1.0 INTRODUCTION
1.1 Origin of the Report
Masters of Business Administration (MBA) Course requires a three months attachment
with an organization followed by a report assigned by the supervisor in the organization
and endorsed by the faculty advisor. I took the opportunity to do my internship in Bank
Asia Limited at Gulshan Branch, Dhaka. Here the organizational supervisor Md. Zahid
Hossain, Assistant Vice President & Sub-Manager of Gulshan Branch asked me to conduct
a study on Credit Approval & Monitoring process of Bank Asia Limited with respect to
Bangladesh Bank guidelines. My faculty supervisor Mr. Mohiuddin Ahmed, Lecturer of
Institute of Business Administration, University of Dhaka, also approved the topic and
authorized me to prepare this report as part of the fulfillment of internship requirement.
1.2 Background of the Report
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 produced 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 & Liability / Balance Sheet Risks;
c) Foreign Exchange Risks;
d) Internal Control & 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 credit approval and monitoring system by
December, 2003 based on the guidelines sent to them.
While doing internship in the Credit Department of Bank Asia Limited, Gulshan Branch,
and for preparing the report, I will try to make a comparative analysis of Credit Approval
& Monitoring process of Bank Asia Limited existing credit policy following Bangladesh
Banks suggested guidelines.
1.3 Objectives of the Report
The study has been undertaken with the following objectives:
To fulfill the requirement of the internship program under MBA program.
To have better orientation on various 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
Bank Asia Limited (BAL).
To compare the existing credit approval and monitoring process of Bank Asia Limited
with that of Bangladesh Bank guidelines.
To identify and suggest scopes of improvement of existing methods of loan approval,
maintenance and monitoring in the credit division of BAL.
To get an overall idea about the performance of Bank Asia Ltd.
nation. Bank Asia conducts all types of commercial banking activities. The core business
of the bank comprises of import, export, working capital finance and corporate finance.
The bank is also rendering personal credit, and services related to local and foreign
remittances. The Personal Credit scheme of the bank, which is designed to help the fixed
income group in raising standard of living is competitively priced and has been widely
appreciated by the customers. The Bank also has ATM services and very lucrative deposit
schemes i.e. DG+, DB+, MB+ which have earned the Bank a name in the market.
However, these products are temporarily suspended at present. Bank Asia has also
embarked on a new Era of banking automation by migrating to Stelar Software System
since January 01, 2004.It is also the first local bank to initiate SMS banking via Citycell
and Grameen Phone. The banks strategy is to gradually cover the total arena of banking.
Bank Asia has said its aim high enough: to provide high quality service to its customers, to
participate in the growth and expansion of our national economy, to set high standards of
integrity, to bring total satisfaction to our clients, shareholders and employees, and to
become the most sought after bank in the country, rendering technology driven innovative
services by the dedicated team of professionals.
Bank Asia is expecting to concentrate on efforts to set high standards for quality of service
at all levels. Highest emphasis is given on quality in recruiting human resources, and in
adopting state-of-the-art technology for serving the clients. The management of Bank Asia
is determined to maintain and upgrade the quality of these resources through continuous
training and upgrading of technology to keep pace with market demands, new
developments and practices of the competitors. Bank Asia entered the market at a time
when the economic policy environment of the country is poised for higher levels of
business activities and growth. The prevailing macroeconomic management and the
governments determination to carry on reforms in the banking sector provide a supporting
and encouraging environment.
The breakthrough was possible for some visionary decision-makers and also dedicated
team of professionals who are constantly putting all their best efforts to establish the bank
as one of the leading concern in the industry.
Paid up Capital
NA-New York & London, Arab Bangladesh Bank-India, Bank of Tokyo, Commerz Bank
AG, Habeeb American Bank, Habeeb Bank AG Zuirch, Hypovereins Bank, Mashreq Bank,
National Westminister Bank & Hong Kong Shanghai Banking Corporation etc. The Bank
is maintaining foreign exchange accounts in New York, Australia, Germany, Tokyo,
Pakistan, Calcutta, and London. The bank has set up letter of credit on behalf of its valued
customers using its correspondents as advising and reimbursing Banks. As of end 2003
Bank Asia established correspondence relationship with 206 banks in 173 countries.
2.9 Human Resources Management of BAL
Bank Asia Limited recognizes that their employees are the most important assets.
Therefore, the Bank consistently channels a great deal of resources into training and
development of managers and employees.
Job satisfaction, growth opportunities, due recognition and good working environment
promotes a high level of loyalty and commitment into the employees. Realizing this Bank
Asia Limited has placed the utmost importance on continuous development of its human
resources, identify the strength and weakness of the employee to assess the individual
training needs, they are sent for training for self-development. To enhance and update the
professional skills and knowledge of the officers and staff, regular training and orientation
courses are organized at Bangladesh Institute of Bank Management (BIBM), a few other
professional institutions and other correspondent Bank as well as in the Banks own
training center. The Bank also sends its Executives outside Bangladesh for specialized
training on money, banking and commercial activities.
The remuneration is very competitive in comparison with industry average. Beside these
the recruitment procedure is comprehensive. By the end of 2003 the manpower strength
increased to 273 from 214 at the end of the previous year.
2.10
Every organization is composed of some strengths and weaknesses, which are its internal
factors. The opportunities and threats it encounters are external elements. The following
10
will briefly list some of Bank Asias internal strengths and weaknesses, and external
opportunities and threats, as I perceive from my experience.
2.10.1 Strengths
Quality
Bank Asia strives to endow its customers with appreciable quality in every service it
provides. Customer satisfaction claims the highest priority, as it should be in any serviceoriented organization.
Adaptability
Bank Asia draws its strength from the adaptability and dynamism it possesses. It has
quickly adapted to world class standard in terms banking services. Bank Asia has also
adopted state of the art technology to connect with the world for better communication to
integrate facilities.
Financial strength
Bank Asia is a financially sound company backed by the enormous resource base of the
mother concern RANGS group. As a result customers feel comfortable and more secure
while dealing with the bank.
Efficient management
All the levels of management are solely directed to maintain a culture for the betterment of
the quality of the service and for developing a brand image in the market through the
organizations wide team approach and horizontal communication system.
State of the art technology
Bank Asia utilizes state-of-the-art technology to ensure consistent quality and operation.
The evidence of that can be found in one of its branches, Gulshan that is equipped with
Reuters and SWIFT. All these facilities will be introduced in every branch very shortly.
Bank Asia Limited has also started using the Stelar Software since January 01, 2004
11
One of the key-contributing factors behind the success of Bank Asia is its HR who are
highly trained and most competent in their own respective fields. Bank Asia provides its
employees with training both in-house and out side job.
Logistics
Bank Asia is free from dependence from the ever-disruptive power supply. The company
generates the required power through generator operating on diesel. Water generation at
present is also done by deep tube wells on site and is abundant in quantity. Also support
tools, like laser printers, photocopiers, microwave oven etc. that have become essential
these days are available at arms length much to the convenience of the users.
First-Rate working environment
Bank Asia provides its workforce an excellent place to work in. The total complex has
been centrally conditioned. The interior decoration has been done exquisitely with the
blend of tasteful colors and artistic yet useful furniture that is comparable to any
multinational bank.
2.10.2 Weaknesses
Limited workforce
Bank Asia has very limited human resources compared to its financial activities. There are
not many people to perform most of the tasks. As a result many of the employees are
burdened with extra workloads and works late hours without any overtime facilities. This
might cause high employee turnover that will prove to be too costly to avoid.
2.10.3 Opportunities
Government support
Government of Bangladesh has rendered its full support to the banking sector for a sound
financial status of the country, as it is becoming one of the vital sources of employment in
the country now. Such government concern will facilitate and support the long-term vision
for Bank Asia.
12
Evolution of e-banking
Emergence of e-banking will open more scope for Bank Asia to reach the clients not only
in Bangladesh but also in the global area. It will also facilitate wide area network in
between the buyer and the production unit of Bank Asia to smooth operation to meet the
desired need with least deviation.
2.10.4 Threats
Mergers and acquisitions
Unstable political situations cause great distraction in the otherwise smooth flow of
business. Sudden hartals and other political programs sometimes present problems for the
employees (esp. female employees) in commuting to and from the office. Political
instability also promotes a weak law and order system leading to an increase in crime rate
in the society. This might also be considered as a potential external threat for a financial
institution.
Emergence of competitors
Due to existence of unfulfilled demand in financial sector, it is expected that more financial
institutions will be introduced in the industry very shortly. And we have already seen such
cases in our country that lots of new banks are coming in the scenario with new services,
which signifies the faster rate of growth of competitors. Bank Asia should always be
prepared to encounter more competition in the coming years.
2.11 Product and Services
The product and services that are currently available are given below:
13
Bank Asia Limited launched several financial products and services since its inception.
Among them are Monthly Savings Scheme, Monthly Benefit Scheme, Special Savings
Scheme, Consumer Credit Scheme, Small Loan Scheme, Rural Finance Scheme & E-cash
ATM. All of these have received wide acceptance among the people.
Monthly Savings Scheme (DG+): The prime objective of this scheme is to encourage
people to build up a habit of saving. In this scheme, one can save a fixed amount of money
every month and receive substantial lump sum of money after three or five years.
Monthly Benefit Scheme (MB+): MB+ is a five (05) years scheme that lets depositors
earn monthly benefit of TK. 1000 or its multiple by minimum initial deposit of TK.
100,000 or its multiple and after maturity depositors will get refund of his/her principle
amount.
Special Savings Scheme (DB+): DB+ is a six (06) or ten (10) years scheme. The deposit
attract not only the usual savings interest but also a further 10% bonus on interest.
Personal Credit: Personal credit is a relatively new field of collateral-free finance of the
bank. People with fixed income can avail of these credit facilities to buy household goods,
consumer items, buy car or to renovate/expand existing house, etc.
Credit Loan: If anyone is in possession of BSP (Bangladesh Sanchaya Patra), which will
mature within the next 05 years, but he/she is in need of funds, the scheme can come to
rescue.
Rural Development Scheme: Rural Development Scheme has been evolved for the rural
people of the country to make them self-employed through financing various incomegenerating activities. This scheme is operated through the rural branches of the Bank.
E-Cash Banking Facility: The E-cash card is an ATM card. It can be used as a
combination of debit facility. The E-cash card network offers ball banking requirements
without ever setting foot in a bank. Its more than just an ATM service for quick cash
withdrawals or account enquiries. E-cash card provides round the clock banking.
14
Tenor 6
months
8.50% P.A.
Tenor 1 year
9.00% P.A.
Short Term
Deposit
5.00% P.A.
Savings
Deposit
6.00% P.A.
15
Internet Banking
Locker Service
2.12.3 Deposits
16
With growing consumer confidence and pro-active marketing Bank Asia increased its
deposit base of TK. 10,431 million by the end of 2003 compared to TK. 7,008 as of 2002.
17
increased to Tk.14,556 million in 2003 from Tk.7,761 million in 2002 and export bills
increased to Tk.5,996 million in 2003 from Tk.5,336 million in 2002. The Bank is using
SWIFT communication system for fast and accurate handling of foreign trade. The Bank is
connected to REUTERS also.
Authorised Capital
Issued, Subscribed & Paid
up Capital
Shareholders Equity
Total Assets
Deposits
Loans & Advances
Import Business
Export Business
Net Interest Income
Operating Income
Operating Expenses
Operating Profit
Investments
Dividend
Profit before Tax
Profit after Tax
Fixed Assets
No of Branches
1999* 2000
2001
2002
2003
8,00.00
8,00.00
8,00.00 **8,00.00 1,200.00
218.00
218.00
218.00
235.44
600.00
213.14
632.01
341.91
19.52
2.98
0.19
8.03
(4.86)
557.95
219.80
2,122.82
1,512.17
1,114.06
1,520.47
262.60
43.99
33.55
58.16
19.37
813.73
167.85
94.64
6.01
1
255.66
173.17
21.85
5
282.81
4,721.76
3,848.81
3,012.69
3,953.75
1,135.86
106.85
121.30
102.46
125.70
1,274.46
18%
453.24
290.39
32.84
7
375.23
889.72
8,457.85 12,599.81
7,008.47 10,431.38
5,449.13 8,189.82
7,761.08 14,556.11
5,336.26 5,996.48
183.65
268.00
218.78
408.04
172.77
256.95
229.66
419.09
1950.28 2,046.10
28%
24%
429.78
509.62
234.31
269.01
105.67
87.45
12
14
18
SECTION III:
CREDIT MANAGEMENT
19
20
stability, earnings and repaying capacity, purpose of advance, securities all differ and their
degree of risks also differ. Although all lending involve risks yet a bank has to go with it
for degree profit and economic upliftment as well. But the fact is this while go on lending;
a bank must follow certain principles. The principal of sound lending is which where risk
involvement may be kept at minimum.
The principal of sound lending involves following things:
a) Safety: The survival of a banker and for the matter of that safety of bank depends on
his/her loans and advances. The ideal position is when all the loans and advances positions
are fully secured. The safety of the advances should be the first principle of lending. To
ensure safety of lending following factors may be considered:
Five Cs : Character/conduct, Capacity/capability, Capital/Credit worthiness, Condition and
Collateral Security.
Five Ps : Person, Purpose, Product(s), Place and Profit.
Five Ms : Man, Management, Money, Materials and Market.
Five Rs : Reliability, Responsibility, Resources, Respectability and Returns
b) Purpose: The purpose of loans helps the banker to determine his course of action as
regards lending. Banker should avoid making loans for unproductive purpose and
speculative activities.
c) Liquidity: Liquidity means availability or readiness of banks funds on short notice. The
liquidity of advance means its repayment on demand on due date or after a short notice.
The bank while making advances must see to it that the money lent is not locked up for
long time because, majority of commercial bank liabilities are payable either on demand or
after short notice. So the bank should be sure that the loan would be liquid.
d) Security: The security offered by a borrower for an advance is an insurance to the
banker. It serves as the safety valve for an unforeseen emergency. There are different types
of security, which call for particular attention and care on part of bank who has to see it
that the title he/she gets on them is not unsafe. The security accepted by a bank to cover a
bank advance must be adequate, readily marketable, easy to handle and free from any
encumbrances. Whatever be the security, a bank must realize that it is only a cushion to fall
21
back upon in case of need, and its adequate alone should not form the sole consideration
for judging the suitability of a loan.
e) Profitability: Banks obtain funds from shareholders and if dividend is to be paid on
such shares it can be paid by earning profits. The working funds of a bank are collected
mainly from by means of deposits from the public and interest has to be paid on these
deposit as well as the bank has to cover establishment charges and other expanses. This is
not possible unless funds are employed profitably.
f) Spread/Dispersal/Diversification: The advances should be as much broad based as
possible and must be in conformity with the deposit structure. There should be spread of
advances against different securities, industries/activities, borrowers, areas etc.
g) National Interest/Social benefit: Bank has a significant role in the economic
development process of a country. They should keep in mind the national development
plan/program while going for lending but maintaining safety, liquidity and profitability.
3.3 Modern Concept of Good Lending
A. Modern concept of lending presupposes a well-developed loan proposal/loan case/
project. This covers as many as six pertinent aspects like Managerial, Organizational,
Technical, Marketing, Financial and Economic/Socio-economic. These are technically
known as feasibility or viability study of a proposal/ loan case/ projects. By studying all
these six aspects if a banker is satisfied about the viability of a loan proposal/loan case/
project, then the bank can finance i.e. grant for lending or otherwise not.
Managerial feasibility will ensure the character/conduct, capacity/capability to run the
project/activity, sincerity/honesty/integrity, education, experience, and reputation of the
borrower. Organizational feasibility will see under what type of organization the activities
will be undertaken. Whether it is under proprietor/sole tradership or partnership or private
limited company, public limited company etc Technical side will take care of location of
business/activities/project, construction of building, shed etc. requirements to be used like
power, fuel, water material etc. Marketing side will ensure about the marketability of the
product(s) out of activities/ business project, consider demand, supply etc. Financial
22
aspect will tell total requirement of fund for the business/activities/projects and how much
will be required from bank, what amount will be given by the borrower himself/herself,
cash inflow and cash outflow, sale forecasts, balance sheet, profit and loss account etc.
Economic aspect will look into socioeconomic benefit and cost out of the
business/activities/project.
B. Financial Spread Sheet (FSS) and Lending Risk Analysis (LRA) are the new technique
of assessing soundness of a loan proposal/project. With the help of FSS bank analyses the
financial statements regarding a loan proposal/project. Credit decision is made by the
bankers on the basis of FSS and LRA and it is a new and modern technique. In LRA
bankers analyze eight risks such as supplies risk and sales risk which are Industry Risk,
performance risk, resilience risk, management competence risk, management integrity risk
which are under Company Risk and security control risk and security cover risk which are
under Security Risk.
Modern approach thus is an integrated approach of lending by bank, which covers safety,
liquidity, purpose, security, profitability etc.
3.4 Credit Policy of Bank Asia Limited
Credit policy is the guideline for the credit division which includes the terms and
conditions of extending credit, which is followed by the credit division. It is prepared in
accordance with the philosophy of the management. Sectors to be covered, steps to be
followed, factors to be considered, limits to be maintained and all other relevant matters
with expectations relating to the credit extension are clearly described here, which helps
the credit division to perform their activities and also in taking the decisions.
Bank Asia (BA) makes loan only to reputable clients who are involved in legitimate
business activities and whose income and wealth are derived from legitimate sources.
Bank Asia encourages lending to socially desirable, nationally important and
financially viable sectors and will not lend to unproductive purpose or socially
undesired projects.
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At all times a policy of Know Your Customer (KYC) must be foremost in the credit
applications process.
Bank Asia extends credit in its discretion, only to qualified borrowers where the
amount and intended purpose or use if proceeds are clear and legitimate and where the
amount and use is reasonable in context of what is known about the particular client
and the intended use or purpose.
BA requires that borrowers have a source of repayment established at the inception of
the credit, and that any exception must be specifically addressed in the credit approval.
There should be identified, whenever possible, a secondary source of repayment. As
with any funds received, any all repayment sources must be legitimate and consistent
with what is known and documented about the client. Borrowers must provide, and the
credit approval package must contain, sufficient information on the borrower to
approve the extension of credit. Satisfactory security and collateral is required as
appropriate. BAs main thrust is on case flow statement of the business rather than on
collateral security.
BA discourages the client with relatively low or no founds of their own and with a
relatively high ratio of borrowed to own founds tend to face liquidity problems, with
adverse repercussions on their ability to service their obligations.
BA dose not engage in Name Lending based only on the general reputation of the
borrower. There are cases however, where certain financial information about private
clients is highly confidential and may not be disseminated. Such situations are
addressed individually at the discretion of management.
BA engages primarily in the extension of credit in Bangladesh Taka or in the same
currency as the collateral.
BA dose not extend any credit facility against cheque (owners cheque) or pledge of
goods / merchandise
BAs unsecured lending practices favor extensions of credit for short term, selfliquidating transactions. To the extent possible, the maturity of the loan should be
matched to the cash conversion cycle of the transaction being financed. General-
24
purpose loans to finance working capital, which are either unsecured or not specifically
secured by the assets, financed and have no clean up requirement; represent policy
exceptions unless secured by pledged liquid collateral.
Overdraft lines should have an annual clean up period unless there is evidence of credit
to the accounts annually two times the average credit. Loans secured by cash or readily
marketable securities may be renewed at the discretion of the approving officers;
however, interest may not be capitalized.
BA may consider term loans with maturities up to five years, or longer. None except
the President & Managing Director approves such loans. Management reviews the term
loan portfolio periodically.
BA extends venture capital to start up businesses, which are entirely dependent on new
technologies, but is considered with extreme caution and also secured by First Class or
other acceptable collateral.
BA dose not extend credit where it does not have the industry knowledge or highly
specialized skills needed to properly evaluate the proposal.
BA extends credit facilities to the area in which the branch located and the size &
ability of its supervise and monitor the same also is considered.
3.5 Global Credit Portfolio of BAL
Credit Portfolio means total investments by a bank segregated under the folios of
different industries. Bank Asia Limited is operating within its own internal environment
under skirt of external macro environment, consisting of elements like economic,
political/legal, demographic, technological, social etc. The size of loan portfolio is
determined by various priorities for banks fund. Besides, the prudent management of Bank
Asia Limited has designated its portfolio considering the following factors under two
broad categories.
External factors:
1. Sectoral Attractiveness.
2. Government Regulation
25
26
27
Funded
Non-funded
Overdraft
* Letter of Credit
Loan
* Bank Guarantee
Consumer Credit
LTR
PAD
Staff Loan
Term Loan
Packing Credit
The varieties used by BAL are briefly described below with the common terms and
condition. Banks generally offer different kinds of credit facilities to the customers.
Industrial Finance:
Finance It is a term financing repayable by installment within a fixed period.
These loans are usually made for:
Consumer Credit Scheme: This loan is allowed for acquiring consumer durable to the
fixed income group and other eligible borrowers. The subject facility is known as personal
credit.
Export Finance: An exporter requires financial accommodation at two stages, namely:
Pre-shipment stage
Post-shipment stage.
Overdraft: It is an arrangement between the borrower and the Bank, whereby the
borrower may overdraw his account up to an agreed amount, within a specified period of
time. Overdrafts represent short-term funds and may be extended to business customers to
28
meet a shortfall in their working capital requirements. Requests for financial capital
expenditure should be considered under fixed loans.
goods/stocks,
Other Advances:
Advanced against import bills:
- Bills against L/C are originated from the lodgment of shipping documents received from
foreign banks against L/C established by the bank.
- Advance against trust receipt
- Advance against Export bills purchased/discounted
- Advance against work order-advance made to client to perform work order
- The credit facilities against cash collateral are FDR/Sanchaya patra/ ICB unit certificates
etc.
Fixed Loans: They represent an arrangement entered into between the borrower and the
bank, whereby the borrower is granted a loan for a specified amount with an agreed period.
A separate fixed loan account is opened, to which is debited the amount of the loan; the
proceeds of the loan being credited to the borrowers current or saving account, from
which source repayments are debited on an installment basis under a standing instruction,
either monthly, bi-monthly, quarterly, half-yearly, annually, or in one lump sum when the
loan matures i.e., a bullet repayment.
Project Loans: Fixed term loans are particularly appropriate for business customers who
require finance on a long term basis for the development of their factories, for purchases of
plant and machinery and other fixed assets as they are able to match the cost of the assets
with the profits expected to be generated over the period. Such loans are invariably subject
to the fundamental principle that the Banks funds go in last: this ensures the borrowers
have sufficient resources to complete their project and there is no necessity for further
29
resource to bank borrowings. In Hong Kong, construction loans are typical project
financing activities.
Syndicated Loans: There are circumstances when a banks regal lending limit to a
particular borrowing group will be exceeded after taking on an additional project loan. In
this instance, the bank will invite its correspondent banks to participate in the loan, with it
acting as an arranger. Agent and/or Lender, whereby its relationship with customer could
be fostered, and generous fee income (i.e., Arranger Fee, Agency Fee, Front-End Fee)
could be earned to improve on its return on assets.
Loan Against Trust Receipts (LATR): Trust receipt accommodation is usually
complementary to letter of credit i.e., bills coming forward under a letter of credit
established by the bank may be converted into a trust receipt.
Under a trust receipt facility, the importer is permitted to take delivery of the inward
shipping documents against the execution by him of a trust receipt. Thereafter, he collects
the goods, processes them and arranges to sell them over a fixed period of time. Upon
releasing the goods to the customer, the Bank undertakes to pay the exporter, while the
trust Receipt document duly signed gives a legal undertaking by the importer that will hold
the goods or the sale proceeds from any part of the goods to the order of the bank until
such times as the loan plus interest has been fully paid.
Guarantees: Guarantees are undertakings of a bank, up-to a specific amount,
guaranteeing a beneficiary the fulfillment of an obligation prior to a certain date. The bank
issues guarantee on behalf of their customer. The guarantee is also valid until the validity
of a credit limit. There are different forms of guarantee:
Bid Bonds: They are issued before any guarantees Performance guarantees are given
after the bid bond.
Local Guarantees: It is for the client who has business here in Bangladesh.
Foreign Guarantees: It is usually used for foreign currencies.
30
Managing Director
Board of
Directors
Comply with the applicable instructions, manual, circulars and other rules of the bank
Assemble the credit information received and place in the customers credit file.
31
relevant entries.
Tasks of credit departments of both corporate office and branch are interrelated. The
branch credit department is responsible for mainly marketing, operational and monitoring,
whereas the head office credit department is mainly responsible for credit policy, credit
approval and supervising. The zonal office also plays the same role as head office.
3.9 Delegation of Lending Authority:
Presently Bank Asia Limited has four levels of sanction authorities:
1.
Branch: Branch Manager is authorized to approve fully secured credit when credit
32
i.
Demand promissory note: Here the borrower promises to pay the loan as
and when demand by bank to repay the loan.
ii.
iii.
Letter of Continuity.
iv.
v.
Stock Report: This report is used for OD and CC. In this report, information
about the quality and quantity of goods hypothecated is furnished.
vi.
vii.
viii.
ix.
x.
Form no. XVII/XIX for filling charges with the register of joint stock
companies under relevant section.
xi.
xii.
xiii.
Debts considered good for which bank holds no other security than the debtors
personal security
33
Debts considered good and secured by the personal security of one or more parties
in addition to the personal security of the debtor.
Category of Credit
S-T Agri & Micro Credit
Continuous loan
Demand Loan
Substandard
following factor.
34
This classification contains where doubt exists on the full recovery of the loan and advance
along with a loss is anticipated but cannot be quantifiable at this stage. Moreover if the
state of the loan accounts falls under the following criterion can be declared as doubtful
Category of Credit
S-T Agri & Micro Credit
Continuous loan
Demand Loan
Doubtful
35
Unclassified
5,368
8,047
Substandard
0.47
0.87
36
Doubtful
0.27
59.52
Tk in million
Bad
80.85
82.56
Negotiation: If the persuasion failed, the loan officer negotiates a plan of action with
the borrower to try to extract both the bank and the borrower from possible loss. This
calls for certain sacrifices on the part of the bank and borrower in their mutual interest.
Litigation: If after rescheduling the loan and or failed to negotiate with the delinquent
client, BAL go for taking legal action against the delinquent client to recover the loan.
3.15 Provisioning
Specific Provision
Head office credit division prepares a list of credit accounts, which are considered to be
totally or partially be unrecoverable & keeps a provision against the outstanding loans.
Rate of Provisioning
Bank Asia Limited in the time of loan provisioning to get the real picture of the income
mainly follows the Bangladesh Bank guideline. The rate of provisioning used in BAL is
summarized in the following table.
Table 4: Rate of provisioning
Class
Unclassified (UC)
Substandard (SS)
Doubtful
Bad or Loss
Short Term
credit.
5%
5%
5%
100%
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time of credit proposal the bank has to come to an acceptable compromise between over
caution and under caution.
3.17 Guiding Principle of Credit appraisal for Credit Officer
To determine the worth of a client, the following conceptual exercises should be
undertaken. There are no fixed and set methods to perform credit marketing, and scope for
application of individual judgment/ perception always plays over set rules in such work.
For example, drop in revenue of a contractor may indicate the clients failure to get work,
or it may be due to adaptation of policy to do higher margin quality jobs.
3.18 Steps Involved in Credit Processing
The credit appraisal process here at Bank Asia limited is a detailed and through one,
complying to the central banks standards as well as analyzing all feasible sources of risk.
Though there is a prescribed format for appraising the potential borrower, the creativity of
the credit officer is very important for identifying various aspects of the investment
proposal. Bank Asia therefore allows some room for flexibility, which may enrich the
appraisal or make it a more complete one.
The credit division follows certain procedures to decide whether or not to allow the credit
facilities demanded. The credit division maintains the tight control over credit reports and
keeps the proper documentation and records in the files. In general following steps are
followed for a standard credit procedure:
3.18.1 Application for Loan
For any type of credit facility relating to the working capital, trade finance, project finance
and contract work, clients/borrowers must fill an application form with following
information: Name of firm/ company/ individual, Business address, Permanent address,
Constitution/ Status (Proprietorship/ Partnership/ Public Limited Co./ Private Ltd. Co.),
Date of establishment and place of incorporation, Background and business experience,
Particulars of assets (Land/Building, Bank Deposit, Stock/Shares), Nature of the business,
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Statement of liabilities with Bank Asia and other banks, Financial statements for the last 3
years explaining the following terms, Capital Funds/ Net Worth (Paid up capital, Retained
earnings, General reserve ),
For processing and getting approval of the requested credit facility the client must provide
the above information and should fully co- operate with the bank for further information as
needed. The analyst should verify the information through both primary and secondary
sources. While evaluating the project for approval the analyst should have adequate
knowledge of the economic environment in which the project is to thrive. Such as
information related to money, banking foreign exchange, reserves, production, price,
national income, cost of living indices, govt. policies covering wages, taxation, tariff,
import control, investment, marketability of product etc.
Projected financial statements
For all credit proposals, the borrowers should submit their financial statements including
last 3(three) years profit and loss A/C and balance sheet-audited/ statement of affairs.
When an individual borrower or guarantor applies for any credit facility, the submitted
financial statements must be signed by competent authority and must contain legend to the
signatory, the assets and liabilities and sources of income and items of expenses.
Here this discussion is like preliminary screening of the plant. So the credit officers need to
be cautious about the facility the client is seeking and the available fund in the bank. More
over most of the businesses in our country dont have any standard form of accounting
department and dont have any audited statement. So the main task of the credit officers is
to make a relationship with the client to find out the hidden income sources.
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When we talk about good lending portfolio, few principals are highlighted, which are
judicious selection or borrower, safety, security, purpose, profitability, liquidity,
supervision, national interest. The main task and the first task of the credit officer is to
select a good borrower as if the borrower selected is good, the recovery and supervision
becomes easy and harmless. Like any other bank, the potential clients approach to Bank
Asia Limited for credits are highly appraised for the ensuring the repayment of the amount
to be disbursed. The credit policy has a prescribed criterion for selecting a borrower beside
this the credit officers take contingent factor analysis and use their analytical ability in the
time of selecting the borrower. The credit officer has to check the integrity and the honesty
of the client using different suitable tools. Lets take a look some of the most frequently
used ones:
Personal interview with the entrepreneur/management
When the client approaches for credit, the credit officer talks to him with a view to
identifying whether the client has only need of seeking credit facility or not. The credit
officer has to have deep analyzing power to find out the clue. The out come of a personal
interview session is to have overall idea about the integrity, experience, and business sense
of the borrower. Prompt and consistent information supply, willingness to supply
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information and other verbal and non-verbal clues can be of value to the credit officer in
judging the client. If possible, a visit is made to the proposed/existing plant/factory.
Report from Bank Asia Limited
If the customer hold an account or is enjoying credit facility from the Bank Asia Limited,
the statements of the accounts are collected for analyzing the performance of the existing
facility, transaction summary of the accounts along with the integrity of the client.
Report from other banks
The client has to mention whether he has other liability in other bank in the name of the
project and or in the name of the sister concern in the time applying for credit. From the
given information the credit officer communicates with the respective authority of those
banks with which the credit seeker has transaction to collect the information about few
things:
Whether the client has taken any loan in the name of the proposed project or any
Sometimes the credit officer collects in formation on a client from other businessmen
having relationship with Bank Asia. Informally the credit officer discusses about the
project, the sponsor(s) and the prospects of the project with persons he thinks can provide
him with information. Moreover, information about the sponsor is also collected from the
socially important person like community representative and chamber representative.
Contacting the clients supplier can also be another way to verify the payment character of
the client.
CIB Report
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There is possibility that client conceals information about his/her companys current
liability and transaction with other banks. So to get the accurate information about the
credibility of the customer the branch office collects CIB report through the head office.
The CIB authority provides the relevant information about the client.
3.18.4 Appraising the business
Appraising the business comprises of analyzing the industry outlook, the potential of the
business for which credit is being sought, market potential of the products, major
competitors, distinctive competitiveness and strategies taken.
In analyzing the industry, number of competitors, the current total production, demand and
supply position of the industry, prospect of demand growth etc are some of the factors that
are looked into. Also assessed is the vulnerability of the industry in the face of changes in
government regulation.
Overall growth of the business and performance are also looked into, using their financial
statements of last three financial years. The trend of sales, net margin, net income etc. is
examined.
Another important consideration is customer base of the firm and relationship with major
buyers. As mentioned earlier, competition in the market is an important factor all through.
Major competitors, distinctive competitiveness of the incumbent firm and the strategic
taken to combat the competition are also analyzed.
Management Competence or Capability Appraisal
The ability of the management to run the business smoothly and business background of
the promoter and the sponsor directors and the management are crucial factors in
determining the success or failure of any business operation. Capability of the borrower in
running the business in highly emphasized in the time of selecting a good borrower. As the
management of the business is the sole authority to run the business that is use the fund
efficiency, effectively and profitability, proper investigation must be carried out in this
regard. With this end in view Bank Asia collects the following information from the client:
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Business performance for the last three years as performance of the business implies
Entrepreneurship skills.
If it is revealed that the directors are in the business for a long time and have operated the
business well are said to have the capability to run the business.
Financial strength Analysis
Analyzing the financial position of the borrower is one of the most crucial jobs to perform
before financing any business. It includes financial base analysis of the borrower/business,
liability position analysis in terms of risk and return measures, and lending risk analysis in
the specified format of Bangladesh Bank.
Financial base
This part of credit appraisal is concerned with whether there is a strong financial standing
of the Borrower Company and its directors. The following information are required: Networth statement of all the directors, Paid-up capital, Investment in business, Leverage
(Equity Multiplier), Cash flow, Allied deposit in Bank Asia Limited, Tangible net-worth of
the business for the lasts three years and projected two years, Total Asset- Total Debt,
Overall group strength (if applicable), Business performance.
Also, in order to get a clear picture of the financial viability of the business credit is asked
for, Bank Asia credit authority emphasizes on financial viability analysis of the client,
using some spreadsheet programs. The clients submit last three years audited/un-audited
financial statements as well as forecasted income and balance sheet in the time of applying
for credit. Using that data and the banks standardized spreadsheet format called
Spreadsheet, the credit officer calculates different ratios, cash flow, risk and return
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measures, working capital, and two standard credit scores (Y Score and Z score). Findings
of the Spreadsheet provide the credit section with all the analysis of the financial
information, and some guidelines as to whether the client is bankable or not. In a word, it
gives the credit appraiser meaningful insight of the financial standing of the borrowing.
Liability Position Analysis
Facility from Bank Asia & other banks taken by the client must be provided while applying
for credit facility. The credit officer looks for-Existing facility enjoying by the Client
Company from the Bank Asia Limited and other banks, Existing facilities for the sister
concerns (if applicable), Debt to Asset ratio, the amount outstanding are classified or not,
Monthly installment payment or fixed charge coverage performance of the client and also
look for the nature, limit, outstanding, overdue, CL status, security value of the credit
facilities.
Financial Viability Analysis
In this part, NPV and IRR of the project are calculated, and breakeven analysis is also
performed in terms of sales volume and capacity utilization. Payback period and modified
IRR are also calculated if deemed necessary for the completeness of the analysis.
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Forecasting the probable future condition of the borrower and deciding whether to
accept or reject a loan proposal
Setting terms and conditions of credit facilities
The most pertinent and prime part of the process is assessment of risk of failure to repay
deals with the overall lending risk combining. In all cases, the banks basic lending criteria
must be satisfied and its policy of Know Your Customer implemented in full. Once
overall risk assessment done credit proposal are forwarded to appropriate authority for
approval.
3.18.6 Documentation & Disbursement
Once credit proposal is approved, a sanction letter is issued to client conveying offer to the
client-mentioning terms of sanction-type of facility, facility amount, repayment, security,
interest rate & fees, positive and negative covenants, etc. Client is advised to complete
documentation. It should be mentioned that documentation should be obtained prior to
disbursement of any loan. All the necessary documentation required meeting the terms and
conditions of the facility in the manner in which it was approved.
Apparently there are three parts of documentation, namelya) Obtaining instruments/ documents-charge documents, standard documents
& other specified documents as specified in terms and conditions in
sanction letter.
b) Stamping
c) Execution
Once documentation is complete, facility is disbursed as per term and conditions in
sanctioned advice.
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47
The analysis of the borrowers business performance and comparison of the projected
and actual to find any deviations.
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49
Mortgage
Mortgage is transfer of interest in specific immovable property. Mortgage is created on the
immovable property like land, building, plant etc. Most common type of mortgage is legal
mortgage in which ownership is transferred to the bank by registration of the mortgage
deed. Another method called equitable mortgage is also used in bank for creation of
charge. Here mere deposit of title to goods is sufficient for creation of charge. Registration
is not required. In both the cases, the mortgage property is retained in the hank of
borrower.
Trust Receipt
Generally goods imported or bought by bank's financial assistance are held by bank as
security. Bank may release this lien / pledge these goods against trust receipt. This means
that the borrower holds goods in trust of the bank, trust receipt arrangement is needed
when the borrower is going to sell this goods or process it further but borrower has no
sufficient fund to pay off the bank loan. Here proceeds from any part of these goods are
deposited to this bank.
Advance against Work-Order
Advances can be made to a client to perform work order. The following points are to be
taken into consideration.
The clients management capability, equity strength, nature of scheduled work and
feasibility study should be judiciously made to arrive at logical decision. If there is a
provision for running bills for the work, appropriate amount to be deducted from each bill
to ensure complete adjustment of the liability within the payment period of the final bill
besides assigning bills receivable, additional collateral security may be insisted upon.
Disbursement should be made only after completion of documentation formalities and
fulfillment of arrangements by the client to undertake the contract. The progress of work
under contract is reviewed periodically.
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Securities
Lien of various kinds of Sanchaya patras, Govt. Securities, FDR,
Collateral of immovable property, shares quoted in stock exchange
Pledge or hypothecation of machinery, land and building on which
machinery are installed, stock in trade, goods products and
merchandise.
Bills itself
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LENDING RISK
BUSINESS RISK
INDUSRTY RISK
SUPPLY RISK
SALES RISK
COMPANY RISK
MANAGEMENT RISK
MANAGEMENT
MANAGEMENT
SECURITY RISK
COMPANY POSITION
SECURITY CONTROL
PERFORMANCE RISK
SECURITY COVER
RESILIENCE RISK
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54
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failure to realize the security depends on the difficulty in obtaining favorable judgement
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 judgement and analyzing the case with which the
bank could take the possession and liquidate the securities.
3.21.14 Security cover 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 risk.
Before completing the LRA form, the relationship manager collects data specially industry
specific from published sources and company specific data that not usually published., by
personally visiting the company. After collecting the necessary data he/ she prepares
financial spreadsheet. This spreadsheet provides a quick method of assessing business
trend & efficiency and helps to assess the borrower ability to pay the loan Obligation.
Financial spreadsheet includes balance sheet, income statement, cash flow statement and
ratios for the purpose of financial statement analysis. Through analyzing data and collected
information, the concerned official completes the LRA form and all scores are transferred
to the scoring matrix to find the overall risk of lending. The overall matrix provides four
kinds of lending risk for decision making viz.--(I) Good (ii) Acceptable (iii) Marginal and
(iv) Poor. The bank does not provide any credit request having an over all risk as
marginal" and " Poor" without justification. All credit application rated "Poor" shall require
the approval of the Board of Directors regardless of purpose tenor or amount.
Therefore-bank can minimize the dangers regarding the bad loan and advances through
using the LRA.
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Business strategy
Regulatory framework
-Asset
liability
Management
-Foreign exchange
-Internal control
-AML
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58
59
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Facility parameters (e.g., maximum size, maximum tenor, and covenant and security
requirements) should be clearly stated. As a minimum, the following parameters should be
adopted:
- Banks should not grant facilities where the banks security position is inferior to that of
any other financial institution.
- Assets pledged, as security should be properly insured.
- Valuations of property taken as security should be performed prior to loans being granted.
A recognized 3rd party professional valuation firm should be appointed to conduct
valuations.
Cross Border Risk
Risk associated with cross border lending. Borrowers of a particular country may be unable
or unwilling to fulfill principle and/or interest obligations. Distinguished from ordinary
credit risk because the difficulty arises from a political event, such as suspension of
external payments
- Synonymous with political & sovereign risk
- Third world debt crisis
For example, export documents negotiated for countries like Nigeria.
4.1.2 Credit Assessment & Risk Grading
4.1.2.1 Credit Assessment
A thorough credit and risk assessment should be conducted prior to the granting of loans,
and at least annually thereafter for all facilities. The results of this assessment should be
presented in a Credit Application that originates from the relationship manager/account
officer (RM), and is approved by Credit Risk Management (CRM). The RM should be
the owner of the customer relationship, and must be held responsible to ensure the
accuracy of the entire credit application submitted for approval. RMs must be familiar with
the banks Lending Guidelines and should conduct due diligence on new borrowers,
principals, and guarantors. It is essential that RMs know their customers and conduct due
diligence on new borrowers, principals, and guarantors to ensure such parties are in fact
who they represent themselves to be. All banks should have established Know Your
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Customer (KYC) and Money Laundering guidelines which should be adhered to at all
times. Credit Applications should summarize the results of the RMs risk assessment and
include, as a minimum, the following details:
- Amount and type of loan(s) proposed.
- Purpose of loans.
- Loan Structure (Tenor, Covenants, Repayment Schedule, Interest)
- Security Arrangements
In addition, the following risk areas should be addressed:
- Borrower Analysis. The majority shareholders, management team and group or affiliate
companies should be assessed. Any issues regarding lack of management depth,
complicated ownership structures or inter group transactions should be addressed, and risks
mitigated.
- Industry Analysis. The key risk factors of the borrowers industry should be assessed.
Any issues regarding the borrowers position in the industry, overall industry concerns or
competitive forces should be addressed and the strengths and weaknesses of the borrower
relative to its competition should be identified.
- Supplier/Buyer Analysis. Any customer or supplier concentration should be addressed, as
these could have a significant impact on the future viability of the borrower.
- Historical Financial Analysis. An analysis of a minimum of 3 years historical financial
statements of the borrower should be presented. Where reliance is placed on a corporate
guarantor, guarantor financial statements should also be analysed. The analysis should
address the quality and sustainability of earnings, cash flow and the strength of the
borrowers balance sheet. Specifically, cash flow, leverage and profitability must be
analyzed.
- Projected Financial Performance. Where term facilities (tenor > 1 year) are being
proposed, a projection of the borrowers future financial performance should be provided,
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indicating an analysis of the sufficiency of cash flow to service debt repayments. Loans
should not be granted if projected cash flow is insufficient to repay debts.
- Account Conduct. For existing borrowers, the historic performance in meeting repayment
obligations (trade payments, cheques, interest and principal payments, etc) should be
assessed.
- Adherence to Lending Guidelines. Credit Applications should clearly state whether or not
the proposed application is in compliance with the banks Lending Guidelines. The Banks
Head of Credit or Managing Director/CEO should approve Credit Applications that do not
adhere to the banks Lending Guidelines.
- Mitigating Factors. Mitigating factors for risks identified in the credit assessment should
be identified. Possible risks include, but are not limited to: margin sustainability and/or
volatility, high debt load (leverage/gearing), overstocking or debtor issues; rapid growth,
acquisition or expansion; new business line/product expansion; management changes or
succession issues; customer or supplier concentrations; and lack of transparency or
industry issues.
- Loan Structure. The amounts and tenors of financing proposed should be justified based
on the projected repayment ability and loan purpose. Excessive tenor or amount relative to
business needs increases the risk of fund diversion and may adversely impact the
borrowers repayment ability.
- Security. A current valuation of collateral should be obtained and the quality and priority
of security being proposed should be assessed. Loans should not be granted based solely
on security. Adequacy and the extent of the insurance coverage should be assessed.
- Name Lending. Credit proposals should not be unduly influenced by an over reliance on
the sponsoring principals reputation, reported independent means, or their perceived
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willingness to inject funds into various business enterprises in case of need. These
situations should be discouraged and treated with great caution. Rather, credit proposals
and the granting of loans should be based on sound fundamentals, supported by a thorough
financial and risk analysis.
Appendix iv contains a template for credit application.
4.1.2.2 Risk Grading
All Banks should adopt a credit risk grading system. The system should define the risk
profile of borrowers to ensure that account management, structure and pricing are
commensurate with the risk involved. Risk grading is a key measurement of a Banks asset
quality, and as such, it is essential that grading is a robust process. All facilities should be
assigned a risk grade. Where deterioration in risk is noted, the Risk Grade assigned to a
borrower and its facilities should be immediately changed. Borrower Risk Grades should
be clearly stated on Credit Applications. The following Risk Grade Matrix is provided as
an example.
The more conservative risk grade (higher) should be applied if there is a difference
between the personal judgement and the Risk Grade Scorecard results. It is recognized that
the banks may have more or less Risk Grades, however, monitoring standards and account
management must be appropriate given the assigned Risk Grade:
Risk Rating Grade Definition
Superior Low Risk (Grade 1) Facilities are fully secured by cash deposits, government
bonds or a counter guarantee from a top tier international bank. All security documentation
should be in place.
Good Satisfactory Risk (Grade2) The repayment capacity of the borrower is strong. The
borrower should have excellent liquidity and low leverage. The company should
demonstrate consistently strong earnings and cash flow and have an unblemished track
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downgraded to 6 if loan payments remain past due for 60-90 days, if the customer intends
to create a lender group for debt restructuring purposes, the operation has ceased trading or
any indication suggesting the winding up or closure of the borrower is discovered. Not yet
considered non-performing as the correction of the deficiencies may result in an improved
condition, and interest can still be taken into profits. An Aggregate Score of 45-54 based on
the Risk Grade Scorecard.
Doubtful and Bad (non-performing) Grade 7 full repayment of principal and interest is
unlikely and the possibility of loss is extremely high. However, due to specifically
identifiable pending factors, such as litigation, liquidation procedures or capital injection,
the asset is not yet classified as Loss. Assets should be downgraded to 7 if loan payments
remain past due in excess of 90 days, and interest income should be taken into suspense
(non-accrual). Loan loss provisions must be raised against the estimated unrealizable
amount of all facilities. The adequacy of provisions must be reviewed at least quarterly on
all non-performing loans, and the bank should pursue legal options to enforce security to
obtain repayment or negotiate an appropriate loan rescheduling. In all cases, the
requirements of Bangladesh Bank in CIB reporting, loan rescheduling and provisioning
must be followed. An Aggregate Score of 35-44 based on the Risk Grade Scorecard
Loss (non-performing) Grade 8 Assets graded 8 are long outstanding with no progress in
obtaining repayment (in excess of 180 days past due) or in the late stages of wind
up/liquidation. The prospect of recovery is poor and legal options have been pursued. The
proceeds expected from the liquidation or realization of security may be awaited. The
continuance of the loan as a bankable asset is not warranted, and the anticipated loss
should have been provided for. This classification reflects that it is not practical or
desirable to defer writing off this basically worthless asset even though partial recovery
may be effected in the future. Bangladesh Bank guidelines for timely write off of bad loans
must be adhered to. An Aggregate Score of 35 or less based on the Risk Grade Scorecard
At least top twenty-five clients/obligors of the Bank may preferably be rated by an outside
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Credit approval should be centralized within the CRM function. Regional credit centers
may be established, however, all large loans must be approved by the Head of Credit and
Risk Management or Managing Director/CEO/Board or delegated Head Office credit
executive.
The aggregate exposure to any borrower or borrowing group must be used to determine
the approval authority required.
Any credit proposal that does not comply with Lending Guidelines, regardless of
amount, should be referred to Head Office for Approval
MD/Head of Credit Risk Management must approve and monitor any cross border
exposure risk.
Any breaches of lending authority should be reported to MD/CEO, Head of Internal
Control, and Head of CRM.
It is essential that executives charged with approving loans have the relevant training
and experience to carry out their responsibilities effectively. As a minimum, approving
executives should have:
- At least 5 years experience working in corporate/commercial banking as a relationship
manager or account executive.
- Training and experience in financial statement, cash flow and risk analysis.
- A thorough working knowledge of Accounting.
- A good understanding of the local industry/market dynamics.
- Successfully completed an assessment test demonstrating adequate knowledge of the
following areas:
oIntroduction of accrual accounting.
oIndustry / Business Risk Analysis
oBorrowing Causes
oFinancial reporting and full disclosure
oFinancial Statement Analysis
oThe Asset Conversion/Trade Cycle
oCash Flow Analysis
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oProjections
oLoan Structure and Documentation
oLoan Management.
A monthly summary of all new facilities approved, renewed, enhanced, and a list of
proposals declined stating reasons thereof should be reported by CRM to the CEO/MD.
4.1.4 Segregation of Duties
Banks should aim to segregate the following lending functions:
- Credit Approval/Risk Management
- Relationship Management/Marketing
-
Credit Administration
The purpose of the segregation is to improve the knowledge levels and expertise in each
department, to impose controls over the disbursement of authorized loan facilities and
obtain an objective and independent judgment of credit proposals.
4.1.5 Internal Audit
Banks should have a segregated internal audit/control department charged with conducting
audits of all departments. Audits should be carried out annually, and should ensure
compliance with regulatory guidelines, internal procedures, Lending Guidelines and
Bangladesh Bank requirements.
4.2 PREFERRED ORGANISATIONAL STRUCTURE & RESPONSIBILITIES
The appropriate organizational structure must be in place to support the adoption of the
policies detailed in Section 1 of these guidelines. The key feature is the segregation of the
Marketing/Relationship Management function from Approval / Risk Management /
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Administration functions. Credit approval should be centralized within the CRM function.
Regional credit centers may be established, however, all applications must be approved by
the Head of Credit and Risk Management or Managing Director /CEO /Board or delegated
Head Office credit executive.
4.2.1 Preferred Organizational Structure
The following chart represents the preferred management structure:
Managing Director/ CEO
Head
of
Credit
Risk
Management
(CRM
Head of Corporate /
Commercial Banking
Credit Administration
Relationship
Management /
Managing
to MD/CEO)
Marketing (RM)
CEO
Director
Business Development
Credit Approval
Business Development
Managing
Centers if applicable)
Director
CEO
Monitoring / Recovery
(includes
regional
Other Direct Reports
recovery
Monitoring/Recovery
centres
applicable)
(includesifregional
recovery
centres if applicable)
Director
CEO
Other Direct Reports
(Internal Audit, etc.)
Managing
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CEO
Director
Director
CEO
Other Direct Reports
(Internal Audit, etc.)
Managing
Director
CEO
The key responsibilities of the above functions are as follows.
Credit Administration:
To ensure that all security documentation complies with the terms of approval and is
enforceable.
To monitor insurance coverage to ensure appropriate coverage is in place over assets
pledged as collateral, and is properly assigned to the bank.
To control loan disbursements only after all terms and conditions of approval have been
met, and all security documentation is in place.
To maintain control over all security documentation.
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To monitor borrowers compliance with covenants and agreed terms and conditions, and
general monitoring of account conduct/performance.
Internal Audit/Control
Conducts independent inspections annually to ensure compliance with Lending
Guidelines, operating procedures, bank policies and Bangladesh Bank directives. Reports
directly to MD/CEO or Audit committee of the Board.
4.3 PROCEDURAL GUIDELINES
This section outlines of the main procedures that are needed to ensure compliance with the
policies contained in Section 1.0 of these guidelines.
4.3.1 Approval Process
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Managing Director
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7
7
Executive Committee/ Board
1. Application forwarded to Zonal Office for approved/decline
2. Advise the decision as per delegated authority (approved /decline) to recommending
branches. A monthly summary of ZCO approvals should be sent to HOC and HOCB to
report the previous months approvals sanctioned at the Zonal Offices. The HOC should
review 10% of ZCO approvals to ensure adherence to Lending Guidelines and Bank
policies.
3. ZCO supports & forwarded to Head of Corporate Banking (HOCB) or delegate for
endorsement, and Head of Credit (HOC) for approval or onward recommendation.
4. HOC advises the decision as per delegated authority to ZCO
5. HOC & HOCB supports & forwarded to Managing Director
6. Managing Director advises the decision as per delegated authority to HOC & HOCB.
7. Managing Director presents the proposal to EC/Board
8. EC/Board advises the decision to HOC & HOCB
** Regardless of the delegated authority HOC to advise the decision (approval/decline) to
marketing department through ZCO
Recommended Delegated Approval Authority Levels
HOC/CRM Executives
Up to 15% of Capital
Managing Director/CEO
Up to 25% of Capital
25% of Capital
Appeal Process
Any declined credit may be re-presented to the next higher authority for
reassessment/approval. However, there should be no appeal process beyond the Managing
Director.
4.3.2 Credit Administration
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The Credit Administration function is critical in ensuring that proper documentation and
approvals are in place prior to the disbursement of loan facilities. For this reason, it is
essential that the functions of Credit Administration be strictly segregated from
Relationship Management/Marketing in order to avoid the possibility of controls being
compromised or issues not being highlighted at the appropriate level. Credit
Administration procedures should be in place to ensure the following:
4.3.2.1 Disbursement:
Security documents are prepared in accordance with approval terms and are legally
enforceable. Standard loan facility documentation that has been reviewed by legal counsel
should be used in all cases. Exceptions should be referred to legal counsel for advice based
on authorization from an appropriate executive in CRM.
Disbursements under loan facilities are only be made when all security documentation is
in place. CIB report should reflect/include the name of all the lenders with facility, limit &
outstanding. All formalities regarding large loans & loans to Directors should be guided by
Bangladesh Bank circulars & related section of Banking Companies Act. All Credit
Approval terms have been met.
4.3.2.2 Custodial Duties:
Loan disbursements and the preparation and storage of security documents should be
centralized in the regional credit centers.
Appropriate insurance coverage is maintained (and renewed on a timely basis) on assets
pledged as collateral.
Security documentation is held under strict control, preferably in locked fireproof
storage.
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up on and corrective action taken in a timely manner before the account deteriorates
further. Refer to the Early Alert Process (section4.3.3.1).
4.3.3.1 Early Alert process:
An Early Alert Account is one that has risks or potential weaknesses of a material nature
requiring monitoring, supervision, or close attention by management. If these weaknesses
are left uncorrected, they may result in deterioration of the repayment prospects for the
asset or in the Banks credit position at some future date with a likely prospect of being
downgraded to CG 5 or worse (Impaired status), within the next twelve months.
Early identification, prompt reporting and proactive management of Early Alert Accounts
are prime credit responsibilities of all Relationship Managers and must be undertaken on a
continuous basis. An Early Alert report should be completed by the RM and sent to the
approving authority in CRM for any account that is showing signs of deterioration within
seven days from the identification of weaknesses. The Risk Grade should be updated as
soon as possible and no delay should be taken in referring problem accounts to the CRM
department for assistance in recovery.
Despite a prudent credit approval process, loans may still become troubled. Therefore, it is
essential that early identification and prompt reporting of deteriorating credit signs be
done to ensure swift action to protect the Banks interest. The symptoms of early alert are
by no means exhaustive and hence, if there are other concerns, such as a breach of loan
covenants or adverse market rumors that warrant additional caution, an Early Alert report
should be raised.
Moreover, regular contact with customers will enhance the likelihood of developing
strategies mutually acceptable to both the customer and the Bank. Representation from the
Bank in such discussions should include the local legal adviser when appropriate.
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An account may be reclassified as a Regular Account from Early Alert Account status
when the symptom, or symptoms, causing the Early Alert classification have been
regularized or no longer exist. The concurrence of the CRM approval authority is required
for conversion from Early Alert Account status to Regular Account status.
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All NPLs should be assigned to an Account Manager within the RU, who is responsible for
coordinating and administering the action plan/recovery of the account, and should serve
as the primary customer contact after the account is downgraded to substandard. Whilst
some assistance from Corporate Banking/Relationship Management may be sought, it is
essential that the autonomy of the RU be maintained to ensure appropriate recovery
strategies are implemented.
4.3.4.2 Account Transfer Procedures
Within 7 days of an account being downgraded to substandard (grade 6), a Request for
Action (RFA) and a handover /downgrade checklist should be completed by the RM and
forwarded to RU for acknowledgment. The account should be assigned to an account
manager within the RU, who should review all documentation, meet the customer, and
prepare a Classified Loan Review Report (CLR) within 15 days of the transfer. The CLR
should be approved by the Head of Credit, and copied to the Head of Corporate Banking
and to the Branch/office where the loan was originally sanctioned. This initial CLR should
highlight any documentation issues, loan structuring weaknesses, proposed workout
strategy, and should seek approval for any loan loss provisions that are necessary.
Recovery Units should ensure that the following is carried out when an account is
classified as Sub Standard or worse:
Facilities are withdrawn or repayment is demanded as appropriate. Any drawings or
advances should be restricted, and only approved after careful scrutiny and approval from
appropriate executives within CRM.
CIB reporting is updated according to Bangladesh Bank guidelines and the borrowers
Risk Grade is changed as appropriate.
Loan loss provisions are taken based on Force Sale Value (FSV).
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Loans are only rescheduled in conjunction with the Large Loan Rescheduling guidelines
of Bangladesh Bank. Any rescheduling should be based on projected future cash flows, and
should be strictly monitored.
Prompt legal action is taken if the borrower is uncooperative.
4.3.4.3 Non Performing Loan (NPL) Monitoring
On a quarterly basis, a Classified Loan Review (CLR) should be prepared by the RU
Account Manager to update the status of the action/recovery plan, review and assess the
adequacy of provisions, and modify the banks strategy as appropriate. The Head of Credit
sho uld approve the CLR for NPLs up to 15% of the banks capital, with MD/CEO approval
needed for NPLs in excess of 15%. The CLRs for NPLs above 25% of capital should be
approved by the MD/CEO, with a copy received by the Board.
4.3.4.4 NPL provisioning and Write Off
The guidelines established by Bangladesh Bank for CIB reporting, provisioning and write
off of bad and doubtful debts, and suspension of interest should be followed in all cases.
These requirements are the minimum, and Banks are encouraged to adopt more stringent
provisioning/write off policies. Regardless of the length of time a loan is past due,
provisions should be raised against the actual and expected losses at the time they are
estimated. The approval to take provisions, write offs, or release of provisions/upgrade of
an account should be restricted to the Head of Credit or MD/CEO based on
recommendation from the Recovery Unit. The Request for Action (RFA) or CLR reporting
format should be used to recommend provisions, write-offs or release/upgrades.
The RU Account Manager should determine the Force Sale Value (FSV) for accounts
grade 6 or worse. Force Sale Value is generally the amount that is expected to be realized
through the liquidation of collateral held as security or through the available operating cash
flows of the business, net of any realization costs. Any shortfall of the Force Sale Value
compared to total loan outstandings should be fully provided for once an account is
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Gross Outstanding
2.
3.
XXX
( XXX )
( XXX )
Loan Value
XXX
4.
( XXX )
XXX
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Banks may wish to introduce incentive programs to encourage Recovery Unit Account
Managers to bring down the Non Performing Loans (NPLs). The table below shows an
indicative incentive plan for RU account managers:
Recovery as a % of Principal plus
Recommended Incentive as % of
interest
76% to 100%
51% t0 75%
20% to 50%
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In the previous sections of this report we have critically analysed Bank Asias existing
credit risk management system as well as Bangladesh Banks best practices guidelines for
managing credit risk. Comparing Bank Asias current credit risk management system with
the Bangladesh Bank guidelines we can evaluate Bank Asia Limiteds existing practices in
banking industry 5.1Credit Policies/ Lending Guideline: In the above analysis we have seen that Bank
Asia Limited possesses a newly introduced written credit policy, which was prepared in
accordance with Bangladesh Bank Guidelines. Corporate Office sent CRM manual to
every Branch Managers, Zonal Heads and all Departmental Heads with a circular on 8 th
July 2004.
The purpose of this document was to provide guidelines to improve the credit risk
management and for the credit officers to take quick decision whether to accept or reject a
project. The lending guideline includes
Lending caps
As there was no written guideline before therefore Bank Asia has just started implementing
the guidelines.
5.2 Credit Assessment & Risk Grading: Proper credit processing and risk grading system
is present here. Adoption of credit risk grading system is required to ensure account
management, structure and pricing to commensurate with the risk involved. Still this
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grading system does not match completely i.e. lower interest rate for lower risk and vice
versa. Therefore pricing should commensurate while processing credit.
5.3 Approval Authority: In Bangladesh Banks guideline it is written, Approval
authority should be delegated to individual executives and not to committees to
ensure accountability in approval process. But we see, in Bank Asia Limited, that
every credit goes to the Board via credit committee. As a result, wastage of time
occurs and no one is held accountable for a bad loan.
5.4 Segregation of Duties: According to Bangladesh Bank Guideline Banks should aim to
segregate the following lending functions to improve the knowledge levels and expertise in
each department:
-
Credit Administration
But in Bank Asia there is no such departmentation or segregation of duties. But it has just
started its delegation of duties like formation of Credit Administration Division in the
Corporate Office. In small branches of Bank Asia only single loan officer do all the tasks
relating credit like loan marketing, risk assessing and credit administration.
5.5 Internal Audit: Bank Asia Limited has a segregated internal audit/ control department
charged with conducting audit of all departments as suggested by Bangladesh Bank
guideline.
5.6 Preferred Organizational Structure: Bank Asia is yet to follow the preferred
management structure as suggested by Bangladesh Bank guideline. The key feature in the
preferred management structure is the segregation of Marketing/ Relationship function
from approval/Risk management/ Administration function.
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5.7 Approval process: According to Bangladesh Bank best practices guideline, the
recommending or approving executives should take responsibility for and be held
accountable for their recommendations and approval. The recommended delegated
approval authority levels are as follows
Head of Credit/CRM Executives
up to 15% of capital
Up to 25% of capital
EC/ Board
But in Bank Asia we see that every credit proposal goes to Executive committee i.e. board.
5.8 Credit Administration:
Disbursement
Custodial duties
Compliance requirement
In Bank Asia credit officers under supervision of Branch Credit In-charge or Branch
Manager carry out all the three functions of credit administration. Therefore Credit
Marketing and Administration is yet to be segregated.
5.9 Credit Monitoring: To minimize credit losses, monitoring procedures and systems
should be in place that provides an early indication of the deteriorating financial health of a
borrower. Early identification, prompt reporting and proactive management of Early Alert
Accounts are prime credit responsibilities of all relationship Managers. An early Alert
Account is one that has risks or potential weakness of a material nature requiring
monitoring, supervision or close attention by management.
In Bank Asia credit monitoring is also done by Credit-In-Charge or branch managers. As
they be busy with their day-today activities Early Alert Accounts do not get that much
attention as needed.
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5.10 Credit Recovery: According to Bangladesh Bank guidelines the recovery unit (RU)
of CRM should directly manage accounts with sustained deterioration. On a quarterly
basis, a Classified Loan Review (CLR) should be prepared by the RU Account Manager to
update the action/ recovery plan, review and assess the adequacy of provisions, and modify
as appropriate.
In Bank Asia the non-performing loan is very low (1.75% till December 31, 2003) and the
recovery unit is yet to be formed. Even for personal loan program, Personal Banking
Division also lacks a recovery unit.
5.11 Account Transfer Procedures: Bangladesh Bank guidelines suggested that within 7
days of an account being downgraded to substandard, a Request for Action (RFA) and a
handover/downgrade checklist should be completed by RM and forwarded to RU for
acknowledgement. An account manager is to be assigned to review all documentation,
meet the customer and prepare a Classified Loan Review (CLR) report within 15 days of
transfer.
This account transfer is yet to be followed as there is no official Recovery Unit (RU) for
this purpose. But at present branch officials perform these activities themselves. Besides
according to Bangladesh Bank guidelines, after classifying as substandard or worse actions
like withdrawal/restriction of facilities, updating CIB report, changing risk grade,
rescheduling of loans or even prompt actions are taken if the borrower is not cooperative.
5.12 Incentive Program: The Bangladesh Bank guidelines also encourage Banks to
introduce incentive programs for the Recovery Unit Account Managers to bring down the
Non Performing Loans (NPLs).
Bank Asia Limited currently has no such incentive program as it does not have such a
Recovery Unit.
5.13 Non-Performing Loan Account Management: This also does not comply with
Bangladesh Bank Guidelines as the officials for recovery unit is yet to be prepared. The
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branch officials therefore consulting with higher management initiate coordinating and
administering the action plan/recovery of the account. The branch officials/credit officer
contacts with the client, tries to negotiate to recover the loan by reducing the interest rate
or even waiving the interest to recover the loan capital and finally finding no other
alternative goes for legal actions.
5.14 Custodial Duties: Bangladesh Bank advises disbursement of loan and security
documents to be kept centrally in regionally credit centers, maintain insurance coverage
and security documents to keep in locked fireproof storage. In Bank Asia security
documents are kept in locked in the vault in their own branches and proper insurance
coverage is maintained.
5.15 Compliance Requirement:
documents in correct format, maintain circulars, review performance of third party service
providers (valuers, lawers, insurers,etc.). Bank Asia sends documents as required by
Bangladesh Bank; keep circulars provided by Bangladesh Bank but third party providers
are not reviewed as advised.
5.16 Analysis of Other Parameters: According to Bangladesh Bank guidelines before
sanctioning any loan some other important parameters like borrower analysis, industry
analysis, supplier/buyer analysis, historical financial analysis, projected parameters,
account conduct, security, loan structure etc. have to be done extensively. We have found
all of these parameters presence in Bank Asia Limiteds loan proposal format and also the
existence in reality.
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06 CONCLUSION
A banker cannot sleep well with bad debts in his portfolio. The failure of commercial
banks occurs mainly due to bad loans, which occurs due to inefficient management of the
loans and advances portfolio. Therefore any banks must be extremely cautious about its
lending portfolio and credit policy. So far Bank Asia Limited has been able to manage its
credit portfolio skillfully and kept the classified loan at a very lower rate ---thanks goes to
the standard and stringent credit appraisal policy and practices of the bank.
But all things around us are changing at an accelerating rate. Today is not like yesterday
and tomorrow will be different from today. Given the fast changing, dynamic global
economy and the increasing pressure of globalization, liberalization, consolidation and
disintermediation, it is essential that Bank Asia Limited has a robust credit risk
management policies and procedures that are sensitive to these changes.
Bank Asia Limited is one of the few local banks that has been able to keep non-performing
assets below 5% -mainly due to the standard and stringent credit appraisal policy and
practices of the bank. The bank has so far been able to make efficient use of the deposit
and has the classified loan under control. Loan mix reveals the diversification sought by
the bank in its loan placements. While keeping on expanding its reach, Bank Asia aims at
maintaining the high quality of services it has already achieved, at the same time being in a
sound financial health.
Bank Asia has set its mission high enough: to provide high quality service to its customers,
to participate in the growth and expansion of our national economy, to set high standards of
integrity, to bring total satisfaction to its clients, shareholders and employees and to
become the most sought after bank in the country, rendering technology driven innovative
services by the dedicated team of professionals. The management of the bank is working
continuously to make their mission a realizable one.
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