A WORKING REPORT ON CREDIT OPERATION & MANAGEMENT OF PRIME BANK LTD

by

Fatima Prodhan ID # 0710011

An Internship Report Presented in Partial Fulfillment of the Requirements for the Degree Bachelor of Business Administration

INDEPENDENT UNIVERSITY, BANGLADESH April 2011

A WORKING REPORT ON CREDIT OPERATION & MANAGEMENT OF PRIME BANK LTD

by

Fatima Prodhan ID # 0710011

has been approved April, 2011

Ms. Sylvana Maheen Ahmed Lecturer School of Business Independent University, Bangladesh

LETTER OF TRANSMITTAL
21 April, 2011

To Ms. Sylvana Maheen Ahmed Lecturer, Independent University, Bangladesh

Subject: Submission of Internship Report.

Dear Madam,

With due respect I am very please to enclose herewith the internship report on Credit Operation and Management of Prime Bank LTD. I have tried my best to prepare a good report with providing all of my effort and to cover all aspects regarding the matter. I think that the report contains the information that you need to get an idea about Credit Operation and Management of Prime Bank Ltd.

I, therefore, hope that you would be kind enough to accept my internship report and oblige there by.

Sincerely Yours,

Fatima Prodhan ID # 0710011

ACKNOWLEDGEMENT

First of all I would like to pay all my sincere gratitude to the creator of this universe Almighty Allah for giving me the required patience, energy and little bit knowledge to prepare this report.

I am also very much grateful to my supervisor Ms. Sylvana Maheen Ahmed for her tips containing prime guideline regarding the preparing the report successfully.

I am very much grateful to the authority of Prime Bank Limited for assigning me as an internee in this reputed bank and having the opportunity to learn theoretical as well as practical knowledge related to overall banking system and complete such an ambitious study for my internship program as well as for preparation of this report.

I am grateful to all concerned persons who provided valuable guidance, suggestions and advices in collecting information, analyzing and preparing the report. I am particularly indebted to them whose efforts and cordial cooperation made the report possible.

Finally I would like to thank bank staffs for providing information and additional elements.

Executive Summary
PRIME BANK is a bank with a difference incorporated as a public limited company on 17th April 1995 under the company acts 1994. Prime Bank limited is a full service commercial bank with local and international institutes. Prime bank has been striving to provide best-in-the-class services to its diverse range of customers spread across the country under an on-line banking platform. I have worked one of the major departments of this bank. The main objectives of this study are to give a brife idea about credit operation and management of Prime Bank and explain my duties and responsibilities in Prime Bank over this three months. For collection of data for this report I have used both primary and secondary sources. I had collected data from personal observation and informal discussion with the employees of Prime Bank Narayanganj Branch, relevant books, newspapers etc. PBL annual report, 2008 2009, published documents, office circular. In this report chapter one is about introduction of PBL and the objectives of this report. Chapter two is talked about the policy of credit operation and management of PBL. Third chapter is about my responsibilities and duties in PBL and the last chapter is conclusion. During analysis of data I have noticed some positive and negative aspects of Prime Bank Ltd. like strong manpower, branch network, work environment problems, administrative problem and technological problem. After observing over these three months in Prime Bank Ltd. I can say that if PBL centralize their monitoring system it could be more active to maintain classified loan to a minimum level. PBL should open more new exchange houses abroad for enhancing remittance business. PBL should arrange job rotation in branch level to get overall banking knowledge for their employee.

Table of Content
Letter of Transmittal Acknowledgement Executive summary Pg No. Chapter 1: Introduction 1.1 Introduction ..... 1 ... 2

1.2 Objective of the Report

1.3 Data Collection ... .2 1.4 Limitations of the Report ........ 2

Chapter 2: Credit Operation & Management 2.1 Credit.... 3 2.2 Credit Operation....... 3 2.3 Credit Management...... 3 2.4 Background of Credit Operation & Management of Prime Bank.... 4 2.4.1 Credit Operation & Management of Prime Bank4 2.4.2 CREDIT RISK MANAGEMENT OF PRIME ......4 2.4.3 CREDIT POLICY OF PRIME BANK LIMITED......... 5 2.4.4 Types of CREDIT OF PRIME BANK....... 5 22.5 Steps in the Lending Process.... 6 2.6 Creditworthiness of the Borrower.... 7 2.6.1 Computation of CRG... 8 2.7 Structure of the Loan Agreement... 10 2.8 DOCUMENTATION OF LOAN AGREEMENT........11 2.9 Information About the loan Customers.....14 2.10 Mechanism of Credit Distribution of the Prime Bank...14 2.11 Disbursement.....15 2.12 Loan Classification-Provisioning...15 2.13 Recovery Policy of the Prime Bank...16 2.14 Conclusion.........16

Chapter 3: Working Experience 3.1 Introduction...17 3.2 General Banking Division.17 3.3 Cash Section..18 3.4 Credit Division...18 3.5 Findings..19 3.6 Recommendations.20 3.7 Conclusion.20

References Appendix

A Working Report on Credit Operation & Management of Prime Bank Ltd

Chapter 1 1.0 Introduction 1.1 Introduction

Prime Bank Limited was incorporated as a scheduled Bank under the Companies Act 1994, initiated its operation on April 17,1995 with target to play the vital role on the socio-economic development of the country (Prime Bank, n.d.). It availed its registration as a Banking company under the Banking Company Act, 1993 from the Bangladesh Bank dated February 12, 1995. PBL focuses on a wide range of financial products and services, which include commercial banking through both Conventional and Islamic mode, Merchant and Investment Banking, SME & Retail banking, Credit Card and off-shore banking. It plays leading role in Syndicated Financing. It has expertise in corporate credit and trade finance and made extensive market penetration with continuous growth in corporate, Commercial and Trade Finance sectors. It has a fully owned exchange house at Singapore focusing on remittance inflow to Bangladesh (Prime Bank, n.d.). The vision of Prime Bank Limited is to be the best private commercial bank in Bangladesh in terms of efficiency, capital adequacy, asset quality, sound management and profitability having strong liquidity. The chairman of Prime Bank is Mr. Azam J. Chowdhury. The Prime Bank Group has a large and well distributed branch network of 94 fully fledged branches and 39 Booths in Bangladesh with a strong tradition of service excellence. Prime Bank Narayanganj Branch has stablished at 15th March 1998 and the manager of the branch is MD. Farhad Ahmad Khan(Senior Assistant Vice President & Head of Branch). Prime Bank offers a number of products and services. The Deposit Schemes are Contributory Savings Scheme, Monthly Benefit Deposit Scheme, Education Savings Scheme, Fixed Deposit Scheme, Short Term Deposit, Lakhopati Deposit Scheme, Double Benefit Deposit Scheme, House Building Deposit Scheme, Prime Millionaire Scheme. Loan Schemes are General Loan Scheme, Consumer Credit Scheme, Personal Loans, Lease Finance, Hire Purchase, Small and Medium Enterprise (SME). Other Services of PBL are On-line Banking, Information Technology in Banking Operation, SWIFT Service and Western Union Money Transfer (Prime Bank, n.d.).

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A Working Report on Credit Operation & Management of Prime Bank Ltd

1.2 Objectives of the Study

The main objectives of this study are: To give a brief idea about credit operation and management of Prime Bank. To explain my duties and responsibilities in Prime Bank.

1.3 Data Collection

Data were collected from both primary and secondary sources. Primary data were collected from personal observation and informal discussion with the employees of Prime Bank Narayanganj Branch. Secondary data were collected from relevant books, newspapers etc. PBL annual report, 2008 2009, published documents, office circular.

1.4 Limitations
Some limitations were faced while conducting this study. The limitations were --

The employees in Prime Bank Limited are so much busy in their responsible fields; they could hardly provide little time to discuss with them. Another limitation of this report is Banks policy of not disclosing some data and information for obvious reason, which could be very much useful. Actually to cover whole credit operation and management of PBL it needs more time. As I had only three month I tried to cover the basic things only.

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A Working Report on Credit Operation & Management of Prime Bank Ltd

Chapter 2 2.0 Credit Operation & Management 2.1 Credit

The word credit comes from the Latin word Credo meaning I believe. It is a lenders trust in a persons/firms or companys ability or potential ability and intention to repay. The fundamental nature of credit is that an element of trust exists between buyer and seller-whether of goods or money. In other words credit is the ability to command the goods or services of another in return for a promise to pay such goods or services in some specified time in the future (Investorwords, n.d.).

2.2 Credit Operation

Bank is a financial intermediary whose prime function is to move scarce resources in the form of credit from savers to those who borrow for consumption and investment. The main use of bank fund is to collect money from surplus unit and lend it to deficit economic unit as credit. A banks main earning source is interests on different credits. In order to ensure the effectiveness and efficiency of utilization of bank fund in the form of credit, the bank has to carry out a certain course of action that is known as credit operation (Wikipedia, n.d.).

2.3 Credit Management

Credit Management is a dynamic field in banking industry where a certain standard of longrange planning is needed to allocate the fund in diverse field and to minimize the risk and maximize the return on the invested fund. While sanctioning of credit undergoes some steps like collecting of related documents and information with duly filled-up credit application form, scrutinizing, investigation, preparation of proposal, sanctioning, pre-disbursement compliance, disbursement, supervision, monitoring. Credit Management deals with all this process. Effective credit administration can ensure good recovery of loan and advances and good yield. (Wikipedia, n.d.).

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A Working Report on Credit Operation & Management of Prime Bank Ltd

2.4 Background of Credit Operation & Management of Prime Bank

This chapter will give a brief idea about the credit operation and management of Prime Bank Limited. Credit operation means to give loans and advances to the customers who have the ability to repay the loan. Credit management means the process of giving loans, assessment the credit worthiness of the customer and the actions taken by the bank when the customer defaults to repay the loans. Credit operation and management is a huge issue and it covers a big area of banking operation. The focus of this study is limited to the basic things of the credit management of PBL due to time constrain.

2.4.1 Credit Operation & Management of Prime Bank

Prime has been established with the objective of providing efficient and innovative banking services to the people of all sections of our society. Towards attainment of its goals and objectives, the bank pursues diversified credit policies and strategic planning in credit management. To name a few, the bank has extended micro credit, consumers durable scheme loans, house building loans etc. to cater to the needs of the individuals, which turn has helped thousands of families. The bank also extends loan in the form of trade finance, industrial finance, and project finance, export & import finance etc (PBL, 2005 November. Credit Risk Management Policy).

2.4.2 CREDIT RISK MANAGEMENT OF PRIME

This is one of the major risks that can be described as potential loss arising from the failure of a counter party to perform as per contractual agreement with Prime Bank. A separate corporate division has been formed at Head Office, which is entrusted with the duties of maintaining effective relationship with the customer, marketing of credit products, exploring new business opportunities etc. The Prime Bank has segregated the functions of credit approval, administration, monitoring and recovery by forming three separate units within Credit Division. In determining the credit limit, the instructions of Bangladesh Bank are strictly followed. Internal audit conducted on periodic interval to ensure compliance of Banks and Regulatory policies. Class of Loans is made as per Bangladesh Bank guidelines (PBL, 2005 November. Credit Risk Management Policy).

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A Working Report on Credit Operation & Management of Prime Bank Ltd

2.4.3 CREDIT POLICY OF PRIME BANK LIMITED

The credit policy pursed by Bangladesh Bank is to be aimed at ensuring development of scare Bank resources in the best possible manner for increasing production, employment and Real income within its objective and justice need for containing money supply within a safe limit (informal discussion): Take deposit from surplus unit and give loans to the deficit unit with higher interest rate to earn profit. (personal letter, February 15, 2011). Prime Bank takes the policies, which help the development of several sectors of the country under general credit division. For achieving the proposed goals of the principles of development of a number of sectors such as Agricultural, Economical, Industrial and Trade the bank follow the guidelines of Bangladesh Bank; this is the credit policy of Prime Bank. This policy is changeable. If Bangladesh Bank resists providing credit in any sector Prime Bank does not provide any credit in those sectors(PBL, 2005 November. Credit Risk Management Policy).

2.4.4 Types of CREDIT OF PRIME BANK

Portfolio management of credit implies the deployment of loan able fund among alternative opportunities through proper allocation. Credit portfolio of the Bank consists of Trade financing, Project Loans for new projects and existing projects, Working Capital financing and Small Scale Industries financing. Besides, the Bank is financing the need of individual borrowers under Consumer Credit scheme. Loans and advances have preliminary been divided into two major groups: 1) Fixed Term Loan: These are the loans made by the Bank with fixed repayment schedule. Fixed term loans are categorized into 3 based upon its tenure which is defined as follows: Short Term : Upto 12 months

Medium Term : More than 12 and up to 36 months Long Term : More than 36 months

2. Continuing Loan: These are loans having no fixed repayment schedule, but have an expiry date at which it is renewable on satisfactory performance of the customer.

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a. Lease Financing: This facility is given to the business enterprises to meet up midterm and long term fund requirements. These facilities are usually provided to acquire capital machinery. However, Loan facility may be allowed for some other purposes such as factory construction etc. b. Back-to-Back L/C: This facility is given to the exporter to procure raw materials from local and overseas sources for execution of export L/C. Since L/C is opened backed by another master L/C, this type of L/C is termed as Back to Back L/C. c. Packing Credit: This facility is given to the exporter for payment of wages, salaries, freight and other factory overhead expenses during execution of an Export L/C. d. L/C (Sight) / Deferred Payment L/C: This facility is given to the importer to procure raw materials or capital machinery from local and overseas sources for trading or manufacturing purpose (PBL, 2005 November. Credit Risk Management Policy). e. LTR: This facility is given to the importer to retire of shipping documents against import of raw materials or capital machinery. This facility is given for the short time usually for 90-120 days for commercial purpose and maximum 180 days for industrial purpose. f. CC (H)/ CC (P)/ OD (General)/SOD (Work Order): This facility is given to the business enterprises to meet up working capital requirements. It may be for commercial purpose or manufacturing purpose. g. IDBP/IBP/FBP/FDBP: This facility is given to the exporter to meet up short term fund requirements. Bank purchases the bill. This facility is also for the short time maximum 180 days. h. House Building Loan (Commercial): Banks provide this facility to construct building for commercial purposes (PBL, 2005 November. Credit Risk Management Policy).

2.5 Steps in the Lending Process

Once a customer decides to request a loan, an interview with a loan officer usually follows right away, giving the customer the opportunity to explain his or her credit needs. That interview is particularly important because it provides an opportunity for the banks loan officer to assess the customers character and sincerity of purpose. The approval process must reinforce the segregation of Relationship Management/Marketing from the approving authority. The responsibility for preparing the Credit Application should rest with the RM within the corporate/commercial banking department. Credit Applications should be recommended for

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A Working Report on Credit Operation & Management of Prime Bank Ltd

approval by the RM team and forwarded to the approval team within CRM and approved by individual executives. Banks may wish to establish various thresholds, above which, the recommendation of the Head of Corporate/Commercial Banking is required prior to onward recommendation to CRM for approval. In addition, banks may wish to establish regional credit centers within the approval team to handle routine approvals. Executives in head office CRM should approve all large loans. The recommending or approving executives should take responsibility for and be held accountable for their recommendations or approval. Delegation of approval limits should be such that all proposals where the facilities are up to 15% of the banks capital should be approved at the CRM level, facilities up to 25% of capital should be approved by CEO/MD, with proposals in excess of 25% of capital to be approved by the EC/Board only after recommendation of CRM, Corporate Banking and MD/CEO (PBL, 2005 November. Credit Risk Management Policy).

Credit Planning or customer decides to request a loan

Portfolio Management of Credit

Preliminary Screening of a Credit Proposal

Analysing of Financial & Cash Flow of the Customer

Pricing of Loan

Selection of Borrower

Credit Risk Grading (CRG)

Proposal sending to CBD

Sanction letter prepared by CRM

Supervision- MonitoringRecovery of Credit

Loan Disbursement

Loan documentation and sending checklist for DA

Fig: Steps in the Lending Process

2.6 Creditworthiness of the Borrower

The question that must be dealt with before any other is whether or not the customer can service the loan-that is, pay out the credit when due, with a comfortable margin for error. This usually involves a detailed study of six Cs of the loan application- character, capacity, cash, collateral,

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A Working Report on Credit Operation & Management of Prime Bank Ltd

conditions, and control. All must be satisfactory for the loan to be a good one from the lenders point of view.

Character: Market reputation, morality, family background and promptness in repayment. Capacity: Ability to manage the business, ability to employ the fund in the right way, ability to overcome unforeseen problems. Capital: Equity strength, assets and properties. Collateral: The easy marketability of the property given security. Conditions: The loan officer and credit analyst must be aware of recent trends in the borrowers line of work or industry and how changing economic conditions might affect the loan. Control: The last factor in assessing a borrowers creditworthy status is control which centers on such questions as whether changes in law and regulation could adversely affect the borrower and whether the loan request meets the banks and the regulatory authorities primes for loan quality. As this six Cs analysis is now a traditional method there is another method to understand the creditworthiness of the customer called Credit Risk Grading (CRG) (Mishkin, F. S. (2008). The economic money, banking, financial markets. Pearson Addison Wesley).

2.6.1 Computation of CRG

Step 1: Identify all the Principal Risk Components Step 2: Allocate weightages to Principal Risk Components Step 3: Establish the Key Parameters Step 4: Assign weightages to each of the key parameters. Step 5: Input data to arrive at the score on the key parameters Step 6: Arrive at the Credit Risk Grading based on total score obtained

An example of CRG of Prime Bank Ltd. Has been attached in the appendix.

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A Working Report on Credit Operation & Management of Prime Bank Ltd

Principal Risk Components

Key Parameters:

Weight:

Financial Risk........ 50% Leverage Liquidity Profitability Coverage 15% 15% 15% 5%

Business/Industry Risk18% Size of Business Age of Business Business Outlook Industry growth Market Competition Entry/Exit Barriers 5% 3% 3% 3% 2% 2%

Management Risk ...12% Experience Succession Team Work 5% 4% 3%

Security Risk.....10% Security coverage Collateral coverage Support 4% 4% 2%

Relationship Risk......10% Account conduct Utilization of limit Compliance of covenants Personal deposit

5% 2% 2% 1%

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No. Risk Grading

Short Name

Score

Superior

SUP

100% Cash Covered, Government Guarantee and Intl Bank Guarantee

2 3 4 5 6 7 8

Good Acceptable Marginal/Watchlist Special Mention Sub-standard Doubtful Bad

GD ACCPT MG/WL SM SS DF BL

85+ 75-84 65-74 55-64 45-54 35-44 Below 35

(PBL, 2005 November. Credit Risk Management Policy).

2.7 Structure of the Loan Agreement

The six Cs of credit aid the loan officer and bank credit analyst in answering the board question. Is the borrower creditworthy? Once that question is answered, however, a second issue must be faced: can the proposed loan agreement be structured and documented to satisfy the needs of both borrower and bank? A properly structured loan agreement must also protect the bank and those it represents principally its depositors and stockholders- by imposing certain restrictions on the borrowers activities then these activities could threaten the recovery of bank funds. The process of recovering the banks funds- when and where the bank can take action to get its funds returned also must be carefully spelled out in a loan agreement (PBL, 2005 November. Credit Risk Management Policy). 2.7.1 Securities: Security means anything that is deposited by borrower to secure the loan or advance. Security may be of the following types:

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Primary security: Primary security is the one for which the advance is made and the security has been deposited by the borrower. For example, in case of House Building loan, primary security is the land & building. Collateral security: Collateral security is the one for which the advance has not been made but the security has been deposited by the borrower. For example, in case of House Building loan, primary security is the land & building. Collateral security may be post dated cheque, FDR etc. 2.7.2 Margin: Definition of Margin varies from situation to situation. In case of security, Margin means the value of the securities and the amount up to which the borrower can draw. For example, value of security is Tk. 100/- and amount of the advance is Tk. 50/-. The margin is Tk. 50/- or 50% of the security. In case of Purchase, Margin means the equity participation. The percentage of margin to be kept differs from one security to another because of: Price fluctuation, Marketability, Depreciation, Possible loss such as fire, burglary etc (PBL, 2005 November. Credit Risk Management Policy). 2.7.3 METHODS FOR CREATING CHARGE OVER SECURITIES: Charge: Charge means right of payment out of certain property. Types of Charge: Fixed Charge: It is a charge on property which is fixed in nature, e.g., charge on land & building. Floating Charge: It is a charge on property which is constantly changing, e.g., charge on stock. Pari passu Charge (Latin: with equal step): It is a charge on property which gives equal rights to all the lenders on the property. No first charge or second charge. Second Charge: It is a second time charge on charged property.

2.7.4 Charging of securities: Charging of securities means the manner by which some articles or commodities or properties are made available to a banker as security is known as charging of securities.

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Second Mortgage: It is the mortgage of mortgaged property by the mortgagor to another person as security for further borrowing. Sub Mortgage: It is the mortgage of mortgaged property by the mortgagee to another person as security for further borrowing (PBL, 2005 November. Credit Risk Management Policy).

2.8 DOCUMENTATION OF LOAN AGREEMENT

Section 3 of Evidence Act, 1872 states: Documentation means any matter expressed or described upon any substance by means of letters, figures or marks or by more than one of those means intended to be used for the purpose of recording that matter. Simply, documents mean any written record which serves as evidence in respect of transaction. Depending on three factors, such as Legal status of the borrower, Type of the securities and Type of loan, necessary documents are obtained. 2.8.1 Charge Documents: Following charge documents are compulsory while giving loans. 2.8.2 Letter of guarantee: This is a document given by the proprietor, directors or the third party in favor of the principal debtor. The beneficiary of this document is the bank. Surety is bound to pay the guaranteed amount if such situation arises. 2.8.3 Counter guarantee: This is a document given by the proprietor, directors or the third party in favor of the principal debtor. The beneficiary of this document is the bank. Surety is bound to pay the guaranteed amount if such situation arises. 2.8.4 Letter of authority: By this letter, the principal debtor gives the authority to the bank to debit the current account or investment account of the principal debtor for the following cases: I. Wages of the go-down keeper and go-down guard. II. Rent of the go-down. III. Insurance premium and IV. Any other expenses regarding these functions. 2.8.5 Letter of recall the loan: This letter is given to the bank by the borrower, giving the bank the right of recalling the loan amount at any time if the borrower fails to repay any one of the installments and the borrower cannot protest such recalling.

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2.8.6 Letter of continuity: By this letter, the borrower agrees that the promissory note given by the bank will act as security for the repayment of the ultimate balance or sum remaining unpaid on account of the overdraft or advance. 2.8.7 Letter of revival: By this letter, the borrower agrees that he will be liable to bank for payment of the promissory note with interest in respect of all present and future indebtedness liabilities secured thereby which promissory note is to remain in force with all relative securities, agreements and obligations. 2.8.8 Joint promissory note: This promissory note is given to the bank by the borrower if the borrowers are more than one person. 2.8.9 Single promissory note: The borrower to the bank gives this promissory note if the borrower is a single person. 2.8.10 Letter of undertaking: This document is given to the banker by the borrower

acknowledging the right to cancel the facility at any time with or without intimation to the borrower. 2.8.11 Loan disbursement letter: By this letter, the borrower request to disburse the loan sanctioned in his favor by the bank. All the persons, in whose names the account is opened, should sign the letter. 2.8.12 Charge over bonds or of shares etc: It is a document given by the borrower to the banker declaring that the stocks, shares, debentures, securities and investments which are now deposited to the bank and which may from time to time be deposited by the borrower shall stand charged and hypothecated to bank as security for the payment to bank on demand of the balance of the loan amount and of any other indebtedness and liability to the bank of any kind whether mature or accruing and whether incurred alone or jointly with others and whether as principal or surety including all interest document, commission, expenses, charges and costs incurred by the bank in relation any such indebtedness or liability. 2.8.13 Letter of lien against fixed deposit receipt: By this letter, the borrower gives the right to the bank to hold the Fixed Deposit Receipt (FDR) if the borrower fails to repay or adjust the loan on demand or discharge the liabilities to bank. In this letter, FDR number, issuing branch, name of the favoring person and amount are writer.

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2.8.14 Letter of authority to en-cash FDR: By this letter, the borrower gives the right to bank to encash the FDR in case of need. Here the amount and address of the bank of issue and the signature of the holders are given. 2.8.15 Memorandum of deposit of title deeds: It is a deed that is necessary in case of mortgage by deposit of title deed or equitable mortgage. Here the mortgagor agrees that he has deposited necessary documents of the property to the bank. Hypothecation of goods to secure a demand cash credit or overdraft or loan account: Here the amount of loan, interest, and the name of the borrowers are written. Here the bank and the borrowers agree on the following terms: Security, Balance due to the Bank, Surplus, Borrowers not to the encumber or parts of the goods, Inspection, Sale, Margin, Repayment, Sale of goods, Deficiency, Insurance, Statement of account, Continuing security, Saving, Change of borrowers and notices, Interest rate.
2.8.16 Guarantee by third party: Sometimes third party guarantee is needed for allowing loan.

Here third party gives the guarantee that of the principal debtor fails to repay the loan, and then the guarantor will be bound to repay the loan to bank. 2.8.17 Hypothecation of vehicle:This document is necessary in case of transport loan. Here the borrower hypothecated the vehicle to the bank. In case of failure of repay the loan, bank will sell the vehicle to collect the money (PBL, 2005 November. Credit Risk Management Policy).

2.9 Information About the loan Customers

The bank relies principally on outside information to assess the character, financial position, and collateral of a loan customer. Such an analysis begins with a review of information supplied by the borrower in the loan application. The bank may contact other lenders to determine their experiences with this customer regarding the following information: Were all scheduled payments in previous loan agreements made on time? Were deposit balances kept at high enough levels? How much was borrowed previously and how well were those earlier loans handled? Is there any evidence of slow or delinquent payments? Has the customer ever declared bankruptcy?

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2.9.1 Sources of Information about the Loan customers: Physical Investigations Customer financial statements Experience of other lenders with this customer Customer Annual Report Local or regional credit bureaus Local Newspapers Local chamber of commerce.

2.10 Mechanism of Credit Distribution of the Prime Bank

The primary factor determining the quality of the banks credit portfolio is the ability of each borrower to honor, on a timely basis. The authorizing credit personnel prior to credit approval must accurately determine this. If the report of the project appraisal is very satisfactory to approve the loan proposal, then the following steps furnish the approval procedure: Make a proposal by the client to the bank Give all the necessary documents. Bank will send the parties statement to the Bangladesh Bank, their CIB (Credit Information Bureau) will inquiry that whether this party is defaulter or a new one. Bank will take the collateral from the party and analysis that how much it will cover the total loans. Bank will send this proposal to the head office. In the head office the Board of Directors and Managing Director will approve the loan. Head Office will send the approval to the branch office.

2.11 Disbursement:
After completing all the necessary steps for sanctioning loans bank will create a loan account by the name of the party and deposit the money to that account. Bank will give cheque books to the party and advice them to draw the money and use it as soon as possible, because whenever the

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money will transfer to the account interest will count from that time (PBL, 2005 November. Credit Risk Management Policy).

2.12 Loan Classification-Provisioning

a. Classification: Classification of loan is mandatory for all scheduled commercial bank. It has been observed that sometimes bank income is being calculated by showing the unrealistic expected income. Loans are classified into 3 categories on the basis of the length of overdue. These are SMA: If the loan remains overdue for 3 months and above Substandard: If the loan remains overdue for 6 months and above Doubtful: If the loan remains overdue for 9 months and above Bad or Loss: If the loans remain overdue for 12 months and above

b. Provisioning: To get real picture of the income, provisioning is made as under- 1% for all loans - 5% for SMA - 20% for Substandard loans - 50% for Doubtful loans - 100% for Bad loans

2.13 Recovery Policy of the Prime Bank

First of all PBL try to recover all loans and advances regularly. If any installment over due PBL officers make phone calls to the customers and if it is overdue for two months they personally go to customers mailing address. In the basis of overdue installments PBL categorize provision. In case of SMA loans determined to have high probability of recovery within 6 months; recovery efforts to continue on an on-going basis. In case of substandard loans determined to have moderate probability of recovery within 1 year; review recovery efforts on a 3 months basis. For doubtful loans it determined to have moderate probability of recovery within 1 year; review recovery efforts on a 3 months basis. Loans determined to have low and remote probability of

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recovery; review case on a 6 months basis. Lastly for those loans have virtually no chance of recovery: charge-off the books. However in these situations proper approval from the appropriate approving authorities should be obtained and also shall be guided by Bangladesh Bank instructions and subject to complete analysis of: Banking practice, Legal and tax implication and Status of each individual credit (PBL, 2005 November. Credit Risk Management Policy).

2.14 Conclusion
Prime Bank Limited celebrates its 12th anniversary on 17th April 2007 (started its operation in 1995). Within this tangible period, the Bank is now graded as the top ranking Bank in the country and it hold top position in CAMEL rating published by Bangladesh Bank in 2005. Credit Management System of PBL is successful. This success lies on its selection of good borrower and close credit monitoring system which reflects on its profitability. Credit is an utmost important factor for a Bank and core income generating source as well as it is involved with risk. So, decision regarding credit is very important in all respect of the Bank. PBL has proper credit management policies that describes what type of loans protect the Banks soundness and also help to meet the needs of the communities the Bank serves. PBL should capitalize its present successful credit management system and try to give better service to its stakeholders in days to come which can ensure its sustainable growth and development.

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Chapter 3 3.0 Working Experience 3.1 Introduction

The BBA program is designed to focus on theoretical and professional development of people open to take up business as a profession as well as service as a career. The course is designed with an excellent combination of theoretical and practical aspects. This internship provides the students to link up their theoretical knowledge into practical fields. In this connection, I was assigned to Prime Bank Ltd. Narayangonj Branch credit operation for my practical orientation. This chapter will give a brief idea about my duties and responsibilities over the three month in Prime Bank Ltd Narayanganj Branch. From the first day of my joining in Prime bank I have given some responsibilities. At first I started from the general banking and after that I was shifted to different departments. Through this internship program I have gathered practical knowledge about the corporate world.

3.2 General Banking Division

General banking is the starting point of all the banking operations. General banking is the frontside banking service department. It deals with those customers who come frequently and those customers who come one time in banking for enjoying ancillary services. In some general banking activities, there is no relation between banker and customers who will take only one service from bank. It opens new accounts, remit funds, issues bank drafts and pay orders etc.

3.2.1 Account Opening

Prime Bank Ltd opens Savings, STD, Current and different deposit accounts. To open this accounts they have account opening forms for each accounts. For Savings, STD and Current accounts the form required detail information about the customer. My duty was to help the customers to fill up the form. If the customer was not able to fill up the form I had to fill it on the behalf of them.

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A Working Report on Credit Operation & Management of Prime Bank Ltd

19

3.2.2 Issue Pay Orders and Demand Drafts

To issue pay orders and demand drafts first I have to receive the application form from the applicant. Then I have to write the date, amount and the name to which these pay orders and DD are issued on the block. In case of DD I have to write down the branch code and the branch name to which these DD will be issue. I have also written the date, amount and commission on the DD register in case of demand draft. Then I have to collect two signatures from two authorized officer on the DD block. The general banking officer ensures the applicant deposit the amount and after that I give the issued pay order or demand draft to the applicant with a signature on the block.

3.2.3 Cheque Books and ATM cards

In the morning when the MICR check books come from the head office I have to sort out them by the first character of the names. When the customers come to get their cheque book or ATM card it was my responsibility to give them their check books or ATM card by taking their signature in the received file.

3.2.4 Giving Information

When the customers come it was my responsibility to give them the proper information about the deposit accounts. Like if a customer wants to open a savings account the required documents and number of photos.

3.2.5 Daily Expenditure Voucher

It was my responsibility to write down the daily expenditure voucher of Prime Bank Limited like local convince, refreshment, cash remittance account etc.

3.3 Cash Section

Cash section demonstrates liquidity strength of a bank. It is also sensitive as it deals with liquid money. Maximum concentration is given while working on this section. As far as safety is concerned special precaution is also taken. Tense situation prevails if there is any imbalance in the cash account. For the safety reason I have no duties in the cash section.

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20

3.4 Credit Division

As the credit division of Prime Bank Limited is fully based on software system there was a little scope for me to work. I have filled up some part of the retail loan form like the personal information of the customer. I have to observe the proposals and documentation of different types of credit.

3.5 Findings
While doing my Internship Program I could find some positive and negative aspect faced by the customers. Those are:

1. Positive Aspect: Strong manpower: The Bank has strong management system. As a result bank got skilled employee and the all work properly. Online Service: Now Bank has an online service in all their branches that also have a strong network. Now client can transaction easily whichever branch they want within Bangladesh. Through the online service client also can transfer their fund in all over the Bangladesh. Branch network: Now presently Bank has almost 64 branches in all over Bangladesh, which is a very impact for a bank to growing faster and increase reserve fund.

2. Negative Aspect: Customer related problems: the Bank has no segmentation to handle different types of customer. They are equally treating of all the customers to provided service. But high status clients seek on extra honor from Bank or instituted. Work Environment Problems: The work environment is noisy and full of crowd sometimes. It is bad for any financial organization and also bad for security. There is no sitting arrangement for a large number of people. Administrative problem: the procedure to open an account is full of fast and regulations .But compare to other Bank, Prime Bank is not as flexible as they are doing to open A/C or attract customer.

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21

Technological problem: The branches only one photocopy machine which is sometimes in clients death. The output of this machine is not ensuring the quality of original documents. So it is an image problem of the Bank. The most important problem is that most of the time clients come with the problem that they punch their ATM card on the machine and it deduct money from their account but they do not get any money. When they come to the bank they fill up a form after that they get back their money in their account from the head office. Product related problem: Compare to other Bank Prime Bank offer low interest rate to depositor. So, they are not interested to keep their money in low rate of interest. The PBL management is only hunting to ward low cost and no cost deposit.

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Chapter 4 4.0 Conclusion & Recommendations

4.1 Conclusion
Prime Bank is an emerging bank. The bank has only completed almost 15 years of banking services. At the initial stage of business, every institution has to go through the difficult path of survival. The main objectives of this study are to give a brief idea about credit operation and management of Prime Bank and explain my duties and responsibilities in Prime Bank over this three months. I have noticed some positive and negative aspects of Prime Bank Ltd. like strong manpower, branch network, work environment problems, administrative problem and technological problem. The bank should redesign all sorts of banking procedures to be more user-friendly, attractive and impressive.

4.2 Recommendations
Considering the findings and analysis in the earlier chapters, PBL can do the following for further growth and development: Central monitoring system should be more active to maintain classified loan to a minimum level. PBL should establish ATM Booth countrywide as soon as possible. PBL should open more new exchange houses abroad for enhancing remittance business. PBL should reduce hierarchy of management to retain its employee. PBL should give more emphasis on HR development that is vital for its overall success. PBL should arrange job rotation in branch level to get overall banking knowledge for their employee.

Prime Bank Limited

References 1. Prime Bank, (n.d.) The Bank <https://www.primebank.com.bd/ the_bank.jsp> (5 February 2011) 2. Investorwords,( n.d.) Credit <http://www.investorwords.com/> (6 February 2011) 3. Wikipedia, (n.d.) Credit Operation <http://en.wikipedia.org/wiki/> ( 6 February 2011) 4. Wikipedia, (n.d.) Credit Operation <http://en.wikipedia.org/wiki/> ( 6 February 2011) 5. PBL, 2005 November. Credit Risk Management Policy. Credit Operation and Management, 38-47. 6. Mishkin, F. S. (2008). The economic money, banking, financial markets. Pearson Addison Wesley 7. http://www.iub.edu.bd/ 8. Annual Report of PBL 2008 & 2009.

Appendix

Prime Bank Limited

Narayanganj Branch

Credit Risk Grading Model Score Summary

Reference No.: Prime/NGJ/CR/ Name of the Borrower Key Person Group Name (if any) Branch: Industry Sector Date of Financials Originated by (RO/SRO) Completed by (RM/SRM) Approved by (CO/SCO) Compact-O-Style Ltd. Mr. X N/A Narayanganj RMG RMG 31.12.2009 Mr. A Mr. B Mr. C 06.10.2010

Aggregate Score:

75.50

Risk Grading: ]

Acceptable

Numeric Grade 1 2 3 4 5 6 7 8 Superior

Grade

Good Acceptable Marginal/Watchlist Special Mention Substandard Doubtful Bad/Loss

Score Fully cash covered, secured by Bank SUP Government/International Guarantee 85+ GD 75-84 ACCPT 65-74 MG/WL 55-64 SM 45-54 SS 35-44 DF BL <35 Short

Credit Risk Grading Model

Score Calculation Sheet (Considering 31.12.2009)

Criteria A. Financial Risk A-1 Leverage A-1.1 Debt-Equity (x) - Times Weight 50% 10% 5% Parameter Score Actual Parameter Score Obtained

Total Liabilities to Tangible Net worth

A-1.2 Debt-Total Asset (x)- Times

5%

Total Liability to Total Assets

< 0.25 x 0.26 to 0.36 to 0.51 to 0.76 to 1.26 to 2.01 to 2.51 to > 2.75 < 0.25 0.26 to 0.36 to 0.51 to 0.76 to 1.26 to 2.01 to 2.51 to > 2.75

0.35 0.50 0.75 1.25 2.00 2.50 2.75

x x x x x x x

0.35 0.50 0.75 1.25 2.00 2.50 2.75

x x x x x x x

5.00 4.50 4.25 4.00 3.50 3.25 3.00 2.50 0.00 5.00 4.50 4.25 4.00 3.50 3.25 3.00 2.50 0.00 5.00 4.50 4.25 4.00 3.50 3.25 3.00 2.50 0.00 5.00 4.50 4.25 4.00 3.50 3.25 3.00 2.00 0.00 5.00 4.50 4.00 3.50 3.25 3.00 2.50 0.00

0.60

0.37

4.25

A-2 Liquidity A-2.1Current Ratio (x) -Times

10% 5%

Current Assets to Current Liabilities

A-2.2 Quick Ratio (x) -Times

5%

Quick Assets to Current Liabilities

> 2.74 2.50 to 2.74 x 2.00 to 2.49 x 1.50 to 1.99 x 1.10 to 1.49 x 0.90 to 1.09 x 0.80 to 0.89 x 0.70 to 0.79 x < 0.70 > 2.00 1.75 to 2.00 x 1.50 to 1.74 x 1.25 to 1.49 x 1.00 to 1.24 x 0.75 to 0.99 x 0.50 to 0.74 x 0.25 to 0.49 x Less than 0.25 > 25% 23% to 25% 20% to 22% 17% to 19% 14% to 16% 11% to 13% 8% to 10% < 8%

1.71

0.71

A-3 Profitability A-3.1 Operating Profit Margin (%)

20% 5% 11.12% 3

(Operating Profit/Sales) X 100

Credit Risk Grading Model

Criteria A-3.2 Net Profit Margin (%)

Weight 5%

Parameter > 15.00% 13% to 15% 11% to 12% 9% to 10% 7% to 8% 5% to 6% 3% to 4% < 3% > 30% 26% to 30% 22% to 25% 18% to 21% 14% to 17% 8% to 13% 5% to 7% < 5% > 15.00% 13% to 15% 11% to 12% 9% to 10% 7% to 8% 5% to 6% 2% to 4% < 2% > 2.00 1.51 to 1.25 to 1.00 to < 1.00 > 2.00 1.51 to 1.25 to 1.00 to < 1.00

Score 5.00 4.50 4.00 3.50 3.25 3.00 2.50 0.00 5.00 4.50 4.00 3.50 3.25 3.00 2.50 0.00 5.00 4.50 4.00 3.50 3.25 3.00 2.00 0.00 5.00 4.00 3.00 2.00 0.00 5.00 4.00 3.00 2.00 0.00 50.00 4.00 3.50 3.00 2.00 1.00 0.00 3.00 2.00 1.00 0.00 2.00 1.50 1.00 0.00

Actual Parameter 11.12%

Score Obtained 4

(Net Profit/Sales) X 100

A-3.3 Retrun on Asset

5%

17.59%

3.25

(Net Profit/Total Asset) X 100

A-3.4 Return on Equity

5%

28.15%

(Net Profit/Total Equity) X 100

A-4 Coverage A-4.1 Interest Coverage () - Times Earning before interest & tax (EBIT) Interest on debt A-4.2 Debt Service Coverage EBITDA/(Total Interest+CMLTD) Total Score- Financial Risk B. Business/ Industry Risk B-1 Size of Business (in BDT crore) Size of the borrower's business measured by the most recent year's total sales. Preferably audited numbers.

10% 5%

3.00

2.00 1.50 1.24

5%

3.00

2.00 1.50 1.24

40.50 5.06 2

18% 4%

> 60.00 30.00 59.99 10.00 29.99 5.00 - 9.99 2.50 - 4.99 < 2.50

B-2 Age of Business Number of years the borrower is engaged in the primary line of business B-3 Business Outlook Critical assesment of medium term prospects of industry, market share and economic factors.

3%

> 10 Years 6 - 10 Years 2 - 5 Years < 2 Years

11

2%

Favorable Stable Slightly Uncertain Cause for Concern

Favorable

Credit Risk Grading Model

Criteria B-4 Raw Material Availability

Weight 2%

Parameter Locally available Partially import dependent Fully import dependent Scarce

Score 2.00 1.00 0.50 0.00 3.00 2.00 1.00 0.00 2.00 1.00 0.00 2.00 1.00 0.00 18.00

Actual Parameter Locally available

Score Obtained 2

B-5 Industry Growth

3%

Strong (10%+) Good (>5% - 10%) Moderate (1%-5%) No Growth (<1%)

Good (>5% - 10%)

B-6 Market Competition Consider market share, demand supply gap etc. B-7 Entry/Exit Barrier (Technology, capital, regulation etc)

2%

Dominant Player Moderately Competitive Highly Competitive

Moderately Competitive

2%

Difficult Average Easy

Difficult

Total Score- Business Risk

14.00

C. Management Risk C-1 Experience Total length of experience of the senior management in the related line of business. C-2 Trackrecord Reputation, commitment, trackrecrod of onwers in business.

12% 5 More than 10 years 610 years 15 years No experience 2 Very Good Moderate Poor Marginal 5.00 3.00 2.00 0.00 2.00 1.00 0.50 0.00 3.00 2.00 1.00 0.00 2.00 1.00 0.50 0.00 12.00 9.00 Very Good 2 Ready Succession 3 Very Good 2 15 years 2

C-3 Second Line/Succession

Ready Succession Succession within 1-2 years Succession within 2-3 years Succession in question

C-4 Team Work

Very Good Moderate Poor Regular Conflict

Total Score- Management Risk

Credit Risk Grading Model

Criteria D. Security Risk D-1 Security Coverage (Primary)

Weight 10% 4%

Parameter

Score

Actual Parameter

Score Obtained

Fully covered by underlying assets/substantially cash covered Registered Hypothecation (1st Charge/Pari passu Charge) 2nd charge/Inferior charge Simple hypothecation Negative lien on assets No security /

Simple hypothecation / Negative lien on assets

2 1 0

D-2 Collateral Coverage (Property Location)

4%

R/M on corporation/Prime property

Municipal Area

No collateral

R/M on Pourashava/SemiUrban area property E/M or No property but other Plant & Machinery as collateral Negative lien on collateral No collateral D-3 Support (Guarantee) 2% Personal Guarantee with high net worth or Strong Corporate Guarantee Personal Guarantees or Corporate Guarantee with average financial strength No support/guarantee Total Score- Security Risk E. Relationship Risk E-1 Account Conduct 10% 10% 5%

3 2

1 0 2 Personal Guarantee with high net worth or Strong Corporate Guarantee 2

0 10 3

More than 3 years Accounts with faultless record Less than 3 years Accounts with faultless record Accounts having satisfactory dealings with some late payments. Frequent Past dues & Irregular dealings in account

5.00

More than 3 years Accounts with faultless record

4.00 2.00

0.00

E-2 Utilization of Limit (actual/projection)-Consider revolving & non-revolving limits.

2% both

More than 80% 61% - 80% 40% - 60% Less than 40% Parameter Full Compliance Some Non-Compliance No Compliance

2.00 1.50 1.00 0.00 Score 2.00 1.00 0.00 1.00

90.00%

Criteria E-3 Compliance of Covenants

Weight 2%

Actual Parameter Full Compliance

Score Obtained 2

E-4 Personal Deposits

1%

Personal accounts of the key business Sponsors/ Principals are maintained in the bank, with significant deposits No depository relationship

No depository relationship

Total Score- Relationship Risk Grand Total - All Risk

0.00 10.00 100.00

9.00 75.50

Note: All calculations should be based on annual financial statements of the borrower (audited preferred).

Credit Risk Grading Model