1 Internship Report“Credit Policy and Performance Analysis”

Pubali Bank Limited View Prepared for

Mr. Kamruzzaman Titu

Prepared By Suvongkar Banik

Roll No: 9952235

Reg No:9997502

BBA

2

National University of Bangladesh

Gazipur, Bangladesh

Internship Report on

“Credit Policy and Performance Analysis” – A Pubali Bank Limited View”

3

Letter of Transmittal

June, 30,2014

Mr. Kamruzzaman Titu

Lecturer, School of Business

Bangladesh Institute of Science And Technology (BIST)

122, New Kakrail, Dhaka-1000

Subject: Submission of the Internship Report.

Dear Sir,

4I am intended very happy of submitting the internshipreport entitled “Credit Policy and PerformanceAnalysis” – A Pubali Bank Limited View”. A report isbased on my internship program.

The whole report is prepared on the basis of practicalexperiences in Pubali Bank Limited, Foreign ExchangeBranch, analyzing Annul Report, Prospectus, variousacademic books and journals and Internet also. I havefollowed your guidelines as per your direction. I havetried enough to furnish all the materials. What I haveachieved during the service period I shall be highlygrateful if you kindly accept this Internship Report.This report is one of very significant as it is one ofthe most important requirements of completing BBAprogram this report is a brief’ summary of work andexperience gained during the service period. I will bepleased to answer any query of you thereby.

Sincerely yours,

Suvongkar Banik

BBA (Major in Finance)

Roll No: 9952235

Reg No: 9997502

STUDENT’S DECLARATION

5

I declare that the report entitled “An Internship Report on “Credit Policy and Performance Analysis” – A Pubali Bank Limited. Pubali Bank Limited, Foreign Exchange Branch, submitted as requirements of BBA of National University, Bangladesh was prepared by me. I wastried my best to collect necessary information that made the report specific and original. I may assure you that the report was uniquely prepared by me.

Suvongkar Banik

National university of Bangladesh

BBA (Major in Finance)

6 Roll No: 9952235

Reg No: 9997502

The successful accomplishment of this project work isthe outcome of the contribution of number of people,especially those who have given the time and effort toshare their thoughts and suggestions to improve thereport.

At the beginning, I would like to pay my humblegratitude to the Almighty Allah for giving me theability to work hard under pressure & complete theresearch paper successfully. However, the spaceinvolved does not allow us to mention everybodyindividually. It gives me immense pleasure to thank alarge number of individuals for their cordialcooperation and encouragement who have contributeddirectly or indirectly in preparing this project. .

I would like to thank my honorable course instructor“Mr. Kamruzzaman Titu” for asking me to prepare thisreport and for providing me proper guidance to work onthis company analysis. It is an opportunity for me totranslate into action the directives of my learnedinstructor and prove my worth in the preparation of thereport confidently. I gathered a lot of knowledge and

ACKNOWLEDGEMENT

7information and practical experience while working onit. I really want to express my heartiest gratitude tohim for his valuable advice and time that he gave me,which helped me prepare this company analysis.

I am very grateful to Mr.Zeauddin Ahmed,AGM of PubaliBank Foreign Exchange Branch, where I completed myinternship program and all the employees especiallySenior Officer of Loan Department Mr.M.A.Khair Khan,SPO,Mr. Swapan Kumar Mridha, Principal Officer, Mr. MD.Nasiruddin, Senior Officer, Mrs. Amina Akter, SeniorOfficer and Mr. S.M. Noman Farhad , Officer of PBL, fortheir hearty co-operation in the learning process aboutPubali Bank: General Banking System & Loan Proceduresin particular. I would also convey my thanks to all theemployees for their beloved manners and attitudes shownto me during the program.

Last of all I would like to express my thanks to theauthors, researchers, article writers whose books andarticles I consulted and my family who helped me inevery stage of the report by providing valuableinformation and suggestion in respect of preparing thisreport.

Abbreviations

8ATM -Automated Teller Machine.

CAD -Central Accounts Department.

DD -Demand Draft.

EFT - Electronic Fund Transfer

CIB - Credit Information Burro

WUMT- Western Union Money Transfer.

F.R.P.P - Foreign Remittance Payment Project.

GDP - Gross Domestic Products.

CAP- Credit Approval Process.

IBCA - Inter Bank Credit Advice.

PO- Payment Order.

MG - Money Gram International.

MIS - Management Information System

MTO -Money Transfer Organization.

SME -Small and Medium Enterprises.

PBL- Pubali Bank Limited

BB- Bangladesh Bank

CM-Credit memorandum

RM- Relationship Manager

CRM- Credit Risk Management

KYC-Know Your Customer

ZCO-Zonal Credit Officer

9HOC-Head of Credit

Banking sector comprises an important segment of the financialinfrastructure of a nation. Today banking has become the mostessential parts of our life and the central driving force of everyeconomy. It moves the heart of the economy in each country. Most ofthe financial transactions are now being made through the bank.Worldwide, banks have become the center points of the economy andBangladesh is no exception. Banks are playing vital role in oureconomy. As a first phase of gathering practical knowledge aboutModern Banking I am doing service at Pubali Bank Limited where myconcerned area was Credit Policy and Performance Analysis.

The Bank was initially emerged in the Banking scenario of the thenEast Pakistan as Eastern Mercantile Bank Limited at the initiative ofsome Bangle entrepreneurs in the year 1959 under Bank Companies Act1913. After independence of Bangladesh in 1972 this Bank wasnationalized as per policy of the Government and renamed as PubaliBank. Pubali Bank limited is the largest Commercial Bank in PrivateSector in Bangladesh. It provides mass banking services to thecustomers through its branch network all over the country. This Bankhas been playing a vital role in socio-economic, industrial andagricultural development as well as in the overall economicdevelopment of the country since its inception through savingsmobilization and investment of funds.

To provide credit facilities to customers of PBL with care andcompetence and institute PBL as the ideal credit service provider inthe country in terms of wide range of credit products, competitiveprice, adherence to credit norms, exercising due diligence andeffective management of risk assets. The credit division is anindependent division in Pubali Bank limited. This division basicallydeals with the extension of credit to the worthy clients and thus tomake a profit from the interest charges. The bank invests the money ofthe depositors and thus the credit division has to be very cautious interms of credit extension. There are Relationship Managers (RM) in the

Executive Summary

10branches who have the responsibility to gather valued client where thebank can invest. When a client applies for certain amount of credit,the credit officers first assess the financial and operationalviability of the client and prepare a call report. If the boardapproves of disbursement and the client fulfills all the necessarylegal and procedural requirements, then only the loan is sanctioned. Asanction advice is prepared and provided to the client. Beforeextension of loans, a comprehensive credit risk appraisal is done andannual reviews are made. A credit memorandum (CM) is prepared by theRelationship Manager (RM) which includes the findings of suchassessment. The RM used to be the owner of the customer relationshipand he / she is held responsible for complying with all the policiesand guidelines of Bangladesh bank, bank laws, PBL policies andguidelines etc. According to Bangladesh Bank guidelines, all Banksshould adopt a credit risk grading system. Therefore, PBL has dulyimplemented a credit risk grading policy in its credit risk assessmentprogram. The system defines the risk profile of borrower’s to ensurethat account management, structure and pricing are commensurate withthe risk involved. (Focus Group on Credit Risk Management, (2005),Credit Risk Management: Industry Best Practices, Managing Core Risksof Financial Institutions, Bangladesh Bank). Before commencing thecredit approval process, a proper credit analysis is done throughCredit Memorandum. No credit facility may be approved unless asatisfactory presentation package has been prepared. To minimizecredit losses, monitoring procedures and systems are in place thatprovides an early indication of the deteriorating financial health ofa borrower.

As a modern bank PBL should go for a technological revolution in allover the organization. The project will be costly but not impossibleusing our own technology. Bangladeshi programmers and technicians canbe used here for reducing the cost. The automation in credit policyand performance analysis will establish PBL as a pioneer of newgeneration banking in Bangladesh. Also PBL will able to grow morerapidly than present.

Table of

11 Description

Page no

1.0  Chapter One: Introduction 12

1.1 Origin of the Report: 12 1.2 Background: 12 1.3 Objectives of the report: 13 1.4 Scope: 13 1.5 Sources of information: 14 1.6 Methodology: 14 1.7 Limitations: 152.0 Chapter Two: Pubali Bank Limited 15 2.1 Background of Pubali Bank Limited:

15

2.2 Vision Statement: 16 2.3 Mission Statement: 16 2.4 Goals of Pubali Bank Limited:

16

2.5 Core Objectives: 17 2.6 Business Objectives: 17 2.7 Strategies: 17 2.8 Business Philosophy of Pubali Bank Limited:

17

2.9 Strength of Pubali Bank Limited:

18

2.10 Board of Directors: 19 2.11 Capital Position: 19 2.12 Product and Services: 19 2.13 New Product and Services: 21 2.14 Correspondent Banking Relation:

21

2.15 Corporate Social 21

12 Responsibility (CSR): 2.16 SWOT ANALYSIS:  23 2.17 Pubali Bank Limited: Online Banking:

23

2.18 Deposits: 25 2.19 Advances: 25 2.20 Investments: 25 2.21 Position of Profit & loss:

26

2.22 Human Resources: 26 2.23 Pubali Bank Limited’s FiveYears’ Financial Positions:

27

3.0 Chapter Three: Credit Policy of Pubali Bank Limited

28

3.1 Credit Overview in Pubali Bank Limited:

28

3.2 Types of Advances: 28 3.3 Portfolio Management of Credit:

29

3.4 Selection of Borrower: 30 3.5 Processing of Credit: 30 3.5.1 Credit Report: 31 3.5.2 CIB Report: 31 3.5.3 Visiting Client: 32 3.5.4 Credit Line Application Form:

32

3.5.5 Supporting Documents:

34

3.5.6    Analysis of Client’s account:

34

13 3.6 Project Financing Evaluation:

35

3.6.1 Project Evaluation:

35

3.6.2 Technical & Market Appraisal:

36

3.6.3 Financial Projections and analysis:

38

3.6.4 Managerial Aspect:

39

3.6.5 Socio-economic Aspect:

39

3.7 Pricing of Loan: 39 3.8 Approval Process: 40 3.9 Post sanctions process: 41 3.10 Documentation: 41 3.11 Creation of Charges over Securities:

42

3.12 Securities and Advances: 43 3.13 DISBURSEMENT: 43 3.14 Monitor/ Control of CreditOperations:

45

3.14.1 Control of overdrawn accounts:

45

3.14.2 Control of loans:

47

3.14.3 Control of other Credit facilities:

48

3.15 Handling of Delinquent Loan/Advance:

50

3.15.1 Identificationof Delinquent Advances:

50

3.15.2 Monitoring of 51

14 the delinquent accounts: 3.16 Loan Classification- Provisioning:

51

3.17 Reservation of Provision: 53 3.18 Treatment of Interest Suspense:

54

3.19 Identification of Possible Recourses for Recovery of Delinquent Debts:

54

3.20 Litigation and Costs: 54 3.21 Loan Loss Provision: 55 3.22 Write Off: 554.0 Chapter Four: Credit Management Guidelines by Bangladesh Bank

56

4.1 Policy Guidelines: 56 4.1.1 Lending Guidelines:

56

4.1.2 Credit Assessment: 58 4.1.3 Risk grading: 60 4.2 Preferred Organizational Structure & Responsibilities:

64

4.3  Procedural guideline: 64 4.4 Credit Administration: 66 4.4.1Disbursement: 66 4.4.2 Custodial Duties: 66 4.4.3 Compliance Requirements:

67

4.5 Credit Monitoring: 67 4.6 Credit Recovery: 68 4.6.1 NPL Account Management:

69

4.6.2 Account Transfer Procedures:

69

15 4.6.3  Non Performing Loan (NPL) Monitoring:

70

4.6.4 NPL Provisioning and Write Off:

70

4.7 Single Borrower Exposure Limit:

71

5.0 Chapter Five: Policy Comparison with Bangladesh Bank

74

5.1 Portfolio Comparison: 74 5. 2  Single Borrower/ Group Limits:

74

5.3 Credit Assessment: 74 5.4 Risk grading: 75 5.5 Approval Authorities: 76 5.6 Credit Process: 76 5.7 Segregation of Duties: 76 5.8 Preferred Organizational Structure:

77

5. 9 Approval Process: 77 5.10 Credit Administration: 77 5.11 Credit Monitoring: 85 5.12 Credit Recovery: 85 5.13 Account Transfer Procedures:

86

5.14 Non-performing Loan Account Management:

86

6.0 Chapter Six:Operational Performance of Pubali Bank Ltd.

87

6.1 Amount of Loans and Advances:

87

6.2 Type-Wise Loans & Advances Portfolio:

88

6.3 Maturity wise Loans andAdvances:

88

6.4 Sector-wise Concentration of loans & Advances:

88

6.5 Location-Wise Loans & Advances:

89

6.6 Classified, Unclassified, Doubtful & Bad Loans & Advances:

90

6.7 Measuring Returns of Pubali Bank Limited:

90

7.0 Chapter Seven: Conclusion 91

16

Chapter One: Introduction

1.1 Origin of the Report:The research paper has conducted on “Credit Policy andPerformance Analysis of Pubali Bank Limited”. This report is apartial requirement of Research Paper of BBA program. Beforepreparation this report I am more experienced in my Bank’spractical activities & on the job training at Pubali BankLimited, foreign exchange Branch, Dhaka. Practical problems havearranged me for preparing this type of Research.

17 1.2 Background:Throughout the last few years Bangladesh has been experiencing arapid and significant change in the banking sector. Not only inour country, all over the world the dimension of banking has beenchanging rapidly mainly due to the technological innovation,globalization and deregulation. This change all over the worldhas significantly affected the banking industry of our country,the result of which is the change in this sector in our country.Now the condition is such that banks must compete in the marketplace both with local institutions as well as foreign ones.

Pubali Bank Limited is the successor of the erstwhile EasternMercantile Bank Limited incorporated in 1959 under the CompaniesAct 1913. Eastern Mercantile Bank Ltd was nationalized underBangladesh Bank's (Nationalization) Order 1972 and was renamed asPubali Bank.

It was denationalized on 30 June 1983 under the Bangladesh Bank's(Nationalization) Amendment Ordinance 1983. Since inception thisBank has been playing a vital role in socio-economic, industrialand agricultural development as well as in the overall economicdevelopment of the country through savings mobilization andinvestment of funds. After being handed over to the privateownership and management, Pubali Bank consolidated its businessand profitability and earned profits in the years 1985 to 1989.However with the increase in classified loans and advancesespecially to Govt. and Semi Govt. sector, and due to theimplementation of the financial sector reform program of theGovt. in 1989 requiring strict classification provision, the Bankfell into catastrophe and started to incur loss.

Through the efforts of the management, the Bank started makingoperating profit from 1994. In 1996 Bangladesh Bank identifiedPubali Bank as a problem bank considering the capital inadequacy,provision shortfall, amount of classified loans etc and the Boardsigned a Memorandum of Understanding with the central bank toregularly report on the improvements in these areas. Pubali Bankhas improved its performance in the recent years.

18The Bank expanded its operation through opening 5 new branches atdifferent places during the year 2013. As such the total numberof branches of the bank stand at 423 all over the country.

At Present, Pubali Bank is the largest private commercial bankhaving 429 branches and it has the largest real time centralizedonline banking network. 

Credit risk management needs to be a robust process that enablesbanks to proactively manage loan portfolios in order to minimizelosses and earn an acceptable level of return for shareholders.Given the fast changing, dynamic global economy and theincreasing pressure of globalization, liberalization,consolidation and dies-intermediation, it is essential that bankshave robust credit risk management policies and procedures thatare sensitive and responsive to these changes. So it is very muchhelpful to me to work my internship is such an area.

1.3 Objectives of the report:Objectives assist the researcher to advance objectively. Thefollowings objectives may be with this identified study aspresented below:

Knowing the credit policy and credit operation model. Knowing lending products of the Pubali Bank Limited. Knowing the interest rates and fees of loans. Knowing the process of selecting borrowers. Knowing about the loan recovery System Knowing about the loan classification. To critically analyze the credit policy of Pubali Bank

Limited. To evaluate the credit performance. To conclude whether the credit policy compliances with

present situation.

19 1.4 Scope:The report is an attempt to state the credit policy of PubaliBank Limited as compared to Bangladesh Bank Credit PolicyGuidelines and to evaluate credit performance. A detailed creditpolicy including borrower selection, credit worthiness analysis,credit approval process, credit disbursement & monitoring, creditadministration etc. has been explained and compared. The creditperformance of bank has analyzed with implementing credit policy.After completion of research, it is helpful to me to understand atotal loans and advanced related works of a bank.

1.5 Sources of Information:The sources of information are both primary and secondary whichhas given as follows:

Primary Sources:

Practical Desk work. Conversation with credit officers and managers. Conversation with clients.

Secondary Source:

Practical case problems. Manual of Credit division. Bangladesh Bank Circulars Annual reports of Pubali Bank Limited. Different manuals, books, existing soft information.

1.6 Methodology:

20Sample Design:  The study represents comprehensive data of PubaliBank Limited and Bangladesh Bank credit management guidelines.

Collection of information: To conduct this study considerableinformation and expert opinion will be collected from primary aswell as secondary sources.

Processing of information: A careful and systemic processing ofinformation facilitates comparison and evaluates performance tomake decision whether the policy compliances with presentsituation.

Analysis and interpretation: The information has been collectedwill be duly analyzed and interpreted as to achieve the desiredobjectives. Credit policy data has analyzed by comparison andcredit performance evaluation is done by trend analysis

Final Report Preparation: The final report has been prepared onthe basis of presentation, analysis and interpretation of theinformation.

1.7 LimitationsTo conduct research, there are many problems arisen, which hasthe purpose of the report. The limitations are:

It was very difficult to collect data from such a bigorganization.

Sufficient books, publications, facts and figures arenot available. These constraints narrowed the scope ofaccurate analysis

Difficult to collect information as concern people arereluctant to disclose information.

Credit management is a too big to cover wholly in thislimited scope. It required huge time and huge space tocover. So, I have covered only some important topics ofcredit management.

21 Access to only a number of information sources. Non-availability of secondary data.

Chapter Two: Pubali Bank Limited2.1 Background of Pubali Bank Limited:Pubali Bank Limited (PBL) was incorporated as Eastern MercantileBank Limited in 1959 as per the companies’ act 1913 with 60percent equity owned by the then few East Pakistanis. Rest 40percent shares were owned by the State Bank of Pakistan. Thefounding chairman was Mr. O R Nizam from Chittagong. The otherfew founding members were Mr. M R Siddiqee, Dr. Naimur Rahman,Mr. M H Chowdhury and Khan Bahadur Mojibur Rahaman.After theindependence, as per the nationalization policy of thegovernment, this bank was nationalized by the Bangladesh Bank(Nationalization) Order – 1972 (PO no. 26 of 1972) and wasrenamed as Pubali Bank. After 12 years of nationalization,according to the privatization policy of the government the bankwas privatized in 1984 and renamed as Pubali Bank Limited (PBL).During the denationalization 160 rural branches were handed overto Bangladesh Krishi Bank. The Government of the People'sRepublic of Bangladesh handed over all assets and liabilities ofthe then Pubali Bank to the Pubali Bank Limited. Since thenPubali Bank Limited has been rendering all sorts of CommercialBanking services as the largest bank in private sector throughits branch network all over the country. Now Pubali Limited Bankis the largest private commercial bank having 423 branches allover the world and it has the largest real time centralizedonline banking network. 

To provide client services all over Bangladesh it has establisheda wide correspondent banking relationship with a number of localbanks. To facilitate international trade transactions, it has

22arranged correspondent relationship with large number ofinternational banks which are active across the globe.

2.2 Vision Statement:Providing customer centric lifelong banking services. Pubali BankLimited dreams of better Bangladesh, where arts and letters,sports and athletics, music and entertainment, science andeducation, health and hygiene, clean and pollution freeenvironment and above all a society based on morality and ethicsmake all our lives worth living. Pubali Bank Limited’s essenceand ethos rest on a cosmos of creativity and the marvel-magic ofa charmed life that abounds with spirit of life and adventuresthat contributes towards human development.

2.3 Mission Statement: To be the most respected and preferred brand among all

financial services providers in Bangladesh. Providing a superior value proposition to the customers by

fulfilling their financial needs in the fastest and mostappropriate way.

To provide world class finance, capital and risk managementproducts bundled with diversity and differentiation,delivered economically through the client’s choice ofdistribution channel recognizing the unique lifetimefinancial needs of clients.

To build an empowering organization with the structure,career development, training and rewards to ensure thevision is achieved.

Using flexible technology, scale and risk management toensure our services are of superior value.

 2.4 Goals of Pubali Bank Limited: Providing appropriate long term returns to our shareholders

and to become the number one bank of all private commercialbank.

23 Serve institutions, corporate, businesses and individuals

through Customer Relationship management (CRM). Develop innovative and new products recognizing the unique

lifetime financial needs of customers. Enhancing Corporate Governance for effective interaction

between various participants i.e. shareholders, board ofdirectors, bank’s management and taking effective decisionto ensure corporate success and economic growth.

Streamlining risk and compliance for shareholdersconfidence, better operating performance and optimal risk-reward outcomes.

Continuous enrichment of its human assets so that theydeliver values to the business.

Strengthening brand image for creating higher customersatisfaction and loyalty.

Adapting latest technologies and responding quickly in fastchanging market scenario for providing uninterruptedservices and business continuity, minimizing risks andmoving towards MIS and DSS.

Enhancing financial inclusion efforts for sustained higheconomic growth and development.

Institutionalize CSR.

2.5 Core Objectives:Pubali Bank Limited believes in its uncompromising commitment tofulfill its customer needs and satisfaction and to become theirfirst choice in banking. Taking cue from its pool of esteemedclientele, Pubali Bank Limited intends to pave the way for a newera in banking that upholds and epitomizes its vaunted Marques“Your Trusted Partner.”

 2.6 Business Objectives: Build up a low cost fund base. Make sound loans and investments. Meet capital adequacy requirement at all time. Ensure 100% recovery of all advances. Ensure a satisfied work force.

24 Focus on fee-based income. Adopt appropriate management technology. Install a scientific MIS to monitor Bank’s activities.

 2.7 Strategies: Synchronized and steady growth of the bank. Utilize all available resources to develop various plans,

policies and procedures in each of the objective and goals area.

Implement plans, policies and procedures. Draw upon the connections, advice etc. of the foreign

partners. Utilize a team of professional employees. Search for a customized solution of IT for the purpose of

full automation step by step.

2.8 Business Philosophy of Pubali Bank Limited:The objectives of Pubali Bank Limited remain to offer modern &innovative products & services to its client’s in Bangladesh. Thepartnership with FMO is optimistically scene to offer scopesopportunities to draw on modern tools & techniques of bankingfrom western world which could be blended with the currentlyprevalent local customs & practice. The Bank is committed tobeing a sophisticated prominent and professional institution,providing a one window service to its customers. During the firstfive years Pubali Bank Limited Bank’s strategy was focused oncontinuing in provident of internal procedures and operatingstructures, to have a greater control on the quality of ourbusiness and to provide better management direction. After fiveyears of working on the Banks structure, its culture andcontrols, the management is confident that the Bank can moveforward on a rapid growth path. The Pubali Bank Limited’scorporate philosophy is to build its non-funded fee andcommission income stream, thus reducing its reliance on interest

25income alone. Pubali Bank Limited’s focus is to provide onecounter service to the clients covering:

a) Commercial Banking ( Deposit Accounts), b) Consumer Banking(Retail Baking ), c) Traveler Cheque, d) Foreign & InlandRemittances, e) Financial Services, f) Corporate Banking, g)Asset & liability management , h) Liquidity & capital ResourcesManagement, i) Information technology  and j) Human Resources.

2.9 Strength of Pubali Bank Limited: Pubali Bank Limited is the largest commercial bank in the

private sector of our country and first Real timeCentralized Online banking network in Bangladesh with 427online branches.

Pubali Bank Limited directors and /or their family membersdo not maintain any sort of bank account with Pubali BankLimited, since its inception.

Pubali Bank Limited’s directors do not avail of anyfacility or even any fee/remuneration from the bank forattending the meetings of the Board/ExecutiveCommittee/Audit Committee.

Pubali Bank Limited’s sponsoring shareholders did not takeany dividend for the initial 5 years in order to increasethe capital base of the bank.

Pubali Bank Limited allows all local remittances such asTT, DD, PO etc. free of cost.

Pubali Bank Limited’s classified loan as on December 31,2013 is only 5.94% of total loans and advances.

Pubali Bank Limited’s authorized capital and paid upcapital as on December 31, 2013 stood at Taka 2000.00 croreand Taka 838.45 crore respectively.

Pubali Bank Limited’s capital adequacy ratio (CAR) as onDecember 31, 2013stood at 11.73% as against BangladeshBank’s minimum requirement of 10.00%.

Pubali Bank Limited maintains general provision onunclassified loans and Advances @3% instead of minimumrequirement of 1% as set forth by Bangladesh Banks loanprovisions.

26 Pubali Bank Limited expands free medical facilities under

its “Rural Health Service Program” to the members of thegeneral public around the rural branches.

Pubali Bank Limited support humanitarian and philanthropicactivities and causes and spends a substantial amount fromits income for these purposes.

pubali Bank Limited promotes different socio-culture andsports activities.

Pubali Bank Limited helps the distressed employees of Ranaplaza tragedy at savar donated tk.2.27 Crore in the reliefFund of our Honorable Prime Minister in 2013.

Pubali Bank Limited provides 12.18% of its total advancesas Term loan and a substantial amount as working capitalloan to support industrial development and boost up exportearnings of the country.

Pubali Bank Limited Global growth has increased veryslightly from an annualized rate of 2.5% in the second halfof 2012 to only 2.75 in the first quarter of 2013.

Pubali Bank Limited has earned an operating profit oftk.813.14 Crore in spite of all national and internationaladversities and able to achieve operating profit growth27.24% in 2013.

Pubali Bank Limited’s objective is not only to make profit,but also simultaneously contribute towards social and humandevelopment through various altruistic activities.

2.10 Board of Directors:Chairman Mr. hafiz Ahmed MazumderVice Chairman Mr. Habibur RahmanDirector Mr. Moniruddin AhmedDirector Mr.Syed Moazzem HussainDirector Mr. Muhammad Faizur RahmanDirector Mr. Ahmed Shafi ChowdhuryDirector Mrs. Suraiya RahamanDirector Mr. Fahim Ahmed Faruk ChowdhuryDirector Mr. Rumana SharifDirector Mr. Mustafa Ahmed

27Director Mr. Musa Ahmed Director Mr. Azizur RahamanDirector Mr. M. Kabiruzzaman Yaqub FCMA(UK) & CGMADirector Mr. Khurshid-ul-alam, Independent DirectorDirector Dr. Shahdeen Malik, Independent DirectorManaging Director&CEO Mr. Helal Ahmed Chowdhury

Chief Financial Officer Mr. Sayeed Ahmed FCA,ACMA,CGMA

Company Secretary Mr. Md. Sayeed Sikder

2.11 Capital Position:The Authorized Capital of the bank is Tk.20000.00 million. As pervendors agreement dated 31 December, 2013 the Pubali bank limitedhas paid Tk.8384.51 million by issuing shares to the government.The total shareholder’s equity of the bank stood at tk. 20305.49million on 31 December, 2013 along with reserve and undistributedprofit of tk. 11920.99 million.

2.12 Product and Services:Pubali Bank Limited Bank’s aims are to provide services to theclients like friends.  For that reasons, the bank offersdifferent products and services for its clients, Pubali BankLimited has never compromised the quality of services. PubaliBank Limited believes customers are the heart of the bankingbusiness. To provide better services, Pubali Bank Limited offersdifferent product for its clients.

Depository Product

28Pubali Bank Limited is now offering the following depository products for mobilizing the deposits from the people.

1. Fixed Deposit 7. Pubali Pension Scheme2. Saving deposit Account 8. Monthtly Profit Based Fixed

Deposit3. Dwigun Sanchaya Prakalpo

9. Special Notice Deposit (SDN)

4. Pubali Sanchaya Prakalpo

10. Monthtly Profit Based Small Deposit

5. Shiksha Sanchaya Prakalpo

11.  Current Account

6. Target Based Small Deposit

Loan Product

1. Car Loan 6. Import Financing2. Flat Purchase Loan 7. Export Financing3. Household Durable Loan 8. Emergency Staff Loan4.Medical Equipment loan 9. Staff car Loan5. Govt. Primary School Teacher Loan

10.Demand Loan

SME Banking

1. PBL Sujon Rin2. PBL Suborno Rin3. PBL Kormo Uddogh Rin4. Pubali Prochest5.Demand Loan

Islamic Banking

1.Al-Wadeeah Current A/C 2. Mudaraba Savings Account3. Mudaraba Short Notice Deposit 4. Mudaraba Term Deposit Receipt

295. Mudaraba Deposit Pension Account5. Mudaraba Hajj Savin

2.13 New Product and Services:The Bank has its concentration for new product and developedservice for satisfying its customer and increasing its customerbase. They prefer now faster service with least cost. Fordelivering faster service the bank has introduced online bankingservice. There are other new products and services that PubaliBank Limited has introduced. They are:

i) Truly Online Banking Services, ii) Internet BankingServices, iii) SWIFT services, iv) L/C Delivery Services,v) Locker Services, vi) ATM services.

 2.14 Correspondent Banking Relation:To deliver prime services to the valued clients, Pubali BankLimited has continued its efforts to reach every corner of theworld with the establishment of an effective correspondentrelationship across the globe. At present Pubali Bank Limited hascoverage in more than 110 countries through more than 100 worldclass banks. Pubali Bank Limited maintains adequate number ofnostro accounts with key players in the world money market tofacilitate export and import payment needs of the clients. PubaliBank Limited also achieved another milestone by installing SWIFTto channel remittance flow in a fast and effective way. PubaliBank Limited is also considering establishment of exchange housesin some prospective locations abroad and/or Taka Drawing

30Arrangement with internationally reputed exchange houses tosupport governments effort of a building a comfortable foreignexchange reserve through channeling inward remittance.

2.15 Corporate Social Responsibility (CSR):

Pubali Bank's response to corporate social responsibility is embodied by the concept of responsible banking, which is imbibed in the way we do business and drive the objectives of the Bank to be the best financial institution in Bangladesh. We recognize our obligations to the society, so we are committed to always making informed, reasonable and ethical decision in the manner we carry outOur business, how we treat our employees, and how we relate to our customers.Our CSR initiatives over the years have focused on health care, sports, education and youth development, the arts, philanthropy and charitable activities.

Health Care

Because we believe that good health is a critical condition for rapid socio-economic development of the country, the Bank has donated or funded large volumes to set up state of an art facility to various hospitals across the country to underline its commitment to ensure availability of health service to all at affordable cost and thus saving exodus of foreign currencies.

Pubali Bank Limited has donated Tk. 10 (ten) crore to Dhaka Ahsania Mission, a humanitarian organization, towards setting up a state of the art modern Cancer hospital to alleviate the sufferings of peoplewho have currently no access to specialized medical treatment of Cancer. In Bangladesh, there are minimal cancer facilities and many people in both urban and rural areas of the country are dying due tolack of hospitals and doctors, to serve their cancer needs. It is estimated that there are 1,000,000 people in Bangladesh who already have cancer and 200,000 new patients are added each year. Currently,with existing hospital facilities, Bangladesh has the capability to serve 20,000 patients each year - which means that 180,000 patients

31go altogether unserved - thousands of them will needlessly suffer and ultimately die without any cancer care. The Ashania Mission Cancer and General Hospital will serve approximately 73,000 patientseach year, preventing as many as 40,000 deaths and reducing the suffering of approximately 270,000 patients all over Bangladesh. Pubali Bank Limited has also donated Tk. 2 (two) Crore to ENT CancerHospital. Apart from direct donation, Pubali Bank Limited from the very initiation extended credit to all big hospitals at a concessional rate of interest so that valuable foreign currency can be saved and our people can get healthcare services at affordable cost:BIRDEMIbrahim Cardiac CenterApollo HospitalUnited HospitalSquare HospitalInternational Medical College and HospitalBangladesh Medical College and HospitalLab AidGreen Life Hospital etc.

Our other areas of Corporate Social Responsibility

Regular donations to different educational institutions, disabledorganizations Sports sponsoring- Boat rowing etc.Helping the distress people for treatmentFinancial and other supports have been provided for the complicatedoperation of the own employeesFinancial support for the educational purposes and good result ofthe childrenPBL has been providing magazines and supports for extra curricularactivities to major universities

32Internship facilities to the students of the leading universitiesFor the natural calamity and national tragedy PBL always extendsits hand to help and provide financial support

PBL always extends its support to distress people throughgovernment scheme/contribution to Government Fund etc.

2.16 SWOT ANALYSIS:             InternalStrengths

1) Cost advantages competitive of products.

2) Competitive advantagesin Branch in terms of geographical coverage.

3) A distinctive competence in Deposit mobilization.

4) The Banking network.

Weakness 1) No clear strategic direction. 2) Lack of management depth & Talent. 3) Absence of formal marketing Strategies. 4) Plagued with internal operating Problem.

ExternalOpportunities 1) Serve additionalcustomer groups. 2) Offering & pricing of fee- based Products. 3) Ability to offerbetter customer Services in thebanking sector. 4) Introducing computer techniques in banking

Threats1) Growing competitive pressures,

2) Declining credit quality 3) Narrowing interest margin 4) Uncertain national economy 5) Adverse Govt. policies.

33activities.

 2.17 Pubali Bank Limited: Online Banking:The year 2013, is a landmark in the history of Pubali BankLimited, as the Bank successfully implemented its online system.Online Banking system provides better services for the customersand makes the bank cost effective. After implementing onlinesystem, customers can enjoy the following world class bankingservices at a reasonable and affordable price through the fullautomated real-time any where any branch banking servicescovering 24 hours a day:

Through Branches:

A customer can avail services with any branch of PubaliBank Limited.

Customer can withdraw or deposit money in any branch ofPubali Bank Limited.

International financial transactions can be carried out bythe on-line SWIFT interface of the banking software.

Customer can enjoy facilities of loan installment paymentsfrom savings/ current accounts, Fund transfer to otheraccounts.

  Sweep-out facility, enabling to transfer the money fromany account when it exceeds pre-defined amounts.

Sweep-in facility, enabling to bring money from anotheraccount when the first account balance falls below a pre-defined amount.

Through ATMs:

By using Pubali Bank Limited’s own ATM pools anywhere in the country, the valued customers of the Bank can perform the following functions at any time:

Account balance enquiry.

34 Cash withdrawal 24 hours a day, 7 days a week, and 365 days

a year. Cash deposit to some designated number of ATM’s at any time Mini statement printing. Statement request. Personal Identification number change. Request for cheque book. Fund transfer within his/her own account. Payment of mobile/T&T phone, gas, electricity, water,

internet, credit card bills from the customer’s savings and current account.

Payment of School/College/University fees by debiting one’s savings a/ current account.

Purchase of activation number for Mobile/Internet pre-paid card.

 

Through Point of Sale (POS) terminals :

Bill settlement at any Pubali Bank Limited POS terminals installed at strategic locations.

 

Through Internet

Through internet banking of Pubali Bank Limited, the following can be performed:

Checking of account balance. Print-out of account statement for a particular period. Transfer of fund within the customer’s own accounts. Payment of mobile/T&T phone, gas, electricity, water, and

internet bills from the customer’s account. Payment of School/College/University fees by debiting

one’s own account. Purchase activation number of Mobile/Internet pre-paid

cards. Deposit of loan installments

35 Stop cheque payments. Opening of an FDR account by debiting one’s

savings/current/STD account. Submission of L/C application online. Foreign currency exchange rates and interest rates enquiry.

2.18 Deposits:The deposit trend was positive in 2013 in spite of political turmoil. At the end of 2012, total deposit was Taka 150418.82 million that came to taka 177868.17 million at the end of 2013 showing 18.26% increase. Out of the total deposit, Time Deposit Taka 160784.89 million and Demand deposits were Taka 17093.29 million i.e. 90.39% and 9.61% respectively.

Financial Year

2008 2010 2011 2012 2013

Deposit (In million)

88466.46

98850.50

123805.97

150418.81

177878.17

 

Figure 1: Deposit Mobilization Trend.

2.19 Advances:Total advances of the bank as on 31 December 2013 stood at Taka 136940.46 million showing an increase o Taka 1471.94 million @ 12.18% growth.

36In line with national economic development, the bank made advances mainly as Commercial Loan, Import & Export business, Term loan to large and medium scale industries, House Building Loan, Working Capital Loan, Consumer’s Credit and Syndication Loans etc. Loan and advances at different level are shown in the following:

 

Financial Year

2008 2010 2011 2012 2013

Advances (In million)

74203.33

89106.21

106329.63

122068.52

136940.46

 Figure 2: Advance Mobilization Trend.

 2.20 Investments:Total investment of the bank was Tk. 48678.92 million during

2013. In comparison to previous

year total investment was increased by Taka 17987.77 million @ 58.61% growth. The bank

mainly invested in Government Bonds, Treasure Bills, Approved Debentures of private

institutions and Capital Market through own portfolio.

Financial

2008 2010 2011 2012 2013

37Year Investments (In million)

12168.65

16516.39

19069.27

30691.15

48678.92

 Figure 3: Investment Mobilization Trend.

2.21 Position of Profit & loss:Total operating income & total operating expenditure of the bankduring 2013 were Taka 12,596.76 million and Tk.5036.96 millionrespectively resulting a profit of Taka 7559.80Million beforemaking provision for bad and doubtful debts and income tax. 

During the year the bank made a provision of taka 2123.01 millionagainst loans and advances, diminution in value of investmentsexposure of off balance sheet items and provision of taka 3081.25million against corporate Income Tax and deferred tax. As such,net profit on the bank stood at taka 2305.54 million which theBoard of Directors propose to appropriate in the followingmanner.

Particulars AmountNet Profit Tk. 2305.54

millionTransferred to Statutory Reserve

Tk. 1077.36 million

Transferred to General Reserve

Tk. 1228.18 million

2.22 Human Resources:Pubali Bank Limited, since its inception, has always laidemphasis on Human Resource Development. pubaliBank Limitedbelieves in the factor that helps the banks survive is closely

38interlinked with the quality of service and satisfaction of therequirements of the clientele and that directly depends on thequalification and efficiency of  the employees. With thisobjective in view, Pubali Bank Limited excels the performance ofits member of the staff by creating opportunities throughproviding proper training, rewards and recognition. To attractand retain qualified and efficient staff.

Pubali considers human resources to be an essential ingredient ofsuccess for Bank. The Bank is committed to effective managementand development of human resources, go through the process ofstabilization, reform and modernization.

In view of the importance of the management of human resources,internal structures were changed. The accountabilities of theGeneral Manager, Administration were changed to provide greateremphasis on HR Management and development plans are under way formore radical change in the various divisions responsible formanaging human resources.

The General Manager– Human Resources Management and Development, is also leading various activities to modernize HR polices and procedures under the guidance of the HR Advisor. These improvements reflect changing pressures on the Bank and are designed to bring HR practices more in line with good practice ininternational banks Pubali Bank Limited has formulated a number of well thought policies for the welfare of its employees, in theform of gratuity funds, Superannuating fund, employees House Building Loan Scheme, Cycle/ Motorcycle / Car loan scheme, etc.

2.23 Pubali Bank Limited’s Five Years’ Financial Positions: 

Key Financials (Figures in a million taka)

   Particurars       2008 2009 2010 2012 2013

39    

Authorised Capital 5000.00 10000.00

10000,00

 20000.00

20000.00

Paid-up Capital 3822.00 4968.60 6707.61 8384.51 8384.51Reserve fund & otherReserve 5687.25 9411.27 10575.5

310420.19

11920.99

Total Deposits 88466.46

98850.50

123805.97

150418.81

177878.17

Total Advances 74203.33

89106.21

106329.63

122068.52

136940.46

Total Investment 12168.65

16561.39

19069.27

30691.15

48678.92

Import Business 60493.85

85683.53

90568.90

108120.30

97380.40

Export Business 24739.65

33909.78

47515.90

59004.80

69484.40

Bridge Finance 689 6.69 6.78 6.78 6.26

Total Income 10663.81

12828.53

15189.70

20778.37

24418.00

Total Expenditure 6824.34 7343.48 9709.48 14642.57

16858.20

Pre-tax Profit 3839.47 5485.05 5480.22 6135.80 7559.80Net Profit 2092.23 3233.09 3140.22 1761.98 2305.54

Total Assets 107579.60

128462.65

157153.71

192947.93

228533.77

Fixed Assets 1443.50 3330.32 3369.19 3502.80 3735.99Other InformationNumber of Employees 5375 5534 6219 6689 7362Number of Shareholders 30899 86200 112065 106876 102604

Number of Branches 386 399 406 419 423Earning Per ordinary share(Tk) 4.21 4.82 3.75 2.10 2.75

*Loss incurred owing to charging of cumulative provision shortfall for loans and advances as well as super annuation fund for Bank employees to comply with IAS-30 since 1972.

40 Chapter Three: Credit Policy of Pubali Bank Limited

3.1 Credit Overview in Pubali Bank Limited:In a financial system of any economy, we know, financial surpluses mobilized from surplus economic unit and transferred tothe deficit economic unit. In the banking world, the bank acts asan intermediary in between deficit economic unit & surplus economic unit. Bank mobilizes the fund from surplus economic unitas deposit & makes the fund available to the deficit unit. The style of making the fund available to the deficit unit is nothingbut creation of credit. Credit is in true sense, making provisionof fund by one party to another party under certain terms & conditions.

3.2 Types of Advances:The credit facilities granted by the bank are classified under different account heads as under:

Loan (like short/ mid/ long term in nature) Overdrafts (allowing frequent debit/credit transactions

within an agreed limit) Trade related credit facilities (like bills port folio) Short Term Advances (like continuing facilities) Contingent facilities (like Letters of Credit, Letters of

Guarantee)

Generally all facilities, except term loans are repayable on demand. Trade related credit facilities are self-liquidating in nature. Cash Credit /Overdrafts are reviewed annually or at regular intervals in case a closer monitoring of the accounts is necessary.

41Continuing Advances:

Secured Overdraft (including Collateralized overdraft one)

Cash Credit (Hypothecation)

Loan against Trust Receipts (LTR)

Loan against Imported Merchandise (LIM)

Export Cash Credit (ECC)

Loans:

Loan General (usually short term in nature)

Transport Loan

House Building Loan

Term Loan (Industrial/project financing)

Term Loan (others)

Syndication Loan

Demand Loan:

Loan against Accepted Documentary Bill (local/ foreign)

Loan against Bills Discounted/Purchased (local/ foreign documentary)

Payments against Documents (PAD)

Own Accepted Bills Purchased (Forced Loan)

Temporary Advance

42Contingent facilities:

Letters of Credit (sight/ Usance/ Back to Back)

Letters of Guarantee

3.3 Portfolio Management of Credit:Portfolio Management of Credit implies the deployment of loanablefund among alternative opportunities through proper allocation. The objective of portfolio management of credit is the best and efficient management of loan to ensure profitability. A prudent loan portfolio management can be done by careful consideration ofthe factors mentioned in the following:

i) Bank’s Capital position, ii) Deposit mix (Tenure of deposit),iii) Credit environment, iv) Influence for monetary and fiscalpolicies v) Credit needs of the respective commanding area andvi) Ability & experience of the bank personnel to handle the loanportfolio. In designing a loan portfolio, three things should bedecided: first- the type of customers the bank wants to serve,second- involvement of risks with various kinds of loans, andfinally- the relative profitability of various kinds of loans.Diversification of credit can be made by extending credit todifferent sectors, to different geographical area, to differentline of product or business and allocating the loanable fund intodifferent type of credit. Secondly, the concentration of creditinto a particular sector or area, product or business should alsobe observed carefully. If credit is already been concentrated toa particular streamline mentioned earlier that should be avoided.Finally, the type & tenure of deposit should be analyzedcarefully in determining the loan portfolio of a bank. How muchquantum of fund will be earmarked for long term lending and howmuch for short term, depends to a large extent on the depositstructure.

3.4 Selection of Borrower:

43Selection of borrower is a very significant part of a creditdecision. The borrower should be diagnosed prudently. Degree ofrisk has an inverse relationship with the selection of borrower.Selection of right borrower reduces the risk of non-repayment ofthe loan. To the contrary, degree of risk of non-repaymentincreases with the selection of wrong borrower. In our country,the huge volume of non-performing loan is mainly the result offailure in selecting right borrower. So, if it is found that lineof business is prospective and profitable but the potentialborrower is not right one, the proposal should not beentertained. There are some parameters for selection of aborrower. Some ‘C’s commonly expresses the parameters. And thusthe criteria for selection of a borrower are popularly known as 5C’s such as:

i) Character:    Market reputation, morality, family background,and promptness in repayment,

ii) Capacity:     Ability to manage the business, ability toemploy the fund in the right

way, ability to overcome unforeseenproblems,

iii) Capital:       Equity strength, assets & properties,

iv) Collateral:  The easy marketability of the properly given assecurity,

v) Condition:  Overall business condition,

If the borrower’s found satisfactory in terms of all C’s onlythen it is suggested to entertain the borrower.

3.5 Processing of Credit:Credit proposals must be prepared for all credit facilities. Theprocessing of a credit proposal falls into mainly two stages asunder:

44 Obtaining due approval of the competent authority

(Discretionary Powers) of Pubali Bank Limited Steps for allowing the client to avail the credit facility.

Management approval levels splits into following authority:

Head Office Credit Committee: The Credit Executive &Recommendation Committee (CRECOM) is responsible to review, andapprove or reject any credit limit proposals on the basis ofapproval lending policy, criteria of lending, sectorial exposure,group exposure and/ or on other genuine grounds. Credit Committeeusually sits on every week or more frequently as the need mayarise. The proposals after thorough discussion/ deliberation iffound suitable is recommended for approval by the ExecutiveCommittee of the Board through the Managing Director:

Delegated authority to the Managing Director: Under delegatedlending authority to the Managing Director, credit proposals, onetime or specific gets approval after scrutiny is done by HeadOffice Credit Division. From time to time the Managing Directormay delegate the branch managers discretionary powers with dueapproval from the competent authority.

Executive Committee of the Board: If the facilities requiredfurther approval from the executive committee of the Board, thenthe proposal send. The credit proposal has been sent to theexecutive committee of the Board if the credit committee thinksto require further approval.

Credit limit proposal originates in the branch. Proposal afterdue checking, analysis is sent with recommendation signed by themanager and the credit officer in-charge. After the creditproposal has been finally approved by the competent authority asthe case may be, the resolution /decision thereof are sent to thebranch for further action as follows:

Convey offer to the borrower and obtain acceptance thereagainst.

45 Branch credit /loan administration perfect the security and

charge documents considering the nature and the terms of thefacility.

Setting –off client file account record.

3.5.1 Credit Report: The branch manager should ensure preparation of credit report onthe client to determine its past record, business performances,market reputation etc. The credit report should contain thefollowing:

1. The nature of client’s business.2. The names of owners and details of their associated business

concerns.3. Net worth of the individual person owing the firm /company

(obtain through declaration at the time of submission ofloan application).

4. The financial health of the business concern.

3.5.2 CIB Report: For processing credit proposals (both funded & non-funded) Banksand Financial Institutions need to obtain mandatory satisfactoryCIB report from Bangladesh Bank. Present criteria for obtainingmandatory CIB report may be changed from time to time at thediscretion of Bangladesh Bank. Branch manager must obtainsatisfactory CIB report prior to processing of credit proposalsand mention the status of the client and its allied concerns/persons of the borrower in the credit line proposal as it isrevealed in the latest CIB report.  In CIB report there is anyclassified loan, no farther credit proposal is processed.

3.5.3 Visiting Client:The visit and meeting the client at their door-step may help toconfirm the business decision reach by the manager with regard to

46the client’s financial status, management efficiency andtechnical details about the good sense and services in which theclient deals. This will also help to judge its quality andacceptability as a reliable security. A set of question, whichmay be asked, should be prepared beforehand.

 

3.5.4 Credit Line Application Form:A credit proposal is its funds or non-funds based at the stage ofprimary scrutiny, credit officers prime consideration is toascertain with reasonable accuracy, due date liquidation ofloan /credit exposure. There are different sections covered inthe credit proposal format which is explained below:

01. Client introduction: Giving the exact name and style of theclient as per registration in case of company. Also indicate thenature of the proposal “Fresh” or “Renewal/ Revision”. Usefigures in denomination of Taka in million, state exact nature ofbusiness/description of the project. Provide business capital/equity capital of the owner based on financial statements.

02. Particulars of owners: State whether proprietor, partners ordirectors. Show the percentage of the shareholdings of thedirectors as per record. Provide declared assets / net worth asthe case may be by individually.

03. Allied concerns: Provide name of allied business concern ofthe owners/ client, their nature of business and their investment/ interest in the business.

04. Credit facility from other banks: Obtain declared statementfrom the client. Also refer to CIB report of Bangladesh Bank.

05. Account maintained with Pubali Bank Limited: State allaccounts including Fixed Deposit, if any, showing averagedeposit/ current deposit.

4706. Existing credit lines(s): Give details and nature offacility. The amount of respective limit and the outstandingare on the date of the proposal, state validity/ maturity stateprimary and collateral security in brief.

07. Proposed credit line(s): In case of renewal /revision, thissection should be completed only after careful review of theconduct of the account, Client’s financial requirement, managingof business affairs in terms of available facility (ies). In caseof fresh proposal, and after having a preliminary discussion withthe client to have a clear view of client’s account, his futureplans and financing requirements, the size of limit, period andproposed security to be structured.

08. Analysis of credit proposal: In this section, provide generalbackground of the client, business profile, project details andmanagement aspects of the business house/industry.

09. Third party information: Provide status of up to date CIBreport, Credit checking with other sources such as previous banksaccount transaction.

10. Financial information: This section reflects the financialsoundness of the business concern and information to be collected/ prepared from spreadsheet analysis on the basis of client’smanagement certified financial statements or audited financialreports. Furnish comments on the liquidity, profitability andleverage position of the client. This exercise / assessmentshould be done carefully pinpointing the strong and weak areas.

11. Prospects: Here business prospects market outlook of theproduct to be given. Salient features of the products, pricing,market strategy to be provided in case of manufacturing products.

12. Assessment of financing requirement: Client’s financingrequirement to be assessed on the basis of business cash flow /working capital assessment / future plans. Exact requirement isto be assessed and recommended after preliminary discussion withthe client.

4813. Inadequacy in the documentation: Mention non-fulfillment ofany documentation / mortgage perfection etc. Also indicate auditobjection on client’s account.

14. Collateral security: Give details of security in the form ofland, building, machinery, it’s written down value or surveyedvalue. Also show nature of marketable securities, its face valueand average market value.

15. Risks Analysis: Furnish comments on Credit Risk Gradingexercise, if done, and indicate the CRG rating. Indicate possiblerisks in the business and its mitigation.

16. Accounts/ Business performance:  Give details of client’sdeposit/ loan accounts performance last 12 (twelve) months. Showdebit/ credit summation, minimum/ maximum balances, L/Cs opened,export documents negotiated during last 12 months.

17. Bank’s earning: Give break-up of earnings from therelationship last 3 (three) years.

18. Recommendation: Give meaningful comments, consideration ofthe business line with clear recommendation.

19 Proposed facility (ies): Give facility wiseproposed/renewed/restructured loan/ credit limits, purpose of thefacility, source of repayment, pricing of the facility, securitysupport and validity of the facility, other conditions/ specialconditions including requirement of Bangladesh Bank approval tobe highlighted.

3.5.5 Supporting Documents:The branch manager while processing a credit proposal for HeadOffice approval, he must see that the proposal recommended isbased on following supporting documents:

i) at least 90 days before Credit report on the client, ii)Financial statements, iii) Spreadsheet analysis, iv) Net worthanalysis and v) Acceptable security details & vi) CRG report.

49This report should be updated when renewal of credit facilitiesare considered. Third party credit report / CIB report along withcredit report on the client should be kept in the file at thebranch. Business/ financial performance is being analysis base onaudited accounts if they are available.

3.5.6    Analysis of Client’s account:The objective of analyzing financial statements from the point ofview of the bank is to understand the manner in which client’sown resources are employed, its liquidity position, the ratios ofnet worth to borrowing and of current assets to currentliabilities. The analysis should provide answers to followingareas:

1. Borrower’s net worth: To see if the borrower’s net worthjustifies the level of credit facilities being requested. Networth is calculated by total debt liabilities from total assets.From another point of view, the net worth is the owners’ totalinterest in the business made up of paid up capital andaccumulated surplus consisting of written earnings and reserves.

2. Working capital: To see whether the current assets aresufficient to meet the client’s current commitments andliabilities. Working capital is arrived at by deducting thecurrent liabilities from the current assets.

3. Profitability: To see whether sufficient earnings from theoperation of the business are there to repay the bank debtsliving sufficient balance /return on equity.

4. Capital Gearing: To see how much amount of equity is in thebusiness compare with the borrowed funds. As a good bankingproposition substantial equity investment should be insured.

5. Cash flow: When assessing the client’s liquidity position andprofitability, the timing of client’s commitment must beconsidered. His commitments must be spread in such a way that thebusiness would never face a cash shortage in the foreseeablefuture.

50

3.6 Project Financing Evaluation:Systematic analysis is required to be undertaken to provide arational basis for decision making. Socio-economic objectives ofthe country needs to be considered in addition to the soundnessof the project in terms of technical, commercial, financial andmanagement considerations while making investment decision.

 3.6.1 Project EvaluationThe proposal may be for a new project or an existing projectrequiring Balancing, Modernization, Replacement and Expansion(BMRE). The project appraises in terms of technical, commercial,financial, management and socio-economic aspects while makinginvestment decision.

The proposal to be developed in the following areas:

a) Cost of the project: The cost of the project represents allfixed capital expenditures incurred or to be incurred foracquisition of its fixed assets and the net working capital torun the project. Proper assessment of the cost of the project isvery important for fixation of debt/equity contribution of theBank. After determining cost of the project, financing plan shallhave to be worked out realistic basis.

b) Means of financing/ Debt-equity ratio: Contribution from thesponsors in the form of paid up capital, director’s loan etc.form part of the equity. Contribution from the bank is consideredas debt. Debt equity ratio should be set in a manner that thesponsors have reasonable stake in the project. In case of BMREproject, debt equity ratio shall be fixed on incremental cost ofthe project.

c) Working Capital:  A portion of working capital remains tied upin the business over the years, called net working capital andrequires funding from long term source. The other portion of

51working capital varies from time to time, generally met fromshort-term sources like commercial bank borrowing and creditors.

While computing working capital requirement, Banks policy andBangladesh Bank’s instruction from time to time to be kept inmind. Following are the generally accepted guideline forcalculation of working capital:

Capacity utilization

a)         Existing unit     : 5% above the last year’s actualcapacity utilization

b)         New unit          : 60% of attainable capacity/ratedcapacity

d) Credit investigation and selection of sponsors: The creditinvestigation conducted by a banker seeks to evaluate theentrepreneurial ability, managerial experience, business acumen,integrity, reputation and financial worth of promoters applyingfor Bank’s financial assistance for setting up industries or BMREof a project. The credit investigation of the clients also lookfor their individual liabilities for a realistic assessment oftheir worth.

e) Balance sheet and statement of accounts: The analysis offinancial statements of a concern would provide information onliquidity, activity and profitability position of the concern.The financial soundness of a business can be determined by usingdifferent indicators from the Balance Sheet and Profit and LossAccount which is known as the ratio analysis.

f) Bank’s past experience: In many cases, the applicant may havealready availed loans either for the project or for some otherpurposes from Pubali Bank Limited or from different financialinstitutions. In such cases, the credit inquiry will providevaluable information about their worth, dealings and presentstatus of the liabilities. Credit Investigation Report should beobtained from other Banks as well as from other divisions of thesame bank.

52g) Govt. report publications; There is another documentary sourceof information namely the official gazette, press reportsregarding suits by or against persons and parties insolvency andliquidation of particular individual or enterprise, black listingand/or similar punitive action against individuals, firms etc. bythe Govt./Autonomous bodies etc. which are very valuable.

h)  Banking Transaction: Clients carry on normal business,maintain deposits and also avail overdraft facilities. A detailedreview of these accounts will give very valuable informationabout the financial standing of the clients.

i) Report from Trade Circle: More information relating tosponsor’s worth, size of business, turnover, integrity,reputation, honesty, business morality conduct etc. of theclients can be obtained from other traders in the same line. Aclient engaged in a manufacturing business must invariably haveconstant trade links with the wholesale market.

j) Source of equity: It may be necessary to raise cash eitherrising of equity through borrowing on the security of thesponsor’s property or through sale of property. Borrowed fundwill be discouraged, if the borrowed fund thus raised is to bepaid back out of earnings of the new project. The sponsors mayhave several other sources of mobilizing equity e.g., cash inhand, bank deposits, dividend income, marketable securities,internal cash generation of the existing business etc. All thesesources should be thoroughly examined.

3.6.2 Technical Appraisal: Following areas to be looked into during technical appraisal:

 a) Product, process and the capacity: Product to be identified,production process to be chalk down and capacity of the projectto be determined.

b) Land and location: Location of the project should be suitablewith all infrastructure facilities. Other relevant issues likeproximity to market, availability of raw materials and worker ,

53environmental issues to be looked into before selecting oflocation.

c) Building: The area and nature of construction should bedetermined as per requirement of the project. The estimatesshould be based on quantitative analysis in respect of variousbuilding materials rather than on a flat rate basis.

d) Machinery and equipment: The cost of machinery, spares etc.constitute the largest component of total cost of the project.All costs related to machinery including duty, tax, insurance,freight, installation etc. should be taken into consideration.The value of machinery and equipment should generally bedetermined on the basis of three competitive genuine pricequotations.

e) Other fixed assets: The project should include furniture,fixture, office equipment etc. as per requirement.  Preliminaryexpenses, cost for trial production, interest during constructionperiod should also be included in the cost of project. It shouldbe kept in mind that no item is left out and if there is anyrequirement of contingencies.

f) Pre-operating expenses: Initial costs like survey, plan,drawing, salary allowances of the employees duringimplementation, promotional fee, legal documentation fee,consultant fee, commission and interest during constructionperiod etc. are the part of project cost and to be includedduring preparation of project cost.

g) Requirement of raw materials: Item wise requirement of rawmaterials to be quantified and the price and duty structure to bementioned to arrived at the actual cost of raw materials, sourcesof raw materials whether imported or local to be mentioned.Requirement of packing materials should also be taken care of.

h) Requirement of utilities: Requirement of utilities, source andthe cost thereof are to be attended.

54i) Waste disposal: Wastage of raw materials during processing andhandling are to be determined with utmost care. Impact of wastageduring calculation of raw materials and finished goods needs tobe addressed properly. Necessary arrangement for disposal ofwastage is also to be made.

j) Environmental impact and pollution control: Effect onenvironment and pollution hazards may be taken intoconsideration. Measures must be prescribed regarding negativeeffect on environment. Steps required to control the possiblepollution should be identified and mentioned in the report.

Market Appraisal: Market in a broader sense, is termed as the sum of contractsbetween buyers and sellers of a product or service, the price andquantity exchanged and which are determined by the forces ofdemand and supply. Following areas need to attend in the marketappraisal:

i) Application of product and services, ii) Target market –Local/Export, iii) Demand/Supply analysis Substitute andcompetitors, iv) Proposed marketing/Distribution Arrangements, v)Proposed Buyers vi) Price competitiveness, vii) PromotionalAspects.

3.6.3 Financial Projections and analysis:a) Earning forecast: The earnings forecasts measure cost ofproduction and profitability relating to a particular period or anumber of periods as may be used for the purpose of forecasts. Athree-year period is needed to be seen by the Bank to arrive atan investment decision. The earnings forecast involve theestimation of sales and estimation of associated costs that shallhave to be incurred to achieve the projected sales.

b) Estimation of sales: In estimating sales, the quantity to besold is to be determined first and then the selling price to beapplied to estimate the sales in monetary terms.

55c) Estimation of cost of sales: Major items of costs should beidentified and highlighted in estimating the total cost of sales.Some cost items such as those relating to raw materials, rent,tax, insurance, water, power, fuel, interest etc. can beestimated at actual with great deal of accuracy. On the otherhand many of the administrative and sales expenses can beestimated only with rough approximation.

d) Cash flow: One of the major tasks in financial forecasting isto assess the requirement of funds and to find out how thoserequirements can be met. It involves estimation of cost andsources of fund, estimation of income from future operation,liabilities that shall have to be incurred and the proposedinvestment in future assets.

e) Analysis: In case of BMRE loan proposal, the project will haverelevant operating past. The analysis of the past operation of anexisting concern is of great usefulness in predicting, with afair degree of accuracy, the future results of business activityand the future ability of an enterprise to meet its creditobligation. In such cases, the financial statement of the concernfor the past three consecutive years should be reviewed to form acorrect opinion.

f) Ratio analysis: The financial statement of an existing concernor future projections for a proposed investment may be analyzedthrough calculation of a number of financial ratios. Many typesof financial ratios may be calculated and used. But the purposefor which the analysis is made will suggest emphasizing one setof ratios in preference to another.

g) Sensitivity Analysis: Sensitivity analysis provides thepicture of relative changes in overall profitability due tochange in any variable. Usually changes (increase) in materialand other variable cost or changes (decrease) in selling priceare being taken into consideration for making sensitivityanalysis.

h) Break-even analysis: The basic strength of a project lies inits overall profitability. But it is equally important to know

56the point of sales, capacity utilization, level of production orprice to cover the expenses and starts profit earning. The pointof activity at which the project would neither earn profit norincur loss is called Break-even point.

i) Financial Internal Rate of Return (FIRR): Financial rate of return measures the potential earning power of a project considering time value of money covering entire life of the project.

FIRR = Lower discounting rate + (NPV at lower discounting rate/ (NPV at lower discounting rate minus NPV at higher discounting rate) X (Difference between Higher discounting rate minus lower discounting rate))

3.6.4 Managerial Aspect: This is another important aspect of the appraisal. Managerialfeasibility refers to the assessment of ability of managementpersonnel in managing a project efficiently. The followingmanagerial skills should be analyzed:

Technical skill to use knowledge, method and Techniques(acquired from experience, education and training) toperform the job.

Human skill to maintain interpersonal relationship withinor outside the organization.

Conceptual skill to understand the complexities in overallorganization.

 3.6.5 Socio-economic Aspect:The observation of this aspect is to see whether the project issocially desirable. How much contribution will be made by theproject to the G. D. P. and how many numbers of employment willbe generated by the project should be ascertained.

57 3.7 Pricing of Loan: Pricing of loan is a great important element in banking business.Because through pricing, bank usually create margin/profit. So itis to be determined carefully. In pricing, four components are tobe calculated prudently otherwise pricing of that loan willcreate a definite loss for the bank. The components are:

i.   Interest Expense or Cost of Fund: The interest to be givento the depositor and to central

Banks for borrowing

ii. Administrative Cost

iii. Cost of Capital: Return expected by the investors for theircapital invested in the bank

Iv. Risk Premium

3.8 Approval Process:In order to fully understand Pubali Bank Limited’s proceduresrelating to sanctioning and control of advances a necessary firststep is to examine the Bank’s organization structure.

The organization structure has three levels – Branch, HeadOffice, CRECOM and Executive Committee of the Board (in lieu ofBoard of Directors).

Branch: The first level of organization in Pubali Bank Limited isthe branch. Function of the branch have been split into four maincategories; Advances, Foreign Exchange, General banking, andAccounting & Establishment. The size of the advance functiondepends on the number of borrowers and the size and complexity oftheir accounts.

58The work of the advance department at the branch is to prepareall the detailed schedules in the Credit Line Proposals. Toensure that the security for the advance is perfected and toprovide all information required on the creditworthiness of thecustomer the department also monitors the advances accountsregular basis.

The branch manager or officer-in-charge of advance departmentshould conduct the initial interview with the customer. If theproposal meets Pubali Bank Limited’s lending criteria and iswithin the manager’s discretionary powers, the credit line shouldbe approved by the Manager.

Head Office: The second level of Pubali Bank Limited’sorganization is the Head Office under Managing Director’sdiscretionary power and /or the Credit Committee (CRECOM) formedat Head Office level. The Credit Committee is headed by itsChairman who is at present ex-officio Deputy Managing Director.Other members of the Credit Committee are the departmental headsrelating to credit, credit administration and fund management.Normally Credit Committee is a recommending forum. Credit lineproposals recommended by the Credit Committee are either sanctionunder discretionary power of the Managing Director or anythingbeyond the capacity of the M.D. is sent to the ExecutiveCommittee of the Board for approval.

It is the responsibility of the Credit Committee to review, andapprove or reject all credit line proposals above the branchmanagers’ discretionary powers. Using the powers delegated to itby the Board of Directors, Credit Committee can finally recommendall credit line proposals up to the approved limit of M.D. andExecutive Committee of the Board.

In the Head Office organization structure the reviewingdepartments are known as the Credit Division and LoanAdministration and Monitoring Division .This department’s dealswith all the detailed work of reviewing credit line proposals andcontrolling overdrafts and loans on a continuous basis.

Executive Committee of the Board:

59The third organizational level within Pubali Bank Limited is theExecutive Committee of the Board comprising of the members fromthe Board of Directors and the Managing Director as an ex-officiomember of the committee. This Committee has the power to approveall other credit line proposals beyond the capacity of branch in-charges and the Managing Director. The Executive Committee of theBoard is responsible for sanctioning, reviewing large credit lineproposals and monitoring credit policy of the bank as determinedby the Board of Directors.

3.9 Post sanctions process:After the credit Line Proposal has been finally approved by theappropriate sanctioning authority in the Bank’s creditorganization structure it enters the post sanction processingstage. At this stage the signed credit line proposals is returnedto the branch/ credit officers, following four further steps areto be taken by the branch manager before the borrower can use thecredit lines that have been sanctioned to him. These steps are asfollows:

Convey offer /sanction letter to the borrower. Branch credit officers perfect the security and charge

documents considering the nature and the terms of facilityand the securities and in accordance with the laws of theland.

An account number is allocated to the new credit facility. The account record is set up and borrower’s file is

prepared.

When these four steps have been complied with, the postsanctioning process is completed and the borrower can draw on hisaccount.

3.10 Documentation:Documentation of Loans & Advances: Immediate after sanctioning ofloan, documentation is to be made properly before disbursement ofloan. Documentation formalities are commonly known as completion

60of ‘Charge document’ in the banking world. Type of documents tobe signed by the client varies depending upon the nature of loanand advances given. Some common documents are listed below:

i) Demand Promissory (DP) Note, ii) Letter Arrangement, , iii) Letter of continuity (in caseof continuous loan), iv) Letter of pledge (in case of Pledge), v) Letter of Hypothecation (incase of Hypothecation), vi) Letter of Undertaking, vii) Letter of Debit Authority, viii) Letterof Installment (in case of term loan to be paid in installment) and ix) Letter ofGuarantee (Personal Guarantee)

Type of advances

Securities

Loans Lien of various kinds of Sanchay Patra, Govt. Securities, and Shares quoted in the Stock Exchange, Debenture, Fixes Deposit Receipt, hypothecation of vehicles, hypothecation of machinery, hypothecation of other moveable assets, hypothecation of book debts and receivables, Collateral of immovable properties.

Over draft Sanchay Patra, Non-resident Foreign currency deposits (NFCD), Shares, debenture, government promissory notes, fixed deposit receipts, life insurance policies.

Cash credits Pledge or hypothecation of stock-in-trade, stock-in-process, goods-in-transit, produce and merchandise, machinery collateral of land & building on which machinery are installed and collateral of third party mortgage of immovable property

Inland billspurchased

Bill itself.

PAD Shipping documents for imports having title to the bank.

T R Trust receipt obtained in lieu of import documents.Export Pledge or hypothecation of goods or export Trust

Receipts.Foreign bills

Shipping documents for exports.

61Purchased

3.11 Creation of Charges over Securities:As a safety measure, bank has to create charges over thesecurities against the risk of non-repayment of loan. The mostcommon modes of charge creation are defined below in a very brieffrom:

1. Pledge: According to the section 172 of the Contract Act, whena borrower surrenders his business goods to the banker’s custodyas the security of loan given by the bank then it is calledpledge. The pledged goods remain with the possession and controlof the bank and the client draw the goods in case of need withthe permission of the bank by repaying adequate amount of loan.Bank usually permits drawing power (DP) to the borrower to drawthe goods from its custody after checking the stock report.

2. Hypothecation: When loan is given to the borrower againsthypothecated possession of goods then it is called Hypothecation,The physical possession & control remains with the borrower’scustody. Bank creates charge over the hypothecated goods in caseof default. For creation of this charge bank takes the letter ofhypothecation from the borrower.

3. Lien: Lien is the right of the creditor to retain the goods orproperties given by the borrower to the creditor as the securityagainst the loan. The creditor deserves the right of lien untilthe debt is paid.

4. Assignment: Assignment is the transfer of a right, property ordebt, existing or future by one person to another person. Inbanking the usual subject of assignment is “auctionable claims”.

5. Set-off: Right of set-off is the right of a banker to combineall the accounts of a customer to realize the debt. Set offaccrues to the banker as a result of banker-customerrelationship. If a customer maintains more than one account withthe bank, usually bank obtains a prior letter of set-off so that

62bank can combine them at its discretion without giving any noticeto the customer.

6. Mortgage: As per the declaration of the Transfer of PropertyAct 1882 under section 58 (a) mortgage is the transfer of aninterest in specific immovable property for the purpose ofsecuring the repayment of money advance or to be advanced by wayof loan, existing or future debt, or the performance of anengagement which may give rise to a pecuniary liability. Thetransferor is called the mortgagor and the transferee is calledthe mortgagee. The mortgagor gets back all his rights to themortgaged property on repayment of loan due three on.  The mosttwo common types are:

a. Registered or Simple Mortgage : Where without delivering possession of the mortgaged property, the mortgagor binds himselfpersonally to repay the debt. The mortgage (Bank) can sell the property by obtaining decree from the court.

b. Equitable Mortgage: Where mortgagor delivers the documents of title of immovable property with intention to create a security thereon, the transaction is called mortgage by deposit of the deeds or equitable mortgage.

 

3.12 Securities and Advances: The following securities are to be obtained by the branches depending on the nature of advances while allowing secured advances to the clients.

Wage Earner Development Bond, Bangladesh Bank Investment Bond and other approved securities that can be marked lien.

Fixed Deposit Receipt issued by any branch of Pubali Bank Limited.

Fixed Deposit Receipts issued by other banks (Normally, Pubali Bank Limited should not encourage this security against our loan).

63 Shares quoted in the Dhaka Stock Exchange, Chittagong Stock

Exchange Ltd., and Sylhet Stock Exchange Ltd. Pledge of goods and produce Hypothecation of goods, produce and machinery. Immovable property Fixes assets of manufacturing unit. Cheques, Drafts, Pay order, Railway Receipts, Steamer

Receipts, Burge Receipts of the Government or Corporations. Shipping documents. All other moveable and floating assets such as, book debts,

receivables etc.

3.13 DISBURSEMENT:Loans: Advance made in a lump sum repayable either on fixed installment basis or in lump sum having no subsequent debit except by way of interest, incidental charges, etc. is called a loan. After creation of loan, there will be only repayment by borrower. The whole amount of loan is debited to the customer’s name on a loan account to be opened in the ledger and is paid to the borrower either in cash or by way of Credit to his current orsavings account.

Over drafts: Advance in the form of over draft is always allowedon a current account operated upon by cheque. Within thesanctioned limit, the borrower can overdraw his account within astipulated period. Here, withdrawals or deposits can be made anynumber of times at the convenience of the borrowers, providedthat the total amount overdrawn does not, at any time exceed theagreed limit. Interest is calculated and charged only on theactual debited balances on daily products basis.

Cash Credit: Cash credit as a form of advance is a separateaccount by itself and is maintained in a separate ledger. Theborrower may operate the account within stipulated limit as andwhen required. The drawings are subject to drawing power. Cashcredit is an active & running account to which deposit and

64withdraws may be made frequently. The debit balance of theaccount on any day cannot exceed the agreed limit.

Inland Bills purchased: Sometimes banks are to purchase bill ofexchange of businessmen to facilitate commercial transactions.Besides bills, banks also purchase cheque drawn by Government,Semi- Government institutions, local authorities, or any firstclass parties for extending accommodation to the partiesrequiring funds. In case of purchase and discounting of bills,the banker credits the customer’s account with the amount of thebill after deducting his charges or discount. In case of purchaseof cheque, amount of the cheque is credited to the party’saccount to the debit of bills or cheque purchased account and onreceipt of the proceeds of the cheque, after collection, bill orcheque purchase account is liquidated.

Payment against documents (PAD): PAD is associated with importand import financing. The bank opening letter of credit is boundto honor its commitment to pay for import bills when these arepresented for payment provided that it is drawn strictly in termsof letter of credit.

The foreign correspondent, which negotiates the documents; debitsthe account of the opening bank and in fact, the amount thusstands advanced on behalf of the importer. The opening bank onreceipt will lodge the shipping documents to their book and willrespond to the debit advice originated by foreign correspondentto the debit of “Payment against documents (PAD)” account andpresent the bill to the importer for payment/ acceptance.

Trust Receipts: Advance against a Trust Receipt obtained from thecustomer, are allowed when the documents covering an importshipment are given without payment. The customer holds the goodsor their sale proceeds in trust for the Bank, till such time, theloan allowed against the Trust Receipt is fully paid off.

Long Term loan: Long-term loan is meant for setting up of aproject/ industrial undertaking, i.e. financing for thedevelopment of the infra structural facilities includingprocurement of machinery, either from abroad or from local

65market. Disbursement may be made in one installment depending onthe item for which financing is being offered or more than oneinstallment matching with the equity investment of the borrower.

Disbursement of equity and loan shall be made strictly inaccordance with the disbursement schedule incorporated in theloan sanction advice for implementation of the project within thestipulated period. Disbursement of each phase is always subjectto satisfactory utilization of previous phase. Utilization ofphase wise disbursement must be verified by an Officer andEngineer of the Bank. In addition, branch must closely supervisethe utilization of disbursement amount from time to time.

3.14Monitor/ Control of Credit Operations:Advance allowed should be very closely watched to see whether thesame are being conducted in accordance with the terms and conditions under which the limits were sanctioned or not. The result of the inspection should be an effective guide in sorting out the measures to be adopted in respect either of correcting the unsatisfactory operation of the advances or recovery of the same.

In order to ensure safety of advances, all advances shall be keptunder supervision and thereby under control. This will include supervision at the time of disbursement to ensure proper utilization of bank credit, to supervise end use during the tenure of advance and to ensure that the repayment is regular. The control of credit operations falls into two main parts, namely: Regular monitoring of all accounts and review of all EOLsand Monitoring of delinquent accounts

Monitoring/controlling contains the following main sections:

 

3.14.1 Control of overdrawn accounts:

66For Pubali Bank Limited, the procedures for controllingoverdrafts are explained in two parts: Branch control ofoverdrafts & Central control of overdrafts.

Branch control of over drafts: The branch control of over drafthas the following five main elements:

i) Sanctioning the overdraft limit : When an overdraft limit is firstsanctioned a Loan Account Input Form for input of details in thecomputer records must be completed at the branch. The form hasthree parts: Customer record, Account record, and Credit linerecord.

All three parts must be completed if the borrower is a newcustomer who has no other accounts with the bank. The customerrecord is transcribed from the account opening form, which iscompleted by the borrower at the branch. If the borrower has anaccount with the bank, then only the account record and creditline record need to be completed. When the Loan Account InputForm has been completed, it is checked and signed by twoauthorized officers at the branch.

ii) Control of cheque and other debits posted to overdrawn accounts : The nextstep in the control system after the sanction of the over draftlimit is the monitoring of cheque and other debit items drawn onthe account against the limit. The following information on eachcheque received at the branch is input daily via the terminal tothe central computer: Account Number, Amount of Cheque & ChequeNumber.

iii)  Periodic review of overdraft accounts :   The third stage in branch control is the periodic review of over draft accounts by the branch manager and the officers responsible for credit operationsat the branch. The checks and control reports used at the branch are as follows:

REPORT      

FREQUENCY

a. Update Customer & Account Data              

Daily

67b. Authorized Withdrawals    

                                                 

Daily

c. Secured over                                                           

weekly

d. Clean over draft

                                                                

weekly

e. Excess over limit/ Excess Over drawing Power    

Weekly

f.Unused facilities                                                                 

weekly

g.Temporary facilities                                                                  

weekly

h. Statement of Interest-Overdraft Accounts                         

Monthly

iv) Preparation of requests for authorizing EOLs, temporary over draft (TOD) or other non- recurring transactions:  EOLs and TODs require authorization. Posting of debit transactions to accounts, which are over the limit, requires the authorization of the branch manager in the first instance. This also be the final authority if the branch manager has the authority and EOL or TOD is within the branch manager’s authority level. If it is not, then a request for approval of the EOL/TOD must be prepared and submitted to HO who will consider the request and, if they agree with it, progress it to final approval.

v) Periodic monitoring of security values: The monitoring procedures for tracking the value of the Bank’s security require elaboration.

68The periodicity of review depends on the nature of security. The guidelines to be observed by all branch managers are as follows:

Head Office control of overdraft:

The controls operated by Head Office are as follows:

Weekly review of reports sent by the branches. Random examination of reports, if required, twice a month

whenever requested by the authority. Review of weekly reports sent to the Head Office on all

EOLs and TODs which have not been authorized correctly. Regular branch/ project visits by officers from Loan

Administration and Monitoring Division to review, on thespot, large and / or irregular advances.

Each of the officers in Loan Administration and MonitoringDivision is responsible for reviewing the advance portfoliosof the branches.

Concerned division of Head office operates a program of regularbranch visits. The visits are at random so that the branch doesnot know in advance when the visit will take place. The officercan ask the branch manager for any information on specificaccounts.

 

3.14.2 Control of loans: Branch control of loans: Branch control of loans has three mainelements as follows:

(i) Setting up of the loan accounts:  The setting up of the loan accountsproceeds in the same way as the overdraft account. A loan accountform as described in the case of overdraft account is filled inat the branch level for each new loan after the signed Creditline proposal is received from the Head office. In addition, thefollowing information is required for loans: Installment amount,

69Installment frequency, First installment due on, and Firstrepayment- Maturity date.

(ii) Review of loan accounts:   After the loan has been set up, it isreviewed monthly by the branch. The purpose of the review is toensure that the monthly interest charges are being paid up andthat repayment of principal are being made on time. Interest ischarged on the unpaid installment and also on the payable butunpaid loan and interest amount during the overdue period and isincluded in next month’s interest charge.

(iii) Periodic assessment of security values :    Periodic review ofsecurity is essential for proper valuation of the security. It isneeded as the value of the security is changing day by day.

Head office control of loan: The controls exercised by HeadOffice are as follows:

Monthly review of the Loan Statement by officers inconcerned division.

A program of regular branch/project visits by officers fromconcerned division.

Each of the officers in concerned division of Head office isresponsible for reviewing the loan portfolios of branches. Bycomparing the statements with previous month’s statement theycheck the progress/ deterioration in repayment of loans andreport to the competent authority.

In cases where there are apparent defaults on capital repaymentsor interest payments, the monitoring officer of HO should contactthe branch to find out the reasons for the apparent defaults.

 

3.14.3 Control of other Credit facilities: This section deals with the controls over the following other types of credit facilities which form an important part of the Bank’s advances port folio:

70Bills purchased: The term “bills purchased” is used to describe short-term loans granted against documentary or clean bills. Thusthe branch “buys” the bill, its “price” being the amount of the loan granted against the bill. The term “bills discounted” is used to describe short-term loan granted against the security of bills where interest amount on loan is deducted from the face value of the bills at the time of discounting the bill. Thus net amount is credited to the borrower’s account. The loan is liquidated through the proceeds of the bill. Interest is charged on the loan at a rate linked to either LIBOR or base rate.

A bill purchased / discounted facility is subject to an approved limit, which is reviewed annually through the Bank’s sanctioning system. The Bank will purchase / discount bills from the drawer up to the limit approved by the credit line proposal. The bills can be denominated in any of the major trading currencies.

The controls over the bills purchased / discounted exercised by the branch manager are as follows:

Report on the creditworthiness of the drawer. Report on the creditworthiness of the drawees. Consideration as to the type and quality of the goods, if

any, covered under the bills. Level of margin allowed on bills: the higher the margin, the

lower the Bank’s assessment of the risk of the lending to the customer against the security of the bill.

Comparison of the value of bills outstanding within the approved limit;

Investigation of bills that are outstanding for an unreasonable period or have matured but have not been paid .

Verification of the Bank’s legal title to the goods.

The branch manager must follow up on all overdue bills by writingto the borrower each month, listing all bills, which have not been paid on their due date.

 

71Letters of credit: The documentary Letter of Credit (LC) is animportant method of setting debts in international trade and is amain source of short term import finance for many of the Bank’scustomers. This section concentrates on the various controls overthe opening and settlement of LCs that are operated by the Bankat branch and Head office levels.

Documents supporting the debit to PAD account should be kept inthe Bank’s custody. Adequate follow up should be made with thecustomer to retire the bill as soon as he can. The branch shouldalso ascertain the expected date of arrival of goods. This dateshould be desired. If the customer fails to retire the billbefore the arrival and delivery of goods, arrangement may be madeto clear and store the goods safely. Arrangement for insuring thegoods should also be made. Such cases should be immediatelyreported to Head Office for necessary instructions. Documentsmust not be parted with until the customer pays in full for thebill.

Control at Head Office : At monthly intervals, the branch managerprovides the following reports to Head Office: Outstanding LCliabilities, Outstanding Acceptance liabilities and OutstandingPAD liabilities.

In each case the position is summarized customer-wise and thenindividual LCs and acceptances are listed. The concerned officersof Head Office should examine the monthly reports from thebranches and carry out the following checks:

Agree the branch reports with the monthly Statement ofAffairs.

Examine the long standing items and due dates shown in thereports.

Letter of guarantees : It is customary for the bank to executeguarantees / counter guarantees on behalf of customers favoringthird parties in the normal course of business. Proposals forissue of guarantees should be submitted, with complete details,for sanction at the appropriate levels.

72Control at Head office

At monthly intervals the branch manager should provide theStatement of Letters of Guarantees issued and Outstanding to HeadOffice. Control procedures for LC as given earlier are followedby Head office for guarantees.

Cash Credit: The procedures for controlling cash credits are twoparts:

Control at Branch : The control procedure for cash credit at thebranch level is similar to control procedure for overdraftaccounts. An account is set up and its details are checkedthrough the relatives’ reports. Daily control is essential whileposting in cheques; similar to overdraft accounts. Debit balanceis matched with the drawing power available in the account. Thebranch should do proper control of security and its periodicalchecks.

Control at Head office:At monthly intervals the branch manager should provide the Statement of Cash Credit facilities which will include, among others, the following:

Name of the client, Limit sanctioned with sanction and expiry date, Details of security held with present value, Account performance (including debit balance, credit

balance, average balance etc.

The concerned division of Head office will analysis/ review the above statements and report to the competent authority with findings.

 

73 3.15 Handling of Delinquent Loan/Advance:Despite the extreme care exercised in the sanctioning and controlprocedures, it is still possible that some advances may become doubtful because of adverse changes in economic conditions seriously affecting the borrower’s business or his personal financial position. All lending decisions involve an element of risk to the Bank, because future economic conditions cannot be predicted exactly. Therefore, an important area in advances control is-

Identification of delinquent advances, and Monitoring of the delinquent accounts.

3.15.1 Identification of Delinquent Advances:The identification starts with the branch manager. As part of thecontrol mechanism, the branch manager is monitoring advances regularly during the week; he or his assistant may check on largeaccounts daily and review the smaller accounts at weekly intervals. The branch manager will be looking at the health of the account and will use the following criteria:

In the case of overdrafts: i) turnover, ii) conduct of the account against the limit sanctioned by the Bank at the last credit line review.

In the case of loans: adherence to the repayment schedule agreed with the borrower, either when the loan was sanctioned, or at thelast rescheduling.

In the case of bills purchased and letters of credit: Payment of the bill by the drawee at the destination on the maturity date orin the event of non-payment by the drawee, by recovery from the drawer of the bill (borrowed).

74In the case of contingent facilities: Letters of credit should bechecked to ensure the reliability of the seller of the goods and the legality of the transaction and

In the case of letters of guarantee: the details of the contact and the period over which the guarantee is valid should be checked: performance bonds and bid bonds also involve additional checks to ensure that the contractor has carried out similar workpreviously.

In addition the branch manager should also keep a watch on declining sales, reducing profits and profitability, deterioration in the financial ratios, if any.  He should remain vigilant of external factors such as non-availability of a particular raw material, delays in payment by Government Agencies, declining market for a particular product, financial weakness of a guarantor etc. These factors have a direct bearing on the health of a borrowing account.

 

3.15.2 Monitoring of the delinquent accounts: After a delinquent advance has been identified by the branch manager and confirmed by Head Office, it must then be monitored through monthly and quarterly reporting to Head Office. The firststage in the monitoring system is to meet the borrower and give him the opportunity to regularize his account. Normally he will be given a time limit to regularize his affairs and to provide plans for solving his financial problems. Branch office, in consultation with the borrower and with the permission of the Head office, will make a recovery plan. This recovery plan and/ or restructuring of the facilities may be either accepted or rejected.

If the recovery plan is rejected or if the recovery plan previously accepted by the Bank does not work, then the borrower may be given some more time to solve his financial problems if

75they appear to be temporary and if extra time is all that the borrower needs to develop a practical solution. However, if the problems appear intractable, then either of the two things may happen:

 

3.16 Loan Classification- Provisioning: The detailed information concerning classification, provisioning and interest Suspense Account will be required to be submitted toBangladesh Bank within 30 days from the date of reference.

Basis for Classification:

All loans and advances will be divided in four categories: (a) Continuous Loan; (b) Demand Loan; (c) Fixed Term Loan; and (d) Short-term Agricultural and Micro-Credit.

a) Continuous Loan: The Loan, which has no particular repayment schedule, but contains date of expiry, credit limit etc. will be termed as Continuous Loan e.g. Cash Credit, Overdraft etc.

Basis of Classification Irregular : Next day after the date of expiry, ifnot adjusted/renewed at expiry date:

Substandard: Un-recovered for more than 03 months but less than 06 months.

Doubtful: Un-recovered for more than 06 months but less than 09 months.

Bad/Loss: Un-recovered for more than 09 months.

b) Demand Loan: The loan, which is considered repayable only after it is claimed by the banks, will be termed as Demand Loan. If contingent or any other liability is converted to Compulsory Loan and Forced Loan then it will be termed as Demand Loan e.g. Forced LIM, PAD, FBP, IBP etc. These are same as Continuous Loan.

76c) Long / Mid Term Loan: The loan, which is repayable within a particular period of time as per repayment schedule, will be termed as Long / mid term loan.

Basis of Classification: If any installment is left un-recovered within the scheduled date, the amount falling due on account of un-recovered installment will be classified as “Overdue Installment”. Term Loan , which is repayable within a maximum period of 5 years:

Substandard: Overdue installment equals or exceeds the amount repayable within 03 months.

Doubtful: Overdue installment equals or exceeds the amount repayable within 06 months.

Bad/Loss: Overdue installment equals or exceeds the amount repayable within 09 months.

Fixed Term Loan which is repayable above 5 years.

Substandard: Overdue installment equals or exceeds the amount repayable within 03 months.

Doubtful: Overdue installment equals or exceeds the amount repayable within 06 months.

Bad/Loss: Overdue installment equals or exceeds the amount repayable within 09 months.

If any term loan is repayable in monthly installment then the amount of recoverable installment will be equal to the sum of 6 installments (monthly). Similarly, in case of quarterly repayableinstallment total amount repayable within 6 months will be equal to the amount of the total of 2 quarterly installments.

d) Short-term Agricultural and Micro-credit: Short-term Credit will include credit extended to Agricultural sector and it is repayable within a period not exceeding 12 months. The short TermMicro-Credit will be that which will not exceed an amount of Tk

7710,000.00 and will be repayable within a period not exceeding 12 months.

Irregular: If not recovered within the scheduled date as per contract of the credit.

Substandard: After exceeding 12 months as irregular credit.

Doubtful: After exceeding 36 months as irregular

Bad/Loss: Overdue installment equals or exceeds the amount repayable within 60 months.

If any improvement achieved in the accounts classified it will again be declassified. However, the credit once classified by inspection team of Bangladesh Bank, that will be treated as finalclassification and before any subsequent inspection is conducted by Bangladesh Bank or without prior approval of Bangladesh Bank the credit will not attain any merit of declassification.

3.17 Reservation of Provision:Provision for reserve will be kept at the following scale:

Particulars

Short termAgriCredit

Consumer Financing

SMEF Loans to BHs/MBs/SDs

All other creditOther

than HF,LP

HF LP

UC Standard

5% 5% 2% 2% 0.25% 2%

1%

SMA - 5% 2% 2% 0.25% 2%

1%

Classified

SS 5% 20% 20% 20% 20% 20%

20%

DF 5% 50% 50% 50% 50% 50%

50%

B/L 100% 100% 100% 100% 100% 100%

100%

78After 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.

Qualitative Judgment: If the recovery of the credit becomes uncertain resulting from change of circumstances under which credit was extended or the borrower sustains loss of capital or the value of security decreases or any adverse situation arises then the credit will be classified on the basis of Qualitative Judgment. Besides, if the credit is extended without any logical basis or the credit is frequently rescheduled or the rules of rescheduling are violated or the trends of exceeding credit limitobserved frequently or a suit is filed for recovery of the creditis extended without the approval of the competent authority, thenthe loan will be classified on the basis of Qualitative judgments. Under these judgments the loans will be classified as under:

Substandard:  Due to reasons stated above or for any other reasonif in spite of possible loss of any credit, there is any probability of changing the present situation through taking proper steps.

Doubtful:        Even after taking proper steps, if the full recovery is not ensured.

Bad/Loss:        If the probability of recovery becomes totally impossible.

If any improvement achieved in the accounts classified it willagain be declassified. However, the credit once classified byinspection team of Bangladesh Bank, that will be treated as finalclassification and before any subsequent inspection is conductedby Bangladesh Bank or without prior approval of Bangladesh Bankthe credit will not attain any merit of declassification.

 

79 3.18 Treatment of Interest Suspense:Generally when a credit is classified as Substandard, Doubtful orBad according to prevailing classification rules, the entire interest that has been accrued/ charged in the account since last“Reference Date” (the date on which previous classification exercise was done) is suspended. Subsequently, all interest charged in the account is also suspended till the account remainsclassified. However, the classification rule provides that any actual recovery made, after such classification is applied first to interest in suspense and then to the interest overdue or currently due Therefore, interest suspense is booked into income to the extent the actual recovery takes place.

 

3.19 Identification of Possible Recourses for Recovery of Delinquent Debts:When an account turns delinquent in spite of all-out efforts, it becomes necessary on the part of the Bank to initiate appropriateactions to recover the debt. Possible recourses, depending on situation, can be as follows:

Issuing Notices/ Legal Notices Goods under Pledge Goods under Hypothecation Mortgages Unsecured Advances

 

3.20 Litigation and Costs:While recommending institution of legal proceedings in any case, branches are generally required by Head Office to indicate the chances of recovery of the amount involved the estimated cost of the litigation (court fees, Legal Advisor’s fees, and

80miscellaneous expenses) and the appropriate time that would be required for getting a decree. On the basis of information supplied, Head Office decides whether it would be worthwhile to take legal action or to write off the amount.

If it is decided ultimately to file a suit, it has to be doneagainst all parties, the principal or his heirs, successors orassignees, and the guarantor or his heirs etc., if any, as thecase may be. After a decree is obtained, it has to be executedthrough court process by attachment and sale of the judgmentdebtor’s property. If in the meantime, the borrower is declaredan insolvent, the provisions of relevant Act in this case shallapply.

 

3.21 Loan Loss Provision: When an account turns delinquent and stands classified as“Substandard”, “Doubtful” or “Bad” depending on the degree ofdelinquency, Loan Loss Provision, at prescribed rates, applicablefor each of the category of classification, should be made.

Usually, the Loan Loss Provision is centrally handled at HeadOffice, on quarterly basis, based on detailed loan classificationexercises undertaken and provision requirement assessed bybranches, as per Central Bank’s rules in force. The rate forprovision requirement on each of the category of classified loansis the minimum prescribed by Central Bank and Banks are free tomake increased provisions.

3.22 Write Off:When all the avenues of recovery of a debt stands exhausted, orhad to be abandoned for genuine reasons, the question of writingoff a debt arises, Branches to approach Head Office for suchwriting off, reasonably establishing that no other avenue is leftto recover the dues. Now Bangladesh Bank fixes up some criteria’sfor which loan is to be write off.

81a)  Having no eligible security in the classified loan report.

b) It must be suit filed.

c) And it will be Bad & Loss type classified loan.

Chapter Four Credit Management Guidelines by Bangladesh BankRisk is inherent in all aspects of a commercial operation;however for Banks and financial institutions, credit risk is anessential factor that needs to be managed. Credit risk is thepossibility that a borrower or counter party will fail to meetits obligations in accordance with agreed terms. Credit risk,therefore, arises from the bank’s dealings with or lending tocorporate, individuals, and other banks or financialinstitutions.

Credit risk management needs to be a robust process that enablesbanks to proactively manage loan portfolios in order to minimizelosses and earn an acceptable level of return for shareholders.It is essential that banks have robust credit risk managementpolicies and procedures that are sensitive and responsive. Theguidelines have been organized into the following sections:

82 4.1 Policy Guidelines:This section details fundamental credit risk management policies that are recommended for adoption by all banks in Bangladesh. Theguidelines contained herein outline general principles that are designed to govern the implementation of more detailed lending procedures and risk grading systems within individual banks.

4.1.1 Lending Guidelines: All banks should have established Credit Policies (“Lending Guidelines”) that clearly outline the senior management’s view ofbusiness development priorities and the terms and conditions thatshould be adhered to in order for loans to be approved.  The Lending Guidelines should be updated at least annually to reflectchanges in the economic outlook and the evolution of the bank’s loan portfolio.

Any departure or deviation from the Lending Guidelines should be explicitly identified in credit applications and a justification for approval provided.  Approval of loans that do not comply withLending Guidelines should be restricted to the bank’s Head of Credit or Managing Director/CEO & Board of Directors. The LendingGuidelines should include the following:

a) Industry and Business Segment Focus: The Lending Guidelines should clearly identify the business/industry sectors that shouldconstitute the majority of the bank’s loan portfolio.  For each sector, a clear indication of the bank’s appetite for growth should be indicated (as an example, Textiles: Grow, Cement: Maintain, Construction: Shrink).  This will provide necessary direction to the bank’s marketing staff.

 

b) Types of Loan Facilities: The type of loans that are permittedshould be clearly indicated, such as Working Capital, Trade Finance, Term Loan, etc.

83c) Single Borrower/Group Limits/Syndication: Details of the bank’s Single Borrower/Group limits should be included as per Bangladesh Bank guidelines. Banks may wish to establish more conservative criteria in this regard.

d) Lending Caps: Banks should establish a specific industry sector exposure cap to avoid over concentration in any one industry sector.

e) Discouraged Business Types: Banks should outline industries orlending activities that are discouraged.  As a minimum, the following should be discouraged:

Military Equipment/Weapons Finance. Highly Leveraged Transaction. Finance of Speculative Investments. Logging, Mineral Extraction/Mining, or other activity that

is Ethically or Environmentally Sensitive. Lending to companies listed on CIB black list or known

defaulters. Counter parties in countries subject to UN sanctions. Share Lending. Taking an Equity Stake in Borrowers. Lending to Holding Companies. Bridge Loans relying on equity/debt issuance as a source of

repayment.

 

f) Loan Facility Parameters: Facility parameters (e.g., maximum size, maximum tenor, and covenant and security requirements) should be clearly stated.   As a minimum, the following parameters are adopted:

Banks should not grant facilities where the bank’s security position is inferior to that of any other financial institution.

Assets pledged as security should be properly insured. Valuations of property taken as security should be performed

prior to loans being granted.

84 

g) Cross Border Risk:  Risk associated with cross border lending.Borrowers of a particular country may be unable or unwilling to fulfill principle and/or interest obligations. Distinguished fromordinary credit risk because the difficulty arises from a political event, such as suspension of external payments:

Synonymous with political & sovereign risk. Third world debt crisis.

 

4.1.2 Credit Assessment:Credit Assessment: A thorough credit and risk assessment should be conducted prior to the granting of loans, and at least annually thereafter for all facilities.  The results of this assessment should be presented in a Credit Application that originates from the relationship manager/account officer (“RM”), and is approved by Credit Risk Management (CRM).  The RM should be the owner of the customer relationship, and must be held responsible to ensure the accuracy of the entire credit application submitted for approval.  RMs must be familiar with the bank’s Lending Guidelines and should conduct due diligence onnew borrowers, principals, and guarantors.

It is essential that RMs know their customers and conduct due diligence on new borrowers, principals, and guarantors to ensure such parties are in fact who they represent themselves to be.  All banks should have established Know Your Customer (KYC) and Money Laundering guidelines which should be adhered to at all times.

Credit Applications should summaries the results of the RMs risk assessment and include, as a minimum, the following details:

Amount and type of loan(s) proposed. Purpose of loans.

85 Loan Structure (Tenor, Covenants, Repayment Schedule,

Interest) Security Arrangements

In addition, the following risk areas should be addressed:

Borrower Analysis:  The majority shareholders, management teamand group or affiliate companies should be assessed.  Any issuesregarding lack of management depth, complicated ownershipstructures or inter-group transactions should be addressed, andrisks mitigated.

Industry Analysis:  The key risk factors of the borrower’sindustry should be assessed.  Any issues regarding the borrower’sposition in the industry, overall industry concerns orcompetitive forces should be addressed and the strengths andweaknesses of the borrower relative to its competition should beidentified.

Supplier/Buyer Analysis:  Any customer or supplier concentrationshould be addressed, as these could have a significant impact onthe future viability of the borrower.

Historical Financial Analysis: An analysis of a minimum of 3years historical financial statements of the borrower should bepresented.  Where reliance is placed on a corporate guarantor,guarantor financial statements should also be analyzed.  Theanalysis should address the quality and sustainability ofearnings, cash flow and the strength of the borrower’s balancesheet.  Specifically, cash flow, leverage and profitability mustbe analyzed.

Projected Financial Performance: Where term facilities (tenor > 1year) are being proposed, a projection of the borrower’s futurefinancial performance should be provided, indicating an analysisof the sufficiency of cash flow to service debt repayments. Loans should not be granted if projected cash flow isinsufficient to repay debts.

86Account Conduct:  For existing borrowers, the historicperformance in meeting repayment obligations (trade payments,cheques, interest and principal payments, etc) should beassessed.

Adherence to Lending Guidelines:  Credit Applications shouldclearly state whether or not the proposed application is incompliance with the bank’s Lending Guidelines.  The Bank’s Headof Credit or Managing Director/CEO should approve CreditApplications that do not adhere to the bank’s Lending Guidelines.

Mitigating Factors :   Mitigating factors for risks identified inthe credit assessment should be identified.  Possible risksinclude, but are not to: margin sustainability and/or volatility,high debt load (leverage/gearing), overstocking or debtor issues;rapid growth, acquisition or expansion; new business line/productexpansion; management changes or succession issues; customer orsupplier concentrations; and lack of transparency or industryissues.

Loan Structure:  The amounts and tenors of financing proposedshould be justified based on the projected repayment ability andloan purpose.  Excessive tenor or amount relative to businessneeds increases the risk of fund diversion and may adverselyimpact the borrower’s repayment ability.

Security: A current valuation of collateral should be obtainedand the quality and priority of security being proposed should beassessed.  Loans should not be granted based solely on security.Adequacy and the extent of the insurance coverage should beassessed.

Name Lending:  Credit proposals should not be unduly influencedby an over reliance on the sponsoring principal’s reputation,reported independent means, or their perceived willingness toinject funds into various business enterprises in case of need. These situations should be discouraged and treated with greatcaution.  Rather, credit proposals and the granting of loansshould be based on sound fundamentals, supported by a thoroughfinancial and risk.

87

4.1.3 Risk grading:All Banks should adopt a credit risk grading system.  The system should define the risk profile of borrower’s to ensure that account management, structure and pricing are commensurate with the risk involved.  Risk grading is a key measurement of a Bank’sasset quality, and as such, it is essential that grading is a robust process.  All facilities should be assigned a risk grade. Where deterioration in risk is noted, the Risk Grade assigned to a borrower and its facilities should be immediately changed.  Borrower Risk Grades should be clearly stated on Credit Applications.

 

The following Risk Grade Matrix is provided as an example. The more conservative risk grade (higher) should be applied if there is a difference between the personal judgment and the Risk Grade Scorecard results.  It is recognized that the banks may have moreor less Risk Grades; however, monitoring standards and account management must be appropriate given the assigned Risk Grade:

 

Risk Rating

Grade Definition

Superior–Low Risk

1 Facilities are fully secured by cash deposits, government bonds or a counter guarantee from a top tier international bank.All security documentation should be in place.

Good – Satisfactory Risk

2 The repayment capacity of the borrower is strong.  The borrower should have excellent liquidity and low leverage.  The company should demonstrate consistently strong

88Risk Rating

Grade Definition

earnings and cash flow and have an unblemished track record.  All security documentation should be in place.  Aggregate Score of 95 or greater based on the Risk Grade Scorecard.

Acceptable – Fair Risk

3 Adequate financial condition though may not be able to sustain any major or continued setbacks. These borrowers are not as strong as Grade 2 borrowers, but should still demonstrate consistent earnings, cash flow and have a good track record.  A borrower should not be graded better than 3 if realistic audited financial statements are not received.  These assets would normally besecured by acceptable collateral (1st charge over stocks / debtors / equipment / property).  Borrowers should have adequate liquidity, cash flow and earnings.    An Aggregate Score of 75-94 based on the Risk Grade Scorecard.

Marginal – Watch list

4 Grade 4 assets warrant greater attention due to conditions affecting the borrower, the industry or the economic environment.  These borrowers have an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and/or inconsistent earnings.  Facilities should be downgraded to4 if the borrower incurs a loss, loan payments routinely fall past due, account conduct is poor, or other untoward factors are present.  An Aggregate Score of 65-74 based on the Risk Grade Scorecard.

Special Mention

5 Grade 5 assets have potential weaknesses thatdeserve management’s close attention.  If left uncorrected, these weaknesses may resultin a deterioration of the repayment prospectsof the borrower.  Facilities should be

89Risk Rating

Grade Definition

downgraded to 5 if sustained deterioration infinancial condition is noted (consecutive losses, negative net worth, excessive leverage), if loan payments remain past due for 30-60 days, or if a significant petition or claim is lodged against the borrower.  Full repayment of facilities is still expected and interest can still be taken intoprofits.  An Aggregate Score of 55-64 based on the Risk Grade Scorecard.

Substandard

6 Financial condition is weak and capacity or inclination to repay is in doubt.  These weaknesses jeopardize the full settlement of loans.  Loans should be downgraded to 6 if loan payments remain past due for 60-90 days,if the customer intends to create a lender group for debt restructuring purposes, the operation has ceased trading or any indication suggesting the winding up or closure of the borrower is discovered.  Not yet considered non-performing as the correction of the deficiencies may result in an improved condition, and interest can stillbe taken into profits.  An Aggregate Score of45-54 based on the Risk Grade Scorecard.

Doubtful(non-performing)

7 Full repayment of principal and interest is unlikely and the possibility of loss is extremely high.  However, due to specificallyidentifiable pending factors, such as litigation, liquidation procedures or capitalinjection, the asset is not yet classified asLoss.  Assets should be downgraded to 7 if loan payments remain past due in excess of 90days, and interest income should be taken into suspense (non-accrual).  Loan loss provisions must be raised against the estimated unrealizable amount of all

90Risk Rating

Grade Definition

facilities.  The adequacy of provisions must be reviewed at least quarterly on all non-performing loans, and the bank should pursue legal options to enforce security to obtain repayment or negotiate an appropriate loan rescheduling.  In all cases, the requirementsof Bangladesh Bank in CIB reporting, loan rescheduling and provisioning must be followed.  An Aggregate Score of 35-44 based on the Risk Grade Scorecard.

Bad & Loss(non-performing)

8 Assets graded 8 are long outstanding with no progress in obtaining repayment (in excess of180 days past due) or in the late stages of wind up/liquidation.  The prospect of recovery is poor and legal options have been pursued.  The proceeds expected from the liquidation or realization of security may beawaited.  The continuance of the loan as a bankable asset is not warranted, and the anticipated loss should have been provided for.  This classification reflects that it isnot practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.  Bangladesh Bank guidelines for timely write off of bad loans must be adheredto. An Aggregate Score of 35 or less based onthe Risk Grade Scorecard’

 

The risk is grading by giving different weight to the followings:

911.      The ratio of a borrower’s Total Debt to Tangible Net Worth: 20%

2. Liquidity : 20%3. Profitability: 20%4. Account Conduct : 10%5. Business Outlook: 10%6. Management: 5%7. Personal Deposit: 5%8. Age of Business : 5%9. Size of Business 5%

 

Risk Grade Scorecard:

Borrower / Group: Industry Code: Date of Grading: Date of Financials: Completedby:

 Score               Risk Grade

95+                        2  75- 94                          3  65- 74                          4  55-64                          5  45-54                          6  35-44                          7   < 35                           8

  

Aggregate Score: ________

  

Risk Grade:           ________

 

 

Approval Authority:

92The authority to sanction/approve loans must be clearly delegatedto senior credit executives by the Managing Director/CEO & Boardbased on the executive’s knowledge and experience.  Approvalauthority should be delegated to individual executives and not tocommittees to ensure accountability in the approval process. Thefollowing guidelines should apply in the approval/sanctioning ofloans:

Credit approval authority must be delegated in writing from the MD/CEO & Board (as appropriate), acknowledged by recipients, and records of all delegation retained in CRM.

Delegated approval authorities must be reviewed annually by MD/CEO/Board.

The credit approval function should be separate from the marketing/relationship management (RM) function.

The role of Credit Committee may be restricted to only review of proposals i.e. recommendations or review of bank’s loan portfolios.

Approvals must be evidenced in writing, or by electronic signature.  Approval records must be kept onfile with the Credit Applications.

All credit risks must be authorized by executives within the authority limit delegated to them by the MD/CEO.   The “pooling” or combining of authority limits should not be permitted.

Credit approval should be centralized within the CRM function.  Regional credit centers may be established, however, all large loans must be approved by the Head of Credit and Risk Management or Managing Director/CEO/Board or delegated Head Office credit executive.

The aggregate exposure to any borrower or borrowing group must be used to determine the approval authority required.

Board of Directors: CEO / MD

93Head of CreditManager Credit Admin(North)Manager Credit Admin(South)Manager Credit Admin(West)Manager Credit Admin(East)Recovery Manager(North)Recovery Manager (South)Recovery Manager (West)Recovery Manager (East)Regional Manager(North)Regional Manager(South)Regional Manager(West)Regional Manager(East)Relationship Management TeamRelationship Management TeamRelationship Management TeamRelationship Management Team Credit Manager(North)Credit Manager(South)Credit Manager (West)Credit Manager (East)

Any credit proposal that does not comply with Lending Guidelines, regardless of amount, should be referred to HeadOffice for Approval.

MD/Head of Credit Risk Management must approve and monitor any cross-border exposure risk.

Any breaches of lending authority should be reported to MD/CEO, Head of Internal Control, and Head of CRM.

It is essential that executives charged with approving loanshave relevant training and experience to carry out their responsibilities effectively.

94 4.2 Preferred Organizational Structure & Responsibilities:The appropriate organizational structure must be in place to support the adoption of the policies.  The key feature is the segregation of the Marketing/Relationship Management function from Approval/Risk Management/Administration functions. Credit approval should be centralized within the CRM function.  Regionalcredit centers may be established; however, all applications mustbe approved by the Head of Credit and Risk Management or ManagingDirector/CEO/Board or delegated Head Office credit exe.

 

  Organizational Structure:

Key Responsibilities:

The key responsibilities of the above functions are as follows:

Credit Risk Management (CRM) Credit Administration Internal Audit/Control

 

4.3 Procedural guideline:

Approval Process:The approval process must reinforce the segregation of Relationship Management/Marketing from the approving authority.  The responsibility for preparing the Credit Application should rest with the RM within the corporate/commercial banking department.  Credit Applications should be recommended for approval by the RM team and forwarded to the approval team withinCRM and approved by individual executives.  Banks may wish to establish various thresholds, above which, the recommendation of the Head of Corporate/Commercial Banking is required prior to

95onward recommendation to CRM for approval. In addition, banks maywish to establish regional credit canters within the approval team to handle routine approvals.  Executives in head office CRM should approve all large loans.

The recommending or approving executives should takeresponsibility for and be held accountable for theirrecommendations or approval.  Delegation of approval limitsshould be such that all proposals where the facilities are up to15% of the bank’s capital should be approved at the CRM level,facilities up to 25% of capital should be approved by CEO/MD,with proposals in excess of 25% of capital to be approved by theEC/Board only after recommendation of CRM, Corporate Banking andMD/CEO. The following diagram illustrates the preferred approvalprocess:

 

 Executive Committee/Board:

Functions of Credit Administration Department DisbursementCustodianMonitoringCompliance      Approval from CRMCompletion of Security DocumentationLimit Creation &Complying Disbursement Check ListDisbursementObtaining Security Documentation as per approvalSafely Storing Loan/Security Documents  (fire-proof)Periodic Review of Documentation Conditions & Covenant Breach MonitoringMonitoring of Past Due, Limit, Expiry &Documents DeficiencyAudit, Internal/BB Inspection ComplianceEnsure Collateral is Insured & Properly Valued.Returns to BB, CIB Reporting, default list circulation.

96Maintain BB Circulars & ensure compliance by all Depts.Ensure all values, lawyers, insurers are approved, enlisted & their performance are reviewed periodically.Ensure adherence to approved terms & other requirements before disbursement.

1. Application forwarded to Zonal Office for approved/decline

2. Advise the decision as per delegated authority (approved/decline) to recommending branches. A monthly summary of ZCOapprovals should be sent to HOC and HOCB to report theprevious month’s approvals sanctioned at the Zonal Offices.  The HOC should review 10% of BCO approvals to ensureadherence to Lending Guidelines and Bank policies.

3. BCO/ZCO supports & forwarded to Head of Corporate Banking(HOCB) or delegate for endorsement, and Head of Credit (HOC)for approval or onward recommendation.

4. HOC advises the decision as per delegated authority to BCO5. HOC & HOCB supports & forwarded to Managing Director6. Managing Director advises the decision as per delegated

authority to HOC & HOCB.7. Managing Director presents the proposal to EC/Board8. EC/Board advises the decision to HOC & HOCB

 

4.4 Credit Administration: The Credit Administration function is critical in ensuring thatproper documentation and approvals are in place prior to thedisbursement of loan facilities.  For this reason, it isessential that the functions of Credit Administration be strictlysegregated from Relationship Management/Marketing in order toavoid the possibility of controls being compromised or issues notbeing highlighted at the appropriate level.  CreditAdministration procedures:

 

97 4.4.1Disbursement:Security documents are prepared in accordance with approval termsand are legally enforceable.  Standard loan facilitydocumentation that has been reviewed by legal counsel should beused in all cases.  Exceptions should be referred to legalcounsel for advice based on authorization from an appropriateexecutive in CRM.

Disbursements under loan facilities are only be made when allsecurity documentation is in place. CIB report shouldreflect/include the name of all the lenders with facility, limit& outstanding. All formalities regarding large loans & loans toDirectors should be guided by Bangladesh Bank circulars & relatedsection of Banking Companies Act. All Credit Approval terms havebeen met.

4.4.2 Custodial Duties: Loan disbursements and the preparation and storage of

security documents should be centralized in the regionalcredit centres.

Appropriate insurance coverage is maintained (and renewed ona timely basis) on assets pledged as collateral.

Security documentation is held under strict control,preferably in locked fireproof storage.

 

4.4.3 Compliance Requirements: All required Bangladesh Bank returns are submitted in the

correct format in a timely manner.

98 Bangladesh Bank circulars/regulations are maintained

centrally, and advised to all relevant departments to ensurecompliance.

All third party service providers (values, lawyers,insurers, CPAs etc.) are approved and performance reviewedon an annual basis.  Banks are referred to Bangladesh Bankcircular outlining approved external audit firms that areacceptable.

 

4.5 Credit Monitoring: To minimize credit losses, monitoring procedures and systemsshould be in place that provides an early indication of thedeteriorating financial health of a borrower.  At a minimum,systems should be in place to report the following exceptions torelevant executives in CRM and RM team:

Past due principal or interest payments, past due tradebills, account excesses, and breach of loan covenants

Loan terms and conditions are monitored, financialstatements are received on a regular basis, and any covenantbreaches or exceptions are referred to CRM and the RM teamfor timely follow-up.

Timely corrective action is taken to address findings of anyinternal, external or regulator inspection/audit.

All borrower relationships/loan facilities are reviewed andapproved through the submission of a Credit Application atleast annually.

Early Alert process:An Early Alert Account is one that has risks or potentialweaknesses of a material nature requiring monitoring,supervision, or close attention by management. If theseweaknesses are left uncorrected, they may result in deteriorationof the repayment prospects for the asset or in the Bank’s creditposition at some future date with a likely prospect of being

99downgraded to CG 5 or worse (Impaired status), within the nexttwelve months. 

Early identification, prompt reporting and proactive managementof Early Alert Accounts are prime credit responsibilities of allRelationship Managers and must be undertaken on a continuousbasis. An Early Alert report should be completed by the RM andsent to the approving authority in CRM for any account that isshowing signs of deterioration within seven days from theidentification of weaknesses. The Risk Grade should be updated assoon as possible and no delay should be taken in referringproblem accounts to the CRM department for assistance inrecovery.

 

Despite a prudent credit approval process, loans may still becometroubled.  Therefore, it is essential that early identificationand prompt reporting of deteriorating credit signs be done toensure swift action to protect the Bank’s interest.

Moreover, regular contact with customers will enhance thelikelihood of developing strategies mutually acceptable to boththe customer and the Bank.  Representation from the Bank in suchdiscussions should include the local legal adviser whenappropriate. An account may be reclassified as a Regular Accountfrom Early Alert Account status when the symptom, or symptoms,causing the Early Alert classification have been regularized orno longer exist. The concurrence of the CRM approval authority isrequired for conversion from Early Alert Account status toRegular Account status.

 

4.6 Credit Recovery:The Recovery Unit (RU) of CRM should directly manage accountswith sustained deterioration (a Risk Rating of Sub Standard (6)or worse).  Banks may wish to transfer EXIT accounts graded 4-5to the RU for efficient exit based on recommendation of CRM and

100Corporate Banking.  Whenever an account is handed over fromRelationship Management to RU, a Handover/Downgrade the RU’sprimary functions are:

Determine Account Action Plan/Recovery Strategy Pursue all options to maximize recovery, including

placing customers into receivership or liquidation asappropriate.

Ensure adequate and timely loan loss provisions aremade based on actual and expected losses.

Regular review of grade 6 or worse accounts.

The management of problem loans (NPL’s) must be a dynamic processand the associated strategy together with the adequacy ofprovisions must be regularly reviewed. A process should beestablished to share the lessons learned from the experience ofcredit losses in order to update the lending guidelines.

 Research Framework

Loan Process

Approval

Disbursement

101

TheoreticalCoding

4.6.1 NPL Account Management: All NPLs should be assigned to an Account Manager within the RU,who is responsible for coordinating and administering the actionplan/recovery of the account, and should serve as the primarycustomer contact after the account is downgraded to substandard.  Whilst some assistance from Corporate Banking/RelationshipManagement may be sought, it is essential that the autonomy ofthe RU be maintained to ensure appropriate recovery strategiesare implemented.

 

4.6.2 Account Transfer Procedures: Within 7 days of an account being downgraded to substandard aRequest for Action should be completed by the RM and forwarded toRU for acknowledgment.  The account should be assigned to anaccount manager within the RU, who should review alldocumentation, meet the customer, and prepare a Classified LoanReview Report within 15 days of the transfer.  The CLR should beapproved by the Head of Credit, and copied to the Head ofCorporate Banking and to the Branch/office where the loan wasoriginally sanctioned.  This initial CLR should highlight anydocumentation issues, loan structuring weaknesses, proposed

Recovery

102workout strategy, and should seek approval for any loan lossprovisions that are necessary. Recovery Units should ensure thatthe following is carried out when an account is classified as SubStandard or worse:

Facilities are withdrawn or repayment is demanded asappropriate.  Any drawings or advances should be restricted,and only approved after careful scrutiny and approval fromappropriate executives within CRM.

CIB reporting is updated according to Bangladesh Bankguidelines and the borrower’s Risk Grade is changed asappropriate.

Loan loss provisions are taken based on Force Sale Value(FSV).

Loans are only rescheduled in conjunction with the LargeLoan Rescheduling guidelines of Bangladesh Bank.  Anyrescheduling should be based on projected future cash flows,and should be strictly monitored.

Prompt legal action is taken if the borrower isuncooperative.

 

4.6.3Non Performing Loan (NPL) Monitoring: On a quarterly basis, a Classified Loan Review (CLR) should beprepared by the RU Account Manager to update the status of theaction/recovery plan, review and assess the adequacy ofprovisions, and modify the bank’s strategy as appropriate.  TheHead of Credit should approve the CLR for NPLs up to 15% of thebank’s capital, with MD/CEO approval needed for NPLs in excess of15%.  The CLR’s for NPLs above 25% of capital should be approvedby the MD/CEO, with a copy received by the Board.

 

4.6.4 NPL Provisioning and Write Off:

103The guidelines established by Bangladesh Bank for CIB reporting,provisioning and write off of bad and doubtful debts, andsuspension of interest should be followed in all cases.  Theserequirements are the minimum, and Banks are encouraged to adoptmore stringent provisioning/write off policies.  Regardless ofthe length of time a loan is past due, provisions should beraised against the actual and expected losses at the time theyare estimated.  The approval to take provisions, write offs, orrelease of provisions/upgrade of an account should be restrictedto the Head of Credit or MD/CEO based on recommendation from theRecovery Unit.

The RU Account Manager should determine the Force Sale Value (FSV) for accounts grade 6 or worse.  Force Sale Value is generally the amount that is expected to be realized through the liquidation of collateral held as security or through the available operating cash flows of the business, net of any realization costs.  Any shortfall of the Force Sale Value compared to total loan outstanding should be fully provided for once an account is downgraded to grade 7.  Where the customer in not cooperative, no value should be assigned to the operating cash flow in determining Force Sale Value.

Following formula is to be applied in determining the required amount of provision:

1.         Gross Outstanding                                                                       XXX

2.         Less:   (i) Cash margin held or Fixed

Deposits/SP under lien.         ( XXX )

(ii) Interest in Suspense Account( XXX )

104 3.         Loan Value XXX

(For which provision is to be created before considering

estimated realizable value of other security/collateral held)       

 

4.         Less: Estimated salvage value of security/collateralheld            ( XXX )

Net Loan Value                            XXX

 

4.7 Single Borrower Exposure Limit: In order to enable the banks to improve their credit risk management further, Bangladesh Bank is issuing this Master Circular by consolidating all the instructions issued so far and incorporating some amendments to the previous circulars.

01. As a result of increase in capital of almost all the banks, now it has been decided to reduce the single borrower exposure limit from 50% to 35%. Thus-

(a) the total outstanding financing facilities by a bank to any single person or enterprise or organization of a group shall not at any point of time exceed 35% of the bank’s total capital subject to the condition that the maximum outstanding against fund based financing facilities (funded facilities) do not exceed15% of the total capital. In this case total capital shall mean the capital held by banks as per section-13 of the Bank Company Act, 1991.

105(b) Non-funded credit facilities, e.g. letter of credit, guarantee etc. can be provided to a single large borrower. But under no circumstances, the total amount of the funded and non-funded credit facilities shall exceed 35% of a bank’s total capital. However, in case of export sector single borrower exposure limit shall remain unchanged at 50% of the bank’s total capital. But funded facilities in case of export credit shall also not exceed 15% of the total capital. In addition, the banks shall follow the following prudential norms, where applicable:

02. (a) Loan sanctioned to any individual or enterprise or any organization of a group amounting to 10% or more of a bank’s total capital shall be considered as large loan.

(b) The banks will be able to sanction large loans as per the following limits set against their respective classified loans:.

 

Level of classified loans

The highest rate fixed for large loan against bank’s total loans & advances

Upto 5% 56%More than 5% but upto 10%

52%

More than 10% but upto15%

48%

More than 15% but upto20%

44%

More than 20% 40%

 

(c) In order to determine the above maximum rates of large loans,all non-funded credit facilities e.g. letter of credit, guarantee, etc., included in the loan shall be considered as 50% credit equivalent. However, the entire amount of non-funded credit facilities shall be included in determining the total

106credit facilities provided to an individual or enterprise or an organization of a group.

03. (a) A public  company, which has 50% or more public shareholdings, shall not be considered as an enterprise/organization of any group.

(b) In the cases of credit facilities provided against governmentguarantees, the aforementioned restrictions shall not be applicable.

(c) In the cases of loans backed by cash and encashable securities (e.g.FDR), the actual lending facilities shall be determined by deducting the amount of such securities from the outstanding balance of the loans.

04. (a) Banks should collect the large loan information on their borrowers from Credit Information Bureau(CIB) of Bangladesh Bank before sanctioning, renewing or rescheduling large loans in orderto ensure that credit facilities are not being provided to defaulters.

(b) Banks must perform Lending Risk Analysis (LRA) before sanctioning or renewing large loans. If the rating of an LRA turns out to be “marginal”; a bank shall not sanction the large loan, but it can consider renewal of an existing large loan taking into account other favorable conditions and factors. However, if the result of an LRA is unsatisfactory, neither sanction nor renewal of large loans can be considered.

(c) While sanctioning or renewing of large loan, a bank should judge its borrower’s overall debt repayment capacity taking into consideration the borrower’s liabilities with other banks and financial institutions.

(d) A bank shall examine its borrower’s Cash Flow Statement, Audited Balance Sheet, Income Statement and other financial statements to make sure that its borrower has the ability to repay the loan.

107(e) Sanctioning, renewing or rescheduling of large loans should be approved by the Board of Directors in case of local banks. Such decisions should be taken by the Chief Executives in case offoreign banks. However, while approving proposals of large loans,among other things, compliance with the above guidelines must be ensured.

05. For the loans that have already been disbursed with the approval of Bangladesh Bank, and that have exceeded the limit as stipulated in Section 01 (mentioned above), banks shall take necessary steps to bring down the loan amounts within the specified limit. In order to accomplish this condition, banks may, if necessary, arrange partaking with other banks. However, for continuous loans, the limit has to be brought down as per Section 02 within June 30, 2012. For term loans, the deadline is June, 2013.

06. Banks shall submit the quarterly statement of large loan in the specified format (Form L) to Department of Off-site Supervision of Bangladesh Bank within 10 days after the end of respective quarter.

07. This circular is issued by Bangladesh Bank in exercise of itspower conferred to it by section 45 of the Bank Company Act, 1991. This circular shall be effective immediately. The chief executives of all the banks are advised to place this circular intheir next Board meetings.

 

108 Chapter Five Policy Comparison with Bangladesh Bank 

5.1 Portfolio Comparison:Pubali Bank Limited policy:

To different sectors, to different geographical area, to different line of product or business.

Different type of credit. Credit into a particular sector or area, product or

business should also be observed carefully. Analyzed carefully in determining the loan portfolio of a

bank.

BB Guidelines:

The Lending Guidelines should clearly identify the business/industry sectors that should constitute the majority of the bank’s loan portfolio.  For each sector, a clear indication of the bank’s appetite for growth should be indicated (as an example, Textiles: Grow, Cement: Maintain, Construction: Shrink

Pubali Bank Limited has followed the Bangladesh Bank guideline. Bangladesh Bank gives special attention to disburse loan in different sectors, especially thrust sectors approved by the government. The recent thrust sector is textile sectors and agro-based industry. Pubali Bank Limited has disbursed majority of advances in the textile sectors but there is little exposure in the agro-based sectors. Bangladesh bank has recently decided to reduce the single borrower exposure limit from 50% to 35%. PubaliBank Limited is followed the Bangladesh Banks rules.

109Pubali Bank Limited has also the rules to disburse loans in the discouraging sectors. Facility parameters (e.g., maximum size, maximum tenor, and covenant and security requirements) should be clearly stated.

5.2 Single Borrower/ Group Limits:Single borrower exposure limit is now 35%. The maximum outstanding against fund based financing facilities (funded facilities) do not exceed 15% of the total capital. In case of export sector single borrower exposure limit shall remain unchanged at 50% of the bank’s total capital. But funded facilities in case of export credit shall also not exceed 15% of the total capital. At present, Pubali Bank Limited is trying to reduce the single borrower exposures limit.

 

5.3 Credit Assessment:Credit department in Pubali Bank Limited try to asses their customers and conduct due diligence on new borrowers, principals,and guarantors to ensure such parties are in fact who they represent themselves to be.  Pubali Bank Limited has established “Know Your Customer (KYC)” and Money Laundering guidelines which should be adhered to at all times.

To assess the credit worthiness, Pubali Bank Limited‘s Applications summaries the results of the risk assessment and include:

Amount and type of loan(s) proposed. Purpose of loans. Loan Structure (Tenor, Covenants, Repayment Schedule,

Interest) Security Arrangements

In addition, Pubali Bank Limited assesses the following areas during credit assessment:

110i) Borrower analysis, ii) Buyer/ Supplier analysis, iii) Industryanalysis, iv) Financial analysis, v)  Projected financial requirement etc.

 In case of BB: The following should be analyzed during credit assessment

Borrower Analysis Industry Analysis Cash flow, leverage and profitability must be analyzed Future Financial Performance Mitigating Factors Security should be proper Loan Restructure

 

5.4 Risk grading:Risk grading is a key measurement of a Bank’s asset quality, and as such, it is essential that grading is a robust process.  All facilities are assigned a risk grade.  Where deterioration in risk is noted, the Risk Grade assigned to a borrower and its facilities will be immediately changed. The Risk grading process in Pubali Bank Limited is not quite up to date.

In BB, Risk grading is done by considering different weight to the following parameters:

The ratio of a borrower’s total debt to tangible net worth: 20%

Liquidity : 20% Profitability: 20% Account Conduct : 10% Business Outlook: 10% Management: 5% Personal Deposit: 5% Age of Business : 5% Size of Business 5%

111 5.5 Approval Authorities:In Pubali Bank Limited , the approval authority is centralized toHead Office where the authority to sanction/approve loans must beclearly delegated to senior credit executives by the Managing Director/CEO & Board based on the executive’s knowledge and experience. In Branch level, only credit proposals, documentation, disbursement, monitoring is conducted. Branch has no power to approve a credit facility.

Approval Authority at Pubali Bank Limited:

Branch processingHead Office Credit CommitteeExecutive Board of DirectorStep to avail the credit facility

 

5.6 Credit Process:Branch step:

Credit ReportCIB ReportVisiting ClientsCredit Line ApplicationSupporting Documents

After branch processing, Proposal send to Head Office for Approval

5.7 Segregation of Duties:Credit Approval, Credit Risk Management (CRM), Credit Administration, Credit Monitoring, Internal Audit/Control all is concentrated in the Head Office. Branch only conducts the Head Office Guideline. The segregation of the Marketing/Relationship Management function from Approval/Risk Management/Administration

112functions is in Pubali Bank Limited. Credit approval should be centralized within the CRM function.  Branch credit centers are established, however, all applications must be approved by the Head of Credit and Risk Management or Managing Director/CEO/Boardor delegated Head Office credit executive.

 

5.8 Preferred Organizational Structure: The Credit Division separates from the corporate division in Pubali Bank Limited. Pubali Bank Limited follows the organizational structure. The people at all the levels have the following key responsibility

Credit Risk Management (CRM) Credit Administration Internal Audit/Control Credit Monitoring & Control

5. 9 Approval Process:  

The approval process in Pubali Bank Limited is as follows:

Credit Application By BorrowersBranch Credit Officer investigates and make proposal for Head Office approval (ZCO)Credit Approval Committee (HOCB)  Managing Director          Executive Committee/Board            1 2 34567

113 

 

In BB guidelines, The facilities are up to 15% of the bank’s capital should be approved at the CRM level, facilities up to 25%of capital should be approved by CEO/MD, with proposals in excessof 25% of capital to be approved by the EC/Board only after recommendation of CRM.

5.10 Credit Administration:The Credit Administration function Pubali Bank Limited is strictly followed. The credit administration in BB is as follows:

Disbursements: under loan facilities are only be made when all security documentation is in place. CIB report should reflect/include the name of all the lenders with facility, limit & outstanding.

Custodial Duties: Loan disbursements and the preparation and storage of security documents should be centralized in the branch. Appropriate insurance coverage is maintained (and renewedon a timely basis) on assets pledged as collateral. Security documentation is held under strict control, preferably in locked fireproof storage.

Compliance: All required Bangladesh Bank returns are submitted inthe correct format in a timely manner. Pubali Bank Limited send the following reports Bangladesh Bank:

REPORT                                      FREQUENCY

 

a. Up date Customer & Account Data                                    Daily

b. Authorized Withdrawals                                                      Daily

114

Pubali Bank Limited follows the above rules.

PUBALI BANK LIMITEDCREDIT APPRAISAL FORM

 ______________ BRANCH, ______________

Existing Customer: Yes No if yes Does operating in

another Br.:Yes No

Customer/Applicant'sName :

REPORT                                      FREQUENCY

 

a. Up date Customer & Account Data                                    Daily

b. Authorized Withdrawals                                                      Daily

115Account No.:

BorrowerID:

Group Name : Group ID:

Relation with our Bank since: D D M M Y Y Branch:

First Sanction Limit: Lac Dat

e D D M M Y YAuthority

:

Last Sanction Limit: Lac Dat

e D D M M Y YAuthority

:

Last Renew Limit: Lac Dat

e D D M M Y YAuthority

:

BB Sector Code:

BB SecurityCode:

BB Economic PurposeCode:

01.

Particulars of Present Proposal

(1.1)Date of application of the Customer:

D D M M Y Y

(1.2)To consider :

Type of creditfacilities

New/Renewal/Enhancement(onl

y Enhanceportion) etc.

Amount Margin

Pricing

Proposedperiod/validity

116

(1.3)Purpose of Facility:

(1.4)Mode of repayment:

(1.5) Value of Securities: (Figure in Lac Taka)

(1.5.1) Primary Security:

a) Existing

b) Offered

(1.5.2) Collateral Security: (Please attach copy of valuation)

Type of Securities:Surveyor’svaluationwith date

Agreed byBM/RM/GM

Valuation ofBM/RM/GM.

(If choice is‘No’ inpreviouscolumn.)

i) Existing CollateralSecurity

Yes No

ii) Offered CollateralSecurity

Yes No

iii)Total value of Collateral

Yes No

iv) Forced sale value of Collateral

Yes No

117(1.5.3) Paper Security :

a) Existing :

b) Offered :

(1.5.4) Others security: (Personal Guarantee, Corporate Guarantee, 1st charge on fixed and/or floating assets, simultaneous charge, negative pledge etc.)

a) Existing :

b) Offered :

N.B: Please attach stock statement as per Bank’s prescribed form (FL-56)

Please attach photocopy of instruments to be pledged/liened.

Please attach personal net worth statement as per Bank’s prescribed format in case of any personal guarantee.

02.

Net-worth and Existing Credit facilities of the Borrower and Group: (Figure in Lac Taka).

(2.1) Capital, Equity/Investment in Business :

Borrower /Group AuthorizedCapital

Paid-upCapital/Investment

Equity/ Networth*

a) Applicant Borrower

b) Subsidiary, Affiliates, Sister Concern

(unit wise, if any)

Total

118(2.2) Existing credit facilities & securities:FacilityType

Limit Validity

Margin

Pricing

Outstanding

Value of security

Primary Collateral

Total

(2.3) Existing exposure of the Borrower and Group from PBL & others :

Particulars Funded Non-funded

Totalexposures

a) To the Borrower from Pubali Bank

b) To the Subsidiary, Affiliates, Sister Concernfrom Pubali Bank

c) Existing Credit facilities to the Group from Pubali Bank (a+b)

d) Credit facilities from Other Bank & FI to the borrower

e) To the Subsidiary, Affiliates, Sister Concern from

Other Bank & FI

f) Global Credit facilities (c+d+e)

g) Present Proposal to the Bank

h) If sanctioned, Credit facilities from Pubali Bank will be (c+g)

119(2.4) Debt Burden Ratio (DBR) of the Borrower:

DBR = [Monthly Loan Installments (existing + proposed)/MonthlyIncome] x 100

(3% of Credit Card limit has to be considered while calculatingDBR.)

(2.5) Details of Guarantor(s): If there any Guarantor(s)

Guarantor Name Assets Liabilities Net worth* Remarks

* Copy of Personal net worth to be attached.

03.

Account Performance and Profitability: (For three years) ( Figure in

Lac Taka)

(3.1) Funded Facility:

Facility

Year Borrower Group (including borrower)

No. ofTransaction

DebitSummation

CreditSummation

No. ofTransaction

DebitSummation

CreditSummation

(3.2) Non Funded Facility:

Facility Year Borrower Group (includingborrower)

Number Amount Number Amount

120

(3.3) Limit Evaluation:

Facility

Limit Year Turnover indicator

=Yearly fundedturnover/Limit

Nos. ofadjustme

nt

MaximumBalance

MinimumBalance

(3.4) Demand & Term Loan Performance of the borrower: (LATR, Short TermLoan etc.)

Facility

Year Numberofloan

Disbursedamount

Interest

Charged

TotalRecoverable Amount

Repayment made

PresentOutstanding

No. ofLoanadjusted

(3.5) Total Earnings:

Year Interest Commission Other Total

From Borrower

From Group

(3.6) Reschedule record (whether any track record in the past) Yes No

121 (if yes) How many times

(3.7) Overdue record (in any existing/previous loans of the borrower)

Yes No

(3.8)

CIB Status:

CIB Report Obtained on ______________________

Report/ Status :

(3.9) Comments from Last Inspection / Audit report : (Our Bank & Bangladesh

Bank)

5.11 Credit Monitoring:There is strong monitoring team in Pubali Bank Limited. There aretwo monitoring teams at Pubali Bank Limited; i) Head Office

122Monitoring Team and ii) Branch Monitoring teams. The two teams combined works to reduce the bad loan.

Control of Overdrawn Account :

Branch Control: Sanctioning the overdraft limit, debited cheque ,control, periodic revives of the overdraft account, Periodic review.

Head Office Control: Weekly review of reports sent by the branches;

Random examination of reports, if required, twice a month whenever requested by the  authority;

Review of weekly reports sent  to the Head Office on all EOLs and TODs which have not been authorized correctly;

Regular branch/ project visits by officers from Loan Administration and Monitoring Division to review, on the spot, large and / or irregular advances.

Each of the officers in Loan Administration

Loan Control:

Branch Control: Setting up loan accounts, review of loan account,periodic assessment of security value

Head office control:

Monthly review of the Loan Statement by officers in concerned division;

A program of regular branch/project visits by officers from concerned division.

 

Control of other credit facilities:

L/C control, LG control, Bill Purchased, Cash credit are controlled by both at Head Office and Branch.

123 5.12 Credit Recovery:The recovery team at Pubali Bank Limited does the followings:

Determine Account Action Plan/Recovery Strategy Pursue all options to maximize recovery, including placing

customers into receivership or liquidation as appropriate. Ensure adequate and timely loan loss provisions are made

based on actual and expected losses. Regular review of grade 6 or worse accounts

In BB policy, the Head of Credit should approve the CLR for NPLs up to 15% of the banks capital, with MD/CEO approval needed for NPLs in excess of 15%.  The CLR’s for NPLs above 25% of capital should be approved by the MD/CEO, with a copy received by the Board.

 

5.13 Account Transfer Procedures: Pubali Bank Limited follows the facilities withdrawn, CIB reporting, Loan loss provision, loan rescheduling, prompt legal action etc approved by Pubali Bank Limited.

Provision for reserve will be kept at the following scale:

Standard                     01%

Special Mention A/c    05%

Sub-Standard              20%

124After 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.

 

5.14 Non-performing Loan Account Management:At BB, on a quarterly basis, a Classified Loan Review (CLR) prepared by the RU Account Manager at Pubali Bank Limited to update the status of the action/recovery plan, review and assess the adequacy of provisions, and modifies the bank’s strategy as appropriate.  The Head of Credit approves the CLR for NPLs up to 15% of the bank’s capital, with MD/CEO approval needed for NPLs in excess of 15%.  The CLR’s for NPLs above 25% of capital shouldbe approved by the MD/CEO, with a copy received by the Board.

At Pubali Bank Limited, it is done by Identification: check largeaccount daily and small account weekly. Monitoring: The first stage in the monitoring system is to meet the borrower and give him the opportunity to regularize his account. Normally he will be given a time limit to regularize his affairs and to provide plans for solving his financial problems.

ChapterSix Operational Performance of Pubali BankLimited

125  6.1 Amount of Loans and Advances: All activities relating to credit of the bank are being carried out as strictly and cautiously as before with proper risk management strategy starting from the selecting credit worthy quality borrowers followed by a well-defined credit appraisal andapproval process, again carried out by the competent personnel atdifferent level. Pubali Bank Limited is in the forefront in implementing the guidelines for managing five core risks in banking. Total Loan and advances at different period are shown inthe following:

Advance Trend (Taka in Million)

Year 2009 2010 2011 2012 2013Advance (million)

74203.33 89106.21 106329.63 122068.52 136904.46

 

Figure 4: Loan and Advances amount at different Financial Year.

 

The financial year 2013 is most successful year in respect of loan disbursement. The growth rate is 12.18% in this year.

 

74203.3389106.21

1 2 3 4

106329.63

122068.52

136904.46

126 6.2 Type-Wise Loans & Advances Portfolio:Pubali Bank Limited loans and advances with types are shown below:

Total advances of the bank as on 31 December 2013 stood at Taka 136940.46 million showing an increase o Taka 1471.94 million @ 12.18% growth.

In line with national economic development, the bank made advances mainly as Commercial Loan, Import & Export business, Term loan to large and medium scale industries, House Building Loan, Working Capital Loan, Consumer’s Credit and Syndication Loans etc.

Figure 5: Type-Wise loan Disbursement.

6.3 Maturity wise Loans and Advances:(Amount in Taka)

Figure 5: Maturity-wise loans & advances

6.4 Sector-wise Concentration of loans & Advances

Receivable 2013 2012On demand

11,271,285,659 9,993,783,509

Up to 3 months 21,482,394,138

12,399,313,661

Over 3 month but not more than 1 year

55,627,574,148

57,099,246,492

Over 1 year but not more than 5 year

40,786,657,376

33,254,344,196

Over 5 Year 6,592,302,096

8,258,312,184

127(Amount in Taka)

Sector 2013 2012Agriculture 1,114,601,777 5,175,881,049Jute 2,04,924,068 2,17,165,881Textile 11,587,735,240 10,342,927,234Ready-made-garments 10,795,184,514 1,212,563,4263Steel & engineering 4,479,065,827 6,705,438,720Ship scraping 3,579,413,018 1,763,594,483Edible oil 6,732,052,098 5,100,657,351Cement 1,961,431,063 2,830,154,216Food & allied 3,327,860,089 4,856,263,263Paper & packing 5,78,578,745 6,20,183,536Construction 7,956,960,677 8,045,566,075Energy and power 9,91,153,495 8,05,139,322Transport and Communication

4,686,466,134 1,662,483,289

Pharmaceuticals 1,724,219,691 1,449,675,530Leather 69,762,778 3,32,426,003Service industries 9,89,794,521 9,36,241,522Others 4,807,871,382 3,544,667,122

Figure 5: Sector-wise Loans portfolio (2013)

 

6.5 Location-Wise Loans & Advances:

(Amount in Taka)

Location Urban-2013

Urban-2012

Rural-2013

Rural-2012

Dhaka 86,834,822,537

75,325,159,575

3,048,386,157

2,175,391,742

128Chittagong 26,332,129,

52327,400,747,178

2,218,293,095

8,31,321,403

Sylhet 6,689,783,867

5,970,183,610

1,803,929,957

1,493,287,694

Barisal 1,327,248,495

1,175,971,283

3,33,866,575 2,25,068,409

Khulna 2,441,466,492

2,585,176,191

7,18,212,598 8,10,848,606

Rajshahi 1,777,459,241

1,500,241,493

8,81,168,303 3,97,962,720

Rangpur 2,074,069,491

1,365,422,297

2,56,677,799 6,96,428,101

Outside Bangladesh

(Foreign bills/drafts purchased)

2013 2012

2,02,948,239

1,15,470,052

Figure 6: Location-Wise Loans & Advances (2013)

6.6 Classified, Unclassified, Doubtful & Bad Loans & Advances:(Amount in Taka)

 Particulars

2013

2012

Unclassified

124,003,931,221

25.50% 112,081,381,396

25.50%

Sub-standard

748,873,385 20% 1,253,147,092

20%

Doubtful 793,331,579 50% 1,221,910,841

50%

Bad/Loss 6,593,899,8 100% 3,684,566,8 100%

12957 21

 Figure 7: Classified, Unclassified, Doubtful & Bad Loans & Advances (2013)

6.7 Measuring Returns of Pubali Bank Limited.Interest Margin: Interest margin indicates the net interestincome into earning assets. Bank’s main earning source is itsinterest income .The higher the interest income, the higher thepossibility for the bank to survive. Interest margin for the bankhas increased for years, which is a good sign for a bank. In theyear 2008 it was about 2.24%.

Profit Margin: It measures the relation between sales and profit.It is calculated by dividing net income by the operating revenuesof the bank. Normally if return on equity and return on assetsare higher the profit margin will also be higher. Pubali BankLimited made an exclusive profit in 2008. From the progress ofinterest margin, it is quite clear that they made such a hugeprofit not from interest income rather from other sources ofincome.

 

Category  2013 2012Profit margin  18.30% 15.30%Gross Classified loans tototal loans

5.94% 5.05%

Equity Multiplier 11.25X 10.26XReturn on assets (ROA) 1.01% 0.91%Return on equity (ROE) 11.33% 9.37%Cost of fund 10.17% 10.77%Return On Investment (ROI)

9.43% 7.95%

130Price Earning Ratio (Times)

11.82 15.70

Loan Deposit Ratio 76.99% 81.15%

 

Return On Assets (ROA): Bank did not have good-looking return onassets in 2013 & 2012, which is only 1.01% and 0.91%.

 

Return On Equity (ROE): Pubali Bank Limited had an exclusivereturn on equity on equity in 2013 which may be due to their newaccounting procedure.

 

Chapter Seven: Conclusion 

From the above discussion, it can be shown that Pubali BankLimited has both positive and negative aspect in loans & advancesdisbursement & monitoring policy. The pubali Bank Limited isplaying pivotal role in providing necessary finance to thedifferent industrial sectors and other sectors.  For socialactivities, Pubali Bank Limited creates a good image in thesociety, but the number of branch is less than any other samegeneration banks. The Pubali Bank Limited competent authorityshould expand the banking markets by establishing new branch atdifferent areas all over the world.

With a view to improving the quality and soundness of loanportfolio, credit risk management methods are continuouslyupdated in Pubali Bank Limited. The Bank is applying a system ofcredit risk assessment and lending procedures by strikerseparation of responsibilities between risk assessments and

131lending decisions and monitoring functions. The Bank monitors itsexposure to particular sectors of economy on an ongoing basis.The Bank has undertaken the changes in policy of credit riskmanagement, credit risk administration and credit monitoring andrecovery in line with the guidelines of Bangladesh Bank and insome cases Pubali Bank Limited followed strictly.

Compliance of Policy between Pubali Bank Limited and Bangladesh Bank Are shown below:

Particulars BB Pubali Bank LimitedLoans Portfolio

Loan Portfolio should be proper

Pubali Bank Limited concentrated only few sector (i.e. textile sector: 50%)

Single Borrower/ Group Limit

Bank must follow the BBspecified limit

Bank is taking the necessary step to reduce limit

Credit Assessment

Banks should follow thecredit assessment procedures

Pubali Bank Limited assessment is more strict in assessing credit

Risk Grading BB has given a guideline for risk grading

Pubali Bank Limited does not strictly  follow the Risk  grading of BB

Approval Authority

Top management should delegate some authority

At Pubali Bank Limited, approval authority entirely

132to branch level on the head office.

Credit Processing

BB has given a guideline

Pubali Bank Limited followsthe guideline

Credit Administration

Functions are: Disbursement, custodialduties, compliance, monitoring

Monitoring, compliance and custodial duties

Credit Monitoring

BB has given a guideline

Pubali Bank Limited implements a new approach in addition to BB guidelines.

NPL A/C maintenance

BB has given a guidelines

Pubali Bank Limited strictly followed the guideline

 

From the performance evaluation of Pubali Bank Limited, it has shown that the credit disbursement, loans & advances growth rate,loans portfolio, loans classified amount are quite in good position in comparison to BB guidelines.

Suggestions: In credit management, it is conventional that proposals of credit facilities must be supported by a complete analysis of the proposed credit. More importance should be given on refund of loans out of funds generated by the borrower from their business activities (cash flow) instead of realization of money by disposing of the securities held against the advance, which is very much uncertain in present context of Bangladesh, where a number of creditors are willful defaulters.

Credit officer measures the risk associated with the credit facility. He should not be liberal in this respect; he should strictly follow the credit evaluation principle setup by the bank. The analysis should contain information about the borrower,credit purpose, credit repayment sources, details of collateral security with valuation and guarantee. It should also contain an assessment of the competence and quality of the borrower’s management ability, the general economic and competitive

133environment of the borrowers industry and other pertinent factors, which may affect the borrower’s ability to repay the facility, should be given much importance. It should improve in file management system to faster the dealings with the client’s proposal.

Bank should introduce more customer friendly loan products. At present Pubali Bank Limited does not offer consumer credit, car financing, etc. It is a good challenge that Prime Bank is catering both conventional and interest based banking. It should introduce more Islamic Branches as soon as possible to compete the Islamic Banking Sector.

References

 

1. Bangladesh Bank circular.2. Cole, Robert H, Consumer and Commercial Credit Management,

Irwin Publisher, 5th edition, 1976.3. Hempel, George H. & Simonson, Donald G., Bank Financial

Management, John Willy & Sons Publisher, 1st Edition, 1991.4. Activities of Bank and Financial Institution (1996-1997),

Banking Sector, Ministry of Finance, Government Republic of Bangladesh.

5. Annual Report for the year 2009 and 2013 of Pubali Bank Limited.

6. Pubali Bank Limited manual.7. World Wide Web

134 ********END********