Report on Fund Management at Uttara Bank Limited

Executive Summary

The banking sector of Bangladesh is the largest service sector of Bangladesh. The growth of this sector is emerging. Almost all the banks are improving year after year. But, the growth of a bank depends mostly on credit management of the bank.

Commercial banks lend money to different categories of borrowers for various purposes with a view to generate revenue. Accordingly, while processing and appraising a loan proposal, banks essentially analyze the information relating to borrowers, assess the purposes of loan and determine the viability of the loan proposal. If the proposal is sound and safe for lending, loan is sanctioned and disbursed.

The report discusses about the different credit facilities, approval process, monitoring and performance of the bank under study.

This report is categorized in eleven different chapters. In chapter one introduction, purpose, objective, scope, methodology, limitations are discussed. Chapter two focus shortly on history of banking in Bangladesh. Chapter three narrates the company profile. Chapter four concentrates on the theoretical aspect of credit management. Chapter five describes credit policy. Chapter six describes in detail about the utilization of funds raised by the bank. Chapter seven, eight and nine concentrate on disbursement procedure, recovery performance of loans, problems in loan recovery, classified loan, and provision required for classification etc. Guidelines for credit management are highlighted in the tenth chapter. Evaluation of credit management of Uttara Bank Limited is in chapter eleven of the report. Finally, findings and concluding recommendations are given at the end of the report. The main objectives of the report are identifying the credit approval and monitoring and the overall performance.

Legal Status and Nature of the Bank Ltd:

Uttara Bank Limited had been a nationalized bank in the name of Uttara Bank Ltd. under the Bangladesh Bank (Nationalization) order 1972, formerly known as the Eastern Banking Corporation limited. The Bank started functioning on and form 28.01.1965. Consequent upon the amendment of Bangladesh Bank (Nationalization) order 1972, the Uttara Bank Ltd. was converted into Uttara Bank Ltd. as a public limited company in the year 1983. The Uttara Bank Ltd. was incorporated as a banking company on 29.06.1983 and obtained business commencement certificate on 21.08.1983. The bank floated its shares in the year 1984. The registered office of the Bank is located at 90 Motijheel Commercial Area, Dhaka 1000. It has 211 Branches all over Bangladesh and 600 affiliates worldwide create efficient networking and reach capability. through which it carries out all its banking activities. It is linked with 686 foreign correspondents all over the world. The Bank is listed in the Dhaka Stock Exchange Ltd. and Chittagong Stock Exchange Ltd. as a publicly quoted company for trading of its shares.

Principal Activities:

The principal activities of the Bank are to provide all kinds of commercial banking services to its customers through its branches in Bangladesh and abroad.

Correspondent Banking:

The focus of International Division with its expertise caters mainly to the Banking needs related to import and export affairs. The department establishes correspondent relationships with the foreign banks in consultation with the respective senior management.

Arabian Exchange Co. W.L.L.:

Arabian Exchange Co. W.L.L. of Doha at Qatar has been functioning under Bank’s own management. The Exchange Company was incorporated in Qatar on June 17, 1987 and commenced its remittance business from the year 1987.

Capital of Uttara Bank Ltd:

Uttara Bank, one of the largest commercial Banks in Bangladesh, has an authorized capital of taka 1,000 million, paid up capital of taka 399.3 million and reserve of taka 2,054.2 million. The Bank has a total asset of taka 52,860.3 million.

Board of Directors:

The Board of Directors is composed of 15 (fifteen) members headed by a Chairman. The rest of them are a Vice- Chairman, a Managing Director and Directors.

Training and Human Resources:

The Bank gives ulmost importance for making continuous investment in Research and Development (R&D) and training to achieve operational efficiency in the competitive global banking scenario. The Bank’s human resource policy is to recruit and build up quality manpower having skill and professional expertise. Skilled human resource is the lifeblood for the development of any service industry. Keeping this universal truth in mind, human development has always been receiving special emphasis in the Bank.

Bank’s own Training Institute that is nicely decorated and equipped with the sophisticated instruments has been striving to bring about a qualitative change and improvement in human resources of the Bank by imparting continuous different training throughout the whole year. Guest speakers specialized in Banking participate in each training program of the Bank in addition to highly educated faculty members of the Institute. Besides, a number of executives and officers were sent to various Training Institute including Bangladesh Institute of Bank Management (BIBM) and abroad for higher training.

During the year 2010 the Training Institute of the Bank arranged 17 different training courses for the officers and members of the staff of the Bank in which as many as 807 officers and members of the staff of the Bank participated. At the same time 229 officers and members of the staff Bank attended training courses/workshops/seminars conducted by BIBM, 30 officers received training from Bangladesh Bank, 8 officers obtained training from other Training Institute and 12 officers obtained training from abroad. The Institute is focused to ensure a formal platform where employees can exchange their ideas, update their knowledge base, and open up their eyes to the complexities of banking world.

The total Manpower of the Bank in different grades as on 31-12-2010was as under:

Mission of Uttara Bank Ltd.

The mission of the bank is to actively participate in the socio- economic development of the nation by operating a commercially sound banking organization, providing credit to viable borrowers, efficiently delivered and competitively priced, simultaneously protecting depositor’s funds and providing a satisfactory return on equity to the owners.

Services Provided by Uttara Bank Ltd.

Uttara Bank offers all the major banking facilities and services to its customers. The Bank with its network spreading throughout the country has a unique feature of ploughing back savings from those places and then investing them into different loan portfolios.

Uttara Bank with its wide ranging branch network and skilled personnel provides prompt and personalized services like issuing:

a. Demand Draft (DD)

b. Telegraphic Transfer (TT)

c. Mail Transfer (MT)

d. Pay Order (PO)

e. Security Deposit Receipt

f. Transfer of fund by special arrangement,

i)       Normal transfer

ii) Electronic transfer through Ready Cash Card.

The Bank provides the following Internet facilities:

• Current/Savings/STD account status
• FDR account status
• Advance account status
• Loan account status

Remittance services are available at all branches and foreign remittances may be sent to any branch by the remitters favoring their beneficiaries. Remittances are credited to the account of beneficiaries instantly or within shortest possible time. Utatara Bank has correspondent banking relationship with all major banks located in almost all the countries/cities. Expatriate Bangladeshis may send their hard earned foreign currencies through those banks or may contact any renowned banks nearby (where they reside/work) to send their money to their dear ones in Bangladesh.

Uttara Bank has already established a world wide network and relationship in international Banking through its 686 foreign correspondents. The Bank has earned an excellent business reputation in handling and funding international trade particularly in boosting export & import of the country. The Bank finances exports within the frame-work of the export policy of the country.

 Credit Program

General and Industrial Credit:

Uttara Bank has formulated its policy to give priority to small and medium business while financing large scale enterprise through consortium of banks total loan and advance of the bank stood at BDT 28,477.4 million as of December 31, 2010 as compared to BDT 25,163.9 million in 2009. Increase rate is 13.17% compared to 2009. Following the guideline of Bangladesh Bank, credit facilities have been extended to productive and priority sectors. In extending credit facilities, the Bank has given due importance to sect oral needs and requirements of both public and private sectors. Major sectors include Agriculture, Industrial Lending, Commercial Lending, Housing, Lease Financing and Bills Discounted & Purchased etc.

Table: Amount of Deposits and Advances

(BDT in million)

Rural Credit, Micro Ent. & SP. Program Financing:

Loan is provided to the rural people for agricultural production and other off-farm activities.

•  Loan pricing system is customer friendly.
•  Prime customers enjoy prime rate in lending and other services.
•  Quick appreciation, appraisal, decision and disbursement are ensured.

Credit facilities are extended as per guide-lines of Bangladesh Bank (Central Bank of Bangladesh) and operational procedures of the Bank. The rates may, however, change from time to time depending on the level of competition in the financial sector.

As a nationalized Bank it has a social responsibility to improve the financial condition of the poor/unemployed people. With a view to perform that social responsibility, Bank has initiated rural credit program since 1974. Now under this rural portfolio there are 15 products.

A vast majority of the Bangladeshis live in the rural areas and their main source of income is agriculture and agro-business. Uttara Bank Ltd. has opened branches in rural areas to cater to the banking needs of rural people. Apart from accepting deposits from the rich and moderately well off villagers, Uttara Bank Ltd. encourages the poor people to make small savings through different mechanisms.

So far lending in rural area is concerned; Uttara Bank Ltd. has been financing agricultural production and poverty alleviation programs since 1977. The average loan size is about Taka 10,000.00 (around US$ 200) and the number of borrowers under rural credit scheme is more than 100,000.

1.                     Short Term Crop Production Loan

2.                     Irrigation and Agricultural equipment

3.                     Fish/Shrimp Production

4.         Horticulture Development

5.                     Agro-based Industry

6.                     Rural Transport

7.                     Weavers Credit

8.                     Agri-business Loan

9.                     Tea Production & Processing Loan

10.       Different Micro Credit Programs

Performance of Uttara Bank

Uttara Bank is one of the largest commercial bank in Bangladesh. The aim of the Bank is to actively participate in the socio-economic development of the nation by operating a commercially sound Banking system. It provides credit to deserving borrowers and at the same time, protects depositor’s interest.

Deposits:

Uttara Bank mobilized total deposit of BDT 43,586.4 million as of December 31, 2010 as compared to BDT 39,360.2 million in 2009. Comparative interest rates deposit mobilization efforts of the bank and confidence reposed by the customer in the bank contributed to the notable growth of 10.74% in deposit. The bank evolved a number of attractive deposit schemes to care to the requirement of small and medium services. This improved not only the quantum of deposits, it also brought about qualitative change in the depositors structure.

Break-up of Deposit and Deposit Mix

(Taka in million)

Investment:

To earn profit, the Bank Prudently invests its fund to different sectors. The investment portfolio of the Bank is comprised of Treasury bill, other bonds, Debenture, Shares etc. The Bank earns a handsome profit from this investment portfolio. Year wise investment of the Bank is shown in the following table:

Head wise position of Bank’s Invested Fund at the end of the year 2007 is given below:

Import Business:

For the very beginning the Bank has embarked on extensive foreign exchange business with a view to facilitating international trade transactions of the country. The total import business handled by the bank amounted to BDT 25,407.9 million as of December 31, 2010 as compared to BDT 22,630.7 million in 2009. Import mainly confined to consumer goods, capital machineries and industrial raw materials.

Export Business:

The total export business handled by the bank amounted to BDT 14,784.5 million as of December 31, 2010 as compared to BDT 18133.9 million in 2009. The bank has made significant contribution to readymade garments sector, which contributed 75.60% of total export of the country in 2007-04. Other items include Shrimps, Tea and Non-traditional item.

Table: Amount of Import and Export

(BDT in million)

Post-Tax Profit:

The Post-Tax Profit of the bank stood to the BDT 409.5 million as of December2007 against BDT 248.8 million in 2006. The growth in Post-Tax Profit is 64.59% in the year 2007 in compared to 2006.

Loans and Advances

The main focus of Uttara Bank Ltd. Credit Line/Program is financing business, trade and industrial activities through an effective delivery system. Uttara Bank Ltd. offers credit to almost all sectors of commercial activities having productive purpose. The loan portfolio of the Bank encompasses a wide range of credit programs covering about 100 items. Credit is also offered to 5 (five) thrust sectors, as earmarked by the govt., at a reduced interest rate to develop frontier industries. Credit facilities are offered to individuals, businessmen, small and big business houses, traders, manufactures, corporate bodies, etc.

Following the guidelines of Bangladesh Bank Ltd, credit facilities have been extended to productive and priority sectors. The outstanding advance of the bank is Tk. 28,477.4 million on 31^st December 2010. In credit facilities, the Bank has given due importance to sect oral needs and requirements of both public and private sector.

Table: Economic Sector wise Distribution of Loans and Advances as on 31-12-2010

(Taka in million)

Among the Loan and Advances, provided by Uttara Bank Ltd, 87.60% is unclassified, 1.08% is substandard and 11.32% is Bad Debt as on 31^st December 2010.

Funding

The principal function of a bank is to lend. Lending is a dynamic activity. It is through the medium of lending the banking industry promotes economic activity, instills and encourages, at the individual level, the principal of self-reliance, and yield earnings for the bank. It is lending alone that brings banking into a more meaningful and purposeful contract with public and, therefore, has the greatest impact upon them.

Proper utilization of fund is an essential pre-requisite of successful bank management. The procurements of funds supported by an efficient deployment of that procured fund lead a bank to the highest point of profitability. I would try to concentrate on Uttara Bank’s nature, pattern, and allocation of invested resources in this chapter. The bank under study has divergence in its investment portfolio, loan programs, advances and recovery rate etc.

Economic Sector Wise Distribution of Fund

Uttara Bank is engaged in extending long, medium and short-term loans to various economic sectors in the country. As Uttara Bank extends its credit programs all over the economy such as agricultural credit program, industrial credit program and commercial financing; the bank tries to achieve significant profit from its operations and also to improve the economic conditions of the general public of the country.

Table: economic sector wise distribution of loans and advances during 2005-2010

(Taka in million)

Nature Wise Distribution of Loans and Advances

Sanctioning advances to customers and others is one of the principal services of a modern bank. Advances by the commercial banks are made in different forms:

• Loans
• Overdrafts
• CC
• House Building Repair Loan
• LIM
• LTR
• SBL
• Bills purchase and discounted

Uttara Bank sanctions loans under the above-mentioned category. It usually grants short-term advances which are utilized to meet the working capital requirements of the borrower. Only a small portion of the bank’s demand and time liability are advanced on long-term basis where the banker usually insists on a regular repayment by the borrower in installments. While lending fund, bankers, therefore, follows a very cautious policy and conduct his business on the basis of well-known principles of sound lending in order to minimize the risk.

Maturity Grouping of Distribution of Loans and Advances

At the very beginning of taking decision for giving credit, Uttara Bank mainly concentrates mainly on liquidity. As it is doing business by public deposits, it is bound to pay the money when people want. Sizable portions of bank advances are, therefore, granted to meet the working capital requirements of the borrower rather than to meet the fixed capital requirement, i.e., repair of building or purchase of fixed deposits. A banker would be failing in his duty to safeguard the interest of his depositors and shareholders if his credit policy does not provide a method of gradual repayment and final recovery of the money advanced.

For liquidity reasons, Uttara Bank is giving credit on short period basis and against security. Short-term loans ensure liquidity to a greater extent than long-term loan. We can classify the bank loans and advances under the following maturity stage:

• Receivable on Demand
•  Up to 1 month
•  Over 1 month but not more than 3 months
• Over 3 months but not more than 1 year
•  Over 1 year but not more than 5 years
• Over 5 years

Loan and Advances (maturity stage wise)

(Taka in million)

Securities in Credit Management

One of the most important functions of a bank is to employ its fund by way of loans and advances to its customers and a bank’s strength depends considerably on the quality of its loans and advances. In order times, when the bankers knew the customers personally and intimately and had complete confidence in the integrity and honesty of a customer, they used to allow loans and advances without a security. The position is quite different today. Banks having a large number of officers over a wide area cannot allow loans and advances without retention of security in one form or the other.

Though the banks are now expected to lay greater emphasis on the purpose for which the borrower needs rather than security he can afford to give, security continues to be one of the most important factors, which determines to a significant extent the banker’s willingness to lend money.

Security is obtained as a line of last defense to fall back upon. It is meant to be an insurance against emergency. But taking security, bank acquires a claim upon the assets of the borrower if repayment is not made as planned. But what should be the significant securities of loans depends in the guidelines prescribed by the Bangladesh Bank through BCD circular no. 17/1977 and also the negotiation of the respective branch to its borrowers. The most significant categories of security lodged are as:

•  Goods and commodities
•  FDR
•  Real estate
•  Stock exchange securities
•  Life insurance policies
•  Gold and gold ornaments
•  Documents of title of goods
•  Book debts
•  Supply bills

Uttara Bank keeps sufficient security before final sanctioning of loans and advances.

Obtaining Credit Information

Uttara Bank Ltd collects credit information about the applicant to determine the credit worthiness of the borrower. The bank collects the information about the borrower from the following sources:

1.  Personal investigation.
2.  Confidential report from other bank Head Office/Branch/chamber of the commerce.
3.  CIB Report from Central Bank.

Information Collection

The loans and advances department gets a form filled by the party seeking a lot of information. The information is listed below:

•  Name and address of the borrower (present and permanent).
•  Constitution or status of the business.
•  Data of establishment and place of incorporation.
•  Particulars of properties, partners and Directors.
•  Background and business experience of the borrowers.
•  Particulars of personal assets, name of subsidiaries, percentage of share holding and nature of business.
•  Details of liabilities in name of borrowers, in the name of any directors.
•  Financial Statement of the last three years.
•  Nature and details of business/products.
•  Details of securities offered.
•  Proposed debt equity ratio.
•  Other relevant information.

Analyzing the Information

Uttara Bank Ltd. then starts examination whether the loan applied for, is complying with its lending policy. If comply, then it examines the documents submitted and the credit worthiness. Credit worthiness analysis, an i.e. analysis financial condition of the loan applicant is very important. If loan amount is more than tk. 50, 00,000, then bank goes for Lending Risk Analysis (LRA) and Spreadsheet Analysis (SA), which are recently introduced by Bangladesh Bank. According to Bangladesh Bank Rules, LRA and SA are a must for the loan exceed of one crore.

If these two analyses reflect favorable condition and document submitted for the loan appeared to be satisfactory, then bank goes for further action.

Lending Risk Analysis (LRA)

LRA is a very important and vital analysis for deciding whether the loan proposal is potential or not. Many types of scientific, mathematical, statistical and managerial tools and devices are required to perform this analysis. Uttara Bank maintains a prescribed format for Lending Risk Analysis, which includes a spreadsheet to analyze a lot of things. It is not possible to discuss the entire LRA in this report.

Lending Risk Analysis (LRA)

a)      Industry Risk:

i.      Supply Risk- What is the risk of failure to disruption in the supply of input?
ii.      Sales Risk- What is the risk of failure due to disruption sales?

b)     Company Risk:

1.       Company Position Risk: 

i.      Performance Risk- What is the risk if the company position is so weak that it cannot perform well enough to repay the loan, given expected external condition?
ii.      Resilience Risk- What is the risk of failure due to lack of resilience to unexpected external condition?

2.      Management Risk:                 

i.      Management Competence Risk- What is the risk of failure due to lack of management competence?
ii.      Management Integrity Risk- What is the risk of failure due to lack of Management Integrity?

c)      Security Risk:

i.            Security Control Risk- What is the risk that the bank fail to realize the security?
ii.            Security Cover Risk- What is the risk that realized security value is less than the exposure?

 Proposal Analysis

The Project Proposal is analyzed and decision about the project is taken. The loans and advance department is responsible for the analysis. After preliminary appraisal of the loan project the final approval is obtain from the manager. If the loan amount crosses a certain amount (tk. 1,00,00,000), managers send the loan project to the principal office for final approval. The experts in principal office find out different projected ratios and developed and understanding about the potentiality of the project. Bank evaluates a loan proposal by considering few predetermined variables. These are:

• Safety
• Liquidity
• Profitability
• Security
• Purpose of the loans
• Sources of repayment
• Diversification of risk etc.

Securities are of two types:

a) Primary Security

b) Collateral Security

The most important measure of appraising a loan proposal is safety of proposal. Safety is measured by the security offered by the borrower and repaying capacity of the borrower. The attitude of the borrower is also important consideration. Liquidity means the inflow of cash into the project in course of its operation. The profit is the blood of any commercial institution. Before approval of any loan project the bank authority has to ensure that the proposed project will be profitable venture. Profitability is assessed from the projected Profit and Loss Statement. The security is the only tangible asset remains with the banker. Securing of collateral is the only weapon to recover the loan amount. So bank has to see that the collateral is easy to sale and sufficient to recover the loan amount. Bank cannot sanction loan by only depending on collateral.

The sources of the payment of the project should be a feasible one. During sanctioning any loan Bank has to be attentive about diversification of risk. All money must not be disbursed amongst a small number of people. In addition any project must be established for the national interest growth.

Evaluation of Collateral

Uttara Bank is very cautious about valuation of the collateral. The bank officials simultaneously evaluate the collateral of the party offered by the private firm. The valuation of the collateral increases the accuracy of its value estimated. Three types of value of the collateral are assumed:

• Current market value
• Forced value
• Value after five years

The legal officers of the bank check the document ascertain their impurity.

Final Decision about the Project

If the loan decision remains with the branch level, that branch sanctions the loan and if the approving authority is Head Office then the decision comes to the branch by Mail.

Proper Supervision of the Project

If such provision is kept in the sanction contracts, the Uttara Bank officials go to the project area to observe how the loan is utilized. If no such clause to supervise the loan is added, even then the bank can see the performance of the project.

Documentation of the Loan

These are the most frequently used and common documents of above mentioned charged and for other formalities for sanctioning the loan:

• Demand Promissory Note: Here the borrower promises to pay the loan as and when demanded by the bank to repay the loan.
• Letter of Arrangement: Here the written amount of the loan sanctioned to the borrower is specified.
• Letter of Continuity: It is used to take continuous facilities as providing continuous securities.
• Letter of Hypothecation: It is the written document of the goods hypothecated thus to put in case of need.
• Stock Report: This report is used for SBL and CC. In this report information about the quality and quantity of goods hypothecated have furnished.
• Personal guarantee: It is the additional confirmation of the borrower to repay.
• Guarantee of the Directors of the company.
• Resolution of the board of directors: It is used to borrow the fund to execute documents and complete other documents.
• Letter of disclaimer: By this letter, the borrower withdraws his all claim on the property/mortgaged.
• Letter of Acceptance: Letter indicating the acceptance of the sanction proposal by the borrower.
• Letter of Pledge: It is the written document of the goods pledge thus the legality of holding the goods.
• Letter of Disbursement: This is the document through which the payment of sanctioned loan indicates.
• Letter of partnership: In case of partnership firm, the partnership deeds are to be provided.
• Letter of Installment: The amount of installment that is to be paid at certain intervals.
• Tax Paying Certificate.
• Others: Any document if described, as essential in the sanctioned advice sanctioned by the Head Office.

Loan Recovery Programs

When Uttara Bank Ltd sanctions loans and advances to its customers, they clearly state the repayment pattern in the loan agreement. But some credit holders do not pay their credit in due period. The nationalized and private sector commercial banks have to face this sort of problems. This situation is also found in Uttara Bank Ltd. To overcome the problem of overdue loan, the bank has taken particular loan recovery programs.

Recovery Programs taken by Uttara Bank Limited

• Establishing credit supervision and monitoring cell in the bank
• Re-structuring the loan sanctioning and distributing policy of the bank
• Sanctioning loans and advances against sufficient securities as best as possible
• Giving more powers to the branch manager in credit management decision making process
• Offering a package of incentives to the sound borrowers
• Giving more emphasis on short term loans and advances
• Imposing restrictions on loans and advances for sick industries
• Taking legal actions quickly against unsound borrowers as best as possible within the period specified by the law of limitations.

Recovery Patterns of Loan & Advances

Generally Uttara bank Ltd sanctions loans and advances to every sector of an economy. Before going into details of recovery performance, we have to be familiar with some terms used in recovery performance:

•       Disbursement: highest outstanding balance on any date during the reporting period minus outstanding balance at the end of the preceding period.
•       Demand for recovery: overdue at the end of the reporting period plus recovery during the reporting period.
•       Recovery: highest outstanding balance on any date during the reporting period minus outstanding balance at the end of the recovery period.
•       Outstanding: Outstanding figures in the ledger at the end of the reporting period.
•       Overdue: Demand for recovery minus recovery.

Table: Recovery performance of Uttara Bank Ltd.

(Tk in million)

Problems in Loan Recovery

Though Uttara bank Ltd is performing better in managing loan and advances, still 12.39% of total loan and advances are classified. There are a lot of reasons for which the loan recovery of the bank is still now defective. In most cases, problems may be raised from sanctioning procedures of loan, investigation of the project, and investigation of the loans etc. that is, the problem in loan recovery proves the outcomes of the default process in loan disbursement. The main reasons of poor loan recovery are categorized in four broad types as follow:

A.     Problems created by economic environment

      The following problems arise from the effect of economic environment:

1. Changing in the management pattern: Changing of management patterns may delay the recover of mature loan.

2. Changing in industrial patterns: The banks sometimes sanction loan to the losing concern for further improvement of the respective sector, but in most cases, they fail to achieve progress.

3. Operation of open market economy: In our country mainly industries become sick and also close their business on account of emerging of open market economy. The cost of production is high and the quality of goods is not of required of standard. As a result, they become the losing concerns and the amount of bad loan increases.

4. Rapid expansion of business: There are many companies which expand their business rapidly, but the expansion is for short time. In the long run, the amount of classified loan increases.

 B.     Problems created by government

The following problems are arisen by the government:

1.            External pressure: Uttara Bank has also faced many problems in the loan recovery process as a part of continuous pressure from various interested groups.
2.            Legal problems: Existing rules and regulations are insufficient to cover the legal aspects of loan recovery. As a result, defaulters can get release easily from all charges against them.
3.            Instability of Govt. policy: Frequent changes in government policies in regard to recovery of loan.

 C.    Problems created by the bank:

The following problems are created by the banks:

1.            Lack of analysis of business risk: Before lending, Sometime Uttara Bank fails to properly analyze the business risk of the borrowers and the bank cannot forecast whether the business will succeed or fail. If it fails to run well, the loan becomes classified.
2.            Lack of proper valuation of security or mortgage property: In some cases, bank fails to determine the value of security against the loan. As a result, if the loan becomes classified, the bank cannot recover its loan through the sale of mortgage.

 D.    Other general causes of poor loan recovery:

Apart from the specific reasons creating problems to recoup loan, there exists some other general causes which have a great impact on creating the problems which are faced by the Uttara Bank under study in the loan recovery process. These are:

1.            Early sanction and disbursement of loan to the borrowers without proper inspection of the project by the bank on account of pressure from lobbying group.
2.                  Lack evaluation of technical and economic feasibility of the program.
3.                  Delay in disbursement of credit.
4.                  Sometime credit is not allowed to actual entrepreneurs sometime.
5.                  Lack of proper supervision.
6.                  Illiteracy of borrowers.
7.                  Negative attitude of borrowers to repay the loan.
8.                  Deterioration of the value system of the borrowers.
9.                  Money borrowers use their loan-money other than specified project, i.e., if the loan is sanctioned for industrial purpose; they use the money in house building or purchase of land for their own purpose.
10.              Sometimes borrowers invest their money outside the country. Many borrowers transfer loan money to abroad where they deposited this money in their own account or spent some other purpose.
11.              Sometimes local borrowers are found to be so much compelled to grant them loan without proper study due to some unexpected reasons. Since these borrowers are capable of getting loan by exercising their influence, they can also escape the repayment liability.
12.              Problems responsible for non-implementation and delayed implementation of project for which the entrepreneurs of the project cannot repay the loan.

The causes of failure may be:

Failure to ascertain the economic availability of the projects

Time lag between approval and sanctioning of the projects

Import of machinery and raw materials both are the problems of paucity of foreign exchange and procedures of licensing.

All of these reasons discussed above are general reasons for problems loan recovery of Uttara Bank. Besides these, there are some specific reasons for loan recovery problems faced continuously by Uttara Bank. They are as:

•       Loans are given under fictitious names and enterprise
•       Loans are given in some cases without sufficient securities
•       Approval of the loans in excess of the branch manager’s power
•       Improper monitoring and supervision of credit
•       Politically misuse of loan programs
•       Lack of timely action against willful defaulter
•       Loans are sometimes for economically unsound project.
•       The pressure to achieve targeted loan and advance given by head office to the branches

Problems in loan recovery are the outcome of the default on loans disbursements in the earlier period.

Banks are financial service firm, producing and selling professional management of the public’s funds as well as performing many other roles in the economy. But now- a-days commercial banks are not performing their activities smoothly for a large burden of default loan. Every year Uttara Bank Ltd. distributes thousand core taka among individuals, organizations etc. but a large sum of these distributed fund cannot be recovered in due time. The Bank has to classify this loan. In this chapter I would like to concentrate on classification procedure, provision making for particular classification, performance of the bank regarding classified loan and recovery of such classified loan.

Signs for Classification

First and foremost requirement for any and all credit managers is to identify a problem credit in its earlier 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 withdraw of key-owners or management personnel.
6.      Company filing for bankruptcy or voluntary dissolution.
7.      Adverse market report about the company itself or its principal owners.

Loan Classification Guidelines from Bangladesh Bank

Classification of overdue loans and advances opened a new era in the credit management of commercial banks in Bangladesh. Before 1989 no specific guidelines were followed by the commercial banks for this purpose. In 1989, Bangladesh Bank issued BCD circular No.34/1989 stating specific rules and conditions of loan classification.

After that each schedule banks except BKB, RAKUB, and BSB would be responsible for its own loan classification according to the guidelines provided by Bangladesh Bank.

Table: status, type and definition of classification*

                                                Source: Bangladesh Bank, BRPD Circular No. 16 of 1998*

Table: loan classification system, 2001*

                                                  *Source: Bangladesh Bank, BRPD Circular No. 9 of 2001

Table: loan classification system (international standard)

*Source: Studies in Bangladesh Banking, BIBM, 2000

Performance of Uttara Bank Limited

From my analysis it is found that during first phase (2005-2007) total loan of Uttara Bank was TK 60,325 million of which classified loan was TK 16,572 million. That is, 27.47% of total credit was classified. During second phase (2008-2010), total loan of the bank was TK 75,493 million of which classified loan was TK 10,843 million. That is 14.36% of total credit was classified.

Table: Classified loan of Uttara Bank Ltd.

(Taka in million)

Source: annual report of Uttara Bank Ltd 2005, 2006, 2007, 2008, 2009, 2010

Findings

Every bank has its own credit procedure. Bank under study possesses a standard credit procedure. As the objective of my study is to make a comment on the credit management of Uttara Bank, I try my best to collect data for the study and find out the reality. Based on the data generated during my study period I will sum up my findings here and I think this will help me to achieve my objectives.

1. If we look at the historical background of Uttara Bank, we see that, the objective of Uttara Bank is to earn profit as well as to improve the economic welfare of the people as a whole.
2. Uttara Bank has a significant role in long term project financing in both agriculture and industrial sectors. Again Uttara Bank has a deep concern for rural farmers.
3. Private sector usually concentrates in the urban areas where as Uttara Bank spread their banking network all over the country.
4. With a view to implementing government policies, Uttara Bank has been maintaining its position in extending credit to government bodies, sector corporations and private enterprises.
5. Though bank required both quantitative and qualitative analysis but for big loans bank emphasizes on the lending risk analysis (LRA). But LRA is not a perfect measure of credit analysis. Because businessmen in our society are usually tempted to take resort of window-dressing that means accounts are so manipulated that the vital facts are concealed and facts presented are superficial. So banks have to go through both quantitative and qualitative analysis.
6. According to the standard and bank’s credit procedure, credit operation is started from the customer application to the branch for the loan. But in some cases, few customers go directly to the directors of the bank and directors send them to the branch offices with his/her reference. In these cases, proper appraisal is not possible as directors the most powerful persons and bank management must give priority towards the decision of the directors. This phenomenon is found in the bank, which hampers the spontaneous procedure of credit appraisal.
7. Bangladesh Bank monitors all the policies of all the private and nationalized banks of the country. According to the Bangladesh Bank’s strategy, all banks must possess the standard policies, which are designed by the central bank. Uttara Bank also possesses a standard credit proposal form. In that form all necessary information are required to fill up. But in practice credit officers do not fill up the proposal form properly. Most of the cases, they use assumption rather than exact figure. This practice might end up with bad or classified one.
8. A standard policy starts from the customer’s direct application for the loan in the branch office. But it’s a phenomenon that some of the customers directly contact with Head office and Head office choose the branch offices to disburse the loan. It may hamper the normal procedure. Branches always stay under pressure when they get order for disbursement from Head office. When branches get order from the head office, then appraisal system loses its formal track. So Head office should not send any order to the branch office without prior appraisal.
9. Every bank has its own budget and plan regarding loan portfolio. This loan portfolio must be diversified so that bank could diversify its risk. A proper and preplanned portfolio can eliminate the risk of huge classified loan or bad loans as this aspect is very much sensitive toward many external and internal factors. The bank under study i.e. Uttara Bank does not have any proper guide line where to invest; moreover they do not do any future plan to maintain a well structured portfolio to decrease the possibility of classified loan. This type of practice is working as an obstacle in smooth credit disbursement as well as in credit appraisal system.
10. Most of the loans that Uttara Bank distributes are as cash credit hypothecation and Uttara Bank emphasizes less on demand loan.
11. In many cases bank face this problem because bank’s credit officer fails to value collateral property. Proper valuation means collateral will exactly cover the risk of bad loan. Officials must do it with due care.
12. During the fiscal year 2006 15.03% of the total loan of Uttara Bank became classified and this classified loan came down to 12.40% in the fiscal year 2007.
13. Uttara Bank keeps enough provisions against classified loans and advances.
14. Uttara Bank is relatively efficient in processing and executing legal actions against defaulters for their nonpayment of loans and advances in due time. The credit management of Uttara Bank is fully conformity with the guidelines prescribed in the bank companies Act 1991 and International Accounting Standerd-30(IAS-30)

Recommendations

I have discussed so far about the different aspects of credit management Uttara Bank. For my report, I have selected Uttara bank. UBL plays an important role in the banking sector as well as in our economy. The success of a bank depends largely on the efficient credit management. A successful credit management is not only need for a bank’s own performance but also it is needed for the smooth development of an economy. In any strategy of economic development, therefore, it is essential to emphasize the evaluation of a sound and well-integrated credit management system from the viewpoint of both resources mobilization and efficient allocation of funds. In conclusion it can be suggested a number of recommendations in order to overcome the problems and how to remove the causes of problem in credit management.

Since this an exploratory research, hence the recommendation given are not decisions rather they are only suggestions to improve the default rate. The recommendations are made on the basis of survey findings.

1.      Central Bank should take proper actions for ensuring equivalent distribution of loans and advances.
2.      Lending policies in our country should be geared to growth potential rather than being determined by the pre-existing collateral.
3.      Changes in lending policies will not suffice the purposes unless it is followed by a change in the attitude and out look of both the borrowers and the bankers.
4.      Improvement of credit management depends on the development of relevant, adequate, proper and reliable data base at the public sector banks as well as private sector banks in Bangladesh.
5.      For developing a reliable credit management system for the commercial banks specially Uttara Bank, it should require to introduce as improved information system within bank as well as among the borrowers. Because ultimately it is what a borrower does with money that should guide the credit plan, the borrowers also have to know exactly where they are going, what their opportunities and how fast they can move?
6.      The security must be valued properly by the independent valuers and constantly watched so that the value of mortgage property becomes sufficient to recover the default loan.
7.      Publishing the names of defaulter as well as good and regular payers in various dailies and granting various sorts of facilities to good borrowers will create a moral persuasion on the borrowers. This may decrease the number of defaulters and the volume of large outstanding loan amounts as well.
8.      Pressure from outsider and influence extorted by borrowers are also a great impediment in the smooth functioning of loan recovery process. The role of government in this case is the most important factor required to solve these sorts of problem.
9.      More and more competent personnel must be recruited to reduce the weakness of credit management. Competent executives will ensure the reduction of wrong appraisal and evaluation of projects.
10.  Prompt legal actions be taken against willful loan defaulters
11.  The new entrepreneurs should be encouraged in disturbing loans and those who have the records of regular payment, should be given preference.
12.  Steps should be taken so that guarantors cannot avoid their responsibility.
13.  It is observed that the defaulters generally get various sorts of exemptions as declared by the government from time to time. Government must not show any kind of mercy to the defaulters in any way which may encourage the default culture. This type of action may discourse the borrowers to become willful defaulters.
14.  The existing amount of classified loans demand for special and corrective attention for example:
By obtaining suitable reduction on amount.
Additional security.
More complete financial data concerning the obligor’s condition or
Other such action as the specific circumstances may require.
15.  The attempt to encourage banks to require borrowers comply with banking laws and regulations and clear up industrial properties prior to granting a loan.
16.  Uttara Bank Limited should follow some straight ward mechanical procedures in assessing the risk of a borrower.
17.  The formulation of a sound credit policy in the possibility of default loans.
18.  The formulation of a sound credit policy in the banking sector as a whole has to take into account all these factors and each bank has to attempt to work out for itself what it is capable of doing so as best as possible.