Report on on Credit Appraisal and Non-performing Loan of Dhaka Bank Ltd

INTRODUCTION
This is an internship report prepared as a requirement for the completion of the BBA Program of Department of Finance, University of Dhaka. The primary goal of internship is to provide an on-the-job exposure to the student and an opportunity to know how to implement theoretical concepts in real life situations. Students are placed in enterprises, organizations, research institutions and as well as in development projects.

As a requirement of the four-year academic program, after appearing in final exam, department placed me in Dhaka Bank Limited for the purpose of internship attachment under the guidance of respected faculty advisor Mr. Mohammad Mujibul Kabir, Associate Professor, Department of Finance, Faculty of Business Studies, University of Dhaka. The duration of my organizational attachment was Two months, from December 28, 2008 to February 26, 2009. This report includes an overview of the organization and elaboration of the project worked on during the internship period.

The Dhaka Bank placed me to their Credit & Reengineering Division under the supervision of Mr. .

Through out my internship period I have got the privilege to gather knowledge about CIB inquiry procedure and credit appraisals of the Bank from the concerned officials of the Dhaka Bank Limited. My supervisor at Dhaka Bank and also of the department encouraged me thus work on the topic entitled “An Exploratory Study on Credit Appraisal and Non-performing Loan of Dhaka Bank Ltd.”.

1.2 BACKGROUND OF THE STUDY
The main product of bank is Loans and Advances. The price of a loan is determined by the cost to make the loan plus a profit or risk premium on it. Lending is the primary business of a bank and profit is a measure of its success. So the main objective of lending is to earn profit on loans for the on going viability of a bank.
Most of the banks use objective and subjective data interpretation to evaluate a borrower’s financial condition from their financial statements. Objective analysis involves traditional methods of number and data analysis. Such as, review of unusual accounting methods used by the client, unusual information in the notes in the financial statement. Review of CIB (Credit Information Bureau) Report of client including financial ratios, trend analysis and financial profitability analysis of his business has been done before disbursement of a loan. Financial profitability, leverage liquidity and efficiency analysis of the client and its business considered as key denominator of considering a prospective client. Subjective analysis involves the overall evaluation of how a borrower is doing financially and whether extending the borrower’s credit would pose any acceptable or unacceptable risk. In particular both objective and subjective analysis is the key to interrelate and correlate the financial strengths and weaknesses of the client under review.
To extend credit (or to continue the credit facilities) facilities to an applicant, bank can make a decision only after an objective analysis and subjective evaluation. This analysis combined with information about applicant’s payment history, trends in the client’s industry, changes in the overall economy, and changes in demand for the client’s products and services are used to develop an intuitive understanding of the opportunities and challenges the client faces.
In many developed and developing countries, various analytical tools are used to assess credit risk. As a developing country, Bangladesh follows analytical tools recommended by BRDP (Banking Rules and Development Policy) of Bangladesh Bank. Bank mainly have to depend on judgment and their confidence whether borrower will pay or not. Dhaka Bank Limited sanctions loan first by seeing the client’s reputation in the market. Secondly, past information helps to analyze the business pattern and industry trend. Thirdly, uses the CRG (Credit Risk Grading) scorecard to evaluate the credit risk. From the CIB report bank can identify whether the client is classified or not.
1.3 STATEMENT OF THE PROBLEM
The profit of commercial banks depends on utilization of their funds and making of loans and advances profitable to the bank. As the bank mobilizes savings of general public in the form of deposit, the most important task of bank is to disburse the said deposits as loans or advances to the mass people for the development of commercial, industrial, who are in need of funds or investments. A bulk of problem loans has brought a gloomy situation in the cost of fund. Loan default culture has started in Bangladesh mainly after the nationalization of banks. However, it was enhanced by the availability of huge amount of credits in the name of developing private and industrial sector. Industry set-up was shown as sick industry to get additional loan and relieve from interest.
Several studies have been conducted on the tools used to evaluate credit risk in commercial banks. However, in Bangladesh very few studies are done about the tools available to evaluate credit risk.
Lending is the primary business of a bank and profit is a measure of its success. Therefore, the main objective of lending is to earn profit on loans for the ongoing viability of the bank. Clients apply for loan for various purposes. The number of borrowing is increasing so is the default rate. So credit risk analysis is important for bank to reduce non-performing loan and to prosper in the banking sector.
Therefore, the researcher intends to explore the risk assessment methods in Dhaka Bank Limited. The overall performance of Dhaka Bank Limited is examined in terms of tools used to identify non-performing loans, loans disbursement and recovery.
1.4 OBJECTIVES OF THE STUDY
Every day banks are trying to innovate new process to attract clients. Now, since clients have more options to switch banks and to go for what they need, bank may loose clients due to this situation. Non-performing loans and advances create problems for both bank and borrower particularly when bank’s profitability is reduced due to classified loans. Customer retention is very important for any company or bank.
1.4.1 Main Objective
The main objective of the study is to develop an insight of tools available to identify efficient methods and used to mitigate overall credit risks and to reduce loan default rate. Recent study shows that banks are unable to maximize their profit without lowering the classified loans. To explore the practical strengths and weaknesses of some credit risk analysis those are used by bank to manage risk. In both decision-making and evaluation process credit control analysis plays both a major part and also some great risks.
1.4.2 Specific Objectives
1. To identify the main factors of the credit risk and computation of credit risk grading of Dhaka Bank Limited.
2. To identify the trend of total & sector wise disbursement of Loans & Advances of Dhaka Bank Limited.
3. To identify and compare the trend of classified, unclassified and recovery of loans and advances of Dhaka Bank Limited.
4. To identify the obstacles encountered when a loan is being default by Dhaka Bank Limited and the ways to overcome the problems.
5. To examine the recent strategy and initiatives taken by Dhaka Bank Limited for further development or reducing loan classification.
6. To identify how and why a loan defaults.
1.5 METHODOLOGY
The report is based on primary and secondary data.
For data collection following methods are followed:
Information collected from face to face communication. Therefore, error depends on the response of the respondents only.
Journals.
Prior research reports.
Bangladesh Bank Reports and several web sites are used.
Website of Dhaka Bank Limited (www.dhakabankltd.com).
The Annual Reports and different publications of Dhaka Bank Limited.
Personal interviews with the employees and customers.
The conclusion drawn in this study is not definite and it depends on the responses collected that is very much theoretical and varies from person to person situation and as well country to country. This study is mainly focused on Dhaka Bank Limited to perceive what tools Dhaka Bank Limited uses to evaluate its borrower.

1.6 SOURCES OF DATA
Both primary and the secondary data were used to prepare the report. The details of these sources are as below:
1.6.1 Primary Sources
Primary data for this report had been collected through the conversation & discussion of different officers. On the job observation of the officers has helped a lot to know information of banking.
1.6.2 Secondary Sources
The secondary sources of data are:
Annual Report of Dhaka Bank Limited
Internal Publications of Dhaka Bank Limited
The website of Dhaka Bank Limited (www.dhakabankltd.com)
The website of Bangladesh Bank (www.bangladesh-bank.org)
1.7 LIMITATIONS
Banking contains a huge volume of operation and it is quite impossible to gain knowledge about all the activities during a research period. The major limitation of the study is accessibility of certain data. As per banking rules and regulations certain information is not disclosed to outsiders for safety purpose of the bank. Therefore, though the researcher is a permanent employee of the institution, is bound to undisclosed specific matters. As the research is exploratory the strengths and weaknesses found in the credit risk analysis tools is based on interview with experts and the researcher’s personal observations. The basic limitations faced in preparing this report on disclosure procedure of Dhaka Bank Limited are:
1. Being private limited company, the private commercial banks like Dhaka Bank Limited keep some information restricted like the actual amount of classified loans.
2. Financial Statements only portray the figures/numbers and their break down but do not clarify the justification in most of the time.
3. Interviewing the officials on specific disclosure items sometimes was not fruitful because of generalized answers.
4. In the literature review, researcher has mentioned several methods and tools that can be used for credit risk analysis. As in our country a very few methods are being practiced by bank to do analysis the credit risk. Therefore, the advantages or disadvantages of those tools application were unable to review in full extent.
5. In-depth interview with the classified clients were not possible.
6. In this research only a few methods are being discussed. There are several other methods that cannot be incorporated in this study, which might have help to understand and evaluate credit risk more efficiently.
7. For credit risk analysis bank mainly focus on personal judgment about the borrower so only the judgmental factors and Credit Risk Grading (CRG) Manuals is followed in risk analysis.
8. The knowledge constraint of the researcher.

CHAPTER TWO: THE ORGANIZATION
2.1 BANKING HISTORY OF BANGLADESH
Bangladesh is a developing country. Banking sector plays a pivotal role in the economic development of the country. Banking system of a country can well be said as a barometer of its economic prosperity. Well-developed banking system is indispensable for modern trade and commerce. Now-a-days, banks not only act as custodian of public money but also are indispensable as vital agent for maintenance of sound financial position of a country.
Nationalized Commercial Banks (NCBs) were established in Bangladesh in 1972 through amalgamation of twelve commercial banks that were operating in pre-independent Bangladesh allowing the poor access to fund, reducing capital flight to foreign countries, and increasing domestic investment were some of the basic objective of this nationalization. That means a society with wealth distributed as equitably as possible. But with time difference those banks have changed their policies and strategies, which were not fulfilling the class banking policies of the government. On an evaluation of the activities of commercial banks, it has been observed that the progresses made by the banking industry since nationalization was not impressive. The nationalized banks could not play the due role in the implementation of government programs and policies. Hence, a trend of de-nationalization of banks started from mid 80’s.
In the meantime, the policy of the government towards banking industry regarding economic management has changed since 1976. That year private sector had been entrusted to play a bigger role in the economy than before. Accordingly, in order to provide more credit to local investors the private sector banking had been introduced. Government decided to allow setting up of local Private Commercial Banks (PCB) in addition to Nationalized Commercial Banks (NCB) operating in the country.
Bangladesh Bank acts as a central bank for our country and it controls, supervises, and looks after the scheduled banks in the private commercial banks as well as the nationalized commercial banks formed by amalgamating the business of the twelve banks doing business in Bangladesh before liberation as per schedule given below:
Existing Bank New Bank Authorized Capital
(Lac Tk.) Paid UP Capital
(Lac Tk.)
The National Bank of Pakistan, The Bank of Behawalpur Ltd. Sonali Bank 500 200
The Premier Bank Ltd., The Habib Bank Ltd., The Commerce Bank Ltd. Agrani Bank 500 100
The United Bank Ltd., The Union Bank Ltd. Janata Bank 500 100
The Muslim Commercial Bank Ltd., The Standard Bank Ltd. Rupali Bank 500 100
The Austrasia Bank Ltd., The Eastern Mercantile Bank Ltd. Pubali Bank 500 100
The Eastern Banking Corporation Ltd. Uttara Bank 500 100
After the liberation of Bangladesh the twelve Banking companies who were doing business in Bangladesh, were nationalized by the Government of the People’s Republic of Bangladesh under president’s order no.26 of 1972 entitled The Bangladesh Bank (Nationalizations) Order, 1972” on March 26, 1972.
During 1983 Bangladesh Government allowed the private sector to operate banking business. Now Banks are formed and are operated under The Bank Company Act, 1991. At present there are about 50 banks operating their business in Bangladesh.
2.2 HISTORY OF DHAKA BANK LIMITED:
Dhaka Bank Limited was incorporated as a public limited company under the Companies Act 1994. The Bank started its commercial operation on July 05, 1995 with an Authorized Capital of Tk.1,000.00 million and Paid Up Capital of Tk.100.00 million. The present Paid Up Capital of the Bank is Tk.1,934,252,875.00 as on June 30, 2008. The total equity (capital and reserves) of the Bank as on June 30, 2008 stood at Tk.3,424,609,016.00. The Bank has 44 branches and 2 Offshore Banking Units across the country and a wide network of correspondents all over the world. The Bank has a plan to open more branches in the current fiscal year to expand the network. Dhaka Bank Limited offers the full range of banking and investment services for personal and corporate customers, backed by the latest technology and a team of highly motivated officers and staffs. In the effort to provide excellence in banking services, the Bank has launched online banking service, joined a countrywide-shared ATM network and has introduced a co-branded credit card. A process is also underway to provide e-business facility to the bank’s clientele through online and home banking solutions. Dhaka Bank Limited is the preferred choice in banking for friendly and personalized services, cutting edge technology, tailored solutions for business needs, global reach in trade and commerce and high yield on investments.
2.2 SLOGAN:
“EXCELLENCE IN BANKING”
2.3 MISSION:
To be the premier financial institution in the country providing high quality products and services backed by latest technology and a team of highly motivated personnel to deliver Excellence in Banking.
2.4 VISION:
At Dhaka Bank, we draw our inspiration from the distant stars. Our team is committed to assure a standard that makes every banking transaction a pleasurable experience. Our endeavour is to offer you razor sharp sparkle through accuracy, reliability, timely delivery, cutting edge technology, and tailored solution for business needs, global reach in trade and commerce and high yield on your investments.
Our people, products and processes are aligned to meet the demand of our discerning customers. Our goal is to achieve a distinct foresight. Our prime objective is to deliver a true reflection of our vision- Excellence in Banking.
2.5 VALUES:
Customer Focus
Integrity
Teamwork
Respect to the Individual
Quality
Responsible Citizenship
2.6 CREDIT RATINGS:
Dhaka Bank Limited was rated by Credit Rating Agency of Bangladesh (CRAB) Limited on the basis of audited Financial Statements as on December 31, 2007. The summary of the rating is as follows:
CRAB has awarded A1 (Pronounced as Single A One) rating in the long term and ST-2 rating in the short term to Dhaka Bank Limited. In 2006, CRAB awarded the same rating to Dhaka Bank Limited in the long term and short term.
Commercial Banks rated in this long-term category are adjudged to be strong banks, characterized by good financials, healthy and sustainable franchises, and a first rate operating environment. This level of rating indicates strong capacity for timely payment of financial commitments, with low likeliness to be adversely affected by foreseeable events.
Commercial Banks rated in this short-term category are characterized with commendable position in terms of internal fund generation, access to alternative sources of funds and moderate level of liquidity. The rating is valid for one year.
2.7 BRIEF PROFILE OF DHAKA BANK LIMITED
Name of company : Dhaka Bank Limited
Legal form : A public limited company incorporated in Bangladesh on 6th April 1995 under companies Act 1994 and listed with Dhaka Stock Exchange Limited and Chittagong Stock Exchange Limited.
Date of commencement : July 5, 1995
Registered office : Biman Bhaban (1st floor), 100 Motijheel C/A, Dhaka 1000, Bangladesh
Telephone : +880 2 9554514, 9571006-10
Telefax : +880 2 9556584, 9571013
Swift code : DHBLBDDH
E-mail : info@dhakabank.com.bd
Auditors : ACNABIN
Chartered Accountants
Tax Consultant : Howladar, Yunus & co.
Chartered Accountants
Managing Director (CC) :
Company Secretary : Arham Masudul Huq

2.8 ORGANIZATIONAL HIERARCHY:

2.9 OBJECTIVES OF DHAKA BANK LIMITED
The main objectives of the Dhaka Bank Limited are as follows:
a) To establish, maintain, carry on, transact, undertake and conduct all types of banking, financial, investment and trust business of in Bangladesh and abroad.
b) To form, establish and organize any bank, company, institutions or organization either singly and/or in joint collaboration of partnership with any individual company, financial institution, bank, organization or any government and or government agency for the purpose of carrying on banking, financial investment and trust business and/or any other business as provided hereafter.
c) To carry on any business relating to Wage Earner Scheme as may be allowed by Bangladesh Bank from time to time including maintaining of foreign currency accounts and any other matter related there to.
d) To contract or negotiate all kinds of loan and/or assistance, private or public from any source, local or foreign, and to take all such steps as may be required to be complete such deals.
e) To form, organize assets, participate or aid in forming, promoting or organizing any company, bank, syndicate, consortium institute or any holding and subsidiary company in Bangladesh or abroad for the purpose of undertaking any banking financial investment and trust business.
f) To take part in the formation, management, supervision or control of business or operations of any company or undertaking and for that purpose to render technical managerial and administrative services and act as administrator, manager and secretary.
g) To purpose, or otherwise acquire, undertake, the whole or any part of or any interest in the business, goodwill, property, contract, agreement, right, private assets and liabilities of any other company bank corporation, partnership, body person or persons carrying on, or having ceased to carry on, any business which the company is authorized to carry on such terms and may be deemed expedient.
h) To encourage sponsor and facilitate participation of private capital in financial industrial or commercial investment, share and securities and in particular by providing finance in the form of long, medium or short term loans or share participation by way of subscription to the promoter shares, or underwriting supports or bridge finance loans and/or by any manner.
i) To amalgamate or reconstruct or recognize with any commercial bank, or body corporate or association in cooperation with any person, commercial bank or association.
j) To establish and open offices and branches to carry on all or any of the above business abroad and within the country provided prior permission is obtained from the Bangladesh Bank.
k) To establish provident fund, gratuity, pension, and other fund for the welfare and benefit of the employees and staffs, former or present and any matter related thereon.
l) To act as official liquidator and receiver.
m) To receive, borrow or raise money on deposit, loan or otherwise upon such terms as the Dhaka Bank may approve and to give guarantee and indemnity in respect of any debt or contract.
n) To appoint officials, staff, experts, advisers, consultants, auditors, Legal advisers and provide for their suitable remunerations.
o) To advance, deposit or lend money to or with such persons or bodies, corporate, unincorporated, statutory, govt. and/or its agencies on such terms as the Dhaka Bank may approve.
2.10 Capital and Reserves
Dhaka Bank Limited has been consistently maintaining the ‘Capital Adequacy Ratio’, as prescribed by Bangladesh Bank. This has been made possible by a policy of building up both capital and reserves. It started with an Authorized and Paid-up Capital of Tk.1,000.00 million and Tk.276.00 million respectively in 1995. Authorized and Paid up Capital increased to Tk.6,000.00 million and Tk.1,934.25 million respectively in 2008. In addition to Paid up Capital, the Bank has built up a strong reserve base over the years.
2.11 Strength and Performance
With the active support and guidance from Bangladesh Bank, clients and patrons, the Bank has been maintaining sound financial strength and showing a steady and impressive business performance. Dhaka Bank Limited is one of the few mentionable banks, which maintains Capital Adequacy ratio and has more than required provision as per Bangladesh Bank criteria.
Starting with a modest deposit of only Tk.10,749.00 million in 1996, the Bank had closed its business with a deposit of Tk.48,731 million as of December 31, 2007. The total deposits stood at Tk.56,986 million as of December 31, 2008. Total credit stood at Tk.49,698 million as on December 31, 2008 against Tk.39,972 million last year. Bank has posted a profit before tax and provision of Tk.2,533 million during the year ended December 31, 2008 against 2,010 million last year with a growth of 26%. Earning per share (EPS) is Tk.43.00 as on December 31, 2008 against Tk.36.00 as on December 31, 2007. Dhaka Bank has received ICAB National Award 2007 in the financial sector for their published Accounts and Reports.
2.12 Credit Policy and Portfolio
Credit policy of the Bank works within the framework of three main objectives, namely, maintenance and improvement of quality of assets, recovery on time and building-up of an efficient customer oriented credit delivery system.
The portfolio includes working capital financing, project financing, import-export financing and domestic trade financing etc. The Bank continued to extend working capital facilities to customers to ensure smooth and uninterrupted operation of their business. At the same time, it expanded project-financing portfolio to meet the growing demands of the economy for long-term finance in a depressed capital market.
Due emphasis was given to financing export oriented and export linked industries without loosing sight of the need for long term loans by other domestic market based industries and ventures. So far the Bank has financed 843 projects in 2007. Among them 129 projects were financed during 2007 amounting to Tk.34,049 million. In long term portfolio, the bank has been diversifying from Textile and RMG industries to Agricultural Industries, Pharmaceutical Industries, Chemical Industries, Food & Allied Industries, Transport & Communication, Electronics & Automobile Industries, Housing & Construction Industries, Engineering & Construction Industries including Ship Breaking, Energy & Power Industries and Service Industries etc. Moreover, the Bank has also extended credit facilities to CNG filling stations, Shipping, Power Sector, Micro Credit and health services etc. For improved customer services, the Bank now extends One Stop services to corporate clients who require term loan, working capital and import-export financing etc. The Bank also participates in Syndicate Financing and so far has sanctioned Tk.1.50 billion in 03 syndications. At Dhaka Bank Limited, the Syndications and Structured Finance unit was setup on October 30, 2004. This unit successfully closed nine syndicated deals till 2008. In 2008 (up to March) Dhaka Bank Limited has arranged 3 syndication deals for a total amount of Tk.1.50 billion. The Syndications and Structured Finance team as a business unit soon followed up by closing another deal totaling Tk.1.40 billion for a large local corporate. In the year 2008 the unit has given priority to the Power, Telecommunication, Textile and any other lucrative industry.
2.13 Functions of the Dhaka Bank Limited
Dhaka Bank Limited performs all types of functions of a modern commercial bank, which generally includes:
1) Mobilization of savings of the people and safe keeping of all types of deposit account.
2) Making advances especially for productive activities and for the other commercial and socio-economic needs.
3) Providing banking services to common people through the branches.
4) Handling of export and import trade and foreign remittances and with special support to export activities.
5) Introduce modern Banking services in the country.
6) Discounting and purchasing bills.
7) Providing various information, guidance and suggestions for promotion of trade and industry keeping in view of the overall economic development of the country.
8) Industrial finance for both capital machinery and working capital.
9) Finance relating to constructions of both commercial and residential.
10) Finance under small business of self employed clients.
11) Finance of farming and non-farming activities to rural people including purchase of agricultural equipments.
12) Ensuing proper utilization of credit disbursed.
13) Developing new products.
14) Market surveys before making any finance.
15) Finance for small transport.
16) Monitoring and forecasting.
17) Developing marketing campaigns.
18) Finance for household durables.
19) Work simplification studies.
20) Monitoring diversification of portfolio among different sectors.
21) Pricing and minimum size of transaction ship.
2.14 Customer Services in Dhaka Bank Limited:
Like some other Banks Dhaka Bank Limited (DBL) has also some Services that it provides its Potential Customers. The Services of the Bank for its Customers are:
Corporate Banking Services:

Floating of Public Issues
Loan Syndication

Personal Banking Services:

Deposit Accounts

– Current Account
– Savings Account
– Short Term Deposit Account
– Fixed Deposit Account
– Excel Account

Foreign Exchange Transactions
Consumer Credit Scheme
E-Cash 24 Hour Banking
Phone Banking
Branch Banking
Dhaka Bank Credit Card
Secured Overdraft
Personal Loan
Car Loan
Safe Deposit Lockers
Private Foreign Currency Accounts
Utility Bill Payments

International Trade & Foreign Exchange
Lease Financing
Capital Market Services
2.15 Extensive Schemes of Dhaka Bank Limited
CAR LOAN: As part of establishing a personal banking franchise of Dhaka Bank Limited, the bank has successfully launched Car Loan Scheme. The product is term financing facilities to individuals to aid them in their pursuit of have a car of their dream. The facility becomes affordable to the clients as the repayment is done through fixed installment s commonly known as EMI (Equated Monthly Installment) across the facility period. Depending on the size and purpose of the loan, the number of installments varies from 12 to 60 months. In case of brand new cars the loan tenure will be maximum 72 months. One can bought his car with the money provided by Dhaka Bank Limited through its Car Loan Scheme.
PERSONAL LOAN: As part of establishing a personal banking franchise of Dhaka Bank Limited, the bank has successfully launched Personal Loan. The product is a term financing facility to individuals to aid them in their purchases of consumer durables or services. The facility becomes affordable to the clients as the repayment is done through fixed installments commonly known as EMI (Equated Monthly Installment) across the facility period. Depending on the size and purpose of the loan, the number of installments varies from 12 to 60 months. The highest amount of loans disbursed through the scheme is Tk.5,00,000.00. Personal Loan scheme of Dhaka Bank Limited is a very popular scheme for individuals especially for the service-oriented people of limited income.
Vacation Loan: Dhaka Bank Limited has successfully launched Vacation Loan. The product is a term financing facility to individuals to aid them in their pursuit of spending a vacation in the country or abroad. The facility becomes affordable to the clients as the repayment is done through fixed installments commonly known as EMI (Equated Monthly Installment) across the facility period. Depending on the size and purpose of the loan, the number of installments varies from 12 to 48 months.
Deposit Pension Scheme (DPS): Dhaka Bank Limited is well poised to be the leading Personal Banking business amongst the local private commercial banks. Bank’s conscious efforts in brand building, introducing and supporting new packaged products, developing Personal Banking organization along with non-traditional delivery channels have resulted in good brand awareness amongst its chosen target markets.
Installment based savings schemes are a major category of saving instruments amongst mid to upper middle-income urban population. DPS is an installment based savings scheme (Deposit Pension Scheme) of Dhaka Bank Limited for individual clients.
ATM: Through extensive ATM network supported by state of the art technology Dhaka Bank Limited provides ATM service 24 hours a day 7 days a week. In the word of the Bank, “We never sleep to serve you.”
Lockers: One can use the locker facility of Dhaka Bank Limited and thus have the option of covering his/her valuables against any unfortunate incident. The Bank offers security to its locker service as afforded to the Bank’s own property at a very competitive price. The Bank would be at peoples service from Saturday through Thursday from 9:00 am to 4:00 pm. Lockers are available at Gulshan, Banani, Dhanmondi, Uttara, CDA Avenue & Cox’s Bazar Branch. The Bank provides locker facilities at the branch to keep valuables safe and secure. With high standard lockers installed for security, the Bank becomes to avail this facility in a secure and homely atmosphere.
Special Deposit Scheme: The Bank has launched Special Deposit Scheme for it customers through Personal Banking wing. Through this scheme one can earn monthly interest depositing Tk.1,00,000.00 or its multiples for 3 years.
Moving the Wheels of Progress: Many wheels revive together to run a total system and so does the banking activities of Dhaka Bank Limited. The Bank has been consistently moving the service wheels like corporate banking, syndication of funds, capital market services and personal banking to support national economy.
Different Business Different Needs: Business needs differ, so do the solution of Dhaka Bank Limited. The Bank provides Project Finance, Import and Export Finance, Corporate Finance and Loan Syndication, Working Capital Finance, Lease Finance, SME Finance, Treasury Services, Remittance, Retail Banking, Opening of LCs, Issuance of Guarantees.
Online Islamic Banking on all Branches: Dhaka Bank Limited is offering Islamic Shariah banking service through online now. Al-Wadia Current Account, Mudaraba Savings and Fixed Deposit Account and also investment within shariah are included in this service. One can easily get the Islamic banking services through any branches of Dhaka Bank Limited.
2.16 Functional Departmentalization at Head Office
The Managing Director, ex-officio Director of the Board, is the Chief Executive Officer (CEO) of the Bank. Next in the organizational hierarchy is the Deputy Managing Director. There are three Deputy Managing Directors in Dhaka Bank Limited. Deputy Managing Director (RM) is engaged with risk management. He monitors credit activities, which includes sanctioning of credit facilities and monitoring after financing. Deputy Managing Director (BB) is engaged with business banking works, which includes selection of new prospective borrowers for the bank. Another Deputy Managing Director (Operations) is engaged with operational activities, such as selection of premises for new branches, shifting of branches to new potential places as and when required etc. Groups/Divisions at Head Office report either directly to the Managing Director or through the Deputy Managing Directors.
Credit Division
Credit Division scrutinizes credit proposals of all the branches and then getting recommendation of Management Credit Committee (MCC) submits it to the Executive Committee (EC) of the Board of Directors meeting for approval. They also monitor the loans and advances whether they are regular or stuck up.
Credit Department exists in all the branches. This department receives request for credit facilities from the clients. Then they take some necessary actions to justify the request, such as they collect reports from Credit Information Bureau (CIB) of Bangladesh Bank, collect TIN and VAT certificate of the client, Trade License, membership certificate of related association etc. Then they estimate Credit Risk Grading (CRG) Analysis to judge the creditworthiness of the client analyzing at least three years audited Financial Statements of the client. After having all related information and discussing with the branch manager the Credit Department analyzes whether the proposed facility falls in the delegation of the branch manager. Otherwise the Credit Department then forwards the credit proposals to the Head Office Credit Division for further analysis.
After receiving the request for credit facilities from the branches the Head Office Credit Division then scrutinize the proposals and match with the cost of fund provided by the Finance and Accounts Division. Then they rearrange the rates, if necessary, and submit it before the Management Credit Committee. The Management Credit Committee (MCC) is represented by the Managing Director, Deputy Managing Directors and Head of Credit Risks & Credit Operations. If the proposed facility falls under the delegation of Management Credit Committee then Sanction Letter is issued by the respective units of Credit Risk after getting approval of the Management Credit Committee. Otherwise the Management Credit Committee recommends the proposal for submission before the Executive Committee for final approval. Executive Committee comprises of 6 (six) members of the Board of Directors, the Managing Director, the Deputy Managing Directors and the Company Secretary. The meeting held once a week. The Committee discusses the proposals of all the branches and decides whether to approve the proposed facilities or not. If yes then the Credit Risk issues Sanction Letter to the branches with necessary corrections in rates, if any stipulating terms and conditions regarding the credit facilities.
The branches then make an offer letter with the rates fixed by the Head Office, Credit Risk. The customer accepts the offer, putting signature on the offer letter. After customers acceptances the credit facilities are disbursed.
Financial Institution Division (FID)
This division deals with international trade that is import, export and foreign remittance. To deal with foreign currency Bank has to take prior permission from Bangladesh Bank.
International trade is an important constituent of the business portfolio of the Bank. Dhaka Bank Limited offers a full array trade finance services, namely, issuing, advising and confirmation of documentary credit, arranging forward exchange cover, pre-shipment and post-shipment finance, negotiation and purchase of export bills, discounting of bills of exchange, collection of bills etc.
Finance and Accounts Division
Finance & Accounts Division is concerned with finding and using funds to carry out the marketing plan. They are responsible for all sorts of payments. They prepare the all sorts of report for management including cost of fund, Profit and Loss account, Balance Sheet, Cash Flow statement, Budget and other relevant reports.
Operations
Operations Division is responsible for all kinds of procurement and logistics support. They purchase all sorts of product that are needed by various divisions and branches. Firstly the divisions requisitioned the necessary products in a prescribed format in every month. When the Divisional Head of the Operations approves it, they purchased the product as per requirement. The division is also responsible for choosing the suitable site for opening new branches.
Human Resources Division
This Division deals with human resources management that is recruitment of new employees, placement of them, promotion, transfer and all other benefits that are entitled by the employees.
Dhaka Bank Limited is expanding its operation day by day, so it is in need of efficient human resources to smoothly run its operation. This efficient force is recruited by Human Resources Division through different types of tests and interviews.
Grading is another task that is accomplished by this Division, with the help of Branch Managers and Divisional Heads. All the Branch Managers and the Divisional Heads along with the concerned employee prepare the Appraisal Forms as prescribed by the Human Resources Division and send it back to the Human Resources Division with a recommended grading. This grading system motivates employees to be more efficient and sincere in their respective job.

Corporate Finance and Syndication
This unit was set up in June 2003 with a mandate to arrange financing for medium to large scale projects through syndications, consortium financing and ‘club deals’. The unit not only was able to break ground in this segment but it also successfully completed the first ever aircraft financing deal that was arranged through local financial institutions. The demand for this service is expected to rise further due to growing and large demand for industrial financing in line with the overall economic development. The Corporate Finance and Syndication Unit is now well equipped to meet the challenges of highly competitive industry by creating a market niche through acquisition of in-depth financial management techniques and development of human resources.
Capital Market Services
Lease Finance, Hire Purchase & Capital market operation besides investment in treasury bills & Prize Bonds constitute the investment basket of Dhaka Bank Limited. Dhaka Bank Limited is a member of the Dhaka Stock Exchange Ltd. and Chittagong Stock Exchange Ltd. The investment portfolio made up of Government Securities & Shares and Debentures of different listed companies stood at TK.2046.1 million this year indexing a 4.91% increase over TK.1950.28 million in the previous year. Now the Capital Market Services Division has opened another four wings at Uttara, Dhanmondi, Motijheel and Chittagong for giving trading facilities to its clients.
Personal Banking Division
Personal Banking Division (PB) with the aim to address modern banking needs of the bank launched Dhaka Bank credit card, personal loan, car loan & vacation loan etc. In the meantime, the bank takes the honor to have client base of approximately 6,000. Moreover restructuring the existing products & services & introducing new products, particularly electronic banking products like Dhaka Bank ATM Card & the automated Tele Banking service from selected branches was highly appreciated by the bank customers.
Year 2007 was particularly a year of growth & challenge for retail business of the bank. The Bank diversified its portfolio & concentrate on offering tailor made products e.g. personal credit, Vacation Loan & Car Loan. The bank customer reach had been extended through establishing a large field sales & service channel for expanded customer reach. With all these efforts, Dhaka Bank Limited was able to create a strong brand in just a year in the market, which is portrayed in the amount of loan disbursement & quality of asset. Yet, as another-addition to the bank commitment Excellence in Banking, the division went on building strategic tie ups with different organizations & conducted different promotional programs. These programs were highly appreciated in the market.
The division focusing to develop & introduce new products & services through extensive market research to meet every facet of modern banking needs.

CHAPTER THREE: LITERATURE REVIEW
3.1 Non-performing Loans
IMF defines “A loan is nonperforming when payments of interest and principal are past due by 90 days or more, or at least 90 days of interest payments have been capitalized, refinanced or delayed by agreement, or payments are less than 90 days overdue, but there are other good reasons to doubt that payments will be made in full”. By Bank regulatory definition non-performing loans consist of a) other real estate owned which is that taken by foreclosure or a deed in lieu of foreclosure, b) loans that are 90 days or more past due and still accruing interest, and c) loans which have been placed on nonaccrual (i.e., loans for which interest is no longer accrued and posted to the income statement).In Bangladesh, loans becomes non-performing when it is classified as bad and loss for which Bangladesh Bank requires 100% provisioning by the scheduled commercial banks (as per BRPD circular).Under Basel-II, loans past due for more than 90 days are non-performing.
3.2 Non-performing Loans in Bangladesh
According to the information available in Bangladesh Bank website in Bangladesh State-owned Commercial Banks (SCBs) and Specialized Banks (SBs) has significant amount of Nonperforming loans (NPLs) mainly resulting from political intervention in the past. One of the reasons for having high NPL is a high lending rate. High NPL reflects serious inefficiency of bank management. Commercial banks should explore possibilities to reduce NPLs so that they can lower the lending rate to a reasonable level. Banks with high NPL suffer form capital inadequacy problem. For example the name of Oriental Bank Limited can be mentioned because of NPLs the bank has suffered and been sold to another company. NPL rate was about 30% in Oriental Bank Limited.
According to Hua Du, Country director of Bangladesh Resident Mission (2006) Non-performing loans (NPLs) are a reflection of problems in the banking and corporate sectors. NPLs create a negative impact on the income statement because of provisioning for loan losses. In an extreme case, a high level of NPLs in banking system causes systemic risk, inviting a panic run on deposits and sharply limiting financial intermediation, and subsequently investment and growth. In addition, it will further deteriorate when some externals shocks such as an unfavorable phase of the macroeconomic cycle or inadequate political or legal support.
3.3 Credit Risk
George E. Peterson (1998) defines credit risk, as “Credit risk is the risk that a borrower will not make full and timely payment of debt service. Once a borrower falls behind in debt servicing, credit risk also involves the relative size and probable duration of default.” It is one of the significant risks a bank is exposed to. Each of the risk areas requires to be evaluated and aggregated to arrive at an overall risk grading measure.
a) Evaluation of financial risk: Financial analysis of leverage, liquidity, profitability and interest coverage ratios will help to analyze the risk that borrower might fail to meet obligation due to financial distress.
b) Evaluation of Business/Industry Risk: Analyzing the business outlook, size of business, industry growth, market completion and barriers to entry or exit to understand the industry situation or unfavorable business condition that might have an impact on borrower’s capacity to meet obligation. This capitalizes on the risk of failure due to low market share and poor industry growth.
c) Evaluation of Management Risk: Due to poor management skill, experience of the management, its succession plan and teamwork might cause the borrower to default.
d) Evaluation of Security Risk: Risk that the bank might be exposed due to poor quality or strength of the security in case of default. This may involve the strength of security and collateral, location of collateral and support.
e) Evaluation of Relationship Risk: These risk areas cover evaluation of limits utilization, account performance, conditions / covenants compliance by the borrower and deposit relationship.
3.4 How is Credit Risk measured?
Credit risk is usually measured on a comparative scale. As per BRPD (Banking Regulation and Policy Department), CRG (credit Risk Grading) score sheet, a scale, is used to summarize risk assessments. Since there is no accurate way to combine the different risk factors, credit professionals either examine and weigh the underlying risks directly, or confirm the track record over time of a credit rating system to discriminate effectively between high and low-risk lending in a particular bank.
3.5 Credit Risk Analysis
The term credit analysis is used to describe any process for assessing the credit quality of a company or individual. Credit analysis include credit scoring, it is more commonly used to refer to process that entail human judgment. Credit professionals in banks review the client’s balance sheet, income statement, recent trends in its industry, the current economic environment, etc. from this they can also assess the exact nature of an obligation. Based on this analysis, the credit manager assigns the client a credit rating, which can be used for making credit decision.
Many banks, investment managers and insurance companies hire their own credit analysts who prepare credit ratings for internal use. In Bangladesh there are two rating agencies one is CRAB (Credit Rating Agency of Bangladesh) and another is Crisal. These two does the rating of all organizations.

Figure: Credit Risk Components.
Source: Bangladesh Institute of Bank Management, Mirpur, Dhaka
3.6 Credit Risk-Grading Score
For loans to individuals or businesses credit quality is typically assessed through a process of credit scoring. The criteria for Credit Risk Grading (CRG) are:
1. Financial risk
2. Business/industry risk
3. Management risk
4. Security risk
5. Relationship risk.

3.7 Categories of Loans
According to BRPD (Banking Regulation and Policy Department) of Bangladesh bank loans and advances are grouped into four categories for the purpose of classification (non-performing) which are as follows:
a) Continuous Loan: The loan accounts in which transactions may be made within certain limit and have an expiry date for full adjustment that will be treated as continuous loan. Examples are Cash Credit and Overdraft.
b) Demand Loan: This type of loans is repayable on demand by the bank and is treated as Demand Loans. If any contingent or any other liabilities are turned to forced loans (i.e. without any prior approval as regular loan) these too will be treated as Demand Loans. Such as: Forced LIM (Loan against Imported Merchandise), PAD (Payment Against Document), FBP (Foreign Bill Purchase), and IBP (Inland Bill Purchase) etc. IBP is under FBP and is used for export purposes for e.g. client of Dhaka Bank will keep IBP as a guarantee which is kept in another bank.
c) Fixed Term Loan: Loans which are repayable within a specific time period under a specific repayment schedule that will be treated as Fixed Term Loans. These loans are given for either 3 or 5 years.
d) Short-term Agricultural & Micro Credit: The annual credit programs issued by the Agricultural Credit and Special Programs Department (ACSPD) of Bangladesh Bank include short- term Agricultural Credits to the agricultural sector where the loans are need to be repayable within twelve months. Short-term micro credit include credits not exceeding twenty-five thousands and need to repay within twelve months a few examples of micro-credit are Non-agricultural credit, Self-reliant Credit, Weaver’s Credit or Bank’s individual project credit. When a loan is not paid within the valid time period it is called “Irregular loan”.

SMA (Special Mention account) Past due/over due for 6 months or beyond but less than 9 months.
SS (Sub Standard): Non-repayment of 6 months installments or after 6 months of expiry.

DF (Doubtful)
Non-repayment of loan within 3 months of the first installment payment (i.e. after 3 months of SS) or if the loan is not paid within 9 months of the due date then that loan will become DF.
CL (Classified loan) Unpaid / due for 3 months* after becoming DF.
BL (Bad & Loss) After 60 months or 5 years of the due date.
*Note: not 3 installments but 3 months
Table: Categories of Non-performing loans
Source: Bangladesh Institute of Bank Management, Mirpur, Dhaka, May 2006

Provision for loans and advances / investments is made based on year-end review by the management following instructions contained in (BCD) Bangladesh Bank Circular no. 34 dated 16 November 1989, BCD Circular no. 20 dated 27 December 1994, BCD Circular no. 12 dated 4 September 1995, BRPD Circular no. 16 dated 6 December 1998, BRPD Circular no. 9 dated 14 May 2001, BRPD Circular no.02 of February 2005, BRPD Circular no. 09 of August 2005 and BRPD Circular no. 17 dated 06 December 2005. The classification rates are given below:
General provision on unclassified general loans and advances/investments 1%
General provision on unclassified small enterprise financing 2%
General provision on unclassified loans/investments for housing finance and on loans for professionals 2%
General provision on unclassified consumer financing other than housing finance and loans for professionals 5%
General provision on small enterprise financing 5%
Specific provision on SS loans and advances/investments 20%
Specific provision on DF loans and advances/investments 50%
Specific provision on BL loans and advances/investments 100%
Table: General Reserve for loan
Source: Bangladesh Institute of Bank Management, Mirpur, Dhaka, May 2006
When loan becomes BL bank files case against the borrower to recover borrowed amount. Bank sell the land or any other property that has been kept as a mortgage when client is unable to make payment then the fore sale value of that property is shown as 30% less then the market value.
3.8 Guidelines on Credit Risk Management
Credit risk is the primary financial risk in the banking system. Identifying and assessing credit risk is essentially a first step in managing it effectively. In 1993, Bangladesh Bank as suggested by Financial Sector Reform Project (FSRP) first introduced and directed to use Credit Risk Grading system in the Banking Sector of Bangladesh under the caption “Lending Risk Analysis (LRA)”. The Banking sector since then has changed a lot as credit culture has been shifting towards a more professional and standardized Credit Risk Management approach.
Credit Risk Grading system is a dynamic process and various models are followed in different countries & different organizations for measuring credit risk. The risk grading system changes in line with business complexities. A more effective credit risk grading process needs to be introduced in the Banking Sector of Bangladesh to make the credit risk grading mechanism easier to implement.
Keeping the above objective in mind, the Lending Risk Analysis Manual (under FSRP) of Bangladesh Bank has been amended, developed and re-produced in the name of “Credit Risk Grading Manual”.
The Credit Risk Grading Manual has taken into consideration the necessary changes required in order to correctly assess the credit risk environment in the Banking industry. This manual has also been able to address the limitations prevailed in the Lending Risk Analysis Manual.
CREDIT RISK GRADING (CRG):
Credit risk grading is an important tool for credit risk management as it helps the Banks & financial institutions to understand various dimensions of risk involved in different credit transactions. The aggregation of such grading across the borrowers, activities and the lines of business can provide better assessment of the quality of credit portfolio of a bank or a branch. The credit risk grading system is vital to take decisions both at the pre-sanction stage as well as post-sanction stage.
At the pre-sanction stage, credit grading helps the sanctioning authority to decide whether to lend or not to lend, what should be the loan price, what should be the extent of exposure, what should be the appropriate credit facility, what are the various facilities, what are the various risk mitigation tools to put a cap on the risk level.
At the post-sanction stage, the bank can decide about the depth of the review or renewal, frequency of review, periodicity of the grading, and other precautions to be taken.
Having considered the significance of credit risk grading, it becomes imperative for the banking system to carefully develop a credit risk-grading model that meets the objective outlined above
Definition of Credit Risk Grading:
• The Credit Risk Grading (CRG) is a collective definition based on the pre-specified scale and reflects the underlying credit-risk for a given exposure.
• A Credit Risk Grading deploys a number/ alphabet/ symbol as a primary summary indicator of risks associated with a credit exposure.
Credit Risk Grading is the basic module for developing a Credit Risk Management system.
Functions of Credit Risk Grading:
Well-managed credit risk grading systems promote bank safety and soundness by facilitating informed decision-making. Grading systems measure credit risk and differentiate individual credits and groups of credits by the risk they pose. This allows bank management and examiners to monitor changes and trends in risk levels. The process also allows bank management to manage risk to optimize returns.
Use of Credit Risk Grading:
• The Credit Risk Grading matrix allows application of uniform standards to credits to ensure a common standardized approach to assess the quality of individual obligor, credit portfolio of a unit, line of business, the branch or the Bank as a whole.
• As evident, the CRG outputs would be relevant for individual credit selection, wherein either a borrower or a particular exposure/facility is rated. The other decisions would be related to pricing (credit-spread) and specific features of the credit facility. These would largely constitute obligor level analysis.
Risk grading would also be relevant for surveillance and monitoring, internal MIS and assessing the aggregate risk profile of a Bank. It is also relevant for portfolio level analysis.
Credit Risk Grading Definitions:
For loans to individuals or businesses credit quality is typically assessed through a process of credit scoring. The criteria for Credit Risk Grading (CRG) are:
• Financial risk
• Business/industry risk
• Management risk
• Security risk
• Relationship risk.
The following CRG is being set by the Bangladesh Bank, which helps to evaluate the borrower. Risk manager will input data available from their income statement, balance sheet and cash flow to the FSS known as Financial Spread Sheet, which will calculate the risk ratio and provide the score (Appendix A). Based on the total score of profitability, risk ratio etc. manager will grade the client. A borrower will be categorized ‘Superior’ when he will provide full-cash security, or guaranteed by the government or international bank. This type of guarantee is superior because there is zero possibility of loan being classified or zero exposure. Next, a borrower is classified as ‘Good’ when the score is 85 or more. ‘Acceptable’ when his credit risk grading score is between 75 and 84. Banker need not to be worry till the score is 75 because they are considered to be ‘Good-performing loan’. When the client is ranked ‘Marginal’ banker needs to be careful about sanctioning loan because this client has 50% probability that he might classify. Then as the score become less by 10 points the client will be categorized ‘Special Mention’, ‘Substandard’, ‘Doubtful’ and ‘Bad/Loss’ when score is below 35. These four are called Non-performing loan. This scoring system is a decision making tool.
Number Grading Abbreviate Score
1 Superior SUP 100%
Fully cash secured, secured by government guarantee/international bank guarantee
2 Good GD 85+
Strong repayment capacity of the borrower, excellent liquidity, low leverage, consistent strong earnings and cash flow.
3 Acceptable ACCPT 75-84
Not strong as GOOD grade borrower but has consistent earnings, cash flow and a good record of accomplishment.
4 Marginal/Watch list MG/WL 65-74
Borrower having an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and /or inconsistent earnings.
5 Special Mention SM 55-64
Potential weaknesses that deserve management’s close attention. If left uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower.
6 Substandard SS 45-54
Weak financial condition, capacity to repay is in doubt.
7 Doubtful DF 35-44
Full repayment of principal and interest is unlikely and the possibility of loss is extremely high. Due to specifically identifiable pending factors such as litigation, liquidation procedures or capital injection, the asset is not yet classified as Bad & Loss.
8 Bad / Loss BL <35
Long outstanding with no progress in obtaining repayment or on the verge of wind up/liquidation. Prospects of recovery are poor and legal options have been pursued.

Table : Credit Rate Grading (CRG)
Source: Bangladesh Institute of Bank Management, Mirpur, Dhaka, May 2006
Ultimately, if client wants to ensure a good credit score they should keep financially fit and deal responsibly with their financial commitments. It is confidence that a loan will be paid back on schedule that determines whether credit is granted.
Re-assessing clients regularly is always a good practice for ensuring proper risk management and financial growth in banks. DBL updates the records with the latest financial statement of the client every year and sometimes every six months for clients. It is a good practice from a credit-risk control standpoint.

CHAPTER 4: LENDING DECISION
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 instill and encourages, at the individual level, the principle of self-reliance, and yields 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.
It is a fundamental precept of banking everywhere that advances are made to customers in reliance on his promise to repay, rather than the security held by the banker. Security is required by the banker as a protection against unexpected default in repayment by the customer. Thus, the object of both external and internal controls is to ensure the employment of bank funds in a profitable manner without undue risk of loss to the capital.
Although all lending involves some degree of risk, it is necessary for any bank to develop sound and safe lending policies and new lending techniques in order to keep the risk to a minimum. The principles of sound lending may, therefore, be summarized on below:
1) Safety: Safety is the first guiding principle of a prudent banker. A bank is in business to make money. It mainly uses depositor’s fund as a means of its earnings. The money of the depositor’s being repayable on demand or, after a short notice, determines the capacity of a bank as to the period for which he can safely lend it out without an uncalculated risk. Safety should never be sacrificed for profitability. Once the confidence of the depositor’s is shaken, the banker cannot carry on the banking business. On principle he, therefore, cannot indulge in unsecured or long term advances. Advances should be expected to come back to resort to legal action or to sell the securities to liquidate the advance. The repayment of the loan depends upon the borrower’s- i) capacity to pay, and ii) willingness to pay.
2) Liquidity: Liquidity is the availability of bank funds on short notice. It is not enough that the money will come back, it is also necessary that it must come back on demand or in accordance with agreed terms of repayment. The borrower must be in a position to repay within a reasonable time after a demand for repayment is made; otherwise, the liquidity position of the bank is endangered.
3) Profitability: Commercial bank has to distribute its resources in a manner that they meet the twin requirements of liquidity and profitability. A banker has; therefore, to see that major portion of the assets owned by it are not only liquid but also aim at earning a good profit.
The working funds of a bank are collected mainly by means of deposits from the public and interest has to be paid on these deposits. They have also to meet their establishment charge and other expenses. They have to make provision for depreciation of their fixed assets and also for any possible bad or doubtful debts. Interest earned by a bank on its advances is the main source of its income. The difference between the interest received on advances and the interest paid on deposits constitutes a major portion of the banker’s income. The bank will not, however, enter into a transaction unless a fair return is assured. So, there is little point in a banker granting facilities which do not bring directly or indirectly some returns.
4) Purpose: A banker would not throw away money for any purpose for which the borrower wants. The purpose should be productive so that the money not only remains safe but also provides a definite source of repayment. The banker should study the purpose for which loan is required and the resources from which the borrower is expected to repay. If the funds borrowed are employed for unproductive purposes like marriage ceremony, pleasure trip, repayment of old debts etc. or speculative activities, the repayment in the normal course will become uncertain. Banks also discourage advances for hoarding of stocks.
5) Security: It is the practice of banks not to lend money without any security. The security offered for an advance is insurance or a cushion to fall back upon in case of need. A banker would normally like to recover the advance from the sale of the security. They would prefer an advance to come back from the normal source. The importance of an adequate and acceptable security can, however, be hardly over emphasized. Security serves as a safety value for an unexpected emergency. An element of risk is always present in every advances however securities are not insisted upon, there are chances that the borrower may raise funds elsewhere by charging them to others and thereby the banker’s position is jeopardized.
Security taken by banks can be classified into two broad categories such as:
a) Primary Security may be either personal security or impersonal security or both. Personal security is given by a borrower by way of duly executed promissory note, acceptance/endorsement on a bill of exchange and personal covenants in mortgage deeds or loan agreements. Impersonal security is given when a charge is created by way of pledge/ hypothecation/mortgage over the borrower’s tangible assets, such as, goods and commodity, fixed assets, bills receivables, book debts.
b) Collateral Security may be direct or indirect. Collateral security obtained from the borrower himself to secure his own account is known as direct collateral security. For example, advance against hypothecation of stock-in-trade is strengthened by equitable mortgage of the title deeds of house property of the borrower. Indirect collateral security means any form of security given by a third person to secure a customer’s account. A guarantee given by a third party is an indirect collateral security.
6) Disposal: The advances should be as much broad-based as possible and must be in keeping with the deposit structure. The advances must not be in one particular direction or to one particular industry; because any adversity faced by that particular industry will have serious repercussions on the bank. Again, advances must not be granted in one area alone. There should be spread of advances against different securities, industries as well as areas. Thus, by a diversification of the advance a banker will be able to spread his risks and considerably improve the safety of advances.
7) National Interest: Banking industry has significant role to play in the economic development of a country. The banker would lend if the purpose of the advance is for overall national development plans necessitating flow of credit to priority sector in the larger national interest. Sometimes the need of the borrower may be considered so essential for the benefit of the national economy that despite heavy risks involved the advance may be granted. In the changing concept of banking, national interest for financing in some areas, especially in advances to agriculture, small industries, small borrowers, and export-oriented industries, are assuming great importance.

CHAPTER 5: ROLE OF CIB IN CREDIT MANAGEMENT
Due to irregular and insufficient flow of credit information in the banking system the proportion of classified loan in relation to the total credit is very high. This proportion of classified loan operated a bad culture in the banking sector. In order to eliminate the bad culture & to equip the banks with proper credit information for loan application processing, proposal for creation of (CIB) was put forward by different committees and organizations and it was established in 1992.
The main objectives of the CIB are to collect all sorts of information in respect of the borrowers from the scheduled banks and other non-bank financial institutions & creation of computer database in order to feedback the same information to the banks & other non-bank financial institutions for quick processing of new loan application, rescheduling, etc. and preparation of various reports for MIS purposes to be used in Bangladesh Bank & ministry concerned.
The Following Are The Main Functions Of CIB:
1) To standardize information flow on loans/ credits within the Bangladesh banking system.
2) To increase the speed & accuracy with which the credit information is made available to banker assessing credit role.
3) To combine the information gathered on classified loans with the information on newly sanctioned loans to the borrowers thereby making available on integrated information package.
4) To integrate the default loan information in the CIB and its timely submission to the banks for loan application processing.
5) To collect credit information on quarterly basis from Banks.
6) To make policy for keeping utmost security & confidentiality of CIB data & reports thereon.
7) To convey the CIB information to Banks as quickly as possible for quick disposal of loan application.
8) To prepare various reports on credit information of the borrowers.
9) To help the commercial Banks to generate their own (automatic) database system for time reduction in submitting the credit report to CIB for assimilation.
10) To conduct itself supervisory job (survey) in case of need to review the correctness of the information submitted by Banks.
11) To prepare summary reports on available information at CIB for management purposes.

From the above discussion, we can conclude CIB database is one of the most important information canters for the financial institutions. This information, if used properly, will definitely improve the relationship between the Bank & its customers and ultimately be helpful to eliminate the present bad culture in banking sector.

CHAPTER 6: LOANS & ADVANCES
6.01 Introduction
Banking business is like all other profit-oriented business. It depends mainly on how much profit they can make. Profit is the yardstick for the bank to move on. Banking is a business that deals only with money and credit. They work as reserves of “savings” of the community and also as lenders or investors for trade business and industry. Banks are profit oriented. They invest their funds in many to earn income. Huge amount of income derives from loans and advances. Credit is continuous process. Recovery of one credit gives rise to another credit. In this process of revolving of funds, bank earns income in the form of interest. A bank can invest its fund in many ways. Banks bake loans and advances to traders, businessmen, and industrialists against the security. Moreover nature of credit may differ in terms of security requirement, disbursement provision, terms and conditions etc. The Dhaka Bank should take proper caution in lending otherwise the risk of default in repayment may arise.
6.02 Target Customers of the Dhaka Bank Limited
The customers for the loan services are categories as follows:
• Individual person.
• Sole proprietorship firms.
• Partnership firms.
• Private limited company.
• Public limited company.
• Government and semi government organization.
• Bank employees.
6.03 Reasons For Providing Loans And Advances
Loans and advances are the survival unit of the bank because until and unless the success of this section, the survival is a question to every bank. If this section is not properly working, the bank itself may become bankrupt. This is important because this is the earning unit of the bank. Banks are accepting deposits from the depositors in condition of providing interest to them as well as safe keeping their interest. Now the question may gradually arise how the bank will provide interest to the clients and the simple answer is advance.
Why the bank provides advances to the borrowers
• To earn interest from the borrowers and give the depositors interest back.
• To accelerate economic development by providing different industrial as well as agricultural advances.
• To create employment by providing industrial loans.
• To pay the employees as well as meeting the interest groups.
We often use loans and advances as an alternative to one another. But academically this concept is incorrect. Academically advance is the combination of such items where loan is a part only. For this credit section of this bank is known as advance section.
6.04 Types of Advances

It is not possible to discuss all types of advances in details in this report but an attempt has been made to analyze the basic difference and characteristics of these advances all in the following:

Overdraft
* Overdrafts are those drawings, which are allowed by the banker in excess of the balance in the account up to a specified amount for definite period (normally 1 year) as arranged for.
* Overdraft facility is generally given to the businessmen for expansion of their business.
* Any deposit in the SOD account is treated as repayment of overdraft.
* Generally it is provided against FDR, PSP or any primary security.
* Normally it is provided with 20% margin, but it may vary.
Secured Overdraft-SOD Loan General-LG
1.
2.
3.

4.

Only businessmen can open this.
Only CD Account holder can open this.
Interest rate is 14.50% with quarterly rest.
Interest starts from the date of first withdrawal. 1.
2.
3.

4.

Anyone can open this account.
Both CD/SB account holder can open this.
Interest rate is 14.50% with quarterly rest.
Interest starts from the date of sanction of the overdraft.

Cash Credit / Working Capital- CC/WC
• Cash credit is given through the Cash Credit (CC) account.
• Cash Credit account is basically a current account; however a little difference exists between them. The distinction between a current account and a cash credit account is that the former is intended to be an account with credit balance and the letter is an account for drawing of advances.
• Operation of cash credit is same as that of overdraft. The purpose of cash credit is to meet working capital needs of traders, farmers, and industrialists.

Cash Credit (Hypothecation)
Cash Credit (Pledge)

It is a charge against a property for a debt where neither the ownership nor the possession is passed to the Banker.
It is granted only to first class party.
Instrument-Hypothecation deed.
Possession of goods is surrendered to the lender when called upon to do so.
Charge is then converted to pledge. 1.

It is a charge against a property for a debt where the ownership remains to the borrower but the possession is passed to the Banker.
It is granted to all types of parties.
Instrument- Pledge deed.
In case of default, Bank may sell the security on giving the debtor reasonable notice of sale.

Term Loans

Types of Term Loans Characteristics
1. Industrial Loans * It is given for 3 years at equal monthly installment
* Interest rate is 16.50%.
* Grace period is allowed depending on types of project.
* This is given to facilitate the industrial growth.
2. Transport Loans * This is given to accelerate the transport facility nationwide.
* Interest rate is 16.50%.
* It is given for 3 years at equal monthly installment.
* Others condition are almost same as the industrial loans.
3. House Building Loans * This is given for the construction of dwelling house.
* It is given for 3 years at equal monthly installment.
* Interest rate is 16.50%.
* It is given for 3 years at equal monthly installment.
* This loan is not given frequently.
4. Others Loan-Including Agriculture Loan * Actually Agricultural loan is not given from this branch of The Dhaka Bank but all other items excluding the mentioned above will go under this head of term loans.
STAFF LOANS
1. Staff House Building Loan-SHBL
Staff house building loan is provided to the employees having 5 years continuous confirmed service in the bank. Ceiling of this loan is 120 times of basic salary. Security of the loan is the legal mortgage of the land. Rate of interest is 1% more than Bank rate that is 8.00% simple rate (no compounding rate). Repayment procedure is 240 equal monthly installments. It is started after 6 months from the date of 1st disbursement of the loan. Repayment is adjusted from their monthly salary. Principle amount is adjusted first, and then interest is adjusted.
2. Staff Loan Against Provident Fund-SPF
This loan facility is provided only for The Dhaka Bank staff. In the provident fund, 10% of basic salary is contributed by employee in every month and also 10% of basic salary of the employee is contributed by the bank. Any continuous confirmed staff can apply for this loan. The rate of interest is 8% (simple rate). Repayment is adjusted from their monthly salary.
Head office allow loan to staff against their provident fund as per the following criterion:
SL. No. Criterion P.F. Loan Ceiling Repayment Period (Max.)
1. Employees having less than 5 years continuous confirmed service in the bank. 80% of own contribution. 48 equal monthly installments.
2. Employees having 5 years but less than 7 years continuous confirmed service in the bank. 60% of both contributions. 48 equal monthly installments.
3. Employees having 7 years but less than 10 years continuous confirmed service in the bank. 70% of both contributions. 48 equal monthly installments.
4. Employees having 1 0 years and above years continuous confirmed service in the bank. 80% of both contributions. 48 equal monthly installments.

Bank Guarantee
The bank very often requested by his customer to issue guarantees on their behalf to a third party- committing to make an unconditional payment of certain amount of money to the third party, if the customer (on whose behalf it gives guarantee) becomes liable, or creates any loss or damage to the third party. It is a contingent liability for the bank. Bank is charged 3% commission for this guarantee. After the expiry of the guarantee period Bank is no longer liable to the third party. Bank guarantee is generally issued by the banker for payment of tender.
Types of Bank Guarantee Characteristics
1. Tender or
Bid Bond * It is issued on behalf of contractor in favor of firms, giving a sort of guarantee for payment of money where tender has been approved but the contractor is not willing to proceed with it.
* It is normally issued for a period of 3 to 6 months against higher cash margin.
2. Performance
Guarantee * If a contract is awarded to the contractor he would be required to furnish a guarantee whereby his execution of contract as per terms and conditions agreed is guaranteed. This is known as performance guarantee.
* It would require high cash margin in addition to collateral security with power of attorney to collect bills.
3. Others
Guarantee * Others guarantee which is issued by the bank include-Shipping guarantee, Investment bank guarantee, Customs and Excise guarantee, Guarantee on account of foreign correspondent, and Deferred payment guarantee.
Bill Purchased & Discounted
Sometimes banks are to purchase bills of exchange of businessmen to facilitate commercial transactions. Purchasing of inland bill of exchange arising out of commercial transaction is called inland bill purchased. Bank purchase two types of inland bill which are as follows:
1. Clean Bill: Clean bills are that bill which requires no document for payment like Cheques, Demand Draft, Pay Order, Telex Transfer, and Mail Transfer.
2. Documentary Bill: When the drawer of a bill encloses the documents of title to goods, such as, Bill of Lading, Railway Receipt, Steamer Receipt, to be delivered to the drawee of the bill on payment or against acceptance of bill, as the case may be, the bill is called Documentary bill. This is often created in business and the Bank purchases these before their maturity.
In case of “Discounting of Bill” the charges are more because the bank, besides charging for the service rendered, will also charge for interest from the date of discounting the bill till the date of maturity.
In all the cases of purchasing and discounting of bills, the bank is granting advance to the customers and, therefore, “Bills Purchased and Discounted” are shown as advances by a bank in its balance sheet.
Consumer Credit Scheme
The objective of this loan is to provide credit to the customer (Service Holder) for purchasing of essential Household durable like- computer, Television, Sound System, Sewing machine, Furniture etc. The borrower executed the following documents in the Bank’s favor to secure the loan:
• Demand Promissory Note (Single).
• Letter of Arrangement.
• Letter of Installment.
• Letter of Disbursement.
• Letter of Hypothecation.
• Personal guarantee signed by the 3rd party with particulars of guarantee form-C.
• Assets and Liability position of the borrower.
• Monthly income of the borrower.
By considering those documents Bank provides loan to borrower under the following terms and conditions:
Margin: 20% on the value of the household items to be purchased.
Repayment: Repayment procedure is 24/36/48 equal monthly installments.
Security: Hypothecation of the purchased assets.
Rate of interest: 16% (Revised from time to time).
Extent of limit: The loan amount sought can not exceed 80% of the purchased price.
Diversification of Credit
As per Bangladesh Bank rule on credit, Dhaka Bank can extended 80% of its deposits. Dhaka Bank extends credit in four sectors which are organized under a broad sector:
Agricultural Credit
About 85% people of rural area are engaged in agricultural activities. But most of them do not have enough money to cultivate their land. Under this category Dhaka Bank provides credit in various agricultural activities such as crops, fisheries, and live stocks, jute & jute goods export etc.
Industrial Credit
Bangladesh is a developing country. We have to develop industry for the economic growth of the country. But most of the people of our country do not have sufficient capital to develop industry. Under this category Dhaka Bank provides credit in various industrial activities such as small & cottage industry, big and medium industry.
Commercial Credit
Dhaka Bank gives credit to purchase commercial goods. As a result the producers of goods can sale their outputs and the traders can do their business efficiently. Under this sector Dhaka Bank provides credit for various activities such as trade, export, import, working capital etc.
Other Credit
Many of our country want to organize some productive activities. But they do not achieve their goal for lack of capital to meet up their needs for capital; Dhaka Bank helps to improve the socio-economic condition of the country. Under this sector Bank provides credit for various activities such as Housing, Consumption, Construction, Transportation, and Equipment (Medical) etc.
4.05 General Procedure For Loans And Advances
The following procedure is applicable for giving loans to the customer. These are:
Application for loan
The borrower applies for the loan in the prescribed form of the bank describing the types and purpose of loan.
Getting Credit Information
The bank collects credit information about the applicant to determine the credit worthiness of the borrower. Bank collects the information about the borrower from the following sources:
• Personal investigation.
• Confidential report from other bank Head Office/Branch/ Chamber of the Commerce.
• CIB Report from Central Bank.
Information Collection
The loans and advance department gets a form filled by the party seeking a lot of information. The information’s are listed below:
• Name and address of the borrower (present and permanent).
• Constitution or status of the business.
• Date of establishment and place of incorporation.
• Particulars of properties, Partners, and Directors.
• Background and business experience of the borrowers.
• Particulars of personal assets, Names 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 for the last three years.
• Nature and details of business/products.
• Details of requested credit facilities.
• Details of securities offered.
• Proposed debt equity ratio.
• Other relevant information.
Analyzing these information
Bank then starts examination that 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, i.e. analysis financial conditions of the loan applicant is very important. If loan amount is more than 50 lac then bank goes for Lending Risk Analysis (LRA) and Spreadsheet Analysis (SA) which are recently introduced by Bangladesh Bank. According to Bangladesh Bank rule, LRA and SA are must for the loan exceed one crore.
If these two analyses reflect favorable condition and documents submitted for the loan appear to be satisfactory, then banks goes for further action.
Lending Risk Analysis-LRA:
LRA is a traditional technique used by experienced people of credit department of banks to calculate the risk of loan. CRG is an upgraded tool of LRA. LRA is a ranking whose total score is 140. Among this score, 120 is for total Business Risk and 20 for Total Security Risk.
Score Business Risk Score Security Risk
13 – 19 Poor risk 0 – 10 Poor risk
20 – 26 Acceptable risk 10 – 14 Acceptable risk
27 – 34 Marginal risk 14 – 20 Marginal risk
Above 34 Good risk Above 20 Good risk

Table: Business Risk Table: Security Risk
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.
The Dhaka Bank Credit Operations & Change Management Dept., Head Office maintains a prescribed format containing 14 pages 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, but the entire framework under which it works has given in the following manner:
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 Risks-What is the risk of failure due to disruption of sales?
b) Company Risk:
1. Company
Position Risk i) Performance Risk-What is the risk that the company position is so weak that it can not 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 conditions?
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 fails to realize the security?
ii) Security Cover Risk—what is the risk that the realized security value is less than the exposure?
6.05 Relevant Matter of Document Checked Before Sanctioning any Loan
• There must be an account of the person want to take loan. The account must have a transaction for not less than 3 months to 6 months; otherwise the loan will not be sanctioned.
• After checking the duration of account then the transaction made by the account holder must be checked. The debit credit position must be also checked, because it is related with future dealings of the borrower.
• The purpose for what the loan is taken by the borrower is another important matter to see and check. Whether the purpose is business or else must be checked with its marketability. Because there is risk of fraud and forgery by the borrower by seeing one purpose in cash of doing any illegal business.
• The banker should check through security whether it is enough or not.
6.06 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 obtained from the manager. If the loan amount crosses a certain amount (not found) manager sends the loan project to the principal office for final approval. The experts in principal office find out different projected ratios and develop an 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 risks etc.
The most important measure of appraising a loan proposal is safety of the project. 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 sure that the proposed project will be profitable venture. Profitability is assessed from the projected profit and loss statement. The security is the only tangible remains with the banker. Securing of collateral is the only weapon to recover the loan amount. So bank has to see that the collateral, it is accepting 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.
6.07 Collateral Evaluation
The Dhaka Bank, Credit Operations & Change Management Dept., Head Office is very cautious about valuation of the collateral. The bank officials and simultaneously evaluate the collateral the party offers by private firm. This two way valuation of the collateral increases the accuracy of its value estimated. Three types of value of the collateral are assumed:
• Current market price • Distress price • Price after five years
The legal officers of the bank check the documents ascertain their impurity.
6.08 Final Decision About the Project
If the loan decision remains with the branch level, branch sanctions the loan and if the approving authority is head office then the decision comes to the branch by telex or fax.

6.09 Proper Supervision of the Project
If such provision is kept in the sanction contracts, the bank officials go to the project area and 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.
6.10 Documentation of the Loan
These are the most frequently used and common documents for creation 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 SOD and CC. in this report, information about the quality and quantity of goods hypothecated furnished.
•Memorandum of deposit of title deed of property duly signed by the owners of the property with resolution of board of directors of the company owning the landed property.
•Personal guarantee: It is the additional confirmation of the borrower to repay.
•Guarantee of all 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/goods liened/mortgaged.
•Form no. 18/19 for filling charges with the register of joint stock companies under relevant section.
•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.
•Insurance Policy: It shows the up-to-date insurance profile of the customer.
•Tax Paying Certificate.
•Any document if described, as essential in the sanctioned advice sanctioned by the head office.
6.11 Existing Process of Handling Loans

Existing loan Information Evaluating project
Proposal Collection and proposal

About About Branch Level
Project Party Evaluation

Legal Evaluating Collateral
Assessment
Evaluating
By Agent

Usual Branch
Recovery Level

Recovery of Supervision Sanctioning & Decision
the loan of loan disbursing loan

Legal Head Office
Recovery Level

6.12 Execution of Documents
Execution of documents should be done with stamping a required under stamps act. There are three kinds of stamp which is used for execution of documents:
i) Judicial-They are of special mark used in the courts.
ii) Non Judicial-It is printed on special paper in different denominations and used for execution of agreements. Indemnity bond, sale deed, mortgage deed etc. are also called impressed stamp.
iii) Adhesive-Revenue stamps, Special adhesive stamps and affixed as required on documents like promissory note. It is receipt on standard printed form such as Letter of continuity, Letter of pledge, Letter of hypothecation, Letter of lien, Supplementary agreement, Letter of guarantee, Trust Receipt etc. such stamp are needed to be canceled in an effective manner so that the same can not be used again.
Documents to be executed (signed) by parties concerned competent to do so either in official capacity or in personal capacity as the case may be. In some cases such documents are required to be executed in presence of witness.
The following precautions are to be taken at the time of execution of documents. Documents to be filled in and are executed in the presence of the manager or an authorized officer of the bank. He must put his initial in pencil so that in future it can be ascertained in whose presence the documents were executed. He may have to depose in a court in future. The client should sign in accordance with the specimen signature recorded with the bank. If documents consist of more than one page, all the pages are to be signed by the expectant at the end of the form and also at the end of the schedule of securities. Mention of date and place of execution on a document is mandatory.
6.13 Creation of Charges for Securing Loan
For the safety of loan, bank requires security from the leaner so that it can recover the loan by selling security if borrower fails to repay. Creation of a charge means making it available as a cover for an advance. The method of charging should be legal, perfect, and complete. Importance of charging security:
• Protection of interest.
• Ensuring the recovery of the money lended.
• Provision against unexpected change.
• Commitment of the borrower.
Securities are two types:
a) Primary Security—Security deposited by the borrower himself to cover the loan such as FDR, Cash, PSS, PSP easily cashable items.
b) Collateral Security—any types of security on which the creditor has a personal right of action on the debtor in respect of advance.
The common methods of charging security and their nature are described below:
Mode of Security Nature of security & its characteristics
Lien * Cash, cash collateral and documents of the title to the goods.
* It is the right of the banker to hold the debtor’s properly until the debt is discharged-generally retained by the bank in its own custody or to the hands of third party with lien marked.
* The third party cannot discharge it without the permission of the bank.
* In case of need bank needs the permission from the court to sell the property.
Assignment * Borrower transfers the right of property or debt to the bank.
* Life insurance policies, supply bills, book debt of the borrower can be assigned.
Pledge * Moveable stock of raw materials, finished goods, merchandise.
* Pledge is also lien but here bank enjoys more right.
* Physical transfer of goods to the bank is must.
* Bank can sell the property without the intervention of any court, in case of default on loan.
Hypothecation * Moveable stock of raw materials, finished goods, merchandise.
* Goods remain in the hands of debtor, but documents of title to goods are handed over to the banker. This method is also called “equitable charge”.
* Bank inspects the goods regularly to judge its quality and quantity for the maximum safety of its loan.
Mortgage * Mortgage is the transfer of specific immoveable property-like land, building, plant etc.
* Most common type of mortgage is legal mortgage in which ownership is transferred to the bank by registration of the mortgage deed.
* Another method called equitable mortgage is also used in bank for creation of charge. Here mere deposit of title to goods is sufficient for creation of charge. Registration is not required. In both the cases, the mortgaged property is retained in the hand of borrower.
Trust Receipt * Intangible asset (goodwill)
* It is used in foreign exchange business.
6.14 Limitation Period
Broad guidelines regarding period of limitation are mentioned hereunder. However, for many clarifications and the safeguard for the interest of the bank, Branch manager must consult with the legal adviser of the bank regarding application of limitation period. Legal action for recovery must be taken within limitation period. The period of limitation within which a suit for recovery of an advance lies, is the ordinary period of three years from the date of which the advance is made. Law of limitation in case of equitable/legal mortgage of property is 12 (twelve) years. In case of bill of exchange and promissory notes payable on demand, the period of limitation, which is of 3 (three) years, begins to run from the date it bears. In this case the date column is left blank but the signature of the borrowers dated, the limitation period will begin to run from the date whichever is later. When such instruments are payable at sight, the date of presentation and in the case of bills and notes payable at a future date, the due date will be the date of the commencement of the period of limitation.
6.15 Loan Classification
When the repayment schedule of a borrower is disrupted then the question of classification arises. Every bank has to send a quarterly CIB report to the Bangladesh Bank for amounts due up to Tk 50000 mentioning the name of the borrower and the purpose for which loan has been sanctioned and a monthly statement for the amount due more than TK 1 crore. Bangladesh Bank provides CF (Classified Form) to every bank for preparing this report. The procedure for loan classification is given by Bangladesh Bank under BRPD circular no. 16, dated 06/12/1998. According to Bangladesh Bank there are 4 types of loan. If any borrower fails to repay his amount or installment within the time period then it will fall under the following classification status:
Classification Continuous loan C/C, O/D Demand Loan (LIM, PAD, FBD, IBP) Term Loan up to 5 years TR above 5 years.
Unclassified Less than 3 months Less than 3 months Less than 6 months Less than 12 months
Substandard More than 3 months but less than 6 months More than 3 months but less than 6 months 6 months or more 12 months or more
Doubtful More than 6 months but less than 12 months More than 6 months but less than 12 months 12 months or more 18 months or more
Bad Loan 12 months or more 12 months or more 1 8 months or more 24 months or more
Bank should preserve the following provisions for continuous, forced and term loan:
• For loan unclassified ———1%
• For loan classified ———20%
• For loan doubtful ———50%
• For loan bad debt ———100%
CHAPTER7: RECOVERY OF LOANS AND ADVANCES
To lend money is an easy matter. To be sure of recovery of the loan is not that easy. No banker whatsoever careful and diligent he is in granting advances succeeds on getting all the money that has been advanced. With the outcome of social responsibilities of the commercial banks to make advances to the priority sectors the situation has been becoming more and more complex. The most serious problem that affects the entire banking industry today is the problem of recovery of bank advances.
In whatever from bank advances is granted, they are repayable on demand or at the expiry of some fixed period. Overdraft and Cash Credit are legally repayable on demand. Loans are repayable on the expiry of the periods for which they are granted. In case loan is repayable in installments and default occurs in the payment of any installment, entire loan usually becomes immediately recoverable at the option of the bank. Bills of Exchange discounted are payable on maturity. Banker has to keep a close watch on the borrower and to take adequate follow-up measures for ensuring that recovery of advance is smooth and timely. A sound practice to follow in handling advance, the systematic plan of repayment. From the bank’s point of view, this is important for at least two reasons:
i) If the borrower has no or has indefinite plans for repayment of the advance, it may indicate that the loan is too risky or is too speculative for the bank to handle.
ii) If the borrower has a plan for the repayment of the loan, the banker is placed in a position to consider the source from which the funds will come for repayment and to analyze the risk involved more intelligently.
7.01 Reasons for non-recovery of loans/advances
a) •Not careful about the weak points while preparing credit proposal.
• Negligence in carefully implementing terms of sanction letter, as a result, loans remain faulty.
• Borrowers take advantage of the situation.
• Failure of the controlling office in monitoring the recovery.
b) Selection of borrower’s essential pre-requests of good loan not properly done.
• His 3 C’s 3 R’s or 5 C’s or 6 C’s not properly assessed, hence recovery becomes difficult.
c) Feasibility study not properly done, project not properly implemented leading to loan becoming undue.
d) All important required papers not obtained before disbursement, law officer not consulted legal actions become difficult.
e) Wrong valuation of pledged goods mortgaged properly over valuation. Branch managers in some cases not aware that goods actually pledged.
f) Loans/advances do not become overdue overnight -corrective measures are not taken when symptoms detected.
g) Lack of control and proper supervision, diversion,
h) Inspection of go-downs/factories not done.
• Stereotype inspection.
• Borrowers take advantages.
• Goods are either damaged or destroyed or removed for want of timely action.
7.02 Procedure for Recovery
If a borrower fails to make repayment of the dues the bank has to consider what steps need to be taken to recover the debt. Banker will eventually have to take the following steps to recover the stuck up advances.
a) Existing loans (all categories):
• Diarizing due dates of repayment.
• Regular follow-up.
• Periodical inspection.
• Surprise visits.
b) Overdue loans/advances:
• Preparation of quarterly lists: Branch copy, controlling office copy and head office copy.
• Attempts made for adjustment of loans before application of quarterly interest.
• Must be adjusted before being classified.
c) Classified loans/advances (Substandard, doubtful and bad.):
• Targets for recovery.
• Steps for classification.
d) Interest exemption:
• Quick decision.
• Communication of decision quickly.
7.03 Remedial Measures of Loan Recovery
• Ascertain reasons for non-payment.
• Persuasion.
• Negotiation.
• Litigation.
• Training and motivating of staff.
• Classification of Borrowers to A, B, C & D.
• Manager handles “D” type customer.
7.04 Strategies for Recovering of Loan
Following are some strategies that yielded appreciable results:
• Tailor-made strategies for different problems must be prescribed.
• Timely wisdom alone works as timely strategy.
• Recovery often proves effective when follow-up done with co-obligates.
• Old loans cleared to secure new loans to be taken advantage.
• Clean loans not recovered are regularized by taking some sort of security to have some hold on borrowers.
• Friendship and exchange of courtesies with dites of the place like DC, SP, elected representatives credit moral impact on borrowers.
7.05 Warning Signal
• Material change.
• Management composition.
• Economic trends- local and international.
• Client performance versus budget.
• Bank versus client relationship.
• Evidence of weakness in borrowers.
7.06 Prevention
• Understand client’s business.
• Analyze Client’s financials.
• Frequent visits to clients.
• Perfected legal documentation.
• Security covers for Bank’s risk.
• Investigate market rumors.
• Use credit bureau checking.
7.07 Corrective Measure:
• Legal review of documents & situation.
• Workout strategy & action.
• Loss evaluation versus security cover.
• Stay or leave decision & reclassification.
• Continuous visits to the client (Defaulter).
• Negotiation versus court action.
• Legal expenses multiplying.
• Obtain support- senior management, legal counsel and specialist; legal, business, and government.
7.08 Different Types of Legal Actions:
When the banks fail to recover the loans through pursuance, they file suit against the defaulting borrowers in competent courts of law through banks approved lawyers to ensure recovery through legal course of action:
• Filling certificate cases under public demand recovery act. 1913.
• Recovery of loans through sale of mortgaged property or taking over management of the defaulting concern.
• Filing criminal cases for breach of trust under 406/420 BPC.
• Filing money suit cases under Artha Rin Adalat Act 1990.
• Filing Bankruptcy cases under Bankruptcy Act 1997.
Prior to setting of Artha Rin Adalat in 1990, Bank’s had to file cases in sub-judge courts, commercial courts, assistant judge courts and certificate cases to the authorized certificate officers in districts & thanas through out the country under Public Demand Recovery Act, 1913 and thousands of cases have been pending for years together in various courts. This legal framework was found quickly inadequate to cope up with the challenges of rapidly changing financial environment.

CHAPTER 8: CREDIT POLICY
8.01 Meaning of Credit Policy
Policy entails projected course of action. Each bank should have its own policy of granting credit although credit is always a matter of judgment applying common sense in the light of one’s own experience.
A sound credit policy includes among other things safety of funds invested vis-à-vis profitability of the bank. Encouraging maximum number of small loans is better than concentration in a particular type of advances which ensures sufficient liquidity with least incidence of bad debts.
It has to be borne in mind that a good loan allowed to a properly selected borrower is half collected. In order to make a good loan there should have a good loan policy.
8.02 Objective of Credit Policy
There are some objectives behind a written credit policy that are as follows:
• To provide a guideline for giving loan.
• Prompt response to the customer need.
• Shorten the procedure of giving loan.
• Reduce the volume of work from top level management.
• Delegation of authority to the middle level management.
• To check and balance the operational activities.
8.03 Importance of Credit Policy:
The necessity of a written credit policy is to provide a framework of standards and points of reference within which individual lending personnel can operate with confidence, relative uniformity, and flexibility. Lending officers will then be able to make their own decisions within delegated authority, without the necessity for constant referral to higher management.
Without such a written policy, there is a tendency to concentrate all decision making in one or two people at or near the top, with the obvious disadvantages of slower decisions and the inability of loan officers to develop their full potential. The other tendency is to foster a dangerous diversity of lending practices and philosophies within the organization, probably leading ultimately to an in-ordinate number of problem loans. In addition to establishing uniform guidelines for loan officers and satisfying the regulator agencies, a written credit policy can aid bank management in defining the objectives of the bank. Like any other business, the commercial banks establish particular objectives to be met.
8.04 Formulation of Credit Policy:
One of the questions that should arise in a discussion of credit policy is who should formulate the policy. Although the ultimate responsibility lays at the highest level in the organization i.e. the board of directors, yet the actual drafting shall have to be done by the senior lending officer in consultation with the chief executive officer and with contributions from senior officers, associates and subordinates. Obviously, the level of origin will vary with the size and structure of the organization. The matter than be referred to the board for approval after careful examination, consideration and discussion.
8.05 Essential Components of A Sound Credit Policy:
There can be some variations based on the needs of a particular organization, but at least the following areas should be covered in any comprehensive statement of credit policy:
1. Legal consideration: The bank’s legal lending limit and other legal constraints should be set forth to avoid inadvertent violation of banking regulations.
2. Delegation of authority: Each individual authorized to extend credit should know precisely how much and under what conditions he or she may commit the bank’s funds. These authorities should be approved, at least annually, by written resolution of the board of directors and kept current at all times.
3. Types of credit extension: One of the most substances parts of a loan policy is a delineation of which types of loans are acceptable and which type are not.
4. Pricing: In any profit motivated endeavor, the price to be charged for the goods or services rendered is of paramount. Without it, individuals have few guidelines for quoting rates or fees, and the variations resulting from human nature will be a source of customer dissatisfaction.
5. Market area: Each bank should establish its proper market area, based upon, among other things, the size and sophistication of its organization, its capital standpoint, defining one’s market area is probably more important in the lending function than in any other aspect of banking.
6. Loan standards: This is a definition of the types of credit to be extended, wherein the qualitative standards for acceptable loans are set forth.
7. Credit granting procedures: This subject may be covered in a separate manual, and usual is in larger banks. At any rate, it should not be overlooked because proper procedures are essential in loan establishing policy and standards. Without proper procedures for granting credit and constant policing to ensure that these procedures are meticulous carried out, the best conceived loan policy will not function and, inevitably, problems will develop.

8.06. Lending Guidelines
As the Bank have a high rate of non performing loans. Banks risk taking applied should be contained and our focus should be to maintain a credit portfolio keeping in mind of Banks capital adequacy and recovery strength. Thus Banks strategy will be invigorating loan processing steps including identifying, measuring, containing risks as well as maintaining a balance portfolio through minimizing loan concentration, encouraging loan diversification, expanding product range, streamlining security, insurance etc. as buffer against unexpected cash flow.
Considering the above few Lending guidelines are elaborated below:
8.07 Industry and business segment focus

Industry Focus Trading /Business Focus
i. Textile i. Distribution
ii. Pharmaceuticals ii. Brick field
iii. Agro-based iii. Rice Mill/Flour Mill/Oil Mill.
iv. Food and allied iv. Work order
v. Telecommunication v. Yarn trading
vi. Power generation and distribution vi. Cloth merchant
vii. Health care vii. Industrial spares
viii. Entertainment viii. Hardware
ix. Services ix. Electronic & Electrical goods
x. Chemicals x. Construction materials
xi. Transport xi. Fish trading
xii. Infrastructure Development xii. Grocery
xiii. Linkage industries xiii. Wholesale/retails
xiv. Information Technology xiv. Others as decided from time to time
xv. Ceramics
xvi. Others as decided from time to time
8.08 Types of credit facilities:
Bank will go for:
• Term financing for new project and BMRE of existing projects (Large, Medium, SME, SCI)
• Working Capital for industries, trading, services and others (Large, Medium, SME, SCI)
• Trade finance for import and export –
• Lease Finance.
• Small loan for Traders, Micro enterprise and other productive small venture.
• Consumer Finance
• Fee business
• Islamic mode of finance
Chapter 9: Credit Appraisal System of Dhaka Bank Ltd.
There is no hard and fast procedure of managing credit, yet is should follow the instructions of the Bangladesh Bank, Central Bank of Bangladesh and the Circular of Head Office from time to tome. The first step of credit proceedings is the request for credit from the clients. Then scrutinizing and collection of information from primary and secondary sources take place. Credit appraisal and evaluation is the most important part of credit management. On the basis of evaluation approval is given by the higher-authority with certain conditions to be fulfilled. Sanction of credit is done by the sanctioning officer, who has the authority to sanction the Credits. After fulfilling the conditions the credit is disbursed. Credit monitoring and reviewing start at the time of disbursement. Necessary steps should be taken to minimize the risk and increase the return of the Bank. Delegation of Business Power is important in credit sanctioning. Four-tire level is maintained in case of large amount of credit sanctioning. Lending risk analysis is also done in case of credit above Tk. 50 lac.

9.1 Requests for Credit from the Client
Bank provides credit facilities to the people who are credit worthy to the bank. Credit worthiness depends on the credibility, financial capability, and feasibility of the project and management ability of the credits to earn profits. When bank is satisfied with all these then the client is provided with the requested credit. At this point it should be mentioned that the client has to go through an interview where his credit potentiality is justified through critical observation. When credit officer is satisfied with the customer he is asked to submit an application and to fill up a form with specific details.
Credit Application:
Completeness of information can best be obtained by requesting the applicant to fill out a comprehensive application. Psychological attitudes toward the seriousness of credit obligations are improved when the application is rather formal and complete.
When the customer fills in the application, it is well for the interviewer to look over the form and to provide supplemental information, which will assure completion of the blanks not filled in, or which probes more deeply into the questionable areas. It is well to provide space on the form for the recording of more information after the customer has left. Points in favor of having the applicant fill out the form are that fewer skilled credit personnel are necessary and that more customers can be accommodated in the same space.
Signature and Contract:
It is regarded as good credit practice to have the applicant sign the application. Some credit departments add words above the signature, which make the application a rather formal written contract. The clause may be a testimony that the information is given for the purpose of obtaining credit and that the facts are complete and correct. The clause may also be recite the terms and be drawn as contract between creditor and debtor.
9.2 Scrutinizing and Collection of Information
In case of clients who have previous record of taking credit facilities, their in-file records are examined to see whether the client has a good record of payments in time.
Information gathered through direct inquiry:
Direct inquiry one of the common methods of obtaining information to verify facts presented on the application of during the interview of an applicant for an initial credit transaction. A careful distinction is made between obtaining credit information directly form sources having such facts and between buying somewhat similar credit data in the form of prepared reports from the credit reporting bureaus and agencies.
Information gathered through in-file ledger fact:
In-file ledger facts are one of the most important sources of information available to credit committee whether to accept or reject a larger amount of credit from an established credit customer. From the in-file records, credit analysts have at their disposal the experience of the concern with the customer. They know the customer’s payment habits, the complaints registered, the collection efforts, if needed to keep the customer in line with the established terms.
9.3 Credit Appraising & Presentation of Credit Proposal for Approval
When credit officer is satisfied with his credit worthiness, financial capability, management ability and feasibility of the project through credit appraisal of clients in a prescribed form, he can hope for credit from the bank. Credit appraisal is done through ‘credit appraisal form’. Ratio analysis is give importance in case of project finance. But most of the medium quality loans are given on the basis of financial capability of repaying and credit worthiness of the client. Lending risk analysis is done in a prescribed form in case of large amount of loan, above 50 Lac.
Credit officer prepares a credit proposal along with the prescribed ‘Credit Proposal Form’. Credit officer measures the risk associated with the credit facility. No credit proposal can be put for approval unless there has been a complete written analysis. It is absolute responsibility of the Proposing Officer to ensure that all necessary proposal documentation have been collected before the facility request is sent to the Sanctioning Officer.
9.4 Approval of Credit by Higher Authority
Branch Credit Committee: Branch credit committee to be headed by the Branch Manager, other members to be selected by the manager in consultation with Head Office.
Head Office Credit committee: Head office credit in accordance with authority established and delegated by the Board of Directors.
 Reviewing, analyzing and approving extension of credit in accordance with authority established and delegated by the Board of Directors.
 Evaluate the quality of tending staff in the bank & take appropriate steps to improve upon.
 Recommending credit proposal to the Executive Committee/Board of Directors which are beyond the delegated authority.
 Ensuring, that all elements of Credit application i.e. Forms, Analysis of statements and other papers have been obtained and are in order.
 Confirming that the transaction is consistent with existing loan policy and Bangladesh Bank guidelines & if not the Committee may prepare a recommendation form an exception to or change in policy for consideration by the Executive Committee/Board of Directors.
Executive Committee: Approving credit facilities as delegated by the Board of Directors. Supervising the implementation of the directives of the Board of Directors. Reviewing of each extension of credit approval by the Head Office Credit Committee/Managing Director. Keeping Board of Directors informed covering all these aspect.
Board of Directors: Establishing overall policies and procedures for approving and reviewing credits. Delegating authority to approve and review credits. Approving credit for which authority is not delegated. Approving all extensions of credit which are contrary to bank’s written credit policies.
9.5 Sanction of Credit
Most important step of providing credit facility is the sanctioning of credit. Because sanctioning authority will be held responsible for any discrepancy. In this step all the documentation is completed and the customer is sent an advising letter for the credit facility along with all the terms and conditions.
Norms maintained in sanctioning of credits are described below:
 Credit will be sanctioned and disbursed strictly in terms of the approved Credit Operational Manual of the Bank and Head Office Circulars issued from time to time.
 All norms informed through the Circulars of Credit Division in particular and all other relevant circulars in general, which are to be followed meticulously while exercising power.
 Credits will be subject of Bangladesh Bank restriction.
 The party to whom credit will be allowed should be as far as possible within the command area i.e. Area of operation of the Branch. Deviations, if any are to be explicitly explained in the proposal.
 No Sanctioning Officer can sanction any credit to any of his near relations and to any firm/company where his relations have financial interest. Such cases should be sent to the Head Office.
 All Sanctioning Officers maintain a Sanctioned Register for recording serially all the credits sanctioned by him. Sanctioning officer will accountable for non-recovery due to his injudicious decision.
 All approval of credit facilities must be conveyed under dual signature. Ideally both the signatories must have the required lending authority. If however, two lending officers of the required lending are not available, one of the signatories must have the required authority.
9.6 Disbursement of Credit
Disbursement of credits presupposes observance of all norms and procedures, which are conveyed through different Circulars of Head Office, issued from time to time.
9.7 Credit Administration and File Maintenance
Credit File Maintenance: The credit file for each facility shall contain all information necessary to facilitate ready monitoring of that facility. It should contain a through history of the customer relationship to help credit officer’: track any problems, assist a newly assigned credit officer in understanding the customer and make the lending process transparent. Primary items in Credit File include:

 Credit application and Credit approval notes/analysis. Evidence of credit approval and data upon which approval was granted together with any comments, if appropriate.
 Copy of sanction and loan agreement. A checklist along with copies of all legal & banking documents obtained / to be obtained. Details and 6 monthly updated information of all related facilities to the name customer group,
 All supporting data such as financial statements and analysis, references, credit investigation results, CIB & other Bank reports and notes of all discussions with the borrower and other relevant parties with paper clipping.
 Correspondences call reports, site visit reports, stock report etc. each credit file shall be maintained in a secured location and where access restricted to authorized personnel’s only. Copies of the information may be kept where regular access is required.
Facility Evidence Maintenance: All charge documents should be maintained in a place of utmost security. All charge documents as prescribed by the bank & local laws, for the relevant credit facility, Signed credit agreement, Signed guarantees or other evidence of credit security or collateral agreement shall be kept in fire proof safe under the custody of Branch manager or his designate alternative and another officer. A register of charge and security documents should be maintained under the supervision of the Branch Manager.
9.8 Credit Monitoring and Reviewing
It is the responsibility of the Manager to monitor the over all profile and risk aspect of the credit portfolio in accordance with the criteria set down in the Bank Credit Policy. Such monitoring shall be evidenced from the comments of the Manager in monthly Call/Visit Report and be kept in the Credit File with a copy to the Head Office.
This Review shall be formally performed at intervals prescribed by Head Office but it is the responsibility of the Manger to ensure at all times that the credit portfolio meets the standard set forth by the Bank.
Periodic Review and Follow-up should aim at ensuring:
I. Terms of approval has been maintained.
II. Conduct (turnover, regularity of repayment etc.) of the borrowing accounts during the period under the review has been satisfactory or as expected.
III. Continuing value of the collateral is adequate.
IV. There are no adverse trends in market, economic and political conditions which may endanger the reliability of the facility.
V. Business reciprocity offered and received is commensurate with the facilities allowed.
VI. Earning from the account is cost effective (i.e. adequate to meet business cost of funds and leave sufficient margin for adequate risk reward, overheads and profits).
VII. Borrowers business is being satisfactorily conducted as reflected through a review and analysis of the financial and operating statements.
Assessment of Group Exposure: If facilities of any one customer group are booked in a number of locations, an officer designated by Head Office shall be responsible for the management of the Bank’s global exposure to that customer group. Any development in the customer’s which may effect the management of the facility and in particular the credit rating assigned to the customer, shall be documented and advised by the designated officer to the concerned Branch & to the Head Office, Credit Division.
General Norms for Monitoring Credit Facilities: The Branches will submit a monthly statement of the credits allowed under the discretionary powers of the Manager to the Head Office irrespective whether the same are outstanding or not on the date of return.
9.9 Taking Precaution/Legal Action against Delinquent Clients
The responsibility for review and classification of credit facilities starts at Branch level. The frequency of the supervision and monitoring depends on the classification of credits.
Sub-standard Advances: This classification contains accounts where irregularities have occurred but where such irregularities are considered to be either “technical” or “temporary” in nature. The main criteria for a sub-standard advance are that despite these “technical” or temporary irregularities no loss is expected to arise.
These accounts will require close supervision by the management to ensure that the situation does not deteriorate further.
Provision @ 15% of the base is required for debt in this classification where the base is the outstanding balance less interest kept in Interest Suspense Account less the value of eligible securities.
Doubtful Debt: This classification contains debts where doubt exists the full recoverability of the principal and/or interest. Although a loss is anticipated it is not possible at this state to quantify the exact extent of that loss. Management is required to handle such debts with the utmost caution to either avoid or minimize the Bank’s losses. Provision @ 50% of the base is required for debts in this classification.
Bad-Debts: These facilities are considered to be uncorrectable shall be made a provision @ 100% of the base.
Special Mention: In addition to the above classification rating, there should be another category which is not classified but where special attention is necessary to keep the account out of classification. This category will be known as Special Mention. Facilities required special monitoring are to be flagged or put on a watch list. No provision is necessary for this category.

CHAPTER 10: PERFORMANCE ANLYSIS OF DHAKA BANK LIMITED
10.01 POSITION OF THE DHAKA BANK AT A GLANCE FOR THE LAST 5 YEARS.

(TK in Million)

Particulars 2004 2005 2006 2007 2008
Income Statement
Interest Income 2,011 2,897 4,342 5,636 7,171
Interest Expense 1,389 2,149 3,380 4,049 5,214
Net Interest Income 622 748 962 1,587 1,958
Non Interest Income 648 739 1,110 1,582 1,929
Non Interest Expense 523 594 889 1,159 1,353
Net Non Interest Income 125 145 221 423 576
Profit before Tax & Provision 747 893 1,183 2,010 2,533
Provision for Loans & Assets 114 125 233 479 669
Provision for Tax (including Deferred Tax) 275 305 370 827 1,025
Profit after Tax 358 463 580 704 839

Balance Sheet
Authorize Capital 1,000 2,650 2,650 6,000 6,000
Paid up Capital 664 1,228 1,289 1,547 1,934
Reserve Funds & Other Reserve 824 988 1,262 1,578 2,065
Shareholders’ Equity (Capital & Reserve) 1,488 2,216 2,551 3,125 4,000
Deposits (Base & Bank excluding Call) 22,270 28,439 41,554 48,731 56,986
Loans & Advances 16,539 23,372 34,049 39,972 49,698
Investments 3,078 3,926 5,378 5,972 7,239
Fixed Assets 125 122 217 291 387
Total Assets ( excluding off-balance sheet items) 28,178 33,072 47,594 57,443 71,137

Foreign Exchange Business
Import Business 28,048 30,213 46,277 49,496 65,737
Export Business 8,881 13,505 23,268 31,081 39,038
Guarantee Business 3,663 6,099 6,473 6,523 7,887
Inward Foreign Remittance 1,110 3,377 16,764 10,609 11,834

Capital Measures
Core Capital ( Tier I ) 1488 2216 2551 3126 3964
Supplementary Capital (Tier II ) 163 237 373 554 844
Tier I Capital Ratio 9.47 9.94 8.23 8.80 9.77
Tier II Capital Ratio 1.04 1.06 1.2 1.56 2.08
Total Capital 1651 2,453 2,924 3,680 4,808
Total Capital Ratio 10.51 11.00 9.43 10.36 11.84

Credit Quality
Volume of Non-performing loans 271 351 554 1,258 1,908
% of NPLs to Total Loans & Advances 1.65 1.51 1.64 3.15 3.84
Provision for unclassified Loans 162 236 372 465 620
Provision for Classified Loans 76 103 172 439 825

Share Information
Number of Shares Outstanding 6.64 12.28 12.89 15.47 19.34
Earning per Share (Taka) 61 44 45 36 43
Book Value per share (Taka) 224 180 198 202 207
Market Price per share (Taka) 850 469 466 706 361
Price Earning Ratio (Times) 14.03 10.66 10.32 15.33 8.31
Price Equity Ratio (Times) 3.79 2.60 2.35 3.49 1.74
Dividend per Share:
Cash Dividend (%) 10 20 10 – 15
Bonus Share 7:20 1:20 1:5 1:4 1:10

Operating Performance Ratio
Net Interest Margin 3.57 3.43 3.77 4.54 4.60
Credit / Deposit Ratio (%) 74.26 82.18 81.94 82.03 87.21
Current Ratio (Times) 1.60 1.33 1.24 1.38 1.28
Return on Equity (ROE) % 24.06 20.89 22.74 22.53 20.97
Return on Assets (ROA) % 1.27 1.40 1.22 1.23 1.18
Cost of Deposit (%) 6.75 8.13 9.15 8.97 9.40
Cost / Income ratio in operating business (%) 71.91 75.44 78.14 72.15 72.16
• Provisional Figures

10.02 Analysis of the Credit Operations of Dhaka Bank Limited

(Information Up to June-2008)
Industry-wise Loans & Advances Amounts (TK in Million)
1. Agricultural Industries 118.614
2. Pharmaceuticals Industries 759.435
3. Textile & Garment Industries 9019.106
4. Chemical Industries 1046.513
5. Food & alied Industries 2102.683
6. Transport & Communication 2089.973
7. Electronics & Automobile Industries 532.466
8. Housing & Construction Industries 4327.219
9. Engineering & Construction Industries including ship Breaking 2640.755
10. Energy & Power Industries 572.829
11. Service Industries 829.978
12. Other Industries 20771.59
Total 44811.16

10.03 Classified Loans and Advances of the Dhaka Bank Credit Operations
(Figure in Million Taka)
Classified Status Amounts Outstanding Interests Suspense (Provision)
1. Unclassified 43041.8 430.42
2. Substandard 167.7013 107.9362
3. Doubtful 250.1852 194.2423
4. Bad & Loss 1161.112 576.6346
5. Total Classified 1578.999 878.8131
6. Total As Per CL 44620.8 43793.91
7. Staff Loan Against PF 190.3588 –
(The Above Information Is Furnished Up to June-2008)

10.04 SWOT Analysis
In order to develop marketing strategy SWOT analysis is very vital. In the process of making a SWOT marketer identifies the strength and weakness of the company and also the opportunities and threat to the company. The SWOT analysis of Dhaka Bank Limited has given below:
Strengths
1. Dhaka Bank Limited has nation wide image of providing quality service. It provides excellent and prompt services with higher degree of secrecy to corporate and mass level of customers.
2. It has an excellent management team and disciplined workforce.
3. NCC abides by a set of core values that reflects high commitment to customer:
• Responsive to customers needs.
• Flexible in approach
• Professional in manner
• Strive for service excellence.
1. A group of qualified, experienced, dedicated and well-trained personnel employing the best effort to accomplish the organizational objective.
4. String network through out the country and correspondent relationship with almost all international and local banks operating in Bangladesh created a good accessibility and relationship with people.
Weakness
1. Most to the employees are not properly trained.
2. The appropriate employees are not in the appropriate position.
3. DBL currently don’t have any marketing division and any strong marketing activities through mass media e.g. Television. TV ads playa vital role in awareness building. DBL has no such TV ad campaign.
4. In order to be more competitive in the market DBL should come up with more new attractive products. This one of the weakness that DBL is currently passing through.
Opportunity
1. Bonus is given four times in a year this is another reason of the employee satisfaction.
2. Promotion system of Dhaka Bank is perfectly structure for the employee inspiration. Generally promotion has been every three years after.
3. Incentives are given to the employee from profit.
4. Rewards are offered to the employees who are able to arrange handsome amount of deposit.
Threat
1. Some foreign banks and private banks are coming threat to Dhaka Bank. At present in retail banking Standard Chartered Bank and in business banking Standard Chartered Bank, Hong Kong Shanghai Banking Corporation, CITY Bank N.A. are rival of Dhaka Bank. Also some private banks like IFIC Bank, Dutch-Bangla Bank, Eastern Bank, Prime Bank, Bank Asia etc. are becoming the new competitions for the bank and will be creating a competitive pressure on Dhaka Bank.
2. Now a day’s different foreign and private bank are also offering similar type of retail lending products like Dhaka Bank. So, if all competitions fight with the same weapons, the natural result is declining profit.
3. Bangladesh bank provides some rules and regulations for all banking institutions. Whether the rules and regulations suit the organization or not, it must obey these that sometimes impose barriers on daily normal operation.

CHAPTER 11: CONCLUSION AND RECOMMENDATIONS
11.01 Conclusion
During the two months internship program at Credit Operations & Change Management Dept., Head Office, almost all the desks have been observed more or less. This internship program, in first, has been arranged for gaining knowledge of practical banking and to compare this practical knowledge with theoretical knowledge. Comparing practical knowledge with theoretical involves identification of weakness in the activities and making recommendations for solving the weakness identified. Though all departments and sections are covered in the internship program, it is not possible to go to the depth of each activities of branch because of time limitation. So, the objectives of this internship program have not been fulfilled with complete satisfaction. However, highest effort has been given to achieve the objectives the internship program.
During the internship, it is found that the branch provides all the conventional banking services as well as some specialized financing activities to the economy. The Credit department provides all the services related to international and disburse credit if the proposal is sound. As specialized financing, it provides term finance to medium and small-scale industries. Thus, by providing this various services, Credit Operations & Change Management Dept., Head Office, is playing an important role in the banking system and expansion of business & industry for economic development of Bangladesh.