An Internship Report On

Credit Management process of commercial banks in Bangladesh

A Study On Jamuna Bank Limited

An Internship report submitted to the course instructor as a partial
fulfillment of the requirements of the BBA Program.

Supervised By:
Mr. Dhiman Barua
Lecturer
Faculty of Business Administration
BGC Trust University Bangladesh

Submitted By:
Md. Nazmul Kabir
ID: 1321190
BBA Program, 21st Batch
Faculty of Business Administration
BGC Trust University Bangladesh

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 Faculty of Business Administration
BGC Trust University Bangladesh

Submission date: Dec, 21, 2013

LETTER OF SUBMISSION
December 21, 2013

To

Mr. Dhiman Barua

Lecturer
Faculty of Business Administration
BGC Trust University Bangladesh

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Chandanish, Chittagong, Bangladesh.

Subject: Submission of internship report.

Dear Sir,
I am very glad to submit you my internship report on
“ Credit Operation of Jamuna Bank Limited” I have
concentrated my all endeavor to conduct the practical
orientation program from November 01, 2016 to December
29, 2016 the most realistic & professional way.

I hope that you would be kind enough to receive this report.

Sincerely yours
Md. Nazmul Kabir
ID: 1321190
BBA Program, 21st Batch
Faculty of Business Administration
BGC Trust University Bangladesh
Chandanish, Chittagong, Bangladesh.

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 CERTIFICATE OF SUPERVISOR

This is to certify that, Md. Nazmul Kabir,student of BBA,ID:

1321190, 21st Batch,Facultyof Business Administration,BGC Trust
University Bangladesh,Chandanish, Chittagong, Bangladesh,has
completed his Internship Program entitled "Credit Operation of
Jamuna Bank Limited”. He has completed this internship
satisfactorily under my supervision as the partial fulfillment for
the award of BBA degree.He has done his job according to my
supervision and guidance. He has tried his best to do this
successfully. I think his study will help him in the future to build
up his career.

I wish him every success in life.

Mr. Dhiman Barua

Lecturer
Faculty of Business Administration
BGC Trust University Bangladesh
Chandanish, Chittagong, Bangladesh.

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 DECLARATION

I hereby declare that the Internship Report on "Credit Operation of

Jamuna Bank Limited.” includes the results of my own research
works, pursued under the supervision of Mr. Dhiman Barua
Lecturer, Faculty of Business Administration, BGC Trust
University Bangladesh, Chandanish, Chittagong, Bangladesh.

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I further affirm that the work presented in this report is original and
no part or whole of this report has been submitted to, in any form,
any other University or Institution for any degree
or any other purpose.

Md. Nazmul Kabir

ID: 1321190
BBA Program, 21st Batch
Faculty of Business Administration
BGC Trust University Bangladesh
Chandanish, Chittagong, Bangladesh.

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 Acknowledgment

Internship Program is a complement of the subject Management as it

is provide practical knowledge to the outgoing students of BBA, as
they are going to participate in Management successfully of
organization in Globalization.

I express my deep gratefulness to the almighty “Allah” for giving me

every assistance in the way of life.

I am highly grateful and indebted to the employees of Bahaddarht

Branch, Jamuna Bank Limited- Md.Jamil Uddin Akhter,Branch
Manager, Md. Shahed Ali Shikdar, Operation Manager, Amit
Barua(FAVP), Md. Taslim Haider(Executive Officer), Md. Shah
Alam(Executive Officer), Md. Belal Uddin(Officer),Md. Abdullah Al
Noman((officer) & others for their excellent guidance in establishing
this report. Their instruction and encouraging attitude and artistic
technique of giving knowledge helped me is an outstanding way to
worked out this difficult task. I have faced various kinds of problem
from beginning to end. I couldn’t solve all those problems without
the help of their most cordial instruction, intellect advice and
sympathy. They gave me valuable suggestion, note of how to prepare
the report, its rule and method and analyzing system.

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I am grateful to the authors of those books from where I have
received necessary help in preparing this report.

My special gratitude goes to my honorable internship supervisor

Dhiman Barua, Lecturer, Faculty of business Administration,

BGC Trust University Bangladesh, who motivated me to choose

this topic. He helped me in every step of my internship & report
writing by giving proper guidance, advice, & inspiration.

Executive Summery

Internship is must to fulfill academic requirement. This internship report is

based on practical experience at the Jamuna Bank Limited, Bahaddarhat
Branch,Bahaddarhat, Chittagong. This study selected five major objectives
i.e. to know about the organizational framework of the Jamuna Bank Ltd., to
present an overview of Jamuna Bank Ltd., to acquire the knowledge about
the credit system of Jamuna Bank Ltd. during the study period, to find out
the SWOT Mix of the Jamuna Bank Ltd., to enhance the recommendation to
remove the problems of Jamuna Bank Ltd. during the study period. In the

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beginning of this study contains some description about the banking sector
and perspective of the Jamuna Bank Limited. I collected both primary &
secondary information for fulfill this study. The next part is Historical
Background of the Bank. Their corporate mission and vision. How they
exercise their corporate and social responsibility. Then a brief description
about the board of director and key management profile. The performance of
the last few year and growth was well satisfactory. The next part is described
about the product & services of the Jamuna Bank Limited. Jamuna Bank
Limited offers a diversified asset and liability product. Those are broadly
described in credit operation in two chapters. For the sanction of loan and
some other expenditure, authorization from the Head Office is required. A
target of profit is given by the Head Office and the branch is trying it best to
achieve it. During my internship program in this branch I have found some
lacings. I found that the credit policy is required for better performance of
the bank. After that I also found that the some problems of Jamuna Bank
Ltd. under the study period. It is to be mentioned that this is from my point
of view. I have also pointed out some recommendations which I believe to
be the best form to solving that the problems and Jamuna Bank Ltd. will be
better perform in future and bank will be a great position among the all
banks in Bangladesh. Finally I observed that Jamuna Bank Ltd. will ensure
the better services to the people of Bangladesh and they will be more
contribution on development of economy of Bangladesh.

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 Table of contents

Particulars Page No.

Executive Summery

Chapter 1 1-3

Introduction

1.1 Prelude 1
1.2 Origin of the Report 2
1.3 Review of the Literature 2

1.4 Objectives of the Study 2

1.5 Methodology of the Study: 3 3

1.6 Scope of the Study 3

1.7. Limitation of the Study 3

Chapter- 2 5-12
Overview of Jamuna Bank Ltd
2.1 Location 5

2.2 Historical background of the company 5

2.3 Strategies of Jamuna Bank Ltd. 6

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2.4 Objectives of Jamuna Bank Ltd. 7

2.5 Offers of Jamuna Bank Ltd. 7

2.6 Board of Directors 8

2.7 Management 8

2.8 Products & Services 10

2.9 Depository Product 10

2.10 Loan Product 10

2.11 Service 10 10

2.12 Asset Products 11 11

2.13 Corporate Banking 11 11

2.14 Personal Banking Division 12 12

Chapter 3 13-36
LITERATURE REVIEW 13

3.1 Introduction 13

3.1.1 Definition of Credit Management 14

3.1.2 Process of Credit Management 14
3.1.3 Types of Credit 15

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3.1.4 Credit Policies and procedures 16
3.1.5 Credit analysis 17
3.1.6 Credit information 20
3.1.7 Credit process 22
3.1.7.1 Business Development and credit analysis 22
3.1.7.2 Credit execution and administration 22
3.1.7.3 Credit review 20 23

3.1.8 Credit Approval and Implementation 20 23

3.1.9 Credit Collection techniques 22 25

3.1.10 Financial analysis 23 26

3.1.11 Criteria for choosing a Bank 24 27

3.1.12 Default problem 26 29

3.1.13 Principles formulated by the bases committee 28 31

3.1.14 Common Sources of major credit problem 30 32

3.2 Empirical studies 34 36

Chapter-4 37-54
Credit Operation Of Jamuna Bank Ltd

4.1 Credit Facilities of Jamuna Bank Ltd

4.2 Loans & Advances 37
4.3 Industrial Credit 37

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4.4 Commercial Credit 38
4.5 Micro Credit 38
4.6 Lending Criteria 38
4.7 Credit Operating System 39
4.8 Credit Risk Assessment 42
4.9 Sector Wise Disbursment of Loans in Jamuna Bank Ltd 42
4.10 Comparative Recovery Rate of Loans 43
4.11.Disbursment of Loan And Net Interest Income from Loan of JBL for 43
the
last five years.(in Million)

4.12. How Jamuna bank recover their Loan 43

4.13. Recovery Patterns of Loan & Advances 44
4.14. Problems in Loan Recovery 44
4.15. Types of loan of Jamuna Bank Limited: 47
4.16. Mission Statement of the Credit Department 49
4.17. Credit Principles 50
4.18. Processing of Credit Approval 51
4.19. Function of Credit Risk Grading 51
4.20. Computation of Credit Risk Grading 54
Chapter-5 54-67

Findings and Analysis

5.1 Financial Analysis 54

5.2 Trend Analysis 56
5.3 Productivity Analysis 61
5.4 Graphical Presentation 62

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 5.5 Findings 66
5.7 SWOT Analysis 67
Chapter-6 69-72
Conclusion & Recommendation
8.1 Recommendation 69
8.2 Conclusion 70
Abbreviations 51 71
References 52 72

Chapter 1
Introduction
1.1 Prelude
We can simply say that Bank is financial organization that deals with money. But it is
the precise most definition about bank. In modern age it is impossible to think a country
without bank. Banks play diversified role in an economy. The most important task that is
done by a bank is building of capital. That is the key factor of the development of an
economy. An Industrialized nation’s build their industrial sector with the help of banking
sector. The growth of the economy also depends on the performance of the banking
sector. Banks secure money of the society. Government takes various monetary policies.
These policies are implemented with the help of banking sector. It is impossible to do
foreign tradewithout the help of bank. Banks provide services that help the business
sector a lot to carry on the business. For example, giving guarantee, different types of
certificate, expertise advice to business people. Banks also help to establish good faith
among businesspersons.
Jamuna Bank Limited (JBL) is a Banking Company registered under the Companies

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Act, 1994 with its Head Office at Chini Shilpa Bhaban, 3 Dilkusha C/A, Dhaka-1000.
The Bank started its operation from 3rd June 2001.
Jamuna Bank Ltd. is a third generation bank in Bangladesh. It is playing an important
role to develop the business sector. The growth of this bank is very good. Its motto is to
provide a prompt and quick service to the clients. Jamuna Bank Ltd. has implemented
well structured online banking systems that make it easier to provide prompt services to
the customer.
This study has been prepared in the light of practical as well as theoretical knowledge.
Also it is prepared under the guidance and supervision of the core teacher. During the
internship program I have got a good idea about the bank and that is depicted in the
report.
1.2 Origin of the Report.
The BBA (Bachelor’s of Business Administration) internship program is required
course for the students who are graduating from the School of Business Administration,
BGC Trust University Bangladesh. It is a four credits hour course with the duration of
{twelve weeks}. Students who have completed all the required courses are eligible to for
this course. In this internship program, I was attached to do my internship by rotation to
all departments of Jamuna Bank Limited, Bahaddarhat Branch, Bepari market,
Bahaddarhat, Chittagong. Both the academic and the organizational supervisor assigned
me on this project. The report is on “Credit Operation of Jamuna Bank Limited”.

1.3 Review of the Literature.

The profit of a commercial bank depends primarily on the utilization of its fund. And
the making of loan and advance is always profitable to a bank. As the bank mobilizes
savingsfrom the general people in the form of deposit, the most important task of it is to
disburse thesaid deposit as loan or advance to the mass people for the development of
commercial,industrial, who are in need of fund for investment.
A great bulk of problem loans and their ever deepen thrust on Bank credit has brought

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a gloomy situation in the cost of fund. Loan Default culture has started in Bangladesh
mainlyafter the nationalization of banks. However, it was enhanced by the availability of
hugeamount of credit in the name of developing private and industrial sector. Industry
set-up wasshown as sick industry to get additional loan and relieve from interest.
Jamuna Bank Ltd. was established to provide term loan and other financial assistance
to accelerate the pace of development to small industry of Bangladesh, is also prone to
suchdisappointing features of problem loans. The report mainly focuses on the credit
operatingsystem, their credit policies and procedures of loan supervision and recovery,
especially theirclassified loans.
1.4 Objectives of the Study
Primary objective: Primary objective is to learn the real world experience because I
have gathered theoretical knowledge for BBA course and try to match real world
experience with the theoretical knowledge.
Secondary Objective:
To acquire the knowledge about the credit system of Jamuna Bank Ltd.
To know about the organizational framework of the Jamuna Bank Ltd.
To highlight an overview of Jamuna Bank Ltd. during 2014-2015.
To find out the SWOT Mix of the Jamuna Bank Ltd.
To find out the Productivity & Trend position of JBL during 2011-2015.
To enhance the recommendation to remove the problems of Jamuna Bank Ltd.
1.5 Methodology of the Study:
 This report is the reflection of three months internship program at the Jamuna Bank
Limited at Bahaddarhat branch, Bahaddarhat, Chittagong. This study covered by both
the primary as well as the secondary form of data was used to prepare the report. . To
prepare this internship report I have collected data and information both from primary
andsecondary sources. I had observed the operations and worked with the officers at the
same time. I had interviewed the JBL officials for getting more information.

 For the analysis part, data have been collected from different statements and the

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 annual report of the bank.
Sources of Information
The data collection method of study consists of both of primary and secondary
sources. But majority of the information was collected from secondary sources.
Primary sources:
 Face to face conversation with the officer.
 Direct observations.
 Face to face conversation with the client.
The secondary sources of information are given below:
 Annul report of the Jamuna Bank Limited during 2014-2015.
 Outlets of Bangladesh Institute of Bank Management.
 Website of the Jamuna Bank Limited.
 Different publications of the Jamuna Bank Limited.
 Theoretical books relating banking sector.
1.6 Scope of the Study
The report commences with the outline of the organization in focus, presenting the
mission and vision, individual department job responsibilities, Credit Risk Analysis relate
dissues are discussed in detail along with their results and possibilities. In this report is all
the aspect of credit risk analysis has been discussed detailed by those the management
can take decisions regarding modifying their plans for granting loans and can strengthen
the relationship with the business environment as well as with the stakeholders and
clients.
1.7. Limitation of the Study
Three months is not enough to know about commercial banking operation through I have
been received maximum assistance from the every individual of the JBL Bahaddarhat
Branch. Definitely, I could not produce an outstanding report for the time limitations.
Due to the time limit, the scope and dimension of the study has been curtailed.

The Term paper is likely to have following limitations:

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Since the ideal size of data could not be taken, suggested operating process may not
be useful without appropriate modifications.
Due to shortage of time, the accuracy of information may not have been completely
perfect.
The Operating Process is a theoretical suggestion. Only a practical application of this
may justify its effectiveness that could not be done due to time limitation.
Lack of comprehension of the respondents was the major problem that created many
confusions regarding verification of conceptual question.
Confidentiality of data was another important barrier that was faced during the
conduct of this study. Every organization has their own secrecy that is not revealed
to others. While collecting data on JBL, personnel did not disclose enough information
for the sake of confidentiality of the organization.
Rush hours and business was another reason that acts as an obstacle while gathering
data.
Observing and analyzing the broad performances of a Bank and one of its Branches,
moreover when it is an AD branch, are not an easy job by this short duration of time (only
three months).

However, omitting this, the report will help us understand the Credit Operation departments of
the bank.

Chapter- 2

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 Overview of Jamuna Bank Ltd

Jamuna Bank Limited (JBL) provides commercial banking services in the Bangladesh.
The bank primarily engages in corporate banking, trade finance, project finance, retail
banking, small enterprise finance, consumer finance, and syndication. Its range of service
offerings include cash management services, payments and clearings, safe deposit
locker services, employee benefits, collection services, treasury services, asset
management, services and SWIFT for foreign trade. Jamuna Bank has an investment of
390 million taka in its business.

2.1 Location
The Registered office & corporate Head Office at Chini Shilpa Bhaban, 3 Dilkusha
C/A, Dhaka-1000. Its branches are situated at all the major cities of the country except 09
which are situated at rural area. The number of bank branches stood at 83.

2.2 Historical background of the company

Jamuna Bank Limited (JBL) is a Banking Company registered under the Companies
Act, 1994 with its Head Office at Chini Shilpa Bhaban, 3, Dilkusha C/A, Dhaka-1000.
The Bank started its operation from 3rd June 2001.
Jamuna Bank Limited is a highly capitalized new generation Bank with an Authorized
Capital and Paid-up Capital of Tk.10000 million and Tk.4488 million respectively. The
Paidup Capital has been raised to 840 million and the total equity of the bank stands at
8325 million as on December 31, 2012. The Bank undertakes all types of banking
transactions to support the development of trade and commerce of the country. JBL's
services are also available for the entrepreneurs to set up new ventures and BMRE of
industrial units. Jamuna Bank Ltd. the only Bengali named new generation private
commercial bank was established by a group of winning local entrepreneurs conceiving
an idea of creating a model banking institution with different outlook to offer the valued
customers, a comprehensive range of financial services and innovative products for

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sustainable mutual growth and prosperity. The sponsors are reputed personalities in the
filed of trade, commerce and industries.
The Bank is being managed and operated by a group of highly educated and
professional team with diversified experience in finance and banking. The Management
of the bank constantly focuses on understanding and anticipating customers needs. The
scenario of banking business is changing day by day, so the bank's responsibility is to
device strategy and new products to cope with the changing environment. Jamuna Bank
Ltd. has already achieved tremendous progress within only twelve years. The bank has
already ranked at top of the quality service providers & is known for its reputation.
Jamuna Bank Ltd. offers different types of Corporate and Personal Banking Services
involving all segments of the society within the purview of rules and regulations laid
down by the Central Bank and other regulatory authorities. As per the provisions of
Bangladesh Bank license, the Bank has offered initially its shares to public by Pre – IPO
and subsequently sold shares to the public through IPO in the year 2004. The shares of
the Bank are listed with both Dhaka Stock Exchange Ltd. & Chittagong Stock Exchange
Ltd.
Our Vision:
To become a leading banking institution by playing a significant role in the development
of the country.
Our Mission:
The bank is committed to satisfy diverse need of its customers through an array of
products at a competitive price by using appropriate technology and providing timely
service so that a sustainable growth, reasonable return and contribution to the
development of the country can be ensure with a motivated and professional workforce.
2.3 Strategies of Jamuna Bank Ltd.
Financing establishment of small units of industries and business and facilitate their
growth Small Balance Sheet size composed of quality assets.
To manage and operate the Bank in the most efficient manner to enhance financial
performance and to control cost of fund

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To strive for customer satisfaction through quality control and delivery of timely
services
To identify customers' credit and other banking needs and monitor their perception
towards our performance in meeting those requirements.
To review and update policies, procedures and practices to enhance the ability to
extend better service to customers.
To train and develop all employees and provide them adequate resources so that
customers' needs can be reasonably addressed.
To promote organizational effectiveness by openly communicating company plans,
policies, practices and procedures to employees in a timely fashion
To cultivate a working environment that fosters positive motivation for improved
performance
To diversify portfolio both in the retail and wholesale market
To increase direct contact with customers in order to cultivate a closer relationship
between the bank and its customers.
2.4 Objectives of Jamuna Bank Ltd.
To earn and maintain CAMEL Rating 'Strong'
To establish relationship banking and improve service quality through development
of Strategic Marketing Plans.
To remain one of the best banks in Bangladesh in terms of profitability and assets
quality.
To introduce fully automated systems through integration of information technology
To ensure an adequate rate of return on investment.
To keep risk position at an acceptable range (including any off balance sheet risk).
To maintain adequate liquidity to meet maturing obligations and commitments.
To pursue an effective system of management by ensuring compliance to ethical
norms, transparency and accountability at all levels.
2.5 Offers of Jamuna Bank Ltd.
Term loans especially to develop small scale enterprises and also attach special

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 importance to technical and advisory support in order to enabling them to run their
enterprises successfully.
Full-fledged commercial banking services including collection of deposit, shortterm
trade finance, working capital finance in processing and manufacturing units
and financing and facilitating international trade.
Technical support to Small Scale Industries (SSIs) in order to enable them to run
their enterprises successfully.
Micro Credit to the urban poor through linkage with NGOs with a view to
facilitating their access to the formal financial market for the mobilization of
resources is another diversification of our services.
In order to perform the above tasks, Jamuna Bank Ltd. works closely with its
clients, the regulatory authorities, the shareholders (GOB), banks and other financial
institutions.
Branch Network
A great deal of investment for developing the physical resources base of the Bank has
been made. Jamuna Bank Ltd. has its presence in all the major industrial and commercial
centers of Bangladesh in order to cater to the need of industry and trade. , there are 83
conveniently located branches throughout Bangladesh till now. The bank has already
signed an agreement with Placid NK Corporation, USA for obtaining foreign currency
remittances. The bank is expected, to sign agreement with Tele Money Transfer, London,
UK Money Gram International, and Minneapolis, USA in near future to ensure flow of
inward remittance. Some agreement with companies located in Saudi Arabia and going to
be finalized shortly.
Human Resources
The Bank's ongoing success speaks to the excellence off its team. Jamuna Bank Ltd. has
a well-diversified pool of human resources, which is composed of people with high
academic background. Also, there is a positive demographic characteristic-most
employees are comparatively young in age yet rich in experiences, hi an increasingly
competitive market for highly skilled staff, Jamuna Bank Ltd. focusing on providing a

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stimulating corporate environment and an attractive compensation package. At the end
2014 the total employee strength was 952.
IT Support
The Board, attaches great importance to acquisition and use of appropriate Information
Technology in the Bank. Both Windows and UNIX based Local Area Network (LAN)
has been installed in the Head Office and different Branches. The Bank had its own
Banking Software developed in 1991, and since then this software is used for performing
normal banking transactions. Besides, SWIFT is being used in the AD Branches the Head
Office of the Bank trade finance related operations. Reuters 3000xtra HTA is being used
at the Head Office for offering the best exchange rates to the Bank's customers.
2.6 Board of Directors
The responsibility of making policies and operational guidelines is vested with the Board
of Directors. The Government holds 100% ownership of the bank and the Government of
Bangladesh appoints all the directors' of the Board. The Board consists of 13 members
who are repotted business executives and leading industrialists of the country.
2.7 Management
The Managing Director is the Chief Executive of the Bank who is an ex.-officio member
of the Board. Four General Managers acting under him and nine Divisional Heads are
performing daily operational activities of the Bank. The Managers of the Branches being
responsible functionally to the Heads of department of the Head Office and report direct
to the Managing Director.
JBL is managed by highly professional people. The present Managing Director of the
bank is a forward-looking senior banker having decades of experience and multi
discipline knowledge to his credit both at home and abroad. He is support by an educated
and skills professional team with diversified experience in finance and banking. Jamuna
bank limited has already achieved tremendous progress within a short period of its
operation.
MANAGING DIRECTOR

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 DEPUTY MANAGING DIRECTOR


SENIOR EXECUTIVE VICE PRESIDENT

Products & Services of Jamuna Bank Ltd.

2.8 Products & Services:
Products of Jamuna Bank Ltd. can be divided into two parts. They are asset product and
liability product. Generally liability product means deposits of many kinds that are
payable to parties. On the other hand, asset products are the products which clients are
liable to pay to bank. Different types of undertaking by the bank to the clients or on
behalf of the clients are also a type of liability to bank. On the other hand a different type
of promises makes by the clients to bank is considered as bank’s asset.
2.9 Depository Product
 Current Account
 Savings Account
 STD (Short term deposit)
 Fixed Deposit
Savings Scheme Products
 Monthly Savings Scheme (MSS)
 Marriage Deposit Scheme
 Lakhpati Deposit Scheme
 Millionaire Deposit Scheme
 Kotipati Deposit Scheme
 Education Savings Scheme
 Monthly Benefit Scheme
 Double/Triple Growth Deposit
 Scheme
2.10 Loan Product

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 Overdraft
 Cash Credit
 Term Loan
 Loan (General)
 Letter of Credit (L/C)
 Back-to Back L/C
 Local Bill Purchase (LBP)
 Foreign Bill Purchase (FBP)
 Loan against Imported Merchandise (LIM) etc.
2.11 Service
Q-Cash ATM
Remittance, Export & Import Business.

2.12 Asset Products

Funded: Funded means those type products in which bank directly fund. This type of
product is provided against mortgage, guarantee previous performances. For example:
Overdraft, Term Loan, Time Loan, Consumer credit, Car Loan, Professional Loan and
Small Business Loan. These will be described on credit part later on.
Non Funded: Non funded means when the bank provides this type of service bank need
not provide immediate fund. It is a high income source for the bank. But the bank has to
provide high care when provide such type of services to the clients. These types of
products are LC, Bank Guarantee. Discussion on LC is later on Foreign Exchange part.
2.13 Corporate Banking
The motto of Jamuna Bank Ltd. Corporate Banking services is to provide a personalized
solutions to our customers. The Bank distinguishes and identifies corporate customers'
need and designs tailored solutions accordingly.
Jamuna Bank Ltd. offers a complete range of advisory, financing and operational services
to its corporate client groups combining trade, treasury, investment and transactional
banking activities in one package. Whether it is project finance, term loan, import or
export deal, a working capital requirement or a forward cover for a foreign currency

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transaction, our Corporate Banking Managers will offer you the accurate solution. Our
corporate Banking specialists will render high class service for speedy approvals and
efficient processing to satisfy customer needs.
Corporate Banking business envelops a broad range of businesses and industries. You
can leverage on our know-how in the following sectors mainly:
Agro processing industry
Industry (Import Substitute / Export oriented)
- Textile Spinning,
- Dyeing Printing
- Export Oriented Garments, Sweater.
- Food & Allied
- Paper & Paper Products
- Engineering, Steel Mills
- Chemical and chemical products etc.
Telecommunications.

Information Technology
Real Estate & Construction
Wholesale trade
Transport

Hotels, Restaurants
Non Bank Financial Institutions
Loan Syndication
Project Finance
Investment Banking
Lease Finance
Hire Purchase
International Banking
Export Finance
Import Finance
2.14 Personal Banking Division

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Personal Banking Division (PBD) introduces to the customers with a variety of products.
Our PBD continuously meets the challenges of developing new products and services to
match the specific requirements of customers.
Personal Banking Division (PBD) issues both VISA Debit Cards and VISA Credit Cards.
VISA is the renowned Card brand in the earth. Jamuna Bank Limited is a principal
member of VISA Worldwide. Remittance Cell is another successful wing of the Personal
Banking Division. Our product range includes:
VISA Debit Cards - You can now avail the convenience of VISA Debit Card. It is the
easiest and the most secured way of utilizing your money for 24/7 retail purchases as well
as cash withdrawal.
VISA Credit Cards - The JBL Credit Card gives you a fast, convenient and reliable way
to pay, 24 hours a day, wherever you are in the world.
VISA Classic
VISA Gold
International Credit Cards – JBL International Credit Cards (VISA) allows you
flexibility and convenience when you travel internationally. The VISA International card
entitles you to exclusive discounts worldwide.
VISA Dual (Gold)
JBL Remittance Cell – “Remit Fast” is the motto of JBL Remittance Cell. It provides the
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1
 CHAPTER 3
LITERATURE REVIEW
3.1 Introduction
Financial institutions, which are composed of banks, micro finances, and
insurances, have comprehensive roles in serving the needs of the society with in
the economy. The service is rendered through providing three major financial
functions: intermediation, or allocation, operational and payment systems.
Operational and allocation functions are the provisions of financial resources to
meet borrowing needs of individuals and other economic agents. The main
microeconomic function of banks is the provision of facilities to collect deposits
and invest these deposits as credits. Provision of a sound payment mechanism is
also the other expected service from banks. Hence, the performance of banks is
measured in terms of the above major roles of the banking business and relies on
the provision of these functions.
As Hoff and Stiglitz in 1990 denoted, in the past decades there have been major
advances in theoretical understanding of the workings of credit markets. These
advances have evolved from a paradigm that emphasis the problems of
imperfect information and imperfect enforcement. They pointed out that
borrowers and lenders may have differential access to information concerning a
business risk, they may form different appraisal of the risk. What is clearly
observed in credit market is asymmetric information where the borrower knows
the expected return and risk of his/her business, where as the lender such as
bank knows only the expected return and risk of the average business in the
economy.
3.1.1 Definition of Credit Management
There are many definitions given for credit management by different scholars.
Among these some are here cited as follows:

1
Credit management is implementing and maintaining a set of policies and
procedures to minimize the amount of capital tied up in debtors and to minimize
the exposure of the business to bad debts.(http://www.smallbusiness.wa.gov.
au/assets/Small-Business-Briefs/small-business-brief-credit-management.pdf).

Credit Management, from a debtor’s point of view, is managing finances

especially debts so as not to have a tail of creditors lurking behind your back.
Credit management is a responsibility that both the debtor and the creditor
should seriously take (http://www.selfgrowth.com/articles/Tabije3.html).
When it functions efficiently, credit management serves as an excellent
instrument for the business to remain financially stable.

3.1.2 Process of Credit Management

The process of credit management begins with accurately assessing the credit-
worthiness of the customer base and his/her business viability. This is particularly
important if the company chooses to extend some type of credit line or revolving
credit to certain customers. Hence, proper credit management is setting specific
criteria that a customer must meet before receiving the proposed credit
arrangement. As part of the evaluation process, credit management also calls for
determining the total credit line that will be extended to a given customer.

Several factors are used as part of the credit management process to evaluate and
qualify a customer for the receipt of some form of commercial credit. This
includes gathering data on the potential customer’s current financial condition,
including the current credit track record that discloses the character of a
customer in meeting obligations as well as collateral value. The current ratio

1
between income and outstanding financial obligations will also be taken into
consideration.
Competent credit management seeks to not only protect the bank or any
financial
institution involved from possible losses, but also protect the customer from
creating more debt obligations that cannot be settled in a timely manner.

When the process of credit management functions efficiently, everyone involved

benefits from the effort. The financial institution such as banks has a reasonable
amount of assurance that loans granted to a client will be paid back within terms,
or that regular minimum payments will be received on credit account balances.

Customers have the opportunity to build a strong rapport with the creditor and
thus create a solid credit reference (http://www.wisegeek.com/what-is-
creditmanagement.htm).
3.1.3 Types of Credit
There are four basic types of credit. By understanding how each works, financial
institutions will be able to get the most solution for their loan recovery and avoid
paying unnecessary charges.
 Service credit is monthly payments for utilities such as telephone, gas,
electricity, and water. You often have to pay a deposit, and you may pay a late
charge if your payment is not on time.
 Loans: Loans can be for small or large amounts and for short or long periods.
Loans can be repaid in one lump sum or in several regular installment
payments until the amount borrowed and the finance charges are paid in full.
Moreover, loans can be secured or unsecured.
 Installment credit: is described as buying on time, financing through the store
or the easy payment plan. The borrower takes the goods home in exchange for a

1
promise to pay later. Cars, major appliances, and furniture are often purchased
this way. You usually sign a contract, make a down payment, and agree to pay
the balance with a specified number of equal payments called installments.
The finance charges are included in the payments. The item you purchase may
be used as security for the loan.
 Credit cards are issued by individual retail stores, banks, or businesses. Using
a credit card can be the equivalent of an interest-free loan--if you pay for the use
of it in full at the end of each month
(http://www.urbanext.illinois.edu/ww1/04-03.html).

3.1.4 Credit Policies and Procedures

A Credit Policy is not something that is only operated by the Credit and risk
Department. All employees involved with customers, in any way, need to be
aware of the credit policy and ensure that it is operated consistently
(http://www.bwaresolutions.com/).
In order to be effective, credit policies must be communicated throughout the
organization, implemented through appropriate procedures, monitored and
periodically revised to take into account changing internal and external
circumstances.
They should be applied, where appropriate, on a consolidated bank basis and at
the level of individual affiliates. In addition, the policies should address equally
the important functions of reviewing.
Economic conditions and the firm’s credit policies are the chief influences on the
level of firm’s account receivable. Economic conditions, of course, are largely
beyond the control of the financial manager. As with other current assets,
however, the manager can vary the level of receivables in keeping with the
tradeoff between profitability and risk. Lowering quality standards may

1
stimulate demand, which, in turn, should lead to higher profitable receivables, as
well as a greater risk of bad debt.
The credit and collection policy of one firm are not independent of those of other
firms. If product and capital markets are reasonably competitive, the credit and
collection practices of one company will be influenced by what other companies
are doing.
Such practice related to the pricing of the product or service and must be viewed
as part of the overall competitive process.
The examination of certain policy variables implies that the competitive process
is accounted for in the specification of the demand function as well as in the
opportunity cost associated with taking on additional receivables. The policy
variables include the quality of the trade accounts accepted; the length of the
credit period, the cash discount, any special terms such as seasonal dating and
the collection program of the firm.
Together, these elements largely determine the average collection period and the
proportion of bad debt losses (Horne, 1995: 361).
3.1.5 Credit Analysis
Credit analysis is the primary method in reducing the credit risk on a loan
request. This includes determining the financial strength of the borrowers,
estimating the probability of default and reducing the risk of non repayment to
an acceptable level. In general, credit evaluations are based on the loan officer's
subjective assessment (or judgmental assessment technique).
Once a customer requests a loan, bank officers analyze all available information
to determine whether the loan meets the bank’s risk-return objectives. Credit
analysis is essentially default risk analysis, in which a loan officer attempts to
evaluate a borrower’s ability and willingness to repay.
Similarly Compton (1985) identified three distinct areas of commercial risk
analysis related to the following questions: 1) what risks are inherent in the

1
operations of the business? 2) What have managers done or failed to do in
mitigating those risks? 3) How can a lender structure and control its own risks in
supplying funds?
The first question forces the credit analyst to generate a list of factors that
indicate what could harm a borrower’s ability to repay. The second recognizes
that repayment is largely a function of decisions made by a borrower. Is
management aware of the important risks, and has it responded? As Tomothy
(1995:665) quoted, the last question forces the analyst to specify how risks can be
controlled so the bank can structure to an acceptable loan agreement.
A bank’s credit analysts often use the five C’s of credit to focus their analysis on
the key
dimensions of an applicant’s creditworthiness.
Lawrence (1997:776-777), identified five C’s of credit. They include; Character,
Capacity, Capital, Collateral, and Conditions.
1. Character: The applicant’s record of meeting past obligations, financial,
contractual, and moral. Past payment history as well as any pending or resolved
legal judgments against the applicant would be used to evaluate its character.
2. Capacity: The applicant’s ability to repay the requested credit. Financial
statement analysis, with particular emphasis on liquidity and debt ratios, is
typically used to assess the applicant’s capacity.
3. Capital: The financial strength of the applicant as reflected by its ownership
position. Analysis of the applicant’s debt relative to equity and its profitability
ratios are frequently used to assess its capital.
4. Collateral: The amount of assets the applicant has available for use in securing
the credit. The larger the amount of available assets, the greater the chance that a
firm will recover its funds if the applicant defaults.
A review of the applicant’s balance sheet, asset value appraisals, and any legal
claims filed against the applicant’s assets can be used to evaluate its collateral

1
5. Conditions: The current economic and business climate as well as any unique
circumstances affecting either party to the credit transaction. For example, if the
firm has excess inventory of the items the applicant wishes to purchase on credit,
the firm may be willing to sell on more favorable terms or to less creditworthy
applicants. Analysis of the general economic and business conditions, as well as
special circumstances that may affect the applicant or firm is performed to assess
conditions.

The credit analyst typically gives primary attention to the first two C’s-character
and Capacity-because they represent the most basic requirements for extending
credit to an applicant. Consideration of the last three C’s-Capital, Collateral, and
Conditions- is important in structuring the credit management and making the
final credit decision, which is affected by the credit analyst’s experience and
judgment.

According to Golden and Walker (1993), there are five Cs of bad debt; which
represent things to guard against in order to help prevent problems. They
include: Complacency, Carelessness, Communication breakdown,
Contingency, and Competition. Complacency refers to the tendency to assume
that because things were good in the past they will be good in the future.
Common examples are an over reliance on guarantors, reported net worth, or
past loan repayment success because it’s always worked out in the past.

Carelessness involves poor underwriting, typically evidenced by inadequate

loan documentation, a lack of current financial information or other pertinent
information inthe credit files, and a lack of protective covenants in the loan
agreement. Each of these makes it difficult to monitor a borrower’s progress and
identify problems before they are unmanageable.

1
Loan problems often arise when a bank’s credit objectives and policies are not
clearly communicated. This is communication breakdown. Management should
articulate and enforce loan policies, and loan officers should make management
aware of specific problems with the existing loans as soon as they appear.
A contingency refers to lenders’ tendency to play down or ignore circumstances
in which a loan might in default.
Competition involves following competitors’ behavior rather than maintaining
the bank’s own credit standards.
3.1.6 Credit Information
Adequate and timely information that enables a satisfactory assessment of the
creditworthiness of borrowers applying for a bank loan is crucial for making
prudent lending decisions. Prudent lending decisions made on the basis of
adequate information on the creditworthiness of borrowers are one of the
principal factors in ensuring the financial soundness of banks.
But, there has been serious difficulty in Ethiopia of getting accurate and timely
information on prospective borrowers that facilitates the making of such prudent
lending decisions. One of the means for alleviating this difficulty of getting
accurate and timely information on prospective borrowers is the establishment of
a Credit Information Center (CIC) where relevant information on borrowers is
assumed to be pooled and made available to lending banks.
According to article 36 of the Licensing and Supervision of Banking Business
Proclamation No. 84/1994, the National Bank Ethiopia (NBE) has issued these
directives to establish such a Credit Information Center (CIC). Though there is
still serious limitations in the accuracy of the credit information extracted the
summary of the directive is as follows:
 Banks shall provide, alter and update credit information on each and every
one of

1
their borrowers using online system.
 Upon written request by banks, the Supervision Department of the NBE shall
provide to the requesting bank, in writing, all credit information available in the
Central Database on a prospective borrower within three working days from the
date of receipt of the request;
 Access to the Central Database shall be restricted to the user group;
 The role of the NBE shall be restricted to administering the Credit Information
Sharing system, providing in writing credit information on borrowers available
at
Credit Information Center to banks, ensuring that access to online system to
update
or alter credit information is given only to authorized persons and ensuring that
the
system is operating smoothly and reliably;
 The NBE shall not be responsible for any damages, claims or liabilities that
may
arise as a result of inaccurate, misleading or incomplete credit information on
borrowers supplied to the Credit Information Center by individual banks and
shared, through the NBE, with other banks.
 Each bank shall provide, electronically, the initial credit and other related
information to the Credit Information Center on each and every one of its
borrower;
 Each bank shall be fully responsible for providing accurate, complete and
timely
credit information to the Credit Information Center. In cases where errors have
been made, such errors shall be corrected promptly by the concerned bank;
 Each bank shall be fully responsible for any damages, claims or liabilities that
may

1
arise as a result of providing inaccurate, misleading or incomplete credit
information to the Credit Information Center or failure to provide, inadvertently
or
otherwise, information to the Center that should have been provided in line with
these directives;
 Each bank shall use the credit information on borrowers obtained from the
Central
Database of the Credit Information Center only and only for making a lending
decision. Such information shall be treated with utmost confidentiality and shall
not be disclosed to any third party or used for any other purpose;
 Each bank shall be fully responsible for any damages, claims or liabilities that
may
arise as a result of disclosure of credit information on borrowers obtained from
the
Credit Information Center to third parties or use of that information for purposes
other than for making a lending decision.
2.1.7 Credit Process
The fundamental objective of commercial and consumer lending is to make
profitable
loans with minimal risk. Management should target specific industries or
markets in
which lending officers have expertise. The credit process relies on each bank’s
systems
and controls to allow management and credit officers to evaluate risk and return
tradeoffs.
According to Timothy (1995), the credit process includes three functions:
business
development and credit analysis, credit execution and administration, and credit

1
review.
2.1.7.1 Business Development and Credit Analysis
Business development is the process of marketing bank services to existing and
potential customers. With lending it involves identifying new credit customers
and
soliciting their banking business, as well as maintaining relationships with
current
customers and cross-selling non-credit services. Every bank employee, from
tellers
handling drive-up facilities to members of the board of the directors, is
responsible for
business development. Each employee regularly comes in to contact with
potential
customers and can sell bank services. To encourage marketing efforts, many
banks use
cash bonuses or other incentive plans to reward employees who successfully
cross-sell
services or bring new business into a bank.
2.1.7.2 Credit Execution and Administration
The formal credit decision can be made individually or by committee, depending
on a
bank’s organizational structure. This structure varies with a bank’s size, number
of
employees, and type of loans handled. A bank’s Board of Directors normally has
the
20
final say on which loans are approved. Typically, each lending officer has
independent

1
authority to approve loans up to some fixed dollar amount.
2.1.7.3 Credit Review
The loan review effort is directed at reducing credit risk as well as handling
problem
loans and liquidating assets of failed borrowers. Effective credit management
separates
loan review from credit analysis, execution, and administration. The review
process can
be divided into two functions: monitoring the performance of existing loans and
handling problem loans. Many banks have a formal loan review committee,
independent of loan officers, that reports directly to the chief executive officer
and
directors’ loan committee.
Loan review personnel review current loan to verify that the borrower’s financial
condition is acceptable, loan documentation is in place, and pricing meets return
objectives.
2.1.8 Credit Approval and Implementation
The individual steps in the credit approval process and their implementation
have a
considerable impact on the risks associated with credit approval. The quality of
credit
approval processes depends on two factors, i.e. a transparent and comprehensive
presentation of the risks when granting the loan on the one hand, and an
adequate
assessment of these risks on the other. Furthermore, the level of efficiency of the
credit
approval processes is an important rating element. Due to the considerable
differences

1
in the nature of various borrowers and the assets to be financed as well as the
large
number of products and their complexity, there cannot be a uniform process to
assess
credit risks.
The quality of the credit approval process from a risk perspective is determined
by the
best possible identification and evaluation of the credit risk resulting from a
possible
exposure.
21
According to Oesterreichische National bank Credit Approval Process and
Credit Risk
Management (2000), the credit risk can be distributed among four risk
components.
a. Probability of Default (PD)
b. Loss Given Default (LGD)
c. Exposure at Default (EAD)
d. Maturity (M)
The most important components in credit approval processes are PD, LGD, and
EAD.
While maturity (M) is required to calculate the required capital, it plays a minor
role in
exposure review. The significance of PD, LGD, and EAD is described below.
a) Probability of Default (PD)
Reviewing a borrower’s probability of default is basically done by evaluating the
borrower’s current and future ability to fulfill its interest and principal
repayment
obligations. This evaluation has to take into account various characteristics of the

1
borrower (natural or legal person), which should lead to a differentiation of the
credit
approval processes in accordance with the borrowers served by the bank.
Furthermore, it has to be taken into account that —for certain finance
transactions —
interest and principal repayments should be financed exclusively from the cash
flow of
the object to be financed without the possibility for recourse to further assets of
the
borrower. In this case, the credit review must address the viability of the
underlying
business model, which means that the source of the cash flows required to meet
interest
and principal repayment obligations has to be included in the review.
b) Loss Given Default (LGD)
The loss given default is affected by the collateralized portion as well as the cost
of
selling the collateral. Therefore, the calculated value and type of collateral also
have to
be taken into account in designing the credit approval processes.
22
c) Exposure at Default (EAD)
In the vast majority of the cases described here, the exposure at default
corresponds to
the amount owed to the institution. Thus, besides the type of claim; the amount
of the
claim is another important element in the credit approval process.
2.1.9 Credit Collection Techniques

1
Effective credit collection techniques are one of the necessities for financial
institutions
in any economic climate. Knowing how to encourage customers to pay their
outstanding debts to financial institutions like banks on time can increase the
cash flow
of banks.
Therefore a number of collection techniques are employed. Under normal
circumstances loan clients are expected to pay in cash or deposit or keep their
installment repayment as per the agreement made. As the loan account becomes
past
due or overdue the collection effort becomes more personal and strict. The basic
techniques are:
 Telephone Calls: If the loan client passes the due date, a telephone call may be
made
to the customer to request immediate repayment and up to date his or her
account.
 Personal visits: - If the telephone call made is not resulted positive response
vesting
his business and discussing the issue with the customer can be a very effective
collection procedure.
 Letters: - If the efforts made so far is unsuccessful and not resulted positive
response a
polite letter is to be served reminding the customer of its obligation followed by
warning letters for the action to be taken in future and its consequence.
Collection
letters are the first step in the collection process for past due and overdue loan
accounts.
23

1
 Using Collection Agencies: Firms can turn uncollectible accounts over to a
collection
agency or an attorney for collection. The fees for this service are typically quite
high;
the firm may receive less than fifty percent on accounts collected in this way.
 Legal Action: legal action is the most stringent step in the collection process. It
is an
alternative to the use of a collection agency not only is direct legal action
expensive,
but is may force the debtor in to bankruptcy, thereby reducing the possibility of
future business without guarantying the ultimate receipt of overdue amount.
(http://www.articlesbase.com/finance-articles/3-top-credit-collection-
techniquesthat-
can-improve-cash-flow-to-your-business-900152.html).
2.1.10 Financial Analysis
Review, appraisal and follow-up are three basic elements in credit management
and
decision-making. At the time of considering fresh proposals or enhancement
proposals,
the banker reviews the past operations with to judge the health status of the
client.
Timothy (1995) identified three basic elements used in credit management to
evaluate
the creditworthiness of clients.
a) Review is for the past. It should enable the banker to find out whether it is safe
to
lend to a particular client. In order to arrive at this decision, the banker has to
satisfy

1
himself about the risk and viability of the unit. Review of any unit involves
assessment
of solvency, liquidity and profitability of that unit as revealed by its financial
statements, i.e. profit and loss accounts and balance sheets. Review, thus,
involves
classification of profit and loss account and the balance sheet according to bank’s
requirement and analysis of these statements.
b) Credit appraisal implies consideration of fresh or enhancement proposals on
the
basis of futuristic data. While appraising proposals, banker tries to find out:
financial
need of the client, end-use of funds, viability of operations and risk involved.
In case of proposals involving working capital finance, the banker can ascertain
the
aforesaid factors only when he/she is supplied with the business plan of the
borrower
24
for the ensuing period. Business plan is expressed through operating statement,
balance sheet, funds flow, and cash flow statements, all on projected basis.
c) Follow-up may be defined as a continuous activity aimed at ensuring
observance of
stipulations laid down by the bank, picking up signals on health status of client’s
position, remedial action and ensuring results of action on a continuous basis.
Safety,
need-based finance and end-use are the key assumptions of lending.
A banker needs various types of data and information from the borrowers for
taking the
credit decisions. Such information is generally available in various financial
statements

1
such as income statement, balance sheet, cash flow statement, funds flow
statement, etc.
But mere collect of these financial data from the borrowers is of little help unless
the
banker is able to use these statements; arrange or classify them according to
his/her
needs and analyze them with a view to draw meaningful conclusions.
2.1.11 Criteria for Choosing a Bank
Individuals whose only contact with their bank is through the use of its checking
services generally choose a bank for the convenience of its location and the
competitive
cost of its services. However, a business that borrows from banks must look at
other
criteria, and a potential borrower seeking banking relations should recognize
that
important difference exist among banks. Some of these differences are
considered here.
a) Willingness to Assume Risks
Banks have different basic policies toward risk. Some banks are inclined to
follow
relatively conservative lending practice, while others engage in what are
properly
termed creative banking practices. These policies reflect partly the personalities
of
officers of the bank and partly the characteristics of the banks deposit liabilities.
Thus, a bank with fluctuating deposit liabilities in a static community will tend to
be a

1
conservative lender, while a bank whose deposits are growing with little
interruption
might follow more liberal credit policies.
25
Similarly, a large bank with broad diversification over geographic regions or
across
industries can obtain the benefit of combining and averaging risks.
b) Advice and Counsel
Some bank loan officers are active in providing counsel and in stimulating
development
loans to firms in their early and formative years. Certain banks have specialized
departments that make loans to firms expected to grow and thus to become more
important customers. The personnel of these departments can provide valuable
counseling to customers.
c) Loyalty to Customers
Banks differ in the extent to which they will support the activities of borrowers in
bad
times. This characteristic is referred to as the degree of loyalty of the bank. Some
banks
might put great pressure on a business to liquidate its loans when the firms’
outlook
becomes clouded, whereas other will stand by the firm and work diligently to
help it
get back on its feet.
d) Specialization
Banks differ greatly in their degrees of loan specialization. Large banks have
separate
departments that specialize in different kinds of loans for example, real estate
loans,

1
farm loans, and commercial loans. Within these broad categories, there might be
a
specialization by line of business, such as steel, machinery, cattle, or textiles. The
strengths of banks also are likely to reflect the nature of the business and
economic
environment in which the banks operate. For example, some California banks
have
become specialists in lending to technology companies, while many Midwestern
banks
are agricultural specialists. A sound firm can obtain more creative cooperation
and
more active support by going to a bank that has experience and familiarity with
its
particular type of business. Therefore, a bank that is excellent for one firm might
be
unsatisfactory for another.
e) Maximum Loan Size
26
The size of a bank can be important factor. Because the maximum loan a bank
can make
to any one customer is limited to certain percent of the banks capital account
(capital
stock plus retained earnings). It generally is not appropriate for large firms to
develop
borrowing relationships with small banks.
2.1.12 Default Problems
Non-payment of loans has several undesirable consequences. It gradually
destabilizes

1
the credit system. Costs of loan administration of overdue loans are high. And
defaults
push up lending costs without any corresponding increase in loan turnover.
Defaults
reduce the resource base for further lending, weaken staff morale, and affect the
borrower’s confidence.
Sanderatne, (1978), after a comprehensive survey of defaults in Sri Lanka,
identified six
factors which contributed to defaults:
a) Variability in incomes caused by fortuitous, seasonal, or unforeseen factors;
b) Defects and inadequacies in the organization disbursing credit;
c) Attitudinal conditions not conducive to repayment;
d) Misallocation of borrowed funds;
e) Miscellaneous reasons such as illness, death. Etc.
According to Pandmanabhan (1986: 26-31), causes of delinquencies and defaults
are
classified as relating to three levels: borrower level, financing institution level,
and
economy level.
a) Causes at borrower level:
 Borrowers who deliberately divert loans to non-essential consumption find it
difficult to meet repayment commitments on time.
 Investments fail to generate sufficient incomes due to improper technical
advice;
absence of supporting services, inadequate marketing, etc. investments also fail
27
due to unforeseen causes like floods, drought, etc. in both cases repayment
would be affected.
 When borrowers have liabilities towards informal lenders, they get precedence

1
over institutional lenders.
 Contingencies at borrower household like death, sickness, etc, affect
repayment
performance. Formal institutions which do not extend consumption and
emergency loans are liable to have higher default rates.
b) Causes at financing institution level:
 Defective procedures for loan appraisal in the financing institutions could lead
to
the financing of bad projects and consequent defaults.
 Quality of loan officers, their ability and knowledge in the field, and their
capacity to
judge borrowers as also the incentive packages available to them affect
repayment
performance.
 Fixing of inappropriate repayment schedules and lack of flexibility often result
in
defaults. Similarly, when the procedure for repayment is cumbersome borrowers
tend to delay repayments.
 Defaults have a ‘spread effect’ particularly in the marginal cases. When lenders
show reluctance to enforce sanctions against conspicuous defaulters, defaults
tend to
increase through a process of imitation.
c) Causes at economy level:
 When overall government policies, particularly those relating to pricing of
inputs
and outputs, marketing, etc., discriminate against the specific sector.
 Faulty monetary and fiscal policies of governments could result in high
inflationary

1
conditions. Borrowers tend to delay repayments in such a situation to take
advantage of the fall in value of currency.
28
 Interest rate policies of government have a vital role in the promotion of
repayments. When the real rate is excessively low, borrowing and consumption
will be much more profitable than saving and repayment.
 Excessive government intervention in the day-to-day administration of
financial
institutions could result in bad loans.
 Calamities like droughts, floods, market glut, etc could result non performing
loans.
2.1.13 Principles Formulated By the Basel Committee
As a direction for the achievement of the required level of loan status and
healthy
financial institutions the Basel Committee on Banking Supervision in September
2000
also formulated the following Principles
a) Establishing an appropriate credit risk environment
Principle 1: The board of directors should have responsibility for approving and
periodically (at least annually) reviewing the credit risk strategy and significant
credit
risk policies of the bank. The strategy should reflect the bank’s tolerance for risk
and the
level of profitability the bank expects to achieve for incurring various credit risks.
Principle 2: Senior management should have responsibility for implementing the
credit
risk strategy approved by the board of directors and for developing policies and

1
procedures for identifying, measuring, monitoring and controlling credit risk.
Such
policies and procedures should address credit risk in all of the bank’s activities
and at
both the individual credit and portfolio levels.
Principle 3: Banks should identify and manage credit risk inherent in all products
and
activities. Banks should ensure that the risks of products and activities new to
them are
subject to adequate risk management procedures and controls before being
introduced
29
or undertaken, and approved in advance by the board of directors or its
appropriate
committee.
b) Operating under a sound credit granting process
Principle 4: Banks must operate within sound, well-defined credit-granting
criteria.
These criteria should include a clear indication of the bank’s target market and a
thorough understanding of the borrower or counterparty, as well as the purpose
and
structure of the credit, and its source of repayment.
Principle 5: Banks should establish overall credit limits at the level of individual
borrowers and counterparties, and groups of connected counterparties that
aggregate in
comparable and meaningful manner different types of exposures, both in the
banking
and trading book and on and off the balance sheet.

1
Principle 6: Banks should have a clearly-established process in place for
approving new
credits as well as the amendment, renewal and re-financing of existing credits.
Principle 7: All extensions of credit must be made on an arm’s-length basis. In
Particular, credits to related companies and individuals must be authorized on
an
exception basis, monitored with particular care and other appropriate steps
taken to
control or mitigate the risks of non-arm’s length lending.
c) Maintaining an appropriate credit administration, measurement and
monitoring
process
Principle 8: Banks should have in place a system for the ongoing administration
of their
various credit risk-bearing portfolios.
Principle 9: Banks must have in place a system for monitoring the condition of
individual credits, including determining the adequacy of provisions and
reserves.
Principle 10: Banks are encouraged to develop and utilize an internal risk rating
system
in managing credit risk. The rating system should be consistent with the nature,
size
and complexity of a bank’s activities.
30
Principle 11: Banks must have information systems and analytical techniques
that
enable management to measure the credit risk inherent in all on- and off-balance
sheet

1
activities. The management information system should provide adequate
information
on the composition of the credit portfolio, including identification of any
concentrations
of risk.
Principle 12: Banks must have in place a system for monitoring the overall
composition
and quality of the credit portfolio.
Principle 13: Banks should take into consideration potential future changes in
economic
conditions when assessing individual credits and their credit portfolios, and
should
assess their credit risk exposures under stressful conditions.
d) Ensuring adequate controls over credit risk
Principle 14: Banks must establish a system of independent, ongoing assessment
of the
bank’s credit risk management processes and the results of such reviews should
be
communicated directly to the board of directors and senior management.
Principle 15: Banks must ensure that the credit-granting function is being
properly
managed and that credit exposures are within levels consistent with prudential
standards and internal limits. Banks should establish and enforce internal
controls and
other practices to ensure that exceptions to policies, procedures and limits are
reported
in a timely manner to the appropriate level of management for action.
Principle 16: Banks must have a system in place for early remedial action on

1
deteriorating credits, managing problem credits and similar workout situations.
2.1.14. Common Sources of Major Credit Problems
1. Most major banking problems have been either explicitly or indirectly caused
by
weaknesses in credit management. In supervisors’ experience, certain key
problems
tend to persist. Severe credit losses in a banking system usually reflect
simultaneous
31
problems in several areas, such as concentrations, failures of due diligence and
inadequate monitoring.
2. Concentrations are probably the single most important cause of major credit
problems. Credit concentrations are viewed as any exposure where the potential
losses are large relative to the bank’s capital, its total assets or, where adequate
measures exist, the bank’s overall risk level.
3. Banking supervisors should have specific regulations limiting concentrations
to one
borrower or set of related borrowers, and, in fact, should also expect banks to set
much lower limits on single-obligor exposure. Most credit managers in banks
also
monitor industry concentrations. Many banks are exploring techniques to
identify
concentrations based on common risk factors or correlations among factors.
While
small banks may find it difficult not to be at or near limits on concentrations,
very
large banking organizations must recognize that, because of their large capital
base,

1
their exposures to single obligors can reach imprudent levels while remaining
within regulatory limits.
4. Many credit problems reveal basic weaknesses in the credit granting and
monitoring
processes. While shortcomings in underwriting and management of market-
related
credit exposures represent important sources of losses at banks, many credit
problems would have been avoided or mitigated by a strong internal credit
process.
5. Many banks find carrying out a thorough credit assessment (or basic due
diligence)
a substantial challenge. For traditional bank lending, competitive pressures and
the
growth of loan syndication techniques create time constraints that interfere with
basic due diligence.
6. Some credit problems arise from subjective decision-making by senior
management
of the bank. This includes extending credits to companies they own or with
which
they are affiliated, to personal friends, to persons with a reputation for financial
32
acumen or to meet a personal agenda, such as cultivating special relationships
with
celebrity.
7. Many banks that experienced asset quality problems in the 1990s lacked an
effective
credit review process (and indeed, many banks had no credit review function).
Credit review at larger banks usually is a department made up of analysts,
independent of the lending officers, who make an independent assessment of the

1
quality of a credit or a credit relationship based on documentation such as
financial
statements, credit analysis provided by the account officer and collateral
appraisals.
At smaller banks, this function may be more limited and performed by internal
or
external auditors. The purpose of credit review is to provide appropriate checks
and
balances to ensure that credits are made in accordance with bank policy and to
provide an independent judgment of asset quality, uninfluenced by relationships
with the borrower. Effective credit review not only helps to detect poorly
underwritten credits, it also helps prevent weak credits from being granted, since
credit officers are likely to be more diligent if they know their work will be
subject to
review.
8. A common and very important problem among troubled banks in the early
1990s
was their failure to monitor borrowers or collateral values. Many banks
neglected to
obtain periodic financial information from borrowers or real estate appraisals in
order to evaluate the quality of loans on their books and the adequacy of
collateral.
As a result, many banks failed to recognize early signs that asset quality was
deteriorating and missed opportunities to work with borrowers to stem their
financial deterioration and to protect the bank’s position. This lack of monitoring
led
to a costly process by senior management to determine the dimension and
severity

1
of the problem loans and resulted in large losses.
9. In some cases, the failure to perform adequate due diligence and financial
analysis
and to monitor the borrower can result in a breakdown of controls to detect
creditrelated
fraud. For example, banks experiencing fraud-related losses have neglected
33
to inspect collateral, such as goods in a warehouse or on a showroom floor, have
not
authenticated or valued financial assets presented as collateral, or have not
required
audited financial statements and carefully analyzed them. An effective credit
review
department and independent collateral appraisals are important protective
measures, especially to ensure that credit officers and other insiders are not
colluding with borrowers.
10. In addition to shortcomings in due diligence and credit analysis, bank credit
problems reflect other recurring problems in credit-granting decisions. Some
banks
analyze credits and decide on appropriate non-price credit terms, but do not use
risk-sensitive pricing. Banks that lack a sound pricing methodology and the
discipline to follow consistently such a methodology will tend to attract a
disproportionate share of under-priced risks. These banks will be increasingly
disadvantaged relative to banks that have superior pricing skills.
11. Many banks have experienced credit losses because of the failure to use
sufficient
caution with certain leveraged credit arrangements. As noted above, credit
extended
to highly leveraged borrowers is likely to have large losses in default. Similarly,

1
leveraged structures such as some buyout or debt restructuring strategies, or
structures involving Customer-written options generally introduce concentrated
credit risks into the bank’s credit portfolio and should only be used with
financially
strong customers. Often, however, such structures are most appealing to weaker
borrowers because the financing enables a substantial upside gain if all goes
well,
while the borrower’s losses are limited to its net worth.
12. Many banks’ credit activities involve lending against non-financial assets. In
such
lending, many banks have failed to make an adequate assessment of the
correlation
between the financial condition of the borrower and the price changes and
liquidity
of the market for the collateral assets. Much asset-based business lending (i.e.
commercial finance, equipment leasing, and factoring) and commercial real
estate
lending appear to involve a relatively high correlation between borrower
34
creditworthiness and asset values. Since the borrower’s income, the principal
source
of repayment is generally tied to the assets in question, deterioration in the
borrower’s income stream, if due to industry or regional economic problems may
be
accompanied by declines in asset values for the collateral. Some asset based
consumer lending (i.e. home equity loans, auto financing) exhibits a similar, if
weaker, relationship between the financial health of consumers and the markets
for
consumer assets.

1
13. A related problem is that many banks do not take sufficient account of
business
cycle effects in lending. As income prospects and asset values rise in the
ascending
portion of the business cycle, credit analysis may incorporate overly optimistic
assumptions. Effective stress testing which takes account of business or product
cycle effects is one approach to incorporating into credit decisions a fuller
understanding of a borrower’s credit risk.
14. More generally, many underwriting problems reflect the absence of a
thoughtful
consideration of downside scenarios. In addition to the business cycle, borrowers
may be vulnerable to changes in risk factors such as specific commodity prices,
shifts in the competitive landscape and the uncertainty of success in business
strategy or management direction. Many lenders fail to “stress test” or analyze
the
credit using sufficiently adverse assumptions and thus fail to detect
vulnerabilities.
2. 2 Empirical Studies
Hong and Sung (1995) have tried to analyze Korean banks’ performance which
was
reflected on their financial statements and to provide some comments to improve
their
banking business. The study was carried out by comparing the eight Korean
banks’ past
five years performance results with other banks in the State of California, other
banks
include Asian banks other than Korean banks owned by such Asians (e.g.,
Chinese and

1
Japanese) and American banks owned by other ethnic groups of Americans (e.g.,
“white” American). The comparative financial analysis indicated that Korean
banks
35
were relatively conservative in managing operations and lending and were more
actively involved in their services for international business and sales activities.
The
analyses also indicated that the Korean banks’ loan quality was relatively low
and their
loan market appears to have been saturated.
They recommend on the basis of the analysis that the Korean banks should adopt
a
more active marketing strategy to expand and create their own market, consider
tighter
control for their operations with understanding banking regulations (e.g.,
Financial
Institutions Reform, Recovery, and Enforcement Act) and adopt the loan policy
in a
way that they can make a loan decision with more reliable cash flow analysis.
Abdus (2004) has examined empirically the performance of Bahrain's commercial
banks
with respect to credit (loan), liquidity and profitability during the period 1994-
2001.
Nine financial ratios (Return on Asset, Return on Equity, Cost to Revenue, Net
Loans to
Total Asset, Net Loans to Deposit, Liquid Asset to Deposit, Equity to Asset,
Equity to
Loan and Non-performing loans to Gross Loan) were selected for measuring
credit,

1
liquidity and profitability performances. By applying these financial measures,
this
paper found that commercial banks' liquidity performance was not at par with
the
Bahrain banking industry. Commercial banks are relatively less profitable and
less
liquid and, are exposed to risk as compared to banking industry. With regard to
asset
quality or credit performance, this paper found no conclusive result.
Non_ performing loans to gross loans (NPLGL) indicates that there was no
difference
in performance between the commercial banks and the banking industry in
Bahrain.
Chowdhury and Ahmed (2007) have tried to analyze the development and
growth of
selected private Commercial Banks of Bangladesh. It was observed that all the
selected
private commercial banks were able to achieve a stable growth of branches,
employees,
deposits, loans and advances, net income and earnings per share during the
period of
2002-2006. Seven trend equations have been tested for different activities (growth
in
branch, employees, deposits, loans and advances, net income and earning per
share) of
36
the private commercial banks. Among them the trend value of branches,
employees,
deposits and net income were positive incase of all the selected banks.

1
The above empirical review of literature emphasizes that all the studies so far
conducted are mainly discussing the loan recovery problems, determinant
factors for
default of borrowers in financial institutions in general at Macro-level. The
researcher
also observed in the review of literature that there are no studies conducted
mainly to
identify the problems related to lack of effective credit management with
reference to
Wegagen Bank Share Company, Tigray region. Thus , the researcher felt it
appropriate
to take up the present study entitled “CREDIT MANAGEMENT- A CASE
STUDY OF
WEGAGEN BANK SHARE COMPANY IN TIGRAY REGION” to assess the
credit
management problems and thereby to recommend courses of action that are
assumed to
promote quality loan growth and curtail non-performing.

Chapter-3
Credit Operation of Jamuna Bank Ltd
Loans and advances are the heart of asset of all commercial banks. All over the world,
Banks
try immensely to make such a loan portfolio which helps maximize revenue at a
minimum
risk. Jamuna Bank continued to extend its credit facility by offering different customized
loan
products to business entities and individuals.

1
3.1 Credit Facilities of Jamuna Bank Ltd.
The main focus of Jamuna Bank Ltd. Credit Line/Program is financing business, trade
and
industrial activities through an effective delivery system.
Jamuna Bank Ltd. offers credit to almost all sectors of commercial activities
having productive purpose.
The loan portfolio of the Bank encompasses a wide range of credit programs.
Credit is also offered to major thrust sectors, as earmarked by the govt., at a
reduced interest rate to develop frontier industries.
Credit facilities are offered to individuals including housewives, businessmen,
small and big business houses, traders, manufactures, corporate bodies, etc.
Loan is provided to the rural people for agricultural production and other off-farm
activities.
Loan pricing system is customer friendly.
Prime customers enjoy prime rate in lending and other services.
Quick appreciation, appraisal, decision and disbursement are ensured.
Credit facilities are extended as per guidelines of Bangladesh Bank (Central Bank
of Bangladesh) and operational procedures of the Bank.
3.2 Loans & Advances
Jamuna Bank Ltd. emphasis on credit quality and customer's services yielded the desired
growth in profit, capital assets and shareholders' value. But to get the loans and advance
the
investors has to follow some terms and condition which falls under the policy and
practice of
the bank instruction booklet.
3.3 Industrial Credit
Jamuna Bank's services are directed towards the entrepreneurs in the small industries
sector.

1
A small industry, as per Industrial policy 1999 approved by the Cabinet, has been defined
as
an industrial undertaking whose total fixed investment is less than Tk.100 million.
The industrial loan reflected a significant growth of 22.59 % over the previous year. Total
outstanding industrial loans including Agri-based industry, RMG, Textile, Ship Building,
Ship Breaking & Other Manufacturing Industry stood Taka1359.29 crore at the end of
2012.
3.4 Commercial Credit
This Bank also supports development of trade, business and other commercial activities
in the
country. It covers the full range of services to the exporters and importers extending
various
facilities such as cash credit, export cash credit, packing credit, short term loans, local
and
foreign bills purchase facilities. At the end of 2012 total outstanding commercial loans
stood
at Taka 2193.92 crore including Transport, Storage, Trade Service & Commercial Real
Estate
financing.
3.5 Micro Credit
Jamuna Bank Ltd. launched a Micro Credit Scheme in 1994. Micro Credit Scheme
provides
for the poor for generation of employment and income on a sustainable basis particularly
in
urban and suburban areas. The Bank follows three systems of credit delivery. These are:
1. Lending to the NGOs who on-lend to their members. At present there are 15 such
NGOs.
2. Lending direct to the targets groups or ultimate borrowers under the Bank's own
management.

1
3. Lending direct to the member-borrowers and NGOs providing non financial services
like group formation and monitoring and supervision on exchange for a supervision
fee.
3.6 Lending Criteria
1. Entrepreneur
Entrepreneur/promoter has to be creditworthy and competent enough to run the
proposed industry.
2. Viability of the project
The project should be viable from organizational, technical, commercial, financial and
economic points of view.
I. Technical Viability
_ The project should be technically sound and environment-friendly.
_ Technology transfer in case of borrowed know-how ought to be ensured.
_ Building should be well planned and well constructed.
II. Commercial viability
_ Market prospect and potential for the product has to be fully assured at
competitive prices.
_ Marketing channel for the product should be accessible to the
entrepreneur.
III. Financial Viability
_ There should be reasonable debt equity ratio as determined by the Bank on
individual case basis.
_ Debt service coverage ratio should be at least 2.5 times at the optimum
level of production.
_ IRR should preferably be not less than 20 %.
IV. Economic Viability
_ The project should ensure benefit to the national economy and create
sufficient employment opportunity and be environment friendly.
3.7 Credit Operating System

1
1. Prospective Borrower
Most bank loans to individuals arise from a direct request from a customer who
approaches a
member of the bank's staff and asks to fill out a loan application. In the Jamuna Bank Ltd.
Bank, business loan request often arise from the contacts the bank's loan officers and
sales
representatives make as they solicit new accounts from firms operating in the bank's
market
area. Sometimes loan officers will call on the same company for months before the
customer
finally agrees to give the bank a try by filling out a loan application.
2. Client's Interview
When a customer decides to request a loan, an interview with a loan officer usually
follows
right ways, giving the customer the opportunity to explain his or her credit needs. That
interview is particularly important because it provides an opportunity for the bank's loan
officer to assess the customer's character and sincerity of purpose. If the customer appears
to
lack sincerity in acknowledging the need to adhere to the terms of a loan, this must be
recorded as a strong factor weighing against approval of the loan request.
3. Client's Request with FIS
The borrower is providing with an instruction paper, which help him or her to prepare the
loan proposal properly. Information on loan proposal should be furnished in prescribed
First
Information Sheet (FIS) in triplicate properly typed in each pages / set should be duly
sealed
and signed by the applicant(s)/ sponsor(s).
4. Information Sheet
Complete information should be furnished in respect of each item supported by
documentary

1
evidences, wherever necessary, to avoid further reference/ delay/ rejection of the
application.
The bank reserves the right to reject the application forthwith if the application given in
the
form is incomplete and not fully documented in all respects. Information may be
provided in
additional sheets of papers, if required. However ensure all the pages and annexure are
signed
under official seal. Also ensure that all the facts/ evidences have been enclosed properly
including the feasibility reports/ detailed study reports on loan proposal.
The client are required to deposit with the application the project examination fee
and
also apportion of the equity at the following rate either by cheque or pay order or
demand draft drown in favor of Jamuna Bank Ltd. and payable in any scheduled
Banks within the country.
Memorandum and Articles of Association together with the certificate of
registration/incorporation commencement of business of the company duly certified
by an aging director of the company should be submitted.
Certificates from the surveyor for determining the price of land of the project/price
of
adjacent land sold during last three years should be submitted. Also to be submitted
are site/ mouza map.
Machinery layout plan, price quotation of three suppliers together with illustrated
brochures and literatures should be submitted for both import and local machinery.
Consent letter from Power Development Board/ Rural Development Board/ Gas
Authority/ Pollution Control Board should be submitted whatever required.
Soil Test/ Water Test report (if required).
Nationality certificate along with attested passport size photographs of the
directors/partners/ proprietor should be submitted.
Declaration of asset and liability of the proposed directors/ partners/ proprietor.

1
Declaration of payment of income tax should be submitted.
5. Justification of Facility Requested
Compared to other financial institutions' usual two months average processing time for its
medium and large loan program, the processing time for small industry loans remains
well
below the above processing time because of its lesser detailed studied as well as the bank
considers that small entrepreneurs look for their sources of credit at their time of need.
The processing/approval time for small industry loan is not more then two months
from the date of receiving complete application from.
Application in prescribe form of received in triplicate, duly filled in, and sealed and
signed by the sponsoring directors along with their attested photographs duly affixed
in the space provided for.
Draft layout plan of the proposed building and the estimated for constriction cost is
obtained.
In case of project to be located in any BSCIC industrial estate, BSCIC latter of
consent particulars of the land, copy of lease deed is obtained.
For location of industry in other areas, permission / no- objection for setting up the
small industry is obtained from the appropriate authorities.
Utility agency's letter of consent of providing necessary utility services to the unit to
be obtained.
Detailed credit report of the sponsors/ project is prepared i.e. the Bank should carry
out detailed credit investigation of the promoters.
Tentative list of machinery / work with detailed specification should be obtained
supported by 3 price quotation.
The individual project appraisal report for small scale and cottage industry may not
be
very elaborate and exhausted. However it covers the Jamuna Bank Ltd. area of project
viability.
Join report from the Bank and the borrower is prepared for informal sector.
6. Analysis a/Proposals

1
JAMUNA BANK LTD. was established to provide term loan and other financial
assistance
including all kinds of banking facilities to accelerate the pace of development to small
industry. The financial assistance includes short term working capital loan, medium and
long
term finance to viable new- small scale industry (SSI) projects and BMRE of SSI projects
which fulfill the banks criteria of viability and acceptability. Project appraisal/ analysis in
the
banking sector is needed for the following reasons:
To justify the soundness of an investment.
To ensure repayment of bank finance.
To achieve organizational goals.
The entrepreneurs of small industry/ project requiring financial assistance from Jamuna
Bank
Ltd. need to fulfill the following criteria:
Credit Ratings
As per Bangladesh Banks mandatory requirement vide BRPD circular No. 06 dated
July 05 2006 Credit Rating of Jamuna Bank Limited was done by the Credit Rating
Agency
of Bangladesh Limited (CRAB) on the audited Balance Sheet as on 31.12.2012
CRAB has submitted their report as under:
Credit Rating Report (Entity Rating)
Long Term Short Term
Current Rating 2012 AA3 ST-2
Previous Rating 2011 A-1 ST-2
Outlook Stable
Date of Rating 3May, 2012
Credit rating agency of Bangladesh Limited (CRAB) Upgrades the rating of Jamuna
Bank Limited to AA3 from A-1 and reaffirms short term rating to ST-2. The above rating
has

1
been done in consideration of Banks visible improvement in fundamentals such as capital
adequacy, liquidity position, profitability, introduction of real time online banking etc.
However, the above rating is moderated, to some extent, by limited market share,
increase in
NPL, high cost of fund, moderate corporate governance, dependency on team deposit etc.
Financial institutions rated in this category are adjudged to offer adequate safety to
timely repayment of financial obligation. This level of rating indicates a corporate entity
with
an adequate credit profile. Risk factors are more variable and greater in period of
economic
stress than those rated in the higher categories. The short term rating indicates good
certain of
timely payment. Liquidity factors and company fundamentals are sound. Although
ongoing
funding needs may enlarge total financing requirements, access to capital markets is
good.
Risk factors are small.
3.8 Credit Risk Assessment
A thorough credit risk assessment should be conducted prior to the granting of loans, and
at
least thereafter for all facilities. The results of this assessment should be presented in a
Credit
Application that originates from the Relationship Manager (RM), and is recommended by
Branch Credit Committee (BCC). The RM should be the owner of the customer
relationship,
and must be held responsible to ensure the accuracy for the entire credit application
submitted
for approval. RMs must be familiar with the bank's Lending Guidelines and should
conduct
due diligence on new borrowers, principles and guarantors. Credit Applications should

1
summaries the results of the RMs risk assessment and include, as a minimum, the
following
details:
_ Amount and type of loan(s) proposed.
_ Purpose of loans,
_ Loan Structure (Tenor, Covenants, Repayments Schedule, Interest)
_ Security Arrangements
3.9 Sector Wise Disbursment of Loans in Jamuna Bank Ltd.:
Sl. No. Sectoral Structere of Lending Outstanding as
on 31.12.2012
As % of Total Loans
& Advances
1 Agriculture And Agro-based Industry 106.68 1.94%
2 RMG 350.77 6.39%
3 Textile 156.10 2.84%
4 Ship Building 0.00 0.00%
5 Ship Breaking 41.61 0.76%
6 Other Manufacturing Industry 41.61 0.76%
7 SME Sector 987.70 18.00%
8 Construction 313.13 5.70%
9 Power, Gas 12.52 0.23%
10 Transport, Storage and Communication 166.55 3.03%
11 Trade Service 1689.62 30.78%
12 Commercial real estate financing 83.27 1.52%
13 Residential real estate financing 85.85 1.56%
14 Consumer Credit 109.58 2.00%
15 Capital Market 87.58 1.60%
16 Credit Card 12.90 0.24%
17 Non-bank financial institutions 21.49 0.39%
18 Bank Acceptance ( i.e. LDBP, FDBP ) 767.28 13.98%

1
19 Others 188.04 3.43%
Total Loans & Advances 5488.70 100.00%
3.10 Comparative Recovery Rate of Loans
In banking environment no reward can be expected without risk. Considering the present
non-performing loan position of the country, Jamuna Bank Ltd. is very much cautious
about
its investment. Every loan proposal is placed under careful scrutiny before approval.
Internal
Audit team and Recovery team exercise close monitoring on every loan transaction. All
out
efforts were made to improve the recovery rate and control of non-performing loans and
advances.
3.11. Disbursment of Loan And Net Interest Income from Loan of JBL for
the last five years.(in Million)
YEAR LOAN AND
ADVANCES
NET INTEREST INCOME
FROM LOAN
2008 21036 568
2009 32287 900
2010 49734 1481
2011 56611 2162
2012 54887 1839
3.12. How Jamuna bank recover their Loan
When Jamuna Bank sanctions loans and advances to its customers, they clearly state the
repayment pattern in the loan agreement. But some credit holders do not pay their credit
in
due period. The nationalized and private sector commercial banks have to face this sort of

1
problems. This situation is also found in Jamuna Bank. To overcome the problem of
overdue
loan, the bank has taken particular loan recovery programs.
Recovery Programs taken by Jamuna Bank Limited:
Establishing credit supervision and monitoring cell in the bank
Re-structuring the loan sanctioning and distributing policy of the bank
Sanctioning loans and advances against sufficient securities as best as possible
Giving more powers to the branch manager in credit management decision making
process
Offering a package of incentives to the sound borrowers
Giving more emphasis on short term loans and advances
Imposing restrictions on loans and advances for sick industries
Taking legal actions quickly against unsound borrowers as best as possible within the
period specified by the law of limitations.
3.13. Recovery Patterns of Loan & Advances:
Generally Jamuna bank sanctions loans and advances to every sector of an economy.
Before
going into details of recovery performance, we have to be familiar with some terms used
in
recovery performance:
Disbursement: highest outstanding balance on any date during the reporting period
minus outstanding balance at the end of the preceding period.
Demand for recovery: overdue at the end of the reporting period plus recovery
during
the reporting period.
Recovery: highest outstanding balance on any date during the reporting period
minus
outstanding balance at the end of the recovery period.
Outstanding: Outstanding figures in the ledger at the end of the reporting period.
Overdue: Demand for recovery minus recovery.

1
Recovery Performance of Jamuna Bank Ltd. of Several Years.
(Tk in millions)
Particular 2008 2009 2010
Total disbursement 21036 32287 49734
Demand for recovery 28391 42743 54633
Recovery 24,321 34,935 51,301
Overdue 4069 7808 3332
Recovery as a percentage of DFR 85% 81% 93%
Overdue as a percentage of DFR 15% 19% 7%
Source: Annual Report 2010
3.14. Problems in Loan Recovery
Though Jamuna bank is performing better in managing loan and advances, still 12.39%
of
total loan and advances are classified. There are a lot of reasons for which the loan
recovery
of the bank is still now defective. In most cases, problems may be raised from
sanctioning
procedures of loan, investigation of the project, and investigation of the loans etc. that is,
the
problem in loan recovery proves the outcomes of the default process in loan
disbursement.
The main reasons of poor loan recovery are categorized in four broad types as follow:
A. Problems created by economic environment
The following problems arise from the effect of economic environment:
1. Changing in the management pattern: Changing of management patterns may delay
the recovery of mature loan.
2. Changing in industrial patterns: The banks sometimes sanction loan to the losing
concern for further improvement of the respective sector, but in most cases, they fail to
achieve progress.
3. Operation of open market economy: In our country mainly industries become sick and

1
also close their business on account of emerging of open market economy. The cost of
production is high and the quality of goods is not of required of standard. As a result,
they
become the losing concerns and the amount of bad loan increases.
4. Rapid expansion of business: There are many companies which expand their business
rapidly, but the expansion is for short time. In the long run, the amount of classified loan
increases.
B. Problems created by government:
The following problems are arisen by the government:
1. External pressure: Jamuna Bank has also faced many problems in the loan
recovery process as a part of continuous pressure from various interested groups.
2. Legal problems: Existing rules and regulations are insufficient to cover the legal
aspects of loan recovery. As a result, defaulters can get release easily from all
charges against them.
3. Instability of Govt. policy: Frequent changes in government policies in regard to
recovery of loan.
C. Problems created by the bank:
The following problems are created by the banks:
1. Lack of analysis of business risk: Before lending, Sometime Jamuna Bank fails to
properly analyze the business risk of the borrowers and the bank cannot forecast
whether the business will succeed or fail. If it fails to run well, the loan becomes
classified.
2. Lack of proper valuation of security or mortgage property: In some cases, bank
fails to determine the value of security against the loan. As a result, if the loan
becomes classified, the bank cannot recover its loan through the sale of mortgage.
D. Other general causes of poor loan recovery:
Apart from the specific reasons creating problems to recoup loan, there exists some other
general causes which have a great impact on creating the problems which are faced by
the
Jamuna Bank under study in the loan recovery process. These are:

1
1. Early sanction and disbursement of loan to the borrowers without proper
inspection of the project by the bank on account of pressure from lobbying group.
2. Lack evaluation of technical and economic feasibility of the program.
3. Delay in disbursement of credit.
4. Sometime credit is not allowed to actual entrepreneurs sometime.
5. Lack of proper supervision.
6. Illiteracy of borrowers.
7. Negative attitude of borrowers to repay the loan.
8. Deterioration of the value system of the borrowers.
9. Money borrowers use their loan-money other than specified project, i.e., if the
loan is sanctioned for industrial purpose; they use the money in house building or
purchase of land for their own purpose.
10. Sometimes borrowers invest their money outside the country. Many borrowers
transfer loan money to abroad where they deposited this money in their own
account or spent some other purpose.
11. Sometimes local borrowers are found to be so much compelled to grant them loan
without proper study due to some unexpected reasons. Since these borrowers are
capable of getting loan by exercising their influence, they can also escape the
repayment liability.
12. Problems responsible for non-implementation and delayed implementation of
project for which the entrepreneurs of the project cannot repay the loan. The
causes of failure may be:
⇒Failure to ascertain the economic availability of the projects
⇒Time lag between approval and sanctioning of the projects
⇒Import of machinery and raw materials both are the problems of
paucity of foreign exchange and procedures of licensing.
All of these reasons discussed above are general reasons for problems loan recovery of
Jamuna Bank. Besides these, there are some specific reasons for loan recovery problems
faced continuously by Jamuna Bank. They are as:
Loans are given under fictitious names and enterprise

1
Loans are given in some cases without sufficient securities
Approval of the loans in excess of the branch manager’s power
Improper monitoring and supervision of credit
Politically misuse of loan programs
Lack of timely action against willful defaulter
Loans are sometimes for economically unsound project.
The pressure to achieve targeted loan and advance given by head office to the
branches
Problems in loan recovery are the outcome of the default on loans disbursements in the
earlier period.
3.15. Types of loan of Jamuna Bank Limited:
Depending on the various nature of financing, all the lending activities have been
brought under the following major heads:
Loan (General)
Short term, Medium term & Long term loans allowed to individual/firm/industries for a
specific purpose but for a definite period and generally repayable by installments fall
under
this head. This type of lending is mainly allowed to accommodate financing under the
categories (i) Large & Medium Scale Industry and (ii) Small & Cottage Industry. Very
often
term financing for (i) Agriculture & (ii) Others are also included here.
House Building Loan (General): Loans allowed to individual/enterprises for
construction of
house (residential or commercial) fall under this type of advance. The amount is
repayable by
monthly installment within a specified period. Such advances are known as Loan
(HBLGEN).
House Building Loan (Staff): Loans allowed to our Bank employees for
purchase/construction of house shall be known as Staff Loan (HBL-STAFF).

1
Other Loans to Staff: Loans allowed to employees other than for House Building shall
be
grouped under head - Staff Loan (Gen).
Cash Credit (Hypo.): Advances allowed to individual/firm for trading as well as
wholesale
purpose or to industries to meet up the working capital requirements against
hypothecation of
goods as primary security fall under this type of lending. It is a continuous credit. It is
allowed under the categories (i) "Commercial Lending" when the customer is other than a
industry and (ii) "Working Capital" when the customer is an industry.
Cash Credit (Pledge): Financial accommodations to individual/firms for trading as well
as
for whole-sale or to industries as working capital against pledge of goods as primary
security
fall under this head of advance. It is also a continuous credit and like the above allowed
under
the categories (i) "Commercial Lending" and (ii) Working Capital".
Hire Purchase: Hire-Purchase is a type of installment credit under which the Hire-
Purchaser
agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of
Principal as well as interest for adjustment of the loan within a specified period.
Lease Financing: Lease Financing is one of the most convenient sources of acquiring
capital
machinery and equipment whereby a client is given the opportunity to have an exclusive
right
to use an asset usually for an agreed period of time against payment of rent. It is a term
financing repayable by installment.
Time Loan: This is one time financial accommodation for short period maximum 12
months

1
to meet some specific purpose. The loan is adjustable within the validity and not
renewable
and no transaction is allowed.
Consumers Credit Scheme: It is a special credit scheme of the Bank to finance purchase
of
consumers' durable to the fixed income group to raise their standard of living. The loans
are
allowed on soft terms against personal guarantee and deposit of specified percentage of
equity by the customers. The loan is repayable by monthly installment within a fixed
period.
SOD (General): Advances allowed to individual/firms against financial obligation (i.e.
lien
on FDR/PSP/ BSP/Insurance Policy/Share etc). This may or may not be a continuous
Credit.
SOD (Others): Advances allowed against assignment of work order for execution of
contractual works falls under this head. This advance is generally allowed for a definite
period and specific purpose i.e. it is not a continuous credit. It falls under the category
"Others".
SOD (Export): Advance allowed for purchasing foreign currency for payment against
L/Cs
(Back to Back) where the exports do not materialize before the date of import payment.
This
is also an advance for temporary period which is known as export finance and falls under
the
category "Commercial Lending".
PAD: Payment made by the Bank against lodgment of shipping documents of goods
imported through L/C falls under this head. It is an interim advance connected with
import
and is generally liquidated against payments usually made by the party for retirement of
the

1
documents for release of imported goods from the customs authority. It falls under the
category "Commercial Lending".
LlM: Advances allowed for retirement of shipping documents and release of goods
imported
through L/C taking effective control over the goods by pledge in godowns under Bank's
lock
& key fall under this type of advance. This is also a temporary advance connected with
import which is known as post-import finance and falls under the category "Commercial
Lending".
LTR: Advance allowed for retirement of shipping documents and release of goods
imported
through LC falls under this head. The goods are handed over to the importer under trust
with
the arrangement that sale proceeds should be deposited to liquidate the advances within a
given period. This is also a temporary advance connected with import and known as
postimport
finance and falls under the category "Commercial Lending".
IBP: Payment made through purchase of inland bills/cheques to meet urgent requirement
of
the customer falls under this type of credit facility. This temporary advance is adjustable
from
the proceeds of bills/cheques purchased for collection. It falls under the category
"Commercial Lending".
Export Cash Credit (ECC): Financial accommodation allowed to a customer for
exports of
goods falls under this head and is categorized as "Export Credit". The advances must be
liquidated out of export proceeds within 180 days.
Packing Credit (PC): Advance allowed to a customer against specific L/C/firm contract
for
processing/packing of goods to be exported falls under this head and is categorized as

1
"Packing Credit". The advances must be adjusted from proceeds of the relevant exports
within 180 days. It falls under the category "Export Credit".
F D B P: Payment made to a customer through purchase/negotiation of a Foreign
documentary bills falls under this head. This temporary advance is adjustable from the
proceeds of the shipping/export documents. It falls under the category "Export Credit".
IDBP: Payment made against documents representing sell of goods to Local export
oriented
industries which are deemed as exports and which are denominated in Local Currency /
Foreign Currency falls under this head. This temporary liability is adjustable from
proceeds
of the Bill.
F B P: Payment made to a customer through Purchase or Foreign Currency
Cheques/Drafts
falls under this head. This temporary advance is adjustable from the proceeds of the
cheque/draft.
3.16. Mission Statement of the Credit Department:
To deliver credit facilities to customers of Jamuna Bank Limited with prudence and
efficiency and establish JBL as the preferred credit service provider in the country in
terms of
wide range of credit product, competitive price, adherence to credit norms, exercising due
diligence, and effective management of risk assets. Credit department of any bank is very
much important. “A bank will collapse or not” this important matter depends upon the
performance of the bank’s credit department Responsibilities of the credit department of
Jamuna Bank Ltd. are many. They have to maintain a lot of scrutiny factors. They have to
use
the deposit collected by the bank in a proper way by giving loans to maintain the
liquidity. A
huge part of the revenue is generated from the interest received from the loans and
advances.

1
Again if they give so many loans then liquidity of the bank may decrease and risk will
also
increase in the market.
But ultimately this is the truth that if banks don’t give loan to their clients their
revenue generation will be slow and ultimately the bank will be collapsed. So bank must
give
loans and advances to the business and the personnel. Now the question arises that how
effectively they can do it. They must have to take care that the loan they are giving to the
clients. Some questions must arise when Jamuna Bank Ltd. gives loan to clients.
Is the client capable enough to repay the loan and interest?
How it will be measured?
On what basis the bank will give the loan to the client?
How will the Jamuna Bank Ltd. recover the lone if it is default?
To get the answer of these questions and maintain the credit activities properly there is no
alternative of Credit Risk Analysis. Analyzing the risk associated with the loan gives a
clear
idea about the next step of the credit department that is what decision they will take
further. I
am focusing this important factor of the credit department that Credit Risk Analysis of
Jamuna Bank Limited that is described broadly in the later part of the report.
3.17. Credit Principles:
In order to maximize the stakeholders’ value by establishing JBL as fundamentally
sound financial institution, there are ten credit principles, which should always Guide
your
behavior in our lending decision:
i. The Bank shall provide suitable credit services and products for the market in which it
operates. Product innovation shall be a continuous process.
ii. Loans and advances shall normally be financed from customers deposit and not out of
temporary fund or borrowing from money market.
iii. Credit facilities shall be allowed in a manner so that credit expansion goes on ensuring

1
quality i.e. no compromise with the Bank’s standard of excellence. Credit is extended to
customers who will complement such standards.
iv. All credit extension must comply with the requirements of Bank’s Memorandum and
Articles of Association, Bank companies Act as amended from time to time,
Bangladesh Bank’s instructions Circulars, Guidelines and other applicable laws, rules
and regulations.
v. The conduct of the loan portfolio should contribute, within defined risk limitation, to
the achievement of profitable growth and superior return on the Bank’s capital.
vi. Credit advancement shall focus on the development and enhancement of customer’s
relationship and shall be measured on the basis of the total yield for each relationship
with a customer (on the global basis), though individual transactions should also be
profitable.
vii. Credit facilities will be extended to those companies/persons, which can make best
use
of the facility thus helping maximize our profit as well as economic growth of the
country. To ensure achievement of this objective lending decision shall be based mainly
on the borrower’s ability to repay.
Proper staffing: Proper analysis of Credit proposal is complex and required high level of
numerical as well as analytical ability and common sense. To ensure effective
understanding
of the concept and thus to make the overall credit port-folio of the Bank healthy, proper
staffing shall be made through placement of qualified officials having appropriate
background, who have got the right aptitude, formal training in Credit Risk Analysis,
Bank’s
credit procedures as well as required experience.
One Assess the customer’s character for integrity and willingness to repay
Two Only lend what the customer will have the capacity and ability to repay
Three Plan for the possibility of default
Four Only extend credit where we can sufficiently understand and manage the risk
Five Ensure independent credit participation in the credit process

1
Six Behave ethically in all credit activities
Seven Be proactive in identifying, managing and communicating credit risk
Eight Be diligent in ensuring that credit exposures and activities comply with JBL
Nine Optimize risk and reward
Ten Build and maintain a diversified Credit portfolio
3.18. Processing of Credit Approval:
Credit Risk Grading System (CGRS)
Risk is inherent in all aspects of commercial operation. However for Banks and
Financial Institutions Credit risk is an essential factor that needs to be managed. Credit
risk is
the possibility that a borrower will fail to meet its obligation in accordance with agreed
terms.
Credit risk, therefore, arises from the Bank’s dealings with or lending to corporate,
individual
and other Banks or financial institutions.
Credit risk management needs to be a robust process that enables Banks to proactively
manage loan portfolio in order to minimize losses and earns an acceptable level of return
for
Shareholders. Central to this is a comprehensive IT system, which should have ability to
capture all key customer data, risk management and transaction information. Jamuna
Bank
Ltd. already has real time on-line Banking system which enables to capture all key
customer
data. Given the fast changing dynamic global economy and the increasing pressure of
globalization, liberalization, consolidation and dis-intermediation, it is essential that
Banks
have robust Credit risk management polices and procedures that are sensitive and
responsive
to these changes. At the post-sanction stage, the bank can decide about the depth of the

1
review or renewal, frequency of review, periodicity of the grading, and other precautions
to
be taken. Since the two credit risk models are presently in vogue, the Governing Board of
Bangladesh Institute of Bank Management (BIBM) under the chairmanship of the
Governor,
Bangladesh Bank decided that an integrated Credit Risk Grading Model be developed
incorporating the significant features of the above mentioned models with a view to
render a
need based simplified and user friendly model for application by the Banks and financial
institutions in processing credit decisions and evaluating the magnitude of risk involved
therein.
3.19. Function of Credit Risk Grading:
Well-managed credit risk grading systems promote bank safety and soundness by
facilitating informed decision-making. Grading systems measure credit risk and
differentiate
individual credits and groups of credits by the risk they pose. This allows bank
management
and examiners to monitor changes and trends in risk levels. The process also allows bank
management to manage risk to optimize returns.
Use of Credit Risk Grading
The Credit Risk Grading matrix allows application of uniform standards to credits to
ensure a common standardized approach to assess the quality of individual obligor,
credit portfolio of a 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

1
analysis.
Number & Short Name of Grading Used in the CRG
The proposed CRG scale consists of 8 categories with Short names and Numbers are
provided as follows:
Characteristics of different grades
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
GRADING SHORT NAME NUMBER
Superior SUP 1
Good GD 2
Acceptable ACCPT 3
Marginal/Watchlist MG/WL 4
Special Mention SM 5
Sub standard SS 6
Doubtful DF 7
Bad & Loss BL 8
Acceptable - (ACCPT) – 3
These borrowers are not as strong as GOOD Grade borrowers, but still

1
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/Watch list - (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 borrower.
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.

1
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 high.
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.
Proceeds expected from the liquidation or realization of security may be
awaited. The continuance of the loan as a bankable asset is not warranted, and
the anticipated loss should have been provided for.
This classification reflects that it is not practical or desirable to defer writing
off this basically valueless asset even though partial recovery may be affected
in the future. Bangladesh Bank guidelines for timely write off of bad loans
must be adhered to. Legal procedures/suit initiated.
Bangladesh Bank criteria for bad & loss credit shall apply.
An Aggregate Score of less than 35 based on the Risk Grade Score Sheet.
3.20. Computation of Credit Risk Grading
So far I have discussed about the theoretical part of the Credit Risk grading. I have
known in which grade what are the characteristics of the company as well as clients’
profile.

1
To measure the actual risk associated with the loan that is going to be paid by the bank to
the
particular client, we have to follow some steps and get a statistical parameter of the risk.
There are six steps to compute credit risk grading. Those are given and described below:
Step 1: Identify all the Principal Risk Components
Credit risk for counterparty arises from an aggregation of the following:
a) Financial Risk
b) Business/Industry Risk
c) Management Risk
d) Security Risk
e) Relationship Risk
Each of the above mentioned key risk areas require be evaluating and aggregating to
arrive
at an overall risk grading measure.
a) Evaluation of Financial Risk: Risk that counterparties will fail to meet obligation due
to financial distress. This typically entails analysis of financials i.e. analysis of
leverage, liquidity, profitability & interest coverage ratios. To conclude, this capitalizes
on the risk of high leverage, poor liquidity, low profitability & insufficient cash flow.
b) Evaluation of Business/Industry Risk: Risk that adverse industry situation or
unfavorable business condition will impact borrowers’ capacity to meet obligation. The
evaluation of this category of risk looks at parameters such as business outlook, size of
business, industry growth, market competition & barriers to entry/exit. To conclude,
this capitalizes on the risk of failure due to low market share & poor industry growth.
c) Evaluation of Management Risk: Risk that counterparties may default as a result of
poor managerial ability including experience of the management, its succession plan
and team work.
d) Evaluation of Security Risk: Risk that the bank might be exposed due to poor quality
or strength of the security in case of default. This may entail strength of security &
collateral, location of collateral and support.
e) Evaluation of Relationship Risk: These risk areas cover evaluation of limits

1
utilization, account performance, conditions/covenants compliance by the borrower and
deposit relationship.
Step 2: Allocate weights to Principal Risk Components
According to the importance of risk profile, the following weightings are proposed for
corresponding principal risks.
Step 3: Establish the Key Parameters
Principal Risk Components Key Parameters
a) Financial Risk Leverage, Liquidity, Profitability & Coverage ratio
b) Business / Industrial Risk Size of Business, Age of Business, Business Outlook,
Industry Growth, Competition & Barriers to Business
c) Management Risk Experience, Succession & Team Work
d) Security Risk Security Coverage, Collateral Coverage and Support
e) Relationship Risk Account Conduct ,Utilization of Limit, Compliance of
covenants/conditions & Personal Deposit
Principal Risk Components: Weight:
Financial Risk 50%
Business/Industry Risk 18%
Management Risk 12%
Security Risk 10%
Relationship Risk 10%
Step 4: Assign weights to each of the key parameters
Principal Risk Components Key Parameters Weights
1. Financial Risk ………………. ……………………………………
Leverage………………….

Liquidity………………….

Profitability……………….

Coverage………………….

50%
15%
15%

1
15%
5%
2. Business / Industrial risk…… ……………………………………
Size of the business………
Age of the business………
Business Outlook…………
Industry growth…………..
Market competition………
Entry / Exit Barriers……...
18%
5%
3%
3%
3%
2%
2%
3. Management Risk…………... ……………………………………
Experience………………..

Succession………………...

Team Work……………….
12%
5%
4%
3%
4. Security Risk………………… ……………………………………
Security coverage…………
Collateral coverage……….
Support……………………

10%
4%

1
4%
2%
5. Relationship Risk…………… ……………………………………
Account conduct…………
Utilization of limit………..
Compliance of covenants…
Personal deposit…………..
10%
5%
2%
2%
1%
Step 5: Input data to arrive at the score on the key parameters
After the risk identification & weighting assignment process (as mentioned above), the
next
steps will be to input actual parameter in the score sheet to arrive at the scores
corresponding to
the actual parameters. This manual also provides a well programmed MS Excel based
credit
risk scoring sheet to arrive at a total score on each borrower. The excel program requires
inputting data accurately in particular cells for input and will automatically calculate the
risk
grade for a particular borrower based on the total score obtained. The following steps are
to be
followed while using the MS Excel program.
a) Open the MS XL file named, CRG_SCORE_SHEET
b) The entire XL sheet named, CRG is protected except the particular cells to input data.
c) Input data accurately in the cells which are BORDERED & are colored YELLOW.
d) Some input cells contain DROP DOWN LIST for some criteria corresponding to the
Key Parameters. Click to the input cell and select the appropriate parameters from the

1
DROP DOWN LIST as shown below.
e) All the cells provided for input must be filled in order to arrive at accurate risk grade.
f) We have also enclosed the MS Excel file named, CRG_Score_Sheet in CD ROM for
use.
Step 6: Arrive at the Credit Risk Grading based on total score obtained
The following is the proposed Credit Risk Grade matrix based on the total score
obtained by an obligor.
Number Risk Grading Short Name Score
1 Superior SUP 100% cash covered
Government guarantee
International Bank
guarantees
2 Good GD 85+
3 Acceptable ACCPT 75-84
4 Marginal/Watch list MG/WL 65-74
5 Special Mention SM 55-64
6 Sub-standard SS 45-54
7 Doubtful DF 35-44
8 Bad & Loss BL <35

Chapter-4
Findings and Analysis
4.1 Financial Analysis:
Table No. 1
(Source: Annual Report of Jamuna Bank Ltd. during 2011-2012)
Financial performance of Jamuna Bank Ltd. During 2011-2012.
(Tk. In Million)

(Cont.)
Year
Paid up

1
Capital
Reserved
Funds
Deposits Advances
Un-
Classified
Loans
Classified
Loans
123456
2008 1313 847 27307 21036 298 296
2009 1622 2359 42356 32287 479 465
2010 2230 4178 60673 49734 718 453
2011 3648 3633 70508 56611 804 627
2012 4488 3837 79623 54887 814 1648
Avg. 2660.2 2970.8 56093.4 42911 622.6 697.8
SD
1359.64 1372.13 21211.84 15564.81 226.18 543.93
CV 51.11 46.19 37.82 36.27 36.33 77.95
Max. 4488 4178 79623 56611 814 1648
Min 1313 847 27307 21036 298 296
Year
Investment
s
Total
Assets
Fixed
Assets
Total
Income

1
Total
Expenditur
e
Income from
Investment
Fig: Financial performance of Jamuna Bank Ltd. During 2011-201
Table No. 1: This table represents the financial performance of Jamuna Bank Ltd. during
2011-2012. This table also shows the twelve selected financial information i.e Paid up
Capital, Reserved Funds, Deposits, Advances, Un-Classified Loans, Classified Loans,
Investments, Total Assets, Fixed Assets, Total Income, Total Expenditure & Income
from
Investment during 2011-2012. Total Assets had the maximum average position i.e. Tk.
69426.4 million followed by Deposits, Advances, Paid Up Capital, Investments, Total
Income, Total Expenditure, Reserve Funds, Income from Investment, Fixed Assets,
Classified Loans & Unclassified Loans respectively during 2011-2012.
4.2 Trend Analysis:
Table No. 2
7 8 9 10 11 12
2008 4238 31646 8138 3407 3033 666
2009 8503 48730 17571 4454 3901 1361
2010 10891 70013 25537 6319 5061 1152
2011 16314 87065 32684 9769 8356 1404
2012 39118 109678 55719 11064 9865 2007
Avg. 15812.80 69426.4 27929.8 7002.6 6043.2 1318
SD 13738.78 30770.75 18024.9 3318.09 2939.82 483.90
CV 86.88 44.32 64.54 47.38 48.65 36.71
Max. 39118 109678 55719 11064 9865 2007
Min 4238 31646 8138 3407 3033 666
Trend of Selected Information Jamuna Bank Limited during
Figure 4.2.1: Trend of Reserve Fund during 2008

1
Reserved Funds
Year
Y X Trend
Year
Actual
2008 847 0 1520 2008
2009 2359 1 2245.40 2009
2010 4178
2 2970.80
2010
2011 3633 3 3696.20 2011
2012 3837
4 4421.60
2012
Yc=a+bx
Intercept a 1520 Intercept
Slope b 725.40 Slope

2011
2008- 2012.(Taka in Million)
Deposits Advances
Y X Trend
Year
Y X Trend
Actual Actual
27307
0 29536.6 2008 21036 0 24505.80
42356
1 42815 2009 32287 1 33708.40
60673
2 56093.40
2010 49734
2
70508
3 69371.80 2011 56611 3 52113.60
79623
4
82650.20
2012 54887
4 61316.20
Yc=a+bx Yc=a+bx
a 29536.6 Intercept a 24505.80
b 13278.40 Slope b 9202.60

2011-2012.

1
Un-Classified Loans
Y X Trend
Actual
2008 298 0 351.20
2 009 479 1 486.90
42911
2010 718
2 622.60
2011 804 3 758.30
2012 814
4 894
Yc=a+bx
Intercept a 351.20
Slope b 135.70

Figure 4.2.2: Trend of Deposit during 2008-2012. . (Taka in Million)

Figure 4.2.3.: Trend of Advances during 2008-2012. (Taka in Million)
Figure 4.2.4: Trend of Un-Classified Loans during 2008-2012. . (Taka in Million)
Classified Loans Investments Total Assets Income from Investment
Year Y X Trend Year Y X Trend Year Y X Trend Year Y X Trend
Actual Actual Actual Actual
2008 296 0 124.6 2008 4238 0 298.80 2008 31646 0 30546.6 2008 666 0 773
2009 465
1 411.2
2009 8503
1
8055.8
0
2009 48730
1 49986.5
2009
1361
1 1045.5
2010 453
2 697.8
2010
10891 2
15812.
8
2010 70013
2 69426.4

1
2010
1152
2 1318
2011 627
3 984.40
2011 16314
3
23569.
8
2011 87065
3 88866.3
2011
1404
3 1590.5
2012 1648
4 1271
2012 39118
4
31326.
8
2012 109678
4
108306.
2
2012
2007
4 1863
Yc=a+bx Yc=a+bx Yc=a+bx Yc=a+bx
Intercept a
124.
6
Intercep
ta
298.
8 Intercept a
3054
6.6 Intercept a 773
Slope b
286.
6 Slope b

1
775
7 Slope b
1943
9.9 Slope b
272.
5
Source: Table No. 1
Figure 4.2.5: Trend of Classified Loans during 2008-2012. . (Taka in Million)
Figure 4.2.6: Trend of Investment during 2008-2012. . (Taka in Million)
Figure 4.2.7: Trend of Total Assets during 2008-2012. . (Taka in Million)
Figure 4.2.8: Trend of Income from Investment during 2008-2012. . (Taka in Million)
Table No. 2: This table shows the Trend of Selected Information of Jamuna Bank
Limited
during 2008-2012 including actual and trend position of the same by using the selected
formula Yc = a+bx, Intercept and Slope. Above trend graph we found that the all the
selected
variables i.e. Reserved Funds, Deposits, Advances, Un-Classified Loans, Classified
Loans,
Investments, Total Assets, & Income from Investment was upward trend during the study
period. So, we can say that the overall position of JBL is above satisfactory under the
study
period.
4.3 Productivity Analysis:
Table No. 3
Productivity Trend of Jamuna Bank Ltd. during 2008-2012.
(Tk. In Million)
Year
Total
Income
Total
Expenditure

1
ΔI/
I
ΔE/
E
Productivity Remarks
(Δ I / I) / (Δ
E / E)
Fav. /
Unfav.
1234567
2008 3407 3033
2009 4454 3901 .30 .29 1.03 Fav.
2010 6319 5061 .85 .67 1.26 Fav.
2011 9769 8356 1.87 1.75 1.06 Fav.
2012 11064 9865 2.25 2.25 1.00 unFav.
Source: Table No.1
It is the rate of the incremental income and the incremental expenditure that measure the
productivity of a bank. Bank’s productivity is defined as percentage change in its
earnings in
relation to percentage change in its costs. To put it differently, the output responsiveness
as
measured by proportionate change in income in relation to proportionate change in
expenditure, measures the productivity of commercial banks. Among the different models
of
productivity, particular model is followed for covering data collection.
Symbolically, P = (1 / 1) / (E / E)
Where, P = Productivity or output responsiveness change in inputs.
= Delta.
I = Total income
E = Total Expenditure.

1
In absence of specific indicator of output and input of a bank, the above measurement of
productivity is widely used. Productivity of a bank is inversely related to cost responsiveness, i.e.
higher cost responsiveness leads to lower productivity and vice-versa. If the proportionate
change in
expenditure (E) leads to a less than the proportionate change in income (1), the cost is higher,
again,
if the proportionate change in (E) expenditure leads to a more than proportionate change
income (1)
the cost is lower. In the first case P<I and in the second case P>I. The productivity (P) is greater
than
(I) one and it is a sign of good health of the banks. Here first year has been assumed as base year
&
for Δ I / I & Δ E / E we have used the following formula:Current year-Base year/Base year.
Table No. 3 (Productivity Trend of Jamuna Bank Ltd. during 2008-2012): This table
reveals that the overall productivity of JBL was satisfactory i.e. (p>1) favorable in 2009,
2010, & 2011 except we found that the JBL was the unfavorable position in 2012 under
the
study period.
4.4 Graphical Presentation:
Table No. 4
Consolidated Information of Selected Variables of
Jamuna Bank Ltd. during 2008-2012.
(Tk. In Million)
Figure 4.4.1:Income From Investment
666
1361
1152
1404
2007
0
500

1
1000
1500
2000
2500
2008 2009 2010 2011 2012
(In Millions)
Year

Income from Investment of JBL during

2008-2012
Income from Investment
Year
Reserved
Funds
Deposits Advances
Un-
Classifie
d Loans
Classified
Loans
Investm
ents
Total
Assets
Income
from
Investm
ent
23456789
2008 847 27307 21036 298 296 4238 31646 666
2009 2359 42356 32287 479 465 8503 48730 1361

1
2010 4178 60673 49734 718 453 10891 70013 1152
2011 3633 70508 56611 804 627 16314 87065 1404
2012 3837 79623 54887 814 1648 39118 109678 2007
Figure 4.4.2:Reserved Funds Position
Figure 4.4.3:Deposits of JBL
847
2359
4178
3633
3837
0
500
1000
1500
2000
2500
3000
3500
4000
4500
2008 2009 2010 2011 2012
(In Millions)
Year

Reserved Funds Position of JBL during

2008-2012
Reserved Funds
27307
42356
60673
70508
79623

1
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
2008 2009 2010 2011 2012
(In Millions)
Year

Deposits of JBL during

2008-2012
Deposits
Figure 4.4.4:Advance of JBL
Figure 4.4.5:Un-classified Loans
21036
32287
49734
56611 54887
0
10000
20000
30000
40000
50000
60000
2008 2009 2010 2011 2012
(In Millions)
Year

1
Advance of JBL during
2008-2012
Advances
298
479
718
804 814
0
100
200
300
400
500
600
700
800
900
2008 2009 2010 2011 2012
(In Millions)
Year

Un-classified Loans of JBL during

2008-2012
Un-Classified Loans
Figure 4.4.6:Classified Loans
Figure 4.4.7:Investments of JBL.
296
465 453
627
1648
0

1
200
400
600
800
1000
1200
1400
1600
1800
2008 2009 2010 2011 2012
(In Millions)
Year

Classified Loans of JBL during

2008-2012
Classified Loans
4238
8503
10891
16314
39118
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
2008 2009 2010 2011 2012
(In Millions)

1
Year

Investments of JBL during

2008-2012
Investments
Figure 4.4.8:Total assets of JBL.
Major Findings of the Study
4.5 Findings:
The study has been made to find out the credit operating system, their credit policies and
procedures of loan supervision and recovery, especially their classified loans of Jamuna
Bank
Ltd. And after discussing their credit system, procedure of loan recovery and analyze
their
performance of loan and advance department including the classified loans, the findings
of
the study are as following:
Jamuna Bank,Bahaddarhat branch,Bahaddarhat,Chittagong is able to achieve
excellent rating from their
clients in two important criteria of branch location & comfortable interior decoration.
Branch managers are made fully liable for the selection of the new borrower in the
bank.
It prohibits the way to improper selection of the new borrower by the branch manager.
Jamuna Bank Ltd. provides working capital facilities like Cash Credit, in against of
stock
of manufacturing goods. And continuously supervise to ensure that appropriate stocks are
there to support the financing.
There are some cases where effective monitoring and persuasion are needed
especially for
substandard and doubtful cases. Persuasion and monitoring are effectively performed by
the branch manager.

1
In some cases those loans becomes classified which the head office has
recommended. So
to some extent it is true that, sometime Head office decision is also creating classified
loans.
31646
48730
70013
87065
109678
0
20000
40000
60000
80000
100000
120000
2008 2009 2010 2011 2012
(In Millions)
Year

Total Assets of JBL during

2008-2012
Total Assets
The employees are very good in nature, highly educated and helpful, if subordinate
makes
a mistake, higher authority motivates politely rather than blaming.
The employees of credit departments that are so crucial matter are highly
experienced and
can handle smartly the clients.
Important factors such as- good reputation in the market, personal & corporate
relationship etc.

1
Number of employee in the branch is few.
Cash limit is low; because of this sometimes clients can not get service properly.
ATM service is week.
The branch manager, officer and executive who have achieved target in all respect
may
be rewarded.
Political interference has to be avoided in selection of employee. Because customers
are
very sensitive in service marketing. If they don’t get right service at right time at right
place by the right person they will switch over in other bank.
Advertising and promotional activities are very effective for informing customers
about
new and (financial) attractive service. So, advertising campaign should be stronger for
quick improvement of the bank.
From the study it has been found that the pricing policy of JBL is not much
satisfactory.
For this reason they should hire marketing specialists who will help them to develop
effective service strategy, different critical decision and prepare various plans.
4.7 SWOT Analysis:
SWOT analysis means analyzing the Strengths, Weakness, Opportunities and Threats of
the
organization to know the present condition. This is very common analysis to determine
the
company s capabilities of doing effective business. This help to know the possible
advantages
and disadvantages of the firm that it has compare to others. The SWOT analyses of
Jamuna
Bank Limited are briefly given in the below:
S- Strengths
Experienced top management.

1
Good operating efficiency.
Satisfactory business growth.
Satisfactory Non-Performing-Loan coverage.
Satisfactory risk management structure.
Multi product financial institution.
Market leader in Small & Medium scale industry banking among me local banks.
Conservative approaches to reduce the risk of classification.
Clear specification of documentation process to reduce the risk of classification.
Strong procedure in selection of new borrower.
W-Weakness
Dependent on fixed deposits.
Moderate risk management system.
Limited delegation of power.
Insignificant market share.
Concentrated ownership.
Low non-funded business.
O-Opportunities
Creation of brand image.
SME and Agro based business.
Real time online banking.
Government and International agencies positive attitude toward low classification
rate.
T-Threats
Increased competition in the market.
Market pressure for increasing the SLR.
Supply gap of foreign currency.
From the above analysis it was found that Jamuna Bank Ltd. has an experienced top
management and efficient professionals who can easily solve the problems of classified
loans

1
or any others, such as delegating proper power or low non-funded business. So the
weakness
can be eliminated easily through its strength.
The credit policy of Jamuna Bank Ltd. has been perfectly designed depending on the
government funds and assistance. But as it is sure that, government will sell its share in
near
future Jamuna Bank Ltd. has to revise its credit policy by considering alternative source
of
fund. International funds can be alternatives for government source if Jamuna Bank Ltd.
can
continuously reduce its classification rate.

Chapter-5
Conclusion & Recommendation
8.1 Recommendations
According to the Jamuna Bank Ltd. position, I will suggest to take the following aspects:
New credit culture needs to be developed in place of default culture. Efforts to be
taken as soon as possible to safeguard the interest of banking sector.
Real value of business can come from making regular visits to the customer's place
of
business rather than holding all meetings in the Bank.
For improving the recovery position and reducing huge over due loans, first action
needed to attract political support and urge upon the govt. and political parties to take
necessary steps for repayment of defaulted loans within a limit.
Against big willful defaulters legal action should be taken promptly. This step
should
be taken as soon as one installment is defaulted without waiting for default of total
loan.
Increase branch wise promotional activities.
Expand the facilities of on line banking all over the branches.

1
Try to faster the service.
Increase the facilities for the employees both financial and environmental.
Jamuna Bank Ltd. should recruit more employees on the branch.
Cash limit should be increased
Number of ATM booth should be increased.
8.2 Conclusion:
Jamuna Bank Ltd. is a commercial bank launched its operation in 2001. It has already
developed goodwill among its clientele by offering its excellent services by different
divisions. This success has resulted from the dedication, commitment and dynamic
leadership
among its management over the periods. The working atmosphere of the Jamuna Bank
Limited is very simulating. During the short span of time of its operation, the bank has
been
successfully to the position itself as a progressive and dynamic financial institution in the
country.
The banking sector of Bangladesh is passing thorough a tremendous reform under the
economic deregulation and opening up the economy. Currently this sector is becoming
extremely competitive with the arrival of multinational banks as well as emerging and
technological infrastructure, effective credit management, higher performance level and
utmost customer satisfaction. Jamuna Bank Ltd. fairly follows the credit policy and
practices
set by the management of the bank. And by that they are doing well in reducing the high
classification rate and in attaining the profit target of the bank. It has been observed that
Jamuna Bank Ltd has been maintaining an encouraging trend of overall performance in
the
country. High employee efficiency, high profitability, rapid growth of deposit and
advances
and high loan recovery prove evidence of sound financial condition of Jamuna Bank Ltd.
The modern business world is on the fastest flow of competition which is growing
wider and wider. To have sustainability in this competitive world the organization are

1
formulating new strategies and business plan with maximum efficiency levels in all
sectors.
To build a strong base for the bank and to uphold the image of bank determination of
firm or customer is not an outsider on their business he she is a part of the bank. They
should
have decrease the knowledge gap that means the gap between customer expectation and
management perception of customer expectation. They should also decrease
communication
gap and ultimately the bank should adjust the customer perception with their expectation.
JBL is a modernized bank; goodwill of JBL is increasing day by day. Because it makes a
good employment opportunity. It provides high standard and expectation facilities for
their
customers. It contributes in the economic development of the country. There are many
services providing by JBL that is carry out good opportunity for general people of the
country
and also for savings. Besides the policy and strategies of JBL is high standard than other
private bank. But they need to be more careful dynamic to retain the old customer and
create
new customer in existing competitive situation.
Abbreviations
A/C Account
B/L Bill of Leading
BB Bangladesh Bank
BOE Bill of Exchange
CB Central Bank
CCH Cash Credit Hypo
CCP Cash Credit Pledge
DD Demand Draft
ERC Export Registration Certificate
GB General Banking

1
IT Information Technology
JBL Jamuna Bank Ltd.
L/C Letter of Credit
LDBC Local Documentary Bill Collection
LDBP Local Documentary Bill Purchase
PO Pay order
TT Telegraph Transfer
WB World Bank
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