Credit Risk Management in Uttara Bank Limited
Chapter – 1 Introduction 1.1 Rational Credit is an arrangement whereby bank acting at the request and on the instructions of a customer or on its own behalf to make a payment to or to the order of a third party or is to accept and pay bills of exchange drawn by the beneficiary. In an economy banks play the role of an intermediary that channels resources from the surplus group to the deficit group. So obviously one of the core functions of Commercial banks is to sanction Credit facility to its customers as per requirement. UTTARA BANK LTD. Bank’s Mission is to actively participate in the growth and expansion of our national economy by providing Credit to variable customers in most efficient way of delivery and at a competitive price. Risk is inherent in all aspects of a commercial operation; however for Banks and financial institutions, credit risk is an essential factor that needs to be managed. Credit risk is the possibility that a borrower or counter party may fail to meet its obligations in accordance with agreed terms. Credit risk, therefore, arises from the bank’s dealings with or lending to corporate, individuals and other banks or financial institutions. In general, a banking system aggregates a high number of low value deposits to fund enterprises with a smaller number of high value loans. This intermediation
through a well functioning bank helps to achieve some economic benefits for the depositors, the borrowers and above all -- the economy. The Bank must allocate loans effectively for achieving these broad objectives of the Economy. While identifying profitable enterprises, the Bank – in fact -- identifies risks of the borrower and business in order to allow loan in the context of its risk–return profile. In other words, Banks are in the business of risk taking; as such risk management is viewed as a core function of banking.
As a financial enterprise, the prime objective of UTTARA BANK LTD. Bank is to maximize stakeholders’ value (share holders, depositors, borrowers, employees and the public). The loan portfolio of the Bank is the primary source of earnings. But it may also be Bank’s greatest concern for survival and sustainable growth in an ever-changing environment.
1.2 The Objective Of The Report The prime objective of the report is to get practical exposure to organizational environment as well as to understand the system and methodology adopted in conducting day to day banking by The Uttara Bank Limited. Besides this report has been composed to obtain the following objectives: •
Credit products and facilities
•
Techniques of credit investigation
•
Risks that affect lending activities and their minimization.
•
Tools and techniques of measuring risks.
•
Credit administration, monitoring, following-up process and recovery mechanism
•
Credit portfolio
•
Asset quality, Capital adequacy and Earnings of Uttara Bank.
•
To assess the decision undertaken by the top level management to keep the rein with the competitiveness of the market.
•
To have a clear concept on departmentalization and the authority entrusted on different officials.
•
To increase the analytical capability on banking management of the Uttara Bank
•
Recommending some guidelines to improve the effectiveness .
•
.
•
To acquaint with the techniques of supervision, monitoring, and recovery of various Investments (Credits).
•
To make some suggestion in order to improvement Credit approval and monitoring process.
1.3 Methodology of the study This study aims to analyse the credit risk management of commercial Banks in context of Uttara Bank Limited. Basically this is a theoretical study.
1.4 Sources of data & information Data and information are mainly collected from secondary sources i.e. Policy Guidelines, records, manuals and publications of UTTARA BANK LTD.; printed materials of Bangladesh Bank, Text book, website etc. The collection of data was mainly concentrated on the term loan portfolio of the bank and data from different branches were colleted from different statements.
1.4.1. Primary Sources :
The Primary data has been gathered by formal discussion with the credit officials and borrowers.
1.4.2. Secondary Sources : Secondary data has also been collected to make the report move concrete. These data has been collected from different financial statements, annual reports/ research reports, electronic media, bank document etc.
1.5 Limitations The Internship report is likely to have following limitations: •
All the variables used in credit risk grading could not be feed in the model to determine the effectiveness in predicting the default risk due to limited access to the data of the bank.
•
Due to shortage of time and inadequate information, in-depth analysis
could
not be done in the report.
Chapter - 2 OVERVIEW OF FINANCIAL SECTOR IN UTTARA BANK LTD. 2.1 Background The financial system in Bangladesh embraces four categories of scheduled banks, various Co-operative Banks, Non-Bank Financial Institutions (NBFIs), Insurance Companies, Credit Rating Agencies and two stock exchanges. In Banking sector of Bangladesh in addition to the Bangladesh Bank (the Central Bank), there are 4 NCBs, 5 state owned SBs, 30 domestic PCBs, 9 FCBs and 28 NBFIs as of 31st December 2005. Figure-1 briefly presents these financial
market players in an organized way.
2.2 Central bank and its policies Bangladesh Bank (BB), as the central bank, has legal authority to supervise and regulate all the banks. It performs the traditional central banking roles of note issuance and of being banker to the government and banks. It formulates and implements monetary policy, manages foreign exchange reserves and supervises banks and non-bank financial institutions.
2.2.1 Interest rate policy Under the existing interest rate policy, which became effective in January 1990, all deposit rates are decontrolled. The market, except for exports, freely determines all lending rates.
2.2.2 Foreign exchange system Prior to the inception of floating exchange rate regime, adjustments in exchange rates were made while keeping in view the trends of Real Effective Exchange Rate (REER) index based on a trade weighted basket of currencies of major trading partners of Bangladesh and the trends of other important internal and external sector indicators. Under the existing floating exchange rate regime (that started from 31/05/2003), the inter-bank foreign exchange market sets the exchange rates for customer transactions and inter-bank transactions based on demand-supply interplay.
2.3 UTTARA BANK LTD.: Background History UTTARA BANK LTD.started its operation from 3 rd August 1999. This is a scheduled private commercial bank, which was established on May 20, 1999 under Bank Companies Act 1991. In 1 st July 2004 UTTARA BANK LTD. converted full pledged Islamic bank from conventional bank. At present, there are 30 branches in operation spread all over the country. Within a very short period of time, UTTARA BANK LTD. has been able to create an image for itself and has earned significant reputation in the banking sector of Bangladesh. This institution
attracted the customer’s attention through its different schemes. All these efforts ultimately lead to the profit generation for the Bank. For survival and growth of any business institution profit generation is must. Like other commercial banks, UTTARA BANK LTD. has specific target for collecting as well as distributing those deposits through different Credit programs for consumers and businesses. Prudent investing by the management and constant monitoring helps the Bank to attain its target and contributes to the growth of the bank as a whole and particularly its branches. Gradual Increase of Branches, UTTARA BANK LTD.
No. of Branches
Branches of Uttara Bank by Year 35 30 25 20 15 10 5 0
Branches
1999
2000
2001
2002
2003
2004
2005
2006
Year
Source: UTTARA BANK LTD., Annual Report The Bank started its Journey with an authorized capital of Taka 1000 million and a paid up capital of Taka 313 millions contributed by the sponsors. The sponsor directors of the bank are well-established businessman and professionals of the country having business in and out Bangladesh. The company philosophy –“ Local Bank global network “ has been precisely the essence of the legend of the banks success.
2.4 Mission Statement Of UTTARA BANK LTD. • •
“To assist in bringing high quality service to our customers and to participate in the growth and expansion of our national economy. To set high standards of integrity and bring total satisfaction to our customers, shareholders and employees.
•
To become the most sought after bank in the country, rendering technology driven innovative services by our dedicated team of professionals.”
UTTARA BANK LTD. aims at excellence and have a new vision to fulfill and a new goal to achieve. The bank has following objectives: •
•
To provide a wide range of quality products and services comparable with those available with any modern bank in the world To explore the needs of the common people including businessman and professionals Extend Credit to private sector of economy
•
To serve with quality at a price competitive to any one in the
•
financial market •
Contribute to the GDP of the country
• •
To develop a youthful and exuberant management team who are technologically sound and rich in experience Highly personalized service.
•
Customer-driven focus.
•
Total commitment to quality.
•
Contribute in the economy.
•
Quality of human resources.
The company believes that communication with, and feedback from, its clients help it achieve its goal of providing world-class products and services. UTTARA BANK LTD. regularly conducts client satisfaction surveys and make immediate accommodations and adjustments where needed. It also constantly monitors its standards, and strives to meet clients’ requirements.
2.5 Organizational Setup
Organizational set-up of Credit division, Head Office is given below. All activity Credit division, Head Office under control of the Deputy Managing Director (DMD)-1 of the Bank. Organizational Chart, Credit division, Head Office Deputy Managing Director (DMD)-1 EVP SVP AVP CREDIT
CREDIT
CREDIT
CREDIT
CREDIT
OFFICER
OFFICER
OFFICER
OFFICER
OFFICER
Source: UTTARA BANK LTD., Head office, 2007
2.6 The Principal Businesses Of UTTARA BANK LTD. Bank
2.6.1 Trade Financing After setting up UTTARA BANK LTD. added new strength in its trade financing activities. Previously there was limited used of “SWIFT” which is very crucial in efficient modern banking correspondence. Now UTTARA BANK LTD. bank has correspondence with over 800 financial institutions worldwide. UTTARA BANK LTD. bank provides L/C payment, L/C advising, negotiation, reimbursement, shipping guarantee, export bill collection services to its valued clients. UTTARA BANK LTD. Bank’s one of the strongest international banking arms, helping to serve their clients through its global network.
2.6.2 Corporate Banking UTTARA BANK LTD. Bank corporate banking arm provides a range of products and services that address the financing needs and transaction structuring requirements of large and mid-sized corporate customers. Services provided
include loan syndication and asset sales, corporate advisory, trade finance, and working capital and term financing. Working closely with the Bank’s trading professionals; Corporate Banking also provides a range of foreign exchange, interest rate management and risk management products.
2.6.3 Private Banking The Private Bank at UTTARA BANK LTD. Bank meets client needs with a line of discretionary portfolio management, custodial services, foreign exchange, deposit services, credit facilities, and personal banking services.
2.6.4 Retail Banking Retail Banking at UTTARA BANK LTD. Bank provides all types of clients with typical banking services such as, savings accounts, current accounts, call and short-term deposit accounts, fixed deposit accounts, time deposits, foreign currency accounts and secure locker services.
2.10 Management in UTTARA BANK LTD., Credit division, Head Office The senior most officer of that any branch/division supervises the Management of any branch/division of UTTARA BANK LTD.. He is called as Manager or division in Charge. The division in Charge of Credit division, Head Office is DMD1. Under the division in Charge, there is a post of sub division in charge in Credit division, Head Office; this post is held by an EVP. There is three PO and two SO and six officers working in the division. All the other officers working in this division are officer, AO or JO.
Chapter - 3
GENERAL BANKING:Analysis & Description 3.1.1. GENERAL BANKING General banking department usually performs a lot of important banking activities. General banking department is the department which is mostly exposed to the maximum number of bank customers. It is the introductory department of the bank to its customers. All business concerns earn a profit through selling either product or a service. A bank does not produce any tangible product to sell but does offer a variety of financial services to its customers. The Eastern Plazabranch of UBL has all the required sections of general banking and this section are run by manpower with high quality banking knowledge. Hence a touch of rich customer service is prevailing in the branch. In UBL the following departments are under general banking section. •
Account opening department.
•
Local remittance department.
•
Cash department.
•
Clearing department.
•
Collection department.
3.1.2. Account opening department. The relationship between a banker in Uttara bank Ltd. and his customer begins with the opening of an account by the former in the name of the latter. Initially all the accounts are opened with a deposit of money by the customer and hence these accounts are called deposit accounts. Bankers solicit deposit from the members of the public belonging to the different walks of life, engaged in numerous economic activities and having different financial status. There is one officer performing various functions in this department. The following are the main functions performed by the department.
•
Acceptance of deposit.
•
Opening of account.
•
Check book issue.
•
Transfer of an account.
•
Closing of account.
3.1.3. Acceptance of deposit: Deposit is life-blood of an Uttara Bank Ltd. Without deposits there are no businesses for the commercial banks of any nature (NCBs, PCBs, and FCBs).in Uttara Bank Ltd. Eastern Plazabranch the various types of accounts are offered to various customers, which are grouped into: •
Demand deposit account.
•
Time deposit account.
•
Fixed deposit account.
3.1.4. Demand deposit account:The amount in accounts are payable on demand so it is called demand deposit account. The following accounts are under demand deposit accounts: •
Current account.
•
Savings account.
•
Short notice term deposit. (STD).
3.1.5. Current account:This type of account is opened by both individuals and business concerns. Frequent transaction (deposits as well as withdrawal) are allowed in this type of account. A current account a/c holder can drew checks on his account for any amount for any numbers of times in a day as the balance in his accounts permits. This account provides no interest. The minimum balance to be maintained is taka 2000.no new account can be opened with a check.
3.1.6. Savings account:-
Individuals for savings purposes open this type of account. Current interest rate of these accounts is 5.50% per annum. a minimum balance of tk.1000 is required to be maintained in a SB account interest on SB account is calculated and accrued monthly and credited to the account half yearly. Interest calculation is made for each month on the basis of the lowest balance at credit of an account in that month. A depositor can withdraw from his SB account not more than twice a week up to an amount not exceeding 25% of the balance in the account.
3.1.7. Special notice term deposit:The deposits in this account are withdrawal on prior notice varying from 7 to 29 days and 30 days or more. The interest is paid on the balance of the accounts. Current interest rate is 6.50% per annum.
3.1.8. Time deposit accounts:The amount in this a/c is payable only after stipulated time. The following a/c’s are under time deposit accounts. • •
Fixed deposit. Bearer certificate of deposits.
3.1.9. Fixed deposit account:These are deposit, which are made with the Uttara bank ltd. for fixed period specified in advance. Uttara bank ltd. need not maintain each reserve against these deposits and therefore, Uttara Bank Ltd. gives high rate of interest on such deposit. A FDR is issued to the depositor acknowledging receipt of the sum of money mentioned therein. It also contains the rate of interest and the date on which the deposit will fall due for payment. Interest Rates on Deposits Particulars Interest rate on deposit:
Rate of interest
1) Savings deposits. 2) Special notice deposit. Fixed deposit(Time deposit): 1) 3 months. 2) 6 months. 3) 1 year. 4) 2 year and above. 5) 3 years.
5.50% 6.50% 7.00% 7.50% 8.00% 8.25% 8.25%
3.1.10. NATURE OF ACCOUNTS AND TYPES OF ACCOUNTS Uttara Bank ltd. provides various types of account opening facilities for its clients. The nature of accounts and types of accounts are as follow:
NATURE OF ACCOUNTS •
Individual.
•
Joint.
•
Proprietorship.
•
Partnership.
•
Club, society, trust, association.
•
School, college, university etc.
•
Limited company.
•
Government.
•
NGO.
•
Others.
TYPES OF ACCOUNTS •
Current account.
•
Deposit account.
•
Saving account.
•
Short term deposit
3.1.11. DOCUMENTS NEED TO OPEN AN ACCOUNT Uttara Bank Ltd. keep some documents from a client when comes to open an account. These documents are varying according to the character of account and client. Uttara Bank Ltd. encloses the following documents for the purpose of current deposit account opening in case of individual or sole proprietor firm: •
Photography of the signatories 2 copies.
•
Photography of the nominee 1 copy each (attested by account holder).
•
Photocopy of passport (first 5 pages).
•
Copy of trade license.
•
Certificate of TIN.
•
Declaration regarding source of fund.
•
Rubber stamp of the firm. (if it is a sole proprietor firm)
Uttara Bank Ltd. encloses the following documents for the purpose of current deposit account opening in case of Club: •
Photography of the signatories 2 copies (each).
•
Photography of passport (first 5 pages) of signatories.
•
Copy of constitution/byelaws.
•
Copy of resolution.
•
Rubber stamp of the signatories.
•
List of members of the executive committee.
Uttara Bank Ltd. encloses the following documents for the purpose of current deposit account opening in case of partnership business: •
Photography of the signatories 2 copies.
•
Photocopy of passport (first 5 pages).
•
Copy of the trade license.
•
Declaration regarding source of fund.
•
Rubber stamp of the firm
•
Partnership deed registered with “RJSC”.
Uttara Bank Ltd. encloses the following documents for the purpose of current deposit account opening in case of limited company: •
Certified true copy of the memorandum and article of association o the company.
•
Certificate of incorporation of the company of inspection and return (along with a duly certified photocopy for bank’s records).
•
Certificate from the registrar of joint company that the company is entitled to commencement business (in case of public Ltd.co.).
•
Extract of the resolution of the board/general meeting of the company for opening the account and authorization for its operation duly certified by the Chairman/Managing Director of the company.
•
List of Director/Authorized officer along with designation and specimen signature who will operate the account.
•
Latest certified copy of Form-x (to be certified by registrar of joint stock companies).
•
Latest certified copy of Form-xii (to be certified by registrar of joint stock companies).
•
Photography of the signatories and all Directors.
•
Photocopy of passport (first 5 pages).
•
Copy of the trade license.
•
Director’s particulars.
•
Declaration regarding source of fund.
•
Certification of TIN.
3.1.12. Clearing department:According to the article 37(2) Bangladesh Bank order 1972 the bank, which are the member of clearinghouse, are called as schedule banks. The schedule bank (Uttara bank Ltd.)Clear the checks drown upon one another through clearing house. All the representatives of all the banks meeting at a specified time, for exchanging the instruments and arriving at the net position regarding receipt or payment. The place where the banks meet and settle their dues is called the clearinghouse. Functions of clearing department are as follows: •
Pass outward instruments to the clearing house.
•
Pass inward instrument to respective department
3.1.13. Collection department:Checks, drafts etc. are drown on Uttara Bank Ltd. located outside clearing house are sent for collection. Principal branch collects its clients above mentioned instruments from other branches of UBL and branches other than UBL .in case of out ward bills for collection customers account is credited after finishing the collection processor. And in case of in ward bills customers account is debited for the purpose.
3.2.FIVE YEARS EXPORT CONDITION OF UBL
Export of UBL
1813
2103
1819
2002 2004 2005 2006 2007
2072 1913
3.3. PERFORMANCE EVALUATION OF UTTARA BANK 3.3.1. CAPITAL ADEQUACY: The Bank achieved the Tk 1.0 billion capital requirement ahead of the deadline set by Bangladesh Bank. The authorized and paid up capital of the Bank are Tk 1,200 million and Tk 744 million respectively. The total shareholders’ equity as of Dec 31, 2007 stood at Tk 1,188 million. The Bank maintained a capital adequacy ratio of
11.60% at the end of 2004 against the regulatory
requirement of 9.0%.
(Amount in crore BDT) Capital Composition 2007 Paid -Up Capital 100 Capital - Core 19.97 Capital - Supplementary 188.58 Total Capital 308.55 Table: Composition of Capital Base of Uttara Limited
2006 20 9.98 176.52 206.5
Capital of Uttara Bank
paid up capital capital core capital supp
3.3.2. INTERNATIONAL TRADE, REMITTANCES: The import business of the Bank decreased to Tk 2263.07 crore in 2006 from Tk 2309.24 crore in 2003 and export bills decreased to Tk 1813.39 in 2006 from Tk 1819 in 2005. The Bank has remittance arrangement with “MONEYGRAM� of USA to facilitate foreign remittance inflows to the country. It also has agency arrangements with May Bank of Malaysia, Myanmar Investment Bank and Bhutan National Bank. As of end 2004 uttara bank Ltd. established correspondence relationship with 293 banks in 90 countries. The Bank is using SWIFT communication system for fast and accurate handling of foreign trade. (Amount in Crore BDT) Foreign Exchange Business YEAR Imports Exports
2003 2004 2005 2006 2007 2709.4 2620.4 2408.0 2309.24 2263.07 4 9 0 2103.6 2072.8 1913.3 1819.18 1813.39 5 9 1 Table: Foreign Exchange Business Performance
Taka in crore
3000 2500 2000
Imports
1500
Exports
1000 500 0 2002
2003
2005
2006
2007
Year
Figure: Foreign Exchange Business Performance
3.3.3. LAST FIVE YEARS PERFORMANCE AT A GLANCE N o 01
Particulars
2004
2004
2005
2006
2007
20
20
20
20
100
02
Authorized Capital Paid-up Capital
9.98
9.98
9.98
9.98
19.97
03
Reserve Fund
145.19
159.70
164.26
176.52
188.58
04
Deposits
2915.39
3936.02
Advances
2293.83
2185.15
2516.39
06
Investments
673.94
1006.21
956.45
07
Gross Income
391.83
382.14
3461.5 2 1860.1 0 1279.4 0 382.09
3689.19
05
3147.7 6 1878.6 3 988.39
426.50
443.51
08
270.74
261.12
265.04
315.32
62.47
68.31
78.26
86.68
10
Gross 260.65 Expenditure Net Profit(pre- 50.20 tax) Import Business 2709.44
2263.07
Export Business 2103.65
1819.18
1813.39
12
Foreign Correspondents
2408.0 0 1913.3 1 295
2309.24
11
2620.4 9 2072.8 9 256
322
329
09
193
13 14 15
Number of 3200 Employees Number of 198 Branches Number of 5684 Shareholders
3209
3382
3265
3505
198
198
198
201
6120
5631
5351
5390
(Figure in crore)
Chapter – 4 Credit Risk Measures By UTTARA BANK LTD. 4.0 Credit Risk Management of risk is fundamental to the business of banking and is an essential element of corporate strategy. Banks face a number of risks in its operations and increasingly the success of the institution depends heavily upon its positive outlook rather than negative to affirm an efficient management of risk. UTTARA BANK LTD. Liquidity risk is undoubtedly the most important concern for any financial organization as it is associated not with growth and profitability, but with survival. The liquidity ratio for a financial organization is measured by dividing the company’s investments in short-term securities by the total customers’ deposits. Interest rate risk is major consideration for any financial organization because it relates to the company’s forecasts of interest rates. This ratio is easily calculated by dividing the interest-sensitive assets of the company by the interest-sensitive liabilities. The capital risk of a bank indicates how much asset values may decline before the position of its depositors and other creditors are jeopardized. Thus a bank with a 10 percent capital-to-assets ratio could withstand greater declines in asset values than a bank with a 5 percent capital-to-assets ratio. From this perspective, UTTARA BANK LTD.
4.1 Principal of Credit Of The Bank
Basic principle governs the extension of Investment. These principles are strictly maintained to shape and define the acceptable risk profile of UTTARA BANK LTD. Bank and guides to respond business opportunities as they arise. Basic lending principles are; • • • • •
Know your customer Liquidity of the customer Safety Security Profitability from both bank’s and customer’s purpose of the loan’s perspective
4.2 Types Of Investment Offered By UTTARA BANK LTD. Bank Basically UTTARA BANK LTD. Bank offers both funded and non-funded Investment facilities.
4.2.1 Non-funded facilities: Non-funded facilities also known, as contingent facilities are those where banks fund is not required directly. A non-funded facility can turned to a funded facility as per situation creates. Bank receives commission rather than interest income by providing non-funded facilities. Following non-funded facilities are provided by UTTARA BANK LTD. Bank –
4.2.2.Letter of Investment (L/C): A letter of Investment is an Investment line given by a bank to an importer to facilitate both foreign and inland transactions. This is a contingent liability which can be converted to a funded facility in case bank makes the payment on behalf of the importer. A letter of Investment can be revocable or irrevocable, restricted or negotiable so on.
4.2.3.Guarantee: UTTARA BANK LTD. Bank offers guarantee for its reliable and valuable customer as per requirements. This is also an Investment facility in contingent liabilities from extended for participation in development work like supply of goods and services.
4.4.1. FINANCIAL POSITION OF UBL ASSETS The economic activities on the country as a whole wee positive and satisfactory during the year under report and the bank closed the year recording steady growth. At the end of the year 2006, total assets o the bank stood at 4521.70 crore as against taka 4206.22 crore registering an increase of 7.5 percent. The assets for last five (2002 to 2007) year are as below (taka in crore): 5000 4000 3000 assets
2000 1000 0 2002 2004
2005 2006 2007
CAPITAL AND RESERVES During the year under report authorized capital of the bank remained unchanged at TK 100crore and the paid-up capital stood at TK 19.97 crore. The reserve fund of the bank increased by 6.8 percent to TK 188.58 crore against TK 176.52 crore in the previous year. The reserves for the last five years (2002 to 2006) are as below (taka in crore):
200 150 100
reserves
50 0 2002 2004 2005 2006 2007
DEPOSIT The deposit of the bank registered an increase of 6.69 percent in the year under review. At the close of 2006, Total deposit stood at TK 3936.02 crore as against TK 3689.19 in the previous year.. Deposits of last five years (2002to2006) are shown below: 4000 3900 3800 3700 3600 3500 3400 3300 3200
deposot
2002 2004 2005 2006 2007
CREDIT The bank continued its participation in different credit programs for financing new industrial projects, working capital, trade finance, international etc. consequently net credit rose to TK 2185.15 crorefrom Tk 2516.39 of 2005.. Sector wise net advances during the year were as follows:1. CONTINUOUS LOAN
11707.88
2. DEMAND LOAN
3076.14
3. TERM LOAN (UP O 5 YEARS)
3222.64
4. TERM LOAN (OVER 5 YEAR)
1954.23
5. STAFF LOAN
250.11
Loans and advance of last five years (2002 to 2006) are given below:
3000 2500 2000 1500
advance
1000 500 0 2002 2003 2005 2006 2007
4.4.2. INCREASED FINANCIAL STRENGTH The Bank had to operate in a declining interest rate environment, but was able to maintain a reasonable spread. It achieved an Operating Profit of Tk 128.19crore in 2006 compared to Tk 161.46 crore in the previous year. After necessary provision net profit stood at BDT 24.88 crore as of December 31, 2006. (Amount in crore BDT) YEAR Operating Profit
2003 131.1
2004 111.40
2005 120.97
2006 161.46
2007 128.19
Profit Before Tax Profit After Tax
8 50.20 24.95
62.47 19.71
68.31 10.06
78.26 14.26
86.68 24.88
Table: Profit Position
180 160 140 120 100 80 60 40 20 0
Operating Profit Profit Before Tax Profit After Tax
2002
2004
2005
2006
2007
4.4.3. INCREASING EARNING The increased earnings were driven by enlarged loans and advances portfolio, increase in export and import business and efficient fund management. Non-interest income continued to contribute higher share in the total income of the Bank. Total income increased from BDT 426.50 crore in 2005 to BDT 443.51 in 2006. Interest income accounted for 69.12%, Income from Investments 10.86%, commission 18.12% and other income 1.90% of total income in 2004 as against 72.77%, 8.65%, 15.47% and 3.11% respectively in 2007. (Amount in crore BDT) Particulars Interest Income Income from Investment
2007 Amt. 274,20,42,7
% 37%
2006 Amt. 200,08,79,5
% Base
28 55,78,86,62
36%
07 88,23,18,10
Base
23.70%
2 107,94,80,6
Base
3.3%
93 30,23,35,95
Base
100.00%
5 278,72,52,8
Base
8 Commission, Exchange and 82,36,76,31 Brokerage Other Operating Income
0 31,15,27,01
Total
8 267,82,97,7 89
13 Table: Income Breakdown
3%
interest income
24%
37%
income from investment com,exch other income
36%
4.4.4. EARNINGS PER SHARE:Earnings pr share and return on equity also experienced a steady shock from 2002 to 2004 although it rises in 2005 from that of the previous year.
YEAR Earnings
per
2003 Share 249.89
2004 197.41
2005 100.80
2006 142.83
2007 124.59
(Taka) Table: Year wise Growth of Earning per Share
300 250 200
Earning Per 150 Share
Earning Per Share
100 50 0 2002
2003
2005
2006
Year
Figure: Year wise Earning per Share
2007
4.5.
Investment Classifications And Provisioning By UTTARA BANK LTD. Bank
4.5.1 Investment Classifications: Investment classification is required to have a real picture of the investment and advances provided by the Bank. It helps to monitor and take appropriate decision regarding each investment account like other banks, all types of investments of BA fall into following four scales:
Unclassified: Repayment is regular
Substandard: Repayment is stopped or irregular but has reasonable prospect of improvement.
Doubtful debt: Unlikely to be repaid but special collection efforts may result in partial recover.
Bad/Loss: Very little chance of recovery.
Table – 8: CL Statement Investment
Unclassified
Substandard
Doubtful
Bad
Type
(Month
(Month)
(Month)
(Month)
Continuous
Expiry up to 5 6 to 8 month
9 to 11 month
12 month+
Investment
month
Demand Investment Term
0 to 5 month
6 to 11 month
12 to 17 month
18 month+
0 to 11 month
12 to 17 month
18 to 23 month
24 month+
0 to 11 month
12 to 13 month
36 to 59 month
60 month+
investment up to 5 year Term Investment more
then
5
years Micro
Investment Source: Publication Of UTTARA BANK LTD. Bank
4.5.2 Investment Provisioning: A Certain amount of money is kept for the purpose of provisioning. This percentage is set following Bangladesh Bank rules. Type of Classification Rate of Provision Unclassified 1% Substandard 20% Doubtful 50% Bad debt 100% Source: Publication Of UTTARA BANK LTD. Bank
Chapter 5 CREDIT RISK SYSTEM BY UTTARA BANK LTD. 5.1 Definition Of Credit Risk Grading (CRG) •
The Credit Risk Grading (CRG) is a collective definition based on the prespecified 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.
5.2 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.
5.3 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.
5.4. Credit Risk Grading Review Credit Risk Grading for each borrower should be assigned at the inception of lending and should be periodically updated. Frequencies of the review of the credit risk grading are mentioned below; Number Risk Grading
Short
Review
1 2 3 4 5 6 7 8
SUP GD ACCPT MG/WL SM SS DF BL
least) Annually Annually Annually Half yearly Quarterly Quarterly Quarterly Quarterly
Superior Good Acceptable Marginal/Watchlist Special Mention Sub-standard Doubtful Bad & Loss
frequency
(at
5.5. MIS On Credit Risk Grading
Bank should have comprehensive MIS reports on credit risk grading to evaluate entire credit portfolio of the Bank. Format of such MIS reports on credit risk grading has been presented in . •
Credit Risk Grading Report (Consolidated)
•
Credit Risk Grading Report (Branch Wise)
•
Credit Risk Grading Report (Branch & Risk Grade Wise)
•
Credit Risk Grading Report (Grade Wise Borrower List)
Chapter 6
FINDINGS 6.1. FINDINGS OF THE STUDY The primary purpose of this study report is to get an idea about the “Credit Risk Management in Uttara Bank Ltd”. After working in this bank we find the some important points.
The bank has a well-organized credit management process in place. The study found that the bank has a well-developed lending policy. The bank follows certain general principle of lending such as safety, purpose, liquidity and diversification. All the loan applications go through each of the steps of the loan granting process. The bank uses its own credit risk evaluation process in addition to LRA Manual of Bangladesh Bank and project appraisal method for evaluating loan proposals. The bank also has a proper loan administration to ensure proper documentation, monitoring and follow up of each loan granted by it. In this paper bank's deposit mobilization and loan disbursement, the average growth rate of deposit and loans & advances from 2002 to 2006 was 45.38% respectively. For loans and advances sanctioning it is observable that in 2004 and 2005 bad loss of giving loans is near about 60% which is not good for the bank. Besides their loans and advances in 2004 is greater than deposit amount. Overall their growth rate is good from the date of establishment Uttara bank is expanding, it must focus on attracting, and getting and retaining qualified personnel for filling up its positions. It is worth spending more on attracting qualified human resources rather than getting the wrong people in the wrong positions.
RECOMMENDATIONS From our performance evaluation I saw that the Uttara Bank losing its business in comparison and other bank because of its lack of use modern age banking technology and human resources. To improve the business condition of Uttara Bank Ltd. and to gain the lost market share I suggest implementing the following suggestion:
Management of the Bank is to work for creation of conceptual framework covering core elements of developed “Model Marketing Plan – (MMP)” of UBL to face the competition a changes in the banking industry into the new millennium for sustained growth of business / profitability of the bank. To accomplish the tasks of formulation of “MMP” focus should be made on the following issues:
Business philosophy that identifies current and future opportunities, defines magnitude and quantum, determines target markets and cluster, and decides on products, services and programs to secure entry to markets for economic and financial gains were made. The aim of planned marketing efforts is to understand customers and to ensure that offered products and services adapt to targeted customers’ needs perfectly. The marketing plan to be designed to perform tasks of stimulating demands for Bank’s products and services to influence the level timing and composition of demand help customers’ consummate their business objectives. Ideas of satisfying the customers’ needs by means of products and the entire cluster of action as associated with creation / delivering and finally consuming the products and services. Process to be employed to interpret markets, customers’ needs and transformation: defining mission / objectives and goals, portfolio plans and new business plans. The plans were structured in 3 (three) operational levels: corporate level, business level and product level. The marketing mission was converted into specific objectives for each level targeted at: profitability, marketshare, positioning, risk-diversification and innovation. The objectives to be made Quantifiable, realistic and consistent towards useful implementation of the marketing action plan. The portfolio plan involved in reviewing of the current portfolio of businesses and deciding on new businesses and potential thrust sectors. Identification of market opportunities through analysis of subjective issues, concepts, strategies and techniques of penetration to create market along with efforts to integrate actions based on collected data to fit into real banking solution having operational linkages with the marketing plan “ “Model Marketing Plan – (MMP)” of UBL.
Natural inducement of the target groups to UBL is that customers must perceive greater degree of satisfaction from the offered services. The qualitative improvement and development of cutting-edge products precipitate in higher degree of customers satisfaction and UBL to plan for improvement of services, adding flair to the products like introduction of ATM / On-line banking / Credit Card / Debit Card / introduction of relationship Manager and Customerfriendly deposit schemes.
CONCLUSION As an organization the Uttara Bank Limited has earned the reputation of top listed banks operating in Bangladesh. The organization is much more structured compared to any other listed bank operating in Bangladesh. It is relentless in pursuit of business innovation and improvement. It has a reputation as a leader in financing manufacturing sector. With a bulk of qualified and experienced human resource, Uttara Bank Limited can exploit any opportunity in the banking sector. It is pioneer in introducing many new products and services in the banking sector of the country. Moreover, in the retail-banking sector, it is unmatched with any other listed banks because of its wide spread branch networking thought the country.
BIBLIOGRAPHY 1. Bank management, fifth edition, George H. Hemple. 2. Credit Risk Management Manual – Bangladesh Bank 3. Studies on Credit Risk Management, Working Paper No. 15, Basel Committee of Banking Supervision. 4. Financial Instructions Management, A modern perspective by Anthony Saunders. 5. Business communication , sixth edition, Raymond V. Lesiker Jhon D. Pettit, JR 6. Commercial banking , fourth edition by Edward W Reed / Edward K. Gill
7. Annual report of Uttara Bank Limited, 2007. 8. Annual report of Uttara Bank Limited, 2006 9. Annual report of Uttara Bank Limited, 2005 10. Annual report of Uttara Bank Limited, 2004 11. Annual report of Uttara Bank Limited, 2003 12. Brochure of Uttara Bank Limited. •
Web site: www.uttarabank-bd.com