American International University-Bangladesh (AIUB)
INTERNSHIP REPORT ON
“Credit Evaluation and Credit Risk
Management of Prime Bank Ltd.”
An Internship Report Presented to the Faculty of
Business Administration in Partial Fulfillment of the Requirements for the
Degree of
Bachelor of Business Administration
Supervised By:
Name : ...................................................
Lecturer
Faculty of Business Administration
Submitted By:
..................................................
ID: ......................................
Major Area: Accounting and Finance
Date of
Submission: ...........................
1.0 INTRODUCTION TO THE
ORGANIZATION
Prime Bank Ltd is a fast growing private bank. It focuses on
providing high quality customer service at a very competitive price. Bank’s
efforts are directed at diversification of product and service. Offering
customers a wide variety of choices and options have remained cornerstone of
their business strategy. Prime
Bank Ltd. was created and commencement of business started on 17th April 1995. The sponsors are reputed personalities in the
field of trade and commerce. The bank has a network of 70
branches strategically located in different cities. All the branches are
functioning in computerized environment. As a fully licensed commercial bank,
Prime Bank Ltd. is being managed by a highly professional, prompt, and dedicated
team with long experience in banking. The constantly focus on understanding and
anticipating customer needs.
The Prime bank Ltd. has made significant progress within a very short period of
its existence. The bank has been graded as a top class bank in the country
through internationally accepted CAMEL rating. Prime Bank Ltd.
offers all kinds of Commercial Corporate and Personal Banking services covering
all segments of society within the framework of Banking Company Act and rules
and regulations laid down by our central bank. Diversification of products and
services include Corporate Banking, Retail Banking and Consumer Banking right
from industry to agriculture, and real state to software. The present day banking structure has evolved over
several decades. The far-triumph program of economic reform is being carried
out at present towards efficient deployment of scarce resources and the
development of private entrepreneurship. In a fast changing business
environment, financial peacekeeping troops are gradually being left to be
guided by market forces rather than regulation. Competition is strengthened by
the entry of new and groundbreaking providers of financial services through the
development of Money Market and Capital Market. Under the enduring financial
liberalization program, Prime Bank Limited emerges as a bank in
private sector to operate in the commercial arena of Bangladesh.
2.0 ORGANIZATION
OVERVIEW
Prime Bank
Ltd., since its beginning has attached more importance in technology
integration. In order to retain competitive edge, investment in technology is
always a top agenda and under constant focus. Keeping the network within a
reasonable limit, bank’s strategy is to serve the customers through capacity
building across multi delivery channels. Bank’s past performance gives an
indication of its strength. Here is a brief overview of the goals, mission,
vision, performance etc of PBL.
2.1 GOALS AND OBJECTIVES OF PRIME BANK LIMITED
q
To improve and broaden the
range of product and services.
q
To offer standard financial
services to the people.
q
To create congenial atmosphere
so that the client becomes interested to deal with the Prime bank limited.
q
To develop welfare oriented
banking service.
q
To offer highest possible
benefit to customers.
q
As to its position among its
counterparts is held high to let the viewers cast their very first look at it.
2.2 Operation
Prime Bank
Limited, since its inception is a fully focused Bank depending on technology.
The bank has by now a network of 70 branches strategically located in different
cities. All the branches are functioning in computerized environment and
integrated through Wide Area Network (WAN) .The branches are full –fledged
units and can provide all commercial and investment banking service raging from
small and medium enterprises to big conglomerates and houses. The Bank will try
to reduce its dependence on interest earnings by giving more emphasis on the
fee – based income through introduction of capital Market Operation and
Leasing. The Capital Market operation will include Portfolio Management,
Investors Account, and Underwriting Mutual Fund Management etc. The Bank will
introduce modern system of Leasing Operation as in practice with Banks in all
other countries of the world. The lease Finance portfolio of the bank will be
the first of its kind in a Commercial Bank in Bangladesh. A warehousing system
will be developed in the country through private entrepreneurs. The
conventional warehousing system of the Banks will gradually be done away with
and a modern system of warehousing will be encouraged in its place for pledge
of goods of the clients. Because Banks
deal with papers and not with goods. Prime Bank Ltd. Investment Counsellors
will give all sorts of advice to their Customers as they may require from time
to time protecting their assets and safeguard to their interest. The Bank will
the help and assistance of competent NGOs will also initiate Rural Credit
Programs. Entrepreneurship Development Training will be arranged to impart
operational skill and modern technique of management to introduce new
entrepreneurs in the field of industrialization on the basis of participating
finance.
Prime Bank Limited is one of first few Bangladeshi Banks who have
become member of SWIFT (Society for Worldwide Inter-Bank Financial
Telecommunication) in 1999. SWIFT is a member owned co-operative, which
provides a fast and accurate communication network for financial transactions
such as letters of Credit, Fund transfer etc. By becoming a member of SWIFT,
the bank has opened up possibilities for uninterrupted connectivity with over
5,700 user institutions in 150 countries around the world SWIFT No. PRBLBDDH.
2.3 Profile of the Bank
Prime Bank Ltd. is operating as a scheduled bank under the banking
license issued by Bangladesh Bank (BB),
the Central Bank of the country on April 17, 1995 through the opening of its Motijheel Branch
at Adamjee Court Annex
Building, Motijheel
commercial area, Dhaka-1000. PBL was actually registered under the Companies
Act of 1913 with its registered office at 5, Rajuk Avenue, Motijheel commercial area,
Dhaka-1000 which was later shifted to Adamjee Court
Annex Building,
119-120, Motijheel commercial area, Dhaka-1000
2.4 Performance at a glance
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Performance at a glance
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** These data’s are collected from the website of Prime Bank Limited **
2.5 Mission
and Vision of Prime Bank Limited
The efforts of Prime bank Limited are focused on delivery of quality
service in all areas of banking activities with the aim to add to increased
value to shareholders investment and offer highest possible benefits to the
customers. There must have the mission as well as vision what should back every
efforts of the organization. As it is said that “mission without vision is a
daydream and vision without mission is a nightmare”.
Mission:
q
Continuous improvement in the
business policies and procedures.
q
Cost reduction through
integration of technology at all level.
Vision:
To be the best
Private Commercial Bank in Bangladesh
in terms of
q
Efficiency
q
Capital adequacy
q
Asset quality
q
Sound management, and
q
Profitability having strong
liquidity
2.6 Managerial Hierarchy
Managerial decision-making
authority starts from the Principal Officer. The top-level authority goes to
the Chairman, the Board of Directors and the Managing Director.
Ø Chairman
Ø
Board of Directors
Ø
Executive Committee
Ø
Managing Directors
Ø
Additional Managing Director
Ø Senior Executive Vice President
Ø Executive Vice President
Ø Senior Vice President
Ø Vice President
Ø Senior Assistant Vice President
Ø Assistant Vice President
Ø First Assistant Vice President
Ø Senior Executive Office
Ø Executive Officer
Ø Principal Officer
Ø Senior Officer
Ø Management Trainee Officer
Ø Junior Officer
Ø Trainee Assistant Management
3.0 INTRODUCTION TO THE
PROJECT
The report basically deals with “The Credit Evaluation and Credit Risk Management of Prime Bank Ltd.”
The credit risk management policy of Prime Bank Ltd is prepared in line
with the guidelines of Bangladesh Bank in Credit Risk Management and for the
guidance of the officers or executives in handling affairs relating to credit
in a disciplined way. Credit department plays a very important role in bank as
they evaluate the risk and take decision about giving loan to the customers. In
this report I have tired to study the literatures statements about credit risk
management and also the credit operation of Prime Bank Ltd. I made a comparison
study between literatures statements and the actual activity of the bank.
4.0 STATEMENT OF THE
PROBLEM
Credit risk
is mostly simply defined as the potential that a borrower or counter party will
fail to meet its obligations in accordance with the agreed terms and
conditions. For this reason credit risk management needs to be a robust process
that enables a bank to proactively manage its loan portfolio in order to
minimize losses and earns fair amount of return for stakeholders. Credit risk
emanates from and off balance sheet dealing with an individual, corporate, bank
financial institution or a sovereign.
5.0 RATIONALE OF THE STUDY
Most of the shares of the total revenue
of the bank come form credit operation and the existence of the bank depends on
quality of assets portfolio. So efficient management of credit risk is of
paramount importance. Credit risk is the loss associated with degradation in
the credit quality of borrowers of counter parties. In a bank’s portfolio,
losses stems from outright default due to the inability or unwillingness of the
customer or counter party to meet commitments in relation to lending, trading,
settlement and other financial transaction. Alternatively, losses result from
reduction in portfolio value arising from actual or perceived deterioration in
credit quality. As the credit department plays a vital role in all these issues
I have chosen this topics for my report.
6.0 SCOPE OF THE PROJECT
This report has been prepared on the
basis of experience gathered during the period of internship. This study is
limited with function of credit operation system and credit risk management of
Prime Bank Ltd. Most of the data used in the reporting of the study are from
secondary sources. All the data related to the reporting requirements are not
available due to confidential reservation practice for the benefit of the
organization.
7.0 OBJECTIVES OF THE
PROJECT
7.1 Broad Objectives
The credit evaluation and the credit risk
management policy of Prime Bank Ltd. is the main concern of this report.
7.2 Specific Objectives
i.
To know about the credit risk principle of
the Prime Bank Ltd.
ii.
How the bank follow credit risk management
policy
iii.
To find out the general credit principle
of the bank
iv.
To know about the credit products
v.
Gain idea on credit facility of the bank
vi.
How the bank asses the credit risk
vii.
To compare the credit operation of bank
with the literatures statements
8.0 METHODOLOGY OF THE
RESEARCH WORK
To meet the objectives of the study I
realized that a single method would not be effective. Formal & oral
discussion, direct observation, & printed papers of the Bank were found
useful. To collect the necessary and meaningful information the following
methods were applied.
Both primary and secondary sources were
used in here.
8.1 Data Collection
The report was fully investigative in
nature. Data have been collected from two sources:
1. Primary sources
2. Secondary sources
8.1.1 Primary Sources
q Face-to-face conversation with the
respective officers and staffs of the Branch.
q Practical work experience in the
different desks of the departments of the Branch covered.
q Relevant file study as provided by the
officers concerned.
8.1.2 Secondary Sources
q Annual Report of Prime Bank Ltd.
q Web site of the Prime Bank Ltd.
q Various books, articles regarding general Banking functions, and
credit policies.
q Different 'Procedure Manual', published
by Prime Bank Ltd.
q Different circular sent by Head Office
of Prime Bank Ltd and Bangladesh Bank.
9.0 TOPIC ANALYSIS AND
DISCUSSION
In this report I have tired to study the
literatures statements about credit risk management and also the credit
operation of Prime Bank Ltd. I made a comparison study between literatures
statements and the actual activity of the bank at the end of the report.
9.1 Literature Review
Loans or credits comprise the most important asset as well as the
primary source of earning for the Banking institutions. On the other hand,
loan/credit is also the major source of risk for the bank management. A prudent
bank management should always try to make an appropriate balance between its
return and risk involve with the loan portfolio. Credit appraisal process is
the tool, which helps the bank to predict the risk and return on the proposed
project for credit disbursement. Therefore, from the above definition it is
clear that credit appraisal is a very important factor for banks. To get a
clear idea about credit appraisal process we need to know the key factors of
credit appraisal procedures. In this chapter, I will give a brief idea on the
key factors of standard credit appraisal procedures.
9.1.1 Credit
The word credit is derived from the Latin word “credo” which means
“I believe” and is usually defined as the ability to buy with a promise to pay.
It consists of actual transfer and delivery of goods and services in exchange
for a promise to pay in future. It is simply the opposite of debt.
Diversification of banking service has accelerated the use of credit in the
expansion of business operation. It is a fundamental precept of banking
everywhere that advances are made to customers in reliance on his promise to
pay rather than the security held by the banker.
9.1.2 Principles of Credit
A prudent Banker should always adhere to the following general
principles of lending funds to his customers.
q
Background, Character and
ability of the borrowers
q
Purpose of the facility,
q
Term of facility,
q
Safety,
q
Security,
q
Profitability,
q
Source of repayment,
q
Diversity.
Bank should never put “All its eggs in one basket”. It should be
note that selection of appropriate borrowers proper follow-up and end-use
supervision through constant close contact with the borrowers, are the corner
stones for timely recovery of credit.
9.1.3 Factors of Credit Policy
Credit policy of all banks cannot be developed on same lines because
of differences in their operational needs and resource structures. In designing
a credit policy, considerations should be given to following:
q
Total deposit resources of the
bank and rate of fluctuation of resources.
q
Deposit structure on tenurial
basis and ownership.
q
Trend of growth in deposit and
economic growth rate of the country.
q
Capital fund and other
reserves. Large bank’s capital fund and secondary reserve in investment can
permit its loan policy to be liberal in respect of its limit of lending in high
risk-high returns loans while a relatively new small bank would stress more on
liquid and highly secured loans at lower interest in its policy.
q
Capability of loan
administration shall have to be given due weight in the credit policy. A large
bank is able to hire numbers of highly skilled specialists/experts in different
areas to advise the bank in loan making but smaller banks relying on usual
credit managers cannot venture into sectors that require expert appraisal of
loan applications and also that requires intensive post implementation
monitoring of large and complex industrial loans.
q
Investment size of the bank and
its nature.
9.1.4 Loan Documentation
The minimum
requirements for loan or other facility documentation of a Bank are:
q
Copies of the relative
C.F.R./Sanction letter indicating that the transaction has been approved by
properly authorized officers of the Bank.
q
A copy of the letter of
sanction addressed to the customer and his acceptance thereof.
q
All necessary documentation
required to meet the terms and conditions of the facility in the manner in
which it was approved.
q
Before disbursement, it should
be satisfied that all legal formalities have been completed.
q
Disbursement of all facilities
shall be made on an Offering Sheet basis to ensure that all additional requests
are duly approved by two authorized Officers one of which must be the Manager
or Sub-Manager.
q
Securities offered should also
be thoroughly verified/inspected once in a month and stock report prepared.
q
Where the loan agreement calls
for restrictive covenants and ongoing conditions, the Manager must not only
satisfy himself that these are adhered to at the outset of the transaction
(i.e. date of initial takedown) but assure himself, at regular intervals, that
these are not being violated.
q
Since the Manager together with
the Credit Officer is fully responsible for documentation, they will formally
sign a check list. Under no circumstances may anyone permit drawings under any
facilities, until they have signed off the check list.
q
The Manager/Sub-Manager should
ensure that appropriate steps are being taken to keep loan documentation
current for all assets Of the Bank. The loan documentation check-list, should,
therefore, be reviewed at regular intervals.
q
Lines of credit should, as a
rule, be confirmed in writing to the borrower. A Specific expiration date for
the line should be included. Moreover every letter of sanction must contain the
Bank's standard clauses.
q
The
borrower must explicitly undertake that all information supplied by him to Bank
in connection with the approved lines Of credit is correct.
q
Any material or adverse change
in business conditions will cause the amount due to Bank from the client
immediately repayable. The Bank reserves the right to call back the facilities
extended at any time without assigning any reason whatsoever.
9.1.5 Standard Procedure of Credit
The Standard Procedure of Credit of a Bank is completed through the
following Steps:
q
Any request for credit
facilities must be made by the borrower in the Bank's prescribed standard
form properly filled in and completed in all respect and duly signed by the
prospective borrower.
q
Submission of past. -3 Years
financial statement: For all credit proposals, the borrowers and guarantors (if
any) should, wherever Possible submit past 3 years Profit & Loss A/C and
Balance sheet duly audited by a recognized and competent Chartered Accountant
containing unqualified opinions. Some borrowers may not have audited financial
statements at all. In either case, the lending officer must interview the
potential borrower or Guarantor and obtain satisfactory, accurate and complete
financial information supporting any prior financial statements either audited
or not audited. In the case of an individual borrower or guarantor, the
financial statements must be signed by competent authority and must contain
legend to the signatory, all assets and liabilities both direct and contingent
and all sources of income and items of expenses. For all un-audited statements
provided by a Company, financial Officer of the Company must execute such
legend.
q
On all new credit arrangements
and annual reviews emanating in Branches, an analysis of the credit worthiness
of the borrower and guarantor (if any) should be prepared by the Credit
Department at the Branch where credit monitoring responsibility lies and a copy
thereof forwarded to the Head of Credit Division at 'Head Office for pre-factor
or post-factor review as the case may be. In case such credit originates in the
Head Office, it will be forwarded to the Branch Manager for record and action.
9.1.6 Credit Analysis
When a customer requests a loan, bank officers analyse 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.
The banker has to identify three distinct areas of commercial risk analysis
related to the following questions:
Ø What risks are inherent in the operations of the business?
Ø What have managers done or failed to do in mitigating those risks?
Ø How can a lender structure and control its own risks in supplying
funds?
The first
question forces the banker 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 decision made by a borrower. Is management aware of
the important risks and has it responded? The last question forces the banker
to specify how risks can be controlled so that bank can structure an acceptable
loan agreement. Therefore, Bankers look into key risk factors or Qualitative
analysis which has been classified according to the Six Cs of credit:
1. Character:
Character refers to the borrower’s honesty and trustworthiness. A
banker must assess the borrower’s integrity and subsequent intent to repay. If
there are any serious doubts, the loan should be rejected.
2.
Capital:
Capital refers to the borrower’s wealth position measured by
financial soundness and market standing. It helps cushion loses and reduces the
likelihood of bankruptcy.
3. Capacity:
Capacity involves both borrower’s legal standing and management’s
expertise in maintaining operations so the firm or individual can repay its
debt obligations. Under capacity an individual must be able to generate income
to repay the cash.
4. Condition:
A condition refers to the economic environment or industry specific
supply, production and distribution factors influencing a firm’s operations.
Repayment sources of cash often vary with the business cycle or consumer demand
5. Collateral:
Collateral is
the lender’s secondary source of repayment or security in the case of default.
Having an asset that the bank can seize and liquidate when a borrower defaults
reduces loss, but does not justify lending proceeds when the credit decision is
originally made.
6. Control:
Control means
management and observation of the changes in law and regulations, whether these
could adversely affect the borrower and whether the loan request meets the
banks and the regulatory authorities standards for loan quality.
9.1.7 Lending Risk Analysis
Lending Risk analysis (LRA) is simply a loan processing manual and
has done when the amount of loan is above 1 core. By going through this manual
the lending bankers can Asses the creditworthiness of their prospective
borrowers.
Therefore, LRA is such an instrument which is definitely and
directly related with lending information to analyse the borrower’s financial,
marketing, managerial and
Organisational aspects subjectively and objectively. It also
facilitates the analyst to know the security risk of the credit. Lending risk
Analysis involves assessing the likelihood of repayment of loans to the bank as
per agreement on the basis of analysis of certain risks. To analyse these risks
bankers will need to fill-up a 16-page LRA form. The form leads to scoring
various risk factors involved in lending. LRA has divided the various risks
into two groups namely, Business Risk and Security Risk.
ü
Business Risk:
Business Risk is concerned with whatever the borrowing company would
fail to generate sufficient cash out of business to repay the loan Business
Risk, the main component of lending risk, consists of the Industry Risk and the
company Risk
A. Industry Risk
Due to some external reasons
a business may fail and the risk which arrives from external reasons of the
business is called Industry Risk. It has two components:
I.
Supplies Risk: When the business fails due
to disruption in the supply of inputs, the consequent risk which would arise is
known as Supply Risk
II.
Sales Risk: When the business fails for
disruption in sales, this type of risk would generate.
B. Company Risk
Company Risk
is shown for some internal reasons of the business. It has also two main
components and four sub-components
I.
Company position Risk: Each and every company holds a position within an industry. This
position is very much competitive. Due to weakness in the company’s position in
its industry, a company may fail and the risk of failure is called Company
Position Risk. It depends on-
(a)
Performance Risk: If a company fails to perform well enough to repay the loan because
of its weakness under given expected external conditions, the company is said
to suffer from performance risk.
(b)
Resilience Risk: When a company fails due to lack of its resilience to unexpected
external conditions, the resilience risk is generated.
II.
Management Risk: If the management of a company fails to exploit the company’s
position effectively, the company can fail and this risk of failure is called
management Risk. It can be subdivided further-
(a) Management Competence Risk: Management
competence risk is the risk that the company fails because the management is
incomplete
(b) Management Integrity Risk: Management
integrity risk is the risk that the company fails to repay its loan due to lack
of management integrity.
ü Security Risk
Security risk is the risk that the realised value of the security
does not cover the exposure of loan. Exposure means principal plus outstanding
interest. Security risk can be divided into two parts:
A. Security Control Risk:
Security control Risk is the Risk that the bank fails to realise the
security because of lack of bank’s control over the security offered by the
borrowers.
B. Security Cover Risk:
Security cover risk is the risk that the realised security value may
not cover the full exposure of loans.
9.1.8 Collateral:
Collateral is the lender’s secondary source of repayment or security
in the case of default. Having an asset that the bank can seize and liquidate
when a borrower defaults reduces loss, but does not justify lending proceeds
when the credit decision is originally made.
Characteristics of Good Collateral
The following five items determine the suitability of items for use
as collateral. The suitability depends in varying on standardisation,
durability, identification, marketability and stability of value.
q Standardization: The standardization leaves no ambiguity between the borrower and the lender as to the nature of the asset that is being used as collateral.
q Durability: Durability refers to the ability of the assets to withstand wear. Or it can refer to its useful life. Durable goods make better collateral than non-durable. Stated otherwise crushed rocks make better collateral than fresh flowers.
q Identification: Certain types of assets are readily identified because they have definite characteristics or serial numbers that cannot be removed. Two examples are a large office building and an automobile that can be identified y make, model and serial number.
q Marketability: In order for collateral to be of value to the bank, the collateral must be marketable. That is the borrower must be able to sell it. Specialized equipment is not as good as collateral as are dump trucks, which have multiple uses.
q Stability of value: Bankers prefer collateral whose market values are not likely to decline dramatically during the period of the loan such as common stock.
Different Kinds of Collateral
Secure loans have a pledge of some of the borrower’s property behind
them (such as home or an automobile) as collateral that may have to be sold if
the borrowers have no other way to repay the bank. Some of the most popular
collaterals are:
- Account Receivable: The banks take a security in the form of a stated percentage of the borrower’s balance sheet. When the borrowers credit customers send in cash to retire their debts this cash payments are applied to the balance of borrowers loans. The bank may agree to lend more money as new receivable arise from the borrowers sells to its customers thus allowing the loan to continue as long as the borrower has need for credit and continuous to generate and adequate volume of sales
- Factoring: bank can purchase a borrowers account receivable based upon some percentage of the book value because the bank takes over the ownership of the receivable, it will inform the borrowers customers that hey should send their payments to the purchasing bank.
- Inventory: A bank will lend only a percentage of the estimated market value of a borrower’s inventory in order to leave a substantial cushion in case the inventories value begins to decline. The inventory pledged may be controlled completely by the borrower using a so-called floating line approach.
- Real Property: A bank may take a security interest in land and / or improvements on land own by the borrower and records its clime-a mortgage-with a government agency in order to define against successful claim by others.
- Personal Property: Bank takes a security in jewellery, securities and other forms of personal property owned by a borrower.
- Personal Guarantees: A pledge of the stock deposits or other personal assets held by the major stock holders or owners of a company may be required as collateral to secured a business loan
9.1.9 Loan Review:
In a bank the purpose of loan review is to minimize loan losses by
reviewing outstanding loans in order to
q
Identify potential problems
with specific loans.
q
Identify weaknesses in
procedures or personnel in general
q
Quantify the repayment risk in
the loan portfolio by estimating how much cash borrowers can generate under
current market conditions from operations and collateral.
9.2
Credit
Department of PBL
Bank is a financial intermediary whose
prime function is to move scarce resources in the form of credit from savers to
those who borrow for consumption and investment. The word “credit” is derived
from the Latin word “credere”, which means to trust. The fundamental nature of
credit is that an element of trust exists between buyer and seller-whether of
goods or money. In a modern industrial
society Banks are uniquely important because of their ability to create money.
Lending comprises a very large portion of a Bank’s total assets and forms the
backbone of the Bank and interest on lending constitutes the highest proportion
of income of a Bank. As such credit quality remains the prime indicator of its
commercial success. Unsound credit reduces the ability of a Bank to provide
credit towards profitable borrowers and undermine liquidity and solvency.
Therefore lending is very important for the profitability and success of a
Bank.
When a bank advances a loan, it does not
pay the amount in cash. But it opens an account in his name and allows him to
withdraw the required amount by cheek. Banks provide credit facilities to
businessmen by way of loans and advances, overdraft and cash credit. When a
loan is granted or overdraft is sanctioned, the amount of loan or overdraft is
entered in the account of the customer and he is allowed to draw cheeks up to
the amount agreed upon. Thus the bank creates a deposit in the name of the
borrower. Basically credit is the function by which people can perform their
job by depositing and lending money from the bank with an implied interest rate
and bank performs here as a middleman.
Banks create money and credit. It happens in two ways. First, when a
customer is granted loan, he has to sign a promissory note and receive in turn,
a bank’s demand deposit, or cash. The promissory note does not act as money but
it receives money and can readily spend almost everywhere. Thus it creates
credit. Second, the entire systems of banks also create money as the deposits
generated by lending flow from bank to bank. By law, each bank must set aside a
fractional reserve behind each deposit it receives and the remaining excess can
be loaned out. No single bank can lend out more than its excess reserves, the
entire banking system can create a multiple volume of deposit money through
credit creation.
9.2.1 Types of credit and advance
Modern banking operations touch almost
every sphere of economic activity. The extension of bank credit is necessary
for expansion of business operations. Bank credit is a catalyst for bringing
about economic development. Without adequate finance there can be no growth or
maintenance of a stable output. Bank lending is important to the economy, for
it makes possible the financing of agricultural, commercial and industrial
activities of a nation.
A. Type of credit
The credit facilities are generally
allowed by the bank may be in two broad categories. They are:
(1) Funded Facilities:
Funded facilities can also be divided
into the following categories:
Ø Loans:
q
Short term : Up to
12 months.
q
Medium term : More than 12 and up to 36 months.
q
Long term : More than 36 months.
Ø Overdrafts:
q
Against hypothecation of
goods/stock
q
Against pledge of goods/stock
q
Against any other permissible
securities.
Ø Other
advances:
q
Against import bills.
q
Against imported merchandise.
q
Against Trust receipts (T/R).
q
Against Export Bills
Purchased/Discounted
q
Against Work order
q
Against other securities.
(2) Non-Funded Facilities:
Ø Letter of credit (L/C)
Ø Letter of Guarantee (L/G)
B. Types
of advances offered by PBL:
1. Secured Advances:
The following type of secured advances are allowed against tangible
securities subject to margin restrictions:
Ø Loan (General)
Ø House Building Loan
Ø Other Loans to Staff
Ø Cash Credit (Hypothecation)
Ø Cash Credit (Pledge)
Ø Hire-Purchase
Ø Lease Financing
Ø Consumers’ Credit
Ø SOD (Export)
Ø SOD (Others)
Ø PAD
Ø LIM
Ø LTR
Ø IBP
Ø Packing Credit
Ø FDBP (Foreign)
Ø FDBP (Local)
Ø FBP
These advances are allowed against the
following securities:
Ø Shares of various Companies approved by Head Office from time to
time and listed in the Stock Exchange.
Ø Term Deposit Receipts issued by any Branch of PBL.
Ø Lien on balance in Savings A/C, Current A/C. and other Savings
Schemes
Ø Government Promissory Notes.
Ø Various Sanchaya Patras
Ø Surrender value of Life Insurance Policies.
Ø WEDB
Ø Assignment of bills against work orders/supply orders and
receivables
Ø Stock of goods in trade (Permissible goods only) pledged or
hypothecated.
Ø Hypothecation of power driven vehicles or watercrafts.
Ø Hypothecation of capital Machineries and equipments.
Ø Immovable Property.
Ø Imported merchandise - pledged or hypothecated.
Ø Trust Receipts.
Ø Import Bills (PADs)
Ø Bills Purchased
Ø Scheduled Bank/Insurance Guarantees
Ø Export Bills
Ø Inland Bills.
Ø Personal Guarantee
Ø Corporate Guarantee
2. Unsecured Advances:
An unsecured or clean Advance is one,
which is granted to a constituent without obtaining any security subject to
restrictions imposed from time to time by Bangladesh Bank or any competent
authority. In such case only charge documents are held.
Unsecured
Advances mean and include:
Ø Clean Overdrafts
Ø Clean Loans.
I.
A customer should not
ordinarily be permitted to overdraw his account without security. However, an
unsecured facility may be allowed in exceptional circumstances, only for a
short period, with definite repayment arrangement, subject to restrictions
imposed by Bangladesh Bank or any other competent authority, with prior approval
of Head Office, to a customer on the basis of his personal credit worthiness,
standing and reliability.
II.
It shall not be granted unless
the Sanctioning Authority has full confidence in the ability and reputation of
the customer to repay it, on demand, or at its maturity if it is a loan.
Definite arrangements for repayment, whether by instalments or otherwise, must,
as a rule, be made.
9.2.2 Credit approval system
Procedure of giving advance:
1.
The borrower has to apply to PBL for loan by filling up
of a specific application form.
2.
After receiving loan
application form, PBL sends a letter to Bangladesh Bank for obtaining a report.
This report is called CIB (Credit Information Bureau) report. Giving of this
report is essential if the loan amount exceeds Tk. 50 lac. The purpose of this
report is to being informed that whether the borrower has taken from any other
bank; if ‘yes’, then whether these loans are classified or regular.
3.
After receiving CIB report, if
the bank thinks that the prospective borrower will be a good borrower, then the
bank will scrutinize the documents. In this stage, the bank will look whether
the documents are properly filled up and signed.
4.
Then comes processing stage. In
this stage, the bank will prepare a proposal. A proposal contains all relevant
information (e.g. name of the client, type of the loan, amount of the loan,
period of giving loan, security, date of application, financial data, etc.)
Branch incumbent (Local Office) has the discretionary power to sanction loan
(SOD) upto Tk.25 lac against financial obligations by informing head office.
But in that case, the branch manager has to give attention on the following
matters:
a)
The interest of the loan must
not be less than 14.5%, and
b)
The borrower must maintain 10%
margin.
Except this case, the branch manager has to send a
proposal to the head office. Head office will prepare a minute and submit it
before the executive committee. The minute has to be passed in the executive
committee (EC) under certain cases.
After
passing the minute, it will be sent to the Bangladesh Bank for approval in the following cases:
a)
If the proposal limit exceeds
15% of bank’s equity.
b)
If the proposal limit against
cash collateral securities exceeds 25% of the bank’s equity.
After getting the proposal it will again come to the head office.
5.
After the processing stage, a
sanction advice will be prepared in favour of the client.
6.
After the sanction advice, bank
will collect necessary documents (charge documents).
7.
After receiving all the
documents, the bank will disburse the loan to the borrowers. For withdrawing
the loan amount, customer creates a current account and the loan amount is
transferred to this account.
Lending principles:
For sound
lending the following points should be kept in view:
Ø Judicious selection of Customers
Ø Purpose
Ø Safety
Ø Security
Ø Liquidity
Ø Adequate return (Profitability)
Ø Supervision
Ø National/Social interest
Ø Credit Control Policy of Bangladesh Bank
It is to be
always remembered that the Bank is the custodian of public money and as such we
must be judicious, careful and selective while lending out the depositors’
money to ensure timely recovery. The deciding factors for recovery of loans are
selection of right type of borrowers, end-use of credits and effective
follow-up and proper supervision.
Processing of Credit
Proposals:
1.
A secured credit facility may
be allowed to a customer only after getting a limit sanctioned by the
authorized officials.
2.
The customer seeking a credit
facility against acceptable security must make an application in banks printed
form “Request for Credit Limit” PF-146 enclosing necessary papers/documents to
his nearest Branch of the Bank where he maintains his operative account.
3.
Make a preliminary study of the
affairs of the intending borrower by consulting the followings:
Ø Borrowers application
Ø Reports in confidence collected through all feasible means regarding
the state of the business of the intending borrower.
Ø Borrower’s own mode of dealing
Ø Statement of accounts of the borrower with own and other Banks
Ø Statement of assets and liabilities
Ø Financial statements for the last 3(three) years
Ø Income Tax statement
Ø Trade and other reports
Arrange an interview with the intending borrower to know on the
following points:
Ø Present and future prospect of the customer’s business
Ø Total investment required in the business
Ø Borrower’s stack in the business
Ø Amount of advance required
Ø Experience in the line
Ø Purpose
Ø Period for which the advance is required
Ø Source of repayment
Ø Customer’s previous Banker
Ø Present liabilities, if any, with other Bank and conduct of the same
Ø Securities offered
Ø Proposed margin
Ø Type of charge to be created against the proposed security
Ø Terms of repayment
Ø Rate of interest
4.
Before finally selecting the
borrower, be satisfied that;
Ø The customer possess character, capacity and capital
Ø The account is remunerative one
Ø Dealing items and primary security of the customer possess the
quality of easy marketability, durability and storability
Ø Collateral security offered possesses the quality of easy
marketability and is not encumbered and its valuation is judiciously assessed
so as to leave sufficient margin after covering the advance and belongs
preferably to the borrower.
Ø Repayment arrangement is satisfactory
Ø Means, standing and respectability of the applicant and the
guarantor (if any) are satisfactory.
Ø Credit worthiness of the applicant is reasonable
Ø Location of the business is good.
5.
If the proposed facility is
beyond the delegated business power of the Branch Manager, the proposal shall
be submitted to Credit Division, Head Office duly recommended in the specified
Format.
The following Papers/documents are to be
submitted by the Branch Managers along with the proposals:
Ø Request for Credit limit of customers.
Ø Project Profile / Profile of Business
Ø Copy of Trade License duly attested
Ø Copy of TIN Certificate
Ø Certified copy of Memorandum and Articles of Association,
Certificate of Incorporation, Certificate of commencement of business in case
of Public Ltd. Co., Resolution of Board of Director, Partnership Deed, (where applicable)
Ø Personal Net worth Statement of the
Owner/Director/Partner/Proprietor in Bank’s Format.
Ø Valuation Certificate in Bank’s Format along with photograph of
collateral security (land & building with detail particulars on the back
duly authenticated by the Branch Manager.
Ø
In case the value of the property offered as
security exceed Tk.50.00 lac, the value to be assessed by bank’s enlisted
surveyor and report thereof to be obtained.
Ø 3 years Balance sheet and profit and loss A/C
Ø CIB Enquiry Form duly filled in (For proposal of Tk.10.00 lac and
above)
Ø Lending Risk Analysis for Credit facilities of Tk.50.00 lac and
above
Ø Inspection/Visit Report of Factory/Establishment/Business premises
of the customer.
Ø Stock Report duly verified (where applicable)
Ø Credit Report from other Banks.
Ø Indent/Proforma Invoice/Quotation (Where applicable)
Ø Price verification report (where applicable)
Ø Statement of A/C (CD/SB/CC) for the last 12 months. In case the
customer maintaining account with other Bank, Statement of Account for the last
12 months of the concerned Bank should be furnished.
Ø In case of renewal/enhancement of credit facility, Debit Turnover,
Credit Turnover, highest drawing, lowest drawing, Total income earned, Detailed
position of existing liabilities of the customer i.e. Date of sanction, Date of
expiry, Present outstanding, Remarks, if any.
Ø Declaration of the customer of the name of sister/allied concerns
and liabilities with other Banks, if any, and an undertaking to the effect that
they have no liability beyond those declared.
Ø In case of L/C proposal, detailed performance of L/C during the last
year i.e. No. and date of L/C opened, commodity, L/C value, Date of creation of
PAD, date of retirement, mode of retirement etc.
Ø Whether the applicant is Shareholder/Director of Prime Bank Ltd. as
per definition of Banking Companies Act.
Ø Financial Analysis to be prepared by the Branch Manager based on the
financial performance of the company which should show trends in
sales/profitability, liquidity, leverage etc. It should also contain an
assessment of the competence and quality of the business management, the
general economic & competitive environment of the borrower’s industry and
any other pertinent factors that is relevant for management’s credit decision.
Ø Justification/consideration for the facility.
Approval of Limit:
The sanctioning authority on receipt of
the proposal shall scrutinize the same and ensure that:
Ø The proposal contains all pertinent information relating to the
proposed facility and the borrower.
Ø All necessary papers and documents have been submitted.
Ø The proposal has been duly signed by the members of the Branch
Credit Committee including the Manager.
Ø The proposal has been duly recommended.
Ø The proposal does not fall within the existing credit restriction
Ø Minimum margin requirement against the credit facility has been
proposed.
Ø The primary security has got easy marketability, durability and
storability
Ø The value of the property offered as collateral security is
judiciously assessed
Ø The proposal is viable and stands all credit tests
Ø The proposed borrower is not defaulter of any Bank/Financial
Institution
Ø There is no request from other Bank/Financial institution for not
allowing/stoppage of facility to the prospective borrower
Ø The proposal meets all the provisions/requirement of Bank Companies
Act/Rules of Bangladesh Bank/Other Laws / Rules
Ø Where the proposed accommodation in the form of working capital may
be considered on the project financed by any other Bank including DFI.
Favourable status report and No Objection Certificate (NOC) from the financing
Institution to be obtained.
Ø Where 2nd charge on the fixed and floating assets (in
case of a limited company) or 2nd mortgage on real estate is offered,
clearance in respect of creation of 2nd charge on the property
together with confirmation that documents will be held by them on behalf of the
Bank and that they shall not part with the same without consent of the Bank, is
obtained from the 1st mortgage.
9.2.3 Securities:
To make the loan secured, charging sufficient security on the credit
facilities is very important. The
banker cannot afford to take the risk of non-recovery of the money lent. PBL charges the following two types
of security, -
a)
Primary security: These are the security
taken by the ownership of the items for which bank provides the facility.
b) Collateral security:
Collateral securities refer to the securities deposited by the third party to
secure the advance for the borrower in narrow sense. In wider sense, it denotes any type of security on which the bank
has a personal right of action on the debtor in respect of the advance.
Modes of Charging Security:
There are different
modes of charging security are exercised by the bank:
1.
Pledge:
Pledge is the bailment of the goods as security for payment of a
debt or performance of a promise. A
pledge may be in respect of goods including stocks and share as well as
documents of title to goods such as railway receipt, bills of lading, dock warrants
etc. duly endorsed in bank’s favour.
2.
Hypothecation:
In case of hypothecation, the possession and the ownership of the
goods both rest the borrower. The
borrower to the banker creates an equitable charge on the security. The borrower does this by executing a
document known as Agreement of Hypothecation in favour of the lending bank.
3.
Lien:
Lien is the right of the banker to retain the goods of the borrower
until the loan is repaid. The
bankers’ lien is general lien. A
banker can retain all securities in his possession till all claims against the
concern person are satisfied.
4.
Mortgage:
According to section (58) of the Transfer of Property Act, 1882
mortgage is the ‘’transfer of an interest in specific immovable property for
the purpose of securing the payment of money advanced or to be advanced by way
of loan, existing or future debt or the performance of an engagement which may
give rise to a pecuniary liability”.
In this case the mortgagor does not transfer the ownership of the specific
immovable property to the mortgage, only transfers some of his rights as an
owner. The banker exercises the
equitable mortgage.
9.2.4 Documentation
Documentation can be described as the process or technique of
obtaining the relevant documents. In
spite of the fact that banker lends credit to a borrower after inquiring about
the character, capacity and capital of the borrower, he must obtain proper
documents executed from the borrower to protect him against wilful defaults. Moreover, when money is lent against
some security of some assets, the document must be executed in order to give
the banker a legal and binding charge against those assets. Documents contain the precise terms of granting loans and they
serve as important evidence in the law courts if the circumstances so desire. That’s why all approval procedure and
proper documentation shall be completed prior to the disbursement of the
facilities.
Charge Documents:
Following charge documents are necessary while giving loans.
Letter of guarantee:
This is a document given by the proprietor, directors or
the third party in favour of the principal debtor. The beneficiary of this document is the bank.
Surety is bound to pay the guaranteed amount if such situation arises.
Counter guarantee:
The principal debtor agreeing that if the guarantor pays
any amount, the principal debtor is bound to pay this amount gives this
guarantee.
Letter of authority:
BY this letter, the principal debtor gives the authority
to the bank to debit the current account or investment account of the principal
debtor for the following cases:
i.
Wages of the warehouse keeper
and warehouse guard.
ii.
Rent of the warehouse
iii.
Insurance premium and
iv.
Any other expenses regarding
these functions.
Letter of recall the loan:
This letter is given to the bank by the borrower, giving the bank
the right of recalling the loan amount at any time if the borrower fails to
repay any one of the instalments. And the borrower can not protest such
recalling.
Letter of continuity:
By this letter, the borrower agrees that the promissory note given
by the bank will be act as security for the repayment of the ultimate balance
or sum remaining unpaid on account of the overdraft or advance.
Letter of revival:
By this letter, the borrower agrees that he will be liable to bank
for payment of the promissory note with interest in respect of all present and
future indebtedness liabilities secured thereby which promissory note is to
remain in force with all relative securities, agreements and obligations.
Joint promissory note:
This promissory note is given to the bank by the borrower if the
borrowers are more than one person.
Single promissory note:
The borrower to the bank gives this promissory note if the borrower
is a single person.
Letter of undertaking:
This document is given to the banker by the borrower acknowledging
the right to cancel the facility at any time with or without intimation to the
borrower.
Loan disbursement letter:
By this letter, the borrower request to disburse the loan sanctioned
in his favour by the bank. All the persons, in whose names the account is
opened, should sign the letter.
Charge over bonds or
certificate of shares etc.:
It is a document given by the borrower to the banker declaring that
the stocks, shares, debentures, securities and investments which are now
deposited to the bank and which may from time to time be deposited by the
borrower shall stand charged and hypothecated to bank as security for the
payment to bank on demand of the balance of the loan amount and of any other
indebtedness and liability to the bank of any kind whether mature or accruing
and whether incurred alone or jointly with others and whether as principal or
surety including all interest document, commission, expenses, charges and costs
incurred by the bank in relation any such indebtedness or liability.
Letter of lien against
fixed deposit receipt:
By this letter, the borrower gives the right to the bank to hold the
Fixed Deposit Receipt (FDR) if the borrower fails to repay or adjust the loan
on demand or discharge the liabilities to bank. In this letter, FDR number,
issuing branch, name of the favouring person and amount are written.
Letter of authority to
encash FDR:
By this letter, the borrower gives the right to bank to encash the
FDR in case of need. Here the amount and address of the bank of issue and the
signature of the holders are given.
Memorandum of deposit of title deeds:
It is a deed that is necessary in case of mortgage by deposit of
title deed or equitable mortgage. Here the mortgagor agrees that he has
deposited necessary documents of the property to the bank.
Hypothecation of goods to
secured a demand cash credit or overdraft or loan account:
Here the amount of loan, interest, and the name of the borrowers are
written. Here the bank and the borrowers agree on the following terms:
Ø Security
Ø Balance due to the bank
Ø Borrowers not to the encumber or parts of the goods
Ø Sale
Ø Inspection
Ø Insurance
Ø Margin
Ø Interest rate
Ø Repayment
Ø Sale of goods
Ø Deficiency
Ø Surplus
Ø Statement of account
Ø Continuing security
Ø Title
Ø Saving
Ø Change of borrowers and
Ø Notices.
Guarantee by third party:
Sometimes third party guarantee is needed for allowing loan. Here
third party gives the guarantee that of the principal debtor fails to repay the
loan, and then the guarantor will be bound to repay the loan to bank.
Hypothecation of vehicle:
This document is necessary in case of transport loan. Here the
borrower hypothecated the vehicle to the bank. In case of failure of repay the
loan, bank will sell the vehicle to collect the money.
Documents required for relevant
advances:
1.
Loan:
Ø D P Note signed on revenue stamp
Ø Letter of arrangement.
Ø Letter of disbursement.
Ø Letter of partnership (partnership firm) or Board of resolution
(limited companies).
Ø Letter of pledge.
Ø Letter of hypothecation.
Ø Letter of lien and ownership / share transfer form (in case of
advance against share).
Ø Letter of lien for packing credit.
Ø Letter of lien (in case of advance against F D R)
Ø Letter of lien and transfer authority.(in case of advance against P S P, B S P)
Ø Legal documents for mortgage of property (As draft by legal adviser)
Ø Copy of sanction letter mentioning details of terms and condition
duly acknowledge by the borrower
Ø Trust receipt.
2. Overdraft:
Ø D P Note.
Ø Letter of partnership.
Ø Letter of arrangement.
Ø Letter of continuity
Ø Letter of lien.
Ø Letter of lien and ownership /share transfer form (in case of
advance against share).
Ø Letter of lien and transfer authority.
Ø Legal documents for mortgage of property.
3. Cash Credit:
Ø D P Note.
Ø Letter of partnership.
(In case of partnership farm) or Board of resolution (in case of limited
company)
Ø Letter of arrangement.
Ø Letter of continuity
Ø Letter of hypothecation [In case of cash credit (Hypothecation)]
Ø Legal documents for mortgage of property
Ø Letter of pledge or Agreement of pledge. [In case of cash credit (pledge)]
4. Bills purchased:
Ø D P Note.
Ø Letter of partnership.
(In case of partnership farm) or Board of resolution (in case of limited
company)
Ø Letter of arrangement.
Ø Letter of acceptance, where it calls for acceptance by the drawee.
Ø Letter of hypothecation of bill.
9.2.5 Loan Schemes offered by PBL
Ø Consumer Credit Scheme
Ø General Loan Scheme
Ø Lease Finance
Ø Small and Medium Enterprise
Ø House Building/Apartment Loan Scheme
Ø Consumer Credit Scheme
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In order
to provide financial assistance to the limited income group for raising their
standard of living by acquiring domestic durables like freezer, TV, Computer,
Motor Car, etc., PBL has introduced a Consumers Credit Scheme to improve the
quality of life particularly of the fixed income earner of the society.
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Eligibility
of Consumers:
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The
Officers having confirmed/permanent job in any one of the following
organizations and age between 20 to 50 years are eligible for availing of
Credit facilities under the Scheme.
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Besides the above, Professionals like
Doctors, Engineers, Architects, Lawyers, Journalists, Chartered Accountants,
Self Employed Business Executives are also eligible for enjoying credit
facilities scheme subject to the providing of Bank Guarantee or Insurance
Guarantee for the amount of Credit.
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Ü Eligible Items / Articles:
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Credit shall be
extended under the Scheme for buying the following items /articles:
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Ü Amount of Credit:
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Amount of
credit shall be keeping in view of the repayment capability of customer. The
amount of credit shall be determined in such a manner that monthly
installment does not exceed 50 % of the disposable income of the customer.
The maximum amount of credit to be allowed to a customer for buying the
listed items will be Tk.1.00 lac. The credit for purchase of Gold Ornament
shall not exceed one-third of the limit. In case of Car, Station Wagon and
Microbus, once the limit will be up to Tk.3, 00 lac.
After
repayment of 73% of the credit allowed to a customer, he/She will be
eligible for fresh credit under the scheme but the total amount of credit
shall not exceed the ceiling under any circumstances. But the credit
facilities for purchase of Car, Station Wagon and Microbus shall be allowed
for one time only.
Rate of
Interest: 16.00% P.A. (With monthly rests)
Service Charge
payable to Supervising Agency: 2.00% (To be borne by the clients)
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The client will also submit crossed cheeks in
advance for all the stipulated instalments in favour of the Bank towards
repayment of loan including interest and service charge. The customer
will provide personal guarantee of an officer preferably his reporting
officer or any other superior or controlling officer. The guarantee will be
duly verified by the competent authority of the respective organizations. The
articles procured under the Scheme shall remain hypothecated to the Bank
as security.
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Ü Rules for Application:
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Intending clients will have to apply for the
credit in bank's printed application form that will be available in
respective branches on payment of tk.10.00 only. Clients will submit the
application form duly filled-in and signed along with quotations for the
purchase of desired articles.
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Ø
General Loan Scheme
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Depending on the
various nature of financing, all the lending activities have been brought
under the following General Loan:
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The loans are 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 are mainly allowed accommodating financing under the categories
(i) Large & Medium Scale Industry and (ii) Small & Cottage Industry.
Very often term financing for (1) Agriculture (ii) Others.
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Ø Lease Finance Scheme
|
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Lease financing is one of
the most convenient long-term sources of acquiring capital
machinery and equipment.
It is a very popular scheme 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. Of late, the lease finance has become very popular
in almost all the countries of the world. An obvious advantage of the lease
is to use an asset without having to buy it. The lessee is obligated to make
lease payments until the expiration of the lease agreement, which corresponds
to the useful life of the asset. In a capital scarce economy like ours, Lease
Financing is suitable for firms to acquire Capital Machinery, Equipments,
Medical Instruments, Automobiles etc. And thereby employ their own resources
more advantageously in some other investments. Lease financing also helps a
firm to reap significant economic benefit through tax saving and by reducing
the risk of the equipments becoming obsolete due to the technological
advancement.
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]
Lease Agreement:
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]
Risk Fund:
A risk fund shall be built up through compulsory
contribution by each lessee on the cost of the lease item (s). The amount
will be @ 1% in case of Machinery or Equipments and @ 2% in case of
Automobiles.
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]
Transport Leasing:
|
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Transport is
one of the most widely traded lease items in the developed as well as
developing countries of the world. The reasons behind success of transport
leasing in many countries could by attributed to tax benefit, efficiency in
found management and above all to the fact that user could exclusively use
the leased transport by paying reasonable rental.
The major
issues of transport leasing are detailed below:
1.
Selection of Vehicle:
The customer
has the right to decide the brand of vehicle, negotiate the price with the
manufacturers of dealers, and arrange after sales services with the supplier.
2. Acquisition
Cost:
The
acquisition cost shall be the actual purchase price after bargaining and all
other incidental expenses incurred by the Bank including financial expenses.
3. Lease Term
:
In case of
Transport leasing, the term shall be maximum 4 (four) years starting from the
date of execution. But when the lease is cancelled for any reason the lessee
will have to return the vehicle to the Bank together with the stipulated loss
value mentioned in the agreement.
4. Lease
Rental :
Lease rentals
calculated on the basis of acquisition cost and lease term shall be paid
monthly.
5. Insurance:
The vehicle
shall be covered by Insurance throughout the lease term with the coverage
decided by the Bank. The premium shall be paid by the lessee.
6. Repair
& Maintenance:
The lessee
shall be obliged to maintain the vehicle for ensuring its normal operation
and shall be solely responsible for loss/ damage as long as it is in his
possession. Accordingly, repairing and maintenance cost for normal operation
during the lease period shall be borne by the lessee.
7.
Registration :
The lessee
will arrange the registration of the vehicle in the name of the Bank at his
own cost and also pay annual taxes and fees payable to the concerned authority.
In case of his failure, Bank will do it and recover the cost from him.
|
||||||||||||||||||||||||
|
]
Salient Features of Lease
Financing:
|
||||||||||||||||||||||||
|
|
Table : Cash Investment for Availing Lease
Finance
|
|||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||
|
Table: Table for Lease
Rental
|
|||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||
|
Mode of Transfer of Ownership:
|
|||||||||||||||||||||||||||||||||||||||
|
Bank may agree to transfer
the ownership of lease item to the lessee even before expiry of the lease
term on receipt of the following payments:
Table: |
|||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||
|
Ø
Small & Medium Enterprise
(SME)
|
|||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||
|
Ü Concepts
|
|||||||||||||||||||||||||||||||||||||||
|
|
Small Enterprise : |
||||||||||||||||||||||||||||||||||||||
|
|
* Small Enterprise refers to those enterprises:
|
||||||||||||||||||||||||||||||||||||||
|
|
 |
*
Where goods are produced, recycled, repaired or traded
in traditional way;
|
|||||||||||||||||||||||||||||||||||||
|
|
|
* Where total bank investment is
limited to Tk.250,000;
|
|||||||||||||||||||||||||||||||||||||
|
|
|
* Where 10 or less workers are engaged
on wages or commission basis;
|
|||||||||||||||||||||||||||||||||||||
|
|
|
||||||||||||||||||||||||||||||||||||||
|
|
Medium Enterprise:
|
||||||||||||||||||||||||||||||||||||||
|
|
Medium Enterprise refers to those enterprises:
|
||||||||||||||||||||||||||||||||||||||
|
|
|
Where goods are
produced, recycled, repaired or traded applying some capital
machinery;
|
|||||||||||||||||||||||||||||||||||||
|
|
|
Where 20 or less
people are engaged on wages or commission basis;
|
|||||||||||||||||||||||||||||||||||||
|
|
|
Where total bank
investment does not exceed Tk.75, 00,000.
|
|||||||||||||||||||||||||||||||||||||
|
Ü Target Group
|
|||||||||||||||||||||||||||||||||||||||
|
Initially, Small & Medium Size Entrepreneurs
located within the accessible area of our branches will be the target area
under this program. The Entrepreneurs should have an existing profitable
business or a viable business plan.
|
|||||||||||||||||||||||||||||||||||||||
|
Ü Eligibility for Credit Facilities
|
|||||||||||||||||||||||||||||||||||||||
|
The following criteria have to
be met by the applicant to qualify for a loan from Prime Bank Limited under
its SME Credit Scheme:
|
|||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||
|
Ü Restricted Business
|
|||||
|
01.
|
Production, Marketing, Trading of alcoholic, narcotic
and other intoxicating drug or liquor.
|
||||
|
02.
|
Production and Trading of any item banned by the
Government.
|
||||
|
03.
|
Any activity not permissible by the law of the land.
|
||||
|
Ü Loan Ceiling
|
|||||
|
01.
|
For small
enterprise : Maximum Tk.2,
50,000/-
|
||||
|
02.
|
For medium
enterprise : Maximum Tk.75, 00,000/-
|
||||
|
No loan
proposal for less than Tk.1, 00,000/- be entertained.
|
|||||
|
Ü Purpose
|
|||||
|
|||||
|
Ü
Mode of Finance
|
|||||
|
01.
|
Cash Credit (Hypo/Pledge);
|
||||
|
02.
|
Hire purchase/ Lease Finance;
|
||||
|
03.
|
Term Loan.
|
||||
|
Interest: 8% above
Bank Rate. Presently 15%.
|
|||||
|
Penal Interest: If any borrower fails to adjust loan within
validity period or to repay consecutive 02 (two)-instalments, penal interest
@0.25% per month shall be charged on the defaulted amount.
|
|||||
|
Ü
Securities
|
|||||
|
It is a supervisory credit scheme. Tangible security
in the form of mortgage may not be available in all the cases. So mortgages
will not be mandatory. Security will be stipulated on a case to case basis
interalia as under(one or several of the following):
|
|||||
|
01.
|
Registered mortgage of land & building.
|
||||
|
02.
|
Mortgage/Assignment of possession right.
|
||||
|
03.
|
Assignment of security money, advance rent, if any.
|
||||
|
04.
|
Assignment of Trade Receivables not older than 90 days.
|
||||
|
05.
|
Hypothecation of machineries, equipment, vehicles, stock-in-trade,
raw materials, work-in-process and finished goods.
|
||||
|
06.
|
Personal Guarantee from persons acceptable to the Bank.
|
||||
|
07.
|
Post dated checks.
|
||||
|
08.
|
Lien on deposits/saving certificates/financial obligations.
|
||||
|
10.
|
Guarantee of USAID for 50% of the exposure.
|
||||
|
Ü Period of Loan
|
||||
|
a.
|
In case of continuous loan
: 01(one) year.
|
|||
|
b.
|
In case of Term Loan :
Maximum 05(five) years.
|
|||
|
Ü Mode of Repayment
|
||||
|
01.
|
In case of continuous loan credit turnover in the
account must be equal to the limit in a quarter and full adjustment within
the validity period.
|
|||
|
02.
|
In case of term loan, the loan should be repaid by
monthly instalments through post-dated checks as per amortization Schedule.
|
|||
|
03.
|
Sale proceeds should be deposited in the account regularly.
|
|||
|
Ü Loan Monitoring and Review
This is a supervising credit scheme. The success of
the scheme depends on the extensive and intensive post disbursement
supervision, follow-up & monitoring. It must be ensured that the loan
fund is not diverted, the sponsors are very serious to the operation of the
project, quality is updated and marketing effort is effective. Regular
repayment must be ensured.
Visit to the
establishment must be done at least once in a month. During visit of the
project motivational work to be done with a view to strengthening the spirit
& morale of the sponsors. A visit report should be recorded in credit
file against each visit. Supervision will be done by the respective branches,
which will be monitored by SME Cell, Credit Division, Head Office. A
signboard shall be displayed at the shop / factory with writing “Financed
by Prime Bank Limited”.
|
||||
|
Ü Recovery System
|
||||
|
a.
|
If any borrower fails to adjust the loan within
validity period or to repay his monthly instalment then the responsible
loan-monitoring officer of the concerned branch will arrange for adjustment
of the overdue instalments from the loanee’s savings account if there is
adequate balance. The officer shall regularly follow up for recovery and take
any measure including legal action for recovery.
|
|||
|
b.
|
If any loanee fails to repay his consecutive 02(two)
monthly instalments, then the Branch’s loan monitoring officer will
investigate into the actual causes of default and report to the Branch
Manager with a copy to SME Cell, Head office for further action and advice
for recovery/regularization of the loan.
|
|||
|
Ø
House Building / Apartment Loan Scheme
|
||||
|
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 (HBL-GEN).
Loans allowed to our Bank
Employees for purchase /construction of house shall be headed Staff Loan
(HBL-STAFF).
|
||||
Issuing Of Bank Guarantee:
Bank Guarantee is a profitable product of
a bank. Sometimes customers need bank
guarantee for their business purposes.
PBL offers three types of guarantee –
i.
Bid bond: This guarantee is given to the business people. This guarantee is
given for the purpose of participating in the tender.
ii.
Performance guarantee: This guarantee is in
favour of the client for assuring that the client will perform some specific
works.
iii.
Advance payment security: By this guarantee, PBL
gives assurance of payment in case of advance payment. It helps in deposit
mobilization.
The procedure of each guarantee is same.
For issuing bank guarantee, customers have to apply to PBL in their own pad.
Then bank issue guarantee on judicial stamp. But the conditions for issuing
bank guarantee are that ---
1. Customers must maintain a current account.
2. Customers must keep certain percentage of guaranteed money as
margin.
3. Bank charges .50% on the guaranteed money per quarter.
Bank’s profit for issuing bank guarantee is
a. .50% commission per quarter.
Furthermore, customer has to maintain
certain
Accounting Treatment Regarding Bank Guarantee:
While issuing guarantee, bank performs the following function:
Customer’s
Liability Dr.
Banker’s
Liability Cr.
Banker’s liability becomes credit
because the guarantee becomes the liability of the bank. If the bank pays the guaranteed amount to the
beneficiary, then PBL reverses the entry and collects money from the customer and
issues the bank draft. But sometimes, while the guarantee remains unused,
customer gives another written in his own pad. Then again bank reverses the
previous entry. PBL also issue revolving bank guarantee.
9.2.6 Credit
Disbursement:
Having completely and accurately prepare
the necessary loan documents, the loan officer ready to disburse the loan to
the borrower’s loan account. After
disbursement, the loan needs to be monitored to ensure whether the terms and
conditions of the loan fulfilled by both bank and client or not.
9.2.7 Credit Monitoring, Follow-Up And
Supervision:
Credit
monitoring implies that the checking of the pattern of use of the disbursed
fund to ensure whether it is used for the right purpose or not. It includes a
reporting system and Communication arrangement between the borrower and the
lending institution and within department, appraisal, disbursement, recoveries,
follow-up etc.
PBL Officer checks on the following points,
a)
The borrower’s behaviour of
turnover
b)
The information regarding the
profitability, liquidity, cash flow situation and trend in sales in maintaining
various ratios.
The review and classification of credit facilities starts at Credit
Department of the Branch with the Branch Manager and finally with Credit
Division- Head Office.
9.2.8 Classification Procedure:
After the date of expiry, if the borrowers do not adjust their loan,
PBL at first gives a notice to them. The period of giving notice depends on the
nature of the loan. For continuous loan, PBL gives notice for three months. For
five-year term loan, PBL gives notice for six months. And for more than
five-year term loan, PBL gives notice for more than 12 months.
After giving notice, if the borrower does
not repay the loan, the loan will be considered as classified.
Pursuant to
Bangladesh Bank’s Banking Regulation and policy Department's Circular No. 16
(1998), loans and advances are classified both on aging and functional criteria
as follows:
|
#
|
Classification & Functional Criteria
|
Type of Loan
|
Definition
|
|
1
|
Unclassified
|
All
|
Current
loans with required adequate eligible security
|
|
2
|
Substandard-loans that there is a reasonable
prospect that the condition of the loan can be improved
|
Continuous
|
Overdue
>3 mo but <6 mo
|
|
Demand
|
Overdue
>3 mo but <6 mo from date of notice
|
||
|
Term <5 yrs
|
If
defaulted amount =or> 6 mo of instalments
|
||
|
Term 5 yrs or more
|
If
defaulted amount = or > 12 mo of instalments
|
||
|
Short term Agricultural or Micro loan
|
Overdue
> 12 mo but less than 36 mo
|
||
|
3
|
Doubtful-probability of recovering the loan is
uncertain
|
Continuous
|
Overdue
>6 mo but <12 mo
|
|
Demand
|
Overdue
>6 mo but <12 mo from date of notice
|
||
|
Term <5 yrs
|
If
defaulted amount = or >12 mo of instalments
|
||
|
Term 5 yrs or more
|
If
defaulted amount = or >18 mo of instalments
|
||
|
Short term Agricultural or Micro loan
|
Overdue
>36 mo but less than 60 mo
|
||
|
4
|
Bad/loss-no hope of recovery, including cases
where: no collateral; borrower is not traceable; barred by statute of
limitations
|
Continuous
|
Overdue
>12 mo
|
|
Demand
|
Overdue
> 12 mo from date of notice
|
||
|
Term <5 yrs
|
If
defaulted amount = or > 18 mo of instalments
|
||
|
Term 5 yrs or more
|
If
defaulted amount = or > 24 mo of instalments
|
||
|
Short term Agricultural or Micro loan
|
Overdue > 60 mo
|
Table: 5th STAGE
CLASSIFICATION
|
Classification Status
|
Length of overdue
|
Rate of Provision
|
|
Unclassified
|
Below 3 months
|
1%
|
|
Substandard
|
3 months and above but below 6 months
|
20%
|
|
Doubtful
|
6 months and above but 12 months
|
50%
|
|
Bad & loss
|
12 months and above
|
100%
|
Source: Bank, as paraphrased
by Thomson Financial Bank Watch
Following measures are
available for non-repayment of loan-
I) To
issue notice for adjustment
ii) To
issue legal notice for filing suite.
iii)
To encash securities (in case
of demand loan)
iv)
To issue legal notice for
selling the hypothecated goods (in case of transport loan, cash credit-hypo).
v)
To issue suite for foreclosure.
vi)
Finally to sue in money loan
court or insolvency court which is suitable?
9.2.9 Lending Risk Analysis
The modern concept of lending has shifted from the security-oriented
approach to business viability one. The emphasis is given on the likelihood of
repayment, business viability, management competence and management integrity
of the proposed debtor. As the prevailing legal system of the country often
favours the borrower by making it difficult for the Bank to foreclose on
collateral, the ultimate security of the Bank is the commercial success of the
borrower. Adequate emphasis of business risk is more such more important than
analysis of security risk
The FSRP has
designed the LRA package, which provides a systematic procedure for analysing
and quantifying the potential credit risk. Bangladesh Bank has directed the
commercial Banks to use LRA for evaluating credit proposals amounting Tk 1.00
core and above.
Experienced people of the credit department of PBL do this sort of
analysis. It is a ranking whose total score are 140. Among this score 120 for total business risk
and 20 for total security risk. It is a four-scale rating.
In case of business risk, if the point falls between 13 to 19 then
poor risk; if the score falls between 20 to 26 then acceptable risk; if the
score falls between 27 to 34 then marginal risk and if the score is over 34
then good risk.
In case of security risk, if the score falls between –20 to –15 then
poor risk; if the score falls between –14 to 0 then acceptable risk; if the
score falls between 0 to 10 then marginal risk and if the score is over 10 then
good risk.
In LRA, the following aspects are analysed—
Ø Supplies Risk,
Ø Sales Risk,
Ø Performance Risk,
Ø Resilience Risk,
Ø Management ability,
Ø Level of managerial teamwork,
Ø Management Competent Risk,
Ø Security Control Risk, and
Ø Security Cover Risk.
10.0 MAJOR FINDINGS
10.1 Comparison (Literature Vs. Existing Credit Appraisal Procedure):
In the previous chapter I described both standard and existing
credit appraisal procedure. In this chapter I would like to compare between
standard credit procedure and existing procedure of Prime Bank LTD. Most of the
procedure of credit appraisal system are standardized under the supervision of
Bangladesh Bank but my experience in the credit department could revealed some
ill practice in the appraisal procedure which can drive the bank in a uncertain
condition in the long run related to the recovery of given loans.
All the banks try to keep their recovery rate cent percent as they
deal with the money of general people. To achieve that rate banks have to have
more careful during loan disbursement and meantime a good appraisal procedure
can ensure a good recovery though there are many internal and external factors
with may influence the rate of recovery.
Prime Bank LTD does have the same vision
towards their loan disbursement. Although their vision is positive but I
observed the following objectionable practices in the credit appraisal
procedure:
10.1.2 Credit Policy (Literature Vs. Existing
Credit Policy):
Credit policy is a guideline for bank. It includes the terms and
conditions of existing credit, which is followed by the personnel of the credit
division. Through Prime Bank LTD is new Bank it has written loan policy which
is very similar to the Standard one. In fact every bank follows the same credit
policy which known as standard credit policy written in the banks guide line.
But the difference is seen in the practice of the policy. Like Standard credit
policy Prime bank LTD has the following credit policy:
*
A goal statement for the banks
loan portfolio.
*
Specification of the lending
authority given to each loan officer.
*
Lines of responsibility in
making assignment and reporting information with in the loan department.
*
The required documentation that
is to accompany each loan application and what must be kept in the banks credit
files.
*
Lines of authority with in the
bank detailing who is responsible maintaining and reviewing the banks credit
files.
Prime bank LTD has the same written loan policy theoretically
present in the bank. But practically they do not follow the procedure.
10.1.3 Procedure of Credit (Literature Vs. Existing):
I have
mentioned that the loan procedure starts from the client and than it goes to
branch (according to standard procedure and existing procedure). But
practically client goes to the higher management of the bank and proposes the
loan first than the head office send the client to the branch office for loan
appraisal. But from the literature review part we have seen that the credit
appraisal starts like the following:
The Standard Procedure of Credit of a Bank is completed through the
following Steps:
Step 1:
Any request for credit facilities, must be made by the borrower in
the Bank's prescribed standard form properly filled in and completed in
all respect and duly signed by the prospective borrower.
Step 2:
Submission Of past.-3 Years financial statement: For all credit
proposals, the borrowers and guarantors (if any) should, wherever Possible
submit past 3 years Profit & Loss A/C and Balance sheet duly audited by a
recognized and competent Chartered Accountant containing unqualified opinions.
Some borrowers may not have audited financial statements at all. In either
case, the lending officer must interview the potential borrower or Guarantor
and obtain satisfactory, accurate and complete financial information supporting
any prior financial statements either audited or not audited. In the case of an
individual borrower or guarantor, the financial statements must be signed by
competent authority and must contain legend to the signatory, all assets and
liabilities both direct and contingent and all sources of income and items of
expenses. For all un-audited statements provided by a Company, financial
Officer of the Company must execute such legend.
Step 3:
On all new credit arrangements and annual reviews emanating in
Branches, an analysis of the credit worthiness of the borrower and guarantor
(if any) should be prepared by the Credit Department at the Branch where credit
monitoring responsibility lies and a copy thereof forwarded to the Head of
Credit Division at 'Head Office for pre-factor or post-factor review as the
case may be. In case such credit originates in the Head Office, it will be
forwarded to the Branch Manager for record and action. Here again the bank
differ its operation from procedure. One thing has seen practice is more
stabilized than procedure.
10.1.4 Credit Analysis (Literature Vs. Existing):
An accurate appraisal of risk in any credit exposure is highly
subject matter involving quantitative and qualitative judgment. Bank analyses
the loan in both quantitative and qualitative method. Qualitative factors refer
to the analysis of financial statement ratios (historical analysis).
Qualitative factors refer to the assessment of management, industry, supplier,
customer and security.
According to the standard procedure bank should analyse all the six
C’s but in the existing procedure I have found bank give more emphasize on only
Capacity and Collateral. In addition some time bank can not do scientific
judgment or extensive analysis (Valuation) of the collateral.
For the big loans bank do Lending Risk Analysis. It is one o the
best modern scientific credit analysis. Through this tools bank analyse the:
·
Business Risk
·
Management Risk
·
Security Risk etc.
All the commercial banks follow this rule when the amount of loan application
is above 1 core. After analysing the above mentioned bank rate the loan
application on the four categories.
·
Good
·
Acceptable
·
Marginal and
·
Poor.
Generally Good and Acceptable loan application are accepted for the
disbursement.
10.1.5 Collateral (Literature Vs. Existing):
Collateral is one of the important factors in the credit appraisal
procedure. If bank can get a good security against the loan, local bank never
think twice to disburse loan. In the standard procedure we have seen different
types of collateral can issued against loan. Such as:
1. Account Receivable:
The banks take a security in the form of a stated percentage of the
borrower’s balance sheet. When the borrowers credit customers send in cash to
retire their debts this cash payments are applied to the balance of borrowers
loans. The bank may agree to lend more money as new receivable arise from the
borrowers sells to its customers thus allowing the loan to continue as long as
the borrower has need for credit and continuous to generate and adequate volume
of sales
2. Factoring:
Bank can purchase a borrowers account receivable based upon some
percentage of the book value because the bank takes over the ownership of the
receivable, it will inform the borrowers customers that hey should send their
payments to the purchasing bank.
3. Inventory:
A bank will lend only a percentage of the estimated market value of
a borrower’s inventory in order to leave a substantial cushion in case the
inventories value begins to decline. The inventory pledged may be controlled
completely by the borrower using a so-called floating line approach.
4. Real Property:
A bank may take a security interest in land and / or improvements on
land own by the borrower and records its clime-a mortgage-with a government
agency in order to define against successful claim by others.
5. Personal Property:
Bank takes a security in jewellers, securities and other forms of
personal property owned by a borrower.
7. Personal Guarantees:
A pledge of the stock deposits or other personal assets held by the
major stock holders or owners of a company may be required as collateral to
secure a business loan. But I have seen that Prime bank LTD never accept the
risky security like personal guarantee, factoring, account receivable and even
some times inventory.
From the above mentioned differences I have drawn the following
concluding remark
Differences between Standard and Existing Credit Appraisal:
|
Criteria
|
Major Differences
|
|
Credit Policy
|
Procedure is there but not widely Practiced
|
|
Procedure of Credit
|
Some times procedure is influenced by top Management
|
|
Credit Analysis
|
Analysis can be biased.
|
|
Collateral
|
Bank does not
take all the collateral that is mentioned in the standard appraisal
procedure.
|
11.0 SUGGESTIONS
q
Proper application of the Risk
Grading Scorecard and Risk Grading Model in Credit operation should reviewed at
least once in a year. And, if change is required, it should be done at the
year-end. Furthermore, accuracy and consistency of the concerned officers/executives
should be reviewed annually.
q
A negative file should be
maintained to ensure that individuals with a history of default and dubious
integrity do not get any loan from the Bank. This negative file is to be
maintained centrally by the Retail Credit Risk Management unit. Access to this
file should be controlled through maker-checker system checks.
q
To be ahead of competition the
bank needs to continuous look for “niches” of value by creating different
products, service preferences based on income levels for such segments. A strategy to continuously innovate for the
so called “ sub-prime” segments & also invest for “tomorrow’s profits” will
bring in rich rewards.
q
The Bank should send the
Relationship Managers and Credit Risk Management (CRM) employees to various
training programs on Loan Application Evaluation Techniques on a regular basis
so that the RMs can properly evaluate all the loan applications in a structured
and scientific way and select only those applications which has a sound credit
worthiness and repayment capability.
q
The RMs should be encouraged to
build up their knowledge base about various industries, the opportunities and
risks in the sectors, the well performers and the upcoming companies, industry
standards etc. For example, RMs can be given incentives to attend various
seminars, workshops, or training programs in these areas.
q
CRM must be strict to see that
all the procedures of Loan Evaluation and Monitoring are followed before giving
any new loans. It was observed that not all the steps of the present guideline
are followed strictly by the RMs. For example, the RMs did not go on regular
quarterly calls to the clients and also sometimes did not verify all the
information provided by the clients. This gives rise to chances that the
client’s actual position may not be understood on time and increases the risk
of classification. So steps must be taken to ensure strict adherence to the
loan evaluation and monitoring policy.
q
The RMs should keep their eyes
open about the position of the industries of their respective clients. As soon as any new risk occurs in the
industry or the industry shows signs of deterioration, they should analyse its
impact on their respective clients and act accordingly.
q
Credit Rating must be given
proper emphasis. Whenever a credit rating is lowered, the RMs must look into
the account to see whether there is any chance of the client being classified
eventually. The RM should also prepare an alternative exit plan from the
account, just in case it is needed.
q
Banks should consider
securities based collateral rather than asset based collateral. Because
securities are easily tradable, compare to assets. Ironically, assets value
depreciated with the passage of time where as securities appreciates with the
passage of time.
12.0 CONCLUSION
Credit
Management policies and techniques used in PBL at present no doubt is
comparable to international standards. The officials follow the policy very
strictly. They are choosy and conservative in sanctioning loan. The proposal is
thoroughly scrutinized by the loan sanctioning authority. The total function of
the credit division is monitored periodically. The bank’s classified loan to
the total Advance is very low. As the advance amount increasing, classified loan
amount is also increasing at a very low increasing rate. Management and others
related to Prime Bank are trying to formulate new services and products. They
are very quick in giving decision. The major source of fund raised from FDR
scheme. It raised the cost of fund. Increasing savings deposit may reduce it.
There is a scope to expand credit facility. It may help to increase the
interest income.
13.0 BIBLIOGRAPHY
Text Books:
q
Chowdhury, L.R., A Textbook on Banker’s Advances; 2nd
Edition; Paradise Printer; 2002
q
Fraser, and Donald R., Commercial Banking; 5th
Edition; West Publishing Company; 2002
q
Macdonald, S. S., Bank Management; 4th Edition;
The Dryden Press; 2000.
q
Qureshi, A A., Higher Management in Banks; 1st
edition; The Pioneer Printing press Ltd; 1997.
q
Rose, and Peter. S; Commercial Bank Management; Fourth
Edition; Irwin-McGraw-Hill; 1999
q
Reading materials on Credit
Management in Banks for the course of
MBM
Websites:
q http://www.wikipedia.org
Others:
q
Annual Report of Prime Bank
Limited
q
Credit Risk Management Policy
report of Prime Bank Limited
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