Credit Risk Management of Dutch Bangla Bank Limited
Chapter: 1 Introduction 1.1
Background of study:
All over the world the dimension of Banking has been changing rapidly due to Deregulation, Technological innovation and Globalization. Banking in Bangladesh has to keep pace with the global change. Now Banks must compete in the market place both with local institution as well as foreign ones. To survive thrive in such a competitive banking world, two important requirements are Development of appropriate financial infrastructure by the Central bank and Development of “Professionalism” in the sense of developing an appropriate manpower structure and its expertise and experience. To introduce skilled Banker, only theoretical knowledge in the field of banking studies is not sufficient. As academic course of the study has a great value when it has practical application in real life situation. So, I need proper application of my knowledge to get some benefit from my theoretical knowledge make it more tactful, when I engage myself in my practical life situation. Such all application is made possible through Internship. When theoretical at only the half way of the subject matter full application of the methods and procedures through rich acquired of subject matter can be forcefully applied in my day-to-day life situation. Such a procedure of practical application in known as internship.
1.2. Objective of the report: 1.3.
Scope:
Dutch-Bangla Bank Ltd [DBBL] is one of the leading banks in Bangladesh. The report covers the background, functions and mostly the credit management of the bank. The scope of the study is just to acquaint with the credit management scenario of DBBL.
1.4. Methodology of the Study: This report is mainly prepared by the secondary sources of information and some few primary sources of information like---
• Direct observation. • Information discussion with professionals.
• Questioning the concerned persons. The secondary sources of my information are as below-
• Annual reports of DBBL. • Credit rating report of DBBL by CRISL (Credit Rating Information and Services Limited).
• Desk report of the related department. • Credit Risk Management manual information. • Different reference books of the library. • Some of my course elements as related to this report. • News paper, web sites etc. were the major sources of secondary date. And the analytical tools used by be is “Data Analysis” from Microsoft Excel for preparing regression and correlation analysis.
1.5. Research Design 1. Exploratory Research 2. Less chances of error as the sample size is limited here. 3. Exploratory research is more flexible and versatile in nature. 4. It can be conducted by a single researcher with a minimum no of sample size.
1.6. Data collection Primary data: Primary sources were officers and manager of Dutch Bangla Bank Limited, Motijheel F. Ex. Branch. Following factors were considered to collect information: a. Conversation with the bank officers and staffs. b. Informal conversation with the clients
Secondary data: Secondary information was collected from various books, journals, manuals, and also from the web sites.
1.7. Data analysis
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Data analysis will be made based on the respondents answers. Every question will be analyzed with different calculations for the optimum results.
1.8. Limitation •
Limitation of time was one of the most important factors that shortened the present study. Due to time constraints, many aspects could not by discuss in the present study.
•
Lack of comprehension of the respondents was the major problem that created many confusions regarding verification of conceptual questions.
•
Confidentiality of data was another important barrier that was faced during the conduct of this study. Every organization has their own secrecy that cannot be revealed in publics.
•
Rush hours and business was another reason that acts as an obstacle while gathering data.
•
As, I had more dependence on the primary sources, so there might be some level of inaccuracy with those collected information.
•
Though, adequate verification and cross- checking was used, to minimize the error level.
•
Confidential information regarding past profit or product cost, financial information was not accurately obtained. Alike all other banking institutions, DBBL is also very conservative and strict in providing those information. In those cases, I have relied upon some assumptions, which in result have created certain level of inaccuracy. Still, I had tried my best in obtaining that sensitive information, as much as possible.
Reasons for choosing Dutch Bangla Bank: Internship Program brings a student closer to the real life situation and thereby helps to launch a career with some prior experience. Specially banking sector fulfills the needs like that. When a student doing his/her internship in a reputed organization, he/she introduced with something creative. These are as follows:
• Introduce with a new culture, which is totally different with the life of student. • Evaluate themselves with the others’ potential. • Begin to present him/her with the world of communication. • Get some practical experiences and gather some knowledge, which is very important for career building.
• Finally motivated towards job and skills.
Chapter: 2 Banking Industry of Bangladesh The banking system at independence consisted of two branch offices of the former State Bank of Pakistan and seventeen large commercial banks, two of which were controlled by Bangladeshi interests and three by foreigners other than West Pakistanis. There were fourteen smaller commercial banks. Virtually all banking services were concentrated in urban areas. The newly independent government immediately designated the Dhaka branch of the State Bank of Pakistan as the central bank and renamed it the Bangladesh Bank. The bank was responsible for regulating currency, controlling credit and monetary policy, and administering exchange control and the official foreign exchange reserves. The Bangladesh government initially nationalized the entire domestic banking system and proceeded to reorganize and rename the various banks. Foreign-owned banks were permitted to continue doing business in Bangladesh. The insurance business was also nationalized and became a source of potential investment funds. Cooperative credit systems and postal savings offices handled service to small individual and rural accounts. The new banking system succeeded in establishing reasonably efficient procedures for managing credit and foreign exchange. The primary function of the credit system throughout the 1970s was to finance trade and the public sector, which together absorbed 75 percent of total advances. The government's encouragement during the late 1970s and early 1980s of agricultural development and private industry brought changes in lending strategies. Managed by the Bangladesh Krishi Bank, a specialized agricultural banking institution, lending to farmers and fishermen dramatically expanded. The number of rural bank branches doubled between 1977 and 1985, to more than 3,330. Denationalization and private industrial growth led the Bangladesh Bank and the World Bank to focus their lending on the emerging private manufacturing sector. Scheduled bank advances to private agriculture, as a percentage of sectoral GDP, rose from 2 percent in FY 1979 to 11 percent in FY 1987, while advances to private manufacturing rose from 13 percent to 53 percent. The transformation of finance priorities has brought with it problems in administration. No sound project-appraisal system was in place to identify viable borrowers and projects. Lending institutions did not have adequate autonomy to choose borrowers and projects and were often instructed by the political authorities. In addition, the incentive system for the banks stressed disbursements rather than recoveries, and the accounting and debt collection systems were inadequate to deal with the problems of loan recovery. It became more common for borrowers to default on loans than to repay them; the lending system was simply disbursing grant assistance to private individuals who qualified for loans more for political than for economic reasons. The rate of recovery on agricultural loans was only 27 percent in FY 1986, and the rate on industrial loans was even worse. As a result of this poor showing, major donors applied pressure to induce the government and banks to take firmer action to strengthen internal bank management and credit discipline. As a consequence, recovery rates began to improve in 1987. The National Commission on Money, Credit, and Banking recommended broad structural changes in Bangladesh's system of financial intermediation
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early in 1987, many of which were built into a three-year compensatory financing facility signed by Bangladesh with the IMF in February 1987. One major exception to the management problems of Bangladeshi banks was the Grameen Bank, begun as a government project in 1976 and established in 1983 as an independent bank. In the late 1980s, the bank continued to provide financial resources to the poor on reasonable terms and to generate productive self-employment without external assistance. Its customers were landless persons who took small loans for all types of economic activities, including housing. About 70 percent of the borrowers were women, who were otherwise not much represented in institutional finance. Collective rural enterprises also could borrow from the Grameen Bank for investments in tube wells, rice and oil mills, and power looms and for leasing land for joint cultivation. The average loan by the Grameen Bank in the mid-1980s was around Tk2,000 (US$65), and the maximum was just Tk18,000 (for construction of a tinroof house). Repayment terms were 4 percent for rural housing and 8.5 percent for normal lending operations. The Grameen Bank extended collateral-free loans to 200,000 landless people in its first 10 years. Most of its customers had never dealt with formal lending institutions before. The most remarkable accomplishment was the phenomenal recovery rate; amid the prevailing pattern of bad debts throughout the Bangladeshi banking system, only 4 percent of Grameen Bank loans were overdue. The bank had from the outset applied a specialized system of intensive credit supervision that set it apart from others. Its success, though still on a rather small scale, provided hope that it could continue to grow and that it could be replicated or adapted to other development-related priorities. The Grameen Bank was expanding rapidly, planning to have 500 branches throughout the country by the late 1980s. Beginning in late 1985, the government pursued a tight monetary policy aimed at limiting the growth of domestic private credit and government borrowing from the banking system. The policy was largely successful in reducing the growth of the money supply and total domestic credit. Net credit to the government actually declined in FY 1986. The problem of credit recovery remained a threat to monetary stability, responsible for serious resource misallocation and harsh inequities. Although the government had begun effective measures to improve financial discipline, the draconian contraction of credit availability contained the risk of inadvertently discouraging new economic activity. Foreign exchange reserves at the end of FY 1986 were US$476 million, equivalent to slightly more than 2 months worth of imports. This represented a 20-percent increase of reserves over the previous year, largely the result of higher remittances by Bangladeshi workers abroad. The country also reduced imports by about 10 percent to US$2.4 billion. Because of Bangladesh's status as a least developed country receiving confessional loans, private creditors accounted for only about 6 percent of outstanding public debt. The external public debt was US$6.4 billion, and annual debt service payments were US$467 million at the end of FY 1986. List of Banks
Central Bank: Bangladesh Bank. Commercial Bank (State owned):
The Banking system of Bangladesh is dominated by the 4 Nationalized Commercial Banks, which together controlled more than 54% of deposits and operated 3388 branches (54% of the total) as of December 31, 2004. The nationalized commercial banks are: • • • • • •
Sonali Bank Karmosangesthan Bank Bangladesh Krishi Bank Janata Bank Agrani Bank Rupali Bank
Commercial Bank (Private): Prime Bank Limited • South East Bank Limited • Al-Arafah Islami Bank Limited • Social Islami Bank Limited • Standard Bank Limited • One Bank Limited • Exim Bank Limited • Mercantile Bank Limited • Bangladesh Commerce Bank Limited • Mutual Trust Bank Limited • First Security Islami Bank Limited • The Premier Bank Limited • Bank Asia Limited • Trust Bank Limited • Shahjalal Islami Bank Limited • Jamuna Bank Limited • ICB Islami Bank • Moon Bank Limited • Bank Limited • AB Bank Ltd • BRAC Bank Limited • Eastern Bank Limited • Dutch Bangla Bank Limited • Dhaka Bank Limited • Islami Bank Bangladesh Ltd • Pubali Bank Limited • Uttara Bank Limited • IFIC Bank Limited • National Bank Limited • The City Bank Limited • United Commercial Bank Limited • NCC Bank Limited Commercial Bank (Foreign): •
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• • • • • • • • • • • • • • • • •
Habib Bank National Bank of Pakistan Wo Bank Bank Alfalah Citibank na HSBC Standard Chartered Bank Commercial Bank of Ceylon State Bank of India Others: Grameen Bank Bangladesh Krishi Bank Bangladesh Development Bank Ltd Rajshahi Krishi Unnayan Bank Basic Bank Ltd (Bank of Small Industries and Commerce) Bangladesh Somobay Bank Limited(Cooperative Bank) Ansar VDP Unnyan Bank
Chapter: 3 Organization Overview
An Organizational Overview of the General Activities Of An over view of the organization: Dutch-Bangla Bank started operation is Bangladesh's first joint venture bank. The bank was an effort by local shareholders spearheaded by M Sahabuddin Ahmed (founder chairman) and the Dutch company FMO. From the onset, the focus of the bank has been financing high-growth manufacturing industries in Bangladesh. The rationale being that the manufacturing sector exports Bangladeshi products worldwide. Thereby financing and concentrating on this sector allows Bangladesh to achieve the desired growth. DBBL's other focus is Corporate Social Responsibility (CSR). Even though CSR is now a clichés, DBBL is the pioneer in this sector and termed the contribution simply as 'social responsibility'. Due to its investment in this sector, DBBL has become one of the largest donors and the largest bank donor in Bangladesh. The bank has won numerous international awards because of its unique approach as a socially conscious bank. DBBL was the first bank in Bangladesh to be fully automated. The Electronic-Banking Division was established in 2002 to undertake rapid automation and bring modern banking services into this field. Full automation was completed in 2003 and hereby introduced plastic money to the Bangladeshi masses. DBBL also operates the nation's largest ATM fleet and in the process drastically cut consumer costs and fees by 80%. Moreover, DBBL choosing the low profitability route for this sector has surprised many critics. DBBL had pursued the mass automation in Banking as a CSR activity and never intended profitability from this sector. As a result it now provides unrivaled banking technology offerings to all its customers. Because of this mindset, most local banks have joined DBBL's banking infrastructure instead of pursuing their own. Even with a history of hefty technological investments and an even larger donation, consumer and investor confidence has never waned. Dutch-Bangla Bank stock set the record for the highest share price in the Dhaka Stock Exchange in 2008.
3. Mission and Vision of Dutch- Bangla bank: 3.1Mission of the Dutch-Bangla Bank: Dutch-Bangla Bank engineers enterprise and creativity in business and industry with a commitment to social responsibility. "Profits alone" do not hold a central focus in the Bank's operation; because "man does not live by bread and butter alone".
3.2Vision of the Dutch-Bangla Bank : Dutch-Bangla Bank dreams of better Bangladesh, where arts and letters, sports and athletics, music and entertainment, science and education, health and hygiene, clean and pollution free environment and above all a society based on morality and ethics make all our lives worth living. DBBL's essence and ethos rest on a cosmos of creativity and the marvel-magic of a charmed life that abounds with spirit of life and adventures that contributes towards human development.
3.3Core Objectives: Dutch-Bangla Bank believes in its uncompromising commitment to fulfill its customer needs and satisfaction and to become their first choice in banking. Taking cue from its pool esteemed clientele, Dutch-Bangla Bank intends to pave the way for a new era in banking that upholds and epitomize its vaunted marques "Your Trusted Partner". The latest slogan of the bank is “Any time Any where�
3.4The Board: The Board is comprised of directors having diverse skills, experience and expertise to add value towards better corporate governance of the bank and maximizing value for all stakeholders. The Board discharges its responsibilities itself or through various committees. The Board meets on a regular basis to discharge its responsibilities. The Board is made up of 10(ten) Directors including a Chairman and
five Directors
representing shareholders , one independent Director, two Directors from depositors and the Managing Director.
3.5 Principal Activities
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The principle activities of the bank are banking and banking related activities. The banking business includes obtain deposits through account opening, offer credit to corporate organizations, as well as retail and small & medium enterprises, trade financing, project financing, lease and hire purchase financing. The mode of banking included conventional banking. It also performs merchant banking function under the license by Securities and Exchange Commission, Dhaka, Bangladesh.
3.6 Product Range of Dutch-Bangla Bank Limited The product list of Dutch-Bangla Bank Limited is stated below: Deposit Product •
Savings Deposit Account-with cheque
•
Savings Deposit Account-without cheque
•
Current Deposit Account
•
Short Term Deposit Account
•
Foreign Currency Deposit Account
•
Resident Foreign Currency Deposit
•
Convertible Taka Account
•
Non-Convertible Taka Account
•
Exporter's FC Deposit Account (FBPAR)
•
Current Deposit Account-Bank
•
Short Term Deposit Account-Bank
•
Term Deposits
•
Monthly Term deposits
•
Term Deposit for 3 Months
•
Term Deposit for 6 Months
•
Term Deposit for 12 Months
•
Term Deposit for above 12 Months
Loans & Advances • Loan against Trust Receipt
• • • • • • • • • • • • • • • •
Transport Loan Consumer Credit Scheme Real Estate Loan (Res. & Comm.) Loan Against Accepted Bill Industrial Term Loan Agricultural Term Loan Lease Finance Other Term Loan FMO Local Currency Loan for SME FMO Foreign Currency Loan Cash Credit (Hypothecation) Small Shop Financing Scheme Overdraft Secured Overdraft (SOD) Retail Loan SME loan
Other Products/ Services •
Any Branch Banking
•
Internet Banking
•
SMS Banking
•
Alert Banking
•
Debit & Credit Card
•
SWIFT
•
Locker Facility
Organizational Hierarchy Structure of DBBL
Managing Director Deputy Managing Director Senior Executive Vice President Executive Vice President Senior Vice President Vice President
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First Vice President Assistant Vice President First Assistant Vice President Senior Executive Officer Executive Officer Senior Officer Officer Assistant Officer Trainee Officer
3.7. Important Financial Highlights of Dutch- Bangla Bank Limited for last five years: •
Number of branches
Year No. Branches
2005 28
2006 39
2007 49
2008 64
2009 79
Table 01: Number of Branches DBBL started its journey with only 1 branch in 1996. Now it has 80 branches in 2009. At the end of 2010 it will reach over 100. This incretion indicates the progress of DBBL.
Capital Structure of DBBL: Banks generally do their business with other’s fund, so DBBL is not in exception. DBBL uses 24% equity and 75% Debt source of capital. The capital structure is following: Particulars
Percentage
Total Shareholders’ Equity
25.02%
Long term Debt (Fixed Deposit 1 year & above)
74.98%
Total Capital
100%
•
Number of POS Terminals
Year
2005
2006
2007
2008
2009
No. Branches
100
200
490
650
715
Terminal of DBBL is increasing in rapid way after 2007.they starts with 100 terminals but now they are running their Bank with 715 terminals.
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•
Classified Loan To Total Asset
Year
2005 0.15
Classified
2006 1.58
2007 2.68
2008 3.26
2009 3.27
Loans (%)
We have seen here that earning per share of DBBL is increasing from 2006.last year it was 3.27%. •
Total Import
Year Total Import
2005 26,029.01
(Tk. In millions)
2006 32,067.74
2007 35,667.74
2008 43,999.44
2009 53,088.66
It’s the overall condition of DBBL in Import. Last year they helped in import of taka 53089 million in Bangladesh. Among all Foreign Exchange Branch imported taka 3245585. •
Total Export
Year Total Export
2005 22,144.17
(Tk. In millions)
2006 33,344.69
2007 34,060.27
2008 40,083.14
2009 41,162.51
Table 04 Total Export of DBBL
As we can see here the total export of DBBL is at the year of 2009 TK. 41,162.51 million. At the year of 2010 until May DBBL help in exportation of TK 1098206. •
Total Capital (Tk. In millions)
Year
2005
2006
2007
2008
2009
Total Capital
1474.50
1909.26
2663.77
3399.49
4615.98
Table 05: Total Capital of DBBL
As we know that a factor of production that is not wanted for it but for its ability to help in producing other goods is known as Capital. So we can see from the table after the year 2005 capital of DBBL is increasing is a rapid way. •
Market Capitalization
Year Market Capitalization
2005 3744.55
(Tk. In millions)
2006 4421.70
2007 3719.28
2008 13,675.44
2009 43,110.00
Market capitalization (often market cap) is a measurement of size of a business enterprise (corporation) equal to the share price times the number of shares outstanding of a public company. •
Net Profit After tax
Year Net Profit (after tax)
2005 162.80
(Tk. In millions)
2006 177.60
2007 210.16
2008 236.35
2009 367.82
Net profit is equal to the gross profit minus overheads minus interest payable plus/minus one off items for a given time period.Net profit of Dutch Bangla Foreign Exchange Branch among all in the month May,2010 is TK.511632.
3.8 Outlook for 2009: In the business plan and budget 2009, deposit are projected to grow by 55.1% to Taka 80,000.00 million and loans are projected to increase by 31.9 % to Taka 55,000,.00 million. Import and export business are expected to rise by 36.4 % to Taka 60,000.00 million and 44.7% to Taka 58,000.00 million respectively. With better quality of assets, higher net interest income as well as growing non-funded business, healthy growth in operating and after tax profit is expected in 2009. The above growth will be supported by expansion of branches, ATM network, up gradation of IT and online banking system to provide better and faster customer services. Human resource will be strengthened to improve operational efficiency and productivity. A number of new products and services particularly in SME and Retail segments will be introduced to provide wider choice to customers. 14
Chapter: 4
Foreign Exchange Branch, DBBL About: Foreign Exchange Branch DBBL Foreign Exchange Branch of Dutch Bangla Bank is situated at 15 Motijheel, Dhaka-1000. The branch started its journey on 1st march 1996. Present Branch manager is Md Hamidur Huq Khan. This branch consists of 40 Regular officers who are working under three main divisions named General Baking (Cash, Customer Service & Accounts), Foreign Trade & Credit. The targeted profit for the Branch in the year 2010 is 40 crore & it achieved a profit of 32 crore in the previous year (2010). The targeted deposit in 2010 is 250 crore. The main earning sources of this Branch are the commissions on Bill Discounting & commissions on opening L/Cs, interest on LTR, SOD, and OD etc. Foreign Exchange Branch is well decorated & well-equipped for its operations. The officers of this Branch are doing their best for providing a best customer services in line with the Banking Policy. The main secrets of this Branch in profit maximization are best dealing with customers, dedication to the work of the executives & officers, good team work & coordination. Specialty of This Foreign Exchange is Branch is Foreign Dealing. And This is branch is doing its duty with their total deliberation. 3 Departments of Foreign Exchange Branch are: 1. General Banking Department 2. Foreign Trade Department 3. Credit Department
4.1. General banking Department: Main two activities of General banking of Foreign Exchange Branch Are: 1. Accounts Opening 2. Cash I. Cash Receipt II. Cash Payment 3. Pay Order 4. Demand Draft 5. Remittance Collection
4.1.1. Account Opening: The relationship between the customer & the bank begins with the accounting opening formalities. DBBL offers different products for its customers according to the needs of time. Different kinds of products fall into some different categories opening procedures. Documents Needed for Account opening In Foreign Exchange Branch:
Individual
Two copies recent passport size photograph
Passport’s
photocopies/Certificate
from
ward commissioner/chairman of union Parishad
Limited Company
Income certificate of the employer if
necessary Application supported with a copy of Board Resolution regarding opening and operation of the account. (The Resolution should contain the specimen signature of the
authorized
signatories
and
their
attested photographs).
Memorandum & Article of Association duly attested by the RJSC
Certificate of Incorporation
Certificate of Commencement (in case of Public Limited Company)
Partnership
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List of Directors certified by RJSC. Partnership Deed
Valid Trade License
Proprietorship Firm

Valid Trade License
4.1.1.2 Various Schemes of DBBL: Deposit plus Scheme (DPS) This deposit scheme returns a handsome amount through forced monthly saving without any cut in living style.
Periodic Benefit Scheme (PBS) PBS provides monthly or quarterly returns for a fixed investment/deposit and pays back the principal amount on maturity. PBS ranges from BDT 50,000/- to BDT 5,000,000/-. Monthly Benefit before Tax.
Quarterly Benefit before Tax.
Bochore Dergun Scheme (BDS) DBBL offers a unique savings scheme for its customers. The scheme returns 1.5 times of the principal’s amount after 1 year through initial deposit and monthly savings. BDTS ranges from BDT 50,000/- to BDT 5,000,000/-.
Children Education Savings Scheme (CHESS) This scheme creates opportunity for individuals to save for their children’s future education.
Bonus Saving Scheme: Its a savings scheme specially designed with for future & held by subscribers with a minimum balance of Tk. 50,000.00 will attract not only the usual savings interest but a further 10% bonus on interest. There is no hidden cost like issuing cheque book. Customer can keep it as long as they wish. Pension plus (PP):
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DBBL offers a wide range of loans and advances to suit your needs. Amongst them are the following. Life Line (a complete series of personnel credit facility) Loan Against. Trust Receipt Transport Loan Real Estate Loan (Res. & Comm.) Loan Against. Accepted Bill Industrial Term Loan Agricultural Term Loan Lease Finance Other Term Loan FMO Local currency Loan for SME FMO Foreign currency Loan Cash Credit (Hypothecation) Small Shop Financing Scheme Overdraft
4.1.2: Cash: A bank needs efficient utilization & management of cash, which is a precondition to successful survival of it. Banks pay cash to customers & receive money from them on various deposit accounts. So Bank should be careful on the following three issues: 1. Safety: Cash balance must be kept in the strong room under the joint custody of the incharge of cash department. Insurance for the cash is must for the branch. 2. Customer Satisfaction: The payment of cash to customer when required by them is an important thing to acquire customer satisfaction. Therefore, bank needs sufficient deposits of cash at all times so that it can satisfy the needs of cash of the customer promptly
4. Income: The management of cash should be such a lowest possible in order to avoid the loss of opportunity income, along with providing the desired cash payment to the customer. •
Transaction of Cash: I. Cash Receipt: All cash receipt vouchers shall be received by the Teller, checked with cash tendered and posted in the respective accounts. The teller shall mention receiving serial on the vouchers and put his/her signature also cash Received stamp on it & deliver the vouchers to the department to which it related. The authorized official also signs the receipt vouchers where necessary and return to the teller. II. Cash Payment: While received cheque for payment across the counter shall be asked to sign on the back of the cheque by the person presenting the cheque after checking carefully the cheque number, date, amount both in words and figures, the drawers and authority signature, stop payment instruction if any, the endorsements and the available balance or drawing power, the Teller will post the cheque in the respective account and will put his signature on the cheque and payment shall be made if the amount is within the delegated power of the Teller after due cancellation of the cheque. If the cheque is beyond the delegated power of the Teller, pass on the cheque to authorized officials for checking and cancellation. The passing officials shall send the check to the Teller after checking and cancellation for payment if the cheque is found otherwise in order.
4.1.3. Pay Order: Pay Order is known as banker’s Check. Pay order can’t be dishonored. Within district pay order is valid. DBBL to others we do pay order. . In whose favor, the pay order is issued is called the payee It is used to transfer money from one person to another, where the payment through cheque is not acceptable to someone.
4.1.4. Demand Draft: Demand Draft is also known as Banker’s cheque. Like pay order DD also can’t be dishonored. It is valid out of district. For DBBL to DBBL we do DD only. DD is costly then Pay Order .There is a test number in DD. with which DD is secured. Only manager or sub manager can issue this test number .if test number is wrong then DD wouldn’t be paid. 20
4.1.5. Remittance Collection: This function of the banker obviates the individual’s difficulty and the hazards in transportation of physical cash from one place to another. Against deposit of the requisite funds and the payment of the remittance charges the banker undertakes to make the equivalent amount available at a particular place to a named person or his order within or outside the country as per instruction of the remitter. The remittances are effected through Banker’s: •
Demand Draft
•
Payment Order
•
Mail Transfer
•
Telegraphic Transfer
4.2. Foreign Trade Department: Dutch Bangla Foreign exchange Branch The bank deals in foreign exchange when it is so authorized by the Bangladesh Bank under Section 3 of Foreign Exchange Regulation Act 1947. And it is then known as Authorized Dealer. The Foreign trade of a country refers to its imports and exports of merchandise from and to other countries under contract for sale. The main two functions of Foreign Exchange Department of DBBL are: I. Export II. Import One of the important functions of commercial bank is to finance export and import trade. As buyers & sellers do not each other & know each other’s country’s rules & regulations. Thus buyers want to be assured of goods and seller to be assured of payments. Commercial banks therefore assure these things to happen simultaneously by opening Letter of Credit guaranteeing payment to seller & goods to buyer. By opening a letter of credit on behalf of a buyer in favor of a seller, commercial banks undertake to make payments to a seller subject to submission of documents drawn in strict compliance with letter of credit terms giving title to
goods to buyer. The letter of credit thus, constitutes one of the most important methods of financing foreign trade. Export: Export plays an important role in regulating the flow of foreign currency into the country. The export is normally executed against letters of credit opened by overseas buyers.
Requirements for Export:
1. Registration: Any firm or party desirous of undertaking export trade are required to obtain Export Registration Certificate (ERC) from CCI&E (Chief Controller of Imports & Exports), Government of Bangladesh. For getting ERC followings are submitted along with the application for ERC: 2. Nationality Certificate 3. Trade License from Multiple Authorities 6. Bank Certificate 6. Income tax certificate
Export Documents:
As soon as the Bill of Lading, Airway Bill or Truck Receipt is received the exporter would prepare the relevant documents & submit the same for early repatriation of export proceeds. The following documents are normally required for negotiation: 1. Bill of exchange: This is sent by the exporter in two or three sets & includes the amount of L/C, date, sight or issuance etc. 2. Commercial Invoice: A statement prepared by shipper containing full details of goods shipped. It gives description and price of merchandise, quantity, quality, packing details, name & address of buyer & seller, name of vessels, date of shipment, number of bill of lading etc. 3. Bill of Lading: The document evidencing the carriage of goods by sea is the Bill of Lading & is issued by the shipping company or its agent & contains brief description
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of goods accepted for transport. It is used usually two or three sets. It also includes general description of the goods, marks numbers gross & net weight. Exp numbers should be correctly mentioned in the Bill of Lading. 4. Airway Bill: The document evidencing the contract of carriage of goods by air is known as Airway Bill. 5. Packing List: A packing list prepared by the exporter serves to indicate the exact nature, quantity & quality of the contents of each package in a shipment. Clearance of goods through customs is also facilitated by packing list. 6. Certificate of Origin: It is a document certifying the country of origin of the goods that is it describes where the goods originally produced or manufactured. 7. Other Certificate: Some other certificate such as Weight Certificate, inspection certificate by supplier or an independent inspection agency, Certificate of Analysis may be required in the chemical & drugs etc.
Import:
The buyer or importer is he who initiates the credit. He applies to the bank for issue of a documentary credit. The applicant is liable to indemnify the bank against all obligations & responsibilities imposed by foreign laws and usages
Procedures of Import:
1. Contract for Sale: The transaction originates when the exporter and the importer enter into a contract of sale. The contract covers all important particulars like the description, value and quantity of goods, the due date for shipment, method of payment etc. 2. Application for Issuing a Letter of Credit: The importer would apply on bank’s standard form to his bank for issuing a letter of credit. In addition to recording the full details of the proposed credit, the application also serves an arrangement between the bank and the buyer. The credit application must be clear and precise and generally includes the following items:
Full name & address of supplier, manufacturer or beneficiary
Opener’s name & address
The total amount of credit asked for & whether the credit is a specific credit or a revolving letter of credit and amount of currency
The type of credit; whether revocable or irrevocable
The terms of sale, whether the contract is on C&F, CIF or FOB basis
The risk to be covered under the policy and the amount of insurance
Brief description of goods including quality, quantity & unit price
The term of payment; whether on DA (Documents against Acceptance) or PAD (Payment Against Documents)
Place of shipment, destination and latest date for shipment
Specific documents like invoice, bill of lading, marine insurance policy, certificate of origin, packing list etc.
The details of mode of shipment & the documents which are to accompany the Bill of Exchange viz, Airway Bill or Air Consignment Note .
The date up to which the credit will remain valid & the date the documents should be presented for negotiation.
Methods of advice credit, whether it should be sent by mail, telecommunicated or electronically conveyed
4.3 Credit Department: Bank Credit is one type of finance. Bank as a financial intermediary provides finance from surplus unit to deficit spenders which plays an important role in economy because it allows funds to be channeled from those who might otherwise not put them to productive use to those who will in this way can use these funds. Banks accepts deposits from individual & makes loans. The range of services includes import/export finance, short term credit, retail banking, project financing through syndication with other co-lenders etc. At micro level bank has the policy to make the flow of credit to some selected & priority sectors, agricultural sector, small business unit, new entrepreneur & economically backward regions. 4.3.1. Credit Assessments:
24
A thorough credit and risk assessment conducted prior to granting of loans, and at least annually thereafter for all facilities. The results of this assessment are presented in the approved Credit Appraisal Form that originates from the Credit Officer/ Relationship Manager and are approved by the Management / Executive Committee of Directors / Board of Directors. The Credit Officer / Relationship Managers must be familiar with the bank's Lending Guidelines and conduct due diligence on new borrowers, principals, and guarantors in line with the policy guidelines. Credit Appraisal summarizes the results of the Relationship Manager’s risk assessment and includes, as a minimum, the following details: •
Amount and type of loan(s) proposed.
•
Purpose of loan (s).
•
Result of financial analysis
•
Loan Structure (Tenor, Covenants, Repayment Schedule, Interest)
•
Security Arrangements
KYC Concept: The credit officers / Relationship Manager must know their customers and conduct due carefulness on new borrowers, principals, and guarantors to ensure such parties are in fact who they represent themselves to be i.e. Know Your Customer (KYC). 4.3.2. Basics of Credit Risk: The following risk areas consider for analyzing a credit proposal: •
Management / Ownership / Corporate Structure Risk
•
Business and Industry Risk
•
Financial Risk (Historical / Projected Risk)
•
Relationship Assessment
•
Critical Risk & Mitigating Factors
•
Adhere to Lending Guidelines
To assess the gravity of different risks the credit officers analyze the above areas through following questions:
Management / Ownership / Corporate Risk
•
Are there adequate ability and experience in senior management?
•
Is there adequate depth and succession planning?
•
Is there any conflict among owners / senior managers that could have serious implications? (i.e. Team Work )
•
Business and Industry Risk
•
Are there any significant concentrations of sales (by customer, industry, county and region)?
•
Any supplier concentration which might impact company’s business adversely?
•
How does the borrower rate with its competitors in terms of market share?
•
Does the borrower deal in any specific product that may be subject to obsolescence?
Financial Risk (historical / Projected)
(Risk that counterparties will fail to meet obligation due to financial distress. This typically entails analysis of leverage, liquidity, profitability, interest coverage ratio etc.) •
Does the borrower produce financial statements on time?
•
Is working Capital Adequate?
•
Has the customer actual title to stock?
•
Have financial covenants been met?
•
Has there been any major sale of shares by directors?
•
Any significant change in asset conversion cycle? (Account Receivables / payables / Inventory etc.)
•
Are there enough cash flows to meet obligations?
4.3.3. Critical Risk & Mitigating Factors:
26
The bankers must assess the critical risks of facilities given / to be given and ways / factors of mitigation of those risks. Some of the critical factors are: Volatility •
High debt
•
Overstocking
•
Rapid growth
•
Acquisition
•
Debtors issues
•
Succession
4.3.4. Approval Authority:
APPROVAL AUTHORITY APPROVAL LETTER
HEAD OF BRANCH HEAD OF CAD COPY
Ensuring compliance with ter ms and condition of the approval letter and completion of docume ntation DISBURSEMENT LETTER UPTO TK.5.00 CRORE B E Y O N D T K . 5 . 0 0 C R O R E R E C OM M NE D E D TO D M D / M D
Set of documents
4.3.5. Credit Monitoring: To minimize credit losses monitoring procedure & systems are in place that provides an early indication of the deteriorating financial health of a borrower. At a minimum, systems are in place to report the following exceptions to relevant executives to relevant in CRM & RM team.
Past due principal or interest payments, past due trade bills, account excesses & breach of loan covenants.
Loan terms & conditions are monitored financial statement are received on a regular basis, and any covenants breaches or exceptions are referred to CRM & the RM team for timely follow up.
Timely corrective action is taken to address findings of any internal, external or regular inspection or audit.
All borrower relationship or loan facilities are reviewed & approved through the submission of a Credit Application at least annually.
At a Glance the Financial Condition of Foreign Exchange Branch Business
Budget
Actual
Variance
Achievement
Budget 2010
Fixed Deposit Savings Deposit Other Deposits Corporate Loan
866107
879164
13057
101.5%
865800
1392517
1274400
(118117)
91.5%
1834520
1847370
1096036
(751334)
59.3%
2405680
6933333
6218982
(714351)
89.7%
6974000
28
Agricultural Loan Retail, SME and Margin Loan Import Export Guarantee Loan Deposit ratio
233333
(233333)
300000
166667
73822
(92845)
44.3%
400000
3364583 2089583 125000 178.6%
3245585 1098206 1751330 193.6%
(118998) (991377) 1626330 15.0%
96.5% 52.6% 1401.1% 0
8075000 5015000 300000 150.3%
Yeild on 11.0% Loans & Advances Interest 7.7% Spread on Advances Cost of Fund 3.3%
11.7%
.7%
0
11.4%
7.9%
.2%
0
8.2%
3.7%
.5%
0
3.2%
Operation Cost
1.3%
.1%
0
1.0%
1.2%
Chapter-5 Credit Risk Management of DBBL 5.1 Introduction: One of the primary functions of commercial banks is sanctioning of credit to the potential borrowers. Bank credit is an important catalyst for bringing about economic development in a country. Without adequate finance there can be no growth or maintenance of a stable economy. Bank lending is important for the economy, for it makes possible the financing of agriculture, commercial and industrial activities of a nation. At the same time, a bank will, therefore, distribute its funds among various sectors in a manner as to derive sufficient incomes. Bank lending is important for the economy in the sense that it can simultaneously finance all of the sub-sectors of financial arena, which comprises agricultural, commercial and industrial activities of a nation. Therefore, a bank is supposed to distribute its loan able fund among economic agent-in-deficit in a manner that it will generate sufficient income for it and at the same time benefit the borrower to overcome his/her deficit. In the matter of
lending purposes DBBL follows precautionary policies and sound-lending principles especially for project appraisal purposes.
5.2 What is Credit? Credit is the confidence of the lender in the ability and willingness of the borrower to repay the loan at a future date. It is generally believed that confidence is the basis of all credit transaction. The fundamental principle upon which credit is generally based is in character, capacity & capital 3C’s or 3 R’s – reliability, responsibility and resources of the borrower. More generally the term credit is used narrowly for debt finance. Credit is simply the opposite of debt. Debt is the obligation to make future payments. Credit is the claim to receive these payments. Both are created in the same act of borrowing and lending. In a credit economy, that is economy with borrowing and lending, each spending unit can be placed in any one of the three categories: deficit spenders, surplus spenders, and balance spenders, as it total expenditure is greater than, less than, or equal to its total receipts respectively. The chief function of credit is to relax the constraint of balanced budgets.
5.3 Credit Department In the large banks it would be impractical, if not impossible, for the cashier, in addition to his other duties, to keep track of every local borrower and the bank may employ a "credit man," who specializes in credits. The next step is the organization of a credit department, usually in charge of one of the officers of the bank. The credit department collects and files every available bit of information concerning people or firms that borrow money. This material consists of financial reports, press clippings, personal interviews, and statements of condition and, in fact, every item that has even a remote bearing upon the standing of borrowers. It requires technical training of a high order properly to classify and analyze this data, but the fundamental idea is to acquire the same knowledge of the true facts that a country bank cashier has with respect to his neighbor. A simple but practical definition of credit is "the ability to buy with a promise to pay," in other words, to obtain present value for a promise to pay in the future. He who has "good credit" can command either goods or money because of the faith or belief that others have in his promise. The word "credit" is derived from the Latin "credo." It is not only essential that the borrower have the ability to pay his note when it is due - he must also have the desire or inclination to pay. Credit is primarily based upon 30
confidence which has as its basis three things. First and foremost is character, the "moral risk" which is indispensable in every case. Then comes capacity, the borrower's ability and business methods. Thirdly, we have capital which, while essential, is distinctly secondary to character and capacity, a combination which is very apt to attract capital. The banker, naturally, in selecting his customers knows that he may be asked to extend credit. He first satisfies himself that the factors of character and capacity are such as to justify confidence. This information is obtained from personal knowledge of the borrower, and by information obtained through other banks, through "the trade" and by agency reports. Trade inquiries are directed to people selling goods to and competitors of the borrower. If all this information is satisfactory, the capital factor is studied in the borrower's financial statement of condition, which balance sheet should be taken off at regular intervals. It must show a sufficiently "liquid" position to satisfy the banker that his loan can and will be repaid when due. To show this, there must be an ample margin of quick assets (those readily convertible into cash) over current liabilities to enable the borrower, despite any natural shrinkage of values in liquidation, readily to meet his obligations. This ratio is often called the 2 to 1 ratio, but differs in proportion according to the character of the business in question. The ability to loan money wisely and to those who are entitled to it - in short, the ability to distinguish between a safe risk and an unsafe one - is the quality that marks the good banker.
5.4 Importance in Bank: If it can be said that one department is more important in a commercial bank than another, surely the credit department is that one. A great deal has been written of late in regard to the systematic gathering of credit information. In a small country bank, the need for classified information regarding borrowers is not so essential to success; but even if the banker feels that he knows each one of his borrowers and just what he is worth, a memorandum file of what has transpired in the loaning account of a customer in the past five or ten years may cause a slightly different decision in regard to a new application. Statements are hard to get in rural communities; because all business men do not keep accounts. Many men who do thousands of dollars worth of business in a year depend entirely upon their check books and stubs as their sole book records. With this class of borrower it will be impossible to obtain more than an estimated statement, but if such facts as can be gathered in this way are reduced to writing and signed by the prospective borrower, they will prove valuable to a tired memory or to the successors or substitute for the incumbent of the presidential chair.
When the community is of such a size that personal acquaintance with every borrower is impossible, or where the population is changing or increasing rapidly, the establishment of a credit department should not be regarded as a useless expense. In large cities such a department is absolutely essential. The first requisite of a good credit department is an efficient credit man to take charge. To state the qualities that go to make up such a credit man would seem like naming all the virtues and saying these he must have. Some things are essential. The man must have a fair knowledge of accounts so as to be able to read between the lines of a statement. He should be a man of pleasing address, able to meet with and draw out of men the information he desires to know in determining the credit a borrower should have. He should never give offense to a debtor under any circumstances. Knowledge of shorthand would be useful, but it should be used with caution. It is a serious mistake to take a conversation down verbatim. Men dislike to be quoted on such matters and the feeling that every word is being recorded has the effect of sealing their lips rather than opening them. The credit man should keep posted regarding conditions of trade, assignments, judgments, conveyances, mortgages, petitions in bankruptcy, etc., and anything that may concern the bank or its customers. It may seem like sacrilege to suggest that banks should exchange information regarding borrowers, but it frequently happens that two or three banks within a stone's throw of each other loan money to the same borrower and each thinks it is the only creditor. Credit has been defined as "A question of ability to pay coupled with an intention to pay." Both ability and intention must be assured in order that the credit may be considered a safe proposition. The latter of these requisites is one that must be settled on the basis of past experience, habits of life, character, etc. If a man always has paid his debts and is not living beyond his means, his intention to pay will be practically assured. The ability to pay is quite another matter and more difficult to determine. It is in this end of the credit work that the credit man is able to display his genius. The information that a credit man obtains from others often compares with the following anecdote: Abraham Lincoln was once called upon to give a report on the financial standing of a brother attorney. Lincoln replied: "I called on Jones at his office and found that he had a wife and a baby, and that ought to be worth $50,000 to any man; he possessed half a dozen law books, two wooden chairs, a pine table, and a rat hole that is certainly worth looking into."
32
There are certain facts that a credit man must know in order to determine whether or not the bank will extend credit to a borrower: 1. The character of the management of the business. 2. The character of the business. 3. What the competition is. 4. How the concern is organized to do business. 5. What are their business methods? 6. Do they pay their bills? 7. What are they worth? 8. What do other people think of them? He must obtain these facts from various sources, and from the information gathered form his conclusions.
5.5 Strategic Credit Management The Credit Department Inc. is the Nation's first and only true credit management outsourcing firm and are simply the best at managing trade receivables worldwide. No other company has the scope of services we provide and no one gets the results we do. We provide manufacturers, distributors and service organizations with credit management outsourcing, collection outsourcing and other specialized services including deduction management. Significant cash flow improvements along with time and cost savings happen everyday for our clients - expect it. We’ve created something that is almost impossible for mid-market companies to duplicate inhouse. After studying hundreds of companies over the years and formulating our own scorecards, we can tell you with the utmost certainty whether a company will be viable in 20 days or two years. We know the trends, where to get the information and what that means for you. We will not only tell you if they are a good credit risk, but unlike other companies, we’ll make
a
recommendation
as
to
how
much
credit
you
should
extend.
The Credit Department has helped over 300 companies in 80 industries bring about change and dramatic results in their sales to cash cycle. We are your strategic business partner who, over a short amount of time, becomes a cohesive and transparent component of your daily operations. There isn’t a better return on investment you could make for your company.
5.6 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.
5.6.1 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.
5.6.2 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.
34
•
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.
5.6.3 Number & short name of grades used in the CRG: The proposed CRG scale consists of 8 categories with Short names and Numbers are provided as follows: GRADING Superior Good Acceptable Marginal/Watchlist Special Mention Sub standard Doubtful Bad & Loss
SHORT NAME SUP GD ACCPT MG/WL SM SS DF BL
NUMBER 1 2 3 4 5 6 7 8
CREDIT RISK GRADING DEFINITIONS A clear definition of the different categories of Credit Risk Grading is given as follows: •
Superior - (SUP) - 1 o Credit facilities, which are fully secured i.e. fully cash covered. o Credit facilities fully covered by government guarantee. o Credit facilities fully covered by the guarantee of a top tier international Bank.
•
Good - (GD) - 2
Strong repayment capacity of the borrower
The borrower has excellent liquidity and low leverage.
The company demonstrates consistently strong earnings and cash flow.
Borrower has well established, strong market share.
Very good management skill & expertise.
All security documentation should be in place.
•
Credit facilities fully covered by the guarantee of a top tier local Bank.
Aggregate Score of 85 or greater based on the Risk Grade Score Sheet
Acceptable - (ACCPT) - 3
These borrowers are not as strong as GOOD Grade borrowers, but still demonstrate consistent earnings, cash flow and have a good track record.
Borrowers have adequate liquidity, cash flow and earnings.
Credit in this grade would normally be secured by acceptable collateral (1st charge over inventory / receivables / equipment / property).
•
Acceptable management
Acceptable parent/sister company guarantee
Aggregate Score of 75-84 based on the Risk Grade Score Sheet
Marginal/Watch list - (MG/WL) - 4
This grade warrants greater attention due to conditions affecting the borrower, the industry or the economic environment.
These borrowers have an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and/or inconsistent earnings.
Weaker business credit & early warning signals of emerging business credit detected.
•
The borrower incurs a loss
Loan repayments routinely fall past due
Account conduct is poor, or other untoward factors are present.
Credit requires attention
Aggregate Score of 65-74 based on the Risk Grade Score Sheet
Special Mention - (SM) - 5
This grade has 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.
36
Severe management problems exist.
Facilities should be downgraded to this grade if sustained deterioration in financial condition is noted (consecutive losses, negative net worth, excessive leverage),
•
•
An Aggregate Score of 55-64 based on the Risk Grade Score Sheet.
Substandard - (SS) – 6
Financial condition is weak and capacity or inclination to repay is in doubt.
These weaknesses jeopardize the full settlement of loans.
Bangladesh Bank criteria for sub-standard credit shall apply.
An Aggregate Score of 45-54 based on the Risk Grade Score Sheet.
Doubtful - (DF) – 7
Full repayment of principal and interest is unlikely and the possibility of loss is extremely high.
However, due to specifically identifiable pending factors, such as litigation, liquidation procedures or capital injection, the asset is not yet classified as Bad & Loss.
•
Bangladesh Bank criteria for doubtful credit shall apply.
An Aggregate Score of 35-44 based on the Risk Grade Score Sheet.
Bad & Loss - (BL) – 8
Credit of this grade has long outstanding with no progress in obtaining repayment or on the verge of wind up/liquidation.
Prospect of recovery is poor and legal options have been pursued.
Proceeds expected from the liquidation or realization of security may be awaited. The continuance of the loan as a bankable asset is not warranted, and the anticipated loss should have been provided for.
This classification reflects that it is not practical or desirable to defer writing off this basically valueless asset even though partial recovery may be affected in the future. Bangladesh Bank guidelines for timely write off of bad loans must be adhered to. Legal procedures/suit initiated.
Bangladesh Bank criteria for bad & loss credit shall apply.
An Aggregate Score of less than 35 based on the Risk Grade Score Sheet.
5.7 Lending Principles Followed by DBBL
As liquidity and profitability are conflicting considerations, Dutch-Bangla Bank Ltd., as a bank, while employing the funds pays due regard to both profitability and liquidity. In order to secure a balance between liquidity, profitability and security, Dutch-Bangla Bank Ltd. follows the following principles of sound lending.
Profitability:
•
All credit facilities granted to the Bank’s customers must produce profit, either directly or indirectly. Spreads are normally associated with the element of risk undertaken and the period and nature of the facilities. When judging a credit proposal, concerned officers are required to take a comprehensive view of other allied business that will be received by the branches. Generally, the Head office advises the rates of interest to be charged on various types of credit facilities. The branch managers would ascertain market conditions and keep the Head Office informed. Cases for charging interest lower than the stipulated rate is supposed to be supported by sound business considerations.
Source of repayment:
•
After satisfying the profitability principle, that is, the transaction will be profitable, next attention to be given to the cash flow situation of the borrower. The Bank’s advances can be classified into three main categories, as follows: 1.
A very short-term advance which will be liquidated by funds received in
the very near future: Examples are advances against foreign or local bills or bridge financing where evidence of credit sanction from another financial institution is available. 2.
Provision for current assets: This type of facility is needed for trading and or
manufacturing activities; the capacity and the potential for adjustment of the facility will depend on the nature of the borrower’s trade and the market in which he operates. 3.
Term advance/ lending over 1 (one) year: Examples of such facilities are
investment in plant and machinery, building, a farm or a shop: generally, a long-term loan is repaid out of future earnings generated by the business.
38
Before granting a facility, it is supposed to be ensured that a reliable source of repayment exists and that the advance will be paid within the agreed period. When considering the period of repayments, required margin should be provided for unforeseen circumstances such as downward market trend, or the general economic condition of the country. Besides payment of interest and installments and other charges, the funds generated by the business should preferably leave adequate margin for meeting needs for future expansion or other business contingencies. Where the facilities are secured by fixed assets, the sale proceeds of such security should not be considered as a prime source of adjustment of the facility.
•
Character and ability of the borrower:
The Branch manager is supposed to know his customer well and should be able to judge his intentions and ability to use the credit facilities to his advantage. Advance should be granted only to those borrowers in whom the branch manager has full confidence. Integrity of the borrower and his ability to conduct business are of paramount importance and take precedence over the value of the securities offered. The directors or partners of limited companies or partnerships should be men of integrity, experience and drive. Assessment of the company’s operations and information about the directors can be gained by studying the past year’s financial statements of the company, its general reputation in business circles, and by reference to the company’s bankers. When recommending a review or extension of a limit, branch managers should verify the past performance from the branch records. The levels of maximum and minimum balances, turnover, the average debit balance, and timely receipt of the installments provide an adequate basis on which to judge the health of the account. The borrower should possess good trade experience, business acumen, initiative and drive. He must have ability to control the finances of his business. Lack of financial control may ruin an otherwise successful business, particularly when the business faces adverse economic conditions. It is imperative that the branch manager should be able to form a favorable impression about the integrity and business ability of his prospective borrower before initiating the loan application. •
Purpose of the facility:
The purpose of advance should be studied with a view to understanding whether it is within the policy of the Bank. (If it is outside the Bank’s policy, the proposal should not be given further consideration).
Each proposal should be considered on its merits. Consideration should of course be given to the nature of business and certainty with which the business or the project will yield results. Branch managers should exercise their judgment and should avoid granting advances for speculative projects. The general test, which should be applied by the branch manager, is whether the Bank is called upon to finance a reasonable business project or whether the borrower will utilize the finance for speculative purposes. In the case of corporate borrowers, the purpose of borrowing must be consistent with the objectives of the company. The objectives laid down in the Memorandum and Article of Association or by-laws of the company is required to be carefully examined before considering any credit facility for limited companies. •
Terms of the facility:
Credit facilities are broadly divided under the following categories: i.
Facilities needed for very short term requirements;
ii.
Facilities needed for current assets requirements;
iii.
Facilities needed for long-term /investment requirements.
Facilities covered under category (a)
Above are generally required for a short period of up to three to six months. Such facilities include packing credits, advances against salaries, advances against purchase/discount of bills and bridging finance facilities. Facilities covered under category
(b)
Are generally for a slightly longer period, say up to one year. When considering a facility of this nature, a feasibility study of the project should be made and a repayment schedule should be agreed.
Having agreed the period of repayment, the branch manager must ensure that repayment is received within stipulated period. It is prudent to take corrective action when the first default is made. Caution at an early stage prevents accumulating heavy debit balances and possible bad debts.
•
40
Information requirements:
To satisfy the majority, if not all, of the principles of lending detailed above, the branch should collect information on the following questions, before considering whether credit facilities should be granted to the borrower: Who is the borrower? Whether any special characteristics of the borrower need
I.
particular attention. For example, if the borrower is a trust, this calls for examination of the trust deed. Is the branch satisfied about the character, ability, integrity and experience of the
II.
borrower? Is the branch confident about the borrower? III.
Is the purpose of borrowing consistent with the objectives of the company?
IV.
Is the purpose legal? Does it contravene any law? Advances should not be considered for illegal purposes.
V. VI.
What is the amount required? Is it sufficient for the purpose mentioned? Is the security offered acceptable and adequate? Has sufficient margin been
maintained? Can a valid charge be obtained on the security? VII.
What is the period of advance? What are the sources of repayment? Is there reasonable certainty that the stipulated installment will be recovered?
VIII.
What is the rate of interest charged? Will it be profitable to the Bank? In assessing
the profitability of the account, allowance must be made for any ancillary business like foreign exchange, business of group accounts, contingent business etc. which may be available to the Bank from the borrower. Branches should also consider whether there is any demanding or difficult work involved in maintaining the account. •
Safety:
The basis of security valuations will be expert third party assessments at two levels; current market price and forced sale value. In the case of property, valuations should be done by enlisted surveyor of the Bank. Inventory valuations may be taken at the balance sheet values shown in unqualified audited accounts after the branch manager has carried out his own investigation into the composition of the inventory. Specialist value source may be requested by the branch to provide other assets valuation (if required) such as machinery and equipment. The value of the debtor may be taken from the balance sheet. The cost of the valuation (if any) will be born by the borrower.
5.8 Security: Cover against loans and advances:
Security is a Cover against loans and advances. It ensures recovery of loans and advances. Though now-a-days greater emphasis is put on the purpose of the loan rather than securities, nevertheless the securities play an extremely important role to take a decision. To ensure the safety of lending bank judges the following most essential elements of the borrower:
Five Cs: (a) (b)
Character/conduct: Intention to pay the loan. Capacity/Capability: Borrower's competence in the field of employ to fund
profitability and ability to generate income. (c)
Capital/Creditworthiness: Financial strength to cover risk.
(d)
Condition: It is general business condition.
(e)
Collateral: Implies additional securities.
5.8.1 Types of Security: The types of securities offered vary from place to place. In metropolitan cities, it may be Govt. bonds / share / assignment of Book debt / Bills receivable etc. whereas, in the industrial area raw materials & finished goods etc. may be offered as securities. Again agricultural produce is the principal securities in the agricultural centers. Further, a bank also accepts moveable & immovable properties, life insurance policy etc. as securities. Securities can be classified into primary security & collateral security: •
Primary security:
Primary security means the security offered by the borrower himself as cover for the loan. It refers to the asset, which has been bought with the help of the bank. Such as when machinery or some goods have been bought with the help of the bank the machinery and goods constitute the primary security. •
Collateral security:
All other additional security other than the primary securities such as land or Building etc. are considered as collateral securities which may be offered or deposited by the borrower or , by any other third party. Good collateral security must have the following characteristics: ♦ Tangible ♦ Transferable / negotiable ♦ Easily marketable ♦ Price stability ♦ Durability (not perishable) ♦ Ascertain ability of market value 42
♌ Genuineness of title (free from encumbrance)
5.8.2 Valuation of Security: Valuation of security is very important for the lending banker. Therefore valuation of security must be done with careful verification of sources, in respect of nature of procurement, quality, quantity and considering possible risks.
Margin:
•
Margin is a cushion against any possible shortage. It is a portion of borrower's contribution. The fixation of margin depends on the nature and type of security and the financial stability of the customer and also keeping in view the restrictions imposed by the Bangladesh Bank (Head Office from time to time. In case of good reasonable margin should be retained for covering any shortage due to shrinkage, fluctuation of rate, fall in prices and charging of bank interest. In case of advance allowed against merchandise imported through bank, the amount of margin fixed should be deducted from the landed cost of the goods. For allowing advances against goods in trade locally purchased the amount of margin fixed should be deducted from the invoice value or ex- factory prices, as the case may be.
5.8.3 Various Mode of Creating Charge: Over Security: While advancing money, banker must secure his position. Not only that he should insist on good security but the method of charging it should be legal and perfect. The securities may be charged by any of the following ways: I. II.
Pledge
III.
Hypothecation
IV.
Mortgage
V. VI. VII. VIII.
I.
Lien
Charge Actionable claims. Assignment Set-off
Lien:
A lien is the right of a person in the possession of goods, to retain them until debts due to him have been satisfied. A lien may be particular or general. A particular lien is a right to retain
the goods in respect of which the debt arises. Thus, a person who has spent his time, labor and money on the goods retained can exercise a particular lien. A general lien on the other hand arises out of the general dealings between two parties and covers any property that the one party may be holding for the other. Bankers' lien have a general lien on all securities deposited with them as a bankers, by a customer, unless there be an express contract or circumstances that show an implied contract, inconsistent with lien.
Pledge:
II.
A pledge is the bailment of goods as security for payment of a debt or performance of a promise. Bailment means the delivery of goods by one person to another for some purpose, under a contract that the goods shall, when that purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person, who delivers the goods as security is called the "pledger" and the person to whom the goods are so delivered, is called the "pledgee".
Hypothecation:
III.
Hypothecation is defined as a charge against property for an amount of debt where neither ownership nor possession is passed to the creditor. It means creating some claim in goods or related documents without transferring their possession to the lender.
Advances are
sometimes granted on hypothecation basis against the security of book-debts. The charge on book-debts is taken by means of a hypothecation deed or agreement specially drafted for the purpose.
IV.
Mortgage:
Mortgages are advances against immovable property. A mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money or advances by way of loan, an existing or future debt or the performance of an engagement that may give rise to a pecuniary liability.
Types of mortgages: (a)
Simple Mortgage
(b)
Equitable Mortgage /Mortgage by conditional sale
44
(C)
English Mortgage
(d)
Mortgage by deposit of title deeds
(e)
Anomalous Mortgage
Charges: Where immovable property of one person is, by act of parties or operation of law made security for the payment of money to another and the transaction does not amount to a mortgage, the later person is said to have a charge on the property, and all the provisions which apply to a simple mortgage, shall so far as may be, apply to such charge. The following elements of a charge emerge from the above definition: (a)
There must be immovable property.
(b)
The immovable property, to which the charge attaches must be specified, otherwise
the charge would be void for uncertainty. (c)
The immovable property must serve as a security for the payment of money.
(d)
A charge may be created in either of the two ways, namely (i) By act of parties (ii)
(e)
By operation of law.
The essential characteristic of a charge is that it gives a right to payment out of a
particular property.
Types of Charges: (a)Fixed charge: A charge is fixed when it is made specifically to cover definite and ascertained assets of permanent nature such as land, building or heavy machinery. (b)Floating charge: It is a charge on a class of assets, which may be present or future, and which charges from time to time in the ordinary course of business
V.
Actionable Claims:
An actionable claim means a claim to (a)Any unsecured debt. (b)Any beneficial interest in movable property not in the possession of the claimant. For example, a claim to recovery arrears of rent due fixed deposits in a bank.
Assignment: An assignment means transfer of right, property or debt (existing or future or to make it over to another person. The person who assigns right property or debt is called the assignor. The person to whom the right etc. is transferred is called the assignee. Types of assignment: (a)Legal Assignment,
VI.
(b) Equitable Assignment.
Set-off:
It is, in effect, the combining of accounts between a debtor and a creditor so as to arrive at the net balance payable to one or the other.
5.9 Document: Document is the written statement of facts or evidence in regard to a particular transaction, which on placement may bind the parties answerable and liable to the court of law. According to the sec.3 of the Evidence Act, 1872, document means any matter expressed or described upon any substance by means of letters, figures or marks or by more than one of those means intended to be used, for the purpose of recording matter.
5.9.1 Documentation: Documentation refers to the process involved in taking documents right from drafting to the execution and ultimate recording in appropriate register.
5.9.2 Importance of Documentation: The documentation does establish a legal relationship between the lending banker and the borrower. The documents are of great import importance to the banks as they assure the character of primary evidence in any dispute between the parties to loans and advances.
5.9.3 Purpose of Documentation: 46
Documentation is necessary for acknowledgement of debt by the borrower and for charging of securities to the bank against loans and advances.
5.9.4 Types of Documents: Documents related to securing loans and advances are classified into the following two categories:
I.
Charge documents:
Charge documents are preformatted and printed required to create charge on securities against loans and the bank provides advances and the documents to the client for execution.
II.
Legal documents:
Legal documents are legal papers provided by the client certifying the legal status of the borrower, borrowing power, title to goods and property; legal deeds and power of attorney related to creation of charge on securities.
5.9.5 Basic Charge Documents: I.
Demand Promissory Note:
DP note is an unconditional written promise made by the borrower to the bank to repay the amount of loans/advances at a fixed or determinable future date along with interest at it stated rate. II.
Letter of Agreement:
The borrower acknowledges the banks right to cancel the facility allowed at any time without assigning any reason and with or without prior notice. III.
Letter of Continuity:
The borrower undertakes to remain liable on the DP note and other loan documentation even if the liabilities are fully or partially adjusted during the tenure of the credit facility and even through the account may show credit balance from time to time. IV.
Letter of Revival:
The document refers to the law of limitation whereby documents become time barred after 3 years from the date of execution. The period of limitation within which a sent for recovery of
overdue loans/advances to be filled the ordinary period of 3 years from the date on which the facility was extended. The limitation period for mortgage is 12 years beginning on the date of the mortgage deed. The borrower through "letter of revival" confirms having precluded enforcement of limitation law, and also confirms to remain liable on Promissory Note and other documents executed notwithstanding the law.
Other Charge Documents: Letter of Undertaking •
Letter of Disbursement
•
Letter of guarantee
•
Letter of Lien
•
Letter of Disclaimer
•
General letter of counter guarantee
•
Letter of indemnity
•
Memorandum of deposit of title deed
•
Letter of Hypothecation with supplementary agreement
•
Letter of pledge with supplementary agreement.
•
Letter of Lien and authority of advances (3d party).
•
Credit sanctions advice accepted by the borrower and so on.
5.9.6 Legal Documents: I. II. III.
Memorandum and Articles of Association (Limited Co.) Registered partnership deed (partnership firm) Board resolution covering corporate borrowing power and execution of security documents (Limited Co.)
IV.
Resolution of the partners for availing of credit facility and for execution of security documents.
5.10 Nature of Advances & Loan The credit facilities granted by the bank are classified under different account heads as following: I. Short-term agriculture and Micro credit II. Continuing Advances III. Loans IV. Contingent facilities 48
Generally all facilities, except term loans are repayable on demand. Cash Credit /Overdrafts are reviewed annually or at regular intervals in case a closer monitoring of the accounts is necessary. Contingent liabilities are also self-liquidating in a broader sense. The credit worthiness of the client on whose behalf the liability is assured is very important. The different account heads appearing in the Statement of Affairs of the branch, DBBL are categorized as following:
1. Short-term agriculture and Micro credit: Short- term agriculture loan include the short- term credit mentioned in the circular issued by Agriculture Credit Department of Bangladesh Bank under annual credit program. Loan disbursed in agro-sector repayable within 12 months will also be treated under this head. Short-term small loan means loan up to Tk. 10000 and micro credit repayable within 12 months. Basis for loan classification for the Short- term agriculture loan includes: a.
If the advances remain irregular for 12 months the amount is treated as sub-
standard. b.
If the advances remain irregular for 36 months the amount is treated as
doubtful. c.
If the advances remain irregular for 60 months the amount is treated as
bad/loss
ii.
Continuing Advances:
The loan which is transacted without specific repayment schedule but there is an expiry date and credit limit is called continuous loan, such as C.C/O.D. A continuous loan will be treated as irregular or overdue if the advance has not been renewed, that is expiration date is passed. If the loans become irregular for 3 months or more but less than 6 months, the loan will be treated as sub standard. If the loan becomes irregular for 6 months or more but less than 12 months, the loan will be treated as doubtful. If the loan becomes irregular for 12inonths or above, the loan will be treated as bad loan. The loan which is payable after demand of bank is called demand loan. Moreover, if any contingent on other liabilities that is turned into forced loan (not sanction as regular loan earlier) is to be treated as demand loan. For example, Forced LIM (loan against imported merchandise), PAD (payment against document) etc. A demand loan will be treated as substandard, doubtful, bad loan for the period of 3 months or more but less than 6 months, 6 months or more but less than 12 months, 12months or above respectively
Usually the forms of continuing advances are as following: a. Demand Deposit b. Secured Overdraft (including Collateralized overdraft one) c. Cash Credit d. Loan Against Trust Receipts (LTR) e. Loan Against Imported Merchandise (LIM) f. Export Cash Credit (ECC) g. PAD (payment against document)
iii.
Loans:
The loan, which is payable on specific repayment schedule and specific period is to be treated as term loan. If any installment of a term loan is not repaid within as per repayment schedule the unpaid amount will be treated as overdue installment. •
Term Loan payable within 5 years: If the amount of overdue
installment stands equal or more than the amounts which is repayable 6 months, the entire advances will be treated as sub-standard. If the amount of overdue installment stands equal or more than the amounts which is repayable 12 months, the entire advances will be treated as doubtful. If the amount of overdue installment stands equal or more than the amounts which is repayable 18 months, the entire advances will be treated as bad/loss.
•
Term Loan payable over 5 years: If the amount of overdue installment
stands equal or more than the amounts. Which is repayable 12 months, the entire advances will be treated as bad/loss. If the amount of overdue installment stands equal or more than the amounts which is repayable 18 months, the entire advances will be treated as bad/loss. If the amount of overdue installment stands equal or more than the amounts which is repayable 24 months, the entire advances will be treated as bad/loss. Basic loans offered are as follows: a. Loan General (usually short term in nature) b. Transport Loan c. House Building Loan d. Term Loan (Industrial/project financing) e. Bridge Loan / Underwriting advance 50
f. Advance Against Accepted Documentary Bill (local/ foreign) g. Local / Foreign Documentary Bills Discounted / Purchased h. Inland / Foreign Bill Purchased (Clean)
iv.
Contingent facilities: a. Letters of Credit (sight/ Back to Back) b. Letters of Guarantee (Bid Bond, Performance Guarantee, Advance Payment Guarantee, Security Guarantee, Shipping Guarantee
5.10.1 Brief particulars of Loans & Advances: Facility
Description
Security Support
Secured
Facility is allowed against easily marketable a)Pledge of instruments duly
/Collateralized
/Govt. approved instruments (such as FDR, discharged
Overdraft
BSP/PSP, Unit certificates etc.) or against b)
(SOD/OD)
security of land /property acceptable to the mortgage of land/ property.
Equitable/
Cash Credit
bank. Facility is allowed for financing inventory Letter
CC (H)
may be either hypothecated or pledged to the pledge of Goods.
bank as primary security. Loan against Trust Facility is allowed to facilitate delivery of A Receipt
of
standard
registered
hypothecation/
form
called
goods against retirement of documents of Title “Trust Receipt”. to Goods. The client is under delegation to pay the outstanding out of the sale proceeds of
the goods. Loan against Facility is allowed against documents received Letter of pledge of Goods. Imported against L/C released to an approved clearing Merchandise (LIM) agent at the request of the client. Goods must be stored in a secured area of the go down under effective control if they are kept on the borrower’s premises. Export Cash Credit Facility is allowed to exporters to facilitate Letter of pledge of Goods. (ECC) Loan
purchase of raw materials for the purpose of (under bonded facility) manufacturing and exporting finished goods. (secured, Facility is allowed for various purposes for Equitable
/registered
mortgages, bonds acquisition of fixed assets and granted for mortgage of tangible fixed and shares, other short, mid or long term purposes.
assets.
marketable securities) Letter of Credit
Letters of Credit for importation of capital Cash margin.
(sight)
machinery or commodity are called sight L/C
Letter of Credit
as the draft to be drawn at sight. This type of Letters of Credit is backed by Lien over master L/C of 1st
(Back to Back)
master export L/C for export of garments to class of banks acceptable to
overseas market. Letters of Usually guarantees can be classified under two Guarantee heads. (a) Financial Guarantees towards (Bid, PG, APG) fulfillment of financial commitment on behalf of the client, (b) Performance Guarantee when the bank guarantees the performance of the client as specified in the guarantee. Letters of Bank issues guarantees in favor of the shipping Guarantee
company to enable the importer to obtain
(Shipping)
delivery of the goods without producing the
DBBL. Margin in the form of cash and /or FDR.
100% built-in margin.
Bill of Lading.
5.11 Processing of Credit Proposals: The client shall submit loan application form with necessary papers/documents as per Bank’s checklist. On receipt of the loan application form; branch shall scrutinize the papers to ensure the following: ♦ All the columns of the application form have been filled in with appropriate information and the application is signed. ♦ All the papers/documents containing requisite information as per checklist have been submitted. There is no apparent discrepancy in the application papers/documents submitted by the client. On scrutiny of the papers, client should be interviewed to know details about the business and find out any inconsistency in the papers. Credit proposals must be prepared for all credit facilities. Facilities will be renewed at the discretion of DBBL every year. The processing of a credit proposal falls into mainly two stages as following: ♦ Obtaining due approval of the competent authority of DBBL ♦ Steps for allowing the client to avail the credit facility.
52
Management approval levels splits into following authority levels: ♦ Head Office Credit Committee ♦ Delegated authority to the Managing Director ♦ Executive Committee of the Board The Credit Committee is responsible to review, and approve or reject any credit proposals on the basis of lending policy, lending criteria, sect oral exposure and/ or on other genuine grounds. Credit Committee usually meets on every week or more frequently as the need may arise. The proposals after thorough discussion/ deliberation if found suitable is recommended for approval to the Executive Committee of the Board through the Managing Director. Under delegated lending authority to the Managing Director, credit proposals, one time or specific gets approval after inspection is done by Head Office Credit Division. From time to time the Managing Director may delegate the branch managers discretionary powers with due approval from the competent authority. Head Office deals with analyzing, reviewing of proposals emanating from branches and have the following responsibilities: •
Reviewing and analyzing the proposal on the basis of merits and complying with
usual norms and procedures and within the policy guidelines of DBBL. ♦ Processing of credit limit proposals for review by Credit Committee. ♦ Processing of full-dressed memo for sanction/ renewal/ re-structure of limits for approval of the Executive Committee of the Board. ♦ Monitoring of loan port-folio of branches including non-performing and classified accounts. ♦ Periodic review of various advances related statements. ♦ Identification and pursuing potential irregular advances. ♦ Monitoring and implementation of DBBL’s credit policy. Credit proposal originates in the branch. Proposal after due checking, and analysis is sent with recommendation signed by the manager and the credit officer in-charge. After the credit proposal has been finally approved by the competent authority as the case may be, the resolution /decision thereof are sent to the branch for further action as following: ♦ Conveying offers to the borrower and obtain acceptance there against. ♦ Branch credit /loan administration perfect the security and charge documents considering the nature and the terms of the facility. ♦ Setting –off client file account record.
5.11.1 Credit Report: The branch manager should ensure preparation of credit report on the client to determine its past record, business performances, market reputation etc. The credit report should contain the following: ♦ The nature of client’s business. ♦ The names of owners and details of their associated business concerns. ♦ Net worth of the individual person owing the firm /company (obtain through declaration at the time of submission of loan application). ♦ The financial health of the business concern. ♦ Assessment of managerial capability through analyzing the up to date financial statements and market report, previous bank’s transaction record.
5.11.2 Credit Information Bureau (CIB) Report: In the recent past, to stream line credit discipline in banking sector and for meticulous adherence to the treatment of delinquent borrower by the commercial banks and DFIs as per stipulation of Bank Companies Act 1991, Bangladesh Bank has introduced a credit port folio data base naming Credit Information Bureau (CIB). For processing credit proposals (both funded & non-funded) banks and DFIs need to obtain mandatory satisfactory CIB report from Bangladesh Bank. Present criteria for obtaining mandatory CIB report may be changed from time to time at the discretion of Bangladesh Bank. Any change in this regard shall be notified to the banks vide Bangladesh Bank CIB Circulars. Branch manager must obtain satisfactory CIB report prior to processing of credit proposals and mention the status of the client and its allied concerns /persons of the borrower in the credit line proposal as it is revealed in the latest CIB report. Irrespective of outstanding amount, the Banks have to submit credit information of all of then- accounts of loans and advances to the CIB of Bangladesh Bank.
•
Category/ Classification of CIB Statements
Range
Period
Over I crore Monthly Over 10.00 lac but Under Quarterly 1.00 Crore 54
Under 10.00 lac but over Quarterly 1.00 lac
Contents of CIB Statements:
• ♦
Name and address of the Account
♦
Period
♦
Borrower code
♦
Bank Code
♦
Branch Serial.
♦
Nature of Advance Sanction limit
♦
Disbursed Amount during the reporting period
♦
Cumulative Disbursement
♦
Outstanding Amount
♦
Due for recovery amount during reporting period
♦
Recovery amount
♦
Cumulative recovery, Total Recovery
♦
Overdue Amount = Due for recovery - recovered amount
♦
Economic purpose code
♦
Security Code
♦
Class Code
♦
Sanction code
♦
Expiry Date
♦
Classification date
♦
Lawsuit date
♦
Guaranteed amount 50% of collateral Asset
♦
Grade
♦
Score - Y Z
5.11.3 Visiting Client: A visit to the client’s business premises, factory can be a very useful avenue to gather information for preparation of credit proposal. This visit and meeting the client at their doorstep may help to confirm the business decision reach by the manager with regard to the clients’ financial status, management efficiency and technical details about the good sense and services in which the client deals.
During the visit particularly to the factory go down, the manager can get an idea about the client’s investment, condition of the machinery and client’s stock movement. This will also help to judge its quality and acceptability as a reliable security. A set of question, which may be asked, should be prepared before hand. There are different sections covered in the credit proposal format which are as following: I.
Client introduction:
Giving the exact name and style of the client as per registration in case of limited company. Also indicate the nature of the proposal “New” or “Renewal/ Revision”. Use figures in denomination of Taka in million. State exact nature of business/description of the project. Provide business capital /equity capital of the owner based on financial statements.
Particulars of owners:
II.
State whether proprietor, partners or directors Show the percentage of the shareholdings of the directors as per record. Provide declared assets / net worth as the case may be by individually. III.
Allied concerns:
Provide name of allied business concern of the owners/ client, their nature of business and their investment / interest in the business. IV.
Credit facility from other banks :
Obtain declared statement from the client. Also refer to CIB report of Bangladesh Bank. V.
Account maintained with DBBL:
State all accounts including Fixed Deposit, if any, showing average deposit/current deposit. VI.
Existing credit lines(s):
Give details and nature of facility. The amount of respective limit and the out standings on the date of the proposal, State validity/ maturity, State primary and collateral security in brief. In footnote, please provide overdue status of PAD/TR/Loan and whether Term Loan repayment is regular. VII.
Proposed credit line(s) :
In case of renewal /revision, this section should be completed only after careful review of the conduct of the account, Client’s financial requirement, managing of business affairs in terms of available facility (s).
56
In case of fresh proposal, and after having a preliminary discussion with the client to have a clear view of client’s account, his future plans and financing requirements, the size of limit, period and proposed security to be structured. VIII.
Analysis of credit proposal:
In this section, provide general background of the client, business profile, project details and management aspects of the business house/industry. Give views on qualification, experience and past history of the owners. IX.
Third party information:
Provide status of up to date CIB report. Credit checking with other sources. Previous banks account transaction. X.
Financial information:
This section reflects the financial soundness of the business concern and information to be collected / prepared from spreadsheet analysis on the basis of client’s management certified financial statements or audited financial reports. Furnish comments on the liquidity, profitability and leverage position of the client. This exercise / assessment should be done carefully pinpointing the strong and weak areas.
X. Prospects: Here business prospects market outlook of the product to be given. Salient features of the products, pricing, market strategy to be provided in case of manufacturing products. XI.
Assessment of financing requirement :
Client’s financing requirement to be assessed on the basis of business cash flow /working capital assessment / future plans. Exact requirement to be assessed and recommended after preliminary discussion with the client. XII.
Inadequacy in the documentation:
Mention non-fulfillment of any documentation / mortgage perfection etc. Also indicate audit objection on client’s account. XIII.
Collateral security:
Give details of security in the form of land, building, machinery, its written down value or surveyed value. Also show nature of marketable securities, its face value and average market value. XIV.
Risks Analysis:
Furnish comments on LRA exercise, if done, and indicate the LRA rating. Indicate possible risks in the business and its mitigation. XV.
Accounts/ business performance:
Give details of client’s deposit/ loan accounts performance during last 12 months. Show debit/ credit summation, minimum/ maximum balances, L/Cs opened, export documents negotiated during last 12 months.
XVI.
Bank’s earning:
Give break-up of earnings from the relationship. XVII.
Proposed facility(s):
Give facility wise proposed/renewed/restructured loan/ credit limits, purpose of the facility, source of repayment, pricing of the facility, security support and validity of the facility. Other conditions/ special conditions including requirement of Bangladesh Bank approval to be highlighted.
5.11.4 Supporting Documents for processing credit proposal: The branch manager while processing a credit proposal for Head Office approval must see that the proposal recommended is based on following supporting documentation: I.
Credit report on the client
II.
Financial statements
III.
Spreadsheet analysis
IV.
Net worth analysis
V.
Acceptable security details
Credit report on client is a prime requisite for assessing his /their creditability, managerial ability and past historical records. This report should be updated when renewal of credit facilities are considered. Third party credit report / CIB report along with credit report on the client should be kept in the file at the branch.
5.11.5 Post sanctions process: After the credit Line Proposal has been finally approved by the appropriate sanctioning authority in the Bank’s credit organization structure it enters the post sanction processing stage. At this stage the signed credit line proposals is returned to the branch/ credit officers, following four further steps are to be taken by the branch manager before the borrower can use the credit lines that have been sanctioned to him. These steps are as following: 58
I. II.
Convey offer /sanction letter to the borrower Branch credit officers perfect the security and charge documents considering the nature and the terms of facility and the securities and in accordance with the laws of the land. Head Office will provide guidance to branches from time to time in this regard. Where considered necessary advice of DBBL’s panel lawyers should be obtained.
III.
An account number is allocated to the new credit facility.
IV.
The account record is set up and borrower’s file is prepared.
V.
When these four steps have been complied with, the post sanctioning process is completed and the borrower can draw on his account.
5.11.6 Disbursement Disbursement of advance can take in the following different forms: I.
Loans: Advance mace in a lump sum repayable either on fixed installment basis or in lump sum having no subsequent debit except by way of interest, incidental charges, etc. is called a loan.
II.
Overdrafts: Advance in the form of overdraft is always allowed on a current account operated upon cheque. Within the sanctioned limit, the borrower can overdue his account within a stipulated period.
III.
Cash Credit: Cash credit as form of advance is a separate account by itself and is maintained in a separate ledger. The borrower may operate the account within stipulated limit as and when required.
IV.
Inland Bills purchased: Sometimes banks are to purchase bill of exchange to facilitate commercial transactions. In case of purchase and discounting of bills, the bankers credit the customer’s account with the amount of the bill after deducting his charges or discount.
V.
Payment against documents (PAD): PAD is associated with import and import financing. The bank opening letter of credit is bound to honor its commitment to pay for import bills when these are for presented for payment provided that it is drawn strictly.
VI.
Loan against imported merchandise (LIM): When the importers fail to retire the documents or requests foe clearance of goods, the outstanding under PAD or B/E is transferred to LIM.
VII.
Trusts Receipts: Advance against a trust receipt obtained from the customers is allowed when the documents covering an import shipment are given without payment.
VIII.
Long Term Loan: Long term loan is meant for setting up of a project/ industrial undertaking, i.e., financing for the development of the infra structural facilities including procurement of the facilities.
5.11.7 Monitor/ Control of Credit Operations: Advance allowed should be very closely watched to see whether the same are being conducted in accordance with the terms and conditions under which the limits were sanctioned or not. The results of the inspection should be an effective guide in sorting out the measures to be adopted in respect either of correcting the unsatisfactory operation of the advances or recovery of the same. In order to ensure safety of advances, advances should be kept under supervision and thereby under control. This will include supervision at the time of disbursement to ensure proper utilization of bank credit, to supervise end use during the tenure of advance and to ensure that the repayment is regular. The control of credit operations falls into two main parts, namely: ♌
Regular monitoring of all accounts and
♌
Review of all EOL’s.
5.11.8 Renewal of limits: While sanctioning limits, the expiry date is fixed by the Sanctioning Authority. Therefore, branch required reviewing the limit for renewal at least 60 days before expiry of the period. If the Sanctioning Authority is satisfied with the recommendation made by the branch manager, the limit shall be renewed. Otherwise, it will be renewed for adjustment purposes only, farther drawings in the accounts of the customers should not be allowed.
5.11.9 Recovery of Advances
60
Advances granted in any form are repayable either on demand or on the expiry of the validity period, or through agreed installments. When repayment is not forth coming in accordance with the repayment terms, recovery efforts should be launched. When the repayment pattern of the advance is such that continuance of the facility is not worthwhile or while the advance allowed on installment has been defaulted or the advance allowed confronts with the following circumstance advance should be recalled: ♦ Borrower or the grantor dies. ♦ Borrower or the grantor has become insolvent. ♦ Borrowing Company has been liquidated. ♦ Partnership has been dissolved. ♦ Borrower does not come forward to renew the documents much before the expiry of the expiry of the period of limitation. ♦ Value of the security has been deteriorated. ♦ Financial position of the borrower has deteriorated alarmingly which is beyond restoration. ♦ The party commits fraud of any sort. ♦ Policy of the bank has under gone change in relation to certain types of advances. ♦ Bangladesh Bank has imposed restriction on certain type of advance and desires its adjustment etc. For the recovery of the advances, branch should take the under mentioned steps: ♦ Make formal demand for repayment in writing. ♦ Put pressure on the borrower by utilizing the most effective and meaningful media, which can exert adequate influence on the borrower. Available to execute the documents immediately after the limitation period expired. ♦ The period of limitation for making various types of application to courts varies from 10 to 90 days except in a few specified cases, e.g., execution of money Intimate the borrower about bank’s ultimate resorting to file suit in the event of non-repayment. ♦ Advice the guarantor if any to adjust the advance or have it adjusted by the principal debtor. ♦ If the borrower and his guarantor (if any) comes forward and proposes repayment arrangement and the same is considered to be an acceptable proposal, the branch
should seek controlling decision in this regard and act in accordance with the instruction.
5.11.10 Time Limitation Limitation refers to a period within which existing rights can be enforced in the court of Law. In other words, limitation prescribes the time Limit within which the credit shall file suit against the defaulting debtor for the realization of advance made to the latter. Limitation period cannot be extended through any agreement made by the debtor and creditor. But the period can be extended by performance of some acts by the parties. If the borrower executes fresh promissory notes or a new bond etc. even after the expiry of the limitation period, the same is extended from the date of execution of fresh documents as per section 25/3 of the contract act 1872. The documents shall however be taken much before the limitation expires because the may not be decree, where application can be filed within 12 years from the date when the decree becomes enforceable. An appeal against an order or decree of a lower court, which will be heard by a High Court, must be preferred within 90 days of order or decree. If any appeal has to be made to any other appellate authority, lower than the High Court, period of limitation is only 30 days. It is always advisable to consult the Bank's Legal Adviser on such matters.
5.11.11 Qualitative Judgment: If the recovery of the credit becomes uncertain resulting from change of circumstances under which credit was extended or the borrower sustains loss of capital or the value of security decreases or any adverse situation arises then the credit will be classified on the basis of Qualitative Judgment. Besides, if the credit is extended without any logical basis or the credit is frequently rescheduled or the rules of rescheduling are violated or the trends of exceeding credit limit observed frequently or a suit is filed for recovery of the credit is extended without the approval of the competent authority, then the loan will be classified on the basis of Qualitative judgment. Under this judgment the loans will be classified as under: •
Substandard:
Financial condition is weak and capacity or inclination to repay is in doubt. These weaknesses jeopardize the settlement of loans. Due to reasons stated above or for any other reason if in spite of possible loss of any credit, there is any probability of changing the present situation through taking proper steps. 62
Doubtful:
•
Even after taking proper steps, if the full recovery is not ensured. Full repayment of principal and interest is doubtful and the possibility of loss is extremely high. However, due to specifically identifiable pending factors such as litigation, liquidation, of capital injection the asset is not yet classified as loss.
Bad/Loss:
•
If the probability of recovery becomes totally nil, i.e., assets are long outstanding with no progress in obtaining repayment or in the late stage of wind up / liquidation. The prospect of recovery is poor and legal option has been perused. The proceeds expected from the liquidation of security may be awaited. The continuance of the loan as a bankable asset is not warranted and the anticipated loss should have been provided for. If any improvement achieved in the accounts classified it will again be declassified. However, the credit once classified by inspection team of Bangladesh Bank, that will be treated as final classification and before any subsequent inspection is conducted by Bangladesh Bank or without prior approval of Bangladesh Bank the credit will not attain any merit of declassification. Provision for reserve will be kept at the following scale: Sub-Standard
: 20%
Doubtful
: 50%
Bad/Loss
: 100%
After adjustment of Interest Suspense and value of Eligible Securities from outstanding balance of classified credit-the reservation of provisions will be kept on the calculated balance. General provision will be kept at the rate of 1% on unclassified loans.
5.12 Approval Process: Before making any commitment verbally or otherwise for extension of credit to any borrower, a proper approval of the competent lending authority must be obtained supported by Customer’s credit analysis and recommendations. No credit facility approve unless a satisfactory presentation package has been prepared. Prior to securing the requisite approval, the Manager ensures due diligence that: •
The Bank is in possession of all credit information required to properly evaluate the risk being undertaken.
•
A detailed Credit Analysis has been completed, to include a written analysis of the financial condition of the borrower.
•
The proposed extension of credit fully meets the standard of purpose, quality etc. self worth in the credit policy guidelines.
•
The Board of Investment (BOI) registration, permission for all the regulatory bodies, clean CIB reports etc. are obtained.
In approval process the Bank segregates its relationship Management / Marketing from the approving authority. Different Branches of the Bank act as Marketing Units where the Head of Branch acts as the Relationship Manager (RM). The existing approval authorities are Head of Branch (wherever applicable) and Head Office Credit Committee, Executive Committee of Directors and Board of Directors as per their discretionary powers defined in later section. However the Bank Management/ Board of Directors of the Bank is actively considering for the Individual Delegation Power to the Senior Level Executives at Head Office instead of Head Office Credit Committee for effective credit risk management. The Branch Marketing Team comprising of Executives and Officers market the clients and then prepare credit appraisal memo as per the prescribed format and within the purview of the set rule/policy guideline of the Bank. In case it is within the delegation power of the Branch Credit Committee the concerned Executive/ Officer place it to the Branch Credit Committee who makes judgment (qualitative and quantitative judgment) and if found viable then they approve the Loan otherwise they may reject it or forward it to the Head of Corporate/ Commercial Banking at Head Office. A flow chart of approval process given below: Flow Chart of approval process:
BRANCH MARKETING TEAM (EXECUTIVES & OFFICERS)
HEAD OF BRANCH (APPROVAL/ DECLINE) AS PER DELEGATION
HEAD OF CREDIT (APPROVAL/ DECLINE) AS PER DELEGATION
DMD (APPROVAL/ DECLINE) AS PER DELEGATION
BEYOND CAPACITY RECOMMNEDED TO
HEAD OF CORPORATE/ COMMERCIAL BANKING (MARKETING) FORWARDED TO
64
BEYOND CAPACITY RECOMMNEDED TO
MD (APPROVAL/ DECLINE) AS PER DELEGATION
EXECUTIVE COMMITTEE OF DIRECTORS (APPROVAL/ DECLINE) AS PER DELEGATION BEYOND CAPACITY RECOMMNEDED TO BEYOND CAPACITY RECOMMNEDED TO
BOARD OF DIRECTORS (APPROVAL / DECLINE) BEYOND CAPACITY RECOMMNEDED TO
MD (APPROVAL/ DECLINE) AS PER DELEGATION
EXECUTIVE COMMITTEE OF DIRECTORS (APPROVAL/ DECLINE) AS PER DELEGATION BEYOND CAPACITY RECOMMNEDED TO BEYOND CAPACITY RECOMMNEDED TO
BOARD OF DIRECTORS (APPROVAL/ DECLINE) BEYOND CAPACITY RECOMMNEDED TO
Chapter: 6 Credit Performance of DBBL Loans and Advances 6.1 Loans and advance position over the years: Sl
Year
No.
Loans
(Tk in Million) & Total Classified Classified advance Classified during
Advance
loans
& to Total advance the year
advance 01 2006 20349.42 357.35 02 2007 28325.34 815.43 03 2008 28369.58 958.03 04 2009 41016.62 1363.17 Table: loans & advance position over the year
(%) 1.58 2.68 3.26 3.27
350.83 815.43 958.02 1363.17
6.2 Total loans & advance over the year: Sl No. 01 02 03 04
Year
Loans & Advance
2006 20349.42 2007 28325.34 2008 28369.58 2009 41016.62 Table: loans & advance over the year
(Tk. in Million) Growth rate of loans & advance (%) 39.19 0.16 44.58
In Dutch Bangla Bank Limited registered a growth in the credit portfolio posting a growth of 44.58%. Total Loans & advances of the Bank stood at Tk 41016.62 million against Tk 28369.58 million in the previous year. The loans & advance from 2005 to 2008 are shown in the following graphical presentation: 2006 20349.42 2007 66
28325.34 2008 28369.58 2009 41016.62 0 5000 10000 15000 20000 25000 30000 35000 40000 45000
From the above information it is shown that the rate of increase of Loans and Advances was highest in 2008 i.e. 44.58 % because of well diversified portfolio management and fair economic condition.
6.3 Industries-wise loans, advance and lease receivable including bill purchased and discount Taka in Crore 2007 86.52
Agriculture Fisheries and Forestry
2009 66.34
2008 23.5
2006 15.72
Pharmaceutical Industries
42.75
21.34
21.02
11.13
Textile and Readymade Industries
1450.98
1227.55
956.03
1023.2
Chemical Industries 26.69 11.74 29.6 31.26 Transport and Communication 136.01 65.97 58.59 43.8 Electronics and Automobile 56.4 52.49 30.73 59.03 Housing and Construction Ind. 292.77 204.71 158.37 112.73 Energy and Power Industries 32.54 37.96 29.73 3.85 Cement and Ceramic Industries 29.52 51.78 58.28 7.97 Food and Allied 70.00 71.56 107.31 142.04 Industries Engineering and 149.30 166.09 162.20 212.72 Metal Industries Service Industries 145.37 102.28 103.32 112.94 Other Industries 1,671.10 903.27 1,030.06 258.41 Total 4,169.77 2,940.24 2,831.75 2,034.85 Table: Industries-wise loans, advance and lease receivable including bill purchased and discount
6.3.1 Loan in agriculture sector Over the Years (Taka in crore & growth rate in%) 2006 2007 2008 2009 & Growth Growth Growth Growth Amount Amount Amount Amount rate rate rate rate
Loans Advance Agriculture sector
15.12
-
86.52
4.50
23.50
-72.83
66.34
182.30
Table-: Amount & growth rate of loan in Agriculture sector Agriculture loan registered in increase of 182.30% during the year under review. At the close of 2008, the loan in Agriculture sector at Tk 66.34 crore against Tk 23.50 crore in the previous year. The loan in Agriculture sector from 2006 to 2009 is shown in the following graphical presentation. In 2008 the growth rate was negative and frustrating for Dutch Bangla Bank limited where as most of other commercial banks have a increasing positive figures. This is because of: • Improper and Inefficient Management Policy •Lacking of well diversified portfolio management •Implied more rules and regulations against Loan •Lack of boldness of RM i.e. unwillingness to take more risk. 20065 2007 2008 2009 Taka in crore Year 100 90
86.52
80 70
66.34
60 50 40 30 20 10 0
68
23.5 15.12
6.3.2 Loan in Textile and readymade Garment Industries. 2006 Loans Advance
& Amount
Textile and readymade Garment 1023.20 Industries sector
2007
(Taka in crore & growth rate in%) 2008 2009
Growth Growth Amount Amount rate rate
Growth Amount rate
Growth rate
-
28.40
18.20
956.03
-6.56
1227.55
1450.98
Table-: Amount & growth rate of loan in Textile and readymade Garment Industries sector. Textile and readymade Garment Industries sector increase of 18.20% during the year under review. At the close of 2008, the loan in Textile and readymade Garment Industries sector at Tk 1450.98 crore against Tk 1227.55 crore in the previous year. The loan in Textile and readymade Garment Industries sector from 2006 to 2009 are shown in the following graphical presentation. Loan in Textile readymade germent industries Sector 1023.2 956.03 1227.55 1450.98 2006 2007 2008 2009 0 500 1000 1500 2000 2500 1 2
3 4 Year Taka in Crore From the above information, it is clearly shown that the rate of increase of the loan in Textile and readymade Garment Industries was highest in 2007 i.e. 28.40 %. After increasing in the year 2007, the growth rate is decreasing in the year 2008.
6.3.3 Loan in Pharmaceutical Industries (Taka in crore & growth rate in %)
Loans Advance
&
2006 Amount
Pharmaceutical Industries 11.13 sector
2007
2008
2009
Growth Growth Growth Growth Amount Amount Amount rate rate rate rate -
21.02
88.59 21.34
1.52
42.75
100.33
Table-: Amount & growth rate of loan in Pharmaceutical Industries sector Pharmaceutical Industries sector registered in increase of 100.33% during the year under review. At the close of 2009, the loan in Pharmaceutical Industries sectorr at Tk 42.75 crore against Tk 21.34 crore in the previous year. The loan in Pharmaceutical Industries sector from 2006 to 2009 is shown in the following graphical presentation. Loam in Pharmaceutical Industries sector 11.13 21.02 21.34 42.75 2009 2008 2007 2006 0 500 1000 1500 2000 2500 1 2 3 4 Year 70
Taka in Crore From the above information, it is clearly shown that the rate of increase of the loan in Pharmaceutical Industries was highest in 2009 i.e. 100.33 %.
6.3.4 Loan in Housing and Construction. (Taka in crore & growth rate in %) 2008 2009 Loans & Growth Growth Growth Growth Advance Amount Amount Amount Amount rate rate rate rate Housing and Construction.se 112.78 158.37 40.42 204.71 29.26 292.77 43.01 ctor 2006
2007
Table-: Amount & growth rate of loan in Housing and Construction. sector Housing and Construction. sector loan registered in increase of 43.01% during the year. At the close of 2009, the loan in Housing and Construction. sector at Tk 292.77 crore against Tk 204.71 crore in the previous year. The loan in Special programme sector from 2006 to 2009 are shown in the following graphical presentation. Housing and Construction sector 112.78 158.37 204.71 292.77 2009 2008 2007 2006 0 500 1000 1500 2000 2500 1 2 3 4 Year Taka in crore From the above information, it is clearly shown that the rate of increase of the loan in Housing and Construction sector was highest in 2009 i.e. 43.01 %. The trend of rate is increasing over the years.
6.3.5 Loan in Engineering and Metal Industries. Loans Advance
(Taka in crore & growth rate in %) 2006 2007 2008 2009 & Growth Growth Growth Growth Amount Amount Amount Amount rate rate rate rate
Engineering and Metal 212.72 Industries. sector
-
162.20
23.75
166.04
2.40
149.30
10.10
Table-: Amount & growth rate of loan in Engineering and Metal Industries sector Engineering and Metal Industries. registered in increase of 149.30% during the year . At the close of 2008, the loan in Engineering and Metal Industries. at Tk 149.30 crore against Tk 166.04 crore in the previous year. The loan in Engineering and Metal Industries from 2006 to 2009 are shown in the following graphical presentation. Loan in Engineering and Metal Industries 212.72 162.2 166.04 149.3 2009 2008 2007 2006 0 500 1000 1500 2000 2500 1 2 3 4 Year Taka incrore
From the above information, it is clearly shown that the rate of increase of the loan in Engineering and Metal Industries was highest in 2005.. Initially the growth rate is decreasing and then the rate is increasing but finally in 2007 the growth rate is decreased in huge.
6.4 Geographical location (Urban) wise loans and advance Including bill purchased and discount
72
(Taka
Urban
in Crore) 2006
Division
2009
2008
2007
Dhaka Division Chittagong Division Khulna Division Sylhet Division Barisal Division Rajshahi Division Total
3575 235.77 5.69 32.03 4.14 9.59 3862.22
2575.12 119.13 3.49 14.45 2.53 3.24 2717.96
2453 207.41 3.5 11.95 1.12 1.38 2678.37
1743.16 150.27 0.9 5.19 1899.52
Table: Geographical location (Urban) wise loans and advance including bill Purchased and discount:
Geographical location wise loans and Advances (Urban) 0 1000 2000 3000 4000 Dhaka Division Chittagong Division Khulna Division Sylhet Division Barisal Division Rajshahi Division Division Taka in Crore 2009 2008 2007 2006
From this Graph we can say that from the Geographical pint Dhaka is going fast in loan site. And Chittagong division is also following that. And Total Loans and Advances of Foreign Exchange Branch is Tk 7674000.
Geographical location wise (Rural) loans and advance including bill purchased and discount: Taka in Crore
Rural
Division
2008
2007
2006
2005
Dhaka Division Chittagong Division Khulna Division Sylhet Division Barisal Division Rajshahi Division Total
287.96 8.35 3.03 8.22 3862.22
212.03 9.17 1.009 2717.96
146.82 6.68 .62 2678.37
131.76 3.63 1899.52
Table: Geographical location wise (Rural) loans and advance including bill purchased and discount.
Geographical location wise loans and advance (Rural) 0 200 400 Dhaka Division Khulna Division Barisal Division Division Taka in Crore 2009 2008 2007 2006
Small & Medium Enterprise Loans: 6.5. SME Loan is the funding of small and medium sized enterprises and represents a major function of the general business finance market – in which capital for firms of types is supplied, acquired, and costed /priced. Capital is supplied through the business finance market in the form of bank loans and overdrafts; leasing and hire-purchase arrangements; equity/corporate bond issues; venture capital or private equity; and asset-based finance such as factoring and invoice discounting. The economic and social importance of the small and medium enterprise (SME) sector is well recognized in academic and policy literature. It is also recognized that these actors in the 74
economy may be underserved, especially in terms of finance. This has led to significant debate on the best methods to serve this sector. There have been numerous schemes and programmers in markedly different economic environments. However, there are a number of distinctive recurring approaches to SME finance. Collateral based lending offered by traditional banks and finance companies is usually made up of a combination of asset-based finance, contribution based finance, and factoring based finance, using reliable debtors or contracts. • Information based lending usually incorporates financial statement lending, credit scoring, and relationship lending. • Viability based financing is especially associated with venture capital. For What Purposes are the Loans Available •
1. Real estate acquisition (The purchase of real estate to house the business) 2. Refinance to business acquisition. 3. Working capital loan 4. Construction, renovation or leasehold improvements 5. To purchase furniture, fixtures, machinery or equipment 6. For the flooring of inventory and for working capital
6.6. SME Loans system in DBBL: Dutch Bangla Bank has introduced their SME loan in their credit system last year. In this one year they gave short term loan of about total cost of 30, 00,000(thirty lacs).But for the future time they are going to increase their loan more than this year. • Requirements of DBBL in SME: The effective management of DBBL of lending to SME s can contribute significantly to the overall growth and profitability of this bank. There has been considerable research and analysis into the methods by which banks assess and monitor business loans, manage business financing risks, and price their products – and how these methods might be further developed and improved. Banks have traditionally relied on a combination of documentary sources of information. Documents required by DBBL during giving SME loans: 1. 2. 3. 4. 5.
D.P Note Letter of Arrangements Letter of Continuity Letter of Disbursement Letter of Revival
6. Letter of Disclaimer 7. Letter of Disclaimer 8. Letter of Installment 9. Personal Guarantees of the Proprietor 10. Personal Guarantees of the Guarantor 11. Personal Guarantees of the Third Party 12. Personal Guarantees of Spouse 13. Personal Guarantees of Parents 14. Letter of Hypothecation on the Inventory, Receivables, Advance Payments, Plants & Machineries etc. 15. Notarized IGPA in favor of the Bank to sell the hypothecated stocks and plant and machinery 16. Standard Term Loan Agreement covering usual covenants to be duly executed 17. Copy of Board Resolution of the company7 for availing credit facilities from DBBL. 18. Copy of Board Resolution for execution of documents 19. An Undertaking not to change the management of the company and the memorandum and articles of the company without prior permission of DBBL. 20. Undated cheque 21. Letter of authorization for encash of securities. 22. Letter of authority to debit Accounts 23. Memorandum of deposit of cheque 24. Letter of lien and authority for advances against fixed deposits 25. An undertaking ‘Client shall not avail of any further finance from any other banks or financial institutions without prior written consent of DBBL’.
In case of Mortgage Property: 1. Lawyers opinion confirming no legal obligation to finance the client against the property 2. Valuation Certificate 3. Original purchase deed along with Bia deeds 4. Non-encumbrance Certificate with search fee paid receipt 5. Certified Mutation Khatian including mutation fee paid receipt(DCR) 6. S.A.,C.S,R.S khatian 7. up to date rent paid/ municipal tax paid receipt etc 8. Certified math khatian 9. Deed of mortgage along with IGPA authorizing DBBL to sell the properties without intervention 10. Personal Guarantees of the Mortgagor 11. Board Resolution if the property is in the name of Limited Co. 12. Original Insurance Policy
Purpose: To meet up working capital requirement of Business
Target Customers: Small or Medium Entrepreneur like: an entity, ideally not a public limited company, does not employ more than 150 persons (if it is manufacturing concern) and 25 persons (if it is a trading concern) and 25 persons (if it is a service concern) and also fulfils the following criteria: 76
• • •
A service concern with total assets at cost excluding land and building from Tk. 50,000/- to Tk. 10 crore A trading concern with total assets at cost excluding land and building from Tk. 50,000/- to Tk. 10 crore A manufacturing concern with total assets at cost excluding land and building from Tk. 50,000/- to Tk. 20 crore
Loan Amount:
Minimum:TK.100,000/Maximum: TK. 5,000,000/Clean: Up to Tk. 500,000/Collateralized: Up to Tk. 5,000,000/Interest Rate (Floating) Clean: @17.00% Collateralized: @16.00% Collateralized with ≥30% Cash Security: @15.00% 100% cash security: @TD+2% spread (considering DBBL TD) and @14% p.a. (considering other cash security/ other bank TD) Processing Fee:1% of the Sanctioned Limit. Renewal/ Enhancement Fee: 0.50% of the Sanctioned Limit. Tenure: 1 year Renewable (if total credit turnover is at least 4 times of existing limit) Overdue charge Additional: 3% p.a. No EOL to be allowed without approval of the Head Office. Stamp charges & VAT All relevant Stamp charges & VAT (as per Govt. rules) Eligible Entrepreneur /Owner Nationality: Bangladeshi by birth Experience: As an entrepreneur must have experience at least 2 (Two) years Age: Minimum 21 years to maximum 65 years for renewal purposes maximum age may be considered up to 70 years
Purpose: The purpose of the loan may be Seasonal Financing of inventory or Trade Receivable or both to the business entity Nature of Business Wholesalers, Manufacturers / Assemblers and Retailers of machinery, accessories, agriculture items, etc.
Loan Amount Maximum: TK. 500,000/Interest Rate: 17% p.a. with quarterly rests Processing Fee: 0.5% of the loan amount but not less than Tk. 1,000/Tenure: 1 year Renewable Primary security Secured by marketable stocks Establishment Must have Shop Establishment Lease Agreement Minimum three years of unexpired lease agreement of the shop Location Within the command area of the branch of DBBL Govt.
Recognition Trade License and TIN Account relationship with DBBL/other Bank(s), if any Satisfactory deposit account with DBBL for minimum 06 months or account with any other bank for one year or more. Business Experience: At least 03 years of experience in this line of trade Average Inventory/stock Value should be at least twice the proposed loan amount. Tripartite Agreement Landlord has to be agreeable to sign tripartite agreement & comply other required formalities in case of leased property / position holding
Chapter- 7 Performance analysis Analysis 7.1. Trend Analysis: Trend Analysis is very important for any bank. Here are the some analyses for last five years. • Deposit: (In million Taka)
Particulars 2005
2006
2007
2008
2009
Deposite
40,111.54
42,110.15
51,575.67
67,788.53
2006
2007
2008
2009
30,456.32
29,403.12
41,698.32
48,410.99
27,241.11
Table 01: Deposit amount of DBBL •
Loans and advances: (In million Taka)
Particulars
2005
Loans and 22,592.27 advances
Table 02: Loans and advances of DBBL •
Assets: (In million Taka)
Particular s
2005
2006
2007
2008
2009
Assets
32,279.41
45,493.13
49,371.35
60,618.97
81,480.53
Table 03: Assets of DBBL •
Profit: (In million Taka)
78
Particulars
2005
2006
2007
2008
2009
Profits
367.82
362.18
479.81
821.67
1,137.70
Revenue:
•
(In million Taka)
Particulars
2005
2006
2007
2008
2009
Revenue
3,434.73
5,181.15
6,367.58
7,275.75
8,914.28
Table 05: Revenue of DBBL
7.2. Ratio Analysis: Ratio analysis is an analytical tool that can be applied to a bank’s financial statements so that management and the external users can identify the most critical problems inside each bank and develop ways to deal with those problems. Some selected ratios are mentioned here to give an insight about Dutch-Bangla Bank Limited. •
Return on Equity:
ROE (in %) = Net income / Shareholders equity. Year ROE (%)
•
2005 37.85
2006 31.50
2007 29.63
2008 26.03
2009 31.01
2007 1.11
2008 1.06
2009 1.29
2008
2009
Return on Assets:
ROA (in %) = Net income / Total asset. Year ROA (%)
•
2005 1.59
2006 1.13
Loan Deposit ratio (%): Total loan
Loan Deposit ratio (%) = ---------------------- x 100 Total deposit Year
2005
2006
2007
Loan
70.00
59.00
66.72
71.09
73.91
Deposit ratio (%)
Return on Investment (ROI) (%) Total income from investment Return on investment (ROI %) = ---------------------------- --- x100 Total investment Year ROI (%)
•
2006 3.11
2007 8.84
2008 6.22
2009 5.25
2007 179.18
2008 237.37
2009 82.17
Earning Per Share (EPS):
Year EPS (in TK)
•
2005 7.74
2005 116.93
2006 181.97
Capital adequacy ratio (%):
Year Capital
2005 8.20
2006 10.09
2007 10.23
2008 10.45
2009 10.16
adequacy ratio (%)
DBBL’s regulatory capital as on December 31, 2008 stood at Tk4616.00 million. Capital adequacy ratio as on December 31, 2009 was 10.96% as Bangladesh Bank’s minimum requirement of 10%.
80
7.3. SWOT analysis of DBBL
Strengths • • • • • • •
Top management Satisfactory asset quality. Good internal capital generation. Satisfactory operating efficiency Diversified product lines Low human resource turnover Experience Management Team
Weaknesses
Opportunities
Threats
•
Limited market share
•
Dependency on Term Deposit.
•
Moderate MIS
•
High cost of Fund
•
Moderate corporate governance
•
Investment in SME
•
Basel-II compliance for capital adequacy
•
Creation of brand image
•
Dual currency Credit card
•
Increasing cost of fund
•
Market pressure for increasing the SLR
•
Implementation of Basel-II
•
Increased Market competition
•
Product Risk.
Chapter-8 Findings, conclusion
Recommendation
&
8.1 Findings: •
Loan amount decreased in the year 2007 and after that the trend of Credit is
increasing. The growth rate of credit in 2009 is 0.45% •
DBBL’s Special credit schemes shows increasing trend.
•
Classified loan is increasing over the year.
•
Provision against loans & advances is more than required amount.
•
Most of the loans & advances disbursed in Dhaka division.
•
Maximum portion of the disbursed loans & advances is commercial lending.
•
The Bank has formulated its credit policy to give priority for small & medium
enterprise. •
Loans are un-recovered as these are sanctioned against improper documents.
•
Loans are un-recovered due to value of the collateral assets are not properly
assessed.
8.2 Recommendation: Credit is the main source of Bank earnings, but irregular loans classified loan is burden for the organization. Dutch Bangla Bank Ltd. has huge amount of classified loan though the recovery rate against classified loan is satisfactory but newly classified loan is also high. My recommendations against classified loan as well as overall credit Management of Dutch Bangla Bank Ltd are: • New areas of credits are to be identified. • Management policy regarding credit should be offensive not defensive. • Credit worthiness of the clients should be poetized. • Banker must analysis borrower nature of business, experience in business, qualification, and goodwill. Income sources, profit from invested money, ability to repayment of loans money. • All security document and charges document must be properly obtained. • Bank must taken urgent measure for recovery of loan money. 82
• Branch manager have to be concern regarding quick settlement of all suit cases, in the case date bank representative must present in the court and provide information to the competent authority. • Strictly follow guideline of Bangladesh bank while sanction loans. • Bank must have strong and active recovery unit (RU). • Measure must be taken all debts before they are being classified or before expiry dates that loans not be classified. • Banker must be insuring that borrower mortgage property is not pledged to other bank. • DBBL should have a clear written credit guideline or bank manual, The guideline should include industry and business segment focus, types of loan, facilities, single borrower and group limit, lending caps, discouraged business types etc. • All the loan application should be classified into risk grade. And the borrowers risk grades should be clearly stated on credit application. • Approval authority should be delegated the authority of loan approval into individual executives level rather than Executive Committee/ Board to speed up the credit management process. Because in the loan approval process, a huge time is waste in granting this credit from head office. • Bank’s credit department should be more expert in file processing. In case of new clients, need lots of paper for borrowing from bank, as for examples collection of Trade certificates, TIN certificates etc. If branch credit officer is efficient then they can help the customer in collecting that. • A long time is takes in collecting CIB report from Bangladesh bank in each loan sanction, in order to minimize that time branch credit executive should maintain a good relationship with Bangladesh bank’s CIB department. • The responsibilities of all the key persons of the credit function must also be clearly specified. So that all the employ should be well known about their authority & responsibilities. • Bank executive should be free from all political biasness, for this head office personnel & Bangladesh bank authority should be active more so that any corruption is not practice in the bank.
• Bank should not grant more than 75% of collateral value, which will ensure bad debt. • Finally strong Monitoring system of head office as well as central bank can ensure sound credit management of any commercial bank
8.3 Special Features of DBBL: Dutch Bangla bank is engaged in conventional commercial banking: •
It is the pioneer in introducing and launching different customer friendly deposit schemes to tap the savings of the people for channeling the same to the productive sectors of the economy.
•
For uplifting the standard of living of the limited income group of the population, the Bank has introduced Consumer Credit Schemes by providing financial assistance in the form of loan to the consumers for procuring household durables, which have had encouraging responses.
•
The Bank is committed to continuous research and development so as to keep pace with modern banking.
•
The operations of the Bank are computer oriented to ensure prompt and efficient services to the customers.
•
The Bank has introduced camera surveillance system (CCTV) to strengthen the security services inside the Bank premises.
•
The Bank has introduced customer relations management system to assess the needs of various customers and resolve any problem on the spot.
8.4 Conclusions: In conclusion, Dutch-Bangla Bank Limited is one of the most potential Banks in the banking sector. It has a large portfolio with huge assets to meet up its liabilities and management of this bank is equipped with the export bankers and managers in all level of management. So it is not an easy job to find out the drawbacks of this branch. We would rather feel like producing our own opinion about the ongoing practices in Motijheel F. Ex. Branch. The credit management policies followed by the bank are really secured policies, complying with the Bangladesh Bank instructed policies. Sometimes, the credit disbursement by the branch takes longer times than other credit proposals. This is done intentionally by the credit management officer. This is done intentionally if the officer suspects any hitch in the credit 84
proposal, and take longer time to scrutinize the proposal than usual. But normally, it does not take much time to disburse any credit to the clients. After doing credit analysis in the practical field of banking, in the Dutch Bangla Bank Ltd., now I can truly understand the procedures and practices of banking in the real world, and understand the behind the desk processes of information, their importance in the bank and so on, moreover we have also learned how to deal with and handle different types of personals, including officials face to face. Though not significant, but the recommendations presented in this report if followed may lead DBBL in the new level of success through improved client service in the credit extending.
Chapter: 9 Appendix and Bibliography
9.1. Appendix: (Abbreviations and Details) BDT CIB AGM DD TT L/C SME LOC FCY P/I B/L P/L PAD LTR LIM FDBC CRG SOD
Bangladesh Taka Credit Information Burro Annual General Meeting Demand Draft Telegraphic transfer Letter of Credit Small and Medium enterprise Line of Credit Foreign Currency Performance Invoice Bill of Lading Packing List Payment against Documents Loan against Trust Receipts Loan against Imported Merchandise Foreign Documentary Bills for Collection Credit Risk Grading Secured Overdraft
CRFL OD TR BG EOL CRM LDO PG CCS TIE
Credit Request for Limit Over Draft Trust Receipt Bank Guarantee Excess over limit Credit Risk management Loan Discounting Overdraft Personal Guarantee Customer Credit Scheme Time Interest Earned
9.2 Bibliography: 1. Credit Manual of Dutch Bangla Bank Limited. 2. Annual Report of Dutch Bangla Bank Limited 2006, 2007, & 2008, 2009. 3. www. dbbl.com.bd 4. www. bangladesh-bank.org 5. Shekhar, K.C., and S, L., “Banking theory and Practice”, New Delhi: Vikas Publishing house pvt. Ltd, 18th edition, 1998 6. Bhuiya, M. A.B., “Bangladesh Laws on Banks & Banking”, Dhaka: M/S Tawakkal Press, 2nd edition, 1996 7. Dr. A.R .Khan, “Bank Management”. Ruby Publication, 2nd Edition, Chapter 4 & 6. 8. Other Internship Reports (refer by the supervisor) and self collected
86