loan pricing of the ‘National Bank Limited’

7/29/2019 loan pricing of the National Bank Limited

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INTRODUCTION

Generally by the word "Bank" we can easily understand that the financial institution

dealing with money. But there are different types of banks like Central Banks,Commercial Banks, Savings Banks, Investment Banks, Industrial Banks, and Co-

operative Banks etc. Banking system occupies an important place in a nations economy

because of its intermediary role; it ensures allocation and reallocation of resources and

keeps up the momentum of economic activities (Bank Fund Management, by Peter S.

Rose). A banking institution is indispensable in a modern society. It plays a pivotal role

in the economic development of a country like Bangladesh the Banking system as a

whole has a vital role to play in the progress of economic development. The overall

purpose of banking is to collect money from surplus unit and transfer it to the deficit

unit.

Banking sector is expanding its hand in different financial events every day. At the

same time the banking process faster, easier and the banking arena is becoming wider.

As the demand for better customer service increases day by day, they are coming with

different innovative ideas & products. In order to survive in the competitive field of the

banking sector, all banking organizations are looking for better customer service

opportunities to provide their fellow clients. As a result it has become essential for every

person to have some idea on the bank and increase the customer satisfaction level.

Origin of Banking Industry

The history of banking is as old as the history of many. Generally, to the necessity

for keeping the money safe, the businesses of banking come in to existence. The

evolution if money solved the problem of Barter System. Earlier there are faithful

person to keep their surplus money safe and the other group owing to transaction felt the

need of some person who could provide money. As a result based on two groups a kind

of businessman came in to picture. They used to keep the money as deposit for security

and give loans to the needy people. How the banking sector has developed.

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The English word Bank is derived from the Italian word Banco. The Latin word

Bancus and the French word Banque which means a bench. They are of the opinion

that the medieval.

European banker (i.e. moneychanger and moneylenders) transacted their banking

activities on the benches in the market place. This money changing and money lending

business is known as banking business.

1.3 Development banking in Bangladesh

Bank system was practiced in the Indian subcontinent from the ancient period. In

Indian subcontinent merchants, goldsmith moneylenders were the primary bankers.

During the Moghal period banking and credit business was enchanted rapidly.

Then the agency house of jagth Seth was similar to the merchant house of

Lombardy Street.

In 1700 AD Hindustan Bank was established as the first joint stock bank. In

1784 Bengal Bank and in 1786 General bank of India was lunched. Then both

the bank absolved respectively in 1793 and 1832.

During the early period of nineteenth century in 1806 Bank of Bengal in 1840

Bank of Bombay and in 1843 Bank of Madras was established. These Banks were

called Presidency Bank. Then in 1920 these three banks merged to Imperial Bank of

India In 1947 after the separation bank business in our country faced a severe disaster as

non Muslim Bankers left to India. Then Reserve bank of India acted as the Central

Bank of Pakistan in 1948 to re-build the Bank Business State Bank of Pakistan was

established as central bank of Pakistan.

In 1971 Bangladesh became independent. After liberation Bangladesh Bank

was automated with the assets and liabilities of former State Bank of Pakistan. It is the

central bank of Bangladesh. During Pakistan period in our country there were 1090

branches of 12 commercial banks. Three foreign banks were also active with 14 branchoffices. Before liberation 80% of banking activities of our country was controlled by

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Pakistan. Consequently Bangladesh traders and industrialist s didnt get notable help

from the Commercial Banks. After liberation reformed the destroyed economy on 26 th

March 1972 the banking sector of Bangladesh was nationalized. After nationalization

government of Bangladesh changed the entire bank to six banks. Which is Sonali Bank,

Rupali Bank, Janata bank, Agrani Bank, Pubali Bank & Uttara bank. But the last two

banks have been handed over two private sectors.

After liberation all the large industries were nationalized. But in 1962private

sector was given priority again in industrial polices the experience of public sector was

nor fruitful. Then in 1983 servile private banks were established now satisfactory number

of private banks is active in our country and playing their role in development of trade

and commerce of Bangladesh as well as in the development of economy.

1.4 Banking structure in Bangladesh

Banking system of Bangladesh comprises of different types of bank and financial

institutions. The name of our central bank is Bangladesh Bank it is the director and

regulator of banking system of Bangladesh. Banking structure in Bangladesh is brieflydescribed below.

Bangladesh Bank is the central bank of Bangladesh. It is director of money market in

Bangladesh. It regulates the activities of other banks of Bangladesh through credit

control, exchange control etc.

Commercial bank both the public and private sectors of commercial bank are active

in Bangladesh. There are 4 nationalized commercial bank Sonali Bank, RupaliBank, Agrani Bank.

In 1983 priority gives on private sector of banking business. As a result two

nationalize bank was handed over to private sector, which are Pubali and Uttara

bank.

Now in our country a large number of private banks are doing banking business.

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1.5 Hierarchy Analysis

Banking sector has a vital role to play in the economic activities and development

of any country. This sector is much more important in a developing country like

Bangladesh. The whole scenario of the economy of a country can be ascertained by

examining the condition of the banking sector. In Bangladesh, the banking sector

dominates the financial sector and macroeconomic management largely depends on the

performance of the banking sector. Banking grew primarily in the public sector with

main emphasis on restructuring of the financial system and development needs of the

war-torn economy with gradual liberalization in subsequent years. It was increasingly

felt that banks should be allowed in the private sector for giving a fillip to development

process on the basis of private initiative.

In the 80s for the first time a number of banks in the private sector were allowed.

Subsequently in the mid 90s some more banks in private sector also commenced

operations. Finally, in 1999, 3rd generation of private sector banks was given permission

to operate. As a result while up to 80s public sector banks dominated financial sector,banks in the private sector were given increased responsibility with the passage of time.

At present there are 51 scheduled banks operating all over the country. Out of

these, 9 are state-owned (including five specialized banks), 29 are private commercial

banks and the rest 13 are foreign commercial banks.

Private commercial banks are divided into three groups according to their

beginning of business. They are familiar in the name of 1st generation, 2nd generation and

3rd generation banks.

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1st Generation Banks (Established 1982-1988):

National Bank Limited, The City Bank Limited, United Commercial bank Limited, AB

Bank Limited, IFIC Bank Limited, Islamic Bank Bangladesh Limited and Al-Baraka

Bank Bangladesh Limited.

2nd Generation Banks (Established 1992-1996):

Eastern Bank Limited, National Credit & Commerce Bank Limited, Southeast

Bank Limited, Dhaka Bank Limited, Al Arafah Islami Bank Limited, National

Bank LTD. And Dutch-Bangla Bank Limited.

3rd Generation Banks (Established 1999 to present):

Mercantile Bank Limited, Standard Bank Limited, One Bank Limited, EXIM Bank

Limited, Premier Bank Limited, Mutual Trust Bank Limited, First Security Bank

Limited, Bank Asia Limited, the Trust Bank Limited, Jamuna Bank, and BRAC Bank,

and Shahjalal Islami Bank Limited

2.1.1 Historical Background of the National Bank LTD.

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National Bank Limited has its prosperous past, glorious present, prospective future and

under processing projects and activities. Established as the first private sector bank fully

owned by Bangladeshi entrepreneurs, NBL has been flourishing as the largest private

sector Bank with the passage of time after facing many stress and strain. The members of

the board of directors are creative businessmen and leading industrialists of the country.

To keep pace with time and in harmony with national and international economic

activities and for rendering all modern services, NBL, as a financial institution,

automated all its branches with computer networks in accordance with the competitive

commercial demand of time. Moreover, considering its forth-coming future, the

infrastructure of the Bank has been rearranging. The expectation of all class

businessmen, entrepreneurs and general public is much more to NBL. At present we

have 157 branches under our branch network. In addition, our effective and diversified

approach to seize the market opportunities is going on as continuous process to

accommodate new customers by developing and expanding rural, SME financing and

offshore banking facilities.

The emergence of National Bank Limited in the private sector was an important event in

the Banking arena of Bangladesh. When the nation was in the grip of severe recession,

the government took the farsighted decision to allow the private sector to revive the

economy of the country. Several dynamic entrepreneurs came forward for establishing a

bank with a motto to revitalize the economy of the country.

National Bank Limited was born as the first hundred percent Bangladeshi owned Bank in

the private sector. From the very inception, it was the firm determination of National

Bank Limited to play a vital role in the national economy. We are determined to bring

back the long forgotten taste of banking services and flavors. We want to serve each one

promptly and with a sense of dedication and dignity.

2.1.2 Mission of National Bank LTD.:

National Bank LTD. mission statement states:

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Efforts for expansion of our activities at home and abroad by adding new dimensions to

our banking services are being continued unabated. Alongside, we are also putting

highest priority in ensuring transparency, account ability, improved clientele service as

well as to our commitment to serve the society through which we want to get closer and

closer to the people of all strata. Winning an everlasting seat in the hearts of the people

as a caring companion in uplifting the national economic standard through continuous up

gradation and diversification of our clientele services in line with national and

international requirements is the desired goal we want to reach.

2.1.3 Vision of the National Bank LTD.

Ensuring highest standard of clientele services through best application of latest

information technology, making due contribution to the national economy and

establishing ourselves firmly at home and abroad as a front ranking bank of the country

are our cherished vision.

2.1.4 Core Values of the NBL

NBLs Core Values Consist of 6 key elements .these values bind our people together

with an emphasis that our people are essential to everything being in the bank.

1. Integrity :-

Nbl protects and safeguards all customer information

Nbl treats everyone in an equitable and consistent manner

Nbl creates an environment, which earns customer trust.

2. Open Communication :-

NBL builds customer relationship with integrity and respect

NBL offers a full line of products amd excellent service.

NBL is committed to the prosperity of the customer and shareholder.

3. Performance driven :-

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In NBL, Customers and employees are judged in terms of their performance.

4. Continuous self improvement :-

Continuous learning, self-challenge and strive make ways for self

improvement of workforce at NBL.

5. Quality:-

NBL Offers hassle free better service timely

NBL Builds-up quality assets in the portfolio.

6. Teamwork:-

Interaction, open communication and maintain a positive attitude reflect

NBLs commitment to a supportive environment based on teamwork.

2.1.5 COMMITMENTS

2.1.6 Organizational Development of the National Bank LTD.:

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InServin

g

Custome

rs

InServing

the

Bank

Carrying

ourselves

at

work

Customer-first

Quality-focus

Credibility and

Secrecy

Loyalty

Total

commitment and

dedication

Excellence

through

teamwork

Discipline

Integrity

Sincerity

Caring

Creativity


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In the 1450s and 1960s a new integrated type of training originated knows was

organizational development. Organizational development is an intervention strategy that

uses group processes to focus on the whole culture of an organization in order to bring

about planned change, it seeks to change belief attitudes, values structure and practices

so that organization can better adapt to technology and live with the fast pace of change.

The general objective of organization development is to change all parts of the

organization in order to make humanly responsive, more effective, and more capable of

self-renewal.

The organizational development process does not preclude the use of conventional

training method, which is useful for some purpose. The management of National Bank

LTD. is also concern about the training for its development. They believe that if the

employees will be trained enough they would contribute more for the development of the

banking business that is why; they send some employee in every batch.

2.1.7 Organizational Structure of National Bank LTD.:

The development of on organization depends on the management style of their

organizations the same the development if the bank is being occurred only for the good

management team. Management of the National Bank LTD. controlling of all the

resources of the organization. To achieve the ultimate objective of making National Bank

LTD. the finest banking of the country, the workforce will be futuristic in outlook,

professional in attitude and honest in reputation.

The board of directors wants to repose in the management all executive powers to run

this service industry administration and credit portfolio independently without any undue

influence from outside. The board formulates policy and gives policy directives to the

management. Transparency and accountability are strictly ensured at all leaves of the

bank. Bank operate with integrity, competence and farsightedness abiding by all the

principals and provisions laid down in the bank company act 1991, 1994 and the

guidelines of Bangladesh Bank. The bank is committed to pursue a straight forward,

upright legitimate banking business, never be tempted by the abnormal prospect of large

returns to do anything. It will only do what may be done under the national policy.

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2.1.8 Board of Directors of National Bank LTD.

Board of Directors of the Bank is a unique combination of both private and Government

sector experience. Currently it consists of 13 Directors. Of them eight represent the

sponsors and general public and four senior officials in the rank and status of Additional

Secretary/Joint Secretary represent the Government. Managing Director is the ex-officio

Director of the Board.

Board of Director

Table: Management position of the executive position of the National Bank Limited.

2.1.9 Products and Services

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Mr. Zainul Haque

Sikder

Chairman

Mr. Ron Haque

Sikder

Ms. Parveen Haque

Sikder

Alhaj Khalilur

Rahman

Mr. Moazzam

Hossain

Mr. Zakaria Taher

Director

Mr. Rick Haque

Sikder

Mr. Mabroor

Hossain

Mr. Md. Anwar

Hussain

Mr. Neaz Ahmed

Managing Director

Mr. Salim Rahman

Director

Mrs. Monowara

Sikder


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The Bank has launched a number of financial products and services since its inception in

addition, to the scheme like Consumer Credit, ATM Card, Any branch banking. The

following are the main indicators for performance analysis:

2.1.10 Performance of the NBL

Particulars

Paid up

Capital

Statutory

Reserve

General

Reserve

Other

Reserve

Retained

Earnings Total

Balance on 01 January

2011

4,412,131,30

0

4,180,253,18

3

497,723,32

74,915334,354 5,112,856,189 19,118,298,353

Net profit for the year - - - - 6,112,987,510 6,112,987,510

Bonus shares for 2010

issued during the year

4,191,524,73

0- - - (4,191,524,730) -

Addition during the year -1,878,388,49

9- - (1,878,388,499) -

Revaluation of Govt.

Treasury Bill, Bond and

other Investment

- - - (3,668,733,726) - (3,668,733,726)

Issued during the year - - - - - -

Transfer from generalreserve

- - - - - -

Balance at December

31,2011

8,603,656,03

0

6,058,641,68

2

497,723,32

71,246,600,628 5,155,930,470 21,562,552,137

Balance at December

31,2011

4,412,131,30

0

4,180,253,18

3

497,723,32

7

4,915334,35

4

5,112,856,18

919,118,298,353

2.1.11 Customer Services and Automation:

The amazing and dazzling touch of the fastest banking practice of National Bank LTD. is

outcome of exciting banking software where I relished the expertise. PC Bank opened up

the door of new horizon for the smarter, better and faster banking. The arenas covered by

the PC BANK are as follows:

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1. SYSTEM INFORMATION 6. STATEMENT

Set up branch code

Set up parameter file

Set up overdraft limit

List of overdraft limit

Set up currency file

Maintain user password

Set up report parameter

Group of company information

System password

Cyclic

On demand

Up to date statement

2. ONLINE 7. PERIOD PROCESS

New Accounts

Maintaining existing account

Inquirers

Instant statement

Add or delete stop payment

Mark clearing cheque

Maintain series

Enter instructions

Interest on demand

Alpa search

Standing order

Term loan

Month end processing

Yearly end processing

Debit charge

Print interest report

Interest report of classified advances

3. TRANSACTION INPUT 8. GENERAL LEDGER

Enter transaction

List transaction

Edit transaction

Display transaction

Total transaction

GL parameter

GL transaction

GL update

GL report

GL report

GL statement

GL period process

4. UPDATE 9. BACK UP AND RESTORE

Update all

Update transactionUpdate clearing

Back up

FormatRestore

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Update quick clearing Listing

5. REPORT 10.DAY START PROCESS

Daily report

Management report

Customer advice

Quarterly report

Optional report

Transfer File

GL Transaction File

Time Deposit Maturity

Scheme Maturity Process

Standing order Process

Clearing File

2.1.12 Social Commitment

The purpose of the banking business is, obviously, to earn profit, but the promoters and

the equity holders of National Bank LTD. are aware of their commitment to the society

to which they belong. A chunk of the profit is kept aside and/or spent for socio-economic

development through trustee and in patronization of art; culture and sports of the country

and the bank want to make a substantive contribution to the society where we operate, to

the extent of our separable resources.

2.1.13 Corporate Culture

This bank is one of the most disciplined Banks with a distinctive corporate culture. Here

we believe in shared meaning, shared understanding and shared sense making. Our

people can see and understand events, objects and situation in a distinctive way. They

mould their manners and etiquette, character individually to suit the purpose of the Bank

and the needs of the customers who are of paramount importance to us. The people in the

Bank see themselves as a tight knit team that believes in working together for growth.

The corporate culture they belong has not been imposed; it has rather been achieved

through their corporate conduct. The Bank achievement has been possible because of the

able leadership; dedicated and committed services provided by all levels of management

and staff which all possible because of a good and quality full corporate culture.

2.1.14 Branch Network

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The Dhaka Main Branch of NATIONAL BANK LTD. has been in operations since

March 23, 1983. Its is in the at 45, Dilkusha Commercial Area. NBL has a total of 157

branches operating all over the country. Like other Banks, NBL has categorized its

branches. The branches had been provided with authorized dealer licensees to handle

import, export, and all types of foreign exchanges. The overall branch activities of NBL

can be primarily divided into four different divisions.

These are:

General Banking Department

Accounts Department

Credit Department

Foreign Trade Department

2.1.15 Operation of NBL

All branches of the Bank including the Head Office have a PC Based Local Area

Network (LAN) on UNIX platform, which are a multi-user and most reliable and

internationally recognized secured Operating System. They use macfree antivirus their

security and bank Maintain software named A to Z .

2.1.16 Green banking

Green banking is a part of international initiative by a group of stakeholders to save the

environment from environmental hazards. Global warming, climate change greenhouse

effect, air pollution, water pollution, waste disposal, adverse weather pattern all these

contribute to environmental hazards. Green banking ensures contribution to transition to

resource efficient and low carbon industries; green industry. National Bank limited,

being environmentally responsible bank do improve its own standards and also

contributing to build up socially responsible business.

Environmental concerns are the focus point of green banking for NBL. Environmental

risk is a facilitating element of credit risk arising from environmental matters. It may be

mentioned that environment in Bangladesh is deteriorating due to:

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Land de-gradation

Water pollution & scarcity

Air pollution

Bio-diversity resources

Impact of natural disaster etc.

NBLs Green Banking policy is formal and structured manner in consistence with

recognized standards to protect environmental degradation and ensures sustainable

banking practices. NBL has taken initiative to implement green banking. A Green

Banking Unit [GBU] has been approved by the Board of Directors. The Audit committee

of the Board of Directors reviews the green Banking tasks in the Bank.

Banks are offering customized and innovative products and services to support activities

friendly to environment. Banks are continually supporting in such a way that help overall

reduction of carbon foot prints set of green house gas emissions caused by organization,

event, product or person.

It may be mentioned that Bangladesh Bank instructed all banks to take necessary

measures towards launching and implementation of green banking in each bank. The

entire implementation cycle is divided into three years sessions as under:

January, 2011 to December, 2011

January, 2012 to December, 2012 and

January, 2013 to December, 2013.

NBL has green products to support the cause and taken tasks for in-house environmental

risk management and also taken awareness creation initiatives for strengthening green

banking.

National Bank Limited is committed to play due role in the implementation of green

banking challenges and have taken different steps towards this goal. NBL believes green

banking preserves resources for next generations.

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2.1.17 CSR (Corporate social Responsibility):-

Corporate social responsibility is integral to our business strategy. We need to ensure

that we are running our business in a responsible way. We need to demonstrate that we

are making a sustained, positive contribution to the economy and to society; by playing

our part in the overall economy. This means that the bank recognizes that its activities

have an impact on the environments in which NBL and its subsidiaries do business and

that society expects the highest standards of when it comes to ethics and corporate

responsibility. Our sustainability report is presented along the four major steps as being

those are most relevant for the financial sectors and those are:

Environment

We believe that we have an important role to play in facilitating and financing the

transition to a low carbon, resource efficient economy. Our vision is to be recognized by

our stakeholders as leading environmentally responsible organization. We have set out

our policies and procedures to reduce the environmental impact of our lending activities.

Responsibility In the marketplace

NBL serves more than 1 million customers approximately across the length and breath of

Bangladesh. The Bank has products and services to cover most banking needs of our

diverse customer base. The Bank has pioneered many of these products and services in

response to indentifying customers unique needs.

Responsibility In the workplace

NBL has been continuously creating new fields of employment every year by way of

expansion of its business activities and branch network. In 2011, created employment

for 529 personnel. In addition NBL also consented on human resource development to

build up an efficient workforce. The Bank invested a total sum of Tk. 3.13 million on

training in 2011 which worked out to an average of Tk. 1399.82 per employee. It is

mentionable here that during 2011, a total number of 2236 official took part 46 training

and workshop program conducted by NBTI and since establishment of this institute a

total of 9354 participants completed training successfully. Apart from this NBL provide

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various short term benefits to its employees like medical services to the employees and

their family members.

Responsibility in the community

National Bank foundation was established in 1989 to fulfill the responsibilities of

welfare for the society. National Bank public School and College in Moghbazr, Dhaka

has been established where about 1065 students are studying in the school section from

class 1 to class 10, while 100 students are at the college section. In 2011, 81 students

appeared at the SSC examination and 63 at the H.S.C examination and in both the

examinations 100% came out successfully. The bank has been accommodating

prospective graduates of recognized universities for completing their internship. NBL

also awarded scholarship to the brilliant children of the employees of the Bank and

contributed Tk. 31.51 Lac t various educational sectors.

Sports and cultural activities

National Bank has a tradition of patronizing and sponsoring sports and culture of the

country. NBL has contributed Tk. 23.08 Lac to various sports league of the nation.

Disaster relief

Natural hazards are common phenomenon in Bangladesh. Specially, those people whose

life is very challenging living in the coastal and northern area of the country. NBL

always extends its helping hands and stands beside the helpless people in times of natural

calamities. Some times NBL con tribute through the Prime Ministers Relief found.

Contribution to national exchequer

National Bank has contributed significantly to the government effort in collection of

revenue. In 2011 it has contributed to national exchequer an amount of Tk. 172.39 core

as tax in addition to VAT deducted & paid on its earnings. Besides the bank deducted

tax, vat, excise duties etc. from various payments and deposited the same to government

exchequer.

Welfare of freedom fighters

NBL family always remembers the sacrifice and contribution of our freedom fighterswith great respect. Every year we contribute for the development of freedom fighters and

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their family members. During the year we contributed Tk.27.15 lac for well fare of

freedom fighter.

Contribution to martyred army officers killed in BDR carnage

Nation bank has contributed significantly and continuously to the government for the

Martyred Army officers Killed in BDR carnage. In 2009 NBL has contributed over

Tk.76.10 Lac for the BDR carnage martyred army officers and freedom fighters.

Additionally we are paying Tk.24.00 lac each year to the family member of martyred

army officers.

For employees

NBL, which has 3, 758 employees provides due importance for the well being of its

employees by offering attractive remuneration and other fringe benefits. During the year

2011 NBL has contributed Tk. 141.47 Lac as medical expenses to its employees and

their family members.

Performance of the Bank (NBL): A brief review of the

activities:

I take this opportunity to place before you the present overall operational of the bank a

follows:

(Taka in Million)

SL.NO. Particulars 2011 2010

1 Paid-up capital 8,603.66 4,412.13

2 Total Capital(Tier-l+ll) 24,905.03 19,190.79

3 Capital Surplus/ (Deficit) 5,223.79 5,137.42

4 Total Assets 169,037.38 134,732.31

5 Total Deposits 128,215.97 102,471.83

6 Total Loans and Advances 115,388.89 92,003.56

7 Total Contingent Liabilities and Commitments 44,392.67 45,045.10

8 Advance / Deposit Ratio 90.00% 89.78%

9 Percentage of Classified Loans against total Loans 2.83% 3.96%

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Property and asset

(Taka in million)loan and

advance

investment

76.05%

84.18% 84.77%89.78% 90.00%

2007 2008 2009 2010 2011

Advance Diposit Ratio

2007 2008 2009 2010 2011

49.07%41.04%

47.85%

31.41%24.73%

cost to income ratio

2007 2008 2009 2010 2011

6.77 6.99

9.31

6.05 6.85

Debt Equity Ratio (Times)

and Advances

10 Profit after Provision & Tax 6,085.70 6,860.34

11 Amount of Classified Loans 3,264.95 3,642.57

12 Provision Kept against Classified Loans 1,166.79 1,086.08

13 Provision Surplus / (Deficit) 325.41 268.79

14 Cost of Found (Including operating cost) 10.35% 9.12%

15 Interest Earning Assets 140,198.97 110,401.84

16 Not-interest Earning Assets 28,838.42 24,330.47

17 Return on Investment(ROI) 12.00% 32.78%

18 Return on Assets (ROA) 4.01% 6.05%

19 Income from Investment 3,320.22 6,115.41

20 Earnings per share(Taka) 7.07 7.97

21 Net income per share (Taka) 7.07 7.97

22 Price Earnings Ratio (Times) 9.45 24.03

23 Net Assets Value per shares (Taka) 25.02 43.30

24 Net operating cash flow per share (Taka) 8.88 7.90

To uphold the continuous growth National Bank Limited always manage Debt

equity ratio,Cost and income ratio, Advance ratio and the mirror of

organization performance shows by these following graph.

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Income (Taka inmillion)

interest

investment

Liabilities and Capital(Taka in million)

paind up

capital

reserve and

surplus

Value added is the wealth created by National Bank Ltd through the banking services.

Value created from the income from banking services is the excess of cost of service

rendered. The Value added statement shows the total wealth created, how it was

distributed to meet certain obligations and reward those responsible for its creation, and

the portion retained for the continued operation and expansion of the Bank. The

comparative value added statement of the bank for the year 2011 and 2010 is given

below:

2010

2011

Value distributed

Salary & allowance

Dividend

Govt. tax

Operating Result &

Assets

2012 2011

Operating Income 21,932m 18,511m

Operating Profit 9,952m 8,941m

Total Assets 169,037m 134,732m

Return on Assets 4.01% 6.05%

Share Value 2012 2011

Earnings Per share 7.07 7.97

Marker value per

share

66.80 191.60

Price Earnings ratio 9.45 24.04

Foreign Trade 2012 2011

Import Export 104,571m 96,443m

Export 60,894m 47,812m

Remittance 54,469m 49,145

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Staff & Logistic 2012 2011

No. of employees 3,785 3,442

Branch & SME

centre

154 145

Foreign Subsidiary 3 2

Operating Income increased by 18.45% due to equal

contribution by each sector

Operating Profit increased by 7.28%

Total assets increased by 25.46% due to increase in

advance and govt. securities

Earnings per share has decreased due to more tax

provision

Market value has decreased due to adverse effect of

capital market

Eue to decrease in market value of shares

Import increased by 8.43%

Export increased by 27.36%

Foreign Remittance increased by10.83%

Manpower has increased by 9.18%

During the year 9(nine) more branches opened

One new subsidiary company formed in Maldives for

remittance business

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2.3.1 OVERVIEW OF THE ORGANIZATION

2.3.1.1GENERAL BANKING

General Banking is the starting point and main function of all the banking operations it is

the department that provides day-to-day service to the customers. Every day it collects

deposit from the customers by allowing broking interest rate, meets their demand for

cash by honoring Cheques and lends it to the customers against ending interest rate.

Lending interest rate in higher than borrowing interest rate, this is the profit for the bank.

2.3.1.1.1 Functions of this department

This department maintains following functions.

Account opening section.

Cash section Remittance section.

Clearing section.

Accounts section.

Establishment.

2.3.1.2 ACCOUNT OPENING SECTION

This section opens different types of account for their valued customers. Selection of

customer is very important for the bank because banks success and failure largely

depends on their customers. If customers are bad they creates fraud and forgery by their

account with bank and, this destroys the good will of the banks. So, this section takes

extreme caution in selecting its valued customer. There are five category of deposit

product in National Bank LTD.

1. Savings Deposit

National Bank Limited offers customers a hassle free and low charges savings account

through the branches all over Bangladesh.

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Benefits (Condition Apply)

Interest rate of 4.00% on minimum monthly balance.

Minimum balance Tk.5000.

Maintenance charge yearly Tk. 600.

No hidden costs.

Standing Instruction Arrangement are available for operating account.

Account Opening

Copies of recent photograph of account holder.

Nominee's Photograph.

Valid photocopy of Voter ID Card.

2. Current Deposit

National Bank Limited offers customers current deposit facility for day-to-day business

transaction without any restriction.


Minimum balance Tk.2000.

Minimum maintenance charges half yearly Tk.400.

No hidden costs.

Standing Instruction Arrangement are available for operating account.

Easy access to our other facilities.

Account Opening

Copies of recent photograph of account holder.

TIN certificate.


Valid photocopy of Voter ID Card.

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3. Monthly Savings

National Bank Limited offers monthly savings scheme for its retail customers.


Monthly installments of deposit will be Tk.500/-, Tk.1,000/- ,

Tk.2,000/- ,Tk.3,000, Tk.4000/- , Tk.5,000/- and Tk. 10,0000

Account may be opened for any installment and term , which is not

changeble.

A person is allowed to open more than one account for different

installment in a Branch/ Bank.

Sl

no

Monthly Installments

(Taka)

Amount to be paid on completion of Term

3(Three) years

@9.00%

5(Five) years

@9.25%

8(Eight) years

@9.50%

01 500/- 20,627/- 37,896/- 70,849/-

02 1,000/- 41,255/- 75,791/- 1,41,691/-

03 2,000/- 82,510/- 1,51,583/- 2,83,394/-

04 3,000/- 1,23,765/- 2,27,374/- 4,25,091/-

05 4,000/- 1,65,020/- 3,03,166/- 5,66,788/-

06 5,000/- 2,06,274/- 3,78,957/- 7,08,485/-

07 10,000/- 4,12,549/- 7,57,914/- 14,16,970/-

Account Opening

1 copy of your recent photograph.


4. Monthly Income Scheme

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Under this scheme one will deposit a minimum of tk.1,00,000/- or its multiple for three

years and will enjoy monthly benefit of Tk.1,000/- for every Tk.1,00,000/-.

Benefits(Condition Apply)

Deposit of Tk.1,00,000/- and its multiple maximum of Tk 50,00,000/- shall be

acceptable under this scheme.

The account may be opened either singly or jointly.

Account Opening

1 copy of recent photograph of account holder.

Nominee's Photograph. Valid photocopy of Voter ID Card.

5. Double Benefit Scheme

Dreams come true. National Bank Limited now offers Double Benefit Scheme for it's

customers. The benefits under this scheme shall become double after 6 years.


Deposit of Tk.50, 000/- and its multiple maximum of Tk 50, 00,000/- shall be

acceptable under this scheme.

A person is allowed to open more than one DBS Account.


All DBS account holder shall be offered with free Life Insurance Policy under

this scheme.

Account Opening



6. Millionaire Income Scheme

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Under this scheme one will deposit a fixed amount on monthly basis for 5, 7 or 10 years

and on maturity he/she will be just a millionaire.


Deposit of fixed monthly amount for 5, 7 or 10 years. Deposit size will be based

on tenure. Upon maturity the depositor will get Tk. 10,00,000/-.

A person is allowed to open more than one MIS Account.


Installment Tenure On maturity

12,450/- 5 10,00,000/-

7,870/- 7 10,00,000/-

4,550/- 10 10,00,000/-

Account Opening



Closing of Account

To close an account parties may be request to send an application along with

the unused leaves of the cheque book. On receipt of the application the

following steps are taken.

The signature of the account holder is verified.

The number of the unused cheque leaves shall be noted therefore.

Debiting the incidental charges to the account.

The account holder is advised to draw the remaining balance.

2.3.1.3 CASH SECTION

Cash department is the most vital and sensitive organ of a branch as it deals with all

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kinds of cash transactions. This department starts the day with cash in vault. Each day

some cash i.e. opening cash balances are transferred to the cash officers from the cash

vault. Net figure of this cash receipts and payments are added to the opening cash

balance. The figure is called closing balance. This closing balance is then added to the

vault. And this is the final cash balance figure for the bank at the end of any particular

day.

Functions of cash department

-Cash payment

-Cheque cancellation process

-Cash receipt

Cash payment

Cash payment is made only against cheque.

This is the unique function of the backing system, which is known as "payment

on demand.

It makes payment only against its printed valid cheque.

Cheque cancellation process

Receiving cheque by the employee in the cash counter and verification of the following

by the cash officer in the computer section:

Date of the cheque. (it is presented within 6 month from issue date)

Issued from this branch.

An amount in figure and in word does not differ.

Cheque is not torn or mutilated. Then gives pay cash seal and sends to the

payment counter and payment office makes payment.

Cash receipt

.

Another important function of this department is receipt of cash. Depositors deposit

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money in the account through this section by deposit slip.

It receives deposit from depositors in the form of cash.

So it is the "mobilization unit" of the banking system.

It collects money only its receipts from.

It receives cash for issuing pay order, DD.

Books maintained by this section:

Vault register: It keeps accounts of cash balance in vault at the bank.

Cash receipt register: Cash receipt in whole of the day is recorded here.

Cash payment register: Cash payments are made in a day are entries here.

Rough vault register: Cash collection for final entry in vault registers done here,

as any error and correction is not acceptable.

Cash balance book: Balance here is compared with vault register. If no deference

is found, indicate no error and omission.

2.3.1.4 LOCAL REMITTANCE

Sending money from one place to another place for the customer is another important

service of the bank. This service is an important part of transaction system. In this

service system, people, especially businessman can transfer funds from one place to

another place easily. There are three kinds of technique for remitting money from one

place to another these are:

-Demand draft (DD)

-Pay order (PO)

Demand Draft (DD)

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DD is an order of issuing branch on another branch of the same bank to pay specified

sum of money to payee on demand. It is generally issued when customer wants to remit

money in any place i.e. outside or the clearinghouse area of issuing branch. Payee can be

the purchaser himself or another mentioned in the DD. It is safe technique of transferring

money from one place to another.

Pay Order (P.O)

Pay order gives the right to claim from the issuing bank. A payment is an instrument

from one branch to the branch of the bank to pay a specific sum of money. Unlike

cheque there is no possibility of dishonoring because before issuing pay order the bank

takes money in advance. There are three reasons behind use of P.O:

Remitting Purpose

Advice to Pay

Payment against bill submitted to the bank.

Pay Order consists of three parties:

Beneficiary

Applicant

Counter Part.

2.3.1.5 CLEARING SECTION

This section receives all kinds of cheque in favor of the valued client for clearing on the

part of their banking services. After receiving cheque it is necessary to endorse it andcross it specially. Clearing of cheque is done through the clearinghouse in Bangladesh

Bank.

1st clearing

2nd clearing

Types of cheque for clearing

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There are four types of cheque for clearing:

Inward clearing cheque.

Outward clearing cheque.

Inward bills for collection.

Outward bills for collection.

2.3.1.6 ACCOUNTS SECTION

This is obviously an independent and unique department, which works as the

composition of all the departments of the branch. This section is fully computerized. So

the conventional large ledger and journal books are not kept like the some nationalized

bank. It receives the vouchers from all departments and prepares the subsidiaries and

maintains accounts.

ESTABLISHMENT SECTION

This section deals with employees salary, many types of internal expenses

such as purchases of stationary, equipment, machinery, payment of labor

cost and convince. In case of leave of absence employee collects prescribed

form from this section.

ICC (Internal control and compliance department)

Internal control and compliance department, this department checks all the

activities as per requirements of Bangladesh Bank.

2.3.1.7 LOANS AND ADVANCES

This is the survival unit of a bank because until and unless the success of this section is a

question to every bank. If this section is not properly working, the bank it self may

become bankrupt. This is important because this is the earning unit of the bank. Banks

are accepting deposits from the depositors in condition of providing interest to them as

well as safe keeping their deposits. Now the question may gradually arise how the bank

will provide interest to the clients and the simple answer is advance.

We often use loans and advances as an alternative to one another. But academically this

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concept is incorrect. Advance is the combination of such items where loan is a part only

for this credit section of the bank.

TYPES OF ADVANCE

All loan and advance that are provided by this bank can be categorized into there heads

according to the nature and characteristics of each product:

Figure: Shows the different types of advances.

2.3.1.8 FOREIGN EXCHANGE DEPARTMENT

The Foreign Exchange Department is mainly divided into three sections. Such as-

1. Import Section

2. Export Section &

3. Remittance Section

The import Section deals with L/C in the perspective of the importers and theExport Section deals with L/C in the perspective of the exporters.

2.4.1 SWOT Analysis of NBL

SWOT analysis refers to analysis of Strengths, Weakness, Opportunities and Threats of

the organization. This analysis helps the organization to facilitate improve its future

performance in comparison to its competitors. An organization can also study its current

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Term Loan Loan

GeneralContinuous

Loan

ADVANCE


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position through SWOT analysis. For these reason, SWOT analysis is considered as an

important tool for making changes in the strategic management of an organization.

2.4.1.1 Strengths

National Bank LTD. has a Reputation all over the country for its excellent service

The bank has already achieved a high growth rate of deposit, Loans and advances,

Import and Export business.

A well-educated and trained workforce is the major strengths of National Bank LTD.

The bank has satisfactory IT infrastructure

National Bank LTD. has satisfied customers

Product Diversification is also a major strength of National Bank LTD.

Skilled, creative & committed manpower

They have their own training center.

The working environment of the bank is very friendly, interactive and informal.

There is no barrier or boundary to communicate with the superiors and the

employees.

2.4.1.2 Weaknesses

The promotional activities of National Bank LTD. are not adequate to gain market

share.

Most of the branch does not have any car parking facility.

Shortage of spaces.

In selecting people for providing services to the customers, the employees

personality, manners, attitudes and acceptability are not properly examined.

Only few branches have spacious car parking facility, which discourage some

customers to deal with National Bank LTD.

There are two major categorized employees one group who are from different banks

or joined through competitive exams, the other group who joined here from different

references. There is a big difference in term of attitude, manner, working style, and

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behavior between the two groups, which has bad impact to the service. Branch

management also loves to ignore the problem.

2.3.1.3 Opportunities

National Bank LTD. has diversified product offering for Small and Medium

Enterprises (SMEs)

Foreign bank penetration may help in technology transfer in our banking system

catering the necessity of improving operational efficiency. To increase operational

efficiency, National Bank LTD. can adopt technology of foreign bank.

Different types of retail lending products have a great appeal to our middle class

people. National Bank LTD. can bring these products for retail lending.

They do not look forward to increase their product or service basket.

They have a big opportunity if they provide online Banking system.

2.3.1.4 Threats

Increasing competition. More private commercial banks are providing service in the

market.

Foreign bank penetration is a major threat for banking industry. It is too bad to lose

market share.

Regulatory restrictions may be a cause of threats.

In our country industries are becoming sick at an increasing rate and growth of

industrialization is very slow in the country. Therefore, it is very likely that poor

industrial growth will affect the potentiality of National Bank LTD.

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3.1 INTRODUCTION OF THE REPORT

Heart business of the bank is to sell their loan products, as well as other activities. One of

the most difficult tasks in lending to business firm and other borrowing customers

is deciding how to price the loan the emergence of National Bank Limited in the

private sector was an important event in the Banking arena of Bangladesh. When

the nation was in the grip of severe recession, the government took the farsighted

decision to allow the private sector to revive the economy of the country. Several

dynamic entrepreneurs came forward for establishing a bank with a motto to

revitalize the economy of the country. National Bank Limited was born as the first

hundred percent Bangladeshi owned Bank in the private sector. From the veryinception, it was the firm determination of National Bank Limited to play a vital

role in the national economy. We are determined to bring back the long forgotten

taste of banking services and flavors. We want to serve each one promptly and

with a sense of dedication and dignity.

3.2 ORIGIN OF THE STUDY

This report will be prepared as a requirement of the internship program of Eastern

University Business faculty. The organization attachment has been started on 18th

October 2012 and will be end on approximately 19th January 2012. This report on Loan

pricing of National Bank and Compare with competitor was assigned by Mr Oli ahad

Thakur, mentor and supervisor, Faculty of Business, Eastern University, Bangladesh,

Dhanmondi -5, Dhaka as a part our education program to complete our graduation.

3.3 RATIONALE OF THE STUDY

The study on the Loan pricing of National Bank and Compare with Competitor

helps and makes me understand the Importance of loan pricing of different products and

its impacts on loan Disbursement of National Bank and other documentation procedures.

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3.4 OBJECTIVES

The main objective of the loan pricing is To Study different types of strategy and

methods of loan pricing of the National bank limited and Compare with Competitor.

Specific objective

To Study the last Two years loan pricing strategy of National bank.

To Study competitors pricing strategy.

Compare loan pricing with competitor.

3.5 SCOPE OF THE REPORT

The study will deal with the Loan Pricing undertaken by NATIONAL BANK

LIMITED. This will be a complete loan pricing report that will focus on the specific

organization and its competitors, and the study will be based on loan pricing activities of

different level of loan operations engaged with this organization. Therefore, it is required

to compile a better view of the overall loan pricing system. The scope of the study is

limited to organizational setup, functions and performances.

3.6 METHODOLOGY OF THE REPORT

The study requires various types of information on past and present policies, procedures

and methods of loan system. All the information incorporated in this report has been

collected both from the primary sources and as well as from the secondary sources.

Primary as well as secondary information are required because the loan pricing require

the customized information for the performance of its progression so primary

information is needed and the secondary information for the past comparison with the

present condition what is happening in the regular situation. The past performance tells

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the feasibility relationship of the past performance with the present progression in the

each month cycle.

3.7 SOURCES OF DATA COLLECTION

Primary sources of information The primary information has been

collected through interview, observation, discussion.

Secondary sources of informationThe secondary information

have been collected through other reports journals,

magazines, web sites etc.

Study Approach

To prepare the report about the Loan pricing of National Bank and Compare with

competitor observation and interview approach, analysis of past and present

performances has been chosen because without interviewing any employee it will be

really hard to know about the past situation of the organization and without analyzing the

present situation a comparison and contrast of the loan pricing of the bank is impossible

along with observation as an employee.

Study Instruments

Analyzing, comparing and evaluating the differences and expected outcomes are helped

and taken and supported by the followings.

Financial Statistical

Ratio analysis GraphsAccounting calculations. Tables

Forecasting software.Diagrams

Charts

Mechanical Instruments The instruments will be paper, pencil, pen, telephone, mobile,

scanner, computer, printer, pen drive, photocopy machine, punching machine etc.

Sampling Plan

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Sampling Unit: Onlyselected divisions ofNational Bank Limited (Motijheel) and the

Advance Department, Credit Risk Management.

Sampling Size: This study is limited within 2 peoples of different level of Advance

department and CRM Department.

Sampling Procedure: The sampling procedure will be personally selected.

Contract Method: Face to face interview, telephone and mobile.

3.8 LIMITATIONS OF THE STUDY

The major limitations of this study are given as follows:

There were some restrictions to have access to the data collection, which is

confidential by distress influence.

In each portion there are lots of activities and different procedure.

It is very difficult to understand each activity within this short period.

Three-month is not adequate time to gain practical knowledge and prepare a

report.

In many cases, up to date information is not published.

To protect the organizational loss in regard of maintaining confidentiality, some

parts of the report are not in depth.

3.9 TOPIC ANALYSIS AND DESCRIPTION

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One of the most difficult tasks in lending to business firm and other borrowing

customers is deciding how to price the loan. The lender wants to charge a high enough

rate to ensure that each loan will be profitable and compensate the bank fully for the

risks involved. However, the loan rate must also be low enough to accommodate the

business customer in such a way that he or she can successfully repay the loan and not be

driven away to another lender or into the open market for credit. The more competition

the bank faces for a customers loan business, the more it will have to keep the price of

that loan at a reasonable level consistent with competition in the financial marketplace.

Indeed, in a loan market characterized by intense competition, the lender is price taker,

not a price setter. With deregulation of banking under way in many nations, deregulated

competition has significantly narrowed the profit margins banks earn from selling

deposits making loans. This makes correct pricing of loans even more imperative for

bankers today than in the past.

Competition in the commercial loan market has increased dramatically over the

last decade. This is true for a number of reasons. First, there is more capital in the

industry than can be put to good purpose. Therefore, banks have been bidding down

existing deals and compressing margins. Second, institutions from other parts of the

financial sector have offered product innovations and product alternatives such as private

placement as direct competitors to the standard loan product. This, in turn, has caused

additional pressure on spreads in the marketplace. Third, given the well-known cycle in

credit spreads, we are now facing a market in which credit spreads are exceedingly tight.

As a result of the recent contraction in the credit spreads across all credit ratings,

individual banks are now facing a pricing grid with an unprecedented and unreasonable

compensation for the risk borne. Fourth, competitors and customers have learned more

about the value of structure. As a result, banks have been suffering from inappropriate

pricing of the imbedded options built into their loan products.

The net result is that many bankers are building loan portfolios that do not cover

their true costs, i.e., the cost of funding, the level of the risk, and the nature of the

imbedded options contained in the loan contract. In order to remedy this situation, the

banking industry will have to directly address the issue of appropriate and accurate loan

pricing. This is particularly true in the large corporate area where this problem is most

serious. It is the case for several reasons. First, it is a market that is highly contested withthe investment banking and insurance sectors vying for first class customers. Second,

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with excess of capital in the industry, the large corporate market has been seen as a place

to employ large quantities with little cost. However, such competition has led to the tight

spreads being more pronounced in this market area.

Loan pricing gives an institution the ability to ensure coverage for the inherent

cost of credit risk associated with different risk grades of loans. Thus, risk-adjusted loan

pricing leads to better risk management. Once a bank has collected profitability data by

loan, it can analyze risk-adjusted profit performance from many points of view--for an

officer's portfolio, for a geographic segment, by industry, by loan size, or by credit grade.

A consistent pricing methodology avoids numerous questionable practices in loan

pricing by lenders. One questionable practice is demonstrated by lenders who typically

do not include any costs associated with the risk of the loan in their pricing. This

omission encourages bad credits to borrow at the same price that are being used to entice

better credits.

Another such practice is evident in lenders within the same organization who

make a wide variety of assumptions about what it costs the bank to originate and

maintain borrowers. Lenders typically don't have good personal knowledge about what it

costs to run the commercial banking organization. They may be estimating something,pulling a number out of the air, or using the rules of thumb used at a previous bank--

probably just as ill-founded.

A third questionable practice occurs when lenders associate too large an earnings

credit with corresponding balances. They don't take into account all factors associated

with deposit profitability. They know less about deposit profitability than loan

profitability--if that's possible!

3.9.1 BANK LOAN POLICY

One of the most impor tan t ways a bank can make sure i t s loans meet

reg ul at or y standards & are profitable is to establish a reliable loan policy. Such a

policy gives loan offers & the banks management specif ic guidel ines in making

individual loan decisions & in shaping the banks overall loan portfolio. The

actual make up of a banks loan portfolio should reflect what its loan policy

says. Othe rwise, the loan policy is not func tion ing effectively & should be either

revised or more strongly enforced by senior management.

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3.9.2 THE CONTENTS OF BANK LOAN POLICY

The examinations manual, which the Federal Deposit Insurance Corporation

gives to new bank examiners, suggests the most important elements of a good

bank loan policy. These elements include:

A good statement for the banks loan portfolio (i.e. statement of the

characteristics of a good loan portfolio for the bank in terms of types,

maturities, sizes & quality of loans.

Specification of the lending authority given to each loan officer & loancommittee (measuring the maximum amount & types of loan that each person

& committee can approve & what signatures are required)

Lines of responsibility in making assignments & reporting information within

the loan department.

Operating procedures for soliciting, reviewing, evaluating & making decisions

on customer loan applications.

The required documentation that is to accompany each loan application &

what must be kept in the banks credit files (required financial statements,

security agreements etc.)

Lines of authority within the bank, detailing who is responsible for

maintaining & reviewing the banks credit files.

Guidelines for taking, evaluating & perfecting loan collateral.

A presentation of policies & procedures for setting loan interest rates & fees &

the terms for repayments of loans.

A statement of quality standards applicable to all loans.

A statement of the preferred upper limit for total loans outstanding (i.e. the

maximum ratio of total loans to total assets allowed)]

A description of the banks principal trade area, from which most loans should

come.

A discussion of the preferred procedures for detecting, analyzing & working

out problem loan situation.

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A written loan policy statement carries a number of advantages for the bank adopting it.

I t communicates to employees working in the loan depar tment what

pr oc edu res the y must follow & what their responsibilities are. It helps the move

toward a loan portfolio that can successfull y blend multiple objectives, su ch as

promoting the bank s prof itab il ity, controlling its risk exposure & satisfying

regulatory requirements. While any written loan policy must be flexible due to

continuing changes in economic conditions & regulations, violations of a banks

loan policy should be infrequent events.

3.9.3 WHAT IS LOAN PRICING?

One of the most difficult tasks in lending to business firms and other borrowing

customers is deciding how to price the loan. The lender wants to charge a high

enough rate to ensure that each loan will be profitable and compensate the

ba nk ful ly for the risk inv olve d. However, the loan rate must also be low

enough to accommodate the business customer in such a way that he or she can

successfully repay the loan and not be driven away to another lender or into theopen market for credit.

Pricing of bank loan means setting the interest rate for sanctioning loan to creditors.

Bank's clients must be individual or business firms. With deregulations of

banking under way in many nations , de regulated competition has

significantly narrowed the profit margins banks earn from selling deposits

and making loans. This makes correct pricing of loans even more imperative for

bankers today than the past.

3.10 WHAT ARE THE FACTORS OF PRICING THE BANK LOAN?

3.10.1 INTERNAL FACTORS:

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Supply of loan giving fund: Bank uses a part of deposits as loan which is

the excess after keeping a reserve for liquidity. Increase in the excess

amount increases the interest rate and vice versa.

Cost of fund collection: Bank uses a part of deposits as loan. If there are

many available sources from where bank can collect deposits then the

cost of collecting the fund will decrease and there by will decrease the

interest rate on investment.

Administrative cost: If the expenses of conducting the banking services

increase, the interest rate also increases.

Other overheads: Increase in other overhead (legal fees, advertisement,

donation, depreciation, etc.) will increase the interest rate.

Enquiring and analyzing cost: Enquiry and analysis about the

applicant's financial condition incurs some expenses which ultimately

increases the interest rate.

Loan supervision collection cost: There are some expenses incurred in case of

loan supervision activities for which interest rate increases.

Possibility of income from alternative assets: If the possibility of income

from other sources (low investment requirement, high liquidity, risk free

investment such as T-bond) increases then there is a chance for the bank to

increase the interest rate.

Opportunity of income from other sources: Bank has many income

sources other than income from investment (Foreign exchange,

General banking service). When those income increases, the interest rate

decreases.

Bank-customer relationship: If bank knows the applicant very well then

it doesn 't have to collect information about the applicant which

reduces the cost of information collection and thereby decreases the interest

rate.

Anticipated dividend rate of shareholders: In pricing bank loan, bank has to

consider the anticipated dividend rate of shareholders. If it increases,

the interest rate increases.

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3.10.2 EXTERNAL FACTORS:

Direction of Bank Regulatory Authority: Central Bank tries to control

the market interest rate on behalf of the Government to control the

supply of loan in the market. This activity of Central Bank has an impact

on the pricing of loan.

Competitor bank: In pricing of loan, Bank also considers the pricing of

loan of the competitor bank. If the competitor bank charges a low interest

rate then bank also charges low interest rate to keep the valuable

customers in the bank.

Other sources of loan procurement: There are other sources from which

a borrower can get loan such as Non-banking Financial Institutions,

Leasing Company, Share Market (bond), etc. If these sources provide

loan at flexible conditions to the borrower then this may affect the

pr icing of loa n of the bank.

Demand for loan: If demand for loan increases, the interest rate charged by the

bank also increases.

Risk of fluctuation in interest rate: Fluctuation of interest rate increases the

risk in banking business. Increases in interest rate decreases demand for loan.

Decrease in interest rate (after considering all the costs) increases

the demand for loan but decreases the bank profit, which consequently reduces

the ability of the bank. So in case of pricing loan, bank has to consider

about the risk of fluctuation in interest rate.

3.11 DIFFERENT TYPES OF LOAN PRICING MODELS.

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3.11.1 COST-PLUS LOAN-PRICING MODEL

A very simple loan-pricing model assumes that the rate of interest charged on any loan

includes four components:

The funding cost incurred by the bank to raise funds to lend, whether such funds

are obtained through customer deposits or through various money markets.

The operating costs of servicing the loan, which include application and payment

processing, and the banks wages, salaries and occupancy expense.

A risk premium to compensate the bank for the degree of default risk inherent in

the loan request; and

A profit margin on each loan that provides the bank with an adequate return on its

capital.

+

+++

Lets consider a practical example: how this loan-pricing model arrives at an interest rate

on a loan request of Tk. 10,000. The bank must obtain funds to lend at a cost of 7

percent. Overhead costs for servicing the loan are estimated at 3 percent of the requested

loan amount and a premium of 3 percent is added to compensate the bank for default

risk, or the risk that the loan will not be paid on time or in full. The bank has determined

that all loans will be assessed a 2 percent profit margin over and above the financial,

operating and risk-related costs. Adding these four components, the loan request can be

extended at a rate of 15 percent (10% loan interest rate = 7% cost of funds + 3%

operating costs + 3% premium for default risk + 2% banks targeted profit margin). As

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Loaninterest

rate

Marginal cost of

raising loan able

funds to lend to the

borrower

Non-funds

bank operating

Banks desired profit

margin

Estimated margin to

compensate the Bank

for default risk


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long as losses do not exceed the risk premium, the bank can make more money simply

by increasing the amount of loans on its books.

3.11.2PRICE-LEADERSHIP MODEL

The problem with the simple cost-plus approach to loan pricing is that it implies a bank

can price a loan with little regard to competition from other lenders. Competition affects

a banks targeted profit margin on loans. In todays environment of bank deregulation,

intense competition for both loans and deposits from other financial service institutions

has significantly narrowed the profit margins for all banks. This has resulted in more

banks using a form of price leadership in establishing the cost of credit. A prime or base

rate is established by major banks and is the rate of interest charged to a banks most

creditworthy customers on short-term working capital loans.

This "price leadership" rate is important because it establishes a benchmark for many

other types of loans. To maintain an adequate business return in the price-leadership

model, a banker must keep the funding and operating costs and the risk premium as

competitive as possible. Banks have devised many ways to decrease funding and

operating costs, and those strategies are beyond the scope of this article. But determining

the risk premium, which depends on the characteristics of the individual borrower and

the loan, is a different process.

3.11.3 CREDIT-SCORING SYSTEMS

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LoanInterest

rateBase or prime rate

Default-risk premium

Paid by non-prime

rated borrowers

Term-risk premium

paid by borrower

seeking long term

credit


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Because a loans risk varies according to its characteristics and its borrower, the

assignment of a risk or default premium is one of the most problematic aspects of loan

pricing.

A wide variety of risk-adjustment methods are currently in use. Credit-scoring

systems, which were first developed more than 50 years ago, are sophisticated computer

programs used to evaluate potential borrowers and to underwrite all forms of consumer

credit, including credit cards, installment loans, residential mortgages, home equity loans

and even small business lines of credit. These programs can be developed in-house or

purchased from vendors.

Credit scoring is a useful tool in setting an appropriate default premium when

determining the rate of interest charged to a potential borrower. Setting this default

premium and finding optimal rates and cutoff points result in what is commonly referred

to as risk-based pricing. Banks that use risk-based pricing can offer competitive prices on

the best loans across all borrower groups and reject or price at a premium those loans

that represent the highest risks.

So, how do credit-scoring models and risk-based pricing benefit the borrower

who only wants a loan with reasonable repayment terms and an appropriate interest ratecharge? Since a bank is determining a reasonable default premium based on past credit

history, borrowers with good credit histories are rewarded for their responsible financial

behavior. Using risk-based pricing, the borrower with better credit will get a reduced

price on a loan as a reflection of the expected lower losses the bank will incur. As a

result, less risky borrowers do not subsidize the cost of credit for more risky borrowers.

3.11.4 RISK-BASED PRICING

Risk-based pricing is a system that evaluates the risk factors of your mortgage

application and credit profile and adjusts the interest rate and discount points up or down

based on this risk evaluation.

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3.11.4.1 RISK-BASED PRICING FACTORS

Two other factors also affect the risk premium charged by a bank: the collateral required

and the term, or length, of the loan. Generally, when a loan is secured by collateral, the

risk of default by the borrower decreases. For example, a loan secured by a car typically

has a lower interest rate than an unsecured loan, such as credit card debt. Also, the more

valuable the collateral, the lower the risk. So it follows that a loan secured by the

borrowers home typically has a lower interest rate than a loan secured by a car.

However, there may be other factors to consider. First, the car may be easier to sell, ormore liquid, making the risk of the loan lower. Second, the term, or length of a car loan

is usually shortthree to five yearsas compared to the 15- to 30-year term of a home

loan. As a general rule, the shorter the term, the lower the risk, since the ability of the

borrower to repay the loan is less likely to change.

3.12 WHAT FACTORS CAN AFFECT ON LOAN PRICING?

Various factors interact to adjust loan pricing. The major factors include:

Credit Profile: A credit report will be obtained that shows the amount of debt one have

outstanding and how he or she has historically paid on that debt. The credit report will

also contain a "credit score" that ranks credit history. Credit scores look at five main

kinds of credit information, namely: payment history; amount owed; length of credit

history; new credit; and types of credit in use. Generally, if anyone has had any history

of nonpayment or late payments on any loans or debt, this may lower the credit score and

increase the interest rate and costs. People with high credit scores consistently: pay their

debts on time, keep balances low on credit cards and other revolving loans; and apply for

and open new credit accounts as needed.

Property: The property that are mortgaging also impacts on loan pricing. For example,

investment property, condominiums or multifamily housing are usually considered to

have a higher risk to lenders than single-family detached homes. The value of the

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property (usually determined by an appraisal) as compared to the amount you wish to

borrow (the "loan-to-value ratio" or "LTV") also impacts on loan price. The higher the

LTV, the higher the interest rate and costs. LTVs over 80% also usually require

mortgage insurance. The price of mortgage insurance may vary based on the credit

profile.

Income/Debt: The amount of mortgage payments and total debt payments as

compared to income, ("debt-to-income ratios") may also impact on loan cost. The higher

the debt-to-income ratio, the higher the risk and so the higher the interest rate and fees.

Other Factors: Other factors may also affect lenders risk, and borrowers interest

rate and fees. These factors include, but are not limited to: previous bankruptcies,

foreclosures or unpaid judgments; and the type of loan product applied for, such as

adjustable rate versus fixed rate, or cash out refinance versus rate and term refinance.

3.13 HOW AND WHEN IS THE PRICE OF LOAN DETERMINED?

Evaluating all the risk factors that are involved in your loan and determining where you

fit into our risk/price range determine your price.

The lender will give an estimate of risk-based pricing after he has done an initial

evaluation of a borrowers credit history and a review of his or her proposed property.

One thing to remember, however, that the risk-based pricing may change from this initial

estimate if any of the risk factors discussed above change for example, if the appraised

value of the property is determined to be different than the value used for the initial

estimate or if the credit profile changes between the time of the initial estimate and

closing.

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If anyone chooses to "lock" a rate prior to the final risk assessment, it will be locked for

the interest rate range available at that time. The actual price will be established based on

where the final risk level fits into that particular interest rate range. The final risk level is

determined at time of closing, when there are no further changes to the credit profile or

loan factors.

Assessing the interplay of credit score, collateral and term to determine the risk premium

is one of a lenders most challenging tasks. Whether loan-pricing models are based on a

simple cost-plus approach or price leadership, use credit scoring or other risk-based

factors; they are valuable tools that allow financial institutions to offer interest rates in a

consistent manner. Knowledge of these models can benefit customers as well as banks.

Although it cannot help customers make their payments, an awareness of loan-pricing

processes can ease the uncertainty that may be involved in applying for a loan.

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3.14 FINDINGS

3.14.1 LOAN-PRICING STRATEGIES OF NATIONAL BANK LTD.

The banks in Bangladesh have been given almost full freedom to determine their

own deposit and lending rates till June 2009 but now Bangladesh bank give circular for

changing interest rate of loan and deposit. Because now world changing and there are

many bank in market and they forget corporate responsibility and charge attractive offer

for investor and its occur internal clash with bank to bank.

Loan pricing is a critically important function for National Bank Ltd. to continue

its operations. Loan-pricing decisions directly affect the safety and soundness of the bank

through their impact on earnings, credit risk, and, ultimately, capital adequacy. As such,

they must price loans in a manner sufficient to cover costs, provide the capitalization

needed to ensure the banks viability, protect the institution against losses, provide for

borrower needs, and allow for growth. The bank must have appropriate policy direction,

controls, and monitoring and reporting mechanisms to ensure appropriate loan pricing.

Determining the effectiveness of loan pricing is a critical element in assessing and rating

an institution's capital, asset quality, management, earnings, liquidity, and sensitivity to

market risks.

Loan-pricing models are used by many institutions to assist in loan pricing. The

models are typically spreadsheet programs that take a variety of information and

calculate the loan rate needed to meet the institution's goals. Loan-pricing models are

often used for pricing individual loans, rather than the entire portfolio, as they work well

for differential loan pricing programs. Simpler models use basic information such as

projected loan volume, interest rate, fees, and cost of funds, operating expenses, and loan

terms to calculate a projected ROA. More complex models can take into consideration a

variety of additional factors such as the quality of the loan, the institution's loan able

funds position, and projected loan prepayments. Some models require dozens of inputs,

and calculate ROA and ROE for multiple periods of time. Loan-pricing models provide

the opportunity to analyze a variety of factors and can be designed to meet the needs of

the institution. However, they can be complex, and are only as good as the information

inputted. Also, these models often do not consider the competition. From the Treasury

Department of national bank Ltd. I came to know that, they usually dont follow or use

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any particular loan-pricing model or method. Their setting price of loan largely depends

on market condition, demand of loans, how much deposit they have and other banks

interest rates; that is competitors price.

Now days Bangladesh bank give to bank a mid-level interest rate bank can update

that rate by 1.5% add or cut .national bank do this like same way that other bank do. This

negotiable interest make bank to bank more competitive because now bank tur

loan pricing of the ‘National Bank Limited’

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