An

overview Bangladesh

on

the

private banking sector of

Banking is indispensable in the business sector. Its numerous services facilitate transactions between both local and foreign business firms. There are different types of banks to cater to the various needs of the business community, such as Savings Banks and Commercial Banks. Ultimately, it is the Central Bank, which controls the entire banking system of the economy and maintains the important link with the government and the financial sector.

The private commercial banks of Bangladesh have added a whole new dimension to the Banking sector of our country. These banks emerged as the result of the unfulfilled financial assistance need of both individuals and businesses that were not properly addressed by the nationalized banks.

Although the overall economic situation is not very encouraging, the private commercial banks are prospering. Their success is attributable to a number of factors. They are able to offer better quality services at an affordable price. Careful investment policy and credit monitoring system permits to keep the percentage of bad debts or classified loans low. These banks owe

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much to the strict regulating and monitoring system of Bangladesh Bank. But they all feel the need to modify the rules concerning the collection of classified loans. These banks provide a wide range and variety of products or financial services to satisfy the different demands of customers. They allow facilities like consumer credit, purpose oriented deposit schemes etc. These schemes have been specially designed to help the mid-level customer group. The private commercial banks are all urban based. They are yet to venture into the rural areas. They do not possess huge capacities like that of nationalized banks needed for widespread coverage. This constraint of capacity has made these private banks cautious in their investment decisions. They mostly finance short-term projects with maximum 2 or 3 years of life span. But the assistance of these banks in developing our industrial sector can be of vital importance. The RMG sector developed rapidly because of heavy investment by these banks. They can come forward to finance the growth of IT sector and other industrial sector. Origin of the report: In order to familiarize the students with the loan and advance facilities of private commercial banks, our Course Instructor, Mr. S. Morshed Jahan, assigned us to study the investment practice of the PCBs and prepare a report on that. We went to several private commercial banks to gather information and experience about the credit systems and practices prevailing in the current banking context of Bangladesh.

Objective of the report:

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General Objective: The general objective of this assignment is to have a clear knowledge and understanding about the credit system of the private commercial banks of Bangladesh. Specific Objective: The specific objective is to familiarize ourselves with the concept of loan giving criteria of the private commercial banks and the areas of investment for PCBs. Thus we tried to locate the followings: Identifying the major areas of investment made by the PCBs. Determining the criteria or factors considered while giving loans by PCBs. Determining the main requirements of the borrowers of loans. Making a comparative analysis of major private sectors as investment opportunities in terms of potentiality and amount of loan received. Reviewing the total loan making or credit giving process of private commercial banks. Identifying specific routine and periodic activities in the credit monitoring process. Reviewing the rules and regulations issued by Bangladesh Bank that affects the credit system of the PCBs. Making proper recommendations on their credit giving and monitoring system. Scope of the Report: The report contains a brief discussion on the loan giving criteria and areas of investment of the private commercial banks. Moreover, how this system works and how it influences the economy of the country is also discussed here in short.

Methodology: The method used for gathering information is the 'Study Approach'. In gathering information, we did not depend on any one particular method. The tools that we mainly used to gather information are:

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Interview Written Questionnaire Checklist Secondary Data

At first, we studied the various rules and regulations regarding the credit monitoring system of the PCBs. We analyzed the investment practices from the organizational viewpoint. We made a questionnaire and took the interviews of some senior bankers from some renowned private banks. Our group members studied the facts collected from those interviews. We studied the existing credit system and tried to locate the ins and outs. We identified the investment criteria and potential areas of the loan giving system and dealt with the distinct factors of the current investment practice. We also made a feasible study of what is supposed to be done to make the total process more feasible and helpful for our economy and use the prevailing system more efficiently.

Limitations: While preparing this report, the main limitation we faced is lack of information. We were dealing with such a matter that was considered as highly confidential by the respective organizations. Therefore, we did not get enough access to the information that we needed. We faced another limitation and that is the limitation of knowledge. This is our biggest and widest assignment in Microeconomics course. When we went to several private banks, we found many things, which did not match with what we have studied in our text. So we were confused many times to deal with that information, to classify them under any specific topic and describe them in a structured way. The list of the private commercial banks of Bangladesh: Pubali Bank

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Uttara Bank Arab Bangladesh Bank Ltd. National Bank Ltd. The City Bank Ltd. Islami Bank Bangladesh Ltd. IFIC Bank Ltd. United Commercial Bank Ltd. Al-Baraka Bank Ltd. Eastern Bank Ltd. National Credit and Commerce Bank Ltd. Prime Bank Ltd. Southeast Bank Ltd. Dhaka Bank Ltd. Al Arafah Bank Ltd. Social Investment Bank Ltd. Dutch Bangla Bank Ltd. Mercantile Bank Ltd. Standard Bank Ltd. One Bank Ltd. Bexim Bank Ltd. Commerce Bank Mutual Bank Security Bank Primere Bank Asia Bank Ltd. Trust Bank Ltd. These banks provide a wide range and variety of products or financial services to satisfy the different demands of customers. They allow facilities like consumer credit, purpose oriented deposit schemes etc. These schemes have been specially designed to help the mid-level customer group. The main function of bank is to take deposits from corporations, companies or individual for giving interest to them. But alike all other business firms,

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bank is also profit oriented. And the main source of the income of a bank comes from giving advances to the borrowers.

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Banks mainly give advances to the business firms. First of all, advances can be divided as general advances, which are: 1) Cash Credit 2) 3) Secured overdraft Loans

Rather than general advances, there are: 1) Letter of Credits 2) Letter of guarantee 1 Cash Credit: The bank sanctions a cash credit advance, the business firm can use the advance with the facility of a current account. The creditor can draw or deposit any amount of money in the account at any time within the limit. Generally bank takes 16.5% interest rate from the borrowers for cash credit, which is taken quarterly. But it may vary from bank to bank and relation with the creditor. Bangladesh Bank allows the private commercial banks to charge the interest rate from the lowest limit of lowest 12.5% to highest 17%. But the foremost purpose of a bank is to make profit without taking any risk of failure that can stagnate the money, which comes from the depositors. So the bank would first look into the security of money that is to be lent to the borrowers. According to the security, cash credit can be divided into two categories. They are: 1) Cash Credit Hypothecation 2) Cash Credit Pledge 1) Cash Credit hypothecation: Cash credit hypothecation is given to meet the instant working capital of any business organization. And for this, generally any property is mortgaged or other collateral other than finished goods is given to the bank. 2) Cash Credit Pledge: In cash credit pledge, finished goods are given as security. The finished goods are kept in a warehouse of the bank

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provided with proper security. But the creditor must pay all the charges of warehouse and the guards provided by the bank. The creditors can get back their collateral by returning the money they have borrowed or they can also get back a portion of the collateral by giving that percent of money to the bank. 2 Secured Overdraft: Secured overdraft is the advance given to any business firm secured by any fixed deposit in that bank or savings bond or other bonds, which are readily cashable. This is the least risky lending process for the bank because bank can get the money back from the defaulter instantly. Secured overdraft can also act like lending process of cash credit. Such as, if any valued client sends a cheque, which exceeds the amount of in his account, the cheque will be honored rather than being dishonored. The additional amount of money, which the bank pays, is treated as an advance given to the client in the form of secured overdraft. 3 Loans: Loans can be classified as only those advances, which are given for a specific period of time and must be returned in fixed installments. The installment amount, the time of installment and the total period of time of the loan is decided on the basis of the type of loan that is given for different purpose. Bank usually prefers to give short-term loans with the time limit of one year. Bank does not want to block money by giving long-term loans. But in the short-term loans the return time is very quick. Before giving loans, bank also looks into the feasibility and risks of the advance. For this reason, the experience of the bank shows that long-term, loans are more risky than the short-term loans. There can be different kind of loans on the basis of the types the loan is given for. They can be described as below. House building loans: House-building loans can be described as the loans that are given for building commercial or residential loans.

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Commercial building can be described as buildings that are made for commercial purpose, which can be any office space, markets etc. or apartments made for sale for commercial purpose. On the other hand, residential buildings are those built with no motive for profit. Banks usually prefers commercial house building loans because in that case the return of money is very quick and also secured. The feasibility of commercial buildings can also be measured easily. But private commercial banks advices people not to seek residential house building loans because it becomes very difficult for individuals to pay the installments in a high interest rate of profit oriented private commercial banks. Consumer Schemes: Consumer schemes can be described as different schemes of the banks for individuals rather than business firms to buy consumer products such as, television, refrigerator, personal computer, music system, car etc. These kinds of consumer schemes are very attractive for general people, especially service holders. These schemes are also very profitable for the banks because the return time is quick and also less risky. It is generally secured by a guarantee letter from the proper authority where an individual is in service.

Loan classification depending on nature

According to Bangladesh Bank, credits are divided into five groups depending on the nature of the loans. They are(1) Continuous loan. (2) Demand loan (3) Term loans up to 5 years. (4) Term loans over 5 years. (5) Short term Agriculture and micro credit.

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Continuous loan

The loans, which do not have specific repayment schedule but have the last date of payment is termed as continuous loan. For example: CC, OD, etc.

Demand loan

The loan which the customer should be able to pay after it is demanded by the bank is termed as demand loan. Contingent or other credits, which are converted into forced loan, are considered as demand loan; example - Forced LIM, PAD, FBP etc.

Term loan up to 5 years

The loan that should be repaid within 5 years installment is considered in this group.

Term loan over 5 years

The loan which should be repaid over 5 years period in installments but within a fixed time period is in this group, i.e. long term project loan.

Short term Agriculture and Micro credit

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This type of loan is defined in the annual gazette of agricultural loan division of Bangladesh Bank. If a loan is repayable within 12 months, it is also included in this group. The loans, which are up to tk.10,000 and repayable within 12 months is also termed as short-term micro-credit.

Credit types depending on repayment pattern

Depending on the repayment pattern of the customer credit is divided into two types.

(1) Regular- the credits that are collected within schedule are termed asregular loan. (2) Irregular: The credits, which are not collected within schedule, are termed as irregular loan. Loan classification considering objective criteria Mainly irregular loans are classified. Depending upon the objective criteria loans are classified as follows-

(1) Unclassified loan The regular loan which is not repaid within scheduled or rescheduled the than the loan is termed as unclassified after the next date of the expiry date. (2) Substandard loan The unclassified loan is converted into substandard loan after it remains as unclassified for certain period. For different types of loan substandard loans are determined as follows:

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Continuous loan- if the loan remained unclassified for 3 months to 6 months than it is substandard. Demand loan- same time period as continuous loan. Term loan up to 5 years - If installment defaulted (i.e. the rest of the installment) amount is equal to or more than the total amount of 6 months installment than the loan is classified as substandard. Term loan over 5 years- If the Installment defaulted amount is equal to 5 or more than the total amount of 12 months installment than the loan is classified as substandard. Short-term agriculture and micro-credit-. If the loan is remained unclassified for 12 months it is classified as substandard. (3) Doubtful loans The unclassified loans that remains unclassified for certain period. Different loans are classified as doubtful by the following regulations: For continuous loan: If the loan remain unclassified for 6 months to 12 months than it is classified as doubtful loans. For Demand loan- If the loan remain unclassified for 6 months to 12 months than it is classified as doubtful. Term loan up to 5 years - if the installment defaulted amount is equal to or more than the total amount of 12 months installments than the loan is classified as doubtful loan. Term loan over 5 years- If the installment defaulted amount is equal to or more than the total amount of IS months installment than the loan is classified as doubtful. Short term agriculture & micro-credit- If the loan remain unclassified for ')6 months than it is classified as doubtful loan.

(4) Bad loans

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When unclassified loans remained unclassified for a certain period of time. Then it is termed as "Bad loan". The different types of Bad loans are given below: Continuous loan- if the loan remained unclassified for 12 months & above, it is classified as bad loans. Demand loan - If the loan remained unclassified for 12 months or above, it is classified as bad loans. Term loan up to 5 years: If the "installment defaulted" amount is equal to or more than the total installment amount of 18 months then the loan is classified as bad loan. Term loan over 5 year: If the "installment defaulted" amount is equal to or more than the total installment amount of 24 months then the loan is classified as bad loans. Short-term agriculture & micro credit- If the loan is remain unclassified for 60 months then the loan is classified as bad loans.

Classification depending upon qualitative judgement

If any uncertainty or doubt arises in case of continuous loan, demand loan or term loan though they are classified objectively or not, then they are classified depending on the qualitative judgement.

Classification depending upon objective judgement

Particulars Continuous

Unclassified Substandard Doubtful Bad Irregular up 3-6 month 6-12 month Above to 3 months remain unclassified = 6 Over 6 month remain month unclassified = = Equal to or Equal more

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Demand = Term loans Up below 5 month

to

to

or

than more than 18

13

years

12

month month instalment

instalment Term loans = 12 month

amount amount Equal to or 24 month more 18 than month

over 5 years

instalment Short terms Up to 12 12 month amount 36-60 month Above month 60

month

Source: statistical yearbook, 1998, Bangladesh bank Factors considered during qualitative judgment of loan classification are: 1. If the situation has changed upon which the loan was sanctioned. 2. If the principal amount is lost in any adverse situation. 3. If the value of security has depreciated. 4. If the loan collection is uncertain due to any adverse situation. 5. If any loan is rescheduled illogically again & again or the rules of rescheduling is not maintained. 6. If there is frequency to break the limit of repayment schedule regularly. 7. If any legal action taken to collect the loan. 8. If any loan has sanctioned without the approval of proper channel. Classification of loans: considering the above factors loans are classified as follows(1) Substandard: Considering the factors that it is harmful for any loan but it can be recovered by taking proper action then the loan is classified as substandard.

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(2) Doubtful: If proper action has taken but it is not certain to recover the total loan then it is classified as doubtful loan. (3) Bad loan: If it is not possible to recover the loan considering the above factors then the loan is termed as bad loan. The above loans can be reclassified if any improvement has occurred in qualitative judgment. But if the investigation team of Bangladesh Bank classified any loan then the Bank itself cannot reclassify it. The private commercial banks are all urban based. They are yet to venture into the rural areas. They do not possess huge capacities like that of nationalized banks needed for widespread coverage. In context of the facilities provided by the Private Commercial Banks, they mainly provide services in two ways. Firstly, their credit facilities should be emphasized. They give advances in different segments of t he society. Apart from that they also invest in several potential sectors and help the growth of our country economy. The major areas of advances can be divided as follows: Agriculture Term loan to medium and large scale industries Working capital loan Export credit Commercial loan Term loan to small and cottage industries Other scattered areas Again the investment areas of PCBs are mainly limited in to the following sectors: 3 years T & T bonds Treasury bills

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Debentures Ordinary shares Prize bonds Other individual bonds The main requirements of the borrowers: At first let us focus on the identity of the borrowers. They are mainly the business people involved in trading and commercial activities and also the industrialists. The loans are divided based on the time span of their return. Some loans are for 3 to 5 years and they can be increased till 10 to 15 years. In these cases the borrower has to make a new deal with the banks management. The constraint of capacity has made these private banks cautious in their investment decisions. They mostly finance short-term projects with maximum 2 or 3 years of life span. But the assistance of these banks in developing our industrial sector can be of vital importance. The RMG sector developed rapidly because of heavy investment by these banks. They can come forward to finance the growth of IT sector and other industrial sector. In recent times, liquidity crisis is the major problem arising in the PCB sector. So most of the banks are afraid of their liquid fund being blocked for a long time. Thats why now a days bank are not too interested to invest in long time credit sectors such as the real estate sector. There are also credit facilities for 3 months, 6 months or more. These facilities are mainly given to small business holders who are going to increase their business. Banks, which have come after 90s, offer some advanced loan schemes only for individuals. These schemes are for 6 months to 2 years. These schemes can be loan for PC or other accessories, loan for land etc. In these cases the interest rate is comparatively low while in the long time loans the interest rate remains high. Recently all the banks have decreased their interest rate for export import finance to encourage others to come to this sector.

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While providing credit facilities PCBs mainly consider the following criteria: The prospect of that particular sector The credibility of that sector The percentage of return The estimated range of recovery period The risk of bad loans The monitoring process of the PCBs by Bangladesh Bank includes two phases: the off-site process and the on-site process. The off site process is done on the basis of the reports sent by the individual banks. In this case they send their periodical reports to Bangladesh Bank for monitoring purpose. The on-site process is done by Bangladesh Bank itself. Here, Bangladesh Bank sends its own inspectors to respective banks to monitor their activities. If there is any kind of difference between the two monitoring outputs of the PCBs and the inspectors of Bangladesh Bank, the decisions of the inspectors are taken as final by Bangladesh Bank. Bangladesh Bank does not have any specific lending policy for the PCBs. The lending policy of Bangladesh Bank was first modified in the early 90s and was secondly modified in 1997. Before the 90s, Bangladesh Bank had total control over the lending policy of the PCBs. There were specific mentions of the allocation of loans into different sectors and even the interest rate was also mentioned. The regulation became more flexible after the 90s. At that period, instead of specifically mentioning the amount of loans and the interest rate, Bangladesh Bank started to provide a specific limit of loans and interest rates. The relaxed policy was also eliminated in 1997. Only a few basic regulations existed and they still exist in the year 2000.

Some of the features of the deregulation include: Interest rate deregulation

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Discontinuation of central bank-directed credit. Discontinuation of subsidized central refinancing facilities. Withdrawal of central bank-fixed margins on loans against imports L/Cs. Lifting of credit restrictions on trade in food grains and a number of other goods of daily necessity. Withdrawal of central bank fixed margins and repayment periods on credits to certain transport sector transactions. Lifting of restrictions on post-import financing against all goods, imports of which are allowed by the import policy. The particular goods from which the financing restrictions have been withdrawn are edible oil and seeds, palm oil, refined salt, corrugated iron sheets, second-hand clothes and sugar. Lifting of restrictions on bank advances against land security. Withdrawal of restrictions on bank financing of stocks of air-conditions, complete bicycles, domestic refrigerators, electric fans, motorcars, trucks and buses. Lifting of restrictions on personal loans by banks against the security of gold and gold ornaments, fixed deposits and financial and security bonds such as Government savings and Defense Certificates, Wage Earners Development Bonds and ICB Unit Certificates, loans to hosiery industry and loans for internal trading activities in some products. Of these deregulations, the last five were effected by Bangladesh Bank BCD Circular no: 25 dated 25 October 1993, and BCD Circular no: 28 of 20 November 1993 and BCD Circulars no: 11 and 12 dated 6 and 7 June 1994. By the new free system lending policy of Bangladesh Bank, PCBs now enjoy total freedom in providing loans and advances to their clients. They can issue loans to any of their clients and also have the right to refuse to some extent. They determine their own interest rate and classify their clients into different classes and charge them differently; for example, the first class clients can enjoy lower interest rates whereas the lower class clients may face a higher interest rate at the time of receiving loan. The interest rate normally fluctuates only up to 2%. By the first class clients, it means the class of

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clients who have the high potential to pay their loans back within the specified time. They have excellent background and also have very low risk of failure. The lower class clients are those who do not have a clear background and also have the risk of failure in their working sector. The PCBs also have the full freedom to provide loans to any sector they want. Bangladesh Bank will only monitor to observe if the PCBs are within limits. Some vital regulations that still exist are as follows: a) Banks will not issue loans and advances by keeping its own shares as collateral. b) No directors or their family members will not receive any loans or advances without any collateral. c) Apart from the related director, no loans or advances should be given without the support of most of the directors. d) Banks will not provide any facilities to any person or organization that adds up more than 15% of the total capital of the bank. e) No sanction should be given to any organization where any of the directors of the bank is involved. f) Banks are not allowed to excuse the advances without the authorization of Bangladesh Bank. According to the Bank Act Law, Bangladesh Bank will fix up the following things: The highest limit of the given loan

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Criteria and reasons for giving loans Highest limit of advances Needed collateral The tax imposed on the advances.

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Loan Divisions The several types of loan divisions perform the basic mission of generating loan business and supporting customers. In larger banks, the divisions Separate usually are organized along both geographic and industry lines. industry.

loan divisions are necessary to service the special needs of the specific At the same time, national and regional loan divisions that cut across different industries are needed to serve geographically dispersed customers.

Credit Department

The primary mission of credit department is to evaluate the creditworthiness and debt payment capacity of present loan customers and new loan applicants. Because the technical nature of its credit evaluation functions, the credit department is an excellent place to train future loan officers. The credit department may also be responsible for loan review, although in larger banks this function is likely to be handled by an audit department. Credit departments are sometimes responsible for collections of past due loans. Specialists within the department usually would handle this function. A crucial and complex loan function is the perfection of the bank's security interest in collateral offered in support of a loan. The legal complications and paperwork generated in this function often justify separation from other activities in a unit such as a collateral and note department.

Loan Committee All banks need effective committees for the review of major proposals and of loan delinquencies. Usually, two committees are needed: a directors' loan committee and an officers' loan committee. Loans above certain minimize sizes must be submitted to the officers' committee, consisting of the bank's

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most experienced loan officers. The officers' committee meets frequently. In large banks, it may meet daily, and in small banks, it may meet only once a week. The officers' loan committee serves as a check on, not a substitution for, the individual officer's judgement. The committee's duties are to1. Review the major loans. 2. Review major loan renewals and ascertain reasons for renewal 3. Review delinquent loans to determine cause. 4. Ensure compliance with stated bank policy. 5. Ensure full documentation of loans. 6. Ensure consistency in treatment of loan applicants. The directors' loan committee reviews major loans approved by the officers' committee. It is usually composed of the bank's president, the most senior loan officers, and two or more board members. The committee makes final judgement on the officers' loan committee decisions, giving closer scrutiny to the largest credit. matters. and problem credits. It is especially concerned with conformity to policy The directors' committee also reviews significant past due loans

Credit Monitoring

The term Credit Monitoring" is consists of two different terms. These are "Credit decision" and " Credit Control". When a customer applies for some credit facility the bank has to take decision measuring different aspects of borrowers proposals. Again, after giving credit facilities to the customer, the bank has to monitor the borrowers' account how he is performing. This is termed as " Credit Control".

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Credit Decision

The need for credit facilities varies with customer type. For these reasons most private banks are now offering five different types of credit facilities. These are: (a) Continuous loan. (b) Demand loan (c) Term loan up to 5 years (d) Term loan over 5 years (e) Short term credit and micro-credit. Information Needed for Loan Sanction In taking decision about credit facilities for any customer, the Bank first tries to ensure that the venture is viable enough to repay the loan. And if the customer is unable to repay then the mortgaged property should cover the loan. Sometimes bank may not ask for any type of mortgage, if the credibility of customer is high. That totally depends on the bank-customer relationship. Some of the banks have specified credit application format. The format is supported by "Net worth" statement of director or directors of the borrowing company. Sometimes the Bank needs further information and the customer provides the information. The standard credit application format is yet to be developed. Basic information those are needed for credit decision is given below: (a) Bio-data of the director/directors. (b) Nature of business. (c) Net worth statement of director/directors. (d) Nature of facility the customer has asked for and the proposed amount. (e) The value of the mortgage given.

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f g h i j k l

(f) How the repayment is arranged. (g) Cash flow statement of borrower. (h) Profitability of Bank on that account. (i) Different financial statement of the company. For example: Income statement, Balance sheet, cash flow for previous five years, etc. (j) Different financial ratios. These are: current ratio, quick ratio, leverage, debt to asset, inventory turnover, return on equity, net profit to sales, etc. (k) CIB report of the directors and of the company. (l) Customers management capability

m (m) Competitive position of the customer in that particular business (n) The comment of the branch in which the customer has applied for credit. If branch manager cannot take decision after analyzing the information manually, then he sends the proposal to head office by internal delivery system. Then again in the head office the information is checked manually and the decision is made. Loan Sanctioning Procedure: In banking practice loan and advances have different meanings. Usually,

loan means the long term (maturity of loan is more than one year) lending to a borrower. On the other hand advances are the short term (maturity of borrowing is at most one year) lending to a borrower. One special difference of these two is advances are revolving that is borrower can renew the borrowing amount every year. A bank always secures its loan and advances by the means of collateral app. 200% of the loaned amount. Banks mostly accepts land, building, plant, machinery, and so on as collateral. Loans can be classified in the basis of that has been secured. The commonly known loans are Loan Secured Mortgage (LSM), where the plant is taken as security and are usually given for building and constructing works. Loan against other security (LAOS), by name it means the fund is provided against the securities like fixed assets, equipment and so on. It is usually given for buying cars, machinery, etc. Loan against merchandise (LIM) is given for importing raw

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materials, equipment, spate parts and so on and those imported goods are taken as collateral. The two most well known advances are: 1) Cash Credit (Hypothecation) which is given for meeting working capital short fall and 2) Cash Credit (Pledge) which is given on the basis that finished goods would be taken as security. Before sanctioning a loan or any other credit facility, the management of the bank usually does important home works to find out the worthiness of the loan. The management has to be cautious in this matter because the bank is doing business with others money. The most important factor is to monitor the borrower. If the loan becomes a default loan then it is the failure of the management in justification of that loan. Loan organization structure: The organizational structure of the lending function varies with the size of the bank and the type of business. An officer of a small bank may perform all the detailed work associated with making a loan, including the credit investigation and analysis, negotiation, consumer contract, periodic review of the loan file, and at times, collection. At larger banks, individual loan officers specialize in consulting and negotiation with customers, and there is greater departmentalization of support functions, such as credit analysis, loan review, and loan collection.Officers loan committee Directors loan committee

Senior loan officers Credit department Board of Directors Executive manager

Incase of industrial loans, most private banks go through the following stages: FIRST STAGE: BEFORE THE LOAN IS APPLIED FOR

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The bank has specifically chalked out the following points to be fulfilled as per its criteria. a) The bank's acceptance of the project is not synonymous with its disbursing loans. b) The financing of any project depends largely on the availability of available liquidity or resources of the bank and overall profitability of the project. Profitability forecast is estimated by the bank's feasibility analysis. c) The project that falls under the list of reserve industry is automatically cancelled out of financing consideration. The list of reserve industry is described hereafter. d) Loan receivers that have been bank defaulters are not considered for fresh loans. e) The BSQF (Bank's Standard Questionnaire Form) is to be taken as a model rather than the exact format conforming to which the projects application will be submitted. Other relevant points that are crucial and specific to the project will have to be elaborated and attached. However, it is to be remembered that the chronology and the serials of BSQF is followed while filling up the project application forms. f) The descriptive and quantitative data are to be concise and they need to be given in a tabular form. If any information asked for in BSQF is irrelevant for the project, it has to be written irrelevant/not applicable against the question asked for. g) The sub-sectors of industry index will be consulted while considering the project. The list for the sub-sectors is given here after:

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g) In case of long-term loan, the banks that have provided capital or will be providing capital other than what BSB (Bangladesh Shilpa Bank) will provide, will have to be provided as a list with the relevant documents. i) If any information is deliberately concocted or hidden or

incomprehensible, the application form will be considered incomplete and thereby the project financing consideration will be made unviable. SECOND STAGE: PROCEDURAL SUBMISSION OF LOAN While submitting the application form, it is very important that the following papers/documents are attached herewith. If anybody faces difficulty regarding this attachment of relevant papers/ documents, the person is advised to contact the BSB (Bangladesh Shilpa Bank) to seek its directions and help. The papers are as follows: a) Four copies of the appropriately filled up loan application form along with the supporting documents. The Form-A is applicable for new project and Form-B for BMRE project. b) For projects, the expenses of which exceed taka 3 crore (expenses excluding land value, cost of installation & local carriage of plant and machinery, customs & duties, etc.), two copies of project. Feasibility report at the own expenses of the applicants. However, for projects those have an expected cost of less than 3 crore taka, that wish to apply new technology - project feasibility study will have to be done and submitted. c) Company's seal will have to be given along with responsible persons' signature on each page of project application form. The same will have to be done on each of the attachments. d) The promoters / sponsors of the company will have to give an evaluation fee at the bank of 1/8 th of 1% of the estimated project cost

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not exceeding taka I lac through cheque/pay order or bank draft. In the case of BMRE project, evaluation fee will have to be given on the extra cost proposed for BMRE. e) On the basis of what has been reported/projected as net worth, the documents of immovable properties, balance sheet of past three years of the business if any, will have to be provided. Here it may be mentioned that the exact position & feasibility of the project will be done by the bank's re-appraisal team. Besides, any encumbrance in the property mentioned and other documents will be analyzed. f) The financial institutions and banks, with which the promoters have financial dealings, documents of dealing with these institutions for at least the last six months, will have to be provided. STAGE THREE: AFTER ACCEPTANCE OF THE PROJECT After acceptance of the project, before opening L/Cs the promoters will have to fund 10% of the project financing of the bank, and another 10% of the project financing of the bank for purchase of land, development of land, etc. If these amounts are not funded with the bank within three months, the bank's acceptance of the project is automatically considered as cancelled. The first 10% as mentioned above would be taken as permanent deposit and lien mark will be given to this amount. One cannot withdraw this deposit without the approval of BSB. This amount will be given back to the promoters in the form of loan disbursed for the purpose of the project. The following documents will have to be provided just after the acceptance of the loan.

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RESERVE INDUSTRY

Those industries which will be reserved' only for Govt. investments, shall be classified as 'Reserve Industry'. The following sectors are included in the scope of Reserve Industry. a) b) c) d) e) f) Arms, ammunition, and equipment/machinery relating to security Nuclear power production The money reserve and the security printing sector (Commercial notes) Plantation in the reserved forest areas and Mechanical Extraction The aeroplane industry for the international routes and the Railway. Others (if applicable)

DIRECTIONS OF THE BANK FOR SUB-SECTORS OF THE INDUSTRY: a) Food and related items Shrimp agriculture & processing Production of fish mill Fruits/ vegetables production & processing b) Textile Industries

Composite Textile Mills Specialized Textile Mills

Products related to the textile industry and value added ready-made garments. c) Leather and leather products d) Leather processing Gloves, bags, shoes, jacket, belt, moneybags etc. Shoe and shoe-upper Tire & Tube Luggage & fashion products

Chemical & Pharmaceuticals Soda ash Paper & pulp (based on Jute wastes & Cuttings) Dyes, pigments & Color Pharmaceutical chemicals Chemicals used for leather goods Plastics

e)

Medium & Light Engineering Industry Electrical equipment & machinery Electronics items Scientific & laboratory items Optical lenses etc. Construction equipment Disposable syringe and Needles

f)

Others Stuffed toys Imitation jewellery Diamond cutting and polishing Export-oriented gift-items

Other exports oriented or export item- supporting products. However, it may be mentioned that other items excluded in the above list, but are encouraged in the Fifth five-year plan and export policy of the Government will be given priority for project approval.

Credit

analysis is the process of assessing the risk of lending

to a business or individual. The so-called credit risk must be evaluated against the benefits the bank expects to derive from making the loan. The direct benefits are simply the interest and fees earned on the loan and possibly, the deposit balances required as a condition of the loan. Indirect benefits consist of the initiation or maintenance of a relationship with the borrower that may provide the bank with increased deposits and demand for a variety of bank services. Credit risk assessment has both qualitative and quantitative dimensions; the qualitative dimensions of risk are generally the more difficult to assess. The steps in qualitative risk assessment are primarily: Gathering information on the borrower's of financial responsibility Determining his or her true purpose for wanting to borrow funds, Identifying the risks confronting the borrowers business under future industry and economic conditions, and Estimating the degree of commitment the borrower will have regarding repayment. The quantitative dimension of credit risk assessment

consists of: the analysis of historical financial data and the projection of future financial results to evaluate the borrower's capacity for timely repayment of the loan and indeed, the borrower's ability to survive possible industry and economic reverses.

The essence of all credit analysis can be captured in four basic credit factors or lines of inquiry: 1. The borrower's character. 2. The use of loan funds. 3. The primary source of loan repayment. 4. The secondary sources of repayment.

Character Most bankers agree that the paramount factor in a successful loan is the honesty and goodwill of the borrower. Dishonest borrowers do not feel morally committed to repay their debts. A determined and skilled dishonest borrower usually can get al through misrepresentation. Because loan officers must spread their time

over many loan relationships, they do not have time to uncover elaborate schemes to defraud the bank. To be sure, it is important to recognize that default does not always occur because of moral failing and willful neglect on the part of the borrower. Perhaps as important are qualities of intelligence, These personal discipline, and managerial skills and instincts. -but not much easier.

qualifies are sometimes easier to evaluate than blatant dishonesty Loan officer must devote ample time in attempting to determine the competence of borrowers. Finally, the subtlest task loan officers face is to discover the true quality of a borrower's business or project. Even competent and essentially honest borrowers are motivated to represent their plans and prospects in the best possible light when they are appealing for

funding.

Without being deceitful, they often will not reveal their

innermost fears and doubts. The bank must protect itself from dishonest, incompetent, or overly subjective background borrowers of the by thoroughly The investigating the credit credit borrower. borrower's precious

relationships can be evaluated from records of the local credit bureau, suppliers, past banking relationships, and customers. If borrower has been routinely late in paying past debts, the reasons should be determined. If previous creditors have experienced losses, the loan officer should almost automatically reject the loan.

Use of loan funds

On the surface, the borrower's need and proposed use for funds usually seems perfectly clear. In many commercial loans, this is frequently not the case. More often than not, determining the true need and use for funds requires good analytical skills in accounting and business finance. An understanding of the loan's intended use helps the analyst to understand whether the loan request is reasonable and acceptable. A common need for funds arises when collections of receivables slow down. Also, the analyst should determine whether working capital needs are seasonal or permanent. Frequently, short - term loans are made to finance working capital needs that initially appear seasonal but subsequently prove to be permanent needs arising from general sales growth. Consequently, short-term loans often become de facto term loans that support permanent increases in accounts receivable, inventory, and fixed assets. Primary source of repayment:

The

analyst's

accounting

and

finance

skills

are

crucial

in

determining the ability of the borrower to repay loan from cash flow. For seasonal working capital loans, cash flow is generated by means of the orderly liquidation of the seasonal buildup in inventories and receivables. In term loans, cash flows are generated from earnings and non-cash expenses charged against earnings. The analyst must ascertain the timing and sufficiency of these cash flows and evaluate the risk of cash flows falling short. Sources of repayment other than cash flow from operation should be viewed with caution. The borrower may plan on a future injection of investor capital to repay the loan. Unfortunately, if the firm fails to produce attractive profits, outsiders usually withhold the investment in the firm. The customer may be depending on borrowings from another institution to repay the bank. Unless a formal commitment exists form another institution, this source suffers from the limitation as a planned equity injection. The future sale of fixed asset is not a reliable source of loan repayment.

Secondary source of repayment In general, cash flow from business operations in the most dependable source of loan repayment. However, if sufficient cash flow fail to materialize, the bank can prevent a loss if it has secured a secondary source of repayment. Collateral should always be viewed as a secondary and not a primary source of repayment. Banks hope to avoid foreclosing on collateral because foreclosure entails much time and expense. Collateral value should cover, in addition to the loan amount and

interest due, the legal cost of foreclosure and interest during foreclosure proceedings. Collateral is the preferred secondary source of repayment. Other secondary sources are guarantors and co-makers. Collection form guarantors and co-makers often requires expensive litigation and results in considerable ill will between the bank, borrower, and guarantor.

Credit investigation

The purpose of credit investigation is to acquire enough information to determine the loan applicant's willingness and capacity to service the proposed loan. The investigation attempts to develop an understanding of the nature of the borrower in terms of the four basic credit factors just discussed: the borrower's character, the true purpose of the loan, the primary source of repayment and the secondary source of repayment. There are fundamental sources of information: customers, internal bank source, and external sources available through institutions outside the bank.

Customer Interview

The prospective borrower is expected to indicate the type and amount of loan requested, designate the proposed source and plan of repayment, identify the collateral or guarantors, name other previous and current creditors, list primary customers and guarantors, and give personal and business history. These and other related information serve the bank to build a comprehensive grasp of strengths and weaknesses of a loan request.

Internal sources of information

If the loan customer has existing relationships with the bank, a great deal of information is available internally to the bank about customer's willingness and capacity to service the proposed loan. The credit officer should study credit files on any current or previous borrowings, examine checking account activity, and review other deposits previously or currently held. These sources will indicate the degree of the bank's satisfaction with past payment performance, and they may reveal tendencies for overdrawing deposit account. Also, these sources will identify primary customers, suppliers, and other creditors with whom the borrower has had financial transactions. Income tax returns are very useful for validating almost every aspect of borrower's personal finance, including income sources and assets and liabilities. The External source of information: The journals published on behalf of the respective industry can be a very good source of information. The Statistical Bureau of Bangladesh can indicate the overall economic situation of the country. And what the bank strives for is the credit report of the loan applicant from other banks. In order to make credit analysis they use two types of form; one is called the Spread Sheet, which is mainly a form showing the data collected from the borrowing companys balance sheet. It also provides the different accounting and financial ratios required to

make decision whether to provide loan or not to the farm. The format of this form is given by Bangladesh Bank and it is followed by most of the farms. Through this form the bank is able to categories all the borrowers regarding their activities and rate them in recommended manner. On the other hand the second form is known as the Lending Risk Analysis Form. This form deals with the different types and levels of risks involved with the borrowers firm and also helps the bank make judgement whether to give loan to the firm or not. Both of these forms are prepared in Microsoft excel and the data are kept in that software. There is another software used by the firm, which classifies the different types of loans for each borrower. Other than these there is no additional computer software to help the officials for credit management purpose. The main two types of credit management policies are described below:

Spread Sheet Analysis:

This form as described above is mainly used for the purpose of analyzing the financial performance of the farm that is seeking the loan and scoring them on the basis of some previously selected criteria. The information in this form is mainly gathered from the balance sheet as well as income statement of the firms previous few years operation. The number of periods to be analyzed by the farm depends upon the type of the firm and how long it has been operating. All the data in the form are also divided into mainly three categories. They are: 1. Audited data 2. Unaudited data 3. Projected data

For those farms which are already operating the data in the balance sheet may be audited or unaudited. For those borrowing farms, which are seeking the loan for starting their operation the data are basically projected or assumed data based on the assets and equity. The form is mainly divided into the following major segments:

Balance Sheet Review: In the first part of the form there is data collected from the balance sheet of the borrowing farm.

Assets In this part all the information about the asset is given, that is there is current asset as well as long term asset. These long term and short tem assets are also subdivided into smaller components, for example in the short term asset category we have Cash on Hand, Marketable Securities and Inventories etc. All these subdivisions are mainly done from the knowledge of accounting and finance. In the form for each previous year the amount of each asset component with their percentage to the total asset is given. Liabilities & Net worth In the liabilities section as described in the asset portion the total liabilities is divided into short term and long term liabilities, which in return is also subdivided into smaller components based on the accounting and financial knowledge. After the total liabilities comes

the Net worth section. This part discusses about the retained earnings as well as net capital and other reserves of the farm. All the amounts as well as the percentage with respect to the total liabilities and net worth are given for each of the component.

Profit & Loss Account Review: In this part the information in the form kept for review is gathered from the income statement or profit and loss account of the borrowing firm. The signmost of the private commercial banksant elements of this part is discussed below: 1. Sales In the first and foremost important part of the income statement is the sales volume as well as the net sales volume. From the above two figures we get the other required figures by adding or subtracting the needed component. The bank can see the changes in the sales figure over the certain periods in the form and get some idea about the performance of the farms operation. 2. Expenses This is another important element that the bank needs to look in order to see whether the borrowing farm is effective in expense management or not. The different yearly data shows how the sub division in the expense changes and which is leading factor in the expense. This also can help the bank to see if the expenses that the farm is making to generate revenue are adequate or not.

3. Profit In this part the bank looks at the gross profit as well as the operating profit. With tax provision the bank can determine the tax deducted profit that is the net profit after tax. By observing the profit over the few of the farms operation the bank can make a judgement on the ability of the borrowing farm to repay the loan. As the amount of all the items are given in monetary unit as well as in the percentage form of the total sales, the bank can obtain in depth information about which factor is having the major impact in making a change in the sales volume as well as in the profit for the farm. If the profit level is good then it will be logical for the bank to provide loan to the borrowing farm.

Cash Flow Review:

In the next part of the form comes the review of the cash flow from the operating activities. From this section the MOST OF THE PRIVATE COMMERCIAL BANKS bank identifies how much cash has been generated from the operation of the farm. This section covers all the components regarding the cash flow statement. By looking at the cash flow generated from the operating activities over the years helps the officials of the bank to make judgmental decision about the farm requesting for loan.

Net Working Capital Review:

The bank breaks this category in the form into two parts. They are: a) Change in the working capital that is the increase or decrease in the working capital in a year. The calculations in this section are based on the accounting formulas. The bank can get some idea about the farm from this change in the net working capital over the years used in the form. b) Components of the working capital that is how the working capital is provided. This information is very important. This shows the bank which factor is stacked up in the working capital. How the sources and funds are used in the work in process as well as whether the factor change or not in the years observed in the form.

Ratio Analysis:

After all the financial statements of the borrowing farm has been reviewed. Then comes the main part for the bank in making decision about lending or rating the farm in a pre determined score given by Bangladesh Bank. There are two types of score for the borrowers depending upon certain characteristics of their operation: Z Score Y Score Z Score: This score is mainly used for the Manufacturing companies, Public Limited Companies, Government Owned Companies and other

companies with sales of Tk. 30.00 Crore and above. The score is done analyzing the following ratios: Working Capital to total Asset Retained earning to total liabilities EBIT to total asset Equity to total liabilities Sales to total asset All these ratios can be found by calculating from the required data of the above mentioned statements. From these ratios the bank assigns corresponding scores. The scores are mainly done from theoretical knowledge of accounting and finance. All the scores corresponding to the ratios are added to get the final score. The bank observes the scores of different years and make judgement. In the Z score there is the following rule: if the score is less than 3.00 it is recommended that the bank make further investigation and if it is less than 1.81 it indicates weakness for the borrowing farm. From the above rule the bank makes decision for the companies which are in this classmost of the private commercial banksation. In the following a table showing the ratio and score for a farm is given:

Z Score

Year 3 Ratio 0.2 Score 0.25

Year 2 Ratio 0.1 Score 0.13

Year 1 Ratio 0.09 Score 0.1

Working Capital total Asset Retained to

0.00

0.00

0.00

0.00

0.00

0.00

earnings

to 0.00 0.99 0.35 0.00 0.59 0.35 1.19 0.00 1.54 0.00 0.00 0.93 0.00 1.05 0.00 4.68 0.00 0.00 2.91 0.00 2.91

total asset EBIT to total asset Equity to total liabilities Sales to total asset Total Score

So we can see that the scores for the present year as well as the year before that shows a signmost of the private commercial banksant weakness according to the Z score rule. The bank based on these scores over the years will judge whether or not give loan to the company. Y Score: This Y score is similar to the Z score regarding the assigning of scores to the corresponding ratios as well as calculating the total score. But there are some differences like the ratios to be analyzed are different so are the farms for which the scores are made. Y score is used for all the borrowers except those discussed in the Z score. The ratios that are analyzed to get Y score are as follows: Current Ratio Quick Ratio Liquidity Ratio Asset Ratio ROE The rule regarding the Y score is that if the score is less than 12 it will mean there is a signmost of the private commercial banksant degree of risk for the farm. And it is recommended not to give loan

to the farm. The following table will give an example of how this Y score is made for a borrowing farm.

Y Score Current Ratio Quick Ratio Liquidity Ratio Asset Ratio ROE Total Score

Year 3 Ratio Score 391.8 4 4 10.98 10.98 1.99 0.00 4 4 2 0 14

Year 2 Ratio Score 121.81 4 8.05 8.05 2.54 0.00 4 4 3 0 15

Year 1 Ratio Score 93.35 4 1.06 1.06 5.68 0.00 4 4 4 0 16

From the rule regarding the Y score it can said score of the farm is acceptable. In addition to the above scores, the bank also analyzes other financial ratios such as, Debt to equity ratio, Net profit to sales ratio, Inventory turnover in days, etc. All these ratios are important in judging a farms financial position. In this way by observing all the financial statements as well as ratios the bank makes decision about the borrowing company. All the components in each of the statement as well as the ratio have some serial no. The form also shows how a particular component is calculated by adding, subtracting, multiplying and dividing some other required components. In this it becomes easy for the banking officials to know which component is required to calculate the other component and whether the data input is correct or not. They can check it easily. Another plus point of the form is that as it shows the total amount as well as percentage component the bank can clearly identify in which component there is problem. They can pin point the particular component. By using all the statements and ratios it gives the bank an exhaustive list of the financial data. This helps the bank in making decision about the credit or lending. The main decision made by the bank that is the interpretation is done

manually. The officials involved in each case make a judgement about the farm by looking at the ratios. The bank does not use any software that can tell directly or go in depth into the ratio and give conclusion about the performance of that borrowing farm. The ultimate verdict rests upon human intellect.

Lending Risk Analysis:

Another form for lending purpose used by most of the private commercial banks is prepared in Microsoft Excel and all the data or record of each of the lender is kept in that software. The form is preliminarily filled by the authorized official of the bank and then the data are kept in the record in Microsoft Excel. Although the calculations in the form are done by the computer, the decision about the loan and the criteria selected to measure the level of risk is done manually by the assigned officer. The main components of the Lending Risk Analysis Form used by most of the private commercial banks are discussed below:

General Information:

At the beginning of each record or form there is a general description of the individual or company requesting the loan. At first there is the name of the company, address of the company and from which branch the company is seeking the loan. In this part the bank also wants to know the industry in which the company is currently operating or will be doing its business. This helps the bank to get some primary idea about the farms competitors as well as the position of the industry in which it will perform, to see whether

the farm will be able to generate profit to repay the loan or not. In the latter part of the form there is in depth analysis of the competition as well as the present state of the industry. After the above information is given, the bank wants to know the purpose of the analysis that is to see if the farm is new one or whether it is a client of the bank wanting to increase to renew the existing lending contract. Depending on the nature of the analysis the bank gives tick mark to the appropriate box corresponding to each of the alternatives. Then the bank wants to see the risk factor of the operation. There are three-risk categories such as business, security and overall. This gives a basic idea in making the decision. In different segments of the form there is in depth review of all the risk factors classified by the bank in order to come to a conclusion about the borrowing company. Next comes the purpose of asking for the loan. In this part the farm tells the bank the main reason for requesting the loan. In this there is also a mention about the amount of loan sought. Then the form discusses about the category of the loan and to the extent of approval required to sanction that loan. The loan may be given voluntarily or it may be given as part of a Government scheme or it may be directed by an influential individual. Depending on the category the level of approval is selected in the form. It may be required to get the approval from the Management of that particular branch or there may require the approval of the Board of Director or in extreme case the approval of Bangladesh Bank itself. At the end of the form there is the name of the assigned officer who makes the judgment about the loan as well as the approving officer to see whether he/she agrees with the decision or not. In this section the date of approval as well as the date of loan

disbursement is given. This is basically keeping the record in the computer. There is no additional effort on part of the computer like doing calculation or giving decision.

Lending Risk Categories:

After all the general information of the customer has been collected the form discusses about the different categories of risk and level of risk and finally scores the risk. This gives broad idea and in the following sections each of the categories is broken down to get a clearer idea about the client.

The bank classifies the Lending risk in the following way:Company Position Risk

Management Competence Risk Management Integrity Risk Company Risk Supplies RiskSales Risk

Industry Risk Business RiskSecurity Control Risk Security Cover Risk Security Risk

Lending Risk

Management RiskPerformance Risk Resilience Risk

After categorizing all the components of lending risk the bank now identifies the risk level and scores them according to a rating scale. The levels of risks and corresponding points are given below: Risk Level Low Average High Excessive Score 1.5 3.0 4.5 12

In the form the risk levels with the score is given next to all the categories of risk discussed in the above figure. The risk is divided into two main segments total business risk and total security risk. Each segment consists of the components discussed earlier in the figure. By adding the individual score the bank gets the total score and from that score they put the company in a four by four matrix to rate them. For business risk a good risk is a score in between 13 and 19, acceptable risk being between 20-26 while poor risk is score over 34. On the other hand for security risk a good risk if 20 to 15 while a poor risk is a score of over +10. A, B, C, and D for security risk and 1, 2, 3 and 4 for business risk does the rating. That is if a company score 1 then it is good score i.e. less risky. After the rating is done the farm prepare the matrix in the computer and selects the overall risk. The matrix is given below: 1 A B C 2 A B C 3 A B C 4 A B C

D Good

D Acceptable

D Marginal

D Poor

In this way the bank gets an idea about the overall risk of the clientseeking loan. In the following sections the report will discuss about the different components of risk and how the officials make in depth analysis of these components:

Supplies Risk Analysis

In this section the bank wants to know about different types of supplies made to the farm regarding their business operation as well as the risk involved in each of the supply. A rating scale determines the risk. The different components in the scale are: 1. Better than average 2. Average 3. Worse than average The client has to tick in the appropriate box and provide the reason for ticking that particular box. The form also provides the bank with the information that to what extent a particular supply is important to that farm. This is done by converting each component of supply as a percentage of the total cost. This information is required by the bank because if the supply is disrupted then the total operation will be hampered that will result in a failure to repay the loan. For this reason the bank tries to identify all the parts in risk analysis.

Sales Risk Analysis

In this section the bank wants to know the customer concentration of the client. In other words the bank asks for the list of five largest customers and their percentage in the total sale. This gives most of the private commercial banks an idea about the risk involved with sales. Because if a farm has customer who consumes close to fifty percent of the total sales then it is very risky that the sales will fall if the customer shifts to the competitor. This section is important for the industry where there is immense competition and in this case if the farm has a very large customer it is a risky proposition to give loan to that farm. The borrowing farm has to give an explanation of choosing the type of risk regarding a single large customer. This section also covers the government control as well as the effect of regulatory changes if made to the industry. The farm provides the level of risk to the sales due to the change in regulations and he also has to give an explanation on choosing that certain level.

Industry & Competitors Analysis:

In this section of the form the bank wants to know about the industry in which it will be performing as well the competitive pressure in the industry. In the industry analysis the bank tries to observe the likely trend in the industry as visualized by the borrowing farm and it must give an explanation in support of his answer. The farm has to tick in a predetermined scale to show the trend in industry turnover. In addition to this the bank asks for the estimated total industry turnover in the recent years. Through these

data the bank can get an idea about the industry and its trend in which the farm will be performing. The bank also wants to know about the performance of the two main competitors of the farm in this section. This segment requires the market share of each of the competitors, turn over and profit made in the recent years and finally the growth of the competitors with respect to the Client Company.

Performance Risk Analysis:

Till now the bank has been dealing with industry as well the competitors of the farm. Now comes the main part in which the actual performance of the company is scrutinized. The bank wants to know how the financial data are obtained. There are some categories and they are as follows: Audited Accounts Unaudited accounts Rank Estimates Other Estimates Then the bank asks for the sales, net worth and profit figures of the recent few years of operation. In the form it is required to give an explanation of any signmost of the private commercial banksant trend of the data given. After the quantitative analysis comes the qualitative analysis. The farm discusses about its strengths and weakness in comparison to its competitors. Then there is a section dealing with the strategy of the farm that keeps it ahead of its competitors. The bank also wants

to know confident is the farm about its strategy that is an idea about the confidence level. All these measurements are done through a selected scale in which there are different categories and the farm has to tick one of them. All these information are used by the computer to get the overall scale for each of the risk component. After that there is a section describing the cash flow forecast. The bank through these information wants to know the level of risk. In the following section of the record bank makes an assessment of the balance sheet value that is asset, liabilities and equity value reported. It also wants know whether the farm is affiliated with other banks or not. This helps the bank to make decisions about the level of loan to be sanctioned. In the liquidity section the bank overviews the ratios and tries to find out the trend. The ratios are collected from another file known a spread sheet which is discussed earlier in the report.

Resilience Risk Analysis:

In this section the bank wants to know how resilient the company is regarding unexpected external conditions. There are two parts here. In the first part the bank makes an assessment of resilience with respect to bankruptcy, liquidity and the adverse effect of political changes. The analysis here is totally qualitative and for this analysis the quantitative information is collected performance risk section. There are three classmost of the private commercial banksation of resilience. They are: 1. Highly resilient (low risk) 2. Average 3. Not at all resilient (high risk)

After assessing all the resilience the bank makes a final judgement about total resilience and this risk level is tick marked with respect to the assessment earlier.

Management Risk Analysis:

In this section the bank analyzes the risk of failure due to the incapability of the management. The section in the form is divided into following sub division. They are as follows: Management Ability In this part the bank wants to know the assessment of the borrowing farm on the ability of the people holding more than 20% of the equity as well as the board members in executing a successful operation of the farm. In addition to this the bank also want to know the ability of the major decision maker(s). Next the bank wants to know about the person responsible for operations issues and makes an assessment on his ability. And finally the bank desires the farm to comment on the strength and weaknesses of all these people. The assessment made by the bank on the above mentioned people are done by a scale in which there are three categories and the farm ticks one of them. There must be explanation given in support of the choice. The categories are: 1. Better than average 2. Average 3. Worse than average

From the three assessments the bank can easily find out the risk of failure due to management ability. This mainly subjective and human judgement and the data gathered are all qualitative. Management Teamwork In this segment the Bank observes the teamwork that exists in the management. Because this teamwork is very much needed for smooth operation by the farm. Here, the issues that are assessed are the organization chart, change in the key management position, the integration between management team and the owners board, analysis by the management team when taking a major decision and finally the ability of the management team to take decisions. Most of the assessments are made by a scale of three categories depending upon the nature of the assessment. Finally all these assessments are summed up to see the level of risk involved for the farm due to lack of managerial teamwork.

Management Competence Risk:

From the assessment made in the managerial ability and the level of teamwork, the risk in management competence is measured. All the measurement are done on qualitative data. These are based on human judgement. There is no additional calculation by the computer software, just data are stored in each record.

The risk level is identified in the following manner:Level of risk due to lack of management competence Low Average High Excess

Low Average High Level of risk due to lack of managerial teamwork:

Excess

Risk due to lack of management competence:

Low

Average

High

Excess

Management Integrity Risk:

In this section the bank tries to find out the honesty of the management of the borrowing as well as tries to assess the reliability of the information given by the farm. Most of the questions asked for analysis in this segment are close ended with few categories from which to choose. There is also open ended phase in the question which comes as supplement to the close ended one. That is, the bank wants some comment for the evaluation made on the company. All these are stored in the record of each client. In the next part the bank wants to know the dependability of the borrower. It views the history of the affiliation between the farm and

the bank. It seeks information about the level of risk that the farm avoids obligation to the bank by diverting fund to associated companies. The answer is chosen from a scale of three categories. The form also analyzes the dependability of the borrower in fulfilling the commitments as specified in the contract. And from all the data gathered by answering this section the bank decides on the level of risk involved due to lack of management integrity.

Security Control Risk:

In this section the bank scrutinizes the components that constitute the security. This section is important for the bank in this aspect that if the farm fails to repay the loan whether bank will be able to realize the security or not. The bank wants to know the amount of risk as well as the type of security i.e. the components of the security. Then the form checks with the level of perfection of the security document to see whether the is any flaw in it or not also it checks whether the document is regularly viewed or not. After the examining of the document the bank tries to find out the level of risk involved in taking possession of the security as well the possibility of getting a favorable judgement. All the questions asked in this segment is answered by ticking the appropriate category in scale. These are all qualitative and based on human judgement. It is nothing but data storing there is not much scope for computer calculation. From all the information gathered the bank makes decision on the risk whether it will be able to realize the security or not.

Security Cover Risk:

This section is very important for the bank due to the fact that it deals with level of risk in the realized value of the security being less than the expected. The major points that are used as basis in judging the risks are as follows: 1. Speed of the liquidation that is how long will it take to liquidate the security. 2. Potential problems in delaying the liquidation. 3. Liquidation value; both primary and collateral. 4. The cost that the bank will have to bear in liquidating the security. 5. The expected value of realization ( Liquidation value cost of liquidation) 6. Expected security cover strength

The expected security cover strength is designed in the computer by using the quantitative data gathered from all the questions prior to the no. 6 and it is estimated in the following manner: a) Type of security b) Expected realizable value at liquidation c) Expected time taken to liquidate this security d) Discount rate % ( 1year FDR) e) Discount factor % = (100 * 1/ (1+d/100)) f) Present Value of the security (b*e/100) g) Current exposure (Principle + interest) h) Security cover % = 100 * f/g From this the bank can understand the security cover strength of the borrowing farm. If the value is more than 100% it indicates strong cover, if it is in a range of 75-100 % tan it is average cover

and below this point it is clearly an indication that security cover strength is weak. These assessments on security cover strength, the risk of liquidation procedure taking longer than expected and finally the risk of the value of realization being less than the estimated is combined to get the final level of risk which will indicate whether realized security value is less than the exposure. From all these risk levels analyzed the assigned official makes the final lending risk score which is a mix of quantitative and qualitative data and a use of 4 by 4 matrix. It should be worth mentioning that human intellect and the theoretical knowledge of the officials assigned mainly do the judgement and the decision. They from their experience and subjective analysis can figure out whether a project is feasible or not. Computer is manly a supporting tool here which helps the analysis to be systematic in nature as well as helping the bank in doing some simple calculations and finally storing all the report of each of the clients in a separate record. This is done so that bank can have an accurate database management system of its client for the purpose of lending and credit management.

Statement of Sector-wise recovery, outstanding and overdue loans: Bangladesh Bank has divided the advances of the private banks in seven major sectors. From the following table we can have a quick look at that:

Recovery for the year 1998: S L. N o. 1 2 Agriculture Term loan to medium and large 3 4 5 6 scale industries Working Capital Loan Export Credit Commercial Loan Term loan to small and Cottage 7 industries Others Total 3077.56 13799.00 2103.04 12502.12 856.62 4234.34 1597.45 873.96 6356.13 213.76 1129.4 1573.44 7236.3 62.94 492.55 236.80 2123.65 60.03 Name of the sector Outstanding at the end of December 1998 98.16 1581.98 Recovery for 1998 (Tk. In million) 60.8 336.2 Overdue as on December 1998 51.39 143.30

Source: Statistical yearbook, 1999, Bangladesh bank

1000

2000

3000

4000

5000

6000

7000

8000

Agriculture

Term loan to medium and large scale industries

Working Capital Loan

Export Credit

Commercial Loan

Term loan to small and Cottage industries

Recovery By PCBs in 1998 (Tk. in million)

Others

0 Recovery

Recovery for the year 1999: S L. N o. 1 2 Agriculture Term loan to medium and large 3 4 5 6 scale industries Working Capital Loan Export Credit Commercial Loan Term loan to small and Cottage 7 industries Others Total 3384.99 16708.70 2972.36 20626.23 806.38 4426.75 1843.22 1139.71 8044.23 150.43 2477.68 3151.29 10998.83 128.88 620.40 3005.50 2052.94 48.47 Name of the sector Outstanding at the end of December 1999 100.48 2045.65 Recovery for 1999 (Tk. In million) 109.32 453.87 Overdue as on December 1999 58.08 534.98

Recovery By PCBs in 1999 (Tk. In million)12000 10000 8000 Recovery 6000 4000 2000 0 Commercial Loan Export Credit Term loan to medium Agriculture Term loan to small and Working Capital Loan Others

Source: Statistical yearbook,

Recovery By PCBs in 1999 (Tk. In million)12000 10000 8000 Recovery 6000 4000 2000 0 Commercial Loan Export Credit Term loan to medium Agriculture Term loan to small and Working Capital Loan Others

1999, Bangladesh bank

Reviewing the classified information banking acquired policy, our from the last five years observation shows that, among the above sectors the export-import finance gives us a good percentage of recovery within a favorable time span. Thus it shows that this sector needs more investment to prove its

potentiality more. Bangladesh Bank, on behalf of the government,

should have a monitoring team to ensure proper and enough money flow in this sector to make it more profitable and to strengthen the establishment of our country economy. A further analysis of different sectors give us a more precise picture why some sectors are considered as more potential than others. The reasons are analyzed from bankers point of view. While discussing the potentiality of the sectors, it can be considered from the point of view of security and bankers experience of the banks. Security comparison: different sectors The foremost criteria that a bank ensures before sanctioning an advance and loans are the security of the banks money. For that reason, a bank considered Security Over Draft (SOD) as the most secured from of advance. In SOD, any form of financial liability is given to the bank as security in the form of Fixed Deposit Receipt, Bonds etc. The bank can receive the money back at any time in case of default. Banks Experience Bank experiences different behaviors from different creditors investing in different sectors. Before giving advances, bankers also considers previous experience for different sectors. On the basis of this, different potential sectors can be listed as below. Import Portfolio: Senior bank considers the import portfolio as the most potential sector for a bank to invest. The return of money in import finance is very quick, which is a vital point for any bank. Again, it is also very secured as bank possesses all the documents of the imported goods. So the

creditor must come to the bank. The bank can also provide extra time period for the creditor by keeping the imported goods in a warehouse in the form of Cash Credit Pledge. Export Portfolio: Bankers are not usually interested in export business. A private commercial bank always looks forward for profit. But for export finance, Bangladesh Bank restricts all the private banks with a fixed interest rate for different export goods at lower rate that is about 11% to 13%. So this sector is considered as non-profitable. House Building Finance: House building finance can be for commercial or residential house building. But banks usually discourage residential house building financed by bank because it becomes difficult for individuals to meet up with the high interest rate of the bank. On the other hand, banks clients. Long-term Project Loan: Banks are not interested in long term project loans. The first reason behind this is the delayed payback period of the loans. Again, bankers experience shows that the default rate for the term loans is higher than other sectors. Agriculture: Private commercial banks are usually not interested in agricultural loans. Generally, the amount of money taken by a creditor is very small. So the overhead cost that occurs from processing each individual loan becomes high and is not profitable for the bank. are interested in financing construction for commercial purpose from its good experience with the

Transportation: Bank experience in financing for transport sector is bitter. But recently some of the private banks are financing in different sectors of transportation, which are taxi-cab (i.e. Anudip), Duranta, Rider etc. and is having a very potential business.

LOANS AND ADVANCES (IN MILLION TAKA)Source: Annual report of NCC, UCBL, AB, City & South-East bank, 1999

BANKS NCC CITY SOUTH EAST AB UCBL

1994 1032.06 4271.17

1995 376.2 460.25 138.62 6735.21 4717.43

1996 508.44 4191.30 1231.00 6700.86 4798.99

1997 995.37 4940.25 2588.32 6741.88 5152.56

1998 1279.07 5535.68 3402.21 7807.24 5554.16

6245.19 4379.75

INVESTMENTSSource: Annual report of NCC, UCBL, AB, City & South-East bank, 1999

Bank CITY SOUTH EAST AB BANK UCBL NCC

1994 834.40

1995 879.90 277.04 1423.16 1278.12 654.91

1996 834.13 429.82 1676.97 1207.87 695.44

1997 882.25 420.66 1537.38 1191.10 766.21

1998 995.16 509.73 1703.91 1958.85 797.16

1019.57 1146.74 355.49