Professional Documents
Culture Documents
ON
CREDIT OPERATING PROCEDURE OF BASIC BANK LTD.
University of Dhaka
Supervisor-
Submitted by:
RUBANA NASRIN M.B.A (HRM), 6TH Batch Roll no.- 438, SL. no.-59 Department of Management Studies UNIVERSITY OF DHAKA.
LETTER OF TRANSMITTAL
Date: 15.02.07 To Syed Golam Maola Professor Department of Management Studies University of Dhaka. Sub: Submission of Internship Report. Dear Sir,
I am highly satisfied to submit my report on credit operating system of BASIC Bank Limited. This report is an integral part of our academic courses in completion of the MBA program, which has given me the opportunity to have an insight into the nature of loan, credit policy & practice, loan recovery and credit problems of BASIC Bank Ltd. For preparing this report I tried my level best to accumulate relevant and up graded information from all available sources. In completing the Report I have tried my best in imparting every available details of the Bank avoiding unnecessary amplification of the report. I hope that this report will meet the standards of your judgments.
Faithfully yours,
_______ Rubana Nasrin M.B.A (HRM), 6th Batch
ACKNOWLEDGEMENT
First of all I would like to express my gratitude to omnipotent and almighty Allah, whose invisible guidance helped me to complete this report. Although, time was very limited for getting the sufficient knowledge about all of banking service, but the short experience that I gathered as an internee, in BASIC Bank Limited is an asset for all the time to come in my life. I take the opportunity to express my deep sense of gratitude of my reverend supervisor, Professor Syed Golam Maola for his invaluable suggestions and guidance during the study period that has greatly inspired me in preparing this report successfully. I am very much grateful to the authority of BASIC Bank Limited to assign me as an internee in this reputed bank and have the opportunity to learn theoretical as well as practical knowledge related to overall banking system and complete such an ambitious study for my internship program as well as for preparation of this report. I am deeply grateful to all concerned persons who provide valuable guidance, suggestions and advises in collecting information, analyzing and preparing the report. I am particularly indebted to them whose efforts and cordial cooperation made the report possible. It couldnt possible to thank all of those marvelous people who have contributed for the preparation of this report. All of BASIC Bank employees are very frank and helpful. I couldnt think a single moment that I am working here as an internee. They helped me as their employee. There are of course some very special people who cant go without mention. I am grateful to Mr. Mobarak Hossain Chowdhury, Deputy General Manager, Mr.Masum Ahmed, Manager, Mr. Faruque Ahmed, Manager, Mr.Saidur Rahman Sohel, Deputy Manager, Mr. Al-Amin, Deputy Manager and Mr. Motin Hossain, Officer, Mrs. Asia Khanam, Assistant Officer, Mr. Billal Hossain, Officer of Dilkusha Branch of BASIC for their cordial attitude and extending their helping hand to my problem regarding internship program. Without their generous support I could hardly achieve my cherished goals. I am grateful to the Department of Management Studies, University of Dhaka for providing me such opportunity to come closer to real situation. Finally, I want to express my deep gratitude to my family members and also remember my friends whose enormous help assisted me to complete my report.
Executive Summary
The present Internship Report Credit Operating System- A case study on Bangladesh Small Industries and Commerce Bank Limited (BASIC) has been prepared under the dynamic supervision of Professor Syed Gulam Maola, Department of Management studies, University of Dhaka. The period of internship lasted for three months. BASIC Bank Limited started its operation from January 21, 1989. Although the Government of Bangladesh took over 100 percent ownership of BASIC in the year 1992, the bank is yet not nationalized; it operates like a private bank. One of the significant characteristics of BASIC is that the Banks Memorandum and Articles of Association stipulates that 50 percent of loan -able fund is required to be invested in Small and Cottage industries sector. Credit is the most fundamental issue in our banking sector. Default culture is the most common phenomenon in the banking sector of Bangladesh. Like other Govt. banks, private banks also suffer from this problem. But, the Credit Management in BASIC is relatively sound compared to all other similar banks operating in the country. As a result, the bank has a very low rate of classified loans, which is around 4% only. Although the amount of classified loans in BASIC is less than that of other banks, it still remains a concern for the management because of its increasing trend during the last three years. One of the major causes of classified loans in BASIC is the unwillingness of the borrowers to repay loans in the backdrop of political unrest of the country. Other causes include high rate of interest, entrepreneurs inability to market their products, lack of proper supervision by the bank officials, sickness of industries due to loss of competitiveness in price with the similar imported products, lengthy bureaucratic procedures of the other govt. agencies etc. Since the process of recovery of classified loan involves lengthy legal procedures, the percentage of recovery of such loans is very low. BASIC therefore emphasizes on persuasion rather than going for legal action in order to recover its classified loans. Bank considers the practical aspects of the projects being sick and extends further finance or reschedules the repayment period. 5
BASIC should therefore establish a review process to examine the changing circumstances of borrowers to determine the position of loans. The bank should also keep in touch with any changes in the management structure of borrower organizations, changes in industry trend and changes in overall economy of the country. Before sanctioning a loan, the Bank should make survey on customers, suppliers and competitors. Regular visits to borrowers places and close monitoring of the activities of the borrowers are more useful than having meetings in the bank.
[1.1] Background of the Study [1.2] Objective of the Study [1.3] Scope of the Study [1.4] Methodology of the Study [1.5] Limitations of the Study CHAPTER 2 [Company Profile] [2.1] Historical Background [2.2] Functions [2.3] Corporate Strategy [2.4] Organizational Goal [2.5] Lending Criteria [2.6] Organizational Structure [2.6.1] Board of Directors [2.6.2] Management [2.7] Resources & Capabilities [2.7.1] Physical & Technological Resources [2.7.2] Human Resources [2.8] Financial Resource [2.8.1] Mobilization of Fund [2.8.2] Utilization of Fund [2.9] Performance of Bank [2.10] Dividend CHAPTER 3 [Commercial Banking in Bangladesh] [3.1] Historical Perspective of the Commercial Bank [3.2] Commercial Banking at Present [3.3] Some Selected Indicator of Commercial Bank [3.3.1] Branch Expansion [3.3.2] Employment Generation [3.3.3] Net Profit Performance [3.3.4] Total Productivity CHAPTER 7 [Findings of the Study] [7.1] Credit Policy of BASIC Bank [7.2] Comparative Analysis of BASICs Credit Policy with other Bank [7.3] SWOT Analysis of BASIC CHAPTER 8 [Recommendation and Conclusions] Conclusion Recommendation Appendix Bibliography
CHAPTER ONE
1.1 Origin of the report 1.2 Background of the report 1.3 Objective of the report 1.4 Reason for the report 1.5 Scope of the report 1.6 Methodology of the report 1.7 Limitations of the report
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1.5
There is certain boundary to cover this report. To achieve the objective of the report, i.e. through knowledge about the organizational functions and its management, it is not possible to cover each and every activity performed in the organization. The report has covered only the general overview of the organization. Moreover the company itself and financial institutions have got some confident information which are not possible to disclose publicly, so those data and information had to be ignored for this report.
1.6
For making any report or statistical survey most of the data should be taken that reflect actual situation. For my report I have collected various types of primary and secondary data while I was performing my job. I have collected various data from various sources. In a disciplined way I can say that the report input were collected from two sourcesPrimary Sources: i) ii) iii) Secondary Sources: i) ii) iii) iv) v) vi) vii) Practical deskwork Face to face conversation with the officers. Face to face conversation with the clients. Annual report of BASIC Bank Brochures of BASIC Bank Prospectus of BASIC Bank Published or unpublished or personally collected data from officers, Dilkusha Branch and Head Office of BASIC Bank Training institutions papers those are supplied to the trainee. Various files and documents of credit division of BASIC Bank Ltd. Articles related to credit management in different journals and magazines.
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CHAPTER TWO
COMMERCIAL BANKING IN BANGLADESH
2.1 Historical perspective of the commercial Banking 2.2 Commercial Banking and Recent Changes of Banking Sector 2.3 Some selected Indicators of Commercial Banks
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V. Develop money market instruments and initiate the auctioning of a short term money market instrument VI. Improve the operation of the capital markets and take the regulatory steps needed to improve such markets VII. Clean up the jute debt in the commercial banking system and eliminate any risk to the commercial bank portfolio VIII. Reform the NCBs in a three step process: 1) Recapitalize the NCBs2) Improve their operating systems 3) Develop strategic approaches to their future development IX. Improve loan recovery through introduction of better legislation X. And courts to collect delinquent loans, improve the bankruptcy law to ease the problems of liquidating companies, improve the flow of credit information for new loans, and required the NCBs to improve their debt collection XI. Initiate an immediate program of improvement to manpower through upgraded training for bankers
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Muslim Commercial Bank Ltd. (Pakistan) recently merged with Bank Asia in 2003. Shamil Bank E.C (merged bank of Faisal Islamic Bank of Bahrain) Credit Agricole Indosuez is the French Bank, formerly known as Bank Indosuez, now this has been purchased by the Commercial Bank of Cylon.
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are volatile over the years. But the profit figures for FCBs are gradually increasing year after year. Total Productivity Total productivity measures the ratio of input and output. In case of banks productivity means the ratio of income and expenditure. If income substantially outweighs expenditure then productivity of the bank is good. If productivity ratio is above one it is an admirable indication. This ratio for foreign banks shows that they are executing at a very good level of productivity. Productivity of private banks is reasonable. Nationalized Commercial banks are impotent for the years 91, 92 and 93. Comparison among foreign banks, nationalized commercial banks and private banks show that foreign banks are most productive, then private banks, and then nationalized commercial banks. The lesson that should be learnt from this analysis is that PCBs, NCBs should substantially reduce their expenditure. Expenditure can be curtailed by installing computer database, reducing human resource expenditure can be curtailed by installing computer database, and installing computer based internal control system
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Chapter- Three
3.1 Profile of BASIC Bank 3.2 Objectives of BASIC 3.3 BASICs Approach 3.4 Strategies of the BASIC Bank 3.5 Mission & Vision of BASIC 3.6 Organizational Goal 3.7 Organizational Structure 3.8 Corporate Culture of BASIC Bank 3.9 Human And Financial Resources of BASIC 3.10 Performance of The BASIC Bank limited 3.11 View of BASIC Bank, Dilkusha Branch
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August 2, 1988 Legal Status Public Limited Company Authorized Capital Tk. 2000.00 (Million) 2005 Paid-up Capital Tk.810.00 (Million) 2005 Deposit, Loans & Advances and Profit (Million) of BASIC Bank
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Deposit Loans & Advances Profit * Profit before tax & provision
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collection of deposits, short term trade finance, working capital finance in processing and manufacturing units and financing and facilitating international trade. BASIC attaches special importance to technical and advisory support to small scale industries in order to enabling them to run their enterprise successfully. Micro Credit to the urban poor through linkage with NGOs with a view to facilitating their access to the formal financial market for the mobilization of resources is another diversification of our services. We provide an environment in which our staff members feel they can exercise their initiative and judgement within a clearly established framework. Our Bank is the leader in offering excellent career opportunity in transparent and participate management culture. Coping with the competitive and rapidly changing financial market of the country, BASIC Bank maintains close connections with its clients, the regulatory authority authorities, the shareholders (the government of Bangladesh), other banks and financial institutions.
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march on the road to growth and progress with services. to achieve the desired goal, there will be pursuit of excellence at all stages with a climate of continuous improvement, because, in BASIC Bank, we believe, the line of excellence is never ending. Banks strategic plans and networking will strengthen its competitive edge over others in rapidly changing competitive environments. Its personalized quality services to the customers with the trend of constant improvement will be cornerstone to achieve our operational success.
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[7] Mr. A. H. EKBAL HOSSAIN. Managing Director BASIC Bank Limited. Head Office Dhaka.
3.7.2 Management
The management is headed by the Managing Director. He is assisted by the General Manager and Departmental heads in the head office. BASIC is different in respect to hierarchical structure from other bank in that it is much more vertically integrated as for as reporting to the chief Executive is concerned. The Branches in charge of the Bank report directly to the Managing Director and for functional purposes, to the Head of Department consequently, quick decision making in disposal of cases is ensured.
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CHAIRMA
BOARD OF DIRECTORS MANAGING DIRECTOR
GM GM
(Operation)
GM
(Audit & Inspection)
(Admin)
Internati onal Division Credit Division
DEVELOPMENT
Central Accounts
Perso nal
Senior Officer
Officer
Assistant Officer
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2006 2004 2002 2000 1998 1996 463 497 510 523 578 601 No. of employees Year
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Financial Resources
Like any other financial intermediaries, BASIC is no exception in performing its cure function viz. Mobilization of fund and utilizing such mobilized fund for profitable purposes. Mobilization of Fund The main sources of fund for BASIC are: 1) Deposit 2) Borrowing (1) Deposit: Deposit is the mainstay of BASICs sources of fund. Following usual practices, it collects deposit through: Mix of deposit at the end of 2005 Current Deposit Saving Deposit Fixed Deposit
Savings 19462 Current Term
2070 793
(2) Borrowing for Development Finance: Apart from deposit BASIC received funds from the following sources: Bangladesh Bank. Asian Development Bank. KfW (Kreditanstalt fur Wieder-aufbau- Credit Institution for Reconstruction), a German Development Bank. All of these funding sources fund are for relatively longer period. Receiving the credit lines from ADB and KfW has been recognition of BASICs highly satisfactory performance.
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Utilization of Fund Utilization of banks fund was more of less satisfactory during the year 2005. Given the difficult economic situation, the management of bank focused on the consolidation and quality of assert rather than in growth. The total assets of the Bank increased to Taka 27,136.37 million at end 2005 from Taka 19,436.57 million in the previous year. Deposit rose from Taka 15,509.18 million in 2004 to Taka 22,325.58 million in 2005 Banks Assets During the year 2005, total assets of the bank increased to Taka 27,136.37 million from Taka 19,436.57 million in 2004.
A ssets C omposition end of 2005
Investm ent Cash Other Prem ises & Fixed assets Advance Balance with other banks M oney at call & Short notice
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2. Capital and reserve fund: The authorized capital of the Bank is 2,000.00 million. Total shareholders equity at the end of December 2005 stood at 1,726.14 million. The capital and reserve of the Bank as on December 2005 stood at 916.14 million and paid up capital of 810.000 million. The Bank also made provision on unclassified investment which is amounted to 10,236.82 million. 3. Investment The total investment of the Bank stood at Tk. 4,540,550,760 as on 31-12-2005 as against Tk. 2,252,964,460 in the previous year showing an increase of Tk. 22,875,863 with growth rate of 100%. Investment is the core asset of a Bank. The bank gives emphasis to acquire quality asset and does appropriate lending risk analysis while approving commercial and trade investment to clients. 4. Advance The Banks Loans &Advances portfolio also indicates an impressive growth. Total loans and advances amounted to Tk. 12,000.15 million in 2004 as against Tk. 15,339.35 million in 2004 and the growth is 27.08%. This is due to increased commercial and trade financing, term lending and working capital support. The classified loan position is almost nil. This was achieved by rendering due attention and monitoring high-risk advances. The Bank is trying to operate its credit activities with the target of achieving Zero classified loans. The sectors financed include manufacturing, trading, construction, transport, agriculture, fishing & forestry, edible oil, pharmaceutical, information technology, consumer credit amongst others. 5. Dividend As per Article number 130 the Memorandum and Articles of Association of Bank, unless otherwise decided by the shareholders at least fifty percent (50%) of the net profit (after tax) to be reinvested in the capital of the company and to that extend bonus shares to be issued to the shareholders in lieu of cash divided. Also in maintaining the competitive edge and creating a strong financial base the Board of directors with a view to improving its equity by issuing bonus shares to its existing shareholders and accordingly, is pleased to propose to its sole shareholders, the Ministry of Finance, subject to approval of the Annual General Meeting, one bonus share against each 5 shares General Meeting, one bonus share against each 5 shares amounting to Tk. 162.00 million and 6.25% cash dividend amounting to Tk. 50.63 million. 6. Foreign Exchange Business International Trade constitutes the main stream of business activities of BASIC Bank. It offers a full range of trade financial services namely, Issue, Advice and Confirmation of Documentary credit; arranging forward exchange coverage; Pre-shipment and Postshipment finance; Negotiation and Purchase of Export Bills; Discounting bill of Exchange; collection of bills, and outward remittance etc. 27
Import Business In 2005 the Bank opened 14,094.96 million import letter of credit and the import volume stood at Tk. 12,508 million with a growth of 12.00% in comparison with previous year. Export Business The growth of the export business has significantly been increased by40%. It stood at Tk. 11,097.23 million as on December 31, 2005 against Tk. 7,908.00 million of the previous year. Foreign Correspondents BASIC Bank has correspondent Banking relationships with over 78 Banks spread across 68 countries to facilitate trade and payment related services. So far the Banks total correspondents are 180. The Bank has maintained relationship with leading international Banks and has successfully established credit lines with major Banks to support global Foreign Trade Business. The Bank has earned an operating profit (after tax) of Tk. 285,494,793 during 2005 after all provisions including the 1% General Provision on unclassified Loans Advances. Provision for Income tax for the year amounted to Tk. 342,943,664 resulting in a net profit, after tax, of Tk. 285,494,793.
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14,094.96 11,097.23
12,508.00 7,908.00
11.66 10.36 58.01 69.74 114.56 1.23 12.81 214.56 17.75 67.00 29 601
12.49 10.47 50.36 77.37 116.70 1.70 16.48 205.07 21.27 62.21 29 601
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There are mainly three divisions in this Branch. The General Banking Division deals the day-to-day transactions. The loan and advance division gives advance to the customer a monitor whether he repays regularly or not. The Foreign Exchange Division is the highest earning division among all the three division that deals their operations by two sub departments Export (EXP) and (IMP).
Assistant Manager
Officer
Assistant Officer
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Part- (i) Introduction Part-(ii) Different type of credit facilities of BASIC Bank Ltd. Funded and Non-funded Credit. Part-(iii) Selection of Borrower, Preparation of credit reports, Processing of credit proposal. Part- (iv) Selection, Valuation , Control & Charges on Securities Part-(v) Documentation: Importance, execution, and safe-keeping Part-(vi) Credit Planning, Pricing, Monitoring Part-(vii) Micro Finance Scheme of BASIC Bank Limited Part-(viii) Loan Classification, Provisioning and Declassification Part- (ix) Supervision and Recovery of loans and advances of BASIC Bank Ltd.
Part-(i) Introduction
BASIC Bank Limited is a new generation Bank. It is committed to provide high quality financial services/products to contribute to the growth of G.D.P of the country through stimulating trade & Commerce, accelerating the pace of industrialization, boosting up export, creation employment opportunity for the educated youth, poverty alleviation, raising standard of living of limited income group and overall sustainable socioeconomic
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development of the country. In achieving the aforesaid objectives of the Bank, Credit operation of the Bank is of paramount importance as the greatest share of total revenue of the Bank is generated from it, maximum risk is centered in it and even the very existence of Bank depends on prudent management of its credit portfolio.
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Regulation of Lending The loan portfolio of any bank is heavily influenced by regulation, because the quality of a banks loan portfolio has more to do with risk and safety than any other aspect of the banking business. Some loans are restricted or prohibited by law. When an examiner finds some loans that carry an immediate risk of not paying out as planned, these credits are adversely classified. Typically, examiners will place adversely classified loans into one of the three groupings: Sub-standard Loans, Doubtful Loans and Loss Loans A common procedure for examiners is to multiply the total of all substandard loans by 0.20, the total of all doubtful loans by 0.50 and the total of all loans by 1.00, then sum these weighted amounts and compare their grand total with the banks sum of loan-loss reserves and equity capital. The quality of loans and other bank assets is only one dimension of a banks performance. Numerical ratings are also assigned based on examiner judgement of the banks capital adequacy, management quality, earnings record, liquidity position, and sensitivity to market exposure. All five dimensions of bank performance are combined into one overall numerical rating popularly referred to as the CAMELS rating. The letters CAMELS are derived from: C=Caspital adequacy A=Asset q\uality M=Management quality E= Earnings record L= Liquidity positiopn S= Sensitivity to market risk Banks whose overall CAMELS rating is toward the low, riskier end of the numerical scale- an overall rating of 4 to 5- are examined more frequently than the highest rated banks, whose ratings of 1,2, or 3.
Credit Policy:
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Credit is a promise of future payment in kind or in money given in exchange for present money, goods, or services. Or, In general credit means the granting of a period of time by a creditor to a debtor at the expiration of which the latter must pay the debt due. The credit policy of any banking institution is a combination of certain accepted time tested standards, and some other dynamic factors determined by the realities of varying and changing situations in the market place. The accepted standards relate to the aspects of security and liquidity whereas the dynamic factors relate to such other aspects as the nature of risk, interest margins, credit concentration, credit dispersal, and banks own capabilities. It is, therefore, necessary that the credit policy be kept under constant review by the Head office Credit committee that is responsible for evolving and recommending a sound, healthy and realistic credit policy and its due implementation. As is true for any other institution, BASIC may have certain unique characteristic relating to its operations, such as its age, and geographical concentration. These unique features may require certain amount of flexibility in the credit policy, but as a rule, the general standards of security and liquidity should not be allowed to be impaired and the operations must be carried out in strict conformity with local laws and supervisory requirements as stipulated. Credit policy lays down the basic principal and broad parameters of the lending operations. The key to a sound, healthy and profitable credit operation, however, lies in the quality of judgment and sense of proportion of the officers making lending decisions, and their knowledge of the borrowers and the market place. The following pages contain only a statement of the basic principles of BASICs credit policy. Reference may be made to the following other documents existing for the operation and administration aspects of management of the credit function:
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1. Aggregate loans and advances shall not exceed the Bank s net worth or 65% of customers deposit whichever is lower (excluding loans and advances covered by specific counter - finance arrangements). 2. Within the aggregate limit of loans and advances as mentioned in (1) above 50% of lending will be small industry sector in accordance with prescribed norms of the government and the Central Bank in terms of the banks objectives with 50% to the commercial sector. No term loans will be approved for the commercial sector. Exceptions will be rare and will require approval of the Executive Committee. 3. All lending will be adequately secured with acceptable security and margin requirement as laid down by the Head office credit committee. 4. The bank shall not incur any uncovered foreign exchange risk (currency exposure) in the lending of funds. 5. The Bank shall not incur any risk of exposure in respect of unmatched rates of Interest of funding of loans and advances beyond 15% of outstanding loans and Advances. 6. End - Use of working capital facilities will be closely monitored to ensure lending used for the purpose for which they were advanced 7. Country risk in loans and advances will be accurately identified and shall be within the country limits if any approved for the bank. The same treatment will be given to country risk arising out of contingent liabilities relating to Letters of credit and letters of guarantee. 8. Loans and advances shall be normally funded from customers deposits of a permanent nature, and not out of short-term temporary funds of borrowings from other banks or through short-term money market operations. 9. The aggregate outstanding loans and advances (excluding loans advances covered by specific counter finance arrangement) shall be dispersed according to the following guidelines (subject to item above whereby 50% of lending being to small industry sector): (a) Short term commercial lending (to include self Liquidating and other short term finance to retail and wholesale business clients to finance their usual Domestic and international trade \ shipping of goods). This category to include working capital to hotel and tourism (b) Facilities to shipping and transport (facilities for the purchase and construction of ship / vessels and other modes of transport both by land and air) 10. Spreads over cost of funds on loans and advances and commissions and fees on other transactions should be commensurate with the rating of the borrower, quality or risk and the prevailing market conditions.
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11. Credit risk evaluation will include an accurate appraisal of risk in any credit exposure is highly subjective matter involving quantitative and qualitative judgments. The financial statements of the borrower do not always provide a complete picture of the borrower. Therefore the bank has to use all financial data available and combine this with a number of qualitative factors analyzing the borrowers financial position.
Part-(ii) Different type of credit facilities of BASIC Bank Ltd. Funded and Non-funded Credit
The Government of Bangladesh has incorporated several changes in its Industrial policy 2005. Lets have a look of the major changes made in redefining small, medium and large industries as under: Scale of Industry Small Criteria Fixed asset vale/replacement cost is less than Tk.1.50 Crore excluding land & Building
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Medium
Fixed asset vale/replacement cost is in between Tk. 1.50 Crore and 10.00 Crore excluding land & Building Fixed asset vale/replacement cost is more than Tk. 10.00 Crore excluding land & Building
Large
Due to this radical change, BASIC Bank also had to amend its Articles of Association regarding finance. In line with the governments intention, amendment has been made by replacing Small & Cottage industry sector with Small & medium industry sector. So, now BASIC is entitled to finance a small scale industry as well as medium scale industry. BASIC Bank offers following credit facilities: a. Project loans to small scale and medium scale industry.
b. Full-fledged commercial banking service including short term trade finance, working capital finance in processing and manufacturing units and financing and facilitating international trade. c. Micro credit to the urban poor through linkage with NGO.
Industrial credit: The main concern of the basic bank is industrial/manufacturing loan. The industrial loan reflected a significant growth of 29.85% over the previous year. Total outstanding industrial loans including term and working capital stood at Taka 9,987.50 million at the end of 2005 compared to Taka 7,691.20 million of 2004. BASIC Banks services are specially directed towards promotion and development of small & medium industries. Its exposure to small industries sector accounted for 51.70 percent of the total loans and advances. During the year total of 175 projects were sanctioned term loan. Out of which 109 were new and the rest were under BMRE (Balancing Modernization, Revamping and Expansion) of the existing projects. The textile sector including garments being one of the major contributors to national economy dominated the loan portfolio of the Bank. Other sectors financed include engineering, food and allied industries, chemicals, pharmaceuticals and allied industries, paper, board, printing and packaging, glass, ceramic and other non-metallic goods , jute yarn and jute products. Recovery rate of project loan was 89 percent.
338.3 9,987.50 5,013.55
Loan Portfolio
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Commercial Credit M icro Credit Industrial
b. Commercial Credit The Bank also supports development of trade, business and other commercial activities in the country. It covers the full variety of services to the exporters and importers extending various facilities such as cash credit, LTR, LIM, packing credit, short term loans, local bills purchase and foreign bills purchase facilities. As on December 31 2005, total outstanding commercial loans stood at Taka 5,013.55 million compared to Taka 4,024.70 million Crore in 2004. c. Micro Credit: BASIC Bank launched a Micro Credit Scheme in 1994. Micro Credit Scheme provides for the poor for generation of employment and income on a sustainable basis particularly in urban and suburban areas. At the end of 2005,total amount of Tk. 338.30 million remained outstanding as against Tk. 284.10 million in 2004.Recovery rate during this period remained at a satisfactory level of 100.00 percent. Perhaps we have got the essence of the credit portfolio of BASIC bank .Now we may go to the topic: Funded and non funded Credit facilities. Funded facilities are the credit facilities where bank has to outlay cash. non-funded facilities are those in which bank has not to put in any cash, rather than merely giving a commitment or promise to pay.
Funded facilities:
Term Loan: Term loan is allowed for procuring fixed assets of the project; hence term loan can be said as project loan also. Right now BASIC Bank is in practice to finance term loan @ 49:51 debt-equity ratio. But, this is not hard and fast rule. There are occasions that bank finances @ 60:40, 70:30 or 80:20. But for new project, if the debt portion is less than the equity portion, that is well and good practice. Generally bank doesnt finance land, land
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development and civil construction. Generally Bank shows more interest to finance a portion /full value of capital machinery. Term loan is secured by registered mortgage of immovable property i.e. land, building, hypothecation of machinery. Term loan is generally disbursed once (or several times in special cases). Repayment of term loan is generally made into some installments. Generally grace period is allowed before commencement of installment. Generally 6 months grace period is allowed. But it may be more or less depending on the tenure of construction period, nature of industry and obviously on cash in flow of the project. In BASIC Bank monthly repayment installment is common practice for term loan. Followings are the type of Term loan: Short term loan Mid Term Loan Long Term Loan Short term loan: The tenure of Short term loan is one year. Generally short term loan is allowed to an existing project for procuring additional equipment/machinery where cash in flow is adequate to repay the loan within a year. Mid term loan: The tenure of mid term loan is greater than one year up to 3 years. Generally Mid term loan is allowed where the bank thinks the project has a higher rate of return (IRR). Long term Loan: Long term loan is allowed for 5 years. Most of the cases we sanction this sort of term loan. For a new project where substantial capital machinery is to be financed by a bank and IRR is not too much high to repay the loan within less than 5 years. So, we must do financial analysis i.e. to calculate financial parameter like NPV, IRR and pay back period. In this regard cash flow statement should be observed very meticulously. Working Capital: Working capital is needed by a concern for its current operational purposes. It is regarded as life blood of the concern. The banker needs to assess the working capital requirement in prudent and positive way. Several factors to be considered while assessing the working capital requirement of a concern like operating cycle, manufacturing cycle, operating efficiency, market credit policies, competition in market, growth and expansion, price hike etc. Forms of working capital finance: Secured Over Draft(SOD) Cash Credit(Hypothecation) Cash Credit(Pledge) Loan General
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Secured Over Draft (SOD): This is an over draft facility secured by encashable securities like FDR, Government Bond, wage earner bond etc. It represents permission to overdraw in current account upto a sanctioned limit. The loan is allowed keeping some margin, generally 5%. Sometimes, overdraft is allowed without any security for a very short period to meet the exigency of the trusted client with high standing and integrity. Bankers must ensure proper turnover in an overdraft limit account. Cash Credit Like overdraft credit it is a continuous loan which is usually sanctioned for 6 months/one year, which is further renewable as per requirement of the borrower. After assessing the working capital requirement and keeping proper margin (say 30%), a limit is sanctioned and the borrower use to do withdrawal and deposit in the account provided that the outstanding is within the sanctioned limit. Two types of Cash Credit are discussed below: Cash Credit (Hypothecation): When cash credit facility is sanction under hypothecation of stock of goods it is called as CC (Hypo). In the case of hypothecation, the stock remains under the possession and ownership of the borrower. Only the right belongs to the bank through creating charge of hypothecation. In case of CC (H) the client has to submit stock report regularly which is to be verified by the bankers time to time. As the nature of security is movable type, bankers are encouraged to take collateral security in case of hypothecation. In BASIC Bank hypothecation is more preferable practice than pledge. Cash Credit (Pledge): In case of Cash Credit (Pledge), only the ownership belongs to the borrower. The possession, control and right remain with bank. The nature of operation in CC (Pledge) account is different than that of CC (H). CC (Pledge) is not a common practice in BASIC Bank. In fact CC (P) is more preferable in case of commercial trading rather than industrial project. Loan General: In nature Loan general facility is like term loan. But, the purpose of this loan is meeting requirement of working capital. It is generally given for 1-year period. Repayment is made in installment basis or lump sum basis. The loan general facility some time may be called as short-term loan. International Trade Finance International Trade dealings are one of the major business activities undertaken by BASIC Bank Ltd. To facilitate international trade transactions, it has arranged correspondent relationship with large number of international banks, which are active across the globe. The Bank with its worldwide correspondent network and close
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relationships with key financial institutions provides an extensive trade services network to handle transactions efficiently.. BASIC offers following trade finances: Issuing, advising and confirming of Documentary Credits. Pre-shipment and post-shipment finance. Negotiation and purchase of Export Bills. Discounting of Bills of Exchange. Collection of Bills. Import finance: Loan is given to the importer to provide liquidity for buying imported items. Each loan must be related to one specific import transaction and the term of the financing can vary depending on the type of products imported on the needs of the importer. BASIC Bank extends finance to the importers in the form of: 1. Opening of Import L/C 2. Payment against document(PAD) 3. Loan against Imported Merchandise (LIM) 4. Loan against Trust Receipt for retirement of import bills. (LTR) 5. Short term, medium term & Long term loans for installation of imported machineries & production thereof. Payment against document (PAD): After establishing the Letter of Credit, the bank is bound to honor its commitment to pa for import bills when these are presented for payment. The foreign correspondent, who negotiates the documents, gets payment as per stipulated reimbursement terms of the L/C to the debit of the account of L/C opening bank s F.C. account .The opening bank lodges the shipping documents in their books and responds debit advice originated by foreign correspondent to the debit of payment against document (PAD) account. In fact, the amount stands as advance to the importer which is adjusted by delivery of documents against cash payment or by allowing post import finance such as LIM, LTR or even by term loan /Loan general (if sanction is made so). Loan against Imported Merchandise (LIM): Loan against Imported Merchandise (LIM) is allowed against imported merchandise storing the same in banks custody. There may be an existence of agreement or the party may propose to the bank for having LIM facilities after arriving the goods in the port. The merchandise is cleared by the bank through its approved clearing agent. . If the party doesn't have any godown facilities or he has the shortage of money to clear the goods from the port, then he wants bank loan. The advance is adjusted by delivering the goods against payment by the importer. The documents remain with the bank. LIM facilities are usually allowed for 90 days for each case. It may vary depending on the marketability of the goods. A party may have LIM limit for one year but each LIM must have to be adjusted within the specific expiry date of that particular LIM. 41
Loan against Trust Receipt for retirement of import bills. (LTR) Depending on the relationship with the client, he may ask for LTR facilities instead of LIM. Party has to submit proper securities. Documents are given to the party to retire goods from the port on good faith. After selling the goods to the market the party adjust the LTR alongwith the interest. It is a form of short-term loan. LTR facilities are usually allowed for 90 days for each case. For trading purpose the tenure may be shorter like 60 days. Each LTR must have to be adjusted within the specific expiry date of that particular LTR. Export Finance: Preshipment finance Loan given by BASIC Bank to the exporter to provide liquidity for buying or processing Goods to be exported. Pre-Shipment finance in the form of: Back-to-Back L/C Packing credit (PC)
Back-to-Back L/C: Will be discussed in the non-funded facility section. Packing credit (PC): Pre-shipment finance allowed under the name of "Packing Credit", is essentially a very short-term advance granted by the bank to an exporter to enable him to procure, process, manufacture pack and ship the goods to the buyers abroad in conformity with the terms of export L/C /contract.
Post-shipment Finance: Loan provided to the exporters against their export receivables. Post-shipment finance in the form of: Foreign bills purchase (FBP)/ Local Bill Purchase (LBP) Loan Against Foreign /Local Bill Finance against cash incentive The Foreign /Local Bills Purchased or Discounted is a facility granted by the bank to its customer whereby the bank purchases or discounts the customers sight export documents.
Foreign bills purchase (FBP)/ Local Bill Purchase (LBP):
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:In case of a usance bill (i.e. bills drawn on local/foreign BBLC) maturing after a period of time, the banker retains the bill for that period and realize the amount of the bill from the drawee on its due date. This practice is called discounting of bills. However instead of discounting BASIC Bank makes short-term advances to the extent of a certain percentage (say 90%) of a bill amount against the security of the accepted usance bill. This practice is also usually termed as purchase of bills, though it is not right.
Loan against Foreign /Local Bill
Loan against Foreign /Local Bill (LADB): In some cases when we get local currency instead of foreign currency (in case of sight foreign bill), we dont purchase /discount the bill rather we make short term advances to the extent of a certain percentage (say 90%) of a bill amount. Loan General against cash incentive: In case of fund shortage of our exporter we even allow loan against lien of pending claimed cash incentive. Loan is adjusted from receivable cash incentive proceeds. Cash incentive Payment is a time consuming procedure and there is always uncertainty. So, unless a sever exigency of the client to avail this sort of loan, the loan is not a common practice. Besides the bank accomplish Trade Collections namely: Local Bill collection Foreign Bill Collection
Note: above two are not at all credit facilities and there is no obligation for the bank to pay to the exporter until funds are received. Micro Credit: BASIC Bank works closely with its clients (NGO) by following ways: In direct Lending to the NGOs who on-lend to their members. Direct lending to the ultimate borrowers.
Besides there are other funded facilities of BASIC Bank towards its employee: Staff Loan: 3 basic Salary loan Consumer Credit Loan against Provident Fund (P.F. Loan) Staff House Building Commercial Loan Staff House Building Loan Loan against secured bond (LASB)
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Non-Funded facility:
Letter of guarantee (Bank Guarantee, performance guarantee, Bid Bond etc.) Letter of credit (L/C)
Letter of guarantee: A letter of guarantee is a written promise issued by the Bank to compensate (pay a sum of money) to the beneficiary (third party, local or foreign) in the event that the obligor (customer) fails to honor its obligations in accordance with the terms and conditions of the guarantee/agreement/contract. This is issued by the Bank at the request of contractors, wholesalers, companies involved in transaction, etc. for the purpose of handling the guarantee request they receive in their operation. Types of Bank Guarantee: Bank Guarantee- is an irrevocable obligation in the form of written undertaking of a Bank to pay an agreed sum, in case of default by a third party in fulfilling their obligations under the terms of the Bank Guarantee. Types of Bank Guarantee: According to the very purpose of issuance of guarantee, Bank Guarantee can be classified in following ways:
Bid Bond Performance Bond /Guarantee Guarantee for advance payment Shipping Guarantee Custom Duty Guarantee Suppliers credit Guarantee Retention Guarantee
1) Bid Bond: Bid bond or tender guarantee is a surety bond issued by the Bank upon the request by the bidder/tenderer expressing the Bank's commitment to meeting the claim of the beneficiary (the party who invites tender) in case the bidder withdraws from the bid during the bid period or fails to accept the award when he/she becomes a winner. 2) Performance Bond /Guarantee: Performance bond is an undertaking issued by the Bank in favor of a buyer/employer (The beneficiary) at the request of a supplier /service provider, whereby the bank
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undertakes to make payment to the beneficiary in the event of default by the principal (supplier /service provider) in due performance of the terms of the contract . 3) Advance Payment Guarantee This is issued by the Bank in favor of a buyer (who makes the advance) and at the request of the seller/contractor ( who receives the advance), representing the Bank's commitment to repay the sum in the event that the seller/contractor fails to honor the contract terms in their entirety or in part. 4) Shipping Guarantee: A type of BG which is needed to move goods out of the port in case of missing B/L consignment. These guarantees are issued by the Bank at the request of the buyer in favor of a carrier in circumstances where the bill of lading is missing/ delayed but the goods/cargo arrives earlier. 5) Customs duty guarantee These guarantees are issued by the Bank to meet the requests of the beneficiary (Customs Authority) in respect of customs duties in circumstances where the goods /machinery are imported without payment of customs duties in various cases such as pending test report, duty free export oriented capital machinery etc. 6) Suppliers' Credit Guarantee Such guarantee is issued by the Bank to meet any claims to be made by the local or foreign supplier (beneficiary) in case the debtor (local buyer) fails to repay in accordance with the terms and conditions of the contract. 7) Retention Guarantee A guarantee issued at the request of contractor to secure repayment of the retention money held by the employer during different phases of the project, when the project is finalized (at the time of provisional delivery).
Securities:
o o o o Cash margin FDR Acceptable collaterals like land, building etc. Letter of counter Guarantee
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Some aspects in the light of rules and practices of BASIC Bank: BASIC always do prefer to keep 100% cash margin. If not possible, then the bank even issues B/G @ 10% margin or nil margin at the request of its regular and valued clients (those who are availing composite facilities) . But BASIC has to keep in mind that, if 100% margin (cash /FDR) cant be kept as security, then adequate collateral security should be ensured. There is another trend to keep FDR as margin against bank guarantee which is preferable by customer. Commission/Handling charge of Bank Guarantee: As per circular # BASIC/HO/GEN/2002/16 Dt. July 01, 2002: Nature of transaction Issuance of guarantee in local currency against margin less than 100% Against 100% cash margin Shipping guarantee against L/C in absence of original import document Shipping guarantee against BB L/C in absence of original import documen t Charges 0.50% per quarter or part thereof minimum Tk. 500/= No commission, only handling charge Tk. 250/= Tk. 500/= flat Tk. 500/= flat
Delegation power reading issuance of Bank Guarantee: As per circular # BASIC/HO/2001/4641, July 22,2001.In case of cash margin: Margin 100% Cash Margin Amount Any Amount Sanctioning authority GM, BranchIn Charges (Minimum Manager Rank) GM GM
>=50% Cash Tk. 50 Lac Margin but <100% >=20% Cash Tk. 20 Lac Margin but <50% In case of pledge of 100% FDR: Authority Amount of BG GM Any amount
DGM (Br.- AGM (Br.-In- Manager (Br.-InIn-Charge) Charge) Charge) Tk. 50 Lac Tk. 30 Lac Tk. 10 Lac
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Letter of Indemnity: Indemnity means security against or compensation for loss or damage. As defined in sec# 124 of the Contract Act, the contract of indemnity is a contract by which one party promises to save the other from loss caused to him by the conduct of the promissory himself, or conduct of any other person In another language the letter of Indemnity can be defined as below: An agreement whereby one party agrees to secure another against an anticipated loss or damage. Letter of Credit - A letter of credit is a document issued by a bank stating its commitment to pay someone (supplier/exporter/seller) a stated amount of money on behalf of a buyer (importer) so long as the seller meets very specific terms and conditions. Letters of credit are more formally called documentary letters of credit because the banks handling the transaction deal in documents as opposed to goods. Letters of credit are the most common method of making international payments, because the risks of the transaction are shared by both the buyer and the supplier. Documentary letters of credit are subject to the Uniform Customs and Practice for Documentary Credits (UCPDC), Brochure No. 500, of the International Chamber of Commerce (ICC) in Paris.
Basic Letters of Credit:There are two basic forms of a letter of credit: a)Revocable Credit b)Irrevocable Credit: the Irrevocable Credit not Confirmed, and the Irrevocable Confirmed Credit. Special Letters of Credit (a) Standby letter of credit (b) Revolving letter of credit (c) Deferred payment letter of credit (d) Red clause letter of credit (e)Green Clause L/C (f)Telegraphic Transfer Clause
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Part-(iii)
Selection of Borrower, Preparation of credit reports, Processing of credit proposal: In the affair of bank credit, nothing is more significant than the character and responsibilities of the borrower. Practical bankers, and theoreticians alike, suggest that the safest and the most dependable security that could be obtained are the integrity and business-like dealings of the customers. The integrity and reliability of the borrower: To be safe advance should be granted to a reliable and honest borrower, who has the capacity to conduct his business. The study of a borrower involves the study of the three Cs of the party, i.e. his Character, Capacity and Capital or, in other words, his Reliability, Responsibility and Resourcefulness. Character: It denotes integrity of the borrower, i.e. he or she should have willingness to repay the money borrowed. Capacity: It means the ability to employ the funds profitably and repay the advance according to the terms and conditions of the sanction. Capital: It denotes financial soundness.
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Sources of Credit Information: The bankers have to collect information from different sources about a prospective borrower to assess creditworthiness. In 1992, Bangladesh Bank established a full-fledged Credit Information Bureau (CIB) with a view to strengthen credit discipline and streaming all sorts of data relating to loans and advances of borrower. As a matter of policy, all scheduled banks are required to submit data on quarterly basis and other financial institutions on half-yearly basis on each borrower having outstanding credit facility of Tk.1.00 lac and above to Bangladesh Bank on a specially designed form (CIB 01). In addition, Bangladesh Bank also collects information from the scheduled borrowers having outstanding of Tk. 1.00 crore and above on monthly basis. The information so far collected by CIB are: i) Debtors / Borrowers Information (Segment-1) ii) Owners Information (Segment-2) iii) Group/Affiliations Information (Segment-3) iv) Credit/Exposure Matrix or Financial Information (Segment-4) v) Third Party Guarantors Information (Segment-5) CIB is also collecting data relating to the CRR (Credit Risk Rating), Financial Scores, viz. Y-Score and Z-Score from the sche3duled banks. This information will ultimately be tetrieved to the scheduled banks in order to provide more helpful tools to them to decide issues regarding sanction of loan more promptly and smoothly. Bankers of course, have their own ways to collect information about the prospective borrower from the following sources to assess their judgement before proposal for any credit facility is taken into consideration: 1. Loan Application: A banker first studies the loan application made by the borrower. 2. Market reports: Reports can be obtained from various markets, particularly, from businesspersons carrying on the same trade as the borrower does, some of whom may be his friends, others his rivals or enemies. 3. Study of account: If the borrower is the customer of the bank, a study of the borrowers account and his or her past dealings will throw light about his or her financial position, character, and capacity to do business. 4. Financial statement etc.: Financial statements are indicators of two significant factors i) Profitability and ii) financial soundness. The borrower should be requested to supply the latest statement about his or her assets and liabilities. 5. Other sources: Other sources of information about the borrower include press reports regarding purchase and sale of property, auctions and decrees, registration, revenue and municipal records etc. 6. Personal Interview: The banker should be able to know from the interview the customers specific requirements, the prospects of his employing the funds prudently, his capacity to repay and the suitability of the security offered, if any.
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The main idea behind credit investigation is to assess net worth of the borrower from his assets and liabilities. Credit information to be obtained will differ according to the type of the customer. In the case of fully secured advances it may not be necessary to prepare detailed credit reports. In other cases detailed credit reports need to be prepared and kept on record.
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integrity and honesty of the customer and on the genuinity of the purpose for which the borrower needs money, but till today securities continues to be one of the most important factors that determines to a significant extent the bankers willingness to lend money.
Types of security:
Security
Personal
Tangible
Primary
Collateral
Security by which a borrower is personally made liable to repay the loans and advances. Demand Promissory Note, Personal Guarantee, Bill of Exchange etc. Guarantee by the third party for repayment of loan in case of demand by the original borrower is also consider as personal security. Bakers obtain the right of taking action against the borrower personally by taking personal security. Tangible Security:
Tangible asset like stock of goods, Bonds, deposits receipts, bill of lading, bills receivables, warehouse receipts, real state, shares, assignable insurance policies etc. are taken as security against lending. When debts are not repaid by the borrower, the outstandings are realised by sale or transfer of the tangible assets.
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Tangible security sometimes called as Real Security. Tangible security is divided into two parts. They are primary and collateral security Primary Security: The security, which is deposited by the borrower himself against lendings, is called Primary Security. Stock in trade, industry plants, land and building, bills receivables, deposits receipts, shares etc that are deposited by the borrower shall be treated as primary security. Collateral Security: Additional, subsidiary or secondary security in addition to primary security is called collateral security. Collateral Security runs parallel to or side by side with the primary security. In case of default by the borrower to repay the loan, and when loan amount cant be realized in full/ partially by selling primary security, the amount / or rest of the loan amount are realized by selling the collateral securities.
Collateral security obtained from the borrower himself to secure his own account is known as Direct Collateral Security. Indirect Collateral Security:
Collateral Security given by the third party/ person to secure a customers loan account is called Indirect Collateral Security. Categories of Collateral Security The most significant categories of securities lodged as cover of loans are: Real State Deposit Receipts 52
Bills Receivables Share and Securities Life insurance Policies Documents of title of goods Goods and Commodities Gold and Gold Ornaments In our country, collateral security is usually taken against trade finance (hypothecation of stock) which is considered as weak security. Collateral Securities as securities:
Collateral Security is not a must and in all loan cases the Collateral Security are not insisted upon. In loan cases where bank feels that loan amount cant be realized in full by selling the Primary Security, the collateral security is asked for. Where the credit risk is high, a protective device is the pledge of specific collateral does not eliminate the credit risk fully, but it provides the additional resource to the pledge property and the status of secured creditor ship in the event of default. Collateral free loans are justifies on the basis of high credit ratings only included by reliable financial statements. Collateral Security serves two purposes for a lending bank; first, if the borrower cant or doesnt repay loan and cant be realized by selling the primary security, collateral gives the right to the lender to seize or sell those property to cover the amount of unrealized portion of loan. Secondly, Collateral security gives the lender a psychological advantage over the borrower. The borrower in this situation feels more obliged to work hard to repay the loan to avoid loosing valuable assets.
Selection of Security
To be a good security, it should fulfill certain requirements. Before selection of security,
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There must be a critical appraisal of the same. Before selection of a security, a banker should check the legal side regarding the validity and enforceability and secondly marketability, durability, price, etc of the security. A tangible security should possess the following attributes for selection of the same against lending: Clear and undisputed title Validity of title Easy Transferability of title Marketability Easy ascertainment of value Stability of value/Price Durability Transportability Low storing/ supervisory cost (For pledge Godown, insurance, supervision cost) Yield/ Productivity (Income from security, value yield from security) Advance of contingent liabilities (Lease property not fully paid fully, paid shares, etc)
Margin/ Equity:
Hardly any security posses all the above-mentioned attributes, there is always exist the risk of deterioration of the value of the security. So bankers must keep a cushion against possible fluctuation of prices, shortage and depreciation in storing, for increasing of loan amount due to application of interest and other charges.
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Vacant land outside Municipal Area from which no earnings comes also should not be taken as security. Property identified and clearly demarcated property. Ownership must be clear and transferable and there should not be any defect in title or documents. The property should be under possession of the owners. In case of third party mortgage, consent from the owner of the property to mortgage the same against the loan is to be obtained.
Valuation of Security
Valuation of the securities is important since the loan amount or withdrawal limit is fixed / considered on the basis of the value of securities less stipulated margin/equity. Methods of valuation of different categories of securities should be different based on the market value, invoice value and controlled value. Government securities, shares and debenture: Prices is to be ascertained from market quotations- where the price of a particular share suffers from wide fluctuation, the value of its should be fixed slightly lower then the market value. Higher margin should be kept. Seasonal Commodities: Current market price or controlled prices, whichever is lower. Finished/ Manufactured goods: Cost price or market prices whichever is lower. Trade Goods: Market price or invoice prices whichever is lower. Stock in Process: To be ascertained from the record of stock. Controlled Commodities: Controlled prices are fixed by the government / respective authority or market price, whichever is lower. Imported Goods: At landed cost or market value, whichever is lower. Life Policies: At surrendered value, the value of which the company/ corporation is prepared to pay. Valuation of Real States: Location: Commercial/ Industrial/ Residential Construction: Age/ Used Materials/ Design Approaches: Surroundings: Nearby market/ school, college or administrative area etc. For construction, services of architects, engineer and brokers may be obtained to determine the value.
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Valuation of the real state should not be done on the present cost of construction and prevailing price of land; it should be done under the force sale value. Valuation of machineries should be fixed by employing reputed engineering/ surveying firms. For valuation of land, information may be obtained from concerning the Sub Registry Office.
Control of Security:
Control over hypothecated goods control over godown. Proper mortgage /lien on security papers / bond / shares/ deposit receipts Control over real state as security:
Possession by the owner. Acquisition or the notice of acquisition. Demarcation of mortgage of property, signboard of bank as mortgage of property. Clearance of / up to date payment of rent/ Municipal tax and other Govt. duties. Transformation without the knowledge of the bank. Sale/ transfer without the knowledge of the bank.
Insurance of Goods: Insurance may be defined as a contract of indemnity. Bank generally deals with the moveable and immovable securities and securities are insured against risks they bear. For insurance of goods, bank generally obtains insurance covering the risk of fire, thief/ burglary, RSD, flood/cyclone, tidal bore/earthquake. For security of the goods carried by sea marine insurance is taken. So mainly the insurance policy are taken for Policy to be taken covering all the risk asks for. Policy to be taken in the joint name of the bank and the borrower or assigning to the bank. Policy to be taken covering Bank Clause (Mortgage Clause). Policy to be got renewed before expiry. Policy to be obtained covering full value of the stock (including margin).
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Goods and properties & the storage godowns must be correctly described in the policy. Any event of damage of stock must be intimated immediately in writing. Policy to be taken from insurance companies on the on the banks approved list. It is to be ensured that all the desired terms and co0nditions are incorrect in the policy. Reinsurance is to be obtained by the insurance companies in case amount of insurance beyond its limit. Money receipt and the Original Cover Note / policy to be kept with the bank.
Attributes to a good security: Basic requirements of securities to be act as a good securities are Valuation: Title: Easy to value Amount of advance should be less then the value of the security Force sale value in distress situation Whether saleable easily/ timely Tendency of rising / declining of value of the item Possible fluctuation of value
Borrower have good title to the good Borrower have possession on the securities /owner possession in case of third party mortgage - Bank must have a security interest in the securities / collateral and have the legal rights to get possession of the securities and the to sell the securities. - The title has not been transferred / assigned to other earlier/ not charged against some earlier debts or debt to other. Control: - Easy to keep control by the lender - Easy to know experience, location and value to keep proper control/ constant watch. - Hypothecated / pledged goods to properly maintained and keep to fully insured against possible risks. Marketability: - Easily marketable or realizable - Marketable under adverse circumstances and with minimum experiences. - Not perishable in short time / within the life period of credit.
Charges on Securities:
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Banks lend money to the borrower for an agreed period of time. The borrower repays the loan with interest. Borrowers borrow, but sometimes do not repay the loan and interest. Bank therefore wants protection. They want security an interest in the borrowers asset giving preferential status or default or insolvency. Usually security means a charge created over asset(s) held by the business vis--vis sponsor (s) to guarantee fulfillment of an obligation especially the assurance that the debtor will repay (usually with interest) the money or credit intended to him. Charge means right of payment out of certain property. In a charge there is no transfer of interest or property. It is a transaction as a result of which the lender acquires certain rights over the property and the borrower is refrained from dealing in them. In a charge there must be a notice to the subsequent transferees, otherwise the charge is not effective as to the subsequent transferees.
Fixed charge: A charge is said to be fixed if it is made especially to cover definite and ascertained asset of a permanent nature or asset capable of being ascertained and defined, e.g. charges on land and building or heavy machinery. It prevents the loanee from dealing with the property charged without consent of the charge holder. Floating charge:
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It is a charge on the property, which is constantly charging e.g. stock. A company can deal with such property in normal course of its business until it become fixed on the happening of an event. Thus, it is a charge on the assets of a company in general. The Other classification of charges are: Pari Passu Charge: Pari passu charge is created in favour of several creditors, with the condition that they have equal priority. It is generally created in case of consortium accounts. Second charge: A creditor holding a second charge by way of mortgage, is entitled to the proceeds after the first charge is met. He must inform to the prior mortgagee of his charge because the first mortgagee cant part with the proceeds or title of the property if he has notice of the second charge. The modes of charges securities: Pledge: According to section 172 of contract act 1872 when goods are handed over to the lending bank by the trader / manufacturer who borrow against those goods and produces for short term i,e for working capital, will be treated as pledge. Pledge is the bailment of goods as security for payment of a debt or performance or promise. Here, title and ownership are not transferred. Pledge good may be sold out and proceed thereof may be appreciated towards the adjustment of liability in case of future of the borrower to repay or fulfill the terms and conditions. Hypothecation: Hypothecation is a charge on a property for debt but neither possession nor ownership passes to the creditor. This facility is granted by banks normally to the first class parties. Hypothecation good cant be sold out / disposed off without notice and courts order. However, if a special power of attorney is taken in that case can be disposed off without going to the court. Mortgage: Mortgage is the transfer of interest in immovable property to secure the repayment of money advanced. Ownership remains to the mortgagor. In case of equitable mortgage courts order is not necessary for sale / disposal of the mortgaged property for adjustment of advance.
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Lien: lien is the right to possession and no right of ownership. Banks lien is general lien over its own financial obligation to client. Property under lien cant be sold without notice to the owner and sometimes without courts order. Right of set off: The right of set off is the right of a creditor to the total or partial merging of a claim against the counter claim of the debtor. Banker should give reasonable notice to the customer of its intention to exercise its right of set off otherwise it may face troubles. Assignment: An assignment means a transfer of right of property or debt (existing or future) by one person to another person. In banking the usual subject of assignment is actionable claim. Assignments are of two types: legal and equitable assignments.
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Documentation-Definition and importance: The whole process of completion of the documents to secure the credit is called documentation. It is necessary for acknowledgement of debt by the borrower/grantor/mortgagor and for charging of securities in favor of the bank by them. Documentation must be proper and correct for the safety of a credit. Proper document is essential to safeguard Banks interest. It is made covering its all legal aspects. Documentation may be described as the process or technique of obtaining the relevant documents. A banker must obtain proper documents executed from the borrower to protect himself against willful default. Moreover, when money is lent against security of some assets, the document must be got executed in order to give to the banker a legal and binding charge against those assets. Documents contain the precise terms of granting loans and advances and they serve as important evidence in law of courts if the circumstance so require. It is therefore absolutely necessary for a banker to obtain proper documents from the borrower while granting a loan or advance to him. Execution of Documentation
Depending on the nature of credit nature of security, nature of constitutes, various documents are required. The chart of various types of documents required for various facilities as par BASIC Bank Ltd. Head office circular letter no. BASIC/HO/ADV/98/2395, dated November 03, 1998 to be executed by the borrower/grantor/ related persons in respect of credit. Documents for Advances: Documents for advances can broadly be classified into the two categories: 1) Charge documents 2) Security Documents
Charge documents: Charge documents are generally prescribed printed forms used by the bank against credit to be executed by the borrower/party concerned. They are: 1) Demand promissory note (DP note) a. DP note (ADV - F 25) b. DP note (ADV - F 26) c. DP note (ADV - F 27) d. Joint DP note 2) DP note delivery letter 3) Letter of arrangement 4) Letter on continuity
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5) 6) 7) 8) 9) 10) 11) 12) 13) 14) 15) 16) 17) 18) 19) 20) 21)
Revival letter I Revival letter II Letter of guarantee Letter of Hypothecation of goods Letter of Hypothecation of machinery Letter of Hypothecation of bills Letter of Hypothecation of debt assets Letter of pledge goods Letter of lien 1st party Letter of lien - 3rd party Letter of counter guarantee. Letter of trust receipt Letter of ownership Memorandum of deposit of title deeds Disbursement letter Letter of disclaimer Letter of undertaking and declaration with other bank liability
Branch should obtain initially two sets of charge documents. One set is to be duly filled in signed, stamped and witness. Before every renewal / enhancement / or reschedule of loan, Branch should obtain another set of charge document. Documents required for various types of facilities/constitutes are as under: Mortgage of landed properties: 1) 2) 3) 4) 5) 6) 7) 8) 9) 10) Original title deed (S) With chain of documents (All bhaya deed) CS (Cradastal survey) parchas (1909-1922) SA (State acquisition) Parcha (1955-1962) RS (Revised survey of SA) parcha (1969-1978) Mohanagar Jarip Parcha Non-encumbrance certificate from SRO Mutation parchas with DCR Upto date khajna/ rent receipt Upto date municipal tax receipt, gas and WASA bill In case of lease hold property NOC should be obtained from the RAJUK/KDA/CDA/Cantonment board/Ministry or the concerned authority for creation of mortgage in Banks favour. In case of vacant land, certificate from the RAJUK/KDA/CDA/Cantonment board/Ministry of works or the concerned authority to the effect that the land is free
11)
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from acquisition plan to be obtained. (Bank shall also not accept any vacant land against loan as security without HO approval) All Mauza map (if necessary) Court order of case and degree (if necessary) Location/site map Approval plan for construction for the RAJUK/KDA/CDA/Cantonment board or concerned authority (if necessary)
After receiving above documents from the borrower and land owner, bank authority must obtain lawyer certificate/opinion regarding clean title from banks lawyer or legal advisor over the land to be mortgaged. Then bankers execute the following documents: 1. Letter of acceptance of terms of loan 2. Registered deed of mortgage (drafted by banks lawyer and registered from SRO) 3. Registered deed of power of attorney to sell the property as per law of Artha Rin Adalat 2003 (drafted by banks lawyer and registered from SRO) 4. Memorandum of deposit title deed 5. Affidavit (In the court of magistrate first class) to be obtained 6. Valuation certificate from enlisted surveyor (Bank approved) as well as inspection report submitted by banks official as per circular no HO/ADV/98/18 dated September 22, 1998. 7. If the land property belongs to limited company, the mortgage/charge created in banks favor must be registered with registrar of Joint stock companies within 21 days from the date of its creation/execution.
Where advance are allowed to limited company 1. Board resolution of company to open and operate the Bank account, covering , corporate borrowing power and execution of security documents 2. Memorandum of association (copy) 3. Article of association (copy) 4. Certificate of incorporation (copy)
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5. Certification of commencement (public limited company) 6. Personal guarantee of the directors (jointly and severely) 7. Registration of charge with RJSC 8. All share certificates of directors along with form 117 9. Photograph of all directors duly attested 10. Any other documents as per sanction advice Where advance are allowed to partnership firm 1. copy of trade license duly attested 2. original copy of partnership deed 3. Photograph of each partners 4. Undertaking as required sanction letter 5. Personal Guarantee of all partners. Where advance are allowed against third party property As per obtaining approval of HO, If the property belongs to third party, third party guarantee is obtained to secure the property the following additional documents should be obtained. a. Double party D.P. note delivery letter b. Letter of guarantee c. Revival letter II in addition to revival letter I d. 2 copies photographs of the 3rd party land owner offering the security should be obtained after due attestation by well known persons. NB. Property offered as security must be thoroughly investigated for the legal point.
LIST OF ADVANCES DOCUMENTS (Common documents to be obtained for different types of advances)
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SOD (security as FDR) 1) original instrument duly discharged by-holder on revenue stamp on the back of the FDR 2) Usual charge documents 3) Letter of authority to lien 4) Letter of authority from borrower to encash the instrument for adjustment of outstanding liabilities 5) Letter of lien (1st or 3rd Party) 6) Lien confirmation from issuance authority Term Loan 1) Usual charge documents 2) Security documents 3) Letter of acceptance of the term of loan and disbursement request 4) Repayment schedules accepted by borrower 5) Hypothecation of goods/stock 6) Hypothecation of machinery 7) Cheque receive from borrower as per repayment schedule to be adjusted the term loan 8) Insurance policy in the joint names of the bank and the borrower 9) other documents to be obtained depending on the security Bank guarantee 1) Request letter 2) Usual charge documents 3) Letter of counter guarantee 4) If collateral security is obtained 5) Other documents to be obtained depending on the security 6) Letter of lien and authority if financial collateral security is offered All guarantees must be recorded in the register with details. Terms of guarantee must be examined carefully. No guarantee will be issued with unusual clauses that bind the bank eternally Transport loan 1) Request letter 2) Usual charge documents 3) Hypothecation of above Transport 4) Photocopy of blue book, route permit, and Tax token 5) Letter of undertaken 6) Comprehensive 1st party insurance policy in the name of the bank and borrower
Cast credit (Pledge/Hypo.) 1) Letter of acceptance of the terms of loan 2) usual charge documents 3) if collateral security is obtained 4) Stock report (monthly / quarterly) from the borrower and verified by bank official 5) Agreement for pledge/hypo of goods 6) Letter of hypo/pledge of goods 7) Letter of disclaimer singed by the owner of the godown 8) Insurance policy in the joint names of bank and the borrower LTR 1) 2) 3) 4) 5) 6) Usual charge documents Disbursement request Letter of trust receipt Hypothecation of imported goods Insurance policy Security and other documents to be obtained depending on the security.
Packing Credit 1) Usual charge documents 2) Lien over export L/C 3) Disbursement request 4) Hypothecation of stock of goods 5) Letter of packing credit LBP 1) 2) 3) 4) 5) Usual charge documents Disbursement request Lien over export L/C EXP form (one set) Letter acceptance is to be obtained from the local drawee bank in respect of honor of bill of exchange drawn on them on maturity as per L/C terms Hypothecation of bill
6)
Letter of credit 1) Request letter 2) Usual charge documents 3) Letter of guarantee for opening L/C 4) Hypothecation of import of goods 5) Marine insurance policy 6) Letter of undertaken Loan against imported merchandise (LIM) 1) Request letter and letter of acceptance 2) Usual charge documents 3) Pledge of goods to secure loan 4) Instruction to C&F agent 5) Joint insurance coverage on goods under lien 6) if collateral security is obtained Stock position of LIM goods must be recorded in the LIM register
Precautions:
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A banker should take the following precautions while getting the various documents executed from the borrower in order to ensure safety of his funds: 1) All the documents / papers / title deeds should be searched through DC office record room, registry office, Tahsil office and AC land office as required by banks legal adviser/ retainer and have to be attested or verified as it being correct and genuine. 2) 3) 4) 5) 6) The money should be advance only when the borrower has duly filled in all the required documents and completion of all legal formalities All the prescribed documents should be stamped as per stamp act Documents are invariable singed by the borrower in the presence of a bank officer Documents should be obtained on the banks standard forms. The date on the promissory note and the date on other documents should be the same No addition, deletion or replacement should be done in the printed language of the document without consulting the legal adviser of the banker since the banker himself may not know the adverse legal consequences of such an act. 7) 8) 9) 10) The documents should be renewed well in advance of the limitation dates. The period of limitation is three years after which the debts will become time barred All alteration, addition, striking or interlinings, if any, appearing the documents must be authenticated by full signatures of all executants. All documents should be properly dated If there are two or more pages/sheets in a documents each page /sheet should be got signed at the bottom from all the executants in addition to the signature at the end of the documents. 11) Bank to be obtained the following documents every year from the borrower a. Upto date khajna receipt b. Insurance policy c. Loan balance confirmation certificate Bank to be obtained the following documents of every renewal /enhancement/ reschedule of loan a. b. c. d. One set of charge document Insurance policy (for enhancement) Floating charge (for enhancement) Further charge (for enhanced amount)
12)
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Original deeds, stitched at the corner, along with charge documents must be kept in the vault in separate plastic files according to the location of the properties. These files must bear file number, quantity of land, name of the owner of land, and name of the borrower written on their cover. All these files names must be registered in the safe in safe out register orderly and singed with Advance-in-charge and Branch in charge. Every plastic file must contain a checklist and this list must be duly filled and signed by the authorized officer. Remember that charge documents and deed must not be punched. Only custodian can give the original deed to any one required with permission from head office. After adjustment of all the liabilities, deed can be returned to the owner of deed with permission from Head Office after taking request letter from the owner and receiving signature in the Safe in safe out register. In this case custodian can keep a photo copy of the all the documents in a closed file.
Care: Credit facility should be extended only after completion of documentation formalities. Non completion of documentation in respect of their loans will be considered unforgivable offence.
Part-(vi)
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Credit Planning
Credit planning means estimating first the total loanable resources that are likely to be available within the given period and then allocation the same amount is using various alternatives in conformity with national plan and priorities. Necessity of credit planning in context: Demand for credit is much higher than its supply Providing credit to the right person at the right time at the right quantity Getting maximum output as a result of credit allocation Ensuring the best of investment alternative available Achieving declared objectives such as providing credit to priority sectors. Credit planning at the macro level: The basic objective of credit planning at the macro level is to have an estimate of the total resources available at the national level during the budget year and then to ensure that these resources which consist deposit resources flow to areas and sectors in consonance with objectives coins deposit resources and currency components. Credit planning at micro level: In ultimate analysis, credit budget at micro level is an aggregation of the credit budgets of the individual banks put together. As matter of fact, the macro level planner should indicate the thinking to the banks about the magnitude of the macro plan. At the time of sending guidelines to the banks and asking them to prepare their credit budget, the central bank should issue guidelines to banks indicating their assessment of different industries. This will obviously assist individual banks in preparing their credit plans but unfortunately this is not being done in our country. At branch level: 1) Adherence to the policy guidelines of the head office and the supplementary policy guidelines of the regional office. 2) Analysis of the command area. 3) Determination of the requirements of the incremental loan able funds. 4) Allocation of the said funds to different sectors and client groups during the budged period. At regional level: 1. Analysis and settlement of the branch credit plan in a branch managers meeting and in a democratic way 2. Transmission of the regional credit plan to the head office. At head office level: 1. Adherence to the policy guidelines of the central bank regarding deployment of credit. 2. Correction of regional as well as sect oral imbalances if any. 2. Settlement of the credit plan of the concerned back for the budget year.
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Loan Pricing
A manufacturer offers the market goods as its product. Like this a bank offers the market a loan as its product. the price of a good is determined by the cost to make it plus profit on it. Similarly, the price of a loan is determined by the cost to make the loan plus a profit or risk premium on it. Lending is the primary business of a bank and profit is a measure of its success. So the main objective of lending is to earn profit on loans for the on going viability of the loan. Price of loan How to determine: The price of a loan is the interest rate the borrower must pay to the bank, in addition to the amount borrowed (principal). The price/interest rate of a loan is determined by the TRUE COST (BASE RATE) of the loan to the bank plus PROFIT/RISK PREMIUM for the banks services and acceptance of risk. Base rate is the banks break-even point, at which income and expenses are equal each other or profit = 0 of a loan. True Cost ( base rate) and its components: There are three primary components of the cost of a loan that must be determined: a) Interest expenses (For deposit and borrowings) b) Administration expenses c) Cost of capital Here, TRUE COST (BASE RATE) = (a) + (b) + (c) That is, Base rate = Interest expense (2 components) + Admn. Exp. +Cost of capital Note a) Interest expense = Interest in deposit + Interest on borrowings from B.B, etc. Formula The weighted average interest rate = [(% of deposit in total liabilities 5 Average rate of interest) + (% of borrowings in total liabilities 5 Average rate of interest)] b)Administrative expenses The bank must pay salaries, rent and other overheads for head office, zonal office and branches as deposit and loan administration costs. Formula
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Total Loans c) Cost of capital = Investors Expected rate of return Formula ERR 5 Proportion of Bank Capital in Total Liabilities Cost of capital = Proportion of loans in total assets. Risk Premium: The price a borrower must pay to the bank for assessing and accepting repayment risk is called the Risk Premium. Losses Risk Premium = Total category loans
Credit Monitoring
Post loan activity: Caring for the loan at post sanction stage in order to ensure the safety of the money lent. Why credit monitoring: Minimize credit losses Return on funds Compliance of terms and conditions Problem solving Feed back Taking timely corrective action Review of borrower relationships/loan facilities Methods for credit monitoring:
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Off-site Monitoring: Periodic reports -Discussion -Operating statements and cash flow statements On-site Monitoring:-Visits -Nominee Directors Early warning system (EWS) to be in place to identify Early Alert Accounts (EAA): Address problems Prevent loan classification, Int. Rev loss Obtain support for redress
Part-(vii) Micro Finance Scheme of BASIC Bank Limited Objective of the Scheme:
The objective of the scheme is to provide credit to the poor people, particularly the landless and asset-less urban poor with a view to creating self-employment. The bank has limitation of addressing the problem of rural poor; one of the reasons of which is the absence of any branches in the rural areas. The bank has been providing credit to the urban poor in a limited scale. The has been drawn based on the experience of the Bank in providing credit to poor people and also on the experiences of other banks and NGOs in the country.
Target Group:
The target group of the scheme mostly consists of the poor people in urban areas, particularly in the urban informal sector. They mostly live in city slums and shanty towns. The rural poor, particularly artisan groups who can be easily organized are also to be covered by the scheme. Following poor and/or disadvantaged groups fall within the definition of target group:
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Those employed in self employed income generating activities having knowledge in the trade and marketing.
The individuals should not have assets in the form of machines, tools and equipment, other movable assets domestic livestock of worth and use exceeding Tk. 30000.00.
Those individuals whose monthly income does not exceed Tk. 5000.00.
Activities Financerd: The urban poor rely heavily, for their livelihood, on work in small enterprises in the informal sector. A huge number of activities can be included in the tentative list. A few of these are tailoring, handicrafts, embroidery, sweet meet box making, rubber slipper strap, jute bag, paper bag and envelopes, bangle manufacturing, hair cutting saloon, shoe making and polishing, push cart, sugar cane juice making, tea shop/hawking, pan and biri shop, chanachur selling, chatpati, jhalmuri, peanut selling and fresh flower selling shop etc. Credit Delivery System: Three alternate delivery systems are being used to reach credit to the urban poor borrowers. These are: BASIC provides loan to NGOs which on-lend to the poor borrowers. Credit risk is borne by the NGOs which are responsible to make repayment to the Bank. The endborrowers repay loan to the NGOs. The Bank provides loan to the urban poor borrowers through NGOs or the bank directly extends loan to the borrowers. The borrowers repay loan direct to the Bank. The NGOs assist the Bank in motivation, formation of self help groups and monitoring and supervision of loan utilization. For such service the NGO will be paid a fee by the Bank. 72
BASIC provides loan to the urban poor borrowers direct without assistance of any NGO. BASICs staffs perform all required functions of motivation, group formation and monitoring and supervision of loan utilization. Borrowers make repayment to the Bank.
Loan size: Loan may be sanctioned to individual members organized in a group as well as to NGOs. The maximum limit of loan per person is Tk. 15,000.00. The minimum loan size is Tk. 2,000.00 per borrower.
Interest size: Monitoring and supervision cost of small loans are high. It is reported that NGOs require 10% - 12% interest spread to cover their cost. As far as possible market rates should be charged. In the case of providing fund to NGOs for on lending interest rate charged to NGOs vary from 7% to 10% per annum. For direct lending to NGO members the Bank charges 16% interest rate. Also in the case where we handle microfinance operation entirely on our own, the interest is charged at the rate of 16% per annum. Growth in Microfinance: The growth in microfinance of the Bank during last five years is shown in the following table:
Microfinance Amount in million tk. Growth % of total loans & advances 2001 183.80 2.9% 2002 186.20 1.3% 2.3% 2003 181.00 12% 2.00% 2004 284.10 57% 2.4% 2005 (up to June) 310.50 9.3% 2.3%
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Description Numbers Total districts covered by other credit programs All districts Total districts covered by microfinance programs 30 Districts Total branch 29 Branch with microfinance operations 11 Table:Area covered by the NGOs financed by BASIC Bank
Future plans: The experience of BASIC Bank has lend support to actively consider the following in respect of its microfinance scheme: Rural poor are out of focus of the scheme. As such, BASIC Bank will introduce some special schemes for rural micro industries to offer the benefit of the scheme to the rural poor too. Growth in microfinance shall be at least equal to the growth of total loans and advance. Strategic network will be developed with premier stakeholders in the sector.] periodical program to exchange views with participatory NGOs on strategic changes and other vectors of the micro enterprise development and poverty alleviation. Regular training of officials engaged with microfinane operation in head office as well as in the branches shall be arranged.
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3.Fixed a. 3 Months and above b. 6 Months and above c. 12 Months and above d.24 Months and above Lending 1. Agriculture Primary Products. 2.Industrial Term Lending a. Agro-Based Industries b.Micro Industries with project cost up to Tk. 50.00 lac c.Other Small Scale Industries d.Large & medium scale industries 3. Working capital (Indutrial) a. Agro-based Industries b. Micro industries with project cost up to Tk. 50.00 lac c. Other small scale industries d.Large & medium scale industries 4. Export a. Export (Direct) i) Readymade garments, frozen food, agro-based industries. ii) Others b. Advance against inland documentary bills accepted by banks i)Payment in foreign currency ii) Payment in local currency 5. Commercial Lending a. financing/other short term demand loan 6. OD against a. Banks own FDR b. Other banks Fixed Deposit Receipt c. PSP/SP/Other Govt. Bonds Internal trade/import
7.00% 7.00% 10.00% 13.00% 14.00% 2% above FDR rate 14.00% 12.00% 13.00%
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d. Unit Certificate 14.00% 7. Housing loan 11.00% 8. Micro Credit through NGOs and other special programs
Importance of Loan Classification : International best practices require that a loan will be classified as non-performing if its principal and/or interest are three months or more in arrears. For the moment, banks in Bangladesh as prescribed by the Central Bank follow classification rules based on a tine frame of six months, still away from International best practices. On introducing special mention account, we are trying to emphasize regularization of the loan accounts not yet been classified but acts like a non-performing loan.
Special Mention Account: A continuous credit, demand loan or a term loan which will rnain overdue for a period of 90 days or more will be put into the Special Mention Account and interest accrued on such loan will be credited to interest suspense account, instead of crediting the same to income account. This will act as Early Warning Signals of shadow classification. Basis of Classification: There are only 2 (Two) criteria to categorize the loan to be classified or not a. Objective Criteria, b. Qualitative Criteria Objective Criteria concentrates the following :-Limit Expiry Required Payment. 77
Qualitative Criteria is entirely judged by the Branch-in-Charge. In case the loan account is unclassified by Objective Criterion, this could be even treated as classified by Qualitative Criterion. Some instances of such criteria may be like these: low transaction in a newly disbursed loan, fund diversification or non-traceability of the borrower, etc. Some other discussions of loan classification: Total loans and advances are divided into 4 (four ) categories under new system. These are:1. Continuous Loan. 2.Demand Loan. 3.Fixed Term Loan. 4. Short Term Agricultural and Micro Credit. CL1 is the consolidated statement of all the break-up of CL2,CL3,CL4 and CL6 CL1= CL2+CL3+CL4+CL6 CL2= Continuous Loan(TOD,SOD,C.C(H),C.C(P)) CL3= Demand Loan(PC,PAD,LTR,LIM,FBP,LBP,LAFB,Demand) CL4= Term Loan up to 5 Years (Term-SSI, Term-MSI,Loan General having any specific Repayment Schedule) CL5= Term Loan over 5 Years (Term-SSI, Term-MSI,Loan General having any specific Repayment Schedule) CL6= Short Term Agricultural and Micro Credit (Direct Individual) Some Important Notes: For CL4 & CL5: Amount in Arrears = Amount Due-Amount Paid Time Equivalent = Amount in Arrears* Installment Frequency (months)/Installment Size.
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Procedure of Loan Classification: 1. Objective Criterion: Category Limit expiry exceeds 6 months or above but <9months CL-2 CL-3
Status
SS DF BL SS DF BL
9 months or above but >12months 12 months or above 6 months or above but <9months 9 months or above but >12months 12 months or above 6monthly installments or above but<12 monthly installments 2quarterly installments or above but<4 quarterly installments 1half yearly installments or above but<2 half yearly installments 12monthly installments or above but<18 monthly installments 4quarterly installments or above but<6quarterly installments 2 half yearly installments or above but<3 half yearly installments 18 monthly installments or above 6 quarterly installments or above 3 half yearly installments or above 12monthly installments or above but<18 monthly installments 4 quarterly installments or above but<6quarterly installments 2 half yearly installments or above but<3 half yearly installments 1 yearly installments or above but< 1.5 yearly installments 18monthly installments or above but<24 monthly installments 6 quarterly installments or above but< 8 quarterly installments 3 half yearly installments or above but< 4 half
CL-4
SS
DF
BL
CL-5
SS
DF
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yearly installments 1.5 yearly installments or above but< 2 yearly installments 24 monthly installments or above 8 quarterly installments or above 4 half yearly installments or above 2 yearly installments or above
BL SS DF BL
CL-6
12 months or above but < 36 months 36 months or above but < 60 months 60 months or above
Loan Provisioning:
There is every risk when we lend money to the customer. If any loan extended to a customer is not returned, we need to take some precautions before giving the loan. In general, we ask for good security from the borrower. Further, we follow some extra measures to safeguard the loan portfolio. As a matter of fact, we try to maintain some reserve fund to cover the risk to be involved by loss due to classified loans of the bank and the entire procedure is loan provisioning. The effort helps reduces the possibility of losses of such assets. Base for Provisioning; Base for provision = Balance outstanding Interest Suspense Eligible Security Interest Suspense = Interest not credited as income account. (under Sundry Creditors Head liability side.) Eligible security:
Matter Deposit Gold Govt. bond/savings certificate Guarantee by the Govt./ Bangladesh Bank
Easily saleable goods under Banks control Mortgaged land, building (market value)
50% 50%
Provision for general credit: Category Unclassified Unclassified (special mention account Substandard Doubtful Bad loan Provision on agro credit and micro credit: Category Unclassified Substandard Doubtful Bad loan Base Balance outstanding Base for provision Base for provision Base for provision Rate 5% 5% 5% 100% Base Rate Balance outstanding 1% excluding staff loan 5% Base for provision 20% Base for provision 50% Base for provision 100%
Declassification:
Borrower in some specific cases may be the victim of the circumstances and they do not default of any loan willingly. Many a times, it has been seen that, due to political unrest, turbulence, natural calamity, particular business constraints, bureaucratic bottlenecks, entrepreneurial problem and industry hazard may result a loan account to get it classified. However, BASIC will not concentrate more on the matter in accordance with the purview of the subject paper: rather we will focus on the rules and regulations of declassification of a loan. As per BRPD circular no.01 dated 13.01.03 regarding Reschedule Policy of classified loan, there are some guidelines to be followed as under: a) If the default borrower is a habituated one, then the bank consider its declassification.
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b) The bank has to take into consideration of the default borrowers other banks liability before go for declassification. c) The bank will look into the cash flow statement, audited accounts, revenue and other financial statement as to test the clients solvency to adjust the exciting liability. d) The bank official will physically visit the business concern and maintain some reports. e) If all the above guidelines are complied with meticulously and also if the bank is fully satisfied with good repayment performance, then rescheduling is possible. f) Re-scheduling to be made on actual basis; it is wise to give a minimum time frame. g) If Re-scheduling is needed to place before the Board, then a through study will be required for its ultimate implication over the banks profit, costing and other measures. Rescheduling Procedure: Type of loan Stage (B) (A) Term Loan 1st
2nd 3rd
Outstanding Balance (D) 10% of (D) 20% of (D) 30% of (D) Up to Tk. 1 crore
Tk. 5 above If any 1st demand or 2nd continuous reconstructed as a term loan 30% of (C) 50% of (C)
crore
& to a minimum of
Tk. 50 lac.
5% of (D) subject
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Part- (ix) Supervision and Recovery of loans and advances of BASIC Bank Limited
Supervision and follow-up of advances are the direct responsibilities of the branch. Branch is the unit wherefrom the proposal is made for any advance, disbursements are made. The borrower maintains his account with the branch, operations are conducted through the account, reports and returns are submitted by the borrower to the branch. So, success depends on how effectively the branch ensures supervision and follow up of the advances. In conducting supervision and follow up, branches have to follow the under noted common methods: i) Keep watch over the ledgers and accounts to ensure that operations are regular and as per procedure. Particular care should be taken when the balance in the account remains very near or goes beyond the drawing limit or there is no good turnover. ii) Ensure that inputs/materials are purchased/procured as per procedure/terms of sanction and are used properly and outputs are sold properly. iii) Keep watch over the inflow and out flow of fund. iv) Collect periodical reports, returns and information about the borrower and examine the activities of the project/enterprise financed. v)Ensure that security/collaterals have been obtained as per terms of sanction and valuation has been assessed correctly and security is maintained properly. vi) Ensure that security has been properly insured where required as per policy, procedure and practice.
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vii)Ensure that the documents have been obtained as per terms of sanction and as per procedure for such type of advances. If not, get the documents regularized. viii) Keep regular contact with the borrower both formally and informally and pay regular visits to the project/enterprise financed. ix) Keep watch over the repayment trend and see that the advance does not turn up as irregular or stuck up and becomes time-barred. x) Ensure that appropriate actions are taken in time to regularize the irregularities and recover the loan as per schedule. xi) Obtain periodical balance confirmation from the borrower and where a necessary fresh document is obtained as per procedure/practice. BASIC Bank Limited has been following a series of measures, both in Head Office and branch level, to follow up and supervision of loans and advances to avoid and minimize performing loan of the bank. At Branch Level: In order to ensure an effective supervision all branches are instructed to take care following factors: 1) End-use of fund: To see that the funds lent to the borrower are used for the purpose for which they have been given. Any diversion of funds and deviation by the borrowers from the terms and conditions stipulated by banks have to be noticed and timely action to be taken. Branch in charges are instructed to be cautious and guard against any misuse of credit facilities. 2) Monitoring of borrowers account: All branches are advised to keep the borrowers account under close watch as it is helpful for effective credit management. 3) Security: The branches are instructed to see that the security offered is safe and continues to remain available for repayment of loan. Security may be in the form of i) Fixed Assets ii) Goods iii) Bills etc. All branch in charges are also advised to diarized all important dates in regard to an account, to ensure that an advance does not breach any provision of law of lending and to review all advances every six month or once in twelve months. At Head Office level: In order to control and supervise credit, Head Office prepares a consolidated statement of loans and advances every month to indicate banks exposure in each types of loans and advances on the basis of risks involved and sectoral distribution for purposes of controlling excessive exposure in unwanted portfolios.
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Head office effectively monitors all loans and advances through inspection to the branch (including surprise visit), examine different periodical statements (weekly, fortnightly, monthly, quarterly and half-yearly). a) Periodical inspection: Branches are periodically inspected by internal auditors/inspectors by head office and external auditors, during each inspection the inspector makes a comprehensive and detailed examination of all advances including documents, security and turnover of the account and whether the terms and conditions the sanction have been complied with. Spot inspection is also conducted by vigilant team from Head Office by a surprise visit when specific and urgent information are needed by the management. This report will be short and cover specific area. b)Periodical statement: All branches are instructed to submit different statement relating to loans advances in weekly, monthly, quarterly, half-yearly basis. If anything found adverse against any branch, Head office instantly asked the branch to clarify its position. Head office takes necessary measures against branch which found committed irregularities and damaged banks interest. c) Arranging meeting with branch in charge: Besides regular meetings of the branch managers with Head office for overall review of loans and advances of each branch arranged under the chairmanship of Managing Director of the bank for guidance reducing overdue loans and recovering classified loan and sanction of new loans. Recovery of loans and advances: Bank generally recalls its advances under the following cases: i i) If death occurs either of the borrower or the guarantor. ii) If the borrower is reported to have committed an act of insolvency or has filed iii)Dissolution of the partnership. iv) Liquidation of the borrowing company. v) Failure to renew the documents sufficiently before the expiry of the limit. vi) If there is any serious deterioration in the security charged to the bank and want of satisfactory turnover in the account. application for his insolvency.
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vii) There has been deterioration in the financial position of the party. If the banker comes to know that his client has committed a fraud or indulged in speculation, it will be invisible to continue the advance. viii) Failure to adhere to the terms and conditions of the sanction in spite of
repeated reminders to the borrower. ix) If the borrower fails to maintain the stipulated margin and does not restore the shortfall in spite of repeated reminders. x) Change in the banks policy of certain types of advances. xi) The policy of Selective Credit Control by Bangladesh Bank. xii) Detection of any undesirable features in the account. xiii) There may also be other reasons for withdrawing the facility, i.e., the law and order situation at a certain place is such that it may be risky to continue the advance. Procedure for recovery: If a borrower fails to make repayment of dues the bank has to consider what steps need to be taken to recover the debt. Banker will eventually have to take the following steps to recover the stuck-up advances. i) Exerting moral pressure: The banker will visit the borrowers place of business and find out the cases of non-payment of the banks dues. The banker may also request some influencer customers of the area to exert pressure on the borrower to clear banks dues. If there is a guarantor, he is also called upon to adjust the account or have it adjusted by the principal. ii) Incase the borrower does not adjust the account as desired , the only course left open to the bank would be to send a notice by registered post to the last known address of the borrower and guarantor, if any, preferably through a lawyer. In that notice, it has to state the undesirable character of the advance and recall it and ask the party to liquidate it within a stipulated period, say 30 days. Presently banks are empowered to dispose off the security without intervention of the court under the Artha Rin Adalat Ain 2003. This law empowered the financial institutions to sell property kept with them as lien, pledge, mortgage or hypothecation without any intervention of the court in order to adjust default loan from sale proceeds followed by filing of law suits. Another important feature of this act is the limitation of the financial institution that it would not file any suit claiming interest more than two hundred percent of the principal amount of loan(Section-12).
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iii) Filing a suit: If the advance is not fully secured and where there is a shortfall to adjust the advance after disposal of securities, the decision has to be taken by the bank whether to keep the borrower in business or file a suit against him for recovery of banks dues. It is well known that once the suit is filed, the borrower ceases to be cooperative. BASIC Bank Limited has been followed a series of measures to recover the default amount of loans and advances both in Branch and Head Office level. All branches are kept under serious pressure through circular, circular letter, verbal instruction etc in regular basis to take necessary precautions to avoid new default loan in the branch. Besides, branches have been given yearly target to recover dues from the existing default borrower to reduce the classified loans and advances up to minimum level. Head Office monitors each branch whether it is performing in accordance.
The scenario of loans and advances of BASIC BANK Ltd. as on December 31, 2005 is as follows (at a glance): 1. Total Loans and advances a) Term loan b) Commercial loan c) Micro credit Total 2. Total Classified loan 3. Rate of CL to total advance 4. Total claimed amount against suit 5.Recovery from the account under suit 6. Number of suit feild Tk. 978.76 crore Tk. 501.34 crore Tk. 33.83 crore Tk. 1533.93 Tk. 69.84 crore 4.55% Tk. 35.02 crore Tk. 2.38 crore 57 no.
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Chapter- Five
FINDINGS OF THE STUDY
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Attempt has been made to find out the actual practices of the Bank against the credit operating procedure specified in previous chapters. We will verify whether BASIC Bank Ltd. is following the credit operating procedure that are specified by Bangladesh Bank and as well as specified by itself. 1. Aggregate Loans and advances are 79% of the total Deposit: As we have seen in the credit policy that, it strictly specifies that, at best 65 of the total deposit should only be provide for the loans and advances. If we consider the call deposit and fixed deposit then the figures comes to 79% at June 2003. So in that case BASIC is taking some sort of risk. But as the amount of non-performing asset is low this rate is acceptable. And when we have examined this rate for other private commercial and specialized banks the amount approximately was 80 to 95 percent of the total deposit. 2. Approximately 77% of the loans and advances have been given to small and cottage industries: In the credit policy it has been specified that, approximately 50% of the loans and advances will be given to small-scale industries. By examining the figures we have found that, for the month ended June 2003, BASIC employed 77% of its loan able funds to small-scale industries. If we take the example of some local private and government banks we can see the following position. Name of the bank Arab Bangladesh Bank Islami Bank Sonali Bank Rupali Bank Investment to small scale industries 4.74 % 21.21 % 10.83 % 0.43 % 89
3.45 % 10.45 %
So we have seen that, comparatively that all other banks are investing fewer amounts to small-scale industries. By this they are maintaining steady short-term profit but endangering long run profitability. 3. Head Office of the bank are monitoring all kind of loans and advances: The Head office of the bank perfectly monitors the banking operation and execution of the credit policy. When I have examined the credit extension procedure of the bank I have found that, every proposal are forwarded to the Head office for granting the loan and Head office has the full authority to reject any kind of proposal. Thus any kind of ill practices at the branch level are restricted. Along with that, some power has also been forwarded to the branch manager most of whom also are well conversant about the credit policy of the bank. 4. Branch managers are fully liable for the selection of the borrower: Branch managers are made fully liable for the selection of the new borrower in the bank. It prohibits the way to improper selection of the new borrower by the branch manager. 5.Continuous monitoring of the working capital facilities are ensured by the inspection of the stocks: BASIC bank provide working capital facilities like Cash Credit, in against of stock of manufacturing goods. I have checked the inspection file of 5 branches and am informed that, continuous supervision is held to ensure that appropriate stocks are there to support the financing. Usually Cash credit is allowed on 70% on the total stock value. 6. Conservative approach are taken to avoid any kind of foreign exchange exposure: In credit policy of BASIC it has been specified clearly that no additional risk should be taken in dealing with foreign exchange. I have visited 5 branch of BASIC and I have found that excessive measure is taken to avoid any kind of risk. Some problems arise because of these excessive measures as new borrowers fears to open an L/C. 7. Documentation Process: To judge whether the branches are following the credit policy for documentation I have visited 5 branch and made sample test. In that we have taken four borrowers in each branch and compare the documentation process with the standard one. There we have find that, in 90% cases standard documentation has been maintained. 8. No credit is extended to customer client Entity, which exceeds in total commitment more than 10% of the Banks capital and fees reserves. 9. House building loan facility and other commercial loan facility has been demoralized by the branch authority: As per credit policy of the bank the branch credit committee always demoralize loan facility to commercial sector. It has been revealed from the interview and from the
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balance sheet. The reason behind that is the non-productiveness of the house-building loan. 10. Persuasion and monitoring are moderately maintained for ensuring the prompt payment: There are some cases where effective monitoring and persuasion are needed especially for substandard and doubtful cases. I have evaluated 5- branch persuasion chart and have seen that, persuasion and monitoring are effectively performed by the branch manager. 11. Head Office decision sometimes creating classified loans: I have analyzed the written communication regarding the classified loans and other loans between the Head office and our 5-sample branch. There I have identified that, in some cases those loans becomes classified which the head office has recommended. So to some extent it is true that, sometime Head office decision is also creating classified loans. 12. Credit evaluation techniques are not enough to judge the credibility of the borrower: Though the classification rate of BASIC Bank is well below of the acceptable rate but its credit techniques to judge the client are not satisfactory. Where all the Nationalized Commercial banks are using LRA procedure, where most of the new private commercial banks are using their own modern rating system and the foreign commercial banks are using international rating procedure. BASIC is following the traditional credit evaluation technique. When we have visited and evaluated the credit evaluation techniques we have found that, those techniques neither prove the economic viability of the project nor prove the future prospects of the potential borrower. In our sample 5-branch I have found that, 60% of the borrower firm does not properly submit their financial statement. The reason behind this is that, the Bank is not following effective credit management technique. Because of the less effective appraisal process sometimes it becomes difficult for the bank to judge whether the borrower can pay off the loan or can maintain effective transaction with the bank. In most of the time the borrower produce imaginary data regarding the projected financial statement. But only because of effective technique it cannot be identified. Because of lack of financial statement analysis perfect action are delayed to protect the classification. Not only that, BASIC Bank does not have any working capital analysis procedure which can ensure the accurate working capital requirement of the client. They are following five years old working capital analysis procedure prescribed by Bangladesh Bank. As a result some borrower get the chance to channel fund on different uses. 13. Excessive measures are taken to reduce foreign exchange risk: I have interviewed 5-branch manager and concern officer of foreign exchange. All of them have agreed on the issue that excessive control measures are taken to reduce any kinds of foreign exchange risk. They informed that, this only because the head office supervises all kinds of dealing and the concern officer is fully liable for any kind of losses. And to keep the classification rate low additional care also been taken in financing foreign bills.
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14. Credit analysis techniques for LIM facility: Among five of the sample branch I have found that, in those cases where branches provide loans for PAD, LTR and converted the facility to LIM as the borrower fails to release imported goods than problem arises. In those cases we have found that, because of prompt action from the branch and Head Office huge amount become classified. Analyzing the practices stated above we have found that, in most of the cases BASIC Bank limited is perfectly following the credit practices except the credit analysis technique. If the Bank can improve that technique it will be able to reduce its classification rate more effectively. 15. Small range of loan portfolio are restricting further improvement: Comparative to private commercial and foreign commercial banks BASIC Bank have small loan portfolio. Presently it only providing CC (P), CC(H), SOD, LIM, Term loan, Micro Credit, LIM, LBP, FBP, PAD, PC and L/C facility to its clients. Where other commercial banks are offering modern services like Consumer loan, ATM, and Credit cards. 16.Lack of up-to-date credit manual: A common problem I have identified in all branches is that, there is no credit manual for smooth operation. The last edition of credit manual lay bare in the year of 1994. Since then no time tested credit manual has been provided.
Chapter-Six
6.1 Comparative analysis of BASICs credit policy with other bank 6.2 SWOT analysis of BASIC
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yet it has set a milestone in banking. When I have talked with the Officials of Nationalized Commercial banks they have informed me that, one major problem of those banks is the CBA of the respective government banks. They have stated that because of this organization sometimes it becomes impossible to initiate any strong policy to wipe out inefficiency of the nationalized banks. They have also stated that, the salary structure of the Nationalized Commercial Banks is another problem for what the operational manager become less inspired for collecting the classified loans. In BASIC Bank there is no CBA or any kind of employee organization so it becomes possible to take any action against inefficiency. And the salary structure of BASIC is well above of any nationalized banks so employees get inspired to work for the betterment of the bank. Specialized Commercial Banks In Bangladesh there are four specialized commercial banks (except BASIC) named: Bangladesh Krishi Bank, Bangladesh Krishi Unnayan Bank, and Bangladesh Shilpa Rin Sangstha. These banks are providing subsidies and other improvement facilities for poverty alleviation, industrialization and agricultural development. The rate of classification of Bangladesh Krishi Bank is 35%, Bangladesh Shilpa Bank 29% and Bangladesh Shilpa Rin Sangstha 21%. It shows that, from classification of loans point of view these banks are less efficient than BASIC. Private Commercial Banks There are 30 scheduled local private commercial banks operating in Bangladesh. Among them 14 banks starts its operation during 1995 to 2004. In sense they are modern in their nature and activity. These banks gain knowledge and lessons from those banks incepted before 1995. If we focus on the credit management techniques of these banks we can find that, literally they are great. These banks introduced some brilliant package, which are attractive to the borrower and also to the depositor. But from our point of view it is difficult to comment or compare these banks with BASIC Bank, because the effectiveness of the credit policy can only be judged after 6 or 7 years. But so far they are doing well than the BASIC Bank. Among other banks incepted before 1995 some banks like EBL, Dhaka, Prime and National bank are doing well. If we compare them from the classification of loans and advances point of view then we can see that, BASIC is in good position. But if we judge the level of service provided, management skills, volume of loans, technical knowledge and number of valuable client handled then we can find that, these banks are doing really well. Especially these banks have introduced modern techniques, which is essential for loan appraisal. Foreign Commercial Banks
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There are 10 foreign commercial banks operating in Bangladesh. Among them two banks named Standard Chartered Grind lays Bank, and HongKong Shanghai Banking Corporation are providing excellent services to its client. The have introduced modern credit management techniques to select the best client. They have global credit appraisal system that ensures low classification rate. In every aspect their credit policy and practices are superior to that of BASIC Bank. This is to some extent also true for other foreign commercial banks Foreign commercial banks monitoring and supervision technique is also superior to BASIC Bank. The reason of this efficiency is that, the performance evaluation of the manager of the foreign commercial banks depends largely on this. And because of selective sector selection it becomes possible. Not only that, because of modern technology and excellent recruitment procedure it becomes possible for them to have competitive efficiency.
Threats Not suitable for future competition in the market. Reduced Government support in future.
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Strengths: The main advantage of BASIC Banks credit policy is its conservative approach. The entire policy is designed in a way that, it could always avoid default risk. In the credit policy all kinds of documentation process, appraisal techniques are designed so that the bank officials can take no excess risk. In the credit policy top management are assigned adequate power to monitor the credit operation at the branch level. In most of the government bank we have seen that, the head office is not contributing more for the supervision of the loans and advances. But in BASIC a handful number of top officers have been engaged to monitor day to day operation, which are reducing the number of errors. In the credit policy it has been clearly specified that, 50% of the total fund should be invested in the in small and cottage industries for short time. And we all know shortterm loans are more secured than the long term. And also small investors are much more honest than the large investors. So for this policy BASIC Bank is getting competitive advantage. All the investors know that, it is very difficult to get loan from BASIC Bank. They have to satisfy concern body and should be very optimistic about the future of their project. If any kind of loopholes exist in their procedure it will be very tough for them to get any loan from the bank. This policy gives the bank small but strong borrower portfolio that is important to keep the classification rates low. Not only that, BASIC Bank is the one of those banks, which never takes any kind of, uncovered risk in dealing with foreign trade. They provide the foreign trade facilities only to their prime clients. Weaknesses: The technique that has been used in credit analysis is not adequate. Now days it is not possible to justify of a client by analyzing only their projects production capacity. It is important to analyze their financial statement and market share make sure that the project will last for long. BASICs credit policy does not clearly specify these techniques. In the credit policy no emphasis has been given for mobilizing deposit from private sources. But private sources are the least costly sources and using it is possible to earn more profit from investment. Opportunities: Bangladesh is a country where it is very difficult to establish hi-tech industries because of high capital asset cost. So the government of Bangladesh and other international bodies convincing to establish small and cottage industries first which will make the ground for huge investment. As a result the numbers of small industries are increasing day by day. And BASICs has huge chance to progress if it can hunt this sector. Not only that, international organizations and donor countries are continuously convincing the 96
government of Bangladesh to attenuate the high classified loan rate. Now a day they are including the clause of reducing the classified rate before sanctioning donation or loan to the country. As BASIC bank is successfully keeping the classification rate low it is possible that, it will get international assistance from ADB and from other organizations. And obviously these funds will have lower interest rate by which the bank can earn handful profit. Threats: From 1990 the core concept of banking in Bangladesh is changing. Now banks are going to the customer with services and try to convince them by it. Most of the banks have increased its service range significantly to attract its client and to satisfy them properly. Along with that, now the banks are trying to accumulate more funds from the middle class group. Alike insurance companies most of the banks also have employ marketing agents to convince the mass. All of said situation is happening because of the increase of number banks in the country and competition among them. BASIC bank is not very keen in marketing its product. And in credit policy it also not specified significantly. Not only that, it does not have any marketing plan to grab the market after 5 or 10 year. So if the banks do not change this attitude its profit will be reduced for the abnormal competition in the market. And also if the government sells its entire share to the private sector the bank will face huge pressure from its competitor.
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Chapter-Seven
Conclusion Recommendation
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Conclusion
The BASIC Bank Limited has been trying to operate its business successfully in Bangladesh since 1994. Basic Bank has already developed goodwill among its clientele by offering its excellent services through General banking, Credit division and Foreign Exchange divisions. This success has resulted from the dedication, commitment and dynamic leadership among its management over the periods. The working atmosphere of the BASIC Bank Limited is very simulating. During the short span of time of its operation, the bank has been successfull to the position itself as a progressive and dynamic financial institution in the country. The banking sector of Bangladesh is passing through a tremendous reform under the economic deregulation and opening up the economy. Currently this sector is becoming extremely competitive with the arrival of multinational banks as well as emerging and technological infrastructure, effective credit management, higher performance level and utmost customer satisfaction. From my survey I have found that, all branches of BASIC Bank fairly follows the credit policy and practices set by the management of the bank. And by that they are doing well in reducing the high classification rate and in attaining the profit target of the bank. It has been observed that BASIC Bank Ltd has been maintaining an encouraging trend of overall performance in the country. High employee efficiency, high profitability, rapid growth of deposit and advances and high loan recovery prove evidence of sound financial condition of BASIC. Findings are encouraging in the sense that it shows efficient management can lead to successful banking business in Bangladesh. This could be source of useful lessons to the total banking sector. BASIC being the best among the Government owned banks and should go hand in hand with the modern banking system and culture to retain and improve the present position in the financial arena. The implementation of the suggested ideas in the organization will undoubtedly lead it to be an efficient and sustainable financial institution. But as we have seen that in some areas the credit policy and 99
practices are problems for BASIC. Changes are necessary to eliminate those problems to increase the efficiency and betterment of the bank. The top management can make changes by taking the suggestions of the management (Medium and lower level) and also by taking into consideration the responses of the clients regarding each area of credit policy of the bank.
Recommendations:
Banks should establish a review process to examine the changing circumstances of borrowers to determine the position of loans. Attention devoted to these loans is more likely to result in proper action to safeguarded the Banks position and to assist the borrower to take appropriate steps in their business to bring back loan performing. . Here some recommendations are made to enrich the credit policy and practices of the bank: 1. Loan appraisal technique should be modernized: In Government commercial banks LRA method have followed to appraise the loan application. And in private commercial banks LRA and other systematic method have followed to judge a client. Compared to those technique BASICs loan appraisal techniques are relatively traditional and ineffective. And using that technique it is not possible to evaluate the financial soundness of a company. As such it is essential for BASIC to change its loan appraisal technique. 2. Documentation process should be improved: As I have discussed the documentation process of BASIC Bank is fair relative to other commercial banks operating in Bangladesh. But this process is fair as long as BASIC is interested only in small loan amounts and small loan portfolio. When the volume and amount of loan will increase then this documentation process will not be suitable. As such identical documentation and filling process should be introduced for the betterment of the bank. 3. Customer Services should be enhanced: Every banks prime objective is to satisfy its client. Increased customer services are must for it. In Bangladesh all foreign banks and some private commercial banks are now providing excellent services like: ATM, Credit card, phone banking, super saving 100
facilities and other fast service facilities to its client. But in that area BASIC has taken no pragmatic steps. As such they are loosing its valuable client to those which are providing these services. So BASIC should improve its service portfolio and should introduce more technology-oriented services to its customer. 4. Marketing for selling the services should be encouraged Most of the employees of BASIC or the top management of it are not very much interested for marketing for BASIC Bank. Door to door or business to client relationship is not maintained in this respect. The reason behind this may be that, no incentives are given for this job. So special incentive schemes should be introduced for mass marketing of services. 5. Detail manual should be prepared for accurate credit operation: A common problem I have identified in all branches is that, there is no credit manual for smooth operation. The last edition of credit manual lay bare in the year of 1994. Since then no time tested credit manual has been provided. So top management of the bank should provide appropriate attention for preparation of the credit manual. 6. Adequate training is required for credit officer: Adequate training is essential for the efficient credit management. Almost all recognized commercial bank have its own training center, where continuous training is given to the managers and credit officers for their improvement. But no such training center has yet been established in BASIC Bank. In our study we have revealed that, the training that has been given to the employees is not adequate. Since 1999 no training is given to the bottom level management. So from our viewpoint adequate training should be arranged for better credit management and implementation of credit policy. 7. LIM facility should be withdrawn by the Bank Management: It has been revealed that, because of LIM facility branches are suffering losses. For that facility branches are forced to have godown, extra manpower and obtain risk for the goods. And it is evident that, a handful percentage of LIM facility becomes classified loan. As such it is reasonable for the bank to pause LIM facility as soon as possible. 8. Adequate measures should be taken for small industrial loan: In our study I have revealed that, most of the small industrial loans become bad or classified. This is due to the weak financial capacity of the firm. So adequate measure should be taken before disbursing the loan. Especially alternative sources of repayment or adequate security coverage should be checked and satisfied in this regard. 9. Management should be careful about high liquidity ratio: As per Bangladesh Bank inspection report it has been revealed that, most of the branches are keeping more funds in their hand, which are affecting the profitability. Also the conservative approach of the bank is affecting its profitability. As such the bank now should involve more of its strength to find new investment area and let its idle funds to be used.
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10. Some discretionary power should be given to the branch management: When we have discussed with the clients of BASIC Bank they have complained us about the extra time needed for sanctioning a loan. They have said that, if no LC limit is there it takes two days for opening a LC that creates problems for them. This problem arises, as the branch managers dont have discretionary power to sanction any advance above BDT 30.00 lac. So the branch manager should be given discretionary power to furnish loans more than 1 crore. 11. Adequate care should be taken for LIM facility: Among 5 of our sample branch we have found that, in those cases where branches provide loans for PAD, LTR and converted the facility to LIM as the borrower fails to release imported goods than problem arises. In those cases we have found that, because of prompt action from the branch and Head Office huge amount become classified. Analyzing the practices stated above we have found that, in most of the cases BASIC Bank limited is perfectly following the credit practices except the credit analysis technique. If the Bank can improve that technique it will be able to reduce its classification rate more effectively. 12. Others: Banks should establish a review process to examine the changing circumstances of borrowers to determine the position of loans. Attention devoted to these loans is more likely to result in proper action devoted to these loans is more likely to result in proper action to safeguarded the Banks position and to assist the borrower to take appropriate steps in their business to bring back loan performing. Major problems in a business arises when changes in management (Business concern) occurs. The loan officer should observe that whether there is loss of the top executive, demand, or any other most important new one has entered and often the change may be worse. Bank should also be aware of significant changes in the personal habits of current management. Changes in industry trends may directly affect business so that it can no longer completely profitable. Therefore, the Bank should keep information about the environment of each industry in which its customers operate. Deterioration in the overall economy can turn a good loan a week one. During unusual inflation or depression, many companies experiences difficulties. The loan department should be aware of it. From the beginning of the relationship, the loan officer should know who the companys major trade suppliers are. If he can discover that a major supplier is reducing credits to the customers, this could be a sign that the borrowing company is facing serious financial difficulties. Bank should start credit inquiries from trade suppliers. 102
Real value of business can come from making regular visits to the customers place of business rather than holding all meetings in the Bank. For improving the recovery position and reducing huge over due loans, first action needed to attract political support and urge upon the govt. and political parties to take necessary steps for repayment of defaulted loans within a limit. Against big willful defaulters legal action should be taken promptly. This step should be taken as soon as one installment is defaulted without waiting for default of total loan. New credit culture needs to be developed in place of default culture. Efforts to be taken as soon as possible to safeguard the interest of banking sector
Bibliography
Koch, Timothy W, Bank Management, The Dryden Press, New York Ahmed, Dr. Jamal Uddin, Credit Management by Commercial Banks in Bangladesh. Mimeograph, November 2000. Bahar, Habibullah, The Structural growth of Banks deposits in Bangladesh, 1973-1992. Chowdhuri, Nurul Islam and Chowdhury, Toufic Ahmed, Performance of Private Commercial Banks vis-a vis Bank Parikrama, 1993 (52-63). Khalily, M.A. Baqui; Meyer, Richard L; Hushak Leroy J. Deposit Mobilization in Bangladesh: Implication for Rural Financial Institutions and Financial Policies. The Bangladesh Development Studies Vol. XV, NO. 4, December 1987, (85-117). Credit Manual and various Booklets, Credit Division, BASIC Bank Limited. Annual Report 2001, 2002, 2003, 2004 of Basic Bank Ltd, Bangladesh. Behrens, Robert H., Commercial lending, Bankers Publishing Company, Rolling Meadows, Illinois, 1990.
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