8/3/2019 Trust Bank

1/54

07 June, 2006

Begum Khaleda Khanam

Supervisor

ProfessorDept. of Accounting & Information Systems

University of Dhaka.

Subject: Submission of BBA Project Paper.

Dear Sir

With suitable respect I would like convey to your knowledge that as per our BBAProgram I have prepared my project paper under the topic of Credit Operations and

Performance Evaluation of The Trust Bank Limited under your kind supervision. Now I

like to submit my paper to you. I have tried my best to prepare the paper in consistence

with the optimal standard under your valuable direction..

I request you modestly to accept my paper as it may suffer from some shortcomings. Idesired and endeavored to make this paper a complete one. Therefore, I hope that this

will meet the standard of your judgment.

Thanking you for your kind supervision

Sincerely yours

Md. AhsanuzzamanBBA 7th Batch

Roll No. 159 (B)Dept. of Accounting & Information SystemsUniversity of Dhaka

8/3/2019 Trust Bank

2/54

Acknowledgement

It was a great pleasure to prepare project paper on the various aspects of credit activities

and operations by The Trust Bank Limited. I would like to thank and convey my

gratitude to honorable Supervisor, Begum Khaleda Khanam, Professor, Dept. ofAccounting & Information Systems, University of Dhaka, for letting me to prepare this

report I would also like to express my sincere appreciation to her for his wholehearted

support and guidance.

I am also grateful to the management of The Trust Bank Limited for offering me the

Internship training. My special thanks to Mr. Saaduddin Ahmed, Senior Vice President &

Manager (SKB Branch), Mr. Mohammad Mosaddequl Haque, Vice President (Head ofMarketing & HRD), and Mr. Abdul Motalib Patwary, Senior Assistant Vice President &

Sub Manager (SKB Branch) of The Trust Bank Limited, and the staffs who have given

me the practical knowledge about the Banking operations.

I am also owed to each person who I bothered inside and outside of TBL, SKB Branch, in

carrying out this report.

EXECUTIVE SUMMARY

The principal reason banks are chartered by the government and the central bank is tomake loans to their customers. Banks are expected to support their communities with an

adequate supply of credit for all legitimate business and consumer financial needs and to

price that credit reasonably in line with competitively determined interest rates. Indeed,making loans is the principal economic function of banks to fund consumption and

investment spending by businesses, individuals, and units of government. How well a

bank performs its lending function has a great deal to do with the economic health of fits

region, because bank loans support the growth of new businesses and jobs within the

8/3/2019 Trust Bank

3/54

banks trade territory and promote economic vitality. Moreover, bank loans often seem to

convey positive information to the marketplace about a borrowers credit quality,

enabling a borrower to obtain more and perhaps somewhat cheaper funds from othersources.

For most banks, loans account for half or more of their total assets and about half to two-thirds of their revenues. Moreover, risk in banking tends to be concentrated in the loan

portfolio. When a bank gets into serious financial trouble, its problems usually spring

from loans that have become uncollectible due to mismanagement, illegal manipulationof loans, misguided lending policies, or an unexpected economic downturn. No wonder,

then, when examiners appear at a bank they make a thorough review of the banks loan

portfolio. Usually this involves a detailed analysis of the documentation and collateral for

the largest loans, a review of a sample of small loans, and an evaluation of the banksloan policy to ensure that it is sound and prudent in order to protect the publics funds

The Trust Bank Ltd. started their operation more than 6 years ago. They gained success

from the very beginning of their operation and were capable enough to hold the successyear after year. They gained success very early because they have a very strong backup to

provide them financial support and they are the Army Welfare Trust. Total loans &

advances of the bank as on December 312005 was Tk. 9,738.32 million as against Tk.6,804.45 million in FY2004, showing an increase by 43.12% over the preceding year.

The credit portfolio of the bank is a mix of scheme loans, namely Micro credit,

Consumers durable scheme loan (CDS), Marriage Loan, Car Loan, HBF Loan andCommercial Loans. Commercial Loans comprise Trade financing in the form of working

Capital and industrial loans (both large and medium scale industries) in the form of Term

loans and other funded & non-funded credit facilities. Term financing indicates theparticipation in the industrial development of our country while by extending small loans

TBL has fulfilled the borrowing needs of the low and medium income groups of our

society. The classified loans & advances accounted for only 3.16% of the total Loans &

Advance of Tk. 1897.63 million in FY 2002. The bank as a matter of priority in its thepolicy wants to ensure quality of its Loan Portfolio by strengthening post disbursement

recovery measures as well as by prioritizing on Early Warning System (EWS) to check

the growth of non-performing assets.

8/3/2019 Trust Bank

4/54

INTRODUCTION

Credit it is a very similar word for the bank. It contents a huge meaning. A banks mainearning source is credit. If banks credit management is not good then the bank will never

ever achieve its proper goals. Question may arise what are the proper goals for the bank?

The proper goals for the banks are profit maximization and shareholders wealth

maximization. The fundamental nature of credit is that an element of trust exists betweenbuyer and seller whether of goods or money. The main use of bank fund is to collect

money from surplus unit and lend it to deficit economic unit. The Trust Bank Limited is a

newly established bank, which is incorporated in 1999. The TBL has been established

with the objective of providing efficient and innovative banking services to the people ofall sections of our society. One of the notable strengths of this bank is that it is backed by

the disciplined and strongest Institution of Bangladesh i.e. Bangladesh Army and there isa synergy of welfare and profits in the dynamics of this institution. Towards attainment of

its goals and objectives, the bank pursues diversified credit policies and strategic

planning in credit management. To name a few, the bank has extended micro credit,

consumers durable scheme loans, house building loans etc. to cater to the needs of theindividuals, which in turn has helped thousands of families. The bank also extends loan in

the form of trade finance, industrial finance, and project finance, export & import finance

etc. The banks credit polices aimed at balanced growth and harmonious development ofall the sectors of the countrys economy with top most priority to ensure quality of

lending by averting growth of non-performing assets.

Origin of the report

Now a days, education is not just limited to books and classrooms. In todays world,education is the tool to understand the real world and apply knowledge for the betterment

of the society as well as business. From education the theoretical knowledge is obtained

from courses of study, which is only the half way of the subject matter. Practicalknowledge has no alternative. The perfect coordination between theory and practice is of

paramount importance in the context of the modern business world in order to resolve the

dichotomy between these two areas. Therefore, an opportunity is offered by Dept. of

Accounting & Information Systems, University of Dhaka, for its potential business

8/3/2019 Trust Bank

5/54

graduates to get three months practical experience, which is known as Internship

Program. For the competition of this internship program, the author of the study was

placed in a bank namely, The Trust Bank Limited. Internship Program brings a studentcloser to the real life situation and thereby helps to launch a career with some prior

experience.

This paper is entitled Credit Operations and Performance Evaluation of The Trust Bank

Limited originated from the fulfillment of the internship program. For the internship

program, each student is attached with an organization. My internship was at The TrustBank Ltd., Sena Kalyan Bhaban Branch, Dhaka. During my internship, I had to prepare a

report under the supervision of Begum Khaleda Khanam, Professor, Dept. of Accounting

& Information Systems, University of Dhaka.

Objectives of the Study

To present an over view of The Trust Bank Ltd.

To analysis the Lending procedures maintained by the TBL

To observe principal Lending activities of The Trust Bank Ltd.

To evaluate Lending performance of The Trust Bank Ltd.

To measure the actual position in classified Loan and provisions maintained bythe TBL

To appraise the actual Recovery position of the TBL

To compare the classified conditions of the NCBs vs. PCBs vs. FCBs inBangladesh.

To evaluate the success of credit operations compare with other Banks.

To identify problems in credit operations of The Trust Bank Ltd.

To recommend suggestions for the successful Lending Operations of the TrustBank Ltd.

Methodology

8/3/2019 Trust Bank

6/54

For preparing this paper, I used both Secondary and Primary data.

Collection of Primary Data:

Many of the data and information were collected from my practical experience andqueries from the executives while doing my internship at The Trust Bank Ltd.

Information and data regarding Overview of the TBL, interest rates & charges, credit

operations, performance measurement in Lending, SWOT Analysis, credit policies, LoanAgreement etc. were collected from these sources.

Collection of Secondary Data:

Data regarding the Credit operations and Performance Evaluation of The Trust Bank Ltd.

were collected from secondary sources like: Annual Reports, Brochures, Manuals and

Publication of The Trust Bank Ltd., Bangladesh Bank Library, BIBM Library, DSE

Library, News paper etc. were the major sources of secondary date.

Limitation of the study

The main problem faced in preparing the paper was the inadequacy and lack of

availability of required data. This report is an overall view of Credit Operations of The

Trust Bank Ltd. But there is some limitation for preparing this report. Firstly this bank isvery new so they do not have enough data, thats why I did not make vast compare this

bank with other banks. Secondly when I was doing my internee then there internal and

Bangladesh Bank auditing is going on thats why I did not get the after closing data thatis available data of 2005. With all of this limitation I tried my best to make this report as

best as possible. So readers are requested to consider these limitations while reading and

justifying any part of my study.

8/3/2019 Trust Bank

7/54

An Over View of The Trust Bank Limited

The Trust Bank limited (TBL), a private commercial bank sponsored by the Bangladesh

Army Welfare Trust, started its operations in November 29, 1999.The authorized capital

of the bank is Tk. 2,000 million. The Army Welfare Trust (AWT) is the majorshareholder of the Trust Bank Ltd. Total shareholders equity at the end of December

2005 stood at Tk.991.97 million, where Paid-up capital is Tk 500 million, statutory

reserve is Tk 113.14 million and Retained Earnings is Tk. 178.83 million and sharemoney deposits Tk 200 million. The Paid- up capital is indicative of the face value of

5,000,000 ordinary shares of Tk.1,00/-each fully subscribed by the shareholders.

Status of The Trust Bank

The Trust Bank Limited is a scheduled commercial bank established under the Bank

Companies Act, 1991 and incorporated as a Public Limited Company under the

Companies Act, 1994 in Bangladesh on June 1999 with the primary objective to carry on

8/3/2019 Trust Bank

8/54

all kind of banking business in and outside Bangladesh. The Bank had twenty one (21)

branches operating in Bangladesh now. It renders all types of personal, commercial and

corporate banking services to its customers within the purview of the Bank CompaniesAct, 1991 and in line with the directives and policy guidelines laid down by Bangladesh

bank.

Objective of the Bank

The Trust Bank Limited has been established with the objective of providing efficient

and innovative banking services to the people of all sections of our society. One of thenotable strengths of this bank is that it is backed by the disciplined and strongest

Institution of Bangladesh i.e. Bangladesh Army and there is a synergy of welfare andProfits in the dynamics of this institution.

Bank is service-oriented industry and we on our part are committed to ensure customized,

qualitative and hassle free services in our banking operations along with the focus tobroaden the clientele base. The bank has extensively in the countrys industrial and

agricultural sectors in the coming days. The bank is committed to contribute as such as

possible within its limitations for the economic growth and for ensuring value of itsavailable resources.

Performance of the TBL

TBL a blend of expertise and technological excellence is in place to meet varied needs of

modern customers. The bank aims at mobilizing untapped money of the country andprudent deployment for productive activities in the form of lending at a competitive

interest rates/loan pricing. Towards attainment of its goals and objectives, the bank

pursues diversified credit policies and strategic planning in credit management. To namea few, the bank has extended micro credit, consumers durable scheme loans, house

building loans etc. to cater to the needs of the individuals, which in turn has helped

thousands of families. The bank also extends loan in the form of trade finance, industrialfinance, project finance, export & import finance etc. The banks credit polices aimed at

balanced growth and harmonious development of all the sectors of the countrys

economy with top most priority to ensure quality of lending by averting growth of non-

performing assets.

8/3/2019 Trust Bank

9/54

Reserves

The policy of the Trust Bank Ltd is to keep statutory reserve at 20% on profit before tax.

The Bank raised its Statutory Reserve from Tk 43.26 million in FY 2004 to Tk. 45.26

million in FY 2005.

Profit and Operating Results

Total operating income of the bank in FY 2005 was Tk. 511.45 million against a total

operating expenditure of Tk. 215.19 million. Total profit before provision stood at Tk.296.26 million during FY 2005. After keeping Tk. 69.97 million as provision against

classified loans & advances, and Tk. 105.00 million as provision for income tax, the net

profit stood at Tk. 121.29 million during FY 2005. Net profit after income tax in the year

2004 posted by the bank was Tk. 216.38 million. There is a significant increase in profitin 2005 over the preceding FY 2004. The earning per share was Tk. 24.26 in FY 2005.

The retained earning increased by 174% to Tk 178.33 million in FY 2005 compared toTk. 102.80 million in FY 2004.

Deposits

In FY 2005, the deposits of TBL shot up to Tk. 12704.90 million from Tk. 9314.65million as recorded in FY 2004. During this period, the deposit base was increased by

36.40% compared to the preceding year. The combination of competitive interest rates,

depositors trust in the bank and mobilization efforts of the bank resulted in this growth

of deposits. Efforts are a foot being made to further increase deposit base of the bank

8/3/2019 Trust Bank

10/54

through promotion of business and exploring of potential scope.

Deposits of the TBL during the year

2000-2005 (in million)

1,111.182,478.82

2,975.73

4,483.259,314.65

12,704.90

A(2000)

B(2001)C(2002)

D(2003)

E(2004)

F(2005)

Loans & Advances

8/3/2019 Trust Bank

11/54

Total loans & advances of the bank as on December 31, 2005 was Tk. 9,738.32 million as

against Tk. 6804.45 million in FY2004, showing an increase by 43.12% over thepreceding year. The credit portfolio of the bank is a mix of scheme loans, namely Micro

credit, Consumers durable scheme loan (CDS), Marriage Loan, Car Loan, HBF Loan and

commercial Loans. Commercial Loans comprise Trade financing in the form of workingcapital and industrial loans (both large and medium scale industries) in the form of Term

loans and other funded & non-funded credit facilities.

Loans & Advances of TBL during the year

2000-2005(in million)

525.74

1,603.95

1,897.63

4,358.31

6,804.45

9,738.32

A(2000)

B(2001)C(2002)

D(2003)

E(2004)

F(2005)

Term financing indicates the Banks participation in the industrial development of our

country while by extending small loans the TBL has fulfilled the borrowing needs of thelow and medium income groups of our society. The bank in the year 2005 is not extendedrepair & reconstruction of dwelling house. The classified loans & advances accounted for

only 1.32% of the total Loans & Advance of Tk. 9,738.32 million in FY 2005. The bank

as a matter of priority in its policy wants to ensure quality of its Loan Portfolio bystrengthening post disbursement recovery measures as well as by prioritizing on Early

Warning System (EWS) to check the growth of non-performing assets.

Branch Expansion

The TBL has taken up a programmed to expand its branches. The bank has already 21

branches in many different places in Bangladesh; most of them are inside the different

cantonments. The management is filling that they need more branches all over theBangladesh. So very recent they will open a branch in Gulshan, Dilkusha, Chittagong and

Sirajgonj. As per Bangladesh Bank circular that if any banks open a branch in Dhaka then

they have to be open a branch in out side Dhaka.

Information Technology (IT) & Automation

8/3/2019 Trust Bank

12/54

All the branches of the TBL are fully computerized. New software is now in use to

provide faster, accurate and efficient service to the clients. The bank is continuously

striving for better services through extensive automation of its branches. We are soongoing to launch One Branch Banking through on-line connectivity. The bank has set up

a full-fledged IT division to keep abreast of the latest development of IT for better service

in the days to come.

Foreign Correspondents

Foreign correspondent relationship facilities foreign trade operation of the bank, mainly

in respect of export, import and foreign remittance. The number of foreigncorrespondents and agents of the bank in the year 2005 stood at more than 300, which

covers important business and trade centers of the world. The bank maintains excellent

relationship with the leading international banks, for handling all foreign correspondent

and maintaining all foreign business there is an International Division, which is called ID.

SWOT Analysis of the TBL

SWOT Analysis is an important tool for evaluating the companies Strengths,

Weaknesses, Opportunities and Threats. It helps the organization to identify how toevaluate its performance and can scan the macro environment, which is turn would help

the organization to navigate in the Turbulence Ocean of competition. Following is given

the SWOT analysis of The Trust Bank:

Strengths

1. Top Management:

The top management of the bank, the key strength for The Trust Bank has contributed

heavily towards the growth and development of the bank. The top management officials

are armys highest position holder, so they have a good idea about the current situation.

2. Company Reputation:

The Trust Bank has created a good reputation in the banking industry of the country.Their main customers are army persons. The popularity of this bank is increase day by

day also in the general public area.

3. Sponsors:

The Trust Bank has founded by The Army Welfare Trust. The main sponsors for this

bank are Sena Kalyan Sangstha. The chairperson of this bank is Chief of Army Staff and

8/3/2019 Trust Bank

13/54

directors are also appointed by the sangstha, thats why the sponsor does not have any

problem for the fund.

4. Modern Facilities and Computer:

From the very beginning The Trust Bank tries to furnish their work surroundings withmodern equipment and facilities. For speedy service to the customer, The Trust Bank had

installed money-counting machine in the teller counter. The bank has computerized

banking operation under software called PC banking. More over computer printedstatements are available to internal use and occasionally for the customers. The Trust

Bank is equipped with telex and fax facilities.

5. Stirring Branches:

From the formative stage of The Trust Bank tried to furnish their branches by the

impressive style. Their well-decorated branches gets attention of the potential customer,

this is one kind of positioning strategy. The Sena Kalyan Bhaban Branch is alsoimpressive and is comparable of foreign banks.

6. Interactive Corporate Culture:

The corporate culture of The Trust Bank is very much interactive compare to other localorganization. This interactive environment encourages the employee to work attentively.

Science the banking jobs is very much routine work oriented and lovely environment

boots up the work capability of the employees.

Weaknesses

1. Limitation of Information System (PC Bank):

PC bank is not comprehensive banking software. It is desirable that a more

comprehensive banking system should replace PC bank system.

2. Hierarchy Problem:

The hierarchy problem treated as a weakness for The Trust Bank, because the employeewill not stay for a long. So there will be a chance of brain drain from this bank to other

bank.

3. Advertisement Problem:

8/3/2019 Trust Bank

14/54

There is another weakness for The Trust Bank is advertisement. Their media coverage is

so much low that people do not know the bank thoroughly.

Opportunities

1. Diversification:

The Trust Bank can pursue diversification strategy in expanding its current line of

business. They do not serve not only the army but also the general people.

2. Business Banking

The investment potential of Bangladesh is foreign investors. So EBL has opportunity to

expand in business banking.

3. Credit Card

There is an opportunity to launch Credit Card in Bangladesh by EBL. Beside this, EBLcan acquire services for cards like VISA, MASTER CARD etc. So that they can enhance

the market based card service

Threats

1. Contemporary Banks:

The contemporary banks of The Trust Bank like: Dhaka Bank, Dutch Bangla Bank,

National Bank, Mutual Trust Bank, Mercantile Bank are its major rivals. They arecarrying out aggressive campaign to attract lucrative clients as well as big time

depositors. The Trust Bank should remain vigilant about the steps taken by these banks,

as these will in turn affect The Trust Bank strategies.

2. Multinational Bank:

The Rapid expansion of multinational bank poses a potential threat to new PCBs. Due tothe booming energy sector, more foreign banks are expected to operate in Bangladesh.

Moreover, the existing foreign banks such as HSBC, AMEX, CITI N.A, and Standard

Chattered are now pursing an aggressive branch expansion strategy. Since the foreignbanks have tremendous financial strength, it will pose a threat to local bank to a certain

extant in terms of grabbing the lucrative clients.

3. Default Culture:

8/3/2019 Trust Bank

15/54

Default culture is very much familiar in our country. For a bank, it is very harmful. As

The Trust Bank is new, it has not faced it seriously yet. However as the bank grows older

it might become big problems.

Types of Credit made by the TBL

Modern banking operation touches almost every sphere of economic activity. The

extension of bank credit is necessary for expansion of business operations. Bank credit is

a catalyst bringing about economic about economic development. Without adequatefinance there can be no growth or maintenance of a stable output. Bank lending is

important to the economy, for it makes possible the financing of commercial and

industrial activities of a nation. The credit facilities are generally allowed by the bank

may be in two broad categories. They are as follows:

A. Funded Facilities:

Funded facilities can also be divided into the following categories

Term Loans:

The term of loan is determined on the basis of gestation period of a project generation of

income by the use of the loan. Such loans are provided for Farm Machinery, Dairy,Poultry, etc. It is categorized in three segments:

Types of Term Loan Time (Period)

Short Term 1 to 3 years

Medium Term 3 to 5 tears

Long Term Above 5 years

Over Draft (OD):

OD is some kind of advance. In this case, the customer can over draw from his/hercurrent account. There is a limit of overdraw, which is set by the bank. A customer can

with draw that much amount of money from their account. For this there is a interestcharge on the over draw amount. This facility does not provide for every one, the bank

will provide only those who will fulfill the requirement. It means that only real customer

can get this kind of facility.

Cash Credit (Hypo):

8/3/2019 Trust Bank

16/54

It allows to individuals or firm for trading as well as whole-sale purpose or to industries

to meet up the working capital requirements against hypothecation of goods as primarysecurity fall under this type of lending. It is a continuous credit. It allowed fewer than two

categories:

1. Commercial Lending2. Working Capital

Cash Credit (Pledge):

Financial accommodation to individual/firm for trading as well as whole sale purpose or

to industries as working capital against pledge of goods primary security falls under this

head of advance. It also a continuous credit and like the above allowed under thecategories:

1. Commercial Lending

2. Working Capital

SOD (General):

Advance allowed to individual/firm against financial obligation (i.e. lien of FDR/PS/BSP

etc.) and against assignment of work order for execution of contract works fall under this

head. This advance is generally allowed for allowed for definite period and specific

purpose. It is not a continuous credit.

SOD (Imports):

Advances allowed for purchasing foreign currency for opening L/C for imports of goods

fall under this type of leading. This is also an advance for a temporary period, which is

known as preemptor finance and falls under the category Commercial Lending.

PAD:

Payment made by the bank against lodgment of shipping documents of goods imported

through L/C falls under this type head. It is an interim type of advance connected with

import and is generally liquidated shortly against payments usually made by the party forretirements of documents for release of import goods from the customer authority. It falls

under the category Commercial Lending.

LTR:

Advances allowed for retirement of shipping documents and release of goods imported

through L/C without effective control over the goods delivered to the customer fall under

this head. The goods are handed over the importer under trust with arrangement that sales

proceed should be deposited to liquidate the advances within a given period. This is also

8/3/2019 Trust Bank

17/54

temporary advance connected with import that is known post-import finance under

category Commercial lending.

IBP:

Payment made through purchase of inlands bill to meet urgent requirements of customer

fall under this type of credit facility. This temporary advance is adjusted from the

proceeds of bills purchased for collection. It falls under the category CommercialLending.

FDBP:

Payment made to a party through purchase of foreign documentary bills fall under this

head. This temporary advance is adjustable from the proceeds of negotiable

shipping/export documents. It falls under category Export Credit.

LDBP:

Payment made to a party through purchase of local documentary bills fall under this

head. This temporary liability is adjustable from proceeds of the bill.

Bank Guarantee:

The exporters pay of the imported goods on behalf of the importer through bank

guarantee. If the exporter fails to make the fulfill payment at the moment the bank willtake the liability and pay to the exporter. This type of guarantee is also needed to attend

in any tender.

Micro Credit:

Loan has given only to the Army Person for the purpose of Repairing and Reconstructionof dwelling Houses.

CDS:

A credit facility is available for Armed Forces officials (Major and above or equivalent

Ranks and Status with minimum length 12 years of services). Car loan and Marriage loan

are also included as CDS.

HBL:

A credit facility is available for the retired Armed Forces officials.

B. Non Funded Facilities:

Non funded facilities are divided into the following categories:

8/3/2019 Trust Bank

18/54

Bank Guarantee:

A credit facility in contingent liabilities from extended by the banks to their clients forparticipation in development work, likes supplies goods and services.

Letter of Credit:

A credit facility in contingent liabilities from provided to the clients by the banks for

import/procurement of goods and services.

Components of the Lending operationsMaintained by the Bank

Written Loan Policy

One of the most important ways a bank can make sure its loans meet regulatory standardsand are profitable is to establish a written loan policy. Such a policy gives loan officers

and the banks management specific guidelines in making individual loan decisions and

in shaping the banks overall loan portfolio. The actual make up of a banks Loan

portfolio should reflect what its loan policy says. Otherwise, the loan policy is notfunctioning effectively and should be either revised or more strongly enforced by senior

management.

1. A goal 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, and quality ofloans)

2. Specification of the lending authority given to each loan officer and loan

committee (measuring the maximum amount and types of loan that each person and

committee can approve and what signatures are required).

8/3/2019 Trust Bank

19/54

3. Lines of responsibility in making assignments and reporting information within

the loan department.

4. Operating procedures for soliciting, reviewing, evaluating, and making decisionson customer loan applications.

5. The required documentation that is to accompany each loan application and what

must be kept in the banks credit files (required financial statements, security agreementsetc.).

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

and reviewing the banks credit files.7. Guidelines for taking, evaluating, and perfecting loan collateral.

8. A presentation of policies and procedures for setting loan interest rates and fees

and the terms for repayment of loans.

9. A statement of quality standards applicable to all loans.10. A statement of the preferred upper limit for total loans outstanding (i.e. the

maximum ratio of total loans to total assets allowed).

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

come.12. A discussion of the preferred procedures for detecting, analyzing, and working

out problem loan situation.

Steps in the Lending Process

Most bank loans to individuals arise from a direct request from a customer who

approaches a member of the banks staff and asks to fill out a loan application. Business

can requests, on the other hand, often arise from contacts the banks loan officers andsales representatives make as they solicit new accounts from firms operating in the banks

market area. Sometimes loan officers will call on the same company for months before

the customer finally agrees to give the bank a try by filling out a loan application.

Once a customer decides to request a loan, an interview with a loan officer

usually follows right away, giving the customer the opportunity to explain his or her

credit needs. That interview is particularly important because it provides an opportunityfor the banks loan officer to assess the customers character and sincerity of purpose.

If a business or mortgage loan is applied for, a site visit is usually made by an

officer of the bank to assess the customers location and the condition of the property and

to ask clarifying questions. The loan officer may contact other creditors who havepreviously loaned money to this customer to see what their experience has been.

If all is favorable to this point, the customer is asked to submit several crucial

documents the bank needs in order to fully evaluate the loan request, including complete

8/3/2019 Trust Bank

20/54

financial statements and, in the case of a corporation, board of directors resolutions

authorizing the negotiation of a loan with the bank. Once all documents are on file, the

credit analysis division of the bank conducts a thorough financial analysis of them aimedat determining whether the customer has sufficient cash flows and backup assets to repay

the loan. The credit analysis division then prepares a brief summary and

recommendation, which goes to the loan committee for approval.

If the loan committee approves the customers request, the loan officer or the

credit committee will usually check on the property or other assets to be pledged ascollateral in order to ensure that the bank has immediate access to the collateral or can

acquire title to the property involved if the loan agreement is defaulted. This is often

referred to as perfecting the banks claim to collateral. Once the loan officer and the

banks loan committee are satisfied that both the loan and the proposed collateral aresound, the note and other documents that make up a loan agreement are prepared and are

signed by all parties to the agreement.

Credit Analysis:

The division of the bank responsible for analyzing and recommendations on the fate of

most loan applications is the credit department. Experience has shown that this

department must satisfactorily answer three major questions regarding each loan

application:1. Is the borrower creditworthy? How do you know?

2. Can the loan agreement are adequately protected and the customer has a high

probability of being able to service the loan without excessive strain?3. Can the bank perfect its claim against the assets or earnings of the customer so

that, in the event of default, bank funds can be recovered rapidly at low cost and with low

risk?Lets look in turn at each of these three key issues in the yes or no decision a bank

must make on every loan request.

Is the Borrower Creditworthy?

The question that must be dealt with before any other is whether or not the customer can

service the loan-that is, pay out the credit when due, with a comfortable margin for error.

This usually involves a detailed study of six aspects of the loan application- character,capacity, cash, collateral, conditions, and control. All must be satisfactory for the loan to

be a good one from the lenders point of view.

Character. The loan officer must be convinced that the customer has a well-defined

purpose for requesting bank credit and a serious intention to repay. If the officer is not

sure exactly why the customer is requesting a loan, this purpose must be clarified to thebanks satisfaction.

Responsibility, truthfulness, serious purpose, and serious intention to repay all monies

owed make up what a loan officer calls character.

8/3/2019 Trust Bank

21/54

Capacity. The loan officer must be sure that the customer requesting credit has the

authority to request a loan and the legal standing to sign a binding loan agreement. This

customer characteristic is known as the capacity to borrow money. For example, in moststates a minor (e.g., under age 18 or 21) cannot legally be held responsible for a credit

agreement; thus, the bank would have great difficulty collectors on such a loan.

Cash. This key feature of any loan application centers on the question: Does the

borrower have the ability to generate enough cash, in the form of cash flow, to repay the

loan? In general, borrowing customers have only three sources to draw upon to repaytheir loans: or (a) cash flows generated from sales or income, (b) the sale or liquidation of

assets, or (c) funds raised by issuing debt or equity securities. Any of these sources may

provide sufficient cash to repay a bank loan.

Collateral. In assessing the collateral aspect of a loan request, the loan officer must ask,

does the borrower possess adequate net worth or own enough quality assets to provide

adequate support for the loan? The loan officer is particularly sensitive to such features as

the age, condition, and degree of specialization of the borrowers assets.

Conditions. The loan officer and credit analyst must be aware of recent trends in theborrowers line of work or industry and how changing economic conditions might affect

the loan.

Control. The last factor in assessing a borrowers creditworthy status is control whichcenters on such questions as whether changes in law and regulation could adversely

affect the borrower and whether the loan request meets the banks and the regulatory

authorities standards for loan quality.

Can the Loan Agreement Be Properly Structured and Documented?

The six Cs of credit aid the loan officer and bank credit analyst in answering the broad

question: Is the borrower creditworthy? Once that question is answered, however, asecond issue must be faced: Can the proposed loan agreement be structured and

documented to satisfy the needs of both borrower and bank?

A properly structured loan agreement must also protect the bank and those it represents-

principally its depositors and stockholders- by imposing certain restrictions (covenants)

on the borrowers activities then these activities could threaten the recovery of bankfunds. The process of recovering the banks funds- when and where the bank can take

action to get its funds returned-also must be carefully spelled out in a loan agreement.

8/3/2019 Trust Bank

22/54

Needs for Collateral

Most Borrowers at one time or another will be asked to pledge some of their assets or topersonally guarantee the repayment of their loans. Getting a pledge of certain borrower

assets as collateral behind a loan really serves two purposes for a lender. If the borrower

cannot pay, the pledge of collateral gives the lender the right to seize and sell those assetsdesignated as loan collateral, using the proceeds of the sale to cover what the borrower

did not pay back. Secondly, collateralization of a loan gives the lender a psychological

advantage over the borrower.

The goal of a bank taking collateral is to precisely define which borrower assets are

subject to seizure and sale and to document for all other creditors to see that the bank has

a legal claim to those assets in the event of nonperformance on a loan.

Sources of Information about Loan Customers

The bank relies principally on outside information to assess the character, financial

position, and collateral of a loan customer. Such an analysis begins with a review of

information supplied by the borrower in the loan application. The bank may contact otherlenders to determine their experiences with this customer. Were all scheduled payments

in previous loan agreements made on time? Were deposit balances kept at high enough

levels? How much was borrowed previously and how well were those earlier loanshandled? Is there any evidence of slow or delinquent payments? Has the customer ever

declared bankruptcy?

Sources of Information about the Loan customers

Physical Investigations

CIB of Bangladesh Bank

Customer financial statements

Experience of other lenders with this customer

Customer Annual Report

Local or regional credit bureaus

Local Newspapers

Local chamber of commerce

Mechanism of Credit Distribution of the TBL

The primary factor determining the quality of the banks credit portfolio is the ability of

8/3/2019 Trust Bank

23/54

each borrower to honor, on a timely basis. All credit comities made to the bank. The

authorizing credit personnel prior to credit approval must accurately determine this. If the

report of the project appraisal is very satisfactory to approve the loan proposal, than thefollowing steps furnish the approval procedure:

Make a proposal by the client to the bank Give all the necessary documents

Bank will send the parties statement to the Bangladesh Bank, their CIB (Credit

Information Bureau) will inquiry that whether this party is defaulter or a new one.

Bank will take the collateral from the party and analysis that how much it will

cover the total loans.

Bank will send this proposal to the head office. In the head office the Board of

Directors and Managing Director will approve the loan.

Head office will send the approval to the branch office.

Branch office will give the sanction letter to the party.

Bank will take the security and make it in their favor.

Loan Disbursement

After completing all the necessary steps for sanctioning loans bank will create a loanaccount by the name of the party and deposit the money to that account. Bank will give

cheque books to the party and advise them to draw the money and use it as soon as

possible, because whenever the money will transfer to the account interest will count

from that time.

Analyzing the Year Wise Loan Disbursement by the TBL

YEAR AMOUNT OF LENDING

(in million/Tk.)2000 525.75

2001 1,603.95

2002 1,897.63

2003 4,358.31

2004 6,804.45

2005 9,738.32

TOTAL 24,928.41

8/3/2019 Trust Bank

24/54

Year-wise Total Amount of Lending

(million/Tk)

1,603.95 1,897.63

4358.31

6804.45

9,738.32

0

2,000

4,000

6,000

8,000

10,000

12,000

A(2001) B(2002) C(2003) D(2004) E(2005)YEAR

AMOUNT

Year-Wise Loan Disbursment

(Percentage)

7%8%

18%

28%39%

A(2001)

B(2002)

C(2003)

D(2004)E(2005)

From the graph we can say that in the year 2005 the total loan disbursement is 39% (Tk9738.32 million) to compare with other financial years. In the year 2004 the loan

disbursement was 28% (Tk 6804.45 million) and in the year 2001, 2003 & 2003 the loan

disbursement was 7% (Tk 1603.95 million), 8% (Tk 1897.63 million) & 18% (Tk

4358.31 million). So according to this graph we can easily say that the banks loandisbursement is increasing day by day. It is a positive sign for the bank. After

establishing the bank, disbursement of loan is not so high because of their inexperience

and inadequate loan disbursement policy. Now the bank has an attractive loan policywhich attracts the customers. If we see the percentage increase by the year then in the

loan disbursement is 39% and in the previous year it was 28%. So the percentage

increases by 11% only. In the year 2003 & 2004 the percentage increased by 10%. Incompare, the increasing percentage is about to same that is in 2005 the increasing

8/3/2019 Trust Bank

25/54

percentage was 11% which is more then 1% in the previous year. It may be the good sign

for the bank because the loan disbursement is increasing or steady not decreasing. Banks

main earning source is loan disbursement, like: interest earning. It is a big part of thebanks total earning. So the bank should take care in this loan side.

Analyzing the Sector-wise LendingBy the TBL (million/Tk)

SECTOR 2003 2004 2005

Cash Credit 179.92 165.83 257.06

Cash Collateral 148.59 199.53 220.66

Overdraft 355.07 529.89 736.52

SOD 1,676.17 2,153.63 3,011.33

Marriage Loans (ML) 87.35 81.90 74.03

Car Loan (CL) 17.00 26.26 28.28

House Building Loan(HBL) 89.16 100.23 397.73

Term Loans 284.34 834.56 1,744.04

Staff Loans 11.23 20.94 46.16

Consumer Durable Scheme (CDS) 33.04 25.70 25.87

Repair & Recon. of Dwelling House (RRDH) 247.38 233.35 222.08

Loan Against Trust Receipts (LTR) 987.85 2,044.41 1,823.81

Payment Against Documents (PAD) 209.01 257.49 114.46Bill Purchased & Discounted 30.49 114.04 354.86

Other Loans 1.72 16.69 681.42Total Loans & Advances 4,358.31 6,804.45 9,738.32

Analyzing the Sector-Wise Loan Disbursement

Of the TBL in the year 2003

8/3/2019 Trust Bank

26/54

SECTOR WISE LENDING IN 2003

328.

51

2031.24

247.

38

33.0

4

87.

35

17 8

9.1

6

987.85

209

30.

49 2

84.3

4

11.2

3

1.7

2

0

500

1000

1500

2000

2500

Amt. Of Lending (million/Tk)

Cash Credit

Overdraf t

RRDH

CDSML

CL

HBL

LTR

PAD

IBP

Term Loan

Staf f Loan

Other Loan

In the year 2003, The Trust Bank Ltd. only passes three years experience with loan

disbursement. This is not enough experience for lending loan disbursement. From thegraph, we can say that the TBL was not able to maintain a good lending operation in the

year 2003, though it was the fourth year of the TBL Banking operations. The maximum

portion of the lending has disbursed in the sector of Overdraft. About 43.63% of total hasgiven in this sector. The second position of loan disbursement was 22.67% on Loans

against Trust Receipts (LTR). Repair & Reconstruction of Dwelling House which another

name is Micro Credit has given up a big portion of total loan disbursement. More than19% of total loans have disbursed as other Loans (SOD, RRDH, ML, CL Letter of Credit

etc.). About 6.52% loans has given in the sector as Long Term Loan and 7.54% loanshave given as cash credit.

Analyzing the Sector-Wise Loan Disbursement

Of the TBL in the year 2004SECTOR WISE LENDING IN 2004

365.36

2683.52233.35

25.7

81.9

26.26100.23

2044.41

257.49

8/3/2019 Trust Bank

27/54

114.04

834.56

20.9416.69

0

5001000

1500

20002500

3000

Amt. Of Lending (million/Tk)

Cash CreditOverdraft

RRDH

CDS

MLCL

HBLLTR

PAD

IBP

Term LoanStaff Loan

Other Loan

In the year 2004, from the graph we can say that the maximum portion of lending has

disbursed to the Overdraft sector which was 39.45% of total loan disbursement. The total

loan disbursement amount of Overdraft was increased but the percentage was decreased.

8/3/2019 Trust Bank

28/54

In the year, loan disbursement of RRDH (Micro Credit) was decreasing. The second

highest percentage of lending was 30% of the total in Loans against Trust Receipts. Term

Loans has maintained the third position in loan disbursement by the TBL. The amount ofloan was 834.56 million, which was about12.26% of the total lending. A large amount of

loans was also disbursed as Cash Credit. Loan has also disbursed as short-term loans,

cash credit, House-building loans, Staff loans etc.

Analyzing the Sector-Wise Loan Disbursement

Of the TBL in the year 2005

SECTOR WISE LENDING IN 2005

477.

72

3747.85

222.0

8

25.

87

74

.03

28.2

8397.

73

1823.81

114.

47

354.8

6

1744.04

46.1

66

81.

42

0

500

1000

1500

2000

2500

3000

3500

4000

Amt. of Lending (million/Tk)

Cash Credit

Overdraf t

RRDH

CDS

ML

CL

HBL

LTR

PAD

IBP

Term Loan

Staf f Loan

Other Loan

In the year 2005, from the graph we can say that the maximum portion of lending has

disbursed to the Overdraft sector. Total percentage of Overdraft was 38.49%. Though

total amount of this sector was continue to increase but the percentage of the sector wasdecreasing. RRDH or Micro Credit was highly decreased. Loan against Trust receipt and

Term Loan are the second and third position in this year. The percentage of lending in

LTR was 18.73% of the total in this sector. This year long term Loans have maintainedthe third position in loan disbursement by the TBL. The amount of loan was 1744.04

million which about 17.91% of the total lending. Loan has also disbursed as Cash credit,

House building loans, Marriage loan, Car loan, Consumer Durable Scheme etc.

8/3/2019 Trust Bank

29/54

LOAN-PRICING POLICY USED BY THE TBL:

In pricing a business loan, Bank management must consider the cost of raising loan able

funds and the operating costs of running the Bank. This means that Banks must know

what their costs are in order to consistently make profitable, correctly priced loans of anytype. There is no substitute for a well-designed management information system when it

comes to pricing loans.

The Trust Bank Limited is generally used the simplest loan-pricing model which assumesthat the rate of interest charged on any loan includes four components: (1) the cost to the

Bank of raising adequate funds to lend, (2) the Banks no funds operating costs

(including wages and salaries of loan personnel and the cost of materials and physical

facilities used in granting and administering a loan), (3) necessary compensation paid tothe Bank for the degree of default risk inherent in a loan request, (4) Banks desired profit

margin.

LOAN Marginal cost of raising No funds

loanable funds to lend + operating costs

INTEREST = Bank to the Borrower (including wages andSalaries of Bank Personnel)

RATE

Estimated margin to Bank

+ Compensate the Bank + desiredFor default risk profit margin.

Chart of Interest rate of The Trust Bank for Lending

SL Sector-Wise Lending

01 Agriculture/ Agro-Based Industry

a Loan to Primary Producer

b

Loan to Agriculture input Traders/Fertilizer

Dealers/Distributors

c Agro Processing Industries / Firms

02 Large & Medium Scale Industry (Term Loan)

03 Working Capitala Jute

8/3/2019 Trust Bank

30/54

b Other than Jute 1

04 Export Financing

a Jute and Jute Products

b Other Exports 7%

05 Commercial Lendinga Loan against work order & brick manufacture

b Commercial Loan (Garments)

c Commercial Loan (Others)

d Small and Medium Scale Enterprise

06 Term Loan

a Small and cottage industries

b Urban Housing (Residential)

c Urban Housing (Commercials)

d

Loan for dwelling house repair & reconstruction ( Banks

scheme loan for low income bracket)

e Transport Loan

f Customer durable scheme

g Car and Marriage Loan

h House building scheme loan for in service Army Officers

07 Loan against FDR issued by TBL 2.5% above FDR rate but not less than 12%

08 Loan against Lien/ Pledge on saving certificates WEBD & other financial assets issued by TBL

09Loan against lien/ pledge on FDR , Saving Certificates, WEBD &Other allowable financial assets issued by TBL/ Financial Institution.

Revised on May, 2006

These sector-wise interest rates have been introduced by the Head Office of the Trust

Bank Limited. They use cost-plus pricing method in case of pricing the loans. The Head

office and the twenty (21) branches of the Trust Bank Limited have maintained theserates strictly except in case of some quality and credit-worthy lenders. After judging the

lenders credit-worthiness, the Trust Bank Limited gives some beneficiary to this kind of

lenders. They can enjoy a decreasing interest rate, which maintained by the Trust Bank

Limiteds branches internally. Other wise, the scheduled rates are maintained by all the

TBL branches. In case of Micro Credit, as the loan amount is not so large thats why thescheduled rate is maintained by the Bank. Actually, the Lending rate is based on the

prescription, which is given by Bangladesh Bank. Recently TBL has revised their lendinginterest rate on April, 2006. The revised lending interest rates have been effective from

May 01, 2006 for all existing and fresh sanction of credit facilities.

8/3/2019 Trust Bank

31/54

Sector-wise Interest Income of the TBL During the year 2003-2005(million/Tk)

INTEREST INCOME SECTOR 2003 2004 2005

Interest on Consumer Durable Scheme 6.76 3.02 2.87

Interest on Over Draft 5.79 11.72 15.30

Interest on SOD (Industrial ) 75.27 236.45 351.35

Interest on Cash Credit 27.29 17.85 24.68

Interest on Marriage Loan 13.76 9.93 8.55

Interest on Car Loan 2.98 3.00 3.94

Interest on Payment Against Document (PAD ) 15.52 32.61 33.05

Interest on Reair&Recon. of dwelling House(RRDH) 31.43 24.55 22.51

Interest on House Building Loan 9.08 11.34 24.37

Interest on Term Loan 28.24 58.34 157.48

Interest on Time Lone - 1.35 27.38Interest on Inland Bills Purchased & Other Loan 109.17 5.20 23.35

Interest on Cash Collateral 6.58 17.32 31.60

Interest on Other Loans 0.95 235.99

Interest from Banks & Other Financial

Institutions

8/3/2019 Trust Bank

32/54

Interest on FDR 66.92 112.37 122.40

Interest on Bangladesh BankForeign Currency Accounts

0.12 1.04 2.59

Interest Received From Local Banks 1.39 0.75 4.71

Interest on Call deposits 2.30 1.57 5.38

Interest Received from Foreign Bank 0.26 0.42 2.74

Total Interest Income 403.82 749.03 1,100.21

Analyzing the Year-Wise Total Interest Income

Of the TBL

Year-Wise Total Interest Income (million/Tk)

189.71276.41

403.83

749.03

1100.21

0

200

400

600

800

1000

1200

A(2001)

B(2002)

C(2003)

D(2004)

E(2005)

YEAR

AMOUNT

From the graph we can say that in the year 2005 the total interest income is 1100.21

million to compare with other two financial years. In the year 2004 the interest income

was 749.03 million and in the year 2003 the total interest income was only 403.83 millionwhich is more than the interest income year 2000 &2001. So according to this graph we

can easily say that the banks total interest income is increasing day by day. It is a

positive sign for the bank. But there is one thing that if we see the percentage increase bythe year then in the interest income is 76.16% in year 2005 and in the previous year 2004

it was 71.00%. So the percentage increases by 5.17% only. The total interest income was

75.40% in year 2003. In the year 2005 to 2004 the percentage increased but in compare

with year 2003 to 2004, the total percentage of interest income decrease. It may be not a

8/3/2019 Trust Bank

33/54

good sign for the bank, because banks main earning source is interest earning. So the

percentage of total interest income should be steady & increase year after year. It is a

main part of the banks total earning. So the bank should take care in this interest incomesectors.

Analyzing the sector-wise Interest Income of

The TBL in the year 2003

SECTOR WISE INTEREST INCOME IN 2003

33.87

81.06

31.43

15.8

16.74

4.63 1

5.5

28.4

104.35

71.69

0.26

0

20

40

60

80

100

120

Amount (million/Tk)

Cash Credit

OD & SOD

RRDH

CDS & HBL

ML &CLIBP

LTR & PAD

Term Loan

Other Loan

Local Instit.

Foreign Bank

According to the graph, we see that in the year 2003, the total interest income was Tk403.83 million. In this year, the highest interest income was come from the Overdraft &

SOD which was Tk 81.06 million. Next position for the interest income was held from

the Local financial institution & banks. Cash credit and Repair & Reconstruction ofDwelling House (RRDH) which another name is Micro credit were about to same

contribution of the total interest income in this year. Interest income from consumer

durable scheme, IBP, Foreign exchanges also influence strongly on the TBLs total

interest income in this year.

8/3/2019 Trust Bank

34/54

Analyzing the sector-wise Interest Income of

The TBL in the year 2004

SECTOR WISE INTEREST INCOME IN 2004

35.1

248.18

24.5

14.3

6

12.9

2

5.2

232.26

59.6

0.5

5

115.7

3

0.4

2

0

50

100

150

200

250300

Amount (million/Tk)

Cash CreditOD & SOD

RRDH

CDS & HBL

ML &CL

IBP

LTR & PAD

Term Loan

Other Loan

Local Instit.

Foreign Bank

According to the graph, we see that in the year 2004, the total interest income was Tk749.03 million. In this year, the highest interest income was come from the Overdrafts

and Loan against Trust Receipts (LTR) & Payment Against Document (PAD) which was

Tk 248.18 & Tk 232.26 million. In this year, the interest income of RRDH that meansMicro Credit was continuing to decrease. Next position for the interest income was held

from the local financial institution & banks. Interest on Term loans & Cash Credit also

has the large impact on the total interest income in this year. Interest income from

Marriage & Car Loan, IBP, Foreign exchanges etc also influence strongly on the TBLstotal interest income in this year.

Analyzing the sector-wise Interest Income ofThe TBL in the year 2005

8/3/2019 Trust Bank

35/54

SECTOR WISE INTEREST INCOME IN 2005

24.7

1

366.65

22.

51

52.4

4

12.4

9

23.7

8

234.61

164.8

7

60.3

6135.0

5

2.7

4

0

50

100

150

200

250300

350

400

Amount(million/Tk)

Cash Credit

OD & SOD

RRDH

CDS & HBLML &CL

IBP

LTR & PAD

Term Loan

Other Loan

Local Inst it .

Foreign Bank

According to the graph, we see that in the year 2005, the total interest income was Tk

1100.21million. In this year, the highest interest income was come from the Overdraft &

SOD which is Tk 366.65 million that was 33.23%. In this year, Micro credit sectorcontinue decrease the interest income. Next position for the interest income was held

from loans against trust receipts (LTR) & payment against document (PAD) and local

financial banks & financial institution and the amount were Tk 234.61 & Tk 136.05million. Interest on Term loans also has a large impact on the total interest income in this

year. Interest income from Cash credit, IBP, Foreign exchanges and other loans also

influence strongly on the TBLs total interest income in this year.

Loan Classification and the TBL Bank

Signs for Classification

First and foremost requirement for any credit managers is to identify a problem credit in

its earliest stages by recognizing the signs of deterioration. Such signs include but notlimited to the following:

01. Non-payment of interest or principal or both on due dates or past dues beyond a

reasonable period or recurring past dues.02. In case of Overdraft no movement in the account beyond a reasonable period.

03. Deterioration in financial condition of the client, as gathered from clients latest

financial statement.

04. A shortfall in collateral coverage, particularly if the collateral was a key factor inthe decision-making.

05. Death or withdrawal of key owner(s) or management personnel.

06. Company filing for bankruptcy or voluntary dissolution.

8/3/2019 Trust Bank

36/54

07. Adverse market report about the company itself or its principal owners.

Steps to follow for Classification

Steps to follow in such situations would be:

01. Recheck the account, for all outstanding, including any outstanding in allied or

sister company or in owners or partners or directors personal names.

02. Thoroughly review loan documentation to confirm, We have what we need,documents are in proper from, properly executed and current (i.e. not time barred).

03. If possible take current market value of the securities according to liquidation

basis. And take a close look at the assets and liabilities to determine who has the prior

right on those assets.04. If Grantors are involved, look closely at the net worth statement and send

demand notice.

05. Once the account is classified Sub-Standard, credit lines must be frozen.

Classification Process

For the purpose of determining the Classified status of an account, following guidelinesare to be observed

01. The process of classification of an account will start with strict application of the

risk rating assessment that isi. Sub-standard

ii. Doubtful

iii. Bad or Loss02. However unpaid interest or Principal or Expired Limit for a period of 180 days or

more or recurring past dues will remain the most significant rules for classification.

CLASSIFICATION AS SUBSTANDARD:

A loan is classified as substandard if any one of the following conditions is met:

(a) If an advance or any portion of an advance or interest thereon remains overdue for

180 days or more but less than 270 days then the advance is classified as substandard.

(b) For an advance of a continuing nature, even if the loan is not overdue as much as180 days, but the limit stands overdrawn by move than 50% for a period of 45 continuous

days preceding the reference date for the classification, then it is classified as

substandard.(c) If a loan has been renewed or rescheduled at least three times but is not overdue,

and any of the required payments for the required period have not made when they fall

due, then the loan is classified as substandard.

CLASSIFICATION AS DOUBTFUL:

8/3/2019 Trust Bank

37/54

A loan is classified as doubtful if any one of the following conditions is met:

(a) The advance or any portion of the advance or interest thereon remains overdue

for 270 days or more but less than 360 days.

(b) A loan classified as substandard per clause 6 (b) above has remained substandardfor 180 days or more.

(c) A loan classified as substandard per clause 5 (c) above has remained substandard

for 180 days or more.(d) Legal action has been initiated.

(e) Qualitative criteria based on judgment.

CLASSIFICATION AS BAD.

A loan is classified as bad if any one of the following conditions is met:(a) The advance or any portion of an advance or interest thereon remains overdue for

360 days or more.(b) A loan classified as doubtful per clause 6 (b) above has remained doubtful for

180 days or more.

(d) A loan classified as doubtful per clause 6 (c) above has remained doubtful for180 days or more.

(e) If legal action has been initiated and no court decision has been obtained within

360 days of initiation of action then the loan is classified as bad.(f) Qualitative criteria based on judgment.

Classified Loan conditions of the TBL (million/Tk)

Particulars 2000 2001 2002 2003 2004 2005

Unclassified

Loans &Advances

525.74 1583.21 1837.63 4,271.20 6,704.10 9,609.36

Sub-Standard

Loans &Advances

- 14.95 29.86 40.75 33.43 48.85

Doubtful Loans

Advances

- 4.42 23.63 21.22 8.28 5.00

Bad/Loss Loans

& Advances

- 1.37 6.51 25.14 58.64 75.11

Total 525.74 1603.95 1897.63 4,358.31 6,804.45 9738.32

8/3/2019 Trust Bank

38/54

Ratio of classified Loans to Total Loans of the TBL

PARTICULARS 2000 2001 2002 2003 2004 2005

Classified Loan 0% 1.29% 3.16% 2.00% 1.48% 1.32%

Unclassified Loan 100% 98.71

%

96.84

%

98.00

%

98.52

%

98.68

%

Total 100% 100% 100% 100% 100% 100%

Year-Wise Classified Loan (Percentage)

1.29

3.16

2

1.48

1.32

0 1 2 3 4

A(2001)

B(2002)

C(2003)

D(2004)

E(2005)

YEAR

Percentage

Classified Loan

The Trust bank Limited recorded a satisfactory level of performance in all the areas of its

operations in the year 2001- 2005. The success due to the combined and concerted efforts

of the management and staff of the bank under the able guidance, support and patronageof the members of the Board. But these were not enough in case of the Lending

operations.

The graph shows that the percentage of classified Loan in the year 2001 was 1.29% (Tk20.74 million), but in the year 2002, it was vastly increased and went up to 3.16% (Tk

60.00 million). After that TBL decreased their classified loan. In the year 2003, the

classified loan was 2.00% (Tk 87.11 million). Then in the year 2004 & 2005, the

8/3/2019 Trust Bank

39/54

classified loan was 1.48% (Tk 100.35 million) & 1.32% (Tk 128.96 million). According

to international rules, a bank may have a maximum limit of classified Loans as 5% of the

total Lending. Though TBL did not pass this limit, but it is not a good sign for the Bank.In year 2002 TBLs CAMEL rating was 3, which means the Bank was only in a fair

position. The main problem of the TBL was that it was not able maintain a good Loan

policy. As a result, classified loans of this Bank have increased. After that TBL tooksome good loan policy which improves percentage of classified loan that is decrease the

percentage. It may notice that though the percentage of classified loan decrease every

year but the total amount of classified loan increase every year. TBL must have toimprove in this area and has to decrease the amount of classified Loans by a well-

designed recovery policy.

What are the main reasons behind classification

of the TBL?

01. New Banker or lacking of experience.

02. Most of the time bankers have to relay on the documents provided on the client.

But what is the purity of these data. Although the CA firm certifies the dates but financialjugulating is practicing around the world.

03. Clients over confidence about the project.04. Change in National and International Political scenery.

05. Sometimes borrower talks about some other repayment source out of the proposed

project but they dont keep the source as security to the bank.

06. Sometimes other than land or building banks also keep furniture and machinery assecurity. Later on when bank come to sell those, they found that the market value of those

assets is much lesser than the book value.

07. Sometimes bankers dont go through the financial figures properly.08. Most of the cases clients have done some financial jugulating on their data.

09. Sometimes Client caught by some unavoidable circumstances like- ship sink,

10. Sometimes bank dont take appropriate security from the client or grantor.11. Sometimes bank dont put concentration about the insurance.

12. Most of the cases the bankers fail to forecast the future business condition of the

clients.

Provision for Loans and Advances maintained

By the TBL

8/3/2019 Trust Bank

40/54

Loan Loss Provision Procedure

As pert of pragmatic and conservative approach to sustain the quality of the Banks loanportfolio, Loan Loss Provision exercise made mandatory for all Line of Business. Such

exercise is decided by: a) generally accepted banking practice, b) conservative approach

to assess the quality of Risk Assets whereby the most accurate health of the LoanPortfolio is reflected on the books of the Bank and c) to be guided by Bangladesh Bank

instructions on provisioning.

Following guidelines are to be observed:

i. The prudential Provision Practice dictates that rather that wait until the close of

the fiscal year; provision exercise would be an on-going one, with the needed provisioncreated, when an account is classified and continues to remain classified. The provision

exercise is to be carried out by each quarter end, based on reports on Classified Accounts

related to previous quarter.

ii. Bangladesh Bank instructions are to be followed for the purpose of Loan LossProvision exercise.

iii. Unless otherwise enhanced by Bangladesh Bank regulatory body, Loan Loss

Provision Policy as per the matrix given below is to be adopted and followed by the

Bank:

Past Due O/S

Expired Credit

(CRITERIA)

Classification

Status

Maximum Provision to be held

against Net Loan Value

180 days

270 days 360 days

Substandard

DoubtfulBad / Loss

20%

50%100%

iv. Following formula is to be applied in determining the required amount of

provision:1. Gross Outstanding XXX

2. Less: (I) Cash margin held or fixed

Deposit (XXX)(II) Interest in Suspense Account ( XXX )

3. Loan Value

(For which provision is to be created before

considering estimated realizable value of othersecurity/collateral held) XXX

4. Less: Estimated salvage value of security / collateral held (XXX)

Net Loan Value XXX

8/3/2019 Trust Bank

41/54

8/3/2019 Trust Bank

42/54

gone up 3.16%. After that the next three years classified loan amount was decreasing and

the percentage was 2%, 1.48% & 1.32%. Though the percentage of classified loan was

decreasing but the total amount of classified loan increased as the loan amount every yearincreased. In the year 2004, total provision of loans have created Tk 108.12 million

where provision of classified loan Tk 8.52 million & unclassified loan Year 2003 as Tk

60.23 million. In the year 2005, the classified loan increased to double as Tk 16.71million which is the bad sign for the bank. In this year provision against special

maintenance account was Tk 2.5 million. And provision against unclassified loan created

1% of total unclassified loan amount.

Provisions can be positive for the Bank

Although provisioning is associated with classified loans but it has a positive effect on

the banks. The Income Statement shows net profit after deduction of provisioning fund.

As a result tax goes down. But the most important thing is, it doesnt affect the dividend.Although naturally banks pay dividends from net profit but some times they pay

dividends from previous retained earnings. Moreover banks dont keep money as idlefund for provisioning. Money circulates among the operations. They just show this fund

to cover actual loss. So the bottom line is nothing is wrong to provision though it is

associated with classified loans.

8/3/2019 Trust Bank

43/54

Recovery Policy of the TBL

Recovery Performance:

The recovery performance of the bank was not so good during the period 1999-2002.

Because the bank was recently established and the management was new &inexperienced in the banking sector. Also the credit administration and monitoring of this

bank was inexperienced. This bank is monitoring and all the loans are sanction by the

high authority whose are high officials of Bangladesh Army. This Bank has a common

thinking that the people who taking loan from this bank always think that this is an armybank so if I failed to pay then it will be a very big problem for me. But this thinking did

not work properly. Thats why the management have to think about a well-designed

Recovery Policy.

TBL Introduces A New Recovery Policy In 2003

TBL has introduced a new department called Early Warning System Department(EWSD). The bank as a matter of priority in its policy wants to ensure quality of its Loan

Portfolio by strengthening post disbursement recovery measures as well as by prioritizing

on Early Warning System (EWS) to check the growth of non-performing assets.

The secondary task of this department is to collect money from the classified clients. But

in the other banks the Branch Manager does this job. Other than that the recovery criteriaare more or less same for the banks. At the very begging they send reminder letter. Then

they send letter to inform them that they (bank) are going to sue against the client. Finally

the banks sue against the client.

Early Warning System Department (EWSD)

TBL has a special department called EWSD who are responsible for all accountsclassified in the banks portfolio. Actually they have work like CID officers. However

EWSDs responsibility will cover the areas of

01. Monitoring and controlling the classified accounts through monthly reporting and

quarterly review.

02. Actively follow the borrowers for recovery.03. Negotiate and reschedule the debts.

04. If the client dont utilize the new offer than it is the EWSDs responsibility to file

suit against the client.

EWSD will also prepare a Consolidated Report of all bad loans written-off on a quarterly.

8/3/2019 Trust Bank

44/54

TBLs Recovery Probability Categories to be Assigned To All Classified Loans

Category

I. Loans determined to have high probability of recovery within 6 months; recovery

efforts to continue on an on-going basis.

II. Loans determined to have moderate probability of recovery within 1 year; review

recovery efforts on a 3 months basis.III. Loans determined to have low and remote probability of recovery; review case on

a 6 months basis.

IV. Loans determined to have virtually no chance of recovery: charge-off the books.

However in these situation proper approval from the appropriate approving authoritiesshould be obtained and also shall be guided by Bangladesh Bank instructions and subject

to complete analysis of:

Banking practice.Legal and tax implication andStatus of each individual credit.

Notes for assessment of category

Estimate the cost of continued collection efforts against any money, which can be

reasonably expected to be recovered. Include in the cost (i) employee man-hour, (ii) legal

expenses, (iii) charge of any external collection agency if used.

Why Recovery takes so much time

Only because of existing rules and regulation recovery is a time consuming procedure. I

think an example will make this thing clear. Let, Mr. X took loan from Y bank by giving

a land as registered mortgage and become bad. Now bank cannot sell the land without thepermission of court though the land was as registered mortgage to bank. So bank has to

sue against Mr. X and court send notice to Mr. X. But Mr. X can delay his coming by

saying he is sick and asking for more time. Court gives new date to settle the matter.Then on new date a person came to the court saying that he is the brother of the client and

the land is their fathers property. And most importantly, client didnt notify him before

give the land to the bank. So court asks him to prove his claim. Finally, if court gives

injunction in favor of bank, they face problem to sell the land. Because client put mussel-

8/3/2019 Trust Bank

45/54

men protect the land from bank. Moreover people are not interested buy land on occasion

from court. Finally the interesting thing is most of the time the same client but the land in

another name

A COMPARATIVE STUDY TO EVALUATE THE LENDING PERFORMANCE OF

THE BANKING SECTOR IN BANGLADESH

NCBs vs. FCBs vs. PCBs

In our country there are basically three types of banks- Nationalized Commercial Banks

(NCBs), Private Commercial Banks (PCBs) and Foreign Commercial Banks (FCBs).

According to last 5 years (2001-2005) data among the total loans 23% loans becomeclassified. Now among the three types of banks, the lowest amount of classified loans is

hold by the FCBs, which is followed by PCBs and NCBs respectively. Now the question

arises why the FCBs are most efficient and the NCBs are the most inefficient.

Nationalized Commercial Banks

Currently there are four NCBs- Sonali, Agrani, Rupali and Janata. These banks are

inefficient because of the employees. As they are not responsible for their activities, theycan do whatever they wish. The easiest way to take loan from these banks is to give bribe

to top officers. Most of the cases they dont go for the feasibility studies of the borrower.

But recently Govt. become aware about this factor and takes several strong steps toremove this culture. But they dont successful until and unless, Govt. impose punishment

for the responsible employees. The punishment may be sack from job and jail. Now the

Govt. banker thinks whatever may be the case they dont loose their job. If Govt. couldremove this idea from them then they would become more careful about their activities.

Foreign Commercial Banks

Now lets put our attention to the FCBs. Currently twelve foreign banks operates in thecountry. Among them Standard Chartered Bank takes the leading role. Whatever maybe

the case, again here we try to find out why these banks hold less classified loans.

Firstly, out of twelve only five are effectively engaged in corporate banking, one is newly

established and others are basically doing foreign transactions job. As a result their

amount of classified loans becomes smaller then the other two types of banks.

Secondly, their cost of fund is less than others banks. So they can charge less interest

against the loan. As a result the demand for their loan is high and they have more options

to choose clients than other banks.

8/3/2019 Trust Bank

46/54

Finally and most importantly because of their organization structure their employees are

more efficient and responsible to their activities. The ultimate result is that they hold lessclassified loans.

Private Commercial Banks

At last, lets put our concentration to the PCBs. Among the three types of banks, these

banks have about 26.10% classified loans because of two reasons.

First of all, their cost of fund is not cheaper than the FCBs. So they cant compete withthem.

Secondly and finally, the employees of these banks are not Govt. employees. They should

to be responsible for their activities. Moreover the borrowers have to wait long to getloans. But because of the efficient employees the PCBs hold less classified loans than the

NCBs.In a nutshell, we can say that the FCBs and NCBs enjoy better facilities than the PCBs.

The elite customers, who look for cheaper source of money, nock the FCBs doors. The

customers, who looks for quick source of money looks for the NCBs. PCBs have to deal

with the rest of the clients. Another point is that the numbers of PCBs are several timeshigher than the FCBs and NCBs. So a strong competition is moving around in the market

and the competition is not equal.

A COMPARATIVE STUDY TO EVALUATE THE LENDING PERFORMANCE THE

TRUST BANK LIMITED VS. PRIME BANK LIMITED

PBL vs. TBL

At the end of each year there a rating is done by Bangladesh Bank called CAMEL rating.

CAMEL i.e. five components are considered at the time of rating. Example C for Capital,

A for Asset, M for Management, E for Earning and L for Liquidity. Those who arestronger on these categories, their given number is 1 (one), satisfactory is 2 (two), fair is

3 (three), marginal is 4 (four) and unsatisfactory is 5 (five). CAMEL rating determines all

banks positions.

Now the reasons for which these two banks are selected for this comparison is their

position in the CAMEL rating. PBL (only PCB) located in the 1 category and TBL holds

the 2 or satisfactory position in the rating. Here I try to put our attention the reasons for

8/3/2019 Trust Bank

47/54

which PBL holds number 1 position and what are the wrongs with the TBL management

that they hold only number 2 or satisfactory position.

Prime Bank vs. Trust Bank

Prime Bank Limited

Prime Bank Limited is a fast growing private sector. And the Bank is already at the top

slot in terms of quality service to the customers and value addition for the shareholders.The Bank made satisfactory progress in all areas of business operation in 2005. In 2005,

the percentage of lending to deposits was about 88.60%, which increased in 2004 as

82.72%. The amount of total operating income of the PBL shows it different from the

other Banks. In 2005, the amount of total operating income was Tk 2,406.43 million,which was in 2004 about Tk 1,970.37 million which was slightly increased and the

amount was Tk 436.06 million.

Prime Bank Limited at a glance (million/Tk)

Particulars 2004 2005

Deposits 28,069.24 36,022.46

Loans & Advances 23,219.67 31,916.11

Total Operating Income 1,970.37 2,406.43

Profits 1,064.24 1,200.83

Loans as (%) of total deposits 82.72% 88.60%

Provisions 58.35 20.28

Unclassified Loans 22,866.94 31,402.58

Classified Loans 246.23 308.21

Ratio of classified Loans to total Loans 1.25% 0.96%

8/3/2019 Trust Bank

48/54

Total Deposits, Loans & Profits (million/Tk)

36022.46

28069.24

31916.11

23219.67

1200.8

1064.2

0

5000

10000

15000

20000

25000

30000

35000

40000

A(2005) B(2004)

YEAR

AMOUN

DEPOSITS

LOANS

PROFITS

Prime Bank Limited, it is the only private commercial bank in the 1st position in the

CAMEL rating. At the same time it holds negligible number of classified loans becauseof two reasons.

First of all, their loan sanction system is simple and easier then other banks. If anybodywants to take loan than he or she would contract with the branch manager. The managers

took the necessary documents form the client and send it to the Credit division located at

Head Office. The credit division verifies the documents and the client and sends theproposal to the Board of Directors for approval or rejection. If the board approved the

loan then Branch Manager will proceed next and continue to communicate with the

client. And he has to take all responsibility against the client, none else. As a result, he

becomes conscious about his job.

Secondly and finally, Prime Bank Limited put more concentration on the consumer client

than corporate client. Here consumer client means the borrower is a person rather thanlimited or proprietor based business organizations. And it is easy task to handle those

consumer clients. Moreover their client selection is better for which they are able to take

this position.

The Trust Bank Limited

The Trust Bank Limited at a glance (million/Tk)Particulars 2004 2005

Deposits 9,314.95 12,704.90

Loans & Advances 6,804.45 9,738.32

Total Operating Income 427.43 511.46

Profits 216.38 226.29

8/3/2019 Trust Bank

49/54

Loans as (%) of total deposits 73.05% 76.65%

Provisions 47.89 69.97

Unclassified Loans 6,704.10 9,579.68

Classified Loans 100.35 128.97

Ratio of classified Loans to total Loans 1.48% 1.32%

Total Deposits, Loans & Profits (million/Tk

12704.9

9314.9

9738.32

6804.45

226.2

9

216.3

8

0

2000

4000

6000

8000

10000

12000

14000

A(2005) B(2004)YEAR

AMOUNT DEPOSITS

LOANS

PROFITS

The Trust Bank Limited is one of the latest names in the PCBs. It started its operation justfive years back. In 2000, the percentage of lending to deposits was 48%, which increased

in 2005 as76.65%. In 2004, the amount of total operating income was about Tk 427.43

million but in 2005 it was vastly increased by Tk 84 million and the amount was Tk511.46 million. In the year2004 total loan & advances and the deposits was Tk 6804.45 &

Tk 9314.90 million which increased in year 2005 to Tk 9738.32 & Tk 12704.90 million.

These are too difficult to make a comparison with the PBL. Here I tried to find out thereasons for the difference with PBL.

First of all, their organization structure. Here basically the branch manager seeks the

clients and sends documents to the Head Office Credit Division. Then credit division

verifies those papers and send proposal to the Board of Directors. If the proposalapproved then the client communicate with the head office to continue their facility and

for money contract with t