Executive Summary
Banking sector is one of the important sectors for the economic development of a country. Generally banks deal with others (people) deposits. So it is very important to make sure that all deposits are invested in such projects which strengthen the bank’s financial position. It is also important that any amounts of the depositors are not used for any personal interest.
Commercial Bank’s most of the earnings come by extending credit to different types of borrowers for many different purposes. Bank should try to extend its credit to different borrowers to diversify its credit risk. Nowadays, many banking organizations have experienced similar problems with bad loan. Loans typically exhibit the greatest credit risk. The credit risk arises when it assumes that the borrower will default, that is, they will not repay the principal and interest on a timely basis. So that, bank should perform a credit analysis on each loan assessment to fail the capacity of borrower capacity to repay the loan.
Bangladesh Bank (BB) evaluates the overall performance of all banks and based on the evaluation it ranked banks into different categories. BB has specific guidelines to follow. The bank that does not follow these guidelines properly falls in the rank of ‘marginal’ and ‘unsatisfactory’, means fall in the criteria of a Problem Bank.
When bank falls in the criteria of Problem Bank for defaulting on loan and project finance procedure, it faces a lot of problems and restrictions in operation. So it always tries to overcome that situation and to overcome the situation they have to follow the guidelines submitted by the BB. So many time clients of Agrani Bank also fall in this criterion and try to overcome the situation. When the bank thought that it follows all the guidelines provided by BB and they are in the position to overcome the situation, then Agrani Bank had to be conscious about success ness of loan & credit management.
Part one
Introduction
INTRODUCTORY VIEW OF THE REPORT TITLE
Agrani Bank is a state owned scheduled bank in Bangladesh. It has a vital contribution towards lending and investment in economy because Agrani Bank has been participating at all sectors (from industrial sector to microfinance). Sometimes it was failed because of unsound procedure of loan and financial sector. That’s why day by day this bank has been modifying itself in this sector. Agrani Bank has a wide sound communication system. This bank has also established strong linkage between other banks and financing institutions.
Here main purpose of preparing this report to make clear idea about credit risk management of Agrani Bank and gather enough knowledge to deal with these functions. We know that The Bangladesh Bank (BB) has placed few banks in the category of problem banks. Main reason of these banks is bankruptcy. So many time borrowers are not conscious about procedure of all activities of loan and procedure. A problem bank emerged from its past poor management of loan portfolio and operational inefficiency.
According to the BB requirement Agrani Bank has been coordinating their procedure for short term or long term financing. I was engaged in these activities of loan and project finance procedure. The bank needs to maintain proper direction of BB for CRM, lending, project finance procedure, etc. I have worked on this sector and able to know about the lending and procedural guidelines of loans and advanced division of banking sectors.
I have made this report on the topic which I have worked in my internship program. And this is why I named the topic as ‘Credit Risk Management and Project Finance Procedure of Sonali Bank.’
OBJECTIVES OF THE STUDY
Preparation and presentation of this report contains few specific objectives. These are:
1. Primary objective is to fulfill the requirement of the MBA program.
2. To achieve the difference between theoretical and practical knowledge.
3. To have an exposure on the function of credit risk management of Agrani Bank.
4. To get significant knowledge about how the effective of loan and sanction procedure are conducted on the evaluation of credit risk management.
METHODOLOGY OF THE STUDY
I. Sources of data
The study is based on primary and secondary sources of data. Data have been collected from office records discussions with employees and from different paper circulars and annual report of Agrani Bank. For the report preparation concepts and techniques are gathered from bank manuals and relevant books.
ii) Sampling plan
Credit information bureau report and existing loan procedure which were made by authority of Agrani Bank, we have covered 100% of the credit risk management portfolio. We have evaluated and discussed regarding various project profile which are found from Sonali Bank Staff College. I have covered the credit information from 2001 to 2004 and also at a glance of Sonali Bank presented with this duration. Here I have used purposive sampling technique which is the part of non probability sampling technique.
iii) Data collection
Data were collected personally from Agrani bank head office and Agrani bank training institute. The authority Agrani Bank rechecked these collected data before entering them into data base system.
iv) Fieldwork
As part of the assignment, team members visited Head Office of Agrani bank and Agrani bank training institute .During data entry phase, 100% data were rechecked by cross matching with fact sheets and hard copies. We have considered 100% accuracy level for numeric data and 95% accuracy for alphanumeric data for entered data into the system.
v) Data entry and processing
Professional data analyst and data entry personnel were deployed to assist the team in developing fact sheets in the inception phase. Selected actual data were collected, compiled and entered into the system for dummy/ trial running of the system. Corrective measures initiated from trial running were incorporated and redrafted the fact sheets accordingly. For this purpose we have utilized most convenient database platform to safeguard entered data and also to generate different report from the database.
LIMITATIONS
Agrani Bank is a public bank. So most of the time all staffs of Agrani Bank are busy. Despite their responsibility, they could not cooperate frequently for their business. On the other hand they are not bound and have no accountability to provide all support with my demand. For this reason I faced time constraint. Confidentiality also has imposed a huge restriction. That’s why I can not disclose any numerical information in this report which I have achieved about our clients.
CONCLUSION
In this introductory section I tried to explain why this report is prepared, reasons behind the title name as ‘Credit Risk Management’. To prepare this report which guidelines I have to follow are expressed in the ‘scope of the study’ and what methodologies are followed means how the report is done to prepare this report are explained in this chapter. I also mention here what problems I have faced to prepare this report.
Part two
Organization & It’s Responsibilities
ESTABLISHMENT
Agrani Bank is one of the largest commercial bank in the country. It was established under Bangladesh Banks (Nationalization) Order 1972 (Presidents Order No. 26 of 1972). By taking over branches of Former the commerce bank Ltd and The Habib bank Ltd. performing class banking over the country in that period and National Bank of Pakistan was Government supported bank which was established to finance the jute sector in East Pakistan in the early period of Pakistan. After the birth of Bangladesh on 16th December 1971, newly formed Sonali Bank for mass banking got special facilities from the government to work on behalf of Bangladesh Bank in those areas where Bangladesh Bank is not available. With the increase of responsibility and by virtue of performance within a few years, it becomes the largest commercial Bank of the country with 1225 branches up to December 2002.
MANAGEMENT
The management of the bank is vested on a Board of directors, subject to overall supervision and directions on policy matters by the Boards which is constituted in terms of Bangladesh Bank (Nationalization) Order 1972. Board of directors, constituted by seven members, has authority to organize, operate and manage its affairs on commercial consideration within the board policy of the Government. There are directors appointed by the Government. Others members of the board including MD are also Government appointed out of that at least three have the experience in the field of Finance, Banking, Trade, Commerce, Industry, and Agriculture.
The management Director is the chief executive of the Bank. He executes all the activities under the direction of the Board. All line and staff personnel of the Bank’s are own recruitment except member of the Board of Directors.
ORGANIZATION
Agrani Bank is one of the largest nationalized Commercial Bank of the country. It has extended 867 branches through out the country abroad to serve the nation. There are two “Agrani Exchange house in Singapur and malyasia. The head office of the bank is located at Motijheel Commercial Area, Dhaka that is the controlling Headquarter. It has eight GM offices in six Divisional Headqurtes and 26 principal offices and 32 regional offices. Principal office is headed by DGM and each Department is headed by AGM. Different grade officers depending on the size and nature of the branch head the branches.
Principal office Headquarter has the jurisdiction over the entire area of a district i.e. the principal office is the local point of the bank’s administrative zone of the district. The regional office is situated at the thana level within the district, is under control and supervision of the principal office of that district. Regional offices are responsible for their activities to the principal office.
Regional heads exercise control and supervision overall the branches within their jurisdictions and keep the head of the principal office informed the development of their respective areas from time to time.
WHATS THE MEANING OF CREDIT
Credit comes from a Latin word ‘Credo’, which means “I trust” i.e. moneylenders trusts his borrowers to pay them back. In terms of bank, bank trusts his borrower will repay the loan as per terms & conditions. Before allowing credit bank should have confidence in the borrower’s ability & willingness to repay the loan. Credit does not exist because of confidence alone. Hence bank prepares a report on the proposed / existing borrower / importer / exporter which is called Credit Report. It is an elaborate & exhaustive report. It contains a full, true, correct & reliable record of the character, integrity, honesty, business ability &worth of the borrower. It assembles accurate & complete information & provides an evaluation of a borrower credit standing. Before giving credit facilities the manager has to reach his conclusion to select a borrower that qualifies the following five essentials which may be termed as 5 C’s namely;
1. Character – It is intention of the borrower to pay the loan. It determines the moral risk. It includes integrity of purpose, reputation for honesty, promptness in paying debts & fulfilling contract, high standard of business ethics & records of past performance.
2. Capacity – It is Borrowers competence in the field to employ the fund profitably & ability to generate income. It indicates the business risk. Capacity involves business ability of borrower, reputation of product & soundness of business method.
3. Capital – It is the financial strength of a risk. It is measured by the equity or net worth of the business.
4. Condition – It is the general business conditions and the conditions of the particular industry in which the applicant is involved.
5. Collateral – It implies the additional security taken to offset weaknesses that are apparent in the risk.
Before performing credit report, the Manager has to go through an investigation. The degree of investigation will be greater or less depending upon the amount of the loan & whether the loan is or is not secured.
For investigation the manager has to enquiry about:-
Who is the borrower
Nature of business
Experience in the business
Equity in the business
Purpose of borrowing
Duration of loan
Sources of repayment
Means & security offered
Profitability of the transaction
History of accounts operated by borrower
Market reputation regarding character, honesty, integrity etc.
SOURCES OF CREDIT INVESTIGATION
The followings are the sources of Credit information:
Loan application
Financial statement
Study of accounts
Market reputation
Other sources, i.e.
Incomes-Tax statement
Registration office
Press report
Revenue & municipal rent receipt
Registrar of joint stock co.
VAT Return
Report from CIB
Confidential report from fellow banks.
Personal interview
Personal visit
CREDIT RISK MANAGEMENT PROCEDURE
POLICY GUIDELINES
Lending Guidelines
– Safety
– Liquidity
– Purpose
– Profitability
– Security
– Spread
– National Interest, suitability, etc.
Credit Assessment & Risk Grading
Credit Assessment Risk areas should be addressed:
Borrower Analysis
Industry Analysis
Supplier / Buyer Analysis
Historical Financial Analysis
Projected Financial Performance
Account Conduct
Adherence to Lending Guidelines
Mitigating Factors
Loan Structure
Security
Risk Grading
All Banks should adopt a credit risk grading system. The system should define the risk profile of borrower’s to ensure that account management, structure and pricing are commensurate with the risk involved. Risk grading is a key measurement of a Bank’s asset quality, and as such, it is essential that grading is a robust process. All facilities should be assigned a risk grade. Where deterioration in risk is noted, the risk Grade Assigned to a borrower and its facilities should be immediately changed. Borrower Risk Grades should be clearly stated on Credit Application.
Approval Authority
The authority to sanction / approve loan must be clearly delegated to senior credit executives by the Managing Director/CEO & Board based on the executive’s knowledge and experience. Approval authority should be delegated to individual executives and to committees to ensure accountability in the approval process.
Segregation of Duties
Banks should aim to segregate the following lending functions:
Credit Approval / Risk Management
Relationship Management / Marketing
Credit Administration
The purpose of the segregation is to improve the knowledge levels and expertise in each department, to impose controls over the disbursement of authorized loan facilities and obtain an objective and independent judgement of credit proposals.
Internal Audit
Banks should have a segregated internal audit/control department charged with conducting audits of all departments. Audits should be carried out annually, and should ensure compliance with regulatory guidelines, internal procedures, Lending Guidelines and Bangladesh Bank requirement.
PREFERRED ORGANISATIONAL STRUCTURE & RESPONSIBILITIES
Preferred Organizational Structure
PROCEDURAL GUIDELINES
Approval Process
Credit Administration
Disbursement
Custodial Duties
Compliance Requirements
Credit Monitoring
Credit Recover
Non performing Loan Account Management
Account Transfer Procedures
Non Performing Loan (NPL) Monitoring
Non Performing Loan (NPL) Provisioning and Write Off
Incentive Program.
VARIOUS LOANS AND ITS SANCTION PROCEDURE
Cash Credit
A Cash Credit is essentially a drawing account against credit granted by the bank. Cash credit is sanctioned as working capital as various types of businesses. Cash Credit is normally for those good current deposit holders who are dealing with the bank for a long time. On the basis of security cash credit is divided into cash credit (pledge) and cash credit (hypothecation).
Cash Credit (pledge):
In a cash credit (pledge) bank has the possession of primary securities (goods) and borrower has the ownership. It is a charge against a property for a debt where the ownership remains to the borrower but the possession is passed to the banker. The instrument of pledge is pledge deed. In case of default, bank may sell the security on giving the debtor reasonable notice of sale.
Cash Credit (Hypothecation):
Cash Credit (Hypothecation) is that type of loan in which the primary security is kept under the position and ownership of the borrower. The instrument of hypothecation is hypothecation deed. Possession of goods is surrendered to the lender when called upon to do so. The bank creates only a floating charge on the security. Borrower’s personal security and collateral security is usually needed for CC(pledge) also.
Sanction Procedure:
The sanction procedure of Cash Credit (pledge) and Cash Credit (hypothecation) are as followers:
a) The borrower will apply for sanctioning credit in white paper.
b) Banker will examine the borrower’s current account statement and transaction.
c) Banker will collect confidential report from other banks and other business man.
d) Security checking, valuation and observing perfection by the lending officer. For checking collateral security (Land and Building) banker will collect CS, SA and RA records of the land, Mutation and Non-Encumbrance Certificate, Mouza Map, Up-to-date Rent and Legal opinion of the banks legal advisor.
e) For loans more than tk.50 Lac, LRA is required.
f) The borrower will fill up the prescribed application form.
g) The credit officer will prepare loan proposal and credit report.
h) The proposal will move to the sanctioning authority with commend and / or recommendation of management of every step of the hierarchy.
i) If the proposal is approved, bank will prepare a sanction letter and the borrower will receive it.
Bankning issues two copies of “Sanctioning cash credit, the customer is to prepare documents required charge documents. Thereafter, the banker issues a cheque book for withdrawing cash from the account. The customer can withdraw cash from the account the sanctioned amount.
Documentation:
The borrower will fill and duly sign all internal documents of the bank, as-
Demand promissory Note.
Demand Promissory Note delivery Letter
Agreement for Hypothecation / Pledge of goods.
Letter of Authority
Letter of Continuity.
Stock Report.
Contact of Bailment of Goods (Pledge)
Agreement of Banks Right of Set-off (Pledge).
Undertaking by the borrower to submit periodical statements of stocks and to allow at his cost inspection by the bank from time to time of the goods as well as borrowers record.
Other documents are:
Trade license.
Account Statement of the business.
Statement of the borrower’s property.
Original title deed and registered mortgage for collateral security.
Insurance Policy (on the joint name of the borrower and the bank)
All the documents must be duly stamped.
After completion of documentation, the bank will open a loan account and issue a checkbook. The list of the document must be written in the document execution register and miscellaneous document register and signed by the borrower. Bank will appoint a godwon keeper for pledge godwon and place a signboard on the wall of the godwon market “Pledged to Sonali Bank” should be placed at the business place of the borrower. If a third party guarantees for the loan bank will receive Demand Promissory Note and other documents from the guarantor as well as the borrower. In a pledge godwon there will be a list of the goods, which will be compared periodically with the physical inventory and sign by the officer. The borrower will require a delivery order from the bank for disposal of goods every time. Banker must monitor borrowers business continuously and counseling. If any problem arises he will report it immediately to the management.
House Building Loan
Hosing Building Loans are three types, Hose building loan (General) are generally sanctioned for commercial building sometimes for houses to the general people. Staff hose building loans are for the bank employees to construct houses. House building loans are also provided to the employees of other financial institutions with the clearance of the BB for those, who have obtained loan from their respective institutions but could not complete construction. Hose building loans and repayment is made by installments and maximum repayment period is 12 year. The current interest rate of Hose building loan (General) is 15% per annum and the procedure goes on usually in simple interest. Bank also gives 5% rebate to the good borrower but in case of debt the calculation turns to compound interest. The interest rate of House Building Loan (Staff) is only 8% per annum.
Procedure:
a) Application for credit by the borrower with following documents.
Estimated cost and building layout plan prepared by engineer and architect.
Certificate from RAJUK.
Tax Payment receipt.
Borrower monthly income statement
Original title deed of the land.
b) The credit officer will prepare a credit report.
c) Banks lawyer will verify the documents.
d) Branch will send the proposal to the head office with proper recommendation.
e) Engineer of the head office will analyze the documents and place for approval.
f) If the loan is approved, the branch will issue a sanction letter.
g) Documentation: the borrower will fill and sign all internal documents of the bank as-
Demand promissory note.
Demand promissory note delivery letter.
Original title deed.
Registered Mortgage Deed.
Insurance Policy.
Certificate from WASA, DESA, City Corporation, Gas Supply Authority.
All the documents should be listed in the document execution register and signed by the borrower.
Overdrafts
Over Drafts are temporary overdrafts from current accounts, which are extended only to bank’s most creditworthy and reliable customer, who required money for a short period. This type overdraft is maintained as debit balance in the current account of the borrower. Overdrafts against FDR, DPS, Sanchay Patra, Insurance Policy, Share certificate, and work order are treated as secured overdraft because they are sanctioned only against the respective document by certain lien. These documents are kept in the safe custody of the bank and returned only after full repayment of the dues. These advances are for one year and in case of renewal, all the procedures of the first sanctioned should be followed. A minimum margin is kept for these types of advances.
Procedure
Application by the borrower with the instrument against their intersected to credit.
Bankers will verify the documents from the issuing authority and get clearances.
The credit officer will recommend for sanction.
The sanctioning authority will sanction the advance.
After documentation the bank will open an overdraft account and issue a checkbook.
Documentation:
The borrower will fill and sign all internal documents of the bank as-
Demand Promissory Note.
Demand Promissory Note Delivery Letter.
Letter of Lien.
Letter arrangement
The instrument duly discharged by the borrower or the third party.
In case of third party letter of lien cum guarantee.
The document should be duly stamped, signed by the borrower and interested in the document execution register.
Staff Loan
Staff loans are LAPF, MCL, and BCL
LAPF is loan against provident fund and extended to the bank employees for the purpose of repair of house, marriage of son or daughter and for medical treatment of family members.
MCL is for purchase of motorcycle and BCL is for bicycle. Though these loans are fully secured, credit officer should be careful in documentation and inspection of whether the money serves the purpose. These loans are term and medium term loans. Interest rate of such loan is only 6.5% per annum.
Staff house building loans (SHBL):
1) 20 times of the basic salary is provided as SHBL.
2) Bank rate is changed %, time to time.
3) Repayment is adjusted from their monthly salary.
4) Repayment is made at equal monthly installment.
Staff loan against provident fund:
1) Time limit is 10 years or rime of retirement whichever is lower.
2) Interest rate is 6.5% (Changes time to time).
3) Security :
a) Demand promissory note.
b) Band lien against future fund.
4) Repayment is made at equal monthly installment.
5) Repayment is adjusted from their monthly salary.
Consumer Loans:
The main purpose of the scheme is to improve life standard of the customers by providing them loans for purchasing house hold items, for example, computer, television, freeze, motor car & cycle, air-condition & cooler, furniture etc. Various commercial bank offering various types of loans to the consumer so that they can enjoy these innovations and fixed a very easy installment process to repay that money.
Sonali bank is offering loan calling Consumer credit scheme in various types of goods.
The features of this scheme are:
Interest charged in this scheme is 15%.
The maximum amount to be sanctioned is Tk.100000.
Margin is 25%.
Security:
a) Purchased goods/products is hypothecated.
b) A third party guarantor.
Time limit is up to 3 years.
Bank Guarantee
General advance division also provides Bank Guarantee to the different types of customer. In case of Bank Guarantee there are three parties, borrower, bank and beneficiary (Example: Different types of organization which calls Tender Notice for their particular works and asks Bank Guarantee from the contractor). Bank declares in favor of customer to the beneficiary that he (bank) is liable to pay a certain some of money in case of customer’s debt. Two types of practice are seen in the procedure of such Bank Guarantee.
1. Customer will deposit 100% money to the bank and he will get the same amount of guarantee.
2. Customer will deposit 10% money to the bank and 90% of collateral and he will get 100% of Bank Guarantee. He can deposit security paper or Shanchay Patra or his FDR account as his 90% of collateral.
Part four
Industrial Credit Management & Sanction Procedure
INDUSTRIAL CREDIT ASPECTS OF SONALI BANK
This department deals with fixed capital and working capital of industrial and agro based industrial projects. The major areas sectors covered are:
Small and Cottage Industries
Jute Industries
Composite textile
Textile spinning
Plastic Industries
Export-Oriented Garments
Pharmaceutical Industries
Garment Accessories
Printing & Packaging
Paper & Board Mills
Cold storages
Tannery, Footwear & Rubber Industries
Engineering Industries
Partex Board Industries
Chemical Industries.
Glass & Ceramics In dustries
Partex Board Industries
Cement Industries
Procedure of sanctioning industrial credit
a) The customer shall apply with a full project profile which contains the management and organization, marketing, technical and financial aspects of the project.
b) Banks financial analyst will analyze the profile. Before this he will collect necessary papers and documents from different sources. Banks engineer will visit the premise and will furnish a technical report.
c) If the applicant is apparently seems to be eligible to get the credit he has to fill the prescribed application form. The application with other papers and the project profile will be sent to the head office. The financial analyst will prepare a financial report. If required, he will perform the lending risk Analysis and Financial Spreadsheet Analysis. The application will be accompanied by recommendations of the financial analyst, officer in charge of the credit department and the branch incumbent.
d) The proposal will be appraised by another financial analyst of the industrial credit division of the head office and will be forwarded to the proper sanctioning authority.
e) If the proposal is approve, head office will prepare a sanction letter with detail terms and conditions of the loan and send it to the branch again.
f) If the borrower signed in the sanction letter accepting the terms and conditions, the agreement is made.
g) After documentation and creation of charges on securities, the first installment will be disbursed with the fulfillment of terms like utilization of the borrower’s equity capital.
Papers needed to be submitted by the borrower:
I. Project profile with three years projected financial statement for new projects and three years audited financial statements for an existing projects.
II. Borrower / Borrower’s personal income statement, character certificate, statement of properties and other businesses, income tax certificate etc.
III. Original title deed of the property of the project.
IV. Trade license.
V. For limited company, letter of incorporation, memorandum and articles of association and for public limited company, certificate of commencement of business.
VI. Lay out plan of the project.
VII. Indent and manual of the machinery.
VIII. Valuation Certificate of the property.
IX. Latest rent / tax receipt, Ledger and Mutation records of the property.
X. Clearance certificate from environment, electricity, water and gas authority.
Papers to be obtained by the banker:
1. Credit information Bureau Report about each borrower and the company / firm.
2. Confidential report from other banks and financial institution.
3. Industrial policy of
4. the government.
5. Industrial position and trend.
6. Competitor’s financial and marketing position.
The credit offer must collect the information about the borrower’s present and past business, character and family background and financial position and public reputation. The respective offer shall visit the site with expert, collect lawyer’s certificate about the property. He will take interview of the borrowers and other related persons not only prescribed or formal view but also inactive view. The lending officer’s personal judgement is an important factor for a loan proposal.
PREPARATION OF APPRAISAL REPORT ON INDUSTRIAL SECTOR
Preparation of appraisal report is the most important task a banker performs in the process of sanctioning loan for an industrial project. He has to consider numerous things. He has to examine all situations favorable or unfavorable. He has to presume all the may occur. Preparation of appraisal report is needed for the following reasons-
To justify the soundness of the investment.
To endure repayment of bank’s money.
To achieve organizational goals.
To recommend if the project is not designed properly.
The concerned officer of the industrial credit department prepares appraisal report considering all information furnished in the application and other document supplied with the application. The officer summarizes and devaluate all the information and document provided.
In preparing appraisal report, the officer summarizes and evaluates all the information and document aspects:-
1. Technical Aspect:- The following technical aspects are usually considered in preparation of appraisal :-
Location of the proposed project.
Environmental impact of the project.
Building and civil construction.
Machinery and equipments of the project.
Production capacity of machines and equipments.
2. Management Aspect:- The following managerial aspects are usually considered here:-
Bio-data of the directors.
Education, experience, professional qualification of directors.
Social status of directors.
3. Marketing Aspect:- The following marketing aspects are usually considered here-
Demand of the product to be produced.
Supply of raw materials.
The places, where the products will be marketed.
The consumers, for whom the product will be marketed.
4. Financial Aspect:- The following things financial aspects are considered in preparation of the appraisal report:-
Ratio of loan and equity.
Currency fluctuation risk (CFR).
Focus on earning (Income Statement).
Financial ratio analysis.
Operating profit or sale.
Net profit/sale.
Debt service coverage ratio.
Internal rate of return.
Break even point/sale.
Pay back period
Fund flow statement.
Balance sheet.
Repayment schedule.
5. Socio-Economic Aspect:- The following socio-economic aspects are usually considered here-
Social impact of the product produced by the project.
Alleviation of poverty of the surrounding people.
Employment generation.
If the officer finds that the loan proposal will be viable one. He proposes for the approval of sending the proposal of Head Office, Industrial Credit Division for sanction.
If the loan amount is within one crore, Head Office places the loan proposal to the Credit Committee. In the credit committee meeting, all the aspects are discussed and if the committee finds the proposal viable, give sanction to loan proposal. If the amount exceeds one crore, the proposal is placed in the Board for sanction. Considering all the relevant aspects, the board approves the proposal.
After obtaining approval of the competent authority, Head Office sends a sanction letter stating necessary terms and conditions and instructs the corresponding branch office, subject to the completion of required documentation, to disburse the sanctioned loan. Then branch office prepares two copies of sanction advices stating the terms and condition; one for the borrower and other for keeping in the branch as record. In the sanction advice, the borrower is instructed to execute necessary document. If the borrower finds the terms and conditions are acceptable, execute necessary documents and the loan is disbursed accordingly.
INDUSTRIAL CREDIT PROGRAMME AT SONALI BANK
Being a Nationalized Commercial Bank Sonali Bank has to finance directly on priority basis to Agriculture, Industry and Commercial sectors for strengthening the economic base of the country. Sonali Bank finances almost all the productive sectors.
Sonali Bank’s slogan for credit:
Today’s loan should be better than yesterday.
Today’s bad loan will eat up Tomorrow’s profit.
Sonali Bank has taken different industrial credit schemes in different times, after 1978. These are:
A. 2nd IDA Credit Scheme:
The industrial development authority (IDA) had undertaken a credit line to help establishing small and cottage projects in the private sector in 1978. Under this credit line IDA placed a fund of 7.00 million US dollar. Government of Bangladesh released the fund in equivalent of Taka to the major two nationalized banks, Sonali Bank and Janata Bank for lending to the small and cottage industrial firms.
Under this scheme, Sonali Bank launched a credit scheme named as 2nd IDA Credit scheme, project with an investment size not exceeding TK 23 lakh (for cottage projects maximum TK 1 lakh) were eligible for financing.
B. 3rd IDA Credit Scheme:
In 1980 Govt. of Bangladesh and IDA signed an agreement. A credit fund of 33 million US Dollar were allocated for financing small and extending Guarantee facilities to the NCBs (Sonali, Janata & Agrani Bank). Bangladesh Bank made the fund available for lending to the entrepreneurs.
Sonali Bank Launched a credit scheme in 1981 as 3rd IDA Credit Scheme to finance small and credit industries through out the country.
C. NORAD Credit Scheme:
Norwegian government had granted #0 million of NOK (Norwegian Crooner) to Bangladesh for industrial development in 1983. Under this foreign aid Sonali Bank got Tk 30 crore out of total grant for lending to the cottage industries. Sonali Bank got the said fund in the form of refinance from the Bangladesh Bank according to the credit arrangement.
With this foreign aid Sonali Bank had undertaken a separate credit scheme “NORAD Credit Scheme” in 1983. Maximum Sanction able loans in the scheme for per borrower/project of cottage industries were only TK 23000.
D. EXIM Bank Credit Scheme:
In 1984 Sonali Bank came an agreement with EXIM Bank of India. EXIM Bank of India had provided 140 million Indian Rupee at 9.25% interest rate and the repayment to EXIM Bank will be completed by 1998. The condition was that the loan would be utilized by import of machinery from India.
Under this agreement Sonali Bank launched EXIM Bank Credit Scheme and Loan limit per borrower/project was 92.5% of the FOB/FOR value and freight cost and maximum IRs. 30.00 lakh.
Industrial Credit Scheme from Bank’s own resources:
E. Special Credit program
Sonali Bank extended financing in the small and cottage industries in 1978 through a scheme “Special Credit Program” according to the instructions of Bangladesh Bank. Firstly 12 districts were selected for this credit program. The small and rural based entrepreneurs were the main target group. The loan limit per borrower/project was maximum TK 4.00 lakh and the regional office heads were given power to sanction the loan.
F. Sonali Bank Industrial Credit Scheme (SBICS)
Long term financing is most essential for the development of industrial sector of a country. But such financing was very rare to the need of the country. Most of the industrial units were financed by the external credits that were suffering from inadequacy of funds and as a result it did not achieve expected result. Sonali Bank decided to finance to the industrial sector from it’s own resources. In 1984 Sonali Bank launched two financing schemes:
Sonali Bank Industrial Credit Scheme for less and least development areas.
Sonali Bank Industrial Credit Scheme for developed areas and export oriented industries
The main purpose of this scheme was financing to the private sector projects conforming to the investment schedule of GOB. The Sonali Bank Industrial Credit Scheme for less and least developed areas; preferred projects that were invested not more than TK. 2.00 crore and the loan limit for those projects were TK. 50.00 lakh. The scheme has been taken for financing small industries.
Sonali Bank Industrial Credit Scheme for developed areas and export oriented industries has been taken for financing of both small and medium scale industries. The scheme preferred projects that were invested not more than TK. 50.00 crore and the loan limit for those projects were were TK. 1.00 crore.
With the liberalization of government’s industrial policy in 1986 and declaration 50.00 lakh of incentive for industrialization in the industrial policy 1991, Sonali Bank has renewed it’s own financing schemes.
Part five
Sound Lending
PRINCIPLES OF SOUND LENDING
Introduction
Of all the functions of a Commercial Bank, lending is far the most important. Lending is a dynamic activity. Advances comprise a very large portion of a bank’s total assets, and form the backbone of a very bank’s structure. The strength of a bank is thus primarily judged by the soundness of its advance.
It is fundamental precept of banking everywhere that advances are made to customers in reliance on his promise to repay, rather than the security held by the banker. Again, all lending involves some degree of risk. It is necessary for any bank to develop sound and safe lending policies and new lending techniques in order to keep the risk to a minimum. There are some common principles of good lending which every banker follows when appraising an advance proposal. The principles of sound lending are stated in the following paragraphs:
Safety
“ Safety First” is the most important principles of good lending when a banker lends, he must feel certain that the advance is safe; that is, the money will definitely come back. Because the very existence of a bank depends on the safety of its outstanding which should never, therefore, he sacrificed to the profit earning capacity of its advances. The banker is to ensure in the best possible manner that the money advanced by him goes to the right type of borrower and is utilized in such way that it will not only be safe at the time of lending but will remain so throughout, and after a useful purpose in the trade or industry where it is employed, is repaid with interest.
Liquidity
The liquidity of an advance means its repayment on demand or on due date or after a short notice. The loan must stand fair chances or repayment according to the repayment schedule. It is not enough that the money will come back; it is also necessary that is must come back on demand or in accordance with agreed terms of repayment. It is utmost important that Bank loan must be repaid as they become due otherwise the liquidity position of the bank is endangered. The major cause of Ban’s failure is liquidity. Most of the bank wants to invest in short term investment to maintain the liquidity of the bank. The borrower must be in a position of repay within a reasonable time after a demand for repayment is made. The period of the advance and the case with which it will be repaid are very important. Even in the case of fully secured advances if it is feared from the very beginning that the advances would only he recovered by selling the securities it is not considered a good advances. It must, therefore, always ensure that the advance will be repaid from resources other than securities pledged.
Purpose
The purpose should be productive so that the money not only remains safe but also provides a definite source of repayment. The purpose should also be short – termed so that it ensures liquidity. Banks discourage advances for hoarding stocks or for speculative activities.
The banker must closely scrutinize the purpose for which the money is required, and ensure as far as he can, that the money borrowed for a particular purpose is applied by the borrower accordingly. Purpose has assumed a special significant in the present-day concept or banking.
Profitability
The main objective of the commercial bank is to maximize profit. A prudent banker must consider whether the proposed advance will earn more profit or not. As such bankers should always keep in mind that the advances should be made to profitable sector, so that they get a fair return on the advances.
Diversification of risks
The security consciousness of a banker and the integrity of the borrower are not adequate factors to keep the banker on safe side. What is more important is the diversification of risk. This means, he should not lend a major portion of his loan able funds to any single borrower or to an industry or to one particular region. In fact, the entire banking business is one of taking calculated risks and a successful banker is an expert in assessing such risks. He is keen on spreading the risks involved in lending over a large number of borrowers, over a large number of industries and areas, and over different types of securities; the advances must not be in one particular industry. Too many eggs should not be placed in one basket, because any adversity faced by that particular industry will have serious effect on the bank. Slump does not normally affect all industries and business simultaneously.
Security
Bankers generally make advances against Collaterals or security. And the Security is considered as insurance or a cushion to fall back upon in case of an emergency. As such the security must be adequate, readily marketable, easy to handle and free from encumbrances.
Spread
Another important principle of good lending is the diversification of advances. An element of risk is always present in every advance, however secure it might appear to be. As such a prudent banker must be keen on spreading the risks involved in lending, over a large number projects and areas, and over different types of securities.
National Interest, Suitability, etc
The banker would lend if the purpose of the advance is for overall national development plans necessitating flow of credit to priority sector in the larger national interest. Again the banker is to see whether the law and order situation at the place where the borrower carries on his business is suitable or not.
In the changing concept of banking, factors such as purpose of the advance, viability of the proposal and national interest are assuming a greater importance than security, especially in advances to agriculture, small industries, small borrowers, and export oriented industries.
Conclusion
The Banker making an advance must consider the safety of the advance, its liquidity and profitability. As such the borrower must have adequate experience in the line of business applied for and he is also a reliable customer. Again the advance must be such as can be recalled within a reasonable time and without undue difficulty. The advance must also be profitable and must permit the charging of a reasonable rate of interest. Successful lending depends upon sound judgement and accurate knowledge of the character and credit-worthiness of the borrower.
LENDING RISK ANALYSIS
Lending risk is the risk is the risk that the bank cannot fully recover the loan. Broadly lending risks are categorized as business risk and security risk, and then divided into several parts.
Figure-5.1
Business Risk: The risk that the business fails to generate sufficient cash to repay.
a) Security Risk: The risk that the realized value of the security does not cover the exposure.
b) Industry Risk: The Risk that the company fails for internal reasons.
c) Company Risk: The risk that the company fails for internal reasons.
d) Supplies Risk: The risk of failure due to disruption in the supply of inputs.
e) Sales Risk: The risk of failure due to disruption to sales.
f) Company Position Risk: The risk of failure due to weakness in the company’s position in the industry.
g) Performance Risk: The risk that the company’s position is so weak that it cannot perform well enough to repay the loan given expected external condition.
h) Resilience Risk: The risk of failure due to lack of resilience to unexpected external conditions.
i) Management Risk: The risk of failure due to management not exploiting effectively in the company’s position.
j) Management Competence Risk: The risk of failure due to management competence.
k) Management Integrity Risk: The risk of failure due to lack of management integrity.
l) Security Control Risk: The risk that the bank fails to realize the security.
m) Security Cover Risk: The risk that the realized security value is less than the exposure.
Example of lending risks and their analysis:
TYPES OF RISK ANALYSIS
Example of Supply Risk
Increase to cost of supply reduces margin.
Scarcity of supplies or unreliability of deliveries causes production loss.
Difficulty in obtaining right quality of supplies results in inferior product.
Reviewing recent changes in Govt. regulations and to determine the likelihood and nature of any future changes, this may affect supplies.
To obtain cost breakdown for each item and assess the risk that can disrupt the supplies of these items.
Example of Sales Risk
Sales drop because total market size drops.
Sales drop as a result of increased competition.
Sales damaged by changes in regulations
Company losses a single large customer.
Obtaining industry turnover for at least 3 years.
Determining if the project is obsolete, seasonal or cyclical.
Predicting growth or decline in market turnover over next few years.
Analyzing the financial data of at least two major competitors.
Determining how the company differentiates itself from its competitors.
Determining how company’s production technology compares with that of competitors.
Review regulations, which govern industry.
Observing recent changes and predicts future changes.
Evaluating the impact on industry of recent and potential future changes.
Identifying company’s 5 largest customers.
For any customer representing more than 10% of sales, assessing the risk that these customers switch to a competitor.
Example of Performance Risks
Company borrows more than it can repay, based on unrealistic performance expectations.
Analyzing recent performance history, competitive position, company’s strategy and cash flow forecast.
Example of Resilience Risk
Company has insufficient equity to avoid bankruptcy.
Company has insufficient cash flow to meet repayments.
Company position weakened by inappropriate connections.
Analyzing of Debt/Equity Ratio, obtaining Credit Bureau Report, and assessing shareholders support.
Analyzing Financial Ratios and flexibility of production.
Determining political and private sector affiliations of owners and key managers.
Example of Management Competence Risk
Managers do not have the necessary ability or experience.
Managers do not work well together, poor decision making.
Obtaining key manager’s bio-data to determine education, experience relevant skill.
Reviewing organization chart and comparing performance with competitors, determining reasons for any recent changes in management.
Example of Management Integrity Risk
Bank is unable to assess risk properly due to unreliable or inadequate data.
Bank has difficulty in recovering loan due to failure of management to meet commitments.
Reviewing credit file, interview of management and individuals familiar to management, performing site visit to assess, looking for signs of audit problem.
Reviewing intra-group accounts, looking for characteristics of managers.
Examples of Security Control Risk
Legal rights compromised, documentation inadequate, fraud, insurance does not cover exposure, customers able to influence judgement.
Security missing transferred immobile.
Verifying documentation, assessing customers lobbing power.
Site visiting to verify security existence.
Security Cover Risk
Expected realizable value is less than the exposure.
Acquiring and selling of security for liquidation takes longer than expected time.
Value realized at liquidation is less than the estimated value because security loss value or market price changes.
Complete security covers application form.
Reviewing recent cases to estimate speed of realization, assessing power of borrower to prolong legal process, analyzing market demand for securities.
Using assessor to value security.
Reviewing recent cases for difference between assessed and realized value.
Reviewing economic conditions.
RISKS RELATED TO INTERNATIONAL TRADE FINANACING AND PRECAUTIONS
Pre-Shipment Credits:
a) Before marking lien on the original letter of credit, it must be authenticated first and all the terms and conditions should be thoroughly scrutinized so that no detrimental clauses including violation of foreign exchange regulation and terms of UCPDC (Uniform Customs and Practices for Documentary Credit) are included and it must be properly preserved by the bank.
b) Expiry date of the L/C should be properly recorded in the book and no drawing is to be allowed against expired L/C.
c) The credit worthiness and solvency of the foreign buyer as well as the importer must be ascertained.
d) In case of properties mortgaged as collateral securities, the bank’s approved lawyer together with valuation certificate from proper authority must scrutinize the relative documents.
e) The exporter should arrange forward sale of foreign exchange to avoid exchange loss at the time of negotiation of export documents.
f) Incase of packing credit, the export L/C and relative documents must be verified.
g) Export Credit Guarantee must be obtained from Sadharan Bima Corporation in favor of the bank so that in case of failure to effect shipment in time or to repay the credit within 4 months, the bank may lodge claim against the guarantor.
h) While dispatching goods for shipment to port under packing cash credit the bank must verify the shipping mark on each of the packets / cartons as given in the relative invoice.
Post Shipment Finance:
a) Before extending post-shipment credit, the Bank must obtain credit report of the foreign buyer in time.
b) Bank’s proper charges documents / Guarantee bond must be signed by the exporter or duly authorized person of the exporter.
c) In negotiating, purchase or providing loan against export bill drawn under L/C. Export finance guarantee must be obtained from Sadharan Bima Corporation in fabor of the bank so that claim can be lodged at the event of non-payment by the foreign buyer.
d) In case of post shipment credit against export document not drawn under L/C comprehensive guarantee must be obtained in favor of exporter from Sadharan Bima Corporation.
e) After sending the export documents for realization, the bank must follow up regularly until realization of export proceeds. Proper instruction must be provided in the export bill forwarding schedule so that, In case of non-acceptance of bills appropriate measures may be taken by the collecting bank to protect the goods from loss of damage or lodge insurance claim in time.
Sonali bank uses a 15-page Standard Risk Analyzing from for assessing credit risks for the loan more than TK 50. Lakh. For credit less than that amount, the analyst should assess the risks in the same manner. For analyzing lending risks the analyst should collect the following documents / items:
I. Company financial statements (projected for new project) for at least 3 years.
II. Bank statement for prior 12 months from previous bank (for new customers).
III. Aged debtor list.
IV. Set of financial statements for at least two competitors.
V. Industry average figures.
VI. Financial spreadsheets.
VII. Customer account statistics form.
VIII. Credit Bureau report.
IX. Organization Chart.
X. Bio-data for-Directors and head of operations.
XI. Copies of all reports on site visits made during the last 12 months.
XII. Valuation of securities offered.
XIII. Memorandum and Articles of association.
XIV. Business Plan.
The LRA form contains each type of risks, assessment procedure and table to insert data, grading of each type of risk as low, Average, High and Excessive. In the 2nd page there is a risk-scoring matrix which has separate scores for business risk as Good / Acceptable / Marginal or poor risk. It also contains a prescribed consumer site visit report and another consumer accounts statistics form. The bank officer, who will analyze the risks, called the originating officer. The originating officer and the branch must sign in the LRA form and send it for approval to the sanctioning authority.
The analyst should be very careful for analyzing the lending risk. He has to use his foresight and personal judgement. He must not put average marks blindly on each item, which can also be sufficient to qualify a bad proposal. The analyst must have the skill and efficiency to understand each item separately and comment against the documents properly.
MAJOR PROBLEMS OF LRA IMPLEMENTATION:
Though LRA system is very systematic approach, but there are some shortcomings also. The major problems of LRA implementation are:
1. Inadequate Date: To apply LRA, financial data relating of a firm is very important to assess its strength. In many cases up-to-date and reliable data like production, trade, business raw-material, total demand and supply of different product of different industries, industry growth, sales turnover, performance data for major competitors are inadequate, which are necessary for assessing sales risk. The collection of company’s positional data is also cumbersome. So company’s rank in industry (in terms of turnover), and competitors financial position is difficult to assess in analyzing performance risk.
2. Inaccurate Date: LRA requires the financial statements of the company. Most of the borrower’s do not prepare financial statements. They fail to provide accurate data. Experience shows that even the financial statements submitted by the applicants can not be relied upon. Inconsistencies are observed in the information provided by applicants. So analysis of performance risk and resilience risk is difficult.
3. Lack of Auditor’s Performance: To minimize chance of unfair presentation of financial statement, lending officers have to rely much on audited financial statements. But in practical, the auditing firms sometimes help the business concerns in providing false and fictitious statements. With few exceptions, audited financial statements follow client’s instructions.
4. Unwillingness to disclose information: Generally, competitors do not have the habit of disclosing their business information. They always tend to maintain secrecy for their business interest. But LRA calls for submission of competitor’s performance.
5. Non-Cooperation between different Banks: LRA techniques require information regarding exposure to other banks. Though credit bureau report has an important role in this regard, the non-cooperation between different banks is a real difficulty.
6. Lack of experienced assessor: In most cases, the value of security actually realized is less than what a bank estimates. Sometimes, security also loses value before it is realized. Experience, qualified and reliable surveyor institutions to assess value of security, its quality and market, demand are very scarce in Bangladesh.
7. Inadequacy of skilled lending office: Preparing LRA requires special skill and knowledge. But there is lack of sufficient skilled lending officer.
8. Insufficient independence: Banks and financial institutions are not apart from any type of political influence or pressure group in respect of loans and advances. Besides, independence of credit analysis section at branch level is not fully ensured.
PREPARATION OF LOAN PROPOSAL
Some items are required to prepare a loan proposal these are given below:
Loan application
Stock list.
Required papers as per ownership of the firm.
Scheduled of mortgage properties and relevant papers.
Market reputation.
Other banks opinion
Lease deed and relevant letters.
Financial statement.
Lending risk analysis (LRA)
Financial spread sheet analysis.
Credit scoring.
Offering sheet (letter of credit)
Credit report
Introduction
Net worth
Relation with the bank
Social status
Political affiliation
Liabilities of other banks
Recommendation
Forwarding
Valuation of certificate
Sanction:
When a branch manager writes a letter to accepting all terms and conditions of loan, it is called loan sanction. The conditions which are included in the loan sanctions these are given bellow:
Limit
Primary securities
Collateral securities
The rate of interest
Expire date
Repayment
Documentation
Others condition
Documentation
Demand promissory note
Demand promissory note delivery letter
Revival letter
Balance confirmation
Form “A” special
Form “K” special
Form “C” general
Personal guarantee
Simple mortgage
Registered mortgage deed
General irrevocable power of attorney
Affidavit
Charge creation with a joint stock company:
The following terms and conditions are included in the charge creation with a joint stock company:
Simple mortgage deed
From “L”
Floating charge
Personal guarantee
List of machinery’s
Letter of continuity
Board resolution
Article of association and memorandum of association.
Disbursement:
Loan disbursement has to be made after completion documentation and observance of the sanctioning terms against rising of equity by sponsors as lay down. Each phase of loan disbursement to be supersede to be supervised by bank official so that borrower is not given scope of diversion funds to anywhere tends to purpose other than the project and the phase of implementation of the project to be effectively supervised and borrowers persuaded for completion of project in time. There are main three important factors in the loan disbursement, such as;
Completion of documentation.
Verification of stocks.
All import documentation.
Supervision:
Branch manager are expected are expected to exercise common sense and proper case in handing advances by them or any other appropriate authority. The branch manager is the corner stone of the bank and on him the success of a bank depends to large extent. In the first place he represents his bank and its management to the local public. The way in which he discharges the two functions makes him either a successful or an unsuccessful branch manager. He can to control advances judiciously to save the bank from failing into losses.
A. The customer is legally competent to borrow
B. The entire necessary document have been duly filled in, stamped and correctly executed by the borrower.
C. A proper authority covering operation and conferring power to overdraw is held in respect of accounts of permeated upon by persons other than the borrowers themselves.
D. It should be seen that the advance does not contravene and law directed by Bangladesh bank or the lending policy of the bank.
E. Security is correctly valued and is easily saleable.
F. Proper storage and custody are made.
G. Stipulated margin is maintained.
H. Adequate insurance, where necessary, has been taken
I. There is quick turnover of stocks.
J. Operations of customers account.
K. The balance is the account remains very near or goes beyond the drawing limit or there is no good turnover.
L. The balance is stagnant.
M. Cheques are drawn by the party are returned for storage of fund.
N. Post-date Cheques are issued by the party.
O. Cheques drawn by the party are frequently countermanded financial position.
Recovery:
Loans and advances in whatever from granted by the bank to its clients are repayable either on demand or at the expired of fixed period or as per payment schedule agreed upon while granting the facilities. If a loan is repayable on installment is not repaid on due date. Overdraft and credit are legally repayable on demand, although the bank seldom excises the right but in certain customers. In case loan is repayable in installments and default causes in the payment of any installment, entire loan usually become immediately recoverable of at the option of the bank.
Bank generally really their advances under the following cases:
A. If death occurs either of the borrower or of the guarantor.
B. If the borrower is reported to have committed as act of insolvency or has filed an application for his insolvency.
C. Dissolution the partnership.
D. Liquidation the borrowing company.
E. Failure to renew the documents sufficient before the expired of the limitation.
F. If there is any serious deterioration in the security charged to the bank and want of satisfactory in the account.
G. There has been deterioration in the financial position of the party.
H. If the borrower fails to maintain the stipulated margin and does not restore the shortfall inspire of repeated remainders.
I. Change in the bank’s policy of lending.
J. The policy of selective credit control by Bangladesh bank.
K. Detection of any other undesirable feature in the account.
L. There may also be other reasons for withdrawing the facility, i.e. the law and order situation at ascertain place is such that it may be risky to the advance.
Conclusion:
In the concluding note I would like to give an explanation regarding some aspects of the study. In this report I tried my best to attend the objective of the study. But there are certain limitations that underline the scope and validity of the study. This is due to lack of information and published data.
According to international standard, if the classified loan above 5% the board management would be inefficient. In this case World Bank does not give permission to them to operate banking functions but says that they will march with other banks or financial institutions and operate banking functions. Classified loan of this branch is above 5% of the total loan at present. So according to World Bank, the management of Sonali Bank is insufficient. But Sonali Bank says that the major loan of there is directive i.e. political person’s elite persons of the society pressure create on them to sanction loan. So, the Board of management of Sonali Bank says that their management is efficient.
Loan operation is an important factoring in Bangladesh because of its high demand. Supply of loan is inadequate and existing supply cannot produce satisfactory result. From brief analysis it is clear that fund for continuous supply of loan is the lengthy procedural steps of loan sanction policy make the problem in investment and recovery. Bureaucratic complexity internal and external influence, activities of trade union needed to be eliminated from banking operation to implement the successful credit policy which will make up optimistic about future. The bank is trying is best to remove all these difficulties and to participate in more and more extent in the economic up of the country. I think that recommendations may be implemented to improve the loan sanctioning, policy of Sonali Bank as well as other nationalized commercial banks. The picture about loan sanctioning policy of Sonali Bank, which I visualize, is not the picture of Sonali Bank alone; it is also true for all nationalized commercial banks.
Before concluding again I would like to emphasize the need for further study in this particular field. Because, from my experience of the study, I can say the subject matter have multiple linkages with the development of the economy.
Part Six
The Financial reform of Project and its Procedure
THE FINANCIAL SECTOR REFORM PROJECT
In 1993, The World Bank initiated Financial Sector Reform projects for improving the operational efficiency of nationalized commercial banks (NCBs) of Bangladesh. It focuses on the internal changes to the lending process to improve the loan portfolio of banks. In supervision of an international consultant, all application for credit and existing credits were thoroughly analyzed to assess the risk that the bank will not fully recover the loan. The recommendations on the basis of the finding and comparing those with standards, were
The banking system should channel scarce resources into those opportunities with maximum return.
Profitable enterprises should receive finding and grow.
Loss making enterprise should be refused funding and go out of business.
The bank shall make profit and pay taxes.
The economy will grow and people will be benefited.
Behind each of the suggestions, they found many violations. In these circumstances, FSRP team introduces some particular programs to be implemented immediately, for the improvement of credit conditions of banks. These are:
1. Change in organizational Behavior, ideas, and Attitude.
2. Performing Planning System (PPS)
3. Management information System (MIS)
4. Financial Spread Sheet Analysis (FSSA)
5. Lending Risk Analysis (LRA).
6. Credit Policies and Procedure (CP&P).
7. Bank Culture.
PROCEDURES FOR LOAN AND PROJECT FINANCE:
The general advances Department of Dilkusha Corporate Branch usually, follows the procedures and stages for sanctioning any kind of advances.
Those are mentioned below:
The prospective borrower has to apply to Sonali Bank for loan by filling up of a specific application form. Submit the entire required document indicated in the application form.
The application form contains following particulars:
1. Name of the borrower.
2. A/C number.
3. Business address (with telephone no.)
4. Residential address and permanent address.
5. Introducer’s name, A/C no. & address.
6. Date of establishment/Incorporation.
7. Trade license number, issue date, and expiry date (photocopy of trade license enclosed).
8. GIR/TR no. and amount of income tax paid last year.
9. Constitution / status (Mention whether sole proprietorship /partnership / public ltd. Company / private ltd. Company).
10. Particulars of individual/ proprietor/ partners/ directors (Name & Designation, Father’s and Husband’s name, present and permanent address with telephone no. % of shares held).
11. Experience and background of individual / proprietors / partners / directors.
12. Full particulars of assets in the personal name of individual / proprietor / partners / directors with valuation.
13. Names of subsidiaries / Affiliates, percentage of share holding and nature of business.
14. Nature and details of business / products (for which credit facility is applied for), Markets (Present market price per unit, factory price). Estimated sales for next one year.
15. Credit facilities required (type, amount, period, purpose, and mode of adjustment).
16. Details of securities offered with estimated value (Primary security, Collateral security, market value of the security).
17. Details of liabilities in the name of the client or in the name of any other partners / Directors of subsidiaries / Affiliates with Sonali Bank and other banks, if any (Name of the bank, A/C no. nature of the advance, amount, security and validity of limit).
18. Balance sheet / income statement or statement of accounts of the following years attached (Preferably last 3 years).
19. Other relevant in formation
20. Proposed debt / equity ratio.
21. Signature of the applicant.
An officer scrutinizes the documents whether the party has submitted the documents properly.
After receiving the loan application form, Sonali Bank sends a letter to Bangladesh Bank for obtaining a report from there, This report is called CIB (Credit Information Bureau) report. This report is essential if the loan amount exceeds TK. 50 lakh. The purpose of this report is to being informed that whether the borrower has taken loan from any other bank; if ‘Yes’, then whether these loans are classified or not.
The branch manager or an officer then takes the responsibility to visit and evaluate the concern.
Then proposal processing stage. In this stage, the bank will prepare a proposal. A proposal contains following information-
a) Name of the borrower.
b) Nature of limit.
c) Purpose of limit.
d) Extent of limit.
e) Security.
f) Margin
g) Rate of interest.
h) Repayment.
i) Validity.
Forwards the proposal to Head Office with proper recommendations.
Up to approval the work of the credit service department ended.
After the sanction advice, Bank will collect necessary documents (Charge documents).
Bank verifies all the documents executed by the borrower. If everything is found as per law, the branch disburses the loan to the borrower. A “Loan Repayment Schedule” is also prepared by the branch and is given to borrower.
After the disbursement of the loan the bank monitor the activities of the borrower in the following manner-
Constant supervision.
Working capital assessment.
Stock report.
Break even analysis.
Rescheduling of repayment (if necessary).
In general the borrowers repay the loans in installment directed by the bank. Some loans are repaid all at a time. If the borrower fails to repay the loans as per schedule, a notice is served to make repayment. Sometimes legal actions also taken for recover the loan.
Part seven
CHAPTER-I
1. POLICY GUIDELINES:
The Credit Policy guidelines of the Bank contain details fundamental credit risk management policies, outlines general principles that are designed to govern the implementation of more detailed lending procedures and credit risk analysis/risk grading system.
1.1 LENDING GUIDELINES:
The basic principles of lending are described in this section. It should be clearly understood at the very outset that these principles are not inflexible and are given as guidelines for protecting the Loans and Advances.
a) The bank shall provide suitable credit services and products for the markets in which it operates.
b) Loans and advances shall normally be financed from customers deposit and not out of temporary funds or borrowing from other Banks.
c) Credit facility will be allowed in a manner which will in no way compromise with Banks standards of excellence
d) All Credit extension must comply with the requirements of Bank’s Memorandum and Articles of Association, Banking Companies Act 1991 as amended from time to time, Bangladesh Bank’s instructions and other applicable rules and regulations.
e) The Bank will always adhere to the following general principles of extending credit facility to his customers; e.g. (1) Background, character and capability of the borrowers, (2) Purpose of the facility, (3) Term of facility, (4) Safety, (5) Security, (6) Profitability, (7) Source of repayment, (8) Diversity
It should be remembered that selection of the appropriate borrowers, proper follow-up and end-use supervision through constant follow-up and monitoring are the cornerstones for timely recover. These guidelines will be updated annually.
Before selecting a customer / client and subsequent recommendation for financing the Credit Officer / Relationship Manager shall observe the following basics of lending:
1.1.1 Industry and Business Segment Focus:
As a general practice Mercantile Bank Limited will definitely concentrate its business in Trade Finance / Export – Import business and all types of Commercial Loan, Industrial / Project Finance except otherwise restricted by the Government or indicated as unethical and banned items.
The Bank will give emphasis to diversify its business portfolio commensurate with economic and business trend, life cycle of the products, demand supply gap, social and national obligation etc. The Bank’s policies for financing in different major sectors are summarized as follows:
Table-6.1
SL Sectors Policies
1) Textile / Spinning/ Sweater/ Knitting/ Denims & Garments To expand
2) Cement To expand
3) Construction / Real estate / House building To expand
4) Tele communication To expand
5) Communication Selective basis
6) Information Technology (IT) Project To expand
7) Aro-based Industry To expand
8) Hospital / Clinic / School / College / University Selective basis
9) Healthcare / Pharmaceuticals / Medicine To expand
10) Electrical / Electronic appliance To expand
11) Finance to NBFI To maintain
12) Special Program – CCS, Personal Loan, Supervised Credit, Loan to SME clients To expand
13) Plastic / Packaging Selective basis
14) Leather Selective basis
15) Steel and Engineering To expand
16) Edible oil To expand
17) Scrap Vessel Restricted way
18) Paper / Pulp / Partex To expand
19) Chemicals Restricted way
20) Others Based on merit
The Banks policy is to handle the specialized business sectors / segments by setting up separate units in Head Office Credit Division. In view of this Bank has already set up the following units in Head office Credit Division:
• Syndication and Structured Finance
• Project Finance
• Garments Sector
• SME
• Specialized Schemes such as Consumers Credit – CCS / Personal Loan / Credit Card
• The Islamic Banking Wing is in the process to set up subject to approval from Bangladesh Bank.
The Policies for the above specialized segments / sectors have been / to be circulated to all concerns from time to time.
1.1.2 Types of Credit Facilities:
1. Trade Finance:
The Bank’s is to introduce diversified / new types of Products / Products derivatives alongwith usual Banking Products. At present the Bank offers the following facilities:
a) Non-Funded: L/C, Acceptance, Bank Guarantee, etc.
b) Funded: Cash Credit (Hypo), Cash Credit (Pledge), SOD(General), SOD(others), LTR/ PAD/ IBP/ FDBP/ IDBP/ Time Loan, etc.
2. Project Finance: (Large and Medium Industries / Small Industries including Agro-based Industries):
a) Non Funded: Acceptance, L/C for import of Machinery, Bank Guarantee, etc.
b) Funded: Time loan / Term loan for retirement of documents of imported machinery / Local machinery / other project fixed costs.
3. Working Capital (For Industrial Finance):
a) Non Funded: L/C for import of Raw Materials, Acceptance, Bank Guarantee, SOD (General), SOD (others), etc.
b) Funded: Cash Credit (Hypo) / Cash Credit (Pledge) / PAD / LTR / Time Loan / IBP / IDBP / FDBP / Packing Credit (for export oriented industries), etc.
4. Commercial Lending :
a) Non Funded: L/C for import goods, Acceptance, Bank Guarantee, etc.
b) Funded: Cash Credit (Hypo) / Cash Credit (Pledge) / OD / PAD / LTR / Time Loan / IBP / IDBP / FDBP, etc
5. Finance to NBFI:
a) Non Funded: L/C for import of machinery’s / equipment for their clients, Bank Guarantee, etc.
b) Funded : OD / SOD (General) /Time Loan / Term Loan
6. Special Program:
a) Funded: Consumer Credit Scheme, Personal Loan in the form of Time Loan / Term Loan, Staff House Building, SME (including Non-Funded), Visa Credit Card, EEF, etc.
7. Export Oriented Business:
a) Non Funded: Back to Back L/C (Revolving), Acceptance, Bank Guarantee, etc.
b) Funded: LTR, Packing Credit, FDBP, IDBP etc.
8. Products under Islamic Banking System:
1.1.3 Single Borrower / Group Limits / Syndication:
The Bank may extend the maximum credit facilities (funded / non-funded) to a single client / enterprise / group as per guidelines of Bangladesh Bank vide BRPD circular issued / to be issued from time to time on the following criteria:
a) Clients who obtained ‘A’ category as per Bank’s Risk Grading System.
b) Covered by adequate collateral security or Guarantee
c) Established long term business / Banking relationship
d) The total outstanding financing facilities by the Bank to any single client or enterprise or organization / group shall not at any point of time exceed 35% of the Bank’s total capital subject to the condition that the maximum outstanding against fund based financing facilities (funded facilities) do not exceed 15% of the total capital. Non-Funded Credit facilities e.g. letter of credit, guarantee, etc. can be provided to a single large borrower but under no circumstances, the total amount of the funded and non-funded facilities shall exceed 35% of the Bank’s Capital.
e) In case of export sector, single borrower exposure limit shall be 50% of the Bank’s total capital. But funded facilities in case of export credit shall also not exceed 15% of the total capital.
f) Loan sanctioned to any individual or enterprise or group amounting to 10% or more of the Bank’s capital shall be considered as large loan.
g) Total large loan portfolio of the Bank will not exceed the limit fixed by Bangladesh bank vide their BRPD circular # 05 dated April 09, 2005 or as advised by Bangladesh Bank from time to time.
In line with basic principles of lending, the Bank always discourages to lend its maximum ceiling to a single client / group to minimize the risk. The Bank will prefer as a policy guideline to arrange syndicated loan and participated in the syndicated / consortium loan arrangement or in club finance.
One obligor / Group Concept:
Group Relationship would be established as per Bangladesh Bank guidelines provided / to be provided from time to time.
1.1.4 Lending Caps:
a) The Bank Management will establish a specific industry sector exposure cap to avoid over concentration in any one-industry sector. Sector-wise allocation of Credit shall be made annually with the approval of the Executive Committee of the Board of Directors / Board of Directors as per appendix-A.
b) Diversification of Credit Portfolio will be encouraged so as to reduce the risk of dependence on a particular sector for balanced socio-economic development of the country.
c) Branches shall submit a report outlining trend and outstanding to the Head of Credit Administration Department on quarterly basis for onward submission to the Executive Committee of the Board of Directors / Board of Directors for information/ perusal/ guidance.
1.1.5 Discouraged business types:
The Bank will discourage lending to following areas of business:
• Military Equipment/Weapons Finance
• Tobacco sector
• Companies listed on CIB black list or known defaulters
• Highly Leveraged Companies
• Finance of Speculative Investments (Not more than 40% of share value: Face value or last 6 months average whichever is lower)
• Logging, Mineral Extraction/Mining or other activity that is Ethically or Environmentally Sensitive
• Counterparties in countries subject to UN sanctions
• Share Lending (Not more than 40% of share value or as per guidelines of Bangladesh Bank)
• Taking an Equity Stake in Borrowers (except under Islamic Banking Operation)
• Bridge Loans relying on equity/debt issuance as a source of repayment
1.1.6 Loan Facility Parameters:
The Loan facility parameters for the Bank have been set as under:
a) The Bank in general will approve / renew trade finance facility for the period of 01 (one) year from the date of approval / last expiry date.
b) The Bank will extend medium term loan for 3(three) years period.
c) The Bank will extend long term loan for maximum period of 6(six) year including grace period of 6(six) months to 18(eighteen) months (depending on the nature of Project) for project finance but in case of need, in syndication or club financing, the Bank may extend the period of loan unto 7(seven) years.
However, in case of House Building Loan (General), the repayment period will be maximum of 15(fifteen) years.
d) House Building Loan to Bank’s employee shall be governed as per policy guidelines of “Employees Building Loan” scheme.
e) Besides above, the Bank will extend credit facilities under different scheme like Consumer Credit Scheme, Small and Medium Enterprise Loan (SME), NBFI’s as per policy set / to be set by the Bank under the policy guidelines of the specific scheme.
f) The rate of Interest / Commission / Charges / Fees etc. would be as per the approved schedule of charges with variation permissible as per Bangladesh Bank guidelines and with the approval of competent authority.
g) The interest rate to be charged and to be paid out on quarterly basis except the especial schemes and unless otherwise specified in the approved terms.
h) Repayment of term loan would be fixed preferably on monthly/quarterly basis.
i) In general, the cash margin for L/C would be 10% of the L/C amount or on the basis of Banker – Customer relationship subject to the minimum requirement of Bangladesh Bank whichever in higher.
j) For the import of Capital machinery, the cash margin for L/C would be 25% – 30% or on the basis of Banker – Customer relationship subject to the minimum requirement of Bangladesh Bank whichever is higher.
k) Any exception, as mentioned above, would be specifically approved by the competent authority of the Bank.
l) Security accepted against credit facilities shall be properly valued and shall be affected in accordance with Laws of the country in which the security is held. An appropriate margin of security will be taken to reflect such factor as the disposal costs or potential price movements of the underlying assets.
Accepted Securities are: Cash/Cash equivalent, Land and Building (in the form of registered mortgage) hypothecation of Plant and Machinery, goods, assignment of bills / receivables, book debts, pledge of shares, guarantee / Corporate Guarantee, etc.
m) Valuation of the lender property / Building / Machinery / Raw materials shall be done by the Bank’s enlisted professional surveyors duly checked by the Bank officials.
n) Mortgage formalities including execution of registered irrevocable power of attorney must be completed as per legal vetting of the Bank’s approved Lawyer.
o) The value of the mortgage property shall be preferably being double of the facility to be extended depending upon other security coverage.
The security condition may be relaxed depending upon the Credit worthiness of the customer / Banker-Customer relationship / potentiality of the business of the client.
Any exception of the parameters mentioned above is subject to be approved by the competent authority as per delegated power approved by the Board of Directors
1.1.7 Cross Border Risk / Political and Sovereign Risk:
Risk associated with cross border lending. Borrowers of a particular country may be unable or uncivilling to fulfill principle and/or interest obligation, distinguish from ordinary credit risk because the difficulty arises from a political event, such as suspension of external payments
– Synonymous with political and sovereign risk
– Third world debt crisis
For example, export documents negotiated for countries like Nigeria.
1.1.8 Pricing Policy:
Interest on various lending categories will depend on the level of risk and type of security offered. The higher the risk, the higher will be the interest rate. However, exceptions shall be made in case of lending in national priority sectors.
The Bank from time to time circulate the interest rate / pricing of loans / charges / commissions, etc. to its branches with the approval of competent authority and as per guidelines of Bangladesh Bank. As on date the Bank fixes a mid rate for lending based on the Average Cost of Fund. All pricing of loans shall, however, have relevance to the market condition and be approved by the appropriate authority of the Bank.
1.1.9 Credit and Marketing Fundamentals:
a) In order to give high priority on the quality of Risk Assets, new Credit proposals must meet the Bank’s Credit criteria
b) Maximization of profit is the basic aim of the Bank as such every profit opportunity should be explored and professional skills are employed in the direction.
1.2 CREDIT ASSESSMENT AND RISK GRADING:
All financial activities involve a certain degree of risk and particularly, the financial institutions of the modern era are engaged in various complex financial activities requiring them to put proper attention to every detail.
1.2.1 Credit Assessment:
A thorough Credit and Risk assessment shall be conducted for all types of credit proposals. The results of this assessment shall be presented in the approved Credit Appraisal Form that originates from the Credit officer / Relationship Manager (RM) and is to be approved by the Management / Executive Committee of the Board of Directors / Board of Directors. The Credit officers / RM is the owner of the customer relationship and must be held responsible to ensure the accuracy of the entire credit application / proposal submitted for approval. The Credit Officer / RMs must be familiar with Bank’s lending guidelines and should conduct due diligence on new borrowers, principals and guarantees in line with policy guidelines.
Credit Appraisal should summarize the results of Credit Officers / RMs risks assessment and includes as a minimum, the following details:
• Amount and type of loan(s) proposed
• Purpose of Loan(s)
• Results of Financial analysis
• Loan structure (Tenor, Covenants, Repayment schedule, Interest)
• Security Arrangements
KYC Concept:
The Credit Officers / RM must know their customers and conduct due diligence on new borrowers, principals and guarantees to ensure such parties are in fact who they represent themselves to be i.e., Know Your Customer (KYC).
The Banker – Customer relationship would be established first through opening of CD/ STD / SB accounts. Proper introduction, photographs of the account holders / signatories, passport, Trade License, Memorandum and Articles of the Company, List of Directors, resolution, etc., all the registered papers as per Bank’s policy and regulatory requirements are to be obtained at the time of opening of the account. A declaration regarding approximate transaction to the account is to be obtained during opening of account. Information regarding business pattern, nature of business, volume of business, etc. are to be ascertained. Any suspicious transaction must timely addressed and brought down to notice of Head Office / Bangladesh Bank as required and also appropriate corrective measures to be taken as per the direction of Bank Management / Bangladesh Bank.
1.2.2 Risk Management / Credit Risk Evaluation / Assessment – Lending Decision :
A comprehensive and accurate appraisal of the risk in every credit proposal of the Bank is mandatory. No proposal can be put on place before approving authority unless there has been a complete analysis. In order to safeguard Bank’s interest over the entire period of the advance, a comprehensive view of the capital, capacity, integrity of the borrower, adequacy, nature of security, compliance with all regulatory /legal formalities, condition of all documentation and finally a continuous and constant supervision on the account are called for. It is absolute responsibility of the Credit Officer / RM to ensure that all the necessary documents are collected before the proposal is placed for approval. Where Loans/Advances/Credit facilities are granted against the guarantee of the third party, that guarantor must be subject to the same credit assessment as made for the principal borrower.
While making lending decisions, particular attention shall be given to the analysis of credit proposals received from heavily leveraged companies and those dealing in non-essential consumer goods, taking special care about their debt servicing abilities.
Emphasis shall be given on the following several credit principles:
a) Present and future business potentiality for optimum deployment of Bank’s fund to increase return on assets
b) Preference for self liquidating Quality business
c) Avoiding marginal performers
d) Risk depression is basic to sound credit principles and policies. Bank shall be careful about large and undue concentration of credit to industry, one obligor and common product line, etc.
e) Managing the amount, size, nature and soundness of one-obligor exposures relative to the size of the borrower and Bank’s position among his other lenders.
f) Personal guarantee of the principal partners or the Directors of the Company shall be obtained
1.2.3 Basics of Credit Risk :
The following risk areas shall be considered for analyzing a credit proposal.
• Borrower Analysis (Management/Ownership/Corporate Structure Risk):
The majority shareholders, management teams and group or affiliate companies shall be assessed. Any issues regarding lack of management depth, complicated ownership structures or inter-group transactions shall be addressed, and risks to be mitigated. The following questions may be asked to assess the Management Risk:
Who is the borrower? Does any particular/special characteristic of borrower need particular attention? For example, if the borrower is a Trust, this calls for examination of Trust Deed.
Are there adequate abilities and experience in senior management?
Is there adequate depth and succession planning?
Is there any conflict amongst owners/senior managers that could have serious implications?
Is the Manager/Credit Officer satisfied about the character, ability, integrity and experience of the borrower?
• Industry Analysis (Business and Industry Risk):
The key risk factors of the borrower’s industry shall be assessed. Any issues regarding the borrower’s position in the industry, overall industry concerns or competitive forces (demand supply gap) shall be addressed and the strengths and weakness (SWOT Analysis) of the borrower relative to its competition to be identified. For the above purpose the Credit Officers/RM may obtain / collect data from the statistical yearbook / economic trends of Bangladesh Bank / public report / newspaper/ journals etc. The following questions may be asked to assess the Business and Industry Risk:
Are there any significant concentrations of sales (by customer, industry, country, and region)?
How does the borrower rate with its competitors in terms of market share?
Can increased direct production costs be easily passed on to customers?
Does the borrower deal in any specific product that may be subject to obsolescence?
Is the purpose of borrowing consistent with the objectives of the Company?
Is the purpose legal? Does it contravene any rules and laws of the country and any instruction issued by the Bangladesh Bank/Head Office?
• Supplier/Buyer Analysis/Market Risk:
Any customer or supplier concentration shall be addressed, as these could have a significant impact on the future viability of the borrower.
• Market Risk:
The sufficient market data is to be obtained to identify clients/borrowers’ market share in the industry/demand-supply gap in the market.
• Technological Risk :
The product that is manufactured must be technologically viable i.e. whether the technology applied is updated. The product’s stage in its life cycle must be understood. Technical Aspects of the products must be addressed. The Credit Officer / RM must be satisfied with the mitigating factors of technical and technological risk, associated with the products.
• Financial Analysis (Historical / Projected):
An analysis of a minimum of 3 years historical financial statements of the borrower should be presented. Where reliance is placed on a corporate guarantor, guarantor’s financial statement should also be analyzed. The analysis should address the duality and sustainability of earnings, cash flow and the strength of the borrower’s balance sheet. Specifically, cash flow, leverage and profitability must be analyzed. In this regard the Credit Officer / RM must look into the status of chartered accountant audit firm.
Where term facilities (tenor > 1 year) are being proposed, a projection of the borrower’s future financial performance should be provided, indicating an analysis of the sufficiency of cash flow to service debt repayments. Loans shall not be granted if projected cash flow is insufficient to repay debts. In this regard the possibilities of cost overrun and sensibility analysis shall be done. The following questions may be asked to assess the Financial Risk:
Does the borrower produce financial statements on time?
Is working Capital Adequate?
Has the customer actual title to stock?
Have financial covenants been met?
Has there been any major sale of shares by directors?
Any significant change in asset conversion cycle? (Account Receivables/ payables Inventory etc.)
• Account Conduct:
For existing borrowers, the historic performance in meeting repayment obligations (trade payments, cheque, interest and principal payments, etc.) shall be assessed. In this regard the Credit Officer / RM may look into the account turnover like debt summation / credit summation- highest debit balance/ highest credit balance (or lowest debit balance), no. of debit entries/ no. of credit entries for last three years (year wise)
• Adherence of Lending Guidelines :
The Credit Applications/ Appraisals must be prepared in line with Bank’s lending guidelines. It must be clearly stated whether or not the application/proposal is in compliance with Bank’s Credit Policy lending guidelines. Related questions to be addressed are:
Is proposed application in compliance with Bank’s guidelines?
Does the lending to clients also compliant with Central Bank’s guideline?
What are the Niche Products?
• Interest Rate Risk :
The interest rate must be fixed based on different risk factors associated with the type of business such as liquidity risk, commodity risk, equity risk, and loan period risk. Interest rate also arises from the movements of interest rate in the market. In assessing the pricing and profitability, the credit officer/RM must consider the income from ancillary business like foreign exchange business, group business, volume of business etc. Related questions to be addressed are:
What is the rate of interest charged?
Is the rate fixed in consideration to the risk factors?
Will the rate charged be profitable to the Bank?
• Foreign Exchange Risk :
The foreign exchange transaction is associated with foreign currency fluctuation risk. Therefore the credit officer/RM must take care of for the Forex risk. The questions to be addressed as:
Does the business involve foreign currency dealings?
What are trends of foreign currency fluctuation?
• Cost overrun Risk :
This type of risk is generally involved in taking project finance decision. A high degree of cost overrun may cause the failure of the project. Therefore the credit officer must consider the cost components of the project and their chance of devaluation. The questions to be addressed are-
Whether the construction cost may increase?
Whether the imported machinery cost may increase for the fluctuation of the foreign currency.
Are all types of cost components addressed during preparation of feasibility report?
Does sensitivity analysis prove sufficient shock absorbing capability of the project?
• Mitigating Factors :
The Credit Officer/RM must address to different risks associated with the proposal. The possible risk include but not limited to market risk, financial risk, foreign exchange risk, risk of cost overrun, margin sustainability and/or volatility, high debt load (leverage/gearing), overstocking or debtor issues, repaid growth, acquisition or expansion, new business line/product expansion: management changes or succession issues, customer or supplier concentrations, and lack of transparency or industry issues obtaining factors for risks identified in the credit assessment shall have to be described and understood.
The Bank must assess the critical risks of facilities given / to be given and ways / factors of mitigation of those risks. Some of the critical factors are:
Volatility
High debt
Overstocking
Rapid growth
Acquisition
Debtors issues
Succession
• Loan Structure :
The amounts and tenors of financing proposed should be justified based on the projected repayment ability and loan purpose. Excessive tenor or amount relative to business needs increase the risk of fund diversion and may adversely impact the borrower’s repayment ability. Related questions to be addressed are:
Are facilities justified by the borrower’s business?
Are any capital / long term expenditure being financed by short time borrowing (either OD or TR)?
What is the amount required? Is it sufficient or excess for the purpose mentioned?
• Security :
A current valuation of collateral must be obtained from Bank’s approved enlisted surveyors and the quality and priority of security being proposed shall be assessed properly.
Loan shall not be granted based solely on security. Adequacy and the extent of the insurance coverage shall be assessed. The Credit Officer/RM must look into the client’s interest / dependability on the collateral offered as security.
Is security offered acceptable and adequate?
Has all the security been perfected in accordance with the loan application?
Have any valuation and inspection been undertaken since the last application?
If you hold a guarantee, do you consider it has value?
Has the credit rating of the Borrower deteriorated and have you considered the requirement for additional security?
Can a valid charge be obtained on the security?
1.2.4 Name lending (Relationship Assessment) :
Credit proposals shall not be unduly influenced by an over reliance on the sponsoring principal’s reputation, reported independent means, or their perceived willingness to inject funds into various business enterprises in case of need. These situations shall be discouraged and treated with great caution. Rather, credit proposals and the granting of loans will be based on sound fundamentals supported by a thorough financial and risk analysis.
Has the borrower complied with the terms and conditions of the facility?
Adverse feature include: any past dues / excesses / delays / cheque returns and or default in covenants and / or failure to meet interest when due.
Does the account fluctuate with the seasonally of the business?
Has the relationship strategy and earnings for the last twelve months been met?
1.2.4 Risk Grading :
Risk grading is a key measurement of a Bank’s asset quality and as such, it is essential that grading is a robust process. All facilities shall be assigned a risk grade. Where deterioration in risk is noted, the Risk Grade assigned to a borrower and its facilities shall be immediately changed. Borrower Risk Grades shall have to be clearly stated on Credit Applications.
Presently the Bank is following/conducting the Lending Risk Analysis to assess the risk grade. The concerned Credit Officer / RM must clearly indicate the risk grade (as per the finding) in the specific column of credit appraisal form so that the authority can take decision on the matter. A standard Risk Grading Matrix is depicted as under based on the Risk Grade Scorecard attached as an Appendix-1
Risk Rating Grade Definition
Superior –
Low Risk
1 Facilities are fully secured by cash deposits, government bonds or a counter guarantee from top tier International Banks / Local Banks. All security documentation’s are in place and in order.
Good –
Satisfactory Risk
2 The repayment capacity of the borrower is strong. The borrower should have excellent liquidity and low leverage. The company must demonstrate consistently strong earning and cash flow and have an unblemished track record. All security documents are in place. Aggregate Score of 95 or greater based on the Risk Grade Scorecard.
Acceptable –
Fair Risk
3 Adequate financial condition though may not be able to sustain any major or continued setbacks. These borrowers are not as strong as Grade 2 borrowers, but should still demonstrate consistent earning, cash flow and have a good track record. A borrower should not be graded better than 3 if realistic audited financial statements are not received. These assets would normally be secured by acceptable collateral (1st charge over stocks/debtors/equipment/property). Borrowers should have adequate liquidity, cash flow and earnings. An Aggregate Score of 75-94 based on the Risk Grade Scorecard.
Marginal –
Watch List
4 Grade 4 assets warrant greater attention due to conditions affecting the borrower, the industry or the economic environment. These borrowers have an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and/or inconsistent earnings. Facilities should be downgraded to 4 if the borrower incurs a loss, loan payments routinely fall past due, account conduct is poor, or other untoward factors are present. An Aggregate Score of 65-74 based on the Risk Grade Scorecard.
Special Mention
5 Grade 5 assets potential weaknesses that deserves management’s close attention. If left uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower. Facilities should be downgraded to 5 if sustained deterioration in financial condition is noted (Consecutive losses, negative net worth, due for 30-90 days, or if a significant petition or repayment of facilities is still expected and interest can still be taken into profits. An Aggregate Score of 55-64 based on the Risk Grade Scorecard.
Risk Rating Grade Definition
Substandard
6 Financial condition is weak and capacity or inclination to repay is in doubt. These weaknesses jeopardize the full settlement of loans. Loans should be downgraded to 6 if loan payments remain past due for 90 days but less than 180 days, if the customer intends to create a lender group for debt restructuring purposes, the operation has ceased trading or any indication suggesting the winding up or closure of the borrower is discovered. Not yet considered non-performing as the correction of the deficiencies may result in an improved condition and interest can still be taken into profits. An Aggregate Score of 45-54 based on the Risk Grade Scorecard.
Doubtful
and Bad
(non-performing)
7 Full repayment of principal and interest is unlikely and the possibility of loss is extremely high. However, due to specifically identifiable pending factors, such as litigation, liquidation procedures or capital injection, the assets are not yet classified as Loss. Assets should be downgraded to 7 if loan, payments remain past due in excess of 180 days and interest income should be taken into suspense (non-accrual). Loan loss provisions must be raised against the estimated unrealizable amount of all facilities. The adequacy of provisions must be reviewed at least quarterly on all non-performing loans and the bank should pursue legal options to enforce security to obtain repayment or negotiate an appropriate loan rescheduling. In all cases, the requirements of Bangladesh Bank in CIB reporting, loan rescheduling and provisioning must be followed. An Aggregate Score of 35 – 44 based on the Risk Grade Scorecard.
Loss
(non-performing)
8 Assets graded 8 are long outstanding with no progress in obtaining repayment (in excess of 360 days past due) or in the late stages of wind up/liquidation. The prospect of recovery is poor and legal options have been pursued. The proceeds expected from the liquidation or realization of security may be awaited. The continuance of the loan as a bankable asset is not warranted and the anticipated loss should have been provided for. This classification reflects that it is not practical or desirable to defer writing of this basically worthless asset even though partial recovery may be effected in the future. Bangladesh Bank guidelines for timely write off of bad loans must be adhered to. An Aggregate Score of 35 or less based on the Risk Grade Scorecard.
1.3 APPROVAL AUTHORITY:
i) All powers of the Bank are vested in the Board. They are the source of all powers, and any person or body can exercise only the powers delegated by the Board in ways and manners specified by them.
ii) Mercantile Bank Ltd. believes in decentralization of powers. With a view to ensuring prompt and efficient services to its multitude of clients spread far and wide, the Bank envisages delegation of optimum powers to its Executives and Officials at different levels of operations. But, while delegating powers, the Board is also aware of the following principles and factors:
(a) The Board can delegate the authority, not its responsibility.
(b) The evil of dual sub-ordination may creep in the chain of command if authority is not well defined and properly implemented.
(c) Exercise of the delegated authority must commensurate with the shouldering of the responsibility.
iii) In order to implement the system of delegation of powers effectively, and to derive the desired benefit for the Bank as well as the Executives concerned, the Bank must develop a system to ensure that the delegated authority exercised by the Executives can be evaluated realistically and qualitatively. For that purpose, the Bank will have to develop a Management Information System (MIS) so that the Board gets prompt and systematic feed back as to how effectively and efficiently the delegated authority is being exercised by the Executives. For the purpose of investment of Bank’s Fund, the cardinal principle is ‘Safety first, Business next’. Delegation of power shall test the ability of the Executives to take decisions judiciously with honesty and integrity to achieve the objectives of the Bank.
iv) The Board of Directors of the Bank in its 42nd meeting held on 29th April 2003 approved delegation of a) Business Power (Loans and Advances), b) Business Power (Foreign Exchange) to individual executives of the Bank.
v) The Bank intends to make it crystal clear to all concerned that the powers are delegated to serve the greater interest of the institution. So, to achieve this objective, the General Guidelines as described in section . . . . . . . . . Of chapter . . . . . . . and the ceiling as mentioned in Annexure . . . . . . Shall be followed meticulously.
vi) The credit approval function has been separated from the marketing/relationship management function.
vii) Unless personally authorized by a separate letter, mere mention of delegation in this guidelines shall not entitle an official falling under the category to exercise the powers.
viii) Delegated approval authorities shall be reviewed annually by Managing Director & CEO/ Executive Committee of Directors / Board of Directors
ix) All credit risks must be authorized by executives within the authority limit delegated to them by the Managing Director & CEO/ Executive Committee of Directors / Board of Directors. The “pooling” or combining of authority limits is not permitted.
x) The aggregate exposure to any borrower or borrowing group is used to determine the approval authority required.
xi) Any credit proposal that does not comply with Lending Guidelines, regardless of amount, has to be referred to Head Office for Approval.
xii) Managing Director & CEO/Head Office Credit Risk Management / Board as per the delegated power shall approve and monitor any cross border exposure risk / exceptional case.
xiii) Any breaches of lending authority to be reported to Managing Director & CEO, Head of Internal Control and Head of CRM.
1.3.1 Training and Experience:
It is essential that Executives/Officers authorized to exercise delegation of business power must have relevant training and experience to carry out their responsibility effectively and a minimum they should have:
• At least 5 years experience working in Corporate / Commercial banking as a relationship manager/Head of Branch/ Head of Credit, etc.
• Training and experience in financial statement, cash flow and risk analysis
• A thorough working knowledge of Accounting
• A good understanding of the local industry/market dynamics
• Adequate knowledge of the following areas:
Introduction of accrual accounting.
Industry / Business Risk Analysis.
Borrowing causes.
Financial reporting and full disclosure.
Financial Statement Analysis.
The Asset Conversion/Trade Cycle.
Cash Flow Analysis.
Projections.
Loan Structure and Documentation.
Loan Management.
1.3.2 Reporting Of Approved New Facilities And Declined Proposals :
A monthly summary of all new facilities approved, renewed, enhanced and a list of proposals declined stating reasons thereof to be reported by CRM to the Managing Director and CEO.
1.3.3 Time Requirement for Approval of Credit Proposals:
Time requirement for approval of Credit proposals:
• At Branch level : Branch Authority as per their business delegation must take decision within maximum of 3 – 7 days
• At Head Office level : The Head Office Credit Committee(HOCC)/ Executive Committee of the Board of Directors/Board of Directors shall take decision within maximum of :
5 – 7 days for simple type of facility
7 – 15 days for Project Loan
15 – 45 days for Loans under Syndication / Club Finance etc.
• Sanction letter to be issued within 1 – 2 days time from the date of approval.
• In case of Large Loan, it must be reported to Bangladesh Bank.
• In case of the specific loans like Director’s loan, prior approval from Bangladesh Bank to be obtained as per requirements / guidelines of Bangladesh Bank.
1.3.4 Segregation of Duties :
The following lending functions have been segregated:
• Credit Approval / Risk Management
• Relationship Management / Marketing
• Credit Administration
The purpose of the segregation is to improve the knowledge levels and expertise in each department, to decrease the probability of compromise, to impose controls over the disbursement of authorized loan facilities and obtain an objective and independent judgments of credit proposals. The job responsibilities of different units are as follows:
Name of Unit Job responsibility
…………
Relationship Management / Credit Marketing The persons in the department will be responsible for Relationship Management.
1. To act as the primary contact person with the borrower regarding marketing of credit products.
2. To maintain thorough knowledge / up to date position of borrower’s business and industry. The concerned officer must apply his intelligence/common sense to ascertain whether the proposals carry value or contribute to Bank’s profitability.
3. To cater to customer needs and summarize the facilities/ rate of interest / commission / charges / security arrangement etc. and place it to the higher authority for further process.
4. To make periodic visit / inspection in borrower’s shop / factory / warehouse etc. and submit the report to the Head of Credit Marketing.
5. To provide required information to the Credit appraisal team for approval / concurrence or other action and Credit Administration Team in case of need.
6. To monitor the financial performance and account conduct of the borrower and intimate the updated position to the Credit Approval Authority / branches.
7. To prepare a Call report for all customer contact / visit and place it to the reporting authority.
Credit Appraisal / Approval 1. To prepare credit proposals (memo) and place it to the approval authority for decision.
2. To obtain necessary approval from appropriate approval authority
3. Issuance of Sanction Letter / declining decision to the branches
4. All sorts of correspondence to the branches / Marketing division for preparation of memo.
5. Conducting due diligence in line with Bank’s CRM Policy guidelines and Bangladesh Bank / Govt. rules and regulations.
Name of Unit Job responsibility
Credit Administration 1. To ensure completion of documentation formalities in compliance with terms of approval.
2. To monitor insurance coverage to ensure appropriate coverage is in place over assets pledged.
3. To control loan disbursement only after all terms and conditions of approval have been met and all security documentation is in place.
4. To maintain control over all security documentation
5. To monitor borrower’s compliance with covenants & agreed terms and monitor account performance
6. Directly manage all Overdue, Special Mention, Substandard, Doubtful & Bad and Loss accounts to regularize / maximize recovery and ensure that appropriate and timely loan loss provisions have been made.
7. To provide early signals/ warning to the branches / Marketing division / Account Relationship officers.
8. To determine Account Action Plan / Recovery Strategy
9. To pursue all options to maximize recovery
10. To produce required statements related to credit division including statement of new facilities, renewed facilities, declined facilities and submit before the Managing Directors & CEO / EC / Board for review and guidance.
11. To deal with legal matters
12. To process branch proposals regarding rescheduling / classified accounts
13. To collect CIB report from Bangladesh Bank and be responsible for CIB, CL returns of Bangladesh Bank
14. To submit all required Bangladesh Bank returns and statements to other regulatory authorities.
15. To enlist surveyors, lawyers, insurers with approval of the Bank Management and to monitor and review their performance periodically.
1.3.7 Internal Audit/Control:
The Bank has a separate and independent Audit and Inspection Division responsible for conducting audits and inspection of all Branches and Departments of Head Office. Audits and Inspection are carried out on periodic interval (at least once in a year) to ensure compliance with regulatory guidelines, internal procedures and Lending Guidelines as per Bangladesh Bank Core Risk Management policy. Surprise inspection / special inspections are also conducted as and when required. The Head of Audit & Inspection Division directly reports to the Managing Director and CEO.
1.3.5 Establishment of Control Mechanism:
At present 13 (thirteen) Branches of the Bank are interconnected with ONLINE SYSTEM. Rest of the branches will be ONLINE within 2-3 months. Therefore, it will be possible to monitor any function / any transaction of the branches by the controlling authority at Head Office after establishment of ONLINE SYSTEM with other branches. Authority may be given to Managing Director and CEO, Additional Managing Director, Deputy Managing Director, Head of Credit, Head of Credit Administration Department, Head of Internal Audit & Inspection, Head of Board Audit and Head of Compliance to go through any transaction of the Branches as and when required.
1.3.6 Credit Training:
In order to discharge the duties efficiently and conduct the due diligence properly, it is necessary to arrange sufficient training for executives / officers of different areas particularly the credit officers. Considering the requirements the Bank has established its Training Institute in Head Office in 2002 where different types of banking related courses are offered to Officers of different level. It is expected that all Credit and Relationship Officers will be trained gradually in specific fields of Credit Risk Management.
CHAPTER-II
1. ORGANIZATIONAL STRUCTURE AND RESPONSIBILITIES:
The appropriate organizational structure must be in place to support the adoption of policies described in Chapter-I of these guidelines. The key feature is the segregation of the Marketing / Relationship Management function from Approval / Risk Management / Administrative Functions.
Credit approval shall be centralized within the CRM function. Credit application shall be approved by the Managing Director and CEO / Additional Managing Director / Deputy Managing Director / Head of Credit at Head Office / Head of Branches as per their delegation of business powers approved by the Board of Directors and beyond their authority, the proposals are to be placed before the Executive Committee of the Board of Directors / Board of Directors for approval.
2.1 ORGANIZATIONAL STRUCTURE:
The following chart represents the management structures:
2.2 Key Responsibilities:
The key responsibilities of the above functions are as follows. Please you can show (A-D) for sample job descriptions.
A) Head of Corporate / Commercial Banking:
The responsibility of the Head of Corporate / Commercial Banking includes planning, developing and managing the Bank’s corporate, commercial and institutional business to ensure high profitability and sustained growth in line with the Bank’s strategic plan, credit policies and business objectives in order to provide overall coordination of marketing efforts for the Bank’s non-personal business including the formulation of strategy, establishment of performance tracking systems and joint campaign with other Divisions of the Bank. He will serve on the Bank’s Asset and Liability Management Committee.
The other key responsibilities of the Head of Corporate / Commercial Banking are as follows:
1. Oversee the marketing and business development activities of the bank’s non-personal business.
2. Maximize Bank’s profitability through promotion of all bank products and appropriate loan pricing.
3. Ensure credit quality is maintained and that reviews are current at all times.
4. Ensure a prudent level of portfolio diversification.
5. Ensure compliance with Bank Credit Policies and Central Bank regulations.
6. Contribute to the development of relationship management skills of staff in Corporate Banking.
7. Provide input/advice to the MD and CEO/Board of Directors regarding the formulation of strategic operating plans.
8. Maintain an in depth knowledge of the local market.
B) Relationship Manager :
The responsibility of Relationship Managers (RMs) is to serve as the primary relationship contact person with the Bank’s corporate and commercial customers, to maximize relationship profitably through cross selling and to minimize credit losses through risk assessment and timely identification of deteriorating Credit Risk of Customers.
The other key responsibilities of the RMs are as follows:
1. Maintain thorough knowledge of borrower’s business and industry through regular contact, factory/warehouse inspections, etc. RMs should proactively monitor the financial performance and account conduct of borrowers.
2. Timely and accurate submission of Credit Applications for new proposals and annual reviews, taking into account the credit assessment requirements outlined in clause 1.2.1 of Chapter-I of this Credit Policy.
3. Highlight any deterioration in borrower’s financial standing and amend the borrower’s Risk Grade in a timely manner. Changes in Risk Grades should be advised to and be approved by concerned approval authority.
4. Seek assistance/advice at the earliest from CRM regarding the structuring of facilities, potential deterioration in accounts or for any credit related issues.
5. Provide good customer service while ensuring that the Bank’s interest is protected
6. Grow the customer base through marketing and business development efforts, including cross selling to existing customer base
7. Ensure that credit quality is maintained and customer reviews are completed in timely manner.
8. Follow up with customers to ensure the timely receipt of financial statements, loan payments and all documentary requirements of the Bank.
9. Ensure compliance with internal policies and procedures and external regulatory requirements and that all internal and external audit recommendations are implemented.
C) Head of Credit Risk Management :
The Key responsibilities of the Head of Credit Risk Management are as follows:
1. Oversight of the Bank’s credit policies, procedures and controls relating to all credit risks arising from corporate/commercial/institutional banking and treasury operations.
2. Oversight of the Bank’s asset quality.
3. Directly manage all Special Mentioned, Substandard, and Doubtful and Bad & Loss accounts to maximize recovery and ensure that appropriate and timely loan loss provisions have been made.
4. Approve or decline, within the delegated business authority, the Credit Applications recommended by RM. Where aggregate borrower exposure will be in excess of the delegated authority, he will provide recommendation to AMD / MD & CEO / EC / Board of Directors for approval.
5. Provide advice/assistance regarding all Credit matters to line management / RMs
6. Ensure that the lending executives have adequate experience and / or training in order to carry out job duties effectively.
D) Head of Credit :
The responsibility of the Head of Credit is to ensure sound asset quality and create a conservative credit culture through lending activities, credit approval process is responsive to customer needs and credit losses are minimized. He will serve on the Bank’s Asset and Liability Management Committee.
The other key responsibilities of the Head of Credit are as follows:
1. Promote strong asset quality
2. Updating the Bank’s lending guidelines/credit policies as and when required
3. Ensure credit recommendations/approvals are taken in a timely manner
4. Ensure a prudent level of portfolio diversification
5. Maximize recovery of problem loans and minimize credit losses
6. Ensure compliance with internal policies and procedures and external regulatory requirements
7. Contribute to the development of credit risk management skills of staff in Credit Administration and Corporate Banking departments
8. Provide input/advice to the MD & CEO/Board regarding the formulation of strategic operating plans
E) Head of Credit Administration Department (CAD) :
The responsibility of the Head of Credit Administration Department (CAD) includes planing, organizing, directing, controlling and reviewing the operational and administrative functions of Credit Administration Department to ensure efficient and effective support to the concerned Divisions in line with regulatory and Bank requirements while exercising appropriate control and independent judgments.
The other key accountabilities of the Credit Administration Department are as follows:
1. Ensure loan documentation and securities are duly completed and in place prior to disbursement of loans.
2. Ensure that CIB report reflects/includes the name of all the lenders with facility, limit and outstanding.
3. Ensure compliance with all formalities regarding large loans and loans to Directors as per Directives of Bangladesh Bank Circulars & rules and regulations of Banking Companies Act.
4. Ensure that adequate insurance is in place on all pledged assets, all approval conditions have been met and exceptions, if any, are approved prior to disbursement of loans.
5. Maintain control over all security documentation.
6. Monitor borrower’s compliance with covenant, agreed terms & conditions and also monitor account performance.
F) Head of Monitoring, Recovery and Compliance Department :
The key responsibilities of the Head of Monitoring, Recovery and Compliance Department are as follows:
1. Directly manage all Special Mention, Substandard, Doubtful and Bad and Loss accounts in order to standardize/regularize/maximize recovery and ensure that appropriate and timely loan loss provisions have been made.
2. Provide early signals/warning to the Branches/Marketing Division/Account Relationship Managers/Officers.
3. Determine Account Action Plan/Recovery Strategy.
4. Pursue all options to maximize recovery.
5. Deal with all legal matters.
6. Process branch proposals regarding rescheduling of classified accounts.
7. Collect CIB report from Bangladesh Bank and be responsible for sending CIB, CL returns to Bangladesh Bank on time.
8. Ensure all required Bangladesh Bank returns and statements to other regulatory authorities are submitted with accurate statistics in the correct format in a timely manner.
9. Ensure that Bangladesh Bank circulars/regulations are maintained centrally and advised to all relevant departments to ensure compliance.
10. Enlist surveyors, lawyers, insurers with approval of the Bank Management and to monitor and review their performance periodically.
11. Produce required statements related to credit division including statement of newly approved facilities, renewed facilities, declined proposals and submit a report before the Managing Director and CEO / EC / Board for their review and guidance.
CHAPTER-III
3. PROCEDURAL GUIDELINES:
This chapter outlines the main procedures that are needed to ensure compliance with the policies contained in chapter 1 of these guidelines.
3.1 Approval Process :
In approval process the Bank segregates its relationship Management / Marketing from the approving authority. The existing approval authorities are Head of Branch, Zonal Head, Head Office Credit Committee, Executive Committee of the Board of Directors and Board of Directors as per their delegation of business powers defined in later section. The recommending or approving executives shall take responsibility for and be held accountable for their recommendations or approval. Delegation of approval limits shall be as per policy guidelines that all proposals where facilities are upto 15% of the bank’s capital shall be approved at the CRM level, facilities upto 25% of the capital shall be approved by Managing Director & CEO subject to the limit approved by the Board of Directors. At present the Bank has business delegation powers approved by the Board of Directors in its 42nd meeting held on 25th April 2003. Credit proposals in excess of 25% of the Bank’s Capital to be approved by Executive Committee of the Board of Directors or Board of Directors after recommendation of CRM, Corporate Banking and Managing Director & CEO.
The Branch Marketing Team comprising of Executives and Officers will market the clients and then prepare credit appraisal memo as per the prescribed format and within the purview of the set rule/policy guideline of the Bank. In case it is within the delegated business power of the Head of Branch, the concerned Executive / Officer will place it to the Head of Branch who will make judgments (qualitative and quantitative judgment) and if found viable then he will approve the Loan otherwise he may reject it or forward it to the Head of Corporate / Commercial Banking at Head Office.
The facility if beyond the limit of the business delegated power of Head of Branch, the proposal will be sent to the Head of Corporate / Commercial Banking at Head Office along with the branch recommendations. The Proposal on receipt by the Head of Corporate / Commercial Banking will forward it to the Head of Credit who in turn distribute it to the respective Credit Officer at the Head Office to scrutinize, analyze and prepare a memo with due diligence along with their observations / results of analysis and to place it to the Head Office Credit Committee. In Head Office Credit Division, separate Credit Officers are designated for looking after the proposal of separate Branches. There also exist separate units for handling Garments related proposal /Export Finance, Project Loan, Syndication and Structured Finance. The Head Office Credit Committee depending upon the delegated business power either approve it (or reject it if found not viable) or place it to the Executive Committee of Directors / Board of Directors.
3.2 Appeal Process:
Any declined credit proposal may be represented to the next higher authority for reassessment / approval. However, there shall be no appeal process beyond the Managing Director & CEO.
3.3 Delegation of Power:
Delegation of approval of Credit facilities shall be as per policy guidelines that all proposals where credit facility/facilities are upto 15% of the Bank’s Capital shall be approved by CRM level, facilities upto 25% of the Capital shall be approved by the Managing Director and CEO subject to the limit approved by the Board of Directors. Credit facilities in excess of 25% of the Bank’s Capital shall be approved by the Executive Committee of the Board of Director or Board of Directors on recommendation of CRM, Corporate Banking and Managing Director & CEO.
At present the Bank has business delegation powers approved by the Board of Directors in its meeting held on 29th April 2003 which may be revised from time to tome considering the volume of the portfolio and other related factors.
While exercising the business delegation powers, the following general guidelines shall be followed meticulously:
1. The Managing Director can exercise all the powers vested in other Executives/Officers of the Bank.
2. Other than the Managing Director, the Delegation of Powers shall be exercised by the Executives/Officers only to whom such schedule of powers is issued by a separate letter by or under the order of the Managing Director as approved by the Board/Committee. In such cases, the Executive or Officer may also exercise Delegation of Powers vested in other Executives/Officers lower in rank/grade and working in his Deptt./Branch. SEVP, EVPs, VPs, SAVPs, AVPs and officers shall be authorized to exercise delegated powers only when posted as In-charge of Branches.
3. Unless personally authorized by a separate letter, mere mention of delegation in this guidance shall not entitle an official falling under the category to exercise the powers.
4. The Managing Director may suspend exercise of delegated Powers of any Executive/Officer or any category of Executive/Officer through specific or general order with the prior approval of the Board/Committee. In case of emergency, he may also suspend exercise of delegated Powers of any Executive/Officer or any category of Executive/Officer subject to obtaining post-facto approval by the Board within one month from the date of such suspension.
5. Delegated Powers may be reduced, suspended or withdrawn at the discretion of the Board of Directors /Committee.
6. These rules containing schedule of powers shall be treated as strictly confidential and shall always be in the custody of the Executive/Officer to whom it has been issued.
7. The sanctioning authority shall exercise their prudence and judgment in using these powers.
3.3.1 NORMS FOR EXERCISING BUSINESS DISCRETIONARY POWER (LOANS AND ADVANCES)
A.1. DISCRETIONARY POWERS:
1. Delegated powers shall be exercised by the authorized officials judiciously keeping in view the interest of the Bank. In exercising the powers so delegated, authorized officials shall abide by credit restrictions, CIB clearance, margin restrictions, stipulation regarding period of repayment in force from time to time, etc. Advances requiring prior approval of Bangladesh Bank can be sanctioned only after such approval is obtained. Delegations of powers do not vest on the sanctioning official any authority to relax or waive any credit restrictions/stipulation in force from time to time.
2. The first and fore most criterion for allowing credit will be the proper and correct selection of borrower.
The borrower should be selected on the following basis:
a) The borrower must be a man of integrity and must enjoy good reputation in the market.
b) The borrower must have the capacity and capability for utilizing credit properly and profitably.
c) The enterprise of the borrower must be viable and profitable. That is, the proposal of the borrower must be evaluated properly and carefully so as to ascertain its profitability. The enterprise must be able to generate sufficient fund for debt servicing.
3. A party to who credit to be allowed should be as far as possible within the command area i. e. area of operation of the branch. For example, Moulvi Bazar Branch, Dhaka should not normally accommodate a party of Mohakhali area, Dhaka. Deviations, if any, are to be explicitly explained in the proposal.
4. No sanctioning officer can sanction any credit to any of his near relations and to any firm/company where his relations have financial interest. Such cases should be sent to Head Office for consideration.
5. There shall be no power to sanction clean advance. Clean advance or advances may be allowed only with the approval of the Board/Committee.
6. No loan or advances shall be sanctioned to any Director of our Bank or any firm or company where they have interest as Proprietor/Partner/Director or to their family Members as defined in the Banking Companies Act, 1994.
A. 2 DETERMINATION OF SANCTIONING POWERS:
1. The schedule of business powers as per Annexure-A lays down the maximum power per party.
2. While determining sanctioning power per party (Individual/Firm/ Company, etc.) against different type/nature of advances, loans, guarantee, L/C etc. existing sanctioned limit (unexpired), together with proposed amount of limit taken together, should not exceed the delegated power of sanctioning authority against specific type/nature of limit.
3. A party should not be accommodated with different types of credit facilities nor should the same party be allowed credit facilities in different names or from different Branches without the authority of Head Office. A party will mean any one person/firm/company/ concern and will include his/its sister concerns.
4. No discretionary power shall be applied to accommodate parties to whom Head Office has already sanctioned limit or proposals of which have already been rejected by Head Office.
5. Before issuance of any Bid Bond, it must be ascertained whether or not the party will require Performance Bond or any other credit facility.
6. Authority beyond delegated powers shall be exercised by the Board/ Committee.
A. 3. RULES ON MARGIN :
1. Interest/margin on various loans and advances will be in accordance with instructions issued from time to time by Head Office, Board of Directors of the Bank and Bangladesh Bank. In case where minimum margin is specified, the percentage may be increased according to market conditions, salability/durability/ bulk/storage position and inspection facility of the goods. Norms given below shall be followed strictly:
i. Hypothecation with collateral: Minimum 50%.
ii. Hypothecation without collateral: Minimum 60%.
iii. Pledge of F. D. R duly discharged: Minimum 10%.
iv. Sanchaya Patra, Unit certificate: Minimum 10%.
v. Documentary Bill: Minimum 10%.
vi. Life Insurance Policy: Minimum 20% of surrender value.
vii. Immovable property: Minimum 50%.
viii. Govt. Authorized Debenture: Minimum 25% of face value.
ix. Company Shares & Debentures approved by the Bank’s Board of Directors: Minimum 40% of market value or face value whichever is lower.
x. For Industrial Working Capital margin on raw material/ finished goods = Minimum 20%.
2. Sanction of advance/limit should be advised to the borrowers detailing properly the terms and conditions and written confirmation of acceptance of the same to be obtained from the party.
3. All formalities connected with the investigation into the credit worthiness of the parties, processing the proposals, compilation of credit reports and obtaining necessary documents should be observed meticulously.
4. Disbursement of loans presupposes observance of all norms and procedures as per rules and guidelines in this Delegation of Powers, Manuals and also conveyed through different circulars of Head Office and Bangladesh Bank from time to time. The disbursing officer shall ensure that all documentation of credit have been duly completed before disbursement of credit.
5. The Branch In-charge shall remain responsible for constant supervision and follow-up of the advances allowed under the discretionary powers and keep Head Office apprised of the disproportionate variations.
6. Recommending and supervisory officials shall remain accountable for their respective roles.
7. Sanctioning officer will be accountable for non-recovery due to his injudicious decision.
7. All members of the Credit Committee (Management) shall also be accountable collectively and individually for their injudicious decision.
A. 4 SANCTIONING AUTHORITY:
The business powers can be exercised by the following when posted as under :
The Managing Director & CEO. Additional Managing Director(AMD) shall exercise delegated powers on the recommendation of the Credit Committee.
AMD, SEVPs, EVPs, VPs, SAVPs and AVPs shall exercise delegation only when posted as In-charge of Branches. The Managing Director is however, authorized/delegated to allow composite credit facilities within the delegation as per delegation allowed for individual nature of loan. But Composite limit so allowed shall not exceed Tk 10 crore.
There shall be a Credit Committee at Head Office. However in case of any disagreement between the committee and the concerned Executive, the matter may be referred to the Managing Director for disposal in the greater interest of the Bank.
Additional Managing Director/Deputy Managing Director and Executive Vice President & In-charge of Credit Division shall exercise business power delegated to them.
A. 5 RULES OF SANCTIONING LOANS:
1. Sanction orders will be communicated by Head Office to the Branches and by the Branches to the parties under Double signature as follows :
a. For the limits sanctioned at Head Office level : By Executives not below the rank of Asstt. Vice President.
b. For the limits sanctioned at Branch level : By Executives/ Branch-In-Charge.
2. Prescribed limit of business powers shall not exceed under any circumstances.
3. Valuation of goods/produces/hypothecated to the Bank to secure any advance shall in no case exceed:
4. Goods and produces against which advances are made should be readily marketable.
5. Loans & Advances allowed against FDRs/Cash Collateral’s, PSPs etc. shall be adjusted immediately before the face value of the instruments and outstanding advance amount becomes equal or upon maturity, whichever is earlier.
6. In case of advance against mortgage of property, original Title Deed and chain of documents i.e. C.S Parcha, R.S. Khatian, Mutation Certificate, Non-encumbrance Certificate, Municipal Tax Receipt, Approved plan, Rent Receipt (upto date) etc. should be checked by a paneled lawyer or by the Bank’s Law Officer who must certify about correctness of ownership and suitability as security against the advance.
7. Money suit/court cases against any defaulting borrower is to be filed by the branches after obtaining prior approval from Head Office.
8. Branches shall maintain Bank’s printed “Confidential Limits, Register” which will record serially all the limits sanctioned.
3.3.2 NORMS FOR EXERCISING BUSINESS DISCRETIONARY POWERS (FOREIGN EXCHANGE)
B.1. INTRODUCTION:
Discretionary Powers with regard to the Foreign Exchange transaction shall be exercised by the authorized officials judiciously keeping in view the interest of the Bank. In exercising such powers, officials shall take note of any changes of Exchange Control Regulations of Bangladesh Bank and the Import and Export regulations issued by the CCI & E. It may be noted that such regulations are changed and amended regularly.
B.2. BASIS FOR DETERMINATION OF SANCTIONING:
1. The schedule for Business Powers(revised) as per Annexures-B lays down the maximum power per party.
2. One party can be accommodated for one item only. If accommodation for more than one item is proposed, the proposal can be approved by Official who is authorized to sanction the total amount i. e. the combined amount of two or more items together.
3. For all practical purposes, one party will mean one person/firm/ company/concern including his/its sister concerns.
4. Before sanctioning of any financial accommodation to a party, their existing liabilities in various accounts (including those in the name of their sister concerns) shall be taken together along with the proposed accommodation to determine the sanctioning authority.
5. The existing liabilities of a party shall be calculated by the following formula:
a. All outstanding or unexpired sanctioned limit (whichever is higher) in the form of LIM, LTR, PC, ECC, LOANs, Cash Credits, SOD (General) etc.
b. 100% of the Contingent Liabilities after deducting Cash Margin received there – against.
6. Prior approval of The Board is needed for opening any Deferred Payment Letter of Credit for any period and/or any amount. Moreover, this delegation of power shall not cover opening of LC for capital machinery, which shall be opened with the approval of H. O. only. However in case of 100% cash margin or cash collateral deferred payment L/C may be opened as per delegation of Power.
7. In case of opening Letters of Credit where post-import finance shall be required as per arrangement, care should be taken that L/C amount together with other duties and taxes constituting the total landed cost should not exceed delegated authority prescribed for post-import finance.
8. All delegated powers may be exercised subject to any restriction imposed by Bangladesh Bank, CCI & E or Head Office from time to time.
9. Before establishing L/C, genuineness of the importers and the suppliers must be ascertained. The importers must have permanent business establishment with good reputation.
10. Arrangement of pre-shipment inspection of the goods by an internationally reputed surveyor at the loading point indicating the name of carrying vessel with its voyage number may be made as far as practicable at the cost of the opener/beneficiary of the L/C.
11. Outstation importers should not ordinarily be entertained. But, incase of well known and reputed outstation importers, the authorized officer in his own responsibility can open L/C after having been fully satisfied with the importer’s genuineness/integrity and reputation.
12. It is the policy of the Bank that all types of regular importers, including Garment Factories, shall be allowed suitable limit for opening of general and BTB L/C as well as post-import finance. This will avoid any delay in handling such business. So, Branch-In-charges shall obtain necessary limits for such parties at their earliest.
13. Sanctioning authority must report details of accommodation to Head Office on regular basis.
14. Foreign Guarantees shall be processed subject to the approval of Bangladesh Bank, where necessary. Outward Foreign Guarantees shall be issued only after obtaining Counter Guarantee from the applicant of the guarantees. This shall be in addition to other collateral securities, wherever applicable.
15. The Branch In-charge will remain responsible for constant supervision and follow-up of the advances allowed under his discretionary powers and also the advances approved by Head Office on his recommendation. Branch shall keep Head Office apprised of the disproportionate variation, if any.
16. Sanctioning official shall be accountable for non-recovery due to his injudicious decision.
B.3 SANTIONING AUTHORITY:
The Business Powers can be exercised by the following officials when posted as under :
a. Managing Director, Additional Managing Director and other Executives (SVP & above) of the Credit/International Division on the recommendation of the Credit Committee, if any.
b. Branch In-charge/Managers on the recommendation of the Credit Committee, if any.
B.4. OPEING OF BACK TO BACK L/Cs:
1. In case of Back to Back L/Cs and pre-shipment finance on account of export oriented garments & textile industries etc., the following norms shall be followed :
i. While opening Back to Back L/Cs for import/procurement of raw materials on account of clients, their present outstanding amount of Back to Back L/Cs, Back to Back Bills will be taken together into account within the sanctioned limit.
ii. Back to Back L/Cs for new clients or existing clients having overdue Bills liabilities will be opened only after obtaining prior approval from Head Office.
iii. Before opening of Back to Back L/Cs the authorized officers must see that the importer is in possession of :
a. A valid customs Bonded Warehouse License.
b. Freely negotiable export L/C (Master L/C) with shipment validity sufficient to cover the transitional period of import of raw material and manufacturing the garments and export thereof.
c. Quota Allocation letter of Export Promotion Bureau in case of quota item, to be deposited with the branch before opening of L/C.
iv. While sanctioning pre-shipment finance for manufacturing the garments, the authorized officers must see that the entire fabrics and accessories have arrived at the factory premises and are under process of manufacture. He must be satisfied that there will be no difficulty in execution of the export order up to 100% well in time i. e. within the present validity of the export L/C. He will also ensure that the amount of pre-shipment Credit and the amount of Back to Back liability together will, under no circumstances, exceed 90% of FOB value of the export to be made.
2. All imports & exports are subject to Import & Export Trade Control Regulations and Exchange Control Regulations. The authorized Officers while opening L/Cs and negotiating export documents will meticulously follow these regulations.
3. OTHER RULES :
1. Back to Back L/Cs shall be allowed on account of the party on the basis of party’s installed capacity & past performance etc. against proper limits sanctioned by Head Office.
2. Back to Back L/C may be opened depending on the production capacity within the sanctioned limit.
3. Additional Back to Back L/C facilities beyond capacity can be opened with the approval of competent authority as a special case.
4. No Back to Back L/C bill shall be kept overdue beyond its due date of payment as per acceptance communicated by the Bank.
5. All over draft (Export) Loan to be allowed to pay out any overdue bill under Back to Back L/C must have prior or post-facto approval of Head Office.
6. Board shall be regularly apprised on the position of SOD (Export) Loan and overdue bills.
7. Existing facilities, if exceed the sanctioned limit, shall be brought to normal limit or additional security shall be obtained to regularize the facility.
8. PC allowed against any L/C shall be adjusted upon negotiation of the same L/C.
3.4 CREDIT ADMINISTRATION & DISBURSEMENT AUTHORITY:
The Disbursement Authority has been separated from Approval authority. The Disbursement Authority is vested upon the Credit Administration Department (CAD).
The flow chart for disbursement process is given below:
Figure-7.2
The Credit Administration function is critical in ensuring that proper documentation and approvals are in place prior to the disbursement of loan facilities. The functions of Credit Administration are strictly segregated from Relationship Management/Marketing in order to avoid the possibility of controls being compromised or issues not being highlighted at the appropriate level.
Credit Administration procedures are in place to ensure the functions as mentioned in flowchart attached as Appendix-3.1
3.4.1 Disbursement:
Security documents are to be prepared in accordance with approval terms and to be legally enforceable. Standard loan facility documentation’s are to be drafted / prepared by the legal counsel. At present the function of preparation of documents (other than syndication) are performed by the Branch and exceptions are referred to legal counsel for advice.
Disbursements under loan facilities are made when all security documentation is in place. CIB report should reflect/include the name of all the Bangladesh Bank circulars and related section of Banking Companies Act. All Credit Approval terms must be met. The check list certificate is to be signed by Credit In-charge and Head of Branch. In order to cope with the revised policy, the disbursement authority will be vested to the Head of Credit Administration Department upto Tk. 5.00 Crore above which will be vested to the Deputy Managing Director. In the absence of the Deputy Managing Director, the power may be exercised by the Senior Executive Vice President. The Bank has a plan to implement this practice within December 2005.lenders with facility, limit and outstanding. All formalities regarding large loans and loans to Directors are guided by
3.4.2 Custodial Duties:
The documents may either be prepared at Branch level or by Head Office (for Syndication and Large Loan) with the Vetting of legal counsel/adviser of the Bank.
Loan disbursements and storage of security is to be done at Bank’s respective Branch.
Appropriate insurance coverage is maintained (and renewed on a timely basis) on assets pledged as collateral.
Security documentation is held under strict control, preferably in locked fireproof storage and with dual control.
3.4.3 Compliance Requirements:
All required Bangladesh Bank returns are submitted in the correct format in a timely manner.
Bangladesh Bank circulars/regulations are maintained centrally and advised to all relevant Divisions to ensure compliance.
All third party service providers (surveyors/valuers, lawyers, insurers, CPAs etc.) are approved and performance reviewed on an annual basis. Banks are referred to Bangladesh Bank circular outlining approved external audit firms that are acceptable.
3.5 SPECIFIC GUIDELINES:
Annual Credit Program and Refinancing/Rediscounting Policy of Bangladesh Bank are comprehensive and restrictive. While adhering to such a policy in general, the following guidelines must be observed:
Unsecured loans and advances to individuals:
As a matter of policy, these loans and advances are discouraged and are subject to following restrictions, if the collateral offered consists of assets that are not readily marketable. These loan requests must:
Be supported by financial statements showing all direct and contingent liabilities
Clearly identify the purpose of the loan / advance and sources(s) of repayment
The overdrafts must be in the form of approved lines. Overdrafts may not be created to meet other obligations of borrower e.g. payment of interest or repayment of a past due loan. Every effort must be made to ensure recovery within the agreed tenor.
Receivable financing: Outstanding must be adequately covered by eligible receivables; Maximum life of eligible receivables must not exceed 12 months.
Trade finance of supplier’s credit: The basic rule is that the tenor of the facility should not exceed the expected economic life of the items imported.
3.5.1 Facilities subject to guarantees (Personal or Corporate):
It should be made clear to the guarantors that the Bank will call upon them to meet their obligation in the event of the borrower’s default. Guarantors must be informed of all changes in their terms and conditions of the facility and where these involve weakening of the credit e.g. release of collateral, the extension of maturities or an increase in the pricing of the facility, the guarantor’s agreement should be obtained in writing. In the event of default, the guarantor should be advised immediately in writing to meet his obligations under the guarantee. In case of his failure, appropriate action should be imitated.
3.5.2 Changes in Terms and Conditions:
Prior approval of Head Office is required to accomplish any material change in a credit / banking arrangement. This applies specifically to change in rate, maturity, collateral, covenant, waiver of default, amendment and release of guarantee(s) and any other change which would materially alter the credit arrangement from that initially or previously authorized.
3.6 CREDIT MONITORING:
To minimize credit losses, monitoring procedures and systems to be in place, which will provides an early indication of the deteriorating financial health of a borrower. The credit monitoring process in Bank is vested on Monitoring, Recovery and Compliance Division. Head of Monitoring, Recovery and Compliance Division will report the exceptional list of assets on daily basis on the following categories:
Past due (which are not paid or renewed at maturity – Grade 5) principal or interest payments, past due trade bills, account excesses and breach of loan covenants;
Loan terms and conditions are monitored, financial statements are received on a regular basis and any covenant breaches or exception are to be referred to the CRM and the RM team for timely follow-up.
Timely corrective action is taken to address findings of any internal, external or regulator inspection/audit.
All borrower relationships/loan facilities are reviewed and approved through the submission of a Credit Application at least annually as per format attached as Appendix 1.2.1.
The Bank should have a developed IT system which will enable to produce the above information for Head Office as well as local review. Monitoring, Recovery and Compliance Division will keep regularly follow up and corrective action to be taken in a timely manner before the account deteriorates further.
3.6.1 Early Alert Process:
An Early Alert Account is one that has risks or potential weaknesses of a material nature requiring monitoring, supervision or close attention by the management.
If these weaknesses are left uncorrected, they may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date with a likely prospect of being downgraded to 5 Category or worse (Impaired status), within the next twelve months.
Early identification, prompt reporting and proactive management of Early Alert Accounts are prime credit responsibilities of all Credit Officers / RM and must be undertaken on a continuous basis. An Early Alert report (Appendix-3.3.1) shall be completed by the Credit Officer / RM and to be sent to the approving authority for any account that is showing signs of deterioration within seven days from the identification of weaknesses. The Risk Grade shall be updated as soon as possible and no delay to be made in referring problem accounts to the Monitoring, Recovery and Compliance Division for assistance in recovery.
Despite a prudent credit approval process, loans may still become troubled. Therefore, the Credit Officers/RMs must ensure the early identification and prompt reporting of deteriorating credit signs for swift action to protect the Bank’s interest. The symptoms of important early alert shown in Appendix-3.3.2 if there are other concerns, such as a breach of loan covenants or adverse market rumors that warrant additional caution, an Early Alert report should be raised.
Moreover, regular contact with customers is to be maintained to enhance the likelihood of developing strategies mutually acceptable to both the customer and the Bank. Representation from the Bank in such discussions shall include the local legal adviser when appropriate.
An account may be reclassified as a Regular Account from Early Alert Account status when the symptom or symptoms, causing the Early Alert classification have been regularized or no longer exist. The concurrence of the approval authority is required for conversion from Early Alert Account status to Regular Account status.
3.6.2 Classification of Loans:
A classified Loan or Commitment is one, which is classified as Substandard, Doubtful or Loss as per policy of Loan classification set by Bangladesh Bank.
Position of Classified Loans and Advances and other assets shall be placed before the Board of Directors of the Bank and quarterly submitted to Bangladesh Bank.
The classification status must be reflected in the CIB reports on regular basis (monthly for Tk. 1.00 crore and above and quarterly for all the facilities outstanding of Tk. 50,000.00 to below Tk. 1.00 crore. Besides, statement for Tk. 10,000.00 to below Tk. 25,000.00 and Tk. 25,000.00 to below Tk. 50,000.00 has also to be reported.
The following are the broad definition of the classified categories: however, circulars of Bangladesh Bank / Head Office of the Bank regarding basis of loan Classification and provisioning must be followed.
• Special Mention Account (SMA):
As per recent circular from Bangladesh Bank, the Bank has started to observe the rules and regulations of Special Mention Account. According to Bangladesh Bank regulation a Continuous credit, Demand loan or a Term Loan which will remain overdue for a period of 90 days or more, will be put into the “Special Mention Account” and interest accrued on such loan will be credited to Interest Suspense Account instead of crediting the same to Income Account. This categorization helps the Bank to look at accounts with potential problems in focused manner and captures early warning signals for accounts showing first signs of weakness. Loans in the “Special Mention Account” are not treated as defaulted loan.
• Substandard (SS):
A well-defined financial weakness is present in loans of this category, which could affect the ability of the borrower to repay. This is clearly a troubled situation, for one reason or another that requires immediate and intensive effort to correct and reduce the possibility of loss.
• Doubtful (DF):
A serious doubt must exist that full repayment will not be forthcoming but the exact amount of the loss cannot be ascertained at the time of classification.
• Bad / Loss (BL):
Advance or portions of advances which are determined to be uncollectible based on presently known factors.
Adequate provision should be made as per Bangladesh Bank guidelines/circulars.
All classified loans require exceptional and special policy treatment of particular importance is timely recognition of problems so that prompt action can be taken. It is expected that each classified advance will have an action strategy developed by Branch/Regional Office/Head Office with detailed programme to get the advance paid or restored to acceptable credit standards. Classified assets should be recognized by all lending personnel as the assets that present the greatest danger of future write off and as such should be given priority attention in all aspects of credit process.
3.6.3 Rescheduling and declassification:
Resceduling and declassification of loans, advances and other assets require prior approval of Head Office of the Bank and in some specific cases from Bangladesh Bank. During rescheduling / declassification of the Loan the Bangladesh Bank’s sets rules must be followed meticulously in line with BRPD circular no. . . . . . . . . dated . . . . . . . . . . . and circular issued from time to time.
3.7 RECOVERY AND FOLLOW UP OF NOT PERFORMING LOANS AND ADVANCES:
Loans and advances in whatever form granted by the Bank to its clients are repayable either on demand or at the expiry of fixed period or as per repayment schedule agreed upon while granting the facilities. If loan is repayable on installment basis, default may be purely an oversight on the part of borrower but in other cases, it may be much more serious, giving the Bank the first tangible evidence that the borrower is in financial difficulty. At this point the procedure for dealing with potential loan losses comes into operation. The Branch Managers (HoBs) should, therefore, keep a close and constant watch on all their loans and advances to ensure that timely action is initiated in each case for adjustment of the account or its renewal, if it is decided to continue the facility.
For this purpose each Branch should maintain a diary/card in prescribed format in which the due date of expiry of credit facility, a notice should be sent to the borrower reminding him of the due date of repayment and making a formal demand for repayment/renewal as the case may be, Vigorous follow up action should thereafter be taken by issuing repeated reminders and putting pressures on the borrower by calling on him personally. In other words, all out efforts should be taken to recover the advance on its expiry. However, if in spite of vigorous persuasion the borrower fails to adjust the liability within the date of expiry of the facility, the liability should be downgraded to Special Mention (Grade-5) to facilitate monitoring and further follow up. The branches should however, still make constant efforts to recover the advance if necessary, through legal process. Before filing of the suit, Head Office approval should be obtained.
3.7.1 Recovery Unit (RU) and its Function:
In Head Office there is a recovery unit under CRM and a recovery unit in Branch under the supervision of Head of Branch (HoB). In order to facilitate follow up and recovery of NPA’s the branch as well as Head Office recovery unit shall renew at the close of each month at the Special Mention Account / Classified loan accounts incorporating their comments regarding the prospects and measures taken for recovery. The Recovery Unit (RU) directly manages accounts with sustained deterioration Risk Rating of Special Mention (5) to Bad / Loss (8). The Bank’s policy is to transfer EXIT accounts graded 4 – 6 to the RU for efficient exit based on recommendation of CRM and Corporate Banking. Whenever an accounts is handed over from Credit Officer / Relationship Management to RU, a Handover / Downgrade Checklist shall be completed.
The RU’s primary functions are:
Determine Account Action Plan/Recovery Strategy
Pursue all options to maximize recovery, including placing customers into receivership or liquidation as appropriate
Ensure adequate and timely loan loss provisions are made based on actual and expected losses
Regular review of grade 6 or worse accounts
The management of problem loans (NPLs) is a dynamic process and the associated strategy together with the adequacy of provisions is regularly reviewed. A process shall be established to share the lessons learnt from the experience of credit losses in order to update the lending guidelines.
3.7.2 Account Transfer Procedures *:
Within 7 days of an account being downgraded to substandard (grade 60 A Request for Action (RFA Appendix-3.5.1A) and a handover/downgrade checklist (Appendix-3.4) should be completed by the Credit Officer / RM and forwarded to RU for acknowledgment. The account should be assigned to an account manager within the RU, who should review all documentation, meet the customer and prepare a Classified Loan Review Report (CLR. within 15 days of the transfer. The CLR should be approved by the Head of Credit and copied to the Head of Corporate Banking and to the Branch where the loan was originally sanctioned. This initial CLR should highlight any documentation issues, loan structuring weaknesses, proposed workout strategy and should seek approval for any loan loss provisions that are necessary.
Recovery Units ensures that the following is carried out when an account is classified as Sub Standard or worse:
Facilities are withdrawn or repayment is demanded as appropriate. Any drawings or advances shall be restricted and only approved after careful scrutiny and approval from appropriate executives within approving authority and/or as per Bangladesh Bank guidelines.
CIB reporting is updated according to Bangladesh Bank guidelines and the borrower’s Risk Grade is changed as appropriate.
Loan loss provisions are taken based on Force Sale Value (FSV) or as per classification criteria as set by Bangladesh Bank.
Loans are only rescheduled in conjunction with the Rescheduling guidelines of Bangladesh Bank. Any rescheduling should be based n projected future cash flows and should be strictly monitored.
Prompt legal actin is taken if the borrower is uncooperative.
* Not established as yet but under active consideration
3.8 NOT PERFORMING LOAN MONITORING / MANAGEMENT:
All NPLs are assigned to an Account Manager within the RU, who is responsible for coordinating and administering the action plan/recovery of the account and should serve as the primary customer contact after the account is downgraded to substandard. Whilst some assistance from Marketing / Relationship Management may be sought, it is essential that the autonomy of the RU be maintained to ensure appropriate recovery strategies are implemented.
On a quarterly basis, a Classified Loan Review Report (CLR) to be prepared by the RU Account Manager to update the status of the action / recovery plan, review and assess the adequacy of provisions and modify the bank’s strategy as appropriate. At present all the rescheduling / write off is approved by the EC / Board. The Head of Credit will approve CLR for NPLs up to 15% of the Bank’s Capital, Managing Director & CEO will approve CLR for NPLs in excess of 15% of the Bank’s capital. The CLRs for NPLs above 25% of capital shall be approved by Executive Committee of the Board of Directors with a copy to Board.
3.9 NPL PROVISIONING:
The guidelines established by Bangladesh Bank for CIB reporting, provisioning and write off of bad and doubtful debt and suspension of interest must be followed in all cases. Regardless of the length of time a loan is past due, provisions should be raised against the actual and expected losses at the time they are estimated. At present the approval to take provisions, write offs, or release of provisions/upgrade of an account is restricted to EC / Board. The Request for Action (RFA) or CLR reporting format should be used to recommend provisions, write-off or release/upgrades.
The RU Account Manager shall determine the Force Sale Value (FSV) for accounts grade 6 or worse. Force sale value will be the amount that is expected to be realized through liquidation of collateral held as security or through the available operating cash flows of the business net of any realization costs. Any shortfall of the Force Sale Value compared total outstanding shall be fully provided for once an account is downgraded to 7, where the customer is not cooperative no value shall be assigned to the operating cash flow in determining Force Sale Value.
The forced ale value/value of the eligible security is guided by the Bangladesh Bank Circulars issued from time to time. The valuation of the landed property/ building / stocks/ plant & machinery etc. are done by Bank’s approved surveyors. The provisions are made as per Bangladesh Bank guidelines.
Following formula is to be applied in determining the required amount of provision:
Gross Outstanding XXX
Less : (i) Cash margin held or Fixed
Deposits/other cash collateral under lien (XXX)
(ii) Interest in Suspense Account (XXX)
Loan Value
(For which provision is to be created before considering
estimated realizable value of other security/collateral held) (XXX)
Less: Estimated salvage value of security/collateral held (XXX)
(See Note below)
Net Loan Value XXX
Note: The amount of required provision may in some circumstances be reduced by an estimated realizable forced sale value of (i.e. Salvage Value) of any tangible collateral held (viz: mortgage of property, pledged goods/ or hypothecated goods repossessed by the bank, pledged readily marketable securities etc.). Hence in these situations it will be advisable to evaluate such collateral, estimate the most realistic sale value under duress and net-off the value against the outstanding before determining the Net Loan value for provision purposes. Conservative approach should be taken to arrive at provision requirement and Bangladesh Bank guideline to be properly followed.
4. RENEWAL AND STATUS VERIFICATION:
On expiry of a facility, the borrower may come forward with a proposal either for renewal of the facility for a further period or for enhancement of the existing facilities. He may also agree to offer additional stocks/securities or even furnish a guarantor. The Head of Branch (Branch Manager) should examine all such proposals and if he is satisfied, the proposals should be sent to Sanctioning Authority at Head Office, if beyond his business delegation power duly supported by full blown credit analysis including report of verification of Stocks/status of Collateral Securities etc. as is done in case of fresh proposals. The Head Office in turn will process the renewal/enhancement proposal after verifying the following factors:
Justification for renewal/enhancement
Reasons for non-payment / adjustment of the loan in time
Security aspect in terms of outstanding loan
Credit worthiness of the client
4.1 LEGAL ACTION:
Legal proceeding are lengthy and time consuming as well as having an element of negative publicity and as such every effort must made to settle a defaulter’s outstanding out of court. However, if situation compels the Bank to take legal action for recovery of stuck up loans and advances, the same shall be done with prior approval of Head Office. In order to expedite the process, the Government has already enacted the Artha Rin Adalat (Amendment) Act 2003. Therefore the Head of Branch and Monitoring, Recovery and Compliance Division in Head Office must ensure that Legal Action are taken properly and in time. All legal process shall be conducted by the Bank’s Legal Retainer, if necessary in consultation with Bank’s Legal Adviser.
4.2 WRITE OFF OF LOANS / ADVANCES:
On occasion it may be required to write off any loan/advance or portion thereof which may become unrecoverable or represent a total or partial loss. In 2003 Bangladesh Bank has issued circular providing instruction / guidelines for write-off of loan (BRPD circular no. 02 dated January 13, 2003). It is, however, the responsibility of the Head Office to decide which loans/advances are to be written-off.
All loans / advances written-off must be recommended for prior approval of the Head Office and the recommendation must be accompanied by a memo summarizing the circumstances necessitating the current write-off as well as recovery efforts to date. Under no circumstances should the fact that all or any portion of a loan / advances that has been written-off be revealed to the borrower, nor should the borrower be informed that the loan / advances is on a non-accrual basis. Despite, the loans being written-off the recovery process will be continued for those loan and advances.
In case of write-off / waiver the Bank’s policy is to realize the entire Principal amount along with 100% interest taken into income account. Then the Bank may waive / unapplied interest / Write off maximum 50% of interest as kept in interest suspense account against the respective client or as decided by the Board of Directors.
List of Abbreviation
Abbreviations Elaboration
AOA Articles of Association
ALM Asset Liability Management
AVP Assistant Vice President
BB Bangladesh Bank
BRPD Banking Regulation & Policy Department
BOD Board of Director
CC Cash Credit
CCH Cash Credit Hypothecation
CCP Cash Credit Pledge
CIB Credit Information Bureau
CRM Credit Risk Management
CEO Chief Executive officer
DF Doubtful
EVP Executive Vice President
FEX Foreign Exchange
FDBP/FBP Foreign Documentary Bill Purchase
IC Internal Control and Compliance
IDBP/IBP Inland Documentary Bill Purchase
KPMG Klynveld Peat Marwick Goerdeler
Ltd Limited
LIM Loan on Imported Material
LAPF Loan against Provident Fund
LTR Loan against Trust Receipt
LTCL Long Term Credit Line
MCL Motorcycle Loan
MBA Master of Business Administration
MOU Memorandum of Undertakings
MTCL Mid-Term Credit Line
MIS Management Information Systems
OD/SOD Short Term Overdraft
PAD Payment against Document
PWC Price Water House and Coopers
RM Relationship Manager
ROA Return on Asset
SEVP Senior Executive Vice President
SAVP Senior Assistant Vice President
SS Sub-Standard
TOR Terms of Reference
SPO Senior Principal Officer
Conclusion
Banking sector is very crucial for any economy. To have understanding of this sector is very vital for any business graduate. I am really glad to be oriented to this sector through the nation’s largest commercial bank “Sonali Bank”. This bank performs hundreds of important activities both for the public and for the govt. as a whole. It has an outstanding bearing to thrive our business sector. It has strong performance on General Banking, Loans &Advances, Industrial credit and foreign exchange. I had the privilege to learn many things from the Dilkusha Corporate Branch through my active involvement in this branch.
Sonali Bank continues to play its’ lending role in socio-economic development of the country as a companion of independent Bangladesh. Since the inception of Sonali Bank, it has been rendering its’ banking services to meet the needs of the state and the nation and to cope up with the demands of mass people of the country giving priority to service. Almost there is no one financial sector in Bangladesh where Sonali Bank is not existed. Not only loan sector but also general banking, foreign exchange dealings, etc are efficiently and effectively guided by Sonali Bank, that’s why it has been established as a representative of Bangladesh Bank.
Recommendations
In order to get competitive advantage & to deliver quality service, top management should try to modify the services at the loans and advance sector. For the improvement of sound lending and reducing the rate of bankruptcy, the following measures should be taken:
Sonali Bank is the first leading bank in Bangladesh. Its major operations are profit, growth, development and welfare oriented. Management system of this bank is fully democratic. It always maintains the rules declared by Bangladesh Bank. Sonali Bank Staff College provides training facilities to its medium & junior level officers of the bank and also provides executive development & internship programs. This is my observation that the lecture of credit risk management and negative barriers of sanctioning finance should be discussed widely than before. Because the management of Sonali Bank has been facing the high involvement of lending risk & procurement of project finance with Bank’s growth, profit & future.
The management functions (from planning to control) are not clearly present in their various activities. Only the cash section of the branch is computerized. But for reducing bankruptcy Sonali Bank should develop immediately Credit & Project Finance Information System through computer.
Sonali Bank has network manually not computerized. Sonali Bank should had networking system by which all branches of Sonali bank can be connected easily as a largest commercial bank in Bangladesh. By using computerized networking system Sonali bank could disbursement of services on ATM, Debit card, Master card, Q-Cash facilities.
Officers who are working on Credit risk management & Project finance procedure, they should give attention on timing of sanctioning finance. Because demand of any kind of product is being flexible. So if other thing is remaining constant, sanctioning procedure should not be delayed.
Policy should be distinctive and dynamic which has more acceptability to the borrowers. Policy should be made at the consideration of regional, financial, continental, demographical, economical, psycho graphical.
At last Sonali Bank should develop the proper environment so that borrowers can bargain or negotiate about loan and finance. Because Sonali Bank must have think about borrowers needs, wants and demands and beside his profitability.
Political power should not be considered to maintain credit management module and project finance procedure. In our Bangladesh most of the cases procedure is to weak for financing so, ultimate result is being bankrupted.
Decision maker of credit risk management of Sonali Bank should work for the profitability of bank as well as they should have some unique power than before to sanction for sound return on investment.
Bibliography
1. Choudhury. Dr. T. A., An Overview of Banks and Their Services. Reading Materials on Theory & Practice of Banking.
2. Bangladesh Institute of Bank Management (BIBM), 2000.
3. A hand book of Sonali Bank advances.
4. Practical Banking Advances.
5. Head Office Personnel Division Circular.
6. Library of Sonali Bank Staff College.
7. Credit Information Bureau of Bangladesh Bank.
8. Bangladesh regulation and policy department.
(Appendix-1)
Risk Grading
Risk Rating Grade Definition
Superior –
Low Risk
1 Facilities are fully secured by cash deposits, government bonds or a counter guarantee from top tier International Banks / Local Banks. All security documentation’s are in place and in order.
Good –
Satisfactory Risk
2 The repayment capacity of the borrower is strong. The borrower should have excellent liquidity and low leverage. The company must demonstrate consistently strong earning and cash flow and have an unblemished track record. All security documents are in place. Aggregate Score of 95 or greater based on the Risk Grade Scorecard.
Acceptable –
Fair Risk
3 Adequate financial condition though may not be able to sustain any major or continued setbacks. These borrowers are not as strong as Grade 2 borrowers, but should still demonstrate consistent earning, cash flow and have a good track record. A borrower should not be graded better than 3 if realistic audited financial statements are not received. These assets would normally be secured by acceptable collateral (1st charge over stocks/debtors/equipment/property). Borrowers should have adequate liquidity, cash flow and earnings. An Aggregate Score of 75-94 based on the Risk Grade Scorecard.
Marginal –
Watch List
4 Grade 4 assets warrant greater attention due to conditions affecting the borrower, the industry or the economic environment. These borrowers have an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and/or inconsistent earnings. Facilities should be downgraded to 4 if the borrower incurs a loss, loan payments routinely fall past due, account conduct is poor, or other untoward factors are present. An Aggregate Score of 65-74 based on the Risk Grade Scorecard.
Special Mention
5 Grade 5 assets potential weaknesses that deserves management’s close attention. If left uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower. Facilities should be downgraded to 5 if sustained deterioration in financial condition is noted (Consecutive losses, negative net worth, due for 30-90 days, or if a significant petition or repayment of facilities is still expected and interest can still be taken into profits. An Aggregate Score of 55-64 based on the Risk Grade Scorecard.
Risk Rating Grade Definition
Substandard
6 Financial condition is weak and capacity or inclination to repay is in doubt. These weaknesses jeopardize the full settlement of loans. Loans should be downgraded to 6 if loan payments remain past due for 90 days but less than 180 days, if the customer intends to create a lender group for debt restructuring purposes, the operation has ceased trading or any indication suggesting the winding up or closure of the borrower is discovered. Not yet considered non-performing as the correction of the deficiencies may result in an improved condition and interest can still be taken into profits. An Aggregate Score of 45-54 based on the Risk Grade Scorecard.
Doubtful
and Bad
(non-performing)
7 Full repayment of principal and interest is unlikely and the possibility of loss is extremely high. However, due to specifically identifiable pending factors, such as litigation, liquidation procedures or capital injection, the assets are not yet classified as Loss. Assets should be downgraded to 7 if loan, payments remain past due in excess of 180 days and interest income should be taken into suspense (non-accrual). Loan loss provisions must be raised against the estimated unrealizable amount of all facilities. The adequacy of provisions must be reviewed at least quarterly on all non-performing loans and the bank should pursue legal options to enforce security to obtain repayment or negotiate an appropriate loan rescheduling. In all cases, the requirements of Bangladesh Bank in CIB reporting, loan rescheduling and provisioning must be followed. An Aggregate Score of 35 – 44 based on the Risk Grade Scorecard.
Loss
(non-performing)
8 Assets graded 8 are long outstanding with no progress in obtaining repayment (in excess of 360 days past due) or in the late stages of wind up/liquidation. The prospect of recovery is poor and legal options have been pursued. The proceeds expected from the liquidation or realization of security may be awaited. The continuance of the loan as a bankable asset is not warranted and the anticipated loss should have been provided for. This classification reflects that it is not practical or desirable to defer writing of this basically worthless asset even though partial recovery may be affected in the future. Bangladesh Bank guidelines for timely write off of bad loans must be adhered to. An Aggregate Score of 35 or less based on the Risk Grade Scorecard.
