Credit Policy of BASIC Bank Limited

The main principal of this report is to analysis Credit Policy of BASIC Bank Limited. Also focus on the commercial banking system in Bangladesh and explain the present banking system in Bangladesh. Other objectives are on the loan structure, size, profile of sector wise outstanding position of loans and system of loan variation of BASIC and explain the credit policy operations by our commercial banking system. Finally find out the nature and size of problem loans in BASIC Bank and analyze the effects of problem loan on income of BASIC bank Limited.

Introduction

It has long been recognized that credit is an important tool in increasing productivity and thereby increasing the income of borrower. Adequate flow of credit can remove the financial constrains of the borrower. There has been phenomenal growth in the flow of credit after liberation due to governments desire to increase productivity in the country. All the credit institutions were geared up thorough a dynamic credit policy to disburse both short-term credit and long-term credit. As a result the flow of annual credit has increased significantly. As the volume of loan default increased substantially over the years, the percentage of loan default increased gradually. Although loan is one of the major assets of the banking sector, it becomes a liability when the loan is not repaid. Since the late 70s the whole banking sector of Bangladesh is being haunted by the specter of problem loans.

A great bulk of problem loans and their ever deepening thrust on Bank credit has brought a gloomy situation in the cost of fund. The impact of such loan in banking arena hinders the flourishing of banking business. Default culture has started in Bangladesh mainly after the nationalization o banks. However, it was enhanced by the availability of hue amount of credit in the name of developing private and industrial sector. From a statistic of Government it is seen that investment Board did not find may existence of 4422 industrial units amongst he sanctioned 7531 units during the years 1985 to 1990. There happened interesting events in the name of industrial credit. Valuation certificates were managed hundred times over the collateral security. Industry set-up was shown as sick industry to get additional loan and relieve from interest. Despite various Acts, Ordinances as well as various circulars issued by Bangladesh Bank from time to time and special instructions by individual Banks, the striving for realization of such credits proved discouraging.

The Bank of Bangladesh Small industries and commerce (BASIC) Bank Limited, which was established to promote the development of Small-scale industries in Bangladesh, is also prone to such disappointing features of problem loans.

Objective of the Report

The principal intent of this report is to examine Credit Policy of BASIC Bank Ltd. In particular the objectives are as follows:

1. To have a glace at the commercial banking system in Bangladesh.
2. To examine the present banking system in Bangladesh.

3. To get acquainted with the loan structure, size, profile of sector wise outstanding position of loans and system of loan classification of BASIC.
4. To know the deposit behavior of NCBs, FCBs, PCBs and BASIC bank and to cross-examine any structural changes regarding deposit behavior.
5. To examine the credit operations by our commercial banking system.
6. To explain the procedures, systems of credit management and appraisal of BASIC Bank.
7. To find out the nature and size of problem loans in BASIC Bank.
8. To find out the causes of problem loans.
9. To analyze the effects of problem loan on income of BASIC bank Ltd.
10. To evaluate the various loans programs of BASIC bank which includes Industrial, Trade and Commerce, Transport etc.
11. To inspect the recovery of loans by BASIC Bank.
12. To examine whether the attributes of gook performance are observed in BASIC bank.

Methodology

To prepare the report following methodology is adopted:

Collection of data

Required information or data were collected mainly form the secondary sources. The sources are:

• Annual reports and performance reports of the Bank
• Various files and documents of Credit and industrial Credit Division of BASIC Bangladesh limited.
• Articles related to problem loans in different journals and magazines.
• Study of files and documents of some default borrowers of the main Branch of BASIC

The primary source of data and information was the interviews with managers and officials of the Head Office and Main Branch of Basic.

Necessary data were segregated from the source material and collected data were complied and processed to prepare the report.

Sample size

Outstanding loans of the Bank are analyzed in totality to fulfill the objectives of the study.

Historical perspective of the commercial Banking

At the time of liberation there were around thirteen domestic scheduled banks and a few foreign banks operating in the region of Bangladesh. Two of the smaller commercial banks, namely, Easter Banking Corporation and Eastern Mercantile Bank had their head offices in the erstwhile East Pakistan. The major banks only their regional offices in Dhaka. The management accepts the two East Pakistani banks were, however, almost solely in the hands of non-Bengalis. All these banks except National Bank of Pakistan were in the private sector. The Government owned even National Bank of Pakistan only to the extent of 25 percent. However, the management of the National Bank of Pakistan was almost totally free from interference by the Government. Interestingly, the then central bank namely, the state bank of Pakistan was owned by general public to the extent of 49 percent.

After the emergence of Bangladesh, all the banks except the foreign banks were nationalized. The commercial banks were merged into sox larger banks namely, sonali, Janata, Agrani, Rupali, Pubali and Uttara bank. With the exodus of Pakistanis who manned the top and upper middle echelon of management, a sudden vacuum emerged in the effective top management of the nationalized banks. As the banks departed from following the standard norms and practices, the state of affairs of the banks became vulnerable leading to large-scale loan defaults. The loans taken by the public sector bodies like Bangladesh jute Mills Corporation, Bangladesh Textile mills corporation and other state- owned enterprises were stuck- up at these institutions used bank loans mostly for loss- financing.

Considering the backwardness of agriculture as well as its high importance in the overall economy, drive was made at the instance of Government to launch Tk. 100 core special agricultural credit programs in 1977. It was crash program to disburse credit to the cultivators as crop loan. As the NCBs were frawn in a big way for agricultural loan for the first tim, in fact, it paved the way for large-scale default culture in this respect mainly bemause of lack of experience in dealing with agricultural credit by the NCBs.

During early 1980s the role of banks in the private sector was felt as an important factor to invigorate the economy.

A good number of new private banks were allowed to function. Banks following Islamic tents also started funetiong. Most notable development was de-nationalization of two of the six NCBs,namely, Uttara and Pubali.A few more foreign banks were also allowed to operate in the capital and port cities.

During mid 1980s when the private banks started to expand its lending activities, these banks experienced somewhat new situation. The sponsor directors were especially interested to use their influences for taking the loans for their own business houses or for enterprises owned by their relatives or accomplices. Though the executives were free from the dictates of the bureaucrats, but had to show their allegiance to their new masters.

To correct the above-mentioned problems and to ensure the maximum benefits that should be achieved from banking sector in 1990, the Bangladesh Government started with a five-year financial sector reform project with the following ten agenda:

1. Introduce a more liberal interest rate policy
2. Introduce and implement an improved loan classification system
3. Introduce capital adequacy requirement and enforce these on the banking system
4. Develop improved supervision systems for identify problem areas within the banking system
5. Develop money market instruments and initiate the auctioning of a short term money market instrument
6. Improve the operation of the capital markets and take the regulatory steps needed to improve such markets
7. Clean up the jute debt in the commercial banking system and eliminate any risk to the commercial bank portfolio
8. Reform the NCBs in a three step process: 1) Recapitalize the NCBs2) Improve their operating systems 3) Develop strategic approaches to their future development
9. Improve loan recovery through introduction of better legislation
10. and courts to collect delinquent loans, improve the bankruptcy law to ease the problems of liquidating companies, improve the flow of credit information for new loans, and rtequire4 the NCBs to improve their debt collection
11. Initiate an immediate program of improvement to manpower through upgraded training for bankers

In addition, the following initiatives were also taken under FSRP:

Performance planning system (PPS): A performance planning system (PPS) has been introduced in the NCBs under which participants (branch managers) are require to develop- a number of clearly specified, measurable and dated goal statement to b4e accomplished over the following year.

New loan ledger (NLL): As the loan ledgers of the NCBs contain adequate data to monitor their loan portfolio effectively, a new system called new loan ledger (NLL) has been introduced. To correct record keeping at the account-by account level (FSRP) Designed the New loan ledger (NLL) system.

New MIS: FSRP develop a new Management information system (MIS) for banks including an Executive summary Reports, which contains critical management information. The number of monthly MIS reports thus in produced stood at 83 by October 1984.

Although the FSRP (1990-95) introduced a number of changes in the banking system, there is still a lot of be dine. Accordingly, the Govt. initiated the commercial banking-restructuring project (CBRP) in 1997 to ensure a continuity of the reforms as well as to attain the following objectives:

• Strengthening bank management with increased accountability, improved auditing and loan management practices and procedures
• Improving the legal environment for dint recovery
• Modernizing the technology in the banking sector
• Restoring the capital adequacy of banks on risk weighted assets
• Improving income position of bank’s
• Strengthening the supervisory and monitoring capacity of the central bank.

Average Deposit per A/C

Saving is very important for financing economic activities. In our country there exists a wide gap between saving and investment. To reduce the gap between saving and investment and to reduce the dependence on foreign assistance local deposit mobilization is a must. In this respect different categories to commercial bank can play a vital role. Average deposit per Account (Table-6) was very good for the year 1980 and 1985. It was then declining for all the commercial banks. It may be due to the reason that numbers of commercial banks are increasing and so the number of accounts. But the deposits are not growing at the same pace. Only foreign banks are showing a good trend: their deposits are increasing with the increase in number of accounts. NCBs are very week in respect of average deposit per account. This may be due to the increase in number of accounts but stagnation in deposits.

Rural Deposit Expansion

Increase in rural depots is clearly evident from table-7. Rural savings show an increasing trend from 1980 to 1995 and it declined in 1999. Due to the increase in bank branches, more rural people are now enjoying commercial banking service. A drop in rural deposit in 2001 may be due to political instability and low level of income in this year.

Deposit Distributed by size of A/C

Deposit distributed by size of accounts (Table-3) shows that a large percentage of total accounts mobilize deposit of small savers and obviously the percentage of total amount is also smaller.

In 1980, 98.78% accounts hold 41.64 % deposits. Also the accounts of medium-size savers increase gradually. A Small number of accounts hold a larger percentage of deposit. In 1980, .o66% account mobilizes 33.45% deposits and in 1999 64% account mobilizes 50.38% deposits.

This gives the clear indication that large amount of wealth is concentrated in fewer hanks. This gives the clear indication that large amount of wealth is concentrated in fewer hanks. Also is less costly to handle smaller number of large amounts than large number of small accounts

Table-1:  Average Deposit per Account              Lakhs

Source: Calculation based on Quarterly Bank Scheduled Statistics (Various issues)

* No. Of accounts

** Amount

TABLE- 2: Rural and Urban Deposits and the Rate of Savings in Rural Areas:

( Tk. In Crore)

Source: Calculation based on Quarterly Bank Scheduled Statistics (Various issues)

TABLE:    Deposit Distributed By size Of Account (All Commercial Banks)

Source: Calculation based on Quarterly Bank Scheduled Statistics (Various issues)

Deposits per Employee

Deposit per employee (table-4) for different categories of banks shows that foreign banks are most efficient in collecting deposits. Deposit per employee in 1993 was Tk. 164.6 lakhs, which is 6.06 times higher than NCBs and 3.83 times higher than PCBs. So foreign banks are efficient in product diversification and customer satisfaction. In 1999 deposit per employee for FCBs is Tk. 329.21 lakhs, which is 6.98 times higher than NCBs, 5.39 times higher than PCBs.

TABLE:  Deposit per Employee (Lakhs in Tk.)

Source: Calculated form Economic Trends & Quarterly Scheduled Bank Statistics

Deposits per Branch

Deposit per branch (table-5) shows that in 1993 it was Tk. 7555.27 lakhs for FCBs, which is 15.55 times higher than NCBs and 9.31 times higher than PCBs.In 1999 the figure is Tk 13227.28 lakhs for NCBs, which is 16.24 times higher than NCBs, 11.12 times higher than PCBs.The figures are higher for FCBs because they are operating in urban area. There is no branch of FCBs in rural area.But it is true that they are mobilizing savings through product diversification and maximizing customer satisfaction. If BASIC Bank follows the strategy of FCBs its deposit will increase.

Table:  Deposit per Branch

(Lakhs in Tk.)

Source: Calculated from Economic Trends & Quarterly Scheduled Bank Statistics

Credit Policy, Credit Analysis & Evaluation

Introduction

BASIC Bank Limited is a new generation Bank. It is committed to provide high quality financial services/products to contribute to the growth of G.D.P of the country through stimulating trade & Commerce, accelerating the peace of industrialization, boosting up export, creation employment opportunity for the educated youth, poverty alleviation, raising standard of living of limited income group and over all sustainable socioeconomic development of the country.

In achieving the aforesaid objectives of the Bank, Credit operation of the Bank is of paramount importance as the greatest share of total revenue of the Bank is generated from it, maximum risk is centered in it and even the very existence of Bank depends on prudent management of its credit port-folio. The failure of a commercial Bank is usually associated with the problem in credit portfolio ad is less often the result of shrinkage in the value of other assets. As such, credit portfolio not only featured dominates in the assets structure of the Bank, it is critically important to the success of the Bank also. To provide a broad guide line for the Credit Operation towards achieving the objectives of the Bank, for efficient and profitable deployment of its mobilized and to the Credit portfolio in the most efficient way, a clearly defined, well-planned, comprehensive and appropriate Credit policy and control guidelines of the Bank is a prerequisite.

In view of the above, this Credit Policy and Control Guidelines of the Bank has been prepared which is subject to amendment, revision, re-adjustment and refinement from time to time as may be warranted by the change of circumstances due to passage of time to time the requirement of the bank.

The purpose of this policy statement, which replaces all previous ones, is to set out the credit policies of the board of Directors. The policies are described under the following headings: –

• Credit Principles
• Global Credit portfolio limits
• Credit Categories
• Types of Credit activities
• Credit approval
• Credit administration
• Credit monitoring and review

Definition of Credit Policy

The credit policy of any banking institution is a combination of certain accepted time tested standards, and some other dynamic factors determined by the realities of varying and changing situations in the market place. The accepted standards relate to the aspects of security and liquidity whereas the dynamic factors relate to such other aspects as the nature of risk, interest margins, credit concentration, credit dispersal, and bank’s own capabilities.

It is, therefore, necessary that the credit policy is kept under constant review by the Head office Credit committee which is responsible for evolving and recommending a sound, healthy and realistic credit policy and its due implementation.

As is true for any other institution, BASIC may have certain unique characteristic relating to its operations, such as its age, and geographical concentration. These unique features may require certain amount of flexibility in the credit policy, but as a rule, the general standards of security and liquidity should not be allowed to be impaired and the operations must be carried out in strict conformity with local laws and supervisory requirements as stipulated. Credit policy lays down the basic principal and broad parameters of the lending operations.

The key to a sound, healthy and profitable credit operation, however, lies in the quality of judgment and sense of proportion of the officers making lending decisions, and their knowledge of the borrowers and the market place. The following pages contain only a statement of the basic principles of BASIC’s credit policy. Reference may be made to the following other documents existing for the operation and administration aspects of management of the credit function:

Advance manual: It describes elaborately the standard concepts and applicable systems and procedures relation to the credit operation. (Manual of BCCI group who are providing Technical and Management Consultancy is being adopted being a standard credit manual.)

Administrative Booklet on Credit Approval Authority: This lays down the credit approval limits approved by the Board of Directors for various functional levels and the relative guidelines for their operation.

Scopes and Definition

Scope:

1. The credit policy extends to the Head office and all branches of BASIC Bank.

Definitions:

1. The net worth – as used herewith shall mean the aggregate of paid up capital, subordinated loans, and capital notes, unencumbered reserves and inappropriate profits.
2. “Loans and Advances” shall mean any debit balances on customer’s accounts excluding debit balances on the accounts of other banks and excluding loans under specific counter finance arrangement.
3. “Credit Extension” is defined as granting of financial accommodation or consideration to a customer which could incur the Bank in monetary loss in the event of non-repayment by the customer, or the settlement of a claim to a third party on behalf of a customer for which no reimbursement is obtained.

4. “A Customer Entity” signifies one or more actual and/or memorandum accounts whose principles are in the actual or beneficial ownership of one common party whether individual, partnership, corporate, association or government and/or which share the same directors and/or which are linked by guarantees, etc. Including those cases where although the majority ownership may be vested in others, nonetheless management control is exercised by one common party.
5. “Secured” is defined as the pledge or mortgage of tangible readily realizable unencumbered assets, the sale proceeds of which will repay the customer’s obligations and / or acceptable bank guarantees and letters of credit offered as security for the customer’s obligations.
6. “Unsecured” is defined, as extensions not supported by tangible assets in (5) above.

Basic Principles of Loan & Advances in BASIC

Bank

LOANS & ADVANCES

1. 1. Aggregate loans and advances  shall  not  exceed  times  the  Bank s   net  worth  or  65%   of  customers  deposits  whichever  is  lower  ( excluding  loans  and  advances covered  by  specific  counter –  finance  arrangements ) .
2. Within the aggregate limit of loans and advances as mentioned in (1) above 50% of lending will be small industry sector in accordance with prescribed norms of the government and the central bank in terms of the banks objectives with 50% to the commercial sector. No term loans will be approved for the commercial sector. Exceptions will be rare and will require approval of the Executive Committee.
3. All lending will be adequately secured with acceptable security and margin requirement as laid down by the Head office credit committee.
4. The bank shall not incur any uncovered foreign exchange risk (currency exposure) in the lending of funds.
5. The bank shall not  incur  any  risk  of  exposure  in  respect  of  unmatched  rates  of     Interest   of  funding  of  loans  and  advances  beyond  15%  of  outstanding  loans  and Advances .
6. 6.End- use  of  working  capital  facilities will be closely monitored  to  ensure  lending used  for  the  purpose  for  which they were advanced
7. Country risk in loans and advances will be accurately identified and shall be within  the  country  limits  if  any  approved  for  the  bank. The same treatment will be given to country  risk  arising  out  of  contingent  liabilities  relating  to Letters of credit and letters of guarantee .

Following guidelines (subject to item above whereby 50% of lending being to small industry sector):

(a) Short  term  commercial  lending  (to  include  self Liquidating  and  other short  term  finance  to  retail And  wholesale  business  clients  to  finance  their  usual Domestic  and  international  trade \  shipping  of  goods ).This  category  to  include  working  capital  to  hotel  and  tourism

(b) Facilities  to  shipping  and  transport (facilities for the purchase and construction of ship / vessels And other modes of transport both by land  and air)

Therefore the bank has to use all financial data available and combine this with a number of qualitative factors analyzing the borrower’s financial position. In analyzing any credit proposal the analyst should follow THREE distinct and logical steps to conclude on and make appropriate recommendations.

These are:

Historical Analysis (Identify nature of risk):

Evaluate the past performance of the borrower. Determine the major risk factors and how they have been mitigated in the past. Identify factors in the borrower’s present Condition and past performance which may foreshadow difficulties or indicate likelihood of success in his ability to repay the loan, at a future time.

Forecast (Judging future degree of risk):

Having identified the nature of risk involved and how these are mitigated, make a reasonable forecast of the probable future conditions of the borrower and conclude on his ability service the proposed level of debt.

Debt structure and protection:

Assess the borrower’s credit worthiness and prepare a proposal for structuring a credit facility that can be repaid or amortized given the borrower’s assets or his projected Cash flow and the facility offering adequate protection against loss and control of the lending relationship.

Format of credit analysis:

All credit proposals are to be analyzed by the analyst as per standard credit analysis that are specified in the APPENDIX – 1. The detail of the analysis is focused on that part and also in other charters.

• Prevalent credit practices in the market place.
• Credit worthiness, background and track record of the borrower
• Financial standing of the borrower supported by financial statements and other documented evidence.
• Legal justification and implications of applicable laws.
• Effect of any applicable regulations and laws.
• Purpose of the loan/purpose.
• Tenure of the loan/facility.
• Viability of the business proposition.
• Cash flow projections.
• Quality 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 of risk in relation to the risk taking capacity of the Bank or company concerned.
• Profitability of the proposal to the Bank or company concerned.

CONTINGENT LIABILITIES

1. Commercial letters of credit

The Bank shall not undertake contingent liability for letters of Credit exceeding in aggregate four times net worth of the Bank.

2. Letters of guarantee

The Bank shall not undertake contingent liability under letters of Guarantee issued on account of customers exceeding in aggregate four times the net worth of the Bank.

3. Acceptance on account of customers:

These shall not exceed 5% of aggregate outstanding advances.

Loan Department Operation:

This part of this policy contains instructions covering the details of various types of loans and advances of the Bank, the documents to be obtained, accounting record to be maintained, process of the Loan Department, which is responsible for processing and servicing all advances as well as maintaining the records connected with the function.

Main functions of Credit Department:

1. Interviewing the prospective borrower.
2. Receiving the credit information assembled and placed in the Customer’s Credit File.
3. Processing and sanctioning of credit facilities to the customer.
4. Disbursement of credit facilities to borrowers in accordance with established procedures
5. Recording credit facilities in the Register / Card.
6. Preparing “ENTRY TICKETS” (Voucher) pertaining to credit facilities disbursed and passing to General Ledger Accounts.
7. Controlling of securities and their proper custody.
8. Maintenance / Filling of Borrower’s Loan Card / Register.
9. Follow up and recovery of credit as per due date.
10. Computation and checking of interest accrued on loans and advances and preparation of entry ticket thereof.
11. Preparing of “ENTRY TICKETS” (Voucher) for credit repaid and passing the same to the corresponding General Ledger Accounts.

TYPES OF CREDIT FACILITIES:

The following types of credit facilities are generally allowed by the Bank to the individuals, partnership firms, companies, corporations and others, either on demand, time or self liquidating basis and are carried on the Bank’s General Ledger:

Loans:

1. Demand Loans
2. Time loans
3. Term loans (more than one year)

Overdrafts:

1. Against pledge of goods /stocks
2. Against hypothecation of goods/stocks.
3. Against any other permissible securities.

Other advances:

1. Against Imported Merchandise (LIM)
2. Against Import bills (BLC)

Against Work Order

1. Against Other Securities.
2. Letters of Credit
3. Letter of Guarantee.

These are discussed below in brief:

Demand Loans:

Demand loan is granted by the bank against foreign bills under collection and against clearing cheque under collection.

Term loans:

If any loan is extended over a period exceeding one year, it is called “Term Loan”.

These loans are usually made to large well established business enterprise for Capital financing, such as setting up of industry, balancing modernization of existing plant / merchandise of industries, purchase of equipment etc. Covering the repayment period beyond one year.

Overdraft:

Arranged O/D: In this case the customer is allowed on the basis of prior arrangements to overdraw his Current Account by drawing cheques for amounts exceeding the balance up to an agreed limit within certain period of time not exceeding one year, against acceptable securities. These facilities are granted after the credit standing; financial ability and status of the customer as well as the purpose have been favorably established

The limit of the OD is based on ADVISED LINE OF CREDIT available on a revolving basis, subject to review prior to expiration of agreed period, if a renewal is anticipated.

O/D against pledge of goods / stock :

Under this arrangement, the credit facility is granted to the borrower against the security of pledge of goods/produce in the form of raw materials or finished products subject to credit/margin restrictions.

The borrower signs a letter of pledge and surrenders the physical possession of the goods/produce. Pledged under Bank’s effective control but retains the ownership with him. In case of default, the banks can sell the goods on serving proper notice to the borrower and adjust the outstanding out of sale proceeds. Sometimes collateral securities by way of legal or equitable mortgage of immovable properties are also obtained before disbursement of the loan.

O/D against hypothecation of goods/ stocks / plant & machineries:

Under this method, facilities are extended to borrower on his signing a letter of hypothecation, creating a charge against the goods/products, plant & machineries etc. Hypothecated, for the amount of agreed limit of the debt subject to credit / margin restrictions. The control / possession as well as the ownership of the hypothecated goods / products etc. is retained by the borrower but binding himself to surrender possession.

Products etc. is retained by the borrower but binding himself to surrender possession of the goods to the Bank as and when called upon to do so. The Bank only acquires a right or interest over the goods hypothecated.

The Bank, therefore, almost always insist on furnishing collateral securities by way of legal or equitable mortgage of immovable properties and or guarantees where deemed fit.

SECURITIES AGAINST ADVANCES

COLLATERAL  SECURITIES :

The  tangible  securities  pledged / assigned  by  the  borrower  to  the  bank  and  additionally  held  by  the  bank  to  secure  a  loan  is  called  COLLATERAL  SECURITIES   or  simply  collaterals.

In  case  of  advances  against  pledge / hypothecation  of  goods , Bank  may  insists  on  immovable  properties  as  collaterals .

GUARANTEE:

At  times  when  the  personal  security   of  the  borrower  is  not   considered  sufficient ,  or  when  risk  involved  is  a  border  line  case  and  the  borrower  is  not  in  a  position   to  offer  sufficient collaterals   to  support  the  loan  ,  the  bank  may  ask  for  a  guarantee  of  a  third  party  whose  financial  ability  and  credit  standing  is  acceptable  to  the  bank .  A  guarantee  is  an  undertaking  given  to  the  bank  by  a  third  person ,  called  the  guarantor ( or  surety )  to  be  answerable  to  the  bank  for  the  debt  of  the  borrower  upon  his  default   in   repayment  of  the  loan  . It  should  be remembered  that  such  security  for  the  loan  depends  on  the  continued  solvency  of  the  surety .  Only a  continuing  guaranty  in  the  banks  standard  from  should  be  accepted  to  safeguard  the  banks  interest .

MARGIN:

The  difference  between  the  market  value /  assessed  value  of  the  collaterals  pledged / hypothecated  to  secure  a  loan  /advance  and  the  amount  of  the  loan  /advance  ( normally  the  drawing  power )  is  known  as  ‘ MARGIN ‘ .  the  rate  of  margin  to  be  obtained  for  each  types  of  loans  /  advances  and  against  the  various  forms  of  collaterals  is  normally  regulated  under  under  the  credit  restrictions imposed  by  Bangladesh  Bank .

LOANS DOCUMENT

The  following  are  the  most  important  loan  documents  handled  by  loan  department :

Demand Promissory  Note  ( D. P. Note )

It is  an  unconditional  written  promise  of  the  borrower  made  to  the  bank ,  to  repay  the  amount  of  the  loan  on  demand  or  at  a fixed  or  determinable  future  date  along with  interest  at  a  status  rate  percent  per  annum  . A demand  promissory  Note  must  be  obtained  for  each  every  demand  loan ,  Time  loan ,  Term  loan , Installment  loan ,  Overdraft  and  advances  etc .The  signature  of  the  borrower  must  be  properly  verified  by  an  authorized  official  .  Where  the  borrower  is  a  company / corporation ,  the  relevant  corporate  resolution  must  be  consulted  to  see  that  the  person(s)  signing  the D. P. Note  on  behalf  of  the  company  has  been  fully  authorized  to  do  so .  The  date ,  tenor ,  amount  in  words  and  figure  must  me  checked  for  correctness .  Securities  pledged  must  be  listed  in  detail  on  the  loan  card  .

Borrowing Resolutions 

This  is  a  certified  copy  of  a  resolution  adopted  by  the  Board  of  Directors  of  a  company / corporation , authorizing  designated  officers  to  borrow  and  pledge , hypothecate ,  mortgage ,  etc.  The  assets  of  the  company  for  the  purpose  of  securing  the  loan / advance  granted  to  the  company  in  accordance  with  the  corporate  borrowing  power  laid  down  in  the  memorandum /  Articles  of  Association  of  the  company .

General letter of Hypothecation

A  ‘Hypothecation  Agreement ‘ must  be  obtained  when  the  collateral  is  in  the  name  of  a  person  other  than  the  borrower  .  the ‘hypothecation  agreement ’ must  be  compared  with  the collateral  to  be  certain  that  the  security is  solely  owned  by  the  person executing  the  agreement . If  the  security  is  owned  by  more  than  one  person ,  even  though  it  may  be  jointly  owned  and  payable  to  either  or  survivor ,  both  persons  must  sign  the  Hypothecation  Agreement .The  borrowers  agree  to  hypothecate  to  the  bank  goods  and  merchandise  or  any  other  securities  in  consideration  of  credit  facilities  granted  to  them. . they  give  the  bank  the  right  to  sell  the  securities  without  notice  to  them  and  to  adjust  their  outstanding  and  other  expenses  from  the  sale  proceeds .If  the  value  of  the  securities  falls  so  that  the  outstanding  are  in  excess  of  a  specified  margin ,  the  borrowers  will  make  up  the  deficiency  either  by  paying  the  amount  thereof  or  by  enhancing  the  securities  to  maintain  the  margin The  bank  may  require  the  borrowers  to  submit  a  statement  of  stocks  from  time  to  time  and  also  has  the  right  to  inspect  the  securities  at  any  time  and  take  charge  of  the  securities  in  case  of  default  or  if  circumstances  so  warrant .

Subordination Agreement

This  is  sometime  referred   to  as  ‘ Letter  of  Subordination   it   is    agreement  on  the  part  of  one  party  not  to  collect  or enforce  an  indebtedness  of  a  second  party  to  a  third  party  are  fully  paid  .In  other  words , the  claim  of  the  third  (Bank ) is  considered  as  a  primary  lien . The  claim  of  the  party  who  signed  the  ‘Subordination  Agreement ’ is  considered  a  secondary  indebtedness  of  the  second  party  to  the  first  party  and  any  subsequent  indebtedness  incurred  to  the  first  party  by  the  second  party .

Power of Attorney

This  document  authorizes  the  bank  to  sign  or  endorse  documents  on  behalf  of the  party  executing  the  power . If  it  is  given  by a  corporation ,it   must  be  accompanied  by  a  corresponding  copy  of  a  resolution  of  the  board  of  Directors  of  the  corporation  authorizing  the  execution

Letter of agreement

The  borrower  acknowledge  receipt  of  sanction  letter  from  the  bank  and  execution  of  loan  Documents He  also  acknowledges  the  banks  right  to  cancel  the  credit  lines  allowed  to  him  at  anytime  with  or  without  notice  and  promises  to  pay  on  demand  all  outstanding  including  interest  and  other  charges .

Letter of continuity

In  consideration  of  the  bank  allowing  credit  facilities , the  borrower  agrees  to  execute  all  relevant  documentation  and  to  remain  liable  for  all  outstanding  whether  as  principal  debtor,  surety  or  guarantor . The   borrower  undertakes  to  remain  liable  on  the  promissory  note  and  other  loan  documentation , notwithstanding  that  his  liabilities   may  have  been  fully  or  partly  adjusted  during  the  period  of  the  credit  facilities  and  even  though  his  overdrawn  account  may  show  credit  balance  from  time  to  time .

Letter of Revival

This  letter  refers  to  the  limitation  Act  IX  of  1908   or  any  like  law  whereby  documents  become  time  barred  after  a  period  of  3  years  ( minimum  period  depends  on  documents  in  question  ) . The  borrower  here ,  confirms  in  order preclude  any  question  of  limitation  law  that  he  remains  liable  on   promissory  Note  and  other  documentation  notwithstanding  the  law .

General letter of pledge:

When  securities  are  pledge  to  the  bank  in  consideration  of  credit  facilities  extended  to  the  borrowers , they  remain  in  possession  of  the  bank  which  can  sell  them  in  case  of  defaults  and  use  the sale   proceeds  to  adjust  the  borrowers  outstanding .

Other  terms  and  conditions  are  similar  to  those  under  the  letter  of  Hypothecation .

Packing Credit Trust Receipt:

In consideration of the Bank granting credit facilities, the Borrower gives to the Bank the original letter of credit and undertakes that he will utilize the facilities that he will utilize the facilities to purchase / process merchandise relevant to the said letter of credit. The Borrower in trust will hold the merchandise for the Bank as long as it remains in their possession

Credit Principles

The following are the principles to be adopted for lending authority, approval, monitoring and control on a basis consistent with the global operational objectives and business strategies of the Bank.

General: The Bank shall provide suitable credit services and products for he markets in which it operates.

Loans and advances shall normally be financed from customers’ deposits and not out of temporary funds or borrowing from other banks.

Credit will be allowed in a manner, which wills in no way compromise the Bank’s standards of excellence and to the customers who will complement such standards.

All credit extension must copy with the requirements of Bank’s Memorandum & Articles of Association, Banking Companies Act 1991 as amended from time to time, Bangladesh Banks instruction $ other applicable rules $ regulations.

1. Structural: The authority stricture for extension of Credit should enable effective adaptation to changes in the economic, technological, regulatory and competitive environment within which the Bank operates.
2. Performance: The conduct and administration of the loan portfolio should contribute, within defined risk limitation, to the
3. Bank’s achievement of profitable growth and superior return on the Bank’s capital.

Credit advancement shall focus on the development and enhancement of customer relationships and shall be measured on the basis of the total yield for each relationship with a customer (on a global basis), though individual transitions should also be profitable.

Credit facilities will be extended to those companies/persons, which can make best use of them, thus helping to maximize our profits as well as economic growth of the country. To ensure achievement of this objective we will base our lending decision mainly on the borrower’s abilities are granted on a transaction/one-off basis the yield from the facility should be commensurate with the risk.

Loan Pricing: Interest on various lending categories will depend on the level of risk and type of security offered. It should e borne in mind that rate of interest is the reflection of risk in the transaction. The higher the risk, the higher the interest rate.

Interest may be reviewed at least once in 6 month and more often when appropriate. Fixed interest rate should e discouraged. Preferably all rates should vary with cost of funds fluctuation based on a spread for profit.

Effective yield can be enhanced to the extent the borrows are required to maintain deposits to support borrowing activities. Yield should be further improved by Commitment fee and service charges where possible. All pricing of loans should however have relevance with the market condition and be approved buy the Executive Committee/Managing Director from time to time.

Administration/ Monitoring: The administration of the loan process shall ensure compliance with all laws and regulations at both local and global levels including Bank policy as set out in this documents and the Bank’s Credit manual/ Circulars. Proper analysis of credit proposal is complex and requires a high level of numerical as well as analytical ability and common sense.

To ensure effective understanding of the concepts and thus to make the overall credit portfolio of the Bank healthy, proper staffing of the credit departments shall be done through . Placement of qualified officials who have got the right aptitude, formal training in finance, credit risk analysis, Bank credit procedures as well as required experience.

Where repayment and interest servicing performance of a credit deteriorates it shall be identified at an early state and closely monitored in order to avoid loan losses.

Loan/facilities, and where appropriate, related security, shall e monitored and reviewed by a separate unit unconnected with the credit approval process on a regular basis in order to assess the collect ability of the loan and effectiveness of the security. This unit will report to the Managing Director or his designated officer.

Exception of Loan Policy: It is recognized that there will be exceptions to the stated policy, which can e justified. However, the Board should approve these by the Executive Committee or and the circumstances must be fully documented in the credit file.

BASIC PRINCIPLES OF CREDIT POLICY

LOANS & ADVANCES

1. Aggregate loans  and  advances  shall  not  exceed  times  the  Bank s   net  worth  or  65%   of  customers  deposits  whichever  is  lower  ( excluding  loans  and  advances covered  by  specific  counter –  finance  arrangements ) .

2. Within the aggregate limit of loans and advances as mentioned in (1) above 50% of lending will be small industry sector in accordance with prescribed norms of the government and the central bank in terms of the banks objectives with 50% to the commercial sector. No term loans will be approved for the commercial sector. Exceptions will be rare and will require approval of the Executive Committee.
3. All lending will be adequately secured with acceptable security and margin requirement as laid down by the Head office credit committee.
4. The bank shall not incur any uncovered foreign exchange risk (currency exposure) in the lending of funds.

5. The bank shall  not  incur  any  risk  of  exposure  in  respect  of  unmatched  rates  of     Interest   of  funding  of  loans  and  advances  beyond  15%  of  outstanding  loans  and Advances .
6. End- use  of  working  capital  facilities  will  be  closely  monitored  to  ensure  lending used  for  the  purpose  for  which  they  were  advanced .
7. Country risk in loans and advances will be accurately identified and shall be within  the  country  limits  if  any  approved  for  the  bank
8. The same treatment will be given  to  country  risk  arising  out  of  contingent  liabilities  relating  to Letters  of  credit  and  letters  of  guarantee.
9. Loans  and  advances  shall  be  normally  funded  from  customers  deposits  of  a permanent  nature  ,  and  not  out  of  short  term  temporary  funds  of  borrowings from  other  banks  or  through  short  term  money  market  operations
10. The  aggregate  outstanding  loans  and  advances  ( excluding  loans  advances  covered  By  specific  counter – finance  arrangement )  shall  be  dispersed  according  to  the  following  guidelines  (subject  to  item  2  above  whereby  50%  of  lending  being  to small   industry  sector ):

(a)   Short  term  commercial  lending  ( to  include  self Liquidating  and  other short  term  finance  to  retail And  wholesale  business  clients  to  finance  their  usual Domestic  and  international  trade \  shipping  of  goods ).This  category  to  include  working  capital  to  hotel  and  tourism .

(b)   Facilities  to  shipping  and  transport  ( facilities  for the  purchase  and  construction  of  ship  /  vessels  And  other  modes  of  transport  both  by  land  and  air

11. Spreads over cost of funds on loans and advances and commissions and fees on other transactions should be commensurate with the rating of the borrower, quality or risk and the prevailing market conditions.
12. Credit risk evaluation will include:

An accurate appraisal of risk in any credit exposure is highly subjective matter involving quantitative and qualitative judgments. The financial statements of the borrower do not always provide a complete picture of the borrower. Therefore the Bank has to use all financial data available and combine this with a number of qualitative factors analyzing the borrower’s financial position. In analyzing any credit proposal the analyst should follow THREE distinct and logical steps to conclude on and make appropriate recommendations.

 These are:

Historical Analysis (Identify nature of risk):

Evaluate the past performance of the borrower. Determine the major risk factors and how they have been mitigated in the past. Identify factors in the borrower’s present Condition and past performance, which may foreshadow difficulties or indicate likelihood of success in his ability to repay the loan, at a future time.

Forecast (Judging future degree of risk):

Having identified the nature of risk involved and how these are mitigated, makes a reasonable forecast of the probable future conditions of the borrower and conclude on his ability service the proposed level of debt.

Debt structure and protection:

Assess the borrower’s credit worthiness and prepare a proposal for structuring a credit facility that can be repaid or amortized given the borrower’s assets or his projected Cash flow and the facility offering adequate protection against loss and control of the lending relationship

Format of credit analysis:

All credit proposals are to be analyzed by the analyst as per standard credit analysis that are specified in the APPENDIX – 1. The detail of the analysis is focused on that part and also in other charters.

• Prevalent credit practices in the market place.
• Credit worthiness, background and track record of the borrower.
• Financial standing of the borrower supported by financial statements and other documented evidence.
• Legal justification and implications of applicable laws.
• Effect of any applicable regulations and laws.
• Purpose of the loan/purpose.
• Tenure of the loan/facility.
• Viability of the business proposition.
• Cash flow projections.
• Quality 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 of risk in relation to the risk taking capacity of the Bank or company concerned.
• Profitability of the proposal to the Bank or company concerned.

12. Limitation in amount of Credit Extension to any one Customer Entity:

No credit shall be extended to a Customer Entity, which exceeds in total commitment more than 10% of the Bank’s capital and fees reserves.

CONTINGENT LIABILITIES

1. Commercial letters of credit The Bank shall not undertake contingent liability for letters of Credit exceeding in aggregate four times net worth of the Bank.

2. Letters of guarantee The Bank shall not undertake contingent liability under letters of Guarantee issued on account of customers exceeding in aggregate four times the net worth of the Bank.

3. Acceptance on account of customers: These shall not exceed 5% of aggregate outstanding advances.

Loan Department Operation

This part of this policy contains instructions covering the details of various types of loans and advances of the Bank, the documents to be obtained, accounting record to be maintained, process of the Loan Department, which is responsible for processing and servicing all advances as well as maintaining the records connected with the function.

Main functions of Credit Department:

1. Interviewing the prospective borrower.
2. Receiving the credit information assembled and placed in the Customer’s Credit File.
3. Processing and sanctioning of credit facilities to the customer.
4. Disbursement of credit facilities to borrowers in accordance with established procedures.
5. Recording credit facilities in the Register / Card.
6. Preparing “ENTRY TICKETS” (Voucher) pertaining to credit facilities disbursed and passing to General Ledger Accounts.
7. Controlling of securities and their proper custody.
8. Maintenance / Filling of Borrower’s Loan Card / Register.
9. Follow up and recovery of credit as per due date.
10. Computation and checking of interest accrued on loans and advances and preparation of entry ticket thereof.
11. Preparing of “ENTRY TICKETS” (Voucher) for credit repaid and passing the same to the corresponding General Ledger Accounts.

SECURITIES AGAINST ADVANCES

COLLATERAL  SECURITIES :

The  tangible  securities  pledged / assigned  by  the  borrower  to  the  bank  and  additionally  held  by  the  bank  to  secure  a  loan  is  called  COLLATERAL  SECURITIES   or  simply  collaterals In  case  of  advances  against  pledge / hypothecation  of  goods , Bank  may  insists  on  immovable  properties  as  collaterals .

GUARANTEE:

At  times  when  the  personal  security   of  the  borrower  is  not   considered  sufficient ,  or  when  risk  involved  is  a  border  line  case  and  the  borrower  is  not  in  a  position   to  offer  sufficient  collaterals  to  support  the  loan,  the  bank  may  ask  for  a  guarantee  of  a  third  party  whose  financial  ability  and  credit  standing  is  acceptable  to  the  bank .  A  guarantee  is  an  undertaking  given  to  the  bank  by  a  third  person,  called  the  guarantor (or  surety)  to  be  answerable  to  the  bank  for  the  debt  of  the  borrower  upon  his  default   in   repayment  of  the  loan.  it  should  be remembered  that  such  security  for  the  loan  depends  on  the  continued  solvency  of  the  surety . Only continuing  guaranty  in  the  banks  standard  from  should  be  accepted  to  safeguard  the  banks  interest .

MARGIN:

The  difference  between  the  market  value /  assessed  value  of  the  collaterals  pledged / hypothecated  to  secure  a  loan  / advance  and  the  amount  of  the  loan  /advance  ( normally  the  drawing  power )  is  known  as  ‘ MARGIN ‘ .  the  rate  of  margin  to  be  obtained  for  each  types  of  loans  /  advances  and  against  the  various  forms  of  collaterals  is  normally  regulated  under  under  the  credit  restrictions  imposed  by  Bangladesh  Bank .

LOANS DOCUMENT

The  following  are  the  most  important  loan  documents  handled  by  loan  department :

Demand Promissory  Note  ( D. P. Note )

It  is  an  unconditional  written  promise  of  the  borrower  made  to  the  bank ,  to  repay  the  amount  of  the  loan  on  demand  or  at  a  fixed  or  determinable  future  date  along with  interest  at  a  status  rate  percent  per  annum  .

A  demand  promissory  Note  must  be  obtained  for  each  every  demand  loan ,  Time  loan ,  Term  loan , Installment  loan ,  Overdraft  and  advances  etc . The  signature  of  the  borrower  must  be  properly  verified  by  an  authorized  official  .  Where  the  borrower  is  a  company / corporation ,  the  relevant  corporate  resolution  must  be  consulted  to  see  that  the  person(s)  signing  the D. P. Note  on  behalf  of  the  company  has  been  fully  authorized  to  do  so .  The  date ,  tenor ,  amount  in  words  and  figure  must  me  checked  for  correctness .  Securities  pledged  must  be  listed  in  detail  on  the  loan  card  .

Borrowing Resolutions

This  is  a  certified  copy  of  a  resolution  adopted  by  the  Board  of  Directors  of  a  company / corporation , authorizing  designated  officers  to  borrow  and  pledge , hypothecate , mortgage ,  etc.  The  assets  of  the  company  for  the  purpose  of  securing  the  loan / advance  granted  to  the  company  in  accordance  with  the  corporate  borrowing  power  laid  down  in  the  memorandum /  Articles  of  Association  of  the  company .

General letter of  Hypothecation  

A  ‘Hypothecation  Agreement ‘ must  be  obtained  when  the  collateral  is  in  the  name  of  a  person  other  than  the  borrower  .  the  ‘hypothecation  agreement ’ must  be  compared  with  the  collateral  to  be  certain  that  the  security  is  solely  owned  by  the  person  executing  the  agreement . If  the  security  is  owned  by  more  than  one  person ,  even  though  it  may  be  jointly  owned  and  payable  to  either  or  survivor ,  both  persons  must  sign  the  Hypothecation  Agreement .The  borrowers  agree  to  hypothecate  to  the  bank  goods  and  merchandise  or  any  other  securities  in  consideration  of  credit  facilities  granted  to  them. . they  give  the  bank  the  right  to  sell  the  securities  without  notice  to  them  and  to  adjust  their  outstanding  and  other  expenses  from  the  sale  proceeds .If  the  value  of  the  securities  falls  so  that  the  outstanding  are  in  excess  of  a  specified  margin ,  the  borrowers  will  make  up  the  deficiency  either  by  paying  the  amount  thereof  or  by  enhancing  the  securities  to  maintain  the  margin The  bank  may  require  the  borrowers  to  submit  a  statement  of  stocks  from  time  to  time  and  also  has  the  right  to  inspect  the  securities  at  any  time  and  take  charge  of  the  securities  in  case  of  default  or  if  circumstances  so  warrant.

Subordination Agreement

This  is  sometime  referred   to  as  ‘ Letter  of  Subordination ’ .  it   is    agreement  on  the  part  of  one  party  not  to  collect  or  enforce  an  indebtedness  of  a  second  party  to  a  third  party  are  fully  paid  .

In  other  words , the  claim  of  the  third  ( Bank ) is  considered  as  a  primary  lien .  The  claim  of  the  party  who  signed  the  ‘Subordination  Agreement ’ is  considered  a  secondary  lien .  The  ‘subordination  Agreement ’ covers  the  existing  indebtedness  of  the  second  party  to  the  first  party  and  any  subsequent  indebtedness  incurred  to  the  first  party  by  the  second  party.

Power of Attorney 

This  document  authorizes  the  bank  to  sign  or  endorse  documents  on  behalf  of the  party  executing  the  power . If it is  given  by a  corporation ,it   must  be  accompanied  by  a  corresponding  copy  of  a  resolution  of  the  board  of  Directors  of  the  corporation  authorizing  the  execution .

Letter of agreement

The  borrower  acknowledge  receipt  of  sanction  letter  from  the  bank  and  execution  of  loan  Documents . He  also  acknowledges  the  banks  right  to  cancel  the  credit  lines  allowed  to  him  at  anytime  with  or  without  notice  and  promises  to  pay  on  demand  all  outstanding  including  interest  and  other  charges .

Letter  of  continuity

In  consideration  of  the  bank  allowing  credit  facilities , the  borrower  agrees  to  execute  all  relevant  documentation  and  to  remain  liable  for  all  outstanding  whether  as  principal  debtor,  surety  or  guarantor .

The   borrower undertakes  to  remain  liable  on  the  promissory  note  and  other  loan  documentation , notwithstanding  that  his  liabilities   may  have  been  fully  or  partly  adjusted  during  the  period  of  the  credit  facilities  and  even  though  his  overdrawn  account  may  show  credit  balance  from  time  to  time .

Letter of  Revival

This  letter  refers  to  the  limitation  Act  IX  of  1908   or  any  like  law  whereby  documents  become  time  barred  after  a  period  of  3  years  ( minimum  period  depends  on  documents  in  question  ) . The borrower  here ,  confirms  in  order  to  preclude  any  question  of  limitation  law  that  he  remains  liable  on   promissory  Note  and  other  documentation notwithstanding  the  law .

General letter of pledge:

When securities are  pledge  to  the  bank  in  consideration  of  credit  facilities  extended  to  the  borrowers , they  remain  in  possession  of  the  bank  which  can  sell  them  in  case  of  defaults  and  use  the sale   proceeds  to  adjust  the  borrowers  outstanding . Other  terms  and  conditions  are  similar  to  those  under  the  letter  of  Hypothecation .

Packing Credit Trust Receipt:

In consideration of the Bank granting credit facilities, the Borrower gives to the Bank the original letter of credit and undertakes that he will utilize the facilities that he will utilize the facilities to purchase / process merchandise relevant to the said letter of credit.

The Borrower in trust will hold the merchandise for the Bank as long as it remains in their possession.

Branch Credit Committee

Branch Credit Committee to be headed by the Branch Manager, other members to be selected by the Manager in consultation with Head office.

Responsibilities

• The branch Manager will be the first line lending officers and are responsible for exercising their authority with due diligence and discipline.
• They must also know their borrower fully
• Comply with the applicable instruction, manuals, circulars and other rules of the Bank and well as those of Bangladesh Bank Banking companies Act 1991 (as amended from time to time).
• Ensure that Credit proposals submitted to head office, Credit Division are complete and consistent with established polices & procedure.
• Review and analyses the following in connection with credit risk proposals coverage any obligor

1. History of antecedent of the obligor and its management personnel.
2. Financial condition of the obligor evidenced by comparative statement, latest Balance Sheet, income statement, operating results and supplementary facts as well as by personal Net worth statement of the proprietor, partners & Director.
3. Bank & credit information Bureau (CIB) checking and trade standing obtained through investigation.
4. Any other pertinent information.

Secure necessary and adequate Legal & Banking documentation as well as insurance cover, all in our favor to ensure maximum legal protection. They should also ensure that all charge documents, securities, collateral etc. as per sanction letter have been obtained prior to disbursement. Comply with necessary and customary internal & external control & safeguard.

Ensure continuing review of the risks and exposure and compliance with limits with particulars attention being paid to term loans. At the minimum the following should be done:

1. Every month all credit facilities should be reviewed by Branch Manager along with other members of Brash credit Committee.
2. Ensure that all loan covenants are being complied with.
3. Review that regular deposits are being made in the accounts especially for CC & SOD limits and the deposits commensurate with limits and business.
4. Ensure verification of stock reports by the Manager or his authorized officer every month.
5. Visit the business establishment/factories of the borrower at least once in a month to review business position, profitability, future projection etc. and prepare a report of the finding, which is to be cooped to head office. Ensure that all credit facilities are covered y appropriate approval and that they are kept within approved limits and ensure compliance with terms and conditions of the approval.

Loan of Directors

No credit facilities should be allowed to any Director of the Bank as defined by Bangladesh Bank in Banking Companies Act.

Documentation

It is essential that the proposal define clearly the purpose of the facility, the sources of repayment, the agreed repayment schedule security and the customer relationship considerations implicit in the credit decision.

Where security is to be accepted as collateral for the facility all documentation relating to the security shall be in the approved form.

All approval procedures and required documentation shall be completed and all securities shall be in place, prior to the disbursement of the facilities. General documentations as require for different kinds of advance are enumerated below. There may be requirement of specific banking or legal documents to secure a credit according to sanction terms and conditions, which should also be obtained in addition to the following:

A) Loan

• P Note
• Letter of partnership (in case of partnership concerns) or resolution the Board of Director (in case Limited Companies)
• Letter of arrangement
• Letter of disbursement
• Letter of Pledge (in case pledge of goods)
• Letter of hypothecation (in case of hypothecation of goods)
• Trust receipts (in case of LTR facility)
• Letter of lien and ownership/share transfer form (in case advance shares)
• Letter of lien for packing credits (in case of packing credit)
• Letter of lien (in case advances against FDR)
• Letter f lien and transfer authority (in case of advance against PSP, BSP etc)
• Legal documents for mortgage of property (as drafted by legal Advisor)
• Copy of scansion letter mentioning details of terms & conditions duly acknowledge by the borrower.

B) Overdrafts

• Note
• Letter of partnership (in case of partnership concerns ) or Resolution of the board of directors (in case of Limited companies)
• Letter of arrangement
• Letter of continuity
• Letter of lien (in case of Advance against FDR)
• Letter of lien and ownership/share transfer form (in case of advance against shares)
• Letter o lien and transfer authority (in case of advance against PSP, BSP etc)
• Legal documents for mortgage of property (as drafted by legal Adviser)

Cash Credit

• Letter of partnership (in case of partnership concerns) or Resolution of the Board of Directors (in case of limited companies)
• Letter of arrangement
• Letter of continuity
• Letter of Hypothecation {in case of cash credit (Hypo)}
• Letter of pledge/Agreement of pledge {in case of Cash Credit (pledge)
• Legal documents for mortgage of property (as drafted by legal Adviser)

All required documents, as enumerated above, should be obtained before any loan is disbursed. Disbursement of any credit facility requires approval of then sure, before exercising such authority that all the required documentation has been completed.

SWOT Analysis

SWOT ANALYSIS OF BASIC BANK’S CREDIT POLICY

Strength:

The main advantage of BASIC Bank’s credit policy is its conservative approach. The entire policy is designed in a way that, it could always avoid default risk. In the credit policy all kinds of documentation process, appraisal techniques are designed so that the bank officials can take no excess risk.

In the credit policy top management are assigned adequate power to monitor the credit operation at the branch level.

In most of the government bank we have seen that, the head office is not contributing more for the supervision of the loans and advances. But in BASIC a handful number of top officers have been engaged to monitor day to day operation, which are reducing the number of errors.

In the credit policy it has been clearly specified that, 50% of the total fund should be invested in the in small and cottage industries for short time. And we all know short-term loans are more secured than the long term. And also small investors are much more honest than the large investors. So for this policy BASIC Bank is getting competitive advantage.

All the investors know that, it is very difficult to get loan from BASIC Bank. They have to satisfy concern body and should be very optimistic about the future of their project. If any kind of loopholes exist in their procedure it will be very tough for them to get any loan from the bank. This policy gives the bank small but strong borrower portfolio that is important to keep the classification rates low.

Not only that, BASIC Bank is the one of those banks, which never takes any kind of, uncovered risk in dealing with foreign trade. They provide the foreign trade facilities only to their prime clients.

Weaknesses:

The technique that has been used in credit analysis is not adequate. Now days it is not possible to justify of a client by analyzing only their projects production capacity. It is important to analyze their financial statement and market share make sure that the project will last for long. BASIC’s credit policy does not clearly specify these techniques.

In the credit policy no emphasis has been given for mobilizing deposit from private sources. But private sources are the least costly sources and using it is possible to earn more profit from investment.

Opportunities:

Bangladesh is a country where it is very difficult to establish hi-tech industries because of high capital asset cost. So the government of Bangladesh and other international bodies convincing to establish small and cottage industries first which will make the ground for huge investment. As a result the numbers of small industries are increasing day by day. And BASIC’s has huge chance to progress if it can hunt this sector.Not only that, international organizations and donor countries are continuously convincing the government of Bangladesh to attenuate the high classified loan rate. Now days they are including the clause of reducing the classified rate before sanctioning donation or loan to the country. As BASIC bank is successfully keeping the classification rate low it is possible that, it will get international assistance from ADB and from other organizations. And obviously these funds will have lower interest rate by which the bank can earn handful profit.

Threats:

From 1990 the core concept of banking in Bangladesh is changing. Now banks are going to the customer with services and try to convince them by it. Most of the banks have increased its service range significantly to attract its client and to satisfy them properly. Along with that, now the banks are trying to accumulate more funds from the middle class group. Alike insurance company most of the banks also have employ marketing agents to convince the mass. All of said situation is happening because of the increase of number banks in the country and competition among them.

BASIC bank is not very keen in marketing its product. And in credit policy it also not specified significantly. Not only that, it does not have any marketing plan to grab the market after 5 or 10 year. So if the banks do not change this attitude its profit will be reduced for the abnormal competition in the market. And also if the government sells its entire share to the private sector the bank will face huge pressure from its competitor.

Matching of Strength and Opportunities with Weaknesses and Threats.

In the credit policy we have found everything all right except the techniques used for screening the client. BASIC bank has some very efficient and highly educated professionals who can easily solve the problem if they concentrate on the issue. So the weakness can be eliminated easily through its strength.

The credit policy of BASIC has been perfectly designed depending on the government funds and assistance. But as it is sure that, government will sell its share in near future BASIC has to revise its credit policy by considering alternative source of fund. International funds can be alternatives for government source if BASIC can continuously reduce its classification rate.

Alike other bank BASIC can enforce its marketing operation to grab the small savings of the middle class. And a small change is enough to do so as the strength of the present credit policy is capable to take any pressure.

So from the SWOT analysis of the credit policy of the bank we have found that, the credit policy of BASIC Bank is sound with some exception. And by small revise of the policy is can be the best policy that can lead a bank to the peak of success

Comparative Analyses with Other Bank

The organizational structure of BASIC Bank is totally different from other banks operating in Bangladesh. Not only is that, in terms of services provided by the banks to some extent different from other bank. As we have state earlier that, this bank is the only government bank which is established for the betterment of the small-scale business enterprises. So no direct comparison can be made in credit policy and practices. But we can compare them by analyzing the efficiency in credit management.  In that, we will segregate the banks operating in Bangladesh into four types: (i) Nationalized Commercial banks (2) Specialized Banks  (3) Local private Bank (4) Foreign Banks. And then we will analyze and compare BASIC Bank with the credit management efficiency of those banks.

Nationalized Commercial Banks

In Bangladesh the credit management of Nationalized Commercial Banks are most debated issue. Almost 85% of the total classified loan belong to the Nationalized commercial banks. Before 1991 no steps has been taken to reduce this rate. Dishonesty of the Bank manager, Pressure of political leaders, dishonesty of directors, improper supervision and inefficient management techniques are the main reason behind high classification rate of Nationalized Commercial Banks.

BASIC Bank Ltd is also Nationalized Bank but due to its effective management and time tested credit supervision and due to its modern organizational structure it becomes able to reduce its classification rate well below to those Nationalized Commercial Banks. Being a specialized bank it does not have huge services to offer. It does not have huge branches or set business or receive huge loan facility from Bangladesh Bank like those banks but yet it has set a milestone in banking. A comparative analysis are given to Appendix 2 to indicate how efficiently BASIC Bank are operating relative to other Nationalized Commercial Banks.  When we have talked with the Directors of Nationalized Commercial banks they have informed us that, one major problem of those banks is the CBA of the respective government banks.

They have stated that because of this organization sometimes it becomes impossible to initiate any strong policy to wipe out inefficiency of the nationalized banks. They have also stated that, the salary structure of the Nationalized Commercial Banks is another problem for what the operational manager become less inspired for collecting the classified loans.

In BASIC Bank there is no CBA or any kind of employee organization so it becomes possible to take any action against inefficiency. And the salary structure of BASIC is well above of any nationalized banks so employees get inspired to work for the betterment of the bank.

Specialized Commercial Bank

In Bangladesh there are four specialized commercial banks (except BASIC) named: Bangladesh Krishi Bank, Bangladesh Krishi Unnayan Bank, and Bangladsh Shilpa Rin Sangstha. These banks are providing subsidies and other improvement facilities for poverty alleviation, industrialization and agricultural development. The rate of classification of Bangladesh Krishi Bank is 35%, Bangladesh Shilpa Bank 29% and Bangladesh Shilpa Rin Sangstha 21%. It shows that, from classification of loans point of view these banks are less efficient than BASIC.

Local private commercial banks

There are 27 scheduled local private commercial banks operating in Bangladesh. Among them 11 banks starts its operation during 1995 to 2002. In sense they are modern in their nature and activity. These banks gain knowledge and lessons from those banks incepted before 1995. If we focus on the credit management techniques of these banks we can find that, literally they are great.These banks introduced some brilliant package, which are attractive to the borrower and also to the depositor. But from our point of view it is difficult to comment or compare these banks with BASIC Bank. Because the effectiveness of the credit policy can only be judged after 6 or 7 years. But so far they are doing well than the BASIC Bank. Among other banks incepted before 1995 some banks like EBL, Dhaka, Prime and National bank are doing well. If we compare them from the classification of loans and advances point of view then we can see that, BASIC is in good position. But if we judge the level of service provided, management skills, volume of loans, technical knowledge and number of valuable client handled then we can find that, these banks are doing really well. Especially these banks have introduced modern techniques, which is essential for loan appraisal. In APPENDIX 2 we have showed the average loan classification of private local commercial banks along with provision required in against of them.

Foreign Commercial Banks

There are 9 foreign commercial banks operating in Bangladesh. Among them two banks named Standard Chartered Grindlays Bank, and Hongkong Shanghai Banking Corporation are providing excellent services to its client. The have introduced modern credit management techniques to select the best client. They have global credit appraisal system that ensures low classification rate.

In every aspect their credit policy and practices are superior to that of BASIC Bank. This is to some extent also true for other foreign commercial banks. In APPENDIX 2 we have shown how these banks are doing well than BASIC. Foreign commercial banks monitoring and supervision technique is also superior to BASIC Bank. The reason of this efficiency is that, the performance evaluation of the manager of the foreign commercial banks depends largely on this. And because of selective sector selection it becomes possible. Not only that, because of modern technology and excellent recruitment procedure it becomes possible for them to have competitive efficiency.

Result of Effective Credit Management

So far we have discussed the credit management process, techniques, effectiveness and comparative analysis of BASIC Bank’s credit policy. We have showed that, the bank is doing really well, specially on the part of low classification rate. Now we will show how sound credit management of BASIC bank contributing to the development and growth of BASIC Bank.

1. BASIC Bank is the soundest most banks as per CAMEL rating:

As per CAMEL rating of 2001 by Bangladesh Bank BASIC Bank is the second soundest bank in Bangladesh. In every aspect it acquires the highest (5) rating except management efficiency. For consecutively two (1997 and 1998) it was the soundest bank of Bangladesh as per CAMEL rating of Bangladesh Bank.

2. The classification rate of BASIC Bank decreasing year by year:

In Figure –2 we have shown that, the classification of BASIC Bank decreasing year by year. And it proves that, the credit management of BASIC Banks improving day by day.

3. Amount of outstanding loans and advances increasing year by year:

In Figure–2 we have seen that, the outstanding loans and advances are increasing year by year. This also shows that, credit management policy of BASIC attracting the business concerns and individuals..

4. Satisfactory improvement in call and term deposit:

we see that, call and term deposit have increased from 1999 to 2001. The rate of growth is 16%. Comparative to other Nationalized banks this rate is appreciable.

5. The bank has improved in loan disbursement in 2001:

Up to June 2001 the bank has disbursed 3918 million taka. Comparative to 1999 this amount is 11.42% higher.

6. Admirable improvement in micro-credit scheme:

To serve the poor urban people BASIC Bank have introduced micro-credit scheme. Under this scheme BASIC Bank is supporting the poor people by disbursing the loan directly or through well-reputed NGO’s. The amount of loan disbursed under this scheme are given below:

(Amount in Million Tk).

7. Admirable improvement in foreign exchange business:

BASIC Bank has made admirable improvement in foreign exchange business. And by the following figure we could find how they are improving:

Not only that, up to June 2001, BASIC Bank’s total foreign exchange business amount reached at Tk.13740 million. We also to see how the bank is performing in foreign exchange business.

8. Profit of the Bank increasing year by year:

Profit of the banks has increased year by year. It shows sound and steady growth of development of the bank. Where most of the government banks are incurring huge loss it is appreciable that, BASIC Bank is doing really good. It should be also mentioned here that, this profit comes after deducting the provision for classified loans.

So far we have discussed the credit management process, techniques, effectiveness and comparative analysis of BASIC Bank’s credit policy. We have showed that, the bank is doing really well, specially on the part of low classification rate. Now we will show how sound credit management of BASIC bank contributing to the development and growth of BASIC Bank.

9. BASIC Bank is the soundest most banks as per CAMEL rating:

As per CAMEL rating of 2001 by Bangladesh Bank BASIC Bank is the second soundest bank in Bangladesh. In every aspect it acquires the highest (5) rating except management efficiency. For consecutively two (1997 and 1998) it was the soundest bank of Bangladesh as per CAMEL rating of Bangladesh Bank.

10. The classification rate of BASIC Bank decreasing year by year:

In the classification of BASIC Bank decreasing year by year. And it proves that, the credit management of BASIC Banks improving day by day.

11. Amount of outstanding loans and advances increasing year by year:

In Figure we have seen that, the outstanding loans and advances are increasing year by year. This also shows that, credit management policy of BASIC attracting the business concerns and individuals.

12. Satisfactory improvement in call and term deposit:

we see that, call and term deposit have increased from 1999 to 2001. The rate of growth is 16%. Comparative to other Nationalized banks this rate is appreciable.

13. The bank has improved in loan disbursement in 2001:

Up to June 2001 the bank has disbursed 3918 million taka. Comparative to 1999 this amount is 11.42% higher.

14. Admirable improvement in micro-credit scheme:

To serve the poor urban people BASIC Bank have introduced micro-credit scheme. Under this scheme BASIC Bank is supporting the poor people by disbursing the loan directly or through well-reputed NGO’s. The amount of loan disbursed under this scheme are given below:

(Amount in Million Tk).

15. Admirable improvement in foreign exchange business:

BASIC Bank has made admirable improvement in foreign exchange business. And by the following figure we could find how they are improving:

Not only that, up to June 2001, BASIC Bank’s total foreign exchange business amount reached at Tk.13740 million. We also refer Appendix – 8 to see how the bank is performing in foreign exchange business.

16. Profit of the Bank increasing year by year:

Profit of the banks has increased year by year. It shows sound and steady growth of development of the bank. Where most of the government banks are incurring huge loss it is appreciable that, BASIC Bank is doing really good. It should be also mentioned here that, this profit comes after deducting the provision for classified loans.

From the above analysis it is clear that, for good credit policy

BASIC Comparative Problem (Classified) Loan

According to figure 2, percentage of classified loan is in consonant with the percentage of Distributed loans. Textile & Garments sectors are the leading defaulters in BASIC as the highest % of loans have been distributed to these 2 sectors.

Causes of Problem Loans in BASIC

Both borrowers and lender (BASIC) differ in their opinions about causes of problem loans in BASIC. According to the BASIC’s point of view, the main reason for loan default is the borrowers’ unwillingness to repay loans. The manageme4nt of BASIC alleges that the borrows frequently manipulate their documents to show negative demand or higher accounts receivable or sometimes negative profitability in order to avoid repaying loans. However, management admits that in some cases the industry in which the borrowers operate has really become sick.

On the other hand borrowers categorically refute the allegation that they are unwilling to repay-to-repay loans. They blame a number of reasons for their inability to repay loans. One of the reasons, they point out, is lengthy loan sanctioning procedure of

BASIC that delays their plan of operation. They instability, frequent powe4r crises and unloading of imported draw materials that results in delay in production.

However, the study of files and documents of top defaulters of BASIC reveals the following causes of problem loans.

Poor Loan Interview

A poor interview most occurs when the loan officer is dealing with a friend or a relative or an influential person of the society. For this he may biased to help; the loan seeker to get the loan.

Inadequate Financial Analysis

Many loans become problems when a loan officer considers the financial analysis to be unimportant but complete analysis of income statements, balance sheets, rations, cash flow etc. are necessary fords judging the ability of the client to overcome the adversity. In Bangladesh, it is easier to manipulate financial documents and also to prepare false documents. In that case proper financial analysis is impossible

Improper Loan Structuring

Another cause of problem loans is the failure of the loan officer to structure the loan properly. Problems often arise when the officer fails to understand the client’s business and the industry and environment in which it operates. Without this knowledge, it is difficult to anticipate future financing needs and to choose the appropriate loan type, amount and repayment terms. Sometimes loan officers loan

officers to evaluate the entrepreneurs’ inability to market and promote their product due to their inexperience in the industry or business in which they operate.

Improper Loan Support

Another leading cause of loan loss is improper collateralization. Accepting collateral that has not been properly evaluated on its ownership, value, or marketability can leave the Bank unprotected in the event of default. A reliance on so-called windshield appraisals, in which collateral is cursorily inspected from afar, is a common pitfall. Another is the overvaluing of collateral.

Inadequate Monitoring

Many problem loans can be regularized if the loan officer closely follows the loans. Financial statement reviews, occasional site visits and collateral inspections and other loans monitoring tasks must be performed to ensure that the company’s financial position remains good and the terms of the loan agreement are being met. Inadequate follow-up allows small problems to become big ones.

Impact of Problem Loan in BASIC

Since banks have to set aside a portion of money to make provisions for possible loan losses, a huge portion of its money becomes idle. Again, unearned interest income from the problem loans is shown in the interest suspense accounts. It reduces the profit or the bank that could be earned by investing the money in a profitable sector. Table 13 shows the amounts of provisioning and interest suspense account amounts of provisioning and interest suspense account amounts of provisioning.

Table. Operational Efficiency of BASIC

Table : Shows banks operational efficiency over the years 1992 through 1998. Although BASIC’s loan to deposit ratio was slighter in 1997, it did not improve much during these year. The ratio has declined in 1998 compared to that of1997.Profitability was measured by dividing the total assets to net profit. According to Table 13, profitability of the bank has increase slightly. Had there been no problem loan it could be better. On the other hand, productivity (total income /to9tal expense) has decreased throughout these years due to increase in Total expenses.

Table.  Capital Adequacy of BASIC

Table. Shows the capital adequacy of BASIC from 1995 to 1998. Although the bank enjoyed provisioning surplus during the years 1994 and 1995, it has decreased significantly in 1996 and 1998 with provisioning shortfalls. Increase in problem is responsible for this shortfall.

Classified Loans in Private Sector Banks

The classified loans of BASIC as a percentage of total loan is less than other commercial banks in Bangladesh. But it is also true that BASIC’s volume of total outstanding loan is much less that of other banks. Again BASIC disburse small amount of money to borrow compared to other banks. The \highest amount of loan of BASIC that has become bad loss is Tk. 4.3 million. Because most of its borrowers operate effects of small-scale industries

Other effects of problem loans on BASIC are descried below:

 Damaged Reputation

Banking business is built on trust. A Bank can attract the capital it needs for loans and other investments only if its depositors and investors have confidence in the Bank’s ability to handle prudently their money. And excessive number of problem loans damages the banks their money. And excessive number of problem loans damages the banks reputation in the eyes of its depositors. Once that happens, profitability declines and growth is hindered.

Increased Administrative Expense

A problem loan demands more attention from bank personnel. The loan officer devotes extra time to work with borrower. The extra tome spent on a problem loan is basically unproductive-it merely serves to protect the banks assets and does not generate additional revenue.

 Lowered Employee Morale

When a bank has excessive number of problem loan employees morale often suffers. An unprofitable Bank cannot reward its employees with large increases in salaries and bonuses. As a result, the best loan officers and other key personnel may switch over to another profitable organization.

Increased legal Expense

A problem may eventually have to be resolved in the court. If so, by the time litigation is finalized and a settlement rendered, the bank’s recovery may e substantially reduced by attorney’s fees and court costs.

Lost lending & investment opportunities

Capital tied up with a problem loan is unavailable to be lent or invested for more useful and profitable purposes.    Decreased Solvency

Capital adequacy is an indicator of Bank’s solvency. According to Banking Company Act 1991, every Bank has to maintain minimum capital of Tk.20 crore of or 6% of total time and demand deposits which ever is higher. If a Bank fails to maintain the capital requirements, it will be under pressure of Bangladesh Bank. The Bank can not even declare dividend without provisioning Bank. The Bank can not even declare dividend without provisioning shortfall.

Common Characteristics of Default Borrower Program

Study of files and documents of some top default borrower of BASIC reveals the following common characteristics of default borrowers:

• Tendency of nonpayment. It is the most common characteristics of default borrowers of BASIC. Almost 70 percent of default borrowers of BASIC tend to avoid repaying loan.
• Frequently manipulation in financial statements. The main objective of this manipulation is deceit the lender before and the sanction of loans. Before sanction borrowers submit inflated figures of projected cash flow to convince the lender that the business is profitable. But after getting the loan they try to show the gloomy picture market ad economy.
• Bad securities offered to Bank and their over valuation.
• Inexperience in the business and tend to exercise external influence to get the credit approval. Some of the default borrowers of BASIC got credit against such projects in which they had no previous experience.
• Usually evade Bank’s cal to contact and communicate. BASIC is always first to communicate with default borrowers by letters and telephone calls. But borrowers even do not bother to respond to those or respond later. Sometimes BASIC has to urge them respond to those or respond later. Sometimes BASIC has to urge them for rescheduling their loan.

• Diversion of funds other to non-project concerns.

BASIC Activities in Loan Recovery Program

It is one of the prime obligations of the banks and financial/credit institutions to ensure that the funds advanced as loans to the borrowers are spent for the purpose for which these are sanctioned. To make it sure, monitoring, follow-up and ends-use of the loan is a must. After a loan is disbursed, a branch should keep regular follow-up for adjustment/performance by the client (borrower) as per the sanction terms. Branch also has to prepare and submit monthly/periodical statements of all the outstanding credit facilities (as per prescribed formats) such as MSOCF, BLC, LIM/TR statements form the branches, Credit Division and industrial Credit Division of Head Office reviews the position of each outstanding account as per the stamens and suggestion correctives measures and obtaining compliance report from ranches. This is a regular process of monitoring by Head Office, which has been set up especially for this purpose of monitoring/follow-up for recovery/regularization of the non-performing and overdue/classified and stuck-up loans and advances of the none performing and overdue/classified and stuck-up loans and advances of the respective branches.

Follow-up for recovery of Loans

Regarding follow-up for recovery of loans, there is an oft-quoted maxim as follows:

“Follow-up for recovery of a loan virtually starts from the day it has been disburse.

It means that Bank (i.e. manager/credit officer of a bank branch) should remain ever vigilant since disbursement of a loan and deep regular follow-up with the client (borrower) for  adjustment/performance as per the sanction terms, so that the loan does not stuck-up/non-operative.

However, if the branch manager finds that despite repeated follow-up/reminder letters issued by the bank, the concerned client (borrow) fails to come forward for adjustment /performace/debt-serving,prompt corrective measures are taken by the Branch manager after reviewing the loan account position and the loan is immediately called back, if any vi8tal sanction terms/repayment schedule is violated by the client.

Treatment of stuck-up loans

“Past due papers is a head of account in the General ledger of BASIC which reflects the total outstanding overdue loans and advances of the respective branches as well as the bank ad a whole.The outstanding balance of nonperforming/stkuck-up loans and advances that have become overdue liabilities as well as to avoid the increasing burden of unrealized interest income in the stuck-up /the accrued interest although charged to the loan account, will be held in “interest Suspense Account “ instead of crediting the same to Bank’s income account, as per usual procedure.

However, after transfer of the stuck-up /overdue loans to “past due papers”,

Branch manager must ensure issuing repeated notices in writing upon the client (borrower) demanding adjustment of the enti5e outstanding defaulted loan. Then “Final Notice shall be served upon the client, in case there is no positive response from the borrower to the earlier reminder notices. If the client still fails to come forward for adjustment or amicable settlement, the bank serves 15/30 days “Legal Notice”, through the bank’s legal Adviser, on the defaulting borrower demanding full adjustment of the outstanding dues within the estipulate date as mentioned in the legal Notice expressing banks clear intention to file suit is filed against the borrower for recovery of banks dues. Although it is a normal procedure of BASIC, managers are hardly eager to file cases because of lengthy and ineffective legal process.

Follow-up for recovery of problem loans from head office

Branches submit Monthly statement of overdue loans/overdrafts etc. as per prescribed format to credit division and industrial credit division head office. After receiving the monthly statement of past due papers (overdue loans etc. from the branches head office reviews the position of each outstanding overdue loan account as per the statement and sends review letters to the respective branches separately providing client-wise guidelines/action plan etc. for recovery of problem loans. Compliance reports are obtained from the branches. This is a regular process of monitoring/follow-up by head office.

Moreover, head office Management gives periodical visits to different branches. Meetings are held at the respective branch premises. In those meetings management reviews client wise entire portfolio of the overdue loans of the branch and gives spot instructions/guidelines to the branch for the recovery of the problem loans and Minutes of such meetings are sent to the branches for compliance with the given guidelines/action plans. Similar reviewing the position of the branches of Dhaka City area.

Task Force program

As advised by Bangladesh Bank vide letter: BRPD (P) 748/5/96/2020 date 9.12.96, a Task Force” headed by the managing Director of BASIC, for monitoring the recovery of overdue loans, has accordingly been constituted at the Head Office.

Daily/monthly statements in given formats under the “Task Force” program, showing positions/progress of recovery of overdue/classified loans and advances arte submitted by the branches to head office. On the basis of these documents head office furnishes the consolidated daily/monthly statements to Bangladesh Bank Task Force Cell regularly. This shows the utmost importune Bangladesh Bank has placed on the recovery of overdue loans.

Repayment Schedule

The term “Rescheduling” has now become a household word in the banking scenario of the loan recovery measured resorted to by the banks for recovery/adjustment of the overdue/stuck-up loans and advances. The term rescheduling means that upon written application by a loan defaulter, bank allows extension of repayment time with a specific repayment schedule for adjustment to the outstanding defaulted loan by monthly installment s of specified fixed amounts or by lump-sum payment, usually with interest.

For “Rescheduling” purpose, Bangladesh Bank vide BCD circular No. 18 dated 11.12.95 and subsequent letters dated 28.1.96 and 15.4.96, has set the following guidelines we for the scheduled Banks, which are being observed by all banks:

• The issue of waiver/remission of interest for the purpose of rescheduling of the overdue outstanding loan is to be decided by the financing Banks themselves. And consequently, for consideration of such matter, the rate of the down payment may be decided on case to case basis by the banks themselves, at their own discretions. But the down payment mist not is below 10% of the overdue outstanding amount, under any circumstances. And without deposit of this minimum 10% down payment, no rechecking facility can be allowed to any borrower.
• The matter relation to rescheduling of the installments during the validity of the repayment period will be decided by the banks at their own discretion and on the basis of banker-customer relationship.
• The repayment repayment schedule to be submitted by the borrower should be realistic and logical. Banks should also ensure whether adequate securities are held against the rescheduled outstanding loan.
• Bangladesh Bank in the decent bankers meeting also resolved the at rescheduling facility should not allowed for more than twice, to avoid the delaying tactics to the loan defaulters in repayment of the bank dues.

Since the rescheduling proposal (s) are required to be approved by the Banks competent authority (head /board of Directors) individually, branches should forward all such rescheduling proposals, as submitted by the borrowers with their recommendation/comments, in a case to case basis 6o head office, for consideration.

Legal Action

Legal action being a very complicated and lengthy procedure, is the most extreme measure, or so to loans and advances with the loan-defaulter before taking the last step i.e. legal action. Before filling case in the court against the loan defaulter, BASIC makes serious follow-up efforts with the client in the following way:

• Call on the client (borrower) and make verbal requests for adjustment of bank dues.
• Issuing of reminder letters requesting the client to arrange adjustment to submit acceptable repayment schedule for adjustment/amicable settlement.
• Issuing of “Final Notice” giving 15/30 days time to the client with the request to of arranging adjustment/ /acceptable repayment schedule for adjustment /amicable settlement, mentioning in the notice the banks intention of initiating legal action in the event of clients default.
• In case the client fails to respond to the “Final Notice” bank will request its lawyer (Legal Adviser) to serve “Legal Notice” upon the loan defaulter. Accordingly, banks lawyer will serve the formal “Legal Notice”, on behalf of the bank, upon the borrower demanding adjustment of the entire bank dues with interest within 15/30 days from the date of the Notice and specifically mentioning that legal suit will be filed against the borrower if the fails to comply with the legal notice.
• Thereafter, if the client (Loan-defaulter) fails to respond positi8vely to the legal notice, bank will finally arrange to file suit in court by paying the requisites court/fees through the legal Adviser, paying for realization of the entire outstanding dues own by the borrower to the bank.
• After promulgation of Banditry Act. 1997, Bankruptcy Courts have been establishes in Dhaka and Chittagong. As per Bangladesh banks derectives/guidelinge, our bank, as well as other banks, has already filed a few suits in formal 90 (ninety) days notices served upon the borrowers under Secton-9(1) of the Bankruptcy Act. Necessary circulars/guidelines in this respect have4 already been given to the Branches. It is expected that Bankruptcy cases will be disposed of confiscation/attachment of all properties/assets of the judgment debtors by the court will be implemented for realization to the dues of dues to the decree holder bank expeditiously.

Law of Limitation

There is a “Time-bar” under the law of limitation which rules that such suit must be filed in the court within 3 (three) years from the date of client’s last acknowledgement of de3bt(i.e. outstanding loan liabilities), whichever is later. Branch must file suit in the court well ahead of the time-bar situation, to safeguard the banks interest.

Write-off

The term” write- off” means deletion of whole or part of an unrealizable overdue/stuck-up loan amount to liquidate the outstanding account, by passing necessary reversal entries in the books of accounts of the bank, relation to the defaulted loan accout.Write-off normally occur I the following circumstances:

Under amicable settlement either the client (borrower)

When an overdue/stuck-up loan is classified ad “Doubtful” or “Bad/Loss”’ it becomes necessary for the bank to take all out efforts for recovery of such classified loans either through persuasive measures or through legal action.

The process of legal action being very complicated a long-drawn affairs, bank usually prefers to accept any realistic/logistic/logistic proposal from the borrower for an amicable settlement.If the client is financially distressed and proposes to repay the principal amount only in full and final settlement with the request to the bank waive/write-off the balance outstanding amount, as the case may be, to liquidate the outstanding account, interest suspense or interest memo, as the case may be, to liquidate the outstanding account, bank may accept the amicable settlement by receiving the principal amount and arrange to write-off /waive the balance outstanding being interest in client account, interest suspense/memo, as the case may be. Here, write-off entries will be passed in respect of the interest in client account which as already been credited to banks income account. Normally, and IBCA (inter-branch credit advice) is issued by head office of the bank dote the concerned branch for the equivalent amount of interests in client account. Upon receipt of the bank to the IBCA from Head Office, the concerned branch responds to the credit advice by crediting the proceeds in the outstanding loan account, whereby the outstanding account is liquidated. Inertest suspense/Memo, if is to be waived by the branch simply by reversal of entries.

Under such situation where the client (borrower) has come forward for amicable settlement, the bank will consider the request for write-off only in respect of interest income proton, but under no circumstances, clients request for write-off of any guidelines given by Bangladesh Bank.

Under the situation when the bank filed suit against the borrower and the case has been settled through the court by execution of decree the auction sale proceeds of the attached properties of the judgment debtors, as received through the Court  and if there is a  short-fall as compared to  the  outstanding liabilities,  the unrealized (short-fall) amount will, then have to be written-off waived by the Bank to liquidate the outstanding account through passing entries by means to IBCA issued from Head Office to Branch, as mentioned the situation of amicable settlement with the client, outside the court.

Head office usually issued the aforesaid IBCA for the purpose of write-off of the unrealized amount of the outstanding defaulted loans, as described above, by utilizing the fund from “provision Amount” held against “Bad and Doubtful” (Classified) loan accents as per classification rules prescribed by Built up by appropriation from the Banks annual profit.

Credit Planning

Credit Planning- meaning and objective: Credit planning means estimating first the total loan able resources that are likely to be available within the given period and then allocation the dame amount various alternative uses in conformity with national plan and priorities. Central bank has to take direct and actins role, firstly in creating or helping to create the machinery needed to finance development activities all over the country, and secondly in ensuring that the finance available flows in the directions intended.

Necessity of cre4dit planning in context:

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

Credit planning at the macro level: The basic objective of  credit planning at the macro level is to have an estimate of the total resources available at the national level during the budget year and then to ensure that these resources which consist deposit resources flow to areas and sectors in consonance with objectives coins deposit resources and currency components.

Credit planning at micro level: In ultimate analysis, credit budget at micro level is an aggregation of the credit budgets of the indivikkusal banks put together. As matter of fact, the macro level planner should indicate the thinking to the banks about the magnitude of the macro plan. At the time of sending guidelines to the banks and asking them to prepare their credit budget, the central bank should issue guidelines to banks indicating their assessment of different industries.

This will obviously assist individual banks in preparing their credit plans but unfortunately this is not being done in our country.

At branch level:

1. Adherence to the policy guidelines of the head office and the supplementary policy guidelines of the regional office.
2. Analysis of the command area.
3. Determination of the requirements of the incremental loan able funds.
4. Allocation of the said funds to different sectors and client groups during the budged period.

At regional level:

1. Analysis and settlement of the branch credit plan in a branch managers’ meeting and in a democratic way.

2. Transmission of the regional credit plan to the head office.

At head office level:

1. Adherence to the policy guidelines of the central bank regarding deployment of credit.
2. Correction of regional as well as sect oral imbalances if any.
3. Settlement of the credit plan of the concerned back for the budget year.

Lending Policy

Objectives of lending policy: Banking, in general, is a business activity requiring professional skill while lending activity, in particular, requires more professionalism and care. Successful banking business large depends on effective lending and for a commercial bank, the objectives of having a lending policy usually includes among others, the following:

1. Resource planning to match lending outlay.
2. Strategy to win over the nearest competitors.
3. Augment god-lending base with moderate risk involvement.
4. Increased profitability
5. Ensure balanced loan portfolio.
6. Quick disposal of loan portfolio
7. Development of efficient and capable loan personnel.
8. Building up market reputation.
9. And goodwill by satisfactory services to loan customers.

Lending Risk Analysis

Any lending will involve risk, the primary concern of a banker should, therefore, to assess the relative risk as well as profitability of loans and advance. Proper lending analysis help minimizes loan losses by identifying risk in either prospective or existing loan relationship. In addition, credit analysis helps identifying areas of strengths or profit potentiality.Lendidgn analysis can therefore be used not only to support loan approval decision by assessing risk rating of the borrower but also to determine lending price based on risk rating of the borrower.

LRA is one of the new management and operational tools for improving the operational efficiency to the banking in our country imitated by financial sector

Reform Program (FSRP) in 1993. It focuses on internal changes to the lending process to improve the loan portfolio of the banks. According to FSRP international consultant in a successful country (in terms of lending), all applications for credit are thoroughly analyzed to assess the risk that the bank will not fully recover the loan and the results of the lending process are:

• The banking system channels scarce financial resources into those opportunities with maximum return.
• Profitable enterprises receive funding and grow
• Loss making enterprises are refused funding and to out of business
• The banks made profits and pay taxes
• The economy grows
• The people benefit

The same FSRP international consultant further say, in Bangladesh, loan analysis in the NCBs is inadequate. The loan analysis in the NCBs typically covers only 25% of the potential risks that are analyzed by the banks in the developed world (1993). Analysis skills are virtually non-existent in the NCBs. 90% of lending officers do not know how to analyze a sets of accounts. So, the ultimate results of the lending process are:

• The country’s scarcer financial resources are not applies effectively
• Loss making enterprises receive funding and stay in the business, allowing them to loss even more
• Profitable enterprises are constrained by lack of funding
• The taxpayers are obliged to subsidies heavily the banking system
• Bangladesh remains one of the poorest countries in the world.

In this circumstance, FSRP team has designed a new system to assess lending risk called LRA Manual. Bangladesh Bank has already made it mandatory for commercial banks to exercise it for granting loans above taka one crore. But in nearfkuture, Bangladesh Bank may suggest it for all kind of loans.

According to FSRP’s own estimates as on July 1995 around 1500 new large loans of NCBs have been sanctioned by applying LRA technique. This improved methodology for analyzing lending risk is undoubtedly a unique technique for the lending institutions the country in the present bay context. But while implementing this new LRA technique the lending officers of the implementing banks have been experiencing lots of problems, which need to be solved.

Lending risk analysis (LRA) – overview: before deciding whether to accept or reject a loan proposal a banker is faced with the following questions:

What id the risk if the bank does not fully recover the loan? Or what is the likelihood that the borrow will repay the loan?

The LRA forms describe bow to assess the risk that the bank does not fully recover the loan. It is a systematic and structured way of assessing lending risk. Lending risk broadly subdivided into (1) business risk i.e. the risk that the business fails to generate sufficient cash to repay the loan and (2) security risk, i.e. the risk that the realized value of the security does not cover the loan exposure.

Business risk further classifies industry risk and command risk where industry risk involves supplies risk, sales risk and company risk, which again relates to company position risk and management risk. The company position risk is subdivided into performance risk and resileence4 risk whereas management risk is further classified into management competence risk and manage4mtnat integrity risk. On the other Bank, security risk is divided into two groups’ security control risk and security cover risk. In lending risk analysis, much of the emphasis has been placed on business risk than security risk.

Process of completing LRA from: Before completing LRA form, lending officer must collect data specific from published sources and company specific data that is bnot6 usually published personally visiting the company. For assessing management ability and integrity the lending officer should interview the management. He must also make overall assessment on the security offered by the applicant. Finally, he should analyze those data and prepare financial spreadsheets i.e. balance sheet, income statement, cash flow statement and ratio analysis. These financial statement spreadsheets provide quick method of business trends and deficiency and help assess the borrowers? Ability to repay the loan with interest. These spreadsheets also realistically show business trends and allow comparisons to be made within the industry. At the time of analyzing data, the lending officer may prepare supplementary questions for company management if require.

Loan Pricing Methodology

Banks are the major financial institutions, which intermediate between actual lenders and actual borrows. For this intermediation, Banks are to pay actual lenders and charge actual borrowers. The loan pricing process can be viewed as following:

• The price of the loans is the interest rate the borrowers must pay to the bank in addition to the amount borrowed (participle)
• The interest rate of the loan is determined by the true cost of the loan to the bank (base rate) plus profit/risk premium for the banks services and acceptance of risk.
• The components of the true cost of the loan are
  • Interest expense
  • Administrative cost
  • Cost of capital
• Interest expense= deposit interest +central bank borrowing
• Administrative cost= depots as well as loan administrative cost
• Cost cost= deposit as well as loan administrative cost
• Cost of capital= return on capital or the rate of return investors would expect to receive and invest in a bank
• Risk is the measurable possibility of losing or not gaining value
• The prime risk which making a loan repayment risk which is the measurable possibility that a borrower will not repay their obligation as agreed
• A god lending decision minimizes repayment risk
• The price a borrower must pay to the bank for assessing and accepting this risk is called risk premium
• Since pars performance of a sector, industry or the bank for assessing and accepting this risk is called risk premium
• Since past performance of a sector, industry or company is a string indicator of future performance, risk premiums are generally based on the historical, quantifiable amount of losses in that category
• Interest rate charge=base rate=risk premium
• Loan priding is nor an exact science. There are several methods of calculating loan process.

Findings

• Deposit is the sources of funds for banks, in other words it is the supply side of the Lon able funds in credit management system. There is a major problem in our banking scoter regarding attracting more deposits. Deposit mobilization gas often been confined to urban areas, primarily because of the neoclassical assumption that rural people have low incomes and cannot save. Recent literature amply documents that rural areas have savings that can be mobilized through improvement of rural banking system (Adams; Agabin; Gongalez-Vega). In our country rate of deposit in rural areas was 14.11%, 23.41%, 27.26% and 22.31% in 1980, 85, 95, 99 respectively. So toincreaswthe4 loan able funds deposit mobilization in rural areas should be taken care of.
• Recovery profile of small and medium debtors is better than large ones in our country. The fastest growing borrower segment in the world is the “SMS” or “Small and Medium Enterprise” segment. However, very few of our products are geared towards supporting g this segment of the market. Traditionally, we have considered this segment as high-risk.
• Advance policy of our banking sector shows that agricultural sector is the neglected area due to the low loan recovery rate and lending to agricultural sector is risky because of the variation in the products due to natural calamities. But agriculture’s contribution in our GDP is still significant (29.95% of total GDP).
• Private sector bank’s lending was directed to satisfy sponsor directors interests. Proper professional exercised were not in place in respect of disbursement, monitoring and supervision of credit.
• Frequent change in Exchange Rate affects banks in import business.
• Deposit per employee and deposit per branch figures are satisfactory only for foreign banks and the performance of the rest of banking sectors not reasonable. The problem is acute because of less depots mobilization and higher employee and branches in comparison with foreign banks.

Recommendations

Banks should establish a review process to examine the changing circumstances of borrowers to determine the position of loans. Attention devoted to these loans is more likely to result in proper action devoted to these loans is more likely to result in proper action to safeguarded the Banks position and to assist the borrower to take appropriate steps in their business to bring back loan performing.

• Major problems in a business develop when a changing in management (Business concern) occurs. The loan officer should observe that whether there is loss of the top executive, demand, or any other most important new one has entered and often the change may be worse.
• The Bank should also be aware of significant changes in the personal habits of current management.
• Changes in industry trends may directly affect business so that it can no longer completely profitable. Therefore, the Bank should keep information about the environment of each industry in which its customers operate.
• Deterioration in the overall economy can turn a good loan a week one. During unusual inflation or depression, many companies expiries difficulties. The loan should be aware of it.
• From the beginning of the relationship, the loan officer should know who the company’s major trade suppliers are.

If he can discover that a major supplier is reducing credits to the customers, this could be a sign that the borrowing company is facing serious financial difficulties. Bank should start credit inquiries from trade suppliers.

• Real value of business can come from making regular visits to the customers place of business rather than holding all meetings in the Bank.
• For improving the recovery position and reducing huge over due loans the first action needed to attract political support and urge upon the govt. and political parties to take necessary steps for repayment of defaulted loans within a limit.
• Against big willful defaulters legal Acton should be taken promptly. This step should be taken as soon as one installment is defaulted without waiting for default of total loan.
• New credit culture needs to be developed in place of default culture. Efforts to be taken as soon as possible too safeguard the interest of banking sector.

Conclusion

The banking sector of Bangladesh is passing thorough a tremendous reform under the economic deregulation and opening up the economy. Currently this sector is becoming extremely competitive with the arrival of multinational banks as well as emerging and technological infrastructure, effective credit management, higher performance level and utmost customer satisfaction.