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Credit Management Procedure of SEBL


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Credit Management Procedure of SEBL

1.1 Introduction
Loans comprise the most important asset as well as the primary source of earning for the banking
financial institutions. On the other hand, this (loan) is also the major source of risk for the bank
management. A prudent bank management should always try to make an appropriate balance
between its return and risk involved with the loan portfolio. An unregulated banking financial
institution might be fraught with unmanageable risks for the purpose of maximizing its potential
return. In such a situation, the banking financial institutions might find itself in serious financial
distress instead of improving its financial health. Consequently, not only the depositors but also
the general shareholders will be deprived of their money from the bank. The deterioration of loan
quality will also affect the intermediation efficiency of the financial institutions and thus the
economic growth process of the country. This establishes the fact that banks should provide
increasing emphasis on various analytical tools and techniques for screening proposals and loan
decision taking. Credit Worthiness Analysis is one of the most important activities before
sanctioning any credit to a new borrower as well as existing borrower to avoid any default risk
and for improving the operational efficiency of nationalized and private sector commercial

1.2 Origin of the Report

Bachelor of Business Administration (BBA) Course requires a three months attachment with an
organization followed by a report assigned by the faculty supervisor. I took the opportunity to do
my internship in Southeast Bank Limited, Bandar Bazar Branch. The organization attachment
started on April 1, 2010 and finished on June 31, 2010. Actually this is a feedback which
department accepts from the students who join in an organization after the completion of
theoretical part of the BBA program. My faculty supervisor Tahsina Haque Simu, Lecturer,
Department of Business Administration, Shah Jalal University of Science and Technology asked
me to prepare a report on Credit Management Procedure of Southeast Bank Limited as
part of the fulfillment of internship requirement.

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1.3 Objective of the Report

The study has been undertaken with the following objectives:

To have better orientation on credit management activities.

To find out the strengths and weakness of the credit procedure method.

To identify the factors that must be considered and analyzed by the bank and financial
institutions in determining the credit worthiness of the client.

To get an overall idea about the performance of Southeast Bank Ltd, Bandar Bazar
Branch, Sylhet.

1.4 Scope of the Report

The study would focus on the following areas of Southeast Bank Limited: Credit management
system of Southeast Bank Limited, Procedure for different credit facilities, Portfolio (Loan or
advances) management of Southeast Bank Limited, Organization structures and responsibilities
of management.
Each of the above areas would be critically analyzed in order to determine the efficiency and
effectiveness of Credit Management System of Southeast Bank Limited.

1.5 Methodology of the Report

Both primary and secondary data sources were used to generate this report. Primary data sources
are informal discussion with professionals and observation while working in different desks. The
secondary data sources are annual reports, manuals, and brochures of Southeast Bank Limited
and different publications of Bangladesh Bank. 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 was done.

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1.5 Limitation of the Report

I did my best and there has no dearth of sincerity on my part to make the report. But, I had some
limitations also.

This report only considers Credit Management System of SEBL.

Time frame for the research was very limited.

In many cases, up to date information is not published.

Getting Relevant papers and documents were strictly prohibited.

Due to lack of practical experience, some errors might be occurred during the study.

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Organizational overview
of Southeast Bank Limited

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2.1 An Overview of Southeast Bank Limited (SEBL)

Southeast Bank Limited (SEBL) is the leading private sector bank in Bangladesh offering full
range of Personal, Corporate, International Trade, Foreign Exchange, Lease Finance and Capital
Market Services. Southeast 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.

2.2 Status of Southeast Bank Limited

Southeast Bank Limited is a modern bank that was established in 1995 with a dream and a vision
to become a pioneer banking institution of the country and contribute significantly to the growth
of the national economy. The Bank's journey began when it was incorporated as a Public Limited
Company on March 12, 1995. The Registrar of Joint Stock Companies and Firms issued the
Certificate of Commencement of Business of the Bank on the same date. The Bank received its
Banking License from Bangladesh Bank on March 23, 1995. The Bank's first branch was opened
by Late M. Saifur Rahman, the then Honorable Finance Minister of the Government of the
People's Republic of Bangladesh as the Chief Guest at the busiest commercial hub of the country
at 1, Dilkusha Commercial Area, Dhaka on May 25, 1995.
In its arduous journey since, Southeast Bank has succeeded in realizing the dreams of those who
established it. Today it is one of the country's leading banks in the private sector contributing
significantly to the country's economy. The Authorized Capital of the Bank today is Tk.10, 000
million. Its Paid-Up-Capital and Reserve reached Tk.9, 927.16 million as on December 31,
2009. The Bank had 1402 Staff of whom 113 were Executives. 1141 were Officers and 148 were
other staff as on December 31, 2009.

2.3 Core Values, Core Strengths and Core Competencies of the SEBL
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The Core Values, Core Strengths and Core Competencies of the SEBL are given below:
Core Values

Core Strengths




Core Competencies
quick Knowledge

decision making

Efficient team of performers

Experience and Expertise


Satisfied customers



Internal control


Team spirit

Skilled risk management




Zeal of Improvement






Service Excellence

Growth Strategy

2.4 Slogan
The slogan of Southeast Bank Limited is A Bank with Vision

2.5 Foundation of SEBLs Strength

2.5.1 SEBLs Vision:
To be a premier banking institution in Bangladesh and contribute significantly to the National

2.5.2 SEBLS Missions:

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High quality financial services with state of the art technology

Fast customer service
Sustainable growth strategy
Follow ethical standards in business
Steady return on shareholders equity
Innovative banking at a competitive price
Attract and retain quality human resource
Commitment to Corporate Social Responsibility
2.5.3 SEBLS Commitment to Clients:

Provide service with high degree of professionalism and use of modern technology

Create long - term relationship based on mutual trust

Share their values and beliefs

Respond to customer needs with speed and accuracy

Grow as our customers grow

Provide products and service at competitive pricing

Ensure safety and security of customers' valuables in trust with us.

2.6 Branches of SEBL

Southeast Bank limited has 51 conventional Branches and 5 Islamic Banking Branches. Among
total of 56 Branches, 24 branches are located in Dhaka City, 8 branches are located in
Chittagong, 6 branches are located in Sylhet and the other

18 branches are located in

ur,Barisal,Rajshahi,Noagaon and Comilla. The registered office (Head Office) of Southeast Bank
Limited is at Eunoos Trade Cenre 52-53,Dilkhusha Commercial area, Dhaka-1000.

2.7 Southeast Bank at a glance

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The financial statement and an overview of Southeast Bank Ltd is given below:
Table-1: Southeast Bank at a glance





in Taka




in Taka in

Taka in



















48164060 41147.28





































Authorized Capital




Paid-up Capital
Reserve Fund














Import Business


Export Business


Guarantee Business


Total Income


Total Expenditure


Operating Profit



Fixed Assets








Total Assets
Earning per Share (Taka)

112676.92 81181.53

Dividend Cash (%)

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Bonus Shares


25% (4:1) 8%(12.5:1) 20%(5:1)


Return on Equity (ROE)


Return on Assets (ROA)





1.90 %





















Non performing Loans as % of 3.73%
Total Loans
Capital Adequacy Ratio




Correspondent 146

Foreign 589

Number of Shareholders


Number of Employees
Number of Branches


Source: Annual Report 2009, Southeast Bank Ltd.


2.8 Southeast Bank Ltd, Bandar Bazar Branch (Islamic Banking)

Southeast Bank Limited has started its operation as a Conventional Bank on May 1995. But
pretty soon afterwards, within few months, the Bank has taken up the Challenge to start Islamic
Banking Operations. The Challenge is not so much as in operating Islamic Banking but in
maintaining both the forms in Parallel. From its inception as an Islamic Bank the bank has
proven itself to be worthy of its slogan of Bank with a vision, through successful operation of
Islamic Banking.
Southeast Bank has started its Islamic Banking operation through its first Branch being
inaugurated at Chagalnaya, Feni on 28 July 2003.Southeast Bank Limited, Bandar Bazar Brach
is the second Islamic banking branch which was inaugurated at Karimullah Market, Sylhet on 4
December 2003.Since then it has so far has established three more branches at different
locations in the Country. Because of its popularity and managements commitment toward social
well being gradual expansion of Southeast Banks Islamic Banking operations is assured.
Following are the salient features of Islamic Banking, as is practiced in Southeast Bank Limited:
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01. All activities are conducted according to Islamic Shariah.
02. Interest free monetary operations.
03. Building partnership relation between the Bank and its customers.
04. Following Islamic principles in its investment portfolio.
05. While investing special consideration to social needs is given.
06. Through small and long term deposit schemes providing hope to the poor income
group of the society.
07. Client service centric banking, through which making the clients feel special.
2.8.1 Service Portfolio:
Southeast Bank Limited, Bandar Bazar Branch provides following services under Islamic Banking:

a) Deposit: In this case, Bank collects money from its customer by two types of account.
One is Al-Wadiah where depositors are not given any profit. Another one is Mudaraba,
where profit and loss is divided into two parties, bank and customer.
b) Investment: Bank invests into different sector by providing loan to reasonable client.
c) Remittance and Fund Transfer: In this case, bank provides foreign remittance service
to the customer and also provides fund transfer service to the customer.
2.8.2 Various Types of Accounts at Banadar Bazar Branch, SEBL:
Southeast Bank Limited, Bandar Bazar Branch maintains different types of account. The list of
different types of account is given below:
Table-2: Various Types of Account at Bandar Bazar Eranch, SEBL as On 30/06/2010
Al-Wadiah Current Account
Mudarabah Savings Deposit
Mudaraba Savings Deposit Staff
Mudaraba Short Term Deposit
Mudaraba Term Deposit Recpt(1 Month)
Mudaraba Term Deposit Recpt(3 Month)
Mudaraba Term Deposit Recpt(6 Month)

Total Accounts
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Mudaraba Term Deposit Recpt(12 Month)
Mudaraba Term Deposit Recpt(36 Month)
Millionaire Deposit Scheme- 4Y
Millionaire Deposit Scheme- 5Y
Millionaire Deposit Scheme- 6Y
Millionaire Deposit Scheme- 7Y
Millionaire Deposit Scheme- 9Y
Millionaire Deposit Scheme- 10Y
Mudaraba Pension Savings Scheme-6Y
Mudaraba Pension Savings Scheme-8Y
Mudaraba Pension Savings Scheme-10Y
Mudaraba Marriage Savings Scheme
Mudaraba Monthly Savings Scheme(MMSS)-B
Mudaraba Monthly Savings Scheme(MMSS)-A
Mudaraba Education Savings Scheme(MMSS)-B
Mudaraba Double Benefit Scheme
Mudaraba Hajj sanchay Prokolpo- 3Y
Mudaraba Hajj sanchay Prokolpo- 5Y
Mudaraba Monthly Income Scheme 3Y
Mudaraba Monthly Income Scheme Y
Consumer Credit Schemes
Staff Loan- House Building
Bai Muajjal Commercial
Hire Purchase- Real Estate
Quard Against Deposit


Source: Daily Affairs June 30, 2010, Bandar Bazar Branch, Southeast Bank Ltd.

Credit Management Procedure and Practice
at Southeast Bank Limited, Bandar Bazar

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3.1 Overview
The word credit comes from the Latin word Credo meaning I believe. It is a lenders trust in
a persons/ firms/ or companys ability or potential ability and intention to repay. In other words,
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. For a bank, it is the main source of profit
and on the other hand, the wrong use of credit would bring disaster not only for the bank but also
for the economy as a whole.
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 and
advance and their efficient management. Credit management is a dynamic field where a certain
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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. Continuous supervision, monitoring and
follow-up are highly required for ensuring the timely repayment and minimizing the default.
Actually the credit portfolio is not only constituted the banks asset structure but also a vital factor
of the banks success. The overall success in credit management depends on the banks credit
policy, portfolio of credit, monitoring, supervision and follow-up of the loan and advance.
Therefore, while analyzing the credit management of SEBL, it is required to analyze its credit
policy, credit procedure and quality of credit portfolio. From the view of Islamic banking, the
term credit is known as Investment.

3.2 The objectives and principles of investment of Islamic Banking

The special feature of the investment policy of Islamic Banking is to invest on the basis of
profit and loss sharing system in accordance with the tenets and principles of Islamic Shariah.
Earning of profit is not the only motive and objective of the Islamic Banking investment policy
rather emphasis is given in attaining social welfare and creating employment opportunity.
The objectives and principles of investment of Islamic Banking are:
01. To invest fund strictly in accordance with the principles of Islamic Shariah.
02. To diversify its investment portfolio by size, by sector, by economic purpose, by
securities and by geographical area including industrial, commercial and agricultural
03. To ensure mutual benefit for both the Bank and the investment client.
04. To make investment keeping in view of the socio economic requirement of the country.
05. To increase the number of potential investors by making participatory and productive
06. To finance various development schemes for poverty alleviation, income and
employment generation, with view to accelerate sustainable socio-economic growth.
07. To invest in the form of goods and commodities rather than give out cash money to the
investment clients.
08. Though all mode of investment is practiced in the Islamic Banks are fully permissible,
Musharaka and Mudaraba are the pristine mode of Islamic investment. The objective
would be to increase investment through these modes.

3.3 Modes of Investment under Islamic Banking System

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Islamic Bank in purport and nature is an investment house. An Islamic Bank mobilizes
deposits from the masses according to Mudarabah principles and deploys the same in various
investment activities under different modes permitted by Islamic Shariah. The Profits derived
from such investment operations are divided among the bank and depositors according to the
ratio as declared in the beginning of a particular financial/banking year. Some Popular modes
of Islamic Investments are practiced in Southeast Bank, Bangladesh are mentioned below:
Southeast Bank, Bandar Bazar Branch conducts its investment portfolio mainly under three
mechanisms. These are as follows:
01. Bai Mechanism (Buying & Selling mode)
02. Share Mechanism (profit & Loss sharing mode)
03. Ijara (Rent Sharing mode)
There are some other forms of investments which can be categorized as miscellaneous.
3.3.1 Product List
The product list of Southeast Bank Ltd is shown below:
Table 3: Total Product List of Southeast Bank Ltd, at Bandar Bazar Branch
Classification of

Classification of


Bai Mechanism

Share Mechanism

of Ijara



2.Hire purpose


3.Staff house building


Source: Credit Policy Guide 2009, Southeeast Bank Ltd

3.4 Bai- Murabaha

The terms "Bai-Murabaha" have been derived from Arabic words and ( Bai and
Ribhun). The word means purchase and sale and the word means an agreed upon
profit. " Bai-Murabaha" means sale on agreed upon profit.
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Bai-Murabaha can be defined as a contract between a Buyer and a Seller under which the Seller
sells certain specific goods permissible under Islamic Shariah and the Law of the land to the
Buyer at a cost plus agreed profit, payable in cash or in lump sum or by installments on any fixed
future date. The profit marked-up may be fixed in lump sum or in percentage of the cost price of
the goods.
3.4.1 Important Features:

It is permissible for the Client to offer an order to purchase by the Bank particular goods
describing its specification and committing him to buy the same from the Bank on Murabaha,

i.e., cost plus agreed upon profit.

2. It is permissible to make the promise binding upon the Client to purchase from the Bank, that
is, he is to either satisfy the promise or to indemnify the damages caused by breaking the
promise without excuse.
3. It is permissible to take cash/ collateral security to guarantee the implementation of the
promise or to indemnify the damages.
4. It is also permissible to document the debt resulting from Bai-Murabaha by a Guarantor, or a
mortgage, or both, like any other debt. Mortgage/Guarantee/ Cash Security may be obtained
prior to the signing of the Agreement or at the time of signing the Agreement.
5. Stock and availability of goods is a basic condition for signing a Bai-Murabaha Agreement.
Therefore, the Bank must purchase the goods as per specification of the Client to acquire
ownership of the same before signing the Bai-Murabaha agreement with the Client.
3.4.2 Rules of Bai-Murabaha:
The Bai-Murabaha has some legal rules. These rules are mentioned below:
1. It is permissible for the client to offer to purchase a particular commodity, deciding its
specifications and committing itself to buy it on Murabaha for the cost plus the agreed upon

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2. It is permissible that the mutual agreement shall contain various conditions agreed upon by
the two parties, especially with respect to the place of delivery, the payment of a cash security to
guarantee the implementation of the operation and the method of payment.
3. It is permissible to stipulate the binding nature of the promise to purchase.
4. It is a condition that the bank purchases the requested commodity (first purchase contract)
before selling it on Murabaha to the buyer.
5. It is permissible for the bank to authorize a second party including the buyer to receive the
commodity on its behalf.
6. Once the bank takes ownership of the goods, it is responsible for any damages or defects.
7. It is a condition that the Bai-Murabaha contract be drawn at the last phase.
8. The legal rules of Bai-Murabaha must be observed in drawing the contract of the Murabaha
sale connected with a promise to purchase.
9. It is permissible to document the debt resulting from Bai-Murabaha by a guarantor or a
mortgage, like any other sale on credit.
3.4.3 Steps of Bai-Murabaha:
First Step: The client submits a proposal regarding his requirements of the bank. The client
sends a proposal with the specifications of the commodity to be acquired from the bank. The
proposal also indicates details regarding the date, time and place of delivery as well as price and
form of payment information. The bank responds by sending a counter proposal either accepting
the buyers price or stipulating a different price.

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Second Step: The client promises to buy the commodity from the bank on a Bai-Murabaha basis,
for the stipulated price. The bank accepts the order and establishes the terms and conditions of
the transaction.
Third Step: The bank informs the client (ultimate buyer) of its approval of the agreement to
purchase. The bank may pay for the goods immediately or in accordance with the agreement.
The seller expresses its approval to the sale and sends the invoice(s).
Fourth Step: The two parties (the bank and the client) sign the Bai-Murabaha Sale contract
according to the agreement to purchase.
Fifth Step: The Bank authorizes the client or its nominee to receive the commodity. The seller
sends the commodity to the place of delivery agreed upon. The client undertakes the receipt of
the commodity in its capacity as legal representative and notifies the bank of the execution of the

3.5 Bai-Muajjal
The terms Bai and Muajjal have been derived from Arabic words and . The word
means purchase and sale and the word means a fixed time or a fixed period. Bai-Muajjal
means sale for which payment is made at a future fixed date or within a fixed period. In short, it
is a sale on Credit.
Bai-Muajjal is a contract between the Bank and the client (Seller and Buyer) under which the
Bank (Seller) sells to the client (Buyer) certain specified goods (permissible under Shariah and
Law of the country), purchased as per order and specification of the client at an agreed price
payable within a fixed future date in lump-sum or by fixed installments.
3.5.1 Important Features:
01. Bank is not bound to declare cost of goods and profit mark-up separately to the client.
02. Spot delivery of the item and payment is deferred.
03. Ownership and possession of the goods is transferred by the Bank to the client before
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receipt of sale price.

Client may offer an order to purchase by the Bank any specified goods and committing


himself to buy the same from the Bank on Bai-Muajjal mode.

It is permissible to make the promise binding upon the client to purchase from the Bank.
That is, he is to either satisfy the promise or to indemnify the damages caused by breaking

the promise.
3.5.2 Steps of Bai-Muajjal:
This type of financing by the bank is considered to be more risky than the other Islamic modes of
investment. Therefore, the application/proposal for Bai-Muajjal investment must be reviewed
very carefully to ensure the client can ultimately make payment. . The following steps may be
taken to ensure the Bai-Muajjal Investment is a good proposition for the bank:
1. The bank may meet with the prospective client regarding his investment needs and
business experience prior to an application /proposal is submitted.
2. The bank may review the clients past performance and other financing arrangements he
may have had with the bank in the past.
3. The bank may review its current investment policy regarding this type of financing
arrangement to ensure the proposal meets bank guidelines.
4. It should be remembered that if the Bai-Muajjal investment is not secured by first class
collateral securities, it becomes more risky than investments under other modes of
Islamic banking.
The following points should receive attention before making any investment decision under BaiMuajjal.

Whether the goods that the client intends to purchase are marketable and have steady
demand in the market.

b) Whether the price of the goods is subject to frequent and violent changes.
c) Whether the goods are perishable in short or in long-term duration.
d) Whether the quality and other specifications of the goods as desired by the client can be
e) Whether the goods are available in the market and the bank will be in a position to
purchase the Goods in time and at the negotiated price.

Whether the sale price of the goods is payable by the client at the specified future date in
lump sum or in Installments as per the agreement.
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3.6 Bai-Salam
Bai-Salam is a contract between a buyer & a seller under which the seller sells in advance the
certain commodities/products permissible under Islamic Shariah and the Law of the land, to the
buyer at an agreed price payable on execution of the said contract and the commodities/products
are delivered as per specification, size, quality, quantity at a future time in a particular place.
In other words, Bai-Salam is a sale whereby the seller undertakes to supply some specific
commodities/products to the buyer at a future time in exchange of an advanced price fully paid on
the spot. Price is paid in cash and delivery of the goods is deferred.
The Bai-Salam sales serve the interests of both parties (Ibid).
1. The seller receives advance payment in exchange for the obligation to deliver the
commodity at some later date. He benefits from the Salam sale by locking in a price for
his commodity, thereby allowing him to cover his financial needs whether they are
personal expenses, family expenses or business expenses.
2. The purchaser benefits because he receives delivery of the commodity when it is needed
to fulfill some other agreement, without incurring storage costs. Second, a Bai-Salam sale
is usually less expensive than a cash sale. Finally a Bai-Salam agreement allows the
purchase to lock in a price, thus protecting him from price fluctuation.
3.6.1 Important Features:

A commodity/product sold without having the same in existence or possession of the


seller. Commodity ready for sale, Bai-Salam is not allowed in Shariah.

Generally used to infuse finance so that production is not hindered due to shortage of
fund/cash and as such. Industrial and agricultural products are purchased/sold in advance


under Bai-Salam.
Permissible to obtain collateral security from the seller to secure the investment from any


hazards (non supply, partial supply, low quality).

Permissible to obtain Mortgage or personal guarantee from a third party before or at the


time of signing the agreement.

Bai-Salam on a particular commodity/product or on a product of a particular field or farm
can not be effected (Agri. product only).

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The seller (manufacturer) client may be made agent of the bank to sell the goods
delivered to the bank by him and a separate agency agreement is to be executed between

the bank and the client (Agent).

3.6.2 Rules and Conditions:
There must be a contract which will be the principal instrument to govern the advance selling


and buying. The agreement should be signed before two witnesses (Surah Al-Baqarah-282).
Name, specification, brand, quality, quantity, size etc. of the goods must be specified clearly.
Unit price and total price of the commodity must be fixed and mentioned.
Exact time and place of delivery must be specified.
Mode of transportation, cost, and other charge, if any, must be specified.
The name of party who will bear those costs to be mentioned.
Price shall be paid to the seller in full at the time of signing the contract.
Delivery of the commodity/product can be made / taken in installment or at a time within the

contract period if mentioned in the contract.

Quantity of the commodity/product shall be in unequivocal terms.
The supplier (client) is bound to repay the price received in advance if failed to deliver goods.
Only purchase price of the commodity/product may be mentioned.
Buyer Bank shall bear the risk until dispose/delivery of the same to the ultimate buyer.
3.6.3 Steps of Bai-Salam:
1. Cash sale or Sale on Credit
The bank pays the agreed upon price at the time of the contracts inception. The seller agrees
to the delivery of the commodity some specified date in the future.
2. Delivery and Receipt of the Commodity on the Specific due Date
There are several options for delivery available to the bank:
a) The bank may receive the commodity and resell it to another party for cash or
b) The bank may authorize the seller to find another buyer for the commodity.
c) The bank may direct the seller to deliver the commodity directly to a third party
with whom the bank has entered into another agreement.
3. The Sale Contract
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The bank agrees to sell the commodity for cash or a deferred price, which is higher than the
Salam purchase price. The buyer agrees to purchase and to pay the price according to the

3.7 Mudaraba
Mudaraba may be defined as a contract between two parties under which one party (Bank)
supply capital and another party (client) invest his efficiency, labor, experience and necessary
business activities. In such a business, Bank is called Sahib-Al-Mall and the client is called
In Mudaraba both the parties share the profit as per agreed upon ratio and the losses, if any, being
borne by the provider of funds. But if the loss is due to breach of trust i.e. misconduct,
negligence or violation of the conditions agreed upon by the Mudarib, then the loss is fully borne
by the Mudarib.
3.7.1 Important Features:
01. Bank supplies capital as Sahib-Al-Maal and the client as the Mudarib invests in business

using his/her skill, experience and expertise.

Administration and Management is maintained by the Mudarib/Client.
Profit is divided as per agreement.
Bank bears the actual loss alone.
Client can not take another investment for that specific business without the permission of

the Bank.
3.7.2 Rules of Mudaraba:
There are some legal rules that govern the business relationship Mudaraba which are as
1. It is a condition in Mudaraba that the capital be specific in nature.
2. It is a condition that capital must be in the form of currency in circulation.
3. It is a condition that the capital cannot be subject to indebtedness.
4. It is a condition that the capital of the Mudaraba is delivered to the Mudarib.
5. It is permissible for the capital owner to deliver capital to two Mudharibs in a single contract.
6. It is permissible to impose restrictions on the Mudarib as long as the restriction is beneficial
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and does not hinder the agents ability to make a profit.
7. It is permissible for the Mudarib to hire an assistant to perform difficult work .
8. The Mudarib is not required to contribute any capital to the Mudaraba contract except when
he is found to be negligent in the way the funds are handled.
9. It is a condition that profits be carefully and properly accounted for to avoid confusion by the
parties to the contract.
10. The Mudarib shall collect his share of the profit only after obtaining the permission of the
capital owner.
11. The Mudarib does not receive his share of the profits until the final settlement of the
12. The Mudaraba agreement may be terminated if one of the two parties decides to rescind the
3.7.3 Steps of Mudaraba:
The bank provides the capital as a capital owner. The Mudarib provides the effort and expertise
for the investment of capital in exchange for a share in profit that is agreed upon by both parties.
1. The Results of Mudaraba: The two parties calculate the earnings and divide the profits at the
end of Mudaraba. This can be done periodically in accordance with the terms of the agreement,
subject to the legal rules that apply.
2. Payment of Mudaraba Capital: The bank recovers the Mudaraba capital it contributed
before dividing the profits between the two parties because the profit is considered collateral for
the capital.
3. Distribution of wealth resulting from Mudaraba: In the event a loss occurs, the capital
owner (the bank) is responsible for the entire loss. In the event of profits, they are divided
between the two parties in accordance with the agreement between them, subject to the capital
being recovered first.

3.8 Musharaka

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The term Musharaka have been derived from Arabic words Shirkat and Sharikat. The
word shirkat or sharikat means partnership of sharing. Thus the word Musharaka mean a
partnership established between two or more partners for purpose of a commercial venture
participated both in the capital and management. Where the profit may be shared between the
partners as per agreed upon ratio and the loss, if any incurred, is to be borne by the partners as
per capital/equity ratio.
In case of investment through Bank, Musharaka means a partnership between the Bank and
the Client for a particular business in which both the Bank and the client provide capital at an
agreed upon ratio and manage the business jointly, share the profit as per agreed upon ratio and
bear the loss, if any, in proportion to their respective equity.
3.8.1 Types of Musharaka:
Musharaka, in the context of Islamic modes of financing, may be of two types:

Permanent Musharaka and


Diminishing Musharaka.

These are discussed below:

i) Permanent Musharaka: In this type of Musharaka the period for termination of contract is
not specified. Thus it is also called continued Musharaka. Though this type of Musharaka is
intended to continue up to the dissolution of the enterprise/company, but one can sell his/her
share of equity before dissolution.
Steps of Permanent Mushraka:
The three steps to establishing Permanent Musharaka are discussed below.
1. Partnership in Capital: The bank tenders part of the capital required in its capacity as a partner
and authorizes the customer/partner to manage the project.
2. Results of the Projects: The intent of the project is growth. However, the project may be
profitable or it may loss money.
3. The Distribution of wealth accrued from the Project: In the event a loss or profit is incurred,
each partner bears part of the loss or profit proportionate to his share in capital.

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Rules for Permanent Musharaka:
The following is a discussion of those legal rules that apply to the Musharaka relationship:

It is a condition that the capital provided by each partner is specific, existent and easily


It is permissible for partners to have unequal ownership in the project.


It is a condition that the capital of the company is money and valuables.


It is impermissible to impose conditions forbidding one of the partners from work.


A partner is a trustee of company funds in his possession and is responsible for their proper


It is a condition that each partners share of the profits be known to avoid uncertainty.


In principle, profit must be divided among partners in ratios proportionate to their shares in

capital but some of the jurists permit variation in profit shares, so long as it is agreed to by all of
the partners.

In principle, a partnership is a permissible and non-binding contract.

Application of Permanent Musharaka:

Permanent Musharaka is helpful in providing financing for large investments in modern
economic activities. Islamic banks can engage in Musharaka partnerships for new or established
companies and activities. Islamic banks may become active partners in determining the methods
of production cost control, marketing, and other day-to-day operations of a company to ensure
the objectives of the company are met.

ii) Diminishing Musharaka: In this type of Musharaka the share of capital or ownership to the
assets/property of the Bank gradually reduces and goes to the account of the Client with the
payment of share value by the Client in addition to share in profit as per agreement.

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Steps of Diminishing Musharaka:
It appears that there are four steps of the diminishing partnership. Those are mentioned below:
1. Participation in Capital: The bank - tenders part of the capital required for the project in its
capacity as a participant and agrees with the customer/partner on a specific method of
gradually selling its share in capital back to the partner.
2. The partner - tenders part of the capital required for the project and agrees to pay the agreed
upon amount in return for the ultimate full ownership of the business.
3. Results of the Projects: The intent of the project is capital growth. The project may be
profitable or lose money.
4. The distribution of the Wealth accrued from the Projects: In the event of loss each
partner bears his share in the loss in his exact proportionate share of capital. In the event that
the project is successful, profits are distributed between the two partners (the bank and the
customer) in accordance with the agreement.
5. The bank sells its Share of Capital: The bank expresses its readiness, in accordance with
the agreement, to sell a specific percentage of its share of capital.
6. The partner pays the price of that percentage of capital to the bank and the ownership is
transferred to the partner.This process continues until the bank has been fully compensated
for its capital share of the business. In this way the bank has its principal returned plus the
profit earned during the partnership and vice versa.

Rules for Diminishing Musharaka:

There are some legal rules for diminishing Musharaka as given below:
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In addition to all the legal rules that apply to the permanent partnership which also apply to the
decreasing partnership, the following rules also must be observed.
1. It is a condition in the decreasing partnership that it shall not be a mere loan financing
2. It is a condition that the bank must completely own its share in the partnership and all rights
of ownership with regard to management of the business.
3. It is impermissible to include in the contract of decreasing partnership a condition that
adjudges the partner to return to the bank the total of its shares in capital in addition to profits
accruing from that share, because of resemblance to Riba (usury).
4. It is permissible for the bank to offer a promise to sell its shares in the company to the
partner, if the partner pays the value of the shares.
Application of Diminishing Musharaka
The decreasing Musharaka is suitable for the financing of industrial businesses that have regular
income. It can be considered to be the appropriate mode to finance collective investment. In this
arrangement, the bank earns periodic profits throughout the year and it encourages the partner to
participate in the joint investment. In addition it fosters individual ownership by allowing the
partner to gradually buy the banks ownership interest. In terms of society as a whole it corrects
the course of the economy by developing a mode of positive partnership instead of the negative
relationship of indebtedness. In addition, it assists in the equitable distribution of societys

3.9 Ijarah

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Fuqaha (jurists) have defined Ijaraha as ownership of a benefit for consideration. This is also
known as lease or Hire contract. Al-Ijarah is an Arabic term. This has been derived from the
Arabic term Ujr or Ujrat which means consideration or return or wages.
According to Islamic Shariah (jurisprudence), Ijarah is a contract between two parties the
lessor and the lessee, where the lessees (Hirer or Mustajir) have the right to enjoy/reap a specific
benefit against a specified consideration/rent/wages from the lessor the owner (Muajjir).
3.9.1 Elements of Ijarah:
According the majority of Fuqaha, there are three general and six detailed elements of Ijarah:
1. The wording: This includes offer and acceptance

Contracting parties: This includes a lessor, the owner of the property, and a lessee, the party

that benefits from the use of the property.

3. Subject matter of the contract: This includes the rent and the benefit.
The lessor (Mujjir) The individual/organization who leases/rents out the property/service is
called the lessor.
The lessee: (Mustajir) The individual or organization who hires/takes the lease of the property
or service against the consideration rent/wages/remuneration is called the lessee (Mustajir).
The Benefit (Maajur) The benefit that is leased/rented out is called the benefit (Maajur).
The rent (Ajr or Ujrat) The consideration either in monetary terms or in quantity of goods
fixed to be paid against the benefit of the goods or service is called the rent or Ujrat or Ajr.
3.9.2 Rules for Ijarah:
It is condition that the subject (benefit/service) of the contract and the asset (object) should be
known comprehensively.

It is a condition that the assets to be leased must not be a fungible one (perishable or

consumable) which can not be used more that once.


It is a condition that the subject (benefit/service) or the contract must actually and legally

be attainable/ derivable.

It is a condition that the lessee shall ensure that he will make use of the asset(s) as per

provisions of the Agreement or as per customs/norms/practice, if there is no expressed provision.

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The lease contract is permissible only when the assets and the benefit/service derived from

it are within the category of Halal or at least Mobah as per Islamic Shariah.

The lessor is under obligation to enable the lessee to the benefit from the assets by putting

the possession of the asset(s) at his disposal in useable condition at the commencement of the
lease period.

In a lease contract, the period of lease and the rental to be paid in terms of time, place or

distance should be clearly stated.


Everything that is suitable to be considered a price, in a sale, can be suitable to be

considered as rental in a lease contract.


It is a condition that the rental falls due from the date of handing over the asset to lessee

and not from the date of contract or use of the assets.


It is permissible to advance, defer or install the rental in accordance with the Agreement.


It is permissible to review the lease period or the rental or the both, if the lessor and the

lessee mutually agree to do so.


The leased asset is a trust in the hands of the lessee.


The lessor/owner bears all the costs of legally binding basic repairs and maintenance

including the cost of the replacement of durable parts on which the permanence and suitability of
the leased assets depends.

It is permissible to make the lessee bear the cost of ordinary routine maintenance, because

this cost is normally known and can be considered as part of the rental.

It is permissible for the lessee to let the asset to a third party during the lease period

whether for the same rental or more as long as the asset is not affected by the change of user and
not barred/restricted by the Lease Agreement/customs to do so.

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It is permissible to purchase an Asset bearing a lease contract. The lease contract may

continue since the purchased agrees to its continuity up to the end of the lease term.

As soon as the lease period terminates the lessee is under obligation to return the Asset to

the owner or if the lessor agrees he may enter into a fresh lease contract or purchase if from the
lessor on payment of agreed upon price as per market rate.

The lease contract is binding and no one party shall unilaterally rescind except reasons that

abrogate binding contracts such as damage or destruction.


If the leased asset is damaged or destructed by the act of Allah and if the lessor offers a

substitute with the same specifications agreed upon in the lease contract, the contract does not

3.10 Hire Purchase

Hire Purchase is a special type of business transaction which is also traditionally practiced for
procurement of goods, mainly, are of fixed nature. Here, purchaser purchases the asset from the
seller by paying the price gradually or in lump sum after the rent period and pay rent for the
asset up until making the full payment.
In this type of contract the hiree, here the Bank, has the full ownership of the goods. The
ownership is only transferred to the hirer, here the client, after the price of the goods is fully paid
to the Bank. That means ownership has to be manually transferred in this type of contract. Up
until ownership of the asset is transferred the client has to pay a fixed rental to the Bank
according to the schedule specified in the contract.
Important Features:
01. The Bank purchases goods for the client taking an agreed upon margin and a risk

weighted fund.
The full ownership of the goods stays with the Bank throughout the contract period.
The ownership is usually transferred to the client after the rental period.
The client has to pay a fixed rental throughout the rental period.
As the ownership of the goods is with the bank thus the risk of damage of goods is also
with the Bank, if the damage is not due to the negligence of the client.

3.11 Al-Quard-ul-Hasan
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Quard means loan without interest and Hasan means beautiful. Al-Quard-ul-Hasan implies
beautiful loan on good faith or beneficial loan. Islamic Banks do not recover any charge, even
service, from Al-Quard-ul-Hasan account. Loanee has to repay the principal amount. This loan
facility is extended only to deserving cases on compassionate grounds and special welfare
consideration. The principal amount is refundable within a reasonable time. Southeast Bank
grant this loan not only for consumption purpose but also for owning factor(s) of production.
The ultimate objects of both the consumption and production Al-Quard-ul-Hasan are to enable
the loanees to support economic problems.
In Islamic Banking Branches of Southeast Bank an investment is created against pledge of
Term Deposit. Generally 80% of the Term Deposit is allowed to the holder for Halal activities
without any profit. Only a minimum service charge per deal is taken. Thus It is also called
Quard against Term Deposit Receipt.

3.12 Consumer Credit Scheme

In a developing country like Bangladesh people of middle and lower middle class specially
service holders with limited income find it difficult to purchase articles like refrigerator,
television, almirah, wardrobe, sofa-set, pressure cooker, sewing machine etc. which are part of
modern and decent living. They can not enhance the standard and quality of life to the desired
level due to the constrain of their limited income.
Southeast Bank Limited has, therefore, introduced Consumer Credit Scheme which has already
created great enthusiasm among the people and received tremendous response from them.
The objectives of Consumer Credit Scheme are:
To assist the service holders with limited income in purchasing household durables.
To assist the fixed income group in raising the standard of living.
To create opportunity for the service holders to enjoy the benefit of modern and sophisticated
living and at the time lead a decent and honest life.
Eligibility of Customer:
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The criteria to become eligible for availing the facility under the scheme are given below:

Any Citizen of Bangladesh having age in between 1855 falling under the following
categories are eligible for availing of credit facilities under the scheme:

Confirmed Officers of government organization, Semi Government organizations,

Autonomous bodies, Banks, Leasing Companies, Insurance Companies, any other
financial /business organizations and public & private organizations having corporate

Professionals viz. Doctors, Engineers, Architects, Chartered Accountants, Cost

Accountants, Lawyers Journalists and Teachers etc.

Members of Armed Forces, BDR, Police & Ansar subject to fulfillment of terms and
conditions as per circular No. 3204/R/AG (PS1) dated 03.03.99 of Head Quarters of
Armed Forces (Copy enclosed).

Service & Business Length Requirement:

Permanent Employees with minimum of 02 years continued service as to the limit date
of application

Self employed businessmen with minimum of 03 years continued business as to the date

Amount of Credit & Equity:

The amount of Credit to be allowed to a particular customer will be maximum of Tk. 2.00 (Two)
lac excluding minimum of 25% equity from the customer.
The credit shall be allowed considering the repayment capability of a customer. Loan amount
will be determined in such a way that the monthly installments do not exceed 40% of the total
take home salary (disposable income) of the client. In case of a service holder take home salary
shall be determined from the salary certificate from competent authority supported by bank
account statement and for a self employed person take home monthly income shall be at
maximum 20% of average monthly balance for last two years. To compute average monthly
balances 1st, 15th & last working day of each month shall be taken into consideration.
A customer who has liability under the scheme will be eligible for further credit up to the
maximum ceiling as indicated above should to complete satisfactory performance i.e.
installments are regularly repaid.
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For client already availed facility and fully repaid in the full satisfaction at the bank, second time
loan disbursement equity amount is to be minimum 20% and this rate the may be minimum at
15% and 10% for 2nd time and more respectively.

3.13 Staff House Building Loan

One of the basic human needs is to have a house to live in. A house is an abode of peace and
happiness. Housing has now become an acute problem in the country, especially in the towns,
cities and metropolis. With their limited income, it has become almost impossible on the part of
the service holders and professionals to solve their housing problem. To meet this basic human
need of the clients; Southeast Bank Limited is committed to contribute to this end to provide a
peaceful and happy living. The Bank has introduced 'Staff House Building Loan with the
objective to ease and minimize the housing problem and assist the clients with limited income in
materializing their dream of becoming owner of houses.
To extend the benefits of the investment of the Bank to different sections of the staff.
To assist in solving the existing housing problem of the country.
To assist the staffs with fixed income to arrange for houses of their own.
To make investment facilities easily available under Islamic Shariah to those who do not
want to avail investment facilities from interest-based financial institutions.
Only the staffs of Southeast Bank Limited shall be eligible to apply for availing investment

Disbursement Procedure of Investment:

Bank will pay the sanctioned money through Pay-Order directly or through investment staff to
the supplier of construction materials/owner of the apartment/owner of the built house. However,
the following points shall be taken into consideration in disbursing the investment:

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In case of purchase of apartment/flat/built house, the staff shall have to deposit the equity
money in the Branch or produce documentary evidence in support of his investment up
to the satisfaction of the concerned Branch.
In case of construction of house on the staff's own land or for extension of the existing
house, the valuation of the Bank as regards staff's investment shall be considered final.
The staff shall have to submit to the Bank, the construction plan approved by the
competent authority and also the required permission to mortgage the property, where
The staff must execute all necessary documents including mortgage deed and complete
all necessary documentation formalities to avail the investment. Related documents of
mortgage, agreement of sale and other documents must be vetted by the penal lawyer of
the Bank.
Procedure for Application:
Interested persons shall have to apply in prescribed form of the Bank through the Branch of the
concerned area. The Bank shall sanction investment if the proposal is found acceptable after
examination of its viability and profitability. The Bank reserves the right to sanction or reject any
investment proposal.

3.14 Sources of Funds

The financial resources of the banks consist of ordinary capital resources comprising paid-up
capital and reserves, and funds rose through borrowings from the central bank and other banks
(inter-bank borrowing), and issue of Islamic financial instruments. The major part of their
operational funds is, however, derived from the different categories of deposits accepted on the
Islamic principles of Mudaraba and Al-Wadiah which are discussed in the previous chapter.

3.15 Credit Policy of SEBL

The credit policy of SEBL is a combination of certain accepted, time tested standards and other
dynamic factors dictated by the realities of changing situations in different market places.
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The accepted standards relate to safety, liquidity and profitability of the advance whereas the
dynamic factors relate to aspects such as the nature and extent of risk, interest or margin, credit
spread and credit dispersal. General guidelines about the conduct of advances are issued by Head
Office. In all business dealings, officers and employees must be guided by the principles of
honesty, integrity and safe-guard the interest of the depositors and shareholders of the Bank.
They should strictly adhere to the Banking Laws, Rules and Regulations of the Govt. of
Bangladesh, the instructions issued by the Bangladesh Bank/Head Office from time to time
which affect the business practices of the Bank. However, the key to safe, liquid, healthy and
profitable credit operation lies in the quality of judgment used by the officers making lending
decisions and their knowledge of the borrowers and the market place.
In formulating a credit judgment and making QUALITY Credit Decisions the lending officer
must be equipped with all information needed to evaluate a borrowers character, management
competence, capacity, ability to provide collaterals and external conditions which may affect his
ability in meeting financial obligations.

3.16 Discouraged Business Types

The Bank will discourage lending to following areas of business:

Military Equipment/Weapons Finance

Tobacco sector

Highly Leveraged Transactions (Maximum debt to equity ratio is 60:40 )

Finance of Speculative Investments (Not more than 40% of share value)

Logging, Mineral Extraction/Mining, or other activity that is Ethically Sensitive.

Lending to companies listed on CIB black list or known defaulters

Counterparties in countries subject to UN sanctions

Share Lending (Not more than 40% of share value or as per guidelines of Bangladesh


Taking an Equity Stake in Borrowers (except under Islamic Banking Operation)

Lending to Holding Companies

Bridge Loans relying on equity/debt issuance as a source of repayment.

3.17 Credit Evaluation Principles

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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. It should be clearly
understood, at the outset, that these factors are not inflexible and are given as guidelines for
protecting the advances. A prudent banker should always adhere to the following general
guidelines of lending funds to his customers, e.g.

Background, Character and ability of the Borrowers

Purpose of the facility
Nature of Security
National interest

3.18 Determinants for Selection of Borrower

The business of sanctioning advances whether secured or unsecured, is risky and needs special
attention. In the absence of a charge over any specific asset, the safety of advance depends upon
the honesty and integrity of the borrower as much as upon the worth of his tangible assets. The
banker has, therefore, to make proper enquiries about the borrower. This is more important in
Bangladesh where the incidence of default has become almost endemic.
Here I will try to discuss some determinants which help to select a good borrower but these will
not give the ultimate decision to select the borrower.
The Cs of Good & Bad Loan
Collection of Credit Information

3.18. 1 The Cs of Good & Bad Loan:

The Branch manager of SEBL try to judge the possible client based on some criteria. These
criteria are called the Cs of good and bad loans. These Cs are described below:

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The outcome of analyzing the character is to have overall idea about the integrity, experience,
and business sense of the borrower. Two variables; Interaction/interview, and Market Research
are used to analyze the character of the borrower.
For identifying the capital invested in the business can be disclosed using the following
a) Financial Statements
b) Receivable, Payable, statements to practically assess the business positions.
Capability of the borrower in running the business is highly emphasized in the time of selecting a
good borrower.
Make sure that there is a second way out of a credit, but do not allow that to drive the credit
Cash Flow
Cash flow is the vital factor that is used to identify whether the borrower will have enough cash
to repay the loan or advance.
Understanding the business and economic conditions can and will change after the loan is made.
Do not rely on past history to continue. Stay alert to what can go wrong in any loan.
Remember that documentation, follow-up and consistent monitoring are essential to high quality
loan portfolios.
Share credit objectives and credit decision making both vertically and laterally within the bank.
Make sure that you understand the risks, particularly the downside possibilities and that you
structure and price the loan consistently with that understanding.
Do not get swept away by what others are doing.
3.18.2 Collection of Credit Information:

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Credit information can be collected from the following sources:
Personal Interview
After having collected all the information from outside source, it is advisable to arrange for a
personal interview with the borrower. The interview should be conducted in a free and pleasant
Loan Application
When a loan proposal has to be processed a banker first studies the loan application made by the
borrower. A loan application usually contains information pertaining to the name of the concern,
constitution, nature and place of business, year of establishment, borrowers experience in the
line, particulars of assets and liabilities, purpose of advance, amount required, the period of
advance applied for, nature of security offered, sources of repayment etc.
Market Reports
Reports can be obtained from the various markets, particularly, from businessman carrying on
the same trade as the borrower does, some of whom may be his/her friends, others his/her rivals
or enemies.
Study of account
If the borrower is the customer of the bank, a study of the borrowers account and his/her past
dealings will throw light on the aspect of keeping up commitments, borrowing else-where etc.
which will assist a banker in judging about creditworthiness of the borrower.
Financial statement
The borrower should be requested to supply the latest statement in regard to his/her assets and
liabilities. It is always preferable to have audited statements for the last three years.
Credit Information Bureau (CIB) Report
The Credit Information Bureau (CIB) was created in on august 18, 1992. After establishment of
Credit Information Bureau (CIB) at Bangladesh Bank, collection of information about the
borrower has become easier. Bankers, of course, have their own ways to collect information
about the prospective borrower. The Credit Information Bureau (CIB) of Bangladesh Bank has
undertaken the task of collecting, collating and storing detailed credit information from
scheduled Banks and other financial institutions in its proper prospective so that these can be
exchanged among the scheduled banks, financial institutions and Bangladesh Bank for quick
processing of new loan proposals and re-scheduling of existing loans.
The information so far collected by CIB is:
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Debtors/Borrowers information


Owners information


Group / Affiliation information


Credit Exposure Matrix or Financial information


Third Party guarantors information

Other sources
Other sources of information about the borrower include press reports regarding purchase and
sales of property, auctions and decrees. Registration, revenue and municipal records can also be
referred to with advantage to verify the properties owned by the borrower and charges thereon, if

3.19 Documentation of the Loan

Before disbursement of loan, correct Documentation is essential for the safety of an advance.
Documentation is obtaining such agreement where all the terms and condition and securities are
written and signed by the borrower. It specifies rights and liabilities of both the banker and the
borrower. In documentation each type of advances requires a different set of documents. It also
differs with the nature of securities. The documents should be stamped according to the stamp
Act. There are no hard and fast rules of documentation and it varies from bank to bank.
Generally, following documents are taken in the case of a secured advance by Southeast Bank

Demand promissory note: Here the borrower promises to pay the loan as and when
demand by bank to repay the loan.


Letter of arrangement.


Letter of continuity.


Letter of hypothecation of goods and capital machinery.


Stock report: This report is used for OD and CC. In this report, 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.


Personal guarantee of the owners of the property.


Guarantee of all the directors of the company.

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Resolution of the board of directors to borrow fund to execute documents and completes


other formalities.


Letter of Revival.
Letter of lien for advance against FDR.

3.19.1 Objectives of Documentation against loan/advance:

It procures a written evidence of transaction.

The Document will help the bank to include protective clauses to safeguard the interest of
the bank.

It identifies the borrowers, co-borrowers & guarantors.

It defines the security.

It also identifies the nature of charge created by the bank.

3.19.2 Steps for Documentation:

The following steps are followed in case of taking documentation
1. Drafting of Documents.
2. Filling of Documents
3. Execution of Documents
4. Witnessing
5. Stamping
6. Registration
7. Signature Verification
8. Safe Keeping of Documents
3.19.3 When Documents become Invalid:
1. Alteration and Interlineations in documents: If it is done after execution.
2. Deed misled by the miss-statement.
3. If the party is blind or illiterate and if the documents is read falsely.
4. The party executing the documents in not competent
5. Improper stamping/under stamping
6. Want of attestation or witnessing, if necessary.
7. Failure to register with competent authority within specific time.
8. Ambiguous schedule of the offered security
9. Forgery, tempering deleting of documents.
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10. Deed executed by undue influence or forcefully.

Instrument executed in blank (amount. security, and liability) with a bad intention.

12. When documents have become time barred.

3.20 Security against Advances

Security means things deposited as a guarantee of an undertaking or loan, to be forfeited on case
of default. Also means documents as evidence of a loan, certificate of stock, bonds, etc. it is also
means to be an insurance against an emergency. The customer should own it.
3.20.1 Types of securities:
The different types of securities that may be offered to a banker are as follows:
a) Personal security
b) Tangible security
c) Primary security
d) Collateral security
Personal security: Guarantee of a respectable third party as personal security.
Tangible Security: That can be realized from the sale or transfer e.g. shares, stocks, land,
goods, life policy etc.
Primary Security: Main cover for an advance. Primary security is the Principal or direct
security against which loan is sanctioned. The banks get their charge noted over this security
in the form of pledge or hypothecation or mortgage.
Collateral security: A collateral security is an additional security taken for advance.
Collateral security may be two types:

Direct collateral security: Direct collateral security means security obtained from the
borrower himself to secure his own account.


Indirect collateral security: Indirect collateral security means any form of security
given by a third person to secure a customers account.

3.20.2 Attributes of a Good Security:

There are certain qualities which a good tangible security should posses. Some of the important
attributes are given below:
a) Ready Marketability
b) Easy Ascertainment of Value
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c) Stability of Value
d) Durability
e) Storability
f) Low cost of Labor and Supervision
g) Transportability
h) Ascertainment of Title
i) Easy transfer of title
j) Absence of contingent liability
k) Yield

3.21 Method of Creating Charges

Charge means Where in a transaction for value both parties evidence an intention that property
existing or future shall be made available as security for payment of a debt and that the creditors
shall have a present right to have it made available, there is a charge, even though the present
legal right which is contemplated can only be enforced at some future date, and though the
creditor gets no legal rights to property, either absolute or special or any legal right to possession
but only gets the right to have the security made available by an order of the court."
3.21.1 Types of Charges:
i) Fixed Charge: A charge is said to be fixed if it is made specially to cover definite and
ascertained assets of a permanent nature or assets capable of being ascertained and defined,
e.g., charge on Land and building or heavy machinery. It precludes the company from
dealing with the property charged' -without the consent of the shareholder.
ii) Floating Charges: It is charge on property which is constantly changing, e.g., stock-in trade.
The company can deal with such property in normal course of its business until it becomes
fixed on the happening of an event. Thus, it is a charge on the assets of the company in
3.21.2 Lien:
A lien is right of banker to hold the debtors property until the debt is discharged. Bank generally
retains the assets in his own custody but sometimes these goods are in the hands of third party
with lien marked. When it is in the hand of third party, the third party cannot discharge it without
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the permission of bank. Lien gives banker the right to retain the property not the right to sell.
Permission from the appropriate court is necessary. Lien can be made on moveable goods only
such as raw materials, finished goods, shares debentures etc.
Types of Lien:
There are two types of Lion:
Particular Lien: Particular lien retains the particular commodity by the creditor in respect of
particular debt.
General Lien: The characteristics of the general lien are

Right for a general balance

Does not have the right to sell the property
Simply the right to retain

3.21.3 Pledge:
Pledge is the "Bailment of goods as security for payment of a debt or performance of a
promise"(sec-172 of Cont. Act)
Bailment is the delivery of goods by one person to another for some purpose, under a contract
that the goods shall, when the purpose is accomplished, be returned or otherwise disposed of,
according to the direction of the persons delivering them.(sec-172 of Cont. Act)
Features of Pledge:

Goods bailed/pledged must be movable property,

Ownership remains with pledgor, (borrower) Possession retains with pledgee, (bank).

3.21.4 Hypothecation:
Hypothecation is a charge against property for an amount of debt where neither ownership nor
possession is passed to the creditor. Though the borrower is an actual physical possession but the
constructive possession remains with the Bank as per the deed of hypothecation. The borrower
holds the possession not in his own right as the owner of the goods but as the agent of the Bank.
Features of Hypothecation:

Charge against a property for an amount of debt.

Goods remain in the possession of the borrower.

Equitable charge to the bank under document Letter of credit.

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Borrower binds himself to give possession of the hypothecated goods to the Bank -when
called upon to do so.

It is a floating charge.

It is rather precarious.

3.21.5 Mortgage:
Mortgage is created on the immovable property like land, building, plant 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. Here mere deposit of title to goods is sufficient for creation of charge. Registration is not
required. In both the cases, the mortgage property is retained in the hand of borrower.


All financial activities involve a certain degree of risk and particularly, the financial institutions
of the modern era are engaged in various complex financial activities requiring them to put
proper attention to every detail.
3.22.1 Credit Assessment:
A thorough credit and risk assessment should be conducted prior to granting of loans, and at least
annually thereafter for all facilities. The results of this assessment should be presented in a Credit
Appraisal that originates from the Credit Officer/ relationship manager/ (RM) and is approved by
Head Office Credit Committee (HOCC)/Executive Committee of Directors/ Board of Directors.
The Credit Officer/RM should be the owner of the customer relationship, and must be held
responsible to ensure the accuracy of the entire credit application submitted for approval. The
Credit Officer/RMs must be familiar with the bank's Lending Guidelines and should conduct due
diligence on new borrowers, principals, and guarantors.
The credit officers/RM must know their customers and conduct due diligence on new borrowers,
principals, and guarantors to ensure such parties are in fact who they represent themselves to be
i. e. Know Your Customer (KYC).
Credit Appraisal should summarize the results of the RMs risk assessment and include, as a
minimum, the following details:

Amount and type of loan(s) proposed.

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Purpose of loan (s).

Result of financial analysis

Loan Structure (Tenor, Covenants, Repayment Schedule, Interest)

Security Arrangements

KYC Concept:
The credit officers/RM must know their customers and conduct due diligence on new borrowers,
principals, and guarantors to ensure such parties are in fact who they represent themselves to be
i.e. Know Your Customer (KYC).
At first the Banker-Customer relationship would be established through opening of CD/SB
accounts. Proper introduction, photographs of the account holders/ signatories, passports etc., all
the required papers as per Bank's policy are to be obtained during account opening. Physical
verification of the address is to be made. A declaration regarding approximate transaction in the
account is to be obtained during opening of account. Information regarding business pattern,
nature of business, volume of business, etc are be ascertained. At least three Cs, i.e., Character,
Capital & Capacity must be confirmed. Any suspicious-transaction must be timely addressed and
brought down to the notice of Head Office/ Bangladesh Bank as required and also appropriate
corrective measures to be taken as per the direction of Bank authority/ Bangladesh Bank.
3.22.2 Risk Management -Lending Decision:
To safeguard Banks interest over the entire period of the advance, a comprehensive view of the
capital, capacity, integrity of the borrower, adequacy, nature of security, compliance with all legal
formalities, completion of all documentation and finally a constant watch on the account is called
for. Where advances are granted against the guarantee of a third party, that guarantor must be
subjected to the same credit assessment as made for the principal borrower. The basis of security
valuations will be expert third party assessments, current market price and forced sale value. The
Bank has enlisted some surveyor firms/companies for valuation of assets of the borrower; the
credit officer must obtain the valuation report from the enlisted surveyors only for the valuation
of security.
While making lending decisions, particular attention should be given to the analysis of credit
proposals received from heavily leveraged companies and those dealing in non-essential
consumer goods, taking special care about their debt servicing abilities.
Emphasis should be given on the following sound credit principles:Page 45 of 82

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Present and future business potentiality for optimum deployment of Banks fund to increase

return on assets.

Preference for self liquidating QUALITY business.

Avoiding Marginal performers.

Risk dispersion is basic to sound credit principles and policies. Bank should be careful

about large and undue concentration of credit to industry, one obligor and common product line

Managing the amount, size, nature and soundness of one obligor exposures relative to the

size of the borrower and Banks position among his other lenders.

Personal guarantees of the principal partners or the Directors of the companies and where

necessary, subordination agreement should be obtained.

Recognize impact of fee income through Remittances, Letter of Credit, Letter of

Guarantee, Foreign Exchange business in enhancing return on assets.

The asset-conversion or transaction flow cycle and the net-trading cycle of the customer i.e.

the terms on which they conduct the business.

3.22.3 Basics of Credit Risk:
One of the most significance risks is exposed to is, what is generally termed as Credit Risk.
Since the largest slice of income generated by a bank and a major percentage of assets is subject
to this risk. It is obvious that prudent management of this risk is fundamental to the sustainability
of a bank. So, the following risk areas should be considered for analyzing a credit proposal:

Borrower Analysis (Management/Ownership/Corporate Structure Risk)

Industry Analysis (Business & Industry Risk)

Supplier/Buyer Analysis/Market Risk

Technological Risk

Interest Rate Risk

Foreign Exchange Risk

Cost Overrun Risk

Financial Analysis (Historical/Projected)

Account Conduct

Adherence to Lending Guidelines

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Mitigating Factors

Loan Structure


Name lending ( Relationship Assessment)

3.22.4 Credit Risk Grading (CRG):

The Credit Risk Grading (CRG) is a collective definition based on the pre-specified scale and
reflects the underlying credit-risk for a given exposure.
Credit risk grading is an important tool for credit risk management as it helps the Banks &
financial institutions to understand various dimensions of risk involved in different credit
transactions. The aggregation of such grading across the borrowers, activities and the lines of
business can provide better assessment of the quality of credit portfolio of a bank or a branch.
The credit risk grading system is vital to take decisions both at the pre-sanction stage as well as
post-sanction stage.

The Credit Risk Grading matrix allows application of uniform standards to credits to
ensure a common standardized approach to assess the quality of individual obligor, credit
portfolio of a unit, line of business, the branch or the Bank as a whole.

As evident, the CRG outputs would be relevant for individual credit selection, wherein
either a borrower or a particular exposure/facility is rated. The other decisions would be
related to pricing (credit-spread) and specific features of the credit facility. These would
largely constitute obligor level analysis.

Risk grading would also be relevant for surveillance and monitoring, internal MIS and
assessing the aggregate risk profile of a Bank. It is also relevant for portfolio level


The proposed CRG scale consists of 8 categories with Short names and Numbers are provided as
Table-4: Credit Risk Grading
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Short Name





Special Mention
Sub standard
Bad & Loss



Source: Credit Risk Grading Manual 2009.

A clear definition of the different categories of Credit Risk Grading is given as follows:
Superior - (SUP) 1:
Credit facilities, which are fully secured i.e. fully cash covered.
Credit facilities fully covered by government guarantee.
Credit facilities fully covered by the guarantee of a top tier international Bank.
Good - (GD) 2:
Strong repayment capacity of the borrower
The borrower has excellent liquidity and low leverage.
The company demonstrates consistently strong earnings and cash flow.
Borrower has well established, strong market share.
Very good management skill & expertise.
All security documentation should be in place.
Credit facilities fully covered by the guarantee of a top tier local Bank.
Aggregate Score of 85 or greater based on the Risk Grade Score Sheet.
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Acceptable - (ACCPT) 3:
These borrowers are not as strong as GOOD Grade borrowers, but still demonstrate
consistent earnings, cash flow and have a good track record.
Borrowers have adequate liquidity, cash flow and earnings.

Credit in this grade would normally be secured by acceptable collateral (1st charge over
inventory / receivables / equipment / property).

Acceptable management
Acceptable parent/sister company guarantee
Aggregate Score of 75-84 based on the Risk Grade Score Sheet.
Marginal /Watchlist - (MG/WL) 4:
This grade warrants greater attention due to conditions affecting the borrower, the industry or
the economic environment.
These borrowers have an above average risk due to strained liquidity, higher than normal
leverage, thin cash flow and/or inconsistent earnings.
Weaker business credit & early warning signals of emerging business credit detected.
The borrower incurs a loss
Loan repayments routinely fall past due
Account conduct is poor, or other untoward factors are present.
Credit requires attention
Aggregate Score of 65-74 based on the Risk Grade Score Sheet
Special Mention - (SM) 5:

This grade has potential weaknesses that deserve management's close attention. If left
uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the

Severe management problems exist.

Facilities should be downgraded to this grade if sustained deterioration in financial condition
is noted (consecutive losses, negative net worth, excessive leverage)
An Aggregate Score of 55-64 based on the Risk Grade Score Sheet.
Substandard - (SS) 6:
Financial condition is weak and capacity or inclination to repay is in doubt.
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These weaknesses jeopardize the full settlement of loans.
Bangladesh Bank criteria for sub-standard credit shall apply.
An Aggregate Score of 45-54 based on the Risk Grade Score Sheet
Doubtful - (DF) 7:
Full repayment of principal and interest is unlikely and the possibility of loss is extremely
However, due to specifically identifiable pending factors, such as litigation, liquidation
procedures or capital injection, the asset is not yet classified as Bad & Loss.
Bangladesh Bank criteria for doubtful credit shall apply.
An Aggregate Score of 35-44 based on the Risk Grade Score Sheet.
Bad & Loss - (BL) -8:
Credit of this grade has long outstanding with no progress in obtaining repayment or on the
verge of wind up/liquidation.
Prospect of recovery is poor and legal options have been pursued.
Bangladesh Bank criteria for bad & loss credit shall apply.
An Aggregate Score of less than 35 based on the Risk Grade Score Sheet.

3.23 Organizational Structure of Credit Management

The appropriate organizational structure must be in placed to support the adoption of the
guidelines which are discussed earlier. The key feature is the segregation of the Marketing/
Relationship Management function from Approval/Risk Management / Administrative functions.
The lending authority should be centralized in Head Office and currently the authority is vested
on the Head Office Credit Committee (HOCC) and beyond their approval authority the proposal
to be placed to the Executive Committee of Directors or Board of Directors. However, the
process of delegation of discretionary power to individual Executives for approval of credit
proposals is under active consideration of the Bank Management/Board of Directors.
A detailed organ gram is given in the next page:

Organogram of Credit Department

An organogram of Credit Department is given below:
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Board of Directors
President & Managing Director

Deputy Managing
Director - 1

Deputy Managing
Director 2
Head of Corporate/

Managers (RM)


Head of Credit
(Credit Appraisal
& Approval)

Head of Credit


compliance with
terms &
conditions of
approval, Issuing


Monitoring &

(CIB Report

BL accounts,
Dealing legal

Producing all
required by





Source: Credit Policy Guide 2009.

3.24 Approval Process

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Credit Management Procedure of SEBL

In approval process the Bank segregates its relationship Management / Marketing from the
approving authority. The existing approval authorities are Head of Branch (wherever applicable)
and Head Office Credit Committee, Executive Committee of Directors and Board of Directors.
The Bank Management/ Board of Directors of the Bank is actively considering for the Individual
Delegation Power to the Senior Level Executives at Head Office instead of Head Office Credit
Committee for effective credit risk management.
Before approving any facility the following guidelines are to be applied:

Before approving any facility the approval authority must ensure that the borrowers CIB

report as obtained is updated and clean.

Delegated approval authorities should be reviewed annually by MD/EC/Board.

The credit approval function has been separated- from the marketing/ relationship

management function.

Approvals are evidenced in writing (sanction letter). Approval records are kept in file with

the Credit Applications.

All credit risks must be authorized by Committee within the authority limit delegated to them

by the MD/EC/Board. The "pooling" or combining of authority limits is not permitted.

The aggregate exposure to any borrower or borrowing group is used to determine the

authority required.

Any credit proposal that does not comply with. Lending Guidelines, regardless of amount, is

referred to Head Office for Approval

MD/Head Office Credit Committee / Board as per the delegated power approve and monitor

any exceptional case.

Any breaches of lending authority to be reported to MD, Head of Internal Audit/ Control &

Compliance Department.

Flow Chart of Approval process

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A flow chart of approval process of loan is given below:















Source: Credit Policy Guide 2009, Southeast Bank Ltd.

3.24.1 Appeal Process:

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Any declined credit may be represented to the next higher authority for reassessment/approval.
However, there should be no appeal process beyond the President & Managing Director.
3.24.2 Time requirement:

At Branch level : Branch Authority must take decision within maximum of 3-5 days

At Head Office level: The Head Office Credit Committee/EC/Board should take decision

within maximum of:

3 -5 days for simple type of facility.
7-15 days for Project Loan.
15-30 days for loans under Syndication.

Sanction letter on approval, the sanction letter to be issued within 1-2 days time.

In case of Large Loans it must be reported to Bangladesh Bank.

In case of other specific loans like Directors loan, prior approval from Bangladesh Bank to

be obtained as per the requirements/ guidelines of Bangladesh Bank.

3.25 Disbursement Authority &Credit Administration

The Disbursement Authority has been separated from Approval Authority. The Disbursement
Authority is vested upon the Credit Administration department (CAD).
The Credit Administration function is critical in ensuring that proper documentation and
approvals are in place prior to the disbursement of loan facilities. The functions of Credit
Administration are 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.

Functions of Credit Administration Department (CAD):

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The functions of Credit Administration Department (CAD) are given below by using a Flow
Function of Credit Administration Flowchart
Functions of Credit Administration



Approval from

Obtaining Security
Documentation as
per approval


Conditions &


Returns to BB,
CIB Reporting,
default list

Completion of

Safely Storing
Loan/Security Documents

Monitoring of Past Due,

Limit, Expiry &
Documents Deficiency

Maintain BB Circulars
& ensure compliance
by all Depts.

Ensure adherence
to approved
terms & other

Periodic Review
of Documentation


Ensure all valuers,

lawyers, insurers are
approved, enlisted &
their performance are
reviewed periodically

Ensure Collateral is
Insured & Properly

Limit Creation &

Check List


Source: Credit Policy Guide 2009, Southeast Bank Ltd.

3.26 Disbursement Process

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Security documents are to be prepared in accordance with approval terms and to be legally
enforceable. Standard loan facility documentation is to be drafted/ prepared by the legal counsel.
Disbursements under loan facilities should be made when all security documentation is in place.
CIB report should reflect/include the name of all the lenders with facility, limit & outstanding.
All formalities regarding large loans & loans to Directors is guided by Bangladesh Bank
circulars & related section of Banking Companies Act. All Credit Approval terms must be met.
The check list certificate is to be signed by Credit In-charge and Head of Branch. The
disbursement authority is vested to the Head of Credit Administration Department upto Tk 5.00
crore, above which is vested to the President and Managing Director.

3.27 Procedure for Loan Sanction

Loan sanctioning is a comprehensive method that involves different steps.
Fig: Procedure for Loan Sanction









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To minimize credit losses, monitoring procedures and systems should be in place which will
provide an early indication of the deteriorating financial health of a borrower. The credit
monitoring process in Bank is vested on CAD. The Head of Credit Administration Department
will report the exceptional list of assets on daily basis on the following categories:
Past due (which are not paid or renewed at maturity (Grade E) principal or interest payments,
past due trade bills, account excesses, and breach 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 credit officer / RM
team for timely follow-up.
Timely corrective action is taken to address findings of any internal, external or regulator
All borrower relationships/loan facilities are reviewed and approved through the submission
of a Credit Application at least annually.
Credit Administration Department regularly will keep follow up on and corrective action takes in
a timely manner before the account deteriorates further.

3.29 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.
Early identification, prompt reporting and proactive management of Early Alert Accounts are
prime credit responsibilities of all Credit Officers / RMs and must be undertaken on a continuous
basis. An Early Alert report should be completed by the Credit Officers/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.

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3.30 Recovery and Follow up of Non Performing Loans (NPL) and Advances
Loans and advances in whatever form granted by the Bank to its clients are repayable either on
demand or at the expiry of fixed period or as per repayment schedule agreed upon while granting
the facilities. If loan is repayable on installment basis, default may be purely an oversight on the
part of borrower but, in other cases, it may be much more serious, giving the Bank the first
tangible evidence that the borrower is in financial difficulty. At this point the procedure for
dealing with potential loan losses comes into operation. The Branch Managers (HoBs) should,
therefore, keep a close and constant watch on all their loans and advances to ensure that timely
action is initiated in each case for adjustment of the account or its renewal, if it is decided to
continue the facility.
3.30.1 Recovery procedure of Southeast Bank:
When Southeast Bank is facing difficulties in getting repayment of advance, he takes the
following steps:
A. Exerting moral pressure
B. Notice for recalling advance
C. Legal Action
Exerting moral pressure: The banker will visit the borrowers place of business and find out the
causes of non-payment of the banks dues. If there is a guarantor, he is also called upon to adjust
the account or have it adjusted by the principal. In case of small borrower manger invite for tea
and try to say about dues.
Notice for recalling advance: In case the borrower does not adjust the account as desired, the
only course left open to the bank would be to send a notice by registered post to the last known
address of the borrower and guarantor, if any, preferably through a lawyer.
Legal Action: Legal proceedings are lengthy and time consuming as well as having an element
of negative publicity and as such every effort must be made to settle a defaulters outstanding out
of court. However, if situation compels the Bank to take legal action for recovery of stuck up
loans and advances, the same should be done with prior approval of Head Office.

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On expiry of a facility, the borrower may come forward with a proposal either for renewal of the
facility for a further period or for enhancement of the existing facilities. He may also agree to
offer additional stocks/ securities or even furnish a guarantor. The Head of Branch (Branch
Manager) should examine all such proposals and if he is satisfied the proposals should be sent to
Sanctioning Authority, duly supported by full blown credit analysis including report of
verification of Stocks/ status of Collateral Securities etc. as is done in case of fresh proposals.
The Head Office in turn will process the renewal/ enhancement proposal after verifying the
following factors:
Justification for renewal.
Reasons for non-payment/ adjustment of the loan.
Security aspect in terms of outstanding loan.
Credit worthiness of the client
On occasion it may be required to write off any loan/advance or portion thereof which may
become unrecoverable or represent a total or partial loss. Normally many of these loans /
advances would have already been placed in the Special Mention Loan. In 2003 Bangladesh
Bank has issued circular providing instruction / guidelines for write-off of loan (BRPD circular
no. 02 dated January 13, 2003). It is, however, the responsibility of the Head Office to decide
which loans/advances are to be written-off. All loans / advances written-off must be
recommended for prior approval of the Head Office and the recommendation must be
accompanied by a memo summarizing the circumstances necessitating the current write-offs as
well as recovery efforts to date. Under no circumstances should the fact that all or any portion of
a loan / advances that has been written-off be revealed to the borrower, nor should the borrower
be informed that the loan / advances is on a non-accrual basis. Despite the loans being written-off
the recovery process will be continued for those loan and advances.
In case of write-off / waiver the Banks policy is to realize the entire Principal amount along with
100% Interest taken into income account. Then the Bank may waive / unapplied interest / Write
off maximum 50% of interest as kept in interest suspense account against the respective client as
decided by the Board of Directors.
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Performance Indicators of Credit

Management Operations of the Bank

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4.1 Analysis of Loans & advances of Bandar Bazar Branch, Southeast Bank
A detailed analysis of loans and advances of Southeast Bank Ltd, Bandar Bazar Branch is given
4.1.1 The Scenario of Deposit at Bandar Bazar Branch (Last Five Years):
Table-5: Scenario of Deposit (Fig. in Tk.)
2010 (Upto June)
Source: Annual Report 2009 and Daily Affairs June 30, 2010, Bandar Bazar Branch, SEBL
The amount of deposit has been increased in each year. In 2006, the total amount of
deposit was approximately

Tk.45.86 Crore has raised up to above approximately

Tk.148.80 Crore by the year 2009 and approximately 82.52 crore in 2010 (June). So,
there is a positive increasing rate of the total deposit.
Graph-1: Scenario of Deposit

4.1.2 Amount of Various Kinds of Deposit at Bandar Bazar Branch,SEBL (Last Five Years):
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Table- 6: Amount of Various Kinds of Deposit (Fig. in Tk.)
2010 (Upto June)

Demand Deposit

Savings Deposit

Time Deposit

Source: Annual Report 2009 and Daily Affairs June 30, 2010, Bandar Bazar Branch, SEBL.
From the above table we can see that People are very interested about Time Deposit among
various Depository Schemes. The amount of time deposit is increasing year by year. It is
Noticeable that the amount of saving deposit was increased in a great amount by 2009. The
amount of demand deposit of this branch is not in satisfactory level compare to others.
Graph-2: Amount of Various Kinds of Deposit

4.1.3 Amount of Total Loans and Advances at Bandar Bazar Branch,SEBL (Last Five Years):
Table- 7: Amount of Total Loans and Advances (Fig. in Tk.)

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2010 (Upto June)
Source: Annual Report 2009 and Daily Affairs June 30, 2010, Bandar Bazar Branch, SEBL.
Total loan and advances of this branch was not satisfactory before 2009. In 2008, the total
amount of loan and advances was approximately 54 crore 58 lac. After that the amount of loan
and advances was grown year by year.
Graph-3: Total Loan and Advances

4.1.4 Various Types of Loans and Advances at Bandar Bazar Branch,SEBL (Last Five Years):
Table-8: Amount of various Types of Loans and Advances (Fig. in Tk.)



Hire Purchase






(Real estate)






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Source: Annual Report 2009 and Daily Affairs June 30, 2010, Bandar Bazar Branch, SEBL.
The most popular modes of disbursement of this branch are Bai-Muajjal and Hire purchase.
These two modes of disbursement contribute more than 50% of total disbursement for each
financial year, though the al-Quard-ul-Hasan and CCS has the great influence on this specified
area. In 2010 (Upto June), the highest disbursement of loan is occurred in the field of Hire
Purchase. In 2009, the most popular mode of Investment is Al-Quard-ul-Hasan. The highest
disbursement on Quard against Deposit has been occurred in 2009. In that period more than TK.
65 Crore has been financed to various economic sectors. This loan is mainly given for business
and other purposes. Again, in the year 2006, the amount of disbursement on Hire Purchase was
highest where more than TK. 22.45 crore had been financed to the real estate. Consumer credit
scheme is a type of loan which is mainly given to the professionals or public/private employee.
The amount of CCS is decreasing. Staff house building loan is a loan which is issued only to the
staffs of the branch at a lower interest rate for the purpose of house building for staff. The
volume of this mode of finance is also very much negligible.

Graph-4: Various Types of Loans

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4.1.5 Amount of Short Term, Mid Term and Long Term Loan at Bandar Bazar Branch,SEBL:
Table-9: Amount of Short Term, Mid Term and Long Term Loan (Fig. in Tk.)
Short-term Loan
Mid-term Loan
Long-term Loan
2010 (Upto June)
Source: Annual Report 2009 and Daily Affairs June 30, 2010, Bandar Bazar Branch, SEBL.
From the chart we can see that the amount of Long Term loan is so negligible in 2006 and 2007
compare to others. But it was increased in a noticeable amount by the year 2008, 2009 and 2010.
But the amounts of investment in Short Term Loans are varying from year to year. The amount of
Mid term Loan is in a good position by 2006 and 2007. But it was started to gradually decline by
2008. And by 2009, the amount of this loan was so poor that it was only more than 30.44 lac.
Graph-5: Amount of Short Term, Mid Term and Long Term Loans

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4.1.6 Percentage of Short Term, Mid Term and Long Term Loan at Bandar Bazar
Branch,SEBL (Last Five Years):
Table-10: Percentage of Short Term, Mid Term and Long Term Loan
Short-term Loan
Mid-term Loan
Long-term Loan
2010 (Upto June)
Source: Annual Report 2009 and Daily Affairs June 30, 2010, Bandar Bazar Branch, SEBL.
The percentage of short term loan on the basis of total loan is decreasing year by year. And last
year it was only 7.25%. The percentage of mid term loan was better by the year 2007 and it was
70% but last year it declined to 0.25% only. From the above table we can say that the branch
give more preference to long term loan from last 2 years. And in 2008, 60 percent of total loan
was long term loan.
Graph-6: Percentage of Short, Mid, Long Term Loan

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4.1.7 Area of Disbursement at Bandar Bazar Branch,SEBL (Last Five Years)::

Table-11: Disbursement in Different Sectors of this Branch (Fig. in Tk.)

Business/Trade Real Estate








Source: Annual Report 2009 and Daily Affairs June 30, 2010, Bandar Bazar Branch, SEBL.
The Southeast Bank Ltd, Bandar Bazar Branch is financing most of its disbursement on the
communication, real estate and for the business/trade sectors. In these three sectors this branch
investing more than 90% of its total loans and advances. Consumer loan is another important
segment where this branch is also keeping a significant role on the total economy. This branch is
also financing on staff loan sector which has an influence on its total disbursements.

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Graph-7: Disbursement in Different Sectors

4.1.8 Provisioning:
Specific Provision:
Head office credit division prepares a list of credit accounts, which are considered to be totally or










Rate of Provisioning:
Southeast Bank Limited in the time of loan provisioning to get the real picture of the income
mainly follows the Bangladesh Bank guideline. The rate of provisioning used in SEBL is
summarized in the following table.

Table-12: Rate of Provisioning


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General Provision On:
Unclassified Loans and Advances
Small Enterprise
Consumer Finance for House Building Loan and Loans for Professional 2%
Other Consumer finance
Specific Provision On:
Special Mention Account
Sub-Standard Loans and Advances
Doubtful Loans and Advances
Bad / Loss


Source: Annual Report 2009 and Daily Affairs June 30, 2010, Bandar Bazar Branch, SEBL.
Graph-8: Provision of Loans

4.1.9 Recovery of Loan at Bandar Bazar Branch,SEBL (Last Five Years):

Table- 13: Recovery of Loan (Fig. in Tk.)

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2010 (Upto June)
Source: Annual Report 2009 and Daily Affairs June 30, 2010, Bandar Bazar Branch, SEBL.
The recovery of loan of this branch was not in a satisfactory level before the period 2008. In
2006, the amount of total recovery loan was only TK.15.10 crore. After that the amount of
recovery was decreasing in next financial year though the trend was very slow after 2006. In the
year 2008, the amount of recovery was increased and the total recovery of this branch was more
than TK. 28.74 crore. But in 2009 the amount of total recovery again decreased and the figure
stood only 5.69 crore.
Graph-9: Recovery of Loan

4.1.10 Classified Loans of Bandar Bazar Branch, Southease Bank Ltd (Last Five Years):
Table- 14: Total Classified Loans (Fig. in Tk.)

Mention 1,51,000

Sub Standard





2010 (Upto June)






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2,80,000 1,44,000 61,04,000 2,16,90,000 3,18,11,000
Source: Annual Report 2009 and Daily Affairs June 30, 2010, Bandar Bazar Branch, SEBL.
The amount of classified loan increased in the year 2009.From the Chart, it has been seen that
classified loan was decreased from the period of 2006 to 2007.But in 2008 and 20099 it was
Graph-10: Total Classified Loans

4.1.11 Amount of Profit at Bandar Bazar Branch, Southeast Bank Ltd ( Last Five Years):
Table-15: Amount of Profit (Fig. in Tk.)
2010 (Upto June)
Source: Annual Report 2009 and Daily Affairs June 30, 2010, Bandar Bazar Branch, SEBL.

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The amount of profit of this branch is in a satisfactory level each year then the other branches of
Southeast Bank Ltd of Sylhet. The amount of Profit is higher in 2009 and it was more than 2.83
crore taka. And by this year it will also increase.
Graph -11: Yearly Amount of Profit

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4.2. Ratio analysis of Loans & advances of Bandar Bazar Branch, Southeast Bank Ltd
4.2.1 Percentage of Disbursements on Deposits at Bandar Bazar Branch,SEBL:
Table-16: Percentage of Disbursements on Deposits

Total Deposits


Percentage of Disbursements on

148,79,94,903 118,94,42,233
2010 (Upto June) 82,51,62,221
Source: Annual Report 2009 and Daily Affairs June 30, 2010, Bandar Bazar Branch, SEBL.
The percentage of disbursements on deposits is calculated by the following formula:
% of disbursements on deposits = Total Disbursements/Total Deposits
From the above table we see that percentage of disbursements was 76% in 2006. In 2007 it was
increased from to 94%. Again the percentage was declined by the period 2009. But it will
increase by 2010.
Graph -12: Percentage of Disbursements on Deposits

4.2.2 Disbursement and Recovery at Bandar Bazar Branch,SEBL (Last Five Years):
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Table-17: Recovery Ratio on Total Disbursements
Total Disbursements Total Recovery
2010 (Upto June)
Source: Annual Report 2009 and Daily Affairs June 30, 2010, Bandar Bazar Branch, SEBL.
From the table, we see that the ratio for disbursement and recovery was in an increasing trend till
2008. But it was decline in 2009.In 2007, the ratio was only 24%, but this ratio comes to 53% in
2008. In 2009, the ratio for disbursement and recovery declined to only 5%.
[Ratio :( Recovery of Loan/Total Loan)*100]
Graph-13: Disbursement and Recovery

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4.3 SWOT Analysis of Southeast Bank Ltd, Bandar Bazar Branch
SWOT analysis, is a strategic planning tool to evaluate the Strengths, Weaknesses, Opportunities
and Threats involved in a project or in a business venture. It involves specifying the objective of
the project or business venture and identifying the internal and external factors that are favorable
and unfavorable to achieve the objectives. The aim of the SWOT analysis is to identify the key
internal factors (strengths, weaknesses) which are controllable and external factors
(opportunities, threats) which are uncontrollable.
Strengths are attributes of the organization that are helpful to achieve the organizational
objectives. Strength of the credit department of Southeast Bank Limited, Bandar Bazar Branch
are as follows:

Strictly follow ethical banking practices.

It establishes participatory banking instead of banking on debtor-creditor relationship.
It invests on profit and risk sharing basis.
Experienced credit management team.
Providing loan in corporate sector.
Especial credit monitoring team.
Presence of Consumer credit Scheme.
Provide fair treatment to all customers, depositors and borrowers without any

Provide speedy customer service at a very competitive cost.
Deal with customers in a transparent manner and without any hidden cost.
Maintain strict secrecy of customer account.
Deal quickly with complaints received from customers.
There is no discrimination on grounds of religion, sex or race at any stage.

Weaknesses are attributes of the organization that are harmful of to achieve the organizations
objectives. Some weaknesses of the credit department of Southeast Bank Limited, Bandar Bazar
Branch are as follows:
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The management of this Branch says that they conduct interest-free banking but in actual the
Branch has not abolished interest. They only changed the nomenclature of their transactions.

It has not yet been successful in devising an interest-free mechanism to place their funds.

According to the Bangladesh Bank guidelines the spread between the FDR rate and loan
against FDR rate should not more than 3%. But the bank some times charge more than that
spread rate for loan.
Lack of employees in credit department.
SEBL, Bandar Bazar do not have the necessary expertise and trained manpower to appraise,
monitor, evaluate and audit the projects they are required to finance.
Higher interest rate in case of consumer loan.
Guidelines provided by Bangladesh Bank do not followed properly.
Internal conditions those are helpful to achieve organizations objectives. Some opportunities of
the credit department of Southeast Bank are as follows:
The population of Bangladesh is continuously increasing at a rate of 7.3% per annum. The
countrys growing population is gradually and increasingly learning to adaptation of
consumer finance. Lower interest rate for financing consumer can attract a large number of
Southeast Bank Limited has the chance to capture student segment of the market by giving
them customized service for both saving and credit scheme.
As Sylhet started its journey as Metropolitan City that is why there is a huge opportunity of
industrial advance.
It can attract more clients by lowering its interest rate in case of consumer loan.

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It can provide Car Loan at lower interest rate than other to attract people.
External factor can work as barrier to achieve the organization objectives. Some threats of
Southeast Bank are as follows:
Lower interest rate in case of consumer credit scheme at Agrani Bank Limited attract a huge
number of clients who need consumer loan. Southeast Bank provides consumer loan at 25%
interest rate whereas Agrani Bank Limited provides it at 14% only.

Some Banks offering more attractable rate on deposits than Southeast Bank in some cases
which reduce the deposit of bank as a result bank cannot provide more loan.

Numbers of domestic private banks and foreign banks are increasing day by day which are
providing efficient modern services and they continuously innovating new product.
Foreign banks are occupying markets by various attractive advertising and promotional
Restless political condition in Bangladesh becomes a serious threat for Banks.
Current law and order situation is not positive for the investment part.
Pessimistic representation to the government and Bangladesh Bank.

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5.1 Recommendation
Southeast Bank Limited is a second generation private commercial bank in the country with
commendable operating performance. Some recommendations regarding banks betterment are
described below. The recommendations given below are not decisions; rather they are only
suggestions to improve the performance in order to fulfill the customer satisfaction so that clients

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give more preference to Southeast Bank Limited. The recommendations are made on the basis of
survey findings and analysis and these are:
1. To fulfill the vision of this Bank, it should grants investment portfolio to new
entrepreneurs /new businessmen, new companies etc.
2. The process of loan proceeds takes more than a month which some times makes the
borrower helpless to get the loan on due time. Bank should more focus on agricultural
and industrial credit.
3. It needs to slightly modify their savings scheme to attain superior customer satisfaction.
In this case, they should consider maximizing customer profitability alongside the banks.
4. It should recruit more employees for credit department.
5. Bank should make proper and exhaustive documentation before disbursement and to
ensure proper supervision, monitoring and follow up of each credit.
6. The Bank should provide training to the employees so that they become more expertise in
Islamic Investment System.
7. It should follow the guidelines provided by Bangladesh Bank.
8. If possible, up dated software should be used by SEBL giving up conventional PC Bank
9. By inventing formatting system, manual work of writing voucher can be reduced so that
time will be saved.
10. Emphasis on corporate social responsibility is also necessary. Sponsorship in different
social programs can flourish bank image.
11. Southeast Bank should do aggressive advertising and promotional activities to get a broad
geographic coverage.
12. To gain success in the programs like "Poverty Alleviation and "Self Reliant" especially
in rural areas, this bank should provides investment facilities on the basis of individual.

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6.1 Conclusion:
A banker can not sleep well with bad debts in his portfolio. The failure of commercial banks
occurs mainly due to bad loans, which occurs due to inefficient management of the loans and
advances portfolio. Therefore any banks must be extremely cautious about its lending portfolio
and credit policy. So far Southeast Bank Limited has been able to manage its credit portfolio
skillfully and kept the classified loan at a very lower rate.
All things around us are changing at an accelerating rate. Today is not like yesterday and
tomorrow will be different from today. The Credit Management system that may seem fit today
but may not work tomorrow. So, by taking consideration the fast changing, dynamic global
economy and the increasing pressure of globalization, liberalization, consolidation and
disintermediation, it is essential that Southeast Bank limited has a robust credit risk management
policies and procedures that are sensitive to these changes.
Southeast Bank Limited is a private sector bank having a small market share of the industry.
Although it is a second generation bank facing government deposit restrictions, it has all the
potentials to penetrate in the market. If the weakness are addressed appropriately and
opportunities are explored keeping in view the threats behind with a stable and adroit
management having regard to appropriate corporate governance and modern automation
technology, it is expected that Southeast Bank advance up in the ladder of success in the coming

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Annual Reports of Southeast Bank Ltd. (2009)

Prospectus, Leaflet, Brochure of Southeast Bank Limited.

Banking Operational Manual.

Credit Risk Grading Manual (November 2005), published by Bangladesh Bank.

Credit Policy Guide-Guidelines for Credit Risk Management of Southeast Bank Limited.

Daily Affairs of Southeast Bank Limited, Bandar Bazar Branch.

Islamic Banking and Finance- written by Sk. Harun-ar-Rashid and Sk. Nazibul Isalm
(published on October 02,2005)


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