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ON
CREDIT OPERATING PROCEDURE OF BASIC BANK LTD.
pe ople
for
pr ogress
University of Dhaka
Supervisor-
Submitted by:
RUBANA NASRIN
M.B.A (HRM), 6TH Batch
Roll no.- 438, SL. no.-59
Department of Management Studies
UNIVERSITY OF DHAKA.
LETTER OF TRANSMITTAL
Date: 15.02.07
To
Syed Golam Maola
Professor
Department of Management Studies
University of Dhaka.
Sub: Submission of Internship Report.
Dear Sir,
Faithfully yours,
_______
Rubana Nasrin
M.B.A (HRM), 6th Batch
ACKNOWLEDGEMENT
First of all I would like to express my gratitude to omnipotent and almighty Allah, whose
invisible guidance helped me to complete this report. Although, time was very limited for
getting the sufficient knowledge about all of banking service, but the short experience
that I gathered as an internee, in BASIC Bank Limited is an asset for all the time to come
in my life. I take the opportunity to express my deep sense of gratitude of my reverend
supervisor, Professor Syed Golam Maola for his invaluable suggestions and guidance
during the study period that has greatly inspired me in preparing this report successfully.
I am very much grateful to the authority of BASIC Bank Limited to assign me as an
internee in this reputed bank and have the opportunity to learn theoretical as well as
practical knowledge related to overall banking system and complete such an ambitious
study for my internship program as well as for preparation of this report. I am deeply
grateful to all concerned persons who provide valuable guidance, suggestions and advises
in collecting information, analyzing and preparing the report. I am particularly indebted
to them whose efforts and cordial cooperation made the report possible.
It couldnt possible to thank all of those marvelous people who have contributed for the
preparation of this report. All of BASIC Bank employees are very frank and helpful. I
couldnt think a single moment that I am working here as an internee. They helped me as
their employee. There are of course some very special people who cant go without
mention. I am grateful to Mr. Mobarak Hossain Chowdhury, Deputy General Manager,
Mr.Masum Ahmed, Manager, Mr. Faruque Ahmed, Manager, Mr.Saidur Rahman Sohel,
Deputy Manager, Mr. Al-Amin, Deputy Manager and Mr. Motin Hossain, Officer, Mrs.
Asia Khanam, Assistant Officer, Mr. Billal Hossain, Officer of Dilkusha Branch of
BASIC for their cordial attitude and extending their helping hand to my problem
regarding internship program. Without their generous support I could hardly achieve my
cherished goals.
I am grateful to the Department of Management Studies, University of Dhaka for
providing me such opportunity to come closer to real situation. Finally, I want to express
my deep gratitude to my family members and also remember my friends whose enormous
help assisted me to complete my report.
Executive Summary
The present Internship Report Credit Operating System- A case study on Bangladesh
Small Industries and Commerce Bank Limited (BASIC) has been prepared under the
dynamic supervision of Professor Syed Gulam Maola, Department of Management
studies, University of Dhaka. The period of internship lasted for three months.
BASIC Bank Limited started its operation from January 21, 1989. Although the
Government of Bangladesh took over 100 percent ownership of BASIC in the year 1992,
the bank is yet not nationalized; it operates like a private bank. One of the significant
characteristics of BASIC is that the Banks Memorandum and Articles of Association
stipulates that 50 percent of loan -able fund is required to be invested in Small and
Cottage industries sector.
Credit is the most fundamental issue in our banking sector. Default culture is the most
common phenomenon in the banking sector of Bangladesh. Like other Govt. banks,
private banks also suffer from this problem. But, the Credit Management in BASIC is
relatively sound compared to all other similar banks operating in the country. As a result,
the bank has a very low rate of classified loans, which is around 4% only.
Although the amount of classified loans in BASIC is less than that of other banks, it still
remains a concern for the management because of its increasing trend during the last
three years. One of the major causes of classified loans in BASIC is the unwillingness of
the borrowers to repay loans in the backdrop of political unrest of the country. Other
causes include high rate of interest, entrepreneurs inability to market their products, lack
of proper supervision by the bank officials, sickness of industries due to loss of
competitiveness in price with the similar imported products, lengthy bureaucratic
procedures of the other govt. agencies etc.
Since the process of recovery of classified loan involves lengthy legal procedures, the
percentage of recovery of such loans is very low. BASIC therefore emphasizes on
persuasion rather than going for legal action in order to recover its classified loans. Bank
considers the practical aspects of the projects being sick and extends further finance or
reschedules the repayment period.
5
CONTENTS
CHAPTER 1
[Introduction]
PAGE
NO.
1
2
2
2
4
5-13
5
5
5
6
6
6
6
7
9
9
9
10
10
11
13
13
14-17
14
15
16
16
16
17
17
46-51
46
49
51
56-59
56
59
60
63
CHAPTER ONE
1.1 Origin of the report
1.2 Background of the report
1.3 Objective of the report
1.4 Reason for the report
1.5 Scope of the report
1.6 Methodology of the report
1.7 Limitations of the report
the MBA program, I was sent to BASIC Bank Ltd., Dilkusha Branch for having practical
exposure in the Bank for three months internship program.
build up potential future Banker MBA program can help a lot. Internship program can
help to be acquainted with day-to-day affairs of such people.
1.5
There is certain boundary to cover this report. To achieve the objective of the report, i.e.
through knowledge about the organizational functions and its management, it is not
possible to cover each and every activity performed in the organization. The report has
covered only the general overview of the organization. Moreover the company itself and
financial institutions have got some confident information which are not possible to
disclose publicly, so those data and information had to be ignored for this report.
1.6
For making any report or statistical survey most of the data should be taken that reflect
actual situation. For my report I have collected various types of primary and secondary
data while I was performing my job. I have collected various data from various sources.
In a disciplined way I can say that the report input were collected from two sourcesPrimary Sources:
i)
ii)
iii)
Secondary Sources:
i)
ii)
iii)
iv)
v)
vi)
vii)
Practical deskwork
Face to face conversation with the officers.
Face to face conversation with the clients.
Annual report of BASIC Bank
Brochures of BASIC Bank
Prospectus of BASIC Bank
Published or unpublished or personally collected data from
officers, Dilkusha Branch and Head Office of BASIC Bank
Training institutions papers those are supplied to the trainee.
Various files and documents of credit division of BASIC Bank
Ltd.
Articles related to credit management in different journals and
magazines.
11
CHAPTER TWO
COMMERCIAL BANKING IN BANGLADESH
12
13
I.
II.
III.
IV.
V.
VI.
VII.
VIII.
IX.
X.
XI.
14
ANZ Grindlays bank has merged in the Indian sub-continent and Middle East,
with standard Chartered Bank and has become ANZ Grindlays Standard
Chartered Bank in 2000.
Woori Bank is the renamed bank in Jan 2003,of Hanvit Bank Ltd, of formerly
Hanil Bank of South Korea, renamed in May1999.
Muslim Commercial Bank Ltd. (Pakistan) recently merged with Bank Asia in
2003.
Shamil Bank E.C (merged bank of Faisal Islamic Bank of Bahrain)
Credit Agricole Indosuez is the French Bank, formerly known as Bank Indosuez,
now this has been purchased by the Commercial Bank of Cylon.
15
16
Chapter- Three
3.1 Profile of BASIC Bank
3.2 Objectives of BASIC
3.3 BASICs Approach
3.4 Strategies of the BASIC Bank
3.5 Mission & Vision of BASIC
3.6 Organizational Goal
3.7 Organizational Structure
3.8 Corporate Culture of BASIC Bank
3.9 Human And Financial Resources of BASIC
3.10 Performance of The BASIC Bank limited
3.11 View of BASIC Bank, Dilkusha Branch
17
1989
Incorporated January 21, 1989
August 2, 1988
18
Legal Status
Public Limited Company
Authorized Capital
Tk. 2000.00 (Million) 2005
Paid-up Capital
Tk.810.00 (Million) 2005
Deposit, Loans & Advances and Profit (Million) of BASIC Bank
Deposit
Loans & Advances
Profit
2005
22,326
15,339
872
2004
15,509
12,000
689
2003
11,267
9,283
616
To receive, borrow or raise money on deposits, loan or otherwise, upon such terms as
the company may approve and to hive guarantees and indemnities in respect of all
debts and contracts.
To invest money in such manner as may from time to time be thought proper
To carry on the business of buying and selling bullion, gold, and other valuable
assets.
19
and sustainable growth. BASIC offers term loans to clients especially to develop smallscale enterprises and also provide full-fledged commercial banking services like
collection of deposits, short term trade finance, working capital finance in processing and
manufacturing units and financing and facilitating international trade.
BASIC attaches special importance to technical and advisory support to small scale
industries in order to enabling them to run their enterprise successfully.
Micro Credit to the urban poor through linkage with NGOs with a view to facilitating
their access to the formal financial market for the mobilization of resources is another
diversification of our services.
We provide an environment in which our staff members feel they can exercise their
initiative and judgement within a clearly established framework. Our Bank is the leader
in offering excellent career opportunity in transparent and participate management
culture.
Coping with the competitive and rapidly changing financial market of the country,
BASIC Bank maintains close connections with its clients, the regulatory authority
authorities, the shareholders (the government of Bangladesh), other banks and financial
institutions.
20
The gist of our vision is Together towards Tomorrow. BASIC Bank of Bangladesh
Limited, as the name implies, is not a type of Bank in some countries on the globe, but is
the first of its kind in Bangladesh. It believes in togetherness with its customers, in its
march on the road to growth and progress with services. to achieve the desired goal, there
will be pursuit of excellence at all stages with a climate of continuous improvement,
because, in BASIC Bank, we believe, the line of excellence is never ending. Banks
strategic plans and networking will strengthen its competitive edge over others in rapidly
changing competitive environments. Its personalized quality services to the customers
with the trend of constant improvement will be cornerstone to achieve our operational
success.
as: - Provide high quality financial services in export and import trade
To employ funds for profitable purposes in various fields with special emphasis
on small-scale industries.
To undertake project promotion to identify profitable areas of investment.
21
To search for newer avenues for investment and develop new products to suit
such needs.
To establish linkage with other institutions which are engaged in financing micro
enterprises.
Adoption of new banking technology
[2]
Mr. Md. Sikander Ali Mondal
Director
BASIC Bank Limited &
Chairman, Bangladesh Small and
Cottage Industries Corporaion
[3]
Dr.Mohammad Tareque
Director, BASIC Bank Limited
& Joint Secretary, Ministry of
Finance, Govt. of the Peoples
republic of Bangladesh
[5]
Mr. Md. Mosharraf Hossain
Bhuiyan
Director, BASIC Bank Limited &
Joint Secretary
Ministry of Commerce
Govt. of the opleRepublic of
Bangladesh
[6]
Mr. Asaduzzaman Khan
Director
BASIC Bank Limited
&
Executive Director
Bangladesh Bank.
3.7.2 Management
The management is headed by the Managing Director. He is assisted by the General
Manager and Departmental heads in the head office. BASIC is different in respect to
hierarchical structure from other bank in that it is much more vertically integrated as for
22
as reporting to the chief Executive is concerned. The Branches in charge of the Bank
report directly to the Managing Director and for functional purposes, to the Head of
Department consequently, quick decision making in disposal of cases is ensured.
GM
(Admin)
Internati
onal
Division
Credit
Division
GM
(Operation)
Establishment &
DEVELOPMENT
Branch Control
Central
Accounts
Industria
l Credit
Division
Perso
nal
Senior Officer
Officer
Assistant Officer
Clerical Staff:
Banking Staff
Go-down Staff
Non-Clerical Staff:
Messenger Staff
Security Staff
23
Year
2006
2004
2002
2000
1998
1996
463
497
510
523
578
601
No. of employees
24
Financial Resources
Like any other financial intermediaries, BASIC is no exception in performing its cure
function viz. Mobilization of fund and utilizing such mobilized fund for profitable
purposes.
Mobilization of Fund
The main sources of fund for BASIC are:
1) Deposit
2) Borrowing
(1) Deposit: Deposit is the mainstay of BASICs sources of fund. Following usual
practices, it collects deposit through:
Current Deposit
Mix of deposit at the end of 2005
Saving Deposit
Fixed Deposit
Savings
2070
19462
Current
793
Term
(2) Borrowing for Development Finance: Apart from deposit BASIC received funds
from the following sources:
Bangladesh Bank.
Asian Development Bank.
KfW (Kreditanstalt fur Wieder-aufbau- Credit Institution for Reconstruction), a
German Development Bank.
All of these funding sources fund are for relatively longer period. Receiving the credit
lines from ADB and KfW has been recognition of BASICs highly satisfactory
performance.
1000
500
582.82
676.51 690.95
839.61
937.52
25
0
2001
2002
2003
2004
2005
Utilization of Fund
Utilization of banks fund was more of less satisfactory during the year 2005. Given the
difficult economic situation, the management of bank focused on the consolidation and
quality of assert rather than in growth. The total assets of the Bank increased to Taka
27,136.37 million at end 2005 from Taka 19,436.57 million in the previous year. Deposit
rose from Taka 15,509.18 million in 2004 to Taka 22,325.58 million in 2005
Banks Assets
During the year 2005, total assets of the bank increased to Taka 27,136.37 million from
Taka 19,436.57 million in 2004.
A ssets C omposition end of 2005
56%
Investment
Cash
1%
Other
1%
4%
Advance
Balance with other banks
17%
6%
15%
26
After critical handling the Bank mobilized total Deposit of 22,325.58 million as at 3112-2005 , where it was 15,509.18 million as at December 31, 2004which is an increase of
48.44%.
2. Capital and reserve fund:
The authorized capital of the Bank is 2,000.00 million. Total shareholders equity at the
end of December 2005 stood at 1,726.14 million. The capital and reserve of the Bank as
on December 2005 stood at 916.14 million and paid up capital of 810.000 million. The
Bank also made provision on unclassified investment which is amounted to 10,236.82
million.
3. Investment
The total investment of the Bank stood at Tk. 4,540,550,760 as on 31-12-2005 as against
Tk. 2,252,964,460 in the previous year showing an increase of Tk. 22,875,863 with
growth rate of 100%. Investment is the core asset of a Bank. The bank gives emphasis to
acquire quality asset and does appropriate lending risk analysis while approving
commercial and trade investment to clients.
4. Advance
The Banks Loans &Advances portfolio also indicates an impressive growth. Total loans
and advances amounted to Tk. 12,000.15 million in 2004 as against Tk. 15,339.35 million
in 2004 and the growth is 27.08%. This is due to increased commercial and trade
financing, term lending and working capital support. The classified loan position is
almost nil. This was achieved by rendering due attention and monitoring high-risk
advances. The Bank is trying to operate its credit activities with the target of achieving
Zero classified loans. The sectors financed include manufacturing, trading, construction,
transport, agriculture, fishing & forestry, edible oil, pharmaceutical, information
technology, consumer credit amongst others.
5. Dividend
As per Article number 130 the Memorandum and Articles of Association of Bank, unless
otherwise decided by the shareholders at least fifty percent (50%) of the net profit (after
tax)
to be reinvested in the capital of the company and to that extend bonus shares to be
issued to the shareholders in lieu of cash divided. Also in maintaining the competitive
edge and creating a strong financial base the Board of directors with a view to improving
its equity by issuing bonus shares to its existing shareholders and accordingly, is pleased
to propose to its sole shareholders, the Ministry of Finance, subject to approval of the
Annual General Meeting, one bonus share against each 5 shares General Meeting, one
bonus share against each 5 shares amounting to Tk. 162.00 million and 6.25% cash
dividend amounting to Tk. 50.63 million.
6. Foreign Exchange Business
27
International Trade constitutes the main stream of business activities of BASIC Bank. It
offers a full range of trade financial services namely, Issue, Advice and Confirmation of
Documentary credit; arranging forward exchange coverage; Pre-shipment and Postshipment finance; Negotiation and Purchase of Export Bills; Discounting bill of
Exchange; collection of bills, and outward remittance etc.
Import Business
In 2005 the Bank opened 14,094.96 million import letter of credit and the import volume
stood at Tk. 12,508 million with a growth of 12.00% in comparison with previous year.
Export Business
The growth of the export business has significantly been increased by40%. It stood at Tk.
11,097.23 million as on December 31, 2005 against Tk. 7,908.00 million of the previous
year.
Foreign Correspondents
BASIC Bank has correspondent Banking relationships with over 78 Banks spread across
68 countries to facilitate trade and payment related services. So far the Banks total
correspondents are 180. The Bank has maintained relationship with leading international
Banks and has successfully established credit lines with major Banks to support global
Foreign Trade Business.
The Bank has earned an operating profit (after tax) of Tk. 285,494,793 during 2005 after
all provisions including the 1% General Provision on unclassified Loans Advances.
Provision for Income tax for the year amounted to Tk. 342,943,664 resulting in a net
profit, after tax, of Tk. 285,494,793.
28
2005
2004
2,000.00
810.00
9,116.14
1,726.14
135.00
27,136.37
22,325.58
937.51
15,339.35
10,236.82
2,000.00
675.00
816.23
1,491.23
101.41
19,436.57
15,509.18
839.61
12,000.15
6,098.51
2,228.21
1,599.77
628.44
285.49
1,777.70
1,758.85
1,241.63
527.22
291.48
1,434.76
14,094.96
11,097.23
12,508.00
7,908.00
11.66
10.36
58.01
69.74
114.56
1.23
12.81
214.56
17.75
67.00
12.49
10.47
50.36
77.37
116.70
1.70
16.48
205.07
21.27
62.21
29
601
29
601
29
saying that fustom service starts right from the stairs of the Bank building. The guard at
the door is the first person represents the Bank, receives a customer with wishes in
smiling face.
There are mainly three divisions in this Branch. The General Banking Division deals the
day-to-day transactions. The loan and advance division gives advance to the customer a
monitor whether he repays regularly or not. The Foreign Exchange Division is the highest
earning division among all the three division that deals their operations by two sub
departments Export (EXP) and (IMP).
Assistant Manager
Officer
Assistant Officer
CHAPTER- FOUR
30
Part-(i)
Introduction
BASIC Bank Limited is a new generation Bank. It is committed to provide high quality
financial services/products to contribute to the growth of G.D.P of the country through
31
32
33
Banks whose overall CAMELS rating is toward the low, riskier end of the numerical
scale- an overall rating of 4 to 5- are examined more frequently than the highest rated
banks, whose ratings of 1,2, or 3.
Credit Policy:
Credit is a promise of future payment in kind or in money given in exchange for present
money, goods, or services.
Or,
In general credit means the granting of a period of time by a creditor to a debtor at the
expiration of which the latter must pay the debt due.
The credit policy of any banking institution is a combination of certain accepted time
tested standards, and some other dynamic factors determined by the realities of varying
and changing situations in the market place. The accepted standards relate to the aspects
of security and liquidity whereas the dynamic factors relate to such other aspects as the
nature of risk, interest margins, credit concentration, credit dispersal, and banks own
capabilities.
It is, therefore, necessary that the credit policy be kept under constant review by the Head
office Credit committee that is responsible for evolving and recommending a sound,
healthy and realistic credit policy and its due implementation.
As is true for any other institution, BASIC may have certain unique characteristic relating
to its operations, such as its age, and geographical concentration. These unique features
may require certain amount of flexibility in the credit policy, but as a rule, the general
standards of security and liquidity should not be allowed to be impaired and the
operations must be carried out in strict conformity with local laws and supervisory
requirements as stipulated. Credit policy lays down the basic principal and broad
parameters of the lending operations.
The key to a sound, healthy and profitable credit operation, however, lies in the quality
of judgment and sense of proportion of the officers making lending decisions, and their
knowledge of the borrowers and the market place. The following pages contain only a
statement of the basic principles of BASICs credit policy. Reference may be made to the
following other documents existing for the operation and administration aspects of
management of the credit function:
34
35
international trade \ shipping of goods). This category to include working capital to hotel
and tourism
(b) Facilities to shipping and transport (facilities for the purchase and construction of
ship / vessels and other modes of transport both by land and air)
10. Spreads over cost of funds on loans and advances and commissions and fees on other
transactions should be commensurate with the rating of the borrower, quality or risk and
the prevailing market conditions.
11. Credit risk evaluation will include an accurate appraisal of risk in any credit exposure
is highly subjective matter involving quantitative and qualitative judgments. The financial
statements of the borrower do not always provide a complete picture of the borrower.
Therefore the bank has to use all financial data available and combine this with a number
of qualitative factors analyzing the borrowers financial position.
36
The Government of Bangladesh has incorporated several changes in its Industrial policy
2005. Lets have a look of the major changes made in redefining small, medium and large
industries as under:
Scale of Industry
Criteria
Small
Medium
Large
Due to this radical change, BASIC Bank also had to amend its Articles of Association
regarding finance. In line with the governments intention, amendment has been made by
replacing Small & Cottage industry sector with Small & medium industry sector.
So, now BASIC is entitled to finance a small scale industry as well as medium scale
industry.
BASIC Bank offers following credit facilities:
a.
b.
Full-fledged commercial banking service including short term trade finance,
working capital finance in processing and manufacturing units and financing and
facilitating international trade.
c.
Industrial credit:
The main concern of the basic bank is industrial/manufacturing loan. The industrial loan
reflected a significant growth of 29.85% over the previous year. Total outstanding
industrial loans including term and working capital stood at Taka 9,987.50 million at the
end of 2005 compared to Taka 7,691.20 million of 2004. BASIC Banks services are
specially directed towards promotion and development of small & medium industries. Its
exposure to small industries sector accounted for 51.70 percent of the total loans and
advances. During the year total of 175 projects were sanctioned term loan. Out of which
109 were new and the rest were under BMRE (Balancing Modernization, Revamping and
Expansion) of the existing projects.
37
The textile sector including garments being one of the major contributors to national
economy dominated the loan portfolio of the Bank. Other sectors financed include
engineering, food and allied industries, chemicals, pharmaceuticals and allied industries,
paper, board, printing and packaging, glass, ceramic and other non-metallic goods , jute
yarn and jute products. Recovery rate of project loan was 89 percent.
Loan Portfolio
338.3
9,987.50
5,013.55
Commercial Credit
M icro Credit
Industrial
b. Commercial Credit
The Bank also supports development of trade, business and other commercial activities in
the country. It covers the full variety of services to the exporters and importers extending
various facilities such as cash credit, LTR, LIM, packing credit, short term loans, local
bills purchase and foreign bills purchase facilities. As on December 31 2005, total
outstanding commercial loans stood at Taka 5,013.55 million compared to Taka 4,024.70
million Crore in 2004.
c. Micro Credit:
BASIC Bank launched a Micro Credit Scheme in 1994. Micro Credit Scheme provides
for the poor for generation of employment and income on a sustainable basis particularly
in urban and suburban areas. At the end of 2005,total amount of Tk. 338.30 million
remained outstanding as against Tk. 284.10 million in 2004.Recovery rate during this
period remained at a satisfactory level of 100.00 percent.
Perhaps we have got the essence of the credit portfolio of BASIC bank .Now we may go
to the topic: Funded and non funded Credit facilities.
38
Funded facilities are the credit facilities where bank has to outlay cash. non-funded
facilities are those in which bank has not to put in any cash, rather than merely giving a
commitment or promise to pay.
Funded facilities:
Term Loan:
Term loan is allowed for procuring fixed assets of the project; hence term loan can be
said as project loan also. Right now BASIC Bank is in practice to finance term loan @
49:51 debt-equity ratio. But, this is not hard and fast rule. There are occasions that bank
finances @ 60:40, 70:30 or 80:20. But for new project, if the debt portion is less than the
equity portion, that is well and good practice. Generally bank doesnt finance land, land
development and civil construction. Generally Bank shows more interest to finance a
portion /full value of capital machinery.
Term loan is secured by registered mortgage of immovable property i.e. land, building,
hypothecation of machinery. Term loan is generally disbursed once (or several times in
special cases). Repayment of term loan is generally made into some installments.
Generally grace period is allowed before commencement of installment. Generally 6
months grace period is allowed. But it may be more or less depending on the tenure of
construction period, nature of industry and obviously on cash in flow of the project.
In BASIC Bank monthly repayment installment is common practice for term loan.
Followings are the type of Term loan:
Short term loan
Mid Term Loan
Long Term Loan
Short term loan: The tenure of Short term loan is one year. Generally short term loan is
allowed to an existing project for procuring additional equipment/machinery where cash
in flow is adequate to repay the loan within a year.
Mid term loan: The tenure of mid term loan is greater than one year up to 3 years.
Generally Mid term loan is allowed where the bank thinks the project has a higher rate of
return (IRR).
Long term Loan: Long term loan is allowed for 5 years. Most of the cases we sanction
this sort of term loan. For a new project where substantial capital machinery is to be
financed by a bank and IRR is not too much high to repay the loan within less than 5
years.
So, we must do financial analysis i.e. to calculate financial parameter like NPV, IRR and
pay back period. In this regard cash flow statement should be observed very
meticulously.
Working Capital:
39
Working capital is needed by a concern for its current operational purposes. It is regarded
as life blood of the concern. The banker needs to assess the working capital requirement
in prudent and positive way. Several factors to be considered while assessing the working
capital requirement of a concern like operating cycle, manufacturing cycle, operating
efficiency, market credit policies, competition in market, growth and expansion, price
hike etc.
Forms of working capital finance:
Secured Over Draft(SOD)
Cash Credit(Hypothecation)
Cash Credit(Pledge)
Loan General
Secured Over Draft (SOD):
This is an over draft facility secured by encashable securities like FDR, Government
Bond, wage earner bond etc. It represents permission to overdraw in current account upto
a sanctioned limit. The loan is allowed keeping some margin, generally 5%. Sometimes,
overdraft is allowed without any security for a very short period to meet the exigency of
the trusted client with high standing and integrity. Bankers must ensure proper turnover in
an overdraft limit account.
Cash Credit
Like overdraft credit it is a continuous loan which is usually sanctioned for 6 months/one
year, which is further renewable as per requirement of the borrower. After assessing the
working capital requirement and keeping proper margin (say 30%), a limit is sanctioned
and the borrower use to do withdrawal and deposit in the account provided that the
outstanding is within the sanctioned limit.
Two types of Cash Credit are discussed below:
Cash Credit (Hypothecation):
When cash credit facility is sanction under hypothecation of stock of goods it is called as
CC (Hypo). In the case of hypothecation, the stock remains under the possession and
ownership of the borrower. Only the right belongs to the bank through creating charge of
hypothecation. In case of CC (H) the client has to submit stock report regularly which is
to be verified by the bankers time to time. As the nature of security is movable type,
bankers are encouraged to take collateral security in case of hypothecation. In BASIC
Bank hypothecation is more preferable practice than pledge.
Cash Credit (Pledge):
In case of Cash Credit (Pledge), only the ownership belongs to the borrower. The
possession, control and right remain with bank. The nature of operation in CC (Pledge)
account is different than that of CC (H). CC (Pledge) is not a common practice in BASIC
Bank. In fact CC (P) is more preferable in case of commercial trading rather than
industrial project.
40
Loan General:
In nature Loan general facility is like term loan. But, the purpose of this loan is meeting
requirement of working capital. It is generally given for 1-year period. Repayment is
made in installment basis or lump sum basis. The loan general facility some time may be
called as short-term loan.
International Trade Finance
International Trade dealings are one of the major business activities undertaken by
BASIC Bank Ltd. To facilitate international trade transactions, it has arranged
correspondent relationship with large number of international banks, which are active
across the globe. The Bank with its worldwide correspondent network and close
relationships with key financial institutions provides an extensive trade services network
to handle transactions efficiently.. BASIC offers following trade finances:
Issuing, advising and confirming of Documentary Credits.
Pre-shipment and post-shipment finance.
Negotiation and purchase of Export Bills.
Discounting of Bills of Exchange.
Collection of Bills.
Import finance:
Loan is given to the importer to provide liquidity for buying imported items. Each loan
must be related to one specific import transaction and the term of the financing can vary
depending on the type of products imported on the needs of the importer.
BASIC Bank extends finance to the importers in the form of:
1. Opening of Import L/C
2. Payment against document(PAD)
3. Loan against Imported Merchandise (LIM)
4. Loan against Trust Receipt for retirement of import bills. (LTR)
5. Short term, medium term & Long term loans for installation of imported
machineries & production thereof.
Payment against document (PAD):
After establishing the Letter of Credit, the bank is bound to honor its commitment to pa
for import bills when these are presented for payment. The foreign correspondent, who
negotiates the documents, gets payment as per stipulated reimbursement terms of the L/C
to the debit of the account of L/C opening bank s F.C. account .The opening bank lodges
the shipping documents in their books and responds debit advice originated by foreign
correspondent to the debit of payment against document (PAD) account. In fact, the
amount stands as advance to the importer which is adjusted by delivery of documents
41
against cash payment or by allowing post import finance such as LIM, LTR or even by
term loan /Loan general (if sanction is made so).
Loan against Imported Merchandise (LIM):
Loan against Imported Merchandise (LIM) is allowed against imported merchandise
storing the same in banks custody. There may be an existence of agreement or the party
may propose to the bank for having LIM facilities after arriving the goods in the port. The
merchandise is cleared by the bank through its approved clearing agent. . If the party
doesn't have any godown facilities or he has the shortage of money to clear the goods
from the port, then he wants bank loan. The advance is adjusted by delivering the goods
against payment by the importer. The documents remain with the bank. LIM facilities are
usually allowed for 90 days for each case. It may vary depending on the marketability of
the goods. A party may have LIM limit for one year but each LIM must have to be
adjusted within the specific expiry date of that particular LIM.
Loan against Trust Receipt for retirement of import bills. (LTR)
Depending on the relationship with the client, he may ask for LTR facilities instead of
LIM. Party has to submit proper securities. Documents are given to the party to retire
goods from the port on good faith. After selling the goods to the market the party adjust
the LTR alongwith the interest. It is a form of short-term loan. LTR facilities are usually
allowed for 90 days for each case. For trading purpose the tenure may be shorter like 60
days. Each LTR must have to be adjusted within the specific expiry date of that particular
LTR.
Export Finance:
Preshipment finance
Loan given by BASIC Bank to the exporter to provide liquidity for buying or processing
Goods to be exported.
Pre-Shipment finance in the form of:
Back-to-Back L/C
Packing credit (PC)
42
Post-shipment Finance:
Loan provided to the exporters against their export receivables.
Post-shipment finance in the form of:
Foreign bills purchase (FBP)/ Local Bill Purchase (LBP)
Loan Against Foreign /Local Bill
Finance against cash incentive
The Foreign /Local Bills Purchased or
Discounted is a facility granted by the bank to its customer whereby the bank purchases
or discounts the customers sight export documents.
Foreign bills purchase (FBP)/ Local Bill Purchase (LBP):
Note: above two are not at all credit facilities and there is no obligation for the bank to
pay to the exporter until funds are received.
Micro Credit:
BASIC Bank works closely with its clients (NGO) by following ways:
43
Besides there are other funded facilities of BASIC Bank towards its employee:
Staff Loan:
Non-Funded facility:
Letter of guarantee:
A letter of guarantee is a written promise issued by the Bank to compensate (pay a sum of
money) to the beneficiary (third party, local or foreign) in the event that the obligor
(customer) fails to honor its obligations in accordance with the terms and conditions of
the guarantee/agreement/contract. This is issued by the Bank at the request of contractors,
wholesalers, companies involved in transaction, etc. for the purpose of handling the
guarantee request they receive in their operation.
Types of Bank Guarantee:
Bank Guarantee- is an irrevocable obligation in the form of written undertaking of a Bank
to pay an agreed sum, in case of default by a third party in fulfilling their obligations
under the terms of the Bank Guarantee.
Types of Bank Guarantee:
According to the very purpose of issuance of guarantee, Bank Guarantee can be classified
in following ways:
Bid Bond
Shipping Guarantee
44
Retention Guarantee
1) Bid Bond:
Bid bond or tender guarantee is a surety bond issued by the Bank upon the request by the
bidder/tenderer expressing the Bank's commitment to meeting the claim of the
beneficiary (the party who invites tender) in case the bidder withdraws from the bid
during the bid period or fails to accept the award when he/she becomes a winner.
2) Performance Bond /Guarantee:
Performance bond is an undertaking issued by the Bank in favor of a buyer/employer
(The beneficiary) at the request of a supplier /service provider, whereby the bank
undertakes to make payment to the beneficiary in the event of default by the principal
(supplier /service provider) in due performance of the terms of the contract .
3) Advance Payment Guarantee
This is issued by the Bank in favor of a buyer (who makes the advance) and at the request
of the seller/contractor ( who receives the advance), representing the Bank's commitment
to repay the sum in the event that the seller/contractor fails to honor the contract terms in
their entirety or in part.
4) Shipping Guarantee:
A type of BG which is needed to move goods out of the port in case of missing B/L
consignment. These guarantees are issued by the Bank at the request of the buyer in favor
of a carrier in circumstances where the bill of lading is missing/ delayed but the
goods/cargo arrives earlier.
5) Customs duty guarantee
These guarantees are issued by the Bank to meet the requests of the beneficiary (Customs
Authority) in respect of customs duties in circumstances where the goods /machinery are
imported without payment of customs duties in various cases such as pending test report,
duty free export oriented capital machinery etc.
6) Suppliers' Credit Guarantee
Such guarantee is issued by the Bank to meet any claims to be made by the local or
foreign supplier (beneficiary) in case the debtor (local buyer) fails to repay in accordance
with the terms and conditions of the contract.
7) Retention Guarantee
A guarantee issued at the request of contractor to secure repayment of the retention money
held by the employer during different phases of the project, when the project is finalized
(at the time of provisional delivery).
45
Securities:
o
Cash margin
FDR
BASIC always do prefer to keep 100% cash margin. If not possible, then the bank
even issues B/G @ 10% margin or nil margin at the request of its regular and valued
clients (those who are availing composite facilities) .
But BASIC has to keep in mind that, if 100% margin (cash /FDR) cant be kept as
security, then adequate collateral security should be ensured.
There is another trend to keep FDR as margin against bank guarantee which is
preferable by customer.
Commission/Handling charge of Bank Guarantee:
As per circular # BASIC/HO/GEN/2002/16 Dt. July 01, 2002:
Nature of transaction
Issuance of guarantee in local currency
against margin less than 100%
Against 100% cash margin
Shipping guarantee against L/C in absence of
original import document
Shipping guarantee against BB L/C in
absence of original import documen
t
Charges
0.50% per quarter or part thereof
minimum Tk. 500/=
No commission, only handling
charge Tk. 250/=
Tk. 500/= flat
Tk. 500/= flat
46
Amount
Any Amount
>=50%
Cash Tk. 50 Lac
Margin but <100%
>=20%
Cash Tk. 20 Lac
Margin but <50%
Sanctioning authority
GM, BranchIn Charges (Minimum
Manager Rank)
GM
GM
GM
Amount of BG
Any amount
Letter of Indemnity:
Indemnity means security against or compensation for loss or damage. As defined in sec#
124 of the Contract Act, the contract of indemnity is a contract by which one party
promises to save the other from loss caused to him by the conduct of the promissory
himself, or conduct of any other person
In another language the letter of Indemnity can be defined as below:
An agreement whereby one party agrees to secure another against an anticipated loss or
damage.
Letter of Credit - A letter of credit is a document issued by a bank stating its commitment
to pay someone (supplier/exporter/seller) a stated amount of money on behalf of a buyer
(importer) so long as the seller meets very specific terms and conditions. Letters of credit
are more formally called documentary letters of credit because the banks handling the
transaction deal in documents as opposed to goods.
Letters of credit are the most common method of making international payments, because
the risks of the transaction are shared by both the buyer and the supplier.
Documentary letters of credit are subject to the Uniform Customs and Practice for
Documentary Credits (UCPDC), Brochure No. 500, of the International Chamber of
Commerce (ICC) in Paris.
47
48
Part-(iii)
Selection of Borrower, Preparation of credit reports, Processing of credit proposal:
In the affair of bank credit, nothing is more significant than the character and
responsibilities of the borrower. Practical bankers, and theoreticians alike, suggest that
the safest and the most dependable security that could be obtained are the integrity and
business-like dealings of the customers.
The integrity and reliability of the borrower:
To be safe advance should be granted to a reliable and honest borrower, who has the
capacity to conduct his business. The study of a borrower involves the study of the three
Cs of the party, i.e. his Character, Capacity and Capital or, in other words, his
Reliability, Responsibility and Resourcefulness.
Character: It denotes integrity of the borrower, i.e. he or she should have willingness to
repay the money borrowed.
Capacity: It means the ability to employ the funds profitably and repay the advance
according to the terms and conditions of the sanction.
Capital: It denotes financial soundness.
Sources of Credit Information:
The bankers have to collect information from different sources about a prospective
borrower to assess creditworthiness. In 1992, Bangladesh Bank established a full-fledged
Credit Information Bureau (CIB) with a view to strengthen credit discipline and
streaming all sorts of data relating to loans and advances of borrower.
As a matter of policy, all scheduled banks are required to submit data on quarterly basis
and other financial institutions on half-yearly basis on each borrower having outstanding
credit facility of Tk.1.00 lac and above to Bangladesh Bank on a specially designed form
(CIB 01). In addition, Bangladesh Bank also collects information from the scheduled
borrowers having outstanding of Tk. 1.00 crore and above on monthly basis. The
information so far collected by CIB are:
i) Debtors / Borrowers Information (Segment-1)
ii) Owners Information (Segment-2)
iii) Group/Affiliations Information (Segment-3)
iv) Credit/Exposure Matrix or Financial Information (Segment-4)
v) Third Party Guarantors Information (Segment-5)
CIB is also collecting data relating to the CRR (Credit Risk Rating), Financial Scores,
viz. Y-Score and Z-Score from the sche3duled banks. This information will ultimately be
tetrieved to the scheduled banks in order to provide more helpful tools to them to decide
issues regarding sanction of loan more promptly and smoothly.
Bankers of course, have their own ways to collect information about the prospective
borrower from the following sources to assess their judgement before proposal for any
credit facility is taken into consideration:
49
1. Loan Application: A banker first studies the loan application made by the borrower.
2. Market reports: Reports can be obtained from various markets, particularly, from
businesspersons carrying on the same trade as the borrower does, some of whom may be
his friends, others his rivals or enemies.
3. Study of account: If the borrower is the customer of the bank, a study of the
borrowers account and his or her past dealings will throw light about his or her financial
position, character, and capacity to do business.
4. Financial statement etc.: Financial statements are indicators of two significant
factors i) Profitability and ii) financial soundness. The borrower should be requested to
supply the latest statement about his or her assets and liabilities.
5. Other sources: Other sources of information about the borrower include press reports
regarding purchase and sale of property, auctions and decrees, registration, revenue and
municipal records etc.
6. Personal Interview: The banker should be able to know from the interview the
customers specific requirements, the prospects of his employing the funds prudently, his
capacity to repay and the suitability of the security offered, if any.
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Part- (iv)
Security: Selection, Valuation , Control & Charges on Securities
Security:
When Banker ordinarily takes as things assets, goods, valuables, financial papers, any
surety, guarantee, against the risk of lending is called security. Security fortifies or makes
secure a persons under taking, particularly to pay or repay money.
An element of risk is always present in every advances, in whatever degree a banker
knew his customer personally and intimately, in whatever degree he has the confidence in
the integrity and honesty of a customer. Though a banker always lay stress on the
integrity and honesty of the customer and on the genuinity of the purpose for which the
borrower needs money, but till today securities continues to be one of the most important
factors that determines to a significant extent the bankers willingness to lend money.
Types of security:
Security
Personal
Tangible
Primary
Collateral
Direct
Indirect
Personal Security:
51
Security by which a borrower is personally made liable to repay the loans and advances.
Demand Promissory Note, Personal Guarantee, Bill of Exchange etc. Guarantee by the
third party for repayment of loan in case of demand by the original borrower is also
consider as personal security. Bakers obtain the right of taking action against the
borrower personally by taking personal security.
Tangible Security:
Tangible asset like stock of goods, Bonds, deposits receipts, bill of lading, bills
receivables, warehouse receipts, real state, shares, assignable insurance policies etc. are
taken as security against lending. When debts are not repaid by the borrower, the
outstandings are realised by sale or transfer of the tangible assets.
Tangible security sometimes called as Real Security. Tangible security is divided into
two parts. They are primary and collateral security
Primary Security:
The security, which is deposited by the borrower himself against lendings, is called
Primary Security. Stock in trade, industry plants, land and building, bills receivables,
deposits receipts, shares etc that are deposited by the borrower shall be treated as primary
security.
Collateral Security:
Additional, subsidiary or secondary security in addition to primary security is called
collateral security. Collateral Security runs parallel to or side by side with the primary
security. In case of default by the borrower to repay the loan, and when loan amount cant
be realized in full/ partially by selling primary security, the amount / or rest of the loan
amount are realized by selling the collateral securities.
52
Collateral security obtained from the borrower himself to secure his own account is
known as Direct Collateral Security.
Collateral Security given by the third party/ person to secure a customers loan account is
called Indirect Collateral Security.
Categories of Collateral Security
The most significant categories of securities lodged as cover of loans are:
Real State
Deposit Receipts
Bills Receivables
Share and Securities
Life insurance Policies
Documents of title of goods
Goods and Commodities
Gold and Gold Ornaments
In our country, collateral security is usually taken against trade finance (hypothecation of
stock) which is considered as weak security.
Collateral Security is not a must and in all loan cases the Collateral Security are not
insisted upon. In loan cases where bank feels that loan amount cant be realized in full by
selling the Primary Security, the collateral security is asked for.
Where the credit risk is high, a protective device is the pledge of specific collateral does
not eliminate the credit risk fully, but it provides the additional resource to the pledge
property and the status of secured creditor ship in the event of default. Collateral free
53
loans are justifies on the basis of high credit ratings only included by reliable financial
statements.
Collateral Security serves two purposes for a lending bank; first, if the borrower cant or
doesnt repay loan and cant be realized by selling the primary security, collateral gives
the right to the lender to seize or sell those property to cover the amount of unrealized
portion of loan. Secondly, Collateral security gives the lender a psychological advantage
over the borrower. The borrower in this situation feels more obliged to work hard to
repay the loan to avoid loosing valuable assets.
Selection of Security
To be a good security, it should fulfill certain requirements. Before selection of security,
There must be a critical appraisal of the same. Before selection of a security, a banker
should check the legal side regarding the validity and enforceability and secondly
marketability, durability, price, etc of the security.
A tangible security should possess the following attributes for selection of the same
against lending:
Margin/ Equity:
54
Hardly any security posses all the above-mentioned attributes, there is always exist the
risk of deterioration of the value of the security. So bankers must keep a cushion against
possible fluctuation of prices, shortage and depreciation in storing, for increasing of loan
amount due to application of interest and other charges.
Valuation of Security
Valuation of the securities is important since the loan amount or withdrawal limit is
fixed / considered on the basis of the value of securities less stipulated margin/equity.
Methods of valuation of different categories of securities should be different based on the
market value, invoice value and controlled value.
Government securities, shares and debenture: Prices is to be ascertained from
market quotations- where the price of a particular share suffers from wide fluctuation,
the value of its should be fixed slightly lower then the market value. Higher margin
should be kept.
Seasonal Commodities:
Current market price or controlled prices, whichever
is lower.
55
Control of Security:
Insurance of Goods:
56
Insurance may be defined as a contract of indemnity. Bank generally deals with the
moveable and immovable securities and securities are insured against risks they bear. For
insurance of goods, bank generally obtains insurance covering the risk of fire, thief/
burglary, RSD, flood/cyclone, tidal bore/earthquake.
For security of the goods carried by sea marine insurance is taken. So mainly the
insurance policy are taken for
Valuation:
Title:
-
Easy to value
Amount of advance should be less then the value of the security
Force sale value in distress situation
Whether saleable easily/ timely
Tendency of rising / declining of value of the item
Possible fluctuation of value
57
Bank must have a security interest in the securities / collateral and have the
legal rights to get possession of the securities and the to sell the securities.
- The title has not been transferred / assigned to other earlier/ not charged
against some earlier debts or debt to other.
Control:
- Easy to keep control by the lender
- Easy to know experience, location and value to keep proper control/
constant watch.
- Hypothecated / pledged goods to properly maintained and keep to fully
insured against possible risks.
Marketability:
- Easily marketable or realizable
- Marketable under adverse circumstances and with minimum experiences.
- Not perishable in short time / within the life period of credit.
Charges on Securities:
Banks lend money to the borrower for an agreed period of time. The borrower repays the
loan with interest. Borrowers borrow, but sometimes do not repay the loan and interest.
Bank therefore wants protection. They want security an interest in the borrowers
asset giving preferential status or default or insolvency. Usually security means a charge
created over asset(s) held by the business vis--vis sponsor (s) to guarantee fulfillment of
an obligation especially the assurance that the debtor will repay (usually with interest) the
money or credit intended to him.
Charge means right of payment out of certain property. In a charge there is no transfer of
interest or property. It is a transaction as a result of which the lender acquires certain
rights over the property and the borrower is refrained from dealing in them. In a charge
there must be a notice to the subsequent transferees, otherwise the charge is not effective
as to the subsequent transferees.
58
Fixed charge:
A charge is said to be fixed if it is made especially to cover definite and ascertained asset
of a permanent nature or asset capable of being ascertained and defined, e.g. charges on
land and building or heavy machinery. It prevents the loanee from dealing with the
property charged without consent of the charge holder.
Floating charge:
It is a charge on the property, which is constantly charging e.g. stock. A company can deal
with such property in normal course of its business until it become fixed on the
happening of an event. Thus, it is a charge on the assets of a company in general.
The Other classification of charges are:
Pari Passu Charge:
Pari passu charge is created in favour of several creditors, with the condition that they
have equal priority. It is generally created in case of consortium accounts.
Second charge:
A creditor holding a second charge by way of mortgage, is entitled to the proceeds after
the first charge is met. He must inform to the prior mortgagee of his charge because the
first mortgagee cant part with the proceeds or title of the property if he has notice of the
second charge.
59
Pledge: According to section 172 of contract act 1872 when goods are handed
over to the lending bank by the trader / manufacturer who borrow against those
goods and produces for short term i,e for working capital, will be treated as
pledge. Pledge is the bailment of goods as security for payment of a debt or
performance or promise. Here, title and ownership are not transferred. Pledge
good may be sold out and proceed thereof may be appreciated towards the
adjustment of liability in case of future of the borrower to repay or fulfill the
terms and conditions.
Hypothecation: Hypothecation is a charge on a property for debt but neither
possession nor ownership passes to the creditor. This facility is granted by banks
normally to the first class parties. Hypothecation good cant be sold out / disposed
off without notice and courts order. However, if a special power of attorney is
taken in that case can be disposed off without going to the court.
Lien: lien is the right to possession and no right of ownership. Banks lien is
general lien over its own financial obligation to client. Property under lien cant
be sold without notice to the owner and sometimes without courts order.
Right of set off: The right of set off is the right of a creditor to the total or partial
merging of a claim against the counter claim of the debtor. Banker should give
reasonable notice to the customer of its intention to exercise its right of set off
otherwise it may face troubles.
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Part-(v)
Documentation: Importance, execution, and safe-keeping
Document is the acknowledgement of the parties concerned and their involvement in the
credit/transaction. It is the acknowledgement of the debt and confirmation to repay from
the part of a borrower/mortgager/owner of the security to be liable in the court of law and
can be enforced the court of law.
Documentation-Definition and importance: The whole process of completion of the
documents to secure the credit is called documentation. It is necessary for
acknowledgement of debt by the borrower/grantor/mortgagor and for charging of
securities in favor of the bank by them. Documentation must be proper and correct for the
safety of a credit. Proper document is essential to safeguard Banks interest. It is made
covering its all legal aspects.
Documentation may be described as the process or technique of obtaining the relevant
documents. A banker must obtain proper documents executed from the borrower to
protect himself against willful default. Moreover, when money is lent against security of
some assets, the document must be got executed in order to give to the banker a legal and
binding charge against those assets. Documents contain the precise terms of granting
loans and advances and they serve as important evidence in law of courts if the
circumstance so require. It is therefore absolutely necessary for a banker to obtain proper
documents from the borrower while granting a loan or advance to him.
Execution of Documentation
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Documents for Advances: Documents for advances can broadly be classified into the two
categories:
1) Charge documents
2) Security Documents
Charge documents: Charge documents are generally prescribed printed forms used by
the bank against credit to be executed by the borrower/party concerned. They are:
1) Demand promissory note (DP note)
a. DP note (ADV - F 25)
b. DP note (ADV - F 26)
c. DP note (ADV - F 27)
d. Joint DP note
2) DP note delivery letter
3) Letter of arrangement
4) Letter on continuity
5) Revival letter I
6) Revival letter II
7) Letter of guarantee
8) Letter of Hypothecation of goods
9) Letter of Hypothecation of machinery
10) Letter of Hypothecation of bills
11) Letter of Hypothecation of debt assets
12) Letter of pledge goods
13) Letter of lien 1st party
14) Letter of lien - 3rd party
15) Letter of counter guarantee.
16) Letter of trust receipt
17) Letter of ownership
18) Memorandum of deposit of title deeds
19) Disbursement letter
20) Letter of disclaimer
21) Letter of undertaking and declaration with other bank liability
Branch should obtain initially two sets of charge documents. One set is to be duly filled
in signed, stamped and witness. Before every renewal / enhancement / or reschedule of
loan, Branch should obtain another set of charge document.
Documents required for various types of facilities/constitutes are as under:
62
11)
12)
13)
14)
15)
Original title deed (S) With chain of documents (All bhaya deed)
CS (Cradastal survey) parchas (1909-1922)
SA (State acquisition) Parcha (1955-1962)
RS (Revised survey of SA) parcha (1969-1978)
Mohanagar Jarip Parcha
Non-encumbrance certificate from SRO
Mutation parchas with DCR
Upto date khajna/ rent receipt
Upto date municipal tax receipt, gas and WASA bill
In case of lease hold property NOC should be obtained from the
RAJUK/KDA/CDA/Cantonment board/Ministry or the concerned authority for
creation of mortgage in Banks favour.
In case of vacant land, certificate from the RAJUK/KDA/CDA/Cantonment
board/Ministry of works or the concerned authority to the effect that the land is free
from acquisition plan to be obtained. (Bank shall also not accept any vacant land
against loan as security without HO approval)
All Mauza map (if necessary)
Court order of case and degree (if necessary)
Location/site map
Approval plan for construction for the RAJUK/KDA/CDA/Cantonment board or
concerned authority (if necessary)
After receiving above documents from the borrower and land owner, bank authority must
obtain lawyer certificate/opinion regarding clean title from banks lawyer or legal advisor
over the land to be mortgaged.
Then bankers execute the following documents:
1. Letter of acceptance of terms of loan
2. Registered deed of mortgage (drafted by banks lawyer and registered from SRO)
3. Registered deed of power of attorney to sell the property as per law of Artha Rin
Adalat 2003 (drafted by banks lawyer and registered from SRO)
4. Memorandum of deposit title deed
5. Affidavit (In the court of magistrate first class) to be obtained
6. Valuation certificate from enlisted surveyor (Bank approved) as well as inspection
report submitted by banks official as per circular no HO/ADV/98/18 dated
September 22, 1998.
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b. Letter of guarantee
c. Revival letter II in addition to revival letter I
d. 2 copies photographs of the 3rd party land owner offering the security
should be obtained after due attestation by well known persons.
NB. Property offered as security must be thoroughly investigated for the legal point.
Packing Credit
1)
Usual charge documents
2)
Lien over export L/C
3)
Disbursement request
4)
Hypothecation of stock of goods
5)
Letter of packing credit
LBP
1)
2)
3)
4)
5)
6)
Letter of credit
1)
Request letter
2)
Usual charge documents
3)
Letter of guarantee for opening L/C
4)
Hypothecation of import of goods
5)
Marine insurance policy
65
4)
5)
6)
6)
Letter of undertaken
Precautions:
A banker should take the following precautions while getting the various documents
executed from the borrower in order to ensure safety of his funds:
1)
All the documents / papers / title deeds should be searched through DC office
record room, registry office, Tahsil office and AC land office as required by banks
legal adviser/ retainer and have to be attested or verified as it being correct and
genuine.
2)
The money should be advance only when the borrower has duly filled in all the
required documents and completion of all legal formalities
3)
4)
Documents are invariable singed by the borrower in the presence of a bank officer
5)
Documents should be obtained on the banks standard forms. The date on the
promissory note and the date on other documents should be the same
6)
7)
The documents should be renewed well in advance of the limitation dates. The
period of limitation is three years after which the debts will become time barred
8)
9)
10)
If there are two or more pages/sheets in a documents each page /sheet should be got
signed at the bottom from all the executants in addition to the signature at the end
of the documents.
11)
Bank to be obtained the following documents every year from the borrower
12)
Original deeds, stitched at the corner, along with charge documents must be kept in the
vault in separate plastic files according to the location of the properties. These files must
bear file number, quantity of land, name of the owner of land, and name of the borrower
written on their cover. All these files names must be registered in the safe in safe out
register orderly and singed with Advance-in-charge and Branch in charge. Every plastic
file must contain a checklist and this list must be duly filled and signed by the authorized
officer. Remember that charge documents and deed must not be punched.
Only custodian can give the original deed to any one required with permission from head
office.
After adjustment of all the liabilities, deed can be returned to the owner of deed with
permission from Head Office after taking request letter from the owner and receiving
signature in the Safe in safe out register. In this case custodian can keep a photo copy
of the all the documents in a closed file.
Care: Credit facility should be extended only after completion of documentation formalities.
Non completion of documentation in respect of their loans will be considered unforgivable
offence.
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Part-(vi)
Credit Planning, Pricing, Monitoring
Credit Planning
Credit planning means estimating first the total loanable resources that are likely to be
available within the given period and then allocation the same amount is using various
alternatives in conformity with national plan and priorities.
Necessity of credit planning in context:
Demand for credit is much higher than its supply
Providing credit to the right person at the right time at the right quantity
Getting maximum output as a result of credit allocation
Ensuring the best of investment alternative available
Achieving declared objectives such as providing credit to priority sectors.
Credit planning at the macro level: The basic objective of credit planning at the macro
level is to have an estimate of the total resources available at the national level during the
budget year and then to ensure that these resources which consist deposit resources flow
to areas and sectors in consonance with objectives coins deposit resources and currency
components.
Credit planning at micro level: In ultimate analysis, credit budget at micro level is an
aggregation of the credit budgets of the individual banks put together. As matter of fact,
the macro level planner should indicate the thinking to the banks about the magnitude of
the macro plan. At the time of sending guidelines to the banks and asking them to prepare
their credit budget, the central bank should issue guidelines to banks indicating their
assessment of different industries.
This will obviously assist individual banks in preparing their credit plans but
unfortunately this is not being done in our country.
At branch level:
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1) Adherence to the policy guidelines of the head office and the supplementary
policy guidelines of the regional office.
2) Analysis of the command area.
3) Determination of the requirements of the incremental loan able funds.
4) Allocation of the said funds to different sectors and client groups during the
budged period.
At regional level:
1. Analysis and settlement of the branch credit plan in a branch managers meeting
and in a democratic way
2. Transmission of the regional credit plan to the head office.
At head office level:
1. Adherence to the policy guidelines of the central bank regarding
deployment of credit.
2. Correction of regional as well as sect oral imbalances if any.
2. Settlement of the credit plan of the concerned back for the budget year.
Loan Pricing
A manufacturer offers the market goods as its product. Like this a bank offers the market
a loan as its product. the price of a good is determined by the cost to make it plus profit
on it. Similarly, the price of a loan is determined by the cost to make the loan plus a profit
or risk premium on it.
Lending is the primary business of a bank and profit is a measure of its success. So the
main objective of lending is to earn profit on loans for the on going viability of the loan.
Price of loan How to determine:
The price of a loan is the interest rate the borrower must pay to the bank, in addition to
the amount borrowed (principal). The price/interest rate of a loan is determined by the
TRUE COST (BASE RATE) of the loan to the bank plus PROFIT/RISK PREMIUM for
the banks services and acceptance of risk.
Base rate is the banks break-even point, at which income and expenses are equal each
other or profit = 0 of a loan.
True Cost ( base rate) and its components:
There are three primary components of the cost of a loan that must be determined:
a) Interest expenses (For deposit and borrowings)
b) Administration expenses
c) Cost of capital
Here, TRUE COST (BASE RATE) = (a) + (b) + (c)
That is, Base rate = Interest expense (2 components) + Admn. Exp. +Cost of capital
Note
a) Interest expense = Interest in deposit + Interest on borrowings from B.B, etc.
69
Formula
The weighted average interest rate = [(% of deposit in total liabilities Average rate of
interest) + (% of borrowings in total liabilities Average rate of interest)]
b)Administrative expenses
The bank must pay salaries, rent and other overheads for head office, zonal office and
branches as deposit and loan administration costs.
Formula
Total Admn.
Exp.
% of admn. Exp. to Loan =
100
Total Loans
c) Cost of capital = Investors Expected rate of return
Formula
ERR Proportion of Bank Capital in Total Liabilities
Cost of capital =
Proportion of loans in total assets.
Risk Premium:
The price a borrower must pay to the bank for assessing and accepting repayment risk is
called the Risk Premium.
Losses
Risk Premium =
Total category loans
Credit Monitoring
Post loan activity: Caring for the loan at post sanction stage in order to ensure the safety
of the money lent.
Why credit monitoring:
70
Part-(vii)
Micro Finance Scheme of BASIC Bank Limited
Objective of the Scheme:
The objective of the scheme is to provide credit to the poor people, particularly the
landless and asset-less urban poor with a view to creating self-employment. The bank
has limitation of addressing the problem of rural poor; one of the reasons of which is the
absence of any branches in the rural areas. The bank has been providing credit to the
urban poor in a limited scale. The has been drawn based on the experience of the Bank in
providing credit to poor people and also on the experiences of other banks and NGOs in
the country.
Target Group:
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The target group of the scheme mostly consists of the poor people in urban areas,
particularly in the urban informal sector. They mostly live in city slums and shanty towns.
The rural poor, particularly artisan groups who can be easily organized are also to be
covered by the scheme. Following poor and/or disadvantaged groups fall within the
definition of target group:
The individuals should not have assets in the form of machines, tools and equipment,
other movable assets domestic livestock of worth and use exceeding Tk. 30000.00.
Those individuals whose monthly income does not exceed Tk. 5000.00.
Activities Financerd:
The urban poor rely heavily, for their livelihood, on work in small enterprises in the
informal sector. A huge number of activities can be included in the tentative list. A few of
these are tailoring, handicrafts, embroidery, sweet meet box making, rubber slipper strap,
jute bag, paper bag and envelopes, bangle manufacturing, hair cutting saloon, shoe
making and polishing, push cart, sugar cane juice making, tea shop/hawking, pan and biri
shop, chanachur selling, chatpati, jhalmuri, peanut selling and fresh flower selling shop
etc.
Credit Delivery System:
Three alternate delivery systems are being used to reach credit to the urban poor
borrowers. These are:
BASIC provides loan to NGOs which on-lend to the poor borrowers. Credit risk is
borne by the NGOs which are responsible to make repayment to the Bank. The endborrowers repay loan to the NGOs.
72
The Bank provides loan to the urban poor borrowers through NGOs or the bank
directly extends loan to the borrowers. The borrowers repay loan direct to the Bank.
The NGOs assist the Bank in motivation, formation of self help groups and
monitoring and supervision of loan utilization. For such service the NGO will be
paid a fee by the Bank.
BASIC provides loan to the urban poor borrowers direct without assistance of any
NGO. BASICs staffs perform all required functions of motivation, group formation
and monitoring and supervision of loan utilization. Borrowers make repayment to the
Bank.
Loan size:
Loan may be sanctioned to individual members organized in a group as well as to NGOs.
The maximum limit of loan per person is Tk. 15,000.00. The minimum loan size is Tk.
2,000.00 per borrower.
Interest size:
Monitoring and supervision cost of small loans are high. It is reported that NGOs require
10% - 12% interest spread to cover their cost. As far as possible market rates should be
charged. In the case of providing fund to NGOs for on lending interest rate charged to
NGOs vary from 7% to 10% per annum. For direct lending to NGO members the Bank
charges 16% interest rate. Also in the case where we handle microfinance operation
entirely on our own, the interest is charged at the rate of 16% per annum.
Growth in Microfinance:
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The growth in microfinance of the Bank during last five years is shown in the following
table:
Microfinance
Amount in million tk.
Growth
% of total loans &
advances
2001
183.80
2.9%
2002
186.20
1.3%
2.3%
2003
181.00
12%
2.00%
2004
284.10
57%
2.4%
Description
Numbers
Total districts covered by other credit programs
All districts
Total districts covered by microfinance programs
30 Districts
Total branch
29
Branch with microfinance operations
11
Table:Area covered by the NGOs financed by BASIC Bank
Future plans:
The experience of BASIC Bank has lend support to actively consider the following in
respect of its microfinance scheme:
Rural poor are out of focus of the scheme. As such, BASIC Bank will introduce some
special schemes for rural micro industries to offer the benefit of the scheme to the
rural poor too.
Growth in microfinance shall be at least equal to the growth of total loans and
advance.
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Part-(viii)
Loan Classification, Provisioning and Declassification
A Loan account generates interest earning and reasonably treated as the most vital asset
of the bank. To have a substantial profit, a bank should always maintain a sound loan
portfolio. To do so, bankers have to monitor the loan accounts meticulously with a view
to keeping its assets safe side. In practice, some of the loan accounts are found to be
performing; some are non-performing. A loan account is said to be unclassified if its
status is good; otherwise it is called classified. There are some classification categories:
primary stage is termed as Substandard, secondary stage is Doubtful and the worst one
is Bad or Loss.
behavior for a certain time frame; details will be discussed later. When a loan account
functions non-performing for some specific period, we cannot consider taking interest
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into income account; we accumulate the interest and keep it into suspense account since
the time of its Substandard status. If at any stage, the loan is regularized, then we
reverse the suspense account into income account. If it reaches at Bad Loan, keeping the
suspense interest unchanged, we will no more charge interest on the loan account. We
will better go for legal action. Upon courts decision, we will calculate unpaid principal,
up-to-date interest along with other charges.
Interest
Deposit
1.Savings
2.STD
5.00%
3.00%
3.Fixed
a. 3 Months and above
b. 6 Months and above
c. 12 Months and above
d.24 Months and above
6.00%
6.25%
6.75%
7.00%
Lending
1. Agriculture
Primary Products.
10.00%
10.50%
11.00%
12.00%
12.00%
11.00%
12.00%
12.50%
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13.00%
4. Export
a. Export (Direct)
i) Readymade garments, frozen food, agro-based industries.
ii) Others
b. Advance against inland documentary bills accepted by banks
i)Payment in foreign currency
ii) Payment in local currency
5. Commercial Lending
a.
financing/other short term demand loan
Internal
6.
OD against
a. Banks own FDR
b. Other banks Fixed Deposit Receipt
c. PSP/SP/Other Govt. Bonds
d. Unit Certificate
7.00%
7.00%
10.00%
13.00%
trade/import
14.00%
2% above FDR rate
14.00%
12.00%
13.00%
14.00%
7. Housing loan
11.00%
8. Micro Credit through NGOs and other special programs
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such loan will be credited to interest suspense account, instead of crediting the same to
income account. This will act as Early Warning Signals of shadow classification.
Basis of Classification:
There are only 2 (Two) criteria to categorize the loan to be classified or not
a. Objective Criteria,
b. Qualitative Criteria
Objective Criteria concentrates the following :-Limit Expiry
Required Payment.
Qualitative Criteria is entirely judged by the Branch-in-Charge. In case the loan account
is unclassified by Objective Criterion, this could be even treated as classified by
Qualitative Criterion. Some instances of such criteria may be like these: low transaction
in a newly disbursed loan, fund diversification or non-traceability of the borrower, etc.
Some other discussions of loan classification:
Total loans and advances are divided into 4 (four ) categories under new system. These
are:1. Continuous Loan.
2.Demand Loan.
3.Fixed Term Loan.
4. Short Term Agricultural and Micro Credit.
CL1 is the consolidated statement of all the break-up of CL2,CL3,CL4 and CL6
CL1= CL2+CL3+CL4+CL6
CL2= Continuous Loan(TOD,SOD,C.C(H),C.C(P))
CL3= Demand Loan(PC,PAD,LTR,LIM,FBP,LBP,LAFB,Demand)
CL4= Term Loan up to 5 Years (Term-SSI, Term-MSI,Loan General having any specific
Repayment Schedule)
CL5= Term Loan over 5 Years (Term-SSI, Term-MSI,Loan General having any specific
Repayment Schedule)
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CL-4
Status
SS
DF
BL
SS
DF
BL
SS
DF
79
CL-5
CL-6
BL
SS
DF
BL
SS
DF
BL
Loan Provisioning:
There is every risk when we lend money to the customer. If any loan extended to a
customer is not returned, we need to take some precautions before giving the loan. In
general, we ask for good security from the borrower. Further, we follow some extra
measures to safeguard the loan portfolio. As a matter of fact, we try to maintain some
reserve fund to cover the risk to be involved by loss due to classified loans of the bank
and the entire procedure is loan provisioning. The effort helps reduces the possibility of
losses of such assets.
Base for Provisioning;
80
Rate
100%
100%
100%
100%
50%
50%
Base
Rate
Balance
outstanding 1%
excluding staff loan
5%
Base for provision
20%
Base for provision
50%
Base for provision
100%
Base
Balance outstanding
Base for provision
Base for provision
Base for provision
Rate
5%
5%
5%
100%
Declassification:
Borrower in some specific cases may be the victim of the circumstances and they do not
default of any loan willingly. Many a times, it has been seen that, due to political unrest,
turbulence, natural calamity, particular business constraints, bureaucratic bottlenecks,
81
entrepreneurial problem and industry hazard may result a loan account to get it classified.
However, BASIC will not concentrate more on the matter in accordance with the purview
of the subject paper: rather we will focus on the rules and regulations of declassification
of a loan.
As per BRPD circular no.01 dated 13.01.03 regarding Reschedule Policy of classified
loan, there are some guidelines to be followed as under:
a) If the default borrower is a habituated one, then the bank consider its declassification.
b) The bank has to take into consideration of the default borrowers other banks liability
before go for declassification.
c) The bank will look into the cash flow statement, audited accounts, revenue and other
financial statement as to test the clients solvency to adjust the exciting liability.
d) The bank official will physically visit the business concern and maintain some
reports.
e) If all the above guidelines are complied with meticulously and also if the bank is fully
satisfied with good repayment performance, then rescheduling is possible.
f) Re-scheduling to be made on actual basis; it is wise to give a minimum time frame.
g) If Re-scheduling is needed to place before the Board, then a through study will be
required for its ultimate implication over the banks profit, costing and other
measures.
Rescheduling Procedure:
Type of loan
(B)
Term Loan
Stage
(A)
1st
2nd
3rd
Demand
& 1st
Overdue amount
(C)
15% of (C)
30% of (C)
50% of (C)
Outstanding
Balance (D)
10% of (D)
20% of (D)
30% of (D)
Up to Tk. 1 crore
Down-payment
(E)
Minimum of (C)
& (D)
15% of (D)
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Continous
Loan
2nd
3rd
Tk. 15 lac
Tk. 5
above
If
any 1st
demand or 2nd
continuous
reconstructed
as a term
loan
30% of (C)
50% of (C)
crore
20% of (D)
30% of (D)
5% of (D) subject
& to a minimum of
Tk. 50 lac.
Minimum of (C)
& (D)
Part- (ix)
Supervision and Recovery of loans and advances of BASIC Bank Limited
Supervision and follow-up of advances are the direct responsibilities of the branch.
Branch is the unit wherefrom the proposal is made for any advance, disbursements are
made. The borrower maintains his account with the branch, operations are conducted
through the account, reports and returns are submitted by the borrower to the branch. So,
success depends on how effectively the branch ensures supervision and follow up of the
advances.
In conducting supervision and follow up, branches have to follow the under noted
common methods:
i) Keep watch over the ledgers and accounts to ensure that operations are regular and as
per procedure. Particular care should be taken when the balance in the account remains
very near or goes beyond the drawing limit or there is no good turnover.
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84
3) Security: The branches are instructed to see that the security offered is safe and
continues to remain available for repayment of loan. Security may be in the form of i)
Fixed Assets ii) Goods iii) Bills etc.
All branch in charges are also advised to diarized all important dates in regard to an
account, to ensure that an advance does not breach any provision of law of lending and to
review all advances every six month or once in twelve months.
At Head Office level:
In order to control and supervise credit, Head Office prepares a consolidated statement of
loans and advances every month to indicate banks exposure in each types of loans and
advances on the basis of risks involved and sectoral distribution for purposes of
controlling excessive exposure in unwanted portfolios.
Head office effectively monitors all loans and advances through inspection to the branch
(including surprise visit), examine different periodical statements (weekly, fortnightly,
monthly, quarterly and half-yearly).
a) Periodical inspection: Branches are periodically inspected by internal
auditors/inspectors by head office and external auditors, during each inspection the
inspector makes a comprehensive and detailed examination of all advances including
documents, security and turnover of the account and whether the terms and conditions
the sanction have been complied with.
Spot inspection is also conducted by vigilant team from Head Office by a surprise
visit when specific and urgent information are needed by the management. This report
will be short and cover specific area.
b)Periodical statement: All branches are instructed to submit different statement relating
to loans advances in weekly, monthly, quarterly, half-yearly basis. If anything found
adverse against any branch, Head office instantly asked the branch to clarify its position.
Head office takes necessary measures against branch which found committed
irregularities and damaged banks interest.
c) Arranging meeting with branch in charge: Besides regular meetings of the branch
managers with Head office for overall review of loans and advances of each branch
arranged under the chairmanship of Managing Director of the bank for guidance
reducing overdue loans and recovering classified loan and sanction of new loans.
Recovery of loans and advances:
Bank generally recalls its advances under the following cases:
i
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86
ii) Incase the borrower does not adjust the account as desired , the only course left open
to the bank would be to send a notice by registered post to the last known address of the
borrower and guarantor, if any, preferably through a lawyer. In that notice, it has to state
the undesirable character of the advance and recall it and ask the party to liquidate it
within a stipulated period, say 30 days. Presently banks are empowered to dispose off the
security without intervention of the court under the Artha Rin Adalat Ain 2003. This
law empowered the financial institutions to sell property kept with them as lien, pledge,
mortgage or hypothecation without any intervention of the court in order to adjust default
loan from sale proceeds followed by filing of law suits. Another important feature of this
act is the limitation of the financial institution that it would not file any suit claiming
interest more than two hundred percent of the principal amount of loan(Section-12).
iii) Filing a suit: If the advance is not fully secured and where there is a shortfall to adjust
the advance after disposal of securities, the decision has to be taken by the bank whether
to keep the borrower in business or file a suit against him for recovery of banks dues.
It is well known that once the suit is filed, the borrower ceases to be cooperative.
BASIC Bank Limited has been followed a series of measures to recover the default
amount of loans and advances both in Branch and Head Office level. All branches are
kept under serious pressure through circular, circular letter, verbal instruction etc in
regular basis to take necessary precautions to avoid new default loan in the branch.
Besides, branches have been given yearly target to recover dues from the existing default
borrower to reduce the classified loans and advances up to minimum level. Head Office
monitors each branch whether it is performing in accordance.
The scenario of loans and advances of BASIC BANK Ltd. as on December 31, 2005
is as follows (at a glance):
1. Total Loans and advances
a) Term loan
b) Commercial loan
c) Micro credit
Total
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88
Chapter- Five
FINDINGS OF THE STUDY
Attempt has been made to find out the actual practices of the Bank against the
credit operating procedure specified in previous chapters. We will verify whether BASIC
Bank Ltd. is following the credit operating procedure that are specified by Bangladesh
Bank and as well as specified by itself.
1. Aggregate Loans and advances are 79% of the total Deposit:
As we have seen in the credit policy that, it strictly specifies that, at best 65 of the total
deposit should only be provide for the loans and advances. If we consider the call deposit
and fixed deposit then the figures comes to 79% at June 2003. So in that case BASIC is
taking some sort of risk. But as the amount of non-performing asset is low this rate is
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acceptable. And when we have examined this rate for other private commercial and
specialized banks the amount approximately was 80 to 95 percent of the total deposit.
2. Approximately 77% of the loans and advances have been given to small and
cottage industries:
In the credit policy it has been specified that, approximately 50% of the loans and
advances will be given to small-scale industries. By examining the figures we have found
that, for the month ended June 2003, BASIC employed 77% of its loan able funds to
small-scale industries. If we take the example of some local private and government
banks we can see the following position.
Name of the bank
Arab Bangladesh Bank
Islami Bank
Sonali Bank
Rupali Bank
Dutch Bangla Bank
Agrani Bank
So we have seen that, comparatively that all other banks are investing fewer amounts to
small-scale industries. By this they are maintaining steady short-term profit but
endangering long run profitability.
3. Head Office of the bank are monitoring all kind of loans and advances:
The Head office of the bank perfectly monitors the banking operation and execution of
the credit policy. When I have examined the credit extension procedure of the bank I have
found that, every proposal are forwarded to the Head office for granting the loan and
Head office has the full authority to reject any kind of proposal. Thus any kind of ill
practices at the branch level are restricted. Along with that, some power has also been
forwarded to the branch manager most of whom also are well conversant about the credit
policy of the bank.
4. Branch managers are fully liable for the selection of the borrower:
Branch managers are made fully liable for the selection of the new borrower in the bank.
It prohibits the way to improper selection of the new borrower by the branch manager.
5.Continuous monitoring of the working capital facilities are ensured by the
inspection of the stocks:
BASIC bank provide working capital facilities like Cash Credit, in against of stock of
manufacturing goods. I have checked the inspection file of 5 branches and am informed
that, continuous supervision is held to ensure that appropriate stocks are there to support
the financing. Usually Cash credit is allowed on 70% on the total stock value.
6. Conservative approach are taken to avoid any kind of foreign exchange exposure:
In credit policy of BASIC it has been specified clearly that no additional risk should be
taken in dealing with foreign exchange. I have visited 5 branch of BASIC and I have
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found that excessive measure is taken to avoid any kind of risk. Some problems arise
because of these excessive measures as new borrowers fears to open an L/C.
7. Documentation Process:
To judge whether the branches are following the credit policy for documentation I have
visited 5 branch and made sample test. In that we have taken four borrowers in each
branch and compare the documentation process with the standard one. There we have
find that, in 90% cases standard documentation has been maintained.
8. No credit is extended to customer client Entity, which exceeds in total
commitment more than 10% of the Banks capital and fees reserves.
9. House building loan facility and other commercial loan facility has been
demoralized by the branch authority:
As per credit policy of the bank the branch credit committee always demoralize loan
facility to commercial sector. It has been revealed from the interview and from the
balance sheet. The reason behind that is the non-productiveness of the house-building
loan.
10. Persuasion and monitoring are moderately maintained for ensuring the prompt
payment:
There are some cases where effective monitoring and persuasion are needed especially
for substandard and doubtful cases. I have evaluated 5- branch persuasion chart and have
seen that, persuasion and monitoring are effectively performed by the branch manager.
11. Head Office decision sometimes creating classified loans:
I have analyzed the written communication regarding the classified loans and other loans
between the Head office and our 5-sample branch. There I have identified that, in some
cases those loans becomes classified which the head office has recommended. So to some
extent it is true that, sometime Head office decision is also creating classified loans.
12. Credit evaluation techniques are not enough to judge the credibility of the
borrower:
Though the classification rate of BASIC Bank is well below of the acceptable rate but its
credit techniques to judge the client are not satisfactory. Where all the Nationalized
Commercial banks are using LRA procedure, where most of the new private commercial
banks are using their own modern rating system and the foreign commercial banks are
using international rating procedure. BASIC is following the traditional credit evaluation
technique. When we have visited and evaluated the credit evaluation techniques we have
found that, those techniques neither prove the economic viability of the project nor prove
the future prospects of the potential borrower. In our sample 5-branch I have found that,
60% of the borrower firm does not properly submit their financial statement. The reason
behind this is that, the Bank is not following effective credit management technique.
Because of the less effective appraisal process sometimes it becomes difficult for the
bank to judge whether the borrower can pay off the loan or can maintain effective
transaction with the bank. In most of the time the borrower produce imaginary data
91
regarding the projected financial statement. But only because of effective technique it
cannot be identified. Because of lack of financial statement analysis perfect action are
delayed to protect the classification. Not only that, BASIC Bank does not have any
working capital analysis procedure which can ensure the accurate working capital
requirement of the client. They are following five years old working capital analysis
procedure prescribed by Bangladesh Bank. As a result some borrower get the chance to
channel fund on different uses.
13. Excessive measures are taken to reduce foreign exchange risk:
I have interviewed 5-branch manager and concern officer of foreign exchange. All of
them have agreed on the issue that excessive control measures are taken to reduce any
kinds of foreign exchange risk. They informed that, this only because the head office
supervises all kinds of dealing and the concern officer is fully liable for any kind of
losses. And to keep the classification rate low additional care also been taken in financing
foreign bills.
14. Credit analysis techniques for LIM facility:
Among five of the sample branch I have found that, in those cases where branches
provide loans for PAD, LTR and converted the facility to LIM as the borrower fails to
release imported goods than problem arises. In those cases we have found that, because
of prompt action from the branch and Head Office huge amount become classified.
Analyzing the practices stated above we have found that, in most of the cases BASIC
Bank limited is perfectly following the credit practices except the credit analysis
technique. If the Bank can improve that technique it will be able to reduce its
classification rate more effectively.
15. Small range of loan portfolio are restricting further improvement:
Comparative to private commercial and foreign commercial banks BASIC Bank have
small loan portfolio. Presently it only providing CC (P), CC(H), SOD, LIM, Term loan,
Micro Credit, LIM, LBP, FBP, PAD, PC and L/C facility to its clients. Where other
commercial banks are offering modern services like Consumer loan, ATM, and Credit
cards.
16.Lack of up-to-date credit manual:
A common problem I have identified in all branches is that, there is no credit manual for
smooth operation. The last edition of credit manual lay bare in the year of 1994. Since
then no time tested credit manual has been provided.
92
Chapter-Six
6.1 Comparative analysis of BASICs credit policy with other bank
6.2 SWOT analysis of BASIC
93
Foreign commercial Banks. And then we will analyze and compare BASIC Bank with the
credit management efficiency of those banks.
Nationalized Commercial Banks
In Bangladesh the credit management of Nationalized Commercial Banks are most
debated issue. Almost 85% of the total classified loan belongs to the Nationalized
commercial banks. Before 1991 no steps has been taken to reduce this rate. Dishonesty of
the Bank managers, Pressure of political leaders, dishonesty of directors, improper
supervision and inefficient management techniques are the main reason behind high
classification rate of Nationalized Commercial Banks.
BASIC Bank Ltd is also Nationalized Bank but due to its effective management and time
tested credit supervision and due to its modern organizational structure it becomes able to
reduce its classification rate well below to those Nationalized Commercial Banks. Being
a specialized bank it does not have huge services to offer. It does not have huge branches
or set business or receive huge loan facility from Bangladesh Bank like those banks but
yet it has set a milestone in banking. When I have talked with the Officials of
Nationalized Commercial banks they have informed me that, one major problem of those
banks is the CBA of the respective government banks.
They have stated that because of this organization sometimes it becomes impossible to
initiate any strong policy to wipe out inefficiency of the nationalized banks. They have
also stated that, the salary structure of the Nationalized Commercial Banks is another
problem for what the operational manager become less inspired for collecting the
classified loans.
In BASIC Bank there is no CBA or any kind of employee organization so it becomes
possible to take any action against inefficiency. And the salary structure of BASIC is well
above of any nationalized banks so employees get inspired to work for the betterment of
the bank.
Specialized Commercial Banks
In Bangladesh there are four specialized commercial banks (except BASIC) named:
Bangladesh Krishi Bank, Bangladesh Krishi Unnayan Bank, and Bangladesh Shilpa Rin
Sangstha. These banks are providing subsidies and other improvement facilities for
poverty alleviation, industrialization and agricultural development. The rate of
classification of Bangladesh Krishi Bank is 35%, Bangladesh Shilpa Bank 29% and
Bangladesh Shilpa Rin Sangstha 21%. It shows that, from classification of loans point of
view these banks are less efficient than BASIC.
Private Commercial Banks
There are 30 scheduled local private commercial banks operating in Bangladesh. Among
them 14 banks starts its operation during 1995 to 2004. In sense they are modern in their
nature and activity. These banks gain knowledge and lessons from those banks incepted
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before 1995. If we focus on the credit management techniques of these banks we can find
that, literally they are great. These banks introduced some brilliant package, which are
attractive to the borrower and also to the depositor. But from our point of view it is
difficult to comment or compare these banks with BASIC Bank, because the
effectiveness of the credit policy can only be judged after 6 or 7 years. But so far they are
doing well than the BASIC Bank. Among other banks incepted before 1995 some banks
like EBL, Dhaka, Prime and National bank are doing well. If we compare them from the
classification of loans and advances point of view then we can see that, BASIC is in good
position. But if we judge the level of service provided, management skills, volume of
loans, technical knowledge and number of valuable client handled then we can find that,
these banks are doing really well. Especially these banks have introduced modern
techniques, which is essential for loan appraisal.
Foreign Commercial Banks
There are 10 foreign commercial banks operating in Bangladesh. Among them two banks
named Standard Chartered Grind lays Bank, and HongKong Shanghai Banking
Corporation are providing excellent services to its client. The have introduced modern
credit management techniques to select the best client. They have global credit appraisal
system that ensures low classification rate.
In every aspect their credit policy and practices are superior to that of BASIC Bank. This
is to some extent also true for other foreign commercial banks Foreign commercial
banks monitoring and supervision technique is also superior to BASIC Bank. The reason
of this efficiency is that, the performance evaluation of the manager of the foreign
commercial banks depends largely on this. And because of selective sector selection it
becomes possible. Not only that, because of modern technology and excellent recruitment
procedure it becomes possible for them to have competitive efficiency.
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Strengths
Conservative approaches to reduce the risk of
classification.
Assigning adequate power to the top
management to monitor credit operation.
Clear specification of documentation process
to reduce the risk of classification.
Providing guideline to furnish loans only to
small-scale industries for short time.
Clear definition of measures in dealing with
foreign exchange transaction.
Strong procedure in selection of new
borrower.
Weaknesses
Techniques specified for credit
appraisal is not sufficient.
More dependency on Government
sources for deposit mobilization.
Services offered are in adequate.
Opportunities
Suitable for small-scale business, which is
growing day by day.
Government and International agencies
positive attitude toward low classification
rate.
Threats
Not suitable for future competition in
the market.
Reduced Government support in
future.
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those banks, which never takes any kind of, uncovered risk in dealing with foreign trade.
They provide the foreign trade facilities only to their prime clients.
Weaknesses:
The technique that has been used in credit analysis is not adequate. Now days it is not
possible to justify of a client by analyzing only their projects production capacity. It is
important to analyze their financial statement and market share make sure that the project
will last for long. BASICs credit policy does not clearly specify these techniques. In the
credit policy no emphasis has been given for mobilizing deposit from private sources. But
private sources are the least costly sources and using it is possible to earn more profit
from investment.
Opportunities:
Bangladesh is a country where it is very difficult to establish hi-tech industries because of
high capital asset cost. So the government of Bangladesh and other international bodies
convincing to establish small and cottage industries first which will make the ground for
huge investment. As a result the numbers of small industries are increasing day by day.
And BASICs has huge chance to progress if it can hunt this sector. Not only that,
international organizations and donor countries are continuously convincing the
government of Bangladesh to attenuate the high classified loan rate. Now a day they are
including the clause of reducing the classified rate before sanctioning donation or loan to
the country. As BASIC bank is successfully keeping the classification rate low it is
possible that, it will get international assistance from ADB and from other organizations.
And obviously these funds will have lower interest rate by which the bank can earn
handful profit.
Threats:
From 1990 the core concept of banking in Bangladesh is changing. Now banks are going
to the customer with services and try to convince them by it. Most of the banks have
increased its service range significantly to attract its client and to satisfy them properly.
Along with that, now the banks are trying to accumulate more funds from the middle
class group. Alike insurance companies most of the banks also have employ marketing
agents to convince the mass. All of said situation is happening because of the increase of
number banks in the country and competition among them.
BASIC bank is not very keen in marketing its product. And in credit policy it also not
specified significantly. Not only that, it does not have any marketing plan to grab the
market after 5 or 10 year. So if the banks do not change this attitude its profit will be
reduced for the abnormal competition in the market. And also if the government sells its
entire share to the private sector the bank will face huge pressure from its competitor.
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In the credit policy we have found everything all right except the techniques used for
screening the client. BASIC bank has some very efficient and highly educated
professionals who can easily solve the problem if they concentrate on the issue. So the
weakness can be eliminated easily through its strength.
The BASIC has been perfectly designed its credit operating system depending on the
government funds and assistance. But as it is sure that, government will sell its share in
near future BASIC has to revise its credit policy by considering alternative source of
fund. International funds can be alternatives for government source if BASIC can
continuously reduce its classification rate.
Alike other bank BASIC can enforce its marketing operation to grab the small savings of
the middle class. And a small change is enough to do so as the strength of the present
credit policy is capable to take any pressure.
So from the SWOT analysis of the credit policy of the bank we have found that, the credit
policy of BASIC Bank is sound with some exception. And small revise of the policy can
be the best policy that can lead a bank to the peak of success.
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Chapter-Seven
Conclusion
Recommendation
Conclusion
The BASIC Bank Limited has been trying to operate its business successfully in
Bangladesh since 1994. Basic Bank has already developed goodwill among its clientele
by offering its excellent services through General banking, Credit division and Foreign
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Exchange divisions. This success has resulted from the dedication, commitment and
dynamic leadership among its management over the periods. The working atmosphere of
the BASIC Bank Limited is very simulating. During the short span of time of its
operation, the bank has been successfull to the position itself as a progressive and
dynamic financial institution in the country. The banking sector of Bangladesh is passing
through a tremendous reform under the economic deregulation and opening up the
economy. Currently this sector is becoming extremely competitive with the arrival of
multinational banks as well as emerging and technological infrastructure, effective credit
management, higher performance level and utmost customer satisfaction. From my
survey I have found that, all branches of BASIC Bank fairly follows the credit policy and
practices set by the management of the bank. And by that they are doing well in reducing
the high classification rate and in attaining the profit target of the bank. It has been
observed that BASIC Bank Ltd has been maintaining an encouraging trend of overall
performance in the country. High employee efficiency, high profitability, rapid growth of
deposit and advances and high loan recovery prove evidence of sound financial condition
of BASIC. Findings are encouraging in the sense that it shows efficient management can
lead to successful banking business in Bangladesh. This could be source of useful lessons
to the total banking sector. BASIC being the best among the Government owned banks
and should go hand in hand with the modern banking system and culture to retain and
improve the present position in the financial arena. The implementation of the suggested
ideas in the organization will undoubtedly lead it to be an efficient and sustainable
financial institution. But as we have seen that in some areas the credit policy and
practices are problems for BASIC. Changes are necessary to eliminate those problems to
increase the efficiency and betterment of the bank. The top management can make
changes by taking the suggestions of the management (Medium and lower level) and also
by taking into consideration the responses of the clients regarding each area of credit
policy of the bank.
Recommendations:
Banks should establish a review process to examine the changing circumstances of
borrowers to determine the position of loans. Attention devoted to these loans is more
likely to result in proper action to safeguarded the Banks position and to assist the
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borrower to take appropriate steps in their business to bring back loan performing. . Here
some recommendations are made to enrich the credit policy and practices of the bank:
1. Loan appraisal technique should be modernized:
In Government commercial banks LRA method have followed to appraise the loan
application. And in private commercial banks LRA and other systematic method have
followed to judge a client. Compared to those technique BASICs loan appraisal
techniques are relatively traditional and ineffective. And using that technique it is not
possible to evaluate the financial soundness of a company. As such it is essential for
BASIC to change its loan appraisal technique.
2. Documentation process should be improved:
As I have discussed the documentation process of BASIC Bank is fair relative to other
commercial banks operating in Bangladesh. But this process is fair as long as BASIC is
interested only in small loan amounts and small loan portfolio. When the volume and
amount of loan will increase then this documentation process will not be suitable. As
such identical documentation and filling process should be introduced for the betterment
of the bank.
3. Customer Services should be enhanced:
Every banks prime objective is to satisfy its client. Increased customer services are must
for it. In Bangladesh all foreign banks and some private commercial banks are now
providing excellent services like: ATM, Credit card, phone banking, super saving
facilities and other fast service facilities to its client. But in that area BASIC has taken no
pragmatic steps. As such they are loosing its valuable client to those which are providing
these services. So BASIC should improve its service portfolio and should introduce more
technology-oriented services to its customer.
4. Marketing for selling the services should be encouraged
Most of the employees of BASIC or the top management of it are not very much
interested for marketing for BASIC Bank. Door to door or business to client relationship
is not maintained in this respect. The reason behind this may be that, no incentives are
given for this job. So special incentive schemes should be introduced for mass marketing
of services.
5. Detail manual should be prepared for accurate credit operation:
A common problem I have identified in all branches is that, there is no credit manual for
smooth operation. The last edition of credit manual lay bare in the year of 1994. Since
then no time tested credit manual has been provided. So top management of the bank
should provide appropriate attention for preparation of the credit manual.
6. Adequate training is required for credit officer:
Adequate training is essential for the efficient credit management. Almost all recognized
commercial bank have its own training center, where continuous training is given to the
managers and credit officers for their improvement. But no such training center has yet
been established in BASIC Bank. In our study we have revealed that, the training that has
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been given to the employees is not adequate. Since 1999 no training is given to the
bottom level management. So from our viewpoint adequate training should be arranged
for better credit management and implementation of credit policy.
7. LIM facility should be withdrawn by the Bank Management:
It has been revealed that, because of LIM facility branches are suffering losses. For that
facility branches are forced to have godown, extra manpower and obtain risk for the
goods. And it is evident that, a handful percentage of LIM facility becomes classified
loan. As such it is reasonable for the bank to pause LIM facility as soon as possible.
8. Adequate measures should be taken for small industrial loan:
In our study I have revealed that, most of the small industrial loans become bad or
classified. This is due to the weak financial capacity of the firm. So adequate measure
should be taken before disbursing the loan. Especially alternative sources of repayment or
adequate security coverage should be checked and satisfied in this regard.
9. Management should be careful about high liquidity ratio:
As per Bangladesh Bank inspection report it has been revealed that, most of the branches
are keeping more funds in their hand, which are affecting the profitability. Also the
conservative approach of the bank is affecting its profitability. As such the bank now
should involve more of its strength to find new investment area and let its idle funds to be
used.
10. Some discretionary power should be given to the branch management:
When we have discussed with the clients of BASIC Bank they have complained us about
the extra time needed for sanctioning a loan. They have said that, if no LC limit is there it
takes two days for opening a LC that creates problems for them. This problem arises, as
the branch managers dont have discretionary power to sanction any advance above BDT
30.00 lac. So the branch manager should be given discretionary power to furnish loans
more than 1 crore.
11. Adequate care should be taken for LIM facility:
Among 5 of our sample branch we have found that, in those cases where branches
provide loans for PAD, LTR and converted the facility to LIM as the borrower fails to
release imported goods than problem arises. In those cases we have found that, because
of prompt action from the branch and Head Office huge amount become classified.
Analyzing the practices stated above we have found that, in most of the cases BASIC
Bank limited is perfectly following the credit practices except the credit analysis
technique. If the Bank can improve that technique it will be able to reduce its
classification rate more effectively.
12. Others:
Banks should establish a review process to examine the changing circumstances
of borrowers to determine the position of loans. Attention devoted to these loans
is more likely to result in proper action devoted to these loans is more likely to
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result in proper action to safeguarded the Banks position and to assist the
borrower to take appropriate steps in their business to bring back loan performing.
Major problems in a business arises when changes in management (Business
concern) occurs. The loan officer should observe that whether there is loss of the
top executive, demand, or any other most important new one has entered and
often the change may be worse.
Bank should also be aware of significant changes in the personal habits of current
management.
Changes in industry trends may directly affect business so that it can no longer
completely profitable. Therefore, the Bank should keep information about the
environment of each industry in which its customers operate.
Deterioration in the overall economy can turn a good loan a week one. During
unusual inflation or depression, many companies experiences difficulties. The
loan department should be aware of it.
From the beginning of the relationship, the loan officer should know who the
companys major trade suppliers are. If he can discover that a major supplier is
reducing credits to the customers, this could be a sign that the borrowing company
is facing serious financial difficulties. Bank should start credit inquiries from
trade suppliers.
Real value of business can come from making regular visits to the customers
place of business rather than holding all meetings in the Bank.
For improving the recovery position and reducing huge over due loans, first
action needed to attract political support and urge upon the govt. and political
parties to take necessary steps for repayment of defaulted loans within a limit.
Against big willful defaulters legal action should be taken promptly. This step
should be taken as soon as one installment is defaulted without waiting for default
of total loan.
New credit culture needs to be developed in place of default culture. Efforts to be
taken as soon as possible to safeguard the interest of banking sector
Bibliography
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