Credit Management Practices in National Bank Limited

  Origin of the Report

As part of the Internship Program of Masters of Business Administration course requirement, I was assigned for doing my internship in the National Bank Limited as an internee by the department of Accounting & Information System, Jagannath University, Bangladesh. In National Bank Limited, I was assigned in the Credit department of new Easkaton branch, Dhaka, and my organizational supervisor was Mr. Sultan Ahmed. My project was Credit Management Practices in National Bank Limited, which was assigned by faculty Supervisor Muhammad Zahirul Islam, Lecturer,The department of Accounting & Information System, Jagannath University ,  Bangladesh, also approved the project and authorized me to prepare this report as part of the fulfillment of internship requirements.

Rationale of the Study

Theoretical knowledge is not enough for a student. It is miles difference between theoretical knowledge and practical field. So, this two should be synchronized. An Internship is launched mainly for this purpose. Another purpose that may be is to know about the rules, regulations and environment of an organization before getting a job. Such experience may facilitate a student to have a better job. Further more, Bangladesh is encountered with the acute problem of poverty and unemployment. Experience reveals that poverty-focused programs undertaken during the past could not make significant headway in alleviating poverty. Over the time span of a decade’s national Bank claimed to make contribution in alleviating poverty of its borrowers through its unique credit delivery system and making perfect recovery of credit advanced to them. Throughout this study an attempt has been made to describe the NBL methodology of banking with the poor with an emphasis on its credit policy and recovery system.

 Objective of the study

Specific Objective:

The Primary objective of the report is to provide a general description of the Credit Recovery System of NBL and to have practical knowledge of credit management practice by a prominent bank and to know the effectiveness of credit appraisal system in the process of credit approval system and the portfolio of loan and advances and how they manage it.

Sources Of Data

For general concept development about the bank short interviews and discussion session were taken as primary sources. Information was gathered through face-to-face interview with the informed personnel of national bank who has been assigned to various departments to carry on specific tasks and responsibilities.

Most of the information of the report was collected from secondary sources like-

  Credit Policy guidelines by Bangladesh Bank and NBL.

  Various manuals and Credit Mechanism.

  Published reports and annual reports of the National Bank Limited.

 Limitations

  Limitation of time was a major constraint in making a complete study, due to time limitation.

  It was too limited to cover all the banking area. Many aspects could not be discussed in the present study.

  Lack of experience on the part of write may act as drawback.

  As being an internee, it also created some problems as I was unable to acquire hands-on-experience in all the departments, due to the bank’s policy of maintaining secrecy and also because I did not get the opportunity in all the departments.

Overview of National Bank Ltd.

Vision statement of National Bank Ltd:

Ensuring highest standard of clientele services through best application of latest information technology, making due contribution to the national economy and establishing ourselves firmly at home and abroad as a front ranking bank of the country are our cherished vision.

Mission statement of National Bank Ltd:

Quality-focus

Credibility & secrecyLoyalty

Total commitment & dedication

Excellence through teamworkDiscipline

Honesty & Integrity

Sincerity

Caring

Creativity

NBL mission is to continue our support for expansion of our activities at home and abroad by adding new dimension to our banking services are being continued unabated. Alongside, we are also putting highest priority in ensuring transparency, accountability, and improved clientele services as well as to our commitment to serve the society, through which we want to get closer and closer to the people of all strata. Winning an everlasting seat in the heart of the people as a caring companion in uplifting the national economic standard through continuous up gradation and diversification of our clientele services in line with national and international requirements is the desired goal we want to reach. ‘A Bank for Performance with Potential” is the prime objective to uphold the slogan in all actives.

New Product and Services:

The bank firmly believes that technology based product and services will play significant role in the performance of the bank as people are getting more conscious about their service quality. They prefer now faster service with least cost. That’s why bank is providing these:

  Online banking services

  SWIFT services

  L/C delivery services

  Locker services

  Merchant banking services

  ATM services (proposed)Deposit Products of NBL:

National Bank Limited is now offering 18 depository products for mobilizing the savings of the general people. There are accounts for force saving from the exporter that is called Reserve Margin from the export bill.

Loan Products of NBL:

The National Bank is offering the following loan and advance product to the client for financing different purpose that fulfill the requirements of the bank and have good return to the investment as well as satisfy the client. The loan and advance products are:

The national Bank Limited is always emphasizing the improvement of banking service and betterment of living standard of the general people of Bangladesh. The product and services are targeted to the lower level to the upper level income group in deposit collection. For lending, the services are made if certain requirements are fulfilled.

 SWOT Analysis of the National Bank Limited

The acronym for SWOT stands for:

1. Strength
2. Weakness
3. Opportunity
4. Threat

The SWOT analysis involves an examination of a firm’s strengths, weaknesses, opportunities, Und threats. It should help to evaluate a firm’s strategies to exploit its competitive advantages defend against its weaknesses. Strengths and weaknesses involve identifying the firm’s internal abilities or lack thereof Opportunities and threats include external situations.

The SWOT analysis of National Bank Ltd. is given below:

Strengths:

1. National Bank Limited has already established a favorable reputation in the banking industry of the country.
2. It is one of the leading private sector commercial banks in Bangladesh.
3. The bank has already shown a tremendous growth in the profits and deposits sector.
4. National Bank Limited has already achieved a high growth rate accompanied by an impressive profit growth rate in 2008.
5. The number of deposits and the loans and advances are also increasing rapidly.
6. National Bank has the reputation of being the provider of good quality services too its, potential customers.

Weakness:

1. Not desperate in increasing its services with the new clients or innovative products line;
2. The operation system is not yet fully modernized according to present demand of the banking system as a whole;
3. ATM facility is not according to demand,
4. The staff often leave bank for better prospects,
5. Shortage of manpower which impact in service delivery,
6. Required level of logistics are not ensured for optimum services,
7. There is no regular training provision,
8. The checking system of clients’ credit worthiness in respect of mainly previous credit position and its default, is not efficient because present operations takes more time as the system is not centralized.

Opportunity:

1. There is scope for creating new clients and investment in new products if the bank introduce more efficient operation system through adapting advance technology;
2. The diversified Corporate Sector, Retail Banking, Money Market Operations, Consortium and Structured Financing and Export Oriented and remittance initiatives are the scope for higher growth;
3. National Bank Ltd. is contracted with Bangladesh Bank for on Online CIB (Credit information Bureau) report which will help client assessment and opportunity for quick service delivery;
4. If in-house training provision is ensured quality and quantity services will be enhanced and would impact in increasing growth of the operational performances of the Bank;
5. The growing business prospects in Bangladesh and the international market is the scope of bank for expanding its services;
6. The bank may expand its operation country-wide through increasing its service centre/branch at viable scales.

 Threats:

1. The banking services in Bangladesh is being more competitive due to continuous introduction of new generation Banks;
2. Expansion of foreign bank services in Bangladesh is also challenge for local -banking services because they are more healthy in respect of capital and well organized to provide quality services world-wide;
3. Frequent changes of investment policy, lending policy and operational policy of banking services,
4. Uncertainty of favorable terms of international trade and commerce;
5. Instability of socio-economic environment of the country;

Credit Risk Policy

Risk is inherent in all commercial operations. For Banks and Financial institutions, Credit risk is an essential factor, which needs to be managed properly. Credit risk virtually is the possibility that a borrower will fail to repay debt in accordance with the terms of sanction. Credit risk therefore arises from the bank’s lending operations. In the present day’s state of deregulation and globalization, banks range of activities have increased, so also are the risks. Expansion of bank’s lending operations covering new products have forced the banks to confront newer risk areas and therefore to work out proper risk addressing devices. Credit risks are so exhaustive that a single device can not encompass all the risks, Moreover lending risks today have assumed such diverse nature, that newer techniques are to be applied to effectively contain the risks, In order to effectively contain risks, credit risk management has to be done in order to enable the bank to proactively manage loan portfolios in order to minimize losses and earn acceptable level of return for the shareholders, In the present scenario of fast changing, dynamic global economy and the increasing pressure of globalization, liberalization, consolidation and disintermediation, it is essential to undertake robust credit risk management policies and procedures, sensitive and responsive to these changes.

In the back drop, National Bank Limited underscoring the need of effective credit risk management process has prepared the policy guidelines for credit risk Management. The policy should be reviewed annually by the Board of Directors of the Bank. The policy is distributed to the concerned officials, all divisional heads, Branches, Regional Offices and top management officially. The policy is strictly followed by all concerned. Any deviation from the guidelines is to be clearly identified and justification for approval is to be provided.

Credit Principles

To achieve the goal for maximizing the stockholder’s value and protect the interest of the depositors as well as to improve the quality of banks assets as fundamentally sound financial institution, NBL is abide by but will not be limited to the following credit principles, which should guide the behavior in lending decisions:

Credit Evaluation

• National Bank Limited follows the following credit evaluation process:
•   Prevailing credit practices in the market.
•   Credit worthiness, background and track record of the borrower.
•   Financial standing of the borrower supported by financial statement and other documentary evidences.
•   Legal jurisdiction and implications of applicable laws.
•   Effect of any applicable regulations and laws.
•   Purpose of the loan/facility.
•   Tenure of the loan/facility.
•   Viability of the business concern.
•   Cash flow analysis and also projections thereof.
•   Quality, value and adequacy of security, if available.
•   Risk taking capacity of the borrower.
•   Entrepreneurship and managerial capabilities of the borrower.
•   Reliability of the sources of repayment.
•   Volume if risk in relation to the risk taking capacity of the bank or company concern.
•   Profitability of the proposal to the bank or company concerned.
•  Credit Risk Grading.
•   Yield from the facility.
•   Market aspect.

¨      Total global exposure of the borrower

¨      CIB status.

 Credit Policy Guidelines

Lending Guidelines

Industry and Business Segment Focus:

Bank’s main focus on various lending/areas will be under:

Airlines, etc.Growxi) Steel and Re-rolling MillsGrowxii) Engineering and ConstructionGrowxiii) Small Traders/SMEEncouragexiv) Agro-based industry/Dairy Products/

Fishery/Tea/Crop.Encouragexv) Export Oriented IndustriesEncouragexvi) PharmaceuticalsEncouragexvii) Consumer loans (personal, auto, credit      card)Encouragexviii) Food and Allied (edible oil, flour, etc.)Maintainxix) ship ScrappingMaintain xx) Real EstateMaintainxxi) PaperMaintainxxii) TransportDiscouragedxxiii) Cold storage financeDiscouragedxxiv) Financing Cement industriesDiscouraged

 Single Borrower/Group limits/Syndication:

National Bank Ltd. Peruses/will continue to peruse the policy of avoiding too much loan concentration to a single borrower/ group in order to by pass possible threat in the event of such advances turning sticky. In a bid to keep credit risk at the minimum level in respect of large but prospective advance, National Bank Ltd. will prefer syndicated financing after proper feasibility study.

National Bank Limited has been following strictly and will continue its lending operation, in complete obedience to the guidelines circulated by Bangladesh Bank on single party exposure limit to a borrower/group. National Bank Limited will not extend credit (Funded + non-funded) for more than the percentage on capital of the bank, permitted by Bangladesh Bank and will follow all modification, amendments, additions alterations that may be made by Bangladesh Bank from time to time.

However, National Bank follows the following Guidelines of Bangladesh Bank on lending to single borrower/group under one obligor.

  Lending Caps:

National Bank Limited is very much aware of over concentration of credit in a particular area, which may under some situation, create disaster for the bank. Keeping this in consideration and also the over all business, trend, prospects/potentials, problems, risks & mitigates, pricing, owner’s stake in business competitors involvement, safety, liquidity, security etc. NBL is guided by the following Lending caps generally:-

  *The caps will be revised from time to time depending on the market conditions, shift in Government Policy and National Bank’s credit focus.

 Discouraged Business Types

While National Bank follows the policy of financing prospective, feasible & rewarding areas, it has identified some areas as discouraged. Generally the following areas are discouraged for financing:-

•   Military Equipment/Weapon Finance
•   High leveraged Transactions
•   Finance of speculative business
•   Logging, Mineral Extraction/Mining or other activity that is ethically or environmentally sensitive.
•  Lending to companies listed on CIB black list or known defaulters
•   Counter parties in countries subject to UN sanctions
•   Share lending
•   Taking an equity stake in borrowers
•   Lending to holding companies
•   Bridge Loans relying on equity/ debt issuance as a source of repayment
•  New cold storage finance
•   Finance cements industries.

Loan Facility Parameters

National Bank Limited extends and will extend credit for various genuine purposes. One type of advance requires to be treated differently from other types. Depending on the type financed, ownership pattern, business mode, cash flow, security and other related matters facility parameters are to be set, however the general parameters in facility are as under:

Nature of Advances:

Each advance made, has to be categorized under one of the arranged types and will be governed under the terms & conditions related thereto.

Purpose:

NBL’s lending is guided by legitimate purpose. Financing for hoarding, speculative purpose and which are utilized for degrading the character of the people is avoided. Credit which will contribute to production, trade, commerce, import, export, development of Industry, development activities/Economic growth, infrastructural development, employment generation, poverty alleviation etc will be stressed.

Limit/ Amount of facility/Maximum Size:

Facility is considered based on assessment of requirement & justification subject to the overall lending cap as per Bangladesh Bank single party exposure limit.

Margin/Equity:

It is the general policy of the bank to judiciously ensure stake of the borrower in any financing plan. Margin will however be subject to institutional policy in this regard and central bank policy where applicable.

Rate of Interest/Commission and other charges:

Rate of interest is charged as per declared rate of the bank. Pricing is basically risk based. Higher price is considered for riskier borrowers because of their higher risk involved (i.e. lower score obtained by an obligor as per CRG score sheet is called a risky Clint). Similarly lower price is considered for prime clients on the basis of their low risk(Low risk grade clients means where an obligor obtained higher aggregate score as per CRG score sheet or 100% cash covered or govt./international top bank guarantee).In fixing interest rate cost of fund & the prevailing rate in the competing market shall also be considered. Confessionals interest rates to the deserving customers will be allowed within the declared interest rate band of the bank. Commission/ charges on credit facilities will be realized taking the competing scenario in the banking market into account, involved risks in financing & overall policy of the bank.

Mode of disbursement:

In disbursing credit the bank ensures for the purpose the loan has been sanctioned. Where required visit of the business/site etc are suggested and all subsequent disbursements are made conditional to full utilization of disbursed money in the preceding phase. In case of disbursement of loan, money for acquisition of assets, payment is suggested after receipt of the assets by the borrower. For commercial lending, storage of merchandise against which facilities have been sanctioned is either in shop/show room or in go down. Against LIM/pledge, go downsizing required stock is ensured.

Mode of Adjustment/Repayment:

For the borrower to exhibit capability to periodically adjust the drawing taken and as such to have idea regarding the rationale for continuation of the facility, adjustment mode is given. In term of lending, where revolving transaction is not allowed, adherence to adjustment stipulation (month, quarterly, half yearly, yearly or other wise) is suggested to ensure recovery of the loan disbursed. By perusing adherence/ non-adherence to the stipulated adjustment mode, status of the advances, capability of the borrower, how the account to be treated and course of action to be taken, etc are decided.

Security:

NBL mostly relies/will continue to rely on security based lending, taking into consideration, the character of the borrower, nature of business cash flow, environmental, economic, business and other influencing factors. In obtaining security primary and collateral security are suggested. Primary securities are valued on the basis of landed cost in case on imported goods/ex-mill or factory price/ whole sale market price for the local goods.

Collateral security of acceptable type having adequate market/sale value is accepted. Collateral property is judiciously valued before accepting the same. The property is valued by the branch officials by applying prudence and considering prevailing rate in the area of the property. Bank has some potential valuers engaged to assess the valuation of the mortgagable property. These appraisers assess the value of the property independently & submit the same to the bank directly. Assets are in from of goods pledged as security are duly insured protecting the Bank’s interest. Goods and machinery (for industry) taken as primary security are also insured.

Validity/Expiry/Maximum tenor:

Validity/Expiry date for continuous credit is set at a period not exceeding 1 year, Short term loan mostly is allowed for trade/ commerce. This expiry date is virtually the date for adjustment/review of the facility, subject to periodical and satisfactory turn over of the limit. Conduct of the business during the whole of validity period determines the fate of continuation of the facility for the next period. Loan for short/medium/long term are also sanctioned depending upon the requirement thereof and also on cash flow generation, repayment capability and over all lending feasibility. Such loans are allowed for adjustment in installments.

Short term                   : up to 12 months

Medium term              : More than 12 months up to 60 months

Long term                  : More than 60 months.

Security and Support:

The following types of securities are generally accepted:

i)                    Machineries of factory/industry on hypothecation basis. Value of machineries is checked.

ii)                  Raw materials work in process, finish goods, stock in trade on hypothecation and pledge basis. Inventory is held in a warehouse/ goes down for financing against pledge under Bank’s control. Value of inventory is checked.

iii)                Land and building of acceptable type and value, under registered mortgage.

iv)                Financial obligation (to be kept under lien) after ascertaining its genuineness of issuance, ensuring marking of lien of the lender bank on the instrument and obtaining confirmation from the issuing bank that encashment including even before maturity date will be allowed to the lender bank on request without referring to the instrument holder.

v)                  Bills receivable against work order/ supply order duly assigned/supported by registered P.A> executed by the client for the bank, confirmed by the work entrusting authority that the cheques/bills against the work shall be issued in the name of the bank A/C of the client.

vi)                Cars/buses/water crafts/vessels under hypothecation and joint registration.

vii)              Shipping documents as the lien against LC.

viii)            Trust receipt (for LTR).

ix)                Export documents-under lien (for LDBP/FDBP).

x)                  Export LC/ Contract under lien (for BTBL/C).

xi)                Packing credit letter (for PC).

xii)              Personal guarantee/corporate guarantee/cross-corporate guarantee.

xiii)            Post dated cheques.

xiv)            1^st /2^nd charge/1^st ranking pari passu charge on fixed and floating assets of the limited companies financed.

xv)              Bank obtains authorization to debit client’s account in order to keep policy in force.

Quality of Security:

i)                    Primary security having adequate market value is accepted.

ii)                  Perishable goods and seasonal goods are generally discouraged as primary security.

iii)                Acceptable financial obligations are preferred.

iv)                Receivable bills against work order/supply order funded by Foreign Agencies which bear adequate funding arrangements are preferred.

v)                  Documents which are drawn in conformity with the export L/C terms (i.e. documents which do not have discrepancies) are accepted for negotiation.

vi)                Personal guarantee of those persons having high net worth/ assets, satisfactory commitment fulfillment track record and no connection with any irregular classified advance are obtained.

vii)              Subordinated rank (in respect of financing) on fixed and floating assets of the companies proposed for financing are generally discouraged.

viii)            Land, Building having defect less title, chain of proper document, adequate valuation and acceptable forced sale value, located under municipality/ Municipal corporation/ RAJUK/KDA/CDA important commercial centers are best choice for creating mortgage thereon. 3^rd party mortgage is backed by personal guarantee of the owner of the property. Property located outsides the above areas are also accepted as collateral, with out compromising with proper valuation proper title, non-encumbrance sale possibility in requirement etc.

ix)                RAJUK/KDA/CDA/other govt. authority owned property is mortgaged after getting NOC of the owning authority for the allotee-mortgagor to mortgage the property against advance is also obtained.

x)                  In syndicated financing mortgage is executed on the first ranking pari passu basis.

Legal interest Protection:

i)                    Title searches are conducted periodically for collateral both with RJSC and land Registrar for mortgages.

ii)                  Collateral arrangements are detailed in credit proposal.

iii)                Bank’s legal adviser establishes the required legal documentation for a borrower’s legal standing and enforcement of the bank’s interest.

iv)                Mortgage documents are properly vetted by Bank’s legal advisor.

v)                  Registered mortgage of property are supported by registered irrevocable general power of attorney to sell the property.

vi)                Bank has proper inventory of standard security documentations vetted by legal counsel.

vii)              Non-standard documentations are vetted by appropriate authority.

Valuation of collateral:

i)                    Credit administration department independently controls and matches the value of cash collateral which is lien to the bank and against which borrowings are/will be allowed as per approval.

ii)                  Value of inventory and machineries supplied by client will be cross checked.

iii)                Credit administration department will ensure receivables that actually exist and that past due. Disputed and other items with impaired collateral value to be identified and removed from collateral pool.

iv)                Value is sourced from independent appraisals addressed to the bank.

Insurance:

NBL having insurable interest on a property/ an asset obtains insurance policy as per norms against credit facilities extended in order to protect the banks’ interest. Insurance policy is taken covering all possible risks. Branches shall ensure that insurance policy is current and renewed on a timely basis. Insurance shall be obtained from a reputed company.

General/Special condition/ Covenants:

General/Special condition/ Covenants will be according to the nature of advance, security arrangements, ownership pattern, and mode of acquisition, institutional norms/instructions, and guides lines of the central bank / regulatory authority.

Credit Assessment & Risk Grading

Credit Assessment:

A thorough credit and risk assessment to be conducted before g of loans, and once approved, all facilities are to be reviewed at least annually. Credit assessment will be presented, in a credit application duly signed/approved by the official of the branch. In case an account deviates from the guidelines the same should be identified in credit applications and justification for approval should be provided by the originating officials of the branch. Bank has the conduct financial analysis on a regular basis & monitor changes in the client’s financial condition. The proposals are prepared in proposal format that originates in credit department of the branch and is processed and approved by the head of branch/Regional Head/Hade office Management/Executive committee as per delegated authority .At the time of originating a proposal accuracy of all information must be ensured.

Originating officers should follow credit principles, credit policy and guidelines and conduct due diligence on new borrowers, principals and guarantors. They need to adhere to the NBL’s established Know Your Customer (KYC), money laundering guidelines, and Bangladesh Bank’s regulations. For initiating credit relationship credit officer/Relationship Manager can call on the client, visit factory/ business centers to see production facility/ stock/ storage pattern/ business transactions/reputation etc and though these, to assess possibilities of establishing a remunerative relationship. He / she can also conduct due diligence to get market information on the borrower from industry sources, competitors, local area. Branch Manager may also be part of this process. In this regard, if required, the BM/ Credit officer Relationship Manager will also take help of Head Office Engineer/ HO personnel for initial assessing credit needs of large borrowers:

Based on finding of such calls/visits/inspection, Relationship Manager (RM)/Credit Officer, (along with the Branch Manager) will initial proposal, containing information on client’s background, business, market share, integrity, credit exposure/ existing banking relationships, and credit needs along with pricing, loan structure (tenor, covenants, repayment schedule) purpose of credit, type of credit, security arrangement, etc.

Before sending proposal to the approving authority, the originating officials of the branch shall ensure that the following steps/formalities have been taken properly and incorporated in the credit proposal appropriately:

1.   Current CIB Report obtained.

2. Repayment sources of the borrower has justifiably established by financial analysis.

3.  Purpose and amount with types of loan proposed by the borrower stated in the proposal.

4.  Earnings from the relationship properly assessed in the credit proposal.

5.  Pre-sanction inspection report/call report/site visit report is in place.

6. Management profile & capital structure, constitution, date of establishment are stated in the proposal.

7.  Experience of borrowers, business skills, management & successions are properly mentioned in the proposal.

8.  Borrower’s rating in the industry is assessed along with overall industry concerns and borrower’s strength & weakness relative to its competitors are identified.

9.  Industry’s position along with supplier and buyer risk is analyzed.

10. Borrower credit worthiness is established by review of 3 years historical financial    statement and past track record.

11.  Cash Flow analysis justifying client’s ability to repay is reflected in the credit proposal.

12.  Industry and Business analysis is done in the proposal.

13. Credit facilities availed from other banks is clearly stated in the proposal and opinions are obtained regarding the credit standing of the borrowers.

14.  Credit facilities are based on an evaluation of the borrower’s business needs.

15.  Possible risks are identified in the credit assessment & risk mitigating factors are clearly mentioned in the proposal.

16.  Credit proposal clearly mention current outstanding against all limits.

17. Audited financials, Large loan position etc. reflected in the credit Proposals.

18. Branches ensure that collateral has been properly valued, verified and are managed.

19.  Account conduct of the borrower & his allied concerns has been done.

20. Amount and tenors are justified based on the projected repayment ability & loan purpose.

21.  Adequacy and the extent of insurance coverage are assessed.

22.  Policy compliance is clearly stated in the credit proposal.

23.  Changes in pricing of facilities are highlighted in credit proposal.

24. Usage of borrowed fund is confirmed through financial statement analysis.

25. Borrowers risk grade has been done as per Bangladesh Bank guidelines examined     & approved by the authorized official and stated in the credit proposal.

Borrower Analysis:

Full particulars of the proprietor, partners, directors, etc are to be examined; their management capability is to be ascertained. Overall performance and credit status of the allied concern of the client i.e. group will be assessed. Lack of management capability of the co. concentration of the whole affairs of business is one hand and lack of initiative to create subsequent management line, complicated ownership structures of inter group transactions shall be addressed and related risks to be mitigated.

 Industry Analysis:

Before extending credit in an area, over all business conditions of that area/sector will be critically examined, prospects and problems will be ascertained. Demand and supply of the concerned goods/ services, Demand and supply gap, contribution of the borrower in meeting the gap, strength and weakness of the borrower & their competitors to be accurately assessed.

Sales concentration of the borrower, borrowers rating with competitors in terms of market share, prevalence of substitutes of the produced items in the market and barriers to entry into the product line of the borrower are needed to be properly identified.

Supplier/Buyer Analysis:

Lending decision will be preceded by an intensive analysis on whether the borrower depends on a single or a very few customer or gets the supply of the raw materials/dealing items from a single supplier. Such sales and supply concentration will be given a very careful consideration, because it will have significant impact on the future viability of the borrower.

Historical Financial Analysis:

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

Projected Financial Performance:

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

Account Conduct:

For existing borrowers, historic performance in meeting repayment obligations (trade payments, cheque, interest and principal payments, etc) should be assessed. Credit-debit summation, maximum-minimum balance, recycling and adjustment of the liability will be looked into which generally will back our renewal decision.

Adherence to Lending Guidelines:

Credit proposals to be prepared in line with bank are lending guidelines.

A credit application/proposal will clearly mention whether or not the proposal complies with the bank’s lending guidelines. A proposal that will not adhere to the bank’s

lending guidelines will not be approved.

Mitigating Factors:

In the credit assessment, possible risks, such as margin sustainability and/or volatility, high debt load (leverage/gearing), over stocking or debtor issues, rapid growth, acquisition or expansion, new business line/product expansion, management changes or succession issues, customer or supplier concentrations and lack of transparency or industry issues and their mitigating factors to be identified.

Loan Structure:

Amount and tenor of loan will be fixed justifiably based on income generation prospect, projected repayment ability and loan purpose. Failure in properly perusing these factors especially allowing loan for excessively long period of more than what is really justified/ required in the business, will expose the bank to risk and also to non-repayment by the borrower.

Security:

Banks’ lending will generally be adequately securitized. Securities must to be obtained and will be acceptable, valuable, and easily marketable & defect less. Valuation of security will be properly assessed. Security will comprise primary and collateral and will be adequately insured where applicable).

Name Lending:

Lending depending only on the fame and reputation of a borrower will be avoided. All associated risks, lending fundamentals and a through financial analysis will be made.

Credit Risk Grading (CRG):

Definition of Credit Risk Grading

  The Credit Risk Grading (CRG) is a collective definition based on the pre-specified scale and reflects the underlying credit-risk for a given exposure.

A Credit Risk Grading deploys a number/ alphabet/ symbol as a primary summary indicator of risks associated with a credit exposure.

  Credit Risk Grading is the basic module for developing a Credit Risk Management system.

Functions of Credit Risk Grading

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

Uses of Credit Risk Grading

   The Credit Risk Grading matrix will allow application of uniform standards to credits to ensure a common standardized approach to assess the quality of individual obligor, credit portfolio of a unit, line of business, the branch or the bank as a whole.

 As evident, the CRG outputs would be relevant for individual credit selection, wherein either a borrower or a particular exposure/facility is rated. The other decisions would be related to pricing (credit-spread) and specific features of the credit facility. These would largely constitute obligor level analysis.v  Risk grading would also be relevant for surveillance and monitoring, internal MIS and assessing the aggregate risk profile of a Bank. It is also relevant for portfolio level analysis.

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

 1 Facilities fully secured by cash/bonds/ bank guaranteeGood-Satisfactory Risk

285+Repayment capacity of the borrower is strong.Acceptable–Fair Risk375-94Adequate financial strength.Marginal – Watch list

465-74Grade 4 assets warrant greater attention due to conditions affecting the borrower, the industry or the economic environment.Special Mention

555-64Assets with potential weaknesses that deserve close attention. If left uncorrected, may result in a determination of the repayment prospects of the borrower.Substandard

645-54Financial condition is weak and capacity or inclination to repay is in doubt. These weaknesses jeopardize the full settlement of loans.Doubtful and Bad

(non-performing)

735-44Full repayment of principal and interest is unlikely and the possibility of loss is extremely high.Loss

(non-performing)

8<35Assets with long outstanding with no progress in obtaining repayment. The prospect of recovery is poor and legal options have been pursued.

Regulatory Definition on Grading of Classified Accounts:

Irrespective of credit score obtained by a particular obligor, grading of the classified names will be in line with Bangladesh Bank guidelines on classified accounts, which is extracted from “Prudential Regulation For Banks: Selected Issues” (updated) by Bangladesh Bank as under the basis for Loan Classification:

(A) Objective Criteria:

  Any Continuous Loan if not repaid/renewed within the fixed expiry date for repayment will be treated as irregular just from the following day of the expiry date. This loan will be classified as Sub-standard if it keep irregular  for 6 months or beyond but less than 9 months, as `Doubtful’ if for 9 months or beyond but less than 12 months and as `Bad-Debt’ if for 12 months or beyond.

  Any Demand Loan will be considered as Sub-standard if it remains unpaid for 6 months or beyond but not over 9 months from the date of claim by the bank or from the date of creation of the forced loan; likewise the loan will be classified as “Doubtful’ and Bad & loss if remains unpaid for 9 months or beyond but less than 12 months and for 12 months and beyond respectively.

  In case any installment(s) or part of installment(s) of a Fixed Term Loan is not repaid within the due date, the amount of unpaid installment (s) will be termed as `defaulted installment’

In case of Fixed Term Loans, which are repayable within maximum 5(five) years of time: –

If the amount of ‘defaulted installment’ is equal to or more than the amount of installment (s) due within 6 months, the entire loan will be classified as ’Sub-standard’. If the amount of ‘defaulted installment’ is equal to or more than the amount of installment(s) due within 12 months, the entire loan will be classified as ”Doubtful. If the amount of ‘defaulted installment’ is equal to or more than the amount of installment (s) due within 18 months, the entire loan will be classified as ”Bad -Debt.”

In case of Fixed Term Loans, which are repayable in more than 5(five) years of time: –

  If the amount of defaulted installment is equal to or more than the amount of installment(s) due within 12 months, the entire loan will be classified as ‘Sub-standard.’

   If the amount of defaulted installment is equal to or more than the amount of installment(s) due within 18 months, the entire loan will be classified as ‘Doubtful’.

  If the amount of defaulted installment is equal to or more than the amount of installment(s) due within 24 months, the entire loan will be classified as ‘Bad-Debt’.

Explanation: If any Fixed Term Loan is repayable at monthly installment, the amount of installment (s) due within 6 months will be equal to the amount of summation of 6 monthly installments. Similarly, if repayable at quarterly installment, the amount of installment(s) due within 6 months will be equal to the amount of summation of 2 quarterly installments.

(B)Qualitative Judgment:

If any uncertainty or doubt arises in respect of recovery of any Continuous Loan, Demand Loan or Fixed Term Loan, the same will have to be classified on the basis of qualitative judgment be it classifiable or not on the basis of objective criteria.

If any situational changes occur in the stipulations in terms of which the loan was extended or if the capital of the borrower is impaired due to adverse conditions or if the value of the securities decreases or if the recovery of the loan becomes uncertain due to any other unfavorable situation, the loan will have to be classified on the basis of qualitative judgment. Besides, if any loan is illogically or repeatedly re-scheduled or the norms of re-scheduling are violated or instances of (propensity to) frequently exceeding the loan-limit are noticed or legal action is lodged for recovery of the loan or the loan is extended without the approval of the proper authority, it will have to be classified on the basis of qualitative judgment.

Despite the probability of any loan’s being affected due to the reasons stated above or for any other reasons, if there exists any hope for change of the existing condition by resorting to proper steps, the loan, on the basis of qualitative judgment, will be classified as ‘Sub-standard ‘. But even if after resorting to proper steps, there exists no certainty of total recovery of the loan, it will be classified as ‘ Doubtful ‘ and even after exerting the all-out effort, there exists no chance of recovery, it will be classified as ‘ Bad-Debt ‘ on the basis of qualitative judgment and can declassify the loans if qualitative improvement does occur.

But if any loan is classified by the Inspection Team of Bangladesh Bank, the same can be declassified with the approval of the Board of Directors of the bank. However, before placing such case to the Board/CEO and concerned branch manager shall have to certify that the conditions for declassification have been fulfilled. The bank will have to inform such declassification’s to the Department of Banking Inspection/concerned offices of Bangladesh Bank within 15 days of such decision taken by the Board of Directors. Bangladesh bank will examine these matters on case to case basis and if any irregularities/deviations are detected is detected, necessary legal action will be taken against the concerned officials.

EARLY WARNING SIGNALS (EWS)

Early Warning Signals (EWS) indicate risks or potential weaknesses of an exposure requiring monitoring, supervision, or close attention by management.

If these weaknesses are left uncorrected, they may result in deterioration of the repayment prospects in the Bank’s assets at some future date with a likely prospect of being downgraded to classified assets .Down grade should not be postponed until further improvement & review process.

Early identification, prompt reporting to the Branch Manager and proactive management of Early Warning Accounts are prime credit responsibilities of branch credit manager/Relationship Managers and must be undertaken on a continuous basis. Branch shall report also Credit Administration Division, HO, and Particulars of Early Warning Accounts. HO Credit Administration Division will also identify accounts with Early Warning Signals (EWS), report to the higher authority, monitor such accounts, and advise the branch suitably to improve status of such accounts.
Despite a prudent credit Determination of Market Value of Eligible Security, loans may still become troubled. Therefore, it is essential that early identification and prompt reporting of deteriorating credit signs be done to ensure swift action to protect the Bank’s interest. The symptoms of early warning signals as mentioned below are by no means exhaustive and hence, if there are other concerns, like breach of loan covenants or adverse market rumors that warrant additional caution, a Credit Risk Grading Form should be presented.

Irrespective of credit score obtained by any obligor (i.e. a Bank) as per the proposed risk grade score sheet, the grading of the account highlighted as Early Warning Signals (EWS) accounts shall have the following risk symptoms.

a) Marginal/Watch list (MG/WL – 4): if –

• Any loan is past due/overdue for 60 days and above.
• Frequent drop in security value or shortfall in drawing power exists.

b) Special Mention (SM – 5): if –

• Any loan is past due/overdue for 90 days and above.
• Major document deficiency prevails.

The Credit Risk Grading Form of accounts having Early Warning Signals should be completed by the Relationship Manager of the branch and sent to the branch approving authority. The Credit Risk Grading should be updated as soon as possible and no delay should be there in referring Early Warning Signal accounts or any problem accounts to the Credit Administration Division, Head Office.

Approval Authority:

All powers of the bank are vested in the board. Executives/officers in NBL are allowed to exercise only those powers which are delegated to him/her by the Managing Director & Board in the manner as specified in writing by the Board in the rule book of the Bank and those approved by the Board from time to time for facilitating smooth operations. In order to ensure quick and timely delivery of credit, NBL has resorted to the policy of judicious delegation of authority to sanction/ approve loans and advances to its executives/ officers.

NBL has its own rule book containing all exercisable powers including those of credit by its executives/ officers, approved by the Board. The rule book is subject to review and update depending on the requirement of prompt and efficient credit delivery. In spite of the rule book’s having contained authority of exercising business power, the power are exercised by the officers/executives when ever they are empowered to do so by the Managing Director. Credit approval at the management level is made based on the recommendation of the credit committee where the sanctioning authority is not a member. Credit Committee’s role in NBL is only restricted to the recommendation/review of bank’s loan proposals. Credit approvals are evidenced in writing and records whereof are kept in the file with credit proposals.

In approving credit proposals, all credit risks are authorized by the Officers/Executives under their delegated business power. Pooling or combining of authority limits are not permitted. All large loans, under single party exposure limits are sanctioned by the Executive Committee of the Board. Aggregate of exposure of a borrower/group is taken into consideration while applying delegated authority. Any credit proposal, which does not comply with lending guidelines, should be referred to HO for consideration. Any breach of lending authority by any executives/ officers entrusted with approving loans should have aptitude, training and experience to carry out their responsibilities effectively. Credit approving executives should preferably have, reasonable working experience in credit line ( minimum 5 years), understanding (Training & Experience) of financial statement, cash flow and risk analysis, knowledge of accounting, good understanding of local industry/market conditions, trend and  industry/Business risk analysis, rationale of borrowing, working capital assessment technique, business projections, CRG, loan structuring, documentation, overall loan management.

Approving executive should have the knowledge of the following areas:

•   Introduction of accrual accounting.
•   Industry/ Business Risk Analysis.
•   Borrowing Causes.
•   Financial reporting and full disclosure.
•   Financial Statement Analysis.
•   The Asset Conversion/ Trade Cycle.
•   Cash Flow Analysis.
•   Projections.
•   Loan Structure and Documentation.
•   Loan Management.

Segregation of Duties:

NBL has an established credit handling set up, where the whole task from receipt of credit application to disbursement & recovery is handled by the concerted efforts of officers/Executives of branch, Regional office & Head Office. In the present set up credit proposals are received at the branch. The proposal is processed by the Officers/ Executives in the credit department of the branch. If the proposal is acceptable the same is placed to the branch committee. When the Committee recommends the proposal it is placed to the Branch Manager, who finally approves the proposal under his business delegation. When the proposal is beyond the delegated power of the Branch Manager, it is sent to the Regional Head. The proposal is processed by the Officer/Executive of credit department of the Regional Officer and it is placed to the Regional Credit Committee, the committee if finds the proposal acceptable, submits to the Regional Head, who, if finds the proposal viable and if the proposal falls within his delegated power, the same is sanctioned by him. If the proposal is beyond his delegated power, he sends the same to Head Office Credit Division with his recommendation for consideration.

 CREDIT Risk Management system

To manage the credit risk, capacity of owner, director, managers, and officers are very important. The capacity of the owner, director, managers depends on: Physical Ability, Education qualification, Training, Experience, willing to work, Perseverance, self-confidence, Self-reliability presence of mind etc.

The ability of work with staff/workers depends on: Organ gram, Change in Management, The relation of staff/workers with management, Time to take decision, Ability to take right decision etc. Analyzing the above things, one can have the idea about the owner, director, managers.

Credit risk is one of the major risks faced by the banks. This can described as potential loss arising from the failure of a counter party to perform according to contractual arrangement with the bank. The failure may arise due to unwillingness of the counter party or decline the economic condition etc. bank’s risk management has been designed to address all these issues. The Board itself decides on the largest financing application. For corporate loan, a key concept in NBL’s policy for accepting new clients is the ‘Know Your Customer’ principle, meaning that loans are granted only to the corporate clients are known to NBL.

RISK Management

The risk of NBL is defined as the possibility of losses, financial or otherwise. In today’s challenging financial and economic environment effective risk management is vital for sustainable growth of shareholders value. The major areas of risk which the activities of the banking operation are exposed to are Credit Card, Liquidity Risk, Market Risk, Operation Risk and Reputation Risk due to Money Laundering Risk. Market risks include Foreign exchange risk, Interest rate risk and Equity risk.

  Risk Management Process

NBL’s activities involve analysis, evaluation, acceptance and management of some risk or combination of risks. Risk management is emphasized not only for regulatory purpose but also to improve operational and financial performance of the bank. The prime objective of the risk management is that the Bank takes well calculative business risks while safeguarding the Bank’s capital, its financial resources and profitability from various risks. The Risk management policy of the bank operates under 5 broad principles: Oversight by the Board/Executive committee. Board approves policies and processes of risk management recommended by the management and Executive Committee approves the credit proposals submitted by the management; Audit committee of the board reviews the internal audit reports of the Bank and risk management covering credit risk, operational risk including money laundering risk, market risk and liquidity risk; Dedicated independent risk management units viz Credit Risk Management units, Credit Administration Unit, Credit Monitoring and Recovery Unit, Internal Control and Compliance Unit are responsible for implementation of the risk policies and monitoring of compliance with risk policies. They are also responsible for identification of and measuring risks. Dedicated committee at management level has been set up to monitor risk viz. credit risk through Credit Review Committee/ and Risk Management Division, Operational Risk through Management Committee and Internal Control and Compliance Division, Market and Liquidity risk through Asset Liability Committee (ALCO); Information risk through MRS Committee and Reputation risk arising out of money laundering through Chief Compliance Officer of the Bank and Compliance Officers of the branches.

In order to streamline risk control features in a more effective manner, NBL has put in places all manuals all manuals as suggested in the core risk management guide lines of Bangladesh Bank. Its standard Operation (SOP) contains all the guide lines and also includes some of internationally accepted best practices. SOPs cover all operating department including corporate banking, SME banking, retail banking, credit card, foreign exchange, treasury, human resources and financial administration.

MEASURING Risk of NBL

Risk to banker means the perceived uncertainty connected with some event. Bankers may be most interested in achieving high stock values and high profitability, but none can fail to pay attention to the risks they are accepting ass well. The more volatile the economy and the recent problem in the default culture led the banker to focus on the risk arises from taking any decision and how the banking risks can be measures and minimize. In the following section different risks of National Bank Limited are discussed.

Table: Risk of NBL

I.S Liabilities1.28%1.34%1.55%

 Credit Risk

The probability are that some of the bank assets, especially its loans, will decline in values and perhaps become worthless is credit risks. Because banks hold relatively little owners capital relative to the aggregate of their assets, only a relative small percentage of total loans need to turn bad in order to push any bank to the brink of failure. The credit risk is increasing is increasing for NBL.

 Liquidity Risks

Liquidity risk is the risk that may not meet financial obligation as they become due. Liquidity risks also include the inability to liquidate any asset at reasonable price in a timely manner. It is the policy of the Bank to maintain adequate liquidity at all times and in both local and foreign currencies. Liquidity risks are managed on a short, medium and long-term basis. There are approved limits for credit-deposit ratio, liquid assets to total assets ratio, maturity mismatch, commitments for both in on-balance sheet and off-balance sheet items and borrowing from money market to ensure that loans & investments are funded by stable source, maturity mismatches are within limits and that cash inflow from maturities of assets, customer deposits in a given period exceeds cash outflow by a comfortable margin even under a stressed liquidity scenario.

Liquidity risk is decreasing as the ratio shows increasing trend over the last three years. The ratios are 10%, 13% and 14% for the year 2007, 2008, and 2009.

Interest Rate Risks:

Interest rate risk is potential reduction in net interest income caused by changes in the level of interest rates. In NBL, it is ensured that the Bank is not subjected to undue interest rate risks due to interest rate mismatch and maturity mismatch. Fixed rates assets are not financed by floating rates liabilities or vice versa. Movements in the market interest rate can have potent effects on a bank’s margin of revenues over opening cost. Rising interest rates can lower a bank’s margin of profit if the structure of the institution’s assets and liabilities is such that interest expense on borrowed money increase more rapidly than interest revenues on loans and security investment. If the bank has less interest sensitive asset (ISA) than interest sensitive liabilities (ASL), during rising interest rate it will suffer a loss. The ratio of interest is sensitive assets to interest sensitive liabilities are 1.28, 1.33 and 1.54 in the year of 2007, 2008, and 2009 respectively. So it can be said that NBL in good position in terms of ISA and ISL matching.

 Risk control and Measurement are taken by NBL

  Manual and standard operating procedure is in place and its implementation is regularly monitored.

  Regular review of system and network of management committee (MANCOM) and Management Information System Committee (MIS).

  Management through Internal Control and Compliance Division                      control operational procedure of the bank.

  Internal Control and Compliance Division undertakes periodical and special audit of the branches and departments at Head office for review of the operation and compliance of statutory requirement.

  Comprehensive and special audit of branches and business unit by internal audit, internal control and compliance division.

  Risk based audit by internal audit division.

  Segregation of duties and multi-tier approval procedure.

  IT audit is conducted on regular basis.

  Establishing a DataCenter for backup of data and information.

Regular testing of system’s back-up procedure and contingency plan.

 Procedural Guidelines

 Credit Approval Process

National Bank limited conducts its banking operation under branch banking system. For administrative control and smoothening its day-to-day operation and extension of appropriate and quick services, quick credit delivery, some branches have been placed under some Regional offices. Responding to the requirement of customers in the state of lack of full computerization facilities of the branches and on line banking facilities some credit sanctioning powers have been delegated to the Branch Managers and the Regional Managers. Credit proposals are generally originated at branch. However proposals may also be received at Head Office for syndication and also from big clients, Financial Institutions.

At the branch level, the officers/executives of credit department have to obtain full knowledge of the policy & procedures of credit operations. The credit officers/executives after obtaining credit applications through Branch Manager along with all required papers /documents ensure sufficiency and consistency of the papers/documents. They can originate credit proposals, prepare detailed credit memorandum after undertaking a thorough credit check and conducting credit risk assessment of the client in light of credit policy Guidelines of the Bank. The fully documented Credit Memorandum (CM) will be placed to the Branch Credit Committee by the officer in charge credit. Credit committee after thoroughly & critically examining the proposal recommends it to the Branch Manager who approves credit under his delegated authority.

 Mandatory Checking:

•     Proposed Credit facilities are compliant of the existing banking   regulations.
•     CRG has been done.
•     Other analysis and assessment has been done properly.
•     Competent authority as per Bank’s policy approves facilities in writing.
•     All Credit approvals are given on a one-obligor basis.
•     Limit is approved as per authority delegated in the rule book.
•     Standard facilities are described using standard language.
•     Large loans are approved within the ceiling advised by Bangladesh Bank.
•     Fresh approvals, renewal, rescheduling, compromise agreement for large loan accounts are placed for approval by the Board as per Bangladesh Bank Guidelines.
•     Proposal incorporates that facilities are subject to banking regulation, which shall be mentioned in the sanction letter also.
•     Approvals authorities check that pricing of the facilities are within the Bank’s declared band.

 Disbursement:

Before disbursement of the approved facilities, branch Credit Administration should ensure that the following steps have been properly followed:

a)      Approval has been obtained.

b)     Standard loan facility documentation including security documentation has been completed.

c)      Limit Creation & documentation Check List has been completed.

d)     Credit officer & Credit Administration officer of the branch has jointly signed documentation checklist before disbursement.

e)      The approved terms and other requirements have been adhered to by the branch.

f)    Branch Credit Administration Unit/ (HO Credit Administration – if required) issues security compliance certificate and Loan Disbursement /Limit Loading Checklist & Authorization Form before disbursement.

g)   Branch Credit Administration Unit/ (HO Credit Administration – if required) check collateral.

h)     Bank’s legal adviser ensures that the Bank’s security interest is perfected.

i)        Incomplete documentation receives a temporary waiver from approving authority.

j)       Branch Credit Administration Unit/ HO Credit Administration ensure that all disbursements are covered by approved credit lines.

k)     Authorized officers as per our bank’s policy disburse facilities.

l)        Evidence of disbursements is properly documented.

m)   Unauthorized approvals are surfaced and proper actions are taken.

n)     Excess over limit are allowed under pre-fact credit approvals.

 Custodian

a)      Obtaining Security Documentation as per approval

b)     Safely Storing Loan/Security Documents Cash collateral such as Fixed Deposit Receipt, Script, Bonds, Marketable Securities etc. are under dual control in fireproof vault and for this purpose two custodians and their alternates are to be identified in writing.

c)      Periodic Review of Documentation

d)     Ensuring insurance of the insurable objects.

e)      Ensuring maintenance of Safe in & safe out register properly to track their movement.

f)       Releasing of collateral of debt obligation instruments under appropriate approval.

g)      Ensuring keeping current Insurance policy in the vault and renewal of the policy on a timely basis.

* Periodically Means:           Risk Grade                 Review Frequency

> 6                             Quarterly

4-5                             Semi-Annuals

1-3                             Annually

Compliance requirements of credit administration:

a)                  Credit administration shall submit all required Bangladesh Bank returns on credit in specific format in a timely manner.

b)      Credit Administration Division maintains Bangladesh Bank circulars/regulations/ guidelines relating to credit centrally ensure issuance of corresponding circulars and advise all relevant departments to ensure compliance of the contents of the circular.

c)      All 3rd party service providers like, valuers, lawyers, CPA’s etc shall be approved and their performance reviewed on annual basis.

Credit Monitoring

To minimize credit losses, monitoring procedures and system should be reinforced and more effective system should be developed in view of varied complexities involved in various types of credit. The procedures and system must provide early indication of deteriorating financial health of a borrower.

At a minimum, report on the following to be generated and submitted to management and instruct the branch to regularize the same.

a)      Overdue principal & interest (Monthly)

b)      Overdue trade bills (Monthly)

c)      Excess over limit/ Excess over facility approved (Monthly). Status reports on Excess over Limit and expired credit limit on a regular basis.

d)     Status reports on drawing power and Collateral shortfall on a regular basis.

e)      Breach of loan covenants/ terms and conditions/Documentations deficiencies (Fortnightly)

f)       Nonpayment and late payment

g)      Branch monitors OD/CC facilities on a regular basis to ensure accounts turn over.

h)      Non-Receipt of Financial Statements in time (Annually)

i)        Objections of internal/external or regulator Inspection/ Audit and advise corrective measures timely.

j)        Details of Early Alert Accounts and preparation of list of delinquent account & Special Mention Account (SMA). (Monthly)

k)      Identification of early alert accounts, delinquent account & Special mention account (Monthly)

l)        Identification of the accounts, which have assumed SMA status due to non-renewal. (Monthly)

m)    Listing of the accounts, which shall be SMA if not renewed within 2 months and taking necessary measures. (Monthly)

n)      Status of timely renewal of limits and informing Branch, regional Office &

Early Alert Process:

An account that has risks or potential weakness of material nature, requiring monitoring, supervision or close attention by the Management is brought under Early Alert Process; otherwise these weaknesses may result in deterioration of repayment prospects for the assets or in the bank’s credit position at future date.

In order to keep an account on track, early Identification, prompt reporting and pro-active management of Early Alert Accounts are to be placed under the responsibility of dealing credit officials and must be undertaken on a continuous basis. An Early Alert Report should be completed by the Branch credit officers and sent to the HO Credit Administration for any account showing signs of deterioration within 7 days from the identification of weakness.

i)              As part of Early Alert Process the following takes are to be performed:

ii)            Control mechanism to be made more effective and where required to be devised, to ensure that calls/inspections are made regularly on the clients and documented.

iii)          Regular inspections are conducted to confirm that bank’s security / collateral is secured.

iv)      Call /Early Alert Reports is to be analyzed by branch & Head office credit administration to ensure that affairs of the borrower are being run on expected lines and there are no material changes in the status of borrower.

v)       Relationship Manager/ credit officer should regularly monitor the performance of the clients business as well as repayment and prepare status report.

vi)      Relationship Manager/ credit officer should prepare Early Alert Report within 7 days after identification of weakness and signs or deterioration.

Credit Recovery

Recovery Unit (RU) should:

a)      Determine Account Action plan/ Recovery strategy.

b)     Make all out efforts to maximize recovery including placing customers into receivership or liquidation as appropriate.

c)      Provide for adequate and timely loan loss provision, based on actual and expected losses.

d)     Reschedule accounts as per norms.

e)      Review classified accounts.

f)       Initiate legal action as per norms.

g)      Follow up Court cases regularly and ensure that necessary steps are taken for early resolution.

Non-performing Loan (NPL) Accounts Management:

As management of problem loans is a dynamic process, management strategy and adequacy of provisions should be reviewed regularly. All NPLs are assigned to a responsible official within Recovery unit (at Branch/ Regional Office/Head Office level) who is responsible for coordinating and administering the action plan/recovery of the advance. Recovery Unit (Branch/ Regional Office/Head Office), if required, seeks assistance from HO Credit Division but the responsibility to recover NPL should be with Recovery Unit (Branch/ Regional Office/Head Office).

 Non-performing Loan (NPL) monitoring:

Classified Loan Review (CLR) should be prepared by Law & Recovery Division on quarterly basis to update status of action/recovery plan, review and assess the adequacy of provisions and modify bank’s strategy appropriately. Classified Loan Review (CLR) for NPLs up to 15% of the bank’s capital should be approved by Head of law and Recovery Division. While NPLs above 15% but below 25% is approved by Head of Law and Recovery Division with the approval of MD/CEO. NPL for more than 25% of bank’s capital is approved by the MD/CEO and Board is informed.

 NPL provisioning and write off:

In compliance with Bangladesh Bank guidelines for CIB reporting, provisioning, write off & suspension of interest, bank tries to adopt more stringent provisioning/ write off policies in order to strengthen credit portfolio.

The amount of required provision may, in some circumstances, be reduced by an estimated realizable forced sale value (i.e. Salvage Value) of any tangible collateral held (viz. mortgage of property, pledged goods/or hypothecated goods repossessed by the bank, pledged readily marketable securities etc). Hence, in these situations, it is advisable to evaluate such collateral, estimate the most realistic sale value under duress and net-off the value against the outstanding before determining the Net Loan value for provision purposes. Conservative approach should be taken to arrive at provision requirement and Bangladesh Bank guideline to be properly followed.

Appropriate authorities should approve exceptions, waiver of interest and reschedule/compromise, settlement, where applicable Bangladesh Bank approvals are also to be obtained. Appropriate authorities should also approve Write off in line with Bangladesh bank guidelines.

Target Customers of the National Bank Limited

The customers for the loan services are categories as follows:

•   Individual person.
•   Sole proprietorship firms.
•   Partnership firms.
•   Private limited company.
•   Public limited company.
•   Government and semi government organization.
•   Bank employees.

Types of Loan Facilities

National Bank Limited has been offering wide range of credit facilities as under:

Construction, finishing, expansion, repair, renovation of house/Flat/Real estate business.LCA (Loan against cash Assistance)Financing for the period of non-receipt of reimbursement from Bangladesh Bank.LC (Local & Foreign) Sight & on Deferred payment basisFor import/local procurement of goods/services.PAD (Payment Against document)For making payment of the L/C obligations against receipt of documentation.LTR( Loan Against Trust receive)Retirement of shipping documents.LIM(Loan Against Imported Merchandise)Retirement of shipping documents.PC (Packing Credit)Meeting financial requirement of the exporter at pre-shipment stage against export L/C.LDBP/FDBP(Local documentary bill purchased)/(Foreign documentary bill purchased)As post shipment financing against local/foreign export bolls.BTB L/C(Back to Back L/C)Import of raw/packing materials against export L/C.Bank Guarantee Local/Foreign Performance guaranteeFor submission of tender/to obtain and offer as security against work order, supply order/For Gas, Electricity connection/against delivery of goods/against release of goods, without or against partial payments by customer etc.

Documentation of the Loan

These are the most frequently used and common documents for creation of above mentioned charged and for other formalities for sanctioning the loan practiced by National Bank Limited:

  Demand promissory note: Here the borrower promises to pay the loan as and when demanded by the bank to repay the loan.

  Letter of Arrangement: Here the written amount of the loan sanctioned to the borrower is specified.

  Letter of Continuity: It is used to take continuous facilities as providing continuous securities.

  Letter of Hypothecation: It is the written document of the goods hypothecated thus to put in case of need.

  Stock Report: This report is used for SOD and CC. in this report, information about the quality and quantity of goods hypothecated furnished.

  Memorandum of deposit of title deed of property duly signed by the owners of the property with resolution of board of directors of the company owning the landed property.

  Personal guarantee: It is the additional confirmation of the borrower to repay.

  Guarantee of all the directors of the company.

  Resolution of the board of directors: It is used to borrow the fund to execute documents and complete other documents.

  Letter of disclaimer: By this letter, the borrower withdraws his all claim on the property/goods liened/mortgaged.

  Form no. 18/19 for filling charges with the register of joint stock companies under relevant section.

  Letter of Acceptance: Letter indicating the acceptance of the sanction proposal by the borrower.

  Letter of Pledge: It is the written document of the goods pledge thus the legality of holding the goods.

  Letter of Disbursement: This is the document through which the payment of sanctioned loan indicates.

  Letter of Partnership: In case of partnership firm, the partnership deeds are to be provided.

 Letter of Installment: The amount of installment that is to be paid at certain intervals.

  Insurance Policy: It shows the up-to-date insurance profile of the customer.

  Tax Paying Certificate.

Creation Of Charges For Securing Loan

For the safety of loan, Dhaka Bank requires security from the leaner so that it can recover the loan by selling security if borrower fails to repay. Creation of a charge means making it available as a cover for an advance. The method of charging should be legal, perfect, and complete. Importance of charging security:

  Protection of interest.

  Ensuring the recovery of the money lend.

  Provision against unexpected change.

  Commitment of the borrower.

Securities are two types:

a) Primary Security—Security deposited by the borrower himself to cover the loan such as FDR, Cash, PSS, PSP easily cashable items.

b) Collateral Security—any types of security on which the creditor has a personal right of action on the debtor in respect of advance.

The common methods of charging security and their nature are described below:

* It is the right of the banker to hold the debtor’s properly until the debt is discharged-generally retained by the bank in its own custody or to the hands of third party with lien marked.

* The third party cannot discharge it without the permission of the bank.

* In case of need bank needs the permission from the court to sell the property.Assignment* Borrower transfers the right of property or debt to the bank.

* Life insurance policies, supply bills, book debt of the borrower can be assigned.Pledge* Moveable stock of raw materials, finished goods, merchandise.

* Pledge is also lien but here bank enjoys more right.

* Physical transfer of goods to the bank is must.

* Bank can sell the property without the intervention of any court, in case of default on loan.Hypothecation* Moveable stock of raw materials, finished goods, merchandise.

* Goods remain in the hands of debtor, but documents of title to goods are handed over to the banker. This method is also called “equitable charge”.

* Bank inspects the goods regularly to judge its quality and quantity for the maximum safety of its loan.Mortgage* Mortgage is the transfer of specific immoveable property-like land, building, plant etc.

* Most common type of mortgage is legal mortgage in which ownership is transferred to the bank by registration of the mortgage deed.

* Another method called equitable mortgage is also used in bank for creation of charge. Here mere deposit of title to goods is sufficient for creation of charge. Registration is not required. In both the cases, the mortgaged property is retained in the hand of borrower.Trust Receipt* Intangible asset (goodwill)* It is used in foreign exchange business.

 Comments

Over the years the amount of sanction, disbursement, loan expired and outstanding loan have been increased. Though the total classified loan is more in 2009 but as a percentage of total loans it is only 5.96%.In 2009 the disbursement amount is about 1.30 times is clear that there is significant difference between the amount of sanction and disbursement over the years and the gap is creasing tendency. This indicates the poor to very poor management system.

Non-Performing Loans

IMF defines “A loan is nonperforming when payments of interest and principal are past due by 90 days or more, or at least 90 days of interest payments have been capitalized, refinanced or delayed by agreement, or payments are less than 90 days overdue, but there are other good reasons to doubt that payments will be made in full”.

By Bank regulatory definition non-performing loans consist of a) other real estate owned which is that taken by foreclosure or a deed in lieu of foreclosure, b) loans that are 90 days or more past due and still accruing interest, and c) loans which have been placed on nonaccrual (i.e., loans for which interest is no longer accrued and posted to the income statements).

In Bangladesh, loans becomes non-performing when it is classified as bad and loss for which Bangladesh Bank requires 100% provisioning by the scheduled commercial banks (as per BRPD circular).

Under Basel-II, loans past due for more than 90 days are non-performing.

 Non-performing loan: National Bank’s perspective

Non Performing Loan is one of the major concerns in the financial sector of Bangladesh. NATIONAL Bank’s loan quality situation is not very pleasing. The percentage of NPL is on an increasing tone during the last two years showing the poor risk allocation procedure that is prevalent in NBL. Though National Bank Ltd. tries to fight against the challenges of NPL by strict adherence to the risk management processes and guidelines but there is scope to improve.  Now I am going to present a few bars and charts that will reflect the loan quality of NBL in short.

Comment

In government sector the invested amount was in static position from the year 2007 to 2011. Among the non government sectors, in agricultural sector total classified loan was more in 2008 and lower in 2011. In 2011, huge amount of loan was classified in the large and medium industry sector, about 3.43 times more compare to the year 2010. Commerce loan; export loan and small & cottage loan from other sectors have been reduced. The increase of classified loan in export sector and large & medium sector in 2011 indicates weak monitoring and supervision system of the bank.

National Bank Limited, New Eskaton Branch

 Profile:

National Bank Limited, New Eskaton Branch (NEB) has started since 2009, August 20. As a new branch of a private commercialized Banks, they need to hunt or mobilize bank amount of Deposits from the surplus economic unit. The deposit which has mobilized from surplus economic unit will be used for leading purpose. At the very beginning day of this branch, NEB mobilized deposit fund of Tk. 4,62,00,000 (Four Crore Sixty Two Lac Only). The budgeted profit given by the branch was 500 Lac and the Head Office recommended arranging Deposit Tk. 650 Lac.

The Advance this branch was 12,000 Lac which has been set as budget in 2010. In light of actual performance, it has been observed that branch lent 7,000 Lac at the end of 2010. The advance by the branch is much lower. Income generated by the branch was Tk. 991.96 Lac, but the 755.58 Lac was set as budget. On the other hand, Expenditure incurred by the branch was 741.96 Lac Tk. which was quite expensive on the part of this branch. Since the inception, the NEB, NBL was unable to make profit, but at the year 2010 it reached their profit amounting Tk. 250 Lac.

Branch Activities

Banks initially go for marketing with a new to information the customer that a new branch of NBL is going to be established. By doing marketing, a bank can be known to the greater public discloser. Customers who are interested to do their banking, they come to the bank. Account is opened with the bank. Now customer/Account holder may ask for different facilities from the branch. They may do TT/ DD/ PO which are ancillary services on the part of the bank. In exchange of making these TT/ DD/ PO, they take same fees. These are the fees going into the banks earning portion. Some of the account holders many intend to go for other services like loan, L/C, online services, foreign remittance services etc. for loan purpose; bank doesn’t easily identify the customer. They analyze the borrower. To analyze borrower, liquidity, profitability, safety, soundness of the business of customer are analyzed. We know that loan and advances are not alike. Loan is a kind that loan and advances are not alike. Loan is a kind of credit facility given to the borrower without taking any collateral. Loan faculties can not be going on continuous basis. Interest earning a loan will be fixed and maturity is also at a certain date. Advance is something that doesn’t match absolutely with the loan. It refers when the facility is given on continuous basis. No fixed installment is required for obtaining credit facility, particularly the advance facility. However, NBL is not much ahead of providing credit better than any other existing private commercial banks. Banks gain profit on credit facility.

This is mainly a Foreign Exchange Branch dealing with a lot of foreign transaction like L/C; the customers are mainly doing international trade on Electronic Goods, Poultry Feed, Capital machineries, Spare Parts, TSP Fertilizer, Chemical, and Recondition Motor Car.

Findings of the study

National Bank Limited is a bank that runs its operation with a slogan keeping in mind always ‘A Bank for Performance with Potential’. Though the risk is inherent, National Bank always tries to estimate, evaluate and analyze the risk in providing loan and advances to the borrowers.

National Bank Limited is committed to extend high quality services to its clients through different financial products and profitable utilization of fund by undertaking various lending operations including financing trade, commerce and industry etc. In conducting lending operations NBL always bears in mind the essence of proper risk identification and their effective management. It is also recognized that failure in proper identification and management of risks may result in a large quantum of bank advances turning into non-performing.

In the back drop, National Bank Limited underscoring the need of an effective credit risk management process which is going to provide effective policy guidelines for Credit Risk Management. I have found that the credit policy is being reviewed annually by the Board of Directors and it is distributed to the concerned officials, all divisional Heads, Branches, Regional Offices and top management formally. NBL also ensured that the policy is being implemented by all levels with strict rigidity. Any deviation from the guidelines to be clearly identified and justification for approval would have to be provided with detail clarification.

I. Findings about source of fund:

Most of the funds for NBL come from customer deposit which has 18 types of deposit facilities. It can also take loan from Bangladesh Bank when needed. The percent of deposit as a total source of fund over the five years (2007 – 2011) are: 85.8%, 86.27%, 84.85% and 83.34% respectively.

II. Findings about loan disbursement:

NBL provides loan mainly in 5 broad sectors. The main fields where the National Bank provide loan are- Trade Finance, Overdrafts, Consumer Loan, SME Loan and Lease Financing. Through the study it was found that Branches have power to disburse any loan to the applicants within the sanction provided by the branch itself or the regional office or the head office. Branches can disburse loan to the applicant at any time after the approval of sanction. Most of the loans and advances are provided for trading and commerce. About 45 percent of the total loan is disbursed to this sector.

III. Findings about the reason for loan loss:

In the study from the year 2006 to 2009 it was found that there is an increasing tendency of the amount of bad & loss for the NBL. Most of the classified loan is Bad & loss. It is found from table-3 that it is regularly switching from sub-standard to doubtful and ultimately to the bad and loss loan. In 2009, sub standard loan is 2.80 times more compared to 2008 and bad loan is 1.14 times more than in 2008. The reason is for increasing classified loan in 2009 is for global recession and political instability in commerce and trade. Apart from this there found large borrowers were foiled to repay the loan in due time in year 2009. But the continuous increasing of classified loan is for increasing the amount of disbursement, and weak regular monitoring system, faulty in customer selection, and faulty in documentation.

IV. Findings about sanction procedure:

In sanction procedure generally most of the tasks are done by branches and large proposal is sent to the Head Office. Head Office has the format to evaluate the task of branches and the applicants. If the documents provide right information then head office approves the proposal for loan of applicants. Head Office mainly checks the documents, security, and CIB report and credit worthiness of the applicants in case of sanction. The proposals are not only sanctioned by head office but also by branches and regional offices within delegated authority, most of the cases the branch manager ignore the decision of credit administration & rather goes with the Branch Incharge decision. It appears that the sanction authority is decentralized in case of small amount but highly centralized in case of large borrowing.

V. Findings about security selection:

Most of the time, NBL provides loan and advances to the borrowers against hypothecation and pledge. However, recently it allows loan only against hypothecations for avoiding trouble in pledge because of the problems associated with the keeping of warehouse keys. Assets in the form of goods pledged as security are duly insured protecting the Bank’s interest. Goods and machinery (for industry) taken as primary security are also insured. It also provides loans against collateral security. Most of the loan in Dhaka city and adjacent area to Dhaka is distributed as cash credit (CC) and security overdraft (SOD) by taking primary and collateral security.

VI. Findings about expired loan & classified loan:

In spite of taking all out efforts to reduce the non performing loan, and following guidelines provided by Bangladesh Bank, classified loan for the Bank has been increased from the year 2008 amounting tk. 2729.33 million to 2009 amounting tk. 3880.31 which is 42.17% more than 2008. The reason is for the global recession and political instability which hampers business concerns to run properly. Apart from this I found that total loan disbursement has been increased from 2008 to 2009. So expired loan and classified loan is higher than previous year. In 2009 bank faced problem to recovery loan from large and medium industry sector. About 38.92 percentage of total classified loan was originated from large and medium industry sector.

VII. Other findings:

There is a no standard format in each and every paper. They work manually.  The Management of NBL always delay while make any decision. Deposits are the main sources of fund and loan & advances are the main application of fund. Loan disbursement and loan recovery do have positive correlation but not so strongly correlated. That is the increase in loan disbursement leads to increase in loan recovery. Loan disbursement and expired loan do have strong positive correlation. That is the increase in loan disbursement leads to increase about same rate of expired loan. Loan disbursement and classified loan do have positive correlation. That is the increase of loan disbursement is increasing the classified loan over the years. Disbursements of loan, recovery of loan, expire of loan and classified loan are inter-related and more or less they are dependent with one another.

Limitation of National Bank Limited

National Bank has achieved many awards for positive performance, still now it is doing some laudable tasks for the society as well as for its own. But it is not out of limitation. There are some limitations I found to remark which are as follows:

1. Inclusion of Independent Director in the audit committee has not been done yet.

2. Intensify of recovery of past due loan and initiate early warning reports for loan shows deteriorating condition.

3. In the Head Office I found, the environment is not suitable for working in long time.

4. Credit risk management division is designed to restructure at regular time. I heard the present structure is of this division newly built up. So much information is not readily available and data is not online based processing system.

5. The sanction procedure is well enough but Head Office most of the cases depends on the branches for evaluating of borrowers in sanctioning of loan.

6. The system of getting loan for the small borrowers very rigid and interest rate is high.

These are the limitations for National Bank, but I think these are the minor drawbacks. I think these will not hamper its image but by solving these minor limitations it can be the number one Private Bank in the country. By removing these more competitive advantages are easily possible to get for the bank.

  Recommendations

The existing credit policy is good enough to run the bank. But as the competition is increasing day by day the bank should take some measures so that they can distinguish it from the others. To attain its goals more successfully the credit management of NBL Bank Ltd. can follow the following suggestion to improve their performance and distinguish from others.

  Branches may give suggestion regarding the features of lending products and regular revision for its products with more competitive advantage and local demand.

  The bank management can give permission to its branches to design or change lending products on the basis of local demand.

  The bank management can reduce the interest rate. Because of high interest rate, the net profit of NBL is increasing over the years. Though the net profit is increasing but some good loan may turn to bad loan. So if the interest rate decreases then the default loan may decrease.

  To grade the credit risk, the bank can follow other appropriate models besides the credit risk grading model, because the credit risk grading models yardsticks are static which do not take into account the flexibility in economic or business or financial condition.

  The bank management should follow the changes in policy, system, procedure, product, technology and compliance in the banking industry, so that NBL can take appropriate measure to adapt her with the changes.

  Sanction procedure should be evaluated more effectively. Loan recovery system should be monitored more strictly.

  Interest rate for loan providing to marginal farmer should be in somewhat lower rate. Sometimes loan can be provided as collateral free.

  The credit management of National Bank Limited can follow the above mentioned suggestion to improve their performance so that they can be competitive in the market and can gain some competitive advantage.

Bibliography

Relevant Websites:

1. National Bank Limited:htt//www.nblbd.com

Organization web Link

Bangladesh Bureau of Statistics (BBS)

http://www.bbs.gov.bd

National Data Bank (NDB)

http://www.bangladeshgov.org/mop/ndb/

Securities and Exchange Commission (SEC)

http://www.secbd.org/