Credit Appraisal and Credit Management Practice by Prime Bank

General objective of this report is to finding out the credit appraisal and credit management practice by Prime Bank Limited. Other objectives are analysis and comparison of credit appraisal and management with that of standard. Report also focus on trend analysis of Loans and Advances particularly of Syndication Finance and Consumer Credit Scheme. Finally draw SWOT Analysis of Prime Bank Limited and finding out the major and minor problems associated with that of Prime Bank Limited and recommendations there against.

AN OVERVIEW OF PRIME BANK LTD.

BACKGROUND:

Prime Bank being Banking Company has been registered under the companies Act 1993 as a Public Limited Company on February 12, 1995 with its registered office at 5, Rajuk Avenue, Motijheel Commercial Area, Dhaka-1000, Bangladesh. Later, the office had been shifted to Adamjee Court (annex building), Motijheel Commercial Area. It started operation from April 17, 1995 with a commitment to play some social role in addition to normal banking. Its slogan is “Prime Bank Ltd. – a bank with a difference”. From the very beginning, the bank has adopted the policy of diversifying its business. To achieve this objective, the bank started Consumer Credit Scheme, Lease Financing, Hire Purchase, loans in general, Secured Overdrafts etc. Under the dynamic leadership of the Chief Executive Officer, the bank earned profit within December 1995 and raised its reserve. The bank started operation its business through four branches. Now its branches stood at fifty two and by this year another two new branches will start their operation.

Prime Bank has an authorized capital of Taka 4,000 million and paid up capital of Taka 1,750 million. It is a full licensed scheduled commercial bank set up in the private sector by a group of highly successful entrepreneurs in pursuance of the government to liberalize banking and financial services. The former Governor of Bangladesh Bank Mr. Lutfar Rahman Sarker was the first Managing Director of this bank. At present, Managing Director is Mr. M Shahjahan Bhuiyan, who has a long experience in domestic and international banking. Highly professional people having wide experience in domestic and international banking are managing the bank. The bank has made a significant progress within a very short time due to its very competent board of directors, dynamic management and introduction of various customer friendly deposit and loan products. At present bank has 13 Directors, including the Chairman. The bank holds the first position in the CAMEL rating, published by Bangladesh Bank for the last consecutive four years.

OBJECTIVES OF THE BANK

The objectives of the Prime Bank Limited are specific and targeted to its vision and to position itself in the mindset of the people as a bank with difference. The objectives of the Prime Bank Limited are as follows:

• To mobilize the savings and channeling it out as loan or advance as the company approve
• To establish, maintain, carry on, transact and undertake all kinds of investment and financial business including underwriting, managing and distributing the issue of stocks, debentures, and other securities
• To finance the international trade both in Import and Export
• To carry on the Foreign Exchange Business, including buying and selling of foreign currency, traveler’s cheque issuing, international credit card issuance etc.
• To develop the standard of living of the limited income group by providing Consumer Credit
• To finance the industry, trade and commerce in both the conventional way and by offering customer friendly credit service
• To encourage the new entrepreneurs for investment and thus to develop the country’s industry sector and contribute to the economic development.

DEPARTMENTS OF PBL

If the jobs are not organized considering their interrelationship and are not allocated in a particular department, it would be very difficult to control the system effectively. If the departmentalization is not fitted for the particular works there would be haphazard situation and the performance of a particular department would not be measured. Prime Bank Limited has done this work very well.

Logistic & Support Services Division (L&SSD)

This Division was formerly known as General Services Division (GSD). Its main functions relate to procurements and supply of all tangible goods and services to the Branches as well as Head Office of Prime Bank Limited. These include:

1. Every tangible functions of Branch opening such as making lease agreement, interior decoration etc.
2. Print all security papers and Bank Stationeries
3. Distribution of these stationeries to the Branch
4. Purchase and distribute all kinds of bank’s furniture and fixtures
5. Receives demand of cars, vehicles, telephones etc. from branches and different divisions in Head Office and arrange, purchase and delivery of it to the concerned person / Branch
6. Install & maintain different facilities in the Branches

Financial Administration Division (FAD)

Financials Administration Division mainly deals with the account side of the Bank. It deals with all the Head Office transactions with bank and its Branches and all there are controlled under the following heads:

1. Income, Expenditure Posting: income and expenditures are maintained and posted under these heads.
2. Cash Section: Cash section generally handles cash expenditure for office operations and miscellaneous payments.
3. Bills Sections: this section is responsible for inland bills only.
4. Salary & Wages of the Employee: Salary and wages of the Head Office executives, officers and employees are given in this department.
5. Maintenance of Employee Provident Fund: Employee provident fund accounts are maintained here.

Consolidation of Branch’s Accounts: All Branches periodically (especially monthly) sends their income and expenditure i.e. profit and loss accounts and Head Office made the consolidation statement of income and expenditure of the bank. Here branch Statements arte reviewed. This division also prepares different monthly, quarterly, half-yearly statements and submits to Bangladesh bank. It also analyzes and interprets financial statements for the management and Board of director.

Credit Division

The main function of this division is to maintain the Bank’s Credit Portfolio. A well reputed and hard working group of executives & officers run the functions of this division. These functions are as follows:

1. Receiving proposals
2. Proposing and appraising
3. Getting approval
4. Communicating and sanctioning
5. Monitoring and follow-up
6. Setting price for credit and ensuring effectiveness of it
7. Preparing various statements for onward submission to Bangladesh Bank

International Division:

The objective of this division is to assist management to make international dealing decisions and after decision is made, guide Branches in their implementation. Its functional areas are as follows:

1. Maintaining correspondence relationship
2. Monitoring foreign rate and exchange dealings
3. Maintaining Nostro A/Cs and reconciliation
4. Authorizing of signing and test key
5. Monitoring foreign exchange returns & statements
6. Sending updated exchange rates to the concerned Branches

Computer Division:

Prime Banks operates and keeps records of its assets and liabilities in computers by using integrated software to maintain client Ledger and general Ledger. The main function of this division is to provide required Hardware and Software. The functions of this division are:

1. Designing software to support the accounting operation
2. Updating software, if there is any lagging
3. Improvising software to get best possible output from them.
4. Hardware and Software trouble shooting
5. Maintaining connectivity through LAN, Intranet & Internet
6. Providing updated CD’s of online accounts to the Branches
7. Routine Checking-up of computers of different Branches

Public Relations Division

It has to perform certain functions related to all types of communication. The broad routine functions can be enumerated as follows:

1. Receiving and Sanctioning of all advertisement application
2. Keeping good relation with different newspaper offices
3. Inviting concerned ones for any occasion
4. Keeping good relation with different officers of electronic media

Marketing Division

Marketing Division is involved in two types of marketing:

Asset Marketing: Marketing of assets refers to marketing of various kinds of loans and advances. In-order to perform this job, they often visit dome large organizations and attract then to borrow from the Bank to finance profitable ventures.

Liability Marketing: The process of Liability marketing is more of less same as Asset marketing. In this case different organizations having excess funds are solicited to deposit their excess fund to the Bank. If the amount of money to be deposited is large, the Banks sometimes offer a bit higher price than the prevailing market rate.

Human Resources Division

HRD performs all kind of administrative and personnel related matters. The broad functions of the division are as follows:

1. Selection & Recruitment of new personnel
2. Preparation for all formalities regarding appointment and joining of the successful candidates
3. Placement of manpower
4. Dealing with the transfer, promotion and leave of the employees
5. Training & Development
6. Termination and retrenchment of the employees
7. Keeping records and personal file of every employee of the Ban
8. Employee welfare fund running
9. Arranges workshops & trainings for employee & executives

Inspection & Audit Division

Inspection and Audit division works as internal audit division of the company. The officers of this division randomly go to different Branches, examine the necessary documents regarding each single account. If there is any discrepancy, they inform the authority concerned to take care of that/those discrepancies. They help the bank to comply with the rules and regulation imposed by the Bangladesh Bank. They inform the Bangladesh Bank about the Current position of the rules and regulation followed by the Bank.

Credit Card Division

Prime Bank obtained the principal membership of Master Card International in the month of May, 1999. A separate Division is assigned to look after this card. The Marketing Team of this division goes to the potential customers to sell the card. Currently Prime Bank Ltd. offers four types of cards-

1. Local Silver Card
2. International Silver Card
3. Local Gold Card
4. International Gold Card

Recently Prime Bank has obtained the membership of VISA credit Card and soon they will start marketing of it.

Merchant Banking and Investment Division

This division concentrates its operation in the area of under writing of initial public offer (IPO) and advance against shares. This division deals with the shares of the Company. They also look after the security Portfolio owned by the Bank. The Bank has a large amount of investment in shares and securities of different corporations as well as government treasury bills and prize bond.

HUMAN RESOURCES MANAGEMENT OF PBL

The core competencies in banking sector can be created with the help of its personnel. The main thing in banking business is that a bank or financial institution has to avail the trust of the depositor, client for improving its performance. Availing the trust of the general people is not an easy task. Not only the directors attitude and efficiency but also that of the employees are important for achieving the trust of the general people and thus for better performance of the bank. In the face of the today’s global competition, it is not only essential to assemble the best people to work for the company but also to equip the workforce with the latest skill and technologies and retain the high achievers to compete effectively and efficiently.

To cope with the consumers’ need Prime Bank’s human resources policy emphasize on providing job satisfaction, growth opportunities, and due recognition of superior performance. A good working environment reflects and promotes a high level of loyalty and commitment from the employees. Realizing this Prime Bank Limited has placed the utmost importance on continuous development of its human resources, identify the strength and weakness of the employee to assess the individual training needs, they are sent for training for self development. To orient, enhance the banking knowledge of the employees PBL organize both in-house and external training.

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-

1. Technical skill to use knowledge, method and Techniques (acquired from experience, education and training) to perform the job.
2. Human skill to maintain interpersonal relationship within or outside the organization.
3. Conceptual skill to understand the complexities in overall organization.

Socio-economic Aspect

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

Security Appraisal & Valuation

Asset that will be offered as security must be analyzed thoroughly on the basis of few criteria as different assets as different influencing factors. The factor that has to be considered in the time of asset valuation are briefly discussed

Liquidity:

In a word it means, “ How quickly an assets can be converted into cash”. The more liquid the asset the greater its value as collateral. Stocks, bonds, and other marketable securities are easily sold and for this reason, these represent attractive value as collateral and highest liquidity.

Depriciability:

Some types of assets lose their values rapidly than others. Computers and other electronic assets are continuously upgraded so that last years models are technically obsolete. Dresses suits and apparels also quickly lose their values as public’s fashion taste change frequently.  But however real estate and certain other fixed assets may increase in value day by day. These assets are attractive sources as collateral.

Marketability:

The market available for purchasing liquid assets is a vital part of having a good collateral value. Secondary market is necessary for buying and selling the liquid assets.  If secondary market is not available the bank has to lose the value of the asset and has to sell it at discount. So if there exists secondary market for the collateral assets, it can yield an attractive value.

Controllability:

This refers to the banks’ ability to locate and hold the assets. Bonds and stocks posted as collateral can be held in the banks’ volt easily and highly controllable by the bank. Therefore, prior lien, offsets, warranties & other legal claims should be investigated by the credit officer before taking any thing as collateral as the higher the complexity in realizing the collateral the lower the value. Once the collateral loan value is established the commercial loan officer should deduct the costs that can be expected to be incurred if the collateral is liquidated. The bank may absorb forecasting cost (Legal & Appraisal) and holding cost (Including tax and maintenance costs) before proceeds are realized from the sale of the collateral assets. The amount remaining after deducting all this cost, the bank can expect to apply to the principal, interest and cost of the loan.

In providing loan PBL take mortgage of land and buildings along with PSP, FDR, MBDS. In the time of taking documents the borrower has to disclose all the information related to the land and buildings, which will be offered as collateral against the loan.

• The credit officer must collect all the documents to verify the land’s actual owner and the updated government fees paid receipt.
• For justification the documents should be communicated with the bank’s lawyer.
• Whether the site plan of the land are permitted by the RAJUK (if applicable).
• The client must have to submit valuation certificate from an engineering firm.
• Valuation by the two Credit officers must be submitted after visiting the land and discussing with the neighborhood about the value, and the market value and the forced value of the land and /or building must be submitted in prescribe form and duly signed by them as well.
• Three photographs from three different angles of the mortgage land should be submitted photographs must be duly attested by the credit officer.

Invoice /Quotation Verification

While taking loan from banks, the instances of over invoicing and under- invoicing are common. But the privatized commercial banks are strict in monitoring this.

• Two or three price quotations from three different suppliers are collected and judged.
• Two or three invoices from suppliers collected by the borrower must be submitted and the borrower has to take all the responsibility about the quality of the machinery or goods to be purchased.
• Taking ideas about the price from other branches or banks, which has already financed this type of projects.
• Taking Internet facility

Credit Demand Assessment

The client may seek for credit in terms of working capital, work-order finance, and Project loan. The credit officer has to analyze the required amount though the client revealed their credit demand in the credit application. The calculated or assessed amount by the credit officer may be lower than the client’s demand.  PBL analyze the financial statements and the amount required as working capital. The credit officers analyze earning forecast, expense estimation.

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

Approval of Credit by Higher Authority

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

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

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

Executive Committee: Approving credit facilities as delegated by the Board of Directors. Supervising the implementation of the directives of the Board of Directors. Reviewing of each extension of credit approval by the Head Office Credit Committee/Managing Director. Keeping Board of Directors informed covering all these aspect.

Board of Directors: Establishing overall policies and procedures for approving and reviewing credits. Delegating authority to approve and review credits. Approving credit for which authority is not delegated. Approving all extensions of credit which are contrary to bank’s written credit policies.

Sanction of Credit

Most important step of providing credit facility is the sanctioning of credit. Because sanctioning authority will be held responsible for any discrepancy. In this step all the documentation is completed and the customer is sent an advising letter for the credit facility along with all the terms and conditions.

Norms maintained in sanctioning of credits are described below:

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

LIMIT ENHANCEMENT/RENEWAL

If the client approach for limit enhancement or time extension, his previous performance of the loan account is highly emphasized and analyzed. In that case for analyzing the account, the performance is measured din the in the following way:

Recycle Time = Credit Turnover/ Limit

Debit Turnover = summation of credit transaction

Credit Turnover = summation of debit transaction

Adjustment Time = How many times the party has adjusted the accounts, which implies that the party has made reasonable transactions. The standard is that party will adjust the account every quarter.

Disbursement of Credit

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

Credit Administration and File Maintenance

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

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

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

Credit Monitoring and Reviewing

It is the responsibility of the Manager to monitor the over all profile and risk aspect of the credit portfolio in accordance with the criteria set down in the Bank Credit Policy. Such monitoring shall be evidenced from the comments of the Manager in monthly Call/Visit Report and be kept in the Credit File with a copy to the Head Office.

This Review shall be formally performed at intervals prescribed by Head Office but it is the responsibility of the Manger to ensure at all times that the credit portfolio meets the standard set forth by the Bank.

Periodic Review and Follow-up should aim at ensuring:

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

Assessment of Group Exposure: If facilities of any one customer group are booked in a number of locations, an officer designated by Head Office shall be responsible for the management of the Bank’s global exposure to that customer group. Any development in the customer’s which may effect the management of the facility and in particular the credit rating assigned to the customer, shall be documented and advised by the designated officer to the concerned Branch & to the Head Office, Credit Division.

General Norms for Monitoring Credit Facilities: The Branches will submit a monthly statement of the credits allowed under the discretionary powers of the Manager to the Head Office irrespective whether the same are outstanding or not on the date of return.

Taking Precaution/Legal Action against Delinquent Clients

The responsibility for review and classification of credit facilities starts at Branch level. The frequency of the supervision and monitoring depends on the classification of credits.

Sub-standard Advances: This classification contains accounts where irregularities have occurred but where such irregularities are considered to be either “technical” or “temporary” in nature. The main criteria for a sub-standard advance are that despite these “technical” or temporary irregularities no loss is expected to arise.

These accounts will require close supervision by the management to ensure that the situation does not deteriorate further.

Provision @ 15% of the base is required for debt in this classification where the base is the outstanding balance less interest kept in Interest Suspense Account less the value of eligible securities.

Doubtful Debt: This classification contains debts where doubt exists the full recoverability of the principal and/or interest. Although a loss is anticipated it is not possible at this state to quantify the exact extent of that loss. Management is required to handle such debts with the utmost caution to either avoid or minimize the Bank’s losses. Provision @ 50% of the base is required for debts in this classification.

Bad-Debts: These facilities are considered to be uncorrectable shall be made a provision @ 100% of the base.

Special Mention: In addition to the above classification rating, there should be another category which is not classified but where special attention is necessary to keep the account out of classification. This category will be known as Special Mention. Facilities required special monitoring are to be flagged or put on a watch list.

No provision is necessary for this category

At present, Loan under syndication and Consumer Credit Scheme get vast popularity. Considering this view, some important features and facts about Syndication/Structured Finance and Consumer Credit Scheme are detailed here:

CONSUMER CREDIT SCHEME

Since Bangladesh is one of the poorest country the majority of our population is forced to live a sub-standard life. The middle class cannot afford to buy essential utility products. In this connection Prime Bank Limited has introduced “Consumers Credit Scheme” to increase living standard of the limited income people. Consumers Credit scheme is very popular in most of eh developed and developing countries of the world. This is designed to finance the fixed income people to buy essential commodities to be repaid by installments at different rate for different rate for different product. Consumers Credit Scheme is based on trust in the customer ability and willingness to pay.

OBJECTIVES OF THE SCHEME

Major Objectives:

• To bring our credit service to a wide range of customers.
• To provide financial assistance to the limited group towards buying utility products
• To help the professionals in raising their standard of living.
• To participate in the4 socio-economic development of the country.

Subsidiary Objectives:

• To establish a participatory economic system.
• To provide investment facility t the depositors of the bank.
• To popularize the bank’s products among the mass people.
• To develop the characteristics regarding monitory transaction of general people.
• To protect the defaulter culture of the country through supervising credit program.
• To increase the number of beneficiaries through these types of small credit program.
• To increase the relationship network of the bank.

ELIGIBLE ITEMS UNDER THE CONSUMER CREDIT SCHEME

Vehicles

Car, Micro-bus, Four Wheel Drivers, Ambulance, Motor Cycle, Bi-cycle etc.

Domestic Appliances:

Air Conditioner, Refrigerator, Deep Freezer, Washing Machine, Air Cooler, Water Cooler, Room Heater, Water Pump, Phone, Cellular/Mobile Phone, Ceiling Fan, Pedestal Fan, Sewing Machine etc.

Office Equipment:

Generator (non-=commercial), Personal Computer, Photo Copiers, Facsimile Machines, IPS, UPS, Volt guard/stabilizer.

Entertainment:

VCR, VCP, Music system, Sound System, Radio System, Radio, Two in one, Video Camera with accessories etc.

Kitchen Range:

Oven, Micro Oven, Toaster, Blender, Pressure-cooker, Dinner se, Tea set, Crockery etc.

Furniture:

Different types of furniture, home repairing, internal decoration, Redecoration etc.

Specialist-Accessory:

Clinical Instrument, Dental Instrument, Engine Architects, Chartered Accountants etc specially needed instruments.

Intangibles/Service Facility: 

Holidays, Education, Medical Expenses, Ornaments purchase or any other durable which bank consider fit to finance. So in our country consumer credit are provided for consumer goods, durables and non-durables. In durable category falls automobile, office equipment etc whose useful life extends over a relatively longer period. As a result these consumer purchase become consumption as well as investment. On the other hand in non-durable category there falls services of specialist, foreign tour etc. where there are straight consumptions.

SECURITY/COLLATERAL:

Generally it depends on the banks assessment of risk in making credit. However in case of consumer finance a trend is observed. Banks prefer financial instruments like Fixed Deposit Receipt (FDR), Savings Certificate (Sanchay Patra), Wage-earners Development Bond, ICB Unit Certificate, hypothecation of assets, shares of public limited company with transfer document etc.

In most cases 100% credit is covered. On basis of bank-customer relationship coverage may vary. In case of banks running according to Shariah, require purchasing goods in bank-customer joint name.

GUARANTEE/SECURITY:

Repayment commitment is required to be guaranteed as relevant by centurion employer or higher officials. Much flexibility observed in determining who require being guarantor. Some banks ask it to be organization chief. Some banks ask guarantor from a specified graded officer above; who should be of the same rank or senior to the client. Banks also accept social elite or financially person’s guarantee in case of non-employed client. However credit equivalent bank guarantee or insurance guarantee also accepted.

OPERATIONAL RESULT OF PRIME BANK LTD.

GROWTH OF CREDITS OF PRIME BANK LTD. 

Credit Distribution: Credits are provided in different fields in different names. Prime Bank Ltd provided 16 types of credits to their clients. Actually bank started operation in 12 types of credits in 1995. It has started operation in LIM, IDBP, and QTDR in 1996 and Cash credit (Pledge) in 1997

2006 is a successful year for the Bank The bank has made a good progress in Loan (gen.), Cash Credit (hypo) and Secured Overdrafts (SOD) this year. But, Loan against Trust Receipt (LTR) goes down in 2004. Consumer Credit Scheme (CCS) increases for the year 2005-2006. Other Types of credit grew moderately. While in 2001 we see curves are not that much steep but overall there shows a progress, this is a good sign of credit distribution.

(Figures in Million Taka)

Source: Statement of Consolidated Affairs of Prime Bank Ltd.

Table: Amount of credit disbursed for the year 2003-2006

RECOVERY OF CREDIT

The ratios of classified loans to total loans of Prime Bank Ltd. in 2002, 2003, 2004, 2005 and 2006 were  1.49%, 1.13%, 1.48%, 1.98% and 1.52% respectively. Whereas international standard is 5%. In Bangladesh the ratio of classified loans to total loans for all non-government commercial banks is 10% and for all government commercial banks is about 50%. The industry average is 65%.

So we can clearly see that recovery of credit of Prime bank Ltd. is above the International standard and better than the industry as well as non-government commercial bank’s average.

As such we can say that credit management of Prime Bank Limited is effective.

PROFITABILITY ANALYSIS OF A BANK

Many Banks will have to take and manage higher risks in the 21st century in order to make acceptable returns. It will be increasingly important for a Bank to be able to measure the risk taken to produce acceptable return during the coming period of challenging external factors and deregulation. A Bank performance will affect its valuation in the market, its ability to acquire other Banks or to be acquired at a good valuation in the market, its ability to acquire other banks or to be acquired at a good price, and its ability to be funded in the deposit and financial markets. The Return on Equity (ROE) model, first developed by Du Pont Corporation, desegregates ROE into its basic components, which can be analyzed to identify areas in which a business may want to improve.

ROE Model: A bank’s ROE is derived from its return on assets (ROA) and its leverage multiplier. ROA, which is net income divided by total assets, should reflect the bank management’s ability to utilize the bank’s financial and real resources to generate net income. Many regulators believe ROA is the best measure of bank efficiency. Since ROA is lower for financial intermediaries than for most non-financial businesses, most intermediaries must utilize financial leverage heavily to increase ROE to a competitive level. The leverage multiplier to be applied to ROA is calculated by dividing assets by equity (assets minus all liabilities, borrowing and preferred stock).

Measuring Returns of a Bank: Bank management’s primary objective is to maximize the value of the owner’s investment in the bank. Useful information on the appropriate trade-off between returns and risk is obtained from restively efficient markets for most publicly held banks. The management of the smaller banks seeks to achieve the highest returns for the risk level deemed appropriate by the owners and top management. However, the Steps of measuring returns of a Bank are as follows:

• The first return measurement is the Interest Margin in percentage term, which income minus interest expense divided by earning assets (all securities and loans).
• Interest income less both interest expense and other expenses divided by the revenues is leveled the Net Margin.
• This net margin limes the Asset Utilization {revenues divided by assets) equals the ROA. It is important to note that is asset utilization figure is strongly affected by how much a bank has invested in earning assets.
• When the ROA is multiplied by the Leverage Multiplier (asset divided by equity capital) is the most important measurement of banking returns because it is the ROE. The ROE (net income divide by the equity capital) is the important measurement of returns because it is influenced by how well the bank has performed on all other return categories and indicates -whether a bank can compete for private sources of capital in the economy.

Measuring Risks of a Bank: Risk measurement is related to return to return measurement because a bank must take risks in order to earn adequate returns. Four categorizes of risks are computed here.

Liquidity Risk: A bank’s liquidity risk refers to a comparison of its liquidity needs for deposit outflows and loan increases with its actual and potential sources of liquidity, from either selling an asset it holds or acquiring an additional liability. It is computed by dividing short-term securities with the deposits.

The tradeoffs that generally exist between returns and risks are demonstrated by observing that a shift form short-term securities into long-term securities or loans would raise a bank’s return but would also increase its liquidity risk. The inverse would be true if short-term securities were increased. Thus, high liquidity ratio for the sample bank would indicate a less-risky and less profitable bank.

Interest Rate Risk: The bank’s interest rate risk is related to the changes in interest rates. The ratio of interest- sensitive assets to interest-sensitive liabilities is the measure of interest rate risk.

Particularly in the period of wide interest rate movements, this ratio reflects the risk the bank is willing to take so that it can predict the future direction of interest rates. The difficulty of predicting interest rates, some bank has concluded that the way to minimize interest- rate risk is to have an interest sensitivity-ration to close to 100 percent.

Credit Risk: Credit risk measures the risk of medium quality loans into assets. The relative amount of past due loans or loan loss would be a better measure but such data are not available. The credit risk is higher if the bank has more medium quality loans, but the returns are usually higher too.

Capital Risk: Capital risk is measured by dividing capital by the risk assets. Capital risk indicates the risk of creditors can be shifted to the owners if the company is in jeopardized condition. The higher the capital risks the higher the safety for the creditors and the inverse is also true.

The capital risk is inversely related to the leverage multiplier and therefore of the ROE. When a bank chooses (assuming this is allowed by its regulators) to take more capital risk, its leverage multiplier and ROE will be higher, if a other factor remains unchanged. If the bank choose (or is forced to choose) to lower capital risk, its leverage multiplier ROE will be lower.

PROFITABILITY ANALYSIS OF PRIME BANK LTD.

Prime Bank Ltd. had a record of successful years from the very beginning of its operation. It earned profit in the very first year, which is a remarkable achievement for the bank. It earned tremendous profit in 2003. Profitability of a Bank depends on ROE. But we cannot avoid Risk Factors in case of a Bank, because too much risk taking may harm the interest of the depositors. Here ROE model is applied for the profitability analysis of Prime Bank Ltd.

MEASURING RETURNS OF THE PRIME BANK LTD.:

Interest Margin: Interest margin indicates the net interest income into earning assets. Bank’s main earning source is its interest income. The higher the interest income, the higher the possibility for the bank to survive. Interest margin for the bank remains steady for years, which is a good sign for a bank. In the year 2006 it was about 3.23%.

Net Margin: Net margin is the net income for the bank after covering all the expenses. Prime Bank Ltd. made an exclusive profit in 2002. From the progress of interest margin in 2006, it is quiet clear that they made such a huge profit not from interest income rather from other sources of income, probably from share market operation. By comparing the interest margin and net margin we can visualize the real source of earnings a Bank.

Source: Annual Reports of Prime Bank Ltd.

Table: Measuring returns of PBL

Note:

• Earning assets = Money at call & short notice, investments, advances
• Net interest income = Interest and discount – Interest paid on deposit
• Net income = Net profit after tax
• Revenues = Interest paid + Operating Income
• Assets = Total Assets
• Equity = Paid up capital + Retained Earnings

MEASURING RISKS OF PRIME BANK LTD.

Bank’s risk factors are not as usual as non-financial organizations. Risk of a bank depends on its liquidity, investment and capital.

Liquidity Risk: Bank has different type of assets. Among those assets some assets are readily convertible into money and they are termed as money equivalents. This type of assets can reduce the risk of the depositors. Prime Bank Ltd. has a satisfactory percentage of short-term securities against deposits. In 2006 it had a liquidity risk coverage of 14.33%.

Investment Rate Risk: How much interest sensitive-assets a bank has over interest-sensitive liabilities affect the risk of a bank. If interest rate fluctuates positively than this may adversely affect the bank because most of the hanks have more interest sensitive-liabilities than interest-sensitive assets. All the banks try to remain as close to 100 percent to minimize the risk. In the year 2005 and 2006 PBL had an investment rated risk of 330.22% and 342.7% respectively.

Source: Annual Reports of Prime Bank Ltd.

Noe:

• Short term securities = Govt. Securities, Treasury Bills/Bonds + Shares + Prize Bonds
• Interest sensitive assets = Money at call & short notice + Govt. Securities, Treasury Bills/Bonds + Advances
• Interest sensitive liabilities = Short term deposits + Savings deposit + Current and other A/Cs
• Medium quality loans = Loans + Cash credits + Overdrafts etc.
• Capital = Stock holders Equity
• Risk assets = Money at call & short notice + Shares and Debentures + Advances

Credit Risk: Most of the banks like to take moderate risk, therefore banks try to increase its medium quality loans. Medium quality loans measure the credit risk for the bank. The higher the proportion of cash credits, overdrafts, and loans into assets the higher the credit risk for the bank. The relative amount of past-due loans or loan losses would be a better measure, but these data are not available. Bank has a gradual increase in credit risk. In 2006 bank had a credit risk of 67.83%, Bank should try to reduce credit risk through increasing high quality loans.

Capital Risk: The proportion of capital into risky assets indicates capital risk. In the last year (2004) the capital risk was 13.29%.

PROFITABILITY ANALYSIS OF PRIME BANK, DHAKA BANK AND SOUTHEAST BANK:

In 1995 three banks started their operations; they are Prime Bank Ltd., Southeast Bank and Dhaka Bank.

MEASURING RETURNS OF THE TWO BANKS:

Measuring of returns of the banks is quite similar with non-financial organizations. The difference is, here in calculation of returns on equity (ROE) a leverage multiplier is used, which makes the ROE equivalent to the non-financial organization. Assets divided by equity calculates leverage multiplier.

Source: Annual Report of Prime Bank, Southeast Bank, and Dhaka Bank

Table: Comparison of returns of the Prime Bank and Dhaka Bank

Interest Margin: Interest margin for the Prime Bank is higher than the Dhaka Bank.

Net Margin: Net margin for the Prime Bank is also higher, about 18.58%, while Dhaka Bank and Southeast Bank had 12.18% and 13.09% respectively.

Asset Utilization Ratio: Prime Bank had an asset utilization ratio of 11.23%, and Dhaka Bank and Southeast Bank had 10.07% and 10.25%. Therefore, Prime Bank earned more revenues from its assets.

Return on Assets: Prime Bank, Dhaka Bank and Southeast Bank had returns on assets were respectively 2.09%, 1.23% and 1.34% respectively. Prime Bank had much higher ROA because of its abnormally higher net income.

Leverage Multiplier: Prime Bank had a leverage multiplier of 33.36 times and Dhaka Bank and Southeast Bank had 50.36 times and 47.32 times respectively. Prime Bank had lower leverage multiplier because it capitalized its huge profit in equity capital.

Return on Equity (ROE): Prime Bank, Dhaka Bank and Southeast Bank had return on equity (ROE) about 69.57, 61.77% and 63.54% respectively. Prime Bank had a much higher ROE because of tremendous Return on Assets (ROA) 2.09%.

MEASURING RISKS OF THE THREE BANKS:

Liquidity Risk: Prime Bank had a compatible liquidity risk; it was about 11.72%. South East Bank and Dhaka Bank had 12.91% and 14.87% respectively.

Investment Rate Risk: Prime Bank, Dhaka Bank had 227% and 372% investment rate risk respectively. Southeast Bank had a very low interest sensitive liability; about maximum of its deposits were fixed deposit. Therefore, its investment rate risk was about 490% in 2003, which was abnormally high.

Source: Annual Reports of Prime Bank, Southeast Bank, and Dhaka Bank

Table: Comparison of risks of the Prime Bank, Southeast Bank, and Dhaka Bank (2002)

Credit Risk: Prime Bank had 56.10% of its assets in medium quality loans. Dhaka Bank and Southeast Bank had 55.28% and 66.96% respectively. In present economic condition where capital market is in a grip of shock, Banks should try to maximize their profits through increasing high quality loans like L/C credits, post-import finance etc.

Capital Risk: The higher the capital risk, the lower the risk of the creditors. Risky assets, which are covered by capital, are denoted by capital risk. Prime Bank had the highest 13.29% capital risk coverage in 2003. Therefore, it can achieve more credits from the creditors, if necessary in cheaper rate than others can.

Findings & Recommendations

MAJOR PROBLEMS ASSOCIATED WITH PRIME BANK LIMITED

Weakness In Marketing

Though there is marketing department in Prime Bank Ltd., but the activities of that particular department can’t able to take any significant role in Bank’s Business. They are just maintaining the relationship with the existing client rather than to create any new client. Basically there is no professional person who will look after this department. There is a public relation ship department under the network of marketing Department. They are just doing of publishing the news and photograph of different activities of PBL. There are only three marketing officer with two executives are running both the PR & Marketing Dept. Now a days Banking product service marketing is a sophisticated matter.

Loan Portfolio

Loan portfolio is another main problem area of PBL. Most of their advances (more than 75%) are in RMG (Ready Made Garments) and textile sector. More over for some specific group they invest a lot. So, if those one or two groups collapse, then PBL will face a tremendous problem.

High Cost Of Fund

As there is 52 schedule Banks now operating in Bangladesh, the power of supplier is moderate to high. Depositors want a high rate on their deposit. Due to competitive market PBL has to incur higher cost on their Deposit. PBL has more Long-term deposit than Short-term deposit, which is another reason behind the high cost of Fund. More over PBL do not get Govt. fund, which is less costly than other fund very often usually.

Limited Number Of Branch

Prime Bank Limited has only 52 branches. It is very few in number considering other second generation Banks. There are some very important places in Bangladesh where PBL don’t have their Branch. Few Branch means limited income. The more Branches PBL have, the more income they can generate.

Buyers & Suppliers Turnover Is High

Recently PBL is facing a major problem that their old clients of both deposit and advances are high due to their previous Managing director. Two Key people acting as Managing Director resigned from PBL within a very short time. These two previous Managing Director Mr. Kazi Abdul Mazid and Mr. Bakhtiar is taking some of their client whom they build up at the time of their management.

Gap Management Between Asset And Liability

Most of the deposit of PBL is long-term deposit and against these deposit most of their loans and advances are short term. For that they can’t utilize their fund very well. Some times PBL has some idle fund with their hand. PBL has very few Project and long term loan where they can utilize their long-term deposit in an effective way. If interest rate rises in the market it will hurt bank’s profitability to a great extent.

MINOR PROBLEMS ASSOCIATED WITH PRIME BANK LIMITED

Employee Turnover rate

It is more or less a problem associated with every Bank. As with in a very short time Two Key person acting as Managing Director resigned from PBL, they are taking some of the employee whom they were used to work together by giving them higher rank into their present Bank where they are working now.

Long Hierarchy Than Other Banks

PBL has a very long hierarchy than other Bank. In some bank there is only 8-9 posts before the CEO but in PBL this number is 12, which might be a cause of de-motivated employee.

Absence Of Effective Training Policy

Actually PBL doesn’t have any effective training policy. PBL has a training institute but they can’t able to use this institute properly. The officers of the Bank are not properly trained in every sector of banking.

ALTERNATIVE STRATEGIES

It is necessary for PBL to take some alternative strategies as opposed to that of the existing ones in order for PBL to become the market leader. Considering that PBL can consider to take up the following strategies as the alternative strategies: –

Recruitment Personnel In Marketing Department

Now a days Banking product service marketing is a sophisticated matter. Most of the Bank now employed some professional in this department. PBL can take some marketing officer and an Executive in marketing Division who has some experience regarding Bank product marketing. PBL also can go for some promotional activities through their PR Department.

Diverse Fund In Different Loan Portfolio

PBL can go for different types of loan in their loan portfolio. Transport sector in Bangladesh is highly potential now. As they don’t have any loan in this sector they can go for this sector. More over they can restructure their Loan portfolio with long term and short term loan. By investing to small businessman in a large number they can reduce the risk to invest huge to one or two party.

Take More Govt. Fund To Reduce The Cost Of Fund

PBL can offer better services and facility such as any branch Banking, quick service, better environment than others and by doing this they can attract the depositor to deposit their fund in to the Prime bank Limited. With a high interest rate than others PBL also can pursue to Govt. high officials and can make a better relationship with them to get Government fund.

Expand Number Of Branch

Prime bank Limited can open some more branches in some important place in Bangladesh. By doing this PBL can increase their business opportunity as well as their image so that they also do their banking network in rural area and make a significant contribution to the economy of the country.

Give More Facilities To Existing Client

PBL can upgrade the interest rate to their existing depositor and can reduce the interest rate of loans advances for their existing valued client. More over they can go for some promotional activities for their previous client. Besides that PBL also can get some new clients through their new Managing Director, which also can reduce some pressure of taking off client by other Bank.

Increase Interest Sensitive Asset Over Liability

PBL’s management may invest more in interest sensitive asset by taking deposit of short term and lend for long to reduce gap between its interest rate sensitive assets and interest rate sensitive liabilities.

Reduce The Hierarchy

Prime Bank Limited can take an initiative through their HRD that they can merge two or more post and by doing this they can reduce the hierarchy, or they can reduce the time for promotion also. By giving promotion to efficient and experience bankers, PBL can avoid employee turnover that are going to other Bank.

FINDINGS

• Prime Bank Limited though performing very well and hold the first position in the CAMEL rating published by the Bangladesh Bank, should be careful and control its costs. No doubt this is the good management that this bank comes to this stage only by ten years. But now the time to lengthen this time and made its capital base stronger with having insignificant percentage of non-performing assets. Though the appraisal and proposal system of the prime bank is said to the best one in this kind certain factors are overlooked.
• In appraisal system the competitive position analysis is not focused while doing the appraisal system.
• The product appraisal is done on the customer base not any comparison is done with other product.
• The suppliers’ influence is overlooked.
• Due to the data unavailability the credit demand assessment is not properly done.
• With a view to improving the quality and soundness of loan portfolio, credit risk management methods were updated in 2004. The Bank is now applying a new system of credit risk assessment and lending procedures by striker separation of responsibilities between risk assessment and lending decisions and monitoring functions. The Bank monitors its exposure to particular sectors of economy on an ongoing basis. The Bank has undertaken the changes in policy of credit risk management, credit risk administration and credit monitoring and recovery in line with the guidelines of Bangladesh Bank, formulated in the last year.

• Recently Bangladesh Bank has issued a circular that any Bank can disburse loan upto 25% of its total capital to a single customer. It actually encourages syndicated financing. Because textile/spinning/glass factory and dyeing factory etc are capital intensive and requires a lot of fund. That’s why for the last several years Prime bank achieved a landmark progress in syndication finance and arrange fund in the Rahmat Textiles Limited, Nasir Glass Industries Limited, H.P. Chemicals Limited, Appollo Ispat Complex Limited etc.

List of companies and amount in which Prime Bank acts as Lead Arranger in case of Syndication Arrangement of Loans:

• The living standard of the middle-class is increasing. As a result, amount of Consumer Credit loan increased with the increase of the buying power.
• Stage in life cycle: The banking industry in Bangladesh is in growth stage of the business life cycle.
• The drivers of change in the Industry and impact thereon:

• Product innovation

Financial product innovation can shake the structure of competition by broadening the industry’s customer base, and widening the degree of product differentiation among rival banks. Successful new product introductions strengthen the market position of the innovating banks, usually at the expense of companies who stick with their old products or are slow to follow with their own version of the new product.

• Service innovation

Service innovation is a great driving force in banking industry, because all the banks exert their best efforts to win customers by innovating new services. That’s why innovation of superior service will place a bank in competitive position in the industry.

• Changes in Cost and Efficiency

Widening or shrinking differences in the costs and efficiency among key competitors tends to dramatically alter the state of competition. Especially in the face of threat from new private banks, older banks are hard-pressed to achieve highest point of efficiency resulting in lowest cost.

• Regulatory Influences and Government Policy Changes

Regulatory and government actions can often force significant changes in banking industry’s practices and strategic approaches, as it is a highly regulated industry. Bangladesh Bank, the central bank of the country time to time issues different orders to the commercial banks to protect greater public interest, but it may have detrimental effects on individual bank’s operations.

• Technological Change

Advances in technology can broaden an industry’s landscape, making it possible to produce new and /or better products at lower cost and opening up whole new industry frontier. Modern technology helped development of some attractive electronic banking products like ATM, Phone Banking, Credit Card, Electronic Fund Transfer (EFT), SWIFT, etc. With the progress of information technology we have observed the introduction of new digital financial products. This trend will continue with the improvement in Telecommunication technology.  In the near future, the banking industry in Bangladesh is yet to render the services offered by the latest technology, namely, the I-Banking or Internet-Banking.

• Companies in a strongest and weakest position:

RECOMMENDATION

In credit management, it is conventional that proposals of credit facilities must be supported by a complete analysis of the proposed credit. More importance should be given on refund of loans out of funds generated by the borrower from their business activities (cash flow) instead of realization of money by disposing of the securities held against the advance, which is very much uncertain in present context of Bangladesh, where a number of creditors are willful defaulters.

Credit officer measures the risk associated with the credit facility. He should not be liberal in this respect; he should strictly follow the credit evaluation principle setup by the bank. The analysis should contain information about the borrower, credit purpose, credit repayment sources, details of collateral security with valuation and guarantee. It should also contain an assessment of the competence and quality of the borrower’s management ability, the general economic and competitive environment of the borrowers industry and other pertinent factors, which may affect the borrower’s ability to repay the facility, should be given much importance. It should improve in file management system to faster the dealings with the client’s proposal.

 Using the five force model the client must be appraised to identify the what is the competition like and how strong each of the competitive forces are on the business of the client where the following things must be highlighted;

• The rivalry among the competitor
• The potential entry of new competitors-interms of economies of scale, technological Know-how, Experience curve effect, resources requirements, access to the distribution network.
• Bargaining power of the buyer
• Suppliers’ influences and bargaining power over the business of the client.
• Potentiality of the substitute products.

Product comparison should be done between competitors in terms of Characteristic, Price, packaging, Ingredients, Unique selling Proposition (in case of services what they are offering quality of the service analysis)

As it has been observed that, there are some inconsistency in post approval and pre-approval monitoring. Most of the clients don’t submit the stock report, monthly statements, and overall stage report in case of large project. To reduce the difficulties in project implementation and supervision and monitoring following clue can be implemented.

• A time budget for the project to be implemented with mentioning the exact time of beginning and ending must be collected. So that time over-run while project completion can be avoided.
• For reducing the cost problem the credit officer must look for whether the construction be given contract and turn-key basis.
• Disbursement of fund procedure must be improved –the credit officer must become sure that the funds are going to the project it is sanctioned. There must be a credit officer assigned to the project and he will be responsible for completing the “Stage Completion Report Form” which will mainly deal with the details of the cost incurred in the previous period. And percentage of project work completed. Justification whether the portion of the project works are completed in time. The management must introduce project progress reporting form for better disbursement procedure.
• Most of the time the client doesn’t channel their proceeds through the accounts with the prime bank though they supposed to. Revenue Cascade and hierarchy of payment must be maintain to ensure that the installments are in time in right amount as there is a potentiality that the client will default.

IMPLEMENTATION PLAN

A strategy becomes successful only after its meaningful implementation. Crafting strategy is a difficult task but successful strategy implementation is demanding. Following are the implementation plan to avoid failure.

• Strategy implementation process should be two way not one way or directive. Every body should be involved in strategy formulation. Suggestion should be welcome. Low-level employee should take part by giving their suggestion from partially gathered knowledge and experience.
• PBL can take some marketing officer and an Executive in marketing division who has some experience regarding Bank product marketing.
• Managing Director can implement open door management. Once in a week every one is allowed to meet him and discussed with different issues regarding Bank’s Implement.
• Internal Audit Department should be more supportive to be aware from any unethical practices.

CONTINGENCY PLAN

Everybody should be involved in strategy formulation may not be work well. So before that it is need to develop the organizational culture on that way through training and participative meeting in branch level. As managing Director is the top person, employee may not be participative to discuss with him directly. So in Branch level, Branch Managers can do this thing and letter they can discuss the same thing in monthly meeting with Managing Director and each Branch manager and all top executive can share the idea. Rotation of potential employee is needed to make him/her an essential and knowledgeable employee who can work for the Bank effectively and efficiently later on.