1.

1 Objective of the study: The objective of the assignment is to familiarize students with the real business situation, to compare them with the business theories & at last stage make a report on assign task. The study has been undertaken with the following objectives:

To analysis the pros and cons of the conventional ideas about credit operation of a Bank. To have better orientation on credit management activities specially credit policy and practices, credit appraisal, credit-processing steps, credit management, financing in various sector and recovery, loan classification method and practices of National Bank Limited (NBL). To compare the existing credit policy of National bank limited with that of best

Practices guideline given by Bangladesh Bank, the central bank of Bangladesh.

To identify and suggest scopes of improvement in credit management of NBL. To get an overall idea about the performance of National Bank Ltd.

1.2 Background of the Assignment: Last year Bangladesh Bank undertook a project to review the global best practices in the banking sector and examines in the possibility of introducing these in the banking industry of Bangladesh. Four Focus Groups were formed with participation from Nationalized Commercial Banks, Private Commercial Banks & Foreign Banks with representatives from the Bangladesh Bank as team coordinators to look into the practices of the best performing banks both at home and abroad. These focus groups identified and selected five core risk areas and produce a document that would be a basic risk management model for each of the five core risk areas of banking. The five core risk areas are as followsa) Credit Risks; b) Asset and Liability/Balance Sheet Risks; c) Foreign Exchange Risks; d) Internal Control and Compliance Risks; and e) Money Laundering Risks.

Bangladesh Bank in one of its circular (BRPD Circular no.17) advised the commercial banks of Bangladesh to put in place an effective risk management system by December, 2003 based on the guidelines sent to them. I am working in the Credit Department of National Bank Limited. In this assignment, I will try to make a comparative analysis between Bangladesh Bank suggested best practices guideline for managing credit risk and National Bank Limited existing credit policy. Credit Risk Management of National Bank Limited 1 | P a g e

Chapter 01

Risk Management of National Bank Limited

1.1 Definitions of risk: Risk is a concept that denotes a potential negative impact to some characteristic of value that may arise from a future event, or we can say that Risks are events or conditions that may occur, and whose occurrence, if it does take place, has a harmful or negative effect. Risk is a commercial strategic board game, produced by Parker Brothers (now a division of Hasbro). It was invented by French movie director Albert Lamorisse, and originally released in 1957, as La Conqute du Monde (The Conquest of the World), in France. Risk is an album by thrash metal band Megadeth released in 1999. Risk is also notable as the last original Megadeth release to feature long time Megadeth guitarist Marty Friedman. This album is the first Megadeth recording with drummer Jimmy DeGrasso. The probability of harmful consequences, or expected losses (deaths, injuries, property, livelihoods, economic activity disrupted or environment damaged) resulting from interactions between natural or human-induced hazards and vulnerable conditions Risk is a science fiction short story by Isaac Asimov, first published in the May 1955 issue of Astounding Science Fiction, and reprinted in the collections The Rest of the Robots (1964) and The Complete Robot (1982).

1.2 Definition of Credit risk: Risk is inherent in all commercial operations. For banks and financial institutions credit risk is an essential factor, which needs to be managed properly. Credit risk virtually is the possibility that a borrower will fail to repay debt in accordance with the terms of sanction. Credit risk therefore arises from the banks lending operations. In the present days state of deregulation and globalization banks range of activities have increased, so also are the bank. Expansion of bank lending operations covering new products have focused the bank to confront newer risk areas and therefore to work out proper risk addressing devices. Credit risks are so exhaustive that a single device can not encompass all the risk. As National bank is providing credit facility out of its total available funds, it has to manage these credits very efficiently. An efficient credit management system comprises many things and this cover the pre-sanction activities to post-sanction activities. Credit management is important as it helps the banks and financial institutions to understand various dimensions of risk involved in different credit transactions. At the pre-sanction stage, credit management helps the sanctioning authority to decide whether to lend or not to lend, what should be the loan price, what should be the extent of Credit Risk Management of National Bank Limited 2 | P a g e

exposure, what should be the appropriate credit facility, what are the various facilities, what are the various risk mitigation tools to put a cap on the risk level. At the post-sanctioning stage, the bank can decide about the depth of the review of renewal, frequency of review, periodicity of the grading, and other precautions to be taken.

1.3 Credit risk and Bangladesh bank: The Financial Sector Reform Project (FSRP) has designed the LRA package, which provides a systematic procedure for analyzing and quantifying the potential credit risk. Bangladesh Bank has directed all commercial bank to use LRA technique for evaluating credit proposal amounting to Tk. 10 million and above. The objective of LRA is to assess The credit risk in quantifiable manner and then finds out ways & means to cover However, some commercial banks employ LRA technique as a credit appraisal evaluating credit proposals amounting to Tk. 5 million and above. Broadly LRA divides the credit risk into two categories, Business risk & Security risk. the risk. tool for package namely

A detail interpretation of these risks and the procedure for evaluating the credit as follows 1.3.1 Business risk: It refers to the risk that the business falls to generate sufficient cash flow to repay the loan. Business risk is subdivided into two categories. 1.3.2 Industry risk. The risk that the company fails to repay for the external reason. It is subdivide into supplies risk and sales risk. 1.3.3 Supplies risk: It indicates that the business suffers from external disruption to the supply of imputes. Components of supplies risk are as raw material, Labor, power, machinery, equipment, factory premises etc. 1.3.4 Sales risk: This refers to the risk that the business suffers from external disruption of sales. Sales may be disrupted by changes to market size, increasing in competition, change in the regulation or due to the loss of single large customer. Sales risk is determined by analyzing production or marketing system, industry situation, Government policy, and competitor profile and companies strategies.

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1.3.5 Company risk: This refers to the risk that the company fails for internal reasons. Company risk is subdivided into company position risk and Management risks. 1.3.6 Company position risk: Within an industry each and every company holds a position. This position is very competitive. Due to the weakness in the companys position in the industry, a company is the risk for failure. That means, company position risk is the risk of failure due to weakness in the companies position in the industry. It is subdivided into performance risk and resilience risk. 1.3.7 Performance risk: This risk refers to the risk that the companys position is so weak that it will be unable to repay the loan even under Favor able external condition. Performance risk assessed by SWOT (Strength, Weakness, Opportunity and Threat) analysis, Trend analysis, Cash flow forecast analysis and credit report analysis (i.e. CIB repot from Bangladesh Bank). 1.3.8 Resilience risk: Resilience means to recover early injury, this refers to risk that the company falls due to resilience to unexpected external conditions. The resilience of a company depends on its leverage, liquidity and strength of connection of its owner or directors. The resilience risk is determined by analyzing different financial ratio, flexibility of production process, shareholders willingness to support the company if need arise and political and private affiliation of owners and key personnel. 1.3.9 Management risk: The management risk refers to the risk that the company fails due to management not exploiting effectively the companys position. Management risk is subdivided into management competence risk and integrity risk. 1.3.10 Management competence risk: This refers to the risk that falls because the management is incompetent. The competence of management depends upon their ability to manage the companys business efficiently and effectively. The assessment of management competence depends on management ability and management team work. Management ability is determined by analyzing the ability of owner or board of the members first and then key personnel for finance and operation. Management.. 1.3.11 Management integrity risk: This refers to the risk that the company fails to repay the loan amount due to lack of management integrity. Management integrity is a combination of honesty and dependability.

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1.3.12 Security risk: This sort of risk is associated with the realized value of the security, which may not cover the exposure of loan. Exposure means principal plus outstanding interest. The security risk is subdivided into two major heads i.e. security control risk and security cover risk. 1.3.13 Security control risk: This risk refers to the risk that the bank falls to realize the security because of banks control over the security offered by the borrower i.e. incomplete documents. The risk of failure to realize the security depends on the difficulty in obtaining favorable judgment and taking possession of security. For analyzing the security control risk the credit office is required to verify documentation to ensure security protection, documentation completeness, documentation integrity and proper insurance policy. He/she also conducts site visit to verify security existence. Assessment of security control risk requires analyzing the possibility of obtaining favorable judgment and analyzing the case with which the bank could take the possession and liquidate the securities. 1.3.14 Security covers risk: This refers to the risk that the realized value of security is less than exposure. Security cover risk depends on speed of realization and liquidation value. For analyzing security cover risk, the official requires assessing the power of the customer to prolong the legal process and to analyze the market demand for the security For assessment of security control risk, the officials times the time that would require to liquidate the security and assess the risk and estimates the security value at liquidation and assess the rise 1.4 Process of Credit risk: Credit Management Policy for any commercial bank must have been prepared in accordance with the Policy Guidelines of Bangladesh Banks Focus Group on Credit and Risk Management with some changes to meet particular banks internal needs. Credit management must be organized in such a process that the bank can minimize its losses for payment of expected dividend to the shareholders. The purpose of this process is to provide directional guidelines that will improve the risk management culture, establish minimum standards for segregation of duties and responsibilities, and assist in the ongoing improvement of concerned bank. The guidelines for credit management may be organized into the following sections: Policy guidelines a. Lending guidelines

b. Credit assessment and risk grading c. Approval authority d. Segregation of duties Credit Risk Management of National Bank Limited 5 | P a g e

e. Internal control and compliance Program Guidelines a. Approval process b. Credit administration c. Credit monitoring d. Credit recovers

Policy guidelines a. Lending guidelines: The lending guidelines include the following:

Industry and Business Segment Focus Types of loan facilities Single borrowers/ group limits/ syndication Lending caps Discouraged business types

As a minimum, the followings are discouraged:

Military equipment/ weapons finance Highly leveraged transactions Finance of speculative investments Logging, mineral extraction/ mining, or other activity that is ethically or environmentally sensitive Lending to companies listed on CIB black list or known Counter parties in countries subject to UN sanctions Lending to holding companies.

b. Credit Assessment and Risk Grading: A thorough credit and risk assessment should be conducted prior to the granting of loans, and at least annually thereafter for all facilities. Credit Applications should summaries the results of the risk assessment and include, as a minimum, the following details:

Environment or social risk inputs Amount and type of loan (s) proposed Purpose of loans Loan structure ( tenor, covenants, repayment schedule, interest) Security arrangement Any other risk or issue Risk triggers and action plan-condition prudent, etc.

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Risk is graded as per Lending Risk Analysis (LRA), Bangladesh Banks Guidelines of classification of loans and advances.
1. c. Approval Authority:

Approval authority may be as the following:

Credit approval authority has been delegated to Branch Manager, Credit Committee by the MD/ Board Delegated approval authorities shall be reviewed annually by MD/ Board.

MD/ Board:

Approvals must be evidenced in writing. Approval records must be kept on file with credit application The aggregate exposure to any borrower or borrowing group must be used to determine the approval authority required.

d. Segregation of Duties: Banks should aim at segregating the following lending function:

Credit approval/ risk management Relationship management/ marketing Credit administration

e.

Internal Control and Compliance: conducting

Banks must have a segregated internal audit/ control department charged with audits of all branches. Program Guidelines

a. Approval process: The following diagram illustrates an example of the approval process:

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b. Credit administration: The credit administration function is critical in ensuring that proper documentation and approvals are in place prior to the disbursement of loan facilities. c. Credit monitoring: To minimized credit losses, monitoring procedures and systems should be in place that provides an early indication of the deteriorating financial health of borrower.

d. Credit recovery: The recovery unit of branch should directly manage accounts with sustained deterioration (a risk rating of sub-standard or worse). The primary functions of recovery unit are: Determine account action plan/ recovery strategy

Pursue all options to maximize recovery, including placing customers into receivership or liquidation as appropriate. Ensure adequate and timely loan loss provisions are made based on actual and expected losses. 1.5 Types of credit risk:

Term financing for new project had BMRE of existing projects (large, medium, SME). Working capital for industries, trading services and others (large, medium, SME). Trade finance for import and export Lease finance Small loan for traders, micro enterprise and other productive small venture. Consumer finance Fee business

1.6 Importance of credit risk: The importance of credit risk management for banking is tremendous. Banks and other financial institutions are often faced with risks that are mostly of financial nature. These institutions must balance risks as well as returns. For a bank to have a large consumer base, it must offer loan products that are reasonable enough. However, if the interest rates in loan products are too low, the bank will suffer from losses. In terms of equity, a bank must have substantial amount of capital on its reserve, but not too much that it misses the Investment revenue and not too little that it lead itself to financial instability and to the risk of regulatory non-compliance.

Credit risk management, in finance terms, refers to the process of risk assessment that comes in an investment. Risk often comes in investing and in the allocation of capital. The risks must be assessed so as to derive a sound investment decision. Likewise, the assessment of risk is also crucial in coming up with the position to balance risks and returns.

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Banks are constantly faced with risks. There are certain risks in the process of granting loans to certain clients. There can be more risks involved if the loan is extended to unworthy debtors. Certain risks may also come when banks offer securities and other forms of investments. The risk of losses that result in the default of payment of the debtors is a kind of risk that must be expected. Because of the exposure of banks to many risks, it is only reasonable for a bank to keep substantial amount of capital to protect its solvency and to maintain its economic stability. The second Basel Accords provides statements of its rules regarding the regulation of the banks capital allocation in connection with the level of risks the bank is exposed to. The greater the bank is exposed to risks, the greater the amount of capital must be when it comes to its reserves, so as to maintain its solvency and stability. Risk management must play its role then to help banks be in compliance with Basel II Accord and other regulatory bodies. To manage and assess the risks faced by banks, it is important to make certain estimates, conduct monitoring, and perform reviews of the performance of the bank. However, because banks are into lending and investing practices, it is relevant to make reviews on loans and to scrutinize and analyze portfolios. Loan reviews and portfolio analysis are crucial then in determining the credit and investment risks

The complexity and emergence of various securities and derivatives is a factor banks must be active in managing the risks. The credit risk management system used by many banks today has complexity; however, it can help in the assessment of risks by analyzing the credits and determining the probability of defaults and risks of losses. Credit risk management for banking is a very useful system, especially if the risks are in line with the survival of banks in the business world. 1.7 Credit risk planning: There are some objectives behind a written credit policy of National Bank that are as follows: 1. To provide a guideline for giving loan. 2. Prompt response to the customer need. 3. Shorten the procedure of giving loan. 4. Reduce the volume of work from top level management. 5. Delegation of authority of work from top level of management. 6. To check and balance the operational activities

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1.8 Tools of credit risk: For credit management, a firm may use tools available to them. Such tools include Credit Risk Grading (CRG) and Financial Spread Sheet (FSS). Credit risk grading is an important for credit risk management as it helps the banks and financial institutions to understand various dimensions of risk involved in different credit transactions. The aggregation of such grading across the borrowers, activities and the lines of business can provide better assessment of the quality of credit portfolio of a bank or branch. The Lending Risk Analysis (LRA) manual introduced in 1993 by the Bangladesh Bank has been in practice for mandatory use by the banks and financial institutions for loan size of BDT 1.00 crore and above. However, the LRA manual suffers from a lot of subjectivity, sometimes creating confusion to the lending bankers in terms of selection of credit proposals on the basis of risk exposure. Meanwhile in 2003 end, Bangladesh Bank provided guidelines for credit risk management of banks wherein it recommended, interalia, the introduction of Risk Grade Score Card for risk assessment of credit proposals. Bangladesh Bank expects all commercial banks to have a well defined credit risk management system which delivers accurate and timely grading. In practice, a banks credit risk grading system should reflect the complexity of its lending activities and the overall level of risk involved. 1.9 Essential Components of a Sound Credit Policy There can be some variations based on the needs of a particular organization, but at least the following areas should be covered in any comprehensive statement of credit policy and National Banks policy also covers these areas: 1. Legal consideration: The banks legal lending limit and other constraints should be set forth to avoid inadvertent violation of banking regulations.

2. Delegation of authority: Each individual authorized to extend credit should know precisely how much and under what conditions he or she may commit the banks funds. These authorities should be approved, at least annually, by written resolution of the board of directors and kept current at all times.

3. Types of credit extension: One of the most substances parts of a loan is a delineation of which types of loans are acceptable and which type are not Credit Risk Management 4. Pricing: In any profit motivated endeavor, the price to be charged for the goods or services rendered is of paramount without it, individuals have few guidelines for quoting retag or fees, and the variations resulting from human nature will be a source of customer dissatisfaction. 5. Market Area: Each bank should establish its proper market area, based upon, among other things, the size and sophistication of its organization its capital standpoint,

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defining ones market area is probably more important in the lending function than in any other aspect of banking. 6. Loan Standard: This is a definition of the types of credit to be expended, wherein the qualitative standards for acceptable loans are set forth.

1.10 Focus on Industry and Business Segment

Industry segment focuses on Textile, Pharmaceuticals, Agro-based, Food and allied, Telecommunication, Power generation and distribution, Health care, Entertainment Services, Chemicals, Transport, Infrastructure development, Linkage industry, Information technology, Ceramics, Others as decided from tome to time. And business segment focuses on Distribution, Brick field, Rice mill/ flour mill/ oil mill, Work order, Yarn trading, Cloth merchant, Industrial spares, Hardware, Electronic and electrical goods, Construction materials, Fish trading, Grocery, Wholesale/ retail, Others as dedicated from time to time
1.11 Lending Guidelines

As the bank has a rate of non-performing loans. Banks risk taking applied should be contained and our focus should be to maintain a credit portfolio keeping in mind of banks capital adequacy and recovery strength. Thus banks strategy will be invigorating loan processing steps including identifying , measuring , containing risks as well as maintaining a balance portfolio through minimizing loan concentration , encouraging loan diversification , expanding product range , streamlining security , insurance etc. as buffer again unexpected.

Chapter 02 Credit Evaluation Process

2.1 Indebtedness, Rural and Urban: Indebtedness means the amount borrowed by the people from various sources for investment in the various fields. Rural indebtedness is the amount borrowed by the agriculturists from various sources. This amount is to be used for the improvement in agriculture, for the purchase of improved agricultural implements, better seeds, fertilizers, etc. But the amount, thus borrowed, is not generally used for the purpose for which it is borrowed. The funds are utilized for unproductive purposes such as orthodox, customs heavy expenditure on ceremonial activities, weddings, festivals, etc. By urban indebtedness is meant the amount borrowed by the industrialists, traders and other business community. Their business needs are met to some extent by the commercial banks and government agencies, but, for incurring non-productive expenditure, they have to resort to borrowing from the money-lenders. Contrary to the indebtedness, the amount borrowed is generally utilized for the use in the respective establishments. Credit Risk Management of National Bank Limited 11 | P a g e

The commercial banks in the district generally charge interest from 7 per cent to 13 per cent, according to the amount advanced and security offered. The banks advance loans on the pledge of goods movable or immovable. The movable goods are kept in the custody of the banks. The average lending rate in the Central Co-operative Financial Institutions ranges in between 6 to 8 per cent, depending upon the nature and purpose of loans. The cooperative societies advance loans at the rate of interest ranging from 2 to 8 percent. Loans advanced, under the State Aid to Industries Act, 1935, carry interest from 2 to 6 percent. The indebtedness money-lenders charge interest varying from 12 to 25 percent. The loans advanced by the unregistered money-lenders carry much higher rate of interest, usually ranging from 60 to 100 percent, per annum. The indigenous bankers are either going out to the picture or they are trying to fall in line with the modern banking institutions. There is hardly any case where usury is noticed these days. The interest is sometimes calculated in kind, too, in rural areas. It is done only in case where loan is advance in kind. Such interest varies from 25 to 50 percent on the loan advance in kind, i.e., is one quintal of wheat is advanced as loan, it will fetch one quintal 25 kilos or one quintal fifty kilos to the creditors, as the case may be. Such loans are advanced by landlords, but this practice is by and by disappearing because of the coming up of cooperative institutions which extend financial assistance liberally to the rural areas.

2.2 Role of Private Money-lenders and Financiers Money-lenders. - Though the institution of private money-lending has lost its importance, yet it has not been completely eliminated. It is regarded as a necessary agency where the modern banking has not developed. The illiterate and conservative people, who have not been fully acquainted with the modern banking practices or have not brought themselves into the co-operative fold, still go to the doors of the private money-lenders. The money-lenders or the Banian still dominates the rural sector of the district economy. His supremacy in the field of rural finance is still unchallenged. The business of the money-lenders is generally a family concern. His working capital is his own. He grants He follows indigenous methods of keeping he charges is out of proportion to the rate of interest charged by the other banking institutions. In the primitive agriculture society, the indigenous money-lender constituted the main and only source of finance to a large section of population. He served in many ways the agriculturist who required money for the purchase of food and other necessaries of life, for social and religious ceremonies and for securing agriculture requisites such as seeds, bullock etc. In times of drought and famine, agriculturists used to borrow heavily from the moneylender against the security of agricultural lands return the debts at harvest time. These debts, not regularly repaid by the farmers, piled up through generation and created in succeeding years the problem of rural indebtedness. In the absence of any adequate protection to the debtor in the form of State regulation the money-lender indulged in a number of malpractices and caused hardships to the debtors. The Government had, therefore, to intervene to prevent money-lenders from indulging in malpractices. The various Acts passed by the Government Credit Risk Management of National Bank Limited 12 | P a g e

checked the activities of the money-lenders. The rise and growth of modern banking institutions also affected their business adversely. Till recently, private money-lending was regarded as a hereditary profession. There was a separate class which was having money-lending as its regular profession. The children of this class generally used to adopt the same profession in turn. The passing of the Punjab Regulation of Accounts Act, 1930, affected the private money-lending business adversely. Though the class of professional money-lending still exists, yet it has either left moneylending as a profession or has refined this profession in line with the modern practice of m0ney0lending. Now the money-lenders are required to get themselves registered with 2.3 Government and Semi-Government Credit Agencies Till recently, the system of indigenous money-lending as a source of finance, both in rural and urban areas, was common. But the development of Government/Semi Government credit agencies gave a death blow to it. The Government/Semi Government agencies are: (i) The Punjab Financial Corporation. It was established in1953 under the State Financial Corporation Act, 1951, with the object of providing medium and long-term loans to industrial concerns located in the Punjab State to the extent of Rs 20 lakhs in the case of a public limited company or a registered co-operative society and 10 lakhs in other case, at a rate of interest of 3 percent above the bank rate, with a minimum of 9 percent per annum. This amount is repayable in 10 years. The loans are advanced on the security of land, building, plant and machinery, by way of first registered mortgage, with a margin of 40 percent of the net assessed value. In case of Government guarantee, the margin is reduced to 25 percent. ; (ii) The Khadi and Village Industries Commission. It caters to the financial needs of the khadi and village industries for short-term loans. ; (iii) Joint Stock Banks ; and (iv) Cooperative banks. Financial assistance is also rendered by the State Department of Industries under the State Aid to Industries Act, 1935, for setting up new industrial units and for expansion/modernization of existing units. The Government also advances loans to the agriculturists of agricultural purpose such as purchase of fertilizers, seeds, cattle, tractors, agricultural implements, etc 2.4 Joint-Stock Banks The banks registered under the Indian Companies Act, 1913, come under this head. Organized on modern lines of joint-stock companies with limited liability, the joint-stock banks are usually referred to as commercial banks. The modern banking institutions in the country had a very chequered history. The beginning of the 20th century was a turning point in their development. The Swadeshi movement gave a great fillip to the banking industry. A good number of banks were started by enterprising Indian businessmen and capitalists. However, there were several banking failures. The first two decades of the 20th century were characterized by progress of banking as well as bank closures. The World-Wars I (1914-18) and II (1939-45) brought acceleration progress. During the thirties also there was a banking crises. The passage of the Banking Companies Act, 1949, in the banking legislation in India. This Act was amended from time to time.

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In the Gurdaspur District, in the beginning, there was at Gurdaspur a branch of the Doaba Bank Ltd., but it had a very short life. Thereafter, a branch of the Peoples Bank of Northern India Ltd. was opened. Though fro a sometime it had a good business, yet it also went into liquidation. Batala had a branch of Sahukara Bank Ltd. The Amrit Bank Ltd. with its Head Office at Amritsar, opened a branch at Gurdaspur in 1939 and another one at Batala. The Batala branch was closed after about a year but another was opened at Dinanagar. At that time, the Amrit Bank was the only commercial bank at Gurdaspur. Later on, the Central Bank of India Ltd. And the Imperial Bank of India (now the State Bank of India) also opened their branches there, but these closed soon after. After the lapse of some period, the Bharat Bank Ltd. and the Punjab National Bank Ltd. opened their branches at Gurdaspur (in 1944), 2.5 Leading Guidelines of NBL: This section details fundamental credit risk management policies that are recommended for adoption by all banks in Bangladesh. The guidelines contained herein outline general principles that are designed to govern the implementation of more detailed lending procedures and risk grading systems within individual banks

2.5.1 Types of loan facilities: National Bank has been offering wide range of credit facilities as under:
NAME Cash credit(Hypo & Pledge) SOD ( General) SOD ( Export ) PURPOSE Business capital / Working capital. Against F.O/ Work Order/ supply order. Payment of accepted bills at maturity before receipt of export proceeds. Acquiring capital assets/ purchasing, constriction finishing, expansion, repair, renovation of house/ flats/ real estate business etc. Financing for the period of non- receipt of reimbursement from Bangladesh bank. For import/ local procurement of goods/ service.

Loan ( Gen. )

LCA ( Loans against cash assistance )

LC ( Local and foreign) Sight & on deferred payment basis PAD

For making payment of the L/C obligation against receipt of document. Retirement of shipping document. Retirement of shipping document.

LTR LIM

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PC

Meeting financial requirement of the export at pre- shipment stage against export L/C. As post shipment finances against local/ foreign export bills. Import of raw/ packing materials against export L/C. For submission of tender/ to obtain and offer as security against work order, supply order/ for gas electricity connection against delivery of goods against release of goods without or against partial payment by customer etc.

LDBP/FDBP

BTB L/C

Bank guarantee local/ foreign

2.5.2. Single borrower/ group limits/ syndication: National bank ltd pursues / will continue to pursue the policy of avoiding too much loan concentration to a single borrower group in order to by pass possible threat in event of such advance turning sticky. In a bid to keep credit risk at the minimum level in respect of larger but prospective advance, National bank will prefer syndicated financing after proper feasibility study. 2.5.3. Leading caps: National bank ltd is very much aware of over concentration of credit in a particular area, which may under some situation, create disaster for the bank. Keeping this in consideration and also the over all business, trend, prospects/ potentials, problems, risk & mitigates, pricing owners stake in business, business competition involvement safety, liquidity, security etc. Our bank will be guided by the following leading caps generally:
Sector Caps Trade and commerce SME Industry- working capital Project finance- loan term Retail/ consumer ( CCS ) % 45% 10% 10% 10% 10%

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Agro credit Work/ supply order ( contractual finance ) Others Total

5% 5% 5% 100%

2.5.4.1 Nature of advanced: Each advanced to be made will be 2.5.4 Loan facilities parameters: National bank ltd extends and will credit for various genuine purpose. One types of advance requires to be treated different from other types. Depending on the types financed ownership pattern, business mode, cash flow, security and other related maters facility parameters categorized under one of the arranged types and will be governed under the terms and conditions related thereto. 2.5.4.2 Purpose: Our leading will be guided by legitimate purpose, financing for hoarding, speculative purpose and which will be utilized for degrading the character of the people will avoided. Credit which will contribute to production, trade, commerce, import, export, development of industry, development activities. 2.5.4.3 Limit/ amount of facility/ maximum size: Facility will be considered based on assessment of requirement & justification subject to the overall leading caps as per Bangladesh bank single party exposure limit. 2.5.4.4 Margin/ Equity: It will be the general policy of the bank to judiciously ensure stake of the borrower in any financing plan. Margin will however be subject to institution policy in this regard and central bank policy where applicable.

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2.5.4.5 Rate of interest/ Commission: Rate of interest will be charged as per declared rate of the bank. Pricing will be basically risk based. Higher price will be considered for riskier borrower because of higher risk involved. (I.e. lower score obtain by an obligor as per CRG score sheet is called a risky client). Similarly lower prices will be considered for prime clients on the basis of their low risk. (Low risk grade client means where an obligor obtained higher aggregate score as per CRG score sheet or 100% cash covered or govt. international top bank guarantee). 2.5.4.6 Insurance: Our bank have insurable interest on a property an asset obtain insurance policy as per norms against credit facilities extended in order to protect our banks interest. Insurance policy shall take timely basis. Insurance should take from a reputed company. 2.5.4.7 Security: Our bank mostly relies/ will continue to rely on security based leading taking into consideration the character of the borrower nature of business cash flow, environmental, economical, business and other influencing factor. Collateral security of acceptable type having adequate market sale value is accepted. Collateral property is judiciously valued before accepting the same. The property is valued by the branch official by applying prudence and considering prevailing rate in the location area of the property.

2.6 Credit Principles of NBL: To achieve our goal for maximizing the stockholders value and protect the interest of the depositors as well as to improve the quality of banks assets as fundamentally sound financial institution, we will abide by but will not be limited to the following credit principles, which should guide our behavior in our leading decisions:

Assessment of the customer integrity and willingness to repay will form basis of leading. Customer having capacity and ability to repay shall only be lent. Possibility of default will be worked out before lending. Credit will be extended in the areas risks of which can be sufficiently understood and managed. Independent credit participation in the credit process shall be ensured.

2 3 4

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6 7 8

Ethical behavior in all credit activities shall be ensured. Be proactive in identifying, managing and communicating credit risk. Be diligent in ensuring that credit exposures and activities including processing function complying with NBL requirements as well requirement of regulatory authority. Risk is reward to be optimized. Diversified credit portfolio to be built and maintained. Credit will normally be financed from customers deposit. The bank will provide suitable credit service and products for the market in which it operate. Credit will be allowed in a manner which will in no way to compromise. All credit extension must comply with the requirement of banking companys act 1991 and amendment thereof from time to time.

9 10 11 12

13 14

2.7 Credit Evaluation Process of NBL: National bank will follow the following evaluation process:

Prevailing credit practices in the market. Credit worthiness, background and track records of the borrower. Financial standing of the borrower supported by financial statement and other documentary evidence. Legal jurisdiction and implications of applicable laws. Effect of any applicable regulations and laws. Purpose of the loan/facility. Tenure of the loan/facility. Viability of the business concern. Cash flow analysis and also projection thereof. Quality value and adequacy of security if available. Risk taking capacity of the borrower. Entrepreneurship and managerial capability of the borrower. Reliability of the source of repayment. Volume of risk in relation to the risk taking capacity of the bank or company concern. Profitability of the personal to the bank or company concerned. Credit risk grading. Yield from the facility. Market aspect. Total global expansion of the borrower.

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Chapter 03
Highlights of Financial Performance

3.1 Highlights on the overall activities of the NBL for the year2012, 2011, 2010 & 2009.

(Taka in Millions)
SL. No Particular 01 02 03 Paid-up Capital Total Capital Capital surplus/Deficit Total Asset 2012 1208.21 4711.49 1117.41 2011 805.47 3237.88 352. 87 2010 619.59 2658.03 3 54.19 2009 516.33 2088.69 307.04

04

56526.96 46796.04

38400.37

35127.30

05 06

Total Deposits Total Loan and Advances Total Contingent Liabilities and commitments

47961.23 36475.75

40350.87 32709.68

32984.05 27020.21

28973.39 23129.65

07

26801.08

19737.75

16645.76

12897.66

08 09

Loan Deposit Ratio Ratio of Classified Loan to Total Loan and Advances Profit after Tax & provision

76.05% 4.53%

81.06% 6.01%

81.92% 7.06%

79.83% 17.24%

10

1238.11

507.49

271.67

170.02

11

Amount of Classified 1651.10 Loans during the

1967.16

1906.40

3988.59

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Currant year 12 Provision kept against classified loans 947.75 1161.61 967.21 1966.65

13

Provision surplus or 430.30 deficit Cost of Fund Interest earning Assets 6.35% 47506.42

352.62

73.95

185.00

14 15

6.15% 44194.85

5.58% 34162.47

5.55% 30973.49

16

Non Interest earning 9020.57 Assets Return on Investment (ROI) Return on Assets(ROA) Income from Investment Earning per share (Taka) 14.31%

2601.19

5470.26

4153.81

17

5.62%

8.25%

6.62%

18

4.29%

2.50%

2.22%

2.09%

19

1110.43

321.95

294.05

289.51

20

102.47

63.01

43.85

27.44

21

Net Income per share 102.47 (Taka) Price Earning Ratio (Times) 14.32

63.01

43.85

27.44

22

12.07

17.02

17.32

3.2 Ratio Analysis: Financial ratios are constructed by forming ratios of accounting data contained in the banks reports of income (i.c balance sheet). Ratio analysis is a part of financial analysis. A ratio analysis is defined as the indicated quotient of two mathematical expressions and as the relationship between two or more things. In financial analysis a ratio is use as a benchmark for evaluation the financial position and performance of a bank. A wide verity of financial ratio can be calculated to assess different characteristics of financial performance. To evaluate a particular financial ratio for a bank, comparison with peer group bank is often used. Also it is benefited to track the ratio over time relative to other banks. Even without

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comparison with other bank. Ratio trends over time may provide valuable information about the bank performance. To measure the performance of the bank it is important to measure source of the ratios to get a clear picture about the bank and its activities. Some of the important ratios are Return and asset ratio (ROA), Return on equity (ROE), profit margin and asset utilization ratio.

3.2.1 Profit Margin Ratio: The profit margin gives some ingredients to judge the ability of management to control expense; including taxes give a particular level of operating income. The profit margin ratios are as follows:
Profit Margin NBL SIBL IBBL 2010 21.59 11.00 7.15 2011 20.63 15.49 9.25 2012 14.82 14.40 14.45

3.2.2 Rate of return on asset (ROA): The rate of return on asset is frequently used to evaluate banks management. The ROA measure the ability of management to utilize the real and financial resource of the banks to generate returns. It indicates net income per taka of total assets owned during the period. The ROA of the banks are as follows:
ROA NBL SIBL IBBL 2010 2.22 1.25 1.92 2011 2.50 2.15 2.05 2012 4.29 3.75 3.25

3.2.3 Rate of return on Equity (ROE): The rate of return on equity is considered as a well judgment in analyzing a banks financial health. ROE shows what contribution the equity capital has on net income. It measures the percentage return on each dollar of stockholders equity is the aggregate return to stockholders before disbursing dividends. Credit Risk Management of National Bank Limited 21 | P a g e

The higher return the better as banks can add more to retained earnings and pay more in cash dividends when profits are higher. The ROE of the banks are
ROE NBL SIBL IBBL 2010 7.90 4.51 8.15 2011 8.64 5.12 8.60 2012 5.56 8.46 8.04

3.3 Asset Utilization Ratio: The asset utilization ratio represents the ability of management to employ assets effectively to generate revenues. Bank assets fall into one of four general categories. Loans investment securities non interest cash and due from banks and other assets. The assets utilization ratios are:
Assets Utilization NBL SIBL IBBL 2010 29.22 6.75 10.9 2011 43.55 16.33 12.74 2012 30.15 7.26 17.08

3.4 Risk ratio Analysis: It is very important for bank to measure its risk associated with its operation. Without identifying risk any bank can success in future rather it will face liquidity operational and market risk. Therefore it is very important measure risk and takes necessary steps against it. 3.4.1 Equity Multiplier (EM): Equity multiplier measures financial leverage and represents both profit and risk measure. EM affects banks profits because it has a multiplier impact on ROA to determine a banks ROE. It should be obvious that a higher equity multiplier can increase both ROE and the growth rate of the bank as long as ROA is positive. On the downside if ROA is negative ROA will be margined in a negative direction.
Equity Multiplier NBL 2010 27.61 2011 34.16 2012 23.30

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SIBL

10.00

21.00

28.00

3.4.2 The investment ratio: The investment ratio indicates that extent to which assets are developed to loans as opposed to other assets, including cash securities and plant and equipment. The greater the greater the banks ability to generate income as interest that the bank owns.
Investment Ratio NBL SIBL IBBL 2010 8.25 46.25 52.95 2011 5.62 31.08 20.15 2012 14.31 45.53 40.63

3.5 Liquidity Ratio: Liquidity can be defined as the extent to which the bank has funds available to meet cash demands for loans and deposit withdrawals. The failure of bank meet its obligations due to lack of sufficient liquidity , will result in a poor creditworthiness, loss of creditors confidence or even in legal tangles resulting in the closure of the bank. A very high degree of liquidity is also unexpected idle cash earn nothing. Therefore it is necessary to strike a proper balance between high liquidity and lack of liquidity. The most common ratio is as follows:

3.5.1 Cash Ratio: Cash including vault cash, deposit at other banks and cash items in the process of collection. All these earn no interest. As such bank management should attempt to minimize its investment in these assets. On the other hand, it is the most liquid asset. Banks must maintain liquid assets to meet up any sudden need. Lower cash ratio indicates higher risk or it will lose its reputation. Therefore banks have to maintain optimal cash ratios of the bank are 2010 to 2012
Cash Ratio NBL SIBL IBBL 2010 4.50 34.15 19 2011 4.96 18.37 20.04 2012 4.17 15.92 20.11

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Conclusion & Recommendation for the NBL: It is also very difficult for me to give any recommendation with my little working experience but I have tried as my best to give best recommendation above shortcomings (its may be its not sweet able for NBL)

NBL should give more freedom to their branches for taking decisions and their head office should take decision more quickly. NBL should build separate loan recovery division if it happed then their classified loan amount will reduce and they can invest more. NBL, Inter Bank Transaction is made by advice but it is unsecured for bank so NBL have to build net working system between branches and head office. NBL should go through the online banking as early as possible for better service to the customer. NBL should increase own investment in different sectors as like Islami Bank Ltd. if they can increase their own investment then their cost of capital will reduce. NBL, Human Resources Department should train their employees with computer knowledge and their Human Resources Department should arrange training program frequently. NBL, management should take decision more quickly. NBL should use group incentives so that employee can share their experience, strength and can work smoothly. their statement should be computerized which is cost effective and safe. It has been seen that NBL marketing activates are not sufficient but now a days proper marketing is important for creating good image in target customer mind. They should increase promotion campaign and they should participate in social activities for creating good image in target customer mind.

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