of own bank FDR

Security:

 Lien over FDR, BSP, ICB Unit Certificate, RFCD, NFCD, and CD account(s) etc. One personal guarantee in case of third party cash collateral (as per our list of eligible guarantors

Corporate banking:

AB Bank provides complete range of solutions to meet Corporate Customers’ requirement. AB’s Corporate Banking solutions include a broad spectrum of products and services backed by proven, modern technologies.

 Corporate lending

AB’s specialist teams offer a comprehensive service providing finance to large and medium-sized businesses based in Bangladesh.

 Structured finance

AB have a specialist Structured Finance Team who arrange and underwrite finance solutions including Debt and Equity Syndication for financial sponsors, management teams and corporate. AB also provides corporate advisory services.

The aim of structured finance is to provide tailored financing solutions with a dedicated team who can rapidly respond to client needs.

Following are some of the products and financial tools of Corporate Banking:

•   Project Finance
•   Working Capital Finance
•   Trade Finance
•   Cash Management
•   Syndicated Finance, both onshore & off-shore
•   Equity Finance, both onshore & off-shore

SME Banking:

The Small and Medium Enterprises worldwide are recognized as engines of economic growth. In recent days the Small and Medium Enterprise (SME) Financing has become an important area for Commercial Banks in Bangladesh. To align its corporate policy with the regulation of Central Bank, banks have become more concerned about SME and opened windows to conduct business in this particular area. According to the latest circular of Bangladesh Bank (Date – 26/05/2008), the definition of Small and Medium Enterprise sector is given below:

Small enterprises:

Small enterprises refer to those enterprises which are not any Public Limited Companies and which fulfill the following criteria-

 Service Concern:

Having an investment of Tk.50,00 to Tk. 50, 00,000 excluding land & building And / or employing up to 25 workers.

 Business Concern:

Having an investment of Tk. 50,000 to Tk. 50, 00,000 excluding land & Building and / or employing up to 25 workers.

 Manufacturing Concern:

Having an investment of Tk. 50,000 to Tk. 1, 50, 00,000 excluding land & Building and / or employing up to 50 workers.

  Medium enterprises:

Medium enterprises refer to those enterprises which are not any Public Limited Companies and which fulfill the following criteria:

Service Concern:

Having an investment of Tk.50, 00,000 toTk.10,00, 00,000 excluding land & building and / or employing up to 50 workers.

Business Concern: Having an investment of Tk. 50, 00,000 to Tk. 10, 00, 00,000 excluding land & building And / or employing up to 50 workers.

Manufacturing Concern:

Having an investment of Tk.1,50, 00,000 to Tk.20, 00, 00,000 excluding land & building And / or employing up to 150 workers.

 SME products offer by AB Bank Limited:

The following Loan schemes under the category of Small & Medium Enterprise (SME) have been introduced:

Loan syndication

Syndication or club financing is a growing concept in Banking Arena of Bangladesh. Syndicated finance diversifies the risk of one bank on a single borrower and increases the quality of loan through consensus or cumulative judgment and monitoring of different banks / financial institutions.

AB Bank, the first bank in the private sector also took initiative to adapt to this growing concept.

In 1997, AB Bank for the first time arranged a club financing with AB Bank Ltd to raise Tk. 6700 lac – out of which ABBL financed Tk. 5700 Lac and Dhaka bank financed Tk. 1000 Lac.

In 1999, AB Bank arranged its second syndicated credit facility with IPDC to raise Tk 3563 Lac.

Since then AB Bank did not look back.

Since 1997 to 2007 (till date), AB Bank has raised total Tk. 25989.56 Lac as Lead Arranger. The following banks from time to time have been our partners in these syndications:  Dhaka Bank, IPDC, EXIM Bank, Bank Asia, Oriental Bank, NCC Bank, The City Bank, Trust Bank, Bank Asia.

AB Bank has also participated in different syndications arranged by other Banks, out of which till date 6 (six) syndication has successfully been completed. AB Bank exposure in these completed syndications was   Tk. 4700 Lac.

Islami banking

Islami banking to provide the Islami banking services in accordance with the principles of Islami Shariah, AB Bank has established Islamic Banking Wing and started its functioning by opening full-fledged Islamic banking branch on 23.12.2004. The branch is known as AB Bank Islami Banking Branch, Kakrail, and is situated at 82, Kakrail, Ramna, and Dhaka. Prominent Islami Banker Mr. M. Azizul Huq has joined the Bank as its Islami Banking Consultant. A dedicated team of experienced Islamic bankers is working under his active guidance both at head office and branch level. A competent Shariah Council consisting of Islami scholars, Ulema, Fukaha and Islamic bankers headed by Mr. Shah Abdul Hannan, a prominent Islamic scholar and former Secretary, Government of Bangladesh has also been formed to guide the Islamic banking affairs. Board of directors as well as management of the bank are very much interested to promote Islamic banking system in the bank aiming at opening more Islamic branches in the near future. AB Bank has already obtained membership of Islamic Banks Consultative Forum (IBCF) and Central Shariah Board for Islamic Banks of Bangladesh.

Under this wing AB Bank extends the following Islamic banking services:

•   Deposit services
•   Investment services

Under Deposit services the following services are being rendered:

•   Mudaraba Savings Account
•   Mudaraba Short Noticed Account
•   Mudaraba Term Deposit Account (with different terms)
•   Mudaraba Monthly Profit Account
•   Al-Wadiah Current Deposit Account
•   Mudaraba Deposit Pension Scheme

 Other services

Above all AB Bank also provides the following services to its customer:

a) AB Investment Bank Limited (ABIL),

 a subsidiary of AB Bank Limited incorporated under the company’s act 1994 and running its Merchant Banking operations being licensed by the securities and exchange commission. ABIL’s head office is located at 30-3 Dilkusha C/A, Dhaka. ABIL has two branch offices at Agrabad, Chittagong and Chowhatta, Sylhet.  Necessity of valued clients in view and upholding the principle of Islamic Shariah Custodial Service

 b) Card service

AB Bank Limited is one of the leading first generation private sector commercial banks with Branch Network all over the country. The Bank started issuing VISA Credit Cards from the end of year 2004 as a principal member of VISA International.

 AB Bank Visa EASI Credit Card

Who can apply for a card?

Anyone between 21 and 60 years of age and have a steady job or income that pays at least BDT 120,000 annually (gross), can apply for an AB Bank Visa EASI Credit Card.

 Card Annual Fees

ABBL Visa EASI Credit Gold: BDT 1,500 and ABBL Visa EASI Credit Classic: BDT 1000.

These prices are exclusive of VAT charges.

 Card Activation

After receiving the card, sign the acknowledgement slip and send it to card division or any branch of ABBL or call Card Division for activation. Sign the signature panel, back of the card.

PIN Maintenance

Destroy the PIN mailer after memorizing don’t write the PIN on the card Change the PIN every month

 C) Western union

Western Union Financial Services Inc. U.S.A. is the number one and reliable money transfer company in the world. This modern Electronic Technology based money transfer company has earned worldwide reputation in transferring money from one country to another country within the shortest possible time.

AB Bank Limited has set up a Representation Agreement with Western Union Financial Services Inc. U.S.A. Millions of people have confidence on Western Union for sending money to their friends and family.

Through Western Union Money Transfer Service, Bangladeshi Wage Earners can send and receive money quickly from over 280,000 Western Union Agent Locations in over 200 countries and territories worldwide- the world’s largest network of its kind, only by visiting any branches of AB Bank Limited in Bangladesh.

For Inward Remittance, AB Bank established extensive drawing arrangement network with Banks and Exchange Companies located in the important countries of the world.

d) Locker service

A Safe Deposit Locker with AB Bank is the solution to your concern. Located at select branches in cities all over the country, our lockers ensure the safe keeping of your valuables.

Terms & Condition

•   For obtaining a Locker at AB Bank you must be an account holder with our Bank.
•   Lockers can be allotted individually as well as jointly.
•   The Locker holder is permitted to add or delete names from the list of persons who can operate the Locker and can have access to it.
•   Loss of Key is to be immediately informed to the concerned Branch.

Charges for lockers of AB Bank

Table- 3.3: Charges of Lockers of ABBL

e) Foreign remittance:

ABBL provides premium quality service for repatriation and collection of remittance with the help of its first class correspondents and trained personnel. By introducing on-line banking service and becoming a SWIFT Alliance Access Member, which enable its branches to send and receive payment instruction directly, which helps provide premium services. Remittance services provided by ABBL are:

  Inward Remittance: Draft, TT

  Outward Remittance: FDD, TT, TC and Cash (FC)

f) ATM Services:

We can find ABBL ATMs beside our home, in our office premise, nearby market, university, college & school premises, Airport, Railway stations etc., throughout the country. Using any of the ABBL ATM pools anywhere in the country, you can perform the following:

  Account balance enquiry

  Cash withdrawal – 24 hours a day, 7 days a week, 365 days a year

  Cash deposit to a certain number of ATMs any time

  Mini statement printing

  PIN (Personal Identification Number) change

All the ATMs can accept ABBL Easy ATM / POS card and ABBL Credit card

 g) Foreign trade:

ABBL extends finance to the importers in the form of:

  Opening of L/C (Foreign/Local)

  Credit against Trust Receipt for retirement of import bills.

  Short term & medium term loans for installation of imported

Import Finance:

ABBL extends finance to the importers in the form of:

  Opening of L/C

 Credit against Trust Receipt for retirement of import bills.

Export Finance:

ABBL extends finance to the exporters in the form of:

  Pre-Shipment finance

   Post-Shipment finance

h) ABBL internet banking:

ABBL Internet banking enables customer to access his/her personal or business accounts anytime anywhere from home, office or when traveling. Internet Banking gives customer the freedom to choose his/her own banking hours. It can save time, money and effort. It’s fast, easy, secure and best of all.

Using any of the ABBL ATM pools anywhere in the country, you can perform the following:

  Securities with ABBL Internet Banking

  A/c Opening & Accessing Internet Banking

  Internet Banking Features

 Terms & Conditions of Internet Banking

Credit Risk

The word credit comes from the Latin word “Credo” meaning “I believe”. It is a lender’s trust in a person’s/ firm’s/ or company’s ability or potential ability and intention to repay. In other words, credit is the ability to command goods or services of another in return for promise to pay such goods or services at some specified time in the future. For a bank, it is the main source of profit and on the other hand, the wrong use of credit would bring disaster not only for the bank but also for the economy as a whole.

The objective of the credit management is to maximize the performing asset and the minimization of the non-performing asset as well as ensuring the optimal point of loan and advance and their efficient management. Credit management is a dynamic field where a certain standard of long-range planning is needed to allocate the fund in diverse field and to minimize the risk and maximizing the return on the invested fund. Continuous supervision, monitoring and follow-up are highly required for ensuring the timely repayment and minimizing the default. Actually the credit portfolio is not only constituted the bank’s asset structure but also a vital factor of the bank’s success. The overall success in credit management depends on the banks credit policy, portfolio of credit, monitoring, supervision and follow-up of the loan and advance. Therefore, while analyzing the credit management of ABBL, it is required to analyze its credit policy, credit procedure and quality of credit portfolio.

Risk management framework

Risk is defined by ABBL as risk of potential losses or foregone profits that can be triggered by internal and external factors. Therefore, the objectives of risk management are identification of potential risks in .Our operations and transactions, in our assets, Liabilities, income, cost and off-balance sheet Exposures and independent measurement and assessment of such risks and taking timely and adequate measures to manage and mitigate such risks within a risk-return framework. In ABBL, only calculated risks are taken while conducting banking business to strike a balance between risk and return. Risk is clearly identified,

Mitigated or minimized and if possible eliminated to protect capital and to maximize value for shareholders. It is also ensured that on-balance sheet and off-balance sheet, risks taken by the Bank are consistent with risk appetite and short term as well as long term strategic objectives of the Bank. A wide range of tools and techniques are used to address & mitigate all kinds of inherent and potential Risks in banking operations.

The Bank attaches highest priority to establish, maintain and upgrade risk management infrastructure, systems and procedures. In this regard, sufficient resources are allocated to improve skills and expertise of relevant banking professionals to manage the risk effectively. The policies and procedures are approved by the Board and assessed on a regular basis to bring these to the level of satisfaction required to manage & mitigate the risks adequately and consistently. Ultimate responsibility for effective risk management lies with the Board of Directors of ABBL.

 Risk management producer

To ensure that risks are properly addressed and protected for sustainable development of the Bank, there are approved policies and procedures covering all the risk areas i.e. credit risks, operational risks and market risks. These are formulated taking into account Bangladesh Bank’s Guidelines on managing Core Risks on Credit Risk Management, Internal & Compliance, Asset and Liability Management, Foreign Exchange Risk Management, Information Technology Risk Management and Money Laundering Risk Management as well as the business environment in which the Bank operates, specific needs for particular type of operations or transactions and international best practice. These policies are regularly reviewed and updated to keep pace with the changing operating environment, technology and regulatory requirement. Meticulous compliance with the established procedures are ensured to satisfy that the Bank is operating within approved procedures limits and that risks are within tolerable limits to effectively ensure long term solvency and sustainable growth of the Bank.

 How credit risk is measured

Credit risk is usually measured on a comparative scale. As per BRPD (Banking Regulation and Policy Department), CRG (credit Risk Grading) score sheet, a scale, is used to summarize risk assessments. Since there is no accurate way to combine the different risk factors, credit professionals either examine and weigh the underlying risks directly, or confirm the track record over time of a credit rating system to discriminate effectively between high and low-risk lending in a particular bank.

The term credit analysis is used to describe any process for assessing the credit quality of a company or individual. Credit analysis includes credit scoring, it is more commonly used to refer to process that entail human judgment. Credit professionals in banks review the client’s balance sheet, income statement, recent trends in its industry, the current economic environment, etc. from this they can also assess the exact nature of an obligation. Based on this analysis, the credit manager assigns the client a credit rating, which can be used for making credit decision.

Many banks, investment managers and insurance companies hire their own credit analysts who prepare credit ratings for internal use. In Bangladesh there are two rating agencies one is Credit Rating Agency of Bangladesh Limited (CRAB) and another is Credit Rating and Information Services Limited (CRISL). These two do the rating of all organizations.

 Lending Risk Analysis (LRA): Modern technique of credit appraisal

The Financial Sector Reform Project (FSRP) has designed the LRA package, which provides a systematic procedure for analyzing and quantifying the potential credit risk. Bangladesh Bank has directed all commercial bank to use LRA technique for evaluating credit proposal amounting to Tk. 10 million and above. The objective of LRA is to assess the credit risk in quantifiable manner and then find out ways & means to cover the risk. However, some commercial banks employ LRA technique as a credit appraisal tool for evaluating credit proposals amounting to Tk. 5 million and above.

a)      Evaluation of financial risk:

Financial analysis of leverage, liquidity, profitability and interest coverage ratios will help to analyze the risk that borrower might fail to meet obligation due to financial distress.

b)     Evaluation of Business/Industry Risk:

Analyzing the business outlook, size of business, industry growth, market completion and barriers to entry or exit to understand the industry situation or unfavorable business condition that might have an impact on borrower’s capacity to meet obligation. This capitalizes on the risk of failure due to low market share and poor industry growth.

c)      Evaluation of Management Risk:

Due to poor management skill, experience of the management, its succession plan and teamwork might cause the borrower to default. 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 involve the strength of security and collateral, location of collateral and support.

d)     Security risk:

This sort of risk is associated with the realized value of the security, which may not cover the exposure of loan. Exposure means principal plus outstanding interest. The security risk is subdivided into two major heads i.e. security control risk and security cover risk.

e)      Evaluation of Relationship Risk:

These risk areas cover evaluation of limits utilization, account performance, conditions/covenants compliance by the borrower and deposit relationship.

Creditworthiness analysis

The notion “creditworthiness” can be defined as a presumed ability to meet agreed deadlines related to repaying the credit and the interest accrued without affecting the vitality of the borrower, i.e. there payment process should be based on the income received in the process of the borrower’s usual activity, without affecting adversely his financial situation, his financial results as well as other business entities.  An important point in conducting the credit activity is the thorough analysis of the business activity and the income received in this business activity is taken as a fulcrum. It is necessary that a number of conditions be observed, namely:

  The credit extended as an absolute value should meet the real needs of the borrower;

  The credit period should correspond exactly to the circulation speed of the resources  for the securing of which it has been extended;

  The profitability of the borrower’s business activity should entirely cover the credit amount, the interest rate, the charges and the risks, calculated in the credit analysis.

Stages of the credit analysis

The credit analysis can be defined as a process of determining the current creditworthiness of the loan applicant and forecasting the tendencies in its future development. This process is connected with the financial and accounting analysis of the current and future activity and the financial situation of the loan applicant in the specific economic environment and the expected changes in the forthcoming periods. The priority of the credit analysis is to determine the following:

  The managerial qualities of the loan applicant;

  His ability to regularly repay the loan, the interest accrued and charges by using his  current revenue from his business activity at present and in the future;

  The influence of micro and macro environment over the business activity of the company during the current period and in the future and respectively over his ability to service the bank loan;

  The correspondence between the extended credit and the real need for it;

  Specific risk situations which can affect the borrower’s money inflow and consequently result in problems with the repayment of the loan;

  The correspondence between the term of credit and the circulation speed of the funds for the raising of which it was extended.

Accounting information and creditworthiness analysis

From the presented model of creditworthiness analysis of bank loan applicants and the study of its main stages we come to the conclusion that the prerequisite for precision and accurate credit risk assessment in the credit analysis is the reliability and the sufficient trustworthiness of the collected economic information about the property and the financial situation of the loan applicants. The accounting information has the highest relative share in the total value of this information. This finding, however, is not sufficient. It is necessary to point out the range of the needed and sufficient accounting information for the needs of the credit analysis. The minimal required number of accounting reports, presented by the loan applicants is as follows:

  Accounting balance sheet;

  Profit and loss account;

  Statement of liability on previous credits and their servicing;

  Statement of changes in equity;

  Statement of cash flow;

  Audit reports on the company’s financial situation.

To these accounting documents we can add comparative reports on a number of balancing positions of the loan applicant. It is recommended that these comparative reports show the respective balancing positions in absolute and value terms. Along these lines a  comparative report on positions from the profit and loss account will be useful, as well as  a detailed analysis of the financial situation of the credit applicant and the tendencies in  its development over the latest accounting periods.

Categories of loan

According to BRPD (Banking Regulation and Policy Department) of Bangladesh bank loans and advances are grouped into four categories for the purpose of classification (non-performing) which are as follows:

a) Continuous Loan:

The loan accounts in which transactions may be made within certain limit and have an expiry date for full adjustment that will be treated as continuous loan. Examples are Cash Credit and Overdraft.

b) Demand Loan:

This type of loans is repayable on demand by the bank and is treated as Demand Loans. If any contingent or any other liabilities are turned to forced loans (i.e. without any prior approval as regular loan) these too will be treated as Demand Loans. Such as: Forced LIM (Loan against Imported Merchandise), PAD (Payment against Document), FDBP (Foreign Documentary Bill Purchase), and IBP (Inland Bill Purchase) etc. IBP is under FDBP and is used for export purposes e.g. client of Dhaka Bank will keep IBP as a guarantee, which is kept in another bank.

c) Fixed Term Loan: Loans, which are repayable within a specific time period under a specific repayment schedule that will be treated as Fixed Term Loans. These loans are given for either 3 or 5 years.

d) Short-term Agricultural & Micro Credit:

The annual credit programs issued by the Agricultural Credit and Special Programs Department (ACSPD) of Bangladesh Bank include short-term Agricultural Credits to the agricultural sector where the loans are needed to be repayable within twelve months. Short-term micro credit include credits not exceeding twenty-five thousands and need to repay within twelve months a few examples of micro-credit are Non-agricultural credit, Self-reliant Credit, Weaver’s Credit or Bank’s individual project credit. When a loan is not paid within the valid time period it is called “Irregular loan”.

Classification of loan

Credit may be classified with reference to elements of time, nature of financing and provision base.

a) Classification of irregular loans

SMA (Special Mention Account): Past due/overdue for 6 months or beyond but less than 9 months.

SS (Sub Standard): Non-repayment of 6 months installments or after 6 months of expiry.

DF (Doubtful): Non-repayment of loan within 3 months of the first installment payment (i.e. after 3 months of SS) or if the loan is not paid within 9 months of the due date then that loan will become DF.

CL (Classified loan): Unpaid/due for 3 months after becoming DF.

BL (Bad & Loss): After 60 months or 5 years of the due date.

Provision for loans and advances/investments is made based on year-end review by the management following instructions contained in (BCD) Bangladesh Bank Circular no. 34 dated 16 November 1989, BCD Circular no. 20 dated 27 December 1994, BCD Circular no. 12 dated 4 September 1995, BRPD Circular no. 16 dated 6 December 1998, BRPD Circular no. 9 dated 14 May 2001, BRPD Circular no.02 of February 2005, BRPD Circular no. 09 of August 2005 and BRPD Circular no. 17 dated 06 December 2005. The classification rates are given below:

 Table- 4.1: General Reserve for loan

When loan becomes BL, bank files case against the borrower to recover borrowed amount. Bank sell the land or any other property that has been kept as mortgage when client is unable to make payment then the force sale value of that property is shown as 30% less than the market value.

b) Classification on characteristics of financing

 The varieties used by ABBL are briefly described below with the common terms and condition. Banks generally offer different kinds of credit facilities to the customers.

The credit facilities of ABBL may be broadly classified into five categories. They are as follows:

Loans Cash Credit Overdraft Bills purchased and discounted Consumer Credit/ personal loan

They are discussed below accordingly.

Loan

In case of loan the banker advances a lump sum for a certain period at an agreed rate of interest. The entire amount is paid on an occasion either in cash or by crediting in his current account, which he can draw at any time. The interest is charged for the full amount sanctioned whether he withdraws the money from his account or not. The loan may be repaid in installments or at expiry of a certain period. Loan may be demand loan or a term loan.

Eligibility: loans are normally allowed to those parties who have either fixed source of income or who desire to pay it in lump sum.

Interest Rate: 12%-15% per annum (Quarterly paid).

Cash Credit

In Cash credit, banker specifies a limit called the cash credit limit, for each customer, up to which the customer is permitted to borrow against the security of tangible assets or guarantees.  Cash credit is given through the cash credit account. The purpose of cash credit is to meet working capital need of traders, farmers and industrialists.

In Cash credit, banker specifies a limit called the cash credit limit, for each customer, up to which the customer is permitted to borrow against the security of tangible assets or guarantees.  Cash credit is given through the cash credit account. The purpose of cash credit is to meet working capital need of traders, farmers and industrialists. Rate of Interest: 12%-14%. Renew System: it is renewed in periodic basis (yearly).

Overdraft

Overdrafts are those drawings which are allowed by the banker in excess of the balance in the current account up to a specified amount for definite period as arranged for. These advances are secured The loan holder can freely draw money from this account up to the limit and can deposit money in the account off course, this loan has an expiry date after which renewal or enhancement is necessary for enjoying such facility.  Any deposit in the OD account is treated as repayment of loan. Interest is charged as balance outstanding on quarterly basis. Overdraft facilities are generally granted to businessmen for expansion of their business, against the securities of stock-in-trade, shares, debenture, Government promissory notes, fixed deposit, life insurance policies etc.

Bills purchased and discounted

Banks grant advances to their customers by discounting bill of exchange or pro-note.

 Personal Loan (Consumer Credit Scheme)

Objectives:

The objectives of this loan are to provide essential household durable to the fixed income group (Service Holders) and other eligible borrowers. Car loan, loan for house renovation, vacation loan, marriage loan and loan for household equipment well as entertainment products are governed by personal loan program. The Total amount of loans along with the duration in which these loans taken, need to be repaid is given below:

Table- 4.2: Personal loan schedule of AB bank

Personal loan is given under personal guarantee of the borrower and another third parson known to the borrower. As this loan is collateral free the rate of interest is little bit high such as 15% to 18%. There is also a processing fee of 1.5% taken at the time of disbursement of the loan.

Models and tools available to evaluate credit risk

It is impossible to imagine life in today’s economy without loans. Major purchases, such as cars or homes are often financed by a bank loan. However, demands for smaller loans are increasingly at a higher rate. Banks have to be in a position to process loan applications swiftly and cost-effectively and make sound, objective decisions for both the clients and bank interests. The following models are used by various credit analysts around the world to evaluate credit risk:

 Lending Risk Analysis (LRA)

LRA is a traditional technique used by experienced people of credit department of banks to calculate the risk of loan. CRG is an upgraded tool of LRA. LRA is a ranking whose total score is 140. Among this score, 120 is for total Business Risk and 20 for Total Security Risk.

Table- 4.3: Business Risk

 Table- 4.4: Security Risk

 Credit Risk Model

Merton (1999) defines Credit Risk Modeling as a concept that broadly encompasses any algorithm-based methods of assessing credit risk. The term credit scoring is frequently used to describe the use of “asset value models” and “intensity models” in several contexts. These include:

  Replacing traditional credit analysis (LRA).

  Being used by financial engineers to value credit derivatives.

  Being extended as “portfolio credit risk measures” used to analyze the credit risk of entire Portfolios of obligations to support securitization, risk management or regulatory purposes.

There are several ways to manage and mitigate credit risk.

•   The first stage is the use of credit scoring or credit analysis to avoid extending credit to clients that incorporate excessive credit risk.
•   Credit risk limits are widely used; generally specify maximum exposure a bank is willing to take for a client.
•   Calculation of exposure under certain limit requires some form of credit risk modeling.
•   Transactions of credit may be structured to include collateralization or various credit enhancements.
•   Credit risks can be hedged with credit derivatives.
•   Finally, firms can hold capital against outstanding credit exposures.

 Credit scoring model

  To evaluate the creditworthiness of a client

  Credit score is a number indicating the statistical probability of a loan being repaid on schedule

  Calculated individually by bank based on the available information about the client (Last three years Income statement, Balanced sheet and others)

According to Peter Burns and Christopher Ody (2004), there are two types of risk models:

a)      Credit scoring models commonly used in credit underwriting.

b)      Loss forecasting models used to predict losses over time at the portfolio level.

Banks use Credit Scoring Model to make a variety of decisions, such as

Whether to grant credit,

  What will be the interest rate to set and

  What will be the borrowing limit? Bank management adjusts score for granting credit also for setting risk-based prices and credit limits. This adjustment is generally based on an assessment of market conditions and on the observed absolute rate of default for a given score band.

  Used for accruing accounts that are typically built on a static sample of accounts for which CIB (Credit Information Bureau) and often-other applicant or demographic information is available at the time of application

  Banks use it to separate and rank borrowers in order by risk-based on the possibility to default on a loan

 In contrast, validation of loss forecasting models is based on the accuracy of the model’s prediction compare to those of alternative model.

 Loss forecasting models

  Based on recent outcome performance generally one year, which can be weighted by the distributions of accounts today

  Considered to be more accurate than relying on scorecard outcomes which are one to two years old

  Any forecast assumes that the future is driven by the same factors that operated in the past

  Issues of causality and accuracy of data can cause degradation o the forecasts

  History of an individual account including the economic data and the use of time-series analysis make these forecasts more reliable over time

  Predict amount of Taka losses for a portfolio or sub-portfolio, not individual accounts

  Vintage Curve Analysis and Markov models are the most popular loss forecasting models that rely on delinquency analysis of accounts/clients

  Economic data may be explicitly included in the model or implicitly included by using a time series covering an entire business cycle.

Portfolio credit risk models

According to Crouhy et al. (2000) and Gordy (2000) default model can be combining with correlation model to facilitate modeling the credit risk of portfolios with exposures to multiple borrowers. The default model specifies unconditional probabilities of default for individual obligations. This model can be used

  To calculate utilization of industry, country or portfolio credit risk limits;

  To prize collateralized debt obligations (CDOs) or other securitizations;

  To support capital calculations

 Credit Risk Grading Score (CRG)

For loans to individuals or businesses credit quality is typically assessed through a process of credit scoring. CRG is an upgraded tool replaced LRA. The criteria for Credit Risk Grading (CRG) are:

  Financial risk

  Business/industry risk

  Management risk

  Security risk

  Relationship risk.

Function of Credit Risk Grading:

Well-managed credit risk grading systems promote bank safety and soundness by facilitating informed decision-making. Grading systems measure credit risk and differentiate individual credits and groups of credits by the risk they pose. This allows bank management and examiners to monitor changes and trends in risk levels. The process also allows bank management to manage risk to optimize returns.

Use of Credit Risk Grading:

 The Credit Risk Grading matrix allows application of uniform standards to credits to ensure a common standardized approach to assess the quality of individual obligor, credit portfolio of a unit, line of business, the branch or 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.
• Risk grading would also be relevant for surveillance and monitoring, internal MIS and assessing the aggregate risk profile of a Bank. It is also relevant for portfolio level analysis.

Number and Short Name of Grades used in the CRG:

The proposed CRG scale consists of eight categories with Short names and Numbers are provided as follows:

Table-4.5: Short name of CRG

Credit Risk Grading Definitions:

A clear definition of the different categories of Credit Risk Grading is given as follows:

 Superior – (SUP) – 1:

  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 company 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

Acceptable – (ACCPT) – 3:

  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 and 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 guarantee

  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 & early warning signals of emerging business credit detected.

  The borrower incurs a loss

  Loan 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 prospects 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.

Substandard – (SS) – 6:

  Financial condition is weak and capacity or inclination to repay is in doubt.

  These weaknesses jeopardize the full settlement of loans.

  An Aggregate Score of 45-54 based on the Risk Grade Score Sheet. Bangladesh Bank criteria for sub-standard credit shall apply.

Doubtful – (DF) – 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 Bad & Loss.

  Bangladesh Bank criteria for doubtful credit shall apply.

  An Aggregate Score of 35-44 based on the Risk Grade Score Sheet.

Bad & Loss – (BL) – 8:

  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 pursued.

  Bangladesh Bank criteria for bad & loss credit shall apply.

  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 valueless asset 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.

  An Aggregate Score of less than 35 based on the Risk Grade Score Sheet.

Computation Credit Risk Grading

The following step-wise activities outline the detail process for arriving at credit risk grading

 Step-1: Identify all the Principal risk component

Credit risk for counterparty 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.

Step-2: 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                                      45%
• Business/Industry Risk                        18%
• Management Risk                                10%
• Security Risk                                       15%
• Relationship Risk                                12%

Step-3: Establish the Key Parameters:                 

 Table- 4.6: the Key Risk Parameters of ABBL

Step- 4: Assign weight ages to each of the key parameters:

Table- 4.7: Assign weight ages to each of the key parameters

 Step-5: Input data to arrive at the score on the key parameters:

After the risk identification & weight age assignment process, the next steps will be to input actual parameter in the score sheet to arrive at the scores corresponding to the actual parameters.

Step-6: Arrive at the Credit Risk Grading based on total score obtained:

The following is the proposed Credit Risk Grade matrix based on the total score obtained by an obligor.

 Table- 4.8: Arrive at the Credit Risk Grading based on total score obtained

The CRG is being set by the Bangladesh Bank, which helps to evaluate the borrower. Risk manager inputs data available from their income statement, balance sheet and cash flow to the Financial Spread Sheet (FSS), which calculates the risk ratio and provides the score. Based on the total score of profitability, risk ratio etc. manager grades the client. A borrower be categorized ‘Superior’ when he provides full-cash security, or guaranteed by the government or international bank. This type of guarantee is superior because there is zero possibility of loan being classified or zero exposure.

 Next, a borrower is classified as ‘Good’ when the score is 85 or more. ‘Acceptable’ when credit risk grading score is between 75 and 84. Banker need not to be worry till the score is 75 because they are considered to be ‘Good-performing loan’. When the client is ranked ‘Marginal’ banker needs to be careful about sanctioning loan because this client has 50% probability that he might classify. Then as the score become less by 10 points the client will be categorized ‘Special Mention’, ‘Substandard’, ‘Doubtful’ and ‘Bad/Loss’ when score is below 35. These four are called Non-performing loan. This scoring system is a decision making tool.

Ultimately, if client wants to ensure a good credit score they should keep financially fit and deal responsibly with their financial commitments. It is confidence that a loan will be paid back on schedule that determines whether credit is granted.

Re-assessing clients regularly is always a good practice for ensuring proper risk management and financial growth in banks. Dhaka Bank Limited updates the records with the latest financial statement of the client every year and sometimes every six months for clients. It is a good practice from a credit-risk control standpoint.

Credit risk management of AB Bank

 In October 2003, Bangladesh Bank advised all banks to put in place an effective risk management system focusing on five core areas. In response to that, ABBL developed a Core Risk Manual on the five core risk areas approved by the Board. During 2004, as per BB guidelines, Credit Risk Management was given a new shape. A new CRM Division was created in June 2005 with identified responsibilities for managing credit risks. The Key feature of CRM in ABBL is the segregation of the relationship function from the credit approval function, in accordance with the core risk guidelines set by the Central Bank. Besides, an independent department, Risk Asset Management (RAM) has been established to deal with the credit

Disbursement and recovery process . Basel II guidelines require banks to accurately measure credit risk to hold sufficient capital to cover such risks. According to the management of ABBL, the Bank is under preparation to implement Basel II.

 Credit risk policy of ABBL

AB Bank have a credit risk policy document that  include risk identification, risk measurement, risk grading/ aggregation techniques, reporting and risk control/ mitigation techniques, documentation, legal issues and management of problem facilities. The senior management of AB Bank develops and establishes credit policies and credit administration procedures as a part of overall credit risk management framework and gets those approved from Board. Such policies and procedures shall provide guidance to the staff on various types of lending including Corporate, SME, Consumer, Housing etc. Credit risk policies should:

  Provide detailed and formalized credit evaluation/ appraisal process

  Provide risk identification, measurement, monitoring and control

  Define target markets, risk acceptance criteria, credit approval authority, credit origination/ maintenance procedures and guidelines for portfolio management

  Be communicated to branches/controlling offices. All dealing officials should clearly understand the FI’s approach for credit sanction and should be held accountable for complying with established policies and procedures.

  Clearly spell out roles and responsibilities of units/staff involved in origination and management of credit In order to be effective.

Further any significant deviation/exception to these policies must be communicated to the top management/ Board and corrective measures should be taken. It is the responsibility of senior management to ensure effective implementation of these policies duly approved by the Board.

Credit risk strategy

The very first purpose of AB bank’s credit strategy is to determine the risk appetite of the financial institution.  AB Bank develops a plan to optimize return while keeping credit risk within predetermined limits. It is essential that AB Bank give due consideration to their target market while devising credit risk strategy. The credit procedures should aim to obtain an in-depth understanding of ABBL clients, their credentials & their businesses in order to fully know their customers.

  AB Bank should develop, with the approval of its Board, its own credit risk strategy or plan that establishes the objectives guiding the bank’s credit-granting activities and adopt necessary policies/ procedures for conducting such activities. This strategy should spell out clearly the organization’s credit appetite and the acceptable level of risk-reward trade-off for its activities

  The strategy would, therefore, include a statement of the ABBL’s willingness to grant facilities based on the type of economic activity, geographical location, currency, market, maturity and anticipated profitability. This would necessarily translate into the identification of target markets and business sectors, preferred levels of diversification and concentration, the cost of capital in granting credit and the cost of bad debts

  The strategy should delineate ABBL’s overall risk tolerance in relation to credit risk, the institution’s plan to grant credit based on various client segments and products, economic sectors, geographical location, currency and maturity

  The strategy should provide pricing strategy and ensure that overall credit risk exposure is maintained at prudent levels and consistent with the available capital

  The strategy should provide continuity in approach and take into account cyclic aspect of country’s economy and the resulting shifts in composition and quality of overall credit portfolio. While the strategy would be reviewed periodically and amended, as deemed necessary, it should be viable in long term and through various economic cycles

  Senior management of ABBL shall be responsible for implementing the credit risk strategy approved by the Board

Credit Principles

In the feature, credit principles include the general guidelines of providing credit by branch manager or credit officer. In AB Bank Limited they follow the following guideline while giving loan and advance to the client.

Credit advancement shall focus on the development and enhancement of customer relationship.

All, credit extension must comply with the requirements of Bank’s Memorandum and Article of Association, Banking Company’s Act, Bangladesh Bank’s instructions, other rules and regulation as amended from time to time. Loans and advances shall normally be financed from customer’s deposit and not out of temporary funds or borrowing from other banks.

AB Bank provides suitable credit services for the markets in which it operates. It provided to those customers who can make best use of them. The conduct and administration of the loan portfolio should contribute with in defined risk limitation for achievement of profitable growth and superior return on bank capital. Interest rate of various lending categories will depend on the level of risk and types of security offered.

Credit planning

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.     

 Portfolio management

Portfolio Management implies the deployment of loan able fund among alternative opportunities through proper allocation. The objective of portfolio management of credit is the best and efficient management of loan to ensure profitability. Designing the size and pattern of loan portfolio with accuracy is a tough job. Even then, a prudent loan portfolio management can be done by careful consideration of the factors mentioned in the following:

  Bank’s Capital position

  Deposit mix (Tenure of deposit) Credit environment

  Influence for monetary and fiscal policies

  Credit needs of the respective commanding area

  Ability & experience of the bank personnel to handle the loan portfolio

In designing a loan portfolio, three things are considered;

  The type of customers the bank wants to serve.

   Involvement of risks with various kinds of loans

  The relative profitability of various kinds of loans.

With each and every coin of loan, there is an involvement of risk. So the quantum of risk should be spread over the various types of loan through diversification. Diversification of credit can be made by extending credit to different sectors, to different geographical area, to different line of product or business and allocating the loan able fund into different type of credit.

 Lending guidelines

AB Bank established “Lending Guidelines” that clearly outline the senior management’s view of business development priorities and the terms and conditions that should be adhered to in order for facilities to be approved.  The Lending Guidelines should be updated at least annually to reflect changes in the economic outlook and the evolution of the bank’s facility portfolio, and be distributed to all lending/marketing officers. The Lending Guidelines should be approved by the Managing Director/CEO & Board of Directors of the AB Bank based on the endorsement of the organization’s Head of Credit Risk Management and the Head of Business Unit.

Any departure or deviation from the Lending Guidelines should be explicitly identified in credit applications and a justification for approval provided.  Approval of facilities that do not comply with Lending Guidelines should be restricted to the bank’s Head of Credit or Managing Director/CEO or Board of Directors.

The Lending Guidelines should provide the key foundations for account officers/relationship managers (RM) to formulate their recommendations for approval.

Credit assessment

A thorough credit and risk assessment conducted prior to the granting of a facility, and at least annually thereafter for all facilities.  The results of this assessment  presented in a Credit Application that originates from the relationship manager/account officer (“RM”), and is reviewed by Credit Risk Management (CRM) for identification and probable mitigation of risks.  The RM should be the owner of the customer relationship, and must be held responsible to ensure the accuracy of the entire credit application submitted for approval.  RMs must be familiar with the organization’s Lending Guidelines and should conduct due diligence on new borrowers, principals, and guarantors.

It is essential that RMs know their customers and conduct due diligence on new borrowers, principals, and guarantors to ensure such parties are in fact who they represent themselves to be.  All banks should have established Know Your Customer (KYC) and Money Laundering guidelines which should be adhered to at all times. Credit Applications should summaries the results of the RMs risk assessment and include, as a minimum, the following details:

  Amount and type of facility(s) proposed

  Purpose of facilities

  Facility Structure (Tenor, Covenants, Repayment Schedule, Interest)Security Arrangements

  Government and Regulatory Policies

  Economic Risks

In addition, the following risk areas should be addressed:

a) Borrower Analysis

The majority shareholders, management team and group or affiliate companies should be assessed.  Any issues regarding lack of management depth, complicated ownership structures or inter-group transactions should be addressed, and risks mitigated.

b) Industry Analysis

The key risk factors of the borrower’s industry should be assessed.  Any issues regarding the borrower’s position in the industry, overall industry concerns or competitive forces should be addressed and the strengths and weaknesses of the borrower relative to its competition should be identified.

c) Supplier/Buyer Analysis

Any customer or supplier concentration should be addressed, as these could have a significant impact on the future viability of the borrower.

d) Historical Financial Analysis

Preferably an analysis of a minimum of 3 years historical financial statements of the borrower should be presented.  Where reliance is placed on a corporate guarantor, guarantor financial statements should also be analyzed.  The analysis should address the quality and sustainability of earnings, cash flow and the strength of the borrower’s balance sheet.  Specifically, cash flow, leverage and profitability must be analyzed.

e) Projected Financial Performance

Where term facilities (tenor > 1 year) are being proposed, a projection of the borrower’s future financial performance should be provided, indicating an analysis of the sufficiency of cash flow to service debt repayments.  Facilities should not be granted if projected cash flow is insufficient to repay debts.

f) Credit Background

Credit application should clearly state the status of the borrower in the CIB (Credit Information Bureau) report. The application should also contain liability status with other Banks and FI’s and also should obtain their opinion of past credit behavior.

g) Adherence to Lending Guidelines

Credit Applications should clearly state whether or not the proposed application is in compliance with the FI’s Lending Guidelines.  The FI’s Head of Credit or Managing Director/CEO or Board should approve Credit Applications that do not adhere to the FI’s Lending Guidelines.

h) Mitigating Factors

 Mitigating factors for risks identified in the credit assessment should be identified.  Possible risks include, but are not limited to: margin sustainability and/or volatility, high debt load (leverage/gearing), overstocking or debtor issues; rapid growth, acquisition or expansion; new business line/product expansion; management changes or succession issues; customer or supplier concentrations; and lack of transparency or industry issues.

i) Facility Structure

 The amounts and tenors of financing proposed should be justified based on the projected repayment ability and facility purpose.  Excessive tenor or amount relative to business needs increases the risk of fund diversion and may adversely impact the borrower’s repayment ability.

j) Purpose of Credit

ABBL’s have to make sure that the credit is used for the purpose it was borrowed. Where the obligor has utilized funds for purposes not shown in the original proposal, FIs should take steps to determine the implications on creditworthiness. In case of corporate facilities where borrower own group of companies such diligence becomes more important. FIs should classify such connected companies and conduct credit assessment on consolidated/group basis.

k) Project Implementation

In case of a large expansion, which constitutes investment of more than 30% of total capital of a company or for a green field project, project implementation risk should be thoroughly assessed.  Project implementation risk may involve construction risk (Gestation period, regulatory and technical clearances, technology to be adopted, availability of infrastructure facilities) funding risk, and post project business, financial, and management risks.

l) Foreign Currency Fluctuation

Credit application should clearly state the assessment of foreign currency risk of the applicant and identify the mitigating factors for its exposure to foreign currency.

m) Security

A current valuation of collateral should be obtained and the quality and priority of security being proposed should be assessed internally and preferably by third party velour.  Facilities should not be granted based solely on security. Adequacy and the extent of the insurance coverage should be assessed.

 Application for loan

Applicant applies for the loan in the prescribed form of bank. The purpose of this forms is to eliminate the unwanted borrowers at the first sight and select those who have the potential to utilize the credit and pay it back in due time.

Getting Credit information

Then the bank collects credit information about the borrower from the following sources:

1. Personal Investigation
2. Confidential report from other bank, Head office, Branch or Chamber of commerce
3. CIB report from central bank

Scrutinizing and investigation

Bank then starts examination that whether the loan applied for is complying with its lending policy. If comply, than it examines the documents submitted and the credit worthiness. Credit worthiness analysis, i.e.an analysis of financial conditions of the loan applicant is very important. Then bank goes for Lending Risk Analysis (LRA) and spreadsheet analysis, which are recently introduced by Bangladesh Bank. According to Bangladesh Bank rule, LRA and SA is must for the loan exceeding Dhaka core. If these two analyses reflect favorable condition and documents submitted for the loan appears to be satisfactory then, bank goes for further action.

 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 is 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 genuinely 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:

•   Safety of fund
•   Security (easy marketability of the property given as security)
•   Liquidity (the tenure of the loan)
•   Profitability Diversity
•  National interest

The C’s of good & bad loan:

The Branch manager of ABBL try to judge the possible client based on some criteria. These criteria are called the C’s of good and bad loans. These C’s are described below: a) Character

The outcome of analyzing the character is to have overall idea about the integrity, experience, and business sense of the borrower. Two variables; Interaction/interview, and Market Research are used to analyze the character of the borrower.

1. Interaction/interview: the indicators are

a) Prompt and consistent information supply, information given has not been found false (Willingness to give information)

b) CIB also reveals business character.

c) Willingness to give owns stake/equity & collateral to cover.

d) Tax payer.

2. Market Research:

a) Information on business is verified.

b) Dealing with supplier and or customer as supplier is also a kind of lender; the payment character can also be verified.

 b) Capital

For identifying the capital invested in the business can be disclosed using the following indicators.

a) Financial Statements

b) Receivable, Payable, statements to practically assess the business positions.Net worth through financial statements or from declaration of Assets & Liabilities.

 c) Capacity (Competence)

Capability of the borrower in running the business is highly emphasized in the time of selecting a good borrower. As the management of the business is the sole authority to run the business that is use the fund efficiently, effectively and profitably.  The indicators help to identify the capacity of the borrower.

a) Entrepreneurship skills i.e. risk taking attitude shown by equity mobilization.

b) Management competencies both marketing and products detail, ability to take decision. c) Resilience or shock absorption: Connection, Back up (if first time falls second lines come to help.)

 d) Collateral

Make sure that there is a “second way out “of a credit, but do not allow that to drive the credit decision.

 e) Cash Follow:

Cash flow is the vital factor that is used to identify whether the borrower will have enough cash to repay the loan or advance. Cash keeps the liquidity to ensure repayment. The relationship manager tries to identify the annual cash flow from the submitted statements.

 Appraisal of a project

Project is an investment activity from which benefit is expected to be generated over a period of time. Appraisal of project implies the critical analysis of a project from various angles. It is a comprehensive study to see whether the project is commercially profitable, economically viable and socially desirable. An appraisal covers the feasibility study of the following aspects:

  Technical aspect

  Marketing aspect

  Financial aspect

  Managerial aspect

  Socio-economic aspect

a) Technical aspect

In this part, the factors those are more or less technical in nature are examined. Examination of the technical factors enables to know whether the project is technically feasible. The Points of observation in this area are:

  Location or site of the project

  Availability of infrastructural facilities such as: roads & transport, school, college etc.

  Availability of raw materials

  Availability of utilities such as: electricity, gas water etc.

  Availability of required machinery

  Climatic position in the project area

  Availability of required labor

  Nearness of market for the product

  Political factors such as Government Patronage, industrial policy of the Government

  Proximity to complementary projects

b) Marketing aspect

Marketing aspect is the most significant aspect. Whether a project will be able to generate profit depends largely upon the market position. The market demand for the product of the project is analyzed in this part of appraisal. The following assessments are made under marketing feasibility test:

  Past & present demand for the product

  Past & present supply of the product

  Expected future demand for the product

 Demand and supply gap

Existence and impact of complementary goods and the distribution channel or marketing mechanism is critically analyzed in this part of project appraisal.

c) Financial aspect

It is another significant part of appraisal. Financial viability of a project is examined in this part. Various financial tools & Techniques are used in testing the financial viability such as:

1. Capital Budgeting
2. Break Even Analysis
3. Sensitivity Analysis
4. Ratio Analysis

Capital Budgeting Technique

Capital budgeting is a process of planning and evaluating expenditures on assets whose cash flows are expected to extend beyond one year. The Capital budgeting tools used for evaluating an investment opportunity are:

Technical Approach (Time value of money not adjusted):

Average/Accounting Rate of Return (ARR):

ARR is arithmetic expression of expected return from the investment. The higher the rate, the more is the financial viability of the project.

Payback Period:

The period within which the volume of investment is expect to be returned from the project. The “period” should be less than the maximum acceptable payback period.

Discounted cash flow Approach (Time value of money adjusted):

Net Present Value (NPV)

It is the difference between present value (Time adjusted value) of expected inflow or benefit and that of outflow or investment.

Under this method expected future benefits are being converted into present value using reasonable rate of discount. In case of a single project, the project can be accepted present value of inflow is higher than the present value of outflow. But in case of a mutually exclusive decision, the project having higher NPV should be accepted.

Internal Rate of Return (IRR)

It is a rate at which the present value of inflow equates the present value of outflow. IRR tells the minimum required rate of return from an investment. Acceptable IRR is being determined by considering the opportunity cost, cost of capital, the prevailing maximum return in the economy etc. IRR is a trial and error method. Under trial & error process two discounting rate-one, at which NPV is negative and another one, at which NPV is positive are used in calculating IRR.

Profitability Index (PI)

PI is calculated by dividing present value of inflow with the present value of outflow. A project can be accepted if PI ≥ 1.

 Break Even Analysis

Break-Even Analysis is commonly known as the Cost-Volume-Profit (CVP) analysis. Break-even analysis shows the relationship between cost and revenue with respect to profit. By showing the break-even point, this analysis says the minimum level of output or sales that is required to equate the cost. Moreover, break-even analysis provides a clear idea about the required volume of sales to earn a target profit.

 Sensitivity Analysis:

Sensitivity analysis provides the picture of relative changes in overall profitability due to change in any variable. Usually changes (increase) in material and other variable cost or changes (decrease) in selling price are being taken into consideration for making sensitivity analysis.

Ratio Analysis:

Ratio analysis is the analysis and interpretation of data given in the financial statement such as: Balance Sheet, Income statement, Cash Flow statement, Changes in Equity statement etc. Ratio is the quantitative expression of relationship between two accounting figures. Ratio analysis gives a clear picture about the strength and weakness of a firm, its historical performance and current financial condition. The common ratios that are being used in the analysis are:

 Liquidity Ratio

  Current Ratio

  Acid Test etc.

Solvency Ratio:

  Debt-Equity Ratio

  Debt to Total Asset Ratio

  Debt Service Coverage Ratio etc.

Activity Ratio

  Inventory Turnover Ratio

  Debtors/Receivable Turnover Ratio

  Total Asset Turnover Ratio etc.

 Profitability Ratio

  Profit Margin

  Return on Investment

  Return on Equity etc.

d) Managerial aspect

This is another important aspect of the appraisal. Managerial feasibility refers to the assessment of ability of management personnel in managing a project efficiently.

The management personnel should have:

  Technical skill to use knowledge, method and Techniques (acquired from experience, education and training) to perform the job

  .Human skill to maintain interpersonal relationship within or outside the organization.

  Conceptual skill to understand the complexities in overall organization.

e) Socio-Economic aspect

The observation of this aspect is to see whether the project is socially desirable. How much contribution will be made by the project to the GDP and how many numbers of employment will be generated by the project should be ascertained.

Working capital assessment

The Capital, which is needed to meet current obligation and to finance against day-to-day operational expenditure of a firm, is working capital. Assessment of working capital bears great importance because, excess working capital incurs cost for the firm and in reverse, shortage of working capital may totally upset the smooth operation of the firm.

Practically, working capital becomes obvious for the following reasons:

  For purchase of raw materials, stores & spares

  For making advance payment to the raw material suppliers

  Blocking of fund in work-in-process and finished goods

  Blocking of fund with sundry debtors

  For meeting day to day cash expenditures

Basis of Working Capital Assessment

Required components of working capital are to be computed prudently, for example: for a manufacturing concern, working capital can be assessed by calculating the major components:

  Projected annual sales

  Yearly consumption of raw materials

  Annual labor charges

  Overhead costs

  Stock of raw materials

  Stock of work in process

  Stock of finished goods

  Credit allowed to customer in days

  Credit received from suppliers in days

  Annual selling & administrative expenses

 Annual depreciation

  Closing inventory

The days or tied up period for stock of raw materials (Local / Imported), stock of work in process, stock of finished goods, credit allowed to customers, credit received from suppliers should be considered very prudently.

 Documentation of loans & advances

Immediate after sanctioning of loan, documentation is to be made properly before disbursement of loan. Documentation formalities are commonly known as completion of ‘Charge Documents’ in the banking world. Types of documents signed by the clients vary depending upon the nature of loans and advances given. Some common documents are listed below:

  Demand Promissory (DP) Note

  Letter Arrangement

  Letter of Agreement

 Letter of continuity (in case of continuous loan)

  Letter of pledge (in case of Pledge)

  Letter of Hypothecation (in case of Hypothecation

  )Letter of Undertaking

  Letter of Debit Authority

  Letter of Installment (in case of Term Loan / Short Term Loan to be paid in installment)

  Letter of Guarantee (Personal Guarantee)

 Security against Advances

The different types of securities that may be offered to a banker are as follows:

(a) Immovable property

(b) Movable property

1. Pratiraksha Sanchaya Patra, Bangladesh Sanchaya Patra, ICB unit certificate, wage earner development bond
2. Fixed Deposit Receipt
3. Shares quoted in the Dhaka Stock Exchange and Chittagong Stock Exchange
4. Pledge of goods
5. Hypothecation of goods, produce and machinery
6. Fixed assets of manufacturing unit
7. Shipping documents.

 Credit approval system

 Preparation of quality credit proposal helps to mitigate credit risk in aid of certain guidelines of Bangladesh Bank. ABBL follows the strategy of risk diversification through syndicated financing wherever applicable. A detailed analysis of the borrower and relevant industry is conducted through Credit Risk Grading model to mitigate risk factors. Credit Committee of the Bank works on a basic platform for credit evaluation and approval up to certain limit beyond which proposals are placed in the Board.

 Approval Authority:

The authority to sanction/approve loans must be clearly delegated to senior credit executives by the Managing Director/CEO & Board based on the executive’s knowledge and experience. Approval authority should be delegated to individual executives and not to committees to ensure accountability in the approval process. The following guidelines should apply in the approval/sanctioning of loans:

  Credit approval authority must be delegated in writing from the MD/CEO & Board (as appropriate), acknowledged by recipients, and records of all delegation retained in CRM. Delegated approval authorities must be reviewed annually by MD/CEO/Board. The credit approval function should be separate from the marketing/relationship management (RM) function. The  role of Credit Committee may be restricted to only review of proposals i.e. recommendations or review of bank’s loan portfolios.

  Approvals must be evidenced in writing, or by electronic signature. Approval records must be kept on file with the Credit Applications.

  All credit risks must be authorized by executives within the authority limit delegated to them by the MD/CEO. The “pooling” or combining of authority limits should not be permitted.

  MD/Head of Credit Risk Management must approve and monitor any cross border exposure risk. Any breaches of lending authority should be reported to MD/CEO, Head of Internal Control, and Head of CRM. It  is essential that executives charged with approving loans have the relevant training and experience to carry out their responsibilities effectively. As a minimum, approving executives should have:

• At least 5 years experience working in corporate/commercial banking as a relationship manager or account executive.
• Training and experience in financial statement, cash flow and risk analysis.
• A thorough working knowledge of Accounting.
• A good understanding of the local industry/market dynamics.

Approval Process

The approval process must reinforce the segregation of Relationship Management/ Marketing from the approving authority. The responsibility for preparing the Credit Application should rest with the RM within the corporate/commercial banking department. Credit Applications should be recommended for approval by the RM team and forwarded to the approval team within CRM and approved by individual executives. Banks may wish to establish various thresholds, above which, the recommendation of the Head of Corporate/Commercial Banking is required prior to onward recommendation to CRM for approval.

In addition, banks may wish to establish regional credit centers within the approval team to handle routine approvals. Executives in head office CRM should approve all large loans. The recommending or approving executives should take responsibility for and be held accountable for their recommendations or approval. Delegation of approval limits should be such that all proposals where the facilities are up to 15% of the bank’s capital should be approved at the CRM level, facilities up to 25% of capital should be approved by CEO/MD, with proposals in excess of 25% of capital to be approved by the EC/Board only after recommendation of CRM, Corporate Banking and MD/CEO.

1. Application forwarded to Zonal Office for approved/decline
2. Advise the decision as per delegated authority (approved /decline) to recommending branches. A monthly summary of ZCO approvals should be sent to HOC and HOCB to report the previous month’s approvals sanctioned at the Zonal Offices. The HOC should review 10% of ZCO approvals to ensure adherence to Lending Guidelines and Bank policies.
3. ZCO supports & forwarded to Head of Corporate Banking (HOCB) or delegate for endorsement, and Head of Credit (HOC) for approval or onward recommendation.
4. HOC advises the decision as per delegated authority to ZCO
5. HOC & HOCB supports & forwarded to Managing Director
6. Managing Director advises the decision as per delegated authority to HOC & HOCB.
7. Managing Director presents the proposal to EC/Board
8. EC/Board advises the decision to HOC & HOCB Regardless of the delegated authority HOC to advise the decision (approval/decline) to marketing department through ZCO

Preferred risk management structures of ABBL & responsibilities

The appropriate organizational structure must be in place to support the adoption of the policies detailed in Section 1 of these guidelines. The key feature is the segregation of the Marketing/Relationship Management function from Approval / Risk Management / Administration functions. Credit approval should be centralized within the CRM function. Regional credit centers may be established, however, all applications must be approved by the Head of Credit and Risk Management or Managing Director /CEO /Board or delegated Head Office credit executive.

Key Responsibilities

The key responsibilities of the above functions are as follows.

Credit Risk Management (CRM)

  Oversight of the bank’s credit policies, procedures and controls  relating to all credit risks arising from corporate/commercial/institutional banking, personal banking, & treasury operations.

  Oversight of the bank’s asset quality. Directly manage all Substandard, Doubtful & Bad and Loss accounts to maximize recovery and ensure that appropriate and timely loan loss provisions have been made.

  To approve (or decline), within delegated authority, Credit Applications recommended by RM. Where aggregate borrower exposure is in excess of approval limits, to provide recommendation to MD/CEO for approval.

  To provide advice/assistance regarding all credit matters to line management/ RM.

  To ensure that lending executives have adequate experience and/or training in order to carry out job duties effectively.

Credit Administration:

  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 collateral, and is properly assigned to the bank.

  To control loan disbursements 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 borrower’s compliance with covenants and agreed terms and conditions.

Relationship Management/Marketing (RM)

  To act as the primary bank contact with borrowers.

  To maintain thorough knowledge of borrower’s business and industry through regular contact, factory/warehouse inspections, etc. RMs should proactively monitor the financial performance and account conduct of borrowers.

  To be responsible for the timely and accurate submission of Credit Applications for new proposals and annual reviews, taking into account the credit assessment requirements .

  To highlight any deterioration in borrower’s financial standing and amend the borrower’s Risk Grade in a timely manner. Changes in Risk Grades should be advised to and approved by CRM.

  To seek assistance/advice at the earliest from CRM regarding the structuring of facilities, potential deterioration in accounts or for any credit related issues.

Internal Audit/Control

  Conducts independent inspections annually to ensure compliance with Lending Guidelines, operating procedures, bank policies and Bangladesh Bank directives.

  Reports directly to MD/CEO or Audit committee of the Board.

Credit sanction system

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 stengp 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 authority. After fulfilling the conditions, the credit is disbursed .Credit monitoring and reviewing start at the time of disbursement. Necessary steps are taken to minimize the risks and increase the return of the Bank. Four-tire level is maintained in case of large amount of credit sanctioning. Credit Risk Grading (CRG) is also prepared in case of credit above Tk.1.00 crore. Supervision, Monitoring & Recovery of credit

To minimize the credit losses and effective monitoring, credit monitoring is done to detect early indication of the deteriorating financial health of a borrower. In the post sanction stage, constant monitoring is the key element in Risk Management and timely identification of accounts that have risks, monitoring, supervision, or close attention by management called Early Alert Accounts and minimize, external or regulator inspections.  Because of efficient credit risk management of ABBL, percentage of bad loan to total loans and advance reduced year by year; cash recovery, recovery from write-off loans increases.

Recovery of loan ensures the recycling of fund. Non-recycling of fund leads a bank or financial institution to become stagnant. So, recovery of loans and advances is a must. But the scenario of loan recovery is undoubtedly poor and inefficient in our financial system. Willful non-repayment of loan has become a culture in our country. This is mainly because of inadequate, inefficient and even absence of supervision & monitoring system.

Recovery can be ensured or at least making close supervision and monitoring can increase rate of recovery. Supervision should be started from the starting point of a credit proposal. Supervision can be done in two stages:

 Pre Finance Stage Supervision

In this stage, supervision should be made –

  To select the right borrower i.e., credit worthiness of the borrower should be considered first

  To be sure about the business prospect

  To see whether any misstatement made by the borrower etc.

Post Finance Stage Supervision

Post finance stage supervision is sometimes synonymous to the monitoring. Monitoring is a continuous process of overseeing the borrower, his business, his trend in repaying the loan. In this stage, supervision and monitoring should be made-

  To see whether the borrower draws the sanctioned credit regularly

  To see whether the loans are being properly & fully utilized

  To see whether the borrower repays the loan regularly

  To see whether the any significant change happens in the management of the borrower

  To see whether the borrower maintains close contact with bank regularly

  To see whether the any significant change happens in the borrower’s business plan

Supervision monitoring helps to develop a cooperative attitude between the borrower and the Bank. Moreover, close supervision & monitoring make the borrower loyal to the Bank and thus, supervision & monitoring ensure the recovery of loan.

 Early Alert process

An Early Alert Account is one that has risks or potential weaknesses of a material nature requiring monitoring, supervision, or close attention by management. If these weaknesses are left uncorrected, they may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date with a likely prospect of being downgraded to CG 5 or worse (Impaired status), within the next twelve months.

Early identification, prompt reporting and proactive management of Early Alert Accounts are prime credit responsibilities of all Relationship Managers and must be undertaken on a continuous basis. An Early Alert report should be completed by the RM and sent to the approving authority in CRM for any account that is showing signs of deterioration within seven days from the identification of weaknesses. The Risk Grade should be updated as soon as possible and no delay should be taken in referring problem accounts to the CRM department for assistance in recovery.

Despite a prudent credit approval process, loans may still become troubled. Therefore, it is essential that early identification and prompt reporting of deteriorating credit signs be done to ensure swift action to protect the Bank’s interest. The symptoms of early alert are by no means exhaustive and hence, if there  are other concerns, such as a breach of loan covenants or adverse market rumors that warrant additional caution, an Early Alert report should be raised.

Moreover, regular contact with customers will enhance the likelihood of developing strategies mutually acceptable to both the customer and the Bank. Representation from the Bank in such discussions should include the local legal adviser when appropriate.

An account may be reclassified as a Regular Account from Early Alert Account status when the symptom, or symptoms, causing the Early Alert classification have been regularized or no longer exist. The concurrence of the CRM approval authority is required for conversion from Early Alert Account status to Regular Account status.

 Credit Recovery

The Recovery Unit (RU) of CRM should directly manage accounts with sustained deterioration (a Risk Rating of Sub Standard (6) or worse). Banks may wish to transfer EXIT accounts graded 4-5 to the RU for efficient exit based on recommendation of CRM and Corporate Banking. Whenever an account is handed over from Relationship Management to RU, a Handover /Downgrade Checklist should be completed.

The RU’s primary functions are Determine Account Action Plan/Recovery Strategy Pursue all options to maximize recovery, including placing customers into receivership or liquidation as appropriate. Ensure adequate and timely loan loss provisions are made based on actual and expected losses. Regular review of grade 6 or worse accounts the management of problem loans (NPLs) must be a dynamic process, and the associated strategy together with the adequacy of provisions must be regularly reviewed. A process should be established to share the lessons learned from the experience of credit losses in order to update the lending guidelines

 NPL Account Management

All NPLs should be assigned to an Account Manager within the RU, who is responsible for coordinating and administering the action plan/recovery of the account, and should serve as the primary customer contact after the account is downgraded to substandard. Whilst some assistance from Corporate Banking/Relationship Management may be sought, it is essential that the autonomy of the RU be maintained to ensure appropriate recovery strategies are implemented.

 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 should be completed by the RM and forwarded to RU for acknowledgment. The account should be assigned to an account manager within the RU, who should review all documentation, meet the customer, and prepare a Classified Loan Review Report (CLR) within 15 days of the transfer. The CLR should be approved by the Head of Credit, and copied to the Head of Corporate Banking and to the Branch/office where the loan was originally sanctioned. This initial CLR should highlight any documentation issues, loan structuring weaknesses, proposed workout strategy, and should seek approval for any loan loss provisions that are necessary.

Recovery Units should ensure that the following is carried out when an account is classified as Sub Standard or worse:

Facilities are withdrawn or repayment is demanded as appropriate. Any drawings or advances should be restricted, and only approved after careful scrutiny and approval from appropriate executives within CRM.CIB reporting is updated according to Bangladesh Bank guidelines and the borrower’s Risk Grade is changed as appropriate. Loan loss provisions are taken based on Force Sale Value (FSV). Loans are only rescheduled in conjunction with the Large Loan Rescheduling guidelines of Bangladesh Bank. Any rescheduling should be based on projected future cash flows, and should be strictly monitored.

Prompt legal action is taken if the borrower is uncooperative.

 Non- Performing Loan (NPL) Monitoring

On a quarterly basis, a Classified Loan Review (CLR) should be prepared by the RU Account Manager to update the status of the action/recovery plan, review and assess the adequacy of provisions, and modify the bank’s strategy as appropriate. The Head of Credit should approve the CLR for NPLs up to 15% of the bank’s capital, with MD/CEO approval needed for NPLs in excess of 15%. The CLR’s for NPLs above 25% of capital should be approved by the MD/CEO, with a copy received by the Board.

 NPL provisioning and Write Off

The guidelines established by Bangladesh Bank for CIB reporting, provisioning and write off of bad and doubtful debts, and suspension of interest should be followed in all cases. These requirements are the minimum, and Banks are encouraged to adopt more stringent provisioning/write off policies. Regardless of the length of time a loan is past due, provisions should be raised against the actual and expected losses at the time they are estimated. The approval to take provisions, write offs, or release of provisions/upgrade of an account should be restricted to the Head of Credit or MD/CEO based on recommendation from the Recovery Unit. The Request for Action (RFA) or CLR reporting format should be used to recommend provisions, write-offs or release/upgrades.

5.20 Incentive program:

Banks may wish to introduce incentive programs to encourage Recovery Unit Account Managers to bring down the Non Performing Loans (NPLs). The table below shows an indicative incentive plan for RU account managers:

 Table- 5.1: Incentive Program of AB Bank Ltd

 Financial Analysis:

Financial analysis is one of the key indicators of banking sector performance. It indicate whether the bank perform well or not. Total asset, loan and advance, deposit, total shareholder’s equity, earning per share, profit after tax, return on asset, return on equity, and growth rate of asset, loan and advance, deposit, shareholder’s equity, profit after tax etc are the important element of financial analysis. My topics are financial analysis of ABBL in this chapter, but for better understanding I compare the operating performance of AB Bank with NBL. In this chapter I represent some graphical presentation of ABBL as well NBL.

 Profit after tax

Total profit after tax of AB Bank is consistently increases. In 2009 AB bank’s profit after tax increases by 43.44% and the amount was 3300.01 million taka. It increases 20.86% total amount of 2300.62 million taka in 2008. Profit after was in the year 2007, 2006 and 2005 was 1,903.49, 532.19, 162.45 and the growth rate was 257.67, 227.60, 80.67 respectively.

Table- 6.1: Profit after tax of ABBL& NBL

On the other hand profit after of NBL was 2070.47, 1517.43, 1238.11, 507.49 and 271.67 million taka in the year of 2009, 2008, 2007, 2006, and 2005 respectively.

Table- 6.2: Growth rate of ABBL

Above data and figure indicate that the total profit after tax of NBL was greater than the ABBL profit at the beginning year of the analysis, but in the letter year ABBL operating performance become better than the NBL performance.

 Deposit

Deposits are recognized when the Bank enters into contractual provisions of the arrangements with the counterparties, which is generally on trade date and initially measured at the consideration received.

During 2009, ABBL achieved growth of deposits by 21.20% compared to 53.78% in 2006. In such competitive market, maintaining high growth in deposit is very difficult. However, the Bank maintains double digit growth in deposits from 2006. Because of introducing some competitive, Attractive deposit products and all-out activities of the Bank; deposits growth flourished from 2006. The Bank’s major portion of deposits is the term deposits which are higher at cost, and such proportion is continuing increasing trend for last few years.

Table- 6.3: Deposit growth rate of ABBL

In 2009 total amount of deposit of AB Bank was 83,087.22 million taka compare to 27,361.44 million taka in 2005 and total amount of deposit of NBL was 76838.64 million taka in 2009 that was 32984.05 million taka in 2005.

Table- 6.4: Deposit amount of ABBL& NBL

 Loan & Advance

Analysis of the credit portfolio of AB Bank at the end of year 2009 shows that overdraft had the largest share of the total portfolio followed by loans (general, term loan, demand loan, project loan etc), and loan against trust receipt. In terms of growth, electronic banking is one of the major features of today’s banking and AB Bank credit card shows highest growth during this period amounting BDT 44.2 million. The govt. emphasizes to provide agriculture credit through commercial banks. During 2009 loan and advance amount of ABBL was 70,879.93 million taka it was 21,384.63 million taka in 2005, and the loan and advance amount of NBL was 65,129.29 million taka in 2009 compare to 27020.21 million taka in 2005.

Table- 6.5: Loan& advance of ABBL& NBL

Loan and advance growth of ABBL was 24.99% in 2009 that was 38.6%, 30.76%, 46.32 and 25.73% in the year 2008, 2007, 2006 and 2005 respectively.

Table- 6.6: Loan& advance growth rate of ABBL

 Total asset

As the net profit of ABBL is increases the total asset of the bank also increases. The amount of total asset of ABBL was 106,912.31 million taka in 2009 that was 33,065.40 in the year of 2005. Total asset of NBL was 38400.37 million taka in 2005 that was increases to 92084.79 million taka in 2009.

Table- 6.7: Total asset of ABBL& NBL

Growth in Loans and advances increased the asset base of the Bank. Total asset base of AB Bank increased in 2009 at a rate of 27.20% over that of 2008 compared to 32.26% growth in 2008. Each class of asset shows positive contribution in year 2009. Fixed assets shows highest growth because of new land and building amounting BDT 1,009.86 added with existing assets.

Table- 6.8: total asset growth rate of ABBL

 Shareholder’s equity

During the year 2009 shareholder’s equity of ABBL was 106,912.31 million taka over that of 2008 compare to 84,053.61 million taka in the year of 2008. Total shareholder’s equity of AB Bank was 63,549.86, 47,989.34 and 47,989.34 million taka in the year 2007, 2006 and 2005 respectively.

On the other hand shareholder’s equity of NBL was 92084.79, 72205.50, 56526.96, 46796.04 and 38400.37 in the year of 2009, 2008, 2007, 2006 and 2005 respectively. This data suggest that ABBL achieve shareholder’s trust by their performance.

Table- 6.9: Shareholder’s equity of ABBL& NBL

Shareholder’s equity growth rate of ABBL is consistently increases. In the year 2009 the growth rate was 50.04% that was 49%, 74.68%, 69.15% and 22.78% in the year 2008, 2007, 2006 and 2005 respectively.

Table- 6.10:   Shareholder’s equity growth rate of ABBL

 Earnings per share

Basic earnings per share have been calculated in accordance with BAS- 33 “Earning per Share” which has been shown in the face of the Profit and Loss Account. This has been calculated by dividing the basic earnings by the total ordinary outstanding share.

Price of a share mainly depends on some good news about the particular organization. Future expansion of business, effective management team, higher profit earnings ratio, return on asset, efficiency ratio etc. At the beginning of the analysis earning per share of NBL was higher than the AB Bank share. But in the letter year performance of ABBL become efficient and so the earning per share.

In the year 2005 earnings per share of ABBL was 31.26 taka and EPS of NBL was 43.85 taka that was lower than NBL EPS. But from 2006 to 2009 EPS of ABBL become higher than the NBL EPS.

Table- 6.11:  Earnings per share of ABBL& NBL

 Return on asset

Return on asset means how much profit is gain after using the total asset of the organization. This has been calculated by dividing the basic earnings by total asset. Return on asset of ABBL in the year of 2009 was 3.09 times this ratio was 2.74, 3, 1.11 and .5 times during the year of 2008, 2007, 2006 and 2005 respectively. In case of NBL this ratio was 2.25, 2.10, 2.19, 1.08 and .71 time from the year of 2009 to 2005.

Table- 6.12: Return on Asset of ABBL& NBL

 Return on equity

Return on equity indicates return to equity ratio. It means how much profit gain by the organization after using the total equity. ROE has been calculated by dividing the profit after tax by total equity.

Return on equity of AB Bank was 32.72, 343.22, 42.19, 20.61 and 10.64 during the year from 2009 to 2005 respectively. On the other hand ROE of NBL was 23.22, 24.77, 27.10, 21.37 and 9.93 in the year of 2009 to 2005. Above all other position, ROE of ABBL is greater than the NBL. All of the above data indicate that the CRM of AB Bank is more efficient than NBL. CRM carefully observe the creditor, regularly monitoring supervising the creditor before and after grants the credit.  AS a result performance of ABBL increases day by day.

Table- 6.13: Return on equity of ABBL& NBL

Strategic group of competition

After the operation of ABBL in Bangladesh its performance become better and better. Growth rate of AB Bank is consistently high. Market share increases, profitability, efficiency of the management team, earning per share, risk absorb ability is very high. AB Bank has better knowledge how to drill with customer and how to operate different segment within the country. In case of successfully running its business and compete with competitor AB Bank takes different types of strategic plan. As a result AB Bank operates its business so long time and enjoys the leading position in the banking sector of Bangladesh.

SWOT analysis of AB Bank

Strengths

  The Bank has been rated by CRAB Single (AA3) in terms of long term lending. The

Banks asset portfolio consists of above 60% in long term lending.

  The Bank’s Loan disbursement rate is growing largely, suggesting its high growth in lending to deposit ratio (currently 79.4%).

  The bank’s returns on assets and equity are also consistently rising. Its return on average assets registered significant growth of 2.74 % in 2008 and 3.1% in 2009, while its return on average equity also grew to 32.72% in 2008.Its Efficiency ratios are improving, with lower cost per unit operating income.

Weaknesses

  Net Interest Margin on the decline.

  Dilution in EPS in a recent 200%B share issue in 2007

  No cash dividend for shareholders in five years.

Opportunities

  The bank should focus on expanding its loan syndication and project financing business bigger projects.

  Improving capital market conditions and developing equity culture should help the bank

  Improve its fee based revenue by further developing its existing investment management and advisory business.

Threats

  There is intense competition in the local market, not only from the local banks but also from the foreign banks.

  The high growth period for PCBs is sure to decline in the near future, so the bank should be aware of it

Findings

AB Bank Limited provides loans and advances to the borrower through their different branches in all over the country. Though every branch is not best in all respective area of the program but in a particular area a bank can be best. The major point that I have identified in credit policy in procedure of giving loan & advances of AB Bank Limited is given below:

  There are many competitions in the banking sector of our country considering our economic condition. The loan provided by the banks is almost same in case of interest rate.

  Lending is one of the main functions of a bank. But lending is a risky procedure, in order to make it less risky AB Bank have different variations such as credit grading and risk grading system.

  Practical procedure is different from the policy that is prescribed by head office.

  Sometimes situation is a big factor at the time of giving loan. Such as-if there is an occurrence in the branch then head office will restricted the amount of giving loan. At that time Branch will not sanction more loans.

  The full process of loan sanction is done by the branch official, but the final decision is taken by the head office.

  The procedure of giving credit is very complex. That sometimes discourages client from taking loan.

  ABBL’s loans and advances are dominated by financing on short-term credit programmers mainly to the trade commerce & processing units rather in any manufacturing unit.

Recommendation

It is quite difficult to give suggestion to improve the banking conditions of ABBL. AB Bank Limited has been able to manage its credit portfolio skillfully and kept the classified loan at a very lower rate thanks go to the standard and stringent credit appraisal policy and practices of the bank. But all things around us are changing at an accelerating rate. Today is not like yesterday and tomorrow will be different from today. As we know that nothing is perfect, there is always a room for improvement, so I have found during my Thesis Report Prepare can be made up taking into account the following suggestion:                

  AB Bank should have a clear written lending guideline. The lending guideline should include Industry and Business Segment Focus, Types of loan facilities, Single Borrower and group limit, Lending caps, Discouraged Business Types, Loan Facility Parameters and Cross boarder Risk.

  It should adopt a credit grading system all facilities should be assigned a risk grade. And the borrowers risk grades should be clearly stated on credit application.

  Approval authority should be delegated to individual executives rather than Executive Committee/ Board to ensure accountability. This system will not only ensure accountability of individual executives but also expedite the approval process.

  The segregation of duties will improve the knowledge levels and expertise in each department.

  The organization structure should have to be changed to put in place the segregation of the Marketing, Relationship Management function from Approval, Risk Management Administration function.

  The responsibilities of the key persons of the above function must also be clearly specified.

  An Early Alert Account system should be introduced to have adequate monitoring, supervision or close attention by management. There should be a Recovery Unit to manage directly accounts with sustained deterioration. To encourage Recovery Unit incentive program may also introduced.

  AB Bank should increase the amount of loan and advance in micro credit sector as the loan recovery rate from micro credit sector is much higher. Improve the Credit risk management department for avoid possible defaulter.

  AB Bank should examine its borrower’s Cash flow Statement, Audited Balance Sheet, and Income Statement and other financial statement to make sure that its borrower has the ability to repay the loan.

Conclusion

The banking sector of Bangladesh is passing through a tremendous reform under the economic deregulation and opening up the economy. Currently this sector is becoming extremely competitive with the arrival of multinational banks as well as emerging and technological infrastructure, effective credit management, higher performance level utmost customer satisfaction and the transactions of foreign exchange.  As we all know in the business world things move on the will of impression. A banker cannot sleep well with bad debts in his portfolio. The failure of commercial banks occurs mainly due to bad loans, which occurs due to inefficient management of the loans and advances portfolio. Therefore any banks must be extremely cautious about its lending portfolio and credit policy

It has been observed that ABBL started its banking services with a view to minimize the customer’s needs by offering different products and services which are easy and affordable for all level of customers. To that extent, ABBL always emphasizes its customer services, product development, resource management, branch networking and the contribution to the economic development of the country. The bank also provides social services through ABBL as their social responsibility.

In spite of all limitations AB Bank still doing better and holding a good percentage of market shares in banking sector, only because of its best impression, performance and trust of its clients. Proper utilization of use of the loans is very much essential to meet up the requirements of the borrower wants. The loan applied for by the borrower must not be employed for unproductive purpose. So, a purpose-oriented loan must be followed up regularly by the Bank So that the borrower properly uses the fund. AB Bank Ltd airways trying to improve their credit policy for minimizing loss and maximizing profit and various measures are undertaken to develop the credit management system. Recently AB Bank Ltd is going to adopt pure automation system in credit division for proper handling of disbursement and better monitoring reviewing of regular and irregular loan. In addition they are exploring new ideas, implementing new technology to serve the better service to clients.

 References

  www.google.com

  www.abbl.com

  www.nbl.com

  www.thefinancialexpress-bd.com

  www.bangladesh-bank.org

  www.wikipedia.org

Books name:

Reilly/ Brown, Investment Analysis and Portfolio Management (8^th Edition)

Frederick C. Scherr, Modern Working Capital Management (International Edition)

Ross Westerfield Jaffe, Corporate Finance, (7^th Edition)

Frederic S. Mishkin, The Economics Of Money, Banking and Financial Market (7^th Edition)