Trust Bank Credit Management

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Trust Bank Ltd: Corporate Information 1.1Institutional overview: Trust Bank Limited is a scheduled commercial bank established under the Bank Companies Act, 1991 and incorporated as Public Limited Company under the Companies Act, 1994 in Bangladesh on 17 June 1999 with the primary objective to carry on all kinds of banking businesses in and outside Bangladesh. The Bank has Thirty five (35) branches operating in Bangladesh as 30th October 2008.

Initially bank has started its operation in the name of The Trust Bank Limited but on 12 November 2006 it was renamed as “Trust Bank Limited” by the Registrar of Joint Stock Companies. The new name of the bank was approved by Bangladesh Bank on 03 December 2006. Composition of the Board of TBL consists of Ex-officio Directors of in-service senior Army personnel, with the Chief of Army Staff as its Chairman and the Adjutant General as its Vice-Chairman.

In addition to ensuring quality customer services related to general banking the bank also deals in Foreign Exchange transactions. In the mean time the bank has extended credit facilities to almost all the sectors of the country’s economy. The bank has plans to invest extensively in the country’s industrial and agricultural sectors in the coming days.

It has also plans to promote the agro-based industries of the country. The bank has already participated in syndicated loan agreement with other banks to promote textile sectors of the country. Such participation would continue in the future for greater interest of the overall economy. Keeping in mind the client’s financial and banking needs the bank is engaged in constantly improving its services to the clients and launching new and innovative products to provide better services towards fulfillment of growing demands of its customers. Recently the bank has changed its logo. The bank believes the new logo is the symbol of dynamism automation and trust.

Previous Logo

New Logo

2.1Corporate Information: Banking License received on

:

15 July 1999

Certificate of Incorporation received on

:

17 June 1999

Certificate of Commencement of Business received on

:

17 June 1999

First Branch License received On

:

9 August 1999

Formal inauguration on

:

29 November 1999

Sponsor Shareholders

:

Army Trust

Welfare

Listed with DSE

September 2007

25,

Listed with CSE

September 2007

24,

Organization: Head office Department Branches Employees

: Dhaka :8 : 35(as on 20 October 2008) : 508 (as of 31 December 2007)

Capital Structure and Sources of Fund: Authorized Capital: 20,000,000 ordinary shares of Tk.100 each

2,000,000,000

Issued, Subscribed and Paid up Capital: 5,000,000 ordinary shares of Tk. 100 each

500,000,000

Other sources of Bank’s fund are the Bangladesh Bank, Commercial Banks, Local and Overseas financial institutions and customer’s deposits.

2.2 Vision and Mission Statement of TBL The efforts of TBL are focused on delivery of quality service in all areas of banking activities with the aim to add increased value to shareholders’ investment and offer highest possible benefits to the customers. There must have the vision as well mission to what should back every effort of the bank as it is said, “A mission without any vision is a daydream and a vision without any mission is a nightmare”.

Vision: We aim to provide financial services to meet customer expectations so that customers feel we are always there when they need us, and refer us to their friends with confidence. We want to be a preferred bank of choice with a distinctive identity.

Mission: Our mission is to make banking easy for our customers by implementing one-stop service concept and provide innovative and attractive products and services through our skilled and qualified human resources. We always look forward to benefit the local

community through supporting entrepreneurship, social responsibility and economic development of our country.

2.3 Core Values of the Bank In all types of banking activities Trust Bank Ltd. sticks to six core values. In any way the bank does not compromise with any of these values. The bank believes the values are the guidelines in its banking operation. The core values of the bank are as follows: • Dependable • Professional • Dynamic • Reliable • Trustworthy and • Fair.

2.4Philosophy of the Bank: At present, the bank has 35 branches across the country and it is committed to become equal service providers compatible with the norms of commercial schedule bank. It renders all types of personal, commercial and corporate banking services to its customers within the purview of the Bank Companies Act, 1991 and in line with the directives and policy guidelines lay down by Bangladesh bank.

2.5 Ownership: Army Welfare Trust and some defense personnel have retained the total number of outstanding shares of this bank. Army Welfare Trust holds about 99.20% of total number of shares. And eight defense personnel have retained the remaining 0.80% shares equally.

Particulars of the Sponsor Shareholders are as follows: Name of the Sponsor Shareholders 1.

2.

3.

4.

5.

6.

7.

8.

9.

Army Welfare Trust Lt Gen Moeen U Ahmed, psc Maj Gen Md. Matiur Rahman ndu, psc Brig Gen Md. Zillur Rahman, MCPS, MSC Brig Gen S M Mahbubul Karim Brig Gen Md. Rafiqul Islam, ndc, psc Brig Gen Md. Shawkat Hossain, psc Brig Gen Muhammad Anisur Rahman, ndc, psc Brig Gen Mohd. Mahbubul Hasan, ndc, psc

Total

No. Of Amount Shares 4,999,920 499,992,000 10 1,000 10 1,000 10 1,000 10 1,000 10 1,000 10 1,000 10 10 5,000,000

1,000 1,000 500,000,000

2.6 Managerial Hierarchy of TBL The managerial hierarchy of Trust Bank Ltd. starts from Junior Officer and ends to the Managing Director. The managing Director is the apex body of the management of the bank Managing Director Deputy Managing Director

Senior Executive Vice President Senior Vice President Vice President Senior Assistant Vice President Assistant Vice President Senior Executive Officer Executive Officer Principal Officer Senior Officer Officer Junior Officer Figure: Organ gram of TBL 2.7 Nature of the Bank’s Business Trust Bank Ltd offers full range of banking services that include: • Deposit banking • Loans & advances • Export • Import • Financing inland • International remittance facilities The bank offers a full scale commercial banking that includes: • • •

Foreign Exchange transactions Personal Credit Consumer & Corporate Banking

2.8Management: Management of this bank has been lead by the Managing Director. The operational head of each department represent in the management. Management of this bank consists of the following members: • Managing Director (MD) • Deputy Managing Director (DMD) • Head of Credit represent by SVP

• Head of Operation represent by SVP • Head of International Division represent by SVP • Head of Human Resources Division represent by SVP • Head of General Service Department represent by SAVP • Head of Retail Banking Unit represent by VP. 2.9 Audit Committee: An audit committee has been formed by the Board of Directors of the Bank in its 64 th Board meeting held on 05 February 2003. In accordance with the BPRD circular letter no. 12 dated 23 December 2002, the committee constituted with a chairman, two members and a members secretary.

At 31 December 2006, the Honorable Members of the committee were as follows: Name

Position

Brig Gen S.M. Mahbubul Karim Brig Gen Md. Shawkat Hossain Brig Gen Md. Shawkat Hasan Mr. Farhad Uddin

Director Director Director Director

Status With committee Chairman Member Member Member Secretary

Educational qualification B.Sc.(Eng)MBA PSC NDC, PSC M.Com. ACMA

2.10 Online baking service: From 1st March 2007 this bank has introduced online banking service with the motive to provide faster and modern facilities to its customers. The bank is providing online services through FLORA BANK SOFWARE. With the introduction of this system the bank got positive feedback from its clients. The bank takes money from the clients as online service charge at the time of transaction.

2.11 SWOT Analysis of the TBL: SWOT Analysis is an important tool for evaluating the company’s Strengths, Weaknesses, Opportunities and Threats. It helps the organization to identify hoe to evaluate its performance and can scan the macro environment, which is turn would help the organization to navigate in the Turbulence Ocean of competition. Following is given the SWOT analysis of The Trust Bank: Strengths: 1. Top Management: The top management of the bank, the key strength for The Trust Bank has contributed heavily towards the growth and development of the bank. The top management officials are army’s highest position holder, so they have a good idea about the current situation.

2. Company Reputation: The Trust Bank has created a good reputation in the banking industry of the country. Their main customers are army persons and other defense persons. The popularity of this bank is increase day by day also in the general public area.

3. Sponsors:

The Trust Bank has founded by The Army Welfare Trust. The main sponsors for this bank are Sena Kalyan Sangstha. The chairperson of this bank is Chief of Army Staff and directors are also appointed by the Sangstha, that’s why the sponsor does not have any problem for the fund.

4. Modern Facilities and Computer: From the very beginning The Trust Bank tries to furnish their work surroundings with modern equipment and facilities. For speedy service to the customer, The Trust Bank had installed money-counting machine in the teller counter. The bank has computerized banking operation under software called PC banking. More over computer printed statements are available to internal use and occasionally for the customers. The Trust Bank is equipped with telex and fax facilities.

5. Stirring Branches: From the formative stage of The Trust Bank tried to furnish their branches by the impressive style. Their well-decorated branches gets attention of the potential customer, this is one kind of positioning strategy. The Sena Kalyan Bhaban Branch is also impressive and is comparable of foreign banks.

6. Interactive Corporate Culture: The corporate culture of The Trust Bank is very much interactive compare to other local organization. This interactive environment encourages the employee to work attentively.

Science the banking jobs is very much routine work oriented and lovely environment boots up the work capability of the employees.

Weaknesses: 1. Hierarchy Problem: The hierarchy problem treated as a weakness for The Trust Bank, because the employee will not stay for a long. So there will be a chance of brain drain from this bank to other bank.

2. Advertisement Problem: There is another weakness for The Trust Bank is advertisement. Their media coverage is so much low that people do not know the bank thoroughly.

Opportunities: 1. Diversification: The Trust Bank can pursue diversification strategy in expanding its current line of business.

They do not serve not only the army but also the general people.

2. Business Banking: The investment potential of Bangladesh is foreign investors. So TBL has opportunity to expand in business banking.

3. Credit Card: There is an opportunity to launch Credit Card in Bangladesh by TBL. Beside this, TBL can acquire services for cards like VISA, MASTER CARD etc. So that they can enhance the market based card service.

Threats: 1. Contemporary Banks: The contemporary banks of The Trust Bank like: Dhaka Bank, Dutch Bangla Bank, National Bank, Mutual Trust Bank, Mercantile Bank are its major rivals. They are carrying out

aggressive campaign to attract lucrative clients as well as big time depositors. The Trust Bank should remain vigilant about the steps taken by these banks, as these will in turn affect The Trust Bank strategies.

2. Multinational Bank: The Rapid expansion of multinational bank poses a potential threat to new PCB’s. Due to the booming energy sector, more foreign banks are expected to operate in Bangladesh. Moreover, the existing foreign banks such as HSBC, AMEX, CITI N.A, and Standard Chattered are now pursing an aggressive branch expansion strategy. Since the foreign banks have tremendous financial strength, it will pose a threat to local bank to a certain extant in terms of grabbing the lucrative clients.

3. Default Culture: Default culture is very much familiar in our country. For a bank, it is very harmful. As The Trust Bank is new, it has not faced it seriously yet. However as the bank grows older it might become big problems.

2.13 Activities of TBL: The main activities of TBL are as follows: • Deposit Banking • Issuing Credit • Supports in the industrialization • Foreign Remittance • Assistance in foreign transaction • Providing safe locker service to its customers • Supports to its clients.

2.14 Balance sheet of TBL:

2.16 Major Deposit Schemes of TBL:

Trust Bank Limited has introduced different type of deposit schemes to support lower, middle and high income group pf people. Presently they are offering Operational and Nonoperational Account to their prospective customers.

Operational Account: • Savings Account • Current Account • STD Account Non-Operational Account: • Fixed Deposit Receipt (FDR) • Trust Smart Savers Scheme (TSS) • Trust Money Double Scheme (TMDS) • Trust Money Making Scheme (TMMS) • Trust Educare Scheme (TES) • Monthly Benefit Deposit Scheme (MBDS) • Lakhopati Savings Scheme (LSS) • Interest First Fixed Deposit Scheme (IFFDS) • Foreign Currency Account (FC) • Non-Resident Foreign Currency deposit Account (NFCD) • Non-Resident Investors’ Taka Account (NITA) 3. Literature Review Loans or credits comprise the most important asset as well as the primary source of earning for the banking institutions. On the other hand, loan/credit is also the major source of risk for the bank management. A prudent bank management should always try to make an appropriate balance between its return and risk involved with the loan portfolio. Credit appraisal process is the tool, which helps the bank to predict the risk and return on the proposed project for credit disbursement. Therefore, from the above definition it is clear that credit appraisal is a very important factor for banks. To get a clear idea about credit appraisal process we need to know the key factors of credit appraisal procedures.

3.1 Credit The word credit is derived from the Latin word “credo” which means “I believe” and is usually defined as the ability to buy with a promise to pay. It consists of actual transfer and delivery of goods and services in exchange for a promise to pay in future. It is simply the opposite of debt. Diversification of banking service has accelerated the use of credit in the expansion of business operation. It is a fundamental precept of banking everywhere that advances are made to customers in reliance on his promise to pay rather than the security held by the banker.

3.2 Principles of Credit A prudent Banker should always adhere to the following general principles of lending funds to his customers.  Background, Character and ability of the borrowers  Purpose of the facility,  Term of facility,  Safety,  Security,  Profitability,

 Source of repayment,  Diversity.

Bank should never put “All its eggs in one basket”. It should be noted that selection of appropriate borrowers, proper follow-up and end-use supervision through constant close contact with the borrowers, are the corner stones for timely recovery of credit.

3.3 Factors of Credit Policy Credit policy of all banks cannot be developed on same lines because of differences in their operational needs and resource structures. In designing a credit policy, considerations should be given to following: 1) Total deposit resources of the bank and rate of fluctuation of resources.

2) Deposit structure.

3) Trend of growth in deposit and economic growth rate of the country.

4) Capital fund and other reserves. Large bank’s capital fund and secondary reserve in investment can permit its loan policy to be liberal in respect of its limit of lending in high risk-high returns loans while a relatively new small bank would stress more on liquid and highly secured loans at lower interest in its policy.

5) Capability of loan administration shall have to be given due weight in the credit policy. A large bank is able to hire numbers of highly skilled specialists/experts in different areas to advise the bank in loan making but smaller banks relying on usual credit managers cannot venture into sectors that require expert appraisal of loan applications and also that requires intensive post implementation monitoring of large and complex industrial loans.

6) Investment size of the bank and its nature.

3.4 Loan Documentation The minimum requirements for loan or other facility documentation of a Bank are: a) Copies of the relative sanction letter indicating that the transaction has been approved by properly authorized officers of the Bank. b) A copy of the letter of sanction addressed to the customer and his acceptance thereof. c) All necessary documentation required to meet the terms and conditions of the facility in the manner in which it was approved. d) Before disbursement, it should be satisfied that all legal formalities have been completed. e) Disbursement of all facilities shall be made on an Offering Sheet basis to ensure that all additional requests are duly approved by two authorized Officers one of which must be the Manager or Sub-Manager. f) Securities offered should also be thoroughly verified / inspected once in a month and stock report prepared.

g) Where the loan agreement calls for restrictive covenants and ongoing conditions, the Manager must not only satisfy himself that these are adhered to at the outset of the transaction (i.e. date of initial takedown) but assure himself, at regular intervals, that these are not being violated. h) Since the Manager together with the Credit Officer is fully responsible for documentation, they will formally sign a check list. Under no circumstances may anyone permit drawings under any facilities, until they have signed off the check list.

I) The Manager/Sub-Manager should ensure that appropriate steps are being taken to keep loan documentation current for all assets of the Bank. The loan documentation check-list, should therefore, be reviewed at regular intervals.

J) Lines of credit should, as a rule, be confirmed in writing to the borrower. A Specific expiration date for the line should be included. Moreover every letter of sanction must contain the Bank's standard clauses.

K) The borrower must explicitly undertake that all information supplied by him to Bank in connection with the approved lines of credit is correct.

L) Any material or adverse change in business conditions will cause the amount due to Bank from the client immediately repayable. The Bank reserves the right to call back the facilities extended at any time without assigning any reason whatsoever.

3.5 Standard Procedure of Credit The Standard Procedure of Credit of a Bank is completed through the following Steps: A) Any request for credit facilities must be made by the borrower in the Bank's prescribed standard form properly filled in and completed in all respect and duly signed by the prospective borrower.

B) Submission of past 3 Years financial statement: For all credit proposals, the borrowers and guarantors (if any) should, wherever possible submit past 3 years’ Profit & Loss A/C and Balance sheet duly audited by a recognized and competent Chartered Accountant containing unqualified opinions. Some borrowers may not have audited financial statements at all. In either case, the lending officer must interview the potential borrower or guarantor and obtain satisfactory, accurate and complete financial information supporting any prior financial statements either audited or not audited. In the case of an individual borrower or guarantor, the financial statements must be signed by competent authority and must contain legend to the signatory, all assets and liabilities both direct and contingent and all sources of income and items of expenses. For all un-audited statements provided by a company, financial officer of the company must execute such legend.

C) On all new credit arrangements and annual reviews emanating in Branches, an analysis of the credit worthiness of the borrower and guarantor (if any) should be prepared by the Credit Department at the Branch where credit monitoring responsibility lies and a copy thereof forwarded to the Head of Credit Division at 'Head Office for pre-factor or post-factor review as the case may be. In case such credit originates in the Head Office, it will be forwarded to the Branch Manager for record and action.

3.6 Credit Analysis

When a customer requests a loan, bank officers analyse all available information to determine whether the loan meets the bank’s risk-return objectives. Credit analysis is essentially default risk analysis in which a loan officer attempts to evaluate a borrower’s ability and willingness to repay. The banker has to identify three distinct areas of commercial risk analysis related to the following questions: 1. What risks are inherent in the operations of the business?

2. What have managers done or failed to do in mitigating those risks?

3. How can a lender structure and control its own risks in supplying funds?

The first question forces the banker to generate a list of factors that indicate what could harm a borrower’s ability to repay. The second recognizes that repayment is largely a function of decision made by a borrower. Is management aware of the important risks and has it responded? The last question forces the banker to specify how risks can be controlled so that bank can structure an acceptable loan agreement.

Therefore, Bankers look into key risk factors or Qualitative analysis which has been classified according to the five Cs of credit: 1. Character: Character refers to the borrower’s honesty and trustworthiness. A banker must asses the borrower’s integrity and subsequent intent to repay. If there are any serious doubts, the loan should be rejected.

2. Capital: Capital refers to the borrower’s wealth position measured by financial soundness and market standing. It helps cushion loses and reduces the likelihood of bankruptcy.

3. Capacity: Capacity involves both borrower’s legal standing and management’s expertise in maintaining operations so the firm or individual can repay its debt obligations. Under capacity an individual must be able to generate income to repay the cash.

4. Condition: A condition refers to the economic environment or industry specific supply, production and distribution factors influencing a firm’s operations. Repayment sources of cash often vary with the business cycle or consumer demand.

5. Collateral: Collateral is the lender’s secondary source of repayment or security in the case of default.

Having an asset that the bank can seize and liquidate when a borrower defaults reduces loss, but does not justify lending proceeds when the credit decision is originally made.

Under credit analysis Bank also does Quantitative analysis which refers to the analysis of financial statement ratios to know the past performance of a company. Some of the key ratios which serve as a tool for financial analysis are classified as 1) Financial Ratio 2) Turnover Ratio 3) Profitability Ratio 1) Financial Ratio Financial ratios indicate about the financial position of the company. A company is deemed to be financially sound if it is in a position to carry on its business smoothly and meet its obligations-both long-term as well as short term-without strain. Some of the important ratios which are calculated in order to judge the financial position of the company are: i)

Fixed Assets

Fixed Asset Ratio = Long −term funds

Current Assets

ii)

Current Ratio = Current Libilities

iii)

Quick Ratio =

iv)

Debt Equity Ratio = Shareholders Fund

Quick Asset (current assets − inventory ) Current Libilities Long −term Debt

2) Turnover Ratio The turnover ratios indicate the efficiency with which the capital employed is rotated. They are also known as Activity or efficiency ratio. The overall profitability of the business depends on the turnover i.e. the speed at which the capital employed in the business rotates.

Higher the rate of rotation, greater the profitability. In order to find out which part of capital is efficiently employed and which part not, different ratios are calculated. These are: Net Sales

i) Fixed Asset Turnover Ratio = Fixed Assets Net Sales

ii) Working Capital Turnover Ratio = Net Working Capital 3) Profitability Ratio Profitability is an indication of the efficiency with which the operations of the business are carried on. Poor operational performance may indicate poor sales and hence poor profits.

Bankers look at the profitability ratio as an indicator whether or not the firm/company earns substantially more than it pays interest for the use of borrowed funds and whether the ultimate repayment of their debt appears reasonably certain. The important profitability ratios are: Operating Pr ofit

i)

Overall Profitability Ratio = Capital Employed ×100

ii)

Gross Profit Ratio =

iii) Net Profit Ratio =

Gross Pr ofit ×100 Net Sales Net Operating Pr ofit ×100 Net Sales

3.7 Lending Risk Analysis Lending Risk analysis (LRA) is simply a loan processing manual and has done when the amount of loan is above 1 core. By going through this manual the lending bankers can asses the creditworthiness of their prospective borrowers.

Therefore, LRA is such an instrument which is definitely and directly related with lending information to analyze the borrower’s financial, marketing, managerial and organisational aspects subjectively and objectively. It also facilitates the analyst to know the security risk of the credit. Lending risk Analysis involves assessing the likelihood of repayment of loans to the bank as per agreement on the basis of analysis of certain risks. To analyze these risks bankers will need to fill-up a 16-page LRA form. The form leads to scoring various risk factors involved in lending. LRA has divided the various risks into two groups namely, Business Risk and Security Risk.

1. Business Risk: Business Risk is concerned with whatever the borrowing company would fail to generate sufficient cash out of business to repay the loan Business Risk, the main component of lending risk, consists of the Industry Risk and the company Risk A. Industry Risk: Due to some external reasons a business may fail and the risk which arrives from external reasons of the business is called Industry Risk. It has two components: i) Supplies Risk: When the business fails due to disruption in the supply of inputs, the consequent risk which would arise is known as Supply Risk ii) Sales Risk: When the business fails for disruption in sales, this type of risk would generate.

B. Company Risk: Company Risk is shown for some internal reasons of the business. It has also two main components and four sub-components i) Company position Risk: Each and every company holds a position within an industry. This position is very much competitive. Due to weakness in the company’s position in its industry, a company may fail and the risk of failure is called Company Position Risk. It depends on(a) Performance Risk: If a company fails to perform well enough to repay the loan because of its weakness under given expected external conditions, the company is said to suffer from performance risk. (b) Resilience Risk: When a company fails due to lack of its resilience to unexpected external conditions, the resilience risk is generated. ii) Management Risk: If the management of a company fails to exploit the company’s position effectively, the company can fail and this risk of failure is called management Risk. It can be subdivided further(a) Management Competence Risk: Management competence risk is the risk that the company fails because the management is incomplete (b) Management Integrity Risk: Management integrity risk is the risk that the company fails to repay its loan due to lack of management integrity.

2. Security Risk: Security risk is the risk that the realised value of the security does not cover the exposure of loan. Exposure means principal plus outstanding interest. Security risk can be divided into two parts: (a) Security Control Risk:

Security control Risk is the Risk that the bank fails to realise the security because of lack of bank’s control over the security offered by the borrowers. (b) Security Cover Risk: Security cover risk is the risk that the realised security value may not cover the full exposure of loans.

3.8 Collateral Collateral is the lender’s secondary source of repayment or security in the case of default.

Having an asset that the bank can seize and liquidate when a borrower defaults reduces loss, but does not justify lending proceeds when the credit decision is originally made.

3.8.1 Characteristics of Good Collateral The following five items determine the suitability of items for use as collateral. The suitability depends in varying on standardisation, durability, identification, marketability and stability of value.

1. Standardization: The standardisation leaves no ambiguity between the borrower and the lender as to the nature of the asset that is being used as collateral.

2. Durability: Durability refers to the ability of the assets to withstand wear. Or it can refer to its useful life.

Durable goods make better collateral than non-durable. Stated otherwise crushed rocks make better collateral than fresh flowers.

3. Identification: Certain types of assets are readily identified because they have definite characteristics or serial numbers that cannot be removed. Two examples are a large office building and an automobile that can be identified y make, model and serial number.

4. Marketability: In order for collateral to be of value to the bank, the collateral must be marketable. That is the borrower must be able to sell it. Specialised equipment is not as good as collateral as are dump trucks, which have multiple uses.

5. Stability of value: Bankers prefer collateral whose market values are not likely to decline dramatically during the period of the loan such as common stock.

3.8.2 Different Kinds of Collateral Secured loans have a pledge of some of the borrower’s property behind them (such as home or an automobile) as collateral that may have to be sold if the borrowers have no other way to repay the bank. Some of the most popular collaterals are: 1. Account Receivable: The banks take a security in the form of a stated percentage of the borrower’s balance sheet. When the borrowers credit customers send in cash to retire their debts this cash payments are applied to the balance of borrowers loans.

The bank may agree to lend more money as new receivable arise from the borrowers sells to its customers thus allowing the loan to continue as long as the borrower has need for credit and continuous to generate and adequate volume of sales .

2. Factoring: Bank can purchase a borrowers account receivable based upon some percentage of the book value because the bank takes over the ownership of the receivable, it will inform the borrowers customers that hey should send their payments to the purchasing bank.

3. Inventory: A bank will lend only a percentage of the estimated market value of a borrower’s inventory in order to leave a substantial cushion in case the inventories value begins to decline. The inventory pledged may be controlled completely by the borrower using a so-called floating line approach.

4. Real Property: A bank may take a security interest in land and / or improvements on land own by the borrower and records its clime-a mortgage-with a government agency in order to define against successful claim by others.

5. Personal Property: Bank takes a security in jewellery, securities and other forms of personal property owned by a borrower.

6. Personal Guarantees: A pledge of the stock deposits or other personal assets held by the major stock holders or owners of a company may be required as collateral to secure a business loan.

Loans and Advances of TBL The following types of credit facilities are generally allowed by Trust Bank ltd. to the individuals, partnership firms, Corporations and others, either on Demand, Time or Self liquidating basis and are carried on the Bank's General Ledger. The credit facilities provided by the bank are divided into two broad categories: • Funded Facilities • Non- Funded Facilities 4.1 Funded Facilities Any type of credit facility which involves direct outflow of Bank's fund on account of borrower is termed as funded credit facility, the funded facilities of loans and advances are: 1. Short Term Loans 2. Short Term Loans (Others) 3. Long Term Loans 4.1.1 Short Term Loans a) Secured over draft OD is some kind of advance. In this case, the customer can over draw from his/her current account. There is a limit of overdraw, which is set by the bank. A customer can with draw that much amount of money from their account. For this there is an interest charge on the over draw amount. This facility does not provide for every one, the bank will provide only those who will fulfill the requirement. It means that only real customer can get this kind of facility. The practice of TBL is that it states the Over draft as Secured Overdraft. This is a type of over draft facility given by keeping sufficient collateral from the customer. This

facility provides specific right to a client to over draw within a pre fixed limit for a certain period of time. SOD is normally granted against the security of tangible asset such Lien of FDR, Bonds, Sanchay Patra etc. Interest charge on SOD is calculated on the basis of the security liened.

• Incase of FDR with Trust Bank the interest rate is 2.5% above the FDR rate, with other bank is 14% • Incase of Sanchay Patra purchased from Trust Bank the interest rate is 2.5% above the rate Sanchay Patra, from other bank is 14% • The common thing is 2.5% spread is kept in charging interest. Interest is calculated on outstanding amount at daily basis.

SOD (General) Advance allowed to individual/firm against financial obligation (i.e. lien of FDR/PS/BSP etc.) and against assignment of work order for execution of contract works fall under this head. This advance is generally allowed for allowed for definite period and specific purpose.

SOD (Imports) Advances allowed for purchasing foreign currency for opening L/C for imports of goods fall under this type of leading. This is also an advance for a temporary period, which is known as preemptor finance and falls under the category ‘Commercial Lending’. b) Time Loan: Cash Credit (Hypothecation): It allows to individuals or firm for trading as well as whole-sale purpose or to industries to meet up the working capital requirements against hypothecation of goods as primary security fall under this type of lending. It is a continuous credit. It allowed fewer than two categories: • Commercial Lending • Working Capital Cash Credit (Pledge) Financial accommodation to individual/firm for trading as well as whole sale purpose or to industries as working capital against pledge of goods primary security falls under this head of advance. It also a continuous credit and like the above allowed under the categories: • Commercial Lending • Working Capital 4.1.2 Short Term Loans (Others) a. Micro Credit: Loan has given only to the Army Person for the purpose of Repairing and Reconstruction of dwelling Houses. It is usually given for a small amount, such as 20000, 30000, and 40000.

The amount is given on the basis of salary range. b. PAD (Payment against document): Payment made by the bank against lodgment of shipping documents of goods imported through L/C falls under this type head. It is an interim type of advance connected with import and is generally liquidated shortly against payments usually made by the party for retirements of documents for release of import goods from the customer authority. It falls under the category ‘Commercial Lending’.

c. LTR (Loan against Trust Receipts): Advances allowed for retirement of shipping documents and release of goods imported through L/C without effective control over the goods delivered to the customer fall under this head. The goods are handed over the importer under trust with arrangement that sales proceed should be deposited to liquidate the advances within a given period. This is also temporary advance connected with import that is known post-import finance under category ‘Commercial lending’. d. IDBP (Inland documentary bill purchase): Payment made through purchase of inlands bill to meet urgent requirements of customer fall under this type of credit facility. This temporary advance is adjusted from the proceeds of bills purchased for collection. It falls under the category ‘Commercial Lending’. e. FDBP (Foreign documentary bill purchase): Payment made to a party through purchase of foreign documentary bills fall under this head.

This temporary advance is adjustable from the proceeds of negotiable shipping/export documents. It falls under category ‘Export Credit’.

4.1.3 Long Term Loans a. HBL (House Building loan) A credit facility is available for the Armed Forces officials. This loan is provided to build and repair dwelling house. The highest limit of this loan is 25 lac. b. Term Loans: The term of loan is determined on the basis of gestation period of a project generation of income by the use of the loan. Such loans are provided for Farm Machinery, Dairy, Poultry, etc. It is categorized in the following segments: Midterm – This loan facility is extended for more then 1 year but less the 3 year. Trust Bank encourages midterm loan.

Long term – Tenure of long term loan is more then 5 years.

The long term loans / Project loans are provided in two ways by TBL: • Sole Financing • Syndicate Financing.

4.1.3.1 Sole Financing by TBL Here Trust Bank Ltd. finances the whole project from its own fund. Self help is the best help.

TBL believes in this norm. for this it tries its best to fund the loan amount solely except very rare cases. The project appraisal in case of sole financing of TBL covers five different aspects of a project which we shall discuss later in 4.1.3.2 Syndicate Financing by TBL Trust Bank is a private commercial bank. The main focus of Trust Bank is to provide short term & medium term loan facility. So it does not concern much about Long term project finance & syndicated finance. Trust Bank acts simply as a participatory bank rather than Lead bank. Its main concern is to collect the interest & the loan installment and all the regulatory & legal functions are performed by the Lead arranger.

The major syndicate loans provided by Trust Bank are Confidence Salt Ltd., Nasir Glass Industries Ltd, and Popular Pharmaceuticals Ltd. For the Syndicate loan Trust Bank analyses the project feasibility by analyzing the projected data of the particular project. The project analysis practice of Trust Bank is given later in case of Confidence Salt Ltd. Syndicate Loan to Nasir Glass Industries Ltd The features of this syndicated loan are as follows: 1. Name of the Project: Nasir Glass Industries Ltd. 2. Type of Project: Manufacturing Plant of Float glass sheet.

3. Project Location: Gazipur.

4. Estimated project cost: Tk. 199.54 Crore.

5. Capacity: To produce 135 Metric Tons finished float glass sheet per day.

6. Source of raw materials: Both import & local procurement.

7. Total facilities granted by banks: Total facility provided by all banks is Tk. 100 crore where Trust Bank Ltd. provided 9 crore. Trust bank sanction the loan on 25-032004 and the expiry date is 24-03-2010.

8. Interest rate: @ 14% on the total amount of total facility provided, whereas trust bank charges @14% on loan provided by it.

9. Trust bank’s position in this Syndicate loan: Trust bank acts as participatory bank whereas Prime Bank Ltd. act as lead bank and all legal responsibility upon the lead bank. Other participatory banks are: •Mutual Trust Bank Ltd. •Dhaka Bank Ltd. •Mercantile Bank Ltd. •Arab Bangladesh Bank Ltd. •United Commercial Bank Ltd. •State Bank of India.

•Export Import Bank of Bangladesh Ltd. •Dutch Bangla Bank Ltd. •International leasing & Financial Services Ltd. •Premier Leasing International Ltd. •Uttara Finance & Investment Ltd. •Standard Bank Ltd. Syndicate loan in case of Popular Pharmaceuticals Ltd. The features of this syndicated loan are as follows: 1. Name of the Project: Popular Pharmaceuticals Ltd. 2. Type of Project: Manufacturing biological and non-biological drugs.

3. Estimated project cost: Tk. 91 Crore 56 lac..

4. Source of raw materials: Both import & local procurement.

5. Total facilities granted by banks: Total facility provided by all banks is Tk. 39 crore where Trust Bank Ltd. provided 4 crore. Trust bank sanctions the loan on 1912-2004 and the expiry date is 19-06-2012.

6. Interest rate: @ 11% on the total amount of total facility provided, whereas trust bank charges @14% on loan provided by them.

7. Trust bank position in this Syndicated loan: Trust bank acts as participatory bank whereas Prime Bank Ltd. acts as lead bank and all legal responsibility upon the lead bank. Other participatory banks are: •United Commercial Bank Ltd. •State Bank of India.

•Export Import Bank of Bangladesh Ltd. •Standard Bank Ltd. Security documents maintained by Trust Bank Ltd. in this syndicate finance: • Facility agreement • Paripassu security agreement • Escrow account agreement • Memorandum of deposit of title deeds and copy of certificate of registration of mortgage.

• Deed of agreement.

• Letter of hypothecation by way of fixed and floating charge.

• Personal guarantee of Managing Director and witnesses.

4.2 Non Funded Facilities provided by Trust Bank Ltd Non funded facilities are divided into the following categories: • Bank Guarantee.

• Letter of credit.

4.2.1 Bank Guarantee Trust Bank offers guarantee for its reliable and valuable customer as per requirements. This is also a Credit facility in contingent liabilities from extended for participation in development work like supply of goods and services. The features of Bank Guarantee are as follows: • It is a written document on non-judicial stamp • Expiry date is mentioned specifically with other terms and conditions • Trust Bank receives commission quarterly @ 0.50% of the guaranteed amount.

Trust Bank offers two types of Bank Guarantee, which are as follows: 1. Tender or Bid Bond Guarantee In time of tender bidding either cash or bank guarantee is required in case payment of earnest money. The tender guarantee assures that the tenders shall uphold the conditions of his tender during the period of the officer as binding and that he /she will also sign the contract in the event of the order being granted. The steps in the process of Bid bond Guarantee are: • Request letter from customer along with board resolution in case of Limited company • Trade license in case of Proprietorship Company • Copy of tender form • Margin: • Incase of reliable client 10% to 20% • For a new client 100% margin is required • Bank guarantee is issued in 150 Tk. Stamp Pad • Note is initiated

•

Approval of Bank guarantee is given.

2. Performance Guarantee: Trust Bank also gives guarantee on behalf of the customer on completion of the delivery or performance after getting the tender. Beneficiary finds that as a guarantee, the contract will be fulfilled in every respect and can retain the guarantee as per provision for long time.

Including a clause stating that the supplier can claim under the guarantee, by presenting an acceptance certificate signed by the buyer, can counteract this. Document required for performance guarantee are: • Tender schedule.

• Guarantee letter.

A guarantee can be converted into funded facility if it is en cashed. If the client is unable to meet up banks demand a loan account is created like Over Draft as Bank is liable to pay to the beneficiary of the guarantee. If Bank guarantee is not used then the beneficiary or party to whom the guarantee was given on behalf of the client will sign on the back of the Bank Guarantee stamp and write the word ‘Released’. Then the facility will be expired as well as banks liability.

4.2.2 Letter of Credit Through Letter of Credit Trust Bank Ltd. provides a credit line to an importer to facilitate both foreign and inland transactions. This is a contingent liability which can be converted to a funded facility incase bank makes the payment on behalf of the importer. A letter of credit can be revocable or irrevocable, restricted or negotiable so on.

As Letter of Credit is an issue to be discussed in the management of Foreign Exchange Operation of the bank, we shall not proceed in discussing this issue.

4.3 The Rates of different types of loans The revised lending rates as mentioned below effected from 30.04.2007 for all existing and fresh sanction of credit facilities.

Particulars of Sectors 1. Agriculture/Agro-based industry: a) Loan to primary producer b) Loan to Agricultural in put Traders/Fertilizer Dealers/Distributors c) Agro processing industry/farms 2. Large & Medium scale industry (Term Loan) 3. Working Capital: a) Jute b) Other than jute 4. Export Finance: Jute & Jute Products Other Exports

Revised rate(s)% p.a 10.50 10.00 10.00 15.00 11.00 15.00 7.00 7.00

5. Commercial Lending: Loans against Work order and Brick Manufacturing Commercial Loan (Garments) Commercial Loan (Others) Small & Medium Scale Enterprises (SME’s) 6. Term Loan: a) Small and Cottage industries b) Urban Housing (residential) c) Urban Housing (commercial) d) Loan for dwelling house repair and reconstruction (Bank’s Scheme loan for low income bracket) e) Transport loan f) House building scheme loan for serving Army Officers g) Consumer Durable Scheme h) Car & Marriage Loan Scheme 7. Loan against FDR issued by Trust Bank Ltd.

15.00 14.00 15.00 16.00 14.00 15.00 15.50 12.00 16.00 11.00 17.00 12.00 2.50% above FDR rate

8. Loan against Savings Certificates & other allowable 13.00 Financial securities issued by TBL 9. Loan against Lien of FDR / Savings Certificates / 14.00 WEDB & other allowable instruments issued by other Banks/ Financial institutions It is mentioned that variation by 1.5% is allowable both at the upper and lower end from the mid rate on case to case basis with the approval of head office.

Consumer Credit Scheme Retail banking is a modern concept of the age. Trust Bank Ltd. has also introduced retail banking recently. The consumer product is not new for TBL. Before Retail banking scheme TBL also provided some credit of retail banking. The new change is that TBL has added few new credit lines and opened a new department named Retail Banking. The credit lines of Consumer Credit are as follows: • Any Purpose Loan • Apon Nibash Loan • Car Loan • Household Durables Loan • Doctors Loan • Marriage Loan • CNG Conversion Loan

5.1 Any Purpose Loan

"Any purpose" Loan is a terminating facility offered by the Retail Banking Unit of the Bank to individual salaried persons living in the cities/towns where the Bank has its own branches.

It is a clean or unsecured loan in the sense that only security in this type of loan product is: • Letter of introduction from employer • Two Personal Guarantees, acceptable to the Bank preferably earning person from family member and an individual having minimum solvency/income not less than that of the customer.

"Any Purpose" loan which means the applicant does not have to declare the purpose for which he/she is taking the loan hence there will be no hypothecation over the asset to be purchased but the loan is obviously not allowed for any unlawful purpose.

Market Segments for Any Purpose Loan Employees of reputed MNCs .large local corporate, employees of mid-range local companies, reputed Educational institute, Banks/Financial Institutions, Diagnostic center, Hospital, Hotels, Restaurant, Telecommunication, Airlines, Real-Estate Developers of repute, Insurance companies, NGOs, Aid agencies, UN Bodies, and all other salaried employees including Government Employees etc.

5.2 House Finance (Apon Nibash Loan) Following are the features of Apon Nibash Loan: Scope For individual to build or purchase house/ apartment for own use or for let out purpose.

Purpose of the Loan a) Purchasing apartment b) Constructing new house(s) c) Taking over of House Building Loans from other Banks/Non Banking Finance Institutions.

Location a) Any municipal area where there is branch of TBL. b) Outside municipal area but within 1 km radius of Trust Bank Branch Eligibility Any Bangladeshi (Singly or jointly with other co-customers e.g. spouse / son / daughter). To be more specific the following group of people will be eligible for Apon Nibash Loan.

Salaried People a) Employees of govt./Autonomous body. b) Employees of financial institution. c) Employees of different Public Limited.

Company/Private Limited Company having Corporate Structure. d) Teachers of any school/college/university.

Professional (a) Doctor /Medical Professionals (b) Engineer (c) Accountants (d) IT Professionals (e) Management Consultant

Self-Employed Businessman (in business at least for five years).

Loan Amount (Loan to value ratio) a. Upto 60% of the total cost of construction of house b. Upto 70% of purchase price of new apartment/house. However, total loan amount shall not exceed Tk. 50 lac Debt Burden Ratio 40% of gross income. However, the quantum of loan shall be such to ensure monthly installment size would not exceed 40% of the gross income 80% of. the residual income (after deducting all expenses except present rental expense) which over is lower.

Equity participation a. At least 40% of the total cost of the construction of house. b. At least 30% of purchase price of new apartment/house and repairing cost, if any.

Age Limit Maximum age at loan maturity should be considered up to 60 years.

Minimum Construction Standard • A one storied RCC building with at least 600 sft. area and having all utility. • An apartment not less than 600 sft. area with all utilities.

Mode of disbursement For purchasing apartment Firstly, the customer shall pay the equity portion to the developer Later on, the remaining amount will be provided by the Bank.

For construction of building: The customer will have to invest the equity portion first for having disbursement from the sanctioned loan. Bank's Civil Engineer will ascertain whether the customer's equity is rightly invested or not.

Any cost overrun of the projected cost shall be borne by the customer.

Period of the lending Particular

Loan repayment

Construction of new house

Grace Period (months) 1-12

Purchase of new apartment under construction Purchase of new ready apartment

1-12 3

Up to 15 years Up to 15 years

Up to 1 5 years

Note: The grace period interest may be recovered before starting repayment of installments or may be capitalized with the principal for repayment.

Rate of Interest 14.50% to 15.00% p.a. with quarterly compounded.

Processing fees (It may be waived by Head Office considering the merit of the case) 1.00% on loan amount plus 15% vat on processing fees will be realized from the customer before disbursement of the loan.

Mode of Repayment The repayment will be started from the subsequent month of disbursement or from the following month at the end of grace period. The repayment will be made in amortized monthly equal installment comprising of principal and interest Penal Interest If the customer fails to deposit any installment 1 % Penal Interest shall be recovered per month on the defaulted loan amount.

Pre-payment penalty No Pre-payment penalty will be levied, if the loan is adjusted by the customer from his own sources. However, if the customer desires to switch to other Bank/Financial institutions 1% penal interest shall be charged on the outstanding loan amount.

Primary Security Under construction apartment Under supervision of Bank's Penal Lawyer, a Tri-partite agreement will be signed among the customer, the developer and the Bank to the effect that the developer will handover property related documents directly to the Bank being the financer of the apartment. Subsequently the apartment will be registered mortgaged in the name of Trust Bank Ltd..

Collateral On a case to case basis, if available • Mortgage (Registered / equitable) or any other property • Pledge of shares/securities and other encashable securities.

• Lien on retirement benefits • Guarantee from a person acceptable to the Bank (if possible) 5.3 Car Loan Car Loan is a terminating loan facility for the middle class to upper class people of the cities where the bank has its branches to buy a car for their personal usage. Under this scheme, the vehicle is registered in the name of the Bank under Hire Purchase mode only.

Product Communication Points For Any New or Reconditioned Car, Microbus, Jeep, Minibus, Truck, Pick-up, Covered van etc.

Loan Amount • For New car - Loan Limit upto Tk. 20 lac for maximum 5 years • For Reconditioned car - Loan Limit upto Tk. 20 lac for maximum 4 years • For Microbus - Loan Limit upto Tk. 15 lac for maximum 3 years.

• For Minibus, Trucks, Pick-up, Covered van - Loan Limit upto Tk. 50 lac for maximum 5 years • Minimum 20% down payment required.

5.4 Consumer Durable Loan

Consumer Durable Loan is a loan which facilitates middle class people to purchase different household items such as Television, Refrigerator, Air -Conditioners, Washing Machine, Computers and other household furniture etc. for personal use.

Product Communication Points • Consumer Durables for personal use. Items like: Television, Refrigerator, Air Conditioners, Washing Machine, Computers and other household furniture etc.

• Financing 70% of the cost of the item is allowed.

• Tenor for this loan is minimum 12 months and maximum 36 months.

• Maximum loan will be allowed Tk. 5.00 lac Market Segments Any Bangladeshi individual who has the means and capacity to repay bank loan. In specific terms, these could be salaried person of multinational and middle to large size local corporate, Government officials, Officials working in reputed NGOs (Non Government Organizations), Banks/Financial Institutions, International Aid Agencies & UN bodies, any Tax paying businessmen of reputation, any employed/ self-employed tax-paying individual having a reliable source of income.

5.5 Doctors' Loan Doctors' Loan is a loan for professional Doctor to support their small scale purchase of different medical equipments, tools and small machineries for installation of their chamber/hospital/clinic. This is partially secured product, security being the commodity acceptable form of quasi cash securities available in the market.

Product Communication Points • Doctors' Loan for professional use. Items like medical equipments to setup chamber/ hospital/clinic with necessary medical equipments.

• Financing 80% of the cost of the item is allowed.

• Tenor for this loan is minimum 12 months & maximum 48 months.

• Loan amount maximum Tk. 5 lac for general practionear • Loan amount maximum Tk. 10 lac for specialized Doctors 5.6 Marriage Loan Marriage Loan is a loan facility offered by the Retail Banking Unit to provide financial support for marriage purpose for Bangladeshi people. This loan is offered to the persons who have stable monthly income. It is a clean or unsecured loan in the sense that there is no cash security taken against the loan.

Product communication points • This loan is applicable for first marriage only for applicant himself/herself and may be applied by the guardian also.

• • Down payment 20% (minimum).

• Tenor for this loan is minimum 12 months and maximum 36 months.

• Maximum loan will be allowed Tk.3.00 lac.

5.7 CNG Conversion Loan

CNG Conversion Loan is a loan to provide financial supports for converting the vehicle from carbon based fuel system to CNG system. This is an unsecured loan because no additional security is arranged against this loan.

This Product Program Guide (PPG) contains the details rules and regulations of CNG Conversion Loan.

Product Communication Points • CNG Conversion Loan is to convert the vehicle from carbon based fuel system to CNG system.

• Financing 90% of the cost of conversion is allowed.

• Tenor for this loan is maximum 18 months.

Market Segments Any Bangladeshi Individual who has the means and capacity to repay Bank loan. In specific terms, these could be confirmed Service Holders, Businessman, Professionals (owner of the vehicle or valid user of the vehicle) & Corporate Clients (for more than one car). Any other persons who have adequate cash flow to repay the loan installment.

6.1 Lending Procedure of Trust Bank The lending procedure of Trust Bank Ltd. starts with building up relationship with customer through account opening. Control of credit operations is done at branch and Corporate Office Level. There are twelve steps in the lending procedure of TBL which are as follow.

Step-One A loan procedure starts with a loan application from a client who must have an account with the Bank. At first it starts form the branch. Branch receives application from client for a loan facility. In the application, client mentions what type of credit facility he/she wants form the bank including his personal information and business information. Branch Manager or regarding Officer in-charge of credit department conducts the initial interview with the customer.

Step-Two After receiving the loan application form, the bank sends a letter to Bangladesh Bank for obtaining a credit inquiry report of the customer from there. This report is called CIB (Credit information Bureau) report. This report is usually collected if the loan amount exceeds Tk.50 thousand. The purpose of this report is to be informed that whether the borrower has taken loan from any other bank or not, if ‘yes’ then whether these loans are classified or not.

Step-Three If Bangladesh Bank sends positive CIB report on that particular borrower and if the Bank thinks that the prospective borrower will be a good one, the bank will inspect the documents.

Required documents in case of Corporate Client are Financial documents of the company of last three to five years is required. If the company is new then projected financial data are required.

In this stage, the Bank will look whether the documents are properly filled up and signed.

Credit in charge of the relevant branch is responsible to know about the ins and outs of the client’s business through discussing with him.

Step-Four Bank officially inspects the project for which the loan is applied. Project’s existence, distance from bank office, viability, monitoring cost and possibilities are examined.

Step-Five Any loan proposal needs to be evaluated on the basis of financial information provided by the applicant. Experienced personel of Credit department in Trust Bank do an analysis through Credit Risk Grading Score. It is a ranking whose total score are 100. Among this score, minimum score is 75 to grant any commercial loan. For individual borrower this score is not required.

Step-Six Obtain legal opinion on the collateral provided by the applicant, whether those are properly submitted, regular and up to date or else those documents will be asked to regularize by the client.

Step-Seven Then comes the processing stage of loan. In this stage, the Bank will prepare a Proposal. The proposal contains following relevant information.

• Name of the Borrower/borrowers • Nature of Limit • Purpose of Limit • Extent of Limit • Collateral • Margin • Rate of Interest • Repayment • Validity Step-Eight If the proposal meets Trust Bank’s lending criteria and is within the manager’s discretionary powers, the credit line is approved. The manager and the sponsoring officer sign the credit line proposal and issue a sanction letter to client.

If the value of the credit line is above the branch managers’ limit then it is sent to head office or zonal office for final sanction with detailed information regarding clients, business or purpose of the loan, security papers.

Step-Nine Head office processes the credit proposal and afterwards puts up a memorandum to credit committee. The credit committee reviews the credit proposal and accepts or rejects the proposal.

Step-Ten After approval by the Credit Committee, head office or zonal office gives an approval letter to the branch and branch gives a sanction letter. The client should accept sanction advice with seal, which will prove his agreement with the terms and condition offered by the bank.

Step-Eleven

After the sanction advice, Bank will collect necessary charge documents. Charge documents vary on the basis of types of facility, types of collateral.

Step-Twelve Finally loan is disbursed and monitoring of the disbursed loan starts as well.

6.2 Credit Approval Authority in TBL Different amounts and different types of loans and advances are approved at different Divisions by different authorities: • Branch manager can approve those loan proposals that are backed by 100% security (SOD).

• Up to Tk 30. lac, Credit Department / Management Board in the head office can approve.

• Beyond Tk.30 lac to Tk. 1.00 crore, M.D/CEO can approve the Credit proposal.

• The Board of Directors can approve a credit proposal not exceeding Tk.32.31 crore.

• Credit proposals of above Tk. 32.31 crore can be approved by Bangladesh Bank as large loan.

A monthly summary of all new facilities approved, renewed, enhanced, and a list of proposals declined stating reasons thereof should be reported by CRM to the CEO/MD. 6.3 Mechanism to the Appraisal of a Credit Proposal There is no fixed or standardized approach to project appraisal. Numerous and diverse elements enter into the process of appraisal. It is difficult to have a cut and dried formula with the help of which a proposal for financial assistance can be adjusted straightway as acceptable or unacceptable. While broadly the same set of factors is taken into consideration in the scrutiny of individual proposals, the weight given to the factors varies from project to project. However, Trust Bank Ltd. considers five aspects of a credit proposal while appraisal.

6.3.1 Technical Appraisal Technical appraisal report is prepared by an engineer of the appraisal section to see whether the project is sound with regard to every engineering and technological consideration, including product specification, product process, size, internal balance, suitability and availability of physical facilities, designs and layouts of equipment and building etc.

The basic aspects of technical appraisal are: • Cost of the project.

• Annual production capacity & manufacturing process.

• Location, infrastructural facilities feature and estimated cost of the land.

• Civil drawing(s) and cost of civil works.

• Layout plan for Building and Machinery.

• Estimated cost of machinery with installation.

• Selection of product process involving the choice of alternatives, wastage, by-product, disposal of waste and effluents etc.

• Annual requirement of raw material(s) with source of availability.

• All input output data of the project.

6.3.2 Marketing Appraisal

An industrial project is to bring in some goods or services for a community. But the community does not need them infinitely. Their demand is of course finite and at given prices. Marketing plan, as in the case of production and financial plan, should have objective in the back drop; and the objective is what is wanted to be achieved. While appraising industrial projects Trust Bank Ltd. analyses 3 factors and brings out the objectives in quantitative terms: • Macro/ Micro demand/ supply situation for specific products in the market.

• Existing and expected competition in local and foreign markets and • The market share.

6.3.3 Financial Appraisal The next step is to prepare a detailed report on the financial viability of the project. The main purpose of such appraisal is to assess the viability of the project in terms of its operation in the future years and its financial soundness. It is concerned with assessing the feasibility of a project from the point of view of its financial result. The project’s direct costs and benefits are calculated in pecuniary terms at the prevailing market prices. Trust Bank Ltd. satisfies itself not only about the current solvency of the project but also about its continued solvency to ensure timely payment of the principal and regular payment of interest. The revenant information collected on technical economic and management aspects of the project have got direct bearing upon the financial appraisal. Such appraisal is directed to examine mainly the following aspects: 1. Financial requirement to bring the project into existence and the probable sources of finance; 2. Prospect of adequate revenue generation with particular emphasis on actual cash generation (liquidity) and probable impact on the financial condition (solvency).

The basic aspects of financial appraisal are: • Ratio Analysis: • Break-even Analysis • Earning Forecast • Fund flow Statement • Internal Rate of Return (IRR) • Pay Back Period Method • Net present value (NPV) Method.

6.3.4 Economic Appraisal Trust Bank Ltd. does economic analysis of a project to determine whether the project is consistent with overall national objectives and whether the investment proposed is the best means of achieving the intended objectives. It involves a systematic evaluation of a range of options for achieving the intended objectives.

Economic appraisal of the project by TBL covers both quantifiable and non-quantifiable benefits (where applicable).

Quantifiable Benefits TBL considers the following quantifiable benefits of the economic appraisal: • Economic Rate of Return (ERR), • Bruno Ratio/Domestic Resource cost, • Contribution of Gross Domestic Product, and

•

Employment generation and cost per employment.

Non-quantifiable/Intangible Benefits/Externalities The non-quantifiable benefits that TBL considers while doing the economic appraisal of any project are: • Developing a good relation with the client which will benefit the bank in future.

• Creating a good impression in the industry.

6.3.5 Management appraisal TBL emphasizes on the appraisal of management as a very important part of project appraisal. The successful implementation and running of the project depends on the resourcefulness, competence and integrity of its management. There are no sets of rules to find out if the borrowers’ are persons of integrity. The bank does it through direct and indirect investigation.

The basic aspects of the management appraisal by TBL are: • •

Structure & Shares.

Memorandum of Articles and relevant (Joint Stock Company’s) registration certificates.

•

Introduction to members of the proposed management, relevant experience and net worth.

•

Comparison of equity proposed and net worth declared.

•

Source of working capital or working capital loan.

6.4 Credit Risk Grading Score Trust Bank Ltd. makes another analysis of a credit proposal named Credit Risk Grading Score. In this analysis TBL considers the following factors: • Financial Risk • Business/ Industry Risk • Management Risk • Security Risk • Relationship Risk To understand Financial Risk TBL considers the factors such as leverage, liquidity, profitability and coverage of the credit. The weight of this section is 50%. After calculating the financial risk the bank gives a score.

To analyze Business/ Industry Risk TBL considers the factors such as size of the business, age of the business, business outlook, industry growth, market competition, entry/exit barriers. The weight of this section is 18%. After calculating the business risk the bank gives a score.

To analyze Management risk TBL considers the factors such as management experience, success, team work, background etc. The weight of this section is 12%. In the same way the bank calculate the management risk and gives a score.

To analyze Security Risk TBL considers the factors such as security coverage, collateral coverage, support etc. The weight of this section is10%. After calculating the security risk the bank gives a score.

To analyze Relationship Risk TBL considers the factors such as account conduct, utilization limit, compliance of condition, personal deposit. The weight of this section is10%. After calculating the relationship risk the bank gives a score.

After calculating the factors if the total score is at least 75%, then the bank sanctions loan on the project.

6.5 Credit Portfolio as a Tool of Credit Risk Management The bank’s loans and advances grew steadily during 2007. The growth rate was 41.66% against previous year. The bank follows specific guidelines in extending credit to reduce the credit risk at an optimum level and so it concentrates on specific areas than others while providing loan and advances. Here we shall see the graphical presentation of credit portfolio of the year 2007 based on different concentrations.

Category-wise Credit Portfolio Category Loans Cash Credit Over Draft

Amount in Tk. Crore 1,363 117 388

% of Total Loan 73 6 21

Category-w ise Credit Portfolio

Loans (73%) Cash Credit (6%) Over Draft (21%)

Industry-wise Credit Portfolio Industry Agro-sector Automobiles Energy & Power Steel & Engineering Chemical & Pharmaceuticals Textiles & Garments Others

Amount in Tk. Crore 81 33 27 146 38 311 1,232

% of Total Loan 4 2 1 8 2 17 66

Industry-wise Credit portfolio

Agro (4%) Automobiles (2%) Energy (1%) Engineering (8%) Pharma (2%) Textiles (17%) Others (66%)

Geographical Location-wise Credit Portfolio Division Dhaka

Amount in Tk. Crore 1,157

% of Total Loan 61

Chittagong Sylhet Rajshahi Khulna Barisal

662 28 12 9 0

35 2 1 1 0

Geographical Location-wise Credit

Dhaka (61%) Chittagong(35%) Sylhet (2%) Rajshahi (1%) Khulna (1%) Barisal (0%)

Nature-wise Credit Portfolio (In Crore) Nature Continuous

Amount in Tk. 1,037

% of Total Loan 55

Demand Loan Term up to 5 Years Term above 5 Years Short term Agro & Micro Credit Staff Loan

119 477 224 0.5 10

6 26 12 0 1

Nature-wise Credit Portfolio Continuous (55%) Demand Loan (6%) Term 5 Years (26) Term >5 Years (12%) Micro Credit (0%) Staff Loan (1%)

So we find that Trust Bank Ltd. favors Loans (73%) over Cash Credit (6%) and Over Draft (21%) in its credit portfolio. In case of industry-wise credit portfolio we find that the bank prefers Textiles & Garments Industry (17%) as its borrowers and its second preference here is Steel & Engineering (8%) though the major portion of its credit (66%) is not in any specific sector. As most of the industries and businesses are operated in Dhaka and Chittagong, the bank prefers these two areas while granting credit (Dhaka-61% & Chittagong-26%). If we consider nature of the loans, the bank prefers to provide the borrowers with Continuous Loan (55%) as it is safer to extend loans and advances to any client who is already known to the bank. Here Term Loan of 5 Years (26%) is its 2nd Preference. Thus through various concentrations the bank has tried to make an optimum portfolio of its loans and advances to reduce the credit risk.

Credit Provisions from BD Bank and Compliance by TBL As Bangladesh Bank is the apex body of all commercial banks in Bangladesh, it has set necessary rules, regulations and provisions for each of the departments of the commercial banks. The banks must abide by those provisions. In this chapter we shall see what the provisions are Bangladesh Bank has set for the credit divisions of the commercial banks as a whole and how the credit division pf Trust Bank Ltd. is complying with all those provisions.

7.1 Loan Classification as per Bangladesh Bank The classification of loans provided by different commercial banks in Bangladesh can be shown through the following table as guided by Bangladesh Bank.

Classification

Types of Loans Agricultur Continuous al Short Term

Unclassified

Demand

Term (Up Term to 5 years) years)

(>5

12 months Less than 6 Less than 6 Less than 6 Less than or below months months months 12 months

Overdue more than 12 months but less than 36 months

Overdue Overdue If defaulted If defaulted from 6 from 6 amount of amount of months to 9 months to 9 installments installments months months is equal to 6 is equal to months’ 12 months’ payable payable

Doubtful

Overdue more than 36 months but less than 60 months

If defaulted Overdue Overdue amount of from 9 from 9 installments 18 months months to months to is equal to or more 12 months 12 months 12 months’ payable

Bad loan

Overdue Overdue 12 Overdue 12 Overdue of Overdue of more than months or months or 18 months’ 24 months’ 60 months more more payable payable

Substandard

Source: BRPD Circular no. 09 dated May 14, 2001 7.1.1 Qualitative Judgment Criteria of the Classification The criteria on the basis of which the classification of the loans has been made are as follows.

• • • •

Unclassified: Repayment is regular.

Substandard: Repayment is irregular but has reasonable prospect of improvement.

Doubtful Debt: Unlikely to be repaid but special collection efforts may result in partial recovery.

Bad Loan / Loss: When the chance of recovery is very little.

7.1.2 Percentage of Provisions under the Classification Provision has to be made under the same circular which is as follows.

Types / Classification

Provision

A. Agricultural Short Term Loans Unclassified, Substandard, Doubtful Bad / Loss

5% 100%

B. All other Loans Unclassified Substandard Doubtful Bad / Loss

1% 20% 50% 100%

7.2 Other Loan Provisions from Bangladesh Bank The other provisions on loan and advances as circulated time to time to be complied by the commercial banks of Bangladesh are as follows.

1. A policy on maintaining general provision at 5% on Special Mention Account was circulated vide BRPD Circular No. 09 dated August20, 2005. Furthermore all banks have been advised to maintain general provision at 2% on Small Enterprise Financing and Consumer Financing.

2. As per existing interest rate policy, banks are empowered to determine interest rate on lending themselves. In order to inform their clients, banks will announce information relating to interest rates through brochures. It may be mentioned that banks can differentiate an interest rate not more than 3% in the same sector considering comparative risk among the borrowers.

3. In order to establish more transparency in determining interest rates and also to make it easily understandable and clear to their clients, it has been decided that henceforth banks will announce mid rate of interest rate band (if any) on respective sector while declaring interest rate on lending. Banks may charge interest rate 1.5% lower or higher than the declared rate considering comparative risk from client to client.

4. According to the BRPD Circular 02, dated February 15, 2005, Bangladesh Bank will time to time revise its prudential norms for loan classification and provisioning to strengthen credit discipline. As part of the process, Bangladesh Bank has alredy introduced Special Mention Account so that bank can raise early warning signals for accounts showing first signs of weakness. As a further move towards this end, Bangladesh Bank feels that appropriate provisioning against such accounts is necessary.

Accordingly the following amendments have been made to the above circular: 1. Banks will be required to make General Provision at 5% on the outstanding amount of loans kept in the Special Mention Account (SMA) after netting off the amount of Interest Suspense.

2. The status of the loan should be reported to the Credit Information Bureau (CIB) of Bangladesh Bank based on five categories of loan classification status including SMA in stead of the aforesaid classification (four) of outstanding loans. However, 5. Banks have been instructed to conduct loan classification activities and also to maintain provisions on quarterly basis vide BRPD Circular 16, dated December 1998.

6. Bank companies are advised to submit a Statement of Loans Extended to the Directors of the Financial Institutions as per Annexure A to the Financial Institutions Department of Bangladesh Bank at the end of each quarter within next 15 days of the following month of the quarter to which the statement relates. The first statement will be based on June 30, 2004. To

this end, up to date list of the Directors of financial institutions may be collected from the Financial Institutions Department of Bangladesh Bank.

7. At a time a loan as funded facility to a single client will not exceed 15% of the shareholders’ equity and a loan as non-funded facility will not exceed 25%. But if the use of the loan accelerates the socio-economic development and serves a greater interest of our country, Bangladesh Bank may allow a loan exceeding the aforesaid percentage. In this case a prior approval of Bangladesh Bank is a must.

7.3 Compliance with the Provisions by TBL Trust Bank Ltd. has divided its loans and advances into three broad classifications: • Unclassified • Special Mention Account and • Classified.

Classified loans are again divided into three categories. The amounts of loans and advances under different categories are as follows: Classification of Loans

Amount in Tk.

Unclassified

17,885,238,957

Special Mention Account

290,276,290

Classified Sub-standard Doubtful Bad/Loss

506,649,407 27,998,203 317,805,298 160,845,906

The provisions against the loans under this classification are as follows: Status

Base for Provision

Rate (%) Amount in Tk.

Unclassified (Excluding SMA)

17,781,747,000

Various* 206,371,000

Special Mention Account

277,321,760

5%

13,866,000

Sub-standard

19,134,240

20%

3,827,000

Doubtful

249,327,000

50%

124,663,000

Bad / Loss

97,347,000

100%

97,347,000

* General provision is kept @ 2% on Consumer Financing (House Financing & to Professionals) and Small Enterprise Financing, 5% on Other Consumer Financing and Short Term Agriculture & Micro credit and 1% on all other loans and advances.

So we find that Trust Bank Ltd. complies with the provision of loan classification as Bangladesh Bank directed and provisions against different statuses have been kept accordingly. The bank has classified its loans as Special Mention Account also and kept a provision against this loan @ 5%. We also find that the bank complies with the provision of keeping a provision @ 2% on small enterprise financing.

From the interest rates of the bank as stated earlier, we have found that the highest difference among the interest rates in the same sector is 1.5% from the mid rate of interest which does not exceed 3% as required by Bangladesh.

To comply with the provision of quarterly basis revision of loan classification Trust Bank Ltd. revises the classification of loans and related necessary provision quarterly and submit a report to Bangladesh Bank.

Besides, Trust Bank Ltd. complies with the provision of submitting the Statement of Loans Extended to the Directors of Financial Institutions on quarterly basis within the next 15 days of the following month of the quarter.

Again I have observed the approval of a Term Loan of Tk. 50 crore to BRAC by Trust Bank Ltd. The amount of loan supersedes the limit of Tk. 32.31 crore (Shareholders’ equity is Tk. 215.43 crore and the credit facility is funded, so the limit = Tk. 215.43 crore * 15%) as set by Bangladesh Bank based on share holders’ equity. As a result before granting the loan to BRAC the bank had to take a special approval from Bangladesh Bank. So TBL complies the provision regarding the limit of loan based on share holders’ equity also.

Trend Analysis of Different Credit Lines of TBL Below we shall see the performance analysis of different credit lines of Trust bank Ltd from 2004 to 2007 through graphical presentation.

8.1 Overdraft From the table we find that the trend of Overdraft is increasing over time. It is quite satisfactory. TBL has no risk on this credit, because Trust Bank provides Overdraft by keeping 100% security. So interest income is certain in this credit.

Overdraft YEAR Amount

2007 12323004303

2006 3747855568

2005 2683519276

2004 2031240321

OVERDRAFT 15000000000

AMOUNT10000000000 5000000000

0

2007 2006 2005 2004

YEAR

8.2 Car Loan Car loan is increasing over time. Trust Bank has a good performance in this regard. It is also a profitable credit line.

Car Loan YEAR Amount

2007 30181894

2006 28277050

2005 26758040

2004 16997368

CAR LOAN 40000000 30000000

AMOUNT 20000000 10000000

0

2007

2006

2005

2004

YEAR

8.3 Staff Loan Trust bank gives loans to its staffs at a flexible rate. The staff loan is increasing because with the expansion of branches its staffs are also increasing. The motive of this credit is not to earn profit rather than to provide facility to its officials.

Staff Loan 2007 96701751

AMOUNT

YEAR Amount

2006 46158884

2005 20943257

2004 11225088

STAFF LOAN

150000000 100000000 50000000

0 2007

2006

2005

2004

YEAR

8.4 Consumer Durable Loan Scheme It is a product of retail banking department. Consumer durable loan was highest in 2004 among last 4 years.

Consumer Durable Loan YEAR Amount

2007 32072590

2006 25868706

2005 25697584

2004 33037145

CONSUMER DURABLE LOAN 40000000 30000000 AMOUNT

20000000 10000000

0

2007

2006

2005

2004

YEAR

8.5 Apon Nibas Loan It is a term loan (usually mid term). House building loan has an increasing trend in return.

TBL’s performance is better in this regard.

House Building Loan

YEAR Amount

2007 677554651

2006 397726271

2005 100226839

2004 89164634

HOUSE BUILDING LOAN 800000000 600000000 AMOUNT

400000000 200000000

0

2007

2006

2005

2004

YEAR

8.6 Loan against Trust Receipt It is provided to the trustworthy clients. It is an import finance. Among last 4 years the highest amount is provided in 2007.

Loan against Trust Receipt YEAR Amount

2007 3177579488

2006 1823806937

2005 2044412443

2004 987849930

8.7 Marriage Loan Marriage loan is reducing day by day. It is mainly provided to the Army officials against their salary.

Marriage Loan YEAR Amount

2007 67212516

2006 74034648

2005 81896327

2004 87350560

8.8 Term Loan It is the main long term loan of TBL. The major source of interest income is term loan. The graph shows that it is increasing with the expansion of Trust Bank.

Term Loan 2007 3455665526

2006 1774037159

AMOUNT

YEAR Amount

2005 834564116

2004 284342327

TERM LOANS

4000000000 3000000000 2000000000 1000000000

0 2007

2006

2005

2004

YEAR

8.9 Time Loan Time loan is another major short term loan. Among the last 4 year TBL provides the highest loan in 2006. In 2007 the performance of this loan is not satisfactory.

TIME LOANS YEAR Amount

2007 378641271

2006 477720151

2005 365358941

2004 328511506

TIME LOAN 500000000 400000000 TK

300000000 200000000 100000000 0

1

2

2007

3

2006 2005 YEAR

4 2004

8.10 Payment against Document It is an import financing provided for 21 days. In 2007 payment against document is highest.

So the performance of this loan is good.

Payment against Document YEAR Amount

2007 384910469

2006 114475493

2005 257493793

2004 209007234

TK.

PAYMENT AGAINST DOCUMENT 500000000 400000000 300000000 200000000 100000000

0 2007

2006

2005

2004

YEAR

9.1 Recommendations for the Credit Division of TBL •

The credit policy of Trust Bank is very restrictive and defensive. As a result, its loan sanction procedure is somewhat complex. The loan policy and loan sanction procedure should be made flexible and easy.

•

Trust Bank, usually, does not provide overdraft without full coverage of security, i.e., TBL only provides Secured Overdraft. As a result, its overdraft facility is not expanding.

•

Trust Bank has little attention about publicity and advertisement. As a result, most of the consumers are unaware about the bank. So extensive publicity and advertisement is required. Trust bank can set up bill board and it can sponsor different social program to introduce TBL.

•

Trust bank holds huge reserves and fund that are not utilized. As a result, huge opportunity cost is incurred by TBL. So TBL should provide more loans to the profitable credit line.

•

Trust Bank has introduced retail banking in recent time. But the rules and loan sanction requirement is so strict and conservative that retail banking department is not in satisfactory position.

•

Bank should use automated and electronic modern equipments like ATM, debit card, credit card, and smart card extensively.

•

Trust bank’s training programs can encourage their trainees to seek additional education including computer classes, accounting, MBA programs and foreign language instruction. So the training should be full fledged.

•

The number of employees & Officers should increase for operating official activities smoothly.

•

In the credit department, strict supervision is necessary to avoid loan defaulters. The bank official should do regular visit to the project.

9.2 Conclusion Trust Bank Limited is a 3rd generation bank in Bangladesh and has a strong position in the today’s competitive market. It has some features which makes the bank quite different in the private sector. The bank has a tremendous management side that is still trying to make the bank more successful.

Trust Bank Ltd. has incorporated in 1999 but within this short period of time it has achieved a good position and is continuously upgrading itself with a view to be competitive and to attain the leading position of the banking industry. The bank renders service accuracy, friendliness, new ways of meeting customer needs and good quality of services.