Chapter One

INTRODUCTION

1.1 Introduction
1.2 Origin of the report
1.3 Rationale of the study
1.4 Objectives of the report
1.5 Scope of the study
1.6 Methodology of the study
1.7 Limitations of the study

1
1.1 INTRODUCTION
Banking system occupies an important place in a nation's economy. A banking
institution is indispensable in a modern society. Financial institutions are very much
essential for the overall development of a country. Especially banks play an important
role in the field of promotion of capital, encouragement of entrepreneurship, generation
of employment opportunities etc. Market economy or free economy is widely used-
concept about the present economy of Bangladesh. The country adopted the concept in
the late seventies with the privatization of significant number of enterprises. The
practices of free market economy started from the eighties with the changing of the
world economy. A number of initiatives were taken from the nineties to increase the
competition and efficiency in money market, relaxation of unwanted rules and
regulations, improvement of loan related law and other situations and improve the
financial base of the banks of the country. In recent times the banking sector over the
world has been undergoing a lot of changes due to deregulation, technological
innovation, globalization etc. Banking sector in Bangladesh is lagging behind in
adopting these changes.

1.2 ORIGIN OF THE REPORT

The report entitled A Case Study on Credit Management of Janata Bank Ltd. has
been prepared as a partial fulfillment of BBA Program authorized by the Director of
BBA Program, Department of Accounting and Information Systems, University of
Dhaka.

1.3 RATIONALE OF THE STUDY

Due to the increased competition of the increased number of commercial banks and the
growing economy, the expectations of the customers have also increased than ever
before. Realizing the present condition, banks, especially the commercial banks are
trying to elevate their loan giving service as much as reachable to their customers. The
most serious difficulty facing the financial sector is the high level of interest rate and

2
inflation rate. So it is the duty of the top management of the commercial banks to work
with the situation.

1.4 OBJECTIVES OF THE REPORT

The objectives of the report are to determine how credit policy applied in sanctioning
and recovering loans and advances. Credit policy varies in terms of loan sector, status
of the organization, government policy, fiscal budget and guidelines etc.

Specific objectives:

To assess the credit structure of the bank in practice.

To measure the effectiveness of the bank in the utilization of available resources.
To identify the recovery performance of the bank.
To point out the problems in fund utilization and recovery thereon.
To make a critical reasoning in respect to the treatment of provision for bad and
doubtful credit.
To assess and highlight on the legal actions followed by the bank.
To find out the extent of similarities and dissimilarities in the course of action
followed by Janata Bank Ltd.
To compare the credit management of the bank with the Bank Companies Act
1991.
To evaluate the credit management of the bank with respect to IAS#30.
To compare the credit supervision of the bank.
To compare the quantitative change from phase-1 (1996-2000) to phase-2 (2000-
2005).
To find out problems and suggesting recommendations for further improvement.

1.5 SCOPE OF THE STUDY

Janata Bank Ltd. is the second largest commercial Bank in Bangladesh. Janata Bank
Ltd. operates through 848 branches including 4 overseas branches at United Arab
Emirates. It is linked with 1221 foreign correspondents all over the world. I am
assigned to learn practical knowledge from Janata Bank Ltd., TSC Branch. In this study
I would try to concentrate on the theoretical aspect of credit management, that is, the

3
definition of credit management, policy of credit management, tools for managing
credit etc. I would analyze the data on the bank and various programs for loan recovery,
problems in loan in loan recovery, pattern of loan recovery and the performance of the
bank under study in loan recovery, the information in respect to the classification of
unsound credit and provision thereon and also concentrates on the performance of the
bank. And finally I would conclude with the critical evaluation of the credit
management under the guidelines of the Bank Companies Act 1991, IAS#30 and a
discussion on the major findings and recommendations.

1.6 METHODOLOGY OF THE STUDY

The report is descriptive in nature. To fulfill the objectives of this report total
methodology has divided into two major parts:

A) Data Collection Procedure:

In order to make the report more meaningful and presentable, two sources of
data and information have been used widely.

The Primary Sources are as follows:-

I have made questionnaire survey of both managers of credit department and the
customers who have taken loans from Janata Bank Ltd.
Relevant file study as provided by the officers concerned.

The secondary Sources are as follows:-

Annual report of Janata Bank Ltd.
Periodicals Published by Bangladesh Bank
Office files and documents
Study related books and journals
Web sites

4
 b) Data Processing & Analysis:
Collected information have then processed & compiled with the aid of MS Word,
Excel & other related computer software. Necessary tables have been prepared on
the basis of collected data and various statistical techniques have been applied to
analyses on the basis of classified information. Detail explanation and analysis have
also been incorporated in the report.

1.6 LIMITATION OF THE STUDY

To prepare a report on the topic like this in a short duration is not easy task. In
preparing this report some problems and limitations have encountered which are as
follows:
a) The main constraint of the study was insufficiency of information, which was
required for the study. There are various information that bank employee cannot
provide due to security and other corporate obligations.
b) As the data, in most cases, are not in organized way, the bank failed to provide
all information.
c) Due to time limitation, many of the aspects could not be discussed in the present
report.
d) Since the bank personnel were very busy, they could not pay enough time.
e) Lack of opportunity to access to internal data.
f) I had to base on secondary data for preparing this report.
g) Legal action related information was not available.
h) All of them are not eager to give me any kind of legal action related
information.
i) All the clients whom I interviewed did not want to necessary information.

5
 Chapter Two

LITERATURE REVIEW

2.1 DEFINITION OF CREDIT MANAGEMENT

2.2 PROCESS OF CREDIT MANAGEMENT
2.2.1. Policy guidelines
2.2.2 Management structure and responsibilities
2.2.3. Program guidelines

2.3 TOOLS OF CREDIT MANAGEMENT

2.3.1 Definition of Credit Risk Grading (CRG)
2.3.2 Functions of Credit Risk Grading
2.3.2 Functions of Credit Risk Grading
2.3.3 Use of Credit Risk Grading
2.3.4 Number and short name of grades used in the CRG
2.3.5 Financial Spread Sheet in Credit Management

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2.1 DEFINITION OF CREDIT MANAGEMENT
As Sonali Bank Ltd. is providing credit facility out of its total available
funds; it has to manage these credits very efficiently. An efficient credit
management system comprises many things and this cover the pre-sanction
activities to post-sanction activities. Credit management is important as it
helps the banks and financial institutions to understand various dimensions
of risk involved in different credit transactions.

At the pre-sanction stage, credit management helps the sanctioning

authority to decide whether to lend or not to lend, what should be the loan
price, what should be the extent of exposure, what should be the
appropriate credit facility, what are the various facilities, what are the
various risk mitigation tools to put a cap on the risk level.
At the post-sanctioning stage, the bank can decide about the depth of the
review of renewal, frequency of review, periodicity of the grading, and
other precautions to be taken.

Having considered the significance of credit risk, it becomes imperative

for the banking system to carefully develop credit management. For this
reason the bank is maintaining a new division that is well known as credit
division.

2.2 PROCESS OF CREDIT MANAGEMENT

Credit Management Policy for any commercial bank must have been
prepared in accordance with the Policy Guidelines of Bangladesh Banks

7
Focus Group on Credit and Risk Management with some changes to meet
particular banks internal needs.

Credit management must be organized in such a process that the bank can
minimize its losses for payment of expected dividend to the shareholders.
The purpose of this process is to provide directional guidelines that will
improve the risk management culture, establish minimum standards for
segregation of duties and responsibilities, and assist in the ongoing
improvement of concerned bank.

The guidelines for credit management may be organized into the following
sections:

2.2.1 Policy guidelines:

a. Lending guidelines
b. Credit assessment and risk grading
c. Approval authority
d. Segregation of duties
e. Internal control and compliance

2.2.2 Management structure and responsibilities

2.2.3. Program guidelines:

a. Approval process
b. Credit administration
c. Credit monitoring
d. Credit recovery

Now the guidelines are discussed in the following:

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2.2.1. Policy guidelines
a. Lending guidelines: The lending guidelines include the following:
Industry and Business Segment Focus
Types of loan facilities
Single borrowers/ group limits/ syndication
Lending caps
Discouraged business types

As a minimum, the followings are discouraged:

o Military equipment/ weapons finance
o Highly leveraged transactions
o Finance of speculative investments
o Logging, mineral extraction/ mining, or other activity that is
ethically or environmentally sensitive
o Lending to companies listed on CIB black list or known
o Counter parties in countries subject to UN sanctions
o Lending to holding companies.
b. Credit Assessment and Risk Grading:
A thorough credit and risk assessment should be conducted prior to the
granting of loans, and at least annually thereafter for all facilities.

Credit Applications should summaries the results of the risk assessment

and include, as a minimum, the following details:
Environment or social risk inputs
Amount and type of loan (s) proposed
Purpose of loans
Loan structure (tenor, covenants, repayment schedule, interest)

9
 Security arrangement
Any other risk or issue
Risk triggers and action plan-condition prudent, etc.

Risk is graded as per Lending Risk Analysis (LRA), Bangladesh Banks

Guidelines of classification of loans and advances.

c. Approval Authority:
Approval authority may be as the following:
Credit approval authority has been delegated to Branch
Manager, Credit Committee by the MD/ Board
MD/ Board shall review delegated approval authorities
annually.

MD/ Board:
Approvals must be evidenced in writing. Approval records must
be kept on file with credit application
The aggregate exposure to any borrower or borrowing group
must be used to determine the approval authority required.
Any credit proposal that does not comply with Lending
Guidelines, regardless of amount, should be referred to Head
Office for approval.

d. Segregation of Duties:
Banks should aim at segregating the following lending function:
Credit approval/ risk management

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 Relationship management/ marketing
Credit administration

e. Internal Control and Compliance:

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

2.2.2. Management structure and responsibilities

The following chart presents an example of credit management

structure:

Managing Director

HO Business
Development / Corporate Credit Committee HO Credit / Risk
Banking / Marketing

Branch Manager

Marketing Credit Officer Credit Admn. Loan Recovery

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2.2.3. Program guidelines

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

approval process:

Credit application recommended by Branch Manager /

Relationship Manager / Corporate

Head Office, Credit Division

Head Office Credit Committee

Executive Committee of Board of Directors

b. Credit administration: The credit administration function is critical in

ensuring that proper documentation and approvals are in place prior to the
disbursement of loan facilities.

c. Credit monitoring: To minimized credit losses, monitoring procedures

and systems should be in place that provides an early indication of the
deteriorating financial health of borrower.

d. Credit recovery: The recovery unit of branch should directly manage

accounts with sustained deterioration (a risk rating of sub-standard or
worse). The primary functions of recovery unit are:

Determine account action plan/ recovery strategy

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 Pursue all options to maximize recovery, including placing customers
into receivership or liquidation as appropriate.
Ensure adequate and timely loan loss provisions are made based on
actual and expected losses.
2.3 TOOLS OF CREDIT MANAGEMENT
For credit management, a firm may use tools available to them. Such tools
include Credit Risk Grading (CRG) and Financial Spread Sheet (FSS).
Credit risk grading is an important for credit risk management as it helps
the banks and financial institutions to understand various dimensions of
risk involved in different credit transactions. The aggregation of such
grading across the borrowers, activities and the lines of business can
provide better assessment of the quality of credit portfolio of a bank or
branch.

The Lending Risk Analysis (LRA) manual introduced in 1993 by the

Bangladesh Bank has been in practice for mandatory use by the banks and
financial institutions for loan size of BDT 1.00 crore and above. However,
the LRA manual suffers from a lot of subjectivity, sometimes creating
confusion to the lending bankers in terms of selection of credit proposals
on the basis of risk exposure. Meanwhile in 2003 end, Bangladesh Bank
provided guidelines for credit risk management of banks wherein it
recommended, interlay, the introduction of Risk Grade Score Card for risk
assessment of credit proposals.
Bangladesh Bank expects all commercial banks to have a well-defined
credit risk management system that delivers accurate and timely grading.
In practice, a banks credit risk grading system should reflect the
complexity of its lending activities and the overall level of risk involved.

2.3.1 Definition of Credit Risk Grading (CRG)

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 the Credit Risk Grading (CRG) is a collective definition based on the
pre- specified scale and reflects the underlying credit-risk for a given
exposure.
A Credit Risk Grading deploys a number/ alphabet/ symbol as a
primary summary indicator of risks associated with a credit exposure.
Credit Risk Grading is the basic module for developing a Credit Risk
Management system.

2.3.2 Functions of Credit Risk Grading

Well-managed credit risk grading systems promote bank safety and
soundness by facilitating informed decision-making. Grading systems
measure credit risk and differentiate individual credits and groups of
credits by the risk they pose. This allows bank management and examiners
to monitor changes and trends in risk levels. The process also allows bank
management to manage risk to optimize returns.

2.3.3 Use of Credit Risk Grading

The Credit Risk Grading matrix allows application of uniform
standards to credits to ensure a common standardized approach to
assess the quality of individual obligor, credit portfolio of a nit, line
of business, the branch or the bank as a whole.
As evident the CRG outputs would be relevant for individual credit
selection, wherein either a borrower or a particular exposure/ facility
is rated. The other decisions would be related to pricing (credit-
spread) and specific features of credit facility. These would largely
constitute obligor level analysis.

14
 Risk grading also be relevant for surveillance and monitoring,
internal MIS and assessing the aggregate risk portfolio level
analysis.

2.3.4 Number and short name of grades used in the CRG

The proposed CRG scale consists of 8 categories with short names and
numbers are provided as follows:

Grading Short Name Number

Superior SUP 1
Good GD 2
Acceptable ACCPT 3
Marginal/ Watch list MG/ WL 4
Special Mention SM 5
Sub Standard SS 6
Doubtful DF 7
Bad and Loss BL 8

2.3.5 Financial Spread Sheet in Credit Management

1. Financial Spread Sheet provides a quick method of assessing business

trends and efficiency
Assess the borrowers ability to repay
realistically show business trends
Allow comparisons to be made within industry

2. Borrowers that provide Financial Spread Sheets are more likely to be

good borrowers

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 At two of the client banks the FSRP consultants could not find
10 bad loans with 3 consecutive years of financial statements
available.
Out of 25 good loans reviewed by the FSRP consultants, at two
of the client banks, 3 consecutive years of financial statements
were available on all of them.
The willingness of the customer to provide detailed financial
information and to answer question regarding that information, is
indication of the cooperation the bank will receive in the future.

3. A Financial Spread Sheet is an important tool in a discipline of

organized approach to credit analysis.

4. The historic financial reports of a company are a primary indicator of its

future financial position. Spreadsheets allow proper analysis of financial
statements.

16
 Chapter Three

JANATA BANK LIMITED: AN

OVERVIEW

3.1 History of Janata Bank Ltd.

3.2 Mission of Janata Bank Ltd.
3.3 Services provided by Janata Bank Ltd.
3.4 Credit program
3.5 Performance of Janata Bank Ltd.
3.6 Loans and advances

3.1 HISTORY OF SO BANK LTD.

17
Sonali bank limited was incorporated on 3 June 2007 as a public limited
company under companies act, 1994 with its head office at Dhaka and is
governed by the banking companies act.1991 and subsequently on 15
November, 2007 the bank took over the business of Sonali Bank with all
its assets, benefits, rights, powers, authorities, privileges, liabilities,
borrowings and obligations as a going concern under a vendors agreement
signed between the government of the Peoples Republic of Bangladesh
and the Sonali Bank limited.

The bank, through its 1180 branches including 2 overseas branches in

Kolkata at Siliguri in India have been providing banking services to its
customers. Out of the total 1180 branches, 618 are operating in rural areas
and the rest 562 in the urban branches are performing specialized functions
at different locations of the country.
3.2 MISSION OF SONALI BANK LTD.
Dedicated to extend a whole range of quality products that support
divergent needs of people aiming at enriching their lives, creating value for
the stakeholders and contributing towards socio-economic development of
the country.

VISSION OF SONALI BANK LTD.

Socially committed leading banking institution with global presence.

3.3 SERVICES PROVIDED BY SONALI BANK LTD.

Bank Ltd. offers all the major banking facilities and services to its
customers. The Bank with its network spreading throughout the country
has a unique feature of plough back savings from those places and then
investing them into different loan portfolios.

18
Janata Bank Ltd. with its wide-ranging branch network and skilled
personnel provides prompt and personalized services like issuing:
a. Demand Draft
b. Telegraphic Transfer
c. Mail Transfer
d. Pay Order
e. Security Deposit Receipt
f. Transfer of fund by special arrangement,
i) Normal transfer
ii) Electronic transfer through Ready Cash Card.

The Bank provides the following Internet facilities:

Current/Savings/STD account status
FDR account status
Advance account status
Loan account status
Remittance services are available at all branches and foreign remittances
may be sent to any branch by the remitters favoring their beneficiaries.
Remittances are credited to the account of beneficiaries instantly or within
shortest possible time. Janata Bank Ltd. has correspondent banking
relationship with all major banks located in almost all the countries/cities.
Expatriate Bangladeshis may send their hard earned foreign currencies
through those banks or may contact any renowned banks nearby (where
they reside/work) to send their money to their dear ones in Bangladesh.
Janata Bank has already established a worldwide network and relationship
in international Banking through its 4 (four) overseas branches and 1221
foreign correspondents. The Bank has earned an excellent business
reputation in handling and funding international trade particularly in

19
boosting export & import of the country. The Bank finances exports within
the framework of the export policy of the country.
3.4 CREDIT PROGRAM

The bank has continued its lending operation in the productive and priority
sectors covering agriculture, industry, trade and commerce. Total loans and
advances of the bank as on 2005, 2006, and 2007 were tk. 22,700.96crore,
tk. 24102.93, tk. 20634.76 respectively.

General trade and working capital loans:

Sonali Bank Limited plays a vital role in the economy by extending credit
facilities to both public and private sector organizations in different types
of commercial activities and trade. In the year 2007, the bank disbursed tk.
726.00 crore under in the public sector and tk.514.98 crore in the private
sector. The outstanding loans and advances as on 31 December 2007 was
tk.3340.37 crore in this sector. Comparative position of general trade and
working capital loans are given below-

Year Public Private Amount

sector(in sector(in sanctioned(in
crore) crore) crore)
2005 250.00 1413.57 1663.57
2006 294.33 1350.55 1644.88
2007 291.02 514.98 726.00

Agricultural/rural credit:
With an aim to augment agricultural output, create employment
opportunities and generate income of the rural people, Sonali Bank
continued to extend credit facilities to all sections of rural population and
off-farming activities. Total disbursement of Agri/Rural credit at the end of
2006 and 2007 stood at tk.7021.00 crore and 7512.40 crore respectively.

20
The outstanding amount of tk.2849.72 crore in 2007 while it was tk.
3039.87 crore in 2006. The comparative position of rural credit are given
below-
Year Total Outstanding(i
disbursement(incrore n crore)
)
2005 6504.70 3037.69
2006 7021.00 2849.72
2007 7512.41 3039.87

Micro credit
With a view to improving the socioeconomic condition through extending
trade and commerce and strengthening foundation of rural economy of our
country, RCD of head office has been performing a significant role since
its inception. Later on due to increasing scope of the activities the micro
credit system has been accepted and recognized worldwide as an effective
tool for poverty alleviation, self-employment, and rural economic
development. Up to December 2007, tk.3299.47 crore has been disbursed
in this sector under various projects whereas it was tk. 3056.63 crore up to
December 2006. The comparative position of the micro credit are shown
below-
Year Total
disbursement(i
n crore)
2005 2777.96
2006 3036.63
2007 3299.47

Agro based industrial finance:

Economic development of Bangladesh mainly depends on agriculture. A
large number of people of the country are directly or indirectly involved
with agriculture. As a largest commercial bank of the country, Sonali bank
is playing and important role in the economy through expansion of agro-

21
based industries by extending credit facilities under Agro based industries
credit scheme. The comparative position on agro based industries are given
below-
Year Total
disbursement(i
n crore)
2005 2644.54
2006 2659.47
2007 2708.03

Foreign trade finance:

Total foreign exchange business of the bank for the year 2007 is tk.
25904.38 crore as against tk. 26094.00 crore in 2006. The comparative
position of foreign exchange business for the year 2005, 2006, and 2007 is
shown below-
Particulars 2007(tk. In 2006(tk .in 2005(tk. In
crore) crore) crore)
Total import 7649.68 6776.30 11852.80
Total export 7804.59 7969.50 6409.20
Inward remittance 9217.83 9844.90 7548.16
Outward 1232.28 1503.30 1131.51
remittance
Total 25904.38 26094.00 26941.67

Industrial finance:
While implementing govt. policies and goals to accelerate industrial
development program. Sonali Bank Limited has sanctioned a total term
loan of tk.329.74 crore to establish new industries in the year 2007 through
its 98 designated branches. The bank has thus created opportunity for
employment of 21600 persons by sanctioning credits in 2007.overall
industrial credit position of the bank as on 31 December, 2007 are given
below-

22
 Nature of loan Amount Amount Outstandin
sanctioned recovered g

Large and 3668.22 784.05 2660.58

Medium
TypeSmall and As645.25
on As on 31-12-173.78As on 31-12-
582.41
Cottage 31-12-2007(tk 2006(tk in 2005(tk in
Working capital 939.78 706.74 1851.25
in crore) crore) crore)
to industries
Fixed deposit 7071.22 5031.52 5120.64
Short term deposit 2613.55 2194.67 2013.63
Savings deposit 11088.14 10418.27 9204.21
Current deposit 7578.96 5921.77 5945.86
Other deposit 3987.62 6090.35 5003.16
Bill payable 560.23 573.72 420.40
Total 32899.72 30230.30 27707.90

3.5 PERFORMANCE OF JANATA BANK LTD.:

Sonali Bank Ltd. is the largest commercial bank in Bangladesh. The aim of
the Bank is to actively participate in the socio-economic development of
the nation by operating a commercially sound Banking system. It provides
credit to deserving borrowers and at the same time, protects depositors
interest.

Deposits:
Total deposit of the bank as on 31 December is tk.32899.72 crore which
shows an increase of tk. 2669.42 crore over that of the preceding year. The
rate of increase in deposit was 8.83%. Total deposit comprises demand
deposit tk.9437.25 crore and time deposit tk.23462.47 crore. In
government pubic and private sector, the deposits are tk 3014.29, 6882.30
and 23003.13 crore respectively. The breakup of total deposit by type
term and sector are presented in the following table:

Bread-up deposits by type

23
 Break up deposits by terms
Terms As on 31-12- As on 31-12- As on 31-12-
2005 2006 2007
Demand 7237.35 7920.44 9437.25
Time 20470.55 22309.86 23462.47
Total 27707.90 30230.30 32899.72

Break-up of deposits by sector

Type As on 31-12- As on 31-12- As on 31-12-
2005 2006 2007
Govt. 2460.00 2834.09 3014.29
Public 4833.67 4835.45 6882.30
Private 20414.23 22560.76 23003.13
Total 27707.90 30230.30 32899.72

Investment:
Total investment of the bank stood at tk. 8889.09 crore at the end of 2007.
Major investments were made in treasury bills, treasury bonds shares and
debentures. The sector wise summary of the investment as on 31
December, 2007 in Govt. pubic and private sectors is shown below:

Description Governmen public Private Total

t
Treasury bills 856.48 856.48
Bonds 7809.79 3.50 20.46 7833.75
Shares - 3.50 20.51 24.01
Prize bonds 10.40 - - 10.40
Others (security - .35 .35
deposit with reserve
bank of India)
Shares in sonali - 77.53 77.53
bank(UK) ltd.

24
Branches overseas - - 11.14 11.14
(kolkata & Siliguri)
Debentures - 64.04 11.39 75.43
Total 8676.67 71.04 141.38 8889.09

Sector wise investment as on 31 December, 2005

Government public Private Total Total

Treasury bills 2330.00 - - 2330.00
Bonds 1800.76 15.00 20.00 1835.76
Shares - 3.50 18.15 21.65
Prize bonds 9.30 - - 9.30
Call money - - 18.00 18.00
Term deposits - - 270.00 270.00
Debentures - 78.86 12.44 91.30
Total 4140.06 97.36 421.24 4658.66

Import Business:
For the very beginning the Bank has embarked on extensive foreign
exchange business with a view to facilitating international trade
transactions of the country. The Bank has provided BDT 7650 million loan
as of December 31, 2007. Import mainly confined to consumer goods, capital
machineries and industrial raw materials.
Year Total
disbursement(i
n crore)
2005 11853
2006 6776
2007 7650

Export Business:
The total export business handled by the bank amounted to tk. 7804.59
crore as of December 31, 2007 as compared to tk. 7969.50 crore in 2006.

25
Major export items were Readymade Garments, Shrimps, Tea & non-
traditional items. Import remained confined mainly to Consumer's goods,
capital machinery & Industrial raw materials.

Year Total disbursement(in

crore)
2005 6409.00
2006 7969.50
2007 7804.59

Operating Revenue:
The operating revenue of the bank stood to 442.52 as on December2007
against tk.300.58 crore in 2006.

Year Total operating profit (in

crore)
2005 396.36
2006 300.58
2007 442.52

26
 Chapter Four

CREDIT POLICY

4.1 Meaning of credit policy

4.2 Objective of credit policy
4.3 Formulation of credit policy
4.4 Essential components of a sound credit policy
4.5 Lending guidelines:
4.5.1 Industry and business segment focus

27
 4.5.2 Types of credit facilities

4.1 MEANING OF CREDIT POLICY

Policy entails projected course of action. Janata Bank Ltd. have its own policy granting
credit although credit is always a matter of judgment applying common sense in the
light of ones experience.
A sound credit policy includes among other things safety of funds invested vis--vis
profitability of the bank. Encouraging maximum number of small loans is better than
concentration in a particular type of advances, which ensures sufficient liquidity with
least incidence of bad debts.
It has to be borne in mind that a good loan allowed to a properly selected borrower is
half collected. In order to make a good loan there should have a good loan policy.

4.2 OBJECTIVE OF CREDIT POLICY

There are some objectives behind a written credit policy of Janata Bank Ltd. that are as
follows;
To provide a guideline for giving loan.
Prompt response to the customer need.
Shorten the procedure of giving loan.
Reduce the volume of work from the top level of management.

28
 Delegation of authority of work from top level of management.
To check and balance the operational activities

4.3 FORMULATION OF CREDIT POLICY

One of questions that should arise in a discussion of credit is who should formulate the
policy. Although the ultimate responsibilities lay at the highest level in the organization
i.e. the board of directors. Yet the actual drafting shall have to be done by the senior
lending office in consultations with the chief executive officer and with contribution
from senior officers, associates and subordinates. Obviously the level of origin will
vary with the size and structure of the organization. The matter then referred to the
board for approval after careful examination consideration and discussion.

4.4 ESSENTIAL COMPONENTS OF A SOUND CREDIT POLICY:

There can be some variations based on the needs of a particular organization, but at
least the following areas should be covered in any comprehensive statement of credit
policy and JB policy also covers these areas:
1. Legal consideration: The banks legal lending limit and other
constraints should be set forth to avoid inadvertent violation of banking
regulations.
2. Delegation of authority: Each individual authorized to extend credit
should know precisely how much and under what conditions he or she
may commit the banks funds. These authorities should be approved, at
least annually, by written resolution of the board of directors and kept
current at all times.
3. Types of credit extension: One of the most substances parts of a loan is
a delineation of which types of loans are acceptable and which type are
not.
4. Pricing: In any profit motivated endeavor, the price to be charged for
the goods or services rendered is of paramount without it, individuals
have few guidelines for quoting retag or fees, and the variations
resulting from human nature will be a source of customer dissatisfaction.
5. Market Area: Each bank should establish its proper market area, based
upon, among other things, the size and sophistication of its organization

29
 its capital standpoint, defining ones market area is probably more
important in the lending function than in any other aspect of banking.
6. Loan Standard: This is a definition of the types of credit to be
expended, wherein the qualitative standards for acceptable loans are set
forth.
7. Credit Granting procedures: This subject may be covered in separate
manual, and usually is in larger banks. At any rate, it should not be
overlooked because proper procedures are essential in loan establishing
policy and standards. Without proper procedure for granting credit and
constant policing to ensure that these procedures are meticulous carried
out, the best conceived loan policy will not function and inevitable,
problems will develop.

4.5 LENDING GUIDELINES:

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

4.5.1 Industry and business segment focus

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

4.5.2 Types of credit facilities: Bank will go for

30
 Term financing for new project had BMRE of existing projects (large,
medium, SME, SCI).
Working capital for industries, trading services and others (large,
medium, SME, SCI).
Trade finance for import and export
Lease finance
Small loan for traders, micro enterprise and other productive small
venture.
Consumer finance
Fee business

Chapter Five

FUND INVESTED BY JANATA BANK

5.1 Introduction
5.2 Economic sector wise distribution of fund
5.3 Nature wise distribution of loans & advances
5.4 Maturity grouping of distribution loans & advances

31
 5.5 Securities in credit management

5.1 INTRODUCTION
The principal function of a bank is to lend. Lending is a dynamic activity. It is through
the medium of lending the banking industry promotes economic activity, instills and
encourages, at the individual level, the principal of self-reliance, and yield earnings for
the bank. It is lending alone that brings banking into a more meaningful and purposeful
contract with public and, therefore, has the greatest impact upon them.

Proper utilization of fund is an essential pre-requisite of successful bank management.

The procurements of funds supported by an efficient deployment of that procured fund
lead a bank to the highest point of profitability. I would try to concentrate on Janata
Banks nature, pattern, and allocation of invested resources in this chapter. The bank
under study has divergence in its investment portfolio, loan programs, advances and
recovery rate etc.

5.2 ECONOMIC SECTOR WISE DISTRIBUTION OF FUND

Janata Bank Ltd. is engaged in extending long, medium and short term loans to various
economic sectors in the country. As Janata Bank Ltd. extends its credit programs all

32
 over the economy such as agricultural credit program, industrial credit program and
commercial financing; the bank tries to achieve significant profit from its operations
and also to improve the economic conditions of the general public of the country.

Table: economic sector wise distribution of loans and advances during 1997-2006

Economic Phase-1 Phase-2

sectors 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Jute industries 718.9 719.41 747.87 778.28 870.36 837.10 855.90 809.7
Jute trade 23.69 19.18 16.30 1.32 12.36 12.50 11.50 10.6
419.3
Tannery 509.03 423.96 444.65 439.60 361.60 376.50 393.7
8
349.0
Textile 367.51 372.76 369.95 351.66 360.10 495.60 496.5
1
Transport 32.27 29.17 30.27 24.54 24.04 36.00 5.20 6.07
Steel & 474.7
212.98 231.01 208.58 265.70 99.80 105.20 98.85
engineering 2
Tea 15.90 14.00 14.02 13.99 12.16 12.20 12.50 12.35
Sugar mills 88.46 80.01 97.17 99.50 113.24 138.20 116.40 150.82
379.3
House building 428.82 522.59 584.09 659.82 736.40 801.40 182.67
4
556.2
Rural credit 602.81 667.28 778.50 658.12 831.30 917.20 961.82
8
Bricks 45.02 41.52. 79.64 88.20 90.95 85.90 86.50 118.00
Cold storage 5.03 8.45 10.38 9.54 12.32 8.60 15.70 8.00
Food 74.28 80.07 160.15 216.20 124.28 116.70 124.70 126.98
751.3
Export credit 856.38 1016.50 1019.20 1220.78 1295.00 1125.6 1429.03
0

33
 634.7
Import credit 964.98 1273.06 1154.98 1507.85 1614.40 2730.50 3422.73
6
782.6
Industrial credit 894.72 1099.82 1146.35 1403.78 1381.90 1437.20 1496.53
2
1990.
Others 2266.15 2566.61 3036.99 2379.17 2850.90 3229.10 4124.78
42
7341. 10778.5 12446.7
Total 8095.29 9329.39 9974.87 1014619. 13849.25
00 0 0

5.3 NATURE WISE DISTRIBUTION OF LOANS AND ADVANCES

Sanctioning advances to customers and others is one of the principal services of a
modern bank. Advances by the commercial banks are made in different forms:
Loans
Overdrafts
CC
LIM
LTR
Bills purchase and discounted

Janata Bank Ltd. sanctions loans under the above mentioning category. It usually grants
short-term advances which are utilized to meet the working capital requirements of the
borrower. Only a small portion of the banks demand and time liability are advanced on
long-term basis where the banker usually insists on a regular repayment by the
borrower in installments. While lending fund, a banker follows a very cautious policy
and conducts his business on the basis of well-known principles of sound lending in
order to minimize the risk.

5.4 MATURITY GROUPING OF DISTRIBUTION LOANS AND ADVANCES

At the very beginning of taking decision for giving credit, Janata Bank mainly
concentrates mainly on liquidity. As it is doing business by public deposits, it is bound
to pay the money when people want. A sizable portion of bank advances is, therefore,
granted to meet the working capital requirements of the borrower rather than to meet

34
the fixed capital requirement, i.e., construction of building or purchase of fixed
deposits. A banker would be failing in his duty to safeguard the interest of his
depositors and shareholders if his credit policy does not provide a method of gradual
repayment and final recovery of the money advanced.

For liquidity reasons, Janata Bank0is giving credit on short period basis and against
security. Short-term loans ensure liquidity to a greater extent than long-term loan. We
can classify the bank loans and advances under the following maturity stage:
Payable on demand
Payable within 3 months
Payable within 3 months to 12 months
Payable within 1 year to 5 years
Payable in more than 5 years

5.5 SECURITIES IN CREDIT MANAGEMENT

One of the most important functions of a bank is to employ its fund by way of
loans and advances to its customers and a banks strength depends considerably on the
quality of its loans and advances. In order times, when the bankers knew the customers
personally and intimately and had complete confidence in the integrity and honesty of a
customer, they used to allow loans and advances without a security. The position is
quite different today. Banks having a large number of officers over a wide area cannot
allow loans and advances without retention of security in one form or the other.
Though the banks are now expected to lay greater emphasis on the purpose for
which the borrower needs rather than security he can afford to give, security continues
to be one of the most important factors, which determines to a significant extent the
bankers willingness to lend money.
Security is obtained as a line of last defense to fall back upon. It is meant to be
an insurance against emergency. But taking security, bank acquires a claim upon the
assets of the borrower if repayment is not made as planned. But what should be the
significant securities of loans depends in the guidelines prescribed by the Bangladesh
Bank through BCD circular no. 17/1977 and also the negotiation of the respective
branch to its borrowers. The most significant categories of security lodged are as:
Goods and commodities
FDR

35
 Real estate
Stock exchange securities
Life insurance policies
Gold and gold ornaments
Documents of title of goods
Book debts
Supply bills
Janata Bank Ltd. keeps sufficient security before final sanctioning of loans and
advances.

36
 Chapter Six

LOAN DISBURSEMENT PROCEDURE

OF JANATA BANK
LIMITED

6.1 Getting credit information

6.2 Information collection
6.3 Analyzing these information
6.4 Lending Risk Analysis (LRA)
6.5 Proposal analysis
6.6 Collateral evaluation
6.8 Proper supervision of the project
6.7 Final decision about the project
6.9 Documentation of the loan
6.10 Creation of charges for securing the loans

37
6.1 GETTING CREDIT INFORMATION
Janata Bank Ltd. collects credit information about the applicant to determine the credit
worthiness of the borrower. The bank collects the information about the borrower from
the following sources:
Personal investigation.
Confidential report from other bank Head Office/Branch/chamber of the commerce.
CIB Report from Central Bank.

6.2 INFORMATION COLLECTION

The loans and advances department gets a form filled by the party seeking a lot of
information. The information is listed below:
Name and address of the borrower (present and permanent).
Constitution or status of the business.
Data of establishment and place of incorporation.
Particulars of properties, partners and Directors.
Background and business experience of the borrowers.
Particulars of personal assets, name of subsidiaries, percentage of share
holding and nature of business.
Details of liabilities in name of borrowers, in the name of any directors.
Financial Statement of the last three years.
Nature and details of business/products.
Details of securities offered.
Proposed debt equity ratio.
Other relevant information.

6.3 ANALYZING THESE INFORMATION

Janata Bank Ltd. then starts examination whether the loan applied for, is complying
with its lending policy. If comply, then it examines the documents submitted and the
credit worthiness. Credit worthiness analysis, i.e. analysis financial conditions of the
loan applicant are very important. If loan amount is more than 50, 00,000, then bank
goes for Lending Risk Analysis (LRA) and Spreadsheet Analysis (SA), which are

38
recently introduced by Bangladesh Bank. According to Bangladesh Bank Rules, LRA
and SA are a must for the loan exceed of one crore.
If these two analyses reflect favorable condition and document submitted for the loan
appeared to be satisfactory, then bank goes for further action.

6.4 LENDING RISK ANALYSIS (LRA)

LRA is a very important and vital analysis for deciding whether the loan proposal is
potential or not. Many types of scientific, mathematical, statistical and managerial tools
and devices are required to perform this analysis. Janata Bank Ltd. maintains a
prescribed format for Lending Risk Analysis, which includes a spreadsheet to analyze a
lot of things. It is not possible to discuss the entire LRA in this report.

Lending Risk Analysis (LRA)

b) Industry Risk:
i. Supply Risk- What is the risk of failure to disruption in the supply of
input?
ii. Sales Risk- What is the risk of failure due to disruption sales?
c) Company Risk:
1. Company Position Risk:
i. Performance Risk- What is the risk if the company position is so
weak that it cannot perform well enough to repay the loan, given
expected external condition?
ii. Resilience Risk- What is the risk of failure due to lack of
resilience to unexpected external condition?
2. Management Risk:
i. Management Competence Risk- What is the risk of failure due to
lack of management competence?
ii. Management Integrity Risk- What is the risk of failure due to
lack of Management Integrity?
d) Security Risk:
i. Security Control Risk- What is the risk that the bank fail to realize the
security?

39
 ii. Security Cover Risk- What is the risk that realized security value is
less than the exposure?

6.5 PROPOSAL ANALYSIS

The Project Proposal is analyzed and decision about the project is taken. The loans and
advance department is responsible for the analysis. After preliminary appraisal of the
loan project the final approval is obtain from the manager. If the loan amount crosses a
certain amount (no found), managers send the loan project to the principal office for
final approval. The experts in principal office find out different projected ratios and
developed and understanding about the potentiality of the project. Bank evaluates a
loan proposal by considering few predetermined variables. These are:

Safety
Liquidity
Profitability
Security
Purpose of the loans
Sources of repayment
Diversification of risk etc.

The most important measure of appraising a loan proposal is safety of proposal. Safety
is measured by the security offered by the borrower and repaying capacity of the
borrower. The attitude of the borrower is also important consideration. Liquidity means
the inflow of cash into the project in course of its operation. The profit is the blood of
any commercial institution. Before approval of any loan project the bank authority has
to ensure that the proposed project will be profitable venture. Profitability is assessed
from the projected Profit and Loss Statement. The security is the only tangible asset
remains with the banker. Securing of collateral is the only weapon to recover the loan
amount. So bank has to see that the collateral is easy to sale and sufficient to recover
the loan amount. Bank cannot sanction loan by only depending on collateral.
The sources of the payment of the project should be a feasible one. During sanctioning
any loan Bank has to be attentive about diversification of risk. All money must not be
disbursed amongst a small number of people. In addition any project must be
established for the national interest growth.

40
6.6 COLLATERAL EVALUATION:
Janata Bank Ltd. is very cautious about valuation of the collateral. The bank officials
simultaneously evaluate the collateral of the party offered by the private firm. The
valuation of the collateral increases the accuracy of its value estimated. Three types of
value of the collateral are assumed:
Current market price
Distressed price
Price after five years
The legal officers of the bank check the document ascertain their impurity.

6.7 FINAL DECISION ABOUT THE PROJECT

If the loan decision remains with the branch level, that branch sanctions the loan and if
the approving authority is Head Office then the decision comes to the branch by telex
or fax.
6.8 PROPER SUPERVISION OF THE PROJECT
If such provision is kept in the sanction contracts, the Janata Bank Ltd. officials go to
the project area to observe how the loan is utilized. If no such clause to supervise the
loan is added, even then the bank can see the performance of the project.

6.9 DOCUMENTATION OF THE LOAN

These are the most frequently used and common documents of above mentioned
charged and for other formalities for sanctioning the loan:
Demand Promissory Note: Here the borrower promises to pay the loan as and
when demanded by the bank to repay the loan.
Letter of Arrangement: Here the written amount of the loan sanctioned to the
borrower is specified.
Letter of Continuity: It is used to take continuous facilities as providing
continuous securities.
Letter of Hypothecation: It is the written document of the goods hypothecated
thus to put in case of need.

41
 Stock Report: This report is used for SOD and CC. In this report information
about the quality and quantity of goods hypothecated have furnished.
Personal guarantee: It is the additional confirmation of the borrower to repay.
Guarantee of the Directors of the company.
Resolution of the board of directors: It is used to borrow the fund to execute
documents and complete other documents.
Letter of disclaimer: By this letter, the borrower withdraws his all claim on the
property/mortgaged.
Letter of Acceptance: Letter indicating the acceptance of the sanction proposal
by the borrower.
Letter of Pledge: It is the written document of the goods pledge thus the
legality of holding the goods.
Letter of Disbursement: This is the document through which the payment of
sanctioned loan indicates.
Letter of partnership: In case of partnership firm, the partnership deeds are to
be provided.
Letter of Installment: The amount of installment that is to be paid at certain
intervals.
Tax Paying Certificate.
Any document if described, as essential in the sanctioned advice sanctioned
by the Head Office.

6.10 CREATION OF CHARGES FOR SECURING LOAN

For the safety of loan, Janata Bank Ltd. requires security from the loaner so that it can
recover the loan by selling security if borrower fails to repay. Creation of a charge
means making it available as a cover for an advance. The method of charging should be
legal, perfect complete. Importance of charging securities is as:
Protection of interest.
Ensuring the recovery of the money lent.
Provision against unexpected change.
Commitment of the borrower.
Securities are of two types:
a) Primary Security-Security deposited by the borrower himself to cover the loan
such as FDR, cash, PSS, PSP, easily cashable items.

42
 b) Collateral Security-Any type of security on which the creditor has personal
right of action on the debtor in respect of advance.

Chapter Seven

RECOVERY PERFORMANCE OF
JANATA BANK LIMITED

7.1 Programs for loan recovery

7.2 Recovery programs to be taken by Janata Bank Ltd.
7.3 Recovery patterns of loans & advances
7.4 Problems in loans recovery

INTRODUCTION:
Sources of loans and advances, allocations of such available funds, efficiency in fund
allocations were disclosed. All theses are the one side of sound credit management.
Besides, the most important part of sound credit management is of disclosing the
recovery of loans and advances, problems thereon defaulter patterns, provisioning
against bad and doubtful loans and advances etc. usually banks credit management
performance represents the recovery performance of loans and advances as against the

43
utilization of funds. Besides, it has substantial impact on the banks ultimate profit
performance.

7.1 PROGRAMS FOR LOAN RECOVERY

As the recovery performance of the commercial banks in Bangladesh gradually
deteriorating overtime When Janata Bank Ltd. sanctions loans and advances to its
customers, they clearly state the repayment pattern in the loan agreement. But some
credit holders do not pay their credit in due period. The nationalized and private sector
commercial banks have to face this sort of problems. This situation is, especially severe
in Janata Bank Ltd.. To overcome the problem of overdue loan, the bank need take
particular loan recovery program.

7.2 RECOVERY PROGRAMS TO BE TAKEN BY JANATA BANK LTD.

To establish credit supervision and monitoring cell in the bank
To re-structure the loan sanctioning and distributing policy of the bank
To sanction loans and advances against sufficient securities as best as
possible
To give more powers to the branch manager in credit management decision
making process
To offer a package of incentives to the sound borrowers
To give more emphasis on short term loans and advances
To impose restrictions on loans and advances for sick industries
To take legal actions quickly against unsound borrowers as best as possible
within the period specified by the law of limitations.

7.3 RECOVERY PATTERNS AND LOAN AND ADVANCES

Generally Janata bank Ltd. sanctions loans and advances to every sector of an
economy. Before going into details of recovery performance, we have to be familiar
with some terms used in recovery performance:
Disbursement: highest outstanding balance on any date during the reporting
period minus outstanding balance at the end of the preceding period.
Demand for recovery: overdue at the end of the reporting period plus recovery
during the reporting period.

44
 Recovery: highest outstanding balance on any date during the reporting period
minus outstanding balance at the end of the recovery period.
Outstanding: Outstanding figures in the ledger at the end of the reporting
period.
Overdue: Demand for recovery minus recovery.

Table: Recovery performance of Janata Bank Ltd.

(Tk in crore)

Phase-1 Phase-2
Particulars
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Total
1821 2310 2468 3145 3214 3546 3632 5476 5925 6542
disbursement
Demand for
4257 4365 4825 5154 5796 5986 6475 6849 7214 7544
recovery
Recovery 1618 1921 2127 2371 2492 2933 2590 3288 3607 3697
Overdue 2639 2444 2698 2783 3304 3053 3885 3561 3607 3847
Recovery as a
percentage of 38% 44% 47% 46% 43% 49% 40% 48% 50% 49%
DFR
Overdue as a
percentage of 62% 56% 53% 54% 57% 51% 60% 52% 50% 51%
DFR
Outstanding 5875 5295 5733 7341 8095 9329 9975 10146 10779 12447

7.4 PROBLEMS IN LOAN RECOVERY

There are a lot of reasons for which the loan recovery of the bank is very defective. In
most cases, problems may be raised from sanctioning procedures of loan, investigation
of the project, and investigation of the loans etc. that is, the problem in loan recovery
proves the outcomes of the default process in loan disbursement. The main reasons of
poor loan recovery are categorized in four broad types as follow:

45
A. Problems created by economic environment
The following problems arise from the effect of economic environment:
1. Changing in the management pattern: Changing of management patterns may
delay the recover of mature loan.
2. Changing in industrial patterns: The nationalized banks sometimes sanction
loan to the losing concern for further improvement of the respective sector, but
in most cases, they fail to achieve progress.
3. Operation of open market economy: In our country mainly industries become
sick and also close their business on account of emerging of open market
economy. The cost of production is high and the quality of goods is not of
required of standard. As a result, they become the losing concerns and the
amount of bad loan increases.
4. Rapid expansion of business: There are many companies, which expand their
business rapidly, but the expansion is for short time. In the long run, the amount
of classified loan increases.

B. Problems created by government

The following problems are arisen by the government:
1. External pressure: Janata Bank Ltd. has also faced many problems in the
loan recovery process as a part of continuous pressure from various
interested groups.
2. Loan to government organization: Janata Bank Ltd. is bound to sanction
loan to government organization, though these are losing concern. For
this reason, banks faced problems in loan recovery.
3. Legal problems: Existing rules and regulations are insufficient to cover
the legal aspects of loan recovery. As a result, defaulters can get release
easily from all charges against them.
4. Frequent changes in government policies in regard to recovery of loan.

46
 C. Problems created by the bank:
The banks create the following problems:
1. Lack of analysis of business risk: Before lending, Janata Bank Ltd. does
not properly analyze the business risk of the borrowers and the bank
cannot forecast whether the business will succeed or fail. If it fails to run
well, the loan becomes classified.
2. Lack of proper valuation of security or mortgage property: In most
cases, bank fails to determine the value of security against the loan. As a
result, if the loan becomes classified, the bank cannot recover its loan
through the sale of mortgage.

D. Other general causes of poor loan recovery:

Apart from the specific reasons creating problems to recoup loan, there exists some
other general causes, which have a great impact on creating the problems, which are
faced by the Janata Bank Ltd. under study in the loan recovery process. These are:
3. Early sanction and disbursement of loan to the borrowers without proper
inspection of the project by the bank on account of pressure from
lobbying group.
4. Lack evaluation of technical and economic feasibility of the program.
5. Delay in disbursement of credit.
6. Credit is not allowed to actual entrepreneurs.
7. Lack of proper supervision.
8. Illiteracy of borrowers.
9. Negative attitude of borrowers to repay the loan.
10. Deterioration of the value system of the borrowers.
11. Money borrowers use their loan-money other than specified project, i.e.,
if the loan is sanctioned for industrial purpose; they use the money in
house building or purchase of land for their own purpose.
12. Sometimes borrowers invest their money outside the country. Many
borrowers transfer loan money to abroad where they deposited this
money in their own account or spent some other purpose.

47
 13. Sometimes local borrowers are found so much compelled to grant them
loan without proper study due to some unexpected reasons. Since these
borrowers are capable of getting loan by exercising their influence, they
can also escape the repayment liability.
.
14. Problems responsible for non-implementation and delayed
implementation of project for which the entrepreneurs of the project
cannot repay the loan. The causes of failure may be:
Failure to ascertain the economic availability of the projects
Time lag between approval and sanctioning of the projects
Import of machinery and raw materials both are the problems of
paucity of foreign exchange and procedures of licensing.

All of these reasons discussed above are general reasons for problems loan recovery of
Janata Bank Ltd.. Besides these, there are some specific reasons for loan recovery
problems faced continuously by Janata Bank Ltd.. They are as:

Loans are given under fictitious names and enterprise

Loans are given without sufficient securities
Approval of the loans in excess of the branch managers power
Improper monitoring and supervision of credit
Political misuse if loan programs operated by the public sector banks
Lack of timely action against willful defaulter
Loans are sometimes for economically unsound project.

Problems in loan recovery are the outcome of the default on loans disbursements in the
earlier period.

48
 Chapter Eight

CLASSIFIED LOANS AND BANKS

PERFORMANCE

8.1 Introduction
8.2 Signs for classification
8.3 Loan classification guidelines from Bangladesh Bank
8.4 Performance of Janata Bank Ltd.
8.5 Impact of provision for loan on Bank's profit

49
8.1 INTRODUCTION
Banks are financial service firm, producing and selling professional management of the
publics funds as well as performing many other roles in the economy. But now- a-days
commercial banks are not performing their activities smoothly for a large burden of
default loan. Every year Janata Bank Ltd. distributes thousand crore taka among
individuals, organizations etc. but a large sum of these distributed fund cannot be
recovered in due time. The Bank has to classify this loan. In this chapter I would like to
concentrate on classification procedure, provision making for particular classification,
performance of the bank regarding classified loan and recovery of such classified loan.

8.2 SIGNS FOR CLASSIFICATION

First and foremost requirement for any and all credit managers is to identify a problem
credit in its earlier stages by recognizing the signs of deterioration. Such signs include
but not limited to the following:
1. Non-payment of interest or principal or both on due dates or past dues beyond a
reasonable period or recurring past dues.
2. In case of Overdraft no movement in the account beyond a reasonable period.
3. Deterioration in financial condition of the client, as gathered from clients latest
financial statement.
4. A shortfall in collateral coverage, particularly if the collateral was a key factor in
the decision-making.
5. Death or withdraw of key-owners or management personnel.
6. Company filing for bankruptcy or voluntary dissolution.
7. Adverse market report about the company itself or its principal owners.

8.3 LOAN CLASSIFICATION-GUIDELINES FROM BANGLADESH BANK

Classification of overdue loans and advances opened a new era in the credit
management of commercial banks in Bangladesh. Before 1989 no specific guidelines
were followed by the commercial banks for this purpose. In 1989, Bangladesh Bank

50
issued BCD circular No.34/1989 stating specific rules and conditions of loan
classification.

After that each schedule banks except BKB, RAKUB, and BSB would be responsible
for its own loan classification according to the guidelines are presented in the following
table:

TABLE: LOAN CLASSIFICATION SYSTEM*

Status of Frequency of
Length of overdue Rate of provision
classification classification
All loans except
Annual provision
Agricultural loans:
Less than 1 year Unclassified 1%
Loans overdue for 1 year but
Substandard 10%
less than 3 years
Loans overdue for 3 years
Doubtful 50%
but less than 5 years
Loans overdue for 5 years or
Bad/loss 100%
more
For agricultural loan: Classified,
Loans not overdue for 5 substandard, 5%
years or more doubtful
Loans overdue for 5 years or
Bad/ loss 100%
more
*Source: BCD Circular no. 1989

According to this circular loans and advances were classified on a loan-by-loan basis
rather sample classification. This process was continued till 1994. Bangladesh Bank
further issued a circular in1995 (BCD circular#20/1994). The title of the circular was
Revised rules of classification and provisioning of loans and advances, which came
into implementation from January 1, 1995.

51
 Table: schedule of loan classification and provision program*
a. types of
1st stage 2nd stage 3rd stage 4th stage 5th stage
classification
Period Period Period Period Period
overdue overdue overdue overdue overdue
Less than Less than Less than Less than 6 Less than 3
Unclassified
18 months 12 months 19 months months months
18 months 12 months 9 months or 6 months or 3 months or
or more but or more but more but more but more but
Substandard
less than 36 less than 24 less than 24 less than 12 less than 6
months months months months months
36 months 24 months 12 months 9 months or 3 months or
or more but or more but or more but more but more but
Doubtful
less than 48 less than 36 less than 24 less than 12 less than 6
months months months months months
More than 36 months 36 months 24 months 12 months
Bad
48 months or more or more or more or more
b. Rates of
provision
Unclassified 1% 1% 1% 1% 1%
Substandard 10% 10% 15% 15% 20%
Doubtful 50% 50% 50% 50% 50%
Bad 100% 100% 100% 100% 100%
c. Period of Annual Half yearly Half yearly Quarterly Quarterly
classification basis basis basis basis basis
*Source: BCD circular no. 20 of 27/12/1994

For loan classification Bangladesh Bank also issues circular time to time after
27/12/1994 like BPRD circular no 16,9,2,9 and 17 of 6/12/1998, 14/5/2001, 15/3/2005,
25/8/2005, and 6/12/2005 respectively. Some of these are as follows:

Table: status, type and definition of classification*

52
Status Loan type Definition of status

Unclassified. All current loan All current loans with

Sub standard (SS)
When degree of risk for
non-payable is high but (Less than 5 years)
there is reasonable respect
that the loan condition can
be improved
Doubtful (DF)
When chance of recovery
is uncertain
required eligible security
Continuous/demand/ term Overdue is more than 3
loan months but less than 6
months if default amount
of installment is equal to
installment payable in 6
months
More than 5 years If default amount of
installment is equal to
installments payable in 12
months.
Short-term agro. credit Overdue is more than 12
and micro credit months but less than 36
months
Continuous and demand Overdue is more than 6
months but less than 9
months

Term loan less than 5 If default amount of

years installment is equal to
installments payable in 12
months.
More than 5 years If default amount of
installment is equal to
installments payable in 12
to 18 months.
Short-term agro. credit Overdue is more than 36
and micro credit months but less than 60
months.
Bad/ loss (BL) Continuous and demand Overdue is more than 12

53
 months
No security held, borrower
not traceable, time barred
loans, no hope of recovery

Term loan If default amount of

(Up to 5 years) installment is equal to
installment payable in18
months.
More than 5 years If default amount of
installment is equal to
installment payable in 24
months.

Short-term agro. credit Overdue is more than 60

and micro credit months

Source: Bangladesh Bank, BRPD Circular No. 16 of 1998*

Table: loan classification system, 2001*

Status of Frequency of
Length of overdue Rate of provision
classification classification
Less than 6 months Unclassified 1% Quarterly
Loans overdue for
Sub standard (SS)
6 months but less 20%
than 9 months
Loans overdue for Doubtful (DF) 50%
9 months but less

54
 than 12 months
Loans overdue for
Bad/ loss 100%
12 months or more
*Source: Bangladesh Bank, BRPD Circular No. 9 of 2001

Table: loan classification system (international standard)

Status of Frequency of
Length of overdue Rate of provision
classification classification
Less than 3 months Unclassified 1%-5%
Loans overdue for
Sub standard (SS)
3 months but less 10%-25%
than 6 months
Loans overdue for
Doubtful (DF)
6 months but less 50%-75%
than 9 months
Loans overdue for
Bad/ loss 100%
9 months or more
*Source: Studies in Bangladesh Banking, BIBM, 2000

8.4 PERFORMANCE OF JANATA BANK LTD.

From my analysis it is found that during first phase (1996-2000) total loan of Janata
Bank Ltd. was TK 51285 crore of which classified loan was TK 8055 crore. That is,
15.71% of total credit is classified. During second phase (2001-2005), total loan of the
bank was TK 52676 crore of which classified loan was TK 12163 crore. That is 23.09%
of total credit is classified.

Table: Classified loan of Janata Bank Ltd.

Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Total 4875 5295 5733 7341 8095 9329 9975 10146 10779 12447
Unclassified N/A N/A 3440 4529 5145 6497 7031 7881 8981 11023
Loan (60) (62) (64) (70) (70) (78) (83) (89)
Classified N/A N/A 2293 2812 2950 2832 2944 2265 1798 2324

55
Loan (40) (38) (29) (30) (30) (22) (17) (11)
Source: annual report of Janata Bank Ltd. 1999, 2001, 2003, 2005

8.5 IMPACT OF PROVISION FOR LOAN ON BANKS PROFIT

Provisioning by the bank has not been isolated action, but represents one component in
an ongoing set of negotiations and relationships between borrowers and the banks,
while the borrowers wish to minimize their servicing obligations without damaging
their prospect of future market access, the lending bank wish to maximize their
receipts. Such maximization may involve agreeing to terms which are not so stringent
as to encourage borrowers to opt for all out default. Provisioning has the effect of
bringing the banks actual balance sheet more in line with the market perception of
what they should look alike.

Bangladesh Bank provides specific guidelines for loan provisioning and bases for
calculating such provisions. Provisions for unclassified as well as classified loan are as
follows:

Table: rates loan provision

Unclassified loan Provision Classified Provision

Small enterprise
2% Substandard 20%
financing
Consumer
2% Doubtful 560%
financing
Except SEF, CF
1% Bad or loss 1000%
and SMA
Special account Mention 5%

56
Bank and financial sector may be termed as the vital complementary power of the
economy. But the uncertainty in respect to effectiveness of this sector in the economy
continuously increases over time. Now a days it open secret that JB is under direct
control of the Finance Ministry. Credit management of JB was so meaningless and
corrupted as it is now assumed that more than Tk 30000 crore have become
unrealizable within the last 10 years.

Chapter Nine

CREDIT RATING OF JANATA BANK

LIMITED

9.1 Introduction
9.2 Quantitative Factors
9.3 Qualitative Factors

57
9.1 INTRODUCTION
Bangladesh Bank has made mandatory from January-2007 for all banks to have
themselves credit rated by a credit rating agency vide BRPD Circular No.6 of July 5,
2006 for all banks. The first rating by an external independent rating agency will have
to be completed by June 2007. Accordingly, JB has appointed Credit Rating Agency of
Bangladesh (CRAB) to conduct Credit Rating of the bank, which will be completed
invariably by 30th June 2007. With this end and view memorandum of understanding
of signed in between our bank and CRAB on 14May 2007.
Credit Rating of Banks provides opinion on the types of risks associated with the
relative ability of a bank for timely servicing its debts and other obligations. The rating
exercise is done through a quantitative cum qualitative approach following a structured
methodology.

9.2 QUANTITATIVE FACTORS

a) Capital Adequacy
b) Assets Quality

58
c) Funding & Leverage
d) Liquidity Requirements
e) Earning Quality
f) Market Sensitivity

9.3 QUALITATIVE FACORS

a) Ownership
b) Management Quality
c) Risk Management
d) Compliance with the Statutory
e) Accounting Quality
f) Size & Market Pressure
g) Govt. Support etc.

Chapter Ten

CORPORATIZATION OF JANATA BANK

LIMITED

59
CORPORATIZATION OF JANATA BANK LIMITED
As per directives of the MOF Janata Bank Ltd. have completed all the processes
required to corporatise the bank. The detail chronological steps are as under:
Clearance regarding the nomenclature of the "Janata Bank Limited" has been
obtained from the Registrar "Joint Stock Companies & Firms" as on 11/04/07.
"No objection certificate collected from Bangladesh Bank" on 16/04/07.
On 24/04/07, SEC accorded approval that the paid up capital for Janata Bank
Ltd. would be Tk.259.39 crore.
All the related documents & papers including the Memorandum & Articles of
Association along with the prescribed fees were submitted to the offices of the
Registrar within the fixed date 22nd April 2007.

60
 The certificate of Incorporation No. C-66933(4425)/07 dated 21/05/07 &
Certificate for commencement of Business dated 21/05/07 for "Janata Bank
Limited" approved & delivered on 21/05/07 by the Registrar Joint Stock
Companies & Firms.
License for Banking Business issued by Bangladesh bank in favor of "Janata
Bank Limited" on 31/05/07.
JB is now awaiting Vendor's Agreement & to issue a Gazette Notification as per
the Bangladesh Bank (Nationalization) Order 1972 (P.O.NO. of 1972) Clause
(1) of Article 27A for which a letter has already been written to the MCF.

Chapter Eleven

PROVISION FOR LOANS & ADVANCES

11.1 Interest on loans & advances
11.2 Unclassified loans & advances
11.3 Classified loans & advances
11.4 Security against loans

61
 11.5 Investment
11.6 Write off loans & advances

11.1 INTEREST ON LOANS & ADVANCES

Interest on unclassified loans is calculated on a daily product basis
but charged & account for quarterly basis & in some cases half yearly
& yearly basis. No interest is charged on bad/loss loans & advances.
Interest is calculated on classified loans & advances as per
Bangladesh Bank BRPD Circular nos. 16/1998, 09/2005 & 05/2006
& kept in interest suspense account & credited to income on
realization. The same procedure is followed for special mentioned
account (SMA).

11.2 UNCLASSIFIED LOANS & ADVANCES

62
 Standard:
General provision maintained on unclassified loans & advances 1%
General provision maintained on HF & LP 2%
General provision maintained on other than HF & LP 5%
General provision maintained on Short Term Agriculture Credit 5%
General provision maintained on Small Enterprise financing off 2%
Special Mention Account:
Special Mention account loans & advances 5%

11.3 CLASSIFIED LOANS & ADVANCES

Substandard Loans & advances 20%
Doubtful Loans & advances 50%
Bad/Loss Loans & Advances 100%

11.4 SECURITY AGAINST LOANS

Project loan: Land & building are taken as security against in the form of
mortgage. Plant & machinery are taken in the form of hypothecation.
Working capital & trading loan: Goods are taken as security in the form of
pledge (not less two times covering the loan) & also goods are taken as security
in the form of hypothecation along with land & building as mortgage (Value not
less than 1.50 times covering the amount) in the form of collateral security.
House building loan: Land building is taken as security in the form of
mortgage.
Overdraft: FDRs are taken as pledge, balance in DPS/SDPS A/Cs are marked
as "lien".
Govt. loan: Loan against Govt. guarantee & crop loan to agricultural sector-no
security is taken.

11.5 INVESTMENT
Investments have been shown under two broad categories viz. government
securities & other investments.
Investments in shares & securities have not been revalued at the year-end.
The current & long term investment in securities have been shown separately
analyzing as per the remaining maturity grouping.

11.6 WRITE OFF LOANS & ADVANCES

63
Loans & advances have been written off which has no realistic prospect of recovery,
against which full have been kept & legal cases are pending except the state owned
enterprises for which no legal actions have been initiated. However, this write off will
not reduce the claim of the Bank against borrower in any way. Detailed memorandum
records for all such written off accounts are maintained in note no. 7.00 f (xi) (a, b, c).
\

Chapter Twelve

CREDIT RISK MANAGEMENT

12.1 Application of credit risk management
12.2 Concentration on credit risk

64
12.1 APPLICATION OF CREDIT RISK MANAGEMENT
Credit risk is fundamental to Janata Bank Ltd. & specially the risk that a third party will
not comply with the terms & conditions of the loan & therefore could not meet its
obligations to the Bank. It is a potential loss arising from the failure of a counter party
to perform as per contractual agreement with the Bank, basically failure in payment.
Credit constitutes 67% of Banks assets & this portfolio is by far the most important
objective of the Bank significantly of which about 12.81% is classified. The elaborate
status is as follows:
(Fig in Crore)
BL DF SS SMA Standard Total
1399.61 114.32 261.46 178.96 11894.90 13849.25
10.10% .83% 1.89% 1.30% 85.88% 100%

The exposures to major sectors are: (Fig in Crore)

Export Import Industrial Rural Staff Loan General
credit credit & & other
Micro credit
Loans
1094.21 2780.50 1496.53 961.75 799.60 6716.66

65
Loans & advances amounting to (i) Tk.31209.80 million to Bangladesh Petroleum
Corporation (BPC) (ii) Tk.7385.10 million to Bangladesh Jute Mills Corporation
(BJMC), (iii) Tk.360.10 million to Bangladesh Steel & Engineering Corporation
(BSEC) (iv) Tk.150.80 million to Bangladesh Sugar & Food Corporation (BSFC) & (v)
Tk.1628.30 million to Bangladesh Chemical Industries Corporation (BCIC) against
Government guarantee of Tk.31186.40. investments in public sectors & Corporations
amounting to Tk.442.10 million were made against government guarantee of the
amount of Tk.1202.40 million.
The risk arises from loans & other transactions, some of which may not be recorded as
loans on the balance sheet. For example, Janata Bank Ltd. issue guarantee to a client's
performance under a contract in return for a fee. Elements that increase risk to Bank
may include:
Alarming industries, economic sectors or countries
Significant amount due from related parties
Lending to recently established businesses without a "credit" history, Credit
Information Bureau (CIB) reports, etc.
Lending with poor securities & wrong or weak business analysis.
Lending parties without credit worthiness.
Unwillingness of the counter party or decline in his /her financial condition.

12.2 CONCENTRATION OF CREDIT RISK

Concentration of credit risk arises when a number of counter parties are engaged in
similar business activities or activities in the same geographical region, or have
economic features that would cause their ability to meet contractual obligations to be
similarly affected due to changes in economic, political or other conditions. Factors
mitigating credit risk may include:
Segregation of duties
Risk grading Credit analysis
Conservative management philosophy
Detailed well-documented approval process prior to commitment to lending
Delivery by client of all documents prior to release of funds
Established counter party/lending limits, etc.

66
 Senior management monitoring process of the Bank's exposure limits on
regular basis
If applicable, effective security or insurance arrangements
Early Alert, Special mentioned & Non Performing Loan (NPL)/Bad accounts
management

Chapter Thirteen

GUIDELINES FOR CREDIT

MANAGEMENT
13.1 Introduction
13.2 The Bank Companies Act 1991
13.3 The International Accounting Standards (IAS)-30
13.4 Guidelines followed by banks under study

67
13.1 INTRODUCTION
There is no iron clad formula to fix and determine the sound guidelines for
credit management. As a central bank Bangladesh bank sets the guidelines
for commercial banks in their operations. Such types of guidelines are
general in nature. Commercial banks of Bangladesh are incorporated under
Companies Act 1994 and Bank Companies Act 1991. But none of this act
clearly mentions guidelines for managing credit in commercial banks.
Central bank is the controller of money market in any country. As central
bank, Bangladesh Bank controls money market in our country. Bangladesh
bank, time to time, issues some guidelines and regulations for operation of
a banking concern of the banks. Lending is most profitable business of a
commercial bank but at the same time it is highly risky. how Sonali bank is
following such guidelines in their credit management operations is
intended to be discussed in this chapter .

13.2 THE COMPANIES ACT 1991

According to the Bank Companies Act 1991, the following rules must be
followed by any commercial bank in our country:

Section Contents
22(1)(a) Any bank other than new or
specialized bank will not declare
dividend on its share until the bank
as written off its previous losses
preliminary expenses and other
deferred revenue expenses.
22(2)(c)
Bank will declare dividend

68
 whatever be stated elsewhere if and
only if bank will take proper steps
for their bad and doubtful credit in
27 accordance with the satisfaction of
their auditors.
Discuss on some limitations and
29 restrictions on the distribution of
loans and advances
Without prior approval of the
Bangladesh Bank, commercial
banks will not extend its credit
policy any way.
37 Bangladesh Bank can disclose
collectively or in any other form
the information about the overdue
loans and advances, which fall due
to the BB that that information are
required to be disclosed only in
public interests.

13.3 THE INTERNATIONAL ACCOUNTING STANDARDS (IAS)-

30
In our country Institute of Chartered Accountants of Bangladesh (ICAB)
has so far adopted 21 IASs out of 40 issued so far. The original IAS 30 was
issued in January 1995. IAS 30 is a Generally Accepted Accounting
Standard intended for application in the financial statements of the bank
and similar financial institutions. It is a special purpose; disclosure based
accounting standard catering to the need for proper presentation of

69
disclosures in the financial statements of bank. It enumerates the
accounting principles and disclosure requirements of published financial
statements of banking companies. It thereby provides definitive guidance
to corporate management with regard to the preparation and to independent
auditors for audit of financial information of banks.
Bangladesh Bank issued a circular entitled Amendment of First Scheduled
Forms of the Bank Companies Act 1991, (BRPD Circular No. 03 dated 18
April 2000). Under this circular, newly amended forms have been made
mandatory for all concerned banks and financial institutions since 30
March 2000 in Bangladesh. The new forms have been introduced with a
view to ensuring the discipline in the banking sector, to minimize the
unforeseeable risk, to provide true, relevant and reliable information to the
depositors and shareholders and to meet the financial disclosures in
compliance with the International Standards. However, the financial
institutions should be easy to understand, informative and transparent. The
new forms will reflect all these aspects in reporting financial information.
The features of the newly introduced formats of IAS 30 are as follows:
a. To provide vertical form of financial statements. This form
complies with the international accounting standards though the
heads of accounts are same as those of the previous forms;
b. To disclose the assets and liabilities according to their relative
liquidity;
c. To bring more transparency in reporting financial position of
banks and financial institutions, it is required to disclose gross
loans and advances and bills discounted and purchased after
charging the necessary provisions thereon. The new format of
balance sheet provides the relevant policies for this practice;
d. To disclose the required provisions on securities investments
under the new system;

70
 e. To disclose the loan loss provisions on the profit and loss account
separately and then show the earning per share (EPS) of the
banks;
f. To show the contingent and contra items (i.e. off balance sheet
items) on separate statement and enclose with the balance sheet;
g. To make comparison between the performance of two financial
years, the immediate previous years financial statements to be
furnished along with the current years financial statements in the
annual report; and
h. To furnish one additional statements viz. cash flow statements as
per international accounting standards.

13.4 GUIDELINES FOLLOWED BY SONALI BANK LTD.

Sonali Bank Ltd. usually prepares its financial statements as per IAS 30
and forms prescribed by the bank Companies Act 1991. Before that they
usually follow the old format for preparing statements. Sonali bank
violates the regulations prescribed in Bank Companies Act 1991.
Generally public banks performance is worse than of private banks. Public
banks specially, Sonali Bank Ltd. shows in its profit and loss account but it
is found that if they make actual provisions on their unsound loan they will
incur loss. Sonali bank discloses some general guidelines that act as the
basis for calculation of provisions for bad and doubtful credit. The
standard again states that the principal types of expenses from the
operations of a bank include interest, commissions, losses on loans and
advances, charges relating to the reduction in the carrying amount of
investments and general administrative expenses are separately disclosed
in order that users can assess the performance of the bank. Sonali bank

71
does not disclose relevant and comparable information about their credit
management operations.

Chapter Fourteen

FINDINGINGS &ANALYSIS

72
Evaluation of credit management of Janata Bank Ltd. from the
customers point of view:

During my internship period in Janata Bank Ltd., I asked a number of customers

regarding the credit management of the bank. The interpretation of the data (at a
glance) is given below:

Subject of asking questions:

1. Image of the Janata Bank Ltd. to the customers is satisfactory.

2. Banks relation with customers is good.
3 The formalities followed by the bank-providing loan are necessary.
4. The processing of providing loan is quick.
5. The bank keeps customers informed about when loans and advances are provided.
6. The banks authority tries to provide its services at the same time it promises to do so.
7. You feel safe in your loan-transaction with JB.
8. When problems arising from loan facilities the JB authority shows sincere concern on it.
9. The terms and conditions are flexible regarding loan sanction.
10. The loan interest rate is competitive
11. The amount of security against loan amount is tolerable.
12. Circumstances arising from loan default are strict.

Total number of sample is 10 in every subject.

In this table all the attributes are having specific points.

The table ratings are as follows:

Strongly agree 5
Agree 4
Neutral 3

73
 Disagree 2
Strongly disagree 1

Table-1

Image of Janata Bank Ltd. to the customer is satisfactory

No. Of
SL No. Parameters Percentage
respondents
1 Strongly agree 1 10
2 Agree 7 70
3 Neutral 1 10
4 Disagree 1 10
5 Strongly disagree 0 0
Source: survey of primary data

Calculation:
Total points = 10*5+70*4+10*3+10*2+0*1 = 380
The weighted average is 380/15 = 25.33

Interpretation of the data:

In the point Image of the Janata Bank Ltd. to the customers is satisfactory, 10% of
the sample customers strongly agree, 70% agree, 10% neutral, 10% disagree with this.

74
 Table- 2
Banks relation with customers is good

No. Of
SL No. Parameters Percentage
respondents
1 Strongly agree 1 10
2 Agree 8 80
3 Neutral 0 0
4 Disagree 1 10
5 Strongly disagree 0 0
Source: survey of primary data

Calculation:
Total points = 10*5+80*4+0*3+10*2+0*1 = 390
The weighted average is 390/15 = 26

Interpretation of the data:

In the point Banks relation with customers is good as answer of this question, 10%
of the sample customers strongly agree, 80% agree, and 10% disagree with this.

Table- 3
The formalities followed by the bank-providing loan are necessary.

75
 No. Of
SL No. Parameters Percentage
respondents
1 Strongly agree 1 10
2 Agree 2 20
3 Neutral 6 60
4 Disagree 1 10
5 Strongly disagree 0 0
Source: survey of primary data

Calculation:
Total points = 10*5+20*4+60*3+10*2+0*1 = 330
The weighted average is 330/15 = 22

Interpretation of the data:

In the point The formalities followed by the bank providing loan are necessary as
answer of this question, 10% of the sample customers strongly agree, 20% agree, 60%
neutral, 10% disagree with this.
Table- 4

The processing of providing loan is quick.

No. Of
SL No. Parameters Percentage
respondents

76
 1 Strongly agree 0 0
2 Agree 1 10
3 Neutral 1 10
4 Disagree 7 70
5 Strongly disagree 1 10
Source: survey of primary data

Calculation:
Total points = 0*5+10*4+10*3+70*2+10*1 = 220
The weighted average is 220/15 = 14.67

Interpretation of the data:

In the point The processing of providing loan is quick as answer of this question,
10% of the sample customers agree, 10% neutral, 70% disagree, and 10% strongly
disagree with this.

Table- 5

The bank keeps customers informed about when loans and advances are provided.
No. Of
SL No. Parameters Percentage
respondents
1 Strongly agree 0 0
2 Agree 2 20
3 Neutral 7 70

77
 4 Disagree 1 10
5 Strongly disagree 0 0
Source: survey of primary data

Calculation:
Total points = 0*5+20*4+70*3+10*2+0*1= 310
The weighted average is 310/15 = 20.67

Interpretation of the data:

In the point The bank keeps customers informed about when loans and advances are
provided as answer of this question, 20% of the sample customers agree, 70% neutral,
and 10% disagree with this.

Table-6

The banks authority tries to provide its services at the same time it promises to do so.
SL No. Parameters No. of respondents Percentage
1 Strongly agree 0 0
2 Agree 2 20
3 Neutral 7 70
4 Disagree 1 10
5 Strongly disagree 0 0
Source: survey of primary data

78
Calculation:
Total points = 0*5+20*4+70*3+10*2+0*1 = 310
The weighted average is 310/15 = 20.67

Interpretation of the data:

In the point The banks authority tries to provide its services at the same time it
promises to do so as answer of this question, 20% of the sample customers agree, 70%
neutral, and 10% disagree with this.

Table-7
You feel safe in your loan-transaction with JB.

No. Of
SL No. Parameters Percentage
respondents
1 Strongly agree 2 20
2 Agree 7 70
3 Neutral 1 10
4 Disagree 0 0
5 Strongly disagree 0 0
Source: survey of primary data

Calculation:

79
 Total points = 20*5+70*4+10*3+0*2+0*1= 410
The weighted average is 410/15 = 27.33

Interpretation of the data:

In the point You feel safe in your loan-transaction with JB as answer of this question,
20% of the sample customers strongly agree, 70% agree, and 10% neutral with this.

Table-8
When problems arise from loan facilities, the JB authority shows sincere concern on it.

No. Of
SL No. Parameters Percentage
respondents
1 Strongly agree 0 0
2 Agree 0 0
3 Neutral 7 70
4 Disagree 3 30
5 Strongly disagree 0 0
Source: survey of primary data

Calculation:
Total points = 0*5+0*4+70*3+30*2+0*1=270
The weighted average is 270/15 = 18

80
Interpretation of the data:
In the point When problems arise from loan facilities, the JB authority shows sincere
concern on it as answer of this question, 70% is neutral, and 30% disagree with this.

Table-9
The terms and conditions are flexible regarding loan sanction.

No. Of
SL No. Parameters Percentage
respondents
1 Strongly agree 0 0
2 Agree 8 80
3 Neutral 2 20
4 Disagree 0 0
5 Strongly disagree 0 0
Source: survey of primary data

Calculation:
Total points = 0*5+80*4+20*3+0*2+0*1 = 380
The weighted average is 380/15 = 25.33

81
Interpretation of the data:
In the point The terms and conditions are flexible regarding loan sanction, as answer
of this question, 80% of the sample customers agree, 20% neutral with this.

Table- 10

The loan interest rate is competitive

No. Of
SL No. Parameters Percentage
respondents
1 Strongly agree 2 20
2 Agree 8 80
3 Neutral 0 0
4 Disagree 0 0
5 Strongly disagree 0 0
Source: survey of primary data

Calculation:
Total points = 20*5+80*4+0*3+0*2+0*01= 420
The weighted average is 420/15 = 28

82
Interpretation of the data:
In the point The loan interest rate is competitive as answer of this question, 20% of
the sample customers strongly agree, and 80% agree with this.

Table- 11

The amount of security against loan amount is tolerable.

No. Of
SL No. Parameters Percentage
respondents
1 Strongly agree 0 0
2 Agree 0 0
3 Neutral 0 0
4 Disagree 6 60
5 Strongly disagree 4 40
Source: survey of primary data

Calculation:
Total points = 0*5+0*4+0*3+60*2+40*1 =160
The weighted average is160/15 =10.67

83
Interpretation of the data:
In the point The amount of security against loan amount is tolerable as answer of this
question, 60% of the sample customers disagree, and 40% strongly disagree with this.

Table- 12

Circumstances arising from loan default are strict.

SL No. Parameters
1 Strongly agree
2 Agree
3 Neutral
4 Disagree
5 Strongly disagree
No. Of respondents Percentage
2 20
5 50
3 30
0 0
0 0
Source: survey of primary data

Calculation:
Total points = 20*5+50*4+30*3+0*2+0*1 = 390
The weighted average is 390/15 = 26

Interpretation of the data

In the point Circumstances arising from loan default are strict as answer of this
question, 20% of the sample customers strongly agree, 50% agree, and 30% neutral
with this.

84
From the survey, we can conclude that sometimes without proper investigation, the
management values the security randomly, which is less than the actual value of the
security. The customers also criticize the margin rate of the bank.

From my survey, I also find that the customers, who are also involved in getting loan
from another private bank, complain the loan giving procedure of Janata Bank Ltd..
They comment that the procedure of getting loan is slower than the private bank. And
the cooperation of the private banks is comparatively better. Sometimes the customers
need lobbying with top management to get loan.

Though the customers complain the valuation process of security, which is pledged
against the loan, they choose Janata Bank Ltd. to get loan and advances because of its
competitive interest rate. Though the customers face the problems, they prefer Janata
Bank Ltd. for its comparative lower interest rate, safety of their security, and
availability of the branches of the bank.

So the decision-making body, i.e. BOD/ Top Management should take proper steps in
all aspects of loan giving procedures and overall banking systems. The security
valuation system must be transparent and accurate and verified by the independent and
the efficient persons. The terms and conditions must be flexible from now. The
authority may arrange different programs and publish bulletin for the loan providing
procedure and which sectors are emphasized more as most of the people do not know
the loan procedure of the Janata Bank Ltd.. In fine, all the employees must be more
amicable and cooperative.

85
Findings and analysis
Every bank has its own credit procedure. Bank under study possesses a standard credit
procedure. As the objective of my study is to make a comment on the credit
management of Janata Bank Ltd., I try my best to collect data for the study and find out
the reality. Based on the data generated during my study period I will sum up my
findings here and I think this will help me to achieve my objectives.

1. If we look at the historical background of Janata Bank Ltd., we see that, the
objective of JB is to earn profit as well as to improve the economic welfare of
the people as a whole.
2. Janata Bank Ltd. has a significant role in long term project financing in both
agriculture and industrial sectors. Again JB has a deep concern for rural
farmers.
3. Private sector usually concentrates in the urban areas where as public sector i.e.
JB spread their banking network all over the world.
4. With a view to implementing government policies, JB has been maintaining its
position in extending credit to government bodies, sector corporations and
private enterprises.
5. Though bank required both quantitative and qualitative analysis but for big
loans bank emphasizes on the lending risk analysis (LRA). But LRA is not a
perfect measure of credit analysis. Because businessmen in our society are
usually tempted to take resort of window- dressing that means accounts are so
manipulated that the vital facts are concealed and facts presented are superficial.
So banks have to go through both quantitative and qualitative analysis.
6. According to the standard and banks credit procedure, credit operation is
started from the customer application to the branch for the loan. But in most
cases, many customers go directly to the directors of the bank and directors
send them to the branch offices with his/her reference. In these cases, proper
appraisal is not possible as directors the most powerful persons and bank
management must give priority towards the decision of the directors. This
phenomenon is very common in the bank, which hampers the spontaneous
procedure of credit appraisal.

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7. Bangladesh Bank monitors all the policies of all the private and nationalized
banks of the country. According to the Bangladesh Banks strategy, all banks
must possess the standard policies, which are designed by the central bank.
Janata Bank Ltd. also possesses a standard credit proposal form. In that form all
necessary information are required to fill up. But in practice credit officers do
not fill up the proposal form properly. Most of the cases, they use assumption
rather than exact figure. This practice might end up with bad or classified one.
8. A standard policy starts from the customers direct application for the loan in
the branch office. But its a common phenomenon that most of the customers
directly contact with Head office and Head office chooses the branch offices to
disburse the loan. It hampers the normal procedure. Branches always stay under
pressure when they get order for disbursement from Head office. When
branches get order from the head office, then appraisal system loses its formal
track. So Head office should not send any order to the branch office without
prior appraisal.
9. Every bank has its own budget and plan regarding loan portfolio. This loan
portfolio must be diversified so that bank could diversify its risk. A proper and
preplanned portfolio can eliminate the risk of huge classified loan or bad loans,
as this aspect is very much sensitive toward many external and internal factors.
The bank under study i.e. Janata Bank Ltd. does not have any proper guide line
where to invest; moreover they do not do any future plan to maintain a well
structured portfolio to decrease the possibility of classified loan. This type of
practice is working as an obstacle in smooth credit disbursement as well as in
credit appraisal system.
10. Most of the loans that JB distributes are as cash credit hypothecation and JB
emphasizes less on demand loan.
11. JB distribute loans without sufficient security in some cases. This is violation of
the Bangladesh bank order.
12. In many cases bank face this problem because banks credit officer fails to value
collateral property. Proper valuation means collateral will exactly cover the risk
of bad loan. Officials must do it with due care.

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13. The recovery performance of JB is not in a satisfactory level at all and the
position of those in that respect deteriorated heavily during last two phases. The
recovery performance in agriculture is worse than in other sectors. On the other
hand, as private sector banks distribute more loans on short-term basis and
relatively better than public sector. But if we compare it from the efficiency
point, then it is clear that they are not still efficient in credit management as they
are unable to recover half of their distributed loan in different sectors.
14. During first phase 15.71% of the total loan of JB became classified and this
classified loan came down to 23% in the second phase.
15. JB does not keep enough provisions against classified loans and advances.
16. Private sector banks are relatively efficient in processing and executing legal
actions against defaulters for their nonpayment of loans and advances in due
time that of public sector bank.
17. The credit management of JB are not fully conformity with the guidelines
prescribed in the bank companies Act 1991 and International Accounting
Standerd-30 (IAS-30)

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 Chapter Fifteen

Conclusion and
recommendations
15.1 Conclusion
15.2 Recommendations

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15.1 Conclusion
I have discussed so far about the different aspects of credit management Janata Bank
Ltd.. For my report, I have selected Janata bank Ltd. JB plays an important role in the
banking sector as well as in our economy. The success of a bank depends largely on the
efficient credit management. A successful credit management is not only need for a
banks own performance but also it is needed for the smooth development of an
economy. In any strategy of economic development, therefore, it is essential to
emphasize the evaluation of a sound and well-integrated credit management system
from the viewpoint of both resources mobilization and efficient allocation of funds. In
conclusion it can be suggested a number of recommendations in order to overcome the
problems and how to remove the causes of problem in credit management.

15.2 Recommendations
Since this an exploratory research, hence the recommendation given are not decisions
rather they are only suggestions to improve the default rate. The recommendations are
made on the basis of survey findings.

1. Central bank should take proper actions for ensuring equivalent distribution of loans
and advances.
2. Lending policies in our country should be geared to growth potential rather than
being determined by the pre-existing collateral.
3. Changes in lending policies will not suffice the purposes unless it is followed by a
change in the attitude and out look of both the borrowers and the bankers.
4. Improvement of credit management depends on the development of relevant,
adequate, proper and reliable database at the public sector banks as well as private
sector banks in Bangladesh.
5. For developing a reliable credit management system for the commercial banks
specially Janata Bank Ltd., it should require to introduce as improved information
system within bank as well as among the borrowers. Because ultimately it is what a
borrower does with money that should guide the credit plan, the borrowers also have to

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know exactly where they are going, what their opportunities and how fast they can
move.
6. The security must be valued properly by the independent values and constantly
watched so that the value of mortgage property becomes sufficient to recover the
default loan.
7. Publishing the names of defaulter as well as good and regular payers in various
dailies and granting various sorts of facilities to good borrowers will create a moral
persuasion on the borrowers. This may decrease the number of defaulters and the
volume of large outstanding loan amounts as well.
8. Pressure from outsider and influence extorted by borrowers are also a great
impediment in the smooth functioning of loan recovery process. The role of
government in this case is the most important factor required to solve these sorts of
problem.
9. More and more competent personnel must be recruited to reduce the weakness of
credit management. Competent executives will ensure the reduction of wrong appraisal
and evaluation of projects.
10. Prompt legal actions be taken against willful loan defaulters
11. The new entrepreneurs should be encouraged in disturbing loans and those who
have the records of regular payment, should be given preference.
12. Steps should be taken so that guarantors cannot avoid their responsibility.
13. It is observed that the defaulters generally get various sorts of exemptions as
declared by the government from time to time. Government must not show any kind of
mercy to the defaulters in any way, which may encourage the default culture. This type
of action may discourse the borrowers to become willful defaulters.
14. The existing huge amount of classified loans demand for special and corrective
attention for example:
By obtaining suitable reduction on amount.
Additional security.
More complete financial data concerning the obligors condition or
Other such action as the specific circumstances may require.
15. The attempt to encourage banks to require borrowers comply with banking laws and
regulations and clear up industrial properties prior to granting a loan.
16. JB should follow some straight ward mechanical procedures in assessing the risk of
a borrower.

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17. The formulation of a sound credit policy in the possibility of default loans.
18. The formulation of a sound credit policy in the banking sector as a whole has to
take into account all these factors and each bank has to attempt to work out for itself
what it is capable of doing so as best as possible.

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 Bibliography

1. Annual Report of Janata Bank Ltd., 2000-2006

2. Chowdury, L.P; A Textbook on Bankers Advances; 2nd Edition; Paradise Printer;

2002

3. Managing Core Risk in Banking: Credit Risk Management, Janata Bank Ltd., Head
Office, Dhaka.

4. Md. Maksudur Rahman Sarder & Prashanto Kumer Banerjee (December 1996);
Journal of Business Studies; Break Even Point: A Project Appraisal Technique used in
Banking Sector.

5.Md. Maksudur Rahman Sarker, Credit Management of Commercial Banks: A

Comparative study of Public and Private Sector Banks, The Bureau of Business
Research, University of Dhaka, August 1996

6.Rose, Peter. S; commercial Bank Management; Fourth Edition; Irwin-McGraw-

Hill; 1999

7. Zikmund William, G., Business Research Methods; 7th Edition; Thomson South-
Western; 2003
8 Bangladesh Bank BCD &BPRD circulars

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 Appendices
Questionnaire for Managements of Janata Bank Ltd:

1. What is the main objective of credit program?

a) Only profit motive

b) Profit motive as well as social welfare
c) Others
2. What kind of loans does Janata Bank provide?
a) General credit
b) Rural credit
c) Foreign commercial loan
d) Special program financing
3. Is there existence of delegation of authority in case of sanctioning loan?
a) Yes
b) No
4. Do you think that the credit policy is flexible to attract the customer?
a) Yes
b) No
5. Who are the target customers of Janata Bank Ltd.?
a) Business man
b) Farmers
c) Entrepreneurs
d) Others
6. At what point / points will you give more emphasis in case of loan
disbursement procedure?
a) Credit information of the customers
b) Nature of the security of the customers
c) Lending risk analysis
7. Would you think that the procedure is more familiar with the customers?
a) Yes
b) No
8. What are the basic tools of credit management?
a) GRG
b) Financial spreadsheet
c) Others
9) Is there any provision to calculate N score and Z score in case of
choosing business or firm for giving loan?
a) Yes
b) No
10. Is there any option to sanction personal loan?
a) Yes
b) No

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11. What are the sectors in which JB gives more priority?
a) Industrial Financing Program
b) Import and Export Financing Program
c) Agricultural financing program
d) General Credit Program

12. In what maturing stages JB classifies the bank loans and advances?
a) According to Bangladesh Bank
b) Own procedure
13. Does Janata Bank Ltd. permit any loan without any collateral security?
a) Yes
b) No
14. Does the credit department supervise and monitor recovery performance of
the distributed loans and advances?
a) Yes
b) No
15. What are the main reasons to default loan?
a) Loan given to fictitious name
b) Loan given without sufficient securities
c) Political misuse of loan program
16. Is IAS # 30 strictly followed in preparing financial statements?
a) Yes
b) No
17. Are the forms of financial statements prescribed by Bank Companies Act
1991 followed?
a) Yes
b) No
18. Do you think that enough provision against classified loans and advances
are kept?
a) Yes
b) No
19. Is there any latest loan program?
a) Yes
b) No
20. Standard Credit Proposal Forms designed by Central Bank are filled up
Credit Officer with
a) Exact figure
b) Assumed figure
21. May the loan disbursement procedure be hampered arising from any
situation?
a) Yes
b) No

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