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1.1 Origin of the Report Bachelor of Business Administration (BBA) course requires 45 days attachment with an organization followed by a report assigned by the supervisor in the organization and endorsed by the faculty advisor. I took the opportunity to do my internship in National Credit and Commerce Bank Ltd(NCCBL). My topic of internship is authorized from the head office of NCC Bank Ltd.My faculty supervisor Mrs. Ferdousi sultana, lecturer of Department of Management Studies, University of Dhaka, also approved the topic and authorized me to prepare this report as part of the fulfillment of internship requirement. 1.2 Background of the Report Few years back Bangladesh Bank undertook a project to review the global best practices in the banking sector and examines in the possibility of introducing these in the banking industry of Bangladesh. Four 'Focus Groups' were formed with participation from Nationalized Commercial Banks, Private Commercial Banks & Foreign Banks with representatives from the Bangladesh Bank as team coordinators to look into the practices of the best performing banks both at home and abroad. These focus groups identified and selected five core risk areas and produce a document that would be a basic risk management model for each of the five 'core' risk areas of banking. The five core risk areas are as followsa) Credit Risks; b) Asset and Liability/Balance Sheet Risks; c) Foreign Exchange Risks; d) Internal Control and Compliance Risks; and e) Money Laundering Risks. Bangladesh Bank in one of its circular (BRPD Circular no.17) advised the commercial banks of Bangladesh to put in place an effective risk management system based on the guidelines sent to them. I have worked in various Department of NCC Bank Ltd, Uttara Branch. In this report, I will try to make a overall analysis on all activities of NCC Bank Ltd specially focuses on credit management & international trade. 1.3 Objective of the Report The study has been undertaken with the following objectives: To analysis the pros and cons of the conventional ideas about credit operation of a Bank.¬ To¬ have better orientation on credit management activities specially credit policy and practices, credit appraisal, credit-processing steps, credit management, financing in
various sector and recovery, loan classification method and practices of National Credit and Commerce Bank Ltd(NCCBL). To¬ compare the existing credit policy of National Credit and Commerce Bank Ltd(NCCBL) with that of best practices guideline given by Bangladesh Bank, the central bank of Bangladesh. To identify and suggest scopes of improvement in credit management of NCCBL.¬ To get an overall idea about the performance of NCC Bank Ltd.¬ To fulfill the requirement of the internship program under BBA program¬ 1.4 Scope of the Report The study would focus on the following areas of NCC Bank Limited. Credit appraisal system of NCC Bank Limited.¬ Procedure for different credit facilities.¬ Portfolio (of Loan or advances) management of NCC Bank Limited.¬ Organization structures and responsibilities of management.¬ Each of the above areas would be critically analyzed in order to determine the efficiency of NCC bank’s Credit appraisal and Management system. 1.5 Sources of Information Information collected to furnish this report is both from primary and secondary in nature. The secondary information was collected from the different publication, and books. 1.6 Methodology of the Report The following methodology will be followed for the study: Both primary and secondary data sources will be used to generate this report. Primary data sources are scheduled survey, informal discussion with professionals and observation while working in different desks. The secondary data sources are annual reports, manuals, and brochures of NCC Bank limited. To identify the implementation, supervision, monitoring and repayment practice- interview with the employee and extensive study of the existing file was and practical case observation were done. 1.7 Limitation of the Report This report will only consider credit management & international trade of NCC Bank limited. It will not cover Asset and liability/ balance sheet risk Management¬ Internal control And compliance risk mgt¬ Money laundering Risk mgt.¬
THE ORGANIZATION - 1
2.0 AN OVERVIEW OF NCC BANK LIMITED (NCCBL) NCC Bank Limited is the leading private sector bank in Bangladesh offering full range of Personal, Corporate, International Trade, Foreign Exchange, Lease Finance and Capital Market Services. NCC Bank Limited is the preferred choice in banking for friendly and personalized services, cutting edge technology, tailored solutions for business needs, global reach in trade and commerce and high yield on investments, assuring Excellence in Banking Services. 2.1 Background of NCC Bank Limited National Credit and Commerce Bank Ltd. bears a unique history of its own. The organization started its journey in the financial sector of the country as an investment company back in 1985. The aim of the company was to mobilize resources from within and invest them in such way so as to develop country's Industrial and Trade Sector and playing a catalyst role in the formation of capital market as well. Its membership with the browse helped the company to a great extent in this regard. The company operated up to 1992 with 16 branches and thereafter with the permission of the Central Bank converted in to a fully fledged private commercial Bank in 1993 with paid up capital of Tk. 39.00 corer to serve the nation from a broader platform. Since its inception NCC Bank Ltd. has acquired commendable reputation by providing sincere personalized service to its customers in a technology based environment. The Bank has set up a new standard in financing in the Industrial, Trade and Foreign exchange business. Its various deposit & credit products have also attracted the clientsboth corporate and individuals who feel comfort in doing business with the Bank. Within this short time the bank has been successful in positioning itself as progressive and dynamic financial institution in the country. This is now widely acclaimed by the business community, from small entrepreneur to big merchant and conglomerates, including top rated corporate and foreign investors, for modern and innovative ideas and financial solution. 2.2 Mission Statement
3 Slogan Where Credit & Commerce Integrates 2.. ….6 Values • Customer focus • Integrity • Team Work • Respect for individual • Quality • Responsible citizenship 2.7 Workforce Total number of employees stood at ……… as on January 31. Of the Society : Maximization of Welfare. conventional Branches and ….¬ Cater to all differentiated segments of Retail and Wholesale Customers. 2009.To become a bank of choice in serving the nation as a progressive and socially responsible financial institution by bringing credit and commerce together for profit and sustainable growth. branches are located in Dhaka City. Dhaka . 2.¬ 2.2 .5Objectives Be one of the best banks of Bangladesh. THE ORGANIZATION . Of the Customer : Maximum Benefit and Satisfaction. branches are located in Chittagong. Among total of 60 Branches. Motijheel C/A.¬ Use state-of the art technology in all spheres of banking. Narayangonj. Islamic Banking Branches.¬ Be a high quality distributor of product and services. The registered office (Head Office) of NCC Bank Limited is at 7-8. Bangladesh.1000.¬ Achieve excellence in customer service next to none and superior to all competitors. Narsingdi. …. Sirajgonj each.4 Motto The Bank will be a confluence of the following three interests: Of the Bank : Profit Maximization and Sustained Growth. 2. 2.8 Branches NCC Bank limited has …. The other … branches are located in Sylhet.
its shareholders and in the market it serves. NCC bank treats every employee with dignity and respect in a supportive environment of trust and openness where people of different backgrounds can reach their full potential. namely American Express Bank. and London. .9 Management Information System Since its journey as commercial Bank in 1985 NCC Bank Limited has been laying great emphasis on the use of improved technology. which is gradually expanding. Calcutta. If the departmentation are not fitted for the particular works there would be haphazard situation and the performance of a particular department would not be measured. Standard Chartered bank. Different departments of NCCBL are as follows: Human Resources Division♣ Personal banking Division ♣ Treasury Division♣ Operations Division♣ Computer and Information Technology Division♣ Credit Division♣ Finance♣ & Accounts Division Financial Institution Division♣ Audit♣ & Risk Management Division 2. The number of Foreign Correspondents is------.13 Human Resources Management of NCCBL NCC Bank Limited recognizes that a productive and motivated work force is a prerequisite to leadership with its customers.2. 2. 2. It has gone to online operation system since 2003. The Bank is maintaining foreign exchange accounts in New York. Tokyo. Hong Kong Shanghai Banking Corporation. The Bank maintains a need based correspondent relationship policy. CITI Bank NA-New York and AB Bank Ltd. The bank has set up letter of credit on behalf of its valued customers using its correspondents as advising and reimbursing Banks. Bank of Tokyo. And the new Banking Software Flexible is under process of installation. Mashreq Bank. NCC Bank Limited has does this work very well. As a result the bank will able to give the services of international standards.11 Organization Structure 2.10 Correspondent Relationship The Bank established correspondent relationships with a number of foreign banks.12 Departments of NCCBL If the jobs are not organized considering their interrelationship and are not allocated in a particular department it would be very difficult to control the system effectively.
Beside these the recruitment procedure is comprehensive.15.79.1 Deposit Product NCC Bank Limited is now offering different types product for mobilizing the savings of the general people.14 Product and Services The product and services that are currently available are given below: 2. 2. To orient. Current A/C Savings Bank Deposit A/C Short Term Deposit A/C Term Deposit A/C Premium Term Deposit A/C Instant Earnings Term Deposit A/C Special Savings Scheme Special Fixed Deposit Scheme NFCD RFCD .The bank’s human resources policy emphasize on providing job satisfaction.19.14. identify the strength and weakness of the employee to assess the individual training needs.894/ 2007 602 Tk. Human Resources Training Expenses 2008 803 Tk. Realizing this NCC Bank limited has placed the utmost importance on continuous development of its human resources. enhance the banking knowledge of the employees NCC Bank Training Institute (NCCBTI) organizes both in-house and external training. they are sent for training for self-development. A good working environment reflects and promotes a high level of loyalty and commitment from the employees. growth opportunities.443/ The remuneration is very competitive in comparison with industry average.08. and due recognition of superior performance.
Money Double Program 2.50% 14.00% 14.50% 7.00% 11.50% 5 STD Account 4.00% 3 FDR for 6 months 8.00% Import and Export Financing Long Term (Capital) .00% 14.00% 16.25% 4 FDR above 1 year 8.00% 16.14.00% THE ORGANIZATION .3 Loan and Advance Product The NCC Bank is offering the following loan and advance product to the client for financing different purpose that fulfill the requirements of the bank and have good return to the investment as well as satisfy the client.2 Interest Rate paid to different Deposit liabilities: Serial Application Interest rate 1 FDR for 1 months 184.108.40.206% 6 Savings Account 5.50% 2 FDR for 3 months 8. The loan and advance products are: Working Capital Financing Commercial and Trade Financing Long Term (Capital) Financing House Building Financing Retail and Consumer Financing SME Financing Agricultural Financing Import and Export Financing 2.4 Interest rate charged on different loans & advances Serial Application 1 Working Capital Financing 2 Commercial and Trade Financing 3 House Building Financing 4 Retail and Consumer Financing 5 SME Financing 6 Agricultural Financing 7 8 Interest rate 14.3 2.
479. 2.15. 2.14.7 Brokerage House • • Member. Full Service Depository Participant 2.5 Cards ATM Card Credit Card (Local. International and Dual) 2.2 Capital .6 Remittance Products Special Interest rate on Savings and Term Deposits Wage Earners Welfare Deposit Pension Scheme Loans for Real Estate (Land purchase and House construction/renovation) Advance against Regular Remittance 2.15 Financial Performance of NCCBL The NCC Bank Limited is one of the most successful private sector commercial bank in our country. Approved Securities 2.57 million as of 31 December. 577.14.29 million with a net profit of Tk.Provision for tax for the year amounted to Tk.14. 2006.22 million.1 Profit NCC Bank Limited registered a operating profit of Tk. 1.9 Remittance Service Correspondence arrangement with more than 330 Financial Institutions all over the World For Wage Earners Remittance we have Agency arrangement with 12 reputed Exchange Houses covering major Locations of our Expatriates 2.8 Treasury Service Primary Dealer of Govt.14. Dhaka Stock Exchange Ltd.Financing 2.14.15. It has achieved the trust of the general people and made reasonable contribution to the economy of the country by helping the people investing allowing credit facility.267.
million in the previous year.13 million in 2005.4 Loan and Advances The Bank recorded a 16.13 24.15.22 million excluding call of the previous year.147. 2006 the authorized capital of NCC Bank Limited amounted to Tk. 1.417. 20. The Capital Adequacy Ratio is 9.5 International Trade International Trade is an important constituent of the business portfolio of the bank.34 2.00 million & paid up capital amounted to Tk. 2. The total equity (capital & reserve) of the bank as on December Stood at Tk.147. The bank continues to explore and diversify its loan distribution with the objective of efficient use of resources and take utmost precaution to safeguard it.646.6 Investment Banking: . in millions) Year 2005 2006 Loans & Advances 20. 28.12% in the year 2006. 24. Total export volume of the bank amounted to 8. Table 4: Loans & Advances of NCCBL (Tk.30 million in 2005.533. 2006 which exceed the stipulated requirements for banks in Bangladesh.15.678.22 28.478.678.557.00million in 2006 compared to Tk7. On the other hand.78% as on December 31.79 million. export increased by 9.500. 2.201. NCCBL also participated in a syndicated loan. Table 2: Deposit of NCCBL Tk in million Year 2006 2005 Deposit 21.15.296. NCC Bank is making loan and advances in different areas.34 million excluding call as against Tk.73% over the volume of 16.80% growth in advances with a total loans and advances portfolio of Tk.15. 17.As on December 31.30. 2.533.36 THE ORGANIZATION .37 million.36 million at the end of December 2006 compared to Tk.776. 2. 21. 2006 Total deposits of the bank stood at Tk.4 2.478.80 million in 2006 with a growth of 7. The import value stood at Tk.3 Deposits As on December 31.
) .552.25% increase over Tk.45 million in the previous year.010.08million in 2006 indexing a 15. The investment portfolio made up of Government Securities and Shares and Debentures of different listed companies stood at Tk.16 NCC BANK AT A GLANCE: 2002-2006 Financial statement (in million Tk. 3. 3. Hire purchase and Capital Market Operation besides investment in Treasury Bills and Prize Bonds constitute the investment basket of NCCBL. 2.Lease finance.
267.94 13.08 Import Business 13.15 2.010.19 Operating Expenses 1.34 Loans and Advances 13.45 3.932.13 24.913.966.02 4.296.72 12.55 607.069.37 Deposits 16.92 1.037.478.50 624.51 .57 Profit before Tax 385.00 Paid up Capital 480.673.559.452.859.909.00 4.42 16.15 20.65 1.00 750.65 7.73 761.00 2.34 1.147.274.850.80 Export Business 4.48 552.201.018.2002 2003 2004 2005 2006 Authorized Capital 750.22 28.262.562.283.30 8.90 1.500.88 1.35 14.30 17.500.81 975.50 687.50 13.36 Investment 2.533.913.28 1.79 Reserve fund and other Reserve 388.33 5.01 510.00 Operating Income 2.23 1.00 3.94 2.94 720.60 445.776.08 16.050.62 Operating Profit 597.73 1.49 1.60 1.579.00 2.04 1.211.00 750.056.385.557.38 334.23 3.15 2.147.646.58 Equity fund 1.18 884.089.552.23 21.417.967.678.215.86 2.637.771.645.069.062.063.85 15.66 2.37 2.
01 Fixed Assets 267.212.02 8.99 46. Such a Amount of provision against Classified 633.93 21.439.14 353.118 Earning per Share 44.86 650. credit is the ability to command goods or services of another in return for promise to pay such goods or services at some specified time in the future.114.14 0.33 1. In other words.22 308.02 26.35 1.95 1.11 39. Credit management is1.83 Total Assets (excluding contra) 18.615.95 1.00 - 10.00 30.Profit after Tax 213.1 Overview CREDIT MANAGEMENT IN NCC Bank Limited (NCCBL) 10.00 lender’s Bonus (%) 15.87 4.41 297.00 10.35 and advance and (ROA) (%) a dynamic field where a certain standard of long-range planning is needed to allocate the fund in diverse field and to minimize the risk and maximizing the return on the invested fund. while 9.00 The word credit comes from the Latin word “Credo” meaning “I believe”.75 7. The objective of the credit management is to maximize the performing asset and the minimization of the non-performing asset as well as ensuring the optimal point of loan Return on Assets their efficient management.00 10.22 Retained Profit 1.82 analyzing the credit management of NCCBL.08 479.19 17. a bank can make sure that its loan meet organizational and regulatory standards and they are profitable is to establish a loan policy.234. Advances credit procedure and quality of credit portfolio.253. Continuous supervision. For a bank.01 9.13 32. monitoring.75 12.28 10.68 79.40 981. portfolio of credit.41 0.05 timely Adequacy Ratio only constitute the bank’s asset structure but also a vital factor of the bank’s success.76 300.06 405.54 One of the most important ways. Therefore.78 4.39 9.47 30.16 352.83 would18.12 285.26 523.63 9.82 1.469.59 disaster not only for the bank but also for the economy as a whole.188.31 7.58 . It is a10. the 16. The overall success in credit management depends on the banks credit policy. Actually the credit portfolio is not9.91 36. it is the mainEquity (ROE) (%) on the other hand. supervision Total Nonperforming Loans as % of and follow-up of the loan and advance.14 1.75 Loans 733.54 14.50 19.2 Credit Policy of NCCBL Volume of Non-performing Loans 1. monitoring and follow-up are highly required for ensuring the Capitalrepayment and minimizing the default.00 trust in a person’s/ firm’s/ or company’s ability or potential ability and intention to repay. 3.10 use of20.88 Dividend : Cash (%) 3.71 Number of Branches 31 32 36 41 48 Number of Employees 857 896 925 1.685. it is required to analyze its credit policy.93 wrong credit bring Return on source of profit and 20.000 1.01 9.
¬ Credit facilities to any one customer group shall not normally exceed 15% of the capital fund or TK.90 202. 100 crores¬ 87.60% policy gives loan management a specific guideline in making individual loans decisions and in shaping the bank’s overall loan portfolio.85% 87.¬ Facilities are not allowed for a period of more than 5 (Five) years. Credit advancement shall focus on the development and enhancement of customer relationship.58% 94.¬ The¬ conduct and administration of the loan portfolio should contribute with in defined risk limitation for achievement of profitable growth and superior return on bank capital. Bangladesh Bank’s instructions.14 282. Banking Company’s Act.¬ It should be provided to those customers who can make best use of them. In NCC Bank Limited there is perhaps a credit policy but there is no credit written policy.68% . The bank shall provide suitable credit services for the markets in which it operates. credit principles includes the general guidelines of providing credit by branch manager or credit officer. Loans¬ and advances shall normally be financed from customer’s deposit and not out of temporary funds or borrowing from other banks.34 138.Amount of provision against Unclassified Loans 118. customer exposure.¬ All¬ credit extension must comply with the requirements of Bank’s Memorandum and Article of Association. proportion of unsecured facility etc.4 Global Credit Portfolio limit of NCCBL The features which deals with how much total deposits would be used as lending the proportion of long term lending.09 Advance/Deposit Ratio (%) 81. In NCC Bank Limited they follow the following guideline while giving loan and advance to the client.66% 95.¬ 3.3 Credit Principles In the feature. Interest rate of various lending categories will depend on the level of risk and types of security offered. 3.34 118. country exposure. other rules and regulation as amended from time to time. the most notable ones are: The aggregate of all cash facility will not be more than the 80% of the customers deposit¬ Long term loan must not exceed 20% of the total loan portfolio.
bank extends demand loan to the clients at stipulated margin. Continuous loans: These are the advances having no fixed repayment schedule but have an date at which it is renewable on satisfactory performance of the clients. nature of financing and provision base. • Medium term loan: More than 12 months & up to 36 months • Long term loan: More than 36 months. the clients have to provide the full L/C amount in foreign exchange to the bank.” "Loan against imported merchandise (LIM)" and "Later of Trust Receipt". Term loans: These are the advances made by the bank with a fixed repayment schedule. and "Staff loan". as soon as the L/C documents arrive. the bank requests the clients to adjust their loan and to retire the L/C documents.5 Types of Credit Credit may be classified with reference to elements of time. Terms loans mainly include "Consumer credit scheme". "Lease finance".5." Hire purchase". 3. Continuous loan mainly includes "Cash credit both hypothecation and pledge" and "Overdraft".2 Classification on characteristics of financing: Funded Overdraft Loan Non-funded * Letter of Credit¬ *¬ Bank Guarantee .3. The term loans are defined as follows: • Short term loan: Upto 12 months. Demand loan: In opening letter of credit (L/C). bank credit may be classified into three heads. To purchase this foreign exchange.1 Classification on the basis of time: On the basis of elements of time. However. Demand loans mainly include “Payment against Documents. No specific repayment date is fixed. 3.5. viz.
3.5. farmers and industrialists. Cash credit is given through the cash credit account. The loan may be repaid in installments or at expiry of a certain period. banker specifies a limit called the cash credit limit. Eligibility: loans are normally allowed to those parties who have either fixed source of income or who desire to pay it in lum sum. The interest is charged for the full amount sanctioned whether he withdraws the money from his account or not. Cash credit in true sense is against pledge of goods. In case of hypothecation the ownership and possession of the goods remain with the borrower. if the borrower defaults.1 Loan In case of loan the banker advances a lump sum for a certain period at an agreed rate of interest. Banks generally offer different kinds of credit facilities to the customers. The credit facilities of NCCBL may be broadly classified into five categories. for each customer.5. Loan may be demand loan or a term loan. . Cash credit is also allowed against hypothecation of goods. Interest Rate: 12%-15% per annum (Quarterly paid).2. up to which the customer is permitted to borrow against the security of tangible assets or guarantees.2. The purpose of cash credit is to meet working capital need of traders. The entire amount is paid on an occasion either in cash or by crediting in his current account. They are as follows: Loansθ Cash Creditθ Overdraftθ Bills purchased and discountedθ Consumer Credit/ personal loanθ They are discussed below accordingly. which he can draw at any time.2 Cash Credit In Cash credit. By virtue of the hypothecation agreement bank can take possession of the goods hypothecated.Consumer Credit¬ LTR¬ PAD¬ Cash Credit (Pledge¬ & Hypo) Staff Loan¬ Term Loan¬ Packing Credit¬ The varieties used by NCCBL are briefly described below with the common terms and condition. 3.
00 Up to 3. 3. fixed deposit. life insurance policies etc. The Total amount of loans along with the duration in which these loans taken. Interest is charged as balance outstanding on quarterly basis. 3.3 Overdraft Overdraft are those drawings which are allowed by the banker in excess of the balance in the current account up to a specified amount for definite period as arranged for. Household items for Businessman 3.00 Special Considerations Tenure 4 to 5 years 2 years 2 to 3 years Special Considerations Personal loan is given under personal guarantee of the borrower and another third parson known to the borrower. There is also a processing fee of 1. As this loan is collateral free the rate of interest is little bit high such as 15% to 18%.5.4 Bills purchased and discounted Banks grant advances to their customers by discounting bill of exchange or pro-note.5. Car loan. 3.00 1.5 Personal Loan (Consumer Credit Scheme) Objectives : The objectives of this loan are to provide essential household durable to the fixed income group (Service Holders) and other eligible borrowers.Rate of Interest: 12%-14%. debenture.6 Credit Ratification Authority of NCCBL: . this loan has an expiry date after which renewal or enhancement is necessary for enjoying such facility.2. marriage loan and loan for household equipment well as entertainment products are governed by personal loan program. shares. loan for house renovation.2.2. 3. against the securities of stock-in-trade. need to be repaid is given below: Type of Product 1. Others Loan Amount (Tk) Lac Up to 7. These advances are secured The loan holder can freely draw money from this account up to the limit and can deposit money in the account off course. Government promissory notes. Renew System: it is renewed in periodic basis (yearly). Vehicle 2.5. vacation loan. Any deposit in the OD account is treated as repayment of loan. Overdraft facilities are generally granted to businessmen for expansion of their business.5% taken at the time of disbursement of the loan.Household items for Service holders 4.
Bank is in business to make money but safety should never be sacrificed for profitability. credit division. The customer request for credit limit and the credit officer prepares a credit memo and send it to the head office. In NCCBL broad meeting occurs once in every week.7.1 Liquidity: Liquidity means the availability of bank funds on short notice. that is. The board is final authority to approve or decline a proposal. 3. DMDs and EVPs. 3. 3. Credit committee of NCCBL is comprised of Managing Director and other top-level executives.2 Safety: Safety means the assurance of repayment of distributed loans. 3. After taking all the relevant information from the branch the head office credit division sent the credit memo to the credit committee. The difference between the interest received on advances and the interest paid on deposit constitutes a major portion of the bank income. foreign exchange business is also highly remunerative. No advances will be made by bank for unproductive purposes though the borrower may be free from all risks. If credit committee is convinced about the merit of the proposal then it is sent the broad of directors. The whole process takes a month or more. . The borrower should be chosen carefully. To ensure the safety of loan.3 Intent: Banks sanction loans for productive purpose. the banks must have to maintain sufficient liquidity to repay its depositors and trade off between the liquidity and profitability is must.3 Profitability: Banking is a business aiming at earning a good profit.7. Besides. The main principles of lending are given below: 3. The liquidity of an advance means it repayment on demand on due date or after a short notice.7.7 Credit Evaluation Principles Some principles or standards of lending are maintained in approving loans in order to keep credit risk to a minimum level as well as for successful banking business.7. The bank will not enter into a transaction unless a fair return from it is assured. Therefore. He should be a person of good character & capacity as well as bank must have to maintain eligible number of security from borrower.Credit decisions are heart of all credit works. Generally branch manager and the credit incharge of a branch are held responsible for appraising of a loan proposal.
3.7. The legal documents of the vehicle have been obtained. They will thoroughly¬ examine and ensure that the subject credit facility does not contradict to any law.4 Security: The security offered for an advance is an insurance to fall bank upon in cases of need. Since risk factors are involved. security coverage has to be taken before a lending. Bangladesh Bank and Deed of the Mortgage and power of the Attorney to be drafted and executed under the Supervision of the Bank’s Legal Advisor.5 National interest: Banking industry has significant roll to play in the economic development of a country.¬ Collection of the satisfaction certificate in respect of all the documents both legal and banking from the lawyer.¬ Lawyers¬ certificate to the effect that all the legal formalities (Equitable/ Registered Mortgaged) has been properly created on the land and building in favor of the bank & bank has acquired the effective title of the property. The officer of Loan Administration must collect¬ the acceptance of the customer’s of the terms and conditions on the duplicate copy of the sanctioned advice.7. Registered power of attorney has been¬ collected from the borrower (contractor) assigning the work order favoring the NCCBL and the power of attorney has been registered with the work order given agency and they have agreed that they will issue all the cheques favoring NCCBL. rules and regulation of the country.8 Pre-disbursement Compliance When the credit proposal are approved the credit officer must have to be ensured that the disbursement of the credit facilities must comply with the directions written in the credit policy and circular made by time to time along with checking all the following terms and conditions. 3.¬ . 3. Security serves as a safety value for an unexpected emergency.¬ Entry has been made in the Safe -in and Safe-out register and the documents are preserved. The bank would lend if the purpose of the advances can contribute more to the overall economic development of the country.
ix. Resolution of the board of directors to borrow fund to execute documents and completes other formalities x. vi. Letter of arrangement. Letter of continuity. In documentation each type of advances requires a different set of documents. Letter of Revival xii. iii. 3.After being satisfied all the above terms and conditions the credit in-charge will disburse the loan amount to the client. xi. v. The documents should be stamped according to the stamp Act. Personal guarantee of the owners of the property. Generally. Letter of lien for advance against FDR. In this report. Demand promissory note: Here the borrower promises to pay the loan as and when demand by bank to repay the loan. Letter of hypothecation of goods and capital machinery. It specifies rights and liabilities of both the banker and the borrower. ii. Form no. It also differs with the nature of securities. Stock report: This report is used for OD and CC. . vii. the documents are taken in the case of a secured advance by NCCBL: i. information about the quality and quantity of goods hypothecated is furnished. Memorandum of deposit of title deed of property duly signed by the owners of the property with resolution of Board of Directors of the company owning the landed.9 Documentation of the Loan: Documentation is obtaining such agreement where all the terms and condition and securities are written and signed by the borrower. Guarantee of all the directors of the company. There are no hard and fast rules of documentation and it varies from bank to bank. viii. XVII/XIX for filling charges with the register of joint stock companies under relevant section. iv.
Securities. When it is in the hand of third party. 3. Collateral of immovable property.10 Security against Advances: The different types of securities that may be offered to a banker are as follows: (a) Immovable property (b) Movable property i. Shares quoted in the Dhaka Stock Exchange and Chittagong Stock Exchange. produce and machinery vi.10. iv. Bangladesh Sanchaya Patra.1 Relation between Advances with the Security Types of advance Loans Overdraft Securities Lien or various kinds of Sanchaya patras. The following modes of charging securities are applied in the NCC Bank Limited. Shipping documents. wage earner development bond. land and building on which machinery are installed. Creating charge means making it available as a cover for advance. Bank generally retains the assets in his own custody but sometimes these goods are in the hands of third party with lien marked. ICB unit certificate. the third party . goods products and merchandise. vii.10.10. Govt. In order to make the securities available to banker. Fixed Deposit Receipt iii. a charge should be created on the security.2 Modes of Charging Security: A wide range of securities is offered to banks as coverage for loan.2. Bills itself Bills purchased 3. Fixed assets of manufacturing unit.3. stock in trade. Pratiraksha Sanchaya Patra. Pledge of goods v. ii.1 Lien A lien is right of banker to hold the debtor’s property until the debt is discharged. Hypothecation of goods. 3. shares quoted in stock exchange Pledge or hypothecation of machinery. in case of default of customer. FDR.
building. Bank can sell the property without the intervention of any court. But documents of title to goods are handed over to the banker.2. Since the goods are in the hand of the borrower. nature of scheduled work and feasibility study should be judiciously made to arrive at logical decision. equity strength. If there is a provision for running bills for the work. Bank may release this lien / pledge these goods against trust receipt. plant etc. trust receipt arrangement is needed when the borrower is going to sell this goods or process it further but borrower has no sufficient fund to pay off the bank loan. But for such selling proper notice must be given to the debtor. This method is also called equitable charge. This means that the borrower holds goods in trust of the bank. The client’s management capability. in case of default on loan. Here mere deposit of title to goods is sufficient for creation of charge.2 Pledge Pledge is also like lien but here bank enjoys more right. finished goods. In both the cases.2. Here proceeds from any part of these goods are deposited to this bank. 3. 7. 3. 3.cannot discharge it without the permission of bank.5 Trust Receipt Generally goods imported or bought by bank's financial assistance are held by bank as security.2.4 Mortgage: Mortgage is transfer of interest in specific immovable property. Permission from the appropriate court is necessary. The following points are to be taken into consideration.10.10. bank inspects the goods regularly to judge it s quality and quantity for the maximum safety of loan.10. the mortgage property is retained in the hank of borrower.6 Advance against Work-Order Advances can be made to a client to perform work order. Lien gives banker the right to retain the property not the right to sell. To create pledge. Mortgage is created on the immovable property like land. 3.2.3 Hypothecation In this charge creation method physically the goods remained in the hand of debtor. shares debentures etc. Most common type of mortgage is legal mortgage in which ownership is transferred to the bank by registration of the mortgage deed. Another method called equitable mortgage is also used in bank for creation of charge. appropriate amount to be deducted from each bill to ensure complete adjustment of the liability within the payment period of the final bill . physical transfer of goods to the bank is must.2.10. Lien can be made on moveable goods only such as raw materials. Registration is not required.10.
on the appropriate form. Scrutinize the Fixed Deposit Receipts with regard to the following points. f) The discharged receipt. a letter of lien shall be obtained from the depositors.2. The progress of work under contract is reviewed periodically. because it ensures proper utilities and repayment of bank .2. the letter of lien duly verified by the issuing branch & the letter confirming registration of the lien on the deposit receipts shall be kept along with other documents under safe custody of the bank.7 Advance against Approved Shares: Credit facilities to extend against shares will be called “Investment Scheme against Shares”.besides assigning bills receivable.10. Disbursement should be made only after completion of documentation formalities and fulfillment of arrangements by the client to undertake the contract. c) Creation of liability on Fixed Deposit issued in joint names by any one of the depositors is regular. Subject to margin or may other restrictions imposed by Bangladesh Bank/Head Office of the bank from time to time.10.11 Credit Monitoring and Review: It is the last step in credit policy and procedure framework of NCCBL. d) If the Deposit Receipt is offered as a security for allowing advances. lien against that specific Deposit Receipt to be marked in the fixed Deposit Register of the branch. a) The Fixed Deposit Receipt is not in the name of minor. additional collateral security may be insisted upon. b) It is discharged by the depositor on revenue stamp of adequate value & his signature is verified. 3.8 Advance against Fixed Deposit Receipts: Advance against Fixed Deposit Receipt will be subject to credit Restrictions imposed from time to time by Head Office / Bangladesh Bank. Credit monitoring and review is very important. Value of shares & margin should be worked out as per guidelines issued from time to time by Bangladesh Bank / Head Office of the bank. e) If the Deposit Receipt has been issued by the branch-allowing advance. Advance may be allowed against shares of companies listed with the Stock Exchange Ltd. Credit Monitoring and Review and Classification of the Loan of NCCBL 3. 3.
717.164. Periodic review and follow up should.195.974 which the bank is fully secured Debts considered good for which bank Tk. The analysis of the borrowers business performance and comparison of the projected and actual to find any deviations.fund. inter-alia aims at ensuring: That conduct (Turnover.9.631 Tk824.1. 8. They are as follows: 2005 Tk.¬ Apparent profitability from the loans¬ 3.399. Credit monitoring and review feature of NCCBL is concerned was assessing the quality of different type of loan.949.¬ The value of the collateral security is adequate.379 holds no other security than the debtors personal security Debts considered good and secured by Tk. economy and political conditions.13 Objective Basis of Classification In classifying the loan and advance there are four classes in the loan review practiced in NCC Bank Limited. banks classify the loan and advance on the basis of how much the bank is secured in respective of the loan: Table 1 Classification on the basis of security Security 2006 Debts considered good in respect of Tk.412.422.905.12 Classification of the Loan on the Basis of Security For internal use.1.906 . 3.¬ There¬ is not any unfavorable situation in market. 1302.636 the personal security of one or more parties in addition to the personal security of the debtor. which may endanger the reliability of the borrower account.569 Tk. regularity of repayment etc) of the¬ borrowing accounts during the period under review has been satisfactory or as expected.967.912. The account is not having excess over limit¬ The terms and condition of the sanctioned letter are strictly followed.
Un-recovered for 6 months & above but less than 12 months from the date of the loan is claimed. This type of loan and advances are fall into this class.2 Substandard: This classification contains where irregularities have been occurred but such irregularities are temporarily in nature. Doubtful .3 Doubtful: This classification contains where doubt exists on the full recovery of the loan and advance along with a loss is anticipated but can not be quantifiable at this stage. Continuous loan Demand Loan Un-recovered for 3 months & above but less than 6 months from the date of the loan is claimed.13. Moreover if the state of the loan accounts fall under the following criterion can be declared as doubtful loan and advance. Category of Credit S-T Agri & Micro Credit Continuous loan Demand Loan Time overdue (irregularities) 6 months & above but less than 12 months.13. Repayable more than 5years: If the overdue installment equals or exceeds the amount repayable within 12 months.1Unclassified: The loan account is performing satisfactorily in the terms of its installments and no overdue is occurred. These accounts will require close supervision by management to ensure that the situation does not deteriorate further.13. To fall in this class the loan and advance has to fulfill the following factor.3. 3. Category of Credit Time overdue (irregularities) S-T Agri & Micro Credit 3 months & above but less than 6 months. 3. Repayable within 5years: If the overdue installment equals or exceeds the amount Fixed Term loan repayable within 6 months. Substandard The main criteria for a substandard advance is that despite these technicalities or irregularities no loss is expected to be arise for the bank.
demand loan. Repayable more than 5years: If the overdue installment equals or exceeds the amount repayable within 24 months.4 Bad and Loss: A particular loan and advance fall in this class when it seems that this loan and advance is not collectable or worthless even after all the security has been exhausted.13. Whether any continuous credit. This judgement totally depends on the Branch Manger and or the Head office credit division.Fixed Term loan Repayable within 5years: If the overdue installment equals or exceeds the amount repayable within 12 months. Repayable within 5years: If the overdue installment equals or exceeds the amount repayable within 18 months.¬ Weakening of bank’s position as creditor due to any reason whatsoever.14 Qualitative Judgment Basis of Classification Beside the above-mentioned objective criteria. NCC Bank Limited has other few qualitative judgment for classifying the loan and advance. The qualitative factors that are considered in NCC Bank Limited are as follows: Borrower sustains a loss of capital.¬ Significant decrease in the value of the security. Bad and Loss Fixed Term loan Qualitative Judgment. Un-recovered more than 12 months from the date of the loan is claimed. Provisioning & Credit Appraisal System 3. 3.¬ . Repayable more than 5years: If the overdue installment equals or exceeds the amount repayable within 18 months. Delinquent Client. In the following table the criteria to be fulfilled to fall in this category are summarized: Category of Credit S-T Agri & Micro Credit Continuous loan Demand Loan Time overdue (irregularities) Not recovered within more than 12 months. fixed term loan are classified or not on the basis of the above mentioned objective criterion but if there is any doubt or uncertainty as regarding their recovery then the loan can be classified on the basis of the Qualitative Judgment.
The rate of provisioning used in NCCBL is summarized in the following table. Tk in million Year 2002 2003 Unclassified 10940 12470 Substandard 12 200 Doubtful 5 20 Bad 250 200 3.16 Provisioning Specific Provision: Head office credit division prepares a list of credit accounts. . NCCBL go for taking legal action against the delinquent client to recover the loan.15 Management of Delinquent Client When a problem loan is detected the responsible branch manager takes the corrective action and tries to minimize the loan losses allowing different facilities to the client.Diversification of the funds to uses other than the facility for which the credit was approved. which are considered to be totally or partially be unrecoverable & keeps a provision against the outstanding loans.¬ Negotiation: If the persuasion failed. the loan officer negotiates¬ a plan of action with the borrower to try to extract both the bank and the borrower from possible loss.¬ Credit is rescheduled frequently or the rules of rescheduling are violated or a suit is filed for the recovery of the credit. 3. Litigation: If after rescheduling the loan and or failed to¬ negotiate with the delinquent client.¬ Incorrect information supplied by the borrower or bankruptcy of the borrower. This calls for certain sacrifices on the part of the bank and borrower in their mutual interest.¬ Last year the classification of the loan and advance of Dhaka Bank Limited were like this Table: Classification position last three years. Rate of Provisioning NCC Bank Limited in the time of loan provisioning to get the real picture of the income mainly follow the Bangladesh Bank guideline. The steps practice in NCC Bank Limited to manage the delinquent loan are: Persuasion: This is the first step practiced in the NCCBL to mange the problem loan.
But bank cannot sanction loan by only depending on collateral. All money must not be disbursed amongst a small number of people. business.Table 4: Rate of provisioning Class Short Term credit. . monitoring and the relationship. The profit is the blood for any commercial institution. expertise. industrial entity. So the importance of APPRAISAL. These financial intermediaries collect deposit and disburse it as loan and advance to the individual people. In addition any project must be established for the national interest and growth. liquid. During sanctioning any loan bank has to be attentive about diversification of risk. So the banks have to be very much careful in credit appraisal. The most important measure of appraising a loan proposal is safety of the project. 5% 5% 5% 100% AgricultureAll other credit Rate of Provisions 1% 20% 50% 100% Unclassified (UC) Substandard (SS) Doubtful Bad or Loss 3. Securing or collateral it is accepting must be easy to sell and sufficient to cover the loan amount. Safety is measured by the borrower and repaying capacity of him. in sanctioning the loan. The person who is primarily held responsible for appraising a loan proposal in NCC Bank limited is called the credit officer. liquidity means the inflow of cash into the project in course of its operation. The sources of repayment of the project should be a feasible one. If the relationship manager fail to analyze the clients viability of repaying the loan and the projects cash flow possibility of default may arise due to the fact. At the time of credit proposal the bank has to come to an acceptable compromise between over caution and under caution. and profitable and for acceptable purpose covered by adequate security. efficiency. The attitude of the borrower is also an important consideration.17 Credit Appraisal System The function of commercial banks to collect deposit from the common people and to invest deposited money in different sectors for overall development of the economy of the country. industry analysis. The security is the only tangible remains with the banker. Profitability is assessed from the projected profit and loss statement. Commercial banks and financial institutions intermediate between lenders and borrowers. The loan and advance should be given to them who has the certain and predicted cash flow to repay the credit. commercial. In a word it can be said that the purpose of appraisal is to be sure that the proposed advance will be safe. business performance to ensure the recovery of the credit along with the good supervision. is the key to identify the borrowers ability. Before approval of any loan project the bank authority has to be sure that the proposed project will be a profitable venture.
where the client is. or it may be due to adaptation of policy to do higher margin quality jobs. which may be done in the following aspects: .18 Guiding Principle of Credit appraisal of NCCBL for Credit Officer: To determine the worth of a client. the following conceptual exercises should be undertaken.1 Industry Information: Gather and evaluate industry information. drop in revenue of a contractor may indicate the client’s failure to get work. For example. 3.Guiding Principle of Credit appraisal of NCCBL for Credit Officer 3. There are no fixed and set methods to perform credit marketing. and scope for application of individual judgment/ perception always plays over set rules in such work.18.
1. 3. in which case pricing may be in stress. and other luxury items. tea for coffee. If there are very few sources of procurement. Example of this situation may be Paper for Plastic. often market of the product.2Substitutability Dhaka will influence customers to the other.18.3. Examples of such products would be Winter clothing. If the Product is easily substitutable. to either 3.18. From the records it should be determined whether The Product/ Service has short term jump in demand and hence in price in the increase / decrease.. then price rise in tolerance for short run fluctuation ' for such product is very low. .4 Market pact to protect against unhealthy competition. non-essential items like ice cream.18. vis-a-vis clients cost/ revenue.1 Determine the price behavior Of the product/ service of the client. fast food. price fluctuations are often Wider.1. viz. etc.3 Diversity of source of procurement. Example of this is seen in steel sheet trading. competition.18. etc. 3.1. fluctuation range. fluctuation cycle duration. The effect of such Short Term Increase /Decrease of demand on Sales Volume and Profitability Short Term has to be understood and measured.1. It often happens to specialized trade centers. cars. fluctuations through various lengths of Time in short run/ long run. Records of prices can reveal trend. or drive out set price Existence of monopolist/ oligopolist as client's competitors may Signal prNCCBLem.
etc.6 The class of the country is important to note.18. unfamiliar brands (popular brand in Dhaka country may not be as popular in another country). large investment.1. (b) Festival Depression/ Boost in market demand. Basic food and clothing demand may not be dented much. technology.18. etc. Major construction like bridge over river. govt. In poorer countries/ or in countries with unstable political environment. Pricing of procurement / sale is more sensitive to political turmoil. Examples could be toy taste changes industry. Forei country's dependence of Aid /Grant / Investment may influence certain industry such as building materials like cement rod. (d) Government intervention in stock market. may influence purchase capacity of consumers.5 Item for which competition. office furniture. Of clothing. fashion design very fast. natural disasters (flood / storm / earth quake) in the short run for cars. etc. Such industry is susceptible quick change in taste. therefore scrap vessel. etc. in which case large pile up of inventory may result in pricing stress at the least. High dependency on technology. sharp . etc.3.1. when there is dependence on foreign countries for import/ export. which may change suddenly. non-essential foods like baby food (branded baby serial). car. Some points to carefully watch in case of dependency on foreign market may be: (a) Currency fluctuation. . etc. (c) Development of other country competition. which may in Dhaka country may not be as Examples could be computers/ electronics. establishment of large scale production industry of items like fertilizer.
8 Long run replacement of technology.. shortage of which may result in serious consequence-. Quality of a relationship account may deteriorate due to long Management Capabilities & Financial Strength of NCC Bank 3. etc.7 Possible hazard Some industries are associated with risk of hazard. examples may be education. Deep stage of business cycle. etc. travel. Demography. Management information can be gathered and evaluated in the following angles: .18. building construction.18. may cause raise in expenditure. different aspects of the management of the client have to be mentally perceived and recorded on best judgment/ effort basis. Such industry may require lot of safety inspections. 3. insurance. may eventually become ill quality. nuclear plant. asbestos plant. cars. etc.2 Management Capabilities: There is no set rules to quantify/ confirm management's intentions/ capabilities. baby food. in which case 3. pressurized gas filling. etc. world depression. Client in industry facing sun-set. isotope for medical industry. certifications.popular in another country). medicare. industrial boiler.1. insurance etc.1. Nevertheless. in computer industry. Term Look printing industry. such as mining. medicine plant. change in population of consumer group may influence business. or heavy cost at the least.18.
After all.2. etc. If.ordinates.2. are indicative of the client's integrity.18. (willing to do several start up projects at a time. the key men have thorough 3. Lack of experience always results in over dependence on of owner. or succession. information/ comments from competitors. creditors.18.4 Experience knowledge of the works of the sub. however. There are no set rules for testing this. Lack of delegation. it is the management who moves the business whether in the right or in the wrong direction.3.2. 3. constant interest in new projects). Lenders should take management profile of a company very seriously. It is important that the owner. and inadequate guidance/ management ability.3 Single Autocratic attitude.18. the management was evaluated liberally. Much entrepreneurial attitude.18. 3. etc.1 Significance of managemen t profile evaluation.2. . This is the prime important criterion. t Lack of personnel to act as second line of defense. as lender. subordinates. business associations/ clubs. we certainly will not like it when we will ask them to repay. One man show.2 Integrity Survey of relationship gone ill reveals that for many cases. we do not like the Management now. trouble Inappropriate managemen positioning of people in different responsibilities.
Use of published information is also very useful.3 Financial Strength: (C) Accounts /Financial information should be evaluated in the following directions: .3. 3.18.5 Existence of a well established net work of market Informatio information is essential for any business. should be established and correctly interpreted. other wise a n System.18. financial figures. company loses its touch with the ground Sales team can be a good source of information for market dynamics for retail/ whole sale business. External: Internal: Current and on going information system on inventory/ receivable control.2. lack of skill to interpret-data may result in under utilization/ misinformation all together. Relationship with competitors/ customers is another source. etc.
Such mistakes lead to financial mismanagement on the client's part as well as on the part of the financier.3. Existence of other financing facilities is to be netted out from Bank’s total finance requirements of the client. or not at all accommodation.3.3 Other disclosure. Often qualifications are not clearly expressed which may This should be determined and ensured that client made full 3. otherwise over limits/ outstanding financing. Review. etc.18. permanent working capital requirement is often errDhakaously financed by short term Loan.3. This has to be matched.18.18.18. 3. temporary / seasonal raise in requirement is often mistaken for regular requirement. hence over-trading becomes a serious risk.3.4 Modus operandi of the business/ deal.3. It should be marked as change of policy may effect on the 3. Care should be exercised to distinguish between current and term requirements.1 profitability/ leverage. qualificatio n. vis-àvis facilities to be provided. often client's intuition is taken for determining finance requirements. Accounting Policy.2 Auditor’s have much impact on the financials. Documentation. Socio-economic & Portfolio Management of NCCBL . s.
2 Examples of documents to take particularly take care of. Any terms and conditions should not left as just acceptance of sanction letter. Undertakings by client. Sanction Letter and Acceptance by client.4. etc. etc. Security documents -(Lien .1 Credit / Lending is incomplete without proper documentation. Correspondence with Credit Administrator/ Lawyer. etc. . licenses. indemnification's. 3. specialized authorizations.18. registrations with ministry.). it should be put down in noting through Undertakings. etc. explanation letters. Improper documentation can be really frustrating in times of trouble with the client.18.4 Documentation and Execution of facilities: 3. Memo & Article of Associations.18. Legal documents (loan agreements. application for facilities.hypothecation.3. Amendments to any documents.4. partnership deed. Ensure safe custody of the documents.).
Fixed Loans: Relationship officer should maintain his/ her own schedule of dates when payment is due.18. Client should be contacted on need as well as on routine basis. Examples of points to follow may be as under: STRL: Swings of total outstanding.5 Review/ Renewal: 3. Follow-up of clients facilities movements are integral part of relationship management.18. reasons should be documented. Bills. Short profit making tendency in experimental trade beside regular line of business often put the operational cycle of clients in jeopardy. .18. Change in frequently in extension and retirement of TR may be indicative. Relationship client is to be reviewed as an on going process.4. Cancellation of L/Cs may indicate prDBLem in procurement on the exporter's part/ or fund shortage of funds on the client's part.5. Larger L/Cs than usual should be looked at carefully. Look out for larger than usual debits / credits. proper approval should be obtained and filed.3 Follow through. Reason for such should be obtained and documented. Look out for any deferrals. often it may result in stock pileup.1 On going. L/Cs: Check for unusual items.3. . Usage of LBD should be monitored 3. Should determine need /justification and obtain proper approval mfor any change in installment amounts if approached by client. Look out for cheque returns.
Qualified Auditors' comments. Over-trading. Delay in submission of financial information. statistics of utilization of facilities with own and other banks should be reviewed. the business/ industry environment.3. Cash drain to subsidiaries.6 Socio-economic: A very important job of the relationship officer is to follow up and maintain information on the client. Decline/ appreciation in returns. facilities requirement should also be reviewed and like wise renewed/ (canceled if necessary) 3. Lowering of liquidity. The following may be some guidance for such follow up: 1. Fall in market share. Other cash income (amount and timing). larger swings. Interim losses. Unusual / Lager overdrafts.5. Deviation from planned/ forecasted results. Financial: Adverse tern in sales and/ or profit. Business . etc. politico-economic developments within the country of operations as well as globally to look out for early signals of emergence of problems. Breaches in terms and conditions of finance.2 Annual review.18. Performance of the client must be thoroughly reviewed to justify continuation of relationship. 2. Up to date financial statements.18. Diversion of fund. Unplanned divestiture of funds. Involvement in litigation by client. Deviation from usual borrowing circle. fresh credit reports from other banks.
or major financing company. Change in lender group. Change in market norms/ trading patterns. Market rumors (though must not be taken as facts. Over reliance on single product. Week existence within the industry (in such situation clients tend to cover against weaknesses by making large funds available to the company). Industry Excess capacity/ supply. Changing finance market (rise and fall in base rate of central Bank. 3. deserve due attention as quite often these are early indications of trouble) 5. accidents. etc. etc. Inefficient staff remain un-removed. within country of operations or abroad) Trade inquiry feed back on client. External Observation of stock market up-down. etc. treasury bond issue by govt. Dependency on stronger . High personnel attrition (particularly in management). or customer. Key man's long sickness.Unplanned failure to invest in capital expenditure or R&D. Management Key management departure. excessive life style. 4. usually such attitudes are Displayed in deep crisis. Deregulation (causing rise in competition). Too high optimism.. Devaluation of company stocks. Fast change in technology.
of operation. political. economic changes.1 Market shares market sizes in the country of operations at least. He/ she should follow the strategy of the senior of different management to maintain total exposure on each clients within Dhaka industry. in different industries of product or service.18.currency import. The management may take into consideration the following Relationship personnel should have fair idea of the 3. industries within country Quality of portfolio should also be determined by classification policy and should try to improve it. Change in strategy /policy of portfolio should be executed by increase or decrease of exposure in specified fields.7. industry within limit defined by such strategy. Adverse regulatory. enjoying different types of facilities. Steps Involved in Credit Processing . Cross financing clients within the portfolio may result in higher control.7 Overall Portfolio Management: The term means managing total exposure on different clients. 3.18. sizes of different Exposure on individual client should also be planed.
According to Bangladesh Bank rule. Confidential report from other bank/ Head office/Branch/Chamber of commerce 3. which are recently introduced by Bangladesh Bank.5.5 The C’s of Good & Bad Loan: The Branch manager of NCCBL try to judge the possible client based on some criteria. ie. analysis of financial conditions of the loan applicant are very important. and Market Research are used to analyze the character of the borrower. The purpose of this forms is to eliminate the unwanted borrowers at the first sight and select those who have the potential to utilize the credit and pay it back in due time. Two variables.3 Scrutinizing and Investigation: Bank then starts examination that whether the loan applied for is complying with its lending policy.19. LRA and SA is must for the loan exceeding Dhaka core. If these two analyses reflect favorable condition and documents submitted for the loan appears to be satisfactory then.4 Existing process of handling loans: The process of sanctioning loans is as follows: 3. If comply. information given has not been found false .19.2 Getting Credit information: Then the bank collects credit information about the borrower from the following sources: 1.19. 3. CIB report from central bank 3. bank goes for further action. Credit worthiness analysis.19. 3. than it examines the documents submitted and the credit worthiness. and business sense of the borrower.1 Character The outcome of analyzing the character is to have overall idea about the integrity. These criteria are called the C’s of good and bad loans. Interaction/interview: the indicators are a) Prompt and consistent information supply.19. Personal Investigation 2.1 Application for loan: Applicant applies for the loan in the prescribed form of bank.3. Then bank goes for Lending Risk Analysis (LRA) and spreadsheet analysis. Interaction/interview.19. experience. 1. These C’s are described below: 3.
2. c) Resilience or shock absorption: Connection. but do not allow that to drive the credit decision. d) Tax payer. b) CIB also reveals business character.19.19. Cash keeps the liquidity to ensure repayment.19. As the management of the business is the sole authority to run the business that is use the fund efficiently. c) Willingness to give owns stake/equity & collateral to cover. a) Entrepreneurship skills i.5 Cash Follow: Cash flow is the vital factor that is used to identify whether the borrower will have enough cash to repay the loan or advance.5.(Willingness to give information). 3.2 Capital For identifying the capital invested in the business can be disclosed using the following indicators.19.3 Capacity (Competence) Capability of the borrower in running the business is highly emphasized in the time of selecting a good borrower. Payable.4 Collateral Make sure that there is a “second way out “ of a credit. statements to practically assess the business positions. b) Dealing with supplier and or customer as supplier is also a kind of lender.e. risk taking attitude shown by equity mobilization.5.19. 3. Back up (if first time falls second lines come to help. a) Financial Statements b) Receivable. Net worth through financial statements or from declaration of Assets & Liabilities. The relationship manager try to identify the annual cash flow from the submitted statements. ability to take decision. Market Research: a) Information on business is verified.5. 3. the payment character can also be verified.) 3. 3.5.6 Conditions: .5. b) Management competencies both marketing and products detail. effectively and profitably. The indicators help to identify the capacity of the borrower.
.19.8 Carelessness: Remember that documentation.5.5. Lending Risk Analysis (LRA): Modern Technique Of Credit Appraisal The Financial Sector Reform Project (FSRP) has designed the LRA package.19.9 Communication: Share credit objectives and credit decision making both vertically and laterally within the bank. The objective of LRA is to assess the credit risk in quantifiable manner and then find out ways & means to cover the risk. However.19. follow-up and consistent monitoring are essential to high quality loan portfolios. which provides a systematic procedure for analyzing and quantifying the potential credit risk.10 Contingencies: Make sure that you understand the risks.Understanding the business and economic conditions can and will change after the loan is made. Broadly LRA package divides the credit risk into two categories.11 Competition: Do not get swept away by what others are doing.5. particularly the downside possibilities and that you structure and price the loan consistently with that understanding. 10 million and above. namely Business risk Security risk. some commercial banks employ LRA technique as a credit appraisal tool for evaluating credit proposals amounting to Tk.19. 3. 5 million and above.20 Credit Query: The loans and advance department gets a form filled up by the party seeking a lot of information. 3.19. Bangladesh bank has directed all commercial bank to use LRA technique for evaluating credit proposal amounting to Tk.5. 3.7 Complacency: Do not rely on past history to continue. 3. 3. 3.5. Stay alert to what can go wrong in any loan. The typical credit query form is attached in the appendix iii.
21. Business risk is subdivided into two categories.21.2 Industry risk.21. Cash flow forecast analysis and credit report analysis (i.7 Performance risk: This risk refers to the risk that the company’s position is so weak that it will be unable to repay the loan even under Favor able external condition.21. This position is very competitive. Sales risk is determined by analyzing production or marketing system.e.4 Sales risk: This refers to the risk that the business suffers from external disruption of sales. 3.21. 3. It is subdivide into supplies risk and sales risk. It is subdivided into performance risk and resilience risk. Performance risk assessed by SWOT(Strength. 3. Supply risk is assessed by a cost breakdown of the inputs and then assessing the risk of disruption of supplies of each item. factory premises etc.3 Supplies risk: It indicates that the business suffers from external disruption to the supply of imputes. increasing in competition. Trend analysis. company position risk is the risk of failure due to weakness in the companies position in the industry. industry situation. machinery. Labor. The risk that the company fails to repay for the external reason.6 Company position risk: Within an industry each and every company holds a position. Components of supplies risk are as raw material. Company risk is subdivided into company position risk and Management risks. and competitor profile and companies strategies. a company is the risk for failure. Sales may be disrupted by changes to market size. Opportunity and Threat) analysis. 3.21.5 Company risk: This refers to the risk that the company fails for internal reasons. 3. 3. That means. power. Due to the weakness in the company's position in the industry.21. Government policy.1 Business risk: It refers to the risk that the business falls to generate sufficient cash flow to repay the loan. .A detail interpretation of these risk and the procedure for evaluating the credit as follows 3. equipment. change in the regulation or due to the loss of single large customer. CIB repot from Bangladesh Bank). Weakness.
3. The resilience risk is determined by analyzing different financial ratio. The security risk is subdivided into two major heads i. Exposure means principal plus outstanding interest. The assessment of management competence depends on management ability and management team work.11 Management integrity risk: This refers to the risk that the company fails to repay the loan amount due to lack of management integrity. which requires evaluating the reliability of information supplied and then management dependability.21.21. flexibility of production process. 3. The competence of management depends upon their ability to manage the company's business efficiently and effectively.9 Management risk: The management risk refers to the risk that the company fails due to management not exploiting effectively the company’s position. which may not cover the exposure of loan. For analyzing the security control risk the credit office . incomplete documents.13 Security control risk: This risk refers to the risk that the bank falls to realize the security because of bank's control over the security offered by the borrower i. security control risk and security cover risk. Management integrity risk is determined by assessing management honesty. 3.10 Management competence risk: This refers to the risk that falls because the management is incompetent.8 Resilience risk: Resilience means to recover early injury. shareholders willingness to support the company if need arise and political and private affiliation of owners and key personnel. The risk of failure to realize the security depends on the difficulty in obtaining favorable judgement and taking possession of security. The resilience of a company depends on its leverage.21.12 Security risk: This sort of risk is associated with the realized value of the security. Management integrity is a combination of honesty and dependability. liquidity and strength of connection of its owner or directors.21. Management team work is determined by analyzing management structure and its strength and weakness.3. This refers to risk that the company falls due to resilience to unexpected external conditions.21. 3.e. Management ability is determined by analyzing the ability of owner or board of the members first and then key personnel for finance and operation.21. Management risk is subdivided into management competence risk and integrity risk. 3.e.
3. (I) Good (ii) Acceptable (iii) Marginal and (iv) Poor. After collecting the necessary data he/ she prepares financial spreadsheet.1 Lending Guidelines All banks should have established Credit Policies (“Lending Guidelines”) that clearly outline the senior management’s view of business development priorities and the terms .21. The overall matrix provides four kinds of lending risk for decision making viz. the relationship manager collects data specially industry specific from published sources and company specific data that not usually published. cash flow statement and ratios for the purpose of financial statement analysis.1 POLICY GUIDELINES This section details fundamental credit risk management policies that are recommended for adoption by all banks in Bangladesh. documentation completeness.1. CREDIT RISK MANAGEMENT GUIDELINES BY BANGLADESH BANK 4. This spreadsheet provides a quick method of assessing business trend & efficiency and helps to assess the borrower ability to pay the loan Obligation. All credit application rated "Poor" shall require the approval of the Board of Directors regardless of purpose tenor or amount. The bank does not provide any credit request having an over all risk as “ marginal" and " Poor" without justification.14 Security cover risk: This refers to the risk that the realized value of security is less than exposure. Therefore bank can minimize the dangers regarding the bad loan and advances through using the LRA. documentation integrity and proper insurance policy. the official requires assessing the power of the customer to prolong the legal process and to analyze the market demand for the security For assessment of security control risk.. He/she also conducts site visit to verify security existence. 4. the concerned official completes the LRA form and all scores are transferred to the scoring matrix to find the overall risk of lending. Financial spreadsheet includes balance sheet. income statement. The guidelines contained herein outline general principles that are designed to govern the implementation of more detailed lending procedures and risk grading systems within individual banks. Through analyzing data and collected information. Security cover risk depends on speed of realization and liquidation value.0 INDUSTRY BEST PRACTICES AS SUGGESTD BY BBK 4. For analyzing security cover risk. Before completing the LRA form. the officials times the time that would require to liquidate the security and assess the risk and estimates the security value at liquidation and assess the risk. by personally visiting the company.is required to verify documentation to ensure security protection. Assessment of security control risk requires analyzing the possibility of obtaining favorable judgement and analyzing the case with which the bank could take the possession and liquidate the securities.
and be distributed to all lending/marketing officers. Types of Loan Faciliti ♣ The type of loans that are permitted should be clearly indicated. (Section 2. Term Loan. As a minimum. such as Working Capital. Textiles: Grow. The Lending Guidelines should be approved by the Managing Director/CEO & Board of Directors of the bank based on the endorsement of the bank’s Head of Credit Risk Management and the Head of Corporate/Commercial Banking. For each sector.Lending to companies listed on CIB black list or known defaulters .Counter parties in countries subject to UN sanctions .Ethically or Environmentally Sensitive . the following should be discouraged: . Mineral Extraction/Mining.Taking an Equity Stake in Borrowers .Military Equipment/Weapons Finance . Approval of loans that do not comply with Lending Guidelines should be restricted to the bank’s Head of Credit or Managing Director/CEO & Board of Directors.Highly Leveraged Transactions . Appendix-3. Single Borrower/Group Limits/Syndication ♣ Details of the bank’s Single Borrower/Group limits should be included as per Bangladesh Bank guidelines. Construction: Shrink). This will provide necessary direction to the bank’s marketing staff.Logging. and should include the following: Industry and Business Segment Focus The Lending Guidelines should ♣ clearly identify the business/industry sectors that should constitute the majority of the bank’s loan portfolio. etc.1 of these guidelines refers) Any departure or deviation from the Lending Guidelines should be explicitly identified in credit applications and a justification for approval provided. Trade Finance. Lending Caps ♣ Banks should establish a specific industry sector exposure cap to avoid over concentration in any one industry sector.Finance of Speculative Investments .Share Lending . The Lending Guidelines should be updated at least annually to reflect changes in the economic out look and the evolution of the bank’s loan portfolio. a clear indication of the bank’s appetite for growth should be indicated (as an example.and conditions that should be adhered to in order for loans to be approved. or other activity that is . Discouraged Business Types ♣ Banks should outline industries or lending activities that are discouraged. Cement: Maintain.4. The Lending Guidelines should provide the key foundations for account officers/relationship managers (RM) to formulate their recommendations for approval. Banks may wish to establish more conservative criteria in this regard.3 provides brief description of financing under syndicated arrangement.
The results of this assessment should be presented in a Credit Application that originates from the relationship manager/account officer (“RM”).. . export documents negotiated for countries like Nigeria. 4. It is essential that RMs know their customers and conduct due diligence on new borrowers. and covenant and security requirements) should be clearly stated. All banks should have established Know Your Customer (KYC) and Money Laundering guidelines which should be adhered to at all times.1. and must be held responsible to ensure the accuracy of the entire credit application submitted for approval.Banks should not grant facilities where the bank’s security position is inferior to that of any other financial institution.Valuations of property taken as security should be performed prior to loans being granted. Repayment Schedule.Synonymous with political & sovereign risk .1 Credit Assessment A thorough credit and risk assessment should be conducted prior to the granting of loans.Amount and type of loan(s) proposed. A recognized 3rd party professional valuation firm should be appointed to conduct valuations. the following details: . . The RM should be the owner of the customer relationship.Loan Structure (Tenor. Cross Border Risk ♣ Risk associated with cross border lending.2 Credit Assessment & Risk Grading 4. Covenants.Security Arrangements . . such as suspension of external payments . Loan Facility Parameters ♣ Facility parameters (e.Lending to Holding Companies . and at least annually thereafter for all facilities.Third world debt crisis For example. principals. maximum size.g.Assets pledged.1. .2. and guarantors. Distinguished from ordinary credit risk because the difficulty arises from a political event. and guarantors to ensure such parties are in fact who they represent themselves to be.Purpose of loans. Credit Applications should summaries the results of the RMs risk assessment and include.Bridge Loans relying on equity/debt issuance as a source of repayment. the following parameters should be adopted: .. principals. as security should be properly insured. Borrowers of a particular country may be unable or unwilling to fulfill principle and/or interest obligations. RMs must be familiar with the bank’s Lending Guidelines and should conduct due diligence on new borrowers. as a minimum. and is approved by Credit Risk Management (CRM). Interest) . As a minimum. maximum tenor.
Possible risks include. . The Bank’s Head of Credit or Managing Director/CEO should approve Credit Applications that do not adhere to the bank’s Lending Guidelines. interest and principal payments.Mitigating Factors. Where reliance is placed on a corporate guarantor. Where term facilities (tenor >. Mitigating factors for risks identified in the credit assessment should be identified. leverage and profitability must be analyzed. high debt load (leverage/gearing). For existing borrowers. . Excessive tenor or amount relative to business needs increases the risk of fund diversion and may adversely impact the borrower’s repayment ability. Any issues regarding the borrower’s position in the industry. . Specifically. 1 year) are being proposed. The majority shareholders. and lack of transparency or industry issues. overstocking or debtor issues. acquisition or expansion. new business line/product expansion.Industry Analysis.Account Conduct. cash flow. the historic performance in meeting repayment obligations (trade payments. as these could have a significant impact on the future viability of the borrower. . cash flow and the strength of the borrower’s balance sheet.Projected Financial Performance. . etc) should be assessed. indicating an analysis of the sufficiency of cash flow to service debt repayments.Historical Financial Analysis. management changes or succession issues. management team and group or affiliate companies should be assessed. customer or supplier concentrations. but are not limited to: margin sustainability and/or volatility. . The analysis should address the quality and sustainability of earnings. The key risk factors of the borrower’s industry should be assessed. An analysis of a minimum of 3 years historical financial statements of the borrower should be presented. . guarantor financial statements should also be analysed. Any issues regarding lack of management depth. complicated ownership structures or intergroup transactions should be addressed. rapid growth. . a projection of the borrower’s future financial performance should be provided. . and risks mitigated.In addition. cheques. The amounts and tenors of financing proposed should be justified based on the projected repayment ability and loan purpose.Borrower Analysis.Adherence to Lending Guidelines. Credit Applications should clearly state whether or not the proposed application is in compliance with the bank’s Lending Guidelines. the following risk areas should be addressed: . overall industry concerns or competitive forces should be addressed and the strengths and weaknesses of the borrower relative to its competition should be identified. Loans should not be granted if projected cash flow is insufficient to repay debts.Loan Structure. Any customer or supplier concentration should be addressed.Supplier/Buyer Analysis.
Good – Satisfactory Risk (Grade2) The repayment capacity of the borrower is strong. It is recognized that the banks may have more or less Risk Grades. but should still demonstrate consistent earnings. reported independent means. These borrowers are not as strong as Grade 2 borrowers. it is essential that grading is a robust process. These situations should be discouraged and treated with great caution. Adequacy and the extent of the insurance coverage should be assessed. . Aggregate Score of 95 or greater based on the Risk Grade Scorecard. Borrower Risk Grades should be clearly stated on Credit Applications. Loans should not be granted based solely on security. monitoring standards and account management must be appropriate given the assigned Risk Grade: Risk Rating Grade Definition Superior – Low Risk (Grade 1) Facilities are fully secured by cash deposits. The more conservative risk grade (higher) should be applied if there is a difference between the personal judgement and the Risk Grade Scorecard results. cash flow and have a good track record. however. Where deterioration in risk is noted. Risk Grading 4. government bonds or a counter guarantee from a top tier international bank. The borrower should have excellent liquidity and low leverage. The system should define the risk profile of borrower’s to ensure that account management. All security documentation should be in place. Credit proposals should not be unduly influenced by an over reliance on the sponsoring principal’s reputation. and as such. The following Risk Grade Matrix is provided as an example.Security.1. Borrowers should . Appendix iv contains a template for credit application. Acceptable – Fair Risk (Grade3) Adequate financial condition though may not be able to sustain any major or continued setbacks. All security documentation should be in place.. A borrower should not be graded better than 3 if realistic audited financial statements are not received. The company should demonstrate consistently strong earnings and cash flow and have an unblemished track record. These assets would normally be secured by acceptable collateral (1st charge over stocks / debtors / equipment / property).Name Lending. Rather.2 Risk Grading All Banks should adopt a credit risk grading system. the Risk Grade assigned to a borrower and its facilities should be immediately changed. supported by a thorough financial and risk analysis. or their perceived willingness to inject funds into various business enterprises in case of need. Risk grading is a key measurement of a bank’s asset quality.2. All facilities should be assigned a risk grade. credit proposals and the granting of loans should be based on sound fundamentals. structure and pricing are commensurate with the risk involved. A current valuation of collateral should be obtained and the quality and priority of security being proposed should be assessed.
In all cases. Loans should be downgraded to 6 if loan payments remain past due for 60-90 days. Loan loss provisions must be raised against the estimated unrealizable amount of all facilities. the industry or the economic environment. Full repayment of facilities is still expected and interest can still be taken into profits. loan payments routinely fall past due.Watch list (Grade 4) Grade 4 assets warrant greater attention due to conditions affecting the borrower. the requirements of Bangladesh Bank in CIB reporting. An Aggregate Score of 4554 based on the Risk Grade Scorecard. account conduct is poor. Not yet considered non-performing as the correction of the deficiencies may result in an improved condition. the operation has ceased trading or any indication suggesting the winding up or closure of the borrower is discovered. Facilities should be downgraded to 4 if the borrower incurs a loss. These weaknesses jeopardize the full settlement of loans. if the customer intends to create a lender group for debt restructuring purposes. An Aggregate Score of 55-64 based on the Risk Grade Scorecard. Doubtful and Bad (non-performing) Grade 7 full repayment of principal and interest is unlikely and the possibility of loss is extremely high. Assets should be downgraded to 7 if loan payments remain past due in excess of 90 days. cash flow and earnings. negative net worth. However. Facilities should be downgraded to 5 if sustained deterioration in financial condition is noted (consecutive losses. An Aggregate Score of 75-94 based on the Risk Grade Scorecard. and interest can still be taken into profits. The continuance of the loan as a bankable asset is not warranted. higher than normal leverage. An Aggregate Score of 65-74 based on the Risk Grade Scorecard. These borrowers have an above average risk due to strained liquidity. The proceeds expected from the liquidation or realization of security may be awaited. and the bank should pursue legal options to enforce security to obtain repayment or negotiate an appropriate loan rescheduling. loan rescheduling and provisioning must be followed. An Aggregate Score of 35-44 based on the Risk Grade Scorecard Loss (non-performing) Grade 8 Assets graded 8 are long outstanding with no progress in obtaining repayment (in excess of 180 days past due) or in the late stages of wind up/liquidation. and the anticipated loss .have adequate liquidity. Special Mention (Grade 5) Grade 5 assets have potential weaknesses that deserve management’s close attention. these weaknesses may result in a deterioration of the repayment prospects of the borrower. liquidation procedures or capital injection. The prospect of recovery is poor and legal options have been pursued. Marginal . the asset is not yet classified as Loss. excessive leverage). The adequacy of provisions must be reviewed at least quarterly on all non-performing loans. such as litigation. due to specifically identifiable pending factors. if loan payments remain past due for 3060 days. or other untoward factors are present. thin cash flow and/or inconsistent earnings. If left uncorrected. Substandard (Grade 6) financial condition is weak and capacity or inclination to repay is in doubt. or if a significant petition or claim is lodged against the borrower. and interest income should be taken into suspense (non-accrual).
Approval records must be kept on file with the Credit Applications. Regional credit centres may be established. or by electronic signature. Approval authority should be delegated to individual executives and not to committees to ensure accountability in the approval process. acknowledged by recipients. Segregation of Duties & Internal Audit 4. An Aggregate Score of 35 or less based on the Risk Grade Scorecard At least top twenty-five clients/obligors of the Bank may preferably be rated by an outside credit rating agency. recommendations or review of ♣ bank’s loan portfolios. All ♣ credit risks must be authorized by executives within the authority limit delegated to them by the MD/CEO. The following guidelines should apply in the approval/sanctioning of loans: Credit approval authority must be delegated in writing from the ♣ MD/CEO & Board (as appropriate). and records of all delegation retained in CRM. all large loans must be approved by the Head of . and should not be postponed until the annual review process. Delegated approval authorities must be reviewed annually by MD/CEO/Board. the report should be forwarded to Credit Administration. After approval. however. ♣ The role of Credit Committee may be restricted to only review of proposals i. ♣ The credit approval function should be separate from the marketing/relationship management (RM) function.3 Approval Authority The authority to sanction/approve loans must be clearly delegated to senior credit executives by the Managing Director/CEO & Board based on the executive’s knowledge and experience. who is responsible to ensure the correct facility/borrower Risk Grades are updated on the system. Approval Authority. Credit approval ♣ should be centralised within the CRM function. The downgrading of an account should be done immediately when adverse information is noted.should have been provided for. Approvals ♣ must be evidenced in writing. The “pooling” or combining of authority limits should not be permitted.e. The Early Alert Process should be completed in a timely manner by the RM and forwarded to CRM for approval to affect any downgrade.1. This classification reflects that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future. Bangladesh Bank guidelines for timely write off of bad loans must be adhered to.
Successfully completed an assessment test demonstrating adequate knowledge of the following areas: o Introduction of accrual accounting. cash flow and risk analysis. . As a minimum. should be referred to Head Office for Approval MD/Head of Credit Risk Management must approve and monitor any cross border exposure risk.1. o Industry / Business Risk Analysis o Borrowing Causes o Financial reporting and full disclosure o Financial Statement Analysis o The Asset Conversion/Trade Cycle o Cash Flow Analysis o Projections o Loan Structure and Documentation o Loan Management. and Head of CRM. and a list of proposals declined stating reasons thereof should be reported by CRM to the CEO/MD.Credit Approval/Risk Management . renewed. ♣ It ♣ is essential that executives charged with approving loans have the relevant training and experience to carry out their responsibilities effectively.At least 5 years experience working in corporate/commercial banking as a relationship manager or account executive. . ♣ Any breaches of lending authority should be reported to MD/CEO.Training and experience in financial statement.A thorough working knowledge of Accounting. enhanced. Head of Internal Control. 4.Credit and Risk Management or Managing Director/CEO/Board or delegated Head Office credit executive. The aggregate exposure to any borrower or borrowing group must be used to determine the approval authority required.4 Segregation of Duties Banks should aim to segregate the following lending functions: . A • monthly summary of all new facilities approved.A good understanding of the local industry/market dynamics. ♣ Any ♣ credit proposal that does not comply with Lending Guidelines. approving executives should have: . . regardless of amount. .
PREFERRED ORGANISATIONAL STRUCTURE & RESPONSIBILITIES The appropriate organizational structure must be in place to support the adoption of the policies detailed in Section 1 of these guidelines. all applications must be approved by the Head of Credit and Risk Management or Managing Director /CEO /Board or delegated Head Office credit executive. Doubtful & Bad and Loss accounts to maximize recovery and ensure that appropriate and timely loan loss provisions have been made. however. internal procedures. To approve (or decline). within ♣ delegated authority. procedures and controls relating to all credit risks arising from corporate/commercial/institutional banking. Regional credit centers may be established.5 Internal Audit Banks should have a segregated internal audit/control department charged with conducting audits of all departments.Relationship Management/Marketing . The key feature is the segregation of the Marketing/Relationship Management function from Approval / Risk Management / Administration functions.2.Credit Administration The purpose of the segregation is to improve the knowledge levels and expertise in each department.2 Key Responsibilities The key responsibilities of the above functions are as follows. Lending Guidelines and Bangladesh Bank requirements. Credit Risk Management (CRM) Oversight of the ♣ bank’s credit policies.. and should ensure compliance with regulatory guidelines. & treasury operations. Where aggregate borrower exposure is in excess of approval limits. Oversight of the bank’s asset quality. Audits should be carried out annually. personal banking. 4. to impose controls over the disbursement of authorized loan facilities and obtain an objective and independent judgment of credit proposals. to provide recommendation to MD/CEO for approval.1 Preferred Organizational Structure The following chart represents the preferred management structure: 4. Credit Applications recommended by RM. Credit approval should be centralized within the CRM function.1. ♣ Directly ♣ manage all Substandard.2. 4. .
Internal Audit/Control . ♣ To ♣ monitor insurance coverage to ensure appropriate coverage is in place over assets pledged as collateral. To ♣ control loan disbursements only after all terms and conditions of approval have been met.To provide advice/assistance regarding all credit matters to line management/ RMs.2. etc. ♣ To ensure that lending executives have adequate experience and/or training in order to carry out job duties effectively. potential deterioration in accounts or for any credit related issues. taking into account the credit assessment requirements outlined in Section 4. factory/warehouse inspections. RMs should proactively monitor the financial performance and account conduct of borrowers. and is properly assigned to the bank. To seek assistance/advice at the ♣ earliest from CRM regarding the structuring of facilities. To maintain control over all security documentation ♣ To ♣ monitor borrower’s compliance with covenants and agreed terms and conditions. ♣ To ♣ maintain thorough knowledge of borrower’s business and industry through regular contact. and general monitoring of account conduct/performance. 1. To highlight any ♣ deterioration in borrower’s financial standing and amend the borrower’s Risk Grade in a timely manner. Relationship Management/Marketing (RM) To act as the primary bank contact with borrowers. Changes in Risk Grades should be advised to and approved by CRM. To be responsible for the timely and accurate ♣ submission of Credit Applications for new proposals and annual reviews. ♣ Credit Administration: To ensure that all security documentation complies with the terms of approval and is enforceable.1 of these guidelines. and all security documentation is in place.
PROCEDURAL GUIDELINES This section outlines of the main procedures that are needed to ensure compliance with the policies contained in Section 1.0 of these guidelines. the recommendation of the Head of Corporate/Commercial Banking is required prior to onward recommendation to CRM for approval.1 Approval Process The approval process must reinforce the segregation of Relationship Management/ Marketing from the approving authority. operating procedures. Credit Applications should be recommended for approval by the RM team and forwarded to the approval team within CRM and approved by individual executives. The recommending or approving executives should take responsibility for and be held accountable for their recommendations or approval. with proposals in excess of 25% of capital to be approved by the EC/Board only after recommendation of CRM. The following diagram illustrates the preferred approval process: Credit Application Recommended by RM/ Marketing Zonal Credit Officer (ZCO) Head of Credit & Head of Corporate Banking (HOBC) Managing Director . In addition. The responsibility for preparing the Credit Application should rest with the RM within the corporate/commercial banking department.3. Corporate Banking and MD/CEO. bank policies and Bangladesh Bank directives. Delegation of approval limits should be such that all proposals where the facilities are up to 15% of the bank’s capital should be approved at the CRM level. Reports directly to MD/CEO or Audit committee of the Board. Banks may wish to establish various thresholds. 4.Conducts independent inspections annually to ensure compliance ♣ with Lending Guidelines. banks may wish to establish regional credit centres within the approval team to handle routine approvals. facilities up to 25% of capital should be approved by CEO/MD. above which. Executives in head office CRM should approve all large loans.
For this reason. ZCO supports & forwarded to Head of Corporate Banking (HOCB) or delegate for endorsement. Advise the decision as per delegated authority (approved /decline) to recommending branches. and Head of Credit (HOC) for approval or onward recommendation. Credit Administration procedures should be in place to ensure the following: . Managing Director presents the proposal to EC/Board 8. A monthly summary of ZCO approvals should be sent to HOC and HOCB to report the previous months approvals sanctioned at the Zonal Offices. 3. 4.Executive Committee/ Board 1.3. However. 4. 7. Managing Director advises the decision as per delegated authority to HOC & HOCB. Application forwarded to Zonal Office for approved/decline 2. EC/Board advises the decision to HOC & HOCB ** Regardless of the delegated authority HOC to advise the decision (approval/decline) to marketing department through ZCO Recommended Delegated Approval Authority Levels HOC/CRM Executives Up to 15% of Capital Managing Director/CEO Up to 25% of Capital EC/Board all exceed 25% of Capital Appeal Process Any declined credit may be re-presented to the next higher authority for reassessment/approval. there should be no appeal process beyond the Managing Director. HOC advises the decision as per delegated authority to ZCO 5. it is essential that the functions of Credit Administration be strictly segregated from Relationship Management/Marketing in order to avoid the possibility of controls being compromised or issues not being highlighted at the appropriate level. The HOC should review 10% of ZCO approvals to ensure adherence to Lending Guidelines and Bank policies.2 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. HOC & HOCB supports & forwarded to Managing Director 6.
♣ 4. At a minimum. Exceptions should be referred to legal counsel for advice based on authorization from an appropriate executive in CRM. Disbursements under loan facilities are only be made ♣ when all security documentation is in place. Credit Recovery Process of Dhaka Bank Limited 4.1 Disbursement: Security documents are prepared in accordance with ♣ approval terms and are legally enforceable.3. monitoring procedures and systems should be in place that provide an early indication of the deteriorating financial health of a borrower. Credit Monitoring. CPAs etc. preferably in locked fireproof storage.3 Compliance Requirements: All required Bangladesh Bank returns are submitted in the correct format in a timely manner. and advised to all relevant departments to ensure compliance. 4. Standard loan facility documentation that has been reviewed by legal counsel should be used in all cases.3.2 Custodial Duties: Loan disbursements and the preparation and storage of ♣ security documents should be centralized in the regional credit centers. systems should be in place to report the following exceptions to relevant executives in CRM and RM team: Past due principal or interest payments.3 Credit Monitoring To minimise credit losses. All formalities regarding large loans & loans to Directors should be guided by Bangladesh Bank circulars & related section of Banking Companies Act. lawyers.3. All Credit Approval terms have been met. ♣ Security documentation is held under strict control.2. past due trade bills.2.3.) are approved and performance reviewed on an annual basis. and breach . CIB report should reflect/include the name of all the lenders with facility. ♣ Bangladesh Bank circulars/regulations are maintained centrally. ♣ All ♣ third party service providers (valuers. account excesses. insurers. limit & outstanding. Banks are referred to Bangladesh Bank circular outlining approved external audit firms that are acceptable.2.4. Appropriate insurance coverage is maintained (and renewed on a timely basis) on assets pledged as collateral.
of loan covenants; ♣ Loan ♣ terms and conditions are monitored, financial statements are received on a regular basis, and any covenant breaches or exceptions are referred to CRM and the RM team for timely follow-up. Timely corrective action is taken to address findings of any internal, external or regulator inspection/audit. ♣ All ♣ borrower relationships/loan facilities are reviewed and approved through the submission of a Credit Application at least annually. Computer systems must be able to produce the above information for central/head office as well as local review. Where automated systems are not available, a manual process should have the capability to produce accurate exception reports. Exceptions should be followed up on and corrective action taken in a timely manner before the account deteriorates further. Refer to the Early Alert Process (section220.127.116.11). 18.104.22.168 Early Alert process: An Early Alert Account is one that has risks or potential weaknesses of a material nature requiring monitoring, supervision, or close attention by management. If these weaknesses are left uncorrected, they may result in deterioration of the repayment prospects for the asset or in the bank’s credit position at some future date with a likely prospect of being downgraded to CG 5 or worse (Impaired status), within the next twelve months. Early identification, prompt reporting and proactive management of Early Alert Accounts are prime credit responsibilities of all Relationship Managers and must be undertaken on a continuous basis. An Early Alert report should be completed by the RM and sent to the approving authority in CRM for any account that is showing signs of deterioration within seven days from the identification of weaknesses. The Risk Grade should be updated as soon as possible and no delay should be taken in referring problem accounts to the CRM department for assistance in recovery. Despite a prudent credit approval process, loans may still become troubled. Therefore, it is essential that early identification and prompt reporting of deteriorating credit signs be done to ensure swift action to protect the Bank’s interest. The symptoms of early alert are by no means exhaustive and hence, if there are other concerns, such as a breach of loan covenants or adverse market rumors that warrant additional caution, an Early Alert report should be raised. Moreover, regular contact with customers will enhance the likelihood of developing strategies mutually acceptable to both the customer and the Bank. Representation from the Bank in such discussions should include the local legal adviser when appropriate.
An account may be reclassified as a Regular Account from Early Alert Account status when the symptom, or symptoms, causing the Early Alert classification have been regularized or no longer exist. The concurrence of the CRM approval authority is required for conversion from Early Alert Account status to Regular Account status . 4.3.4 Credit Recovery The Recovery Unit (RU) of CRM should directly manage accounts with sustained deterioration (a Risk Rating of Sub Standard (6) or worse). Banks may wish to transfer EXIT accounts graded 4-5 to the RU for efficient exit based on recommendation of CRM and Corporate Banking. Whenever an account is handed over from Relationship Management to RU, a Handover /Downgrade Checklist should be completed. The RU’s primary functions are: Determine Account Action Plan/Recovery Strategy ♣ 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. ♣ Regular review of grade 6 or worse accounts. ♣ The management of problem loans (NPLs) must be a dynamic process, and the associated strategy together with the adequacy of provisions must be regularly reviewed. A process should be established to share the lessons learned from the experience of credit losses in order to update the lending guidelines. 22.214.171.124 NPL Account Management All NPLs should be assigned to an Account Manager within the RU, who is responsible for coordinating and administering the action plan/recovery of the account, and should serve as the primary customer contact after the account is downgraded to substandard. Whilst some assistance from Corporate Banking/Relationship Management may be sought, it is essential that the autonomy of the RU be maintained to ensure appropriate recovery strategies are implemented. 126.96.36.199 Account Transfer Procedures Within 7 days of an account being downgraded to substandard (grade 6), a Request for Action (RFA) and a handover /downgrade checklist should be completed by the RM and forwarded to RU for acknowledgment. The account should be assigned to an account manager within the RU, who should review all documentation, meet the customer, and prepare a Classified Loan Review Report (CLR) within 15 days of the transfer. The CLR
should be approved by the Head of Credit, and copied to the Head of Corporate Banking and to the Branch/office where the loan was originally sanctioned. This initial CLR should highlight any documentation issues, loan structuring weaknesses, proposed workout strategy, and should seek approval for any loan loss provisions that are necessary. Recovery Units should ensure that the following is carried out when an account is classified as Sub Standard or worse: Facilities are withdrawn or repayment is demanded as appropriate. ♣ Any drawings or advances should be restricted, and only approved after careful scrutiny and approval from appropriate executives within CRM. CIB reporting is updated according to Bangladesh ♣ Bank guidelines and the borrower’s Risk Grade is changed as appropriate. Loan loss provisions are taken based on Force Sale Value (FSV). ♣ Loans ♣ are only rescheduled in conjunction with the Large Loan Rescheduling guidelines of Bangladesh Bank. Any rescheduling should be based on projected future cash flows, and should be strictly monitored. Prompt legal action is taken if the borrower is uncooperative. ♣ 188.8.131.52 Non Performing Loan (NPL) Monitoring On a quarterly basis, a Classified Loan Review (CLR) should be prepared by the RU Account Manager to update the status of the action/recovery plan, review and assess the adequacy of provisions, and modify the bank’s strategy as appropriate. The Head of Credit sho uld approve the CLR for NPLs up to 15% of the banks capital, with MD/CEO approval needed for NPLs in excess of 15%. The CLR’s for NPLs above 25% of capital should be approved by the MD/CEO, with a copy received by the Board. 184.108.40.206 NPL provisioning and Write Off The guidelines established by Bangladesh Bank for CIB reporting, provisioning and write off of bad and doubtful debts, and suspension of interest should be followed in all cases. These requirements are the minimum, and Banks are encouraged to adopt more stringent provisioning/write off policies. Regardless of the length of time a loan is past due, provisions should be raised against the actual and expected losses at the time they are estimated. The approval to take provisions, write offs, or release of provisions/upgrade of an account should be restricted to the Head of Credit or MD/CEO based on recommendation from the Recovery Unit. The Request for Action (RFA) or CLR reporting format should be used to recommend provisions, write-offs or release/upgrades.
The RU Account Manager should determine the Force Sale Value (FSV) for accounts grade 6 or worse. Hence. net of any realization costs. Less: (i) Cash margin held or Fixed Deposits /SP under lien. it will be advisable to evaluate such collateral. Less: Estimated salvage value of security/collateral held ( XXX ) (See Note below) Net Loan Value XXX Note: The amount of required provision may. The table below shows an indicative incentive plan for RU account managers: Recovery as a % of Principal plus interest 76% to 100% 51% t0 75% 20% to 50% Recommended Incentive as % of net recovery amount If CG 7-8 if written off 1. on a quarterly basis in the CLR.50% . pledged readily marketable securities etc). in some circumstances. Following formula is to be applied in determining the required amount of provision: 1.5 Incentive Program: Banks may wish to introduce incentive programs to encourage Recovery Unit Account Managers to bring down the Non Performing Loans (NPLs).50% 1. Force Sale Value and provisioning levels should be updated as and when new information is obtained. pledged goods / or hypothecated goods repossessed by the bank.00% 0. Loan Value (For which provision is to be created before considering estimated realizable value of other security/collateral held) XXX 4. 4.4.3. be reduced by an estimated realizable forced sale value of (i. Conservative approach should be taken to arrive at provision requirement and Bangladesh Bank guideline to be properly followed. but as a minimum.25% 0. ( XXX ) (ii) Interest in Suspense Account ( XXX ) 3. in these situations. Where the customer in not cooperative.e. Gross Outstanding XXX 2. no value should be assigned to the operating cash flow in determining Force Sale Value. Any shortfall of the Force Sale Value compared to total loan outstandings should be fully provided for once an account is downgraded to grade 7. Salvage Value) of' any tangible collateral held (viz: mortgage of property. estimate the most realistic sale value under duress and net-off the value against the outstanding before determining the Net Loan value for provision purposes.00% 2.00% 0. Force Sale Value is generally the amount that is expected to be realized through the liquidation of collateral held as security or through the available operating cash flows of the business.
0 COMPLIANCE OF BBK GUIDELINES BY NCC BANK LIMITED In the previous sections of this report we have critically analyzed NCC Bank’s existing credit risk management system as well as Bangladesh Bank’s best practices guidelines for managing credit risk. but there is no risk grading system applied here.2 Credit Assessment & Risk Grading: Though credit is properly assessed in NCCBL. structure and pricing are commensurate with the risk involved. • Types of loan facilities • Details of single borrower/ group limit • Lending caps • Discouraged business type • Loan facility Parameters • Cross Border risk 5.5. Comparing NCC Bank’s current credit risk management system with the BBK best practices guideline we see that NCC Bank lacks some of the best practices in banking industry which can be generated in the following way5. 5. But in NCC Bank limited we see that every credit . branch managers sometimes get confused whether to go with a project or not. Thus NCC Bank limited should have a lending guideline available in every branches so that credit officers can take quick decision whether to accept or reject a project. As there is no written credit policy.3 Approval Authority: In Bangladesh Bank’s guideline it is written that “Approval authority should be delegated to individual executives and not to committees to ensure accountability in approval process”. It should adopt a credit risk grading system to ensure account management.1Credit Policies/ Lending Guideline: In the above analysis we have seen that NCC Bank limited has no written credit policy though it follows some policy. The lending guideline should include the following• Industry or business segment focus.
7 Approval process: According to BBk best practice guideline.8 Credit Administration: The BBk guidelines suggest that Credit administration be strictly segregated from relationship management/ marketing. risk assessing and credit administration.6 Preferred Organizational Structure: Currently NCC Bank does not follow the preferred management structure as suggested by BBk guideline.Credit Administration But in NCC Bank limited there is no such departmentation or segregation of duties. 5. 5. The credit administration has the following functions• Disbursement • Custodial duties • Compliance requirement In NCC Bank credit officers under supervision of Branch Credit In-charge or Manager .Relationship Management/ Marketing . As a result.goes to the board via credit committee. 5.5 Internal Audit: NCC Bank limited has a segregated internal audit/ control department charged with conducting audit of all departments as suggested by Bangladesh bank guideline.e. In small branches of NCCBL only single loan officer do all the jobs like loan marketing. ‘the recommending or approving executives should take responsibility for and be held accountable for their recommendations and approval’.Credit Approval/ Risk Management . The recommended delegated approval authority levels are as follows Head of Credit/CRM Executives up to 15% of capital Managing Director/ CEO Up to 25% of capital EC/ Board All exceed 25% of capital But in NCC Bank we see that every credit proposal goes to Executive committee i. 5. wastage of time occurs and no one is held accountable for a bad loan.4 Segregation of Duties: According to Bangladesh Bank Guideline Banks should aim to segregate the following lending functions to improve the knowledge levels and expertise in each department: . The key feature in the preferred management structure is the segregation of Marketing/ Relationship function from approval/Risk management/ Administration function. 5. board. As a result the possibility of controls being compromised or issues not being highlighted at the appropriate level can be avoided.
a Classified Loan review (CLR) should be prepared by the RU Account Manager to update the action/ recovery plan. In NCC Bank credit monitoring is also done by credit In charge or branch managers. 5.10 Credit Recovery: According to BBk guideline the recovery unit (RU) of CRM should directly manage accounts with sustained deterioration. monitoring procedures and systems should be in place that provides an early indication of the deteriorating financial health of a borrower. Early identification.also carry out all the three functions of credit administration. and modify as appropriate. prompt reporting and proactive management of Early Alert Accounts are prime credit responsibilities of all relationship Managers. supervision or close attention by management. As a result Early Alert Accounts do not get that much attention as needed. 5. Personal Banking Division has a recovery unit. But Credit Marketing and administration is yet to be segregated. 5. In NCC Bank the non-performing loan is very low (below 3%) and the recovery unit is yet to be formed. An early Alert Account is one that has risks or potential weakness of a material nature requiring monitoring.11 Incentive Program: The BBk guideline also encourages Banks to introduce incentive programs for the Recovery Unit Account Managers to bring down the NON Performing Loans (NPLs) NCC Bank Limited currently has no incentive program as it does not have any Recovery Unit. review and assess the adequacy of provisions.9 Credit Monitoring: To minimize credit losses. But for personal loan program. . On a quarterly basis.
Given the fast changing. Loan Facility Parameters and Cross boarder Risk. Today is not like yesterday and tomorrow will be different from today. The¬ lending guideline should include Industry and Business Segment Focus. Therefore any banks must be extremely cautious about its lending portfolio and credit policy. which occurs due to inefficient management of the loans and advances portfolio. But all things around us are changing at an accelerating rate. NCC bank limited should adopt some of the industry best practices that are not practiced currently. Single Borrower and group limit. This system will not only ensure . liberalization. So far NCC Bank Limited has been able to manage its credit portfolio skillfully and kept the classified loan at a very lower rate ---thanks goes to the standard and stringent credit appraisal policy and practices of the bank. These are NCC Bank should have a clear written lending guideline. Approval¬ authority should be delegated to individual executives rather than Executive Committee/ Board to ensure accountability. it is essential that NCC bank limited has a robust credit risk management policies and procedures that are sensitive to these changes. consolidation and disintermediation. The failure of commercial banks occurs mainly due to bad loans. Discouraged Business Types. To improve the risk management culture further. It should adopt a credit grading system All¬ facilities should be assigned a risk grade.06 CONCLUSION AND RECOMMENDATION A banker cannot sleep well with bad debts in his portfolio. dynamic global economy and the increasing pressure of globalization. And the borrowers risk grades should be clearly stated on credit application. Lending caps. Types of loan facilities.
¬ An¬ Early Alert Account system should be introduced to have adequate monitoring.( An early Alert Account is one that has risk and potential weaknesses of a material nature) There should be a Recovery Unit to manage¬ directly accounts with sustained deterioration. Appendix-1 . The¬ organization structure should have to be changed to put in place the segregation of the Marketing/ Relationship Management function from Approval / Risk Management / Administration function. To encourage Recovery Unit incentive program may also introduced. supervision or close attention by management. All lending functions should be segregated in the following way¬ * Credit Approval / Risk Management * Relationship Management / Marketing * Credit Administration The segregation of duties will improve the knowledge levels and expertise in each department.accountability of individual executives but also expedite the approval process. The responsibilities of the key persons of the above function must also be clearly specified.
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