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4. report

  1. 1. INTRODUCTIONNow a day, education is not just limited to books and classrooms. In today’s world, education isthe tool to understand the real world and apply knowledge for the betterment of the society aswell as business. From education the theoretical knowledge is obtained from courses of study,which is only the half way of the subject matter. Practical knowledge has no alternative. Theperfect coordination between theory and practice is of paramount importance in the context ofthe modern business world in order to resolve the dichotomy between these two areas. Therefore,an opportunity is offered by Department of Business Administration, University of DevelopmentAlternative, for its potential business graduates to get Four months practical experience, which isknown, is as “Internship Program”. For the competition of this internship program, the author ofthe study was placed in a bank namely, “BASIC Bank Limited”. Internship Program brings astudent closer to the real life situation and thereby helps to launch a career with some priorexperience.This paper is entitled “Credit Management of BASIC Bank Limited” originated from thefulfillment of the internship program. For the internship program, each student is attached withan organization. My internship was at BASIC Bank Ltd, Mirpur Branch, Dhaka. During myinternship, I had to prepare a report under the supervision of Mr. Siddique Hayat Khan, SeniorLecturer, University of Development Alternative.Background of the Report Credit Management of BASIC Bank Limited 1
  2. 2. Banking sector is spending its hand in different financial event every day. At the same time thebanking process is becoming faster, easier and the banking arena is becoming wider. As thedemand for better service increase day by day, they are coming with different innovative ideas &product. In order to survive in the competitive field of the banking sector, all bankingorganization are looking for better service opportunities to provide their fellow clients. As aresult, it has become essential for every person to have some idea on the bank and bankingprocedure. This report is a practical requirement of my BBA program, and is submitted aftercompletion of the three months Internship program in the BASIC Bank to the internshipsupervisor Mr. Siddique Hayat Khan, Senior Lecturer, University of Development Alternative.The internship supervisor authorized me to submit the report of "Credit Management ofBASIC Bank Ltd".Justification of the ReportThere are three types of schedule commercial banks are in operation in our economy. They areNationalized Commercial Banks, Local Private Commercial Banks and Foreign PrivateCommercial Banks. BASIC Bank has discovered a new horizon in the field of banking area,which offers different General Banking, Investments and Foreign Exchange banking systemfocusing the small industry in Bangladesh. So I have decided to study on the topic “CreditManagement of Basic Bank Limited”. Because the Internship program of the university is anintegral part of the BBA program. So it is obligatory to undertake such task by the students whodesirous to complete and successfully end-up their BBA degree. This also provides anopportunity to the students to minimize the gap between theoretical and practical knowledge.During the internship program the teachers of the department are attached to actively andconstantly guide the students. Students are required to work on a specific topic based on theirtheoretical and practical knowledge acquired during the period of the internship program andthen submit it to the teacher. That is why I have prepared this report.Scope of the Study Credit Management of BASIC Bank Limited 2
  3. 3. The study has many dimensions and covers a broad spectrum. The subject matter of the study isto analysis the overall credit handled by the “BASIC Bank Ltd.” such as short term credit, longterm credit and Micro credit.” If a larger time period was covered then a more comprehensiveunderstanding of the study would’ve been possible. My honorable supervisor and the authority ofBASIC Bank help me to do a more feasible report.The study focuses mainly on the credit policy rather than all other credit schemes. In so doing,credit evaluation criteria along with the credit administration and other related aspects arecovered in the study. In order to gain an insight into the progress of the bank the growth of thebank since introduction has already been assessed. The loan products applicants have beensegmented and analyzed based on the secondary data provided which could’ve been conductedon an even broader spectrum. Inclusion of various other topics would have also been helpful.Objective of the Report Credit Management of BASIC Bank Limited 3
  4. 4. The main objective of the study are to evaluate the credit management of BASIC Bank Limitedand to have an overall idea on how it operates and what functions it does, and prepare a report onit. Besides this main objective there are some specific objectives.General Objective:The General Objective is to prepare & submit a report on the topic “Credit Management of BASIC Bank Ltd ".Project objectives: • To analysis the Lending procedures maintained by the BASIC Bank Ltd. • To observe principal Lending activities of BASIC Bank Ltd. • To evaluate Lending performance of BASIC Bank Ltd. • To understand the project evaluation technique of BASIC Bank Ltd. • To appraise the actual Recovery position of BASIC Bank Ltd. • To identify problems in credit operations of BASIC Bank Ltd. • To measure the actual position in classified Loan and provisions maintained by BASIC Bank Ltd.Methodology of the Study Credit Management of BASIC Bank Limited 4
  5. 5. The following methodology has been followed to come to a successful conclusion. Tosuccessfully finish the project certain methodology has been followed. These are: • Sources of Information & DataIn order to make the Report more meaningful and presentable, two sources of data andinformation have been used widely. Both primary and secondary data sources were used togenerate the report ♣ The “Primary Sources” are as follows – ♦ Informal conversation with the course teacher and bankers. ♦ Observing various organizational procedures. ♦ Relevant file study as provided by the officers concerned. ♦ Unpublished information through interviews ♣ The “Secondary Sources” of data and information are – ♦ Published article and manuals ♦ Periodicals published by Bangladesh Bank. ♦ Various books, articles, compilations etc. regarding general banking functions, foreign exchange operations and credit policies. ♦ From newspapers and internet • Data Collection ProcedureThe study has been primarily based upon information extracted from official documents.Interviews with the managers and officers of the credit division were also being conducted. Onthe other hand, secondary sources (WEB Site) were used to collect data regarding the bank andits practice of online banking since its inception and publications and different kinds of papers,annual reports, borrower’s database etc are the major secondary sources. • Tools use for Analysis Credit Management of BASIC Bank Limited 5
  6. 6. A critical analysis of the data has been made through the bar and line graph over the last fewyears. This will enable me to visualize the trend of the variable of interest over time. Indicatorsof bank performance have also been computed thorough ratio analysis. • Sample SizeAll the Branches of BASIC Bank located in everywhere in Bangladesh has been taken intoconsideration as population. Special focus is given on Mirpur Branch where I have completedmy internship.Limitation of the Report Credit Management of BASIC Bank Limited 6
  7. 7. In all respect some limitation and weakness remain within which I failed to escape by anymeans. These are follows:  Limitation of time: It was one of the main constraints that hindered to cover all aspects of the study.  Lack of Secondary data: The annual report was the main secondary Information source of information that was not enough to complete the report and private the reader a clear idea about the bank.  Confidentiality of data: Confidentiality of data was another important barrier that was faced during the conduct of this study. Every organization has their own secrecy that is not revealed to others. While collecting data on BASIC Bank Ltd.s strategic plan, the personnel did not disclose enough information for the sake of confidentiality of the organization.  Lack of comprehension of the respondents: Lack of comprehension of the respondents was the major problem that created much confusion regarding verification of conceptual questionBackground of BASIC Bank limited Credit Management of BASIC Bank Limited 7
  8. 8. BASIC Bank Limited (Bangladesh Small Industries and Commerce Bank Limited) is a state-owned scheduled bank. The name of the bank is indicative of its nature. It has a unique blend ofdevelopment and commercial banking functions and offers full range of banking services to itscustomers and clients. Fifty percent of its loan able funds require to be invested in small andcottage industries sector.BASIC Bank Limited was established as a banking company under the Companies Act 1913 onthe 2nd of August, 1988, started its operations from the 21st of January, 1989. It is governed bythe Banking Companies Act 1991.At the beginning, the name of the bank was “Bank of Small Industries and CommerceBangladesh Limited” that name was changed in 2001 and converted to “Bangladesh SmallIndustries and Commerce Bank Limited”The Bank was established as the policy makers of the country felt the urgency for a bank in theprivate sector for financing Small Scale Industries (SSIs). At the outset, the Bank started as ajoint venture enterprise of the BCC Foundation with 70 percent shares and the Government ofBangladesh with the remaining 30 percent shares. The BCC Foundation being nonfunctionalfollowing the closure of the BCCI, the Government of Bangladesh took over 100 percentownership of the bank on 4th June 1992. Thus the Bank is state-owned. However, the Bank is notnationalized; it operates like a private bank as before. Being one of the soundest banks in Bangladesh, BASIC Bank Limited is unique in itsobjectives. It is a blend of development and commercial banks. The Memorandum and Articlesof Association of the Bank stipulate that 50 percent of loan able funds shall be invested in smalland cottage industries sector.VisionMaking the contribution to the national economy Credit Management of BASIC Bank Limited 8
  9. 9. Mission ♣ High quality financial services ♣ Fast customer service ♣ Sustainable growth strategy ♣ Follow ethical standards in business ♣ Innovative banking at a competitive price ♣ Attract and retain quality human resource ♣ Commitment to Corporate Social ResponsibilityGoalsThe Bank is unique in its objectives and functions in many ways. As per the Memorandum ofAssociation (MOA) and Articles of Association (AOA), 50 percent of BASIC’s loan-able fundsare required to be invested in small and medium scale industries sector. Accordingly, it has setfollowing goals: ♣ To utilize funds for profitable purposes in various fields with special emphasis on SSIs. ♣ Identification of profitable areas of investment and to undertake project promotion accordingly. ♣ To search for newer avenues for investment and develop new products to suit such needs. ♣ To establish linkage with Micro Finance Institutes (MFIs). ♣ To cooperate and collaborate with institutions which are responsible for promoting and aiding SSI sector.Functions of the BankThe Banks offers the following services to its clients: Credit Management of BASIC Bank Limited 9
  10. 10. ♣ Extends financial & technical support to industries especially to Small and Medium Scale Industries. ♣ Gives full-fledged commercial banking service including collection of deposit, short-term trade finance, and working capital finance in processing and manufacturing units ♣ Finances and facilitates international trade (export/ import). ♣ Provides micro credit to the urban poor through association with Non- Government Organizations (NGOs) with a view to facilitating access for the urban poor to the formal financial market. ♣ Carries out general banking dfacilitiesi rlike t Savings Account, Current Account and B o a r o f D e c o rs remittance. M a n a g in g D i r e c t o r G e n e ra l M a n a g e r D e p u ty G e n e ra l M a n a g e r A s s i s ta n t G e n e ra l M a n a g e r M a n a g e r/ S y s te m A n a ly s t D e p u ty M a n a g e r/ P ro g r a m m e r A s s i s ta n t M a n a g e r / A s s i a ta n t P r o g ra m m e r O f f ic e r / O f f i c e r ( C a s h , C o m p u te r ) A s s i s t a n t O f f ic e r , G r a d e - 1 / S te n o g r a p h e rOrganograms ofi sBASICO Bank eLtd G r a d e - I I / C a s h , C o m p u t e r , R e c e p t i o n A s ta n t f fic r,To achieve its organizational goals, the Bank conducts its operations in accordance with the C a s h i e r , R e c e p ti o n is t, C o m p u te r O p e r a t o rmajor policy guidelines laid down by the Board of Directors, the highest policy making body.The management looks after the day-to-day operation of the Bank. Organogram is given bellow: D r i v e r / E le c tr i c ia n / C a r e t a k e r Credit Management of m e d G Bank dLimited A r BASIC u a r 10 M es s e n g e r/ G u a rd -c u m -M e ss en g e r
  11. 11. Management System of BASIC Bank LtdThe Board of Directors, the highest policy making body, has laid down major policy guidelinesin line with the organizational goals. The management looks after the day-to-day operation of theBank.Business Network of BBL Credit Management of BASIC Bank Limited 11
  12. 12. A great deal of investment for developing the physical resource base of the Bank has been made.BASIC Bank has its presence in all the major industrial and commercial centers of Bangladesh inorder to cater to the need of industry and trade. At the end of 2007, there were thirtyconveniently located branches throughout Bangladesh– eleven branches in the capital city ofDhaka, seven in Chittagong and one each in Narayanganj, Narsingdi, Rahshahi, Saidpur, Bogra,Khulna, Jessore, Sylhet, Moulvibazar, Comilla, Barisal and Sirajganj. Besides these, the bankhas three bill collection booths at Ramna , Sher-e-Bangla Nagar and Gulshan exchange Office ofBTTB, Dhaka. A Foreign Exchange booth was opened at Osmani Int’l Airport, Sylhet in April’05 for mobilizing foreign exchange. This is one of the areas where BASIC Bank is relativelylagging behind.Functional Division/Department of BASIC Bank LtdAll policy formulations and subsequent executions are done in the Head Office. It comprises ofnine major divisions namely Corporate Banking Division, Credit Division, Consumer BankingDivision, Trade Services Division, International Division, Finance and Accounts Division,Human Resources Division, Information Technology Division, and Audit and ComplianceDivision. Besides these main divisions, there is also an Administration Division, which looksafter the Bank’s day–to-day operation. Credit Management of BASIC Bank Limited 12
  13. 13. Financial Highlights of BASIC Bank Ltd Taka in Million Particulars 2003 2004 2005 2006 2007 Authorized Capital 2000 20000 20000 20000 20000 Paid up Capital 450.00 675.00 810.00 945.00 1247.00Reserve and Surplus 799.29 816.25 916.14 1294.00 1349.16Shareholders’ Equity 1249.29 1491.23 1726.14 2239.00 2596.58 Total Assets 14766.32 19436.53 27136.37 29417.09 38773.91 Deposit 11266.54 15509.18 22325.58 24084.65 31947.98 Loan and Advance 9282.20 12000.15 15339.35 19000.00 22263.35 Placement & 4361.93 6098.51 10236.82 5212.23 13560.92 Investment Gross Income 1558.52 1768.85 2228.21 2870.32 3549.51 Gross Expenditure 1004.85 1241.63 1599.77 1858.69 2741.37 Profit before tax 553.67 527.22 628.44 1011.62 808.14 Profit after tax 236.39 281.48 285.49 554.17 282.96 Import Business 9882.80 12507.80 14094.96 17804.27 21266.57 Export Business 6933.90 7908.00 11097.23 15463.74 16794.96IntroductionThe role of credit is imperative in a financial institution. These credit schemes serve as the majorsource of revenue generation for the bank and as such needs to be handled with a lot of care.Successful loan application will have positive impact in attaining corporate mission and visionand ultimately to capitalize the wealth maximization objectives of the corporation.CreditThe word credit comes from the Latin word “Credo” meaning “I believe”. It is a lender’s trust ina person’s/ firm’s/ or company’s ability or potential ability and intention to repay. In otherwords, credit is the ability to command goods or services of another in return for promise to paysuch goods or services at some specified time in the future. For a Bank, it is the main source ofprofit and on the other hand, the wrong use of credit would bring disaster not only for the bankbut also for the economy as a whole. Credit Management of BASIC Bank Limited 13
  14. 14. Credit managementCredit management is mainly concerned with the credit disbursement and recovery in order tostrength credit management and recovery position of the loans/advances by a bank it has beendecided by bank to follow some tools and technique for credit appraisal. With the use of suchtools bank credit management has shown their efficiency. Each bank their own credit policywhich generally formulated on the basis of prevailing countries Socio economic condition,political & other related aspects from time to time and as per guideline of central Bank.Common Types of Credit by Commercial Banks • Term Loan ♣ Short Term Industrial Loan, Mid Term Industrial Loan and Long Term Industrial Loan. ♣ House Building Loan (Commercial) ♣ Loan against Fixed Deposit Receipt/Eligible Financial Instrument • Continuous Credit (Advances) ♣ Overdrafts  SOD against easily en-cashable securities (financial obligations) such as FDR, Bond, and Shares etc. as per rules & regulation in force.  SOD against Work Orders (as working capital Finance) ♣ Cash Credit  Cash Credit (Hypothecation)  Cash Credit (Pledge) • Demand Loan ♣ LIM (Loan against imported merchandise) ♣ LTR (Loan against Trust receipt) ♣ EDF (Export Development Fund) ♣ Packing Cash Credit (PCC) I Export Cash Credit (ECC) ♣ Cash Incentive & Advance against Incentive Credit Management of BASIC Bank Limited 14
  15. 15. • Other Loans ♣ Loan General ♣ Education Credit Scheme ♣ Multipurpose Loan ♣ Consumers Credit Scheme ♣ Real estate loans ♣ Financial institution loans ♣ Agricultural loans ♣ Leasing finance ♣ International trade finance ♣ Miscellaneous loans • Analysis of borrower creditworthinessBorrower creditworthiness can be determined by analysis of 6 Cs which given below: ♣ CharacterThe first section queries about the applicants’ general biographical information. ♣ CapacityThe second portion of the application form is about the business/ service information of theapplicant. Here the name of the company/office is required. If relationship with current employeris less than two years then previous employers name must also be mentioned. ♣ CashThis portion enquires about the estimated cost of purchase and tenure of the loan. This sectionanalyzes the justification of the loan amount to the purchase cost. ♣ CollectionThis section asks whether the application will be 100% secured with the hypothecation overpurchased asset and about the security ratio and the applicable interest rate. ♣ Condition Credit Management of BASIC Bank Limited 15
  16. 16. Understanding the business and economic conditions can and will change after the loan is made. ♣ ControlConditions refer to the economic policies and procedures that may affect the nature of businessof the applicant and may have future influence on the repayment behavior. And control refers tothe degree to which the bank can check the customer in case of defaults. • Project appraisal criteriaThe following analyses are important tools to the credit manager to project appraisal: ♣ Technical appraisal ♣ Marketing appraisal ♣ Financial appraisal ♣ Economic appraisal ♣ Managerial appraisal ♣ Break-even Analysis ♣ Network Analysis • Common Documentation of the Loan of commercial BankDocumentation is obtaining such agreement where all the terms and condition and securities arewritten and signed by the borrower. It specifies rights and liabilities of both the banker and theborrower. In documentation each type of advances requires a different set of documents. It alsodiffers with the nature of securities. The documents should be stamped according to the stampAct. There are no hard and fast rules of documentation and it varies from bank to bank.Generally, the documents are taken in the case of a secured advance by a commercial bank ♣ Demand promissory note: Here the borrower promises to pay the loan as and when demand by bank to repay the loan. ♣ Letter of arrangement. ♣ Letter of continuity. ♣ Letter of hypothecation of goods and capital machinery. ♣ Stock report: This report is used for OD and CC. In this report, information about the quality and quantity of goods hypothecated is furnished. ♣ Memorandum of deposit of title deed of property duly signed by the owners of the property with resolution of Board of Directors of the company owning the landed. Credit Management of BASIC Bank Limited 16
  17. 17. ♣ Personal guarantee of the owners of the property. ♣ Guarantee of all the directors of the company. ♣ Resolution of the board of directors to borrow fund to execute documents and completes other formalities ♣ Form no. XVII/XIX for filling charges with the register of joint stock companies under relevant section. ♣ Letter of Revival ♣ Letter of lien for advance against FDR. • Modes of Charging Security use by commercial BankA wide range of securities is offered to banks as coverage for loan. In order to make thesecurities available to banker, in case of default of customer, a charge should be created on thesecurity. Creating charge means making it available as a cover for advance. The following modesof charging securities are applied in the Basic Bank Limited. ♣ LienA lien is right of banker to hold the debtor’s property until the debt is discharged. Bank generallyretains the assets in his own custody but sometimes these goods are in the hands of third partywith lien marked. When it is in the hand of third party, the third party cannot discharge it withoutthe permission of bank. Lien gives banker the right to retain the property not the right to sell.Permission from the appropriate court is necessary. Lien can be made on moveable goods onlysuch as raw materials, finished goods, shares debentures etc. ♣ PledgePledge is also like lien but here bank enjoys more right. Bank can sell the property without theintervention of any court, in case of default on loan, But for such selling proper notice must begiven to the debtor. To create pledge, physical transfer of goods to the bank is must. ♣ Hypothecation Credit Management of BASIC Bank Limited 17
  18. 18. In this charge creation method physically the goods remained in the hand of debtor. Butdocuments of title to goods are handed over to the banker. This method is also called equitablecharge. Since the goods are in the hand of the borrower, bank inspects the goods regularly tojudge it s quality and quantity for the maximum safety of loan. ♣ MortgageMortgage is transfer of interest in specific immovable property. Mortgage is created on theimmovable property like land, building, plant etc. Most common type of mortgage is legalmortgage in which ownership is transferred to the bank by registration of the mortgage deed.Another method called equitable mortgage is also used in bank for creation of charge. Here meredeposit of title to goods is sufficient for creation of charge. Registration is not required. In boththe cases, the mortgage property is retained in the hank of borrower. ♣ Trust ReceiptGenerally goods imported or bought by banks financial assistance are held by bank as security.Bank may release this lien / pledge these goods against trust receipt. This means that theborrower holds goods in trust of the bank; trust receipt arrangement is needed when the borroweris going to sell these goods or process it further but borrower has no sufficient fund to pay off thebank loan. Here proceeds from any part of these goods are deposited to this bank. ♣ Advance against Work-OrderAdvances can be made to a client to perform work order. The following points are to be takeninto consideration. The client’s management capability, equity strength, nature of scheduledwork and feasibility study should be judiciously made to arrive at logical decision. If there is aprovision for running bills for the work, appropriate amount to be deducted from each bill toensure complete adjustment of the liability within the payment period of the final bill besidesassigning bills receivable, additional collateral security may be insisted upon. Disbursementshould be made only after completion of documentation formalities and fulfillment ofarrangements by the client to undertake the contract. The progress of work under contract isreviewed periodically. ♣ Advance against Approved Shares Credit Management of BASIC Bank Limited 18
  19. 19. Credit facilities to extend against shares will be called “Investment Scheme against Shares”.Advance may be allowed against shares of companies listed with the Stock Exchange Ltd.Subject to margin or may other restrictions imposed by Bangladesh Bank/Head Office of thebank from time to time. Value of shares & margin should be worked out as per guidelines issuedfrom time to time by Bangladesh Bank / Head Office of the bank. ♣ Advance against Fixed Deposit ReceiptsAdvance against Fixed Deposit Receipt will be subject to credit Restrictions imposed from timeto time by Head Office / Bangladesh Bank. Scrutinize the Fixed Deposit Receipts.Regulation of LendingIt is the last step in credit policy and procedure framework of BBL. Credit monitoring andreview is very important, because it ensures proper utilities and repayment of Bank fund. Creditmonitoring and review feature of BBL is concerned was assessing the quality of different type ofloan. ♣ Assessing Bank’s Loan PortfolioIn order to diversify loan portfolio, every bank engaged itself in investment operations throughspecial schemes introduced during the years. ♣ Loan Classification Norms ♦ Substandard Loans The main criteria for a substandard advance are that despite these technicalities or irregularities no loss is expected to be arise for the bank. These accounts will require close supervision by management to ensure that the situation does not deteriorate further. ♦ Doubtful Loans Credit Management of BASIC Bank Limited 19
  20. 20. This classification contains where doubt exists on the full recovery of the loan and advance along with a loss is anticipated but cannot be quantifiable at this stage. Moreover if the state of the loan accounts falls under the following criterion can be declared as doubtful loan and advance. ♦ Bad or Loss Loans A particular loan and advance fall in this class when it seems that this loan and advance is not collectable or worthless even after all the security has been exhausted. In the following table the criteria to be fulfilled to fall in this category are summarized: ♣ Provision System ♦ Specific Provision:Head office credit division prepares a list of credit accounts, which are considered to be totally orpartially be unrecoverable & keeps a provision against the outstanding loans. ♦ Rate of Provisioning Banks in the time of loan provisioning to get the real picture of the income mainly follow the Bangladesh Bank guideline. Credit Management of BASIC Bank Limited 20
  21. 21. Introduction:The word credit comes from the Latin word “Credo” meaning “I believe”. It is a lender’s trustin a person’s/ firm’s/ or company’s ability or potential ability and intention to repay. In otherwords, credit is the ability to command goods or services of another in return for promise to paysuch goods or services at some specified time in the future. For a Bank, it is the main source ofprofit and on the other hand, the wrong use of credit would bring disaster not only for the bankbut also for the economy as a whole. The objective of the credit management is to maximize theperforming asset and the minimization of the non-performing asset as well as ensuring theoptimal point of loan and advance and their efficient management. Credit management is adynamic field where a certain standard of long-range planning is needed to allocate the fund indiverse field and to minimize the risk and maximizing the return on the invested fund.Continuous supervision, monitoring and follow-up are highly required for ensuring the timelyrepayment and minimizing the default. Actually the credit portfolio is not only constituted thebank’s asset structure but also a vital factor of the bank’s success. The overall success in creditmanagement depends on the banks credit policy, portfolio of credit, monitoring, supervision andfollow-up of the loan and advance. Therefore, while analyzing the credit management of BASICBank Ltd, it is required to analyze its credit policy, credit procedure and quality of creditportfolio.4.2 Credit Policy of BASIC Bank Limited Credit Management of BASIC Bank Limited 21
  22. 22. The credit policy of any banking institution is a combination of certain accepted time testedstandards, and some other dynamic factors determined by the realities of varying and changingsituations in the market place. Credit policy lays down the basic principles and broad parametersof the lending operations. The key is to a sound, healthy and profitable credit operation,however, lies in the quality of judgment and sense of proportion of the officers making lendingdecisions, and their knowledge of the borrowers and the market place.4.3 Credit PrinciplesIn the feature, credit principles include the general guidelines of providing credit by branchmanager or credit officer. In BASIC Bank Limited they follow the following guideline whilegiving loan and advance to the client. ♣ Credit advancement shall focus on the development and enhancement of customer relationship. ♣ All credit extension must comply with the requirements of Bank’s Memorandum and Article of Association, Banking Company’s Act, Bangladesh Bank’s instructions, other rules and regulation as amended from time to time. ♣ Loans and advances shall normally be financed from customer’s deposit and not out of temporary funds or borrowing from other banks. ♣ The bank shall provide suitable credit services for the markets in which it operates. ♣ It should be provided to those customers who can make best use of them. ♣ The conduct and administration of the loan portfolio should contribute with in defined risk limitation for achievement of profitable growth and superior return on bank capital. ♣ Interest rate of various lending categories will depend on the level of risk and types of security offered. Credit Management of BASIC Bank Limited 22
  23. 23. Types of Credit offered by BASIC Bank LtdA Bank is nothing but a financial intermediary and it takes deposit from surplus economic unitsand deploys the fund to deficit economic units. So, the more recoverable credit is deployed themore profit is gained. In fact this credit deployment process is run under Loans & Advancesdepartment in branch and Head Office level.Overdraft (OD)It is a continuous advance facility. By this agreement, the banker allows his customer tooverdraft his current account up to his credit limits sanctioned by the bank. The interest ischarged on the amount, which he withdraws, not on the sanctioned amount. OD facilities are oftwo types.Secured Overdraft (SOD):Branch sanctions SOD against different securities like FDR, Sanchaypatras and Work Orders.Temporary Overdraft (TOD):It is given to the valued customers only. It is not that much secured. Usually it forwards withoutany security or sometimes exercise lien against the instrument, deposited in the bank. It is givenby the branch manager discretionary power. Though it is given, but it never desirable.The processes of extending SOD are as follows –1. The party must have a current A/C with the branch2. If the ownership of the firm is proprietorship, then a trade license must be submitted and in case of a limited company, all the documents required to open a current A/C, should be submitted. The financial statements of the concerned firm should also be submitted.3. The party must maintain a good transaction with the branch and have a good turnover rate.4. The party will apply to the officer in charge of credit department of the branch for SOD arrangement Credit Management of BASIC Bank Limited 23
  24. 24. 5. The concerned officer of the branch will give him a Credit Application Form and the party will have to fill up this form. In this form he discloses all the information about his concern, purpose of the loan, description of security, etc.6. The concerned officer will prepare a ‘Credit Line Proposal’, where he writes about the business concern, details of proprietors/directors of the concern, management structure, the existing credit facilities, the particulars about the facilities that asked for – such as margin limit, date of expiry, details of security, and any other relevant information. Then the proposal is sent to the Head Office, General Advances Division for approval.7. The responsible Department of the General Advances Division will appraise the proposal and if it seems to a viable then the loan will be sanctioned.8. After the loan is sanctioned, the branch will issue two copies of a sanction advice, where all the terms and conditions set by the bank is mentioned. The borrower is advised to write, “Accepted” on the original copy if he is satisfied with the terms and conditions of the bank and retain the duplicate one as record.Cash Credit (CC)By this arrangement, a banker allows his customer to borrow money up to a certain limit. CC is afavorite mode of borrowing by traders, industrialists, etc. for meeting their working capitalrequirements. It is operated like an overdraft account. Depending on the needs of the business,the borrower can draw on his cash credit account at different time. Similarly, the liability can beadjusted at any time. The Bank charges interest on the daily balance of the account. Based on thecreation of charge on securities, the bank allows are two forms of cash credit.HypothecationIt is cash credit facility against hypothecation. Hypothecation is a legal obligation of theborrower to the bank where both title and possession of goods remain with the borrower. Thebanker has only equitable charge on stocks, which practically means nothing. So, Cash Credit(Hypothecation) facility is allowed against sufficient collateral security like registered mortgageof land and building and personal guarantee of Directors.Pledge Credit Management of BASIC Bank Limited 24
  25. 25. It is cash credit facility against pledge. Pledge is the bailment of goods as security for payment ofa debt or performance of a promise. In case of pledged goods, the bank acquires the possessionof the goods or a right to hold goods until the repayment for credit with a special right to sellafter due notice to the borrower in the event of non-repayment. The bank usually does not allowthis type of credit facility these days.The processes of opening a CC a/c are as follows–1. The interested party must have a current A/C and good transaction with the branch;2. Applies for CC pledge or hypothecation arrangement;3. Fills up the ‘Credit Application Form’ as provided by the respective officer;4. The concerned officer prepares a ‘Credit Line Proposal’ (CLP) detailing all relevant information;5. Sends the CLP to the Head Office, General Advances Division for necessary action;6. Head Office, General Advances Division examines the proposal and if finds it viable then sanctions it and sends it to the branch;7. The branch issues two copies of ‘Sanction Advice’, one for its own record and the other for the party to keep.After getting the cash credit arrangement, the banker will issue a claque book for withdrawingcash from the account. Whenever the CC account holder wants to withdraw cash from theaccount, the cash officer will scrutinize the amount of cherub in order to make sure that the totaldrawing does not exceed the sanctioned limit.Term LoanBASIC bank is advancing both short and medium term credit to the commercial sector on thebasis of their capital structure, constitution and liquidity consideration. Interest rate is 12% forSSI and 13% for MSI. It is given against land and building along with machinery, personalguarantee of Directors and hypothecation of raw materials.Loan General Credit Management of BASIC Bank Limited 25
  26. 26. This type of loan is usually given against work orders. BASIC Bank extends credit facility toperform a wide range of work orders of different government, autonomous and privateorganizations. The Bank charges 12.00% interest against Loan General.Staff LoanMirpur branch provides advances to the staff for purchasing house building, Sanchaypatras, andmeeting up certain requirements like family medical, personal medical, wedding purposes. Bankprovides this facility under installments. Loan able amount varies on the basis of purpose.Bank GuaranteeBASIC Bank offers three types of guarantees; these are Tender or Bid Bond, PerformanceGuarantee and Advanced Payment Guarantee.Tender or Bid Bond GuaranteeTender or Bid Bond Guarantee assures the employer/ beneficiary on behalf of the tendered, thatthe tendered shall uphold the conditions of his tender during the period of the offer as bindingand that he /she will also sign the contract in the event of the order being granted. The Bankcharges 0.50% per quarter as commission of the guarantee.Performance GuaranteeA Performance Guarantee is a guarantee issued by the Bank on behalf of the contractor/ supplierto the beneficiary/ employer that the contractor would fulfill all the terms and conditions of thecontract. In case of failure of the contractor/ supplier to perform the work order or to supply thegoods or to fulfill in any condition of the contract, the bank is obliged to pay the sum of theguarantee to the beneficiary on behalf of the contractor. A performance guarantee expires oncompletion of the delivery or the performance. The Bank charges 0.50% per quarter ascommission of the guarantee. Credit Management of BASIC Bank Limited 26
  27. 27. Advanced Payment Guarantee (APG)The Bank gives Advanced Payment Guarantee (APG) on behalf of the contractor/ supplier whenthe employer makes advance payment to the contractor/ supplier. The guarantee stipulates thatthe contractor/ supplier will perform the contract and fulfill all the terms and conditions. Thecontractor/ suppliers are required to submit the guarantee before the employer makes anypayment in connection with the work order. The Bank charges 0.50% per quarter as commissionof the guarantee.Foreign Trade CreditBASIC Bank Ltd provides various facilities related to L/C and post import finance like loanagainst imported merchandise (LIM) and loan against trust receipt (LTR) to the importers andback to back L/C and pre-shipment finance facilities like export credit, packing credit andforeign bills purchase (FBP) to exporters. So far, the Bank has established correspondencerelationship with 11 foreign banks in order to facilitate foreign trade...Post import Credit facilityThe Bank provides different form of post-import facility to the customers like LIM (Loan againstImported Merchandise), LTR (Loan against Trust Receipt) etc.Export Credit facilityDifferent types of export credit facilities are available in BASIC Bank, like Export Credit,Packing Credit etc. • Credit Evaluation PrinciplesSome principles or standards of lending are maintained in approving loans in order to keep creditrisk to a minimum level as well as for successful banking business. The main principles oflending are given below:Liquidity Credit Management of BASIC Bank Limited 27
  28. 28. Liquidity means the availability of Bank funds on short notice. The liquidity of an advancemeans it repayment on demand on due date or after a short notice. Therefore, the banks musthave to maintain sufficient liquidity to repay its depositors and trade off between the liquidityand profitability is must.SafetySafety means the assurance of repayment of distributed loans. Bank is in business to makemoney but safety should never be sacrificed for profitability, To ensure the safety of loan. Theborrower should be chosen carefully. He should be a person of good character & capacity as wellas bank must have to maintain eligible number of security from borrower.ProfitabilityBanking is a business aiming at earning a good profit. The difference between the interestreceived on advances and the interest paid on deposit constitutes a major portion of the bankincome, besides, foreign exchange business is also highly remunerative. The bank will not enterinto a transaction unless a fair return from it is assured.IntentlyBanks sanction loans for productive purpose. No advances will be made by bank forunproductive purposes though the borrower may be free from all risks.SecurityThe security offered for an advance is an insurance to fall bank upon incases of need. Securityserves as a safety value for an unexpected emergency. Since risk factors are involved, securitycoverage has to be taken before a lending.National interestBanking industry has significant role to play in the economic development of a country. Thebank would lend if the purpose of the advances can contribute more to the overall economicdevelopment of the country. Credit Management of BASIC Bank Limited 28
  29. 29. General procedure for Loans and AdvancesThe following procedure is applicable for giving loans to the customer. This are- Credit Management of BASIC Bank Limited 29
  30. 30. First Information Sheet (FIS)First Information Sheet (FIS) is the prescribed form provided by the respective branch thatcontains basic information of the borrower. It contains following particulars.1. Name of the concern with its factory location, Office address and Tel No.2. Name of the main sponsors with their educational qualification.3. Business experience of the sponsors, details of past and present business, its achievement and failures, name of all the concerns wherein the sponsors have involvement.4. Income tax registration no. with the amount of tax paid for the last three years.5. Details of unencumbered assets (movable & immovable) personally owned by the sponsors.6. Details of liabilities with other banks and financial institutions including securities held there against.7. Purpose of loan sought from BASIC Bank8. Estimated cost of the project & means of finance.Application for Credit LineAfter receiving the first information sheet from the borrower Bank official verifies all theinformation carefully. He also checks the account maintains by the borrower with the Bank. Ifthe official becomes satisfied then he gives application for credit line form to the prospectiveborrower. The Application for Credit Lines Contain the following particulars:1. Name, address, telephone, telex no. & cable address.2. Date & place established/ incorporated status / constitution.3. Names of major shareholders (in excess of 5%). State relationship between shareholders.4. Names and net worth of directors/partners/owners with background & relationship with each other (Net worth statement of each person to be attached as per format).5. Capital structure & how the capital is deployed in business. Credit Management of BASIC Bank Limited 30
  31. 31. 6. Details of properties/assets of the applicant, with valuation against each type of property/assets and details of charges against them.7. Names and addresses of subsidiaries/affiliates/allied concerns, stating relationship with applicant, nature of business and borrowings from banks against each (including BCCI)8. Nature & details of business.9. Latest audited/ un-audited balance sheet and profit & loss statement attached will be submitted by:10. Management structure (Including their experience and qualification).11. Names & address of other bankers, sanctioned facilities & liabilities outstanding with details of securities there-against.12. Type, extent and period of credit facilities required.13. Purpose of facility, repayment arrangement (with dates and amount), sources of repayment;14. Details of securities offered & any other relevant information.Collecting CIB Report from Bangladesh BankAfter receiving the application for credit line, BASIC Bank sends a letter to Bangladesh Bank forobtaining a report from there. This report is called CIB (Credit Information Bureau) report.Basically branch seeks this report from the head office for all kinds of loans. The purpose of thisreport is to being informed that whether the borrower has taken loan from any other bank; ifyes, then whether the party has any overdue amount or not.Making Credit Line Proposal (CLP)If the officer thinks that the project is feasible then he will prepare a Proposal. BASIC Bankprepares the proposal in a specific from called credit line proposal. It contains following relevantinformation:1. Borrower;2. Date established, constitution;3. Main sponsor/ director with background;4. Capital structure, address;5. Account opening date, introduced by, type of business, particulars of previous sanctions;6. Existing vis-à-vis proposed credit limits; Credit Management of BASIC Bank Limited 31
  32. 32. 7. Particulars of proposed/additional facilities;8. Security (Existing & Proposed/ Additional);9. Movement of accounts;10. Components on the conduct of the account;11. Details of deposit, liabilities of allied concerns, liabilities with other banks;12. CIB report;13. Stock position (Pls. Provide St. report);14. Rated capacity of the project(Item wise);15. Production/purchase during the period;16. Sales during the period;17. Business received for the period (Last three years);18. Earning received for the period;19. Associated lending/business risk (s);After fulfilling the previous particulars, the officer places the CLP to the BCC (Branch CreditCommittee). BCC is then finding out the right borrower by considering the following 5 C’s.These are character, capital, capacity, collateral, condition (economic).Selection of right borrowerThe borrower has to be creditworthy and competent enough to run the proposed industry.Following are the considerations- ♣ Preference given for educated / knowledgeable sponsors, who know about their business concern, have technically know-how and expertise in the field of proposed industry; ♣ Who have own land and building for running the project; ♣ Client with innovative ideas; ♣ Client must have net worth more than 2.5 times of the equity required for investment in the project; ♣ Who have good dealings with the bankers /outside parties and has social contacts and standings; Credit Management of BASIC Bank Limited 32
  33. 33. ♣ Have an a/c with BASIC Bank Mirpur Branch;After approving the proposal by BCC, branch then sends the CLP to the respective division inHead Office. In Head Office there are two divisions of credit department. One is IndustrialCredit Division (ICD) and another is Commercial Credit Division. After receiving the CLPwith application for credit line, resolution copy made in the special meeting of the BCC, branchinvestigation report on borrowers real estate, statement of stock and bank statement (statement ofaccount), the respective divisions then divide the loan proposals into SSI (Small-scale industries)and MSI (Medium scale industries) according to the limit. For SSI the limit is up to 10 crore andfor MSI it is 10 crore and above. Then the respective officer goes for project appraisal.Project AppraisalAn appraisal is a systematic exercise to establish that the proposed project is a viable preposition.The appraising officer checks the various details submitted by the promoter in first informationsheet, application for credit line and CLP. BASIC Bank considers the following aspects inappraising a proposal:Technical AppraisalTechnical appraisal report is prepared by an engineer of the appraisal section to see whether theproject is sound with regard to every engineering and technological consideration, includingproduct specification, product process, size, internal balance, suitability and availability ofphysical facilities, designs and layouts of equipment and building etc.The basic aspects of technical appraisal are: ♣ Cost of the project. ♣ Annual production capacity & manufacturing process. ♣ Location, infrastructural facilities feature and estimated cost of the land. ♣ Civil drawing(s) and cost of civil works. ♣ Layout plan for Building and Machinery. Credit Management of BASIC Bank Limited 33
  34. 34. ♣ Estimated cost of machinery with installation. ♣ Selection of product process involving the choice of alternatives, wastage, by- product, disposal of waste and effluents etc. ♣ Annual requirement of raw material(s) with source of availability. ♣ All input output data of the project.Marketing AppraisalAn industrial project is to bring in some goods or services for a community. But the communitydoes not need them infinitely. Their demand is of courses finite and at given prices. Ordinarily,the market means a precise place where commercial transactions occurred in a broader sense,however it is termed as the sum of contracts between buyers and sellers of a product or servicethe price and quantity and exchanged of which are determined by the forces of demand andsupply. Market analysis is the first “screening” stage in the project appraisal, at which projectsthat cannot expect satisfactory market acceptance shall be rejected.The basic aspects of marketing appraisal are: ♣ Macro/ Micro demand/ supply situation for specific products in the market. ♣ Existing and expected competition in local and foreign markets, ♣ The market share. ♣ One way of identifying them is in term of their complementarily and competitiveness. Complementary goods are used together in a single consumption activity. ♣ Cameras, films and developing instruments and chemicals constitute a set of such complements. Complementary goods may be sold together or separately.Financial AppraisalThe next step is to prepare a detailed report on the financial viability of the project. The mainpurpose of such appraisal is to assess the viability of the project in terms of its operation in thefuture years and its financial soundness. It is concerned with assessing the feasibility of a project Credit Management of BASIC Bank Limited 34
  35. 35. from the point of view of its financial result. The project’s direct costs and benefits are calculatedin pecuniary terms at the prevailing market prices. The Bank has to satisfy itself not only aboutthe current solvency of the Project but also about its continued solvency during the currency ofthe loan to ensure timely payment of the principal, regular payment of interest and adequacy ofphysician assets representing security for the loan. The revenant information collected ontechnical economic and management aspects of the project have got direct bearing upon thefinancial appraisal.The basic aspects of financial appraisal are: ♣ Ratio Analysis: ♣ Break-even Analysis ♣ Earning Forecast ♣ Fund flow Statement ♣ Internal Rate of Return (ERR) ♣ Internal Rate of Return (IRR) ♣ Pay Back Period Method ♣ Net present value (NPV) Method.Economic AppraisalEconomic analysis of a project aims at determining whether that project is consistent with overallnational and sect oral objectives and whether the investment proposed is the best means ofachieving the intended objectives. It involves a systematic evaluation of a range of options forachieving the intended objectives. Economic appraisal should cover both quantifiable and non-quantifiable benefits (where applicable). Such benefits are described ad-seriatim.The basic aspects of financial appraisal are: ♣ Economic Rate of Return (ERR), ♣ Bruno Ratio/Domestic Resource cost, ♣ Contribution of Gross Domestic product, ♣ Employment Generation and Cost per employment. Credit Management of BASIC Bank Limited 35
  36. 36. ♣ To effects that are known to arise but which cannot be measured in physical terms ♣ To effects, this cannot be valued. Difficulties in quantification and valuation will often go together.Management appraisalAppraisal of management is very important part of project appraisal. The successfulimplementation and running of the project depends on the resourcefulness, competence andintegrity of its management. There are no sets of rules to find out if the borrowers’ are persons ofintegrity. It is done by direct and indirect investigation. His educational background, businessexperience, general reputation and above all, his/her receptiveness to new ideas and potentiallyto learn new things can assess the borrowers’ experience and capabilities. Closely related to themanagement is the type of organizational structure necessary to carry out and operated theproject successfully.The basic aspects of Management appraisal are: ♣ Structure & Shares. ♣ Memorandum of Articles and relevant (Joint Stock Company’s) registration certificates. ♣ Introduction to members of the proposed management, relevant experience, net worth (asset declaration). ♣ Comparison of equity proposed and net worth declared. ♣ Source of working capital or working capital loan.The Head Office (HO) mainly checks the technical, commercial and financial viability of theproject. For others HO is dependent on branch’s information. But when the loan size is big, thenthe HO verifies the authenticity of information physically.Head Office Approval Credit Management of BASIC Bank Limited 36
  37. 37. The respective officer of Head Office appraises the project by preparing a summary named “TopSheet” or “Executive Summary”. Then he sends it to the Head Office Credit Committee (HOCC)for the approval of the loan. The Head Office Credit Committee (HOCC) considers the proposaland takes decision whether to approve the loan or not. If the loan is approved by the HOCC, theHO sends the approval to the concerned branch with some conditions. These are like: ♣ Drawing will not exceed the amount of bill receivables. ♣ The tern over in the account during the tenure of the limit should not be less than four times of the credit limit. ♣ All other terms and conditions, as per policy and practice of the bank for such advance to safeguard the banker’s interest shall also be applicable for this sanction also. ♣ Bank may charge/ alter/ cancel any clause (s) of the sanction without assigning any reason whatsoever and that shall be binding upon the client unconditionally. ♣ Branch shall not exceed the sanctioned limit. ♣ Required charge documents with duly stamped should be obtained. ♣ Drawing shall be allowed only after completion of mortgage formalities and other security arrangement.Sanction LetterAfter getting the approval from the HO, the branch issues the sanction letter to the borrower. Asanction letter contains the following particulars amongst other details: 1. Name of borrower. 2. Managing partner 3. Nature of Facility 4. Amount 5. Expiry 6. Rate of interest 7. Purpose 8. Security Credit Management of BASIC Bank Limited 37
  38. 38. 9. Other terms and conditions: Other terms and conditions are like- a) Before availing the loan all documentation formalities must be completed. b) Registered power of attorney in favor of BASIC bank to sell the mortgaged property without the consent of the court or owner of the lender. c) DP note and other usual charge documents/ undertakings etc. duly stamped must be signed and submitted to the authority before the disbursement of loan. d) The loan shall be governed by all other terms and conditions as per policy and practices of the bank which will be applicable for the sanction to safe guard interest of the bank. e) The bank reserves the right to amend, modify or withdraw any or all the terms of the loan at any time without assigning any reason whatsoever or to terminate/ call back the loan facility at any time for which bank or its official cannot be held responsible for any loss (s) for such cancellation of the loan.The borrower receives the letter and returns a copy of this letter duly signed by him as a token ofhaving understood and acceptance of the terms and conditions above.Documentation of loans and advancesIn 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 theborrower to protect him against willful defaults. Moreover, when money is lent against somesecurity of some assets, the document must be executed in order to give the banker a legal andbinding charge against those assets. Documents contain the precise terms of granting loans andthey serve as important evidence in the law courts if the circumstances so desire. That is why allapproval procedure and proper documentation shall be completed before the disbursement of thefacilities. The documents for loans and advances can be classified into two categories, namelyCharge documents & Security documents.Mode of Charging Securities BASIC Bank Mirpur branch practices these two types of securities. Credit Management of BASIC Bank Limited 38
  39. 39. 1. Primary securities: – Cash or cash equivalent that is easily liquidated or convertible into cash.Example – FDR, Sanchaypatras, DP Notes, etc.2. Secondary securities: – These securities are tangible securities which can be realized from saleproceeds or transfer of property. Example– immovable properties like land, buildings, etc.The modes of charging securities are as follows-a) Pledgeb) Hypothecationc) Liend) MortgageLien: Lien is the right to retain possession and not right of ownership. Bank’s lien is general lienover its own financial obligation to clients. Property under lien cannot be realized/sold andproceeds thereof cannot be appropriated without notice to the owner and sometimes withoutcourt’s order.Hypothecation: This is mortgage of movables by an agreement and here neither possession norownership is transferred. Hypothecated goods cannot be sold out/disposed off without notice andcourt’s order. However, if a special power of attorney is taken in that case can be disposed offwithout going to the court.Pledge: Pledge is the bailment of goods as security for payment of a debt or performance orpromise. Here, title and ownership are not transferred. Pledge goods may be sold out andproceeds thereof may be appropriated towards adjustment of Liability in case of failure of theborrower to repay or fulfill the terms and conditions.Mortgage: Mortgage is the transfer of interest in immovable property to secure the repayment ofmoney advanced. Ownership remains with the mortgagor. In case of equitable mortgage, CourtOrder is necessary and in case of registered mortgage court’s order is not necessary forsale/disposal of the mortgaged property for adjustment of advance. Credit Management of BASIC Bank Limited 39
  40. 40. Category Wise DocumentsAll securities are not suitable for all types of advances. There is common type of chargedocuments for all types of advances. These are as follows:• Demand promissory note• Letter of arrangement• Letter of disbursement• Letter of continuity• Letter of revival.Other documents are required for following types of advancesOverdraft/ Loan (General)• Letter of partnership in case of partnership firm or Board resolution in case of limited companies.• Letter of pledge/ Letter of hypothecation.• Letter of lien for ownership transfer of shares.• Letter of lien for packing credit.• Letter of lien in case of advance against F D R• Copy of sanction letter mentioning details of terms and condition duly acknowledge by the borrowerCash credit (Hypothecation)• Letter of hypothecation• Letter of authority empowering the bank to inspect the goods and take possession of the goods in case of duly drafted by the lawyer of the bank.• Stock report duly signed by the borrower on fortnightly basis or after every deposit in the loan account or before realizing fund against limit.• Letter of declaration duly signed by the party clearly stating that the goods hypothecated are not in any case encumbered elsewhere.• Sufficient insurance cover inserting the name of the Bank as mortgage. Credit Management of BASIC Bank Limited 40
  41. 41. • Letter of Disclaimer signed by owner of the godown in case of 3rd party godown. Third party Guarantee if required as per sanction advice.• Statements of other immovable property of the borrower stating those are not encumbered.Mortgage: Legal• Certificate from pourasava authority that the concerned property is situated within pourasava area.• Original title deed of property.• Latest CS, RS parcha along with latest rent receipt of land, tax, wasa, gas, electric bills, etc.• Bia-deeds/ parcha showing chain of transfer of title.• Letter of guaranty in case of 3rd party ‘s property• Non-encumbrance certificate by engineer and branch manager.• Lawyer’s certificate regarding genuineness of title on the property of the mortgage and stating in clear term weather the property can be accepted as security against advances to be allowed.• Letter of guarantee of the owner of the property in case of third party property.• Memorandum of title deed of property.• Registered irrevocable power of attorney duly drafted by bank’s lawyer and executed by the owner of the property.• Registration certificate is required;• Valuation certificate (by engineer and branch manager forced sale value to be considered.Branch shall take note of the following points while accepting a property as a security1. Land should be situated within municipality area, sub-urban area of city and industrial or commercial important areas.2. Rural property, pond and low lying area shall not be taken.3. Vacant land shall not be taken. It the land is protected by the boundary wall and the ownership is clearly identified, the same may however be accepted. Credit Management of BASIC Bank Limited 41
  42. 42. 4. Land must be owned by the borrower/owner of the project/firm/company and/or member(s) of the land shall be obtained duly attested.5. Property owned jointly (‘Ejmali’ property) shall not be accepted.6. Original title deed and bia-deed, Khatian, Parcha, Mutation, certificate, non-encumbrance certificate, up to date rent receipt shall be obtained and duly checked by the credit officer, branch manager and the lawyer.7. The value of the property shall be at least twice the amount of loan.Branch-in-charge shall personally ensure properly mortgaged of property and retain thedocuments in safe custody. Original mortgage deed should be obtained from the registrationoffice in time.Transport Loan:• Hire-purchase agreement for hypothecation of the vehicle (STAMPED and duly NOTARISED)• Purchased documents.• Registration of the vehicle in the joint name of bank and borrower (copy of the blue book to be retained in the branch)• Road permits jointly in the name of bank and borrower.• Insurance cover against all possible perils inserting name of bank as Mortgage with bank mortgage clause.• Certificate signed by the borrower that he has received the vehicle in good condition and that he will exercise due care for maintenance of the vehicle.• Letter of installment.• Undertaking by the party that he will keep the vehicle always ready for inspection by bank officials.• Bank’s name must be written in the body of the vehicle in BOLD LETTERS.Disbursement Credit Management of BASIC Bank Limited 42
  43. 43. After verifying all the documents the branch disburses the loan to the borrower. A loanrepayment schedule also prepared by the bank and given to the borrower.Follow-upAfter the disbursement of the loan bank officials time to time monitor the loan by physicalobservation of the activities of the party. It is done in the following manner:• Constant supervision• Working Capital Assessment.• Stock Report analysis. Part Two: Data AnalysisTrend AnalysisDeposits Growth Taka in million Credit Management of BASIC Bank Limited 43
  44. 44. YEAR AMOUNT 2003 11,266.54 2004 15,509.18 2005 22,325.58 2006 24,084.65 2007 31,947.98 Deposit 40000 30000 20000 10000 0 2003 2004 2005 2006 2007At the end of 2007 total deposits stood at Tk. 31947.98 million, a 32.65% increase compared toTk. 24084.65 million from the preceding year. This was undoubtedly a remarkable progressconsidering volatile price situation for acquiring deposits.Mix of DepositNow we can focus on the deposit collection under major deposit products of each bank so thatwe can understand mode of deposit mobilization they use mostly. Here we can also take a lookon the schemes that are popular to the customers. Types of Deposit AMOUNT Term Deposit 27903.70 Saving Deposit 886.30 Bills Payable 290.75 Current & Other Deposit 2867.19 Credit Management of BASIC Bank Limited 44
  45. 45. From the table we can have a picture of deposit portfolio of Basic Bank Ltd. Term deposit isabout 87% means, the bank is able to collect maximum deposit relatively at long term. Savingdeposit is 3 % means bank collect lower amount at relatively interest deposit Deposit Mix Term Deposit Saving Deposit Bills Payable Current & Others DepositFrom the pie chart we can see about 87% of total deposit are fixed deposit and about 3% aresaving deposit.Loans and Advances Growth Taka in million YEAR AMOUNT 2003 9282.20 2004 12000.10 2005 15339.40 2006 19000.00 2007 22263.35 Credit Management of BASIC Bank Limited 45
  46. 46. Loan and Advance 25000 20000 15000 10000 5000 0 2003 2004 2005 2006 2007Loans and advances of the bank grew strongly by 17.18 percent to 22263.35 million in 2007.Loans and advance increased by 17.18 percent indicating strong growth in operationalperformance. BASIC bank grew loans and advance by 17.18 percent and loans and advances ofindustry grew by 16 percent.Loan PortfolioLoans and advances consist of industrial loans, micro credit, commercial loans and billsincreased by 17.18 percent to Taka 22,263.34 million compared to Taka 19,000.00 million in2006. Taka in million YEAR Industrial Commercial Micro Credit 2003 6066.30 3029.70 186.20 2004 7577.20 4141.20 281.10 2005 9987.50 5013.55 338.30 2006 12243.56 6397.21 359.24 2007 13901.40 7681.74 680.13 Credit Management of BASIC Bank Limited 46
  47. 47. Loan Portfolio 14000 12000 10000 Industrial 8000 Commercial 6000 M icro Credit 4000 2000 0 2003 2004 2005 2006 2007Industrial LoansThe industrial loan reflected a significant growth of 13.54 percent over the previous year. Totaloutstanding industrial loans including term and working capital stood at Taka 13,901.40 millionat the end of 2007 compared to Taka 12,243.56 million of 2006. Total outstanding term loanstood at Taka 5,055.58 million as on December 31, 2007 compared to Taka 3,897.12 million in2006 reflecting a growth of 29.72 percent. The outstanding working capital finance extended toindustrial units stood at Taka 9,525.98 million at the end of the reporting period compared toTaka 8,346.44 million in 2006. Growth rate here was 14.13 percent. BASIC Bank’s services arespecially directed towards promotion and development of small industries. Its exposure to smalland medium industries sector accounted for 56.73 percent of the total loans and advances.Micro creditBASIC Bank also provides micro credit to the poor for generation of employment and income ona sustainable basis, particularly in urban and suburban areas. At the end of 2007, total amount ofTaka 680.13 million remained outstanding as against Taka 359.24 million in 2006. Recovery rateduring this period remained at a highly satisfactory level of 100.00 percent.Commercial CreditThe Bank also supports development of trade, business and other commercial activities in thecountry. It covers the full range of services to the exporters and importers extending variousfacilities such as cash credit, export cash credit, packing credit, short term loans, local and Credit Management of BASIC Bank Limited 47
  48. 48. foreign bills purchase facilities. As on December 31 2007, total outstanding commercial loansstood at Taka 7,681.74 million compared to Taka 6,391.21 million in 2006.Geographic Locations Wise Loans & Advances Taka in million Geographic Location AMOUNT Dhaka Division 69.28 Chittagong Division 16.31 Sylhet Division 1.94 Rajshahi Division 4.44 Khulna Division 4.78 Barisal Division 0.25 Dhaka Division Chittagoan Division Sylhet Division Rajshahi Division Khulna Division Barisal DivisionMost of the branches of Eastern Bank Ltd situated in Dhaka city, therefore most of the loans aredisbursed in Dhaka division which is about 69.28 % of total loan.Deposits Loan Comparison Taka in million YEAR LOAN DEPOSIT 2003 9282.20 11,266.54 2004 12000.10 15509.18 2005 15339.40 22325.58 2006 19000.00 24084.65 2007 22263.35 31947.98 Credit Management of BASIC Bank Limited 48
  49. 49. Deposits Loan Comparison 40000 30000 Loan 20000 Deposit 10000 0 2003 2004 2005 2006 2007At the end of 2007 total deposits stood at Tk. 31947.98 million, a 32.65% increase compared toTk. 24084.65 million from the preceding year. This was undoubtedly a remarkable progressconsidering volatile price situation for acquiring deposits. On the other hand, at the end of 2007total loan stood at Tk. 22263.35 million, a 17.18% increase compared to Tk. 19000.00 millionfrom the preceding year which is less progress than deposit.Foreign Exchange Business Taka in million YEAR IMPORT EXPORT 2003 9882.80 6933.90 2004 12507.80 7908.00 2005 14094.96 11097.23 2006 17804.27 15463.74 2007 21266.57 16794.96 Credit Management of BASIC Bank Limited 49
  50. 50. Foreign Exchange Business 25000 20000 15000 Import 10000 Export 5000 0 2003 2004 2005 2006 2007The Bank’s performance in the area was satisfactory. Total import and export business transectedwere Tk. 21266.57 million and 16794.96 million respectively during 2007. The growth rate ofthe import business was 19.45 percent and the main items of import were industrial machineries,raw materials, commodities and other consumer products. The growth rate of export businesswas 8.61 percent and the items of export were RMG, Shrimp, and Jute etc.Gross Income Taka in million YEAR AMOUNT 2003 1558.52 2004 1768.85 2005 2228.21 2006 2870.32 2007 3549.51 Gross Income 4000 3000 2000 1000 0 2003 2004 2005 2006 2007The Bank’s Gross Income increased during the year by Tk-679.19 million and stood atTk-3549.51 million as at 31 December 2007. Credit Management of BASIC Bank Limited 50
  51. 51. Net Profit (After Tax) Taka in million YEAR AMOUNT 2003 236.39 2004 291.48 2005 285.49 2006 554.14 2007 282.96 Net Profit (After tax) 600 400 200 0 2003 2004 2005 2006 2007The Bank’s net profit is not enough stable. Net profit increased during the year 2006 by 94.10 %but it decrease during the year 2007 Tk-271.18 million and stood at Tk-282.96 million as at 31December 2007.Earnings per share YEAR AMOUNT IN TAKA 2003 30.25 2004 35.99 2005 35.25 2006 58.64 Credit Management of BASIC Bank Limited 51
  52. 52. 2007 22.68 Earning per share in Year 2003 to 2007 80 60 40 20 0 2003 2004 2005 2006 2007Earning per share of the bank is not enough stable. EPS decreased during the year by Tk-35.96and stood at Tk-22.68 as at 31 December 2007.Total Assets Taka in million YEAR AMOUNT 2003 14766.30 2004 19436.60 2005 27136.40 2006 29417.10 2007 38877.90 Total Assets 40000 30000 20000 10000 0 2003 2004 2005 2006 2007The Bank’s performance in the area was satisfactory. The Bank’s Total assets increased duringthe year by 32.16 percent and stood at Tk-38877.90 million as at 31 December 2007Placement and Investment Taka in million Credit Management of BASIC Bank Limited 52
  53. 53. YEAR AMOUNT 2003 4361.45 2004 6098.51 2005 10236.82 2006 8212.23 2007 13560.92 Placem ent and Investm ent 15000 10000 5000 0 2003 2004 2005 2006 2007The Bank’s performance in the area was satisfactory. The Bank’s Total Placement andInvestment increased during the year by 65.13 percent and stood at Tk-1356.90 million as at 31December 2007Number of Branches YEAR Branches 2003 26 2004 27 2005 27 2006 28 2007 30 Number of Branches 30 29 28 27 26 25 24 2003 2004 2005 2006 2007 Credit Management of BASIC Bank Limited 53
  54. 54. The Bank’s Number of Branches increased during the year by 2 and stood at 30 branches as at 31December 2007.Ratio AnalysisRatio Analysis expresses the relationship among selected items of financial statement data. Aratio expresses the mathematical relationship between one quantity and another. The relationshipis expressed in terms of a percentage, a rate, or a simple proportion.Loan to Deposit LiabilitiesThe Loan to Deposit liabilities ratio measures the percentage of the total deposit provided tocreditors as loan and advances. It is computed by dividing total loan by total deposit. YEAR RATIO 2003 82.39 2004 77.37 2005 69.74 2006 78.89 2007 69.69 Loan to Deposit Liabilities 85 80 75 70 65 60 2003 2004 2005 2006 2007The Loan to Deposit liabilities ratio decreased during the year by 9.20 % and stood at 69.69 % asat 31 December 2007.Debt-equity Ratio YEAR RATIO Credit Management of BASIC Bank Limited 54
  55. 55. 2003 6.50 2004 6.95 2005 7.92 2006 9.84 2007 10.46 Debt Equity Ratio 12 10 8 6 4 2 0 2003 2004 2005 2006 2007Debt-equity ratio increased during the year by 0.62 % and stood at 10.46 % as at 31 December2007.Debt (Long term) to total assets ratioThe Debt to total assets ratio measures the percentage of the total assets provided by creditors. Itis computed by dividing total debt by total assets. This ratio indicates the company’s degree ofleverage. YEAR RATIO 2003 4.56 2004 4.32 2005 3.45 2006 2.82 2007 3.57 Debt (Long term) to Total Assets Ratio 5 4 3 2 1 0 2003 2004 2005 2006 2007 Credit Management of BASIC Bank Limited 55
  56. 56. Debt to total assets ratio increase during the year and stood at 3.57 % as at 31 December 2007.Classified Loan as a % of total loans YEAR % 2003 4.25 2004 2.70 2005 4.55 2006 3.70 2007 3.25 Classified Loan as a % of total loans 15 10 5 0 2003 2004 2005 2006 2007The Bank’s performance in the area was satisfactory. The Bank’s classified loan (non-performing loan) reduced during the year by 0.45 percent and stood at 3.25% as at 31 December2007Return on assets ratio (Average) YEAR RATIO 2003 1.70 % 2004 0.83 % 2005 1.94 % 2006 1.23 % 2007 1.70 % Credit Management of BASIC Bank Limited 56
  57. 57. Return on assets ratio (Average) 2.5 2 1.5 1 0.5 0 2003 2004 2005 2006 2007Return on assets ratio (ROA) decreased during the year by 0.47 % and stood at 1.70 % as at 31December 2007.Return on equity (Average) YEAR RATIO 2003 20.90 % 2004 21.27 % 2005 17.75 % 2006 27.82 % 2007 11.70 % Return on equity (Average) in Year 2003 to 2007 25 20 15 10 5 0 2003 2004 2005 2006 2007Return on equity decreased during the year by 16.12 % and stood at 11.70 % as at 31 December2007.Capital adequacy ratio YEAR RATIO 2003 12.57 2004 12.49 Credit Management of BASIC Bank Limited 57
  58. 58. 2005 11.77 2006 11.98 2007 12.91 13.5 13 12.91 12.5 12.57 12.49 12 11.98 11.5 11 11.11 10.5 10 2003 2004 2005 2006 2007Capital adequacy ratio increased during the year by 0.93 % and stood at 12.91 % as at 31December 2007.Interest Margin CoverageTimes interest earned provide an indication of the company’s ability to meet interest payments asthey come due. It is computed by dividing income before interest expense and income taxes byinterest expense. YEAR RATIO 2003 210.87 2004 205.07 2005 214.56 2006 211.72 2007 176.80 Credit Management of BASIC Bank Limited 58
  59. 59. Interest Margin Coverage 250 200 150 100 50 0 2003 2004 2005 2006 2007Interest margin coverage ratio decreased during the year by 34.92 and stood at 176.80 as at 31December 2007. Findings Credit Management of BASIC Bank Limited 59
  60. 60. While working at BASIC Bank, Mirpur Branch, I have attained a newer kind of experience.After collecting and analysis data I have got some findings regarding credit management andothers area of the banking activities. These findings are completely my personal view of point,which are given below- 1. The controlling officers are effective in providing necessary guidance and support to the branch. 2. Branch Manager Conscious efforts to achieve the targets and knows how to motivate employees and how to represent the Bank well in the local community. 3. There are 30 branches of BASIC Bank. From that BASIC bank Mirpur Branch is successfully operating its credit activities. 4. The strategy and policy making of Branch Manager is effective. So in spite of intensity of banks, the bank has possessed its place in the competition. 5. As the bank uses some modern technology such as: Fax, Telex, and SWIFT. So their service is better than most of the bank. 6. The credit analysts have a strong background in accounting financial statement analysis, business law and economics along with good negotiating skills. This lessens the possibility of bad debt. 7. The bank is constantly expanding and improving its performance. 8. The loan administration of BASIC Bank Limited enables it to ensure a smooth loan system. 9. Over the years the loan applications received, approved have all seen an increasing trend while the number of loan declined has a decreasing trend 10. The bank does not have sufficient attention in “consumer credit”. 11. BASIC Bank has yet not setup proper network system, which is very important to compete with the others in this electronic world. 12. For credit appraisal, the bank some time depends on the client for its authentication. Recommendations Credit Management of BASIC Bank Limited 60

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