Credit Management of Bank Asia Limited

Chapter 1: Introduction

 Origin of the study:

The internship report is a basic requirement of the BBA program of the School of Business, North South University.  During the 12 week internship program, students are assigned to an organization to observe the practical applications of their theoretical knowledge. Finally, a report with proper analysis and possible solution of the problematic zones of the organization needs to be submitted to the Faculty Advisor Mohammad Mujibul Haque, Associate Professor, School of Business, NSU.

 Objective of the study:

The objective of the study is to examine the credit management policy of the branch, how they operate credit management, whether they can improve their present credit management policy.

Scope of the study:

The scope of the study is to analyze the Credit Management by Bank Asia Limited (Corporate Branch).

 Methodology:

Both primary and secondary sources have been used for colleting necessary data to analyze the Credit Management of Corporate Branch. Primary sources include face-to-face interview with respective officers in credit department. Secondary sources consist of several reading materials such as journals, brochures and Trial Balance-1.

Limitation of the study

One of the crucial limitations is time constraint. As the Bank moved from Bexibank Software to Stealer Software recently, all the facts and figures not transferred yet from Bexibank to Stealer. So, it is tough to provide all information for the project. Finally, lack of previous experience in this area will be another limitation.

Organizational Benefit:

This report would helpful for the organization for future decisions. Whether they will stick with their present plan or whether they would change their strategy to attract more clients to get credit facilities from the bank. They can also change the credit portfolio analysis

 Chapter 2: Portfolio of Credit Activity

Introduction

We can define credit is a deal whereby bank performing at the request and on the requests of a customer or in its own behalf to make a payment to or to the order of a third party or is to accept and pay bills of exchange drawn by the beneficiary.

Bank Asia Ltd. can lead up to 15% of its capital fund without having any approval from Bangladesh Bank. The maximum limit can go up to 100% of the bank’s capital fund. Bank Asia compiles with the ceiling set by Bangladesh Bank.

What is Loan

When an advance is made in a lump sum repayable either in fixed monthly installments or in lump sum and no subsequent debit is ordinarily allowed except by way of interest and incidental charges. Etc, it is called a Loan. Loan is allowed for a single purpose where the entire amount may be required at a time or in a number of installments within a period of short span. After disbursement of the entire loan amount, there will be repayment by the borrower in installment. A loan once repaid in full or in part cannot be drawn by the borrower. Entire amount of loan is debited to the loan account in the name of the customer and is paid to him/her through his/her SB/CD/Loan account. Some times loan amounts are disbursed in cash.

For purchasing bus, trucks, launches, for construction of building and for capital financing of industrial projects, export finance, import finance, import finance etc. Now a day, commercial banks, especially the nationalized commercial bank, in our country, is to make loans under different schemes viz. Agricultural Loans, and loans under self-employment scheme etc. Depending upon the purpose, loans may be repayable within a few months or the repayment period may extend upon a few years. Agricultural loans are generally repayable within a period of 3(three) months to 1(one) year. But repayment of transport loans & house building loans may take longer period comprising a number of years.

 Loans are generally secured by lien on fixed/term deposits, shares, debenture, Protirakhsha Sanchay Patra, insurance policy, pledge of gold, mortgage of real estates and hypothecation of crops, vehicles, machineries etc, depending upon the nature & purpose of the loan.

Importance of Bank Credit

• To contain inflation in order to remain within safe limit of monetary expansion
• To maintain price stability
• To ensure balanced development of all regions & sectors
• To increase the production & employment
• To maintain socio economic priorities
• Credit influences imports and capital movements, and hence the outcome of the balance of payments.
• Credit provides vital linkage among government sector, private sector, financial sector & foreign sector.
• Credit is an important determinant of money creation i.e. production, consumption & national income.
• Credit is economic power. Proper allocation of credit may lead to the incremental generation of product and services.
• Credit & deposits have vice versa relationship.

There are two types of credit facilities in Bank Asia Limited: funded and non-funded.

 Funded loan facilities

Funded facilities means direct fund involvement of bank. The Funded Facilities of loans and advances are:

• Cash Credit
• Over Draft (OD)
• Secured Over Draft (SOD)
• Term Loan
• Personal Credit(PC)
• Lease
• Hire purchase
• Payment Against Documents (PAD)
• Loan Against Trust Receipt (LTR)

Now I briefly describe above facilities:-

Cash Credit

Cash Credit (CC) is a form of advance is a separate account by itself and is maintained in a separate ledger. It is operated upon like an overdraft account. The borrower may operate the account within a stipulated limit as and when required. A certain limit of credit amount is set at the time of initiation of Cash Credit facility. Usually an expiration date is set, which is not more than one year. The drawings are subject to drawing power. A service charge, which in effect an interest charge is normally made as a percentage of the value of the purchase

Cash Credit is a continuous credit facility usually given for capital fund requirements purpose to the customer. Cash Credit is generally given to traders, industrialists for meeting up their working capital requirements. Cash Credit can be given on Hypothecation of goods or pledge. Bank Asia only Cash Credit on Hypothecation.

 Over Draft (OD)

Overdraft facility is also a continuous loan arrangement on a customer’s current account permitting him to overdraw up to a certain approved limit for an agreed period. In another way we can say that, advances in the form of overdraft are allowed on a current account operated upon by cheques for a certain approved limit for an agreed period. Here the withdrawal of deposits can be made any number of times at the convenience of the borrower, provided that the total overdrawn does not exceed the agreed limit.

Borrowers can return any amount at any time within the pre fixed time of the facility. Turnover of an Over Draft facility is the important phenomenon on which renewal of the facility depends. Over Draft facility is generally granted to businessmen for financing working capital requirement and high net worth individuals to overcome temporary liquidity crunch. Overdraft facility is a fluctuating form of lending. It may increase through withdrawals by the borrower and may increase when the borrower makes payment into the account

 SOD

 When Overdrafts are allowed against securities they are called Secured Overdrafts. Overdrafts are generally granted to contractors & supplies for carrying on construction works and supply orders and to businessmen for expansion of their business. SOD is generally allowed against securities of fixed & term deposits shares/debentures, PSP, Insurance Policy, real estates, etc: depending on the nature & purpose of advance. An interest charge on SOD is calculated on the basis of security liened.

  In case of FDR with Bank Asia 11%, with other Bank is 12%

  In case of Sanchaypatra purchased from Bank Asia 13%, from other bank it is 14%

  2.5% spread is kept in charging interest; interest is calculated on outstanding amount at daily basis.

 Term Loan

Term loan are given to finance to purchase of assets. Loan agreements often contain restrictive agreement and loan is repayable as per amortization chart. Collateral is mandatory for term loan.

There are three types of Term Loan:

1. Short Term Loan is less than 1 year.
2. Mid Term Loan is more than 1 year but less than 3 years.
3. Long Term loan is more than 5 years.

Bank Asia prefers to provide Mid Term Loans to the borrowers.

 Personal Credit (PC)

 For day to day activity for the working people or small type of business activity Bank Asia offers PC to accommodate their daily routine. In PC, no securities are kept for this credit facility but a guarantee from a third party is required who ought to be prominent person or government service holder. Anyone with continuous employment for a reasonable length of time in an organization can have this facility.

The range of PC is Tk. 50,000/- to Tk. 3, 00,000.00. The bank says to the customers that the interest   rate is 14% but actually is 14.25%.

Lease

Lease of finance are made to acquire the assets selected by the borrower (lessee) for buying of the same at a certain agreed terms and conditions with the bank (lessor). In this case bank retains ownership of the assets and borrower possesses and used the same on payment of rental as per contract. In this case no down payment is required and usually and usually purchase option is not permitted. The articles under this type of facility are booked as assets of the bank.

 Hire purchase

This is bailment of goods at certain agreed terms condition. Under this facility, the hirer may have the option either to return those goods and terminate the hiring or alternatively purchase the goods upon the terms set out in the agreement of hire purchase. The hirer may have to affect an agreed sum as down payment and although ownership of articles under this type of facility remains with the bank, it is not booked as asset of the bank. Hire purchase loan is based on hypothecation 

 Loan against Trust Receipt (LTR):

This is also a post- import finance facility awarded to retire import bills directly or under PAD as the case may be. Bank may or may not realize margin on the total landed cost, ending upon banker customer relationship. in LTR of the goods remains with the borrower and the borrower executes’ letter of trust receipt’ in acknowledgement of debt and its repayment along with interest within agreed period in acknowledgement of debt and its repayment along with interest within agreed period of time.

In this type of advance, proceeds of every sale must be deposited with the bank irrespective of validity of the facility. Since goods are held in trust, any misappropriation of the same will entail the borrower to be liable for initiating ‘criminal’ charge against him.

 Non-funded loan facilities

Funded facilities means direct fund involvement of bank. The Funded Facilities of loans and advances are:

• Letter of Credit
• Guarantee
• FDBP
• LDBC
• FDBC

Now I briefly describe above facilities:-

 Letter of Credit

A Letter of Credit(LC) is a non-funded credit line given by a bank to an importer to facilitate both foreign and inland business. This is a contingent liability which can be converted to a funded facility incase bank makes the payment on behalf of the importer. A Letter of Credit can be revocable or irrevocable, at sight or usance, restricted or negotiable  so on.

Bank Guarantee(BG):

Bank Guarantee gives a major potion of revenue for bank every year. Bank offers BG to reliable and valuable customer as per requirement. This is also a contingent liability for bank.

 Foreign Document Bills Purchased (FDBP):

 This type of finance made out to purchase foreign clean bills such as foreign currency draft, cheque etc. The facility is generally allowed to a very well known client with good standing save in the case of encashment of Traveler’s chares.    

 Local Document Bills Collection (LDBC):

 This type of finance made out to purchase local clean bills such as both local and foreign currency draft, cheque etc. The facility is generally allowed to a very well known client with good standing save.

 Foreign Documents Bill Collection (FDBC):

Similar to LDBC, here this is use for outside country bill collection

 Staff Loan

Advance to members of staff is granted according the policies laid down by the bank. Advances are allowed to members of staff who are in the bank’s permanent employment only. House Building Loan & Car Loan are the two types of loans that offer in this category at present.

Syndicated loan

These are the loans usually involving huge amount of credit and as such to reduce a particular bank’s stake a number of banks / financial institutions participate in such credit, known as loan syndication. The bank primarily approached / arranging the credit is known as the lead or managing bank.

 Summary

There are different kind of credit facilities are available in Bank Asia. Most of the credit facilities are ensured with security. For, working people class Bank Asia Ltd only provides PC for daily to daily basis. They might introduce new type of credit facilities for professionals like engineers, teachers, doctors, govt. officers, business executives. Also they can introduce credit facilities for students. As the exchange rate is compare to other commercial banks is high, which affect in the non funded credit facilities.

Credit Department:

One of the primary functions of commercial banks is sanctioning of credit to the potential borrowers. Bank credit is an important catalyst for bringing about economic development in a country. Without adequate finance, there can be no growth or maintenance of a stable economy. Bank lending is important for the economy, because it makes possible the financing of agriculture, commercial and industrial activities of a nation. At the same time, a bank will, therefore, distribute its funds among various sectors in a manner as to derive sufficient incomes.

Bank Asia Ltd, being one of the largest private commercial bank of the country, has some prejudice to finance directly on priority basis to agriculture, industry and commerce sector for strengthening the economic base of the country. Hence, it is very clear that, Bank Asia Ltd. Bank plays an important role to move the economic wheel of the country.

Lending principles followed by BANK ASIA LTD.:

 The Principle of lending is a collection of certain accepted time tested standards, which ensure the proper use of loan fund in a profitable way and its timely recovery. Different authors describe different principles for sound lending.

Bank Asia Ltd. follows the following five principles in its lending activity:

1.                     i.            Safety
2.                   ii.            Security
3.                 iii.            Liquidity
4.                 iv.            Adequate yield
5.                   v.            Diversity
6.                 vi.            Productive purpose
7.               vii.            National interest  

  i.Safety

Safety should get the prior importance in the time of sanctioning the loan. At the time of maturity the borrower may not will or may unable to pay the loan amount. Therefore, in the time of sanctioning the loan adequate securities should be taken from the borrowers to recover the loan. Banker should not sacrifice safety for profitability.

Bank Asia Ltd.. exercises the lending function only when it is safe and that the risk factor is adequately mitigated and covered.  Safety depends upon:

The security offered by the borrower; and

The repaying capacity and willingness of the debtor to repay the loan with interest.

      ii.Liquidity

Banker should consider the liquidity of the loan in time of sanctioning it. Liquidity is necessary to meet the consumer need.

    iii.Security

Banker should be careful in the selection of security to maintain the safety of the loan. Banker should properly evaluate the proper value of the security. If the estimated value is less than or equal to loan amount, the loan should be given against such securities. The more the cash near item the good the security. In the time of valuing the security, the Banker should be more conservative.

    iv.Adequate Yield

As a commercial origination, Banker should consider the profitability. So banker should consider the interest rate when go for lending. Always Banker should fix such an interest rate for it’s lending which should be higher than its savings deposits interest rate. To ensure this profitability Banker should consider the prospect of the project.

      v.Diversity

Banker should minimize the portfolio risk by putting its fund in the different fields. If Bank put its entire loan able fund in one sector it will increase the risk. Banker should distribute its loan able fund in different sectors. So if it faces any problem in any sector it can be covered by the profit of another sector.

    vi.A Productive Purpose:

Bank Asia Ltd exercises its lending function only on productive purpose.

1.   vii.            National or social interest:

Bank Asia Ltd. also considers national aspect of any project while financing. They take utmost care so that the project cannot be detrimental to the society as well as to the nation.

Reason for loan default:

There are many reasons for loan default. The principle reasons are:

Summary

Credit facility is one of the major earning sources for a bank. Credit facility can be an earning source for a bank but it might be also backfires when the authority provides credit facility to the borrower and in future the borrower turned to be loan defaulter. So, it is crucial factor to make a decision for the loan authority whom to provide loan for what purpose so than the bank’s loan portfolio would be well diversified and chance of default is low.

Chapter 3: Loan portfolio Management & Lending Strategy

Lending Authority:

Lending approval process categorized into 4 steps according to the loan amount desired by the borrower. The credit proposal moves through 4 approval levels in Bank Asia:

1.               I.      Branch Manager
2.            II.      Zonal Head
3.          III.      Credit Committee of Corporate Office
4.         IV.      Board of Directors of the bank

  Key of Lending  

Bank Asia provides loan to the borrower with the basis of some key factors which would enable them to reduce the chance of loan default, increase of bank’s revenue also the loan should also secures the opportunity to improve economy of the borrower, country as well as bank. The key factors that are focused are:

• Know Your Customer (KYC)
• Liquidity of the customer
• Safety
• Security
• Profitability from both bank’s and customer’s purpose of the loan’s perspective

 Lending Policies

There are some guidelines for the credit officers to provide credit facility to the borrowers maintained in Bank Asia. These guidelines not only help them to provide loan to the customers but also enable them to make a suitable loan portfolio. In this way bank can ensure its loan meets regulatory standards and are profitable is to establish a written loan policy.  Lending policies of Bank Asia are as follows:

• A goal statement for the bank’s loan portfolio
• Specification of the lending authority given to each loan officer and loan committee
• Lines of responsibility in make assignments and reporting information within the loan department.
• Operating procedures for soliciting, reviewing, evaluating and making decisions on customer loan applications.
• The required documentation that is to accompany each loan application and what must be kept in the bank’s credit files.
• Lines of authority within the bank, declaring who is responsible for maintaining and reviewing the bank’s credit files.
• Guidelines for taking, evaluating and perfecting local collateral.

In black and white loan policy statement carries a number of advantages for the bank adapting it. It communicates to employees working in the credit department what actions they are required to go after    and what their responsibilities are. It would help the bank moves toward a loan portfolio that can effectively blend multiple objectives for example the bank profitability, controlling its risk and finally satisfying regulatory requirements.

 SELECTION OF THE BORROWER:

Selection of borrower is vitally important step for sanction loan.  Due to lack of information and moral hazard, banks have to suffer a lot due to the classified loans and advances. If the selection of borrower is correct, that is, the borrower is of good character, capital and capacity or of reliability, resourceful and responsible the bank can easily get the return from the lending. Consequently, monitoring is making much easier for the banker. From this point of view, BANK ASIA LTD. follows the following procedures:

 Obtaining first information

1. Studying past track record:

After getting an application for a loan, BANK ASIA LTD. Official studies the past track record of the applicant. Generally the study includes:

a)      Account balances and the past transactions;

b)      Credit report from other banks;

c)      Information of the Industry by studying market feasibility;

d)      Financial statements (balance sheet, cash flow statement, and income statement). If the borrower is a sole- proprietor, then the single entry accounting treatment is converted to double entry system.

 2.  Report from Bangladesh bank:

A report from Credit Information Bureau (CIB) of Bangladesh Bank required if the amount is more than TK.10 Lac.

3. Borrower analysis:

Borrower analysis is done from the angle of 3-C (character, capital, capacity) or 3-R (reliability, resourcefulness, responsibility). It follows that the bank forms a rational judgment about the integrity of the borrower, which should be undoubted. The human skill, conceptual skill, operational skill is qualitatively analyzed.

4. Business analysis:

Business analysis is done from two angles-terms, conditions, and collateral securities.

 PROCEDURE FOR GIVING ADVANCE:

The General Advances Department of Corporate Branch Bank Asia Ltd. usually follows the below-mentioned procedures and steps for sanctioning any kind of advances as available with the branch:

First, step

The prospective borrower has to apply to Corporate Branch for loan by filling up of a specific Application form.

Second step

After receiving the loan application form, Corporate. Br. sends a letter to Bangladesh Bank for obtaining a report from there. This report is called CIB (Credit Information Bureau) Report. This report is essential if the loan amount exceeds Tk.50 Lac. But Corporate Br. usually collects this report if the loan amount exceeds Tk.10 Lac. The purpose of this report is to being informed that whether the borrower has taken loan from any other bank or not if ‘yes’, then whether these loans are classified or not.

Third step

After receiving CIB report if the Bank thinks that the prospective borrower will be a good borrower, then the bank will scrutinize the documents. In this stage, the branch will look whether the documents are properly filled up and signed.

 Fourth step

Fourth stage is processing stage and in this stage, the Bank will prepare a proposal.

Branch incumbent (L/O) has the discretionary power to sanction loan (SOD) up to Tk.50 Lac against financial obligations by informing Corporate Office. But in that case, the Branch Manager has to give attention to the following matters:

         The interest rate of the loan must not be less than 15.5% and

         The borrower must maintain 20% margin based on banker’s customer’s relationship.

Except this case, the branch has to send the proposal to the Corporate Office. Corporate Office will prepare a minute and submit it before the Executive Committee (EC). The minute has to be passed by EC.

 Fifth step

After getting the approval of Bangladesh Bank, it will again come to the Corporate Office. After the sanction advice, Bank will collect necessary documents (Charge documents). These documents are:

         Joint Promissory Note

         Single Promissory Note

         Letter of Undertaking

         Loan Disbursement Letter

         Debit Figure Confirmation Sheet

         Letter of Continuity

         Letter of Authority

         Letter of Revival

         Right of Recall the Loan

         Letter of Guarantee

         Letter of Indemnity

         Trust Receipt

         Hypothecation of Goods

         Hypothecation of Vehicles

         Counter Guarantee

         Letter of Lien

         Letter of Lien in case of advance against FDR

Letter of Lien And Authority for advances to third parties against Fixed Deposit/ Call Deposit/ Special Deposit or margin or margin deposits

         Letter of Authority to encash FDR

         Letter of Agreement for Packing Credit

         Letter of Guarantee for opening L/C

         Charges over Bonds or Certificates or Shares etc. by third person, firm or company to secure specific and general liability

         Memorandum of Deposit of Title Deeds

         Hypothecation of goods to secure a Demand Cash Credit or Overdraft/ Loan amount

         Guarantee by Third party.

 Sixth step

DOCUMENTS AND DOCUMENTATION:

DOCUMENTATION:

Documentation is a very important aspect of loans and advances. It may be described as the process or technique of obtaining the relevant documents/papers for securing advances. A banker must obtain proper documents to be executed by the borrower to protect the Bank’s interest. Moreover, when money is lent against security of some assets, the document must be got executed in order to give to the banker a legal and binding charge against those assets. The documents for loans and advances can be classified into the two categories namely charge documents and security documents. Charge Documents are a set of printed and prescribed forms, which are executed by the borrowers to protect Bank’s interest while bank is providing loan/advances. Different types of advances are allowed to the customers against different types of securities.

Charge documents as required by the different types of advances are mentioned in the appendix:

Seventh step

For withdrawing the loan amount, the customer creates a CD account and the loan is transferred to the CD A/C. Afterwards, the customer can withdraw the money.

Eighth step

CREDIT DISBURSEMENT:

After verifying all the documents, the branch disburses the loan to the borrower. The loan officer disburses the loan to the borrower’s loan account .A “Loan Repayment Schedule” is also prepared by the branch and is given to borrower.

Ninth step

After the disbursement of the loan the bank follows the borrower in the following manner

• Constant supervision.
• Working Capital assessment.
• Stock report.
• Break Even analysis
• Rescheduling of repayment.

Tenth step

The loans are repaid in installment. This installment is according to bank directives. Some loans are repaid all at a time. If any loan is not repaid then notices are served to the customer. Sometimes legal actions are also taken for recover the loan.

 Credit Planning at different level:

Credit Planning implies estimating first the total lend able resources that are likely to be available within the given period and then allocating the same amongst various alternative uses in conformity with the national plan and priorities.

Necessity of credit planning in context: 

• Demand for Credit is much more than its supply
• Providing credit at right person at right time at right quantity
• Getting maximum output as a result of credit allocation
• Ensuring the best alternative investment opportunities
• Achieving declared objectives such as providing credit to priority sectors

 Methodology of preparing Credit Budgets at Bank’s Different level:

(a)   At Branch Level:

• Adherence to the policy guidelines of the Corporate Office and the supplementary policy guidelines of the Regional Office
• Analysis of the command area
• Determination of the requirements of incremental creditable funds
• Allocation of the said funds to different sectors and client groups during the budget period

(b)   At Regional Level:

•  Analysis and settlement of the branch credit plan in a branch managers meeting and in a democratic way
  • Transmission of the Regional Credit plan to the Corporate Office

(c)    At Bangladesh Bank Level:

• Adherence to the policy guidelines of the Central Bank regarding development of credits
  • Correction of the regional as well as sectored imbalances if any
  • Settlement of the credit plan of the concerned bank for the budget year.

 Credit Scoring System by Bank Asia Ltd

 Purpose of Credit Scoring System:

• It uses a combination of financial ratios to produce a rating which is an indication of a company’s management ability and financial strength
• The credit score are intended to highlight inherent weakness in financial statements. They are not designed to provide a definitive answer as to whether a proposal should be approved or declined
• As well all financial ratios the trends is just as important as the score. Downward trend requires investigation even when the score is satisfactory
• The spread sheet program will automatically calculate two scores which are titled:
• “Z” Score (in case of Larger Manufacturing Companies)
• “Y” Score (in case of all companies)

 “Z” Score

• Are applied to the following manufacturing companies:
• Public companies quoted on the Dhaka Stock Exchange or Chittagong Stock Exchange
• Government owned or semi government companies
• Other companies with a sale of over Tk. 50 core

• The formula (which can also be used manually) to calculate the “Z” score is as follows:

Z=.012X₁ + .014X₂ +.033X₃ +.006X₄ +.999X₅

Where,

X₁ = Working Capital/Total Assets

X₂ = Retained Earnings/Total Assets

X₃= EBIT/Total Assets

X₄= Equity/Total Liabilities

X₅= Sales/Total Assets

“Z” Score Formula Notes

• Variables X₁ to X₄ must be calculated as absolute percentage i.e. where the result of the calculation of X₁ is 5.2 multiplied by the weighting factors of 0.012
• Variables X₅ uses the whole number i.e. an X₅ calculation of 1.5 gives an X₅ of multiplied by the weighting factors of 0.999

Interpretation of “Z” Credit Scores

• A score higher than 3 rates a “Good risk” means no risk i.e. acceptable
• A score is less than 3 indicates further investigation is required
• A score is less than 1.81 evidences an inherent weakness and a probably of the company failing within 2 years
• A consistent downward trend requires investigation even when the score is satisfactory

“Y” Score

• Are applied to all trading companies
• The formula (which can also be used manually) calculates five ratios and awards points to each according to the table below:
• Current Ratio(CR) = Current Assets/Current Liabilities
• Quick Ratio(QR) = Cash + Equivalents + Accounts Receivables/Current

          Liabilities

• Liquidity Ratio(LR) = Cash + Equivalents/ Current Liabilities
• Asset Ratio(AR) = Total Assets/Total Liabilities
• Return on Investment = Net Profit for the year/ Ending Net Worth

“Y” Score Table

 Interpretation of “Y” Credit Scores

• A total score of less than 12 evidence an unusual degree of risk and a strong reliance of security
• The formula is very dependent on liquidity ratios. Low scores indicate a close review of the components of working capital is required. Inventory will likely form a high percentage of current assets
• Again the trend is just as important as the actual score

Comparing “Y” and “Z” Credit Score

• If the two score appear contradictory, have to review each of the component ratios of the lower score. Have to identify the weak ratios and obtain explanation
• If the “Z” score is satisfactory and the “Y” score is not, then have to review Sales to Total Assets ratio. If that ratio and the Sales to Working Capital ratio are high then the company is probably over trading.

Lending Risk Analysis (LRA): a risk management techniques by Bank Asia:

 Lending Risk Analysis (LRA) is a technique by which the risk of the credit is calculated. Experienced people of General Advance Department do this analysis. It is a ranking whose total score are 140. Among this score, 120 is for Total Business Risk and 20 for Total Security Risk.

It is a four-scale rating.

 In case of business risk, if the score falls:

                 Between 13-19, then——- Good risk.

                 Between 20-26, then——- Acceptable risk

                 Between 27-34, then——- Marginal risk

                 Over 34, then—————- Poor risk

In case of security risk, if the score fall:

                 Between -20 to -15,then———–  Good risk

                 Between -14 to 0, then————- Acceptable risk

                 Between 0 to 10, then————– Marginal risk

                 Over 10, then————————- Poor risk.

In LRA, following aspects are analyzed –

1)      Supplies risk

2)      Sales risk

3)      Performance risk

4)      Resilience risk

5)      Management ability

6)      Level of Managerial teamwork

7)      Management competent risk

8)      Management integrity risk

9)      Security control risk

10) Security covers risk.

   These are for addressing two important factors for the bankers of the bankers. These are

• Is the business good enough to ensure regular repayment of my credit?
• Do the securities cover adequate exposure, if the business fails to produce returns?

Modes Of Charging Security

Securities are the cover against loans and advances. Properties are covered into securities. But for conversation some conditions are to be fulfilled as required by the Bank Asia and these are given below:

1. The properties are to be acceptable to the lending bankers for securities.
2. Creation of the charge on the concerned properties.
3. The acceptability of properties as securities are mainly depend on:

1. value of the property must cover the loan amount with margin
2. consideration of different qualities of properties
3. free from credit restrictions of Bangladesh Bank
4. within in the credit policy of the bank
5. Pledge
6. Hypothecation
7. Lien
8. Mortgage
9. Right of Set off
10. Assignment

4. There are two types of securities i.e. primary and collateral
5. Modes of creation of charges are of different types. There are dependable on the basis of nature of loans and advances and nature of properties for securities.
6. Different modes of  modes of charging security:

 There are different modes of charging securities are exercised by the bank:

PLEDGE:

Pledge is the bailment of goods as security for payment of a debt or performance or promise. Here, title and ownership are not transferred. Pledge goods may be sold out and proceeds thereof may be appropriated towards adjustment of Liability in case of failure of the borrower to repay or fulfill the terms and conditions.

 HYPOTHECATION:

This is mortgage of movables by an agreement and here neither possession nor ownership is transferred. Hypothecated goods cannot be sold out/disposed off without notice and court’s order; if a special power of attorney is taken in that case can be disposed off without going to the court.

 LIEN:

Lien is the right to retain possession and not right of ownership. Bank’s lien is general lien over its own financial obligation to clients. Property under lien cannot be realized/sold and proceeds thereof cannot be appropriated without notice to the owner and sometimes without the order of court.

 MORTGAGE

Mortgage is the transfer of interest in immovable property to secure the repayment of money advanced. Ownership remains with the mortgagor. In case of equitable mortgage, Court Order is necessary and in case of registered mortgage, the order of court is not necessary for sale/disposal of the mortgaged property for adjustment of advance.

Right of set off

Generally right of set off indicates the banker’s right on Customers account i.e. in absence of any a special agreement of the contrary, a banker might set off Customer’s credit balance against a debt due to him from the customer and that there was no legal obligation on a bank to give notice to a customer of his intention to combine account.

Assignment

It is a right or authority given by the Assignor to the Assignee to collect the proceeds payable at present or future on his behalf for adjustment of liabilities.

 CIB:

Bangladesh Bank has established within itself a Credit Information Bureau (CIB), which collects credit information from the banks. Banks are required to furnish such information in respect of credit limit of Tk. 50000 and over. They mention the Name of facility, security and charge along with outstanding balance. After consolidating such information in respect of each customer, the central bank supplies to the total limits sanctioned to and the number of banks dealing with a party. Thus the banks can find out if any of their customers is having excessive borrowings from the banking system at any particular time.

 Credit pricing techniques by Bank Asia:

Credit pricing:

• The price of a credit is the “interest rate” that the borrowers must pay to the bank, in addition to the principal amount.
• The price of the “interest rate” of a credit which is determined by the true cost of the credit of the bank (basic rate) plus profit/ risk premium for the banker’s services and acceptable of the risk.
• The mechanisms of the true cost of a credit are:
• Interest  Expense
• Administrative cost
• Cost of capital
  • Interest  Expense = Deposit Interest + Central Bank Borrowing cost
  • Administrative cost = Deposit as well as Credit Administrative cost
  • Cost of capital = return on capital or the Rate of Return investors would expect to receive from their investment in a bank.
  •  Risk is the measurable possibility of loosing or not gaining value
  • The Primary risk of making credit is Repayment Risk which is the measurable possibility that a borrower will not repay their obligation as agreed
  • The price of a borrower must pay to the bank for assessing and accepting the risk is called the risk premium
  • Since past performance of a sector, industry or company is a strong indicator  of the future performance, risk premium is generally based on the historical, quantifiable amount of losses in that category
  • Interest Rate charge = Base Rate + Risk Premium

Credit Classification and Provisioning by Bank Asia:

Credit Classification

With the initiation of FSRP Bangladesh Bank introduced a new system of credit classification and provisioning to strengthen credit discipline and improve the recovery position of credits and advances. General features of this system:

 Responsibility- Each bank will be responsible for its own credit classification according to the guidelines issued by the Bangladesh Bank form time to time.

 Inspection- Bangladesh Bank will inspect the classification, interest suspense and provisioning carried out by the banks.

 Branch level Action- each branch will carry out credit classification on case by case so that it is available at branches as well as Head Office.

 Classifications of credit in no way lessen the responsibility of the borrowers to repay.

 Setting the limit on loans

The limit for the loan is evaluated on a case by case basis by the branch, by looking at the applicants’ monthly surplus income, net worth, the invoice and the Corporate Office takes the final decision regarding limit.

 Monitoring

Monitoring of advances accounts is carried out on a regular basis by the branch. The following are specially monitored on the periodic basis:

• Whether limits assigned to various customers for their loans have been crossed
• Whether loans have gone into classified status or not
• Whether documents are in order and legally valid
• Whether the loan is being used for the purpose given. This is done through visits, and also through studying the financial statements every month/ every quarter
• On a random basis comparing periodic financial statements with the actual statements  as per the organization’s register to check if the statements are authenticated or not
• Whether the capacity of utilization of the project is as per expectation from time to time
• Whether interest payments are being received regularly

 Any excess over limits are automatically brought to notice by the system giving a signal. To override this, the permission of the Branch Manager has to be taken.

Also monitored are the natures of the activities of the account such as whether there have been no transactions on the account, or too many transactions.

 Renewal of credit facilities

If the loans are renewed, the appraisal process has to be carried out again in order for applicant to once again avail of the loan.

Overdrafts, cash credit and term loan facilities are reviewed annually or sometimes more frequently if it is considered that a closer monitoring of the account is necessary. Trade related credit facilities are self liquidating in nature; for example: with the realization of the export bill purchased by the bank, the outstanding amount is liquidated.

 The Procedure for Credit Classification & Provisioning

 For Classification purposes credits have been categorized under four heads. These are:

 Continuous Credit– the credit, which have no particular repayment schedule, but contains date of expiry, credit limit etc. will be termed as continuous credit e.g. CC, OD etc.

 Demand Credit– The credit, which is considered repayable, only after the banks claim it will be termed as Demand Credit. If contingent or any other liability is converted to Compulsory Credit or Forced Credit (i.e. Credit without having prior approval as regular credit) then it will be termed as Demand Credit e.g. Forced LIM, PAD, and IBP etc.

 Fixed Term Credit– The Credit, which is repayable within a particular period of time as per repayment schedule, will be termed as Fixed Credit.

 Sort term Agriculture and Micro-credit– Those credit which are enlisted as short tem credit under the annual agricultural credit program of the Bangladesh Bank will be termed as agr. Credit. It will also include credit extended to agriculture sector and repayable with in a period nit exceeding 12 months. The short-tem Micro-Credit will be that which will not exceed an amount of taka 10,000 and will be repayable within a period not exceeding 12 months. Such credit may be Non-Agricultural, Swanirvar, Weaving credit or bank’s self financed Project Credits or whatsoever.

Basis for credit classification

A) Objective Criteria:

Any agricultural credit will be tuned into irregular credit just after it is not repaid/ rescheduled within the prescribed time period. If the aforesaid credit lies irregular for three months and above but below six months then the credit will be classified as Sub-Standard, if it lies irregular for 6 months and more but less than 12 months then the credit will be classified as bad credit.

 When demand credit is left un-recovered for 3 months an above but less than 6 months form the date of the credit is clamed or from the date of compulsory credit creation, then the credit will be classified as Sub –Standard, it is i.e. irregular for 6 months and more but less than 12 months then it will be Doubtful and if it remains un-recovered for more than 12 months and above then it will be classified as Bad credit.

 In case of Fixed term Credit if any installment is left un-recovered with in the scheduled date, the amount falling due on account of un-recovered installment, will be classified as “Overdue Installment”

 (A) Fixed Term Credit which is repayable within a maximum period of 5 years in that case

a)      If the amount of Overdue Installment equals or exceeds the amount repayable with in 6 months then such credit will be classified as Sub-Standard.

 b)      If the amount of Overdue Installment equals or exceeds the amount repayable within 12 months then such credit will classified as doubtful.

 c)      If the amount of Overdue Installment equals or exceeds the amount repayable within 18 months than such credit will be classified as ‘Bad Credit”

(B) Fixed Term Credit which is repay able after 5 years in that case

 d)      If the amount of Overdue Installment equals or exceeds the amount repayable within 12 months then such credit will be classified as Sub-Standard.

 e)      If the amount of Overdue Installment equals or exceeds the amount repayable within 18 months then such credit will classified as doubtful.

 f)       If the amount of Overdue Installment equals or exceeds the amount repayable within 24 months than such credit will be classified as ‘Bad Credit”

 Clarification– If any Fixed Term Credit is repayable in monthly installment then the amount of recoverable installment will be equal to the sum of 6 installments (monthly). Similarly, in case of quarterly repayable installment total amount repayable within 6 months will be equal to the amount of the total of two quarterly installments.

 (A) Short Term Agriculture and Micro-credit will be termed as irregular credit if it is not recovered within the scheduled date as per the contract of the credit. After exceeding 12 months as irregular credit it will be classified as substandard, after exceeding 36 months it will be doubtful and after exceeding 60 months it will be bad.

  (B) Qualitative Judgment– Whether any conditions credit or Demand Credit or fixed term credit are classifiable or not on the basis of objective criterion but if there is any doubt or uncertainty as regards their recovery then the credit will be classified on the Qualitative Judgment.

If the recovery of the credit becomes uncertain resulting from change of circumstances under which credit was extended or the borrower sustains loss of capital or the value of the security decreases or any adverse situation arises then the credit will be classified on the basis of Qualitative Judgment.

 Besides, if the credit is extended without any logical basis or the credit is rescheduled frequently or the rules of rescheduling are violated or the trends of exceeding credit limit is observed frequently or a suit is field for recovery of the credit or the credit is extended without the approval of the competent authority, then the credit will be classified on the basis of Qualitative Judgment.

Due to the reasons stated above or for any other reason if in spite of possible loss of any credit, there is any probability of changing the present situation through tagging proper steps, the credit will be classified as Substandard on the basis of Qualitative Judgment.  But even after taking proper steps, if the full recovery is not ensured the credit will be classified as Doubtful and after rending all out efforts, if the probability of recovery becomes totally nil the credits will be classified as Bad Credits.

 The concerned bank will classify the credit on the basis of Qualitative Judgment and if any improvement is achieved, those credits will again be declassified.

 However, the credit once classified by inspection team of Bangladesh Bank team will be treated as final classification and before any subsequent inspection is conducted by Bangladesh Bank the credit will not attain any merit of declassification.

 Accounting Procedure of Interest of Classified Credit

1. If any credit of advance is classified as Unclassified, Substandard,  Doubtful, the interest will be imposed on the credit account but such interest will not be transferred to the Income Account. Total interest imposed in Substandard or Doubtful account will be kept in Interest Suspense.

2. If any credit or advance is classified as Bad and Loss, imposition of interest on that account will be suspended forthwith. If any suit is required to be filed for recovery of such credit, the suit will be filed on the total amount of principal including interest calculated up to the period before the suit if filed. Such interest will be kept on interest suspense account.

3. If any classified credit or any part thereof is recovered i.e. actual deposit on account of recovery is made in the credit account, the recovery of non-imposed as well as imposed interest will be made first from such deposit. Then original credit will be adjusted.

  Reservation of Provision

In case of classified credit of Continuous, Demand and fixed Term Credit the bank will keep provision for reserve at the following scale––

 After adjustment of Interest Suspense and value of Eligible Securities from outstanding balance of classified credit the reservation of provisions will be kept on the calculated balance. General provisions will also be kept at a rate of 1% on unclassified credits.

 Eligible Securities as stated above will include the following Securities–

1. In terms of the above Principals / guidelines the bank will conduct the activities of credit classification on quarterly basis. The detailed information containing Classification, Provisioning and Interest Suspense Account will required to be submitted to Bangladesh Bank within 30 days from the date of reference.
2. After adjustment of Interest Suspense and value of Eligible Securities from outstanding balance of classified credit the reservation of provisions will be kept on the calculated balance. General provisions will also be kept at a rate of 1% on unclassified loans.
3. Eligible Securities as stated above will include the following Securities–

 In terms of the above Principals / guidelines the bank will conduct the activities of loan classification on quarterly basis. The detailed information containing Classification, Provisioning and Interest Suspense Account will required to be submitted to Bangladesh Bank within 30 days from the date of reference.

 STATEMENTS PREPARED BY THE CREDIT DEPARTMENT:

• Monthly statement prepared by the Credit Department for Bangladesh bank.
• Quarterly statement prepared by the Credit Department for Bangladesh bank.
• Monthly statement prepared by the Credit Department for Head office.

Showing monthly statements prepared by Credit Department for Bangladesh bank

Showing quarterly statements prepared by Credit department for Bangladesh Bank

Showing monthly statement prepared by Credit department for Head office

LEGAL FRAMEWORK FOR LOAN RECOVERY:

After being classified, if the borrower is unable to adjust the loan then the bank can take the following legal actions by filing suit:

1. Filing certificate cases under Public Demand Recovery Act-1913;
2. Filing money suit cases under Artha Rin Adalat-1990;
3. Filing Bankruptcy cases under Bankruptcy Act-1997;
4. Filing cases under Negotiable Instrument Act-1881 section 138 to 141 for insufficient fund.( In case of term loan).

 SOME PROBLEMS OF RECOVERY

1. Exemption of interest by govt./ bank.

2.  Exemption of loan including interest by govt.

3. Political pressure and misunderstanding

 Loans & advances comprise the most important asset as well as the primary source of earning for the banking/financial institutions. However lending money is exposed to risk and uncertainties. So a prudent banker should always try to make an appropriate balance between the risk and return involved in the loan portfolio management. The lending banker has to take into account various consideration which relates to bank itself, the borrower, the proposal, the socio economic factors etc. An unregulated financial institution might be fraught with innumerable and unmanageable risk while lending money to the people for maximizing potential gains. So the bank should be prudent, farsighted and efficient while deploying its funds.

 Chapter 4 : Case , Interest gap  & Comparison Analysis

Analysis of PC proposal

 1. Customer’s Occupation or line of work

Bank Asia graded highest points for professionals or business executives because he would able to generate money for each month by doing his profession. He/she has the opportunity to earn more money than his/her present status.

As Dr. Yasmin Islam by profession she is a doctor and has the opportunity to do private practices for that purpose we provided her 10 points.

2. Housing Status

There is always a benefit if the borrower has his/her own house than the borrower has the opportunity or scope to pay the loan amount from house rent. If the borrower rents his house than he has the ability to pay an amount for each month for rental purpose so has the scope to repay an amount which he takes from the bank in the name of credit facility.

Here, as she owns a house so we provided her the highest point.

 3.           Past Track Record (Credit)

 If the borrower took a huge amount of loan or take several loans from various banks including this bank repaid successfully than bank can say that he/she has an excellent past track record.  If she took a small amount and repaid the amount successfully than we can say that she has average past track record.

According to her application form and CIB report we found that she has an average past track record

 4. Length of Time in Current Job

If one person is working for a job for a longer period of time that means he has little chance to loose his job or he has the ability to work for that place for future periods which indicates she has the opportunity to income a particular amount every month which also indicates that she would be able to pay an amount for installment.

According to her application form and necessary documents reflect that she is currently doing her job from 1997 which means she has been there for more than six years. And before joining her present place she served her duty in DMCH. So, we provide her the highest point.

 5.     Length of time at current address

More a person live in one place she gives a sign that she is eager to stay in a place for a longer a period. It will also indicate that the bank authority has the opportunity to track her if he fails to repay the installment in future.

According to the documents she lives in her own home more than ten years. So we provided her highest point in this category.

 6. Telephone in home or apartment

Telephone gives an opportunity to track the borrower also gives another indication that she usually pays her telephone bills regularly which gives an indication that she would pay the installments.

As Dr. Yasmeen has a telephone gives us the opportunity to call her time to time to remember her to pay the installments and hopefully according to our prediction she would pay the installments regularly.

7. Number of dependents reported by customer

More number of people are dependent on the person is a good sign because she would always eager to earn money more or equally to protect the dependents from disaster. It gives an indication that she would always try to earn money and probably repay the loan amount.

According to her application form number of dependent is 3. So, we give her points according the table.

8. Bank Accounts held

FDR accounts always give a sign that bank can collect money if she fails to repay the loan amount. Savings account also gives an indication that she has the tendency to save money. It gives signal that she would pay the amount. If the borrower has both current and savings account means she has the ability to maintain two accounts which reflects the money transaction power is good.

As the applicant has only savings account in the bank so we give her average points.

9. Utility bills payment

Utilities bills also give indications that she would pay the loan amount or not. This criterion is similar to telephone criteria.

Applicant pays regularly her utility bills.

Total point score is 40.

Conclusion

Though in application procedure is good but has some loopholes. In the point grading there is no criteria on how his monthly income; which would give the credit officer the confidence that she should be able to pay. As number 6 and 9 is similar type criteria, the authority can skip one or merge the two points in one criterion.

They can also include if the applicant owns a car which also give an indication that she has assets as well as she is she has the ability to repay the loan amount. If the applicant has bank accounts in other banks would be another indication that how much money she has at present to repay.