Credit Management of Dhaka Bank Ltd

View with images and charts Credit Management of Dhaka Bank Ltd

Introduction: Banking business is associated with risks. In order to remove or minimize risks, banks follow some rules and regulations. Rules and policies are adopted to ensure less risk for every banking business. Dhaka Bank is a fast growing private sector bank. One of the strongest sides of Dhaka Bank is that it has a big market share of loans and advances. This means, this bank gives or sanctions a big amount of loans to corporate and retail customers each year.

Before sanctioning loans, bank does proper judgment of the customer. Dhaka Bank takes every measure to minimize risks. But, many loans become classified every year. Bangladesh Bank has imposed some rules and regulations of credit, which must be maintained by every bank. Bangladesh bank is very eager to bring discipline in the banking sector and improve the loan quality of every bank. Dhaka Bank also has its own credit policy which helps the bank to maintain quality of loans.

Credit: The word “Credit” is derived from Latin word “Credo”, which means, “I believe”. It is usually defined as one’s ability to buy with a promise to pay. From a banker’s point of view, credit is the confidence of the lender on the ability and willingness of the borrower to repay the debts at a future date.

Banks charge a higher interest for loans than the deposit rate given to customers. The difference in rates is the profit for a bank. 80% of a banks profit comes from the interests.

Loans and advances comprise a large portion of banks assets and this is the backbone of a bank’s structure. The strength of a bank is primarily judged by the soundness of its loans and advances. So, the loan and credit department is a very important department of a bank. Credit policy is very important. If a bank takes very strict credit policy, then the amount of loan will be less. If the credit polity is flexible, then the amount of loan will be much. But strict credit policy leads to lesser bad loans. Sometimes, credit policy cannot prevent customers bad intention of not adjusting loans. This is why, strict credit policy is very necessary for every banks for the safety of their investments.

Principles of Lending: Banks invest and earn profits in many ways. At the same time, there is a risk of default loans.

This is why, banks are required to follow certain principles of lending. The principles of lending are: o Safety; o Liquidity; o Profitability; o Purpose, and o Supervision.

The importance of Securities in Credit: Securities play a vital role in sanctioning credit. Security means things deposited as a guarantee of the undertaking or loan to be forfeited in case of failure to repay the same. The customer/ guarantor should own it. In other words, the assets against which banks allow credits are called Securities. Good and strong securities help a bank to take decision about sanctioning credit. It also minimizes the risk. The type of securities offered may be,

Government bonds, share, assignment of book debt or bills receivables, raw material and finished goods, fixed deposit receipts, land, factory building and other movable and immovable assets of the borrower. If a borrower becomes unable to adjust his loan, then bank can recover the loan amount by selling securities. That is why the role of securities is very important in credit system.

Classification of Credit Facilities: Credit or loans can be classified broadly into two categories: ď‚Œ Funded Credit Facilities; ď‚? Non Funded Credit Facilities.

Funded Credit facilities: All type of credit facility which involve direct outflow of Bank’s fund on account of the borrower, is termed as funded credit facility. Funded credit facility can be classified into four categoriesa) Loans: When a lender lends money to a borrower imposing interest for the lended money, for a given time period and which is repayable in fixed monthly installments is called loan.

Loan is allowed for a single purpose where the entire amount may be recovered at a time or in a number of installments within a period of short span. After disbursement of the entire loan amount, there will be only repayment by the borrower. A loan once repaid in full or in part, cannot be drawn again by the borrower.

Types of Bank Loans: Every bank has a credit portfolio. Banks can give loans and invest according to the limit of portfolio. Banks can lend half or more of their total assets and about half to two third of their revenues. Risks in banking tend to be concentrated in the loan portfolio. When a bank gets into serious financial trouble, its problems usually spring from loans that have become uncollectible due to mismanagement, illegal manipulation of loans, ineffective lending policies or an unexpected economic down turn. The banks make a wide variety of loans to a wide variety of customers for many different purposes- for purchasing automobiles, buying new furniture, taking dream vacations, constructing homes and for other corporate and project loans. Bank loans may be divided into the following broad categories of loans, delineated by their purpose: 1. Term Loans: this type of loan is sanctioned for more than one year and designed to fund longer term business investments, such as the purchase of equipment or the construction of new physical facility. Term is allowed for one to five years. Usually, the borrowing firm applies for a lump-sum loan based on the budgeted cost of its proposed project and then pledges to repay the loan in a series of installment. This loan is given for capital expenditure such as construction of factory building, purchase of new machineries, modernization of plant, etc.

2. Commercial and industrial Loans: This type of loan is granted to industries to cover such expenses as purchasing inventories, plant and equipment, paying taxes, meeting payrolls and other operating expenses .

3. Syndication Loan: To finance a project, a big amount of money is needed. It may not be possible for a bank to finance cent percent of it. Then this amount is taken

from several banks. These banks are called a Syndicate and this loan is called a Syndication loan. There is a percentage on equity for sanctioning of loans. For that reason, not all the banks can give same amount of loans. This is according to the banks reserve and equity. Every bank has the equal right to get the money back irrespective of the loan amount sanctioned. Priority does not work here.

4. Loan against Work Order: Sometimes, govt. development work like road construction, bridge construction, setting of sewerage line, setting of underground pipeline takes place. Govt. invites tender and the lowest rate giver wins the work order. But the contractor needs money to start the work on. Then the contractor submits his work order to a bank and takes loan against of that.

5. Demand Loan: Demand loan is payable on demand which is allowed for a short period to meet short term working capital need. This type of loan can take only banks existing clients, with whom bank has a good relation and maintains good transaction over his account 6. Consumer loans: this loan is given to individual customers for the purchase of automobiles, homes, electrical appliances, for vacation and for other personal purposes, which is extended directly to the individual.

7. Working Capital Loan: This type of loan is given to industries ranging from small to medium for the time span of one year. This type of loan is most often used to fund the purchase of inventories, raw material, etc. Working capital loan is designed to cover seasonal peaks in the business customer’s production levels and credit needs .

8. Lease financing: Under this loan scheme, bank buys equipment or vehicles and leases them to its customers. Customers pay the loan installments and after full adjusting the loan, bank gives the ownership of the vehicle or asset to the respective customer.

9. Asset based Loans: this kind of loan is secured by a business firm’s assets, particularly stocks, inventories and accounts receivables.

10. Other Loans: other loans in the funded loan category are Real Estate Loans, Financial institutions loans, agricultural loans, installment loans, etc. b) Cash Credit: Cash Credit facilities are allowed against pledge or hypothecation of goods. Under this arrangement the borrower can borrow any time within the agreed limit and can deposit money to adjust whenever he does have surplus cash in hand. All the nationalized banks allow cash credit both hypothecation and pledge facilities. c) Overdraft: Overdraft is withdrawing money from an account even if the account holder does not have that much amount of balance in his account. Bank gives this money as loans. This is a credit facility against any securities. The customer of the bank who have any savings account or DPS in the bank, can get overdraft facilities from the bank against these securities. The customer can withdraw a certain limit of amount

within a fixed period of time. The interest amount is calculated on the actual debit balance. d) Bills Discounted and purchased: Discount: Banks allow advances to the clients by discounting bill of exchange or promissory note which matures after a fixed tenure. This way, the bank calculates and realizes the interest at a prefixed rate and credit the amount after deducting the interest from the amount of instrument.

Purchase of Bill: Banks also make advances by purchasing bills, instead of discounting, which are accompanied by documents of the title of goods such as bill of lading or railway receipts, etc. In this case the bank becomes the purchaser of such bills which are treated as security for the advance. This allowed primarily relying on the credit worthiness of the client.

Non Funded Credit Facilities: Though these types of credit facilities are primarily non funded in nature but at times it may turn into funded facilities. As such, liabilities against this type of credit facilities are termed as contingent liabilities. The facilities are: • Letter of credit; • Bid Bond; • Performance bond; • Back to Back L/C; • Advance payment Guarantee; • Foreign counter Guarantee.

What does Credit Department do?

Sanctioning loans is the most important and sensitive part of every banks. Interest from credits is the big income of a bank. Loans and advances comprise a large portion of bank’s total assets. The strength of a bank is primarily judged by the soundness of its loans and advances. So, credit department is the most important department of a bank.

The main functions of this department are: o To manage the credit portfolio of Dhaka Bank Ltd; o Receive credit proposal from retail or corporate customers; o Processing of the proposal and approval from head office; o Monitor and follow up of the loans and advances; o Takes necessary steps to recover classified and default loans; o Time to time adjustment of the rates of loans and advances; o Prepare various statements to submit to Bangladesh Bank; o Makes part and full adjust of loans; o Gives balance outstanding statements to customers.

Credit department is fully responsible for analyzing and making recommendations on the fate of most loan applications. Banks need income from business. But at the same time, bank must ensure the safety of the invested amount, which is done by this department. Before sanctioning credits to customers, banks must consider some of the following things: The Creditworthiness of the borrower:

The credit department must assess and analyze that whether the customer will be able to give installments after taking the loans. To assess this, credit department must consider the following things:  Character: very genuine purpose for loan request and serious intention to repay.  Capacity: proper authority to request for loan and legal standing to sign agreement.  Cash: ability to generate enough cash flow in the customer’s business.  Collateral: assets of the customer or business given as security.  Conditions: borrowers present activity and economic condition.  Control: ability of borrower to meet any unexpected circumstance in favor of bank.

Loan quality: Credit department must ensure that the loan is properly structured and documented in order to protect respective bank. The drafting of a loan agreement that meets the borrower’s needs for funds with a comfortable repayment schedule. The borrower must be able to comfortably handle any required loan payments, because the bank’s success depends fundamentally on the success of its customers. If any borrower gets into trouble, the bank may find itself in serious trouble as well. So the credit department must play the role of a financial counselor to customers. A properly structured loan agreement must also protect the bank by imposing certain restrictions on the borrower’s activities when these activities could threaten the recovery of the bank funds. So, this department must ensure the good loan quality in terms of the smoothness of loan recovery.

Proper Security: Keeping proper security is a very important task for this department.

Security or collateral minimizes risk of the bank. If the borrower cannot pay the loan, the collateral gives the lender the right to seize and sell those assets using the proceeds of sale to cover what the borrower did not pay. It also gives the lender a psychological advantage over the borrower. If the borrower don’t repay, his assets will be seized. That is why, the borrower will try heart and soul to repay the loan anyhow. He will avoid loosing his valuable asset. The most popular assets pledged as collateral for bank loans are, Real property, Personal guarantee, Third party guarantee, Inventory, Accounts Receivable, etc.

That is why, credit department must take steps very carefully in case of sanctioning loans, meeting the benefit of customers and obviously, reserving the benefit and security of the bank.

Credit Policy of Dhaka Bank Ltd: Loans and advances is an important function of every commercial bank. Banks earn a big amount of interest from sanctioning and creating loans. So Credit Department is the most important department of a bank. The surplus money, specially the deposit of individuals is invested to the deficit sector. And the difference between these two interest rates is the profit of banks. Credit policy is very important. A strict credit policy can lead to lesser amount loan disbursed and low rate of bad loan. Again a flexible credit policy can lead to high amount of loan default and high amount of loan disbursed. Credit policy is like a guiding light of every loans and advances. A wise and prudent credit policy creates healthy loan, earns money and provide safety of the invested money. Dhaka Bank also has credit policy. Credit policy of DBL generally aims at: 1) Sanctioning healthy loan assets to ensure interest earning of the Bank.

2) Ensuring safety through judicious selection of banks.

The credit policy of Dhaka Bank Ltd. has been formulated of the plan of “All New loans to be Good Loans” The plan was taken on the basis of the following objectives:

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To gain satisfactory return on investment; Credits to be available to viable borrowers at a reasonable cost; Maximizing the profit of the bank by making sound lending; Assisting the social and economic development of the country.

Dhaka Bank Sanctions Credit based on three most essential elements of the borrower:  Character: This is the most important element of three factors. It includes integrity of purpose, reputation for honesty, promptness in paying debts and fulfilling contracts.

Record of past performances and antecedent connections, etc.  Capacity: It refers to borrower’s business ability, particularly profit making records and his acumen to avoid loss.  Capital: this is the real measure of a borrower’s strength. It helps the borrower to recover any loss in the business. It is the financial strength to cover risk.

Procedures for Sanctioning Credit in Dhaka Bank Ltd.: Loans and Advances is the major business of every bank. Banks collects deposit from surplus area and invests this amount as loans. An interest is charged against loans. Credit sanctioning is a task of huge responsibility. Every sanction of credit has risks involved. So, level of risk is to be identified first. The area of consideration also involves the sector of loans applied, bank’s profit from this sanction, etc. So, every steps of sanctioning credit is very important and to be accomplished very carefully. Every branch managers are given authority to sanction loans upto a certain limit. But if any branch receives any loan application beyond that limit, then the proposal must be sent to the head office for the approval of that loan. The steps for sanctioning loan are discussed below: 1.

Application for loan: Customer applies for loan at bank’s prescribed form. Branch will obtain loan application’s duplicate from the customer. The form must be signed by the proprietor or partners or directors. Both corporate and retail customers can apply for loan. All the branches of Dhaka bank, Personal Banking Division and local office receives loan application and gives loan. In conformity with the loan application, each customer must have a bank account is Dhaka Bank. All required documents, papers mentioned in the application form have to submit.

Some general principal must be followed in order to maintain good lending quality: a) Safety; b) Liquidity; c) Purpose; d) Profitability; e) Security, and f) National interest.

2. CIB form fill up: Bangladesh Bank established a new department, “Credit Information Bureau” in 1992 to procure information on default borrowers and also to streamline credit information of the banking systems. When a person or a company applies for a loan, then the credit department of the bank send a CIB report to the Bangladesh Bank including all the information of the applicant.

CIB forms are very important. It is to be ensured that all the columns of form are properly filled in, particulars and information furnished are completed and correct. The forms

of CIB that a retail or corporate customer must fill up to give information to Bangladesh Bank are: a) Form: CIB 01 (Borrower information) Form: CIB 02 ,, Form: CIB 03 ,, Form: CIB 04 ,, Form: CIB 05 (Guarantor information) b) Form: CIB 1A (Inquiry form) Form: CIB 2A (Owner Information) Form: CIB 3A (Information of group) c) CIB undertaking: Contains Name, Address, and Sister Concern of borrower. d) Form SC 8. e) Form: CIB 01 (Segment 5) f) Company Letterhead form. g) Form (XII): This form contains the information of all the directors of the company. This form is needed to submit at the time of enlistment as a limited company at RJSC (Register of Joint Stock Companies). But in case of giving loan to customers this form is essentially kept by bank for the purpose of getting director’s information and reporting to CIB. Through this form, bank can get the information- who are the directors, number of directors, etc. If any director resigns and any new director joins in, then this information must be submitted by the company to the bank within two weeks. h) Schedule (X): This form contains the information about the sponsor shareholders of a firm. Directors can also hold shares of the company. So, this form informs, who the shareholders are, if any director is holding shares, what percentage of share a director is holding of the total share, etc. This information helps the respective bank to take any decision about that company in the future. If the company fails to repay the loan, bank will claim money to all the directors according to the percentage of their shares.

3. Report to Bangladesh Bank: Bank sends all the CIB forms to Bangladesh Bank in order to inform Bangladesh Bank about the borrower. Along with the forms, Bank sends soft copy of the information of the borrower.

Bank sends the soft copy in four formats prescribed by Bangladesh Bank: a) Owner; b) Debtor; c) Guarantor; d) Matrix.

At the same time, bank urges CIB of Bangladesh Bank to inform them about that borrower whether, there is any report about that borrower.

4. Response from Bangladesh Bank: Credit Information Bureau of Bangladesh Bank informs the respective bank about the borrower. If the borrower has taken any loan from any bank previously, then CIB will be able to provide information regarding that borrower. There is a form, called Response Form, through which CIB provides all the information about that borrower. If the borrower has taken loan from a bank and adjusted it, then his report will be clean. If he has taken loan from a bank but did not adjusted his loan within the prescribed period, then his report will be adverse and the borrower will be unable to obtain loan from the respective bank.

There is another way of obtaining information about a client. Information can also be obtained by Confidential Opinion. This is an inter bank confidential report and cannot be published in general. At the time of interview of the customer, bank officials ask informally to the client whether he is having any credit facilities from any bank. If the client tells the name of the banks from where he is having credit facilities, then the bank officials take a note of the name of the banks. Then the bank official issues letters to those banks requesting to supply credit information about that customer. Then those banks give information on credit outstanding about that customer. This report is called confidential opinion. Each Bank also informs to other banks and all their branches about the loan defaulters by this confidential opinion.

5. Credit Risk Grading: If the credit amount is Taka 1 Crore or above, Credit Risk Grading is to be done according to the prescribed format supplied by Bangladesh Bank. If the loan amount is below of Taka 1 Crore, then CRG is essential. Loan is disbursed only after reporting to CIB. In that case, bank takes the Balance Sheet of previous three years of the company. If the CRG is good, then the company is not risky and bank takes the decision to sanction loan to that company. In that case, proposal is sent to Head Office. CRG is to be forwarded along with the proposal. But if the CRG proves that the company is risky, then the branch itself rejects the application and do not send any proposal.

But recently, Dhaka Bank has revised their decision about doing CRG. Previously, it was amount 1 Crore or more for doing CRG. But now, CRG will be done in the following way: Category of Loans Personal Loan Corporate Loan SME

Loan Amount for CRG 10 Lac 10 Lac 10 Lac

The above table shows that bank has taken decision to do CRG if the loan amount is above 10 Lac. This decision reflects the consciousness to make every loan of the bank secured. It will help the bank to raise the quality of loans. After this decision, all the categories of loans will fall under one category, that is, CRG must be done on 10 lac loan amount.

6. Company Visit: The purpose of visiting a company is to find out the actual position or scenario of the company. In other words, the purpose of company visit is to find out whether there are similarities or dissimilarities between the said position and the actual position of the firm.

Senior executives of bank usually go for company visit. The executives scrutinize every single aspect of the company. They tries to find out whether the company really exists or not, what type of company is that (Manufacturing/ Service/ Production)? , how much is the stock of Raw Material and inventory. If the loan is house building loan, then what is the position of land, how much the borrower have invested from his own pocket in the construction of that building, etc. When the officers go for a visit, the team carries all the necessary equipments with them. They use still camera and video camera also for recording the scenario of the project at that time for future reference. Visit report includes the following:  Name of Visitors;  Date of visit;  Company location;

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Nature of project; Land and building; Machinery; Raw material; Existing manpower; and Overall observation.

7. Proposal to Head Office: Every branch managers are given authority to sanction loans upto a certain limit. Managers have some discretionary power, over which they can take some decision. Managers can take decision about sanctioning loans against F.D.R, D.P.S, loan against securities, personal and third party guarantee. That is why, head office approval is not required for all types of loans.

Sometimes, big loan like project loan application comes in and managers cannot take decision alone in these cases. Head office approval is must for large loans.

A proposal is sent to head office along with Credit Risk Grading and visit report. Respective branch also recommends for sanctioning of loans. A proposal includes:  Proposed Limit: Branch recommendation for the client or by client’s requirement.  Security: The agreed security that will be kept against loan by the borrower.  Company Profile: the directors, shareholders, capital, machinery of the company.  Annual production: The annual production capacity of the company.  Share holding position: the sponsor shareholders and the shares of the directors.  Existing credit facilities with other banks: whether the company enjoys credit facilities with other banks, categories and the position of those credits.  CIB report: report sent by CIB about that company or the directors of company.  Credit Risk Grading: the overall riskiness of the company.  Visit Report: The report of visit at the company by the senior executives.  Branch Recommendation: the view of the branch about the customer and the proposed loan. Branch will recommend whether the bank will be profitable or not from the deal and from the client relationship.

8. Head Office sanction of Proposal: The executive committee of head office sanctions loans and takes decisions regarding credit of Dhaka Bank Ltd. The Executive Committee considers the following things before sanctioning credit to a prospective client:  Credit risk grading is good of the company;  The company has given proper security to the bank;  CIB report is clean;  The company in not badly liable to other financial institutions;  The company possess good repayment capacity;  Company has given other personal and third party guarantee;  The interest rate and terms of payment is in banks favor.

The sanction limit of bank is guided by the Central Bank. Every commercial and private banks set up this limit according to the rules of Bangladesh bank. The sanction limits to various types of loans are: 1. In general, a corporate or retail customer can get loan:

Type of loan Funded loan

Maximum limit 15% of Bank’s Equity.

2. For 100% export oriented company: Type of loan Funded loan Non funded loan

Maximum limit 15% of Bank’s equity 35% of Bank’s equity Total= 50% of Bank’s equity.

3. For purely domestic company: Type of loan Funded loan

Maximum limit 20% of Bank’s Equity.

If all the criteria satisfy the Executive committee, then the committee sanctions credit. The credit sanction letter includes:  Name of the Borrower;  Nature of facility;  Extent of limit;  Purpose of Credit;  Interest on funded facility;  Margins;  Commissions;  Mode of disbursement;  Mode of adjustment;  Validity;  Security details; and  Other conditions.

This sanction letter is for branch use stored for future reference. Then the branch issues another letter called Offer letter. This offer letter includes interest rate, mode of disbursement, mode of repayment, securities and all other conditions of sanctioning loans. The party is given the original copy and keeps the duplicate of that letter. If the party agrees all the terms and conditions, then signs in the offer letter. This is the final agreement between the party and the bank. According to the agreement, loan is disbursed, party receives the loan amount and repays at the prescribed time schedule.

9. Mortgage: Mortgage is very essential for large loans. Without mortgage, loan is not sanctioned. It is a security to the bank against the loan amount. If the amount of mortgaged asset is higher than the loan amount, then the bank feels quite safe. Bank becomes the owner of the mortgaged asset and holds the ownership upto the full adjustment of loans. If the loan is fully adjusted, then bank returns the ownership of the mortgaged asset to the borrower through registration.

The main purpose of mortgage is, if the party becomes unable or do not adjust the loan willingly, then bank can recover the loan amount by selling the mortgaged asset. Different types of asset are kept mortgage against different types of loans. These are given below:

Types of loans Project loans Corporate loans Lease finance Personal loan

Assets Mortgaged Land, Building, Factory building, machinery, stock of inventory.

Building, Land.

Machinery, Vehicle.

Land, Building, Gold, Insurance Policy.

10. Signing of Charge Documents: Charge documents play a very important role in loan documentation. Charge document is the means by which bank can sue and take legal action against the borrower in case of loan default. Charge documents must be signed by the borrower before loan disbursement. There are various charge documents. Appropriate charge documents are signed for a particular loan.

This charge documents has legal acceptability to the court and is a useful tool for taking legal action against the loan defaulter. Govt. stamps are attached to each document. This is how charge documents get acceptability to the Government and bank gets priority to the Govt. in case of loan recovery. These charge documents are very important documents for bank and kept in the vault of the bank safely, in case of future need. Various charge documents for different types of loans are given below:                     

Promissory note; Counter guarantee; Debit balance confirmation slip; Letter of revival; Loan disbursement letter; Right to recall the loan; Trust receipt; Letter of authority to debit account; Letter of continuity; Letter of guarantee for opening L/C; Hypothecation of Vehicles; Hypothecation of Goods; Letter of guarantee; Third party guarantee; Letter of authority to mark lien and appropriate proceeds; Memorandum of deposit of title deeds; Letter of authority for lien and encashment (Third party); Letter of authority to encashment of FDR/ SPS/ ICB unit certificates/ WES bonds; Request for credit limit; Limit input form; Letter of disclaimer.

11. Loan Disbursement: After completing all the documentation, security deposit and other formalities, bank disburse the loan amount. The mode of disbursement is pre agreed by both the parties. But bank do not disburse the loan amount by cheque. Bank transfers this amount to the account of the customer. In case of corporate loan or project loan, it is disbursed through the CD account of the customer. In case of retail customer, loan in disbursed through the customers Savings account. And then both the corporate and retail customers withdraw money from their respective accounts.

These are the steps by which a customer can obtain loan from Dhaka Bank. Though the process is very lengthy, but it is good for both the parties. Bank must ensure safety for its

lended amount. On the other hand, customer must agree the terms and conditions imposed by bank. When the time for loan adjustment arrives, customer deposit the installment amount in their respective account and loan account is adjusted automatically. If any loan installment becomes overdue, after a certain period it becomes classified. This is a continuous process.

Retail customers adjust their loan. In case of corporate loan, party takes a loan, adjusts it and then again takes loan. So, in case of corporate customers, the process never stops. Corporate customers enjoy multiple credit facilities from Dhaka Bank. They maintain bank account, takes loan, open L/Cs, have PAD, etc. That is why, big customers build relationship with a bank, which can provide a wide range of products and services to them. And Dhaka Bank is one of the banks of first choice among the large corporate customers.

Different types of loan guided by the Policy of Dhaka Bank Ltd: There are various type of loans offered by Dhaka Bank Ltd. Each loan has its own characteristic which is guided by the policy of Dhaka Bank. Each loans are launched aiming to serve customers. At the same time, the security of the invested amount and bank’s profit are also considered. Description of some of these type of loans are given below: Overdraft: Overdraft is the facility by which a customer can withdraw money over his credit balance in his current account upto an agreed limit. This loan is sanctioned occasionally and for short time duration. This loan is given only when there is enough security in banks hand against this loan. This facility is renewable after expiry. The interest is charged only for the total amount overdrawn, but not for the amount sanctioned. The overdraft facility is provided on the CD account of the customer. In an overdraft account, withdrawals and deposits can be made any number of times within the limit and prescribed period. Interest is calculated and charged only on the actual debit balances and daily product basis.

Overdraft against pledge of goods: Pledge of goods is one of the ways of sanctioning overdraft to a customer. It may be provided to the borrowers against pledge of raw materials for finished goods as security. The borrower surrenders the physical possession of the goods under effective control of the bank. The ownership of the goods however, remains with the borrower. If the borrower fails to repay the loaned amount in prescribed period, then bank can realize the lended amount with interest by selling the pledged goods. In this case, bank must inform the borrower before attempting to sell those goods.

Overdraft against hypothecation of goods: Overdraft facility is also extended against hypothecation of goods or stocks. In this case, both the ownership and physical possession of the goods remain under the borrower’s authority.

The borrower must surrender the hypothecated goods to the bank when he is told to do so.

The bank only acquires a right over the goods. Overdraft facility against hypothecation of goods is allowed only to trustworthy and prudent customers.

The following criteria must be taken in consideration by the bank/ branch before sanctioning overdraft against hypothecation of goods/ stocks:  The value of goods (quantity) must exceed the overdrawn amount.  The goods must be easily salable;  The goods must have a stable demand in the market.  The borrower has an absolute title of the goods.  The goods must be kept in regular supervision of the bank.

Cash Credit:

Cash credit is instant cash supply as credit to customer. This facility is allowed against pledge or hypothecation of goods. This facility allows a customer to borrow within the agreed limit and can deposit money to adjust whenever he can. This credit is sanctioned to those customers who need instant cash loan to meet the working capital requirement for their business. This credit is sanctioned against hypothecation or pledge of goods. There are two types of Cash Credit: Cash Credit (Hypothecation): In cash credit hypothecation, a customer is given loan against the stocks or inventory that is present is the customer’s business place. These are kept as security. The borrower retains the ownership and possession of goods. The documents which creates charge of the lending bank on the hypothecated goods is called letter of hypothecation. By signing this letter of hypothecation, the borrower binds himself to give possession of the hypothecated goods to the lending bank when he is told to do so.

Cash Credit (Pledge): In this type of credit facility, the borrower pledge his goods to the banker as a security against the credit facility. The ownership of the pledged goods remains with the pledgor. Bank reserves the authority of effective control of the pledged goods. The goods may be stored in Go downs of the borrower but bank will keep it locked and will keep the keys of the locks.

Bank’s guards guard the Go down for safety of the goods. Some times pledged goods are stored in bank’s go downs. The goods are insured against all risk under Banks mortgage clause. Go down keeper and security guards are posted in the go downs as per rules of the Bank. The insurance is to be effected for full value of the goods plus 10% extra irrespective of the mount of advance. The policy must always be in the possession of the Bank. It should be regularly renewed by the Bank. The Manager must also verify that the description of the Property in the policy is correct and that the terms of the policy are rigidly complied with so that no claim may be disputed by the insurance company.

Loan against Trust Receipt (LTR): The trust receipt is a document which creates the banker’s lien on goods and practically amounts to hypothecation of the proceeds of sale in discharge of lien. Advances against a trust receipt obtained from the clients are allowed when the documents covering an import shipment are given without prior payment. This type of facility is given only to known and reliable clients. The customer holds the goods or their sale proceeds in trust for the bank till the loan allowed against Trust Receipt is fully paid off. In that moment, the documents of title of goods are delivered by the banker to the importer against trust receipts. This is done in exceptional cases to valued customers. By signing this receipt, the importer undertakes to hold the goods and the proceeds of any sale of them as a trustee for the banker who holds lien

over them until the dues are paid by him. If the importer fails to hand over to the banker, the proceeds of the goods sold, he is liable for criminal offence as breach of trust. It has been noticed that sometimes the banker delivers the sales tax on the other. The period of Trust Receipt may be 30,45,60,90 days. The loan is adjustable within the period. Sale proceeds of goods held in trust must be deposited in the bank by the borrower irrespective of the period of the trust receipt.

The Trust Receipt must be adjusted within 30 days. Branch must insist the customer to adjust the LTR within the prescribed period. If the party fails to adjust the LTR within a reasonable period of time, branch should go for legal action against the customer for recovery of bank dues.

Loans against Imported Merchandise (LIM): Importers usually take this loan from bank. Importers who are in shortage of fund to retire the import bills and unable to clear the goods from the port authority, can avail this loan from Dhaka Bank. This loan can also be said as an advance made to the importers for clearance of the imported merchandise. Loan against the merchandise imported through bank may be allowed pledge of goods retaining margin prescribed on their landed cost. The branch shall also obtain letter of undertaking and indemnity from the customer before getting goods cleared through LIM account. Clearing should be taken by approved clearing agent of the bank. Merchandise should be insured with specific risk factors.

LIM on Importers request: This is one of the ways of opening LIM account. Importer may request the bank to open a LIM account to the bank. Upon receipt of the importer’s application, the import department will prepare a LIM proposal by considering some points to arrive at the total landed cost of the consignment. Efforts should be made so that at least 25% margin of the landed cost may be realized from the importer. Realization of margin will depend on the banker customer relationship and also on the marketability of goods. After approval of the proposal, the required charge documents should be obtained and after clearance, the goods are usually being stored in bank’s or in importers Godown under bank’s supervision. The particulars of the goods to be entered in the LIM register. At the same time insurance and other miscellaneous charges in connection with the LIM account will be paid by debiting to party’s LIM account.

Forced loan for LIM: The cargo ship arrives at the port containing the goods but the importer do not come forward to the bank to retire the documents even after. This sort of situation sometimes occurs in bank. In that circumstance, it is a duty for the branch to arrange clearance of the goods by creating forced LIM to save the consignment from incurring demurrage or auction from port customs. Bank then creates a forced loan against the LIM account of that customer and his account is credited for the amount which was needed to clear those goods from the port authority. It is important that before arranging forced clearance of any consignment, the landed cost as well as market value of the goods are to be ascertained carefully so that further involvement of bank may be helpful in reducing the existing liability in PAD; if not, bank should not go for forced clearance of the goods. Rather, bank should go for legal action straight for realization of bank’s dues as banker deals in credit, not in goods. It may be noted that clearance of consignment is not legally binding on the banker’s side. No further L/C facility to be extended to such parties who will fail to take delivery of the goods cleared under forced LIM or against whom bank had to go for legal action for recovery of PAD dues unless on acceptable arrangement is made by the importer.

LIM Adjustment: The LIM liability should be adjusted within 30 days from the date of storage. If the importer fails to take the goods within the specific period, final notice shall be issued to the importers giving 15 days of time for repayment. If the importer give no response even then, legal notice shall be served to the parties giving another 15 days for repayment.

For disposal of goods under auction, a notice is being published in two national dailies. If then the party comes forward with the prayer for time extension of adjustment of loan, an appropriate arrangement may be made by the bank for recovery of the lended amount to that customer within a maximum time of 30 days.

Bank Guarantee: Bank guarantee is an assurance for a person or company to a third party. It is nothing but giving a guarantee to an organization by bank on behalf of its client stating that if the client of the bank fails to perform certain contractual obligation, the bank will meet all the liability of the client to that organization. When a contractor gets work order, the government wants assurance that the contractor firm’s financial position is sound and is able to perform the work with success. Then the contractor receives the help of bank. The contractor gives this assurance to govt. through a bank guarantee. Bank guarantee is non funded. In real terms, bank gives no money as loan to that client. Or the client gives no deposit amount to bank for that. If the contractor fails to finish or fulfill any part of the work, then bank gives demurrage to govt. Afterwards, bank recover the money from that contractor.

Each bank guarantee requires mortgage of land as security. A limit is sanctioned against this mortgage to the OD limit and BG limit of that client. The party can take bank guarantee to that limit. In other words, the existing clients can take bank guarantee from bank. Bank also gives bank guarantee without any security, if the bank is given 100% cash margin. There is less risk in this case. Bank receives an amount as commission in Bank guarantee. Client can extend the validity of bank guarantee if the guarantee is expired if the client needs guarantee further. Client can also take back the security from bank when the necessity of bank guarantee is finished and after the expiration of that Bank Guarantee.

Under Bank guarantee, there are various types of guarantee, which is required by various customers for their various types of business requirements. The various types of bank guarantee is given below: Bid Bond Guarantee: In many times, for govt. work tender is asked and a specific amount is required for submitting along with the tender schedule as security. The money of this security is submitted in the form of bid bond. This guarantee is issued by the bank on behalf of bank’s client favoring the beneficiary. Bid bond guarantee is required for the purpose of public tender, govt. contracts and to secure payment of guarantee amount. In case of default of the tender at whose request the guarantee is extended the beneficiary may en cash the same. The validity of this guarantee is usually three to six month.

Performance Guarantee: This guarantee ensures the ability and experience of the contractor to the Govt. sometimes, Govt. asks the contractor to submit performance guarantee before starting a govt. work. On request of the client, bank issues a performance guarantee favoring the beneficiary.

Performance guarantee is given to Govt. or any other corporation on behalf of the contractor,

undertaking to make payment of penalty in the event of non-fulfillment of the performance of the contractor according to the contract, supply of goods as per contract or any breach of contract or discrepancy in between the actual performance and the contracted performance.

Contractors and local suppliers may also use performance guarantee, which must be referred to Head office along with the copy of guarantee for necessary approval. The purpose of this guarantee is to pay the beneficiary the guaranteed amount when the supplier/ seller/ contractor have not fulfilled his contractual obligations.

Advance Payment Guarantee:

This guarantee ensures that a supplier/ contractor will supply or do specified work to the buyer within the specified time period. It is an undertaking issued by a bank or insurance company at the request of the supplier of goods or service or other contractor to repay a stated sum of money to the buyer within its validity period in the event of default by the principal to fulfill the terms of the contract. Its purpose is to ensure repayment of advance made to supplier by the buyer for purchase of raw materials, production costs, etc. The guarantee is issued for the period up to completion of the performance. This is more risky than a payment guarantee. If it is found that customer is diverting the money and not using the same money in the work in which it was supposed to, then the branch must inform the Head office about it and further drawing of this facility will not be given to that client. Total amount of APG must be received directly by the bank and credited to customers account.

Withdrawal should be watched and regulated on the basis of understanding with the customer.

Shipping Guarantee:

This guarantee is issued in case of non receipt of original shipping documents, while the ship has arrived and the goods have been incurring demurrage or the original shipping documents have been lost after retirement from bank. These guarantees are limited to the bill amount but not exceeding the letter of credit value and for the period till receipt of original bill of lading.

The guarantee is signed by the importer in favor of shipping company and counter signed by the banker. Full guarantee value must be retained as margin for issue of such guarantee. The goods can also be kept in bank’s custody. As soon as the original shipping documents are received, these shall be sent to clearing agents to facilitate return of original guarantee. In the alternative way, custom authority’s confirmation regarding cancellation shall be obtained.

Guarantee on account of Foreign Correspondent: Foreign correspondent guarantee is required to be issued at the request and on behalf of the clients of foreign correspondents in favor of beneficiaries in Bangladesh in the form of Bid/ Earnest money guarantee or Performance bond. Counter guarantee is required for issuing this guarantee. The authorized dealer of branches will handle this guarantee only.

Personal Loan:

Personal loan is one of the strengths of Dhaka Bank Ltd. Dhaka Bank has created a separate division for this, called, “Personal Banking�. This division is involved in marketing of personal loan products. This division also processes the loan application and sanctions all the personal loan. Dhaka Bank offers various personal loan products. Any Bangladeshi citizen can apply for this loan. The minimum age of an applicant must be 21 years and maximum age must be 52 years. The minimum monthly income of an applicant must be 15,000 Taka. Self employed professionals, salaried employees, business man can apply for this loan. After completion of all the documentations, the papers are sent to the head office. Head office sanctions the loan and send sanction letter to the branch. The branch then disburses the loan to that customer. After two months, the installment for loan repayment starts. The monthly installment will be debited from the client savings account with Dhaka Bank against the post dated cheques or auto debit instructions obtained at the time of loan disbursement. Early settlement of the loan is allowed after six months pre payments. Partial pre payment of the loan is not allowed.

Personal installment loan: This loan is mostly taken by the retail customers. Dhaka Bank has a wide range of personal loan products. Customers can purchase household appliances, electronic goods, computers, can use it for the purpose of marriage, medical treatment, etc. The maximum loan amount for this kind of loan is BDT 5 lac and the minimum of BDT 25 thousand. The loan amount is disbursed through the savings account of the customer. The loan amounts have to be repaid in the monthly installments of 12, 24, 36 and 40.

Car Loan:

Car loan is sanctioned to an individual borrower for the purpose of personal use. The car has to be unregistered reconditioned or brand new. The vehicle has to be registered in the bank’s name and the bank will issue a letter of Authority in favor of the borrower for using that vehicle. Maximum 70% of the value of the vehicle will be sanctioned by the bank or in amount, maximum BDT 35 Lac to minimum 5 Lac. Registration and all other costs will have to be incurred by the borrower. Vehicles will have to be purchased from any of the bank’s enlisted Dealers. The repayment terms are 12, 24, 36, 48 and 60 monthly installments. The borrowers have to choose one of the payment terms. The installments will be according to the tenure of the repayment.

Home Loan: Any Bangladeshi individual can take home loan from Dhaka Bank for the purpose of purchasing, construction, renovation or extension of house or apartment. The maximum amount for this loan is Tk. 5 million or 70% of the price of the home, apartment or office space. And 80% of the cost of repair, construction or extension is given maximum to a customer. Installment is determined based on loan amount and tenure. Retail customers pay on monthly installments basis but Corporate and developer finance customers pay on quarterly basis also. Security is kept against this loan. The purchased home or the repaired house is kept as security and mortgaged to the bank.

Documentation for different kind of loans: Document is the acknowledgement of the parties concerned their involvement in the credit transaction. It is the acknowledgement of debt and confirmation to repay from the part of a borrower/ mortgagor/ owner of the security, to be liable in the court of law and can be enforced by the court of law.

The whole process of completion of the documents to secure the credit is called documentation. It is necessary for acknowledgement of the debit by the borrower / guarantor/ mortgagor and for charging of securities in favor of the bank by them. Documentation must be proper and correct for the safety of credit. Proper documentation is essential to safeguard Bank’s interest. It is made covering its all legal aspects.

Basic Charge documents:  Promissory note,  Letter of Revival,  Letter of Undertaking,  Letter of Continuity,  Letter of Guarantee,  Right to recall the loan,

 General loan and collateral agreement.

Basic supporting papers:  Letter of authority to debit account,  Loan disbursement letter,  Account balance confirmation slip.

Legal Documents:  Memorandum and Article of Association;  Registered Partnership deed;  Board resolution covering corporate borrowing power and execution of security documents;  Resolution of the partners for availing of credit facilities and for execution of security documents.

Steps of documentation: The steps of documentations are given below Obtaining of document or instrument form the borrower/ guarantor/ mortgagor.  Execution;  Stamping (stamp duty rate enclosed);  Filing of document;  Registration.  Signature verification;  Safekeeping of documents.

Security/ Collateral specific documentation: Stocks/ Book debts/ machinery: Hypothecation of stocks/ Book Debts/ Machinery.

RJSC certificate of filing with form XVIII/ XIX. Notarized power of attorney to sell hypothecated Assets.

Land / Building: Registered mortgage/ Equitable mortgage.

Memorandum of deposit of title deeds.

Registered mortgage deeds.

Title deeds and other land related documents.

Stock / Bond: Letter of Lien and Authority.

Form-117.

Process documents related to De-materialization.

FDR/TDR/ ICB unit: Letter of Lien and authority.

Letter of authority for encashment of FDR. Lien confirmation by the issuing Bank.

Discharge of instruments by the instrument holder.

Surrender form for ICB unit certificates.

Vehicle: Hypothecation of vehicle.

Related BRTA documents (TO, TTO, Sale receipt, affidavit, etc).

Hypothecation Documents: Hypothecation documents are obtained where stocks, book debts and/ or machinery are obtained as collateral and charge needs to be created on these collateral. Hypothecation created legal right of the bank on the assets of a borrower while the borrower is free to deal with the assets. Separate hypothecation documents are obtained for each category of assets or

a combined charge on all three types of assets, generally known as floating charge, could be created.

Mortgage Documentation: Title of immovable property in Bangladesh is generally of two types, Freehold and Lease hold. In freehold property, the owner is free to deal with the property without the intervention of Government. On the other hand, for leasehold property, which are primarily located in the city areas, the lessee must comply with the terms of the lease deed in dealing with the property. Such deeds usually contain a condition to obtain the permission of the lessor prior to dealing with the property, including sale, sub-lease or mortgage. Documentation requirement for freehold property is different from that of lease hold. Out of about six different types of mortgages, two are very common and well accepted in banking arena of our country. They are registered mortgage or legal mortgage and Equitable mortgage or mortgage by deposit of title deeds.

Equitable mortgage could be created by submitting a memorandum of deposit of title deeds along with original title deed by the mortgagor of the bank. In absence of original title deed, certified copy of title deed along with original receipt for filing and registration in acceptable.

Legal mortgage requires signing a mortgage deed by the mortgagor in favor of the mortgage.

The mortgage deed must be signed by the mortgagor in presence of and attested by two witnesses. Stamp duties as specified by the Government must be paid for the mortgage deed based on the amount secured by the mortgage deed.

Checklist of Land Documents for Title search: Freehold property:  Title (Sale) deed;  Bia-deeds (deeds in the name of previous owners);  C.S, S.A, R.S, B.S parchas;  Mutation certificate in the name of the owner;  Duplicate carbon receipt;  Land development tax/ rent receipt;  Municipal tax receipt for properties located in municipalities;  Building/ Factory plan with letter of approval;  Valuation certificate;  Non encumbrance certificate.

Leasehold Property:  Lease deed;  Transfer deeds including in the name of lessee mortgagor;  Mutation letter in the name of lessee mortgagor;  Approval/ NOC from lessor;  Land development tax;  Municipal tax receipt;  Building/ Factory plan with letter of approval;  Valuation Certificate.

Existing Stamp duty for Mortgage deed: Mortgage value Upto Taka 10. Lac Tk. 10 Lac- 50 Lac. Exceeding Tk 50 Lac.

Stamp charge Tk. 1500 Tk. 3500 Tk. 3500 for first 10 Lac+ 10% for the rest.

Pledge Documents: Pledge documents are obtained in the case of LIM and CC (pledge) facility. Agreement for pledge is obtained for all types of LIM and CC (pledge) facility. Letter of disclaimer is obtained from the godown if it is neither bank’s godown, nor client’s.

L/C related Documents: While opening L/C, two documents are required: a) L/C application; b) Letter of undertaking for clearance of goods.

For bill discounting/ Bill purchase two documents are to be obtained: a) Letter of indemnity; b) Letter of arrangement for bill purchase limit.

Other important Credit related documents: Marketing Call Report: To be prepared on the basis of a meeting between a potential client and bank’s officer/ executive or between an existing client and bank’s officer / executive for tapping potential business. Sending the copies of this report to senior management will ensure keeping them informed about branch’s activities toward the growth of lending business and intimation about a client/ business prior to sending formal proposal.

Factory visit report: To be prepared by bank’s officer / executive after visiting a client’s factory / manufacturing unit. The factory could be in running condition or it could be a project under construction/ implementation. Additional relevant information might be incorporated on top of information sought in the standard format.

Mortgage Property Visit Report: Mortgage property must be visited prior to making initial lending decision and subsequently at a suitable interval based on branch manager’s judgment. The report to be prepared by the visiting officer and counter signed by the branch manager. The location map will facilitate finding out the property in difficult situation and other information will help management taking appropriate credit decision.

Net Worth Statement: To be obtained, on best effort basis for the proprietor / partners of a firm, directors of a limited liability company and third party guarantors. The importance of this report is rather enormous, when lending decision is largely based on the net worth of the sponsors/ guarantors. In case of major change in net worth position, a fresh report to be obtained.

Statement of Stock and Book Debts:

This statement is to be obtained for all sorts of working capital financing or financing where stocks and / or book debts are primary security. To be obtained periodically as per approval condition. Obtaining and reviewing this report will help monitoring the trend of client’s business activities and highlight any potential problems like blocked receivables, low sales resulting obsolete or accumulation of inventories. The importance of this report is immense for large manufacturing borrowers.

Statement of Stocks (RMG): As the nature of business of RMG units and pattern of bank financing thereof are different from those of other clients, stock report from RMG clients are obtained in a separate format, which would track down stock position corresponding to related BBLC and accepted liability.

Drawing Power Calculation: Drawing power should be calculated for all clients, except RMG, for WC lending. Excess drawing would cause diversion of fund and hence would jeopardize the timely repayment. In case of lending by multiple financial institutions, the outstanding of all financial institutions should come under consideration. Net stocks and book debts position should be taken for DP calculation. The calculation should be done on the basis of stocks and book debts position at a cut off date and outstanding on the same date. This cut off date should preferably be a month end or quarter end position. In case of DP shortfall, investigation and prompt action should be taken. If necessary, the client should be asked to settle excess outstanding.

Charge Documents for different kind of Loans: Charge Document for Overdraft:  Usual Charge Document;  Letter of revival;  Letter of Authority to mark lien;  Letter of Authority for encashment of FDR;  Third party guarantee;  Agreement for pledge of security;  Letter of continuity;  Share Transfer Deed;  Memorandum of deposit of Shares.  Blank Transfer Deed duly verified by the Company.



Charge Document for Cash Credit:  Usual Charge Document;  Letter of Continuity;  Agreement for Hypothecation of stocks;  Letter of Partnership;  Personal Guarantee;  Registered Power of Attorney to sell goods;  Agreement for Pledges of Goods;  Letter of Disclaimer; Charge Documents for LTR:

     

Usual Charge Documents; Letter of Trust Receipt; Hypothecation of imported goods; Personal Guarantee of all the directors; Letter of Partnership in case of partnership account; Resolution of the Board of Directors along with Memorandum and Article of association.

Charge Documents for LIM:  Usual Charge Documents;  Letter of Pledge/ Hypothecation;  Letter of Disclaimer;  Letter of Partnership in case of partnership account;  Personal Guarantee;  Letter of Undertaking;  Letter of Indemnity.

Charge Document for Bank Guarantee:  Usual Charge Document;  General Counter Guarantee;  Letter of Indemnity;  Letter of Continuity;  Irrevocable Power of Attorney;  Letter of Revival;  Letter of consent/ acceptance from the work order / supply order issuing department.

Additional documents for Overdraft/ Cash Credit/ LIM/ LTR/ Bank Guarantee:  Letter of Partnership along with Registered Partnership Deed in case of Partnership Accounts.  Resolution of the Board of Directors along with Memorandum & Articles of Association in case of Accounts of Limited Companies. In case of Corporation, resolution of the Board along with Charter.  Personal guarantee of all the Partners in case of Partnership Accounts and of all the Directors in case of Limited Companies.  An undertaking from the Directors of the Public Limited Company to obtain prior clearance from the Bank before declaring any interim/final dividend.  Letter of Guarantee signed by the depositors of title deeds to secure the advance to third parties.  Notarized/Registered Irrevocable Power of Attorney to collect bills directly from the concerned authority to be vetted by Bank’s Legal Adviser.  In case of Limited Companies get the first charge on the fixed and floating assets of the companies favoring Bank registered with the Registrar of Joint Stock Companies as per companies act within 21 days of the exaction of charge documents & obtain “Certificate of Registration of Mortgage”.  Withdraw the Bank’s charge after the advance is adjusted and limit cancelled by obtaining a certificate from the Registrar to the effect that Bank’s charge has been satisfied.

Charge Document for Personal Loans: Car Loan:  Letter of Revival;  Letter of Set off in respect of credit balance;  Third party personal guarantee;  Spouse guarantee;  Authorization to take repossession of vehicle;  Irrevocable letter of Authority;  Declaration in respect of overdue;  Standing instruction; Personal Installment Loan:  Demand Promissory Note;  Letter of Revival;  Letter of Hypothecation;  Letter of Set off in respect of Credit Balances;  Third Party personal guarantee;  Spouse Guarantee;  Irrevocable letter of Authority;  Letter of Introduction;  Declaration in respect of Overdue;  Standing instructions;  Declaration of Stuckup Liabilities.

Home Loan:  Demand Promissory Note;  Letter of Revival;  Letter of Continuity;  Letter of Hypothecation;  Letter of Set off in respect of Credit Balances;  Third Party personal guarantee;  Spouse Guarantee;  Irrevocable General Power of Attorney;  Letter of Introduction;  Standing instructions;  Letter of Guarantee;  Letter of Authority to mark Lien and appropriate proceeds.

Charge Document for Lease Finance:  Usual Charge Document;  Counter Guarantee;  Loan Disbursement letter;  Letter of undertaking;  Hypothecation of vehicles;

 Letter of Guarantee;  Memorandum of deposit of title deeds;  Request for Credit limit; Documents required at Pre-approval stage of loan: o Review (RJSC certified) Memorandum and Article of Association of the respective client, regarding company’s borrowing authority, restrictions and other clauses. o Review RJSC search report showing interest of other lenders on company’s assets and whether 1st Hypothecation charge could be created. o Review (RJSC certified) Memorandum and Article of Association of the respective client regarding object (third party guarantee) clauses. o Obtain RJSC certified form –XII of the company of the client. Showing the list of directors and RJSC certified Schedule-X, showing the shareholding position. o Obtain the valuation of both the Mortgage properties by approved surveyor. o CIB report should reflect nothing adverse of the client. o CRG outcome should be positive. o Factory visit report. o Mortgage property visit report. o Stock report. o Net worth statement of directors.

Documents required at Post approval stage of loan: o Obtain necessary land related documents. o Carry out the title review of the land / mortgage properties through panel lawyer and obtain letter of Satisfaction. o Send sanction letter of the client for acceptance. o Obtain board resolution from the respective company to borrow, provided that they already have account with Dhaka Bank and resolution for account operation is in place. o Obtain board resolution from the respective company to provide guarantee for the company’s liability in conformity with its MOA an AOA. o Obtain accepted sanction letter and applicable executed charge documents from the company.

Ways of Charging Securities: The process of creating charge over the assets is called perfection of securities. Charging a security means making it available as a cover for a credit. Not only security has to be good, but also the method of charging should be legal and perfect. It is therefore, important that the charge must be complete and all necessary formalities are completed with, so that in case of default by a borrower, the security will be available to the banker. There are different types of charge created on securities considering types of assets, nature of credit and the degree of control over the debtors properly required by the banker. The common ways of charging securities are as follows: Lien: Lien is holding the securities of the borrower until the loan is not adjusted. The security over which the right is to be executed must be in possession of the creditor who will exercise it.

Lien gives a person only a right to retain the possession of the goods, not the right to sell the goods. There must be a lawful debt due to the person in possession of the goods by the owner of the goods. There must be any contract to the contrary.

Pledge: In Pledge, possession of goods is transferred to the bank. Security for the payment of a debt or the fulfillment of some obligations is transferred by the creditor to the debtor. The essence of Pledge is that possession passes to the pledge but legal ownership remains with the pledgor. Only movable property can be pledged.

Hypothecation: Hypothecation means the charging of property to secure debt while the possession and ownership of the property remains with the debtor. Hypothecation agreement between the debtor and creditor gives the debtor the right to sell the goods if the loan is not repaid.

Mortgage: Mortgage is a transfer of interest in specific immovable property as security by the owner for the payment of debt. A mortgage created by mere deposit of title deed relating to mortgage property with the intention to create a security thereon, is called an Equitable Mortgage.

Under this mortgage both the possession and ownership of the property remains with the borrower. In a legal Mortgage, the mortgagor transfers the mortgagee the legal title and interest to the property by preparing a mortgage deed duly registered at the registry office.

Assignment: An assignment means a transfer by one person of a right, property or debt to another person.

The person who assigns the right property or debt is called the assignor. The person to whom the right, property or debt is assigned is called the assignee. The most common examples of assignment are: Book Debts, Supply Bills, Life Insurance Policy, Contract money due from Government and Semi Government Body.

Set-Off: Set off means the total or partial margining of a claim of one person against another by counter claims by the later against the former. It is combining of accounts between a debtor and creditor, so as to arrive at the net balance payable to one or the other.

Securities Kept Against Different Types Of Loans In Dhaka Bank Are Given Below: Security Details of Lease Finance:

Security details of Bank Guarantee:

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Registration of the Vehicle; Personal guarantee of the Leasee; Advance lease deposit; 24 post dated cheques covering monthly rental amount; 1 (One) post dated cheques covering option value; lease agreement between leasee and bank; Usual charge document.

Confirmation of payment of bills of work order; Cash margin on Bank Guarantee; Counter Guarantee; Personal Guarantee.

Security details of  Hypothecation of plant and machinery, work-in-process, Multiple Credit finished goods, raw material both existing and future; facilities:  Registered Mortgage of Project Land, Factory Building.  Registered Power of Attorney to sell the property in case of need;  First charge with RJSC on fixed and floating assets of the company.  First charge by way of hypothecation over plant and machinery;  Personal guarantee of all the directors of the company;  Trust Receipt in case of LTR;  Duty, Vat and other port dues to be borne by the company from their own sources; Other Conditions of  All legal fees and other costs incurred by the bank in Multiple Credit connection with these facilities will be drawn from facilities: borrowers account;  Any material or adverse change in business condition will cause the amount due to bank immediately repayable;  Prior notice should be given to the bank regarding any change in the ownership structure of the company and FormXII, Schedule- X must be submitted.  Authorized financial statement of the company must be submitted in the bank;  Bank reserves the right to setoff any outstanding in one account against any other accounts held in company’s name with the bank whether in debit or credit;  Bank reserves the right to review and change interest rate, if required in connection with market rate;  Marine insurance policy in case of goods imported by ship and lorry insurance policy in case of goods imported by truck to be obtained.

 All rules and regulations of import policy, guidelines of foreign exchange transactions, public notice, Bangladesh Bank and Head office circular issued from time to time must be compiled with;  Quality, Quantity, rates and all other details of the imported goods must be as per respective indent/ proforma invoice and the rate to be comparative as per local and international market.

Security details Personal Loan:

of  Hypothecation of all unencumbered movable assets of the borrower;  Demand Promissory Note;  Letter of Set-Off in respect of Credit Balance.  Third Party Personal Guarantee in Bank’s prescribed format;  Spouse Guarantee in Bank’s prescribed format;

 Declaration in respect of Overdue/ Stuck up liability;  03 (Three) duly signed but unfilled in cheques;  Bank statement of the borrower of last 12 months.

Interest Rates along with other conditions charged to different categories of loans according to the policy of Dhaka Bank Ltd.: Personal Loan: Rate of Interest: Processing Fee: VAT: Late payment interest:

14%-17% p.a.

1.50% of Loan amount.

15% on Processing fee.

48% p.a. (4% p.m.) on the arrear installment amount or BDT 200 (whichever is higher).

Early settlement: i. A fee @ 0.50% on the settlement amount (excluding VAT). ii. Payment of at least 3 (three) equated monthly installments in case of partial settlement.

Non refundable BDT 500. verification fee: Car Loan: Rate of Interest:

14% p.a.

Home loan: Rate of Interest:

13% p.a.

Lease Finance: Rate of Interest: Risk Fund:

15% p.a.

1% of lease amount.

Corporate Loan (CCH): Rate of Interest: Margin on B.G. Commission on B.B. Interest on Funded Liabilities: Margin on L/C: Commission on L/C: Bank Guarantee:

15% p.a.

10% Cash Margin.

0.50% per Quarter.

14% p.a.

10% Cash Margin.

0.50% for 1st Quarter; 0.25% from next Quarter.

Cash Margin: 10% Commission: 0.40% for 1st Quarter; 0.30% from Next Quarter.

Commission on 100% BDT 500.

Cash Margin: LC/LG/ OD/ STL: Rate of Interest: Margin on L/C: Margin on B.G.: Commission on L/C: Commission on B/G:

13% p.a. with quarterly rest or as advised by the Head Office from time to time.

10% in Cash.

5% in Cash.

0.25% for 1st Quarter; 0.15% for subsequent Quarters.

0.25% per Quarter, i.e. 1% p.a.

Long Term Receipt (LTR): Interest on Funded 14% p.a. (with quarterly rests or as advised from time to time).

Facility: Penal Interest: In case of Overdue/ Excess, over 2% penal interest to be charged on outstanding loan amount.

Margin on L/C & L/G: I. 10% margin, i.e. 5% at the time of opening L/C by keeping lien of FDR / STD accounts of sister concerns and rest 5% in the form of cash during the creation of LTR. II. 10% Cash margin in case of issuing B.G. Commission on L/C & I. 0.30% for 1st Quarter and 0.20% for subsequent quarters L/G: for L/C. II. 0.35% per quarter on guarantee amount in case of Bank Guarantee.

Retirement of By creating LTR upto 90% of CFR value if room is available / Documents: in cash.

Repayment: a. From sale proceeds / in cash within the validity. b. Return of Original Bank Guarantee.

Classification of Loans and advances: When loans become irregular in repayment, these loans are called Classified loans.

Classification of loans is the process of identifying those loan accounts and giving special attention to those loans by separating those loan accounts. Classification of loans also measures the level of risk associated with it. Every banks give loans and advances. But not all the loans are repaid by the borrower in specific time. There are some loans, the repayment of which is irregular. Banks find out these loans and give special treatment to these loans.

Classification of loans is of two types: I. Classified Loans: Loans, the repayment of which is irregular.

II. Unclassified Loans: Loans, the repayment of which is regular.

Classified loans are of three types again: 1. Substandard: Repayment is irregular, but it can be improved.

2. Doubtful: Unlikely to be repaid but special collection efforts may result in partial recovery of the loan amount.

3. Bad or Loss: No chance is left for recovery of loan.

Reasons for Classification of Loans: There are some realistic reasons for Classification of loans. These are given below: 1. Fund Diverting: If the borrower divert loan amount to other sector, the loan becomes classified. This has been seen that the borrower do use the loan in his said purpose of loan.

Rater, the borrower uses the loan amount for any other purpose. In these cases, the loan becomes classified. Because, the borrowers intention of taking loans was not good and the borrower do not adjust loan willingly.

2. Change of Political Govt.: If the political Government changes, then many loans become classified. There are sectors in which one Govt. give priority, subsidiary and tax free facility where as, the other Govt. do not. That is why a running company can face huge trouble if the other Govt. comes in power and withdraw all the facilities that were given by the previous Govt. In this case, the borrower unwillingly cannot repay the loan and the loan becomes classified.

3. Death of the Borrower: This has happened that because of the borrower’s death, the loan becomes classified. This situation frequently occurs in case of retail loans. If the Key Person of a business is dead and there is no other capable person to take the charge of the business, then the loan becomes classified.

4. Clash between Partners: Sometimes clash occurs between the partners of a firm. In that case, there exist differences in the opinions of the partners. The business firm becomes unstable at that time. For this reason, they do not adjust the loan and the loan becomes classified.

5. Security of Third Party: There exist some loans, in which security/ mortgage of third party is kept against the loan. In this case, what happens is, the original borrower do not take the repayment seriously. Because, he thinks that the security is not his asset. If borrower do not repays loan, bank will seize the security of that third party, which will cause nothing harm to the real borrower. But that third party will be affected in fact. These types of loans become classified.

6. Debt Buying: If a bank buys back a debt from any other bank in an intention to do business from that debt, in most of the cases, these loans become classified. A customer may have a loan in a bank. That customer requests another bank which he knows, to take that loan.

Because that customer does not want to do any transactions with the loan originating bank. At this moment, the later bank buys that customer’s debt from the original bank in order to make profit from that customer. In these cases, the genuineness of the loan is very bad and the borrower do not repay loan willingly also. For these reasons, the loan becomes classified.

Significance of Classification of Loans: Bangladesh Bank instructs that classification of a loan does in no way lessen the borrower’s responsibility to pay the full amount due, including any suspended interest whether or not entered on the loan ledger. In any court action in which a claim is made of reduced liability due to classification and provisioning, the circular of loan classification should be presented to the court as evidence that the monetary authorities instruct the banks that such

responsibility is not diminished by loan classification, the making of provisions, or the suspension of interest.

Basis of Loan Classification: Qualitative Criteria: The loan should be classified by the lending bank whenever the bank has reason to believe the loaner may not be able to repay the loan due to a change in the circumstances under which the loan was originally sanctioned, i.e. on the basis of qualitative factors. The reasons for classification based on judgment include all criteria previously used by the inspecting departments of Bangladesh Bank in classifying loans, all of which should continue to be applied as previously. These criteria include but are not limited to more than a normal risk due to adverse financial condition (arising from loss of a part of borrowers capital), poor financial performance of the borrower (borrower’s cash flow is insufficient to service debt requirements), or due to insufficiency of security (value of security is less than the amount of the loan outstanding) or other unfavorable factors. This judgment can be made regardless of whether the loan is overdue or not. Banks are responsible for formulating specific conditions for classification on qualitative basis and forming their branches of these conditions.

Objective Criteria: i.

Any agricultural loan will be turned into irregular credit just after it is not repaid/ rescheduled within the prescribed time period. If the aforesaid credit lied irregular for 3 months and above but below 6 months then the credit will be classified as Sub Standard, if it lies irregular for 6 months and above but less than 12 months then it will be classified as Doubtful and if it is left unrecovered for 12 months or above then the loan will be classified as Bad Loan. ii.

When a demand loan is left unrecovered for 3 months or above but less than 6 months from the date of the loan is claimed or from the date of compulsory credit creation, then the loan will be classified as Sub-standard loan. But when it is left unrecovered for 6 months or above but less than 12 months the loan will be classified as Doubtful and if the loan lies unrecovered for 12 months and above then it will be classified as Bad loan. iii.

In case of fixed term loan if any installment is left unrecovered within the scheduled date, the amount falling due on account of unrecovered installment, will be classified as Overdue installment. A fixed term loan is repayable within a maximum period of 5 years. If the amount of overdue installment equals or exceeds the amount repayable within 6 months, then such credit will be classified as Sub standard. If the amount of overdue installment equals or exceeds the amount repayable within 12 months then such credit will be classified as Doubtful. If the amount of overdue installment equals or exceeds the amount repayable within 18 months then such credit will be classified as Bad Loan.

Classification as Sub-standard: A loan is classified as sub standard if any one of the following conditions is met: a) If an advance or any portion of an advance or interest thereon remains overdue for one year or more but less than three years then the advance is classified as substandard. b) For an advance of a continuing nature, even if the loan is not overdue as much as one year, but the limit stands overdrawn by more than 50% for a period of 45 continuous days preceding the reference date for the classification, then it is classified as sub standard. c) If a loan has been renewed or rescheduled at least three times but is not overdue, and any of the required payments for the required period have not been made when they fall due, then the loan is classified as sub standard.

Classification as Doubtful: A loan is classified as doubtful if any one of the following conditions is met: a) The advance or any portion of the advance or interest thereon remains overdue for three years or more but less than five years. b) A loan classified as substandard mentioned above has remained substandard for two years or more. c) Qualitative criteria based on judgment. d) Legal action has been initiated.

Classification as Bad or Loss: A loan is classified as bad if any one of the following conditions is met: a) The advance or any portion of an advance or interest thereon remains overdue for five years or more. b) A loan classified as doubtful mentioned above has remained doubtful for two years or more. c) If legal action has been initiated and no court decision has been obtained within five years of initiation of action then the loan is classified as bad. d) Qualitative criteria based on judgment.

Accounting Procedure of interest of Classified Loan: If any credit or advance is classified as substandard or doubtful, the interest will be imposed on that credit account but such interest will not be transferred to the income account. Total interest imposed on substandard or doubtful account will be kept in interest suspense.

If any credit or advance is classified as Bad or loss, imposition of interest on that account will be suspended forthwith. If any suit is required to be filed for recovery of such credit, the suit will be filed on the total amount of principal including interest calculated upto the period before the suit is filed. Such interest will be kept on interest suspense. In case of any other special reason if interest is imposed on Bad and Loss account then such interest will be recovered in interest suspense account.

If any classified loan or part of thereof is recovered, i.e. actual deposit on account of recovery is made in the credit account, then recovery of non imposed as well as imposed interest will be made first from such deposit. Then original loan will be adjusted.

Classification of loans according to overdue period: 1st Phase Classification Length status overdue

2nd Phase of Length overdue

3rd Phase of Length overdue

4th Phase of Length overdue

5th Phase of Length overdue

of

Unclassified

Less than 12 Less than 9 Less than 9 Less than 6 Less than 3 months. months. months. months. months.

Substandard

12 months or more but less than 36 months.

9 months or more but less than 24 months.

9 months or more but less than 24 months.

6 months or more but less than 12 months.

3 months or more but less than 6 months.

Doubtful

36 months or more but less than 48 months.

24 months or more but less than 36 months.

24 months or more but less than 36 months.

12 months or more but less than 24 months.

6 months or more but less than 12 months.

Bad/Loss

48 months or 36 months or 36 months or 24 months or 12 months or more. more. more. more. more.

Credit Management Procedure of Dhaka Bank Ltd: Loans and Advances is the major business of any banks. Banks receive idle money or Deposit from a source and lend this money to others. Bank gives interest on deposit and receives interest from lended amount. Obviously, the lending rate is higher than the interest paid on deposit. So, bank gains from this trade off. Like any other banks, credit department is the most important division of Dhaka Bank. Because, credit department sanctions loans and it is the major business of this bank. We can say that this is the life blood of Dhaka Bank Ltd. So, it is very important to direct this division very carefully. Credit management is the process by which Dhaka Bank can direct the department as well as can control each and every steps of loan sanction and disbursement. Credit management procedure also helps to monitor and supervise the sanctioned loan. Sanctioning a loan is important. But the more important is to monitor and supervise that loan so that it is smoothly repaid by the borrower. Bangladesh Bank also has been playing an important role for bringing out discipline and dynamism in the banking sector of the country. Due to stringent supervision and control exercised by the central bank, there had been a significant progress in the reduction of percentage of classified loans in the banking sector. The guidelines introduced by Bangladesh Bank influences the Credit management of Dhaka Bank. The Credit management procedure of Dhaka Bank is discussed below:



Reporting to Credit Information Bureau (CIB): When a corporate or retail customer applies for a loan, it is mandatory for a bank to inform about that customer to CIB of Bangladesh Bank and obtain CIB report about that customer also. This has been made mandatory by Bangladesh Bank to all the Bank and financial institutions. Bank has to inform the CIB about the existing borrowers also. The schedule for informing CIB about the borrowers is: Loan Amount 1 Crore and above 10 Lac- 1 Crore.

1Lac- 10 Lac.

Statements to be sent: Monthly Quarterly Quarterly

The Credit Information Bureau of Bangladesh Bank has undertaken the task of collecting the detailed credit information in its proper perspective so that these are exchanged among the scheduled banks and financial institutions and Bangladesh Bank for credit approval purpose.

The timely reporting of correct credit information will not only help in streamlining all sorts of credit data but also help the scheduled banks and financial institutions in getting loan applicant’s information and expedite approval process. Proper recording of data in Segments1,2,3,4 & 5 of CIB-01 form for creation of database is, therefore, extremely vital. Reporting to CIB has been segregated into the following five segments: Segment – 1 : Debtor’s Information (Debtors only); Segment – 2 : Debtor’s Information (Owners only); Segment – 3 : Debtor’s Information (Group and Affiliates only);

Segment – 4 : Credit Exposure Matrix; Segment – 5 : Guarantors information (Third Party Guarantee/security only).

Instructions to be followed by banks and branches before reporting to CIB: i.

Head offices of Bank branches and financial institutions are required to collect the CIB01 forms from all of their branches and in turn submit the same through computer diskette along with hard copy Credit Information Bureau, Bangladesh Bank, Head office, Dhaka by the end of the month following the quarter to which it relates. The monthly data (borrowers having outstanding balance Tk 1 crore and above) are required to be submitted by them by the 10 th of the following month to which it relates. The CIB-01 forms should be completed for all outstanding loans/ advances as per circular issued by CIB from time to time. ii.

The individual amount pertaining to each facility should be rounded off to the nearest lakh taka and reported in CIB-01 form. Special care should also be taken so that the amount in taka should in no case be other than the rounded lakhs. iii.

Head offices of the bank branches and financial institutions should also furnish the following information along with the forwarding letter: a) Total number of branches; b) Number of non reporting branches; c) Number and list of reporting branches; d) Branches offices of Banks and financial institutions should submit a list of drop out borrower’s and a list of released guarantors with names and addresses to their head offices and head office in turn should consolidate the drop out borrowers and released guarantors names and addresses and submit the same to CIB. e) In the case of new borrowers, banks and financial institutions are required to submit through computer diskette with all relevant segments of CIB-01 form. In the subsequent reporting period they will submit segment 04 only.

Contents of CIB Statements: o Bank/ F1 serial no. o Nature of Advance. o Sanction limit Tk. o Date of Sanction/ renewal. o Date of expiry/ maturity. o Outstanding Tk. o Overdue amount Tk. o Classify status. o No of times rescheduled. o Date of classification. o Date of law sued. o Grading. o Y-Score. o Z-Score. o Reporting period (Monthly/ Quarterly). o Rescheduled/ Adjusted/ Regularized / Classified Date.

Z- Score: Used for Public limited or Govt. owned manufacturing companies. z-score includes: Working Capital / Total Assets.

Retained Earnings.

Equity/ Total Liabilities.

Sales / Total Assets.

Earnings before interest and tax.

Y-Score: Used for all borrowers. Y score includes: Current Ratio, Quick Ratio Liquidity Ratio; Return on assets Return on investment.



Special Mentioned Account (SMA): If a loan’s installment is overdue for three months, then the loan is termed as SMA. This is a new rule from Bangladesh Bank to make the classification of loan more transparent. A loan is classified, if it is overdue for six months at the first phase. But a loan is considered as SMA if it is overdue for 3 months only. The main purpose of doing this is, to prevent a loan from becoming classified at a primary stage. By doing a loan SMA, the borrower is given a signal that his loan is going to be classified. And if his loan is classified, then he will be in trouble.

So, this is a signal for the borrower. According to the Bangladesh Bank guideline, if a loan is in SMA, then Bank’s can’t charge interest for that loan. The interest must be transferred to the suspense account, until the loan has not become regular. A borrower can easily get out this Special Mentioned Account by adjusting the overdue amount to the bank. This is just a warning to the borrower, so that the borrower can prevent his loan from becoming classified.



Credit Risk Grading: Credit risk grading is an important tool for credit risk management as it helps the Banks & financial institutions to understand various dimensions of risk involved in different credit transactions. The aggregation of such grading across the borrowers, activities and the lines of business can provide better assessment of the quality of credit portfolio of a bank or a branch.

The credit risk grading system is vital to take decisions both at the pre-sanction stage as well as post-sanction stage.

Definition of Credit Risk Grading (CRG): • The Credit Risk Grading (CRG) is a collective definition based on the pre-specified scale and reflects the underlying credit-risk for a given exposure.

• A Credit Risk Grading deploys a number/ alphabet/ symbol as a primary summary indicator of risks associated with a credit exposure.

• Credit Risk Grading is the basic module for developing a Credit Risk Management system.

At the pre-sanction stage, credit grading helps the sanctioning authority to decide whether to lend or not to lend, what should be the loan price, what should be the extent of exposure, what should be the appropriate credit facility, what are the various facilities, what are the various risk mitigation tools to put a cap on the risk level. At the post-sanction stage, the bank can decide about the depth of the review or renewal, frequency of review, periodicity of the grading, and other precautions to be taken. Bangladesh Bank expects all commercial banks to have a well defined credit risk management system which delivers accurate and timely risk grading.

Functions of Credit Risk Grading: Well-managed credit risk grading systems promote bank safety and soundness by facilitating informed decision-making. Grading systems measure credit risk and differentiate individual

credits and groups of credits by the risk they pose. This allows bank management and examiners to monitor changes and trends in risk levels. The process also allows bank management to manage risk to optimize returns.

Use of Credit Risk Grading: • The Credit Risk Grading matrix allows application of uniform standards to credits to ensure a common standardized approach to assess the quality of individual obligor, credit portfolio of a unit, line of business, the branch or the Bank as a whole.

• As evident, the CRG outputs would be relevant for individual credit selection, wherein either a borrower or a particular exposure/facility is rated. The other decisions would be related to pricing (credit-spread) and specific features of the credit facility. These would largely constitute obligor level analysis.

• Risk grading would also be relevant for surveillance and monitoring, internal MIS and assessing the aggregate risk profile of a Bank. It is also relevant for portfolio level analysis.

Number And 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/Watch list 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. o Good - (GD) - 2 o Strong repayment capacity of the borrower o The borrower has excellent liquidity and low leverage. o The company demonstrates consistently strong earnings and cash flow. o Borrower has well established, strong market share. o Good management skill & expertise. o All security documentation should be in place. o Credit facilities fully covered by the guarantee of a top tier local Bank.

•

•

•

•

•

o Aggregate Score of 85 or greater based on the Risk Grade Score Sheet o Acceptable - (ACCPT) - 3 o These borrowers are not as strong as GOOD Grade borrowers, but still demonstrate consistent earnings, cash flow and have a good track record. o Borrowers have adequate liquidity, cash flow and earnings. o Credit in this grade would normally be secured by acceptable collateral (1st charge over inventory / receivables / equipment / property). o Acceptable management o Acceptable parent/sister company guarantee o Aggregate Score of 75-84 based on the Risk Grade Score Sheet. o Marginal/Watch list - (MG/WL) - 4 o This grade warrants greater attention due to conditions affecting the borrower, the industry or the economic environment. o These borrowers have an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and/or inconsistent earnings. o Weaker business credit & early warning signals of emerging business credit detected. o The borrower incurs a loss o Loan repayments routinely fall past due o Account conduct is poor, or other untoward factors are present. o Credit requires attention o Aggregate Score of 65-74 based on the Risk Grade Score Sheet o Special Mention - (SM) - 5 o 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. o Severe management problems exist. o Facilities should be downgraded to this grade if sustained deterioration in financial condition is noted (consecutive losses, negative net worth, excessive leverage), o An Aggregate Score of 55-64 based on the Risk Grade Score Sheet. o Substandard - (SS) - 6 o Financial condition is weak and capacity or inclination to repay is in doubt. o These weaknesses jeopardize the full settlement of loans. o Bangladesh Bank criteria for sub-standard credit shall apply. o An Aggregate Score of 45-54 based on the Risk Grade Score Sheet. o Doubtful - (DF) - 7 o Full repayment of principal and interest is unlikely and the possibility of loss is extremely high. o However, due to specifically identifiable pending factors, such as litigation, liquidation procedures or capital injection, the asset is not yet classified as Bad & Loss. o Bangladesh Bank criteria for doubtful credit shall apply.

o An Aggregate Score of 35-44 based on the Risk Grade Score Sheet.

•

Bad & Loss - (BL) - 8 o Credit of this grade has long outstanding with no progress in obtaining repayment or on the verge of wind up/liquidation. o Prospect of recovery is poor and legal options have been pursued. o 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. o 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. o Bangladesh Bank criteria for bad & loss credit shall apply. o An Aggregate Score of less than 35 based on the Risk Grade Score Sheet.

Credit Risk Grading Process:  Credit Risk Grading should be completed by a Bank for all exposures (irrespective of amount) other than those covered under Consumer and Small Enterprises Financing Prudential Guidelines and also under The Short-Term Agricultural and Micro - Credit.  For Superior Risk Grading (SUP-1) the score sheet is not applicable. This will be guided by the criterion mentioned for superior grade account i.e. 100% cash covered, covered by government & bank guarantee.  Credit risk grading matrix would be useful in analyzing credit proposal, new or renewal for regular limits or specific transactions, if basic information on a borrowing client to determine the degree of each factor is a) readily available, b) current, c) dependable, and d) parameters/risk factors are assessed judiciously and objectively. The Relationship Manager as per Data Collection Checklist should collect required information.  Relationship manager should ensure to correctly fill up the Limit Utilization Form in order to arrive at a realistic earning status for the borrower. 



 

Risk factors are to be evaluated and weighted very carefully, on the basis of most up-to-date and reliable data and complete objectivity must be ensured to assign the correct grading. Actual parameter should be inputted in the Credit Risk Grading Score Sheet.

Credit risk grading exercise should be originated by Relationship Manager and should be an on-going and continuous process. Relationship Manager shall complete the Credit Risk Grading Score Sheet and shall arrive at a risk grading in consultation with a Senior Relationship Manager and document it as per Credit Risk Grading Form, which shall then be concurred by the Credit Officer in consultation with a Senior Credit Officer.

All credit proposals whether new, renewal or specific facility should consist of a) Data Collection Checklist, b) Limit Utilization Form c) Credit Risk Grading Score Sheet, and d) Credit Risk Grading Form.

The credit officers then would pass the approved Credit Risk Grading Form to Credit Administration Department and Corporate Banking/Line of Business/Recovery Unit for updating their MIS/record.



The appropriate approving authority through the same Credit Risk Grading Form shall approve any subsequent change/revision i.e. upgrade or downgrade in credit risk grade.



Provisioning of Classified Loans: Provisioning is reserving an amount for safety of the potential risk of loans becoming defaulted. This is shown in the financial statement of a Bank. Whenever any borrower fails to pay his borrowed money, the respective account is classified as substandard, Doubtful and Bad / Loss depending upon the period of non- payment. At the time bank required keeping provisions against those classified loans. As per the BRPD circular No. 16, issued in 1998 of Bangladesh Bank, the portion of provision required as follows: Status of classification Unclassified Substandard Doubtful Bad & Loss

Reserve as provision 1% 20% 50% 100%

Base for Provisions: The base for provisions on substandard loans is the balance outstanding in the loan ledger for the loan less any interest taken in an interest suspense account which is also included in the loan ledger, less the value of eligible securities. The base for provisions for doubtful and bad loans is the balance outstanding less any interest included in the balance outstanding but offset in an interest suspense account. The eligible securities are:  Goods with a ready market that are physically held in the control of the bank in its go down and goods are physically under the control of this borrower in its go down may also be treated as selling subject to the conditions that the bank could hold the full authority of those goods.  Gold/ gold ornaments are physically held by the bank.  Fixed and other deposits which lien is marked. Government bonds or certificate of deposit held by the bank.  Guarantee/ counter guarantees given directly and formally by either the government of Bangladesh or Bangladesh Bank to repay a loan or advance if the borrower defaults. A guarantee by a public sector corporation is not deemed a direct government guarantee and is not an eligible security. To be eligible the guarantee must not have expired.

Rate of Provision for Agricultural Loan: I. All bad agricultural loans : 100% II. All other agricultural loans (Unclassified, Sub standard, Doubtful) : 5% The banks will maintain adequate records to permit Bangladesh Bank to audit the calculation of provisions.

Reservation of Provision: a) In case of classified loan of Continuous, demand and fixed term credit the banks will keep provision for reserve at the following scale: I. Sub standard 20% II. Doubtful 50% III. Bad or loss 100%

b) 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 provisions will also be kept at a rate of 1% on unclassified loans. c) Eligible securities will also include the following securities: Security in respect of lien against loan=100% Security in respect of loan or gold ornaments kept in the bank as per present market Value= 100% Security against value of Govt. Bond/ Sanchay Patra under lien= 100% Guarantee made by the Govt. or Bangladesh Bank= 100% Market value of easily marketable goods preserved under the custody of bank=50% Market value of the mortgaged land & building= Maximum 50% d) In respect of Short Term Agricultural Loan and Micro Credit, the reservation of provision will be made as under: i.

Credits other than Bad Loan (Doubtful, Substandard and regular)= 5% ii.

In case of Bad Loan =100%



Loan Rescheduling: After classification of a loan, if the borrower appears to the bank and states that due to some unavoidable reasons he was unable to adjust the loan. Now the borrower wants to adjust the loan and requests the bank to give a new schedule against his loan. This is called Rescheduling of Loan. In this circumstance, the customer promises to ensure full adjustment of loan in the bank’s prescribed way. In order to reschedule a loan, the borrower must pay 15% down payment of the outstanding balance of the loan at first. If a loan is rescheduled, then the rate of interest increases. The rate of interest increases by 1% in each quarter. If a borrower applies to the bank to reschedule his loan after depositing a specific down payment in order to make his loan regular, then the bank must take decision about rescheduling the loan within three months from the date of receiving the application. The Inter Bank Committee for Loan Rescheduling and Restructure will measure the possibility of rescheduling this loan and will accept the rescheduling in possible terms. In order to measure the loan reschedule proposal, External Consultants could be appointed.



Suspense Account: According to the Bangladesh Bank regulation, when a loan becomes classified, the interest relating that loan is suspended. Therefore, the respective bank or financial institution cannot take the interest amount from that loan. For this reason, an account is created called Suspense Account. In this account, all the interests of classified loans are kept. If the loan becomes regular, then the bank can take the interest charged against that loan. So, the bank has to wait until the loan becomes regular. The main reason of creating this account is, if bank continuously charges interest on a classified loan, it will put extra pressure on the borrower.

Then the borrower will not be interested to adjust that loan. In order to reduce the pressure from the borrower, Bangladesh Bank introduces this account. On the other hand, bank suffers for this account. Bank is not getting the interest income. This is a loss for the bank. Banks are made deprived of getting interest and they have to wait for a long period of time for the loan to be regular. And this is very much uncertain that whether the loan will be regular or not.



Re classification: The loans which are classified on qualitative basis, if the conditions change, then the loans may be re classified appropriately. For fixed term loans, the classification will change with changes in the overdue period. Also if a loan has been rescheduled three or more times and

has been classified and subsequently meets its repayment schedule as due without delay for 12 months it is considered standard.

For continuing advances, a classification of substandard based on being 50% over the limit for 45 days will be withdrawn when that condition is corrected for a period of more than 30 days. If the classification is based on being renewed three times or more and the turnover being less than 100% of the maximum outstanding, the classification will be withdrawn whenever that condition is met. Finally, loans of a continuing nature which are classified on the basis of the length of time, they are overdue and cannot be reclassified except by being renewed and meeting the turnover criterion. Reclassification requires that the turnover criterion will be met regardless of the number of previous renewals.

ď‚Ż

Write Off Loans: A substandard or doubtful loan becomes bad after a specific period of time. If the amount of Bad loan is big of a bank, it is very harmful for that bank. Bad loans are huge liability for a bank. Besides classifying a loan, banks must put provision against those loans. Provisions are liability for a bank and it decreases the volume of asset of that bank. For that reason, banks and other financial institutions delete or mitigate bad loans from their balance sheet. This procedure of deleting bad loans is called Write Off. By writing off loans banks and other financial institutions want to keep themselves clean. There are other reasons of writing off loans. When a borrower of a classified is not traceable and there is no hope of recovering that loan, then that loan is written off. Again, if there is no security kept against a loan which became classified, and there is no chance of recovery of that loan, then that loan is written off also. Banks must continue reporting about the borrower at CIB in every quarter, even after writing the loan off. This guideline has come also from Bangladesh Bank. Some financial institutions put cover on their bad performance by writing off loans.

Some Contradictory Loan Products of Dhaka Bank Ltd: Dhaka Bank introduced some loan products few years back. Instead of gaining profit, these loans brought disturbance and loss for this bank. There were lack proper planning and vision against these loans. For these reason, these loans no more exist. Description of some of these loans is given below: Excel Account: There are some companies, which pay the salary of their employees through the company account of Dhaka Bank. There are some companies who maintain account in Dhaka Bank and use this benefit. Dhaka Bank introduced a loan product called Excel Account. The target customer of this loan product was the employees of those companies. This loan can also be said as employee loan. Dhaka Bank gives loan to those employees through this account. But this loan had a huge shortfall. This has happened that some employees quit from their job after receiving the loan from Dhaka Bank through excel account. On the other way, the company also fires their employees. As a result, Dhaka Bank faced a huge loss. Dhaka Bank only kept the salaries as security against this loan. But when an employee quits, his salary was also stopped from the company. Dhaka Bank was able to find out some of the employees, who took loan from this account. After being cheated, Dhaka Bank stopped giving loans from this account.

Force Loan: Force loan is created from bank’s point of view. There are two ways of creating force loan.

One way of creating force loan is from L/C account of an importer. It happens that, imported

goods have arrived in the port. But the importer does not appear before bank to retire the documents. But the bank is bound to pay bill amount to the foreign counter part. In that case, bank pays all the dues to the foreign company and creates a loan a/c against the importer.

Afterwards, that money is recovered from that importer. Another type of force loan originates from Bank Guarantee. If a contractor fails to perform his job, then the beneficiary claims the bank guarantee. The bank is bound to pay the claim. Then bank pays the claim amount by debiting that party account. In both the cases, loan is created forcefully against the party, without informing him. That is why, the effectiveness or recovery process of the loan is not satisfactory.

Directors Loan: Dhaka Bank gives loan to the directors of any company or bank or financial institutions. In this case, every institution must follow a guideline imposed by Bangladesh Bank that a director cannot take loan from his own company. That is why, directors of a company take loan from other company or bank. In giving Directors loan, there are some norms practiced.

Directors are given loans against their personal guarantee only. There are no securities kept against this loan, which is very much insufficient and ineffective in case of default. It has seen that, directors go away to other foreign countries after taking loan from Dhaka Bank without repaying the loan. The bank did not get any benefit by sue the company of which, the borrower were a director. For these reasons, Dhaka Bank faced a huge loss for giving this loan.

Loan against Shares: Dhaka Bank used to give loans against shares. For this type of loan, shares of the borrower were kept lien. But it has happened that some borrower gave false share certificate to the bank and received loans. The officers relating this loan do not checked the share certificates properly and disbursed loans to some borrowers. The borrowers did not pay the loan and the loan became defaulted. The officers were suspended for this offence and for neglecting their respective duties. Bank took legal action against the borrowers and the officers also. After this incident, Dhaka Bank stopped giving loan against shares.

List of Periodic Statements sent to Bangladesh Bank by Dhaka Bank Ltd.: Serial Name of the Statements no.

A. 1.

Due date Statement (From branch to no.

Head office)

Monthly Statement regarding loans & Advance given to Govt./Autonomous bodies & Semi Autonomous bodies/Non financial Public Enterprise and their DB-3 controlled unit/ Local Authority/other Financial institutions.

2.

CIB Form-01: (Tk. One Crore or above)

3.

Identification of Agro based industries.

ACSPD

B. 1.

Quarterly New loan disbursed in the year for last five years.

DB-13

Within 10th of the following month Within 5th of the following month Within 15th of the following month Within 15th of

2.

Statement of irregular loan Disbursed.

3.

Statement of recovery for classified loans & BR-1 advances.

4.

Statements of the Loans & Advances given to the BR-2 Directors of DBL & their affiliated organizations.

5.

Statements of the Loans & Advances given to the Directors of other bank & their affiliated BR-3 organizations.

6.

Statement of Classified Loans

7.

CIB Form- One Lac to One Crore

8.

Statement of Industrial Loan.

9.

Statement of Advances.

10.

Agricultural Loan

11.

Write Off.

12.

Statement of information regarding loan/ lease extended to the Directors of Financial institutions BR and their affiliates by the Banking company.

13.

Interest wise Classified & Unclassified loan Outstanding.

C.

DB-14

the following month Within 15th of the following month Within 10th of the following month Within 10th of the following month Within 10th of the following month Within 10th of the following month Within 20th of the following month Within 10th of the following month Within 15th of the following month Within10thof the following month Within 10th of the following month.

Within 10th of the following month.

Within 15th of the following month.

Half-Yearly

1.

Statement regarding sector wise outstanding of DB-8 loans & advances.

2.

Statement related to suit filed in Artharin Adalat.

BR-4

3.

Statement of loans given to leather industries.

BR-12

4.

Statement of loans given to Jute Sector.

BR-13

Within 20th of the following month.

Within 10th of the following month.

Within 10th of the following month Within 10th of the following

5.

6.

D. 1.

Statement of Suits Filed at Dewlia Adalat & BR-16 Artharin Adalat at Dhaka and Chittagong.

Loans and Advances secured by financial obligation Yearly

month Within 10th of the following month Within 7th of the following month Within 15th of the following month

Advance & Classified by Economic Sector.

Credit Position of Dhaka Bank Ltd. In a birds eye view: (fig. in million Tk.) Particulars

2004

2003

2002

Total Deposit

25,700

18,366

16,854

Total Loans and Advances

16,539

12,887

11,211

Guarantee

3,663

1,516

1,579

Total amount of Classified Loans

271

419

266

163

202

125

109

Amount of Provision against Classified 76 Loans Amount of Provision against Unclassified 162 Loans Credit Deposit Ratio (%)

64.35%

70.17%

66.52%

Return on Equity (%)

24.03%

22.23%

26.17%

Financial Performance in Credit Sector of Dhaka Bank Ltd.: The amounts of financial performances in credit of Dhaka Bank is Given belowPerformance on Loans, Cash Credit, Overdrafts and others: 2004 2003

(Taka) 2002

Overdrafts Demand Loan Cash Credit House Building Loan Transport Loan Term Loan Loan against Trust Receipt Payment against Documents Loan against Imported Merchandise Loan against Accepted Bills Packing Credit Lease Finance Credit Card Personal/ Car Loan Other loans Bills Purchased & Discounted Total=

3166525948 1415907 1191832376 226371605 72168263 3331891028 5730837570 597505894 619885247 225547 45567716 681737188 58096552 246700758 237901598 330141944 16538805141

265882110 9062917 741497427 377146190 101068832 2778191312 4157653403 646708641 343141861 98191705 30019041 468875795 66735824 106850593 62228387 240495530 12886688559

2008682472 21019206 783446943 333642783 104928984 2685319787 3206179151 741692588 325455144 164523190 33092724 450044806 36891532 -----------316474475 -----------11211393785

From the above table of the performance of credit, we can see that the total amount of loans is increasing. In 2002, it was 11,211 million and in 2004, it became 16,538 million. From the above categories, LTR, Term Loan, Overdraft, LIM, PAD these loans have been sanctioned most. Other types of loans are sanctioned steadily. Every broad sector of the loan outstanding is increasing. It signifies that the credit policy is well balanced in the portfolio. So in the existing credit policy, every broad sector got the treatment that every sector is doing well.

Industry Wise Loans including Bills Purchased & Discounted: (fig. in million Tk.) Agricultural Industries Pharmaceutical Industries Textile and Garment industries Chemical Industries Food & Allied Industries Transport & Communication Industries Electronics & Automobile Industries Housing & Constructions Industries Engineering & Metal Industries Energy & Power Industries Service Industries.

Other Industries Total

2004

2003

2002

4.4 535.82 1889.28 524.14 2262.23 640.63 407.46 1963.39 2340.41 100.00 54.00 5817.03 16538.80

2.57 212.69 896.82 652.09 2216.63 535.27 239.31 1787.65 1626.50 94.78 11.11 4611.21 12886.68

4.49 180.89 669.36 432.63 1812.23 470.52 178.45 1486.52 1358.12 81.25 9.52 3821.25 11211.39

From the above table we can see the industry wise loan outstanding of Dhaka Bank of the year 2002, 2003 and 2004. The above table shows that Engineering & Metal and Food &

Allied industries are given most priority for giving loans. Textile, Housing and Pharmaceutical industries are also sanctioned a good amount of loan during those years. But Agricultural industries are given less amount of loan. The reason for that is, factory for agricultural based products in our country is low. Though our country is an agricultural country and agricultural products are vastly traded all over the country, but because of less scope of agricultural based industries in our country, the sanctioned loan is low in this sector.

Geographical Location wise Loans & Advances:

(fig. in million Tk.)

2004

2003

2002

9274.53 3539.59 44.92 --12859.05

8160.65 2869.31 51.56 --11081.53

2003

2002

Urban Dhaka Region Chittagong Region Sylhet Region Other

12034.26 4254.72 106.53 --16395.52 2004

Rural Dhaka Region Chittagong Region Sylhet Region Other

101.39 ----41.89 143.28 16538.80

Total=

21.31 ----6.31 27.63

3.26 126.60 ----129.86 12886.68 11211.39

Dhaka Bank is very selective in sanctioning loans to different locations of the country. From the above table we can see that Dhaka is the center of concentration for sanctioning loans of Dhaka Bank Ltd. As Dhaka is the capital, this division is given most priority for giving loans.

In the next position, there is Chittagong. Chittagong is the Commercial and Port City of Bangladesh. Therefore this division is also given priority for giving loans. Sylhet and other regions are also given loans. But in recent years, Dhaka Bank did not sanctioned any loan in the rural areas of Chittagong. The reason may be, there are only two branches of Dhaka Bank in Chittagong. For the shortage of branches in Chittagong, Dhaka Bank did not sanctioned any loan in the rural areas of Chittagong.

Classification of Loans and Advances: Unclassified Loans Classified Loans Sub-standard Doubtful Bad/ Loss Total=

2004 16,267,406,911 271,398,230 [57,929,342] [13,543,991] [199,924,897] 16,538,805,141

2003 12,466,735,973 419,952,586 [198,069,371] [15,857,567] [206,025,648] 12,886,688,559

(Taka) 2002 10,943,531,009 267,862,776 [12,905,213] [3,331,549] [251,626,014] 11,211,393,785

From the above table we can see that in 2002, the amount of classified loans was 267 million.

But in 2003, it increased to almost double. It was 419 million. But in 2004, the amount of classified loan again came to the previous position and decreased to 271 million. Due to huge natural calamities in 2004, the classified amount increased this year.

Provisions required for Loans and Advances: Rate 2004 Unclassified 1% 161,817,000 Classified 75,843,000 Sub-standard 20% [8,222,000] Doubtful 50% [3,700,000] Bad/ Loss 100% [63,921,000] Total Provision= 237,660,000

2003 125,127,000 153,394,000 [2,778,000] [2,778,000] [147,838,000] 278,521,000

(Taka) 2002 108,964,000 201,952,000 [45,450,000] [65,300,000] [91,202,000] 310,916,000

From the above table of Provision, we can see that the amount of total provision is decreasing through the recent years. This is a good sign from the banks point of view. As the amount of classified loans will decrease, the necessity of maintaining provision will be less also.

Residual Maturity Grouping of Loans including Bills Purchased and Discounted: (fig. in million Tk.) 2004 2003 2002 Upto 1 month 279 450 513 1-3 months 1,293 1,035 1,111 3 months- 1 year 9,898 7,650 5,965 1 Year – 5 Years 4,472 3,178 3,024 More than 5 Years 593 570 596 Total= 16,538 12886 11,211 From the above table, we can see that loans of long term residual maturity is sanctioned through Dhaka Bank in big volume. Specially one year loans and five year loans are taken in a big volume. Mostly, corporate customers take this type of loan .

Loans and Advances allowed to each customer exceeding 15% of Bank’s total capital: 2004 2003 2004 Amount of Outstanding Loans 9,740,902,71 7,734,189,916 6,962,854,816 Number of Customers 9 66 41 121 From the above table, we can see the total amount of outstanding loan is gradually increasing along with the number of customers through the recent years. The amount represents the sum of total loans to each customer exceeding 15% of total equity of the bank on 31 st December,2004.

Nature and Amount of Secured Loans including Bills purchased & Discounted: (fig. in million Tk.) 2004 Loans secured by Cash & Quasi Cash 2,677 Loans secured by others (land,building,stock) 13,861 Total amount of Outstanding Loans= 16538

2003 2,029 10,857 12,886

2002 1,622 8,694 10,316

As we can see that the amount of secured loans are increasing over the past years, which is very good sign of performance of the bank.

Loans Written Off: Cumulative amount of written off loan

2004 140,196,000

2003 561,468

2002 561,468

The amount of written off loan in 2004 is cumulative, or the total of all written off loan of the previous years.

Interest Suspense Account: Balance at the Beginning of the year Amount transferred to Suspense A/c this year(+) Amount recovered in Suspense A/C this year (-) Amount written off during the year (-) Balance at the end of the year=

2004 26,997,643 16,532,787 (4,514,100 ) (3,570,318 ) 35,446,012

2003 10,099,452 21,858,129 (4,959,938 ) ---

2002 15,563,641 8,721,434 (9,186,977) (4,998,646)

26,997,643

10,099,452

The balance of the interest suspense account is cumulative. Therefore, the amount of 2004 contains the balance of the previous years. In 2004, 16.5 million taka was transferred in the suspense account. But was recovered only 4.5 million taka. The rest 12 million taka is the liability for the bank.

Amount of Non Funded Loans: Bid Bond Performance Bond Counter Guarantee Other Guarantee Shipping Guarantee Total=

2004 468,265,819 1,977,058,194 213,350,594 930,693,935 154 3,589,368,696

2003 178,650,195 705,794,777 28,902,867 1,525,420,686 38 2,438,768,563

2002 170,450,249 689,540,587 22,708,698 1,326,587,586 29 2,336,493,173

Non funded loans are also called contingent liabilities. Money for which the bank is contingently liable in respect of guarantees given favoring Directors, Government, Bank and other financial institutions. Among the guarantees Performance Bond Guarantee is sanctioned in big volume.

Commission Earnings: Commission on L/C Commission on L/G Other Commission / Fees Total

2004 113,145,664 50,971,037 67,351,102 231,467,803

2003 94,864,492 30,680,434 59,236,781 184,781,707

(Taka) 2002 91,687,582 26,546,698 57,132,509 175,366,789

Dhaka Bank charges 10% of commission fees on all the Bank Guarantees. It is a type of earning for bank. In 2004, Dhaka Bank earned 113 million taka from commission from L/C’s. This amount is increasing through the last few years. Dhaka Bank also earns a big amount of commission from L/G every year.

Advances taken by Corporate customers (more than 15% of bank’s total capital): as on 31st December, 2004.

(Fig. in Taka) Sl. no Name of the Client Funded Non-funded Total 1.

Samah Razor Blades Ind. Ltd. 232104837 62300000 294404837 2.

Square Pharmaceuticals Ltd.

193440229

520000

193960229

3.

Abdul Monem Limited

114568397

26241302

140809699

4.

Butterfly Marketing Limited.

209978874

22907100

232885974

5.

Keya Cosmetics Limited

63715039

27466000

91181039

6.

Shahjalal Newsprint Mills Ltd

221925163

66748000

288673163

7.

Rangs Pharmaceuticals Ltd.

122715650

1895063

124610713

8.

Ranks Telecom limited

75361496

200000000

275361496

9.

Abul Khair Steel Ind. Ltd.

129462432

180414000

309876432

10.

PHP Steels limited

24894054

330281750

355175804

11.

Sanowara Dairy Foods ltd.

163684377

5852617

169536994

12.

Shah Cement Industries Ltd.

203757641

355920

204113561

13.

Unilac Sanowara (BD) Ltd.

119745408

39699908

159445316

14.

52413100

159082047

15.

Aftab Fertilizers & Chemicals 106668947 Ltd. Apollo Ispat Complex Ltd. 226684467

71074649

297759116

16.

HRC lighting Limited

978380

239850

1218230

17.

Karnafully Steel Mills Ltd.

308923508

45095586

354019094

18.

Karotoa Spinning Mills Ltd.

72381386

8146398

80527784

19.

Navana Construction Ltd.

81022250

47695414

128717664

20.

Partex Beverage Limited

5959338

16728000

22687338

21.

Partex Sugar Mills Limited

12142628

80674375

92817003

22.

Rahim Steel Mills Co. Ltd.

76632203

189882230

266514433

23.

RFL Plastics Ltd.

117986192

13469487

131455679

24.

Singer Bangladesh Limited

14392119

34152687

48544806

25.

Unique Cement Industries ltd.

294929198

114834335

409763533

26.

Uttara Traders Pvt. Ltd.

294633133

148707379

443340512

//

//

//

//

Total=

9,740,902,719

6,810,584,070 16,551,486,789

Outstanding Advances Distributed By Rates of Interest:

Issued from Dhaka Bank Ltd, Local Office.

As on 30.06.2005

Different Interest Outstanding Advances Rates (%) Classified Unclassified 5.00 -6,099 6.75 -1,300 7.00 -6,326 8.00 -1,298 8.50 -405 10.00 -6,029 10.25 -1,758 10.50 -37,650 10.75 -75,358 11.00 -319,200 11.25 -75,464 11.50 -65,448 11.75 -3,161 12.00 -801,790 12.25 -11,355 12.50 -293,618 13.00 2,409 537,395 13.50 -407,386 13.75 -13,504 14.00 -858,270 14.25 -31,772 14.50 -445,374 15.00 5,035 682,941 15.50 -434,022 16.00 2,879 244,629 17.00 1,238 15,038 18.00 -602 19.00 230 495 Total= 11,791 5,373,687

(fig. in million Tk.) Total 6,099 1,300 6,326 1,298 405 6,029 1,758 37,650 75,358 319,200 75,464 65,448 3,161 801,790 11,355 293,618 539,804 407,386 13,504 858,270 31,772 445,374 687,976 434,022 247,508 16,276 602 725 5,389,478

Dhaka Bank reports to Bangladesh Bank on interest rate wise disbursed loans and advances.

This is a requirement of Bangladesh Bank also. Through this statement, Bangladesh Bank tries to find out, how much loan is given on a particular interest rate by Dhaka Bank Ltd to its customers. It is also seen that on which interest rate highest loan is disbursed. In other words, on which interest rate customers want to borrow money most. Bangladesh Bank also wants to find out what is the range of interest rates on which much of the loans are given. This is also seen that what the loan outstanding position on high interest rates is Sector wise Loan Outstanding Report: Issued by Local Office.

As on 31st Dec, 2005

(Taka.)

Name of Sector Steel Mills Jute Mills Textile Garments Factory Chemical Products Cement Factory Brick Edible Oil Steel Engineering Metal Other Manufacturing Company Garments Other Small Scale Mfg. Co. Hospital Courier Services Other Service industry Importer Exporter Importer Retailer Other Trader Water Transport Construction Company Trust Fund Profitable Org. Non Govt. Organization Leasing Company Investment Company Other Non Banking Fin. Org. Central Co-Operative Bank Other Co-Operative Bank Other Financial Organization Self employed person Service holder within country Other Firm/ Individual Total=

Funded 238,135,471 0.00 152,734,583 267,844,162 80,740,175 376,366,911 16,333,245 95,731,156 54,338,023 205,355,488 0.00 82,017,130 4,645,438 0.00 1,548,770 0.00 149,875,142 23,274,780 6,943,526 1,476,452,226 141,282,396 395,119,368 178,773,816 0.00 187,373,233 25,641,361 52,351,603 1,787,169 0.00 0.00 600,637 8,596,779 2,041,898,842 111,681,676 6,377,443,120

Non Funded 12,679,853 200,000 116,124,804 324,793,439 13,715,100 23,799,893 0.00 0.00 4,360,124 47,085,566 8,162,959 0.00 0.00 2,500,000 157,319 185,262 607,795,920 0.00 0.00 875,209,500 0.00 343,130,147 36,258,312 2,500,000 0.00 0.00 0.00 0.00 914,481 5,900,000 0.00 0.00 2,187,127,429 11,783,492 4,624,383,607

Total Amount 250,815,325 200,000 268,859,388 592,637,601 94,455,275 400,166,805 16,333,245 95,731,156 58,698,147 252,441,055 8,162,959 82,017,130 4,645,438 2,500,000 1,706,089 185,262 757,671,062 23,274,780 6,943,526 2,351,661,727 141,282,396 738,249,515 215,032,128 2,500,000 187,373,233 25,641,361 52,351,603 1,787,169 914,481 5,900,000 600,637 8,596,779 4,229,026,271 123,465,169 11,001,826,727

From the above report of sector wise loan outstanding, we can see that how diversified the credit portfolio of Dhaka Bank Ltd. is. There are a lot of sectors in which this Bank has given credits. Cement factories are the most prioritized sector from Dhaka Bank’s point of view.

There are other sectors in which this bank has given big volume of loans. They are Garments industries, Leasing companies, Import, Construction Companies, etc. These are all funded facilities. On the other hand, Export Sector, Textile and Construction sectors are given Nonfunded facilities most.

Analysis of the Credit Position of Dhaka Bank Ltd:

In this part, the credit position and the performance of Dhaka Bank will be discussed. The financial measurement will help to identify how much effective is Dhaka Bank’s Policy of credit.  Tot al Loans and Advances: (In million Tk.) Year 2002 2003 2004

Total loan outstanding 11,211 12,887 16,539 Total Loans & Advances

18000 16539

15000 12000 9000

12887 11211

6000 3000 0 2002

2003

2004

As it has been mentioned before, that the portfolio of Credit of Dhaka Bank is large and diverse, therefore this bank issues a big amount of Loans each year. Dhaka Bank always maintains quality of loans. Before sanctioning credit, Dhaka Bank confirms the credit worthiness of the customer and repayment capacity. These procedures express the strengths of the Credit Policy of Dhaka Bank. From the above table, we can see that the amount of outstanding loans and advances is increasing in the recent years. Because of the strong credit policy, Dhaka Bank was able to maintain loan quality which leads to increased loan amount every year. Customers are given good facilities beside loans and the after sales service is excellent in this bank. That is why, more customers are taking loans from this bank. Every year, this bank is making relationship with both new corporate and retail customers. This leads to increased amount of loan sanctioned. And another thing is, every year the amount of deposit is increasing in this bank. That is why, this bank is able to sanction more loans each year. There exists some external pressure also. Government directs its financial activities in the country through the Govt. fund. But some times, Govt. is in shortage of fund. At that moment, in order to continue the financial activities, Govt. makes Internal Borrowing. Govt. borrows from the Banks and financial institutions inside of the country. Then banks cannot save themselves from Govt. Borrowing. They must lend loans to the Govt. In that case, Bank’s ability of giving more loans is reduced. In spite of these barriers, Dhaka Bank has successfully managed to give loans and advances to its customers and this amount is increasing every year.

ď‚?

Int

erest earned from loans and advances: Interest earned from different categories of loans and advances are given below(figure in Tk.) 2004 2003 2002 Demand Loan Term Loan Overdrafts Loan against Imported Merchandise Loan against Trust Receipt Packing Credits Cash credit Payment against Documents House Building Loans Transport loans Syndicate loan Hire Purchase Lease rental Credit Card Total=

1,761,245 381,712,439 339,425,178 79,046,930 559,116,608 3,648,727 126,730,259 89,085,961 44,823,117 8,252,937 32,045,466 448,553 84,338,069 15,098,687 1,765,534,176

1,545,744 326,763,127 304,178,658 50,021,883 484,238,210 2,824,486 108,491,531 73,510,708 48,164,255 11,390,573 1,537,034 687,156 74,755,129 117,658,074 1,499,874,298

727,970 355,243,820 255,134,165 49,083,778 417,770,158 2,028,427 141,464,615 83,355,840 44,173,944 13,140,243 151,059 867,019 72,447,020 2,783,572 1,438,371,630

Interest Income from Loans & Advances 2,000 1,765

1,500 1,438

1,500

1,000 500 0 2002

2003

2004

Figures in m illion Taka.

The above chart represents the interest income of loans and advances for the year 2002, 2003 & 2004. Here also we see that the interest is increasing over the years. This is a very good sign for an institution. The increasing income refers that the way Dhaka Bank is operating credit division, is right. This also refers to the effectiveness of the Credit policy of this bank. We know that Dhaka Bank’s credit portfolio is so diverse. Dhaka Bank also offers a wide range of products of loans and advances to its customers. Every year this bank is giving more and more loans in different loan categories. As a result, the bank is getting interests from these loans. Interest from loans is the major earning for a bank. So, higher the loans sanctioned, the higher it will be the interest income. Dhaka bank possess strict credit policies for each and every category of loans and maintains that very strictly also. That is the

reason for maintaining good quality over the credits. This is another reason for gaining steady income from interest of loans over the years.



Volume of Non Performing (classified) Loans: (Figure in million Tk.) Year Non Performing Loan 2002 267.86 2003 419.95 2004 271.40 Volume of Non Performing Loans 450 419

360 270 267

271

180 90 0 2002

2003

2004

Figures in m illion Taka.

From the above table and chart we can see the Non performing loans or Classified loans of Dhaka Bank Ltd. of the past few years. Every year Dhaka Bank gives a big amount of loans to different customer groups. Dhaka Bank’s policy is arranged in such a way, so that the loan is recovered smoothly and without any hazard. But despite all of these, every year there becomes some loans classified which by any means is inevitable. So, banks attempt to minimize these classified loans as low as possible. Dhaka Bank has take it as a challenge.

Dhaka Bank’s volume of classified loans was somewhat stable in the past years. But we can see that in 2003, the amount of non performing loans mounted to 419 million. The main reason behind this big shock is the natural calamity that took place in the year. In 200



Non Performing Loans as % of Advances: In this segment, it will be tried to find out that the amount of Non Performing loans is what percent to the total amount of loans sanctioned.

Calculation Process= (Amount of Classified Loans/ Total amount of Loans & Advances)* 100.

Year % of Non Performing Loans to Advances 2000 1.72 2001 1.19 2002 2.39 2003 3.25 2004 1.63 It is very important to mention that according to Bangladesh Bank regulations, a Bank will be termed as a Problem Bank if the percentage of Non Performing loans to

Total Loans and Advances exceeds 5%.

According to the above calculation, we can see that in 2002, the percentage was 2.39, in 2003 it was 3.25 and in 2004, it came down to 1.63 percent. In the above table, there are calculations of percentage of classified loans to Total loans and Advances of the last five years. As we can see that in none of the years, the percentage exceeded over 5 %. It was fluctuating between 1-2.5 percentages. But as we know that in 2003, the amount of classified loans was a little bit higher, that is why this percentage also increased to 3.25 percentage. But in the next year, it came to the normal position again. So we can say that Dhaka Bank has never been in a position to become a Problem Bank ever. Without an Effective Credit Policy and Credit Management, this would not be possible.



Important Particulars of Loans & Advances: (Fig. in million Tk.)

Loans considered good in respect of which the banking company is fully secured.  Loans considered good against which the banking company holds on security other than the debtor’s Personal Guarantee.  Loans considered good secured by the personal undertakings of one or more parties in addition to the personal guarantee of the debtors.  Loans due by directors or officers of the banking company or any of these either separately or jointly with any other persons.

2004

2003

2002



10,500

9,164

8,905

5,697

1,912

1,422

175

1,302

824

86

76

30

Dhaka Bank is very eager to maintain the quality of loans sanctioned. If the loans sanctioned are fully secured, then it is good for the bank. If the borrower fails to repay the loan, then it will be easy for the bank to recover the loan. From the above table we can see that the amount of loans which is fully secured is increasing over the years. This is a good sign for the bank.

It shows the effectiveness of the bank. Dhaka bank gives a big volume of Directors loan every year. in case of Directors loan, it is a common practice that no security is kept without the Director’s personal guarantee. But this personal guarantee is not sufficient is case of loan default. In 2002 and 2003, the amount of loans given to Directors was in the low range. But in 2004, it jumped. Dhaka bank should control this kind of loans. There is another category, loans considered good which is secured by the personal undertakings of one or more parties beside the personal guarantee of the borrower. Dhaka Bank should work to improve in this category of loans. There is another category, loans due by directors or officers of the banking company either separately or jointly with any other persons. Dhaka Bank should think about this type of loan. If this kind of loan is fruitful, then the bank should try to give more of this loan.

Effectiveness of Credit Policy through Ratio Analysis: Performance measurement is a continuous process. It continuous through the active live of an organization. It is directly related to the goals of different organizations. As the goals of different organizations are different, the performance measurement techniques are also

different for the different organizations. These techniques may also differ even between two organizations of same nature because of the difference of ownership or organizational structure. All categories of banks in Bangladesh are guided by identical rules and regulations.

The operational and financial performance of a Bank was made normally to know the following:  To determine the relative liquidity and solvency of the Banks.  To judge the effectiveness of their Credit policies.  To ascertain the earning capacity of the banks.  To evaluate the efficiency of management.

Risk management is an integral part of the management of Bank’s funds. Banks must make sure that they are compensated with earnings proportionate to the risk they exposed to and they must balance the levels of risk that exists within and among their various portfolios.

Financial institutions should, therefore consider how much risk could be taken to achieve the highest yields without compromising the safety of their funds. Following ratios are used for risk management: 1.

Capital Adequacy Ratio: The calculation process of this ratio is- 9% of risk weighted assets.

Year 2002 2003 2004

Capital Adequacy Ratio 8.75% 10.88% 10.51%

From the above table we can see that the capital adequacy ratio is increasing. The required rate for this ratio is 9%. But we can see that the ratio is over of 9%. In 2003, it is 10.88% and in 2004, it is 10.51% which is a good sign of the performance. This ratio is increasing over the years also.

2.

Plough Back to Shareholders Equity Ratio: This ratio calculates that how much portion of the shareholders equity is coming back as yield to the share holders. The calculation process is- (Reserves and Surplus/ Net Profit)*100.

Decision making way- The higher the ratio, the more strength of a bank.

Year 2002 2003 2004

Plough Back to Shareholders Equity 1.82% 2.19% 2.30%

From the above table, we can see that the Plough back to share holder equity ratio is increasing over the years. This is a good sign for the bank. The higher the ratio, the more strength of a bank. Over the past few years, the ratio is increasing as well.

3.

Non performing Assets ratio: This ratio shows the percentage of the non performing assets to the total assets.

Decision making way: The lower the ratio, more strength of a bank Year 2002 2003

Non performing Assets Ratio 2.39% 3.25%

2004

1.64%

We can see from the above table that the ratio is decreasing over the years. This is because of the effectiveness of the bank’s credit policy. The lower the ratio, more strength of the bank.

4. Loan to Equity ratio: This ratio expresses, how much of the total loan is a portion of the total equity. Calculation Process- (Loan funds/ Net Worth)*100.

Decision making way- Loan to equity ratio should not exceed more than 50%.

Year 2002 2003 2004

Loan to equity ratio 12.52% 10.65% 11.11%

From the table given in the previous page we can get the ratio of loan to equity. This ratio has not exceeded more than 50%. Rather it is decreasing, which is a good sign of success.

Loan Defaulter: If a borrower do not repay the loan for a long period of time and do not maintain any communication with the bank or do not let the bank know the reasons for not repayment of loans then the borrower will be called Loan Defaulter. A loan becomes classified if it is overdue for 6 months. The last step of Classified loan is Bad or Loss. In case of Continuous loan, if 12 installments/ months are overdue, in case of Term loan, if 18 installments/ months are overdue and in case of Long Term Loan, if 24 installments/ months are overdue, then the loan reaches to Bad or Loss stage. When a loan becomes Bad or Loss, then bank can file case against the borrower.

The difference between Classified Loans and Default Loans: In nominal terms, it seems that both classified loans and default loans are same. Many of the bank officers think it is. But there exists some contradictory opinions. In real terms, if we look at these two categories of loans in deep, we will see that classified loans and default loans are not same. A loan becomes classified, if some specific installments remain overdue.

The borrower may not have done this willingly. May be the borrower was in trouble. That is why, he could not adjust his loan for some months or installments. Being a loan classified, it doesn’t mean that the loan is not possible to recover or the borrower will not repay the loan.

There is always a possibility of readjusting a loan when it is classified. The borrower may at any time readjust the loan when he is out of trouble. But when a loan reaches to Bad/ Loss stage, that loan is called default loan. Because, when a loan becomes Bad or Loss, then there is very less chance of recovering the loan. And if a loan reaches to this stage, then it should be understood that either the borrower is not repaying the loan willingly or he is bankrupt. In this stage also, loan amount can be recovered. But it needs legal force / pressure to the borrower. These are the reasons for which we can say that classified loan and default loan are not the same.

The amount of Bad / Loss loan are given below: 2004 Loans as Bad or Loss 199,924,897

2003 206,025,648

2002 251,626,014

From the above scenario, we can see that the amount of loans classified as Bad/ Loss is decreasing over the years. In 2002, it was 251 million, in 2003, it was 206 million and in 2004, it decreased more to 199 million. This scenario tells us that Dhaka Bank’s amount of loan default is decreasing. It reflects the effectiveness of the credit policy of Dhaka Bank Ltd. Bangladesh Bank Guidelines relating to Default loans: Article- 27 (KA KA) of Bank Company Act, 1991, Circulated Vide- BRPD Each Scheduled Banks, Financial institutions will send their list of loan defaulters to Bangladesh Bank time to time.  Bangladesh Bank will send the received list of Defaulters to all the banks and financial institutions of the country.  Banks or Financial institutions will not extend any credit facilities in favor of any loan defaulter.  Whatever there may be in the existing laws, the bank which sanctioned loans will file cases against the loan defaulter according to the present laws.  Reasons for Loan Default: 1) Un willingness of the borrower to pay the loan; 2) If the borrower is Bankrupt; 3) Strictness of rules imposed by Bangladesh Bank; 4) Political pressure and upsurge; 5) Diverting the loan fund from the announced purpose to another sector.

Qualities required in a customer before sanctioning credit in Dhaka Bank Ltd: 1) The personal net worth of the related persons with the borrower company; 2) The market position of the borrower company; 3) Whether the related persons of the borrower company are related with any financial institutions; 4) If the borrower has taken any loan from any financial institution, then how was the borrowers repayment behavior; 5) In some of the cases, matter of adequate securities are also considered; 6) The age of the key persons of the business must be below sixty years; 7) A capable person in the company to take company’s charge in case of death of the key person of the company; 8) Personal guarantee of a renowned person in case of sanctioning loan; In case of Corporate loan, if a company possesses the following lacking, loan will not be sanctioned: 1) If the CIB report is not clean; 2) If the bank finds any adverse report about the borrower through Confidential Report from other banks.

3) If the borrower company is proven financially weak after the analysis of company’s financial statements; 4) If the liability of the company is so much; The steps taken by Dhaka Bank Ltd. if a loan is defaulted: 1) The Bank officials communicate with the borrower personally or by mail several times just after some installments are overdue and before the loan becomes classified; 2) If the borrower do not adjust loan, a legal notice is sent to him;

3) 4)

In order to recover the loan, notice is circulated through newspaper to sell the mortgaged assets kept as security against that loan; If the property cannot be sold or if the money that is earned from selling the mortgaged assets is not adequate enough to adjust the loan then a case is filed at the Money Loan Court;

The reasons for which classification of loan is decreasing: 1) Proper follow up and supervision by the officers of the respective bank from which loan was sanctioned; 2) Sanctioning loans to selective borrowers; 3) For identifying the Loan defaulter through Credit Information Bureau; 4) For keeping valuable securities against loans; 5) For taking securities from any strong Third Party in most of the cases.

6) For the strictness of Credit policy of Dhaka Bank; 7) For the soundness of laws relating credit and legal actions taken in particular cases.

Legal Actions for Loan recovery: When a loan becomes default, bank takes legal action against the borrower to recover the loan. This is the way which is taken at last to recover the loan after taking attempt of all the other ways. Bank keeps securities against loans. But bank cannot sell those mortgaged assets without the permission of the court. There is a specified way also for selling those securities.

When a loan becomes classified, Head Office then takes the files of those borrowers from the branches. Then Head office puts pressure on those clients to adjust their loan. A case is not filed at the first stage. Head office tries to recover the loan keeping everything normal, just putting pressure to the client. The following things are done in this stage:  The borrower is put pressure by making contact with, by phone call and by mail;  The guarantor of this loan is communicated by phone and keep him informed about the loan default;  If any officer of this bank has referred the bank to give loan to that borrower then the referee is given pressure to recover the loan.

After using all these measures, if the client does not appears before the bank or adjusts the loan, then preparation is taken to take legal action against that borrower. In this stage The borrower is given a legal notice informing him that if he do not adjusts his loan, a case will be filed against him. He is given a time frame again to readjust the loan.  If the borrower does not adjust his loan within the time period, then a case is filed against the borrower in the Money Loan Court.  If bank has kept mortgaged assets as security against the loan, then the bank can do Execution Sue instead of Filing case in the Money Loan Court. Execution sued is basically a case in which bank presents proper evidence to the court and applies the court to give permission to sell the mortgaged asset in favor of the bank.  After filing a case in the Money Loan Court, the borrower may want to adjust his loan and pray to the court to reschedule his loan. In this stage, a Settlement Conference is called on. Three parties join in this meeting. The borrower, the bank officials and the advocates from the court. In this meeting, the borrower and the lender mutually agrees in loan rescheduling. The borrower promises to adjust the loan to the bank and court representatives. If the borrower fails to adjust the loan again, within the rescheduled time, then another case is filed against the borrower.  In case of Execution Sued, if the bank gets the permission to sell the mortgaged property, then a notice for Bid is circulated in all the major Daily Newspapers. An open bid is asked to sell the mortgaged assets. Sometimes bank takes the asset instead of







selling it. In that case, bank must pay higher than the highest price that is obtained from the bidding. If the asset is sold and the money earned from selling the asset is not adequate enough to adjust the loan, then a case is filed against the borrower in Money Loan Court for the recovery of the remaining amount.

Before the invitation of Bid, Bank must take possession of the mortgaged asset. In doing so, bank must take the high officials of the DC Office and Police force from the law enforcing agencies. After having the officials, from the mentioned departments, Bank officials go there and take possession of the mortgaged asset.

Criminal Case: If the borrower commits any criminal offence to the bank, then a criminal case is filed against the borrower. If a borrower submits fake registration documents of land for keeping as security, or gives false third party guarantee or gives false financial statement or gives any security which does not even have any existence, if these sort of events occur, then Criminal Case is filed.

Case against Directors: in case of Public limited company, case is filed against all the directors of the company for the same loan amount to each of them. For an example, a company has defaulted 50 Lac Taka. There are five directors of the company. The bank will file cases for 50 Lac against each of the directors. If any one of the directors pay 50 Lac to the bank, then all the cases against the directors will be withdrawn.

Statement of Law suit, Dhaka Bank Ltd. Statement of filed cases and solved cases in Money Loan Court in Dhaka and Chittagong division as on 30th June, 2005: (Figures is million Tk.) No. of Total filed No. of solved cases & No. of Unsolved Cases cases & Total total Recovered & Total Related Division Related Amount Amount.

Amount.

No.

Amount

No.

Amount

No.

Amount

Dhaka

28

1739.57

07

400.13

21

1339.44

Chittagong

01

705.12

--

--

01

705.12

Amount of Lawsuit Filed: 2004 The Amount of Written off loan for 128,384,941 which lawsuit has been filed

2003 561,468

2002 561,468

From the above table we get the information of the total amount of written off loan for which law suit has been filed. When a loan becomes Bad or loss and it remains as for a long time, then bank writes off that loan. The reason behind that is if the loan is carried as Bad/ loss, then bank has to put provision against that loan which is not worth while. That is why, those loans are written off. And case is filed for the purpose of recovering those loans. In 2004, the amount of written off loan for which law suit has been filed is 128 million, which is very high than the previous years. In 2003, there were 419 million Tk classified loans. For these reason, in 2004, law suit has been filed for this amount.

Legal & Professional Expenses: 2004

2003

2002

Legal Expenses Professional Expenses Total=

940,668 991,788

993,104 226,884

507,696 773,500

1,932,456

1,219,988

1,281,196

From the above table we can see that Dhaka Bank expenses a big amount of money to manage its legal actions every year. This was 940 thousand, in 2004. As there were a big amount of classified loan in 2003 that is why, bank has to spend a big amount of money for the legal actions taken. There are Professional expenses also which is related to loan recovery. Bank has to spend a lot of money for this every year also.

Recommendation: Dhaka Bank is directing its operation with expertise. After starting, Dhaka Bank has passed 11 years. And in these years, this bank has developed in all the areas. But still there are some fields where Dhaka Bank needs to reshape the rules and policies. We want to recommend Dhaka Bank about some of the areas of Credit to improve in1) There is a norm in Dhaka Bank Credit Policy and Bangladesh Bank Regulation also, that if the CRG is not good of any client, no loan will be given. But Dhaka Bank relaxes this norm to some of the special cases. I would recommend Dhaka Bank to stick to this norm strictly in order to maintain good credit quality.

2) The Tax Payer’s Identification Number (TIN) must be made compulsory for applying for the loan. Though it is a norm to submit TIN number by the client, but in many cases, it is ignored. The credit officials must ensure that this TIN number is submitted by the client before the sanctioning of loan.

3) If a borrower has taken loan from any of the banks or financial institutions previously, then the bank should revise that loan statement and the repayment behavior of the borrower before sanctioning loan. Bank should collect other additional information (if any) about the borrower form other banks.

4) Bank should not give loans to aged clients. Specifically, client over 55 years of age (in Bangladesh context) should not be given loan.

5) Bank should ensure that if a borrower dies, there are other capable persons who can take charge of the business and keep the business running without any interruption.

6) In case of Letter of credit and Bank guarantee, the necessity of creating Force Loan appears to the bank sometimes. In these cases, Bank should take securities before giving these sorts of facilities to the clients. As a result, there will not be any necessity to create force loan. If any claim arrives, form the beneficiaries of letter of credit and bank guarantee, then that claim can be met by selling that security.

7) In some special cases, Dhaka Bank relaxes in the lending rates of credit, which should not be done at all. It reduces profitability and increases risk. In order to maintain good quality of credit, Dhaka Bank should stick to its rules.

8) In order to secure a loan, Personal Undertaking should also be taken besides personal guarantee.

9) Sometimes, Bank buys loan of a customer from another Bank. It is called Debt buying.

Dhaka Bank should not do it as this loan has 100% chance of becoming classified. Dhaka Bank should carefully select loan customers.

10) In case of loan default, case should be filed against the guarantor also, besides the borrower. This may be proved as an effective move and the loan may be adjusted.

11) Bank officials must supervise and ensure that the sanctioned loan is being used for the announced purpose in order to stop Fund Diverting.

12) Undertaking must be taken from all the partners of a Partnership Firm that in future, Bank will not be disturbed by any activities of the partners or by any disputes among them.

13) Bank do not sanctions Corporate loan, if the liability of the company is too much. In that case, bank can give loan to that customer by taking cash security or land mortgage security.

14) Dhaka Bank do not gives much loans to the rural areas. Dhaka Bank should think about it and sanction loans to the rural areas in some profitable sectors.

15) Bangladesh is an agricultural country. Bangladesh economy is still dependent of agriculture. But Dhaka Bank do not gives loan in this sector. Dhaka Bank should give loans to agricultural industries.

Conclusion: Dhaka Bank is one of the 2nd Generation Banks and is being running successfully. This bank has highly skilled and committed workforce and experienced management to lead the bank from the front. Dhaka Bank has a wide range of products and serves its customers with latest technological tools. One of the strengths of Dhaka Bank is that this bank gives a huge amount of loans and advances to corporate and retail customers. Dhaka Bank is involved more with corporate customers. The credit portfolio of Dhaka Bank is so much diversified and invests in almost all the sectors of industries of Bangladesh. Credit Department, that is why, is an important department for this bank. Every year Dhaka Bank earns a big amount of interest form loans. So, we can say that interest income is the life blood of Dhaka bank. Dhaka Bank is eager to maintain good loan quality. That is why, the interest rates of loans and advances are higher in Dhaka Bank than other banks. In this case, Dhaka Bank is working with Bangladesh Bank. Bangladesh Bank has taken several measures to improve financial discipline in the Banking sector. In spite of maintaining good loan quality, some loans are becoming Bad / Loss every year. Dhaka Bank’s credit policy is very strict. The Credit Management is very effective also. The Credit Management is using some effective tools.

Credit Risk Grading, Special Mention Account, Loan classification, Loan Rescheduling, Provisioning of loans are the important tools for managing credit. That is why, every year the classification of loans and the amount of default loan is decreasing. So, we can say that the credit Policy of Dhaka Bank is effective. But still there are some opportunities to improve and reshape the credit policy in some areas. It can be hoped that Dhaka Bank will be able to contribute more in the Bangladesh economy in the coming years.

References:  Dhaka Bank website: www.dhakabankltd.com  Banker’s Training Handbook, BIBM, 8th edition, 2004.  “Revised Guideline to fill in the CIB-01 Form”, 4th edition, 2002, Credit Information Bureau, Bangladesh Bank.  Dhaka Bank Annual Report, 2003, 2004.  “Strategic Management”, Strickland / Thompson, 13th edition, Tata McGraw Hill, New Delhi.  Newsletters and Product Brochures of Dhaka Bank Ltd.