Executive Summary
In Bangladesh Pakistan Pakistan Bangladesh
In 1984 The Pubali Bank Limited was denationalized and was taken over by a new set of entrepreneurs with all its assets and liabilities. With 398 branches all over the country it became the largest private bank in the country.
The objective of the study is to find out the causes for its unreasonable performance.
The report has been prepared based on primary and secondary data collected from the different branches of PBL (interview of Officials) and furnished by the Head Office officials and the experience gathered by myself during my working tenure in this bank.
The key parts of the report are credit risk and credit management, principles of sound lending, recovery of classified loans and advances, present credit position of PBL, performances evaluation, problem identification and recommendations.
The discussion in the report discloses some problems and I tried my best to recommend some ways according to me as well as the employees of different banks and creditors and depositors.
T Introduction
T Objectives of study
T Methodology
T Scope of the study
T Limitation of the study
CHAPTER- I: INTRODUCTION
1.1 Introduction of the Study:
Private Banks have, of course, a vital role in promoting and accelerating the economic development process as per the demand of time through the implementation of finance for industrial & agricultural project, domestic and foreign trade and allocation the fund to various off –farm employment and self-employment generation projects. Focusing the light and considering the every pros and cons on available statistical data it has been apparently accepted that Pubali Bank Ltd. continued to register its steady process in the field of deposits, advances & foreign exchange business. In view of the sluggish nature of the economic activities over the years the deposit performance of Pubali Bank Ltd. is more or less satisfactory. Pubali Bank Limited gains maximum advantages for foreign exchange related business. The policy of Pubali Bank Limited is aimed at the integrated operation of all its outlet at home and abroad.
The low rate of economic growth, high rate of unemployment, illiteracy, growth rate of population, low rate of recovery etc. are the impediment factor of economic development of a country.
In spite of the above obligations rather in amongst favorable situation Pubali Bank Ltd. have flourishing efficient and endeavoring to the maximum of efficiency of its capacity to catch up with slow growing development of our country.
It has been tried here to highlight the credit procedure and credit management and its evaluation in the perspective of PBL which also quenched my thirst to know about the lending (Credit) business and its management.
1.2 Objectives of the Study:
The objectives act as a bridge between the starting point and the goal of the study. The main objective of my study i.e. to write a report on “Credit Management Of Pubali Bank Limited (PBL)” is to disclose the operational procedures of credit recovery system & its contribution to the people and the nation. The operational procedures include credit application, evaluation of credit proposal, preparation of credit proposal, forwarding to sanctioning authority, giving sanction to the client, disbursement, nursing of the credit and finally recovery of the credit from the client. It is also stated that the report is prepared for serving the academic purposes only but not to disclose its confidential matters to the public.
In brief, the objectives are as below:
¨ To get idea of the credit management procedure of Pubali Bank Limited
¨ To get idea about the Credit Risk Management of Pubali Bank Limited
¨ To discuss the Credit Disbursement procedure.
¨ To identify policy recommendations for further improvement.
1.3 Methodology :
The report has been prepared based on primary and secondary data collecting from its branches & furnished by the Head Office officials of PBL and the experience gathered by myself during my working tenure in this Bank.
The primary data and secondary data have been collected are mentioned below:
Primary Data:-Interviews of different Officials.
Secondary Data:
● Different Annual Reports of PBL
● Brochures and leaflets of the Bank.
● Office files & documents.
● Study related Books and Journals.
● Data and information in internet
● Other publications.
1.4 Scope of the Study:
The focus of the report is on the Credit Management of Pubali Bank Ltd. This Bank is the largest private bank in Bangladesh and highly progressive one among the private commercial Banks PBL is running with 398 branches all over the country. For preparing this report attempts have been particularly made to the investment (loan) giving activities and its recovery system in PBL.
1.5 Limitations of the Study:
The study aims to evaluate the Credit Management activities of PBL .As the report prepared with a short span of time, the report could not be made comprehensive and conclusive. Mainly the report could be made descriptive. Some usual constraints I faced during my course of action/investigation. These are as follows:
· The main limitation of the study is time barrier,
· All of the data are not found because of confidentiality of Bank.
T PBL Profile
T Mission and vision of PBL
T Managing Head (MD) and Board of Directors
T Employees and clients
T Oregano gram of the Bank
T Management of PBL
T Organization Structure of PBL
T Details of Some credit (Loans and advances) of PBL
T Types of Loans
T Securitization of Loans and Overdrafts
T Mortgage
T Credit Proposal & Sanction
T Disbursement of advance
T An overview of Pubali bank Limited, Pahartali branch.
CHAPTER-2
GENERAL DESCRIPTION OF THE PBL
2.1 PBL Profile
Pubali Bank Limited (PBL) was incorporated as Eastern Mercantile Bank Limited in 1959 as per the companies’ act 1913 with 60 percent equity owned by the then few East Pakistanis. Rest 40 percent shares were owned by the State Bank of Pakistan. The founding chairman was Mr. O R Nizam from Chittagong. The other few founding members were Mr. M R Siddiqee, Dr. Naimur Rahman, Mr. M H Chowdhury and Khan Bahadur Mojibur Rahaman.After the independence, as per the nationalization policy of the government, this bank was nationalized by the Bangladesh Bank (Nationalization) Order – 1972 (PO no. 26 of 1972) and was renamed as Pubali Bank. After 12 years of nationalization, according to the privatization policy of the government the bank was privatized in 1984 and renamed as Pubali Bank Limited (PBL). During the denationalization 160 rural branches were handed over to Bangladesh Krishi Bank.
2.2 Mission and vision of PBL
From the era of nationalization (1972) until very recent time the bank did not have any written or unwritten vision. There is no record or any literature available with the bank as to what the organization was trying to achieve, nor were its employees clear about what they were working for. Even after denationalization, its new entrepreneurs also did not set any clear vision for the organization. As usual in the absence of any vision there was also not any clear mission statement for its work force.
On the contrary the noble entrepreneurs of the Eastern Mercantile Bank had a clear vision for the bank. Though there is no written record, but it is articulated from the talk with some of the old employees that the very essential segment of their vision was ‘not letting control of every thing go in the hands of West Pakistanis, we the Bengalis must retain control on our economy.’ The pride was shared by all its employees and there was high sense of owning the bank by its employees also (this is very much evident from the talk with some of the old retired personnel).
The present Managing Director Mr. Helal Ahmed Chowdhury has taken the total charge of the Pubali Bank Limited. His mission is to make profit Tk.600 Crore in the year 2010 & Vision is to reach the No.1 among the private commercial banks.
2.2 Managing Head (MD) and Board of Directors:
Our Present Managing Director Mr. Helal Ahmed Chowdhury joined in Pubali Bank in 1977 when the Bank was nationalized. He joined in the Bank through BCS Exam. He has experience of banking of about 30 years. He is one of the most experienced bankers in our country.
The Board of director comprises of Totaling 14 Members headed by The Chairman Hafiz Ahmed Mozumder.Most of the directors are renowned industrialists and are engaged in various social welfare activities .
2.3 Employees and clients:
In Pubali Bank at present there are about five thousand employees about 4000 of them are officers and rest of them are sub-staff. The customers of PBL are from all walks of life from farmers and rickshaw pullers to industrialists.
2.4 Oregano gram of the Bank
Pubali Bank Limited is the largest bank in the private sector of our country. Organ gram of the PBL as a whole is shown:
Figure 1: Oregano gram of Pubali bank limited
Source: Primary
2.5 Management of PBL
The culture developed during nationalized era could not be totally removed from the management style of PBL. Currently an excellent management team under the direct supervision of a competent board of directors (BOD) runs the bank. Under the BOD there is an MD (Managing Director). A general manager heads each department of the bank. There are total eleven divisions in the Head Office of PBL. List of various divisions with its functions is as follows:
| Table 1 : Divisions and Respective Functions at Head Office | ||
| No | Division | Functions |
| 1 | Board Division | Share Management |
| 2 | Human Resource Division | Recruitment, promotion, training, disciplinary action, dismissal, discharge, retirement, pay and allowances, career plan, trade union etc. |
| 3 | Establishment division | Engineering, transport, telephone, telex, fax, security system, real estate etc. |
| 4 | Credit Division | Credit allocation, estimation, sanction etc. |
| 5 | Credit Monitor and recovery Division | Credit monitoring, classification, evaluation and recovery etc. |
| 6 | International Division | Dealing with foreign banks or organizations. |
| 7 | Central Accounts Division | Financial evaluation and forecast of future financial events of the bank. |
| 8 | Branch Operation Division | Branches’ Management, control, monitoring and performance evaluation. |
| 9 | Business Promotion Division | Improvisation and strategy promulgation for business promotion and development of the bank. |
| 10 | Audit Division | Conduct internal audits of the branches. |
| 11 | I T Division | Data management, maintenance of computer and electronic equipments. |
2.6 Organizational Structure of PBL:
Managing Director
Deputy Managing Director 
General Manager
Deputy General Manager
|
Assistant Genera Manager
Senior Principal Officer
Principal Officer
|
Senior Officer
Officer
Junior Officer
.2.6 Details of some credit (Loans and advances) of PBL:
There are two types of credits: Funded and Non-Funded. While Letter of Credit, Bank Guarantee etc. are non-funded credits, the Commercial Banks provide the following funded credits to meet various requirements of their customers in our country:
ü Cash credit
ü Overdrafts
ü Loan
ü Purchase and discounting of bills.
The terms and conditions, the rights and privileges of the borrower and the banker differ in each case. In Bangladesh the category of loans, cash credits and advances accounts for the bulk of bank credit. Purchase and discounting of bills is not as popular a means of bank credit as it is in advanced countries. The following are the existing practices in the country for grant of loans, cash credits and overdrafts.
2.7 Cash Credit (CC) :
There are two types of Cash Credits (C.C.), CC-Pledge and CC Hypothecation.
2.7.1 Features of Cash Credit-Pledge & Cash Credit – Hypothecation:
CC-Pledge is sanctioned against pledge of marketable commodities. When such advance is allowed to traders or wholesalers the underlying merchandise is pledged with the banker. When a manufacturing concern is allowed CC Pledge facilities, commodities such as raw materials, finished products, stores and spares are taken under pledge.
Another type of cash credit is hypothecation - -in short C.C. (Hypo). This is also an advance against stock of commodities and finished products but C.C. (Hypo) is also extended against work-in-Process, Bills Receivable, Sundry Debtors, Commercial Vehicles etc. For a borrower C.C. (Hypo) is quite advantageous because in hypothecation neither ownership nor possession of goods is transferred to the bank but an equitable charge is created over the movable assets in favor of the bank. The goods remain under the possession of the borrower who binds himself to give the possession to the banker whenever the latter requires him to do so.
Hypothecation is a convenient device to create a charge over the movable assets in circumstances in which transfer of possession is either inconvenient or impracticable. For example, if a borrower wants to borrow on the security of raw materials or goods-in-process, which are to be processed into finished products, transfer of possession will impede the functioning of the borrower's business. By hypothecating such stocks, the borrower may use the same in any manner he likes, e.g., he may take out the stock, sell it and replenish it by a new one. A floating charge is created over the movable assets of the borrower on the basis of confidence reposed by the creditor. Hypothecation is thus only an extended idea of pledge: the creditor permitting the debtor to retain possession either on behalf of or in trust for him.
2.7.2 Overdrafts:
When a current account holder is permitted by the banker to draw more than what stands to his credit, such an advance is called an overdraft. The banker may take some collateral security or may grant such advance on the personal security of the borrower. The customer is permitted to withdraw the amount as and when he needs it and to repay it by means of deposit in his account as and when it is feasible for him. Interest is charged on the exact amount overdrawn by the customer and for the period of its actual utilization.
Generally, an overdraft facility is given by a bank on the basis of a written application and a promissory note signed by the customer. In such cases an express contract comes into existence. Regular limit for a specific amount and period of time is sanctioned in case of overdraft. This type of limit is quite suitable for a single deal like construction work, real estate development, supply job etc. Usually securities like mortgage of property, assignment of Bills Receivable, Lien etc., are obtained against overdraft limits.
2.8 Loan System:
Under the loan system, credit is given for a definite purpose and for a predetermined period. Normally, these loans are repayable in installments. Funds are required for single non-repetitive transactions and are withdrawn only once. If the borrower needs funds again or wants renewal of an existing loan, a fresh request is made to the bank. Thus, a borrower is required to negotiate every time he is taking a new loan or renewing an existing one. Banker is at liberty to grant or refuse such a request dependi\1g upon his own cash resources and the credit policy of the central bank.
2.9 Types of Loans
Banks grant loans for different periods--short, medium and long, and for different purposes. Broadly, the loans granted by banks are classified as follows:
§ Short term Loans
§ Medium and Long Term Loans. Bridge loans
§ Composite Loans
§ Consumption Loans
2.9.1 Short Term Loans: Short term loans are granted to meet the temporary needs of the borrowers. These loans are granted against the security of tangible assets, mainly the movable assets like goods and commodities, shares and debentures etc
2.9.2 Term Loans: Medium and long term loans are usually called 'Term Loans'. These loans are granted for more than a year and are meant for purchase of capital assets for the establishment of new units and for expansion or diversification of an existing unit. Banks sometimes grant such loans together with specialized financial institutions like BSB, BSRS, and ICB etc. Such loans constitute a part of the 'project finance' which industrial enterprises are required to raise from different sources. These loans are usually secured by the tangible assets like land, buildings, plant and machinery, etc.
2.9.3 Bridge Loans: Bridge loans are essentially short term loans which are granted to industrial undertakings to meet their urgent and essential needs during the period when formalities for availing of the term loans sanctioned by financial institutions are being fulfilled or necessary steps are being taken to raise the funds from the capital market. These loans are automatically repaid out of amount of the term loan or the funds raised in the capital market. The maximum period of the bridge loan is one year.
2.9.4 Composite Loans: When a loan is granted both for buying capital assets and for working capital it is called a composite loan. Such loans are usually granted to small borrowers, such as artisans, farmers: small industries, etc.
2.9.5 Consumption Loans: Though normally banks provide loans for productive purposes only, but as an exception loans are also granted on a limited scale to meet the medical needs or the educational expenses or expenses relating to marriages and other social ceremonies etc. of the needy persons. Such loans are called consumption loans which are also allowed to procure Consumer Durables and house-hold items.
2.10 Securitization of Loans and Overdrafts
Overdrafts and Loans are secured or unsecured. While such advances are generally secured, unsecured ones are also sometimes allowed for relatively small amount and for short period of time. Such loans are given to persons of sufficient means and high social standing and reputation against their personal obligations and at times against third party guarantee. Overdrafts and Loans are usually allowed against securities such as land and building, shares, bills receivable, government, bonds, savings certificates, fixed deposit receipts etc., the market value of which is not at any time less than the amount of such advances. Charges on these assets offered as security must be created in favor of the banker. The way charge is created differs from one type of asset to another and mortgage, lien and assignment are the accepted modes of Securitization.
2.11 Mortgage: When a customer offers immovable property like land and building as security, charge thereon is created by means of mortgage. The main characteristics of a mortgage are as follows:
¨ A mortgage is the transfer of an interest in the specific immovable property and differs from sale wherein the ownership of the property is transferred.
¨ If there are more than one co-owners of an immovable property, every co-owner is entitled to mortgage his share in the property.
¨ The property intended to he mortgaged must be specific (i.e., it can be described and identified by its location, size, boundaries, etc.). A mortgagor must mention which of his properties is intended to be mortgaged.
¨ The object of transfer of interest in the property must be to secure a loan or to ensure the performance of an engagement which results in monetary obligation. Thus the property may be mortgaged to provide security to the creditor in respect of the loans already taken by the mortgagor or in respect of the loans which he intends to take in future.
¨ The actual possession of the property need not be transferred to the mortgagee.
¨ The mortgagee gets, subject to the terms of the mortgage deed and the provisions of the Transfer of Property Act, 1882, the right to recover the amount of the loan out of the sale proceeds of the mortgaged property.
¨ The interest in the mortgaged property is transferred to the mortgagor on the repayment of the amount of the loan along with interest thereon.
Forms of Mortgages:
There are the following forms of mortgages and specifies different rights and liabilities of the parties thereto:
v Simple mortgage
v Mortgage by conditional sale
v English mortgage
v Mortgage by deposits of Title Deeds
v Anomalous Mortgage
2.12 Lien
Lien is created on assets such as Bank balance, Deposit Receipts or Certificates or any instruments representing financial assets which can be converted into cash at ease. Lien gives the banker a right to retain the securities handed over to him in his capacity as a banker. The ownership of such securities is not transferred to the banker but he can dispose of the same for adjustment of the relevant advance if it is not repaid as per arrangement. A Banker's Lien is a general lien which empowers the banker to exercise his right of lien on any asset which comes under his possession in the ordinary course of business.
2.12 Assignment
Assignment is another mode of providing security to (he lending banker. Assignment means transfer of a right, property or a debt --existing or future. The borrower may assign any of his rights. Properties or debts to the banker to secure a loan from the latter.
In banking business. a borrower may assign to the banker
v The book debts.
v money due from Government department or semi-government organization, and
v Life insurance policies. In Bangladesh the contractors of the government depal1ment and agencies normally assign their rights in favour of the bank with the stipulations that the contractor's bills as approved by the department will be paid by cheque payable to the account of contractor maintained with the lending bank.
2.13 Credit Proposal & Sanction:
The party seeking a secured advance against any acceptable security must make an application to the branch where he maintains his operative account. Disbursement may be allowed only after getting a limit sanctioned by the authorized officials.
Conducting preliminary study: The credit proposal should be evaluated on the basis of the following documents and parameters:
v Borrower's application
v Reports in confidence regarding the state of business of the intending borrower through available means.
v Report from Bangladesh Bank CIB regarding the applicant's status of borrowings/exposure with other banks.
v Statement of accounts of the borrower with own and other banks.
v Statement of assets and liabilities ( in detail) .:. Balance sheet/profit & loss accounts (in 'case of limited company) for 3 years.
v Memorandum & Articles of Association.
Approval of limit:
The sanctioning authority on receipt of the proposal shall scrutinize the same and ensure that:
· The proposal bears all pertinent information relating to the advance and the borrower.
· All necessary papers/documents have been enclosed with the proposal duly checked and verified by the branch.
· The proposal has been duly recommended.
· The proposal does not fall within the existing credit restrictions.
· Minimum margin requirement against the advance is proposed.
· The primary security has got easy marketability, durability and storability.
· Valuation of the property offered as collateral security is judiciously assessed by the engineer and branch manager as per proforma circulated by Head Office.
· The intending borrower is not a defaulter of the Bank/other banks including DFIs.
2.14 Disbursement of advance:
After being fully satisfied about the execution of all documents and observance of all formalities, the bank shall disburse the advance to the party in accordance with the prescribed procedure. Advances against Different Kinds of Securities.
2.15 An overview of PBL Pahartai Branch, Chittagong:
PBL , Pahartali Branch Chittagong is a medium category Branch among all the branches of PBL . It was opened on 24.12.1968 and opening manager was Mr. Md Firoz Khan and present branch manager Mr. Md Shahjahan. (SPO).
2.16 The Branch’s present structure is as follows:
Senior Principal OfficerPrincipal OfficerSenior OfficerOfficerJunior Officer
Sub-staff
2.17 We have the following Loans and advances in this branch.
- CC
- OD
- HBL
- CLS
- Lease finance
- DL against PPS, PF etc)
- SME
T Definition of Credit & Credit Management
T The Need of Credit Management in Bangladesh
T Basis for Loan Classification
T Principles of sound lending used by PBL
T CAMEL Rating
T New Techniques for assessing soundness of a Loan Proposal
T Collection of Credit Information
T Supervision and Control of Loans & Advances.
CHAPTER:03
FAMILIARIZATION WITH CREDIT MANAGEMENT
3.1 Definition of Credit & Credit Management
Credit is the ability to obtain goods or services in exchange for a promise to pay for them later. Similarly, it is the power or ability to obtain money by the borrowing process in return for a promise to repay the obligation in the future. Properly defined, credit represents the actual or prospective debtors’ power or ability to affect an exchange by his promise by future payment. In defining the credit management we can understand that from the very beginning of the loan giving activities to the end of the recovery of the loan is all the single part of credit management. Credit Management enables the bank to run the safe and sound credit activities and to make the loan receiver fully confident to go forward with a particular bank to achieve a credit facility and that can only be possible if there is an existence of credit management which is intensifying both the bank and the loan receiver.
3.2 The need of Credit Management in Bangladesh.
In Bangladesh the most serious difficulty facing the financial sector is the high level of interest rate. Here the lending rate is at the level of 14 % to 16.5 % and inflation rate is 5 % and the real interest rate is about 10 % . The high interest rate for bank loans drives down the return to capital and tends to reduce investment. High interest rates also contribute to the difficulty the banks face in recovering loans as these led defaults. As there is the high tendency of the loan default in Bangladesh, the need of credit management in our country is inevitable. Having various kinds of problems in loan giving procedure it is quite needed to have a sound credit Management system by the commercial Banks in Bangladesh. A loan is not treated as a default loan from the very beginning. First, a loan is treated a classified, then as sub-standard and then default loan and then as bad debt . If the credit is supervised carefully the loan may not be bad-debt or default. For all kinds of bad debt banks have to reserve 100 % provision of the bad debt which is totally unproductive amount (fund) for the bank. That’s why banks need credit management system.
3.3 Basis for Loan Classification:
The loan classification has been done mainly under two broad heads.
3.3.1 Objective Criteria
The continuous loan and demand loans are classified as different heads of discontinuous loan after the expiry of scheduled date of payment or if it is not renewed, before its expiry:
From 6 months to 9 months……….Substandard loan From 9 months to 12 months………Doubtful loan From 12 months and above………. .Bad debt/Loss loanIf any installment of a term loan is not paid within the scheduled date, then that debt will be termed as installment default.
The term loans, which are to be paid within maximum five years time:
v If the amount of installment default is equal to or more than the installment to be paid within six months will be classified as substandard loan.
v If the amount of installment default is equal to or more than the installment to be paid within 12 months will be classified as doubtful loan.
v If the amount of installment default is equal to or more than the installment to be paid within 18 months will be classified as bad debt or loss loan.
In case of the loan, which are to be paid within more than five years:
v If the amount of installment default is equal to or more than the installment to be paid within 12 months will be classified as substandard loan.
v If the amount of installment default is equal to or more than the installment to be paid within 18 months will be classified as doubtful loan.
v If the amount of installment default is equal to or more than the installment to be paid within 24 months will be classified as bad debt or loss loan.
If short-term agriculture loan is not paid within the date mentioned in the contract, then it will be termed as discontinuous loan. It will be discontinuous if it crosses:
v 12 months ----Substandard loan
v 36 months-----Doubtful loan
v 60 Months-----Bad debt/Loss loan
3.3.2 Qualitative Judgment
If any doubt or uncertainty arises for any loan irrespective of whether it is termed as continuous, demand or term loan under objective criteria, then those loan have to be classified under qualitative judgment.
If there is any change in terms or conditions under which the loan was sanctioned or if the principal of debtor is affected for adverse situation or if the value of security is reduced or if the loan recovery become uncertain, then this loan has to be classified under qualitative judgment. More over, if without any reason or time and again any loan is rescheduled or the regulations for rescheduling is broken or if the tendency of crossing the limit of schedule or any case is filed or any loan is sanctioned without permission of appropriate authority, then this have to be classified under qualitative judgment.
3.4 Reserve Provision
Bank will reserve provision for continuous, demand and term loan as per following rate:
Ø Unclassified (UC) 1%
Ø Substandard loan (SS) 20%
Ø Doubtful loan (DF) 50%
Ø Bad debt or Loss loan (BL) 100%
3.5 Security Provision
Eligible security includes following:
Lien security against the loan- 100% Market rate of deposited gold/ ornaments in the bank- 100% Lien Government Bond/Savings certificate- 100% Guarantee from Government or Bangladesh Bank- 100% Easily Marketable Goods Kept under control of Bank- 50% Market value of secured land and building- 50%3.6 Laws regarding Bad debt/Loss Loan
If the loan classified as bad debt/loss remained outstanding for 9 years will be written off. But that particular debtor will still be treated as a defaulter. A case has to be filed against the defaulter before writing off the bad debt/loss loan. Moreover loan recovery section of the bank will remain responsible to recover the written off loan.
3.7 Principles of Sound Lending used by PBL.
The three cardinal principles of bank lending are safety, liquidity and profitability. We can now have a closer look at what these and other principles are:
v Safety: Bank's business consists of dealing in money but, as mentioned above, this money is borrowed money--borrowed mostly in the form of deposits from the general public. The banks themselves in general and regulatory authorities in all the countries in particular are, therefore, vitally concerned with ensuring safety of money invested by banks on loans and advances. By safety is meant that the borrower is in a position to repay the loan along with interest, according to the terms of the loan contract. To ensure the safety of lending PBL follows the following factors.
 |
Character Person Man Reliability 
Capacity Purpose Management Responsibility Capital Product Money Resources Condition Place Materials Respectability Collateral Profit Market Returns v Repayment : The repayment of a loan depends upon the borrower's (1) capacity to pay and (2) willingness to pay. The former depends upon his tangible assets, cash-flow and the success of his business. The willingness to pay depends upon the integrity, good character and reputation of the borrower. In addition, the banker generally relies on the security of tangible assets owned by the borrower to ensure the safety of his funds.
v Liquidity: Banks are essentially intermediaries for short term funds. Therefore, they lend funds for short periods mainly for working capital purposes. The loans are, therefore, largely payable on demand. The banker must ensure that the borrower is able to repay the loan on demand and this depends upon the nature of assets owned by the borrower and pledged to the banker. For example, goods and commodities are easily marketable while fixed assets like land and buildings can be liquidated after a time interval.
v Profitability: Commercial banks are profit-earning institutions. The banks must employ their funds at a suitable rate of interest to earn sufficient income out of which to pay interest to the depositors, salaries to the staff and to meet various other establishment expenses and generate an income for the shareholders/owners.
v The Purpose of the Loan: While lending his funds, the banker, among other things, enquires from the borrower the purpose for which he seeks the loan. Banks do not grant loans for each and every purpose; they ensure the safety and liquidity of their funds by granting loans for productive purposes only, viz., for meeting working capital needs of a business enterprise. Loans are not advanced for speculative and unproductive purposes. Loans for capital expenditure for establishing industries are of long-term nature and the commercial banks may use part of its loan able funds to provide loans on long term basis for really viable undertakings.
v Creditworthiness of the Borrowers: The business of sanctioning unsecured advances is comparatively risky and needs special attention. In the absence of a charge over any specific asset, the safety of advance depends upon the honesty and integrity of the borrower as much as upon the worth of his tangible assets. The banker has therefore, to make proper inquires not only about the borrower's capacity to pay but also about his willingness to pay the amount of credit. 'Though such inquire is also necessary in case of a secured advance also but it assumes special significance in case of unsecured advances. This is more important in Bangladesh where the incidence of default has become almost endemic. The creditworthiness of a person means that he deserves a certain amount of credit and may safely be granted to him.
Such creditworthiness is judged by the banker on the basis of various parameters but the one that is frequently cited is the so-called CAMEL rating .
3.8 CAMEL Rating:
Banks lend funds to clients having high or acceptable creditworthiness. An effective way of judging the creditworthiness of a borrower is to ascertain CAMEL rating. CAMEL stands for Capital, Assets, Management Earning ratio and Liquidity. These parameters can be briefly described as follows:
v Capital: The borrower must invest his own equity and have his own stake in the business.
v Assets: He must have sufficient assets of good quality which he can fall back upon in case of needs.
v Management: The borrower is required to possess managerial capabilities and management expertise to make his business a success.
v Earning: The business must be a profitable one ensuring good returns on investment.
v Liquidity: The business is expected to have a positive cash-flow based on good cash and cash equivalents and its current assets must be enough to meet its current liabilities.
3.9 New Techniques for assessing soundness of a Loan Proposal.
1) Lending risk analysis (LRA)
2) Collection of Credit Information.
3.9.1 LRA : Lending Risk Analysis (LRA) refers to the degree/intensity of risk that the bank cannot fully recover a loan. Interest from loan is the main source of earnings for the bank but all loans cannot be easily recovered. It depends upon the correct evaluation of the borrowers. There are set rules and guidelines from Bangladesh Bank for this evaluation. PBL follows the instructions for all types of loans that it provides to the customers. So, overall performance of a bank is dependent upon the sound functioning of the lending system. A venture/project involves risk. While financing a venture/ project banks have to take into consideration the risk elements from different angles that are involved in the project.
Regardless of the type of loan, all credit requests goes through a systematic analysis of the borrower’s ability to repay.
The foremost issue in assessing credit risk is determining a borrower’s commitment and ability to repay debts. Commitment is typically evidenced by an individual’s honesty, integrity, and work ethic. While a borrower may sincerely make every effort to repay a loan, the promise is weak if he or she has misjudged the ability to generate cash for payment. An important facet of character is thus credibility. Even if the numbers look acceptable, a bank should lend nothing if the borrower appears dishonest.
Lending Risk Analysis Procedure
The formal lending risk analysis procedure includes a subjective evaluation of the borrower’s request and a detail review of all financial statements. The loan officer may perform the initial quantitative analysis of lending risk. The process consists of:
z Collecting information for the credit file
z Spreading financial statements (analyzing financial ratios)
z Projecting the borrower’s cash flow
z Evaluating collateral
z Writing a summary analysis and making a recommendation
There is a format, which is used by the banks to analyze the lending risk involved in various businesses. It consists of mainly two parts i.e. business risk and security risk. Most important part is business risk, which chiefly includes industry risk and company risk.
Components of LRA:
There are mainly two components of LRA form i.e. Business risk and security risk. Business risk is again subdivided into two parts, Industry risk and Company risk. Details of the format are shown below:
Figure : Components of LRA
Factors influencing Risks:
Components of an LRA format are already mentioned. Again these components are influenced by some factors. These are as follow:
| Table 3: Factors Influencing Risks | |
| Risks | Factors to be considered |
| Supply Risk | 1. Price, Quantity and Quality 2. Review Charges in GOB Policy 3. Obtain cost breakdown |
| Sales Risk | Sales may fluctuate because, 1. Market size drops 2. Increased competition 3. Changes in regulation 4. Lose of largest customers |
| Performance Risk | 1. Recent performance history 2. Competitive position: SWOT as compared to competitor 3. Strategy adopted in view of above 4. Cash flow forecasts |
| Resilience risk | 1. Leverage: DER, CIB report, Shareholder’s further report 2. Liquidity: Ratio analysis, Flexibility- proportion of variables to fixed cost 3. Connection |
| Competence Risk | 1. Management ability 2. Level of team work |
| Integrity risk | 1. Honesty 2. Dependability |
| Control Risk | 1. Ease of obtaining judgment 2. Ease of taking possession of security |
| Cover Risk | 1. Expected realizable value 2. Speed of realization 3. Liquidation value |
3.9. 2 Collection of Credit Information
For the purpose of assessing the creditworthiness of a borrower, a banker has to collect information from a number of sources. In foreign countries specialized agencies collect all information relating to the status and financial standing of businessmen and supply the same to the bankers. Bangladesh Bank has developed a system to collect information regarding the financial position of the borrowers through Credit information bureau.
3.9.3 Credit Information Bureau
The Bureau collects credit information from the banks under Section 42 of the Bangladesh Bank Order, 1972. Banks are required to provide to Bangladesh bank the data on credit facilities provided to the clients. Bangladesh Bank maintains a database in its Credit Information Bureau. The commercial banks enjoy access to these data in respect of their prospective borrowers. Thus, the banks can find out if any of their customers is having excessive borrowings from the banking system at any particular moment and how meticulous they are to meet their repayment obligations. The information is of limited assistance to the banks, but it serves as starting point to institute further inquires before the loan is granted.
v Borrower: Much information may be secured from the borrowers directly. The loan application form seeks basic information about the borrower and his business. The banker may examine his account books and note his past dealings with other banks or parties. His statement of accounts with other banks can show his dealings and the business undertaken in the past. A personal interview with the borrower will also enable the banker to get a clear picture of his state of affairs.
v Bazar Reports: Banks try to find out the creditworthiness of the party by making inquires from the brokers, traders and businessmen in the same trade or industry. Their individual opinions may differ but a balanced opinion may be formed about the borrower on the basis of the feelings expressed by a number of such persons.
v Exchange of credit information amongst banks: It is the practice and customary usage amongst banks to exchange credit information relating to the constituents in their mutual interest. Bangladesh Bank has asked the banks to supply information in respect of defaulting borrowers.
v Balance Sheet and Profit and Loss Account: An analysis of the Balance Sheet and Profit and Loss Account of the borrower for the last few years will reveal his true financial position. These statements should be certified by competent accountants. The procedure followed in analyzing these financial statements is discussed separately.
3.10 SUPERVISION AND CONTROL OF LOANS & ADVANCES:
Advances allowed should be very closely watched to see whether the same are being conducted in accordance with the terms and conditions under which the limits were sanctioned or not. The result of the inspection should be an effective guide in sorting out the measures to be adopted in respect either of correcting the unsatisfactory operation of the advances or recovery of the same. In order to ensure safety of advances, all advances shall be kept under strict supervision and control. This will include supervision at the time of disbursement to ensure proper utilization of the Bank credit. to supervise end use during the tenure of advance and to ensure that the repayment is regular. Supervision and control of advances are exercised at different levels in order to keep the same regular.
3.10.1 Control At Branch Level:
Branches must see and ensure the following:The respective account holder is legally competent to borrow. All necessary documents have been correctly executed and other formalities duly complied with. The security is correctly valued, is easily saleable, margin is properly maintained, turn over of the stock is quick, insurance where necessary has been taken and periodical inspection carried out. Stock report signed by the borrower shall be obtained periodically and pledge godown should be regularly inspected and stocks verified as per existing instruction. All advances accounts must be frequently reviewed particularly when transactions of the account are not satisfactory.
Financial position of the borrower and guarantor, if any, must be reviewed every year and also as and when occasion arises. Published audited balance sheet and profit and loss accounts of the borrowing companies shall be obtained when these are published.
Debt acknowledgement letter duly signed by the borrower, guarantor, shall be obtained in accordance with existing practice to keep the advances alive in order to save advance from being barred by limitation.
Due date diary in respect of important matters e.g. due date of payment of insurance premium, date of collection of interest bearing securities kept under lien, expiry date of sanctioned limits, limitation period, due date of a company's next balance sheet, expiry date of guarantees issued by the branch etc. shall be maintained.
Behavior of the borrower in respect of his overall business shall be closely observed. Party's simultaneous banking with other banks shall be promptly inquired into and immediate measure should be taken to route entire business with the financing branch.
3.10.2 Control at Head Office
Statements relating to advance shall be submitted to the controlling Officers/Head Office. These should be carefully examined for the purpose of watching the period of limitation from the documents executed and securities offered and also the present value of the security offered against the present outstanding.
Branches should be periodically inspected by the Inspection Teams of the Head Office. During inspection all advances, documents, security, turnover, observance of the stipulated terms and conditions of every advance shall be examined.
Where any irregularity in documentation including security arrangements, non adjustment of the advance within the stipulated period and afterwards and other irregularities which lead the advance toward being stuck up are observed, the branch should be advised to make all out efforts, including legal measure, if necessary to recover the stuck up advances.
3.11 Recovery Of Advances:
Advances granted in any form are repayable either on demand or on the expiry of the validity period or through agreed installments. When repayment is not forthcoming in accordance with the repayment terms, recovery efforts should be launched.
v When the repayment pattern of the advance is such that continuance of the facility is not worthwhile or while the advance allowed confronts with the following circumstances, advance should be recalled.
v Borrower or the guarantor dies.
v Borrower or the guarantor has become insolvent.
v Borrowing company has been liquidated.
v Partnership has been dissolved.
v Borrower does not come forward to renew the documents well before the expiry of the period of limitation.
v Turnover in the account has not improved.
v Value of the security has deteriorated.
v The borrower does not comply with the legitimate request of the Bank to complete the required formalities.
v Financial position of the borrower has deteriorated alarmingly which is beyond restoration.
v The party resorts to heavy over trading/speculation.
v The party commits fraud of any sort.
v Policy of the Bank has under gone change in relation to certain types of advances.
For the recovery of the advances, branch should take the under mentioned steps:
v Make formal demand for repayment in writing.
v Put pressure on the borrower by utilizing the most effective and meaningful media that an exert adequate influence on the borrower.
v Intimate the borrower about Bank's ultimate resorting to file suit in the event of non-repayment.
v Advise the guarantor, if any, to adjust the advance or have it adjusted by the principal debtor.
v If the borrower and his guarantor (if any) come forward and propose repayment arrangement and the same is. considered to be an acceptable proposal, the branch should seek controlling/B.O. decision in this regard and act in accordance with the instruction.
v When the borrower does not adjust the account, legal notice, under the approval of the controlling officer/H.O., should be served upon the borrower and the guarantor, through Bank's legal adviser/panel lawyer. It should be mentioned in the notice that if the outstanding is not adjusted within the specific time (which shall be mentioned) suit shall be filed for the recovery of the advance.
v When advance to be recovered was allowed against pledge of goods, after giving notice in the aforesaid manner, arrangement shall be made to sell the goods through auction subject to the approval from Head Office.
v When the charge is by way of hypothecation the branch may, on the strength of the relative documents, take the stock under own possession and thereafter dispose of the same in the above manner.
v When advance allowed against mortgage, either simple or equitable legal recourse shall have to be taken to sell the property through court's decree.
v When the security obtained against the advance, does not cover the outstanding, attempts must be made to secure the advance. If it is not possible and borrower does not repay, chance of recovery must be ascertained and legal action, subject to the approval of the competent authority shall be taken.
v If an advance account of the deceased borrower (individual or proprietary concern) remains unadjusted the following actions shall be taken. No further withdrawal shall be allowed. If the borrower's legal heirs approach for the continuance of the facility, the proposal together with legal opinion shall be referred to the competent authority. In case the authority approves the proposal, the debit balance of the deceased account shall be transferred to a new account in the name of his heirs or successors along with securities held in the account: If the desired facility is declined or no application is made by the successors, the securities if any, may have to be sold and guarantee if any be invoked in a lawful manner. For shortfall, if any, legal action should be taken as per advice of the legal advisor/panel lawyer after obtaining approval from Head Office.
3.12 Filing of Suit for Recovery of Loans and Advances:
Suit is the final steps to be taken in respect of recovery of an advance, when all endeavors of the Bank i.e. personal contact, moral suasion, request, and notice for repayment of the advance turned fruitless.
· As preparatory to filling suit, the branch shall serve legal notice upon the borrower(s), guarantor(s). Directors of the company (in case of advance against Ltd. Co.) through the legal adviser/panel lawyer under registered post demanding adjustment of the liabilities within a specific time.
· Documentation of the advance shall be checked to ensure that these are not barred by limitation for taking legal action. Full particulars of the assets of the borrower and co-obligates of the advance shall be ascertained.
- Review form in respect of each party detailing therein. full particulars about the borrower, his assets and the advance shall be filled in as per the proforma circulated by Head Office. While filing in the review form, chance of recovery shall be clearly mentioned. The review form shall be sent to the competent authority with due recommendation stating the reason for filing Suit. On receipt of approval immediate steps shall be taken to file suit through the Bank's legal adviser/panel lawyer. While filing suit it shall be ensured that all the necessary parties, partners, directors (in case of Ltd. Co.) guarantor, as the case may be are made defendants in the suit and steps are taken to attach the assets before judgment. In case of mortgage of immovable property either by way of equitable mortgage/or by registered mortgage, mortgage/title suit and not money suit shall be filed.
T Credit Risk Grading (CRG)
T Functions
T Use of CRG
T Number and short name of Grades used in the CRG
T Credit Risk Grading Score Sheet
CHAPTER-04
CREDIT RISK GRADING (CRG) OF PUBALI BANK LIMITED
As per reference of Bangladesh Bank BRPD Circular no.7 Pubali Bank Limited has followed some rules and regulation of Credit Risk Management.
4.1 Credit Risk Grading (CRG): The Credit Risk Grading (CRG) is a collective definition based on the pre-specified scale and reflects the underlying credit-risk for a given exposure.
4.2 Functions of Credit Risk Grading: Well managed credit risk grading systems promote banks 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.
4.3 Use of Credit Risk Grading:
The Credit Risk Grading matrix allows application of uniform standards to credits to ensure a common standardize approach to asses 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.
Risk grading would also be relevant for surveillance and monitoring, internal MIS and assessing the aggregate risk profile of a Bank.
4.4 Number and Short Name of Grades used in the CRG:
The proposed CRG scale consists of 8 categories with short names and Numbers as provided as follows:
| Grading | Short Name | Number |
| Superior | SUP | 1 |
| Good | GD | 2 |
| Acceptable | ACCPT | 3 |
| Marginal/Watch list | MG/WL | 4 |
| Special Mention | SM | 5 |
| Sub standard | SS | 6 |
| Doubtful | DF | 7 |
| Bad & Loss | BL | 8 |
4.4.1 Superior-(SUP)-1:
- Credit facilities, which are fully secured.
- Credit facilities fully covered by government guarantee.
- Credit facilities fully covered by the guarantee of top tier international Bank.
4.4.2 Good-(GD)-2
- Strong repayment capacity of the borrower.
- The borrower has excellent liquidity and low leverage.
- Very good management skill and expertise.
- An Aggregate Score of 85 or greater based on the Risk Grade Score Sheet.
4.4.3 Acceptable-(ACCPT)-3
- These borrowers are not as strong as GOOD Grade borrowers.
- Borrowers have adequate liquidity, cash flow and earnings.
- Acceptable management.
- An Aggregate Score of 75-84 based on the Risk Grade Score Sheet.
4.4.4 Marginal/Watch list-(MG/WL)-4
- These Grade warrants greater attention due to conditions affecting the borrower, the industry or the economic environment.
- Weaker business credit and early warning signals of emerging business credit detected.
- The borrower incurs a loss.
- An Aggregate Score of 65-74 based on the Risk Grade Score Sheet.
4.4.5 Special mention-(SM)-5
- These grade has potential weakness that deserve management’s close attention.
- Severe management problem exist.
- An Aggregate Score of 55-64 based on the Risk Grade Score Sheet.
4.4.6 Substandard-(SS)-6
- Financial condition is weak and capacity or inclination to repay is in doubt.
- These weakness jeopardize the full settlement of loans.
- An Aggregate Score of 45-54 based on the Risk Grade Score Sheet.
4.4.7 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.
- An Aggregate Score of 35-44 based on the Risk Grade Score Sheet.
4.4.8 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.
- An Aggregate Score of less than 35 based on the Risk Grade Score Sheet.
4.5 How to compute Credit Risk Grading:
Pubali Bank Limited computes Credit Risk Grading by the following Score Sheet:
CREDIT RISK GRADING SCORE SHEET
| Borrower | | Aggregate Score: Risk Grading: Short Score | |
| Group Name (if any) | | ||
| Branch | | ||
| Industry/Sector | | ||
| Date of Financials | | ||
| Completed by | | ||
| Approved by | | ||
| Number | Grading | ||
| 1 | Superior | SUP | Fully Cash secured, secured by Government/International Bank Guarantee |
| 2 | Good | GD | 85+ |
| 3 | Acceptable | ACCPT | 75-84 |
| 4 | Marginal/Watchlist | MG/WL | 65-74 |
| 5 | Special Mention | SM | 55-64 |
| 6 | Substandard | SS | 45-54 |
| 7 | Doubtful | DF | 35-44 |
| 8 | Bad & Loss | BL | <35 |
| Criteria | Weight | Parameter | Score | Actual Parameter | Score Obtained |
| A. Financial Risk | 50 % | ||||
| 1. Leverage: (15%) Debt Equity Ration(×)-Time Total Liabilities to Tangible Net Worth All Calculation should be based on annual financial statements of the borrower (audited preferred) | · Less than 0.25× · 0.26×to 0.35 × · 0.36 × to 0.50 × · 0.51 × to 0.75 × · 0.76 × to 1.25 × · 1.26 × to 2.00 × · 2.01 × to 2.50 × · 2.51 × 2.75 × · More than 2.75 × | 15 14 13 12 11 10 8 7 0 | | | |
| 2. Liquidity : (15%) Current Ration(×)-Times  Current Assets to Current Liabilities | · Greater than 2.74× · 2.50×to 2.74 × · 2.00 × to 2.49 × · 1.50 × to 1.99 × · 1.10 × to 1.49 × · 0.90 × to 1.09 × · 0.80 × to 0.89 × · 0.70 × 0.79 × · Less than 2.75 × | 15 14 13 12 11 10 8 7 0 | | | |
| 3. Profitability: (15%) Operating Profit Margin (%) Operating profit × 100 Sales | · Greater than 25× · 20%×to 24% × · 15% × to 19 %× · 10% × to 14 × · 7% × to 9% × · 4% × to 6% × · 1% × to 3% × · Less than 1% × | 15 14 13 12 10 9 7 0 | | | |
| 4. Coverage(5%) Interest coverage Ration (×)Times Earning before interest & Tax (EBIT) Interest on debt  Total score-Financial Risk | · More than 2.00 × · More than 1.51 × less than 2.00 × · More than 1.25 × less than 1.50 × · More than 1.00 × less than 1.24 × · Less than 1.00 × | 5 4 3 2 0 50 | | | |
| Criteria Weight | Parameter | Score | Actual Parameter | Score Parameter | |
| B. Business/Industry Risk 18 % | |||||
| 1. Size of Business (Sales in BDT Crore) The size of the borrower’s business measured by the most recent year’s total sales. Preferably based on audited financial statements | · > 60.00 · 30.00-59.99 · 10.00-29.99 · 5.00-9.99 ·2.50-4.99 ·<2.50 | 5 4 3 2 1 0 | | | |
| 2. Age of Business The number of years the borrower has Been engaged in the primary line of business. | · > 10 years · 5-10 years · 2-5 years · < 2years | 3 2 1 0 | | | |
| 3. Business outlook A critical assessment of the medium term prospects of the borrower, taking into account the industry, market share and economic factor. | · Favorable · stable · slightly uncertain · cause for concern | 3 2 1 0 | | | |
| 4. Industry Growth | · strong (10 % +) · Good (>5%-10%) · moderate (1%-5%) · No Growth (<1%) | 3 2 1 0 | | | |
| 5. Market Competition | · Dominant player · Moderately Competitive · Highly Competitive | 2 1 0 | | | |
| 6. Entry/Exit barriers | · Difficult · Average · Easy | 2 1 0 | | | |
| Total Score-Business/Industry Risk | | 18 | | 12 | |
| Criteria Weight | Parameter | Score | Actual Parameter | Score Obtained |
| C. Management Risk 12 % | ||||
(Management & Management Team) The quality of management based on the aggregate number of years that the senior management team has been in the industry. | · More than 10 years in the related line of business. · 5-10 years in the related line of business. · 1-5 years in the related line of business. · No experience | 5 3 2 0 | | |
| · Ready succession · Succession within 1-2 years · Succession within 2-3 years · Succession in question | 4 3 2 0 | | |
| · Very Good ·Moderate · Poor · Regular Conflict | 3 2 1 0 | | |
| Total Score-Management Risk | | 12 | | |
| Criteria Weight | Parameter | Score | Actual Parameter | Score Obtained |
| D. Security Risk 10 % | ||||
| 1. Security Coverage (Primary) | · Fully pledged facilities/substantially cash covered/Reg. Mortg. for HBL · Registered Hypothecation (1st charge/1st pari passu charge) · 2nd charge/inferior charge · simple hypothecation/negative lien on assets · No security | 4 3 2 1 0 | | |
| 2. Collateral Coverage | · Registered mortgage on municipal corporation/prime area property. · Registered mortgage on pourashava/semi-urban area property · Equitable mortgage or No property but plant & machinery as collateral · Negative lien on collateral · No collateral | 4 3 2 1 0 | | |
| 3. Support (Guarantee) | · personal guarantee with high net worth or strong corporate guarantee · personal guarantees or corporate guarantee with average financial strength. · No support/Guarantee | 2 1 0 | | |
| Total Score-Security Risk | | 10 | | 10 |
| Criteria Weight | Parameter | Score | Actual Parameter | Score Obtained |
| E. Relationship Risk 10 % | ||||
| 1. Account Conduct | · More than 3 (Three) years accounts with faultless record. · Less than 3 (Three) years accounts with faultless recorded. · Accounts having satisfactory dealings with some late payments. · Frequent past dues & Irregular dealings in account | 5 4 2 0 | | |
| 2. Utilization of limit (actual/projection) | · More than 60 % · 40 %-60% · less than 40 % | 2 1 0 | | |
| 3. Compliance of (Covenants/conditions) | · Full compliance · Some Non-compliance · No compliance | 2 1 0 | | |
The extent to which the bank maintains a personal banking relationship with the key business sponsors/principals. | · Personal accounts of the key business sponsors/principals are maintained in the bank, with significant deposits · No depository relationship | 1 0 | | |
| Total score-relationship risk | | 10 | | |
| Grand Total-All risk | | 100 | | |
T Performance Trend (Advance).
T Trend of Bad Debt.
T Trend of Recovery of Bad Debt Loan.
T Problem of Credit Management.
CHAPTER 05
FINDINGS AND THEIR ANALYSIS
To evaluate Credit performance of the Pubali Bank Limited, Pahartali Branch, Chittagong in this chapter the performance trend of Loans & Advance, Classified & Unclassified Advances, the trend of bad debt form 2006 to 2010 are discussed below:
5.1 Performance Trend (Advance) of PBL, Pahartali Branch.
Relevant Data:
| Performance Trend of PBL 2006~2010(in Lac) | |||
| Year | Total Loans & Advance | Classified | Unclassified |
| 2005 | 486.60 | 25.56 | 461.04 |
| 2006 | 569.83 | 34.05 | 535.78 |
| 2007 | 740.43 | 8.60 | 731.83 |
| 2008 | 427.92 | 6.34 | 421.58 |
| 2009 | 489.33 | 6.34 | 482.99 |
Figure: Performance Trend of PBL, Pahartali Branch 2006~2010
Analysis: The challenge of bank management is to maximize shareholders wealth. Bank’s profitability is closely linked with the balance sheet. Profitability and soundness is central to the objective of the bank. The achievement of the objective is directly rated with loans & advances. Higher the amount of unclassified loans the higher the operating income.
- Loans & Advances: Bank’s major sources of income are the income from loans & advances that it can make in a financial year. Of course the question of prudent lending remains closely associated with it. The bank has been able to make steady progress in this aspect also.
- Classified loan: The bank generates undisputed income from the unclassified loans. The sample 5 year’s period the bank has been able to improve the situation to some extent. This improvement indicates a remarkable qualitative change in the overall management of the bank.
5.2 Trend of Bad Debt in PBL, Pahartali Branch.
Related data:
| Amount of Bad Debt(Fig in Lac) | ||
| Year | Bad Debt | % Of Bad Debt |
| 2006 | 25.56 | 5.25% |
| 2007 | 34.05 | 5.97% |
| 2008 | 8.60 | 1.16% |
| 2009 | 6.34 | 1.48% |
| 2010 | 6.34 | 1.29% |
Figure: State of Bad Debt (in %)
Source: PBL Annual Report 2006-2010
Analysis: Among the classified loans, bad debt is the worst of all. There is a mandatory need of keeping hundred percent provisions for the bad debt. A good amount of debt has been classified as bad debt and brought forward as a matter of legacy. But now management has taken several steps to recover the classified debt and also taken some precautionary measure so that no new loans become classified debt. In a period of 5 years the percentage of bad debt has fallen from 5.25 % to 1.29%, which is a significant improvement in the recovery state.
5.3 Trend of Recovery of Bad Loan in PBL, Pahartali Branch:
Related Data:
| Recovery of Bad Debt (Fig in Lac) | |||
| Year | Classified Loans | Recovery | % of Recovered |
| 2006 | 25.56 | 15.44 | 60.40% |
| 2007 | 34.05 | 4.98 | 14.62% |
| 2008 | 8.60 | 6.99 | 81.28% |
| 2009 | 6.34 | 0 | 0.00% |
| 2010 | 6.34 | 0.33 | 5.20% |
Figure: State of Recovery (in %)
Analysis: The recovery state of Pubali Bank Limited, Pahartali Branch, Chittagong is not good.
5.4 Problems of Credit Management:
The problems of Credit Management in Pubali Bank Limited are described below:
Centralization: In PBL decision making is mostly centralized. At fields level the branch in charge usually do not enjoy any discretionary power relating to loan sanctioning, interest rates and new business.
Delay in Loan Sanctioning Process: The loan and advance department takes a long time to process a loan because the process of sanctioning loan is manual.
Lack of Supervision: Visits by top and middle ranking management acts as motivating tools for junior employees. Generally there is lack of such supervision especially in the rural branches.
Corruptions: The employees, some times, unlawfully, help the client deliberately by overvaluing the securities taken against the loan. As a result if the client fails to repay the loan. The bank authority cannot collect even the principal money invested by the selling those assets. Though there is no definite proof, but it is evident from the talk with some retired top and middle ranking PBL officers that, there are malpractices of taking bribes and other corruptions especially in credit and purchase departments
T Recommendation
T Conclusion.
CHAPTER-06
RECOMMENDATIONS & CONCLUTION
6.1 Recommendations:
Banking sector is one of the most important service oriented organization. Each and every bank is trying to give batter service. If Pubali bank wants to become a market leader obviously they have to give better service. Though it is observed that credit management of the bank is quite satisfactory, the following recommendations can be taken into consideration to make it more effective.
v If the deposit of the branch is good in position, Loans & Advances may increase for more profit.
v The recovery position of Bad Debt loan is not good enough, So management may take special care in the recovery section.
v Bank may supervise the loans and advances regularly. .
v The loan & Advance division may take a short period for processing and sanctioning loans and advances.
6.2 Conclusion:
The present Pubali Bank Limited started its journey as Eastern Mercantile Bank Limited in 1959 . Now it is growing Bank in the Banking Industry. The Number of Branches of the bank is 398. In spite of having such big net work and experienced set of staffs and employees the bank even under new entrepreneurs did not make any remarkable good progress. The prospect of the bank is good if it can overcome some problems like old legacy, lack of modernization, lack of supervision. These problems enhanced by inherited classified loans. How ever in the study it revealed that the bank is making steady progress in almost all sectors. The present management seems to have conceived the idea of modernization. But rapid progress is required.
References
Annual Report 2005-2009 PBL. Book of Instructions (General Banking) – PBL.
Bank Book of Instructions (Credit) – PBL.
Bank Book of Instructions (Foreign Exchange) – PBL.
Bank O Arthik Pratishthan Samuher Karzaboli 1999 – 2005 Ministry of Finance, Peoples
Bangladesh Laws on Banks and Banking.
BCD circular no-34, 16 November 1989.
BCD circular no-20, 27 December 1994.
BCD circular no-12, 04 September 1995.
BRPD circular no-16, 06 December 1998.
BRPD circular no-18, 14 May 2001.
Credit Risk Grading Manual
Import Policy – Ministry of Commerce, Bangladesh Government.
Republic of Bangladesh.
Reading Materials of the Course on Lending Risk Analysis (LRA)– BIBM.
