Consumer Credit Management of AB Bank Limited

Inroduction

The report is an internship report prepared as a requirement for the completion of the BBA program. The primary goal of the internship was to provide ‘on the job’ exposure to the student and an opportunity for translation of theoretical conceptions in real life situation.  We the students were places in enterprises, organizations, research institutions as well as development projects. In this connection, after the completions of the BBA program, I was assigned to the of AB Bank Limited for practical orientation. I chose the topic “Consumer Credit Management of AB Bank Ltd”. For my internship report under the supervision Krishan Chandra Saha  Senior Lecturer , Department of Business Administration, University of Development Alternative.

Last year Bangladesh Bank undertook a project to review the global best practices in the banking sector and examines in the possibility of introducing these in the banking industry of Bangladesh. Fort ‘focus Groups’ were formed with participation from Nationalized Commercial Banks, Private Commercial Banks & Foreign Banks with representatives from the Bangladesh Bank as team coordinator to look into the practices of the best performing banks both at home and abroad.

BACKGROUND

After completion of all the required courses of the BBA Program from University of Development Alternative, it is an indispensable part of the study to get involved in a practical professional environment for 3 months. I joined AB bank Limited (Dhanmondi Branch.) as an intern. My assigned supervisor advised me to execute the report on “Retail Banking Operation of AB Bank Limited. The Dhanmondi Branch is the active Branch of AB Bank Ltd, full of ideal commercial activities. Since this branch performs the entire banking role, as a result, one can easily learn all simple and intricate banking operations. This report is the output my last three months’ endeavor during a practical experience. This report was prepared on the basis of this Bank’s current conditions and management systems in credit sectors.

Objectives

General objective of the study is to analysis the Consumer Credit of AB Bank Ltd. The broad objective of preparing this study is to get an overall idea about the Consumer Credit Management System in banking sector by working in practical world.

The study has been undertaken with the following specific objectives:

• To analysis the pros and cons of the conventional ideas about consumer credit operation of a Bank.
• To have better orientation on consumer credit management activities specially consumer credit policy and practices, appraisal, processing steps, of AB Bank Ltd.
• 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 consumer credit management of AB bank Ltd.
• To get an overall idea about the performance of AB Bank Ltd.

Scope of the study

The study encompasses organizational profile of ABBL. The study is also focused the credit flows of, overall credit management system and the strategies of it, micro and macro impact of credit disbursement in the private sector and the strategies to attract and retain credit seeking customers of AB Bank Ltd.

Methodology

Methodology will include direct observation, face-to-face discussion with employees of the different departments of the AB Bank Ltd., clients, study of files, circulars & overall practical experience of last three months.

Data Sources

Most of the necessary information was collected from the annual report of AB Bank Limited. Besides that, text books were also being analyzed for conceptual ideas. Information was also taken from several publications of the Bangladesh Bank.The sources are:

• Annual Report of AB Bank Ltd. Periodicals published by the Bangladesh Bank.
• Different publications regarding banking functions, foreign exchange operation, and credit policies.
• Various journals and books.
•  Browsing of different web sites in the Internet.

Significance of the Study

The significance of the study is to gain an inside knowledge about the strategies used to attract and retain clients using the AB Bank consumer credit line. The present study could be very important to the Stakeholders in AB Bank Ltd. The credit department is the most important department in generating revenue for a Bank. This study will also give valuable information and insight on the functioning of the Credit Department to the employees of AB Bank Ltd. The employees will be able to see if their efforts have been up to the mark according to the clients’ expectations. If it is not up to the mark, then they can increase their efforts to meet the clients’ expectations and excel in their profession.

LIMITATION

To make a report various aspects and experience are needed. But I have faced some barriers for making a complete and perfect report. These barrier or limitations which hinder my work.

The limitations regarding the preparation of the report are as follows:

• The main constraint of the study is inadequate access to information, which has hampered the scope of the analysis required for the study.
• Some problems create confusions regarding verifications of data.
• The time is insufficient to know all activities.
• It was very difficult to collect the information from various personnel for their job constraint.
• Some employee cannot provide appropriate information. Because they have lack of knowledge about their work.

AB Bank 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 27 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 74 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 27 this year, concluded the 2008 financial year with good results. The Bank’s consolidated profit after taxes amounted to Taka 230 crore which is 21% higher than that of 2007. The asset base of AB grew by 32% from 2007 to stand at over Tk 8,400 cr as at the end of 2008.The Bank showed strong growth in loans and deposits. Deposit of the Bank rose by Tk. 1518 crore i.e., 28-45% while the diversified Loan Portfolio grew by over 30% during the year and recorded a Tk 1579 core increase. Foreign Trade Business handled was Tk 9,898 crore indicating a growth of over 40% in 2008.

The Bank maintained its sound credit rating in 2008 to that of the previous year. The Credit Rating Agency of Bangladesh Limited (CRAB) awarded the Bank an Al rating in the long term and ST-2 rating in the short Term. From 14th November 2007 Bank changed its existing logo and presently known as AB Bank Ltd. instead of Arab Bangladesh Bank Limited.

Mission Statement to be the best performing bank in the country. Vision Statement to be the trendsetter for innovative banking with excellence & perfection

• To mobilized resources form within the country for suitable and profitable investment.
• To create new entrepreneur in the field of trade, commerce and industry by creating their financial need and providing guidance and advice towards right direction of investment.
• To help formation of capital, broaden the investment base and develop the capital market.
•  To contribute in the field of industrialization of the country and growth of National Economy.
•  To establish, maintain, carry on, transact, undertake and conduct all types of banking, financial all investment and trust business in Bangladesh and abroad.

Main product & services of AB Bank are as follows:

1. Retail Banking
2. Corporate Banking
3. SME Banking
4. Project Finance
5. Loan Syndication
6. Lending Rates
7. Deposit Accounts
8. Exchange Rates
9. Money Transfer
10. Cards
11. Treasury & Foreign Exchange Products
12. Service Products
13. SME Loans

There are some consumer Credit products in AB Bank. These are as follows:

1.  Personal Loan (Unsecured)
2.  Personal Loan (Secured)
3.  Auto Loan
4.  Easy Loan for Executives
5. Gold Grace — Jewelry Loan
6.  House/Office Furnishing/ Renovation Loan
7.  Staff Loan
8. Education Loan
9.  Personal Overdraft

From the graph above we can see that the bank continues to increase its operating profit from the year 2006 to 2009.so it could be predicted that the bank will be able to increase its profit in future.

From the above Graph we can see that the total assets of the Bank has increased gradually from 2005 to 2009, so it could be predicted that the bank will be able to continue its assts increasing in future.

The graph shows that the bank continues to increase the amount of loans and advances from 2005 to 2009 and it could be predicted that the bank would remain increasing the amount of its loans and advances in future.

The graph shows that the bank continues to increase the amount of loans and advances from 2005 to 2009 and it could be predicted that the bank would remain increasing the amount of its loans and advances in future.

The graph shows that EPS has decreased in 2006 but after that it started increasing gradually and could be predicted it will keep increasing in future

The graph shows that the bank continues to increase the amount of its deposits from year 2005 to 2009 and could be predicted that it will remain increasing in future.

The Graph shows that the bank continues to have an increasing amount of profit after tax(PAT) in every year and could be predicted that it will remain increasing in future.

 Credit is the provision of resources (such as granting a loan) by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt, and instead arranges either to repay or return those resources (or material(s) of equal value) at a later date. It is any form of deferred payment.^[1] The first party is called a creditor, also known as a lender, while the second party is called a debtor, also known as a borrower.

Credit need not necessarily be based on formal monetary systems. The credit concept can be applied in barter economies based on the direct exchange of goods and services, and some would go so far as to suggest that the true nature of money is best described as a representation of the credit-debt relationships that exist in society (Ingham 2004 p.12-19).

The word credit is used in commercial trade in the term “trade credit” to refer to the approval for delayed payments for purchased goods. Credit is sometimes not granted to a person who has financial instability or difficulty. Companies frequently offer credit to their customers as part of the terms of a purchase agreement. Organizations that offer credit to their customers frequently employ a credit manager.

Consumer debt can be defined as ‘money, goods or services provided to an individual in lieu of payment.’ Common forms of consumer credit include credit cards, store cards, motor (auto) finance, personal loans (installment loans), retail loans (retail installment loans) and mortgages. This is a broad definition of consumer credit and corresponds with the Bank of England’s definition of “Lending to individuals”. Given the size and nature of the mortgage market, many observers classify mortgage lending as a separate category of personal borrowing, and consequently residential mortgages are excluded from some definitions of consumer credit – such as the one adopted by the Federal Reserve in the US.

The cost of credit is the additional amount, over and above the amount borrowed, that the borrower has to pay. It includes interest, arrangement fees and any other charges. Some costs are mandatory, required by the lender as an integral part of the credit agreement. Other costs, such as those for credit insurance, may be optional. The borrower chooses whether or not they are included as part of the agreement.

Interest and other charges are presented in a variety of different ways, but under many legislative regimes lenders are required to quote all mandatory charges in the form of an annual percentage rate (APR). The goal of the APR calculation is to promote ‘truth in lending’, to give potential borrowers a clear measure of the true cost of borrowing and to allow a comparison to be made between competing products. The APR is derived from the pattern of advances and repayments made during the agreement. Optional charges are not included in the APR calculation. So if there is a tick box on an application form asking if the consumer would like to take out payment insurance, then insurance costs will not be included in the APR calculation .

Visualizing the present scenario, AB Bank Limited has launched the consumer credit scheme into 9 product Brands as follows:

1)    Personal Loan

2)    Auto Loan

3)    Easy Loan (For Executives)

4)    Gold Grace-Jewelry Loan

5)    House/Office Furnishing/Renovation Loan

6)    Staff Loan

7)    Education Loan

8)    Personal Loan

Personal Loan 

Now covered under personal loan, subsequently a new product for executive will be designed

Lending Procedure of AB Bank Limited

The lending procedure starts with building up relationship with customer through account opening. The stages of credit approval are done both at the branches and at the corporate office level. The various stages of credit approval are described sequentially:

A loan procedure starts with a loan application from a client who must have an account with the Bank. At first it starts from the branch level. Branch receives application from client for a loan facility. In the application client mention what type of credit facility he/she wants from the bank including his/her personal information and business information. Branch Relationship Manager or the Relationship Credit Officer of the credit department conducts the initial interview with the customer.

After receiving the loan application from the client, the bank sends a letter to Credit Information Bureau of Bangladesh Bank for obtaining a credit inquiry report of the customer from there. This report is called CIB (Credit Information Bureau) report. This report is usually collected if the loan amount exceeds fifty thousand taka. The purpose of this report is to be informed that whether or not the borrower has taken loans and advances from any other banks and if so, what is the status of those loans and advances i.e. whether those loans are classified or not.

If Bangladesh Bank sends positive CIB report on that particular borrower and if the Bank thinks that the prospective borrower will be a good one, then the bank will scrutinize the documents. Required documents are:

• In case of corporate client, financial documents of the company for the last three to five years. If the company is a new one, projected financial data for the same duration is required.
• Personal net worth of the borrower(s).
• In this stage, the bank will require whether the documents are properly filled up and duly signed. Credit in charge of the relevant branch is responsible enquire about the ins and outs of the customer’s business through discussing with him/them.

Bank officials of the credit department will inspect the project for which the loan is applied. Project existence, its distance from the bank originating the loan, monitoring cost and possibilities are examined.

Any loan proposal needs to be evaluated on the basis of financial information provided by the loan applicant. Financial spread sheet analysis which consists of a series of quantitative techniques is employed to analyze the risks associated with a particular loan and to judge the financial soundness and worthiness of the borrower. Besides lending risk analysis is also undertaken by the bank to measure the borrower’s ability to pay considering various risks associated with the loan. These quantitative techniques supported with qualitative judgment are the most important and integral part of the credit approval process used by AB Bank Limited. This is the credit analysis phase.

Obtain legal opinion on the collateral provided by the applicant, whether those are properly submitted- regular and up to date or else those documents will be asked to regularize by the applicant.

The branch starts processing the loan at this stage. Based on the analyses (credit analysis) done by the branch, the branch prepares a loan proposal. The proposal contains following important and relevant information:

Name of the borrower (s), Nature of credit, Purpose of the credit, Extent of the credit, Collateral, Margin, Rate of interest, Repayment Schedule Validity.

If the proposal meets AB Bank’s lending criteria and is within the manager’s discretionary power, the credit line is approved. The manager and the sponsoring officer sign the credit line proposal and issue a sanction letter to the client.

If the value of the credit line is above the branch manager’s limit then it is sent to head office or zonal office for final approval with detailed information regarding the client (s), credit analysis and security papers.

Head office processes the credit proposal and afterwards puts forward an office notice if the loan is within the discretionary power of the head office credit committee or board memorandum if the loan requires approval from the board of directors.

If the zonal office, credit committee of the head office or the board as the case may be approves the credit line, an approval letter is sent to the branch. The branch then issues a sanction letter to the borrower with a duplicate copy. The duplicate copy duly signed by the borrower is returned to the branch of the bank. This duplicate copy returned by the applicant proves that the borrower agrees with the terms and conditions of the credit line offered by the bank.

After issuing the sanction advice, the bank will collect necessary charge documents. Charge documents vary on the basis of types of facility, types of collateral.

Finally loan is disbursed by the branch through a loan account in the name of the borrower and monitoring of the loan starts formally.

1. For lending against ABBL FDR, the rate is minimum 3.00% above the rate of the instrument subject to maximum 16.00%.
2. Exposure under cash collateral of other banks requires clearance from FI & Treasury.
3. For taking exposure on “Digun Loan” under Special Scheme, the rate will be 8% above the instruments’ rate; subject to maximum 17% p.a.
4. For Women Entrepreneur (Awparajita above Tk. 50.00 lac) under Special Scheme, the rate will be minimum 13.00%-16.00%.

First the applicant goes to the Credit Department with the proposal for loan processing. Then the proposal is sent to the Head Office for Approval, at the same time it is also sent to the Bangladesh Bank for collecting the CIB report of the Applicant. If the report is good then Head Office send an approval letter to the branch the proposal has came from. And then the branch prepares the required documents for the applicant and then the client come to the branch for further formalities.

In the above graph, we can see that the ABBL’s LDO’s position is highest in the manufacturing sector (40%), and the second highest is the Trading sector(25%).

First information sheet 

First information sheet (FIS) is the prescribed from provided by the respective branch that contains basic information of the borrower. It contains following particulars.

1. Name of the concern with its factory location, office address and Tel no.
2. Name of the main sponsors with their educational qualification.
3. Business experience of the sponsors, details of past and present business, its achievement and failures, name of all the concerns wherein the sponsors have involvement.
4. Income tax registration no. With the amount of tax paid for the last three years.
5. Details of unencumbered assets (movable & immovable) personally owned by the sponsors.
6. Details of liabilities with other banks and financial institutions including securities held there against.
7. Purpose of loan sought from AB Bank.
8. Estimated cost of the project & means of finance.

Application for credit line

After receiving the first information sheet from the borrower bank official verifies all the information carefully. He/she also checks the account maintains by the borrower with the bank. If the official become satisfied then he/she gives application to the bank prescribe format supplied by the bank called Credit for request limit (CRFL).

Borrowers Credit Worthiness Analysis by AB Bank Limited following 6 “C”s:

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

The loan officer must be convinced that the customer has a well defined purpose for requesting credit and a serious intention to pay. Responsibility, truthfulness, clean past record, true purpose and honest intention to repay the loan make up what a loan officer calls character.

The customer requesting credit must have the authority to request such and the legal standing to sign a binding loan agreement.

The borrower should have the ability to generate enough cash flow to repay the loan. This cash flow can be generated from sales or income from the sales or income, from the sale of liquidation of assets or funds raised through Collateral: The borrower must possess adequate net worth or enough quality assets to provide adequate support for the loan. The value of the collateral security must cover the loan exposure.

The recent trend of borrower’s line of work or industry must be taken into considerations by the lender.

The lender should be careful about whether changes in law and regulations could adversely affect the borrower and whether loan request meets the Bank’s and regulatory authorities’ standards for loan quality.

Collecting CIB Report from Bangladesh Bank

After receiving the application for credit line, Bank sends a letter to Bangladesh Bank for obtaining a report from there. This report is called CIB (Credit Information Bureau) report. Basically branch seeks this report from the head office for all kinds of loans. The purpose of this report is to being informed that whether the borrower the borrower has taken loan from any other bank; if ‘yes’, then whether the party has any overdue amount or not.

Making Credit proposal

Branch then has to find the right borrower by considering the following 6 C’s. These are character, capital, capacity, cash, collateral, condition (economic). If the branch thanks that the project is feasible then he will prepare a Proposal. Bank prepares the proposal in a specific from called credit proposal. Significance the proposal branch sends it to head office for approval.

Head Office Approval

The respective officer of Head Office appraises the project by preparing a summary named “Top Sheet” or “Executive Summary”. Then he/she sends it to the Head Office Credit Committee (HOCC) for the approval of the loan. The Head Office Credit Committee (HOCC) considers the proposal and takes decision whether to approve the loan or not. If the loan is approved by the HOCC, the HO sends the approval to the concerned branch with some conditions. These are like.

• Drawing will not exceed the amount of bill receivables.
• The tern over in the account during the tenure of the limit should    not be less than four times of the credit limit.
• All other terms and conditions, as per policy and practice of the bank for such advance to safeguard the banker’s interest shall also be applicable for this sanction also.
• Branch shall not exceed the sanctioned limit. Required charge documents with duly stamped should be obtained.

Head Office Approval Authority

Drawing shall be allowed only after completion of mortgage formalities and other security arrangement.

Approval Process

The approval process reinforces the segregation of Relationship Management/Marketing from the Approving Authority. All credit proposals shall be initiated at the Branch level and be forwarded to Head Office Credit Risk Management Division or Head Office Business Banking Division as per following process flow:

1. Branch Manager solicits business from customers.
2. Branch Manager and Credit Officer prepare Credit Memorandum (CM).
3. a. If the CM value i.e. proposed credit facility is within the discretion of Head Office Credit Committee, the CM is submitted to Head of Credit Risk Management (HOCRM) at Head Office.

If the CM value is within the discretion of the Board of Directors, the CM is submitted to the Head of Business Banking (HOBB) at Head Office. HOBB submits the CM, received from the Branch Manager, with their recommendation / comments to HOCRM

HOCRM submits CM to H.O. Credit Committee or Board of Directors, as the case may be. Credit Committee / Board approves (or declines) the Credit Memorandum

HOCRM advises decline of proposal or initiates queries with the Branch    Manager, if the CM is not approved or further information has been solicited by the approving authority. On approval, HOCRM advises the approval, along with all approval terms, to   (i) Branch Manager, (ii) Head Office Risk Asset Management, (iii) Branch Credit Administration and (iv) HOBS (if appropriate)

Post- Approval process:

1. Branch Manager advises the customer regarding the approved credit lines and the terms and conditions attached thereto.
2. Branch Manager forwards customer’s Acceptance of approval letter to Branch Credit Administration. [In case of ‘qualified’ acceptance given by the customer, Branch Manager addresses the same through the Credit approval chain.]
3. Branch Credit Administration obtains legal vetting arranges security / collateral valuation and collects all necessary charge documents, duly executed by the customer, through the Branch Manager.
4. Branch Credit Administration

Sanction letter

After getting the approval from the HO, the branch issues the sanction letter to the borrower. The borrower receives the letter and returns a copy of this letter duly signed by him as a token of having understood and acceptance of the terms and conditions above. Diagrammatically the whole loan appraisal and

Documentation of loans and advances:

In spite of the fact that banker lends credit to a borrower after inquiring about the character, capacity and capital of the borrower, he must obtain proper documents executed from the borrower to protect him against willful defaults. Moreover, when money is lent against some security of some assets, the document must be executed in order to give the banker a legal and binding charge against those assets. Documents contain the precise terms of granting loans and they serve as important evidence in the

Law courts if the circumstances so desire. That is why all approval procedure and proper documentation shall be completed before the disbursement of the facilities. The documents for loans and advances can be classified into two categories, namely Charge documents & Security documents.

DISBURSEMENT:

After verifying all the documents the branch disburses the loan to the borrower. A loan repayment schedule is also prepared by the bank and given to the borrower.

Follow-up:

After the disbursement of the loan bank officials time to time monitor the loan by physical observation of the activities of the party. It is done in the following manner.

• Constant supervision
• Working capital assessment
• Stock report analysis.

Monitoring:

Monitoring is a process of taking case of loan cases starts from the selection of the borrower and remains live throughout the life of a loan. To minimize credit losses, monitoring procedures and systems should be in places that provide an early indication of the deteriorating financial health of a borrower. At a minimum, systems should be in place to report the following exceptions to relevant executives in CRM and RM team:

1. Past due principal or interest payments, past due trade bills, account excesses, and breach of loan covenants.
2. Loan terms and conditions are monitored, financial statements are received on a regular basis, and any covenant breaches or exceptions are referred to CRM and the RM team for timely follow-up.
3. Timely corrective action is taken to address findings of any internal, external or regulator inspection/audit.
4. All borrower relationships/loan facilities are reviewed and approved through the submission of a Credit Application at least annually. Two possible solutions to minimize the credit loss:

Early Alert Process

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.

Incentive Program

Banks may wish to introduce incentive programs to encourage Recovery Unit Account Managers to bring down the Non Performing Loans (NPLs).

Credit Recovery

Commercial Banks sanction loan to different categories of borrowers for various purposes. Before sanctioning of loans and advances (short term loan, long term loan) bank appraises a loan proposal and analyze information relating to the borrower and purpose of the loan to determine viability of the loan proposal. If the proposal is found viable and safe for lending, loan is sanctioned and disbursed.

At the time of sanctioning loan, along with all other terms and conditions repayment period and installment is fixed. Recovery of loan starts just after the maturity of grace period. But more exhaustive appraisal of the loan proposal in the pre-sanction stage is not the guarantee to recover the loan money with interest unless a built in system of supervision & follow up is applied and proper treatment is given as and when problem arises.

The RU’s primary functions are:

1. Determine Account Action Plan/Recovery Strategy
2. Pursue all options to maximize recovery, including placing customers into receivership or liquidation as appropriate.
3. Ensure adequate and timely loan loss provisions are made based on actual and expected losses.
4. Regular review of grade 9 or worse accounts.

The loan classification procedure for all types of loan is governed by the guidelines contained in BRPD Circular no 16 dated 06.12.98 issued by Bangladesh Bank and subsequently revised partially through BRPD Circular no 9 and 10 dated 14.05.2000, According to this circular if any borrower fails to repay his amount or installment within the following time period then it will fall under the following classification status.

Risk Management

Risk is inherent in all aspects of a commercial operation; however for Banks and financial institutions, credit risk is an essential factor that needs to be managed. Credit risk is the possibility that a borrower or counter party will fail to meet its obligations in accordance with agreed terms. Credit risk, therefore, arises from the bank’s dealings with or lending to corporate, individuals, and other banks or financial institutions.

Credit risk management needs to be a robust process that enables banks to proactively manage loan portfolios in order to minimize losses and earn an acceptable level of return for shareholders.

Credit risk

It arises mainly from lending, trade finance and treasury businesses. This can be described as potential loss arising from the failure of a counter party to perform as per contractual agreement with the Bank. The failure may result from unwillingness of the counter party or decline in his / her financial condition. The Bank has segregated duties of the officers / executives involved in credit related activities. A separate Corporate Division has been formed at Head Office which is entrusted with the duties of maintaining effective relationship with the customers, marketing of credit products, exploring new business opportunities, etc. Moreover, credit approval, administration, monitoring and recovery functions have been segregated. For this purpose, two separate units have been formed within the credit division.

Operating risk

Operational risk address the risk associated with fraud, forgery, unauthorized activities, error, omission, system failure and external events among others. Bank is managing these risks through written procedures, regular training and awareness programs. Departmental Control Function Checklist (DCFCL), Quarterly Operations Report, Loan Documentation Checklist etc. are in place covering all probable risks associated with bank’s business and operations. Surprise Inspections are also made on a regular basis to make sure that all control tools are functioning properly.

Market risk

The exposure of market risk of the bank is restricted to foreign exchange risk, interest rate risk and equity position risk.

Foreign exchange risk

Foreign exchange risk is defined as the potential change in earnings due to change in market prices. The foreign exchange risk of the bank is minimal as all the transactions are carried out on behalf of the customers against underlying L/C commitments and other remittance requirements.

Financial Institution and Treasury (FIT) division independently conducted the FX transactions and the Mid Office and the Back Office of treasury is responsible for verification of the deals and passing of their entries in the books of account. All foreign exchange transactions are revalued at Market rate as determined by Bangladesh Bank at the month – end.

Interest rate risk

Interest rate risk may arise from trading portfolio and non- trading portfolio. The trading portfolio of the bank consists of government treasury bills, bond. The short term movement in interest rate is negligible or nil. Interest rate risk of non trading business arises from mismatches between the future yield of an asset and its funding cost. Asset Liability Committee (ALCO) monitors the interest rate movement on a regular basis.

Equity position risk

Equity risk arises from movement in market value of equities held. The risks are monitored by the Investment Banking Division under a well designated policy framework. The market value of equities held was however higher than the cost price at the balance sheet date.

LIQUIDITY risk

The object of liquidity risk management is to ensure that all foreseeable funding commitments and deposit withdrawals can be met when due. To this end, the Bank is maintaining a diversified and stable funding base comprising of core retail and corporate deposits and institutional balance. Management of liquidity and funding is carried out by Financial Institution & Treasury (FIT) department under approved policy guidelines. FIT front office is supported by a very structured Mid Office and Back Office. The liquidity management is monitored by Asset Liability Committee (ALCO) on a regular basis. A written contingency plan is in place to manage extreme situation.

Risk arising from money laundering

AB Bank Limited considers prevention of money laundering risk not only as a compliance requirement imposed by the law of the country but also as one of its core business values. The Board of Directors and Senior Management are firmly committed to combat money laundering. Every year, a message from the President and Managing Director’s office goes to all employees of the Bank reiterating the importance of the issue. There is a high profile Central Compliance Unit (CCU) in place to oversee the anti money laundering activities. The President and Managing Director himself supervise the function of CCU’s. Operation has separate and dedicated headcount for surveillance of the anti money laundering functions across the Bank.

Credit Risk & Credit Analysis

The analysis of financial statements of the prospective borrower(s) carried on for the purpose determining the past financial health of the borrowing unit and judging whether any future loan commitment to the unit is secured or not is known as credit analysis. The basic financial statements required for credit analysis are:

• Balance Sheet
• Income statement (Profit and Loss Account)
• Cash Flow Statement.

Credit Assessment and Risk Grading Credit Assessment

A thorough credit and risk assessment shall have to be conducted prior to the granting of loans, and at least annually thereafter for all facilities. The results of this assessment should be presented in a Credit Application that originates from the Relationship Manager/Relationship Officer, and is approved by Credit Risk Management (CRM). The RM should be the owner of the customer relationship, and must be held responsible to ensure the accuracy of the entire credit application submitted for approval. Risk management (RM) must be familiar with the bank’s Lending Guidelines and shall conduct due diligence on new borrowers, principals, and guarantors.

It is essential that Risk Managers (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. Bank has established Know Your Customer (KYC) and Money Laundering guidelines which shall have to be adhered to at all times.

Risk Grading

The system defines the risk profile of borrower’s to ensure that account management, structure and pricing are commensurate with the risk involved. Risk grading is a key measurement of a Bank’s asset quality, and as such, it is essential that grading is a robust process. All facilities shall be assigned with a risk grade. Where deterioration in risk is noted, the Risk Grade assigned to a borrower and its facilities should be immediately changed. Borrower Risk Grades should be clearly stated on Credit Applications.

The following Risk Grade Matrix is provided as an example. The more conservative risk grade (higher) should be applied if there is a difference between the personal judgment and the Risk Grade Scorecard results. Monitoring standards and account management must be appropriate given the assigned Risk Grade.

Each of the borrowing account will be assessed in terms of 9 matrix namely:

1. Age of Business
2. Account Behavior
3. Personal Banking
4. Size
5. Profitability
6. Management Experience
7. Management Stability
8. Business Outlook
9. Liquidity

Each of the matrixes will carry different weight age and aggregate score will be arrived at after accumulation of allotted points. The aggregate score depicts following credit grade:

Credit Quality Management

Whatever the sector may be the loans are not repaid in proper manner it worth nothing by the banks. Default loans have always been a big problem for our banking sector. The solvency risk of a financial institution often originates from the quality of its assets portfolio. An indicator of asset quality is the ratio of non-performing loans or the classified loans to total loans (gross).The loan classification and loss provisioning criteria and their enforcement continue to be less stringent in Bangladesh than international standers.

Credit Rating Status  of Private Bank

Credit Rating Agency of Bangladesh Limited (CRAB) has assigned “A1”(Pronounced as Single A One) rating in the Long Term and “ST-2” in the Short Term to AB Bank Limited. In 2008, Credit Rating Information and Service Limited (CRISL) awarded A1” (Pronounced as Single A One) in the Long Term and ST-2 in the Short Term to AB Bank Limited. Commercial Bank rated ‘A1’in the Long term are adjusted to be strong bank, characterizes by good financials, healthy and sustainable franchises, and a first rate-operating environment. This level of rating indicates strong capacity for timely payment of financial commitment, with low likeliness of being adversely affected by foreseeable events.

Commercial Bank rated ‘ST-2’ in the Short Term are considered to have strong capacity for timely repayment .Banks rated in this category are characterized with commendable position in terms of liquidity , internal fund generation , and access to alternative sources of Funds in outstanding . In 2009, Credit Rating Information and Service Limited (CRISL) awarded AA3” in the Long Term and ST-1 in the Short Term to AB Bank Limited.

Commercial Bank rated AA3 in the long term belong to “Very strong Capacity & Very high quality” cohort. Bank has very strong capacity to meet their financial commitments. Bank is judged to be of high quality and is subject to low credit risk. Commercial Bank rated ST-1 in the short term is considered to have highest capacity for timely payment of obligations. Bank is characterized with excellent position in terms liquidity, internal fund generation, and access to alternative sources of funds.

SWOT ANALYSIS

 A SWOT Analysis to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a business venture shall be done, particularly in the case of Large Loans.

Strength

• Second highest number of branches in the private bank market.
• Investing lots of money in the social for developing.
• Arranging with the world famous Western Union to deliver quick and safe remittance to the customer.
• Energetic, intelligence officer in the branch level, so they can work a long time without any extra compensation.
• The employee is more flexible. The customer has not any major complain to them.
• Delivering some attractive product to the customer; e.g. ABBL power card.

Weakness

• Worse Management.
• Human Resource Department is not effective.
• The job satisfaction level of the employee is lower level in the branches.
• Their IT system is worse.
• Web site design is poor.
• Training system is not well.
• The bank management is totally dependable on the branch manager. There is no direct communication with the employee.
• Motivation power is less.

Opportunity

• Providing some good products to the customer.
• Providing some good compensation package to the employee.
• Making online banking.
• Providing standard salary to the employee.

Threats

• More competitors in the market.
• The competitors are growing day by day than IT sector, compensation     system, and promotion for the employee.
• The other banks arc providing better compensation to the employee.
• The Competitor’s bank has better and well-timed training strategy.

Findings

AB Bank limited provides the loans and advances to the borrower though their different branches in all over the country. Though every branch is not best 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 indentified in credit policy in procedure of giving loan &advances of AB Bank Limited is given below:

• Lending is one of the main functions of a back. 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 SME loan. Such as-if there is a occurrence in the branch then head office will restricted the % 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 loan 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 very difficult to recommend about this topic because of research restrictions and unavailability of data. Despite these problems there are some things that the credit management systems/policy of AB Bank Limited, Dhanmondi office should look at:

• 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.
• Implement continuous monitoring system in the  loans recovery process
• Improve the Credit risk management department for avoid possible defaulter.
• Improve the criteria for receiving SME loan.
• Ro ensure that the borrowers can utilize the loan on the right purpose
• There are many competitors in banking sector. ATM, online banking, credit card service etc are common in banking sector. They should develop their system.
• 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.
• More training facility should be conducted for the bankers to improve their analytical ability & professional standard regarding the use of CRG and other tools & techniques in selecting the borrowers and analyzing the loan.

Conclusion

Modern Commercial Banking is exacting business. The reward are modest, the penalties for bad looking are enormous. And Commercial banks are great monetary institutions, important to the general welfare of the economy more than any other financial institution. It has a vastly sobering and exacting responsibility. Banking industry in Bangladesh is now on the right track. The banks are contributing much than the previous years for the growth and development of the country. Banking industry is much organized because of strong vigilance and supervision of Bangladesh Bank. In the industry, AB Bank is one of the pioneers in many criteria. AB Bank is committed towards the excellence in the service with efficiency, accuracy and proficiency.

Like of most of the commercial banks, Credit & foreign exchange department is one of the most important departments of AB Bank. Despite problems and weaknesses, it is driving the bank from the front. With an easy to understand operating guidelines, transparent operating procedure and a team of highly knowledgeable and proficient personnel, this department is expanding and excelling itself day by day.

During the three month internship program at ABBL at Dhanmondi Branch, almost all the desks have been observed more or less. This internship program, in first, has been arranged for gaining knowledge of practical banking as to compare this practical knowledge with theoretical knowledge. During the internship, it is found that the branch provides all the conventional banking services as well as some specialized financing activities to the economy. I have seen that AB Bank Ltd. is not much different from other commercial bank of Bangladesh. It follows the same practice & procedure which is followed by it’s industry members. but one thing should be mentioned new loan reformation have slightly changed the appraisal procedure. This Credit Risk Grading manual makes the procedure rather following their own procedure. If the bank follows the standard appraisal hopefully the changes of failure will be minimized in future.

HIGHLIGHTS OF OVERALL BANKING ACTIVITIES