Policies of Credit Risk Management at National Bank

Major purpose of this report is to analyze the Policies of Credit Risk Management at National Bank Limited. Other objectives are identify the various types of credit disbursed and the credit portfolio of National Bank. Here also describe to analyze the credit recovery performance and analyze compliance with the Bangladesh bank’s guidelines. Finally draw swot analysis and analyze the financial performance of National Bank.

Introduction

Bangladesh is a poor, developing country, where every operation must be operated properly. This is because to do work properly and properly use of the capital. There are many financial institutions in the country, which provides different offers but bank is the different from them. Bank offers the customer different types of deposit, advances, cheques etc. Bank is the pillars of the financial system. Specially, hi Bangladesh, proper banking system is very important, because the capital market is little developed here. National Bank Limited has now emerged as a renowned and a reliable financial institution. National Bank plays a different role in terms of foreign remittance. Different types of agencies are included with them. They are doing an incessant expansion by providing the loan too. There are different types of banking taw code/ section, like Bank Act 1959, Cheques Act, and Credit regulation and so on. According to the analysis of these Acts we came to draw a summery that National Bank follows and tries to follow all the rules and regulation imposed by the Bangladesh Government/ Bangladesh Bank. In terms of advance there are many rules run some times for the benefits of the client little rules are violated. Among those they have wide range of network coverage hi Bangladesh. Recently they have lunched their 155^th branch. They are trying to make the employment environment.

Objectives

Broad Objective: To analyze the Credit Risk Management policy.

Specific Objective: To attain the broad objective the following specific objectives will be pursued-

To identify the various types of credit disbursed by NBL.
To analyze the credit portfolio of NBL.
To get idea about the process of credit management practices of NBL.
To examine the credit disbursement trend of NBL.
To analyze the credit recovery performance of NBL.
To analyze compliance with the Bangladesh bank’s guidelines.
To analyze the financial performance of NBL.

Corporate Information

History and Heritage

National Bank Limited has its prosperous past, glorious present, prospective future and under processing projects and activities. Established as the first private sector bank fully owned by Bangladeshi entrepreneurs, NBL has been flourishing as the largest private sector Bank with the passage of time after facing many stress and strain. The members of the board of directors are creative businessmen and leading industrialists of the country. To keep pace with time and in harmony with national and international economic activities and for rendering all modern services, NBL, as a financial institution, automated all its branches with computer networks in accordance with the competitive commercial demand of time. Moreover, considering its forth-coming future, the infrastructure of the Bank has been rearranging. The expectation of all class businessmen, entrepreneurs and general public is much more to NBL. At present we have 145 branches under our branch network. In addition, our effective and diversified approach to seize the market opportunities is going on as continuous process to accommodate new customers by developing and expanding rural, SME financing and offshore banking facilities. We have opened 10 branches and 5 SME/Agri branches during 2010.

The emergence of National Bank Limited in the private sector was an important event in the Banking arena of Bangladesh. When the nation was in the grip of severe recession, the government took the farsighted decision to allow the private sector to revive the economy of the country. Several dynamic entrepreneurs came forward for establishing a bank with a motto to revitalize the economy of the country.

National Bank Limited was born as the first hundred percent Bangladeshi owned Bank in the private sector. From the very inception, it was the firm determination of National Bank Limited to play a vital role in the national economy. We are determined to bring back the long forgotten taste of banking services and flavors. We want to serve each one promptly and with a sense of dedication and dignity.

The then President of the People’s Republic of Bangladesh Justice Ahsanuddin Chowdhury inaugurated the bank formally on March 28, 1983 but the first branch at 48, Dilkusha Commercial Area, Dhaka started commercial operation on March 23, 1983. The 2nd Branch was opened on 11th May 1983 at Khatungonj, Chittagong.

At present, NBL has been carrying on business through its 130 branches and 15 SME / Agri Branches (total 145 service locations) spread all over the country. Since the very beginning, the bank has exerted much emphasis on overseas operations and handled a sizable quantum of home bound foreign remittance. It has drawing arrangements with 415 correspondents in 75 countries of the world, as well as with 37 overseas Exchange Companies located in 13 countries. NBL was the first domestic bank to establish agency arrangements with the world famous Western Union in order to facilitate quick and safe remittance of the valuable foreign exchanges earned by the expatriate Bangladeshi nationals. This has meant that the expatriates can remit their hard-earned money to the country with much ease, confidence, safety and speed.

NBL was also the first among domestic banks to introduce international Master Card in Bangladesh. In the meantime, NBL has also introduced the Visa Card and Power Card. The Bank has in its use the latest information technology services of SWIFT and REUTERS. NBL has been continuing its small credit programmes for disbursement of collateral free agricultural loans among the poor farmers of Barindra area in Rajshahi district for improving their livelihood.

NBL focused on all key areas covering capital adequacy, maintaining good asset quality, sound management, satisfactory earning and liquidity. As a consequence, it was possible to a record growth of 175.51 percent with Tk. 8,809.40 million pretax profits in the year under review over the preceding year. The net profit after tax and provision stood at Tk. 6,860.34 million which was Tk. 2,070.47 million in the previous year registering a 231.34 percent rise. The total deposits increased to Tk. 102,471.83 million being 33.37 percent increase over the preceding year. Loans and advances stood at Tk.92, 003.56 million in the year under report which was Tk. 65,129.289 million representing 41.26 percent rise over the preceding year. Foreign trade stood at Tk. 144,255.00 million in 2010 compared to Tk. 115,939.00 million, increased by 24.42 percent compared to that of the previous year. During 2010, the bank handled inward remittance of Tk. 49,145.30 million, 10.73 percent higher than that of the previous year. Return on Equity (ROE) registered a 77.84 percent rise over the preceding year.

National Bank, has now acquired strength and expertise to support the banking needs of the foreign investors. NBL stepped into a new arena of business and opened its Off Shore Banking Unit at Mohakhali to serve the wage earners and the foreign investors better than before.

Since its inception, the bank was aware of complying with Corporate Social Responsibility. In this direction, we have remained associated with the development of education, healthcare and have sponsored sporting and cultural activities. During times of natural disasters like floods, cyclones, landslides, we have extended our hand to mitigate the sufferings of victims. It established the National Bank Foundation in 1989 to remain involved with social welfare activities. The foundation runs the NBL Public School & College at Moghbazar where present enrolment is 1140. Besides awarding scholarship to the meritorious children of the employees, the bank has also extended financial support for their education. It also provided financial assistance to the Asiatic Society of Bangladesh at the time of their publication of Banglapedia and observance of 400 years of Dhaka City.

The Transparency and accountability of a financial institution are reflected in its Annual Report containing its Balance Sheet and Profit & Loss Account. In recognition of this, NBL was awarded Crest in 1999 and 2000, and Certificate of Appreciation in 2001 by the Institute of Chartered Accountants of Bangladesh.

The bank has a strong team of highly qualified and experienced professionals, together with an efficient Board of Directors who play a vital role in formulating and implementing policies.

Mission

Efforts for expansion of our activities at home and abroad by adding new dimensions to our banking services are being continued unabated. Alongside, we are also putting highest priority in ensuring transparency, account ability, improved clientele service as well as to our commitment to serve the society through which we want to get closer and closer to the people of all strata. Winning an everlasting seat in the hearts of the people as a caring companion in uplifting the national economic standard through continuous up gradation and diversification of our clientele services in line with national and international requirements is the desired goal we want to reach.

Vision

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

Organizational Structure

We know organizational structure plays an important role on the profitability of any organization. National Bank Limited is a centralized organization and it’s activates designed on the basis of traditional banking business process, Such as Credit, International Division, Investment, Administration, and operation etc. NBL has a formal organizational structure that is highly specialized and centralized.

Organizational setup of the National Bank Limited is consisting of three organizational domains. Firstly, the central top management, which contains Board of Directors, Managing Director, Additional Managing Director and Deputy Managing Director. Major responsibilities of this are to take central decision and transmit it to the second step. Secondly, Central executive level management, which contains Executive Vice President, Senior Vice President, Vice President and Assistant Vice President. Major responsibility of this part to supervise and control division/ department. Thirdly, branch operation management, which contains branch manager and other mid/ lower level management. Major responsibilities of this part are to the 130 branches and 15 SME/Agri Branches (total 145 service locations) across Bangladesh and report to the head office time to time.

Planning:

The strategic planning approach in NBL is top-down. Top management formulates strategy at the corporate level, and then it is transmitted through the division to the individual objectives. Board of directors or Executive committee usually takes the decision. In this process lower level manager are detached in making process, even brainstorming of lower level manager is absent in decision-making and planning process.

Organizing:

Organizing of the National Bank Limited is based on departmentalization. The organization is divided into twelve departments headed by Executive Vice President or Senior Vice President. In the NBL the whole operation is centralized and authority is delegated by written guidelines. These guidelines are:

Advance manual including advances limit for different management level
Bad and doubtful recovery manual
Code of conduct
Foreign banking guidelines
Central bank directives
Different management position holders in departments and branches practice their authorized power in different cases with administrative loophole.

Staffing:

Entry level recruitment process of the National Bank Limited in conducted in three ways. One way is recruitment of probationary officer. Each probationary officer has one year probation period. After completion probation period the officer joins as officer grade-Ill (b). The career path of probationary officer is headed toward different management positions. Second way of recruitment is to recruit non probationary officer who joins as an assistant officer. The career path of an assistant officer is lengthier than probationary officer. The third way of recruitment is recruitment of staff and sub staff such as typist, messenger, driver, guard, attendant, cleaner and other lower level positions. Promotion policy of NBL is basically based on seniority basis. Sometimes, employees are promoted to the higher position for their outstanding performance. However, it is found that the average length of a position held by an employee is around five years.

Controlling:

The bank has strict control over its all organizational activities. The Bangladesh Bank directives indicate some control measures. The central bank conducts credit inspection by a team. The National Bank Limited has audit and inspection department to take controlling measures in internal operations. Audit and inspection team send to the branches and then is responsible for preparing report that will be submitted to the chief administration to take necessary actions.

Division of NBL

Audit & Inspection Division
ATM Card Division
Board Secretariat
Budget & Monitoring Division
Credit Division-1
Credit Division-2
Credit Card Division
Classified Loan Recovery Division
Financial Administration Division
Human Resources Division
International Division
Information System & Technology Division
Law & Recovery Division
Marketing Division
Merchant Banking Division
Public Relations Division
Protocol Division
Reconciliation Division
System & Operation

Product & Services

Deposits Products

Current Deposit
Savings Deposit
Term Deposit
Foreign Currency Deposit
Monthly Savings Scheme
Monthly Income Scheme
Double Benefit Scheme
Millionaire Income Scheme

Credit Products

Overdraft
Lease Financing
House Building
Small Medium Enterprise
Consumer Credit Scheme
Trade Finance

Cards

Credits Card
NBL Power Card

Loan Products of NBL

Secured Overdraft (SOD)
Investment against Imported Merchandise (LIM)
Investment against Trust Receipt (LTR)
Payment against Document (PAD)
House Building Investment
House Building Investment (Staff)
Term Investment
Investment (general)
Bank Guarantee
Export Cash Credit
Cash Credit (HYPO)
Foreign Documentary Bill Purchase (FDBP)
Local Documentary Bill Purchase (LDBP)
General Discussion on Credit Risk Management

Credit Management Policy of the National Bank Limited

Overview

Credit extension or lending is the principal business of NBL. Credits constitute more than 60% of a NBL’s assets and remain the main sours of its income. But credit is also the most risk bearing asset and if not manage prudently; it may cause Sevier financial losses to the bank. This conflicting characteristic of credit provides all the significance to credit management. Strong and effective credit management is essential to ensure the financial health of a bank. The dominant objective of credit management is to maximize profit within a consistent framework of risk and credit discipline. Credit management involves credit planning, credit policies, credit producer, credit administration, and credit monitoring and credit recovery.

Principles of Credit Management

The management of credit risk is central to a sound credit management process. The basic principles of NBL have to follow in its credit risk management are:

Selection
Limitation
Diversification

Selection

Selection of borrower is the most important aspects of credit risk management. The quality of the credit portfolio of NBL depends to a large extent on the quality of its borrowers. To judge the quality of borrower NBL considers the folio wings:

Character ( borrowers honesty, willingness and commitment to pay debts)
Capacity (the success of business)
Collateral
Condition (economic)
Compliance (laws and regulation)

Limitation

A system of limits for different types and categories of lending have to be set. The essential requirement is to establish maximization amount that may be loaned to any borrower or a group of connected borrowers and to any one industry or type of industries. Lending limits have been set the bank’s capital and resources into account.

Credit Policy

NBL have established credit policies containing:

Lending guidelines
Credit assessment process
Approval authority

Lending Guidelines

Lending guidelines should clearly outline the senior management’s view of business development priorities and the term and condition that should be followed for loans to be approved. The lending guidelines should provide the foundations to formulate recommendations for loan approval and should include the following:

Industry and business segment focus
Types of loan facilities
Singles borrower/group exposure limit
Lending caps for a specific sector
Discouraged business types
Loan facility parameter (e.g. maximum size, maximum tenor, security requirement)

Credit Assessment

NBL must undertake through credit and risk assessment before taking decision on loan approval. For credit assessment the following should be taken into consideration:

Amount/types of loan proposed
Purpose of loans
Loan structure (tenor, repayment schedule, interest)
Security
Borrower analysis
Supplier/buyer analysis
Financial analysis
Financial performance
Account conduct

For the assessment the risk grading manual of BB should be followed.

Approval authority

The authority to sanction/approve loans must be clearly delegated to senior executives by the Chief Executive or the Board of Directors. Approval authority should preferably be delegated to individual executives based on security, the executive’s knowledge and experience to ensure accountability and quick decision in the approval process.

Credit Procedure

NBL have clear guidelines for procedure to be followed for loan approval. The approval process should provide for the RM/marketing team should recommend segregation of RM/Marketing from the approving authority and forwarded to the approval team and be approved by the individual executives.

Credit Administration

Credit administration is responsible to ensure proper documentation and compliance of terms and conditions of approval before disbursement of loan. For this reason it is essential that the function of credit administration be strictly segregated from RM/Marketing.

Credit Monitoring

To minimize credit losses, monitoring procedures and systems should be in place that should provide an early indication of the deteriorating financial health of a borrower. NBL’s strong credit monitoring system helps to identify potential weakness of loan requiring closes supervision and attention of the management.

Credit Recovery

NBL have a separate credit recovery unit, the primary functions of which including the following:

Determine action plan/recovery strategy
Pursue all options to maximize recovery
Ensure adequate and timely loan loss provision based and expected losses
Regular review of classified loans

Principle of Good Lending

In appraising a credit proposal, NBL follows a few general principles of goods lending, these are stated below:

Safety
Liquidity
Purpose
Profitability
Security
Spread
National interest

Safety:

Safety first is the main slogan of principle of good lending. While lending a banker must feel that the money will definitely come back. The banker is to ensure that the money advanced by him will be employed in a productive field and repaid with interest.

Liquidity:

Lending money must come back within a reasonable time or on demand. Employment of fluids for short term requirements and not locked up in long term schemes is desirable. The repayment through definite, but slow in coming back does not serve the purpose of liquidity. Recover of mortgage money of much higher value than advance money through court process involving few years is safe but not liquid.

Purpose:

The banker should ensure that the borrower applies the money borrowed for a particular purpose accordingly, advanced for personal expense say: marriage, pleasure tours or repayment of previous outstanding debt are ordinarily refused by banks. NBL’s also discourage advance for hoarding stocks or speculative activities.

Profitability:

NBL makes profit to meet up the expenses of deposit interest, establishment, staff salary, rent, stationary etc. And then make reserve or pay dividend to shareholders. After considering all these factors a bank decides upon its lending rates. A particulars transaction may not appear profitable in itself. But borrowers some ancillary business may be highly remunerative to the lending bank. In this way, the transaction may on the whole be profitable for the bank.

Security:

NBL lends out of borrowed money against security. Security serves as a safety valve for an emergency. Apart from this character, capacity, and capital of the borrower are well looked, when an advance is granted.

Spread:

Risk is always inherent in every advance. A successful banker is an expert in assessing such risk. He is keen on spreading/dispersing lending risks over a large number of borrowers, industries, areas and different types of securities. For example, advancing against only one type of security will run if that class of security steeply depreciates.

National Interest:

An advance satisfying all the aforesaid principles may run counter to national interest. In the changing concept of banking, advancing to priority sectors such as Agriculture, Small Industries and Export oriented industries are assuming greater importance than security.

Credit Processing with Special Reference to Credit Risk Management

Credit processing covers the tasks from receipt of application for credit along with all required papers/documcnts/information to evaluation/analysis of the application and preparation of the proposal for ultimate approval. Processing of credit covers the following stages:

Receipt of credit application
Credit investigation
Matching of credit application with policy
Mode and sufficiency of securitization
Credit evaluation in terms various risks involved for ultimate approval

Credit risks are so exhaustive that a single device cannot encompass all the risk. Moreover lending to day has assumed such diverse nature, that newer techniques are to be applied to effectively contain risks. With this ends in view credit risks management has to be done in order to enable the bank to manage loan portfolio in order to minimize losses, hi the present scenario of fast changing, dynamic global economy and the increasing pressure of globalization, liberalization, consolidation and disintermediation, it is essential to undertake robust credit risks management policies and procedures, sensitive and responsive to these changes.

Credit Assessment

A through credit and risk assessment is to be conducted before granting of loans and once approved all facilities are to be reviewed at least annually. Credit assessment should be presented in a credit application duly singed/approved by the official of the branch.

In case an account deviates from the guidelines the same should be identified in credit applications and the originating officials of the branch should provide justification for approval. NBL will conduct financial analysis on a regular basis and monitor changes in the financial condition.

The proposals are in proposal format that originates in the credit department of the branch and is processed and approved by the Head of Branch/Regional Head/Head Office Management/EC as per delegated authority. At the time of originating a proposal accuracy of all information to be ensured. Originating officers shall follow credit principles, credit policy and guidelines and conduct due diligence on new borrowers, principal and guarantors. They will also adhere to the NBL’s established Know Your Customer (KYC), money laundering guidelines, and BB regulations. For initiating credit relationship credit officer will call on the client, visit factory/business center to see. Production facility/stock/storage pattern/business transaction/reputation etc. and through these to assess possibilities of establishing a remunerative relationship. He/she will also conduct due diligence to get market information on the borrower from industry sources, competitors, local area. Branch manager may also be part of this process. In this regard, if required, the BM/Credit officer will also take help of head office engineer/HO personnel for initial assessing credit needs of large borrowers.

Based on findings of such calls/visit/inspection, Credit Officer, along with the Branch Manager, will initiate proposal, containing information on client’s background, business, market share, integrity, credit exposure/existing banking relationships, and credit needs along with pricing etc.

Risk Assessment Areas

Borrower Analysis:

The majority shareholders, management team and group or affiliate companies should be assessed. Any issues regarding lack of management depth, complicated ownership structures or inter-group transactions should be addressed, and risks mitigated.

Industry Analysis:

The key risk factors of the borrower’s industry should be assessed. Any issues regarding the borrower’s position in the industry, overall industry concerns or competitive forces should be addressed and the strengths and weaknesses of the borrower relative to its competition should be identified.

Supplier/Buyer Analysis:

Any customer or supplier concentration should be addressed, as these could have a significant impact on the future viability of the borrower.

Historical Financial Analysis:

Preferably 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 financial statements should also be analyzed. The analysis should address the quality and sustainability of earnings, cash flow and the strength of the borrower’s balance sheet. Specifically, cash flow, leverage and profitability must be analyzed.

Projected Financial Performance:

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. Facilities should not be granted if projected cash flow is insufficient to repay debts.

Credit Background:

Credit application should clearly state the status of the borrower in the CIB report. The application should also contain liability status with other Banks and Fl’s and also should obtain their opinion of past credit behavior.

Account Conduct:

For existing borrowers, the historic performance in meeting repayment obligations (trade payments, cheques, interest and principal payments, etc) should be assessed.

Adherence to Lending Guidelines:

Credit Applications should clearly state whether or not the proposed application is in compliance with the NBL’s Lending Guidelines. The Bank’s Head of Credit or Managing Director/CEO or Board should approve Credit Applications that do not adhere to the Bank’s Lending Guidelines.

Mitigating Factors:

Mitigating factors for risks identified in the credit assessment should be identified. Possible risks include, but are not limited to: margin sustainability and/or volatility, high debt load (leverage/gearing), overstocking or debtor issues; rapid growth, acquisition or expansion; new business line/product expansion; management changes or succession issues; customer or supplier concentrations; and lack of transparency or industry issues.

Facility Structure:

The amounts and tenors of financing proposed should be justified based on the projected repayment ability and facility purpose. Excessive tenor or amount relative to business needs increases the risk of fund diversion and may adversely impact the borrower’s repayment ability.

Purpose of Credit:

Banks have to make sure that the credit is used for the purpose it was borrowed. Where the obligor has utilized funds for purposes not shown in the original proposal, Banks should take steps to determine the implications on creditworthiness. In case of corporate facilities where borrower own group of companies such diligence becomes more important. Banks should classify such connected companies and conduct credit assessment on consolidated/group basis.

Project Implementation:

In case of a large expansion, which constitutes investment of more than 30% of total capital of a company or for a green field project, project implementation risk should be thoroughly assessed. Project implementation risk may involve construction risk (Gestation period, regulatory and technical clearances, technology to be adopted, availability of infrastructure facilities) funding risk, and post project business, financial, and management risks.

Foreign Currency Fluctuation:

Credit application should clearly state the assessment of foreign currency risk of the applicant and identify the mitigating factors for its exposure to foreign currency.

Security:

A current valuation of collateral should be obtained and the quality and priority of security being proposed should be assessed internally and preferably by a third party valuer. Facilities should not be granted based solely on security. Adequacy and the extent of the insurance coverage should be assessed.

Type of Control on Cash Flow:

The credit application should contain and assess if there is any control on the borrowers cash flow for securing the repayment This may include payment assignment from export proceed, payment assignment from customers of the borrower etc.

Exit Option:

Credit application should clearly state the exit option from the borrower in case of early identification of deterioration of grading of the borrower.

Name Lending

Credit proposals should 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 should be discouraged and treated with great caution. Rather, credit proposals and the granting of facilities should be based on sound fundamentals, supported by a thorough financial and risk analysis.

Risk Grading

Overview of CRG

The Credit Risk Grading (CRG) is a collective definition based on the pre-specified scale and reflects the underlying credit-risk for a given exposure. A Credit Risk Grading deploys a number/ alphabet/ symbol as a primary summary indicator of risks associated with a credit exposure. Credit Risk Grading is the basic module for developing a Credit Risk Management system.

Credit Risk Grading Process

For superior risk grading CRG exercise is not applicable.
Credit risk grading matrix would be useful analyzing for credit proposal, new or renewal for regular limits or specific transaction. If basic information on a borrowing client to determine the degree of each factor is a. readily available, b. current, c. dependable, and d. parameters/risk factors are assessed judiciously and objectively. The branch credit officer will collect required information as per data collection checklist.
Risk factors are to be evaluated and weighted very carefully on the basis of most up to date and reliable data and complete objectivity must be ensured to assign the correct grading. Actual parameters should be inputted in the credit risk grading score sheet.
CRG exercise should be originated by trained credit officer of the branch and should be an ongoing and continuous process. They shall complete the credit risk grading score sheet and arrive at a risk grading in consultation with the advance in charge and document it as per credit risk grading form. This shall be concur by the authorized approving official of the branch.
All credit proposal whether new, renewal, enhancement, rescheduling cases or specific facility should consist of a. Data Collection, b. Limit Utilization Form, c. Credit Risk Grading Score Sheet and d. Credit Risk Grading Form.

Then the credit officers would pass the approved credit risk grading form to credit administration department for updating their MIS/Record.

Credit Administration Function

Credit administration function will be critical in ensuring that proper documentation and approval are in place in respect of disbursement of loan facilities. Credit Administration functions will comprise the following:

Disbursement

Getting approval
Ensuring completion of security documentation
Ensuring adherence to the approved terms and other requirements before disbursement by the branch.
Ensuring limit creation and complying with disbursement check list by branch.

In order to administer credit in a proper manner under the present institutional and operational set up, task of credit administration will be done in the following manner:

A copy of sanction letter will be sent by the credit sanctioning authority to HO credit administration division/branch and regional office. Branch credit administration on receipt of the sanction letter will complete full documentation and formalities as per terms of sanction and send compliance to HO credit administration with a copy to regional office along with a list of documents obtained. For exception of full documentation branch will mention in the compliance certificate about the documentation, which could not be complete for genuine reasons and request credit administration for allowing them to disburse, pending completion of those documents with specific mention about time within which incomplete documentation will be completed.

Head office credit administration will examine the sufficiency of the documentation. If documentation is found to have not been properly done, HO credit administration will advise the branch to complete full documentation and confirm and disburse credit after completion of documentation. Where branch seeks permission for disbursement keeping some documents incomplete. HO credit administration division if considers such exception acceptable, will issue authorization to disburse with the condition to complete incomplete documentation within specific time limit.

Branch credit administration will keep the documentations under their strict preferably in locked fireproof storage and all the term of approval has been complied where against drawing will be allowed.

Pre Disbursement Stage

Before disbursement of the approved facilities, branch credit administration shall ensure that the following steps have been properly followed:

Standard loan facility documentation has been used.
Credit office and credit administration officer of the branch jointly singed documentation checklist before disbursement.
Branch credit administration unit/HO credit administration has issued security compliance certificate and loan disbursement/limit loading checklist and authorization from before disbursement.
Legal counsel has ensured that the bank’s security interest is perfected.
Incomplete documentation has received a temporary waiver from approving authority.
Branch credit administration unit/HO credit administration has ensured that all disbursement is covered by approved credit lines.
Credit has been authorized as per our bank’s policy.
Evidence of disbursements is properly documented.
Unauthorized approvals have been surfaced and proper actions taken.
Excess over limit have been allowed under due approvals of the competent authority.

Custodian

Outstanding security documentation as per approval.
Safe storing loan/security documents (fire-proof).
Periodic review of documentation.
Ensuring insurance of the insurable objects.
Cash collateral such as fixed deposit receipt, script, bonds, marketable securities and security documentation etc. are held under dual control in fireproof vault.
Two custodians and their alternates are identified in writing.
Safe in and safe out register is properly maintained to track movement of documents.
Release of collateral of debt obligation instruments has been made under appropriate approval.
Insurance requirements are detailed in the credit proposal and policy kept in the vault.
Insurance policy is current and renewed on a timely basis.

Types of Advance Loan, Overdraft, Cash Credit

The main functions of a NBL are two, a. to take deposits and b. to make advance. Making of advance is the most important function of a bank, as upon it’s depend the profitability of the bank. Moreover, bank make advance out of deposit of the public which are payable on demand. A commercial bank makes advance to different sectors for different purpose. I.e. financing of trade and commerce, imports and exports, industries, agriculture, transport, and house building etc. advance by commercial banks are made in different forms such as loans, overdrafts, cash credits.

Loan

When an advance is made hi a lump sum repayable either hi fixed monthly installments or in lump sum and subsequent debit is ordinarily allowed expected by way in interest and incidental charges, etc. it is called a loan.

Loan is allowed for a single purpose where the entire amount may be required at a time or in a number of installments within a period of short span.

After disbursement of the entire loan amount, there will be only repayment by the borrower. A loan once repaid in full or in part, cannot be drawn again by the borrower.

Entire amount of loan is debited to the loan a/c in the name of the customer and is paid to him through his SB/CD/A/c. sometimes loan amount is disbursed in cash. Commercial banks generally make loans for the following purpose:

Now a day^s commercial banks especially the nationalized commercial banks in our country are to make loans under different schemes VIZ, agriculture loans and loans under self employment scheme etc.
Depending upon the purpose, loans may be repayable within a few months or the repayment period may extend up to a few years.
Agricultural loans are generally repayable within a period of 3 (three) months to 1 (one) year. But repayment of transport loans and house building loans may take longer period comprising a number of years.
Loans are generally secured by lien on fixed/term deposits, shares, debentures, protirakhsha sachoy patra, insurance policy, pledge of gold, mortgage or real estate and hypothecation of crops, vehicles, machineries etc depending upon the nature and purpose of the loan.

Overdraft

The overdrafts are always allowed on a current a/c operated upon by cheques. The customer may be allowed a certain limit up to which he can overdraw within a stipulated period of time. In an over daft a/c withdrawals and deposits can be made any number of times within the limit and prescribed period. Interest is calculated and charged only on the actual debit balances on a daily product basis. Over draft are of three kinds:

Temporary Over Draft (TOD)
Clean Over Draft (COD)
Secured Over Draft (SOD)

TOD:

TOD is allowed to honor an important cheque of a valued client without any prior arrangement. As this facility is allowed for a very short period, it is called Temporary Overdraft.

COD:

Sometimes over draft are allowed with no other security except the personal security of the borrowers. These types of overdrafts are called Clean Overdraft.

SOD:

Some overdrafts are allowed against securities they are called Secured Overdraft. Overdrafts are generally to contractors and supplier for carrying on construction works and supply orders and to businessmen for their business.

Cash Credit

Cash credit is allowed to the businessmen, traders and industrialists etc. for meeting their working capital requirements, cash credit is always allowed against hypothecation or pledge of goods. Hence, cash credit is two types:

Cash credit (Hypothecation)
Cash credit (Pledge)

Cash Credit (Hypothecation)

Cash credit allowed against hypothecation of goods is known as cash credit (HYPO) limit. In case of hypothecation the borrower retains the ownership and possession of goods on which charge of the lending bank is created. Holden says, hypothecation is a legal transaction, whereby goods may be made available as security for debit without transferring either the property of the possession the lender. The documents, which creates charge of the lending bank on the hypothecated goods, is called letter of hypothecation. By singing this letter of hypothecation, the borrower binds him to give possession of the hypothecated goods to the lending bank when called upon to do so. As the hypothecated goods remain under the as such the banker should taken the following precautions:

The banker should carefully verify the stocks of hypothecated goods and their market price.
Periodical statement of stock duly signed by the borrower should be obtained.
Stock should duly insure against fire burglary R.S.D with bank clause.
Banker should try to obtain sufficient collateral security.
The borrower should be trustworthy and prudent customer.
The goods are readily saleable and have good demand in the market.
The price of the goods, offered as security, is to be calculated as per following principle purchase price or market price whichever is lower.
The price of the goods is steady.

Cash Credit (Pledge)

Cash credit allowed against pledge of goods is known as cash credit (pledge) limit. In case of cash credit (pledge) limit, the borrower pledges his goods to the bankers as a security against the credit facility, pledge has been defined as “a bailment of goods as security for payment of debt or performance of a promise”. The ownership of the pledge goods remains with the pledge.

NBL’s retain the effective control of the pledge goods. Pledged goods may be stored in godown of the borrower but under lock and key of the bank. Bank’s guards are posted round the clock to protect the godown. Sometimes, pledge goods are stored in banks godown. Banks makes delivery of the pledge goods to the party against payment.

Following points should be taken into consideration while allowing cash credit (pledge) limit.

The quantity of the goods is ascertained.
The goods are readily salable and have a constant and effective demand in the market.
The quantity of the goods is ensured, the goods are not perishable and will not deteriorate and quality as a result for long or short duration.
Goods are stored in pucca godown to save them from deterioration and to guard them against risks of pilferage.
The borrower has an absolute title of the goods.
The prices of the goods should be steady and are not subject to violent changes.
The valuation of the goods should be made very carefully. “Purchase price or market price whichever is lower” is the general principle for assessing the valuation of the goods.
The goods should be stored in the presence of responsible bank official.
The goods are insured against all risks, such as fire, theft R.S.D. etc and the insurance policy bears “Bank Mortgage Clause”.
The stocks report is obtained duly singed by the borrower.
Stocks must be inspected regularly by the branch in charge.
Stocks cards indicating the quantity of stocks, their value and rate is placed in the godown.
The locks of the godown are sealed and keys are deposited in the branch.

Drawing Power

Both in case of hypothecation and pledge, the banker should find out the drawing power. Advance is allowed against hypothecation/pledge of goods after deduction of the margin. If the margin for advance against stock of “Cotton Yarn” is 30% then bank can advance tk 70/-against hypothecation/pledge of stock of cotton yarn of tk 1007- in this case tk 707- is the drawing power. A banker should know the market price of the goods to arrive at a correct D.P.

To analyze financial performance of NBL, we have to see these:

Capital Adequacy Ratio
Deposits
Import & Export
Net Profit after Tax
Industry wise Loans & Advances
Remittance
Current Financial Position of NBL

Capital Adequacy Ratio

Capital Management of the Bank is to maintain an adequate capital base to support the projected business and regulatory requirement. NBL always maintains a prudent balance between Tier-I and Tier-2 capital- Total capital as on December 31, 2010 was Tk. 19,190.79 million and capital adequacy ratio was 12.29 %. Maintenance of adequate capital enhanced the Bank’s single borrower’s exposure limit up to a high level to cope with the corporate customers demand.

Import & Export

In harmony with earlier years’ trend, National Bank Limited was intensely active in international trade during the year 2010. The Bank put forth every possible attempt to expand its external business by establishing LC, undertaking export bill negotiations, realization of export proceeds, foreign remittance etc.

The Bank opened a total 24,775 LCs amounting to USD 1,390.03 million for facilitating import trade in 2010. The main commodities were capital machinery, raw cotton, scrap vessels, rice, wheat, edible oil, petroleum products, yarn, fabrics, garment accessories and other consumer items.

The Bank has been nurturing the export business enthusiastically since its inception. In 2010 it handled 22,135 export documents valuing USD 691.79 million with agrowth of 24 percent over the last year’s volume of USD 559.78 million. Export finances were extended mainly to readymade garments, knitwear, frozen food and fish, tanned leather, handicraft, tea, jute goods etc.

Deposit

The deposit base of the bank registered a growth of 33.37 percent in the reporting year over the last year and stood at Tk.102, 471.83 million. Expansion of branch network, competitive interest rate and deposit products contributed to the growth. The customers of the bank were individuals, corporations, financial institutions, government and autonomous bodies etc.

Net Profit after Tax

Efficient Board and management, strong capital base, wide branch network, support from other stakeholders helped NBL in revenue earnings and profit maximization. During the period NBL earned an operating profit of Tk. 8,940.60 million in 2010 which was Tk 3,397.50 million in 2009 registering a growth of 163.15 percent. Net Profit after tax grew by 231.34 percent to Tk. 6,860.34 million in 2010 after making provision for loan loss and taxation.

Industry wise Loans & Advances

National Bank Limited formulated befitting credit risk management criteria and strategies for creation of balanced lending mix in its portfolio both for short and long term with the bottom line objective to ensure risk adjusted rate of return in its credit transactions. Loan and advances in the year 2010 registered an increase by 41.26% to BDT 92,003.56 million from BDT 65,129.29 million in 2009. During the year 2010, the credit expansion mainly was in bilateral project finance, syndicate finance, export, import and trade finance as well as SME and Agri finance. The bank as a matter of policy prioritizes to make lending in the thrust sectors of the economy so as to make distinctive

Remittance

National Bank Limited exerted highest emphasis on overseas operation and handling a sizeable quantum of homebound foreign remittance since beginning. By this time, it has earned a reputation as the leader in providing such remittances not only among the customers but also among the regulators. In 1985 the Bank established exchange house with equity ownership and management in Oman. Subsequently many arrangements have been made with different exchange houses and also by establishing subsidiaries abroad for expanding the Bank’s overseas network in places with high concentration of Bangladeshi expatriates.

National Bank Limited in 1993 introduced Western Union Money Transfer, a global leader in money transfer services in Bangladesh remained lone agent till 2002. It was a breakthrough in getting prompt payment of foreign remittances by the beneficiaries which encouraged remitters to use legal channel. As a contributor of national economy, NBL is relentlessly working to ease the flow of inward foreign remittance. The bank introduced different products and technology including Online Banking, EFT and other automated devices for uninterrupted speedy payments. Furthermore, NBL entered into a deal with ASA, a leading NGO having 3,000 outlets throughout the country and also with Social Islamic Bank Limited (SIBL) to provide inward remittance products on behalf of NBL. In 2010, foreign remittance brought through NBL was USD 708.67 million with an increase of USD 62.70 million over the previous year showing a growth of 9.70%.

Current Financial Position of NBL

Profit & Loss account

Based on continued operation of NBL financial performance is very well. Based on unaudited Profit & Loss account on From 01 January to 31 March 2011 NBL earned Net Profit after Tax tk. 6,396,134,256 where Net Profit after Tax was tk. 2,213,817,478 on From 01 January to 31 March 2010. So NBL earned more than three times profit in the same period compare to previous year. At 31 March 2010 EPS 0.75 but now at 31 March 2011 EPS 1.51, which is almost, double than previous year.

Balance Sheet

As at 31 March 2011 NBL total assets tk. 137,444,887,844 but at the same time in previous year as at 31 December 2010 was tk. 134,732,312,229. So here we see NBL assets condition also increased.

Because of issuing bonus share NBL’s paid up capital tk. 8,603,656,030 which is almost double than previous year. Bt it’s negatively affect NBL’s retained earnings. Now NBL’s operating profit is much higher among commercial bank in the current continued operation.

SWOT Analysis of NBL

SWOT analysis is the detailed study of an organization’s exposure and potential in perspective of its strength, weakness, opportunity and threat. This facilitates the organization to make their existing line of their performance and also foresee the future to improve their performance in comparison to their competitors. As though this tool, an organization can also study its current position, it can also be considered as an important tool for making changes in the strategic management of the organization.

Strengths

National Bank Limited has already established a favorable reputation in the banking industry of the country. It is one of the leading private sector commercial banks in Bangladesh. The bank has already shown a tremendous growth in the profit & deposits sector.

National Bank Limited has already achieved a high growth rate accompanied by an impressive profit growth rate in 2010. The number of deposits and the loans and advances are also increasing rapidly.

National Bank has the reputation of being the provider of good quality services to its potential customer.

Weakness

The main important thing is that the bank has no clear mission statement and strategic plan. The banks not have any long term strategies of whether it wants to focus on retail banking or become a corporate bank. The path of the future should be determined now with a strong feasible strategic plan.

The bank failed to provide a strong quality recruitment policy in the lower and some mid level position. As a result the services of the bank seem to be dues in the present days.

The poor service quality has become a major problem for the bank. The quality of the service at National Bank is not higher than the Dhaka Bank, Prime Bank, or Dutch Bangla Bank etc. so the bank has to complete with the multinational bank located here.

Some of the job in National Bank has no growth or advisement path. So lack of motivation exists in persons filling those positions. This is a weakness of NBL that it is having a group of unsatisfied employees.

In terms of promotional sector, NBL has more emphasize on that. They have to follow aggressive marketing campaign.

NBL remittance payment system is very poor, to pay a customer bank consume huge time (in some cases it takes a day to pay), because their IT investment is poor.

Opportunity

In order to reduce the business risk, NBL has to expand their business portfolio. The management can consider options of starting merchant banking or diversify into leasing and insurance sector.

NBL has a huge scope to increase their customer service quality. By investing more in IT sector, recruit dynamic people who can ensure max customer benefit.

The percentage of classified loan of NBL is about 5%, so here bank has a huge scope to maximize performance. Even though classified loan in Babu Bazar Branch is less than 1%.

A large number of private banks coming into the market in the recent time in this competitive environment NBL must expand its product line to enhance its sustainable competitive advantage in that product line, they can introduce the ATM to compete with local and foreign bank. They can introduce credit card and debit card system for their potential customer.

In addition of those things, NBL can introduce special corporate scheme for the corporate customer or officer who have an income level higher from the service holed. At the same time, they can introduce scheme or loan for various service holders. And the scheme should be separate according to the professions such as engineers lawyers, doctors etc.

Threats

All sustain multinational banks and upcoming foreign private banks possess enormous threats to NBL. If that happen the intensity of competition will rise further and banks will have to develop strategies to compete against on slough of foreign the banks.

The default risks of all terms of loan have to be minimizing in order to sustain in the financial market, because default risk leads the organization towards to bankrupt. NBL has to remain vigilant about this problem so that proactive strategies are talent to minimize this problem if not elimination.

The low compensation package of the employees from mid level to lower level position threats the employee motivation. As a result, good quality employees leave the organization and its effects the organization the as a whole.

Recommendation

A banker cannot sleep well with bad debts in his portfolio. The failure of commercial banks occurs mainly due to bad loans, which occurs due to inefficient management of the loans and advances portfolio. Therefore any banks must be extremely cautious about its lending portfolio and credit policy. So far National Bank Limited has been able to manage its credit portfolio skillfully and kept the classified loan at a very lower rate. Thanks go to the standard and stringent credit appraisal policy and practices of the bank.

But all things around us are changing at an accelerating rate. Today is not like yesterday and tomorrow will be different from today. Given the fast changing, dynamic global economy and the increasing pressure of globalization, liberalization, consolidation and disintermediation, it is essential that National Bank Limited has a robust credit risk management policies and procedures that are sensitive to these changes. To improve the risk management culture further, National Bank Limited should adopt some of the industry best practices that are not practiced currently. These are

NBL should have a clear written lending guideline. The lending guideline should include Industry and Business Segment Focus, Types of loan facilities, Single Borrower and group limit, Lending caps, Discouraged Business Types, Loan Facility Parameters and Cross boarder Risk.
It should adopt a credit grading system all facilities should be assigned a risk grade. And the borrowers risk grades should be clearly stated on credit application.
Approval authority should be delegated to individual executives rather than Executive Committee/ Board to ensure accountability. This system will not only ensure accountability of individual executives but also expedite the approval process.
All lending functions should be segregated in the following way:

Credit Approval / Risk Management
Relationship Management / Marketing
Credit Administration

They should avoid nepotism and favoritism,
They should improve relationship with Bangladesh Bank.

The segregation of duties will improve the knowledge levels and expertise in each department.

The organization structure should have to be changed to put in place the segregation of the Marketing/ Relationship Management function from Approval / Risk Management / Administration function.
The responsibilities of the key persons of the above function must also be clearly specified.
There should be a Recovery Unit to manage directly accounts with sustained deterioration. To encourage Recovery Unit incentive program may also introduced.

Conclusion

During the internship program at NBL almost all the desk has been observed more or less, for gaining knowledge about practical banking and to compare this practical knowledge with theoretical knowledge. Though all departments and sections are covered in the internship program, it is not possible to go to the depth or each activities of division because of time limitation. So, objective of this internship program have not been fulfilled with complete satisfaction. However, highest effort has been given to achieve the objectives of the internship program.