Executive Summary

This report is completed as a partial requirement of my desk work which is mandatory for each and every student of Stamford UniversityBangladesh. As I was working in Mutual Trust Bank Limited, Panthapath Branch, Panthapath. I got the opportunity to learn different loan processing activities, preparation of documents related with the loan processing activity, reporting of different financial or non-financial statement to get the idea of loan processing and related control mechanism in the banking system.

Mutual Trust Bank Limited, new generation private commercial bank, was established in 29^th September, 1999. There are ten executives and officers in the Panthapath Branch. As Mutual Trust Bank Limited, maintaining the pace with the competitive commercial banking in Bangladesh, its activities, culture, philosophy and style leads an intern student to be the best at any field of working life.

For this report I had to collect information from the bank itself. In this report I have tried to relate accounting information system with the Credit Management Activities as well as related control mechanism of Mutual Trust Bank Limited.

Mutual Trust Bank Ltd, a new generation private commercial bank strives to consolidate its position among the top banks in the country through offering competitive services and products. It started operations on 24 October 1999 with an authorized and paid up capital of Tk 1,000 million and Tk 200 million respectively. The bank has now 56 branches and 12 SME service centers. The bank earned an operating profit of Tk 30,556.70 Million in 2010 against Tk 25,440.20 million in 2009. The net profit of the bank decreased to Tk 7551.57 million in 2010 against tk 8,206.05 million of the previous year.

Giving a thrust on the use of IT, the bank reorganized the DataCenter installing state of the art modern hardware, network and security equipments. The bank has a strong presence in the country’s growing stock market also. The bank has developed a number of products to cater to the needs of corporate clients to small entrepreneurs and individual clients. It offers special products for the remitters, whose hard earned money helps the country in development. Representatives of the bank in the United Kingdom, the United Arab Emirates, Qatar, Canada and other countries encourage the remitters to send money through formal channel and help the economic activities to remain brisk.

Introduction                                                 

Now a day, it has become essential for almost every person to deal with banks somehow in their bred and better life. As a result it has become essential for every person to have some idea of the bank and banking procedure.

At present time, the banking procedure is becoming faster, easier and the banking arena is becoming wider. As the comparative field of the banking sector, the banking organizations are coming with innovative ideas.

Mutual Trust Bank is a financial institution whose main objective is the mobilization of fund from surplus unit to deficit unit. In the process of acceptance of deposits and provision of loan, Bank creates money. This characteristics feature sets Bank apart from other financial institution. The bank can influence the money supply through lending and investment. The bank is an economic institution whose main objective is to earn profit through exchange of money and credit instruments.

Commercial bank is one which is concern with accepting deposit of money from the public, repaying on demand or otherwise and withdraw able on demand or otherwise and employing the deposits in the form of loan and investment to meet the financial needs of business and other classes of society.

This report has been developed concentrating on the topic “Credit Management” of “Mutual Trust bank Limited, “ Panthapath Branch.”

Objectives of the Study

•  To present an over view of Mutual Trust Bank Ltd
• To analysis the Lending procedures maintained by the MTBL
•  To observe principal Lending activities of Mutual Trust Bank Ltd
• To evaluate Lending performance of Mutual Trust Bank Ltd
• To measure the actual position in classified Loan and provisions maintained by      MTBL
• To appraise the actual Recovery position of MTBL
•  To evaluate the success of credit operations compare with other Banks
•  To identify problems in credit operations of Mutual Trust Bank Ltd
• To recommend suggestions for the successful Lending Operations of Mutual Trust Bank Ltd.
• To contribute to the balanced development of economy by pursuing a sound credit policy that will put emphasis on lending in desired sector.

• To provide directional guidelines to all concerned to pursue the policy of sound lending, improve risk management culture and establish minimum standard for managing risks in credit operations and ultimately minimize credit risks.

• To strictly comply with laws and norms related to lending operation.

• To maintain adequate liquidity, make judicious investment planning and attain sustainable growth and profitability.

• To maintain balanced lending portfolio keeping strict watch on global economic situation that might adversely affect the bank.

• To ensure proper supervision, monitoring & follow up of asset portfolio.

• To strengthen asset quality ensure safe return of money lent, minimizing of credit loss and protect bank’s interest.

• To make credit documentation exhaustive.
• To make lending correct information based
• To strictly comply with laws and norms related to lending operation.
• To inform the banking credit facilities to the mass people.
• To know about the Credit products and the way of disbursement.

Sources of Data:

The report is descriptive in nature. The information was collected from both primary and secondary sources of data. Regarding the information required was collected within the organization from the Corporate Division of Mutual Trust Bank Limited. In December 2000, the total assets of the bank were valued at Tk 2,444.79 million. Assets sprung from off-balance-sheet items were Tk 446.7 million. The bank earned a good amount of interest incomes through treasury functions and by timely placement of surplus funds in call money market. Investment of the bank other than loans and advances figured at Tk 125.10 million in 2000 and the whole amount was in government bills. During 2000, the total operating income of the bank was Tk 178.20 million and its operating expenses were Tk 158.02 million which resulted in operating profits of Tk 20.18 million. 1% provision on the unclassified advances equivalent to Tk 6.19 million was made and Tk 5.60 million was retained as provision for taxation. Of the net profit after tax, Tk 2.80 million was transferred to Statutory Reserves and Tk 5.59 million to General Reserves. The bank reached break even within only 67 days after it commenced business.

Collection of Primary Data

Many of the data and information were collected from my practical experience and queries from the executives while doing my internship at Mutual Trust Bank Ltd. Information and data regarding Overview of MTBL, interest rates & charges, credit operations, performance measurement in Lending, SWOT Analysis, credit policies, Loan Agreement etc. were collected from these sources.

Collection of Secondary Data

Data regarding the Credit operations and Performance Evaluation of Mutual Trust Bank Ltd. were collected from secondary sources like: Annual Reports, Brochures, Manuals and Publication of Mutual Trust Bank Ltd., Bangladesh Bank Library, BIBM Library, DSE Library, News paper etc. were the major sources of secondary date.

Scope of the Study

This report has been prepared on the basis of experience gathered during the period of internship from 16.06.11 to present 2011. For preparing this report, I have also got information from Annual reports and Website of the Mutual Trust Bank Ltd. I have presented my experience and findings by using different charts and tables, which are presented in the analysis part.

Limitation of the study

The main problem faced in preparing the paper was the inadequacy and lack of availability of required data. This report is an overall view of Credit Operations of Mutual Trust Bank Ltd. But there is some limitation for preparing this report. Firstly this bank is very new so they do not have enough data, that’s why I did not make vast compare this bank with other banks. Secondly when I was doing my internee then there internal and Bangladesh Bank auditing is going on that’s why I did not get the after closing data that is available data of 2010. With all of this limitation I tried my best to make this report as best as possible. So readers are requested to consider these limitations while reading and justifying any part of my study.

Organizational Profile of MTBL:

Mutual Trust Bank Limited a private sector commercial bank. It started operations on 24 October 1999 with an authorized and paid up capital of Tk 1,000 million and Tk 200 million respectively. The capital is divided into ordinary shares of Tk 100 each. In December 2004, the bank total equity and reserve funds were Tk 208.48 million and Tk 8.48 million respectively. The bank is a Bangladeshi joint venture company with equity participation from Advanced Chemical Industries Ltd., East West Properties Development Ltd. and Associated Builders Corporation Ltd. The management of the bank is vested in an 18-member board of directors, including representatives of the 3 sponsor firms. The managing director is its chief executive.

The bank conducts all types of commercial banking activities including foreign exchange business and other financial services. During the first two years of operations, the bank’s main focus was on the delivery of personalized customer services and expansion of its clientele base.

The Company was incorporated on September 29, 1999 under the Companies Act 1994 as a public company limited by shares for carrying out all kinds of banking activities with Authorized Capital of Tk. 38,00,000,000 divided into 38,000,000 ordinary shares of Tk.100 each. The Company was also issued Certificate for Commencement of Business on the same day and was granted license on October 05, 1999 by Bangladesh Bank under the Banking Companies Act 1991 and started its banking operation on October 24, 1999. As envisaged in the Memorandum of Association and as licensed by Bangladesh Bank under the provisions of the Banking Companies Act 1991, the Company started its banking operation and entitled to carry out the following types of banking business:

1. All types of commercial banking activities including money market operations.
2. Investment in merchant banking activities.
3. Investment in company activities financiers, promoters, capitalists etc.
4. Financial intermediary services.
5. Any related financial services

The Bank operates through its Head office at Dhaka with 68 Branches & 12 SME service centers. The Bank carries out international business through a Global network of Foreign Correspondents Banks

Mutual Trust Bank Limited at a glance:

Company Registration No: C38707 (665)/99 on September 29, 1999

Bangladesh Bank Permission No: BRPD (P)744(78)/99-3081 on October 5, 1999

Registered Office: MTB Centre, 26, Gulshan Avenue, Plot-5, Block SE (D), Gulshan-1. Dhaka 1212.

Swift Code: MTBLBDDH

Corporate Website: www.mutualtrustbank.com

The Company was incorporated on September 29, 1999 under the Companies Act 1994 as a public company limited by shares for carrying out all kinds of banking activities with Authorized Capital of Tk. 38,00,000,000 divided into 38,000,000 ordinary shares of Tk.100 each.

The Company was also issued Certificate for Commencement of Business on the same day and was granted license on October 05, 1999 by Bangladesh Bank under the Banking Companies Act 1991 and started its banking operation on October 24, 1999. As envisaged in the Memorandum of Association and as licensed by Bangladesh Bank under the provisions of the Banking Companies Act 1991, the Company started its banking operation and entitled to carry out the following types of banking business:

(i) All types of commercial banking activities including Money Market operations.
(ii) Investment in Merchant Banking activities.
(iii) Investment in Company activities.
(iv) Financiers, Promoters, Capitalists etc.
(v) Financial Intermediary Services.
(vii) Any related Financial Services.

The Company (Bank) operates through its Head Office at Dhaka and 36 branches and 5 SMEServiceCenters. The Company/Bank carries out international business through a Global Network of Foreign Correspondent Banks.

Memberships:

• Metropolitan Chamber of Commerce and Industry, Dhaka (MCCI, D)
• The Institute of Banker’s Bangladesh (IBB)
• Bangladesh Foreign Exchange Dealers Association (BAFEDA)
• Bangladesh Institute of Bank Management (BIBM)
• International Chamber of Commerce Bangladesh Limited (ICCB)
• Association of Bankers Bangladesh Limited (ABB)
• Bangladesh Association of Publicly Listed Companies (BAPLC)
• American Chamber of Commerce in Bangladesh (AMCHAM)

Vision:

Mutual Trust Banks Vision is based on a philosophy known as MTB3V. They envision MTB to be:

1. One of the best performing banks in the country
2. The bank of choice
3. A truly world class bank

Mission:

They aspire to be the most admired financial institutions in the country, recognized as dynamic, innovative and client focused company that offers an array of products and services in the search for excellence and to create an impressive economic value.

We aspire to be the most admired financial institution in the country, recognized as a dynamic, innovative and client focused company, that offers an array of products and services in the search for excellence and to create an impressive economic value.

Mission and Vision :

• Extend all types of credit facilities at competitive price with prudence & efficiency
• Offer wide range of financial products
• Encourage loans & advances to productive income generating activities and there by create employment opportunities and improve standard of living of the common people. Loans and advances for productive purpose, which will alleviate poverty, will be given priority.
• Prioritize welfare oriented banking services.
• Diversify lending activities by avoiding undesirable sect oral concentration and ensuring balanced geographical dispersal.
• Design loan operations keeping social and economic and environmental factors in to consideration.
• Attach due importance to consumer credit, personal loan, SME loan and agricultural credit.
• Constantly explore prospective and profitable ventures to achieve institutional and national objectives.

Key Management People:

• The Chairman: Mr. Samson H. Chowdhury, a recognized entrepreneur of the country, is the Chairman of Mutual Trust Bank. This prolific business magnate with variegated experience is a Senior Cambridge and he participated in the Management Training Course jointly conducted by the University of Dhaka and the HarvardUniversity. He has been an icon in the country’s pharmaceutical industry for long. He is the Chairman of the reputed conglomerate Square. Furthermore, he is the Chairman of Central Depository Ltd and Shabazpur Tea Estate as well as life member of Transparency International, Bangladesh Chapter and its former Chairman.

• The Vice-Chairman: Dr. Arif Dowla is the Vice Chairman of Mutual Trust Bank. He is the Managing Director of Advanced Chemical Industries Limited. He obtained PhD degree in Mathematics from the University of California, San Diego. He is also a member of the American Mathematical Society. His doctoral dissertation was on non-stationary stochastic processes, which is a field of study related to probability theory and statistics. His thesis advisor was the renowned Time Series and Random Fields analyst Professor Dimities  N. Polities.

• The Managing Director & CEO: Anis A. Khan (AAK) is Managing Director & CEO of Mutual Trust Bank Limited (MTB), one of Bangladesh’s leading private sector banks, since April 15, 2009. Prior to joining MTB, AAK headed the country’s largest multi product financial institution (non-banking), and one of its premier merchant/investment banks, IDLC Finance Limited (IDLC), for six years, as its CEO & Managing Director. A career banker, Anis earlier served for 21 years, in a multitude of roles, with the then Grind lays Bank pal’s., ANZ Grind lays Bank and Standard Chartered Bank (SCB), both in Bangladesh and abroad.

• Founding Chairman: Mr. Syed Manzur Elahi is the founding Chairman of MTB. He started his career as a professional with a leading multinational corporation and then became an entrepreneur in the early post independence days,. Mr. Elahi is a prominent businessman of the country and is the Chairman of Apex Group, a leading business organization of the country. Throughout his illustrious career, he has made significant contributions to the founding and development of various industrial and business enterprises including banking. He is the founding Chairman of Apex Tannery Ltd., Apex Adelphi Footwear Ltd., Apex Parma Ltd., Pioneer Insurance Co. Ltd. and Grey Advertising (Bangladesh) Ltd.

• Deputy Managing Director: Md. Hashem Chowdhury is the Deputy Managing Director of Mutual Trust Bank Limited (MTB). He is a long experienced banker who joined MTB as a member of its founding team in April 1999, and has over the last decade, made considerable contributions to the bank. He has served MTBL Principal Branch for over nine years, of which four years was spent at its helm, driving remarkable business growth and delivering a steady stream of profits to the Bank. The branch achieved the distinction as the most profitable one in MTB, especially during 2007 and 2008 and Hashem was recognized as the “Best Manager of Mutual Trust Bank” for two consecutive years in 2007 and 2008. He was then transferred to the Head Office in January 2009 and took charge of the General Services Department, Banking

Mutual Trust Bank Limiter’s Strategic Objectives:

• To ensure inflow of funds at combination of least possible cost
• To maintain a discreet credit policy
• To enhance versatility and diversification through the penetration of new market segments, thereby fulfillment unmet needs
• To extend financial assistance to the citizens, living at dispersed locations by expanding the network of branches
• To practice stronger IT-driven initiatives that will meet the challenges and requirements of the banks and its clients
• To improve administrative and organizational structures in order to prepare the platform for the best practices of corporate government.
• To enrich the banking sector with improved awareness on corporate social responsibility
• To provide extensive career opportunities through competitive pay and benefits and a flexible environment.

Business Philosophy of MTBL

The philosophy of MTBL is to develop the bank into an ideal and unique banking institution. The perception is that MTBL should be quite different from other privately owned and managed commercial bank operating in Bangladesh. MTBL is to grow as a leader in the industry rather than a follower. The leadership will be in the area of service, constant effort being made to add new dimension so that clients get ‘Additional’ in the matter of services to commensurate with the needs and requirements of the country’s growing society and developing economy.

Global Economic Perspective

The growth of world economy, according to World Bank’s study on Global Economic Prospects 2009, has been broadening over the past few years. Real GDP growth of the world is expected to be 3.20% in the year 2009 which is remarkably higher than that of previous year’s due to improvement in macroeconomic fundamentals, enhanced structural flexibility, stronger economic climate and progress toward reducing trade barriers. However, International Monetary Fund (IMF) had forecasted 4.30% growth for 2009.

MTBL successfully maintained its growth during the year 2009 and 2010 in terms of business and profitability, with its operating profit was 651.85 million and 969.47 million respectively. The bank diversified its business in new areas of commercial banking operations, trade finance, working capital finance, term finance, etc. the ON line operation of the bank was increasingly gaining popularity and with opening of rural branches, modern banking services were now being enjoyed by the valued customers in places outside Dhaka and even in rural areas, where MTBL is operating.

Corporate Governance

• Corporate Governance is the system by which organizations are directed and controlled firmly. The bank follows the guidelines stated below to ensure corporate governance.
• In accordance with the guidelines of Bangladesh Bank the number of directors in the board is thirteen.
• The board of directors has two committees namely Executive Committee and        Audit committee.
• At least one board meeting is held every month.
• The board reviews the policies related to credit and other major operations in order to establish effective risk management
• The board ensures the compliance with the rules and regulations of Securities and Exchange Commission (SEC) and other regulatory bodies.
• The management performs activities in line related with the board.

Risk Management:

The board and the management of MTBL acknowledges that risk is an integral part of business and gives full cognizance to the importance of various risks involved in the banking business. The bank has taken initiatives to structure the business units in line with Bangladesh Bank risk management guidelines.

The bank takes/ will take care of /analyzes the risks involved with Cross Border lending. Risks associated

with import of a commodity are kept in mind which may basically take the form of failure of the foreign supplier to:

1. Supply goods of specified standard and quality.
2. Supply the contracted goods timely.

These risks are tried to be handled by obtaining satisfactory credit report on the supplier before opening L/C. Track record of the exporter, past performance, capability of the seller to comply with the terms of sale- purchase, timely shipment etc are examined before opening L/C. Advance payment against import is avoided in order to avert credit associated risk. Risks involved in export deal are also taken care of. Capability of the consignee is, when required, ascertained by obtaining credit report on them. Here also past record, past payment behavior, instances of payment refusal, instances of taking discount, frequency of raising of objections on minor grounds and making delay in payments etc a carefully perused and the results form the basis of proceeding properly avoiding risks associated with export deal. Besides, the country risks both of importing & exporting are kept in view in respect of handling the import-export deal.

Corporate Social Responsibilities (CSR):

MTBL has always responded to its commitment to the society and has been taking part in corporate contributions and donations to various charitable, educational and healthcare institutions across the country. The Mutual Trust Bank Foundation has been formed to carry out these benevolent activities. If any situational changes occur in the stipulations in terms of which the loan was extended or if the capital of the borrower is impaired due to adverse conditions or if the value of the securities decreases or if the recovery of the loan becomes uncertain due to any other unfavorable situation, the loan will have to be classified on the basis of qualitative judgment. Besides, if any loan is illogically or repeatedly re-scheduled or the norms of re-scheduling are violated or instances of (propensity to) frequently exceeding the loan-limit are noticed or legal action is lodged for recovery of the loan or the loan is extended without the approval of the proper authority, it will have to be classified on the basis of qualitative judgment .Despite the probability of any loan’s being affected due to the reasons stated above or for any other reasons, if there exists any hope for change of the existing condition by resorting to proper steps, the loan, on the basis of qualitative judgment, will be classified as ‘Sub-standard’. But even if after resorting to proper steps, there exists no certainty of total recovery of the loan, it will be classified as ‘Doubtful’ and even after exerting the all-out effort, there exists no chance of recovery, it will be classified as ‘ Bad & Loss’ on the basis of qualitative judgment. The concerned bank will classify on the basis of qualitative judgment and can declassify the loans if qualitative improvement does occur. But if any loan is classified by the Inspection Team of Bangladesh Bank, the same can be declassified with the approval of the Board of Directors of the bank. However, before placing such case

to the Board, the CEO and concerned branch manager shall have to certify that the conditions for declassification have been fulfilled.

• Developing annual business plans, strategies and steps to be taken to achieve targets.
• Planning, developing and managing MTBL non-personal- corporate, commercial and institutional businesses to ensure high profitability and sustained growth in line with MTB strategic plan, credit policy and business objectives.
• Providing overall co-ordination of marketing efforts for the bank’s non-personal business.
• Formulating strategy for joint campaigns with other banks/departments.
• Formulating/establishing performance tracking system of Relationship Managers.
• Maximizing profitability through cross sales of all bank products and appropriate loan pricing.
• Contributing to the development of relationship management skills of the Relationship staff in Corporate Banking.
• Ensuring compliance with MTBL credit policies and regulations of Bangladesh Bank and other regulatory authorities.
• Guiding   and   supporting   the   marketing   team comprising  of Relationship Managers both at Head Office and Branches.
• Ensuring that RM Team maintains thorough knowledge of borrower’s business and industry through regular contact, factory/warehouse inspections etc.
• Ensuring that deterioration in borrower’s financial standing is highlighted and amendment in the borrower’s Risk Grade takes place in a timely manner. Changes in Risk Grades are advised to and got approved by Head of CRM.

Information Technology (IT) & Automation:

All the branches of the MTBL are fully computerized. New software is now in use to provide faster, accurate and efficient service to the clients. The bank is continuously striving for better services through extensive automation of its branches. It is soon going to launch “One Branch Banking” through on-line connectivity. The bank has set up a full-fledged IT division to keep abreast of the latest development of IT for better service in the days to come.

  To ensure strong quality of asset portfolio, MTB emphasizes that a proper credit management process is in place. For this purpose marketing, approval and disbursement functions/authorities in MTB have been segregated. While Relationship Managers and Head pf Corporate Banking Division are responsible for marketing, Head of Credit Risk management Division is responsible for approval and Head of Credit Administration Department is assigned with the function of disbursement. A copy of sanction letter will be sent by CRM Division to the Branch with copy to HO Credit Administration Department/other related departments/divisions of Head Office. Branch Credit Administration on receipt of copy of the sanction letter will complete full documentation and other formalities as per terms of sanction and send compliance to HO credit administration along with a list of documents (DCL) obtained. For exceptions, branch will mention in the compliance certificate about the documentation which could not be completed for genuine reasons and request HO credit administration for allowing them to disburse, pending completion of these documents/formalities, mentioning specifically about time period within which incomplete documentation will be completed.

Foreign Correspondents:

Bank’s foreign correspondent relationship facilities for foreign trade operations in respect to export, import and foreign remittance. The number of foreign correspondents and agents of the bank in the year 2010 stood at more than 300, which covers important business and trade centers of the world. The bank maintains excellent relationship with the leading international banks, for handling all foreign correspondent and maintaining all foreign business there is an International Division, which is called ID. Foreign Exchange, like foreign trade, is a part of economic science. It deals with methods by which wealth in one country’s are currency is converted into those of another currency. The fluctuation of a Bank in foreign exchange is very important. Bank helps to import, export and maintain exchange rate. A person opens a Letter of Credit (L/C) with the help of bank to export or to import anything from other person. Thereby Banks are helping to balance the economy of the world. Money is a medium of exchange for all transaction that takes place inside the country as well as outside the country. Foreign trade financing is an integral part of banking business. With the globalization of economics international trade has become quite competitive. Timely payment for export; quicker delivery of goods is therefore a pre-requisite for the success of international

trade operation. Growing complexity of international trade underline the need of evolving a

system that balances between the expectation of the seller and the buyer. According to Foreign Exchange Regulation Act, a Revocable Letter of Credit is one which can be amended or cancelled by the issuing bank at any moment and without prior notice to the beneficiary, but the issuing bank is bound to reimburse the negotiating bank or any payment made prior to receipt of notice of cancellation, against shipping documents which are apparently in accordance with the terms of L/C. So this is clear that Revocable L/C can be amended any time without prior notice to he beneficiary. So, revocable letter of credit is very risky. Unsecured Open Account terms allows the importer to make payments at some specific date in the future and without the buyer issuing any negotiable instrument evidencing his legal commitment to pay at the appointed time. These terms are most common when the importer/buyer has a strong credit history and is well-known to the seller. The buyer may also be able to demand open account sales when there are several sources from which to obtain the seller’s product or when open account is the norm in the buyer’s market. This mechanism offers the seller no protection in case of non-payment. However, an exporter can structure his open account sale transaction to minimize the risk of non-payment. For example, the exporter can reduce the repayment period and retain title to the goods until payment is made. Even then, it is difficult to enforce this especially if the goods have been either resold by the buyer or consumed in some other processing activity. Despite the dangers, open account terms with extended dating are becoming more common in international trade. Exporters that offer open account terms are increasingly obtaining credit insurance to mitigate the potential open account credit risks. There are many advantages and disadvantages of open account terms. Under an open account payment method, title to the goods usually passes from the Seller to the Buyer prior to payment and subjects the Seller to risk of default by the Buyer. Furthermore, there may be a time delay in payment, depending on how quickly documents are exchanged between Seller and Buyer. While this payment term involves the fewest restrictions and the lowest cost for the Buyer, it also presents the Seller with the highest degree of payment risk and is employed only between a Buyer and a Seller who have a long-term relationship.

Credit Management

Credit management is a term used to identify accounting functions usually conducted under the umbrella of Accounts Receivables. Essentially, this collection of processes involves qualifying the extension of credit to a customer, monitors the reception and logging of payments on outstanding invoices, the initiation of collection procedures, and the resolution of disputes or queries regarding charges on a customer invoice. When functioning efficiently, credit management serves as an excellent way for the business to remain financially stable.

The process of credit management begins with accurately assessing the credit-worthiness of the customer base. This is particularly important if the company chooses to extend some type of credit line or revolving credit to certain customers. Proper credit management calls for setting specific criteria that a customer must meet before receiving this type of credit arrangement. As part of the evaluation process, credit management also calls for determining the total credit line that will be extended to a given customer.

Several factors are used as part of the credit management process to evaluate and qualify a customer for the receipt of some form of commercial credit. This includes gathering data on the potential customer’s current financial condition, including the current credit score. The current ratio between income and outstanding financial obligations will also be taken into consideration. Competent credit management seeks to not only protect the vendor from possible losses, but also protect the customer from creating more debt obligations that cannot be settled in a timely manner.

Types of Credit made by the MTBL:

Modern banking operation touches almost every sphere of economic activity. The extension of bank credit is necessary for expansion of business operations. Bank credit is a catalyst bringing about economic about economic development. Without adequate finance there can be no growth or maintenance of a stable output. Bank lending is important to the economy, for it makes possible the financing of commercial and industrial activities of a nation. The credit facilities are generally allowed by the bank may be in two broad categories. They are as follows:

Funded Facilities:

Funded facilities can also be divided into the following categories:

To ensure strong quality of asset portfolio, MTB emphasizes that a proper credit management

process is in place. For this purpose marketing, approval and disbursement functions/authorities

in MTB have been segregated. While Relationship Managers and Head pf Corporate Banking

Division are responsible for marketing, Head of Credit Risk management Division is responsible

for approval and Head of Credit Administration Department is assigned with the function of

disbursement.

Term Loans:

The term of loan is determined on the basis of gestation period of a project generation of income by the use of the loan. Such loans are provided for Farm Machinery, Dairy, Poultry, etc. It is categorized in three segments:

Over Draft (OD):

OD is some kind of advance. In this case, the customer can over draw from his/her current account. There is a limit of overdraw, which is set by the bank. A customer can with draw that much amount of money from their account. For this there is a interest charge on the over draw amount. This facility does not provide for everyone, the bank will provide only those who will fulfill the requirement. It means that only real customer can get this kind of facility.

A copy of sanction letter will be sent by CRM Division to the Branch with copy to HO Credit Administration Department/other related departments/divisions of Head Office. Branch Credit .Administration on receipt of copy of the sanction letter will complete full documentation and other formalities as per terms of sanction and send compliance to HO credit administration along with a list of documents (DCL) obtained. For exceptions, branch will mention in the compliance certificate about the documentation which could not be completed for genuine reasons and request HO credit administration for allowing them to disburse, pending completion of these documents/formalities, mentioning specifically about time period within which incomplete documentation will be completed. In the cases where branch seeks permission for disbursement keeping documentation /security formalities partially incomplete /keeping some documents incomplete, Credit Administration Department of Head Office will go through the documentation which have been completed and for which deferral have been requested by the branch and if finds that allowing such deferral will not jeopardize Bank’s interest, will place a note to the relevant committee for necessary recommendation, which then will be placed to the Head of CRM/MD for approval of such deferral. Only upon getting deferral approval, Head Office Credit Admin will issue Disbursement Approval /authorize disbursement with the condition to complete incomplete documentation within specific time limit.

Cash Credit (Hypo):

It allows to individuals or firm for trading as well as whole-sale purpose or to industries to meet up the working capital requirements against hypothecation of goods as primary security fall under this type of lending. It is a continuous credit. It allowed fewer than two categories:

1Commercial Lending

2  Working Capital

Cash Credit (Pledge):

Financial accommodation to individual/firm for trading as well as whole sale purpose or to industries as working capital against pledge of goods primary security falls under this head of advance. It also a continuous credit and like the above allowed under the categories:

1.      Commercial Lending
2.      Working Capital

SOD (General):

Advance allowed to individual/firm against financial obligation (i.e. lien of FDR/PS/BSP etc.) and against assignment of work order for execution of contract works fall under this head. This advance is generally allowed for allowed for definite period and specific purpose. It is not a continuous credit As management of problem loans is a dynamic process, management strategy and adequacy of Recovery unit (at Branch/ Head Office level) who will be responsible for coordinating and administering the action plan/recovery of the loans and advances. Recovery Unit (Branch/ Head Office), if required, will seek assistance from HOCRMD but the responsibility to recover NPL shall be with Recovery Unit (Branch/ Head Office). The initial CLR shall highlight any documentation issues, loan structuring weaknesses, proposed workout strategy and shall seek approval for any loan loss provision that are necessary. Facilities are withdrawn or repayment is demanded as appropriate. Any further drawings or advances are restricted, and only approved after careful scrutiny and approval from HOCRMD/MD.CIB reporting is updated according to Bangladesh Bank guidelines and borrower’s classification/ risk grade is changed as appropriate. Loans are only rescheduled in accordance with the Loan Rescheduling guidelines of Bangladesh Bank. Any rescheduling should be based on projected future cash flows and should be strictly monitored. Prompt legal action is taken if the borrower is not cooperative.

SOD (Imports):

Advances allowed for purchasing foreign currency for opening L/C for imports of goods fall under this type of leading. This is also an advance for a temporary period, which is known as preemptor finance and falls under the category ‘Commercial Lending’. The amount of required provision may, in some circumstances, be reduced by an estimated realizable forced sale value (i.e. Salvage Value) of any tangible collateral held (via: mortgage of property, pledged goods / or hypothecated goods repossessed by the bank, pledged readily marketable securities etc). Hence, it is to be advised 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 to be taken to arrive at provision requirement and Bangladesh Bank guidelines to be properly followed. MTBL will primarily peruse the policy of recovery of NPL s of the bank through its dedicated officials by making them realize the essence of maintaining quality of bank’s assets. Providing incentives to the officials may be considered as an effective instrument for recovery of Non-performing loans. Such incentives may be awarded in the form of cash reward, Letter of citation, expedited promotion etc.

PAD:

Payment made by the bank against lodgment of shipping documents of goods imported through L/C falls under this type head. It is an interim type of advance connected with import and is generally liquidated shortly against payments usually made by the party for retirements of documents for release of import goods from the customer authority. It falls under the category “Commercial Lending”.

LTR:

Advances allowed for retirement of shipping documents and release of goods imported through L/C without effective control over the goods delivered to the customer fall under this head. The goods are handed over the importer under trust with arrangement that sales proceed should be deposited to liquidate the advances within a given period. This is also temporary advance connected with import that is known post-import finance under category ‘Commercial lending’.

IBP:

Payment made through purchase of inlands bill to meet urgent requirements of customer fall under this type of credit facility. This temporary advance is adjusted from the proceeds of bills purchased for collection. It falls under the category ‘Commercial Lending’.

In order to make a significant contribution in the living standards of the people of medium and low income category, MTBL has introduced a scheme called “Consumer Credit

Scheme”. With a view to materialize the dreams of those who are unable to make one time investment from their own savings, one can now afford to buy necessary household equipments and thus improve the standard of living. A customer is not ordinary permitted to overdraw his account without security. However, MTBL Motijheel Branch provides an unsecured advance facility in exceptional circumstances, only for a short period, with define repayment arrangement, subject to restrictions imposed by Bangladesh Bank or any other competent authority, with prior approval of Head Office, to a customer on the basis of his/her personal credit worthiness, standing and reliability. It is not granted unless the Sanctioning Authority. “The Credit Committee” of Head Office has full confidence in the ability and reputation of the customer to repay it, on demand, or at its maturity if it is a loan. Definite arrangements for repayment, whether by installments or otherwise, is as a rule, made.

FDBP:

Payment made to a party through purchase of foreign documentary bills fall under this head. This temporary advance is adjustable from the proceeds of negotiable shipping/export documents. It falls under category ‘Export Credit’. In order to determine required provision, Forced Sales Value (FSV) being the amount expected to be realized through the liquidation of collateral held as security or through the available operating cash flows of the business, net of any realizable costs of collateral to be determined by Credit Recovery Cell for accounts grade 6 or worse.

LDBP:

Payment made to a party through purchase of local documentary bills fall under this head. This temporary liability is adjustable from proceeds of the bill.

Bank Guarantee:

The exporters pay of the imported goods on behalf of the importer through bank guarantee. If the exporter fails to make the fulfill payment at the moment the bank will take the liability and pay to the exporter. This type of guarantee is also needed to attend in any tender. Revised policy calls for an independent assessment of each loan based on qualitative factors and objective criteria. Each loan is branded with the worst level of classification resulting from these independent assessments. If a Continuous Credit or a Demand Loan, remains non-performing for 6 months or more it is classified Sub-standard.

Micro Credit:

Loan has given only to the Army Person for the purpose of Repairing and reconstruction of dwelling Houses. Revised policy calls for an independent assessment of each loan based on qualitative factors and objective criteria. Each loan is branded with the worst level of classification resulting from these independent assessments. If a Continuous Credit or a Demand Loan, remains non-performing for 6 months or more it is classified Sub-standard.

Non Funded Facilities:

Non funded facilities are divided into the following categories:

Bank Guarantee:

A credit facility in contingent liabilities from extended by the banks to their clients for participation in development work, likes supplies goods and services. A Term loan is classified Doubtful and Loss if the time-equivalent of unadjusted balance is 12 months and 18 months respectively.

Letter of Credit:

A credit facility in contingent liabilities from provided to the clients by the banks for import/procurement of goods and services. Agricultural Loan and Micro-Credit is classified Sub-standard if non-performing for 12 months, Doubtful if non-performing for 36 months and Loss if non-performing for more than 60 months.

Written Loan Policy:

One of the most important ways a bank can make sure its loans meet regulatory standards and are profitable is to establish a written loan policy. Such a policy gives loan officers and the bank’s management specific guidelines in making individual loan decisions and in shaping the bank’s overall loan portfolio. The actual make up of a bank’s Loan portfolio should reflect what its loan policy says. Otherwise, the loan policy is not functioning effectively and should be either revised or more strongly enforced by senior management.

1. A goal statement for the bank’s loan portfolio (i.e., statement of the characteristics of a good loan portfolio for the bank in terms of types, maturities, sizes, and quality of loans)

2. Specification of the lending authority given to each loan officer and loan committee (measuring the maximum amount and types of loan that each person and committee can approve and what signatures are required)

3. Lines of responsibility in making assignments and reporting information within the loan department

1. Operating procedures for soliciting, reviewing, evaluating, and making decisions on customer loan applications
2. The required documentation that is to accompany each loan application and what must be kept in the bank’s credit files (required financial statements, security agreements etc.)
3. Lines of authority within the bank, detailing who is responsible for maintaining and reviewing the banks credit files.
4. Guidelines for taking, evaluating, and perfecting loan collateral
5. A presentation of policies and procedures for setting loan interest rates and fees and the terms for repayment of loans
6. A statement of quality standards applicable to all loans
7. A statement of the preferred upper limit for total loans outstanding (i.e. the maximum ratio of total loans to total assets allowed).
8. A description of the bank’s principal trade area, from which most loans should come

 A discussion of the preferred procedures for detecting, analyzing and working out problem loan situation.

Steps in the Lending Process

1. Most bank loans to individuals arise from a direct request from a customer who approaches a member of the bank’s staff and asks to fill out a loan application. Business can requests, on the other hand, often arise from contacts the bank’s loan officers and sales representatives make as they solicit new accounts from firms operating in the banks market

2.  area. Sometimes loan officers will call on the same company for months before the customer finally agrees to give the bank a try by filling out a loan application.

3. Once a customer decides to request a loan, an interview with a loan officer usually follows right away, giving the customer the opportunity to explain his or her credit needs. That interview is particularly important because it provides an opportunity for the bank’s loan officer to assess the customer’s character and sincerity of purpose.

4. If a business or mortgage loan is applied for, a site visit is usually made by an officer of the bank to assess the customer’s location and the condition of the property and to ask clarifying questions. The loan officer may contact other creditors who have previously loaned money to this customer to see what their experience has been.

5. If all is favorable to this point, the customer is asked to submit several crucial documents the bank needs in order to fully evaluate the loan request, including complete financial statements and, in the case of a corporation, board of directors’ resolutions authorizing the negotiation of a loan with the bank. Once all documents are on file, the credit analysis division of the bank conducts a thorough financial analysis of them aimed at determining whether the customer has sufficient cash flows and backup assets to repay the loan. The credit analysis division then prepares a brief summary and recommendation, which goes to the loan committee for approval.

6.  If the loan committee approves the customer’s request, the loan officer or the credit committee will usually check on the property or other assets to be pledged as collateral in order to ensure that the bank has immediate access to the collateral or can acquire title to the property involved if the loan agreement is defaulted. This is often referred to as perfecting the bank’s claim to collateral. Once the loan officer and the bank’s loan

7. committee are satisfied that both the loan and the proposed collateral are sound, the note and other documents that make up a loan agreement are prepared and are signed by all parties to the agreement.

Credit Analysis

• The division of the bank responsible for analyzing and recommendations on the fate of most loan applications is the credit department. Experience has shown that this department must satisfactorily answer three major questions regarding each loan application:
• Is the borrower creditworthy? How do you know?
•  Can the loan agreement are adequately protected and the customer has a high  probability of being able to service the loan without excessive strain?
• Can the bank perfect its claim against the assets or earnings of the customer so  that, in the event of default, bank funds can be recovered rapidly at low cost and with low risk?
• Let’s look in turn at each of these three key issues in the “yes” or “no” decision a   bank must make on every loan request.

Is the Borrower Creditworthy?

The question that must be dealt with before any other is whether or not the customer can service the loan-that is, pay out the credit when due, with a comfortable margin for error. This usually involves a detailed study of six aspects of the loan application- character, capacity, cash, collateral, conditions, and control. All must be satisfactory for the loan to be a good one from the lender’s point of view. To become the client of the bank a person need to open an Account. After opening of an account a person becomes a client of a bank. It is a legal contract between the bank and the client. Through this contract a client is ready to deposit any sum of money with purchasing the belief from the bank. Therefore it means the bank is selling their belief and always ready to pay any sum of deposited money of any client. An accounting opening from is the contractual document. It is the legal of Banker-Client relationship.

Character :

The loan officer must be convinced that the customer has a well-defined purpose for requesting bank credit and a serious intention to repay. If the officer is not sure exactly why the customer is requesting a loan, this purpose must be clarified to the bank’s satisfaction.

Responsibility, truthfulness, serious purpose, and serious intention to repay all monies owed make up what a loan officer calls character Financial institution/ intermediary that mediates or stands between ultimate borrowers and ultimate lenders is knows as banking financial institution. Banks perform this function in two ways- taking deposits from various areas in different forms and lending that accumulated amount of money to the potential investors in other different Capacity: 

The loan officer must be sure that the customer requesting credit has the authority to request a loan and the legal standing to sign a binding loan agreement. This customer characteristic is known as the capacity to borrow money. For example, in most states a minor (e.g., under age 18 or 21) cannot legally be held responsible for a credit agreement; thus, the bank would have great difficulty collectors on such a loan. Bank shall take maximum care and remain alert to record exactly all the transactions of both credit and debit in the Ledger with no fault. However, in case of any mistake/ lapse bank shall reserve the right to rectify the same and recover the money from the customer without any reference/ notice to the customer. Bank shall not make liable for any loss/ inconveniences caused to the customer due to such error/ mistake/ lapses. Bank shall charge incidental expenses and recover the same from the account once after every 6 months for maintenance of the account. In case of closure of any account within 6 months from the date of opening of the same, bank shall deduct Tk.50/= from the account prior to its closure.

Cash:

This key feature of any loan application centers on the question: Does the borrower have the ability to generate enough cash, in the form of cash flow, to repay the loan? In general, borrowing customers have only three sources to draw upon to repay their loans: or (a) cash flows generated from sales or income, (b) the sale or liquidation of assets, or (c) funds rose by issuing debt or equity securities. Any of these sources may provide sufficient cash to repay a bank loan.

Collateral:

In assessing the collateral aspect of a loan request, the loan officer must ask, does the borrower possess adequate net worth or own enough quality assets to provide adequate support for the loan? The loan officer is particularly sensitive to such features as the age, condition, and degree of specialization of the borrower’s assets. MTB will primarily peruse

the policy of recovery of NPL s of the bank through its dedicated officials by making them realize the essence of maintaining quality of bank’s assets. Providing incentives to the officials may be considered as an effective instrument for recovery of Non-performing loans. Such incentives may be awarded in the form of cash reward, Letter of citation, expedited promotion etc. to be decided by the Board from time to time.

Conditions :

The loan officer and credit analyst must be aware of recent trends in the borrower’s line of work or industry and how changing economic conditions might affect the loan. The types of securities offered vary from place to place. In metropolitan cities, it may be Govt. bonds/ share/ assignment of Book debt/ Bills receivable etc. Whereas, in the industrial area raw materials and finished goods etc. may be offered as securities. Again agricultural produce is the principal securities in the agricultural centers. Further, a bank also accepts moveable and immovable properties, life insurance policy etc. as securities. Securities can be classified into primary security and collateral security. Security is a cover against loans and advances. It ensures recovery of loans and advances. Though now-a-days greater emphasis is put on the purpose of the loan rather than securities, nevertheless the securities play an extremely important role to take a decision. Generally loan limit sanctioned 50% against 100% security

Control:

The last factor in assessing a borrower’s creditworthy status is control which centers on such questions as whether changes in law and regulation could adversely affect the borrower and whether the loan request meets the bank’s and the regulatory authorities’ standards for loan quality Credit is a confidence of the lender of the in the ability and willingness of the borrower to repay the loan at a future date. It is generally believed that confidence is the based of all transactions. The fundamental principles upon which credit is generally based are Character, Capacity, Capital and Responsibility, Reliability and Resources of the borrower. Lending is a function, which is crucial to the Banker because of the associated risks and profit potentials. Mutual Trust Bank Limited, Principal Branch also provides Commercial Credit. The loans which are give are- Term Loan, Over Draft, Hypothecation, Pledge etc. The Bank provide loan to firm, company, project etc. The client has to provide proper document to get this type of loan. At first the client gives application to the branch for credit. Then the branch makes proper analysis by ratio analysis, visiting the place, LRA (Lending Risk Analysis), feasibility analysis etc to find out the financial position of the bank. After completing all they process they make a proposal and send it to the Head Office. If the Head Office gives the permission to give the loan then they finally disburse the loan to the loan applicant.

Can the Loan Agreement Be Properly Structured and documented?

The six Cs of credit aid the loan officer and bank credit analyst in answering the broad question: Is the borrower creditworthy? Once that question is answered, however, a second issue must be faced: Can the proposed loan agreement be structured and documented to satisfy the needs of both borrower and bank?

A properly structured loan agreement must also protect the bank and those it represents- principally its depositors and stockholders- by imposing certain restrictions (covenants) on the borrower’s activities then these activities could threaten the recovery of bank funds. The process of recovering the bank’s funds- when and where the bank can take action to get its funds returned-also must be carefully spelled out in a loan agreement.

Needs for Collateral:

Most Borrowers at one time or another will be asked to pledge some of their assets or to personally guarantee the repayment of their loans. Getting a pledge of certain borrower assets as collateral behind a loan really serves two purposes for a lender. If the borrower cannot pay, the pledge of collateral gives the lender the right to seize and sell those assets designated as loan collateral, using the proceeds of the sale to cover what the borrower did not pay back. Secondly, collateralization of a loan gives the lender a psychological advantage over the borrower.

The goal of a bank taking collateral is to precisely define which borrower assets are subject to seizure and sale and to document for all other creditors to see that the bank has a legal claim to those assets in the event of nonperformance on a loan.

Information about Loan Customers:

The bank relies principally on outside information to assess the character, financial position, and collateral of a loan customer. Such an analysis begins with a review of information supplied by the borrower in the loan application. The bank may contact other lenders to determine their experiences with this customer. Were all scheduled payments in previous loan agreements made on time? Were deposit balances kept at high enough levels? How much was borrowed previously and how well were those earlier loans handled? Is there any evidence of slow or delinquent payments? Has the customer ever declared bankruptcy?

Sources of Information about the Loan customers:

1. Physical Investigations
2. CIB of Bangladesh Bank
3. Customer financial statements
4. Experience of other lenders with this customer
5. Customer Annual Report
6.  Local or regional credit bureaus
7.  Local Newspapers
8.  Local chamber of commerce

Mechanism of Credit Distribution of the MTBL:

The primary factor determining the quality of the bank’s credit portfolio is the ability of each borrower to honor, on a timely basis. All credit comities made to the bank. The authorizing credit personnel prior to credit approval must accurately determine this. If the report of the project appraisal is very satisfactory to approve the loan proposal, than the following steps furnish the approval procedure:

• Make a proposal by the client to the bank
•  Give all the necessary documents
• Bank will send the parties statement to the Bangladesh Bank, their CIB (Credit     Information Bureau) will inquiry that whether this party is defaulter or a new one.
•  Bank will take the collateral from the party and analysis that how much it will        cover the total loans.
• Bank will send this proposal to the head office. In the head office the Board of     Directors and Managing Director will approve the loan.
• Head office will send the approval to the branch office.
• Branch office will give the sanction letter to the party.
•  Bank will take the security and make it in their favor.

Loan Disbursement:

After completing all the necessary steps for sanctioning loans bank will create a loan account by the name of the party and deposit the money to that account. Bank will give cheque books to the party and advise them to draw the money and use it as soon as possible, because whenever the money will transfer to the account interest will count from that time After the completion of above formalities, the bank provides the client a Deposit Book and cheque book. The cheque book can be of 10 or 25 pages. It will depend on the type of the account. The 10 pages cheque book is issued to the Saving A/C holder and 20 pages cheque book is issued to the Current or STD A/C holder. The client has to fill up the Requisition Slip for cheque book. Then the officer will take a new cheque book with filling up account number of the client and the branch name in each page of the cheque book. The name and the account number of the client are then registered in the “Cheque book issue register.” The serial number of the cheque book is also entered in the computer for proper maintenance of records. Cash is the key instrument of all financial transaction. The cash section plays a significant role. It is a very sensitive part of the bank because it deals with most liquid assets. Mutual Trust Bank Limited, Principal Branch has a well equip cash section. This section receives cash from depositors and pays cash against cheque, Demand draft, Pay order, and Pay-in-Slip over the counter. This section deals with all types of negotiable instrument and it includes Vault, used as the store of cash and instruments. The Vault is

Analyzing the Year Wise Loan Disbursement by MTBL:

From the graph we can say that in the year 2010 the total loan disbursement is 27% (Tk. 37,730.45 million) to compare with other financial years. In the year 2009 the loan disbursement was 24% (Tk. 33,883.92 million) and in the year 2006, 2007 & 2008 the loan disbursement was 13% (Tk. 18,591.52 million), 16% (Tk. 22,683.23 million) & 20% (Tk. 28,529.34 million). So according to this graph we can easily say that the bank’s loan disbursement is increasing day by day. It is a positive sign for the bank. After establishing the bank, disbursement of loan is not so high because of their inexperience and inadequate loan disbursement policy. Now the bank has an attractive loan policy which attracts the customers. If we see the percentage increase by the year than in the loan disbursement is 27% and in the previous year it was 24%. So the percentage increases by 3% only. In the year 2008 & 2009 the percentage increased by 4%. In compare, the increasing percentage is likely to be same in 2010. The increasing percentage was 27% which is more than 1% in the previous year. It may be the good sign for the bank because the loan disbursement is increasing or steady not decreasing. Bank’s main earning source is loan disbursement, like: interest earning. It is a big part of the bank’s total earning. So the bank should take care in this loan side.

Analyzing the Sector-wise Lending by MTBL (million/Tk):

Analyzing the Sector-Wise Loan Disbursement of MTBL in the year 2008

In the year 2008, Mutual Trust Bank Ltd. only passes four years experience with loan disbursement. This is not enough experience for lending loan disbursement. From the graph, we can say that the MTBL was not able to maintain a good lending operation in the year 2008. The maximum portion of the lending has disbursed in the sector of Secured Overdraft. About 27% of total has given in this sector. The second position of loan disbursement was 21% on Loans against Trust Receipts (LTR). House building loan which is another name of Micro Credit has given up a big portion of total loan disbursement. More than 25% of total loans have disbursed as other Loans, (OD, RRDH, ML, CL Letter of Credit etc.). About 5% loans have given in the sector as Long Term Loan and 5% loans have given as cash credit.

Loan-Pricing Policy Used By MTBL:

In pricing a business loan, Bank management must consider the cost of raising loan able funds and the operating costs of running the Bank. This means that Banks must know what their costs are in order to consistently make profitable, correctly priced loans of any type. There is no substitute for a well-designed management information system when it comes to pricing loans.

Mutual Trust Bank Limited is generally used the simplest loan-pricing model which assumes that the rate of interest charged on any loan includes four components: (1) the cost to the Bank of raising adequate funds to lend, (2) the Bank’s no funds operating costs (including wages and salaries of loan personnel and the cost of materials and physical facilities used in granting and administering a loan), (3) necessary compensation paid to the Bank for the degree of default risk inherent in a loan request, (4) Bank’s desired profit margin.

LOAN                         Marginal cost of raising                      No funds                                 loan able funds to lend                  +                operating costs

INTEREST     =          Bank to the Borrower                         (including wages and

Salaries of Bank Personnel)

RATE

Estimated margin to Bank +   Compensate the Bank + desired for default risk profit margin.

Chart of Interest rate of Mutual Trust Bank for Lending:

Revised on May 2010

These sector-wise interest rates have been introduced by the Head Office of Mutual Trust Bank Limited. They use cost-plus pricing method in case of pricing the loans. The Head office and the twenty (25) branches of MTBL have maintained these rates strictly except in case of some quality and credit-worthy lenders. After judging the lenders’ credit-worthiness, MTBL gives some beneficiary to this kind of lenders. They can enjoy a decreasing interest rate, which maintained by the Bank’s branches internally. Otherwise, the scheduled rates are maintained by all the MTBL branches. In case of Micro Credit, as the loan amount is not so large that’s why the scheduled rate is maintained by the Bank. Actually, the Lending rate is based on the prescription, which is given by Bangladesh Bank. Recently MTBL has revised their lending interest rate on April, 2007. The revised lending interest rates have been effective from May 01, 2007 for all existing and fresh sanction of credit facilities.

Sector-wise Interest Income of MTBL During the year 2008-2010(million/Tk):

Analyzing the Year-Wise Total Interest Income of MTBL:

From the graph we can say that in the year 2010 the total interest income is 10,776.77 million to compare with other two financial years. In the year 2009 the interest income was 8701.49 million and in the year 2008 the total interest income was only 7371.34 million which is more than the interest income year 2006 &2007. So according to this graph we can easily say that the bank’s total interest income is increasing day by day. It is a positive sign for the bank. But there is one thing that if we see the percentage increase by the year than in the interest income is 76.16% in year 2010 and in the previous year 2009 it was 71.00%. So the percentage increases by 5.17% only. The total interest income was 75.40% in year 2008. In the year 2009 to 2010 the percentage increased but in compare with year 2006 to 2007, the total percentage of interest income decrease. It may be not a good sign for the bank, because bank’s main earning source is interest earning. So the percentage of total interest income should be steady & increase year after year. It is a main part of the bank’s total earning. So the bank should take care in this interest income sectors.

Signs for Classification

First and foremost requirement for any credit managers is to identify a problem credit in its earliest stages by recognizing the signs of deterioration. Such signs include but not limited to the following:

1. Non-payment of interest or principal or both on due dates or past dues beyond a reasonable period or recurring past dues.
2. In case of Overdraft no movement in the account beyond a reasonable period.
3.  Deterioration in financial condition of the client, as gathered from client’s latest financial statement.
4.  A shortfall in collateral coverage, particularly if the collateral was a key factor in the decision-making.
5. Death or withdrawal of key owner(s) or management personnel.
6. Company filing for bankruptcy or voluntary dissolution.
7.  Adverse market report about the company itself or its principal owners.

Steps to Follow for Classification

1. Recheck the account, for all outstanding, including any outstanding in allied or sister company or in owner’s or partners’ or directors personal names.
2. Thoroughly review loan documentation to confirm, “We have what we need”, documents are in proper from, properly executed and current (i.e. not time barred).
3. If possible take current market value of the securities according to liquidation basis. And take a close look at the assets and liabilities to determine who has the prior right on those assets.
4.  If Grantors are involved, look closely at the net worth statement and send demand notice.
5. Once the account is classified Sub-Standard, credit lines must be frozen.

 Classification Process

For the purpose of determining the “Classified” status of an account, following guidelines are to be observed

The process of classification of an account will start with strict application of the risk rating assessment that is

1. 1. Sub-standard
   2. Doubtful
   3. Bad or Loss
   4. However unpaid interest or Principal or Expired Limit for a period of 180 days or more or recurring past dues will remain the most significant rules for classification.

Classification as Standard

A loan is classified as substandard if any one of the following conditions is met:

(a)    If an advance or any portion of an advance or interest thereon remains overdue for 180 days or more but less than 270 days then the advance is classified as substandard.

(b)   For an advance of a continuing nature, even if the loan is not overdue as much as 180 days, but the limit stands overdrawn by move than 50% for a period of 45 continuous days preceding the reference date for the classification, then it is classified as substandard.

(c)    If a loan has been renewed or rescheduled at least three times but is not overdue, and any of the required payments for the required period have not made when they fall due, then the loan is classified as substandard.

Classification as Doubtful

A loan is classified as doubtful if any one of the following conditions is met:

(a)    The advance or any portion of the advance or interest thereon remains overdue for 270 days or more but less than 360 days.

(b)   A loan classified as substandard per clause 6 (b) above has remained substandard for 180 days or more.

(c)    A loan classified as substandard per clause 5 (c) above has remained substandard

for 180 days or more.

(d)   Legal action has been initiated.

(e) Qualitative criteria based on judgment.

Classification as Bad

A loan is classified as bad if any one of the following conditions is met:

        (a) The advance or any portion of an advance or interest thereon remains overdue for 360 days or more.

        (b) A loan classified as doubtful per clause 6 (b) above has remained doubtful for 180 days or more.

(c)    A loan classified as doubtful per clause 6 (c) above has remained doubtful for 180 days or more.

(d)   If legal action has been initiated and no court decision has been obtained within 360 days of initiation of action then the loan is classified as bad.

(e)    Qualitative criteria based on judgment.

Classified Loan conditions of MTBL (million/Tk)

3.11.8 Ratio of classified Loans to Total Loans of MTBL

Mutual Trust bank Limited recorded a satisfactory level of performance in all the areas of its operations in the year 2006- 2010. The success occurs due to the combined and concentrated efforts of the management and staff of the bank under the guidance, support and patronage of the members of the Board. But these were not enough in case of the Lending operations.

The graph shows that the percentage of classified Loan in the year 2006 was 1.29% (Tk 20.74 million), but in the year 2007, it was vastly increased and went up to 3.16% (Tk 60.00 million). After that MTBL decreased their classified loan. In the year 2008, the classified loan was 2.00% (Tk 87.11 million). Then in the year 2009 & 2010, the classified loan was 1.48% (Tk 100.35 million) & 1.32% (Tk 128.96 million). According to international rules, a bank may have a maximum limit of classified Loans as 5% of the total Lending. Though MTBL did not pass this limit, but it is not a good sign for the Bank. In year 2007 MTBL CAMEL rating was 3, which means the Bank was only in a fair position. The main problem of the MTBL was that it was not able maintain a good Loan policy. As a result, classified loans of this Bank have increased. After that MTBL took some good loan policy which improves percentage of classified loan that is decrease the percentage. It may notice that though the percentage of classified loan decrease every year but the total amount of classified loan increase every year. MTBL must have to improve in this area and has to decrease the amount of classified Loans by a well-designed recovery policy.

The main reasons behind classification of MTBL

 New Banker or lacking of experience.

1. 1. Most of the time bankers have to rely on the documents provided on the client. But what is the purity of these data. Although the CA firm certifies the dates but financial jugulating is practicing around the world.
   2. Client’s over confidence about the project.
   3. Change in National and International Political scenery.
   4. Sometimes borrower talks about some other repayment source out of the proposed project but they don’t keep the source as security to the bank.
   5. Sometimes other than land or building banks also keep furniture and machinery as security. Later on when bank come to sell those, they found that the market value of those assets is much lesser than the book value.
   6. Sometimes bankers don’t go through the financial figures properly.
   7. Most of the cases clients have done some financial jugulating on their data.
   8. Sometimes Client caught by some unavoidable circumstances like- ship sink.
   9. Sometimes bank don’t take appropriate security from the client or grantor.
   10. Sometimes bank don’t put concentration about the insurance.
   11. Most of the cases the bankers fail to forecast the future business condition of the clients.

Loan Loss Provision Procedure

As a part of pragmatic and conservative approach to sustain the quality of the Bank’s loan portfolio, Loan Loss Provision exercise made mandatory for all Line of Business. Such exercise is decided by: a) generally accepted banking practice, b) conservative approach to assess the quality of Risk Assets whereby the most accurate health of the Loan Portfolio is reflected on the books of the Bank and c) to be guided by Bangladesh Bank instructions on provisioning.

A media can rise or fall an institution within very short time. So if we see to other developed country then we can find that every business institution has a huge budget for the advertisement purpose. They do not take this expense as an expense; they always take it as a huge investment, because if the people do not know about my organization then how they will do business with

us (it dose not matter which type of organization is this), it may be big manufacturing company or a bank. Here I realized for Mutual Trust Bank that they do not have any kind of vast advertisement or any kind of social activities, so most of the people do not have any idea about Mutual Trust Bank. In this case when any one asks that “where are you working?” then if any one say that in Mutual Trust Bank then people reply at first that “is this the bank for the army?” This bank is also serving the general people but it is not so much popular, because of advertisement.

Following guidelines are to be observed:

1. The prudential Provision Practice dictates that rather that wait until the close of the fiscal year; provision exercise would be an on-going one, with the needed provision created, when an account is classified and continues to remain classified. The provision exercise is to be carried out by each quarter end, based on reports on Classified Accounts related to previous quarter.
2. Bangladesh Bank instructions are to be followed for the purpose of Loan Loss Provision exercise.

Unless otherwise enhanced by Bangladesh Bank regulatory body, Loan Loss Provision Policy as per the matrix given below is to be adopted and followed by the Bank:

 Following formula is to be applied in determining the required amount of provision:

1. Gross Outstanding                                                                                XXX

2.   Less: (I)           Cash margin held or fixed

                              Deposit                                                                        (XXX)

             (II)            Interest in Suspense Account                                                 (XXX)

1. Loan Value

(For which provision is to be created before

considering estimated realizable value of other

 security/collateral held)                                                                      XXX

4.   Less: Estimated salvage value of security / collateral held                 (XXX)

Net Loan Value                                                                                        XXX

Provisions for Loans & Advances maintained by MTBL

Conclusion:

Mutual Trust Bank limited is made provision for loans and advance on the basis of period-ended reviewed by the management on the basis of instruction contained in Bangladesh Bank BCD circular No.34 of 1989, BCD circular No.20 of 1994, BCD circular No. 12 of 1995, BRPD circular No.16 of 1998 and BRPD circular No.9 of 2005.

According to the table, we see that the amount of provision for loans and advances of the MTBL has increased gradually over the years. We know that provision for loans and advances depends both on classified and unclassified loans. As the amount of classified & unclassified loans of the MTBL has increased gradually, it shows an increasing rate also in the maintaining provisions. In the year 20072, the percentage of total classified loan has gone up 3.16%. After that the next three years classified loan amount was decreasing and the percentage was 2%, 1.48% & 1.32%. Though the percentage of classified loan was decreasing but the total amount of classified loan increased as the loan amount every year increased. In the year 2009, total provision of loans have created Tk 108.12 million where provision of classified loan Tk 8.52 million & unclassified loan Year 2008 as Tk 60.23 million. In the year 2010, the classified loan increased to double as Tk 16.71 million which is the bad sign for the bank. In this year provision against special maintenance account was Tk 2.5 million. And provision against unclassified loan created 1% of total unclassified loan amount. 

MTBL a blend of expertise and technological excellence is in place to meet varied needs of modern customers. The bank aims at mobilizing untapped money of the country and prudent deployment for productive activities in the form of lending at a competitive interest rates/loan pricing. Towards attainment of its goals and objectives, the bank pursues diversified credit policies and strategic planning in credit management. To name a few, the bank has extended

micro credit, consumers durable scheme loans, house building loans etc. to cater to the needs of the individuals, which in turn has helped thousands of families. The bank also extends loan in the form of trade finance, industrial finance, project finance, export & import finance etc. The bank’s credit policies aimed at balanced growth and harmonious development of all the sectors of the country’s economy with top most priority to ensure quality of lending by averting growth of non-performing assets.