1.

0 Introduction

Bank is a service-oriented organization. With the wide networking and geographical area coverage it emphasizes on its improved services for existence and prosperity. Private sector commercial banks are private companies, operated under the legislative framework, which covers both company Act, and Banking Company Act. Like all business entities, bank's main objective is also profitability and solvency. The Government of Bangladesh has The City Bank Ltd., as a scheduled bank in the private sector is pursuance of the policy of liberalization of banking and financial services in Bangladesh. The bank was incorporated as a public limited company on 14th March 1983 under Companies Act 1913 and commenced banking operations through the Principal Branch at 10, Dilkusha Commercial Area, Dhaka on 27th March 1983. Being the financial intermediary, it is an important task of bank to channel surplus fund from the surplus saving unit to the deficit saving unit. Credit department is related to the latter part of the process. Credit department is engaged in the income generating activities of commercial banks. In the current situation of reducing interest rate, importance and activities of credit department has widened. The research will concentrate on the recovery of loans and advances of the city bank ltd.

1.1 Origin of the Study This report has been prepared as a requirement of the internship program of School of Business, Independent University Bangladesh (IUB). The organization attachment started on 31st July 2005 and it will be ended on 30th October 2005. This project on critical analysis of credit recovery

performance of The City Bank Limited compare with Prime Bank Limited is assigned by Md Saiful Islam, Assistant Vice President, Mouchak Branch, The City Bank Limited (TCBL) and it was approved by institution supervisor Mr. Rushdi Md. Rezzaul Razzaque, Junior Lecturer, School of Business, Independent University, Bangladesh (IUB).

2.0 Statement of the Problem

Loan is the major source of income as well as risk for the bank management. So the deterioration of loan recovery may affect Banks financial health. In such situation, the banking financial institution might find itself in serious financial distress. In this research the researches intend to analysis critically the credit recovery performance of The City Bank Limited compare with prime bank limited.

3.0 Purpose of the Study

Loan comprises the most important asset as well as the primary source of earning for the banking financial institutions. At the same time the function of credit division of a bank is totally different from its other divisions. So it is important to get a general idea about the whole function of the credit department of any bank. Since this part is about the credit recovery and loan management, study of credit function will provide a broad guideline to the whole objective and the operation of the credit division of a commercial bank.

The research will conduct to know how efficient the credit department of The City Bank Limited is to recover the loan given by the bank.

Literature review Loan From an accounting perspective, loans should be recognized as being impaired, and necessary provisions should be made, if it is likely that the bank will not be able to collect all the amounts due principal and interest according to the contractual terms of the loan agreement(s). Loan loss provisioning is thus a method that banks use to recognize a reduction in the realizable value of their loans. Bank managers are expected to evaluate credit losses in their loan portfolios on the basis of available information a process that involves a great deal of judgment and is subject to opposing incentives. Sometimes banks may be reluctant to account for the whole amount of incurred losses because of the negative effect of provisions on profits and on shareholders' dividends. In other cases, if provisions are tax-deductible, banks have an incentive to overstate their loss provisions and to smooth profits over time in order to reduce the amount of tax liability (Laurin and Majnoni, 2003).

Bad debt An uncollectible loan/advance for the banking business is not only a loss of revenue, but also a loss of capital. The uncollectable interest receivable is the loss of revenue and the uncollectable principal is the loss of capital. An analogy between the uncollectable account receivable and the uncollectable interest receivable can be drawn as:Equation 1So, the provision against the interest receivable can be treated as a normal business expense since it reflects the probable loss

of revenue. The conflict may arise that the nature of banking business is different from the nature of other businesses and banks are not utilizing the capital directly to generate revenue-generating goods whereas other businesses do. But the banks take collateral against the loans and advances mainly to create pressure for timely repayment of loans and advances. From this it is evident that the loss of capital is the fault either of the legal system or of the political system or of management efforts but neither of the shareholders nor of the depositors. Under protectionist banking systems like Bangladesh there is less chance that the depositors will be deprived in case of a bank failure. So, the loss is of the owners (shareholders). Proper assessment of the probable losses of revenue is required to make proper provision and to determine the net realizable asset position:

Loan loss provision There is always a requirement for banks to systematically and realistically identify their problem assets and provide adequate reserves for possible losses. To accomplish this, Bangladesh Bank issued guidelines in 1989 (vide BCD Circular No. 34, dated 16.11.89) regarding classification and provisioning procedure. Subsequently, a revised policy was introduced in 1994 (vide circular No. 20, dated 27.12.94) to be implemented by banks in five phases commencing 31st December 1994. The introduction of this program was aimed at bringing loan loss provisioning and classification in line with international standards by the end of 1998. Prior to 1989, there were no clear-cut policy guidelines to enforce adequate provision by the banks. In the majority of cases, banks simply did not identify problem assets, establish realistic provisions for potential losses or suspend interest on non-performing assets. As a result, the balance sheet did not reflect the bank's actual condition and the income statement overstated profits upon which dividends and

taxes were paid. However, during the mid-eighties a norm was fixed by the Central Bank to raise the level of provisions by 0.5% of total loans each year till it reached 4%. Obviously, it had no relation to loans classified. Interestingly, the banks on the whole did not comply with this requirement. The situation ultimately led to unreasonable developments regarding keeping of provisions by the bank (Choudhury et al., 1997, pp. 43-4).

Lending process The main difference between public debt and private bank debt is the number of lenders involved in the financing process. While the ownership of public debt is diffused widely, the ownership of private bank debt rests in the hands of only one lender. Out of this distinguishing characteristic flow most of the economic benefits of using bank loans. For instance, issue costs for private debts and bank loans are lower than public debts since fewer lenders are involved in the issuing process (Beston and Smith, 1976; Blackwell and Kidwell, 1988). The small number of investors involved also facilitates bonding between the lenders and borrowers. The bank-client relationship allows the bank to maintain the confidentiality of proprietary information (Campbell, 1979), monitor the firm more efficiently (Leland and Pyle, 1977; Diamond, 1984), generate reliable information on the firm (Campbell and Kracaw, 1980; Fama, 1985), and effect future loan renegotiations (Berlin and Loeys, 1988; Chemmanur and Fulghieri, 1994). Since bank reserve requirements impose additional costs on bank borrowing, Fama (1985) posits that there must be something special about bank loans relative to other credit contracts. The uniqueness of bank debt is substantiated by several event-studies on stock price response to announcements involving bank financing. In contrast to the negative or zero excess return

associated with other means of raising corporate funds, Mikkelson and Partch (1986), James (1987), Lummer and McConnell (1989), Brown et al. (1993) and Slovin et al. (1992) find that stock prices respond positively to announcements involving bank financing. In addition, Houston and James (1996) and Johnson (1997) find important differences between the determinants of bank debt and non-bank debt. Examining the mix of private and public debt employed by 250 US public corporations between 1980 and 1990, Houston and James (1996) concentrated on the potential hold-up problem associated with borrowing from a single bank[1]. They find that for firms with a single bank relationship, the level of growth opportunities has an inverse effect on the bank debt ratio. Nevertheless, among firms borrowing from multiple banks, they observe a positive relationship between the bank debt ratio and growth opportunities. Houston and James interpret their results as consistent with the hypothesis that multiple banking relationships can mitigate the hold-up problem associated with borrowing from a single bank. In addition, their discovery that firm size and overall leverage are negatively related to bank borrowing suggests that banks specialize in lending to smaller, less risky firms. Johnson (1997) recently studied the debt source choices of 847 US firms. Using tobit regressions with limits at zero and unity, he examined the relationship between several firm characteristics with the proportions of long-term bank debt, long-term private non-bank debt, and long-term public debt in the firms capital structure. By partitioning private debt, Johnson was able to show important differences between bank debt and private non-bank debt. Johnson also observed the systematic use of bank debt by firms with access to public debt, which he interpreted to indicate that the benefits attributed to bank debt in theoretical models remain important after the firm has gained access to the public debt markets. The results of his study further suggest that the firms

debt source choices are influenced by monitoring and information costs, the likelihood and costs of inefficient liquidation, and the borrowers incentive to take actions which are harmful to the lenders. The current empirical study on the determinants of debt ownership choice is in essence quite similar to the study carried out by Johnson. Nevertheless, there are some key differences that distinguish the present research from Johnsons. First, our study focuses on property companies in the UK while Johnsons is on general corporations in the USA. Second, our study employs pooled data of 366 firm-year observations. This allows us to include macro-economic variables as well as firm-specific characteristics in our investigation on the determinants of bank borrowing. Johnson, however, used averages over the study period to measure the dependent and independent variables in his estimation models. While averaging may help to mitigate the problem of extreme values in any one year, it can obscure important information if the firms characteristics and the target bank debt ratio are not constant throughout the study period (Easterwood and Kadapakkam, 1991). Averaging also does not facilitate an examination of the impact of macro-economic factors on the firms ownership decision over time. Third, we also extend the regression analyses to test whether the choice between bank and non-bank debt is affected by corporate ownership considerations. This is a new area that has not been addressed before in the finance literature.

A funding crisis for small and medium-sized enterprises? The effects of these changes in policy can be seen in terms of the availability and cost of bank loans and the conditions under which such loans are made.

Lending criteria The bankshave become more cautious in their lending decisions. They admit that their lending criteria have tightened, and they are aware of the possibility that their central guidance may have had an exaggerated effect at branch level, leading to some viable propositions being turned down by over-cautious managers (Bank of England, 1994, p. 7). Two changes in bank attitudes are of particular note. First, they have sought to limit the access of small firms to overdraft facilities because of their frequent use by undercapitalized businesses as a substitute for equity rather than as working capital (Gapper, 1993a, 1993b; Plender, 1993); in the two years since December 1992 term loans have increased from 50 per cent to 60 per cent as a proportion of total lending to small firms (Bank of England, 1995). The implication is that businesses can no longer expect to obtain what is in effect equity finance but at overdraft rates of interest (Batchelor, 1991). Second, the banks are now requiring greater security for loans and placing greater importance on the level of gearing which, in turn, increases the need for firms to raise additional equity finance, in many cases beyond that which can be raised from the personal resources of the small business owner (Deakins and Hussain, 1991). The experience of the recession, involving sharp declines in property and asset values, has prompted the banks to place conservative values on security, thereby exacerbating the long-term

problem of the limited borrowing capacity of small businesses on account of insufficient collateral. The Midland Bank (1992) highlighted SMEs with already high levels of gearing built up in the late 1980s and weak profitability caused by the recession as having particular problems in raising finance in the economic recovery as a result of these changes. Without an increase in working capital such companies are at risk from overtrading to meet increased sales.

Risk assessment Recession has encouraged the banks to develop more sensitive risk pricing systems. There is some evidence that the better-quality proposals are getting lower margins (Bank of England, 1995). Business size and the associated perception of security is an important determinant of bank attitudes in its own right, with bank managers regarding the bigger businesses as better than the smaller businesses (Vyakarnam and Jacobs, 1991). Indeed, larger small firms are more likely to obtain lower rates of interest on their borrowings than the very smallest businesses (Bank of England, 1993). Keasey and Watson (1993) have also noted that small firms which provide security backed by tangible assets were able to obtain significantly reduced interest charges. In similar vein, Cressy (1993) found that start-ups which provided security were generally charged a lower margin over base than those which did not provide security.

Lending profitability Lending to small businesses has been unprofitable on account of the low margins plus high losses (Bannock and Partners Ltd, 1994). Sir Brian Pearce, former chairman of Midland Bank,

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claims that the banks have probably broken even on lending to small businesses in the past ten years (Financial Times, 1994). Thus, in an attempt to make this activity profitable the banks have raised charges on services such as cheque clearing and unauthorized borrowing and have adopted a more thoroughgoing attitude towards implementing such charges (Bank of England, 1993). However, despite claims to the contrary, there is no evidence that the banks have systematically widened their margins on loans by failing to pass on reductions in interest rates to their small business customers (Bank of England, 1993). Nevertheless, the heavy reliance on short-term debt finance by SMEs in the UK imposes significant costs on the sector: one recent study, for example, concluded that SMEs were paying between 1.9 per cent above base (the average of the lowest interest rates charged) and 4.5 per cent above base (the average of the highest interest rates charged) for loans, and equivalently, between 2 per cent and 6 per cent for overdrafts, although some loans were made at 7 per cent and 8 per cent above base (Scottish Enterprise, 1993, p. 38). These loadings serve to emphasize the already high real interest rates being experienced in the UK compared with Germany, Japan and the USA (Scottish Enterprise, 1993).

Prospect-based lending The banks are increasingly taking the view that lending decisions should be based primarily on an analysis of the borrowers cash flow and business plans, with the availability of security being regarded as an important, but secondary, consideration (Bank of England, 1994). However, such a change is not costless, requiring greater commitment of staff resources by the banks. If detailed analysis of business prospects is to become more prominent, and the routine taking of security less so, then more high quality staff resources will be needed in the small business areas

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by banks. Increased monitoring of borrowers will also place a strain on resources. Training, especially through secondments, is expensive (Bank of England, 1994, p. 7). It is therefore ironic that the need for more detailed information necessary for an improvement in bank-SME relationships imposes additional costs on the banks in order to obtain it, which will, inevitably, result in an increase in bank charges; providing a further stimulus to the deterioration in bankSME relationships on cost, not relationship, grounds (Ennew and Binks, 1993).

GB
An effective credit process is the one which allows both borrowers and lenders to be better off. Lenders must generate enough revenue from lending to cover the costs of funds that they mobilize. On the other hand, for the credit process to make sense, borrowers must be able to repay the principal and interest, as well as to generate some profits. Financial intermediaries produce loans using savings as an input. Like any other input, savings have a price. Therefore, for the financial process to be sustainable, banks have to generate enough revenue to meet savings costs. The rate of interest plays a key role in this process. Interest rate flexibility is crucial to determine the sustainability of credit programmes. The borrower view. Availability of credit, under certain circumstances, may enable the economic agents to accumulate capital. Small and large firms depend on credit to increase investment in capital assets. Banks play the role of intermediaries between surplus units that consume less than what they earn, and those individuals and firms that need money to generate output. The Baker-Hoping Model describes the relationship between equity capital (wealth) and credit in the following equation (Baker and Hopkins, 1969):

Peer monitoring is a system in which loans are given to a group of borrowers who are mutually responsible for repayment and agree to guarantee others in the group (quoted from Mahabubul Islam et al., 1993, p. 25). The key feature of group lending is the joint liability involved. Every

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group member receives an individual loan, but everyone is responsible for the other peer members. Collective responsibility substitutes collateralized assets. The bank explicitly requires that borrowers form a group of five people, who then simultaneously apply for a loan.

4.0 Research Methodology 4.1 Research Design

This research is completely based on exploratory research. The study will evaluate the performance of the credit department of the City bank Limited through a comparative, quantitative and qualitative analysis. To explore the problem statement prudently the research had obtain data particularly from existing and potential clients (borrowers) of The City Bank Limited and The City Bank Limited management.

4.2 Sampling Method This study will be conducted only for The City Banks credit department to see the performance of the credit department compare with the Prime Bank Limited. So the sampling frame of this study is the borrower of The City Bank Limited (TCBL) and Prime bank limited (PBL).

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A Nonprobability sampling method will be used to select the clients (borrowers) and employees of the credit department of TCBL. Under Nonprobability sampling method convenient sampling method will be used to collect data.

4.3 Source of data To complete this report data will be collected from primary and secondary sources. The primary data will be gathered by taking interview of the credit officials and borrowers. Also all practical information used in this report is more or less collected through the day-to-day orientation in the credit division. Some secondary data will be collected to make the report more concrete. These data will be collected from different financial statements, annual reports, newspapers, books, and business outlets and materials etc.

4.4 Sample size To conduct this study the sample size has been limited within 40 people for qualitative study. The predicted sample size is small because in- depth interview method is time consuming.

4.5 Survey Instrument Interview

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An open and close both discussion method has been followed here to gather primary information. The interviews were face-to-face interpersonal situation in which one person. Questions designed to obtain answer pertinent to research problems.

4.6 Data Analysis Procedure As this is an exploratory research, the out come of this research is restricted to only the development of an initial understanding. For the exploratory research the unstructured data collection has been made include and the non-statistical data analysis has been executed for data analysis. For these reason the researcher will collect data by using qualitative method. Particularly the qualitative data will be gathered from in depth personal interview and counter analysis has been properly utilized. Data analysis will be made based on the respondents answers. For the optimum results every single question will be analyzed with different calculations (e.g. mean value). Different sorts of bar charts, pie diagram, and other related graphs would be provided in this section. For the analytical part, researcher will use a framework tool to obtain useful data through the method of observation and interview.

1.5 Limitations of the Study

The major limitations of this study are given as follows

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There were some restrictions to have access to the information confidential by concern authority. Respondents were selected from Mouchak branch only. Respondents were very much busy so they were not interested to fill the questionnaire attentively. Sufficient records, publications were not available as per my requirement.

5.0 Significance of the Study The study will help The City Bank Limited to compare their current recovery management status with other competitive financial institution at the same time understand their problem areas. By the comparing with others, TCBL can take necessary actions to reduce debt more efficiently and minimize their risk.

INTRODUCTION

A banker is a dealer in money and credit. The business of banking consists of borrowing and lending. Bank acts as financial intermediaries between savers (lenders) and investors (borrowers)

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by accepting deposits of money from large number of customers and then on lending a major portion of accumulated pool of money to those who wish to borrow. Successful deployment of bank credit requires a philosophy of lending, a scientific and methodical approach to and upgrading of skills in credit appraisal, assessment of credit needs of borrowers, proper and adequate documentation to ensure safety and security of funds and a mechanism for monitoring and controlling loans and advances after the funds are disbursed, apart from well-planned nursing and effective recovery proceedings where needed. It has been said that a bank never makes a bad loan-- a loan goes bad after it has been made. The account of a borrower when he has defaulted in his commitment is considered a sticky account. Recovery of dues in growing number of sticky accounts is emerging a nerve-wrecking problem for banks. Generally speaking, those advances would be recalled where repayment is doubtful and nursing the account is not considered workable. Other circumstances in which a bank would recall its advance are death, insanity or insolvency of a customer, and winding up of a corporate borrower. Commercial lending, lending to a business, is often very different from lending to a personal customer. The main reason for this difference is that the risk of not being paid has an added dimension in commercial lending. In both cases, there is risk concerning the character, commitment and capability of the person borrowing money, but in commercial lending there is additional risk associated with the business. A highly capable person may do badly in business because of factors like- the state of economy, trend in demand for the product or service provided competition from other suppliers, technological changes etc. which no-one could have reasonably expected. From the bank's point of view such unexpected problems result in a bad debt. So a banker with a watchful eye can often help a business customer steer clear of financial difficulty before it begins, thus holding problem loans to a minimum. In providing loans to both

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personal and business customers, the bank's aim is to make profit. To lend too incautiously will mean losses from bad debts. To be too cautious will mean missed opportunities for profitable business. So after making credit to outsiders every banker should follow up recovery management in order to have systems for monitoring all credits, even those it believes to healthy, and to highlight those borrowers whose quality is either deteriorating.

AN OVERVIEW OF BANK CREDIT FUNCTIONS

Go to PREMIUR BANK Report.

The function of credit division of a bank is totally different from its other divisions. So it is important to get a general idea about the whole function of the credit department of any bank. Since this part is about the credit recovery and loan management, study of credit function will provide a broad guideline to the whole objective and the operation of the credit division of a commercial bank. The following steps are discussed below:

There are many banks opened for the people in the banking sector. As many doors are opened for them they first try to understand the bank's present and future prospective whether the selected bank is well reputed or not. Like the customer the bank also tries to identify a suitable customer. Before extending credit to a customer, bank gathers information about the customer from various

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sources like newspapers, magazines, trade bodies, chamber of commerce and analysis of market segments etc.

Once a suitable client is identified, the credit and the marketing officer try to solicit business for his/her bank. This requires calling on the prospect, visiting the place of business and selling bank's products and services to meet his/her present and future needs. This is a vital starting point in bank's credit process and demands a good application of imagination and selling skills on the part of bank's marketing personnel. When both the prospective customer and the bank official decide to business with each other, the credit department of a bank collects some basic information about the business need of the client. These includes the purpose of credit facilities, amount, period, method of repayment, profit, security margin etc.

2.1 Types of Bank Credit Facilities:

There are two types of bank credit facilities that are used in every commercial bank in our country:

Funded and Non Funded

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Funded Credit Facilities: It is an actual disbursement of cash offered by banks to the customer directly. Every bank has to incur real liability beforehand in order to provide credit facilities to the customer means the bulk of resources of a bank primarily come through accepting customer deposits that affects the balance sheet of the bank both in terms of increase in liability and assets. The City Bank Ltd. rendering services to its valuable customers by providing a various types of funded credit facilities. There are many kinds of funded credit facilities of which the major are discussed below:

i. Overdraft (O/D):

In this case, the customer is allowed on the basis of prior arrangements to overdraw his Current Account by drawing cheques for amount exceeding the available balance up to agreed limit within a certain period of time not exceeding one year, against acceptable securities. These facilities are granted after the credit standing, financial ability and status of the customer as well as the purpose have been favorably established. The overdraft limit is based on "Advised Line Of Credit" available on a revolving basis, subject to review prior to expiration of agreed period of such drawings.

This facility includes the following types:

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O/D Against Pledge of Goods: Overdraft facility may be extended to the borrowers against pledge of raw materials/finished products as security, subject to credit and margin restrictions imposed by Bangladesh Bank / Head office from time to time. In this case, the client by signing a duly stamped letter of Pledge and surrenders the physical possession of the goods under effective control of the bank. The ownership of the goods, remains with the borrower, and the outstanding liabilities are to be adjusted out of the sale proceeds. If there remains any shortfall between the drawing power and outstanding, the same may be recovered from the client.

O/D Against Hypothecation of Goods (stocks): Under this arrangement credit facility is extended to the borrower subject to credit and margin restrictions imposed by Bangladesh Bank / Head Office, from time to time, on his/her signing a duly stamped Letter of hypothecation creating a charge against the raw materials / finished products / plant and machinery etc. hypothecated to the bank as primary security against the advance. In this case both the ownership as well as the physical possession of the goods hypothecated remain with the borrower, who binds himself by an agreement to surrender physical possession of the goods to the bank as and when called upon to do so. The bank only acquires a right over the goods hypothecated. The bank, therefore, generally insists upon the borrowers to furnish collateral securities by way of legal or equitable mortgage of immovable property and / or third party guarantee where deemed fit.

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Loan against Imported Merchandise (L.I.M):

Loan against imported merchandise through the bank may be allowed, retaining margin prescribed on their landed cost, depending on their categories and credit restrictions imposed by the Bangladesh Bank / Head Office from time to time. Clearance of the goods should be taken through Approved Clearing Agent of the bank. Generally part delivery is not allowed from LIM Account. Storage of imported goods under LIM facility may be allowed for specified time within which period importer should take delivery of the goods against payment. Generally the management of the bank discourages the LIM facility.

Loan Against Trust Receipt (LTR):

Two different types LTRs are used to cover the following area of credit lines: -

LTR (For Release of shipping Documents): The borrowers execute this to release shipping documents for taking delivery of merchandise that is hypothecated to the bank. In this case the borrower(s) agree to take delivery of the merchandise as the bank's agent(s) and acknowledge(s) that the bank remains owner of the goods and they will be holding the goods on behalf of the bank, as trustees until complete repayment of the debts to the bank.

LTR (For Pre-shipment Financing): The Trust Receipt is a document, which creates the banker's lien over the goods and practically amounts to hypothecation of the proceeds of sale in discharge of the lien. Basically the borrowers for availing pre-shipment finance execute this by

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creating lien on the original Letter of Credit. The borrower also undertakes that the credit facilities will be utilized to purchase / process the merchandise for shipment as per terms of the credit. Advances against Trust Receipt to the clients are allowed when the documents covering an import shipment are given without payment. However, for such advances prior permission from Head Office must be obtained.

Loans and Overdrafts against Shares:

Credit facilities are sanctioned against shares is called "Investment Scheme against Shares". Loans and overdrafts are allowed to those shares of companies listed with the Stock exchange Ltd., subject to margin or any other restrictions imposed by Bangladesh Bank. Before allowing the advance, the shares tendered, as security for advance must be registered in the name of the transferee. The bank puts a lien on the shares of the respective companies and informs this to the concerned companies and asks the company to return the shares to the bank as the bank has obtained a lien on them.

v.

Advance against Work Order:

Advances are made to a client to perform work order by the bank considering the following pointsThe client's management capability, equity strength, nature of the scheduled work and feasibility study is judiciously made to arrive at a logical decision.

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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. Disbursement is made only after completion of documentation formalities and fulfillment of arrangements by the client to undertake the contract.

vi. Advance against Fixed Deposit Receipts (FDR) and Bearer Certificates of Deposit (BCD):

FDR: When the bank provides advance against FDR the following points are considered: The FDR cannot be in the name of a minor. A lien is issued by the bank on the specified amount of the FDR that indicates the bank has a right over it and informs this to the concerned authorities holding the FDR when the FDR is used as a security for availing the credit facility. Creation of liability on FDR issued in joint names by any on of the depositors is irregular.

BCD: Incase of allowing advance against BCD the following points are consideredA letter is to be obtained from the borrower for depositing BCD to the bank. Lien is to be marked on the face of the certificate. Margin to be calculated on the tendered amount. Lien is also to be marked in the BCD.

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Consumer Credit Scheme (CCS): The objective of this loan is to provide essential household durable to the fixed income group (Service holders) and other eligible borrowers under the scheme. The abbreviated name of the scheme is "Consave". Under this scheme loans are also extended to the employees of the bank and the dues are recovered from the salary account.

CCS program includes the following items: Refrigerator / Deep freeze. Television, VCR, VCP, Dish Antenna. Music Center. Motorcar, Motor Cycle. Air-cooler, Air-conditioner. Personal Computer. Washing Machine Household Furniture & Fixtures. Sewing Machine. Kitchen appliances like Oven, Toaster, Pressure Cooker, Blender, etc.

Mode of CCS Recovery: When advances are provided under CCS program dues are recovered in the following mannersIn equal monthly installments. Through deduction from the monthly salary of the client wherever applicable, by his employer.

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Industrial Loans and Project Loans: As these types of loans generate most of the earnings in the credit division The City Bank Ltd. has actively participated in providing industrial loans and project loans to its corporate clients. Being a new bank the active participation of its marketing division the number of project loans and industrial loans increasing day by day. Since the size of the loan is very big, The City Bank Ltd. has been financing corporate clients in collaboration with other banks. The word Project can be used in many senses. It can be narrowed down to scheme of capital investment to develop facilities to provide goods and services. Project / Term Loan normally has fixed maturity and it relates to term investment. As such it requires appraisal of those proposals to have a rational decision. Appraisal may be termed as assessment of viability over a period of time.

Appraisal: There can be no fixed or standardized approach to Project Appraisal. Numerous and diverse elements come under the process of appraisal. In practice, project appraisal involves investigation on the following five different aspects of a project:

Technical Aspect: The technical aspects of an Industrial Project are appraised to determine whether the project is sound with regard to every engineering and technological consideration

Commercial / Market Aspect: The market aspect is concerned initially with the study of demand for the project's output. An industrial project is to bring in some goods or services for a community. However the community's demand for such goods and services is limited and at a given price. The objective of market analysis is to see how much of these goods and services the community is disposed to acquire and at what prices.

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Financial Aspect: The main purpose of financial appraisal is to assess if the proposed project is viable in terms of its operation in the future year and its financial soundness.

Economic Aspect: The economic appraisal / social cost benefit analysis is concerned with judging a project from the large social point of view. In such an evaluation, the focus is on the social cost & benefits of a project, which may often be different from the monetary cost, & benefit to the firm.

Management Aspect: The management aspect of a project appraisal is very important, as the man behind the machine is vital. An assessment of the promoters in respect of their integrity, experience and capabilities to implement and run the project is of prime importance before extending a credit of any amount. There are no set rules to find out if the borrowers are men of integrity. It has to be done by direct and indirect investigation.

Export Finance: This is another type funded credit facility that The City Bank Ltd. provides to its clients. In this finance an exporter requires financial accommodation at two stages, namely: -

Pre-shipment Stage: In this case credit facilities are extended to the exporters prior to the actual shipment of goods for export. Pre-shipment credit facilities are essentially a short-term credit, which is to be liquidated by negotiation / purchase of export bills covering the particular shipment. It is also allowed either against Irrevocable Letter of Credit from reputed foreign bank

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or against firm contracts from reputed foreign buyers. Pre-shipment credit normally takes the following forms:

Packing Credit. Red Clause Letter of Credit.

Post-shipment Credit: It is a financial accommodation extended to an exporter against export documents after shipment of the goods. When shipment of goods has already been made the exporters may require waiting for some time to receive payment of the proceeds from foreign buyers. But an exporter - be a manufacturer or regular supplier, has to make immediate payment to the suppliers of raw materials, local seller of goods or to procure goods for further shipment. So, an exporter always feels the necessity of Post-shipment Bank's finance to overcome his revolving need of working capital in the process of export trade. Before extending post-shipment credit to the exporters, bank should take into consideration the credit worthiness and export performance of the exporters.

b) Non-Funded Credit Facility:

This is a bank commitment to a third party on behalf of the customer, which does not involve any cash outflow from the bank. In this case when a client contracts with the bank the commitment states that the bank shall pay a specific amount of money to the third party within a prescribed time limit and against stipulated documents. Therefore, a non-funded credit facility is a contingent liability for the bank, which may or may not turn into a real liability with in a future

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date. A non-funded facility does not affect the balance sheet of the bank at the time of commitment but continues the possibility.

Some of the major non-funded credit facilities of The City Bank Ltd. along with explanations are listed below:

Letter of Credit (L/C): Letter of Credit is a written undertaking by a bank (Issuing bank) given to the seller (Beneficiary) at the request, and on the instruction, of the buyer (Applicant / Opener) to effect payment (By making a payment, deferred payment, or by accepting or negotiating bills of exchange) up to a stated sum of money within a prescribed time limit and against stipulated documents.

Bank Guarantee: A guarantee is a contract between the guarantor and the beneficiary where in the guarantee undertakes collateral for the debt, default or miscarriage of a third party. According to the definition, a guarantee is a contract to perform a promise or discharge the liability of a third person in case of his / her default. In banking, it is an irrevocable obligation of a bank to pay a stated sum of money in case of violation of contract by the third party. The basis of a bank guarantee is always a contractual relationship between the principal debtor and the creditor.

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Back to Back Letter of Credit:

Generally The City Bank Ltd. extends back-to-back credit facility for the ready-made garment industries of Bangladesh. This form of credit facility is provided in a situation when the client of the bank is the seller of goods receives an irrevocable L/C from one party in his/her favor where the seller has to purchase the goods from another party to complete the order. In a back to back credit, the seller as beneficiary of the first credit, offers it as security to the advising/confirming bank for it to open a second credit in favor of the seller's own suppliers. Basically this type of credit facility is provided under the strict regulations of Bangladesh Bank.

The City Bank Ltd. takes into consideration of the following points while providing a back-toback credit facility. Only recognized units of ready-made garments or specialized textile units having licensed bonded warehouse facilities will be provided with the back-to-back credit facility. The L/C is valid for a reasonable period of time to cover export o merchandise keeping in view the validity of shipment period of the master L/C. The industry requesting for the credit facility must be an export oriented unit.

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3.0 SECTOR WISE DISTRIBUTION OF LOANS AND ADVANCES The outstanding amount of loans and advances as on 31st December 2005 stood at TK. 23,326 million with a record growth of Tk. 6298 million (37 percent). The outstanding amount at the same period of previous year (2004) was Tk. 17027 million and in 2003 the loan and advance was Tk. 14778.55 million.

Year 2005 2004 2003

Loan amount (in million) 23326 17028 14778.55

Percentage increase than previous year 37% 15% 6%

Continued emphasis on quality assets resulted in more than hundred percent increase in assets that have paved the way for building of a sound asset base for the bank. Trade-related and working capital financing were the principal areas where lending activities were concentrated. Table-VII depicts sector wise break-up of loans and advances position and Table-VIII shows the sector wise distribution of advances in 2001 & 2002 of The City Bank Ltd., which is also represented graphically in the figures VI & VII.

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A critical analysis on credit department of City Bank Limited.

Nature wise Loans & Advances of City bank SL. NO Sector (figure in 000) 1 Continous (CC, Hypo, 2 3 4 5 6 7 Pledge) Demand Loans Term loan (Up to 5 year) Term loan (Over 5 year) Short term agriculture & microcredit Staff loan Total 2003 5439696 5266447 2389766 1463863 218776 14778548 2004 6418899 6099573 2468247 1739560 301558 17027837 2005 8630703 8349109 3058051 2910246 378229 23326338

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Yearly loan disbursement

30000000 Taka 20000000 10000000 0 2003 2004 Year 2005 Series1 Series2

Figure Error! No text of specified style in document.-1

Table-VII Sector-wise break-up of Loans and Advances position (as of December 31, 2005)

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Sectors Agriculture Term loan to large & medium scale industries Housing Working capital & commercial lending Import Export Other Loan Total Source: Annual Report

Amount (Tk. In million) 171.00 3542.30 224.46 8739.79 4094.61 3762.40 2797.74 3402.21

Percentage Distribution 0.73 15.19 0.96 37.47 17.55 16.13 11.97 100%

-Table-VIII

Sector Wise Distribution of Advances of The City Bank Ltd.of the years 2001 & 2002 Sector Working Capital (OD) Outstanding Import Bills Export Finance & Others Post Import Finance Term Loan Consumer Loan Source: Annual Report 2001 Percentage Distribution 53% 1% 1% 15% 28% 2% 2002 Percentage Distribution 57% 2% 1% 10% 29% 1%

Sector Wise Distribution of Advances of The City Bank Ltd.of the years 2003 & 2002

Sector

2003 Taka

2004 Taka

2005 Taka

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Term loan (Industrial loan) Working capital (Industrial loan) Export credit Commercial credit Small and cottage industry Other Total

289,500,110

2,422,300,000

14

3,542,378,000

15

2,009,800,000 1,379,800,000 6,486,500,000 38,300,000

17 11 54 1.96

2,477,900,000 981,800,000 6,031,200,000

15 6 35 0

2,330,565,000

10

3,762,400,000 16 10,503,900,000 45 24,900,000 0.11

1,971,648,000 14.04 14,778,548,110 100

5,114,636,839 30 17,027,836,839 100

3,162,195,550 13.89 23,326,338,550 100

Sector wise Loans & A dvances: 2003

1 6% 0%

2% 1 7%

Term loan (Industrial loan) Working capital (Industrial loan)

Export credit 1% 1 Commercial credit Small and cottage industry

Other 54%

Figure

35

Sector wise Loans & Advances: 2004

1 4% 30% 1 5% Term loan (Industrial loan) Working capital (Industrial loan) Export credit Commercial credit Small and cottage industry 0% 6% Other

35%

Figure Error! No text of specified style in document.-2

Sector wise Loans & Advances: 2005

1 4% 0%

1 5%

1 0%

Term loan (Industrial loan) Working capital (Industrial loan) Export credit Commercial credit Small and cottage industry Other

1 6% 45%

Figure Error! No text of specified style in document.-3

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37

Figure-VI

Sectorial Distribution of Advances 2001

60% 50% Percentage 40% 30% 20% 10% 0%

53%

Working Capital (OD) Outstanding Import Bills

28% 15% 1% 1% 2%

Ex port Financ e & Others Pos t Import Financ e Term Loan Consumer Loan

Se ctors

Figure-VII

Sectorial Distribution of Advances 2002

57%
Working Capital (OD) Outstanding Import Bills

60% 50%
Pe rce ntage

40% 30% 20% 10% 0% Sectors 2% 1% 10% 1% 29%

Export Finance & Others Post Import Finance Term Loan Consumer Loan

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Execution to the Study

4.0 RECALL AND RECOVERY OF LOANS & ADVANCES OF THE CITY BANK LTD.: A GENERAL DIRECTION OF ANALYSIS

It has been mentioned earlier in the second section of my paper that a bank never makes a bad loan-- a loan goes bad after it has been made. Since lending is the most important function of a bank and usually holds the highest position in the total asset of a bank generates the highest level of operating income. On the other hand lending is also one of the major risks for the bank management. So, it is very important for the management to take appropriate steps to recall and recover both the unclassified as well as the classified loans (discussed later) with close watching in order to balance between its return and risk involved with the portfolio. Similarly, The City Bank Ltd. has been also actively involved in carrying out its lending functions through its prudent recovery management. Among the all divisions, the strongest division of The City Bank Ltd. is considered as the credit division of the bank that has been quite aggressive in strengthening its loan portfolio by extending loans and advances to the corporate clients. It should be mentioned that The City Bank Ltd. established a good will in the banking sector among the new comers through its quality services. In my project part, I tried to compare the monthly recovery performance of The City Bank Ltd. with the monthly recovery performance of Prime Bank of the year 2002 of both unclassified and classified loans.

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Before going to the detail analysis, we need to know the following definition:

Unclassified Loans: Unclassified loans are normal accounts or having an overdue but will not be reported as classified up to the months from the time of expiration of the loan.

Classified Loans: Classified loans are those types of accounts, which have crossed the overdue period of six months and are reported as classified clients to the Bangladesh Bank. This type of loan includes the following stages: Substandard Loan: A loan portfolio will be considered as a substandard loan for 6-12 months when the bank management still considers there are some hopes of realizing the money. Doubtful Loan: A loan is considered to be doubtful between the period 12-24 months. The bank management still tries to recover the loans through various means. Bad Loan: A loan portfolio is considered to be a bad loan and is written off from 24 months and above. The bank writes off the loan.

Overdue Loan: Overdue loans are those loans whose term of repayment has expired and according to Bangladesh Bank regulations, a bank can declare a loan portfolio as overdue if no installment for the loan has been paid with in six months after the expiry of the loan.

As on December 31, 2002 the credit division of The City Bank Ltd. comprised with 3 (three) bad loan accounts of Tk. 131.12 lac, 8 (eight) doubtful loan accounts of Tk. 29.61 lac, and 22 (twenty-two) substandard loan accounts of Tk. 140.09 lac.

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Table-IX Monthly Recovery of Overdue Loans and Advances of The City Bank Ltd. in 2002: (Fig. In Lac) Month January February March April May June July August September October November December Overdue amount 193.47 193.47 351.84 333.08 327.50 314.41 293.72 286.49 308.06 301.89 300.82 304.23 Recovery amount 0.00 0.00 103.03 9.38 5.58 24.13 20.69 7.20 8.83 6.14 2.36 6.09 Percentage Recovery 0% 0% 29.28% 2.82% 1.70% 7.67% 7.04% 2.51% 2.87% 2.03% 0.78% 2.00%

Figure-VIII

Monthly Recovery of Overdue Loans in 2002

Recovery rate (%)

30%
Pe rce ntage

20% 10% 0%

Jan 0%

Fe b

Mar

Apr May Jun

Jul

Aug

Sep

O ct

Nov

Dec

Re cove ry rate (%)

0% 29.28 2.82%1.70%7.67%7.04%2.51%2.87%2.03%0.78%2.00%

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Analysis:

Figure-VIII corresponds to the table IX shows that the recovery of overdue loans and advances over the months is not satisfactory in 2002 of The City Bank Ltd.. There has been no consistency in the recovery pattern or rate in the collection from the overdue loans. The rate of recovery throughout the year is very small except the month of March, which is 29.28%.

The performance of the bank in recovery of overdue loans has been reflected here. There has been several ups and downs throughout the year and the recovery rate was totally zero in the first two months reflects bad recovery performance of the bank. It is clear in the figure that the rate of recovery suddenly goes up at an abnormal rate in the month of March and then gave a big nosedive to 2.82% in April and 1.70% in May. In the next two months June and July the rate rose up to 7.67% and 7.04% respectively then again goes down near to 2% over the next months of the year except 0.78% in November. So, it is clear that the management of The City Bank Ltd. is not that much aware of the recovery of overdue loans.

Figure-IX

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Sector Wise Recovery of loans and advances over the Quarters as on Sept. 30, 2002
0.6 0.5

52.23%

49.12%

Percentage

0.4 0.3 0.2 0.1 0

42.65%

1s t Q

a er (J u a rt

n .- A

l.) p t .) ril-Ju . - Se (J u l r ( Ap er rt e u art Qu a 2nd 3 rd Q

p ril)

Analysis:

Figure IX corresponds to the table X shows the quarterly sector wise recovery of loans and advances of The City Bank Ltd. in 2002. The recovery position during the first two quarters was around 50% but the rate fall to 42.65% in the third quarter showing the bad performance of the bank in recovering its loans and advances. In the table above I have shown the data of first threequarters excluding the last quarter because of unavailability of data. It is clear in the table that of The City Bank Ltd. extends loans and advances for large & medium industries, export credit, commercial lending and other purposes in order to earn higher return. Large and medium scale industrial loans are provided for industrial purposes such as term loan and working capital financing. This is an important portfolio for the bank. The recovery amount of large and medium scale loans and export credit shows a remarkable performance during the quarters in the table. Over all, there is a

Comparison of monthly recovery rate of Unclassified Loans of TCBL & Prime Bank in 2002
43
70.00% 60.00%

Perce ntage

50.00% 40.00% 30.00% 20.00% 10.00% 0.00%

Jan. Feb. Mar. April May June July Aug. Sept. Oct. Nov. Dec.

The City Bank Ltd. 9.14% 15.40 16.81 12.48 14.35 19.94 10.78 11.41 7.89% 10.92 16.21 2.68% Prime Bank 26.44 23.73 17.81 13.36 13.48 17.55 62.54 10.61 16.31 11.73 29.18 19.16

highly satisfactory recovery rate prevailing against these two sectors. On the other hand, commercial loans are advances for varied reasons such as over draft and other credit facilities recovered a substantial amount during the quarters. Though in the last two quarters the recovery amount decreased consistently compare to the first quarter, yet the recovery rate is satisfactory Of The City Bank Ltd. And in the case of other types of loans, which include CCS, IBP etc., shows an unsatisfactory performance in collection of loans and advances during the quarters.

Figure-X

Analysis: The explanation of unclassified loans has been mentioned earlier in this section of my paper.

Figure-X shows the recovery rate of unclassified loans and advances between The City Bank Ltd. and Prime Bank Ltd. Comparison shows that how the peer banks performing in recovering the unclassified loans and advances over the year 2002. Any way, the recovery pillars show a mixed trend with ups and downs for both the banks. It is clear from the graph that the recovery

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performance of Prime Bank Ltd. is far better than that of The City Bank Ltd. Prime Bank Ltd. recovered the unclassified loans and advances about three times higher in January, one and half times higher in February, seven times higher in July, more than two times higher in September, two times higher in November and nine times higher in December than The City Bank. Which reflects a very good recovery position of Prime bank as a peer bank of The City Bank Ltd. in the banking sector. On the other hand, the recovery rate is almost close to each other in the rest of the months, where Prime Bank Ltd. again dominates.

Figure-XI

Comparision of monthly recovery rate of Classified Loans of TCBL & Prime Bank in 2002
The City Bank Ltd. Prime Bank

60.00% Percentage 40.00% 20.00% 0.00% Jan. Feb. Mar. April May The City Bank Ltd. Prime Bank

Jun Aug Sept July Oct. Nov. Dec. e . .

0.00 0.00 53.2 5.33 1.68 8.16 6.58 2.46 4.02 2.00 0.78 11.3 1.01 2.04 0.89 5.95 12.0 3.31 3.60 1.73 5.46 2.09 0.29 4.44

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Analysis:

Figure-XI represents the comparison of monthly recovery position of classified loans and advances of The City Bank Ltd. and Prime Bank Ltd. Classified loans, as we know from the definition that those accounts, which cross the overdue period of six months. Since it is very difficult to recover the classified loans and advances, the whole banking sector in Bangladesh is facing from this problem with its 20%-30% of its loan portfolio considered to be unrest. The graph depicts that the recovery performance of classified loans and advances of The City Bank Ltd. is quite better than that of Prime Bank Ltd. There have been several ups and downs in recovery rate for both the banks. In January and February there has been absolutely zero recovery for The City Bank Ltd. whereas Prime Bank Ltd. recovered 1.01% in January and 2.04% in February. But in March the rate shot up to 53.25% for The City Bank Ltd. whereas Prime Bank Ltd. recovered only 0.89%. It should be mentioned that The City Bank Ltd. made a big realization from the classified accounts in that month. The recovery rate is almost close to each other separately for the months of April, August, October and November. The City Bank Ltd. recovered the classified loans and advances about three times higher in June, two times higher in July, three times higher in December but seven times lesser in May than that of Prime Bank Ltd.

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5.0 FINDINGS

The detailed analysis of the project part on the credit recovery of The City Bank Ltd. indicates that the bank is performing moderately well in recovery of its outstanding loans and advances. The City Bank Ltd. is basically performing well in collection of its large and medium scale loans and export credit. But in other sectors like the small borrowers are creating major problems for the bank in terms of non-repayment and classification. The collection of overdue loans over the months of 2002 shows unsatisfactory results. As it is a new bank, the problem of recovery will be quite insignificant in course of time but as the bank is gradually expanding this problem of recovery would become more significant. Regarding the performance evaluation of classified and unclassified credit between the Prime Bank Ltd. and The City Bank Ltd. The main thing that

47

I have found from the comparison of credit recovery that Prime Bank Ltd. did better in recovery of unclassified loans than The City Bank Ltd. the months in 2002. The credit recovery of The City Bank Ltd. is not that much satisfactory because their credit monitoring and recovery procedures are extremely poor and insignificant. Since there are no portfolio officers in the credit department, proper monitor and follow up of loans are not taken after the disbursement of loan. As the management does not know the exact amount of security mortgaged by the borrower severe problems with documentation of loans exists in the credit department. It is very important for a bank to analyze the risk after lending. Analysis of lending risk helps a bank to reduce the level of classified loans. Despite having a form of lending risk analysis it is not implemented at The City Bank Ltd. properly. That is why most of the loans are disbursed without the analysis of lending risk.

6.0 CONCLUSION

Banking has changed enormously in the last decade. Management of bank credit is becoming complex because of fast growing needs of the economy in the context of changing business scenario in the increasing competitive environment of today in which the banks are functioning. Banking sector is considered to be one of the key areas of financial institutions. I tried to discuss the organizational issues highlighting the positive and negative aspects and opportunities as well as the basic orientation of the bank in the first section. Then I mainly focused on the recovery performance of various types of loans of The City Bank Ltd. as well as tried to compare the credit recovery of classified and unclassified loans and advances between The City Bank Ltd. and Prime Bank Ltd. in the center part of the report. During the analysis I have seen that Prime

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Bank Ltd. is doing better than The City Bank Ltd. in the recovery of unclassified loans and advances but The City Bank Ltd. is ahead in the recovery field of classified loans. The over all view is that The City Bank Ltd. is moderately doing better in the recovery of its outstanding loans and advances. Since the banking sector is getting competitive The City Bank Ltd. must follow a strong recovery and loan management system for faster service to its customers. It is expected that The City Bank Ltd. continues to prosper in the coming days and the management should boldly navigate the organization in this turbulent ocean of competition as the bank embarks in to a new millennium.

BIBLIOGRAPHY

1. Philip Kotler, MARKETING MANAGEMENT, 8th ed., New Delhi: Prentice Hall of India (Pvt.) Limited, 1991.

Pettit Lesiker, BUSINESS COMMUNICATION, 6th Edition, Richard D. IRWIN Inc. 1994.

Hampton J. John, FINANCIAL DECISION MAKING, 4th Edition, Pretice Hall Inc., 1990.

Annual Report of THE CITY BANK LIMITED..

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Eric R. Reiden bach, Robert E. Pitts, BANK MARKETING, Prentice Hall Englewood Cliffs, NY, 1986.

BANGLADESH BANK STATISTICS.

E.P Doyle, PRACTICE OF BANKING, 2nd Edition.

COMMERCIAL BANK MANAGEMENT, by Peter S. Rose.

Resume of Financial Institutes of Bangladesh.

THE BANK COMPANIES ACT.-1991, by Md. Abul Hasnat Mullah

COMMERCIAL BANKING, by Brick, John R.

Annual Reports of PRIME BANK LIMITED.

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