Introduction Achievement of high economic growth is the basic principles of present economic policy. In achieving the objectives, the banking sector plays an important role. The banking sectors channel resources through deposit mobilization and providing credit for different business venture. The successful running of a bank business depends upon how effectively the credit management recovered the funds. The Bangladesh Commerce Bank Limited is new banking operation in a sound manner. BCBLi is always ready to maintain the highest quality services by upgrading Banking technology prudence in manage and applying high standard of business ethics through its established commitment and heritage. Objectives of a private institution like BCBL are to maximize profit through optimum utilization of resources by providing best customerâ€™s service. To ensure the safety of depositor and give them different types of credit facilities, Consumer Credit Scheme (CCS) is one of such kind of credit facility, which helps limited income people to purchase any household effects, including car, computer, air conditioner, motorcycle and other consumer durable. The scheme has been generating huge profit for the Bank. But the recovery rate is not up to the mark as BCBL tries to recover. If the management of Bangla Bazar Branch becomes successful to increase the recovery rate of this scheme, it can be the highest profitable sector for the Branch. This research reveals how BCBL can decrease the defaulting rate. The profit of a commercial bank depends primarily on the utilization of its fund. But Bank cannot lend its fund fully. As per Banking Company Act 1991 every banking company has to maintain a specified minimum (presently 16%) of the total of its demand and time liabilities in the form of cash and approved securities with Bangladesh Bank. This percentage or ratio is termed Statutory Liquid Ratio. Further every scheduled bank has to maintain with Bangladesh Bank an average daily balance, the amount of which has not to be less than a particular percentage (presently 4%) of the total of its demand and time liabilities. As such Commercial Bank generally goes for short-term finance although a small portion of its total deposit is invested as long term lending.
Prolegomenon Modern banks play an important part in promoting economic development of a country. Banks provide necessary funds for executing various programmers underway in the process of economic development. They collect savings of large masses of people scattered through out the country, which in the absence of banks would have remained idle and unproductive. These scattered amounts are collected, pooled together and made available to commerce and industry for meeting the requirements. Economy of Bangladesh is in the group of worldâ€™s most underdeveloped economies. One of the reasons may be its underdeveloped banking system. Government as well as different international organizations have also identified that underdeveloped banking system more causes some obstacles to the process of economic development. So they have highly recommended for reforming financial sector. Since 1990, Bangladesh Government has taken a lot of financial sector reform measurements for making financial sector as well as banking sector transparent, formulation and implementations of these reform activities has also been participated by different international organization like World Bank, IMF etc. In 1996, World Bank published â€˜Bangladesh: Agenda for actionâ€™ in which it has suggested a lot of recommendations for economic development of our country. These recommendations include special presentation for reforming banking sector. Rationality of the Study Proper economic growth of a country largely depends on sound and proper industrialization. A huge amount of fund is required for the sound industrialization. Various Private and Public banks invest their funds in the form of credit. The BCBL also invests or lends its fund in this regard. The BCBL has several types of credit facilities. The profitability of a bank largely depends on appropriate credit approval procedure. The credit approval process involves various type of risk. When a bank lends money to the investor, it has to consider the related risks of the lending. So a proper credit approval policy and monitoring technique is essential. For the knowledge of banking system, the students of Business Studies must acquire the knowledge of lending process. It is the core to a bank. Bank earns profit by financing various sectors of business in the form of credit. Hence credit approval and monitoring technique is very important for the bank and the economy also. So the researcher selects this specific topic for the study.
Objectives Prime objective • To know how the Bank fixes its prices for Loan and Advances. Secondary objectives The secondary objectives were: •
To analyze the present policies and practices of credit management in BCBL
To find out the Strength and weakness of Bangla Baser Branch in BCBL
To deliver greater suggestion measures for the improvement
Methodology The nature and type of this study is exclusively an observatory 1 and exploratory2 research. The method involved an intensive study of books; journals and banks survey to gauge the theoretical aspects of commercial bank operation. A commercial bank operation has been observed directly aiming to conduit the theories and practices thereby. Research Types i) Observatory Research A 15 weeks direct observation and participation in BCBL operations has been done by the researcher. During the participatory work in bank, the internee has ideas and collected relevant information from different desks. The methodological procedure follows different stages, which were described briefly as below: •
Sources of data
Information used in the report collects from both primary and secondary sources. Primary data collected mainly through the writer’s observation of the approval process and monitoring techniques, informal interviews of executives, officers and employees of The Bangladesh Commerce Bank Limited. Sources of information for writing this report were: •
Personal experience gained by visiting different desks.
Study of old files.
Different circulars sent by Head Office of Bangladesh Commerce Bank and Bangladesh Bank.
Observation is the only method available to gather certain types of information. Observation is the full range of monitoring behavioral and non behavioral activities and conditions 3. Exploratory studies tend towards loose structure with the objective of discovering future research task. The immediate purpose of exploration is usually to develop hypotheses or questions for further research. 2
Publications on Credit Management •
Probability sampling has been done for the research purpose. This was done for the convenience of the study and to meet the available time in my hand. The bankers surveyed by interview. • Analysis techniques This was a descriptive report mainly aiming to depict the credit approval process and monitoring techniques of the BCBL. The data gathered from both primary and secondary sources arranged orderly to get a clear picture of The Bangladesh Commerce Bank’s credit management policy regarding lending process and monitoring. The study included both qualitative and quantitative analysis of loan approval process and monitoring tools. Based on the observational information writer also tries evaluate and analyze the problems involved in various phases of the credit approval process and monitoring techniques. After receiving the necessary data, it has been placed in the data instrument sheet. As per the guideline in the questionnaire manual, collected data have been analyzed by using different statistical technique. Results of the data analysis have been used to prove the specific objectives to draw a conclusion. ii) Exploratory Research A pricing Loans model has been developed as part of the exploratory research. The loan-pricing model assumes that the rate of interest charged on any loan includes three components: 1) The cost to the lender of raising adequate funds to lend. The lender’s non-funds operating costs. 2) Necessary compensation paid to the lender for the degree of default risk inherent in a loan request. 3) The desired profit margin on each loan that provides the lending institutions stockholders with an adequate return on their capital. The model finally developed considering three factors, such as Price of Loans3 = Cost of Capital fund4 + Risk Premium5 + Expected Profit6
Pricing Loans is the lender wants to charge a high enough interest rate to ensure that each loan will be profitable and compensate the lending institution fully for the risks involved 4 The cost of capital is an expected return that the provider of capital plans to earn on their investment. 5 The risk premium can be the expected rate of return above the risk-free interest rate. 6 Profit is the difference between the income of the business and all its costs/expenses .
Scope and Limitations of the Study Scope The Bangladesh Commerce bank Limited is one of the leading banks in Bangladesh. The scope of the study is limited to the Bangla Bazar Branch only. The portion of the report covers the organizational structure, background, functions and the performance of the bank in broad spectrum. The Credit management portion covered in the Project part of the report. Besides credit management, the report was mainly highlight on few delicate aspects like Service charge, Foreign Currency Exchange rate, Credit worthiness of customer (character, capacity, condition, cash, collateral and control), forced credit and Industry analysis. Limitations Time was a big factor to have adequate knowledge to make a complete report. My internship period was just for 03 (three) months. On the way of my study, I have faced the following problems that may be terms as the limitations/shortcomings of the study. •
Budgeted times for the Study
The first obstruct is time itself. Due to the time limit, the scope and dimension of the study has been curtailed. Bangladesh Commerce Bank Limited is a big organization. It is very tough to deal with this Bank within this short time. On the other hand due to short time I will not become able to conduct with all the customers who have taken the loan. The respondents are scared with different places. Due to the short time it will not possible me to do random sampling and conduct with the respondent by going everywhere. •
It is very difficult to collect data from such a big organization. But for better interpretation I collected some information from the Head office. Because of some divisional and confidential problem, are not to get enough information. So for better interpretation I didn’t get sufficient data. •
Lack of Records
Sufficient books, publications, facts and figures were not available. These constraints narrowed the scope of accurate analysis. If these limitations have not been there, the report would have been more useful and attractive.
BANK PROFILE The prosperity of a country depends upon its economic activities like any other sphere of modern socioeconomic activities; banking is a powerful medium of bringing about socio-economic changes of a developing country. Agriculture, commerce and industry provide the bulk of a country’s wealth. Without adequate banking facility these three cannot flourish. For a rapid economic growth a fully developed banking system is highly essential. A suitably developed banking system can provide the necessary boost for the economic uplift of the country. The whole economy of a country is link up with its banking system. Banks in Bangladesh can be classifying into the following categories:
BANGLADE SH BANK (central bank of the country)
NATIONALIZE D COMMERCIAL BANKS
SPECILIZE D BANKS AND CREDIT AGENCIES
COMMERC IAL BANKS
BANGLADESH SHILPA BANK
CENTRAL COOPERATIVE BANK
BANGLADESH KRISHI BANK
BANGLADE SH SAMABAYA BANK LTD.
BANGLADESH SHILPA RING SANGSTHA PRIMARY COOPERATIVE CREDIT SOCIETES
Figure: 1 Classification of Banks in Bangladesh Background Banking system occupies an important place in a nation’s economy. A banking institution is indispensable in modern society. It plays a liberalization of economic policies in Bangladesh Commerce Bank Ltd emerged as a new commercial bank to provide efficient banking services with a view to improving the socio-economic development of the country. The Bangladesh Commerce Bank Limited has created a new way of its own banking arena of Bangladesh in terms of service to customer and value addition to its stakeholders. The Bangladesh Commerce Bank Limited was incorporated on 01-06-98 as a public limited company by re-organizing erstwhile Bangladesh Commerce and Investment Ltd (BCIL) through passing act 12 of 1997 in the parliament of
the Peoples Republic of Bangladesh and under the Companies Act, 1994 and Banking Companies Act.1991. The commercial operation of the Bank started on 16 th September 1999 through opening of its Principal Branch and all other 24 branches were opened by 31 st December 1999. Bangladesh Commerce Bank Limited is located at 19, Rajuk Avenue, Dhaka 1000, one of the fast growing commercial and business areas of Dhaka city. A group of dynamic Board of Directors drawn from different disciplines manages the Bangladesh Commerce Bank Limited. They hold very respectable positions in the society and are from highly successful group of Businesses and Industries in Bangladesh. The Bank has a very competent Management Team who has long experience in domestic and international Banking. The Bank upholds and strictly abides by good corporate governance practices and is subject to the regulatory supervision of Bangladesh Bank. Authorized Capital: BDT 2000.00 Million Paid up Capital: BDT 920.00 Million Mission and Vision of BCBL Mission: •
To be the most caring and customer friendly provider of financial services, creating opportunities for more people in more places.
To ensure stability and sound growth while enhancing the value of shareholders investment
To aggressively adopt technology at all levels of operation to improve efficiency and reduce cost per transaction
To ensure a high level of transparency and ethical standards in all business transacted by the bank
To be socially responsible and strive to uplift the quality of the life by making effective contribution to national development
Vision: The Bangladesh Commerce Bank has a dream-to carve out a name for our esteemed organization as a symbol of corporate exception that would stand out in the crowed as a “bank par excellence”. Management Team The Board consists of 11 (eleven) Directors. The members of the Board of Directors of the Bank hold very respectable positions in the society. They are from highly successful group of Business and Industries in Bangladesh. Each member of the Board of Directors plays a significant role in the socioeconomic domain of the country.
Offices Automation Basic accounting system of the bank branches has been fully computerized to minimize cost and risk to optimize benefits and increase overall efficiency for improved services. The bank is capable of generating the relevant financial statements at the end of the day. The Bank is taking action to become a member of ATM Network. The web page www.bcblbd.com can be accessed round the clock for appropriate information. Bank Financial Telecommunication: SWIFT is a member owned co-operative, which provides a fast and accurate communication network for financial transactions such as Letters of Credit, Fund transfer etc. In 2002, by becoming a member of SWIFT, the bank has opened up possibilities for uninterrupted connectivity with over 5,700 user institutions in 150 countries around the world. Products and Services of the Bank The motto of The Bangladesh Commerce Bank is ‘Service First’. The BCBL’s goal is to be the most caring and customer-friendly provider of financial services creating opportunities for more people in more places. Bangladesh Commerce Bank always undertakes a continuous mission to develop new and improved services for its valued customers. Some of BCBL’s popular products & services have given bellow: • • • • • • • •
Financing of small and medium Industries Financing of Trade Financing of Import & Export Micro Credit and Micro Enterprise Scheme Credit Scheme for Women entrepreneurs Consumers Credit Scheme Special Credit Scheme for Service holder Special Savings Scheme
Monthly Income Scheme (MIS)
Lakhpoti Deposit Scheme (LDS)
Millionaire Deposit Scheme (MDS)
Kotipoti Deposit Scheme (KDS)
Marriage Deposit Scheme (MDS)
Education Savings Scheme (ESS)
Double Benefit Scheme (DGDS)
Triple Benefit Scheme (TGDS)
Deposit Products: • Monthly Savings Scheme (MSS)
Lending Products: • Consumer Credit Scheme •
Loan Ag. Trust Receipt
Other Commercial Lending such as: Cash Credit, PAD, LIM, LTR
Evening Banking Service
Financial Performance of the BCBL Business Growth and Operating Result Deposit numerous challenges on the frontline of banking, The Bangladesh Commerce Bank Ltd ended with an impressive progress in almost all key areas of banking business during 2007. During the year, Bank retained its upward trend and recorded an operating profit of Tk.998.11 million compared to 942.07 million in 2006 registering a growth of 5.95%. An amount of Tk.451.40million has earmarked as tax contribution to national exchequer. Earning Per Share (EPS) increased to Tk.4.66 in 2007. Capital Funds: The Authorized Capital of the Bank remained unchanged Tk.2000 million and Paid-up Capital at Tk.1689.99 million as on 31 December 2008. Statutory Reserve Fund of the Bank stood at Tk.646.79million, Retained Earnings Tk.125.57million and General Provision for unclassified Loans and Advances at Tk.267.13million. After taking all considerable components for determining Capital Adequacy Ratio (CAR), total capital funds stood at Tk.2792.33 million as on December 31, 2008. Deposits: Deposits have well recognized as the blood of financial institutions especially banks. Inevitably they constitute the very foundation of a bank. In pursuit of deposit mobilization, the bank was most successful during 2008 with a record level of deposit balance of Tk.27114.47 million from 24199.01 million in 2007 producing a growth of 12.05%. Deposit mix at the end of Year 2008 is as follows:
Table- 2.1 (Deposit) Sl. No. 1
% of Total Deposit
Saving Bank Deposits
Short Term Deposits
Deposit of BCBL in 2007
Current Account Saving Account Short Term Deposit(STD) Fixed Deposit Receipt(FDR )Deposit Scheme Bills Payable Other Deposit
Credit Portfolio: The credit portfolio of the bank includes both conventional and Shariah based. The Management Committee (MANCOM) at Head Office administers credit activities of the bank with distribution of distinct responsibilities as regards assessment of risks, lending decisions and monitoring functions. Total Loans and Advances stood Tk.23637.61 million at the end of 2008 against Tk.20677.68 million of 2007 yielding a significant growth of 14.31%. The Bank is very much cautious and selective in choosing borrowers to maintain its assets quality. As a whole the Bank represents a quality credit portfolio. Bankâ€™s Deposit to Advance ratio was as good 87.18% during year. A wide range of business, industry, and service and trade sector constitutes the Bankâ€™s advance portfolio well diversified and extending project finance, export finance, SME Loans, commercial credit, continuous loans, agricultural credit, house building loan and staff loan among its deserving clients. Commercial
credit comprising the major part of corporate credit continued to remain major segment of the business of the Bank. The strategy centered its focus on comprehensive service to the clients who deserve expertise in trade finance and related field. Furthermore, Bangladesh Commerce Bank has been playing a key role in syndication market. The sectors of financing through syndication now consist of pharmaceuticals, chemical, cement, ceramic, steel, micro finance, food and allied infrastructure. Sector wise allocation of credit during 2008: Table -2.2 Credit Portfolio Sector Agriculture
Million (Taka) 814.92
Ready Made Garments
Iron and Steel
Consumer Credit Scheme
Other general Loan
Agriculture Ready Made Garments Textile
30.42 3 0.65
1.62 3.14 1.53
Iron and Steel
5.6 1.33 0.85
Import & Export Business: Bangladesh Commerce Bank maintained strong growth in trade finance. The Bank opened LCs for import worth Tk.26496.80 million in 2008 compared to Tk.21, 856.57 million in 2007. The volume of export bills transacted by the bank was Tk16725.40million in 2008 compared to Tk.16.940.61 million in
2007. The L/C outstanding at the year-end 2007 has reached Tk.5539.76 million as compared to Tk.3140.12 million of last year. Credit Limit: Table - 2.3 Credit Limit Type of Customer
Loan Limit up to
Duration of the Loan
Household Durable Loan Car Loan Doctors Loan Advance Against Salary Any Purpose Loan Education Loan Travel Loan Hospitalization Loan Performance of the bank at a glance:
Tk.5, 00,000.00 Tk.40, 00,000.00 Tk.10, 00,000.00 Tk.3, 00,000.00 Tk.1, 50,000.00 Tk.3, 00,000.00 Tk.2, 00,000.00 Tk.5, 00,000.00
5-yrs 5-yrs 5-yrs 2-yrs 2-yrs 2-yrs 3-yrs 2-yrs
Table -2.4 Performance of the bank 2008 2000.00 1689.99 649.79
Total Capital Funds
27114.4 23637.61 3461.45 43222.20 1620.60 4186.33 3188.22 998.11 219.79 32573.19 145.88 4.66 7%BonusShare 87.18% 5.96%
24199.01 20677.68 2392.01 38797.18 940.10 3622.05 2679.98 942.07 163.93 27170.45 192.44 43.63 10.00% 85.45% 4.91%
20290.47 18032.50 2240.78 34108.50 1427.40 2863.86 1964.83 899.03 165.48 22767.84 203.31 32.45 24.00% 88.87% 3.86%
18005.20 15383.93 2750.00 34108.50 1408.00 2395.45 1464.52 930.93 149.57 20100.25 207.69 84.40 36.84% 85.44% 0.43%
10.66% 26 350 677
8.24% 21 345 605
10.69 21 297 554
Deposits Advances Investment in Govt. Securities Foreign Trade Business Foreign Remittance Income Expenditure Operating Profit Fixed Assets Total Assets Book Value per Share (Taka) Earning per Share (Taka) Dividend Loan as a % of total Deposits Non-Performing Loan as % of total Loan Capital Adequacy Ratio Number of Branches No. of Foreign Correspondents Number of Employees Commitment •
12.66% 27 397 731
2007 2000.00 845.00 543.76
(Tk. In Million) 2006 2005 2000.00 2000.00 557.55 557.55 403.85 301.08
Particulars Authorized Capital Paid-Up Capital Reserve Fund
“Service First” is not just motto, BCBL really mean it. Bangladesh Commerce Bank knows that, by responding to customer needs, one can provide better service. Bank train employees to use their own
initiative to satisfy customer’s needs, resolve problems quickly and make suggestions about how to serve them better. •
Providing customers with a comfortable environment and up to date technical facilities to do their banking is an important aspect of the customer service at Bangladesh Commerce Bank. Goal is to make banking easier through one to one communications. •
Bangladesh Commerce Bank views banking to be a long-term relationship with customers. The business they transact with Bank help to understand their goals and expectations and bank respond proactively to their financial needs. •
At Bangladesh Commerce Bank, great care has taken customers, to make sure that all banking transactions have done in a confidential & Professional manner.
FORMS OF ADVANCES What is Advance? Credit is an arrangement whereby bank acting at the request and on the instructions of a customer or on its own behalf to make a payment to or to the order of a third party or is to accept and pay bills of exchange drawn by the beneficiary. In an economy banks play the role of an intermediary that channel funds from the surplus economic units to the deficit economic units. The bank’s mission is to actively participate in the growth and expansion of our national economy by providing credit to borrowers in most efficient way of delivery and at a competitive price. Bank can lend up-to 84% of the total amount of its total time and demand liabilities. The rest 16% is kept as Statutory Liquidity Reserve (SLR) with Bangladesh Bank. But in practice banks do not lend the whole 84% and a certain portion is set aside to meet up the day-to-day banking operations and also meet up the liquidity requirement of the depositors. Bank can lend up-to 15% of its core capital without the approval of Bangladesh Bank but above that level approval from Bangladesh Bank is required. Credit is continuous process. Recovery of one credit gives rise to another credit. In this process of revolving of funds, bank earns income in the form of interest. A bank can invest its fund in many ways. Bank makes loans and advances to traders, businessmen, and industrialists. Moreover nature of credit may differ in terms of security requirement, disbursement provision, terms and conditions etc. In the banking arena, many types of financial facilities are extended to the clients with the expectation of getting the same returned along with interest. This “provided purchasing power” can be termed as loan, credit or advance. These three terms have similarities as well as some differences. Advance We often use loans and advances as an alternative to one another. But theoretically these two are different concepts. In theoretically Advances is the combination of such items where loans are a part only. For this
credit section of the banks is known as advance section 7. Academically Advance is the combined form of the following items.
A dvances Loans
W o r k in g C a p it a l
C a s h C r e d it
O ve rd ra ft
B ills P u r c h a s e d A n d D is c o u n t e d
Figure: 3.1 Advances From the above discussion, we can easily say that as a profit oriented business organization, if a bank gives its resources temporarily under certain conditions and for a specific duration, it will be called loan. Time to time, the term loan, credit and advance are used separately in different spheres. Loan Banks can provide loan in different ways. Loans can be in cash or in non-cash form. If any client takes advantage from bank by using the bank’s goodwill through making a contract, this will be treaded as “goodwill loan” of the bank. L/C, traveler’s checks, and traveler’s notes are the “goodwill loan” of a bank. Loans can be defined as, “the lending of a sum of money of a lender to a borrower to be repaid with a certain amount of interest” 8. Loans are, “formal agreement between a bank and borrower to provide a fixed amount of credit for a specified period.” 9 Credit The word "Credit" is derived from the Latin word "credo" meaning, "I believe". The term credit may be defined broadly or narrowly. Speaking broadly, credit is finance made available by one party (lender, seller or shareholder/owner) to another (borrower, buyer, corporate or non-corporate firm). More generally the term credit is used narrowly for debt finance. Credit is simply the opposite of debt. Debt is the obligation to make future payments. Credit is the claim to receive these payments. Both are created in the same act of borrowing and lending. In a credit economy, that is economy with borrowing and lending, each spending unit can be placed in any one of the three categories: deficit spenders, surplus spenders, and balance spenders, as it total expenditure is greater than, less than, or equal to its total receipts respectively. The chief function of credit is to relax the constraint of balanced budgets. Types of Advances Advances by commercial banks are made in different forms such as loans, cash credits, overdrafts, bills purchased, bills discounted etc. These are generally short-term advances. Commercial banks do not sanction advances on a long-term basis beyond a small proportion of their demand and time liabilities.
7 8 9
(Bank Manual, 2007) Dictionary of Banking & Finance. Timothy W Koch.
Advances may be granted against tangible security or in special deserving cases on an unsecured/ clean basis. Loans In a loan account, the entire amount is paid to the debtor at one time, either in cash or by transfer to his current account10. No subsequent debit is ordinarily allowed except by way of interest, incidental charges, insurance premiums, expenses incurred for the protection of the security etc. sometimes, repayment is provided for by installment without allowing the demand character of the loan to be affected in any way. Interest is charged on the debit balance, usually with quarterly rests unless there is an arrangement to the contrary. No checkbook is issued. The security may be personal or in the form of shares, debentures, Government paper, immovable property, fixed deposit receipts, life insurance policies, goods etc. Overdraft Overdrafts are those drawings, which are allowed by the banker in excess of the balance in the account up to a specified amount for definite period as, arranged for. Generally it is given to the businessmen to increase their business activities. Any deposit in the SOD account is treated as repayment of overdraft. Generally provide against FDR, PSP or any Primary Security. Table -3.1 Overdrafts SECURED OVERDRAFT â€“ SOD
LOAN GENERAL â€“ LG
Only Businessmen can open this Only CD Account Holder can open Interest rate is 14.00% Interest starts from the date of first withdrawal
Anyone can open this account CD/SB both Account holder can open Interest rate is 15.00% Interest starts from the date of sanction of the overdraft
Cash Credit: Working Capital Management Cash credit account is basically a current account, however a little difference exists, between them. The former is intended to be an account with credit balance and the latter an account for drawing of advances. Operation of cash credit is same as that of overdraft 11. The purpose of cash credit is to meet working capital needs of traders, farmers, and industrialists. The principal advantages of a cash credit account to a borrower are that, unlike the party borrowing on a fixed loan basis, he may operate the account within the stipulated limit as and when required, and can save interest by reducing the debit balance whenever he is a position to do so. Cash credits are against personal security. If there is good turnover both in the account and in the goods, and there are no adverse factors, a cash credit limit is allowed to continue for years together. Of course, a periodical review would be necessary. Inland Bills Purchased - IBP Deviation from this practice is being made in the case of some loans, say, agricultural loans and the amount may be disbursed to the borrower in convenient installments, as and when he may need funds. 11 .Hasem, Abul; What the Banker Does, 2/E; p-53-54. 10
Bank purchase two types of Inland Bill – Clean Bill and Documentary Bill Clean Bills are those, which require no document for payment like Checks, Demand Draft, Pay Order, Telex Transfer, and Mail Transfer etc. Documentary Bills are those, which require related documents for payments like bill of exchange, Railway Receipt, Chalan, and Invoice etc. Before granting a limit, the banker satisfies himself as to the creditworthiness of the drawer. Sometimes banks verify the financial standing of the drawees of the bills, particularly when the bills are drawn from time to time on the same drawees and /or the amounts are large. Sometimes, overdraft or cash credit limits are allowed against the security of bills. A suitable Margin is usually maintained. Bills Discounted Usance bills, maturing within 90 days or so after date or sight, are discounted by banks for approved parties. The difference between the present worth and the amount of the bill is represents earnings of the banker for the period for which the bill is to run. In banking terminology this item of income is called “Discount”. Discounting of issuance bills/ promissory notes constitutes a clean advance against two or more signatures of independent parties, one that of the endorser, and the other that of the drawer / maker. Hire –purchase and Leasing Finance Banks entertain advances to parties who finance hire purchase business relating to transport vehicles, machinery and durable consumer goods e.g. refrigerators, radiograms etc. Banks have also started lending to leasing companies. They have been recently permitted to establish subsidiary companies undertaking leasing business. Temporary Overdrafts An un-interrupted temporary overdraft facility allowed by a bank extending over a period of time, says a few years, and though without execution of documents, is tantamount to a contract between customer and the bank. A contract is implied from the conduct of the parties. The bank cannot therefore unilaterally terminate the facility without giving the account-holder due notice in this regard. 12
Clean Advances Traditionally, clean (unsecured) advances were granted for short periods after taking into consideration the net liquid resources of the borrowers. Since there was no security to fall back upon, only such parties were considered eligible as would, at short notice, be expected to adjust the amount. Credit, Capital and Capacity had, therefore, to be carefully assessed before such facilities were allowed. Clean advances are 12
Indian Overseas Bank vs. N.D. Govindlal Patel, A.L.R.1980,Gujarat, p-158
generally spread over a number of parties and are sometimes required to be reinforced by suitable guarantees. Term Loans Since some time, bankers have started lending large amounts for fairly long periods to industries and agriculture on the security of fixed assets on “term-loan” basis. Such loans are repayable by installment over a number of years ranging from 3 to 10 and sometimes more. Bridge Loan Usually term loans are sanctioned by financial institution such as State Finance Corporations, ICICI and IDBI etc. Sometimes when these institutions are unable to disburse the loans already sanctioned either for what of completion of documentation formalities or, as in the case of some State Finance Corporations, for what of resources, it is customary for them to commercial bank to extend what are known as ‘bridge loans’ for temporary periods as a stop gap arrangement. Participation / Syndicated Loans The size of industrial units is expanding rapidly as requirements for finance. Where the amount of an advance is Large, no bank could afford or would like to sanction the entire limit singly, in such cases two or more banks agree to advance jointly to one borrower in certain agreed proportions against a common security. In such cases the borrower is one, the security is common and the lending banks are more than one. Such loans called participation loans or consortium finance. Types of Loans Table-3.2 Types of Loans Types of Loans Characteristics It is given at equal monthly installment Interest rate is 15.00% Industrial Loans Grace Period is allowed depending on types of project To facilitate the industrial growth this is given This is given to accelerate the transport facility nationwide Interest rate is 15.00% Transport Loans It is given at equal monthly installment Others conditions are almost same as the Industrial Loans This Loan is give for the construction of dwelling house. House Building It is given at equal monthly installment Loans Interest rate is 15.00% This Loan is not given frequently. Others Loan – Agricultural loan is given from this branch of Premier Bank at the rate of Including 12.00-14.00%. agricultural Loan Every Bank has to send a quarterly CIB Report to the Bangladesh Bank for amounts due up to TK.50, 000/- mentioning the name of the borrower and the purpose for which loan has been sanctioned and a monthly statement for the amount due more 1 crore Taka. Bangladesh Bank provides CL (Classification Form) to every bank for preparing this report. Bank preserves following provisions for continuous, forced, and term loan:
For unclassified loan
For SME Loan
For substandard loan
For doubtful loan
For bad loan
Staff Loan STAFF HOUSE BUILDING LOAN – SHBL •
The branch manager is getting this facility.
Repayment is adjusted from his monthly salary.
Repayment is made at equal monthly installment.
STAFF LOAN AGAINST PROVIDENT FUND – SPF •
10% of basic is contributed by employee in every month
10% of basic is also contributed to the PF by the Bank
Repayment is adjusted from their monthly salary
Staffs can take loan against PF
Classification of Bank Loans Bank is an institution which is engaged in the business of money and loan. The more loans a bank can provide the better and beneficial for the bank it will be. The loan should be provided to the appropriate users and they must be monitored in order to ensure the repayment of principal along with interest as and when become due. Loans can be of different types according to the terms, users and security.
In the following chart, the classifications of loans are depicted: Loan
Based on Users Individual
Based on tern
Based on security Unsecured (No Landless collateral)
Non-crop Fully-secured (with Collateral
Crop loan Export/Import
Education/Medical Securitized & others
Working capital Loan
Fixed capital Loan Medium-term
Distribution Long-term One term
Fig: 3.2 Types of loan The types of loans are discussed below: Classifications based on users: Individual Loan: i) Consumer Loan: Banks provide loans for durable goods/ applications and commodities like-loans for Freeze, TV, Computer, Car, Furniture etc. ii)
Housing Loan: This includes loans given to the fixed or low-income people for housing purposes. This loan is usually intermediate and or long-term.
Education/Medical and Other Loans: Some of the banks also provide loans to the people of the society in order to meet their educational or medical needs after being sure about the repayment.
Industry Loan: i)
Working Capital Loan: This type of loan is given to the business/ industry to provide capital required for purchasing raw materials, paying wages and fuel expenses etc.
Fixed Capital Loan: Huge amount of capital is required for procurement and replacement of machinery/ equipments for the industrial organizations.
Loans for Business Persons i)
Working Capital Loan: For maintaining day-to-day transactions, businesspersons need a great deal of working capital. By providing working capital loans, banks help to solve this working capital necessity of the businesspersons.
Export-Import Loan: Banks also help in export-import firms/ companies by issuing L/C, bill of exchange, discounting, direct loans etc.
Loans of Farmers i)
Crop Loan: For buying seeds, cows and fertilizers, farmers need money. They borrow the money from the bank in order to meet he expenses required.
Non-Crop Loan: Farmers also need money for poultry, fisheries, agro-business, agroprocessing and other purposes. In this case, socialized/ commercial banks provide small/medium loans to farmers.
Farming Equipment Loan: To purchase farming equipments, banks also provide loans to farmers. Farming equipments may include- power tiller, tractors, machinery for irrigations, etc.
Loans for Landless People: People are having no land or lands of less than 0.5 acre of land may be called landless people. The different types of loans that are usually provided to landless people are given below:
Small Business Loans: Banks may provide loans to landless people to establish income generating micro-enterprises, small businesses, poultry firms or fisheries. The purpose of banks is to help landless people to overcome financial distress as well as to build up some capital for future investment.
Housing Loan: Bank may provide housing loans to those who have small price of land but donâ€™t have any resource to erect a house just to protect them from rains and sun shines besides earning social status and protection from thieves.
Medical Loan: Loans may be given to landless people also for medical purposes.
Classification based on Term/ Periodicity: According to classification by Term/ periodicity, loans can be of three types: i) Short-Term Loans: This loan is sanctioned for less than one year. These can be of two types: a. Loans provided for immediate use & payable on demand b. Loans payable on short notice. ii) Medium Term: Usually, loans with the maturity of 1 to 5 years are called midterm loans. However, commercial banks give medium loans of maturity of 1-3 years. iii) Loan term: Loans with the maturity of more than 5 years are called long-term loans.
Classification Based On Security: i)
Unsecured Loan: Banks, often, provides loan without any type of collateral to the reliable persons or institution as clients having profound goodwill, excellent track record or sometimes to the very poor clients.
Fully Secured Loans: If the loan is given by taking the security/collateral of the amount exceeding the amount of loan or just equal to the amount of loan, it is called “fully secured loans”.
Partly Secured Loans: If the amount of loan is not fully secured, rather partial amount of collateral is provided to cover the loan sanctioned; it is called “Partly Secured Loan”.
Advances against Balances in SB, CD A/C and Term Deposit Receipt Precautionary Measures: Subject to the credit restrictions imposed, adopt the following precautionary measures in allowing advances against balances lying in the Savings Bank and/or Current Deposit Accounts of the parties: •
The account is not in the name of a Minor.
Make a note of it at the top of the account in the computer.
Right of set off when balance ear-marked in another Account of the borrower: While allowing advance to the customer against a credit balance earmarked/liened in another accounts kept by him in his own name and in the same rights, whether at the same Branch or at some other Branch of the Bank, take a letter of authority from the account-holder to combine the two accounts (one having a credit balance and the other a debit balance), at any time without notice, and to return checks which, as a result of the Bank having taken such an action, would overdraw the combined account. He should also agree not to close the account and withdraw the balance, pending adjustment of the advance. Right of appropriation-Balance earmarked in the Account of a third party: Where the advance is allowed against credit balance, ear-marked/lined in the account of a third party. whether at the same Branch or at some other Branch of the Bank, take an irrevocable letter of authority from that third party, authorizing the Bank to appropriate the credit balance lying in their account to the extent of the debit balance appearing in the account of the borrower, at any time, without any reference to them. This being an irrevocable letter of authority, they should agree neither to close the account pending adjustment of the advance allowed at their instance, nor to issue checks which would reduce that balance. The signature of the account holder in whose account a credit balance is ear-marked is verified on the irrevocable letter of authority given by him. The third party account is not in the name of a Minor. Confirmation having earmarked the credit balance maintained with other Branch of the Bank. In case, advance is allowed against credit balance, maintained with other Branch of the Bank, obtain a confirmation letter from that Branch to the effect that they have earmarked the credit balance in question and shall not close the account and honor checks, which will reduce the balance, until they receive clearance from the Branch allowing the advance. Advances Against Life Insurance Polices and Shares Proposals for advance from known and respectable clients only should be entertained. The Insurance Policy is an endowment policy. The borrower has an insurable interest in the life of the insured, if the
policy does not stand in his own name. Ensure that the policy is properly stamped. The policy does not bear any restrictive of qualifying conditions likely to affect its value as a security. The advance should be restricted to 90 percent of the surrender value to cover interest etc. The surrender value of the policy is ascertained from the Insurance Company/Corporation (policies for less than three years have no surrender value). Take a legal assignment by deed duly stamped at the customerâ€™s expenses and obtain the policy at the same time. The policy is assigned to the Bank by the assured and the assignment is sent to the Insurance Company/Corporation at its principal place of business in Bangladesh for registration and return. There should be provided power for the banker to surrender the policy for cash or otherwise to deal with or dispose of if as the banker may consider necessary fit in the event of failure on the part of the borrower in payment of the dues on due date or on demand being made by the Bank. All persons interested in the policy must join in the assignment. The assignment should be attested by witness. If there is previous assignment, such previous assignees have to reassign the policy in favor of the insured and if this is not done, all such previous assignee should join the assignment in favor of the Bank and all other loan documents. Along with the assignment, a notice in duplicate is also sent to the Insurance Company duly signed by the assignor and the Bank notifying the assignment and requesting them to disclose the surrender value of the policy along with any prior charges registered there against. They should also be requested to return to the Bank, a copy of the notice bearing the Companyâ€™s/Corporationâ€™s acknowledgement. An undertaking is obtained from the assured that he shall keep on paying the premium punctually, and produces the receipts to the Bank, and shall not do anything which might cause the policy to be void. After the loan is repaid the Bank reassigns the policy back to the borrower. The form of reassignment is as follows: Advance may be allowed against shares of various companies quoted on the Stock Exchange against required margin, and subject to credit restrictions imposed from time to time. The Branch should obtain a letter of lien from the borrower/holder in respect of all such shares which stand in his name, or which have been sent to the various companies for registration, in his name. Shares standing in the name of third parties should not, as a rule, be taken as security unless accompanied by proper letter from such third party agreeing to the shares being pledged to the Bank and giving up his own right in favor of the borrower with blank Transfer Deed. Where advance has been allowed to the borrower at the specific request of a third party against shares owned by them, the letter of lien shall be obtained from third party and not from the borrower. In the event of transferring the shares in the name of the Bank with the approval of the Head Office, Branches shall take special notice of any declaration of Dividend, Bonus Shares or any offer of Right Shares made by the companies concerned. They shall also ensure that all such Dividends and Bonus Shares are duly received by them.
The dividend is credited to the account of the borrowers and the bonus shares are kept along with other shares of the borrowers. The case of an offer of Right Shares, Branches shall send intimation to the borrowers concerned enquiring from them if they were interested to acquire them for the value mentioned on the Letter of Rights, which should immediately be deposited by them with the Bank. If the borrowers do not deposit the money from their own resources or make any alternate arrangement in that behalf, the Letter of Rights may be renounced with the permission of the Head Office and sold, and the sale proceeds should be credited to the borrower’s account under intimation to him. Advances (Loans, Overdrafts& Cash Credits) Against Pledge of Goods/Stocks Advance facility may be extended against security of Pledge of goods/stock (raw materials as well as finished product). In this case, the client surrenders the physical possession of the goods under Bank’s effective control. The ownership of the goods is, however, retained with the client. The pledge of the goods creates an implied lien in favor of the Bank on the concerned goods and if necessitated, Bank can sell the goods for adjustment of the advances by giving proper notice to the borrower. Sometimes collateral securities are also obtained if the Bank deems it necessary. While allowing credit facility against pledge of goods/stocks, the following points will be considered subject to restrictions imposed by Bangladesh Bank from time to time. Advances (Loans, Overdrafts& Cash Credits) Against Hypothecation of Good/Stocks Advance may be sanctioned to a client against primary security of hypothecation of raw materials and/or finished products. Under this arrangement, the borrower by signing a letter of hypothecation duly stamped creates a charge against the goods for an amount of debt but neither the ownership nor the possession of the same is passed on to the Bank. Only a right or interest on the goods is created in favor of the Bank, but the borrower binds himself to give possession of the goods to the Bank when called upon to do so. Hence, in order to secure the advance, Bank normally insists on the borrowers to provide suitable collateral security. While allowing credit facility against hypothecation of goods/stocks the following points shall be considered subject to restrictions imposed from time to time: •
The facility is to be allowed only to the trustworthy having undoubted standing and credit worthiness.
The goods are readily sellable and have constant and effective demand in the market.
Banks only for working capital and not for capital investment allow hypothecation advance.
The goods are not subject to rapid deterioration due to storage for short or long duration.
The borrower has an absolute title in goods.
The goods are not encumbered and/or hypothecated to any other Bank.
The prices of the goods are steady.
In case agricultural crops, the crops should be of current season and the advance is adjustable before the crops of next season comes in the market. A declaration to be obtained from the
borrower that he shall not charge the goods hypothecated to another person/Bank without prior consent of the Bank. •
Careful valuation of the goods and its quantity has to be made.
The selling price of goods is to be ascertained from the market.
The goods are to insured covering all risks under Bank mortgage clause.
Stock report duly signed by the borrower is to be obtained in Bank’s printed preformed at least once in a month but while releasing funds, up to date position of the stocks should be obtained. In the event of default, the Bank would be free to stop further drawings.
Fixation of margin, valuation of commodity and drawing power of a borrower are to be done carefully in the manner as advised under advances against pledge of goods/stocks.
Advances (Loans) Against Hypothecation of Transportation, Capital Machinery etc Points for General Consideration: Banks allow advances against power driven Vehicle and subject to Credit restrictions as applied from time to time. The following points are considered before selecting a proposed borrower: •
The customer is trustworthy and has got fair relation with the Bank.
The constituent is preferably a transport operator.
He has adequate experience in transport business.
The value of the vehicle
Projected cash flow vis-à-vis size of repayment installments
This is a medium term loan
This is generally allowed under Hire-Purchase or Lease Financing.
PRICING CONSUMER AND REAL ESTATE LOANS Pricing Consumer and Real Estate Loans A financial institution prices every consumer loan by setting an interest rate, maturity and terms of repayment that both the lender and customer find comfortable. While many consumer loans are short term, stretching over a few weeks or months, long-term loans to purchase automobiles, home applications and new homes may stretch from one or two years all the 25 or 30 years. Competition among consumer credit suppliers is also a power factor shaping consumer loan rates. Where banks face intense competition for consumer loans, interest rates tend to be driven down closer to loan production costs. Shorter-term cash loans may be unsecured, but longer-term loans like purchasing automobiles and other consumer durables are nearly always secured by the assets purchased. The Interest Rate Attached to Nonresidential Consumer Loans
Most consumer loans, like most business loans, are priced off some base or cost rate, with a profit margin and compensation for risk added. Such as the Cost-plus Model:
Loan rate Paid by the Consumer
Marginal cost of raising loan able fund to lend to the borrower
Non funds + operating cost
Premium for term -risk of consumer default
Premium + for termrisk with a longer term loan
Desire + d profit Margin
Banks use a wide variety of methods to determine the actual loan rates they will offer to their household customers. The most popular methods for calculating consumer loan rates include The Annual Percentage Rate (APR), The Simple Interest Method, The Discount Rate, and The Add-On Rate Method. The Annual Percentage Rate (APR) The APR13 is the internal rate of return that equates total payments with the amount of the loan. It takes into account how fast the loan is being repaid and how much credit the consumer will actually have use of during the life of the loan. The Simple Interest Method The Simple Interest approach, like the APR, also adjusts for the length of time a borrower actually has of the credit for which he or she is paying. If the customer is paying off a loan gradually, the simple interest approach first determines the declining loan balance, and that reduced balance is than used to determine the amount of interest owed. Interest owed = Principal X Rate X Time
The Discount Rate Method: While most consumer loans allow the customer to pay off the interest owed, as well as the principal, gradually over the life of a loan, the discount rate method requires the customer to pay interest up front. 13
The Truth-in-Lending Act, passed in the United States in 1968
Under this approach, interest is deduced first, and the customer receives the loan amount less any interest owed. 5.2.4 The Add-On Loan Rate Method: One of the oldest rate calculation methods is known simply as the add-on method because any interest owed is added to the principal amount of the loan before customer is total what the required installment payments will be. Effective Interest owed Loan rate = Average loan amount year 5.3 Compensating Balance Requirements Many banks require that consumer-borrowing money from them keep a certain percentage of the loan amount in a deposit account. This so-called compensating deposit balance requirement raises the effective cost of a consumer loan because the borrower does not have use of the full amount of the loan. Instead, the borrower only has use of the loan amount minus the required deposit balance. The effective interest return to the bank then rises above the loan rate quoted to the borrower.
Effective loan Rate with compensating = Balance Required
Amount of interest owed on the loan Total amount borrowed less compensating balance required
Use of Variable Rates on Consumer Loans The majority of installment and lump sum payment loans to families and individuals are made with fixed interest rates rather than with floating rates that change with credit market conditions. However, due to the volatility of interest rates a greater number of floating-rate consumer loans have appeared. When floating-rate consumer loans are issued, their contract rates are most often tied to either the prime (commercial) at loan rate or to U.S. Treasury bill rates in what is often called base rate pricing. Floating prime-based Consumer loan rate
Prime or base rate
Interest Rates on Home Mortgage Loans
The trend toward more flexible loan rates is particularly evident in home mortgage lending where most lenders offer both fixed-rate mortgage (FRM S) and adjustable- rate mortgages (ARM S). In the case of an adjustable-rate loan, bank loan officers must be especially careful in deciding whether a borrowing customer has sufficient budgetary flexibility to be able to adjust to variable loan payments, particularly if it seems likely that market interest rates may rise significantly over the life of the loan. Practices Observation The management of the branch always tries to provide quality service to customers. As a result, they have got a huge number of deposits accounts14 in this Branch. The BCBL (Bangla Bazar) Branch started on 16 September 1999 with three functional departments as following. 1) The general Banking department 2) The Credit division and 3) The Foreign Exchange department The General Banking Division deals the day-to-day transactions. This is the busiest department among all three departments. The Credit Division distributes loans, and monitors credit recovery related activities. The foreign Exchange Division deals their different activities with the help of Head Office. Products and Services of the Branch: In the Respective Branch of BCBL is always conscious of the changing needs of the customers and strives to develop new and improved services for its valued customers. Bank offers various Deposits and Lending Products, and Services to meet all kinds of financial needs of customers. The Branch offers following products and services:
Table- 6.1 Products description Liability Products
Saving Account Current Account STD Account
Monthly Profit Scheme Monthly Saving Scheme Double Benefit Scheme
Foreign Currency Account
Triple Benefit Scheme
Fixed Deposit Receipt (FDR)
Education Savings Scheme
Total Deposit: 2141187820 in 2008
Lacpati Deposit Scheme
Millionaire Deposit Scheme Crorepati Deposit Scheme Table- 6.2 Products
Marriage Deposit Scheme
Lending Products Consumer Credit Scheme
Loan Ag. Trust Receipt
Payment Ag. Document
Table- 6.3 Services description Services Treasury Remittance Evening Banking The branch has Fifteen (15s) Liability Products shown in table-6.1, Six (06) Lending Products shown in table-6.2 and three (3) Services shown in Table-6.3. One special feature of this bank is paying interest to the Savings & Corporate Savings Accounts on daily balance basis. Deposit Description Deposits are well recognized as the blood of financial institutions especially banks. Inevitably they constitute the very foundation of a bank. In pursuit of deposit mobilization the branch the most successful during 2007 with a record level of deposit balance of Tk.2141.27 million from 1832.43 million in 2006.
Table- 6.4 Deposit details (Demand) Demand Deposit accounts Current Account
% of total TK
Short Term Deposit (STD)
Education Savings Scheme
Sundry Deposits Bills Payable Total
Table- 6.5 Deposit details (Time) Time Deposit accounts
% of total TK
Monthly Saving Scheme
Monthly Income Scheme
Double Benefit Scheme Total
Monthly Saving Scheme
Monthly Income Scheme
Double Benef it Scheme
Table- 6.6 Deposit details Deposits Fixed Deposit Receipt (FDR) Time Demand Total
Million (TK) 1510.65
% of total TK 70
Fixed Deposit Account 21%
Credit Division This department exercises the lending function; therefore, distribute its funds among various investments in a manner as to drive sufficient income. This division of the branch performs following tasks: •
Except the proposal of different loan from the customer
Investigate the customers and its work place.
Lending Risk Analysis (LRA)
Send report to the CIB for bigger loans
Issuing loan for the customer
Collecting Charge documents from the customers
Issuing CCS, SOD, small loan, Doctors credit scheme etc.
Monitoring the recovery
Report to the head office about recovery rate of different
Sending letters to the defaulter
Contact with defaulters etc.
Credit Risk Grading (CRG)
Sector wise allocation of credit during 2008 Table -6.7 Sector wise allocation of credit Sector
% on total loan
Consumer Credit Scheme
Sector wise C redit in 2007
0% 0% 0% 1% 0%
Co ncu m er Cred it Sch em e Lease Fi nan ce Trade Fi nan ce Hou se B u il di ng Loan Hire Pu rchased Sch eme Secu red Over d raf t Personal Lo an Cash Credi t P.A.D(Cash) Stu dent Cre dit Sc hem e O the r Loan EDFLoan A/C LT R
Revision of ‘Mid Rate’ on Lending Products in 2008 Table-6.8 Revised Effective Mid Rate Lending Products
% of Rate (Price)
Term loan to large / medium scale Industry Term loan to small Industry Working Capital to Industry Trade Finance/Commercial Lending Credit to Nationalized Bank Financial Institutions (NBFIs) Others SME Agriculture ((SC-1)15 and (SC-2)16 Export Consumer Credit Credit Card (Per Month)
15.25 14.50 15.25 15.50 15.50 15.50 11 11.50 / 10 7.0 18 2.50
Terms/ Conditions 1. The effective Mid Rates on lending are mentioned in table 6.4. 2. Interest Rate can be varied by mid-rate ±1.5% on case-to-case basis. 3. Interest rate spread for loan against FDR, which is 3% above the rates. Loan Recovery Categorization and the branch’s position The procedure for loan classification is given by Bangladesh Bank under BRPD circular no 16, dated 06/12/1998.According to Bangladesh Bank categorization there are four types of loan. If any borrower fails to repay his amount or installment within the specified period then it will fall under the following classification status. Table -6.9 Loan Recovery Categorization Classification 15 16
Types of Loans
SC-1: Represents finance in Fertilizer Industry SC-2: Represents finance in Agriculture, Plantation, Horticulture etc
Continuous Demand loan (LIM; CL in 2008 DL in 2008 loan (C/C; PAD; FBP; IBP) O/D) Unclassified Less than 6 Less than 6 months months Special Mension 3 months or 3 months or more but Account more but less less than 6 months than 6 months Substandard 6 months or 6 months or more but more but less less than 9 months than 9months Doubtful 9 months or 9 months or more but 1 more but less less than 12 months than 12 months Bad loan 12 months or 12 months or more 1 more In the Branch, we can see the Table- 6.4 Loan Recovery Categorization in 2008 that has no Unclassified, SMA, Substandard loan but One Doubtful loan which is Prime Thread Ltd, Amount Tk.166363.64 and12/09 /2006. And One Bad loan that is M/S. Sujana, amount Tk.3919992.54, 2/11/2001. Table -6.10 Loan Recovery Categorization Classification
Types of Loans Term loans to be overdue after 6 months
Amount in 2007
Term loans to Amount in be overdue 2007 after 12 months Unclassified Less than 6 Less than 12 months months Special Mension 3 months or 3 months or Account more but less more but less than 6 months than 12 months Substandard 6 months or 12 months or 1 more but less more but less than 12 months than 36 months Doubtful 12 months or 2 36months or more but less more but less than 24 months than 48 months Bad loan 24 months or 1 48 months or 2 More more The Table- 6.5 indicates the Loan Recovery has no Unclassified, SMA loan, except one substandard loan which for Ferdous Amen, amount 4257107.62, 30/07/2003, Two Doubtful loans For A.K.M Abdul Hannan, Amount Tk.81190.00 date-18/01/05, and Micro Electronics Ltd, amount Tk.5242835 Date29/09/2005. and Three Bad loans for S.M. Zahidul Hoque, amount Tk.85000, Date- 23/12/2004, another for Sofor-A- Alam, amount Tk.201600 date- 18/08/2004, and Micro Electronics Ltd, amount Tk.3528688, date- 30/11/2003. Performance of the Respective Branch Deposit Particulars: Table -6.11 Deposits Fig in thousand) Particulars 2008
Perfarmance of BCBLBangla Bazar Branch
Financing Particulars: Table-6.12 Financing Particulars Fig in thousand) Particulars
Performance of BCBL Bangla Bazar Branch 60
Percentage 30 20
10 0 2008
Financing Particulars: (income/ expenditure) Table-6.13 Financing Particulars Fig: Thousand) Particulars 2008 Income
Perform ance of BCBL Bangla Bazar Branch Income
50 40 Percentag 30 e 20
10 0 2008
Ratio Analysis •
Ratio Analysis is a method to express the relationship among selected items of the financial statement data.
Ratio analysis has used to evaluate a company’s operating performance and financial stability over a period.
Though the Bangla Bazar branch has no information to do ratio analysis, so have done of the BCBL.
Table – 6.14 Ratio analyses Ratio
Bangladesh Commerce Bank Ltd
Liquidity Ratio Current ratio Current Assets (CA)
2008 2007 1.5 1.7
Liabilities (CL) CA-CL
Capital ratio CA Leverage Ratio Debt to total assets ratio Debt ratio
Total debt Total Assets
equity Total-LongTerm debts Total equity
capital Profitability Ratio Income
total assets Net income to equity Earning share
Investment to capital fund ratio Investment to Deposit ratio
Net income Total assets
Net income Equity & retained earnings Profit after taxation Avg number of ordinary shares Investment (Loans & Advance) Capital Fund Investment (Loans & Advance) Deposit Fund
The bank has 1.4 times more current assets than the current liabilities in order to meet any liquidity crises. This is a strength of the bank. Although the industry average is higher than PBL, the current ratio of PBL is considerably satisfactory.
The income to total assets ratio of BCBL decreased from 1% to 0.07% during 2007-2008.This reflects the weakness of the bank financial management.
ROE is 3% whereas industry average during the year was 5%. Compare to previous year, it also decline blatantly by 19%
The net working capital has increased from 20% to 27%, which shows higher business opportunity for the BCBL.
Net income to equity ratio shows that the net income of the bank is contributing a good amount to the banks equity and retains earning and this was made possible due to good business opportunity of BCBL.
THREAT: • •
The bank has 93% loan capital for funding total assets. Definitely, it is threat for the bank. The bank has three times more long-term debt than its total equity capital for which they may require considerable efforts to arrange more funds for the bank.
The bank has investment (Loans and Advances) 8.5 times from the total capital fund it is more risk for bank.
The bank has investment (Loans and Advances) 87.18% of the deposit, but the Industry average has 79%, that is compatible should be around.
CASES STUDY Eight cases have been picked out from the bank branch Types of Loan
Ifekher Hussain Ahmed
Khandaker Mujahidul Hoque.
Cash Credit (Hypo)
Md. Rafiqul Islam
Mr. A.K.M Abdul Hannan
Amount (TK) 175000 2 84,000 40,00,000 5,00,000 85,000
CASE -1: SECURED OVERDRAFT (SOD) Secured overdraft is one the important task of this Division. These are advances allowed to individual /firms against financial obligation (i.e. lien on FDR). Interest rate: 13%, No Risk premium, 2% Services Charge. The branch’s total SOD accounts and balances are shown in table 2. i) SOD (FDR) Nature of facility
: SOD (FDR)
Amount of facility : Tk.175000/Purpose
: To meet urgent requirement of fund
: 10% of the total balance of FDR A/C.
Rate Of Interest
: 15.50% p.a. with quarterly rest.
Collateral and Conditions: 1. Lien on the balance of the following Fixed Deposit Receipt (FDR) A/C in favor of the Bank FDR No/Date 2430001901-2
Amount Tk 210,000/-
Bank Name Beneficiary BCBLii.Bangla Bazar Ifekher Hussain Branch
2. Letter of Authority to encash the above mentioned Fixed Deposit Receipt (FDR) A/C for adjustment of the SOD, if required, without any reference to you. 3. You will explicitly undertake that all information supplied by you in connection with the approval of the SOD is correct. 4. The Bank reserves the right to call back the SOD facility extended at any time. 5. Without assigning any reason whatsoever and can adjust the SOD by enchasing the above with or without notice to you. 6. All the above terms and condition should be strictly complied with.
7. Interest of FDR A/C will not release till adjustment of the loan. Result Analysis: Secured Overdraft (SOD) Pricing Loan against FDR base rate is 12.5%. But calculated interest rate is 3% above of the FDR base i.e., interest charged rate (12.3+3) is 15.5%. CASE -2: SOD (FO) Nature of facility
: Monthly Savings Scheme (MSS)
Amount of facility : Tk. 2 84,000/Purpose
: To meet urgent requirement of fund
: 80% of the total balance of MSS A/C.
Rate Of Interest
: 16.00% pa with quarterly rest.
Collateral Terms/Conditions: 1. Lien on the balance of the following Monthly Savings Scheme (MSS) in favor of the Bank MSS No/ Date 38100011856,15.09.2003&
Bank Name Beneficiary BCBL Bangla Khandaker Bazar Branch,
Letter of Authority to encash the above mentioned Monthly Savings Scheme (MSS) for adjustment of the SOD, if required, without any reference to you
You will explicitly undertake that all information supplied by you in connection with the approval of the SOD is correct.
The Bank reserves the right to call back the SOD facility extended at any time.
Without assigning any reason whatsoever and can adjust the SOD by enchasing the above with or without notice to you.
All the above terms and condition should be strictly complied with.
Result Analysis: Secured Overdraft (SOD) Pricing Loan against MSS interest rate is 16%.This interest rate calculated by following options: •
Degree of personal relationship
CASE -1: CASH CREDIT (HYPO.) Advances allowed to individual/firm for trading as well as wholesale purpose or to industries to meet up the working capital requirements against hypothecation of goods as primary security fall under this type of lending. It is a continuous credit. It is allowed under the categories (i) “Commercial Lending” when the customer is other than an industry and (ii) “Working Capital” when the customer is an industry. An example of Cash Credit (Hypothetication) is extracted from the respective branch and is shown in table 6.8.
Table- 6.8: Case of a Cash Credit (with details terms/conditions) 1
Name of Credit Facility
Cash Credit (Hypo)
Tk.40, 00,000 Only
50% on the value of the stock of goods or market price, whichever is lower
Rate of Interest
15.50% p.a. at quarterly rest subject to any change that may be made by the Bank from time to time
From the sale proceeds or customerâ€™s other sources.
For meeting up the working Capital requirement of the business
Hypothecation of stocks of goods in Business duly issued by a insurance company acceptable to the Bank covering Fire & RSD, Flood & Cyclone, Theft & Burglary etc. However, if the client is unwilling to insure the hypothecation covering Flood & Cyclone, Theft & Burglary through insurance Company, an undertaking to be obtained from the client through Indemnity Bond to the effect that all losses/damages due to Flood & Cyclone, Theft & Burglary will be borne by the client.
Registered Mortgage of 7.65 (2.40+5.25) decimal land along with a five- stored residential building and a three- storied residential building thereon at Bhairab with the following details valuing Tk.81.21 (37.91+43.30) Lac (FSV):
a) 2.40 decimal land with a 05 storied residential building, J.L.324, Khation: 3933, Dag: 9028, Bhairab, Kishoregonj valuing Tk.50.55Lac (market Value) and Tk.37.91 Lac (Forced sales value- FSV) as assessed by enlisted surveyor Bhuiyan Associate and 47.78 Lac & 38.23 Lac (FSV) as assessed by the Branch- Officials b) 5.25 decimal land with a 03 storied residential J.L.324, Khation: 2925, Dag: 8497, Bhairab, Kishoregonj valuing Tk. 57.74 Lac (market Value) and TK43.30 Lac (Forced sales valueFSV) andTk.56.17 Lac & Tk.44.94 Lac (FSV) as assessed by the BranchOfficials. Both the properties are owned by Md. Rafiqul Islam, proprietor of the concern. iii)
Registered Irrevocable General Power of Attorney to
iv) v) vi) vii) viii) 9
Other Expenditure (if
be executed by the mortgagor in favor of the bank enabling the bank to sell the property without intervention of court in case of default IGPA (duly notarized) to be obtained to sell hypothecated stocks without intervention of the court in case of default Personal Guarantee of the proprietor of the concern along with his spouses Personal Guarantee of mortgagor Post dated check covering the loan amount. Execution of usual change documents
Will be borne by the Lessee
any Result Analysis: Cash Credit (Hypo.) Pricing The respective branch is not empowered to fix (price) a cash credit interest rate. The interest rate (price of cash credit) is therefore fixed by the Head Office. It should be noted that head office is guided by the central bank (Bangladesh bank) while setting the interest rate for CC. Here in this branch the CC rate is 15.5% and for the concerned case -1 thus the rate (price) is charged so.
CASE -1: CONSUMER CREDIT SCHEME It is a special credit scheme of the Bank to finance purchase of consumersâ€™ durable to the fixed income group to raise their standard of living. The loans are allowed on soft terms against personal guarantee and deposit of specified percentage of equity by the customers. The loan is repayable by monthly installment within a fixed period. Table- 6.12 Cases of Consumer Credit Scheme (Details Terms) 1
Credit Consumer Credit Scheme
Tk.5, 00,000 Only
Price of the Car
Tk12, 75,000/- only
Rate of Interest
14.5% p.a. at monthly rest subject to any change that may be made by the Bank from time to time
3% Agent commission (with monthly rest) - The management of the may change the rate of interest from to time.
The loan will be repaid by 60 equal monthly installments of
tk12600/= To Purchase an Unregistered Reconditioned Toyota Corolla X
Sedan Car, Chassis # NZE121-3317975, Model Year: 2005, Color:
Silver. Dated: 18.11.2008. 9
Tk.7, 75,000 only (60.78% of total value of the car) i)
The vehicle will be registered in the joint name of the bank and insurance coverage.
Personal Guarantee of mortgagor
Post dated check covering the loan amount
iv) Execution of usual change documents Result Analysis: Consumer Credit Scheme Pricing Consumer Credit Scheme interest rate (Price) is 14.5% which is computed by following bases: Principal lease amount = Tk.12, 75,000 Down payment = 60.78% of lease amount =Tk7, 75,000 Remaining due=Tk5, 00,000 Monthly installment payment = Tk.12600 for 60 months Other charges = Agent commission =3% monthly rest Total price of the CCS loan Tk.15, 31,000 CCS property cost price
Considering total return on current investment the borrower is basically paying 17% rather than the nominal rate as mentioned (price) 14.5%. CASE 2 CONSUMER CREDIT SCHEME Table- 6.13 Cases of Consumer Credit Scheme (Details Terms) 1
Name of Credit Facility
Consumer Credit Scheme
Tk.85, 000 Only
Price of the Car
Tk1, 06,000/- only
Rate of Interest
10% p.a. (Flat) â€“ (The management of the may change the rate of interest from to time.).
To Purchase Air Conditioned, Dated: 05.01.2005
The loan will be repaid by 24 monthly installments of Tk4250/-.
Tk.21, 000 only
2% Service Charge and 1% risk fund (flat) on the amount will be realized at front end. i) Hypothecation of the article to be purchased ii)
Post dated check covering the loan amount
iv) Execution of usual change documents Result Analysis: Consumer Credit Scheme Pricing Consumer Credit Scheme interest rate (Price) is 10% (flat) that is computed by following bases. Principal lease amount = Tk.1, 06,000 Down payment = lease amount =Tk21, 000 Remaining due=Tk85, 000 Monthly installment payment = Tk.4250 for 24 months Other charges = Service Charge + Risk fund= Tk2550 Total price of the CCS loan Tk.125550 Price of the item
Interest (Price) nominal rate is 10% (flat), but following calculation shown interest (price) real rate is 23%.
FINDINGS An interviewed survey was conducted with structured questionnaire (see appendix-A) and has ideas regarding the issues as follows: 1. Loans demand in order Loans demand in order
SOD Loan 50 40 percentage
30 20 10
Consumer Credit Scheme
Personal Loan 14 8
Fig: 8.1 Loans demand in order The diagram shown 48% of informant coordinators indicated the SOD loan is the most demandable, 30% is CCS loan. Personal loan and others are 14% and 8% respectively. 2. Typical Borrowers
Typical Borrow ers
Business Man 0
Farmers General People
Fig: 8.2 Typical Borrowers Finding shows 50% reflected the major borrowers are the businesspersons, 40% and 10% reflected borrowers are service holder and general people.
3. Frequency of information delivery
Frequency of information delivery
Percentage 30 20 10
more 7 days
Fig: 8.3 Frequency of information delivery Diagrams represent how frequency the branch official delivers loan information to prospective borrowers. 4. Loan interest flexibility (Price flexibility)
Loan interest flexibility 10 -12.5 46
50 40 30 Percentage 20 10 0
12.5 - 15 31
15 - 17.5
17.5 - 20
Fig: 8.4 Loan interest flexibility The diagram shows that 46% of total loan charge interest rate in a range of 15% â€“ 17.5%. 5. Loan Price Evaluations Loan Price Evaluation
Higher Rate (17.5 - 20)
Medium Rate (15 -17.5)
Lower Rate (10 - 12.5)
Average Rate (12.5- 15)
Fig: 8.5 Loan price evaluations
The confidential informant guidelines evaluates the loan price is medium and percentage is 45%. The questionnaire are structured and designed in such a manner that the underlining thoughts of the bankers are revealed as the bankers answered the questions. In the BCBL of Bangla Bazar Branch, credit section has Five Employers, Foreign Exchange has Eight Employers and General Banking has fourteen employers. Case Analysis Summary Sl. no 1
Loans of items SOD
Amount TK 175000
Nominal Rate (%) 15.5
Real Rate (%) 15.5
Ifekher Hussain Ahmed
(FDR) SOD (FO)
Hoque. Md. Rafiqul Islam
Mr. A.K.M Abdul Hannan
1) Secured Overdraft (FDR) base rate is 12.5%, but calculated interest rate (real Price) is 15.5 for 24 months. 2) Secured Overdraft (FO) interest rate (Price) is 16% on 284000 TK for 60 months. This rate is subsistent as it is quoted. 3) The case of Cash Credit loan, the interest rate (Price) is fixed by the head office. Here in this branch the CC rate is 15.5% on TK.40, 00,000 4)
The Case Study (see page- 72) analysis has shown the nominal IRR is 13%, but the rate (real) would be 32%. This is very much inconsistent in pricing system.
Considering total return on current investment the borrower is paying 29.6% rather than the nominal rate as mentioned (price) 16%. (Page-75)
6) The CCS interest rate is quoted as 14.5%, but the borrower really pays 17.5%. 7) In another CCS case, nominal rate is cited as 10 %( flat), but calculated real (price) rate is 23 % which is also very much inconsistent in CCS pricing. (Page – 79). RECOMMENDATION The recommendations given below are not decisions; rather they are only suggestions to bring a positive change in the matters under study. The recommendations are made based on the study of manual data, ratio analysis of the Bangladesh Commerce Bank Ltd. •
SME financing can be introduced and expanded throughout the bank branches.
Real Estate financing for which usually individual’s borrowers are likely to be interest rate if the pricing is fixed at a lower competitive rate.
Competitive lower price may be set for Loans and Advances so that more investment (loan and advance) can be made possible.
BCBL management should concentrate for increasing EPS without expanding financial leverage of its capital structure. At present, its D/TA is 93%. Overall profitability can be grown more by increasing sales (liberalize credit policy) or by reducing cost (processing fees, low compensating balance requirement etc.).
BCBL should increase DOL, which might help enhancing operational profit (EBIT). For example, automation requires huge installation (fixed) costs but it might help enriching EBIT.
The bank should utilize their business opportunities (market reputation) by analyzing the capabilities of existing competitors. Aggressive social marketing or campaign should be stronger than its competitors.
Equity investment in BCBL should be enhanced more so that pricing loans or advances can be control more efficiently.
Banks play an important role in the development of the economy of a country. Without the help of banks, it is not possible to run the business activities of any country. Credit is a continuous process. Recovery of one credit gives rise to another credit. In this process of revolving of funds, bank earns income in the form of interest. A bank can invest its fund in many ways. Bank makes loans and advances to traders, executives, and industrialists. Moreover, nature of credit may differ in terms of security requirement, disbursement provision etc. In the banking arena, many types of financial facilities have extended to the clients with the expectation of getting the same return along with interest. This “provided purchasing power” can be termed as loan, credit or advance. Bank's main function is to finance different business enterprise. However, they face some problems in providing loans and advances. The terms and conditions of the bank for providing loans and advances to the potential borrowers are not so simple. Often the borrowers find it more difficult to fulfill the terms and conditions and become failure in taking loans. 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 to be drive away to another lender or into the open market for credit. The more competition the lender faces for a customer’s loan business, the more it will have to keep the price of that loan at a reasonable level. The loan-pricing model assumes that the rate of interest charged on any loan such as, the cost of capital is an expected return and debt, preferred stock, common stock etc. The risk premium can be the expected rate of return above the risk-free interest rate. Expected profit is a reward to the owners of the business who have taken risks with their money and time. The BCBL of Bangla Bazar branch has Fifteen Liability Products, Six Lending Products and Three Services. One special feature of this bank is the payment of interest to the Savings & Corporate Savings Accounts on daily balance basis. Deposit mobilization shows that the branch was most successful during 2008 with a record level deposit balance of Tk.2141.27 million from Tk.1832.43 million in 2007.and the profit and advances increased from Tk.120, 109 million to Tk.129, 370 million and from Tk1, 996,759 million to Tk1, 649, 611 million respectively in this period. In spite of some difficulties, the branch can get tremendous success. If BCBL can effectively manage its sources of fund, the branch of Bangla Bazar would be one of the profitable branches of BCBL. Customer satisfaction ratings are sometimes quite difficult to interpret from the financial condition of the branch. If BCBL can be successful to reduce their default rate and competitive lower price may be set for loans and advances so that more investment (loans and advances), they would be able to earn huge profit within a short time period. BIBLIOGRAPHICAL REFERENCES Annual Report, 2008 Bangladesh Commerce Bank Ltd. Bedi. L.H. And. Haedikar .K.K “Practical Banking Advances”, 9 th edition. Cooper Donald and Schindler Pamela, “ Business Research Methods”, 8 th edition, Published by Mc Graw – Hill Jrwin, 2003.
Khan R. A.D. “Bank Management a Fund Emphasis”, 1st edition, 2008. BCBL, Procedures and Manual (Credit Sections), 2007. Ross S. Peter and Hudgins C. Sylvia, “Bank Management and Financial Services”, 6 th edition. Roy L. Mohan 2007, “Capital Structure Determinants for Firms in Developing Economics -Perspective Bangladesh”, Journal of The Business and Economic Review, Vol-1, No.1, pp. 31-60, IBAIS University, Dhaka. Uddin D.M. Farid 2007, “The Significance of Relationship Banking: Cross- National Case Study Evidence”, Journal of the Business and Economic Review, Vol-1, No.1, pp. 73-90, IBAIS University, Dhaka. Website: www.bangladesh-bank.org. www.bcblbd.com APPENDIX Appendix -A QUESTIONNAIRE The questionnaire are structured and designed in such a manner that the underlining thoughts of the bankers are revealed as the bankers answered the questions. Below has the given the format of the questionnaire:
1. Which of the Loans demand in order? • Personal Loan •
Consumer Credit Scheme
2. What Typical Borrowers frequently comes in the bank for taking Loan? •
3. How long did it take Frequency of information delivery? •
Between 2 or 3 days
Between 3 or 5 days
More than 7 days
4. What is the range of Loan interest flexibility? • 10 - 12.5 •
12.5 - 15
15 - 17.5
17.5 - 20
5. What are the Loan price evaluations in the Branch? • Higher rate •
Appendix-B Announced Interest Rate Chart of the Scheduled Banks (Lending % per Annum), 2007 Name of the Banks
NCBs SONALI JANATA AGRANI
SC.1 SC.2 SC.1 SC.2 SC.1 SC.2
1 10.00 9.00 10.00 10.00
Term loan to large & mediu m scale industr y 2 13.00 11.00 12.25
Term loan to small industr y
Working capital to industry
Trade financi ng
Hous ing loan
12.00 11.00 11.50
RUPALI PCBs PREMIER JUMUNA BRAC BANK ASIA PUBALI UTTARA ABBANK IFIC ISLAMI PRIME EBL
SC.1 SC.2 SC.1 SC.2 SC.1 SC.2 SC.1
11.50 10.00 10.50
7.50 9.50 11.00 10.25 11.00 11.50 8.00 10.00 12.50
12.50 13.00 13.50 13.00 14.00 11.50
10.50 11.50 13.50 12.00 14.00 11.25 11.50 15.50
13.50 13.00 13.00 12.50 14.00 10.00 11.50 15.00
7.00 7.00 7.00
13.50 12.50 13.50 13.50 12.50 13.50 14.00 12.50 14.50
12.50 13.50 13.00 14.00 14.50 14.00 13.00 11.50 15.00
SC.2 SC.1 SC.2 SC.1 SC.2 SC.1 SC.2 SC.1 SC.2 SC.1 SC.2 SC.1 SC.2 SC.1 SC.2
7.00 7.00 7.00
Achievement of high economic growth is the basic principles of present economic policy. In achieving the objectives, the banking sector play...
Published on May 27, 2013
Achievement of high economic growth is the basic principles of present economic policy. In achieving the objectives, the banking sector play...