Factors of standard credit management procedures of pubali bank ltd

Factors of standard credit management procedures of Pubali Bank Ltd.

1.1BACKGROUND OF THE PROJECT The principal reasons of banks are chartered by the government and the central bank is to make loans to their customers. 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 credit 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 banks trade territory and promote economic vitality.

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 credit portfolio. When a bank gets into serious financial trouble, its problems usually spring from loans that have become uncollectible due to mismanagement of credit, illegal manipulation of loans, misguided lending policies, or an unexpected economic downturn. When examiners appear in a bank they make a thorough review of the bank’s credit portfolio. Usually this involves a detailed analysis of the documentation and collateral for larger loans, a review of a sample of small loans, and an evaluation of the bank’s credit policy to ensure that it is sound and prudent in order to protect the public funds.

The proper goals of the banks are profit maximization and shareholder wealth maximization. If bank’s credit management is not good, the bank will never ever achieved its proper goals. The main use of bank funds is to collect money from surplus unit and lend it to the deficit economic unit. The Pubali Bank Limited has been established with the objective of providing efficient and innovative banking services to the people of all sections of our society. Towards attainment of its goals and objectives, the bank pursue diversified credit policies and strategic planning in credit management. To name a few, the bank has extended micro credit, consumers scheme loans, house building loans etc. to meet the needs of the individuals, 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 bank’s credit policies aimed at balanced growth and development of all the sectors of the country’s economy as well as credit management of a bank is the key factor to achieve an organizational goal.

1.2 PROBLEM STATEMENT OF CREDIT MANAGEMENT “Do more with less” is the target of efficient management. To achieve this, inevitably PUBALI BANK LTD should focus more on the effective and efficient practice of credit management. There are many credit management problems a bank may face including having too much debt, not paying debt and not collecting debt. A bank must implement strategies to manage its credit effectively, or it could face financial and operational problems including downsizing or closure. Another credit management problem a bank may face is not paying back the debt, or credit. Borrowing on credit usually has fees and interest associated with it. If credit is not paid back on a timely basis, a bank could have additional expenses that will affect its cash flow. A bank can avoid this problem by establishing a system of monitoring its debt payments, and having extra cash to make debt payments in emergency situations.

The absence of testing and validation of new lending techniques is another important problem in credit management. Any new technique involves uncertainty about its effectiveness. That uncertainty should be reflected in somewhat greater conservatism and corroborating indicators of credit quality.

Some credit management problems arise from subjective decision-making by senior management of the bank. This includes extending credits to companies they own or with which they are affiliated, to personal friends, to persons with a reputation for financial acumen or to meet a personal agenda, such as cultivating special relationships with celebrities.

In some cases, the failure to perform adequate due diligence and financial analysis and to monitor the borrower can result in a breakdown of controls to detect credit-related fraud. For example, banks experiencing fraud-related losses have neglected to inspect collateral, such as goods in a warehouse or on a showroom floor, have not authenticated or valued financial assets presented as collateral, or have not required audited financial statements and carefully analyzed them. An effective credit management department and independent collateral appraisals are important protective measures, especially to ensure that credit officers and other insiders are not colluding with borrowers.

1.3 SIGNIFICANCE AND RATIONALE OF THE STUDY Major source of income of a bank is the earning from credit. Borrower selection is the main and the prime task of the credit department. Advancing loans are the primary function of the commercial banks. Without loans country’s industrial and commercial development is not possible. Therefore, smooth loan system in the banking sector is a catalyst for economic development of a country.

The word credit defined as the ability to buy with a promise to pay. It consists of actual transfer and delivery of goods and services in exchange for a promise to pay in future. It is simply the opposite of debt. Diversification of banking service has accelerated the use of credit in the expansion of business operation. It is a fundamental precept of banking everywhere that advances are made to customers in reliance on his promise to pay rather than the security held by the banker.

Credit management process is the tool, which helps the bank to predict the risk and return on the proposed project for credit disbursement. Therefore, from the above definition it is clear that credit management is a very important factor for banks. To get a clear idea about credit appraisal process we need to know the key factors of credit management procedures. Here, will give a brief idea on the key factors of standard credit management procedures of Pubali Bank Ltd. Loans or credits comprise the most important asset as well as the primary source of earning for the Banking institutions. On the other hand, loan/credit is also the major source of risk for the bank management. A prudent bank manager should always try to make an appropriate balance between its return and risk involve with the loan portfolio 1.4 OBJECTIVES OF THE STUDY The broad purpose of the study was to gain further knowledge of credit management procedure, policies, and practices in a financial institution like Pubali Bank Ltd. Specifically, the objectives of the study were: •

To evaluate credit management with special emphasis on advance and lending risk analysis (LRA) of Pubali Bank Ltd.

•

To explore credit functions including rules, provisioning policies and practices.

•

To identify a standard procedure of credit followed by Pubali Bank Limited

•

To verify the differences between bank’s policies and practices.

•

To recommend for the effective credit management of Pubali Bank Ltd.

1.5 SCOPE AND LIMITATION 1.5.1 SCOPE: To evaluate about credit functions including rules, policies and practices with some analysis of loan classification, reservation of provision, and rate of recovery. To identify the procedure of lending risk analysis (LRA) including its elements and influencing factors and end of the report, it focused on standard procedure of credit followed by Pubali Bank Limited and the

differences between bank’s policies and practices and finally some recommendations for the effective credit management of Pubali Bank Ltd.

1.5.2 LIMITATION:

1. Every organization has its own secrecy that is not revealed to others. While collecting data i.e. interviewing the credit officials they did not discuss much information for the sake of confidentiality of the Bank.

2. Due to lack of experience, there is a chance of having some mistake in the report though best effort has been applied to avoid any kind of mistake.

3. Limitation of time was one of the most important factors to collect data. A longer time period would have ensured a much better result for the study findings.

4. Have to offset with quality due to time constraint, which apparently seems to be the most severe limitation.

5. Another limitation of this report in non-availability of the most recent data & information about different activities of Pubali Bank policy of not disclosing any data & information for any reasons, which could be very much useful.

2.1 MEANING OF METHODOLOGY We can easily say that methodology is a way to systematically solve the research problem. Broadly saying that methodology is the undertaking and rules of organization of a philosophical system of inquiring procedure. The identifying the relevant sources of data application of appropriate data collection method and the using of proper statistical test and techniques for analyzing the collected data etc. are concerning methodology of the study.

2.2 SOURCES OF DATA To complete this report data was collected from primary and secondary sources. The primary data were gathered by taking interview of the credit officials and borrowers. Some data were collected from advance officer who are in charge of credit management of our Pubali Bank limited in credit division. Data were also collected by interviewing the responsible officers and from some documents & statements printed by the bank and the website of Pubali Bank Ltd. There have been used some statistical tools and graphical representation to find out different types of analytical results and interpretations.

2.3 METHOD OF DATA COLLECTION 2.3.1 Collection of Primary Data: Many of the data and information were collected from my practical experience and queries from the executives of Pubali Bank Ltd. Information and data regarding an overview of the Pubali Bank Ltd., interest rates & charges, credit operations, performance measurement in Lending, credit policies, Loan Agreement etc. were collected from these sources.

2.3.2 Primary information of data: The primary data are those, which are collected afresh and for the first time and thus happen to be original in character. The primary sources are as follows: a) b) c) d) e)

Official records over credit management of Pubali bank Ltd. Interviews , observations and group discussion Face to face conversation with the in charge credit officers and borrowers.

Practical desk work Data collection of own supervision.

f) Informal conversation with the clients. g) Study of the relevant files as instructed by the officers concerned. h) Practical work exposures from the different desks of the three departments of the Branch like credit department, loan section & loan approval section. i)

Last but not the least, my practical work experience as a bank employee.

2.3.3 Collection of Secondary Data Data regarding the Credit management of The Pubali Bank Ltd. were collected from secondary sources like: Annual Reports, Brochures, Manuals and Publication of The Pubali Bank Ltd., Bangladesh Bank web site, BIBM Library, DSE Library, News paper etc. were the major sources of secondary debt.

2.3.4 Secondary information about data The secondary data are those which have already been collected by someone else and which have already been passed through the statistical process. The secondary sources are as follows: a) Annual Reports of Pubali Bank Ltd. published so far. b) Academic journal, accounting manual, internal control and compliance manual c) General banking manual and bank report. d) Selected books on credit management and Bangladesh Bank website e) Financial Statements existing brochures, documents and database

f) Various books and articles regarding general banking functions, foreign exchange operations and credit policies & practices. g) Memo and circular related to credit management h) Periodicals circular published by the Bangladesh Bank credit department.

2.4 DATA PROCESSING AND ANALYSIS The following tools to analyze the data 1.

Tabular representation.

2.

Graphic representation through bar diagram

3.

Pie graph

4.

Chart etc.

2.4.1 Techniques of Analysis After collecting the data, it is necessary to analyze or process the data to get meaningful information. Under this study the collected data were analyzed. To analyze the collected data scrutinized, a person has to require following and applying some techniques. Accordingly, I have used some important techniques for analyzing the required data, so that I can get fruitful result from my study. The techniques that have applied to prepare the report are as follows: 1) Processing of data 2) Analyzing of data 1) Processing of data: Processing of data includes four steps: a) Editing b) Coding c) Classification d) Tabulation a) Editing: Editing of data is a process of examining the collected raw data to detect errors and omissions and to correct these when possible. Editing is done to assure that the data are accurate, consistent with other facts gathered, uniformly entered, as complete as possible and have been well arranged to facilitate coding and tabulation. a) Coding: Coding refers to the process of assigning numerals or other symbols to answer so that responses can be put into a limited number of categories or classes.

b) Classification: Most research studies result in a large volume of raw data, which must be reduced into homogenous groups if we want to get meaningful results. c) Tabulation: When a mass of data has been assembled, it becomes necessary for the researcher to arrange the same in some kind of concise and logical order. This procedure is referred to as tabulation.

2.5 SAMPLE DESIGN A sample design is a definite plan for obtaining a sample from a given population. It refers to the technique or the procedure the researcher would adopt in selecting items for the sample. Sample design may as well lay down the number of items to be included in the sample, i.e. the size of the sample. Sampler design is determined before data are collected. There are many sample designs from which a researcher can choose. Some designs are relatively more precise and easier to apply than others. The researcher must select/prepare a sample design that should be reliable and appropriate for his research study. Have completed my project paper within a limited time and scope. That is why the size of the sample has determined and used is not so large but it is reliable to find out the real fact of sample form 2.5.1 Sampling Procedure: The sampling procedure was conducted on the deliberate sampling method, where the respondents and the interviewees are considered on my convenience and priority. a) Population: The study will be mainly conducted on the credit assortment of Pubali Bank Limited. Therefore, for the purpose of the study credit management of all the branches of Pubali Bank Limited would be constraints of population of the study. b) Sampling Units: In order to carry out the research work, focused on taking the personnel involved in the different departments, especially in credit management department’s manager and senior level employees and business clients who are involved in credit management activities. Only on branch of Pubali Bank Limited would be the sampling unit for the study, i.e., Laboratory Road Branch, Dhaka.

2.5.2 Selection of the Respondents: Time and cost almost invariably leads to selection of respondents. The respondents selected should be representative of the total population as possible in order to produce a miniature cross-section. During the project paper program have collected various information and data from different officers and manger who are very much responsible to the institution and they are involved with the key activities

of the bank like General Banking, Credit Management and loan & advance activities. All of them are very much co-operative and they behaved with me so much cordially.

The Respondents are: 1) Assistant General Manager (AGM), Pubali Bank Ltd. laboratory Road Branch, Dhaka.

2) Senior Officers and Officers of

a)General Banking Department. b) Credit management Department. c)Credit Recovery Department.

3) Other Officials of Pubali Bank Ltd. laboratory Road Branch, Dhaka.

3.1 OVERVIEW OF PUBALI BANK LIMITED Pubali Bank Limited is a scheduled private commercial bank established on May 1959. Licensing no Bl/DA/1/84. In exercise of the powers conferred on the Bangladesh Bank under section 28(1) of the banking companies’ ordinance 1962 as adopted in Bangladesh Pubali Bank Limited; Bank authorized to open the branch at 26 Dilkusha commercial area (Local Office) P.S Motijheel district Dhaka.

Condition mention in this office letter no. BCD (D) 200/42(a)/145. The bank has been widely acclaimed by the business community from small entrepreneurs to large traders and industrial conglomerates within this very short period of time it has been able to create an image for itself and has earned significant reputation in the country’s Banking sector as a bank of vision. Presently it has 400 branches in operations Principal branch is one of the big and important branches of PUBALI BANK LTD. This intended to ensure the trust and confidence of the customers through focused customer’s orientation qualities of services and state of art technology. The company philosophy-A Bank for the 21st century has been precisely the essence of the legend of the Bank success.

3.2 HISTORICAL BACKGROUND OF THE PUBALI BANK LTD The Bank was initially emerged in the Banking scenario of the then East Pakistan as Eastern Mercantile Bank Limited at the initiative of some Bengali entrepreneurs in the year 1959 under Bank Companies Act 1913. After independence of Bangladesh in 1972 this Bank was nationalized as per policy of the Government and renamed as Pubali Bank. Subsequently due to changed circumstances this Bank was denationalized in the year 1983 as a private bank and renamed as Pubali Bank Limited.

The Government of the People's Republic of Bangladesh handed over all assets and liabilities of the then Pubali Bank to the Pubali Bank Limited. Since then Pubali Bank Limited has been rendering all sorts of Commercial Banking services as the largest bank in private sector through its branch network all over the country.

3.3 MISSION AND VISSION OF PUBALI BANK LTD 3.3.1 MISSION OF PUBALI BANK LTD (A) To get recognition as a dynamic, innovative and customer supportive Bank.

(B) To maintain continuous & steady growth with utmost transparency and to diversify development of resources.

(C) To enhance continuous development of information & technology to meet the demand and challenges of the time.

3.3.2 VISION OF PUBALI BANK LTD To excel as best private commercial Bank in Bangladesh with meticulous observance of rules and regulations and commitment to corporate social responsibility.

3.4 PRESENT STATUS OF PUBALI BANK LTD PUBALI BANK LTD is one of the largest private sectors Bank in Bangladesh with years of experience. Adaptations of modern technology both in terms of equipment of banking practice ensure efficient service to clients.

3.4.1 Capital structure of PUBALI BANK LTD The bank was incorporated as a public limited company under the companies’ act 1994. The authorized capital and paid up capital of the bank stood at Tk. 10,000 million and Tk. 4,968 million respectively in 2010. Out of total 86200 shareholders,

Paid up capital (Tk in million) 6000 5000 4000 3000 2000 1000 0 2006

2007

2008

2009

2010

Figure:3.1 Year 2006 2007 2008 2009

Paid-up Capital (Tk. In Million) 1200 2100 2940 3822

2010 4968 Source: PUBALI BANK LTD Annual Report, 2010 Table: 3.1 Paid-up Capitals

3.4.2 Statuary and other reserve: At the close of 2010, the statutory reserve and other reserves of the bank stood at Taka 9,411.27 million, out of which statutory reserve was Tk. 4148.74 million, other reserve was Tk. 5262.54. Total reserves were Tk.5687.25 million at the end of 2010.

Reserve (Tk in million) 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 2006

2007

2008

2009

2010

Figure:3.2 Years 2006 2007 2008 2009 2010 Source: Annual Report, 2010

Reserve (Tk. In Million) 3327 3832 4606 5687 9411

Table: 3.2 Reserves 3.4.3 Deposit: The deposit trend was positive in 2010. At the end of 2009, total Deposit was Tk. 88466.46 million that came to Tk. 98850.50 million at the end of 2010 showing 11.74% increase. Out of total deposits, Time Deposits and Demand Deposits were Tk. 68198.04 million and Tk.30652.46 million i.e. 68.99% and 31.01% respectively.

Deposit (Tk in million) 120,000 100,000 80,000 60,000 40,000 20,000 0 2006

2007

2008

2009

2010

Figure:3.3 Years 2006 2007 2008 2009 2010 Source: Annual Report, 2010

Deposit (Tk. In million) 48,675 57996 73,016 88,466 98,850 Table: 3.3 Deposits

3.4.4 Advances: Total advances of the bank as on 31 st December 2010 stood at Tk. 89106.21 million showing an increase of Tk.14902.88 million at 20.08% growth. In line with national economic development, the Bank made advances mainly as commercial Loan, Import & Export Business, Term Loan to large & medium scale Industries, House Building Loan, Working Capital Loan, consumers’ credit and Syndication Loans etc.

Advances(Tk. in million) 100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 2006

2007

2008

2009

2010

Figure:3.4 Years

Advances (Tk. In Million)

2006 2007 2008 2009 2010 Source: Annual Report, 2008

40386.65 50549.17 61788.15 74203.33 89106.21 Table: 3.4 Advances

3.4.5 Investment Total investment of the Bank was Tk.16516.39 million during 2010. In comparison the previous year total investment was increased by Tk.4347.34 million @ 35.73% growth. The Bank mainly invested in Government Bonds, Treasury Bills, Approved debentures, Shares and Debentures of private institutions.

Investment (Tk.in million) 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 2006

2007

2008

2009

2010

Figure:3.5

Year 2006 2007 2008 2009 2010

Investment (Tk. In Million) 4982 5556 8375 12168 16516

Source: Annual Report, 2008 Table: 3.5 Investments 3.4.6 Import Business: The total import business handled by the Bank during the year 2010 was Tk. 8568.35 million as compared against Tk. 6049 million in the previous year showing a growth rate of 41%. The main

items of import were industrial raw materials, consumer goods, machinery, fabrics and accessories etc.

Import 90000 80000 Tk in million

70000 60000 50000 40000 30000 20000 10000 0 2008

2009

2010

Year

Fig. 3.6: Import of Pubali Bank Ltd Year

Import (Taka in Million)

2008

58009

2009

60493

2010

8568.35 Table 3.6: Import of Pubali Bank Ltd

3.4.7 Export Business: The total export handled by the Bank during the year 2010 was Tk. 3391 million compared to Tk. 2474 million in the previous year showing a growth rate of 37.07%. The main export items were Jute, Jute goods, readymade garments, leather and leather goods etc.

Export 40000

Tk. in million

35000 30000 25000 20000 15000 10000 5000 0 2008

2009

2010 Ye ar

Fig. 3.7 Export of Pubali Bank Ltd Year

Export (Taka in Million)

2008

24795

2009

24739

2010

33909

Table 3.7: Export of Pubali Bank Ltd 3.5 PERFORMANCE OF PUBALI BANK LTD AT A GLANCE (Figure in million taka) SL No. 01.

02.

03.

04.

05.

06.

07.

08.

09.

10.

11.

12.

14 Table: 3.8

Particulars Authorized Capital Paid-up-Capital Reserve fund Deposits Advances Investment Import Business Income Expenditure Fixed Assets Earnings per share Export Business Net profit

2007 5000 2100 3832 57996 50549 5556 48345 7087 4145 1367 6.45 19907 1353

2008 500 2940 4606 73016 61788 8375 58009 9009 5563 1383 5.15 24795 1515

2009 5000 3822 5687 88466 74203 12168 60493 10663 6824 1443 5.47 24739 2092

2010 10000 4968 9411 98850 89106 16516 85683 12828 7343 3330 6.51 33909 3233

3.6 LOAN APPROVAL PROCEDURE BY THE HEAD OFFICE 3.6.1 HEAD OFFICE CREDIT COMMITTEE: The Committee include executives of Head office Credit department, inspection Department, Financial analyst, Account Department and Investment Department and also 2/3 senior managers of large branches.

3.6.2 HEAD OFFICE APPROVAL: After analyzing and judging the credit risk Branch Credit Committee send the loan proposal to head office Credit Committee. Because branch office has no authority to disburse a single amount of loan.

Before giving a loan branch office must propose the head office for the sanction of the loan. If the branch office is satisfied with the proposed application of loan, they forward the proposal to head office for further procedure. If the amount of the loan is above the 8%, of the bank’s paid-up capital it will be treated as a big loan and bank has to send the proposal for Bangladesh Bank consideration. But if it is bellow than the amount bank can disburse it with approval of the Board of directors and Managing director of Head office. Generally, Branch office send their credit proposal mentioning the branch current asset-liability situation and the credit analysis of the proposed loan.

1. Head office approves loan proposals receive from branches after proper examination of the same as per credit policy and credit procedures.

2. It reviewed the overall positions of loans and advances of the branches and suggest measures for fulfilment of objectives of loan procedure.

3. It prepares schedules of loan sanctioning powers for delegation to the managers and supervisor subject to approval by board or managing director.

Thus the way Head office undertakes the necessary steps to sanction a particular loan.

3.7 EXISTING CREDIT POLICY OF PUBALI BANK LTD 3.7.1 Credit Policy: Credit policy is the guideline for the bank’s credit division. It generally aims at firstly creating healthy loan assts to ensure good interest earnings for the bank, secondly ensuring ultimate safety through good selection of assets based on its saleability and thirdly improving discipline on use of resources.

It providing limit to total loan of a bank in relation to its deposit funds, limits of its exposure to different sectors, limits of risk assets on types of security, limits of loans to single borrower entity and limits of loan approval authority at different tiers is the single most important document of guidance to managers and executives of a bank. However, Pubali Bank Ltd is a largest private commercial bank in Bangladesh, it successfully run their business through a standard credit policy. From the very beginning, the initiator of the Bank decided not to encourage the defaulters to obtain credit from this

esteem bank. On the other hand, they want to deal with limited customer who has established their business with integrity. With this view, the board of directors and the higher executives of the Bank structured their credit policy, which covers the following important aspects: 1. Loan limits 2. Sectoral allocation of loan 3. Loan pricing 4. loan approval Authority 5. Restrictions of loans.

6. Loan Renewal and Follow-up.

7. Loan Classification 3.7.2 Loan Limits: As Bangladesh Bank requires the banks to keep 6% deposit in cash reserve ratio and 18% in investment against eligible securities towards statutory liquidity reserve, in the absence further guidelines Pubali Bank Ltd can extend credit up to 80% of deposits.

3.7.3 Sectoral allocation of Loans: After determining the total extendable limit of loan in the policy, it becomes essential for Pubali Bank Ltd to fix limits of loans for disbursing the loans in the different sector to diversify the risk. Pubali Bank Ltd emphasis in the following sector to disbursement of their loan.

Table 3.9: Sectoral Allocation of Loan Investment (in Crore Investment

Name of the Sector

Tk.)

(In %)

Advance against Hypothecation of Vehicles

10.96

20

Real Estate

1.9

3

Ready Made Garments Shipping Executive Loan Import Financing Export Financing Trading Cement Industry Others Total

12.89 1.71 0.22 6.02 4.52 6.41 3.07 8.71 56.41 Source: Annual report 2010

24 3 0 11 8 11 5 15 100

Sectoral Disbursement of Loan

15%

20%

5% 3%

11% 24%

8% 11%

0%

Advance against Hypothication of Vehicles Ready Made Garments Executive Loan Export Financing Cement Industry

3% Real Estate Shipping Import Financing Trading Others

Fig. 3.8 Sectoral Allocation of Loan 3.7.4 Loan Pricing: Another important aspect of credit policy is pricing of loans. Pubali Bank Ltd’s management determine rate of interest through considering the cost of their allocated fund. Bank’s management proves their skill by determining their loan pricing which reflects on their high rate of profitability.

Comparing to the newly established Bank’s, Pubali Bank Ltd’s loan pricing is competitive.

3.7.5 Loan Approval Authority: At the initial stage, Concerned Branch manager has the Authority to consider whether the bank is going to give loan to the particular borrower. After submitting the proposal to the Head office, it is their responsibility to take the final decision to disburse the loan.

3.7.6 Different Parties Involved in Credit Process: In Pubali Bank Ltd I have seen mainly three parties are involved in total credit procedure. One is the Customer himself, second is the Branch and the last one is the head office. The total procedure of a credit is initiated from the customer. PUBALI BANK LTD follows this procedure in their credit appraisal. Customer, Branch Credit Committee and the head office credit committee are involved in the credit disbursement procedure.

3.7.7 Restrictions of Loans: Pubali Bank Ltd follows some restriction to disburse the loan according to the Bangladesh Bank’s rules and regulation. For example: a. Bank does not provide loan against security of its own share.

b. Bank does not provide loan to a minor or a company where a minor is holding majority share. c. Bank does not make loans against accommodation bills. d. Bank does not approve loan in favour of customers who have unpaid loans with another bank with out no objection certificate from the later. e. Bank does not make loan to borrowers whose integrity is questionable. f.

Bank does not allow any unsecured loan to its Directors or family members exceeding amount of Tk. 10.00 (ten) lac without approval from Bangladesh Bank and without approval of it’s Board of Directors

3.7.8 Required information for loan application Previously I have mentioned that the loan procedure started from the customer. Generally, customer came with a written loan application form where he stated the following things: •

Name of the Person / company

•

Business Address

•

Permanent Address

•

Constitution/ status of the Company (sole proprietorship/ partnership/ private limited company/ public limited company.)

•

Date of establishment and place of incorporation.

•

Background and business experience.

•

Particular of Assets o

Land/ Building

o

Bank Deposit

o

Stock/ Shares

•

Nature of Business

•

Amount of loan requested and purpose of loan.

•

Financial Statements for the last three years explaining the following terms: a) Capital Funds/ Net Worth o

Paid up Capital

o

Retained Earnings

b) Balance Sheet Statistics o

Current Asset

o

Fixed Assets

o

Current Liabilities

o

Term Liabilities

o

Capital/Equity

c) Working Capital o

Annual Production

o

Annual sales

o

Sources of raw materials

o

Cash flow statements

After getting the above information Branch credit committee analyze that information, which is known as credit analysis. Like other banks Pubali Bank Ltd do two types of credit analysis. One is Quantitative Analysis (Financial Statement Analysis) and other is Qualitative Analysis (Evaluating the credit worthiness of the borrower). Quantitative Analysis reflects the past performance of the organization but the Qualitative Analysis reflects the future of the business.

3.7.9 Types of Charges or Securities against Advances Pubali Bank Ltd takes the following asset as collateral. a) Guarantee: Pubali Bank Ltd improves their security by having a third party guarantee (the guarantor) the payments. When the personal security of the borrower is not considered sufficient, or when the risk involved is a boarder line case and the borrower is not in a position to offer sufficient collateral to support the loan, the Bank ask for a guarantee of a third party whose financial ability and credit standing is acceptable to the Bank. The bank also notes that such security for the loan depends on the continued solvency of the guarantor. To safeguard the Bank’s interest the Bank obtain a continuing guarantee standard form. b) Margin: The difference between the market value / assessed value of the goods, merchandise and produces pledged / hypothecated to secure a loan / advance and the amount of the loan / advance is know as margin. The margin to be retained for each type of loan / advance will be in accordance with instructions issued from time to time by Bangladesh Bank / Head office of the Bank. In case where minimum margin is specified, the percentage may be increased according to market conditions, sale ability / durability/ storage capacity and inspection facility of the goods.

3.7.10 Loan Documents The following documents are needed in the credit management process A) Demand Promissory Note:

It is an unconditional written promise of the borrower made to the Bank, to repay debts on demand or at fixed or determinable future date along with interest at a stated rate. The signature of the Borrower must be properly verified by an Authorised officer. Where the Borrower is a corporate body, the relevant corporate resolution must be scrutinized to see that the person signing the D.P. Note on behalf of the corporate body has been fully authorized to do so.

B) Borrowing Resolution This is a certified copy of a resolution adopted by the Board of Directors of a corporate body authorizing designated officer(s) to borrow and pledge, hypotheticate, mortgage, etc. The assets of the corporate body for the purpose of securing the loan / advance granted to them in accordance with borrowing power laid down in the Memorandum and Articles of association of the organization.

C) Letter of Hypothecation A “Hypothecation Agreement” obtain when the collateral is in the name of a person (more than one) other than the borrower. Under Hypothecation agreement the borrower agree to Hypothecate to the Bank goods and merchandise or any other securities in consideration of credit facilities granted to them. Under this agreement they give the Bank the right to sell the securities without notice to them and to adjust their outstanding and other expenses from the sale proceeds.

D) Subordinate Agreement “Letter of Subordinate” is an agreement on the part of any one party not to collect or enforce an indebtedness of a second party until certain obligations of such second party to a third party (Bank) are fully met.

E) Power of Attorney This document authorizes the Bank to sign or endorse document on behalf of the party executing the power F) Letter of Continuity In consideration of the Bank allowing credit facilities, the Borrower agrees to execute all relevant documents and to remain liable for repayment of all outstanding.

G) Letter of pledge When securities are pledged to the Bank in consideration of credit facilities extended to the borrowers, these remain in possession of the Bank and can be sold in case of default and the sale proceeds is adjusted towards borrower’s liabilities.

H) Counter Guarantee In consideration of the Bank issuing guarantees from time to time, the borrower agrees to keep the Bank indemnified from all liabilities, costs and legal actions that may arise from the guarantee.

3.7.11 Other Loan Documentations The minimum requirements for loan or other facility documentation of a Bank are: a) Copies of the relative Sanction letter indicating that the transaction has been approved by properly authorized officers of the Bank. b) A copy of the letter of sanction addressed to the customer and his acceptance thereof. c) All necessary documentation required to meet the terms and conditions of the facility in the manner in which it was approved. d) Before disbursement, it should be satisfied that all legal formalities have been completed. e) Disbursement of all facilities shall be made on an Offering Sheet basis to ensure that all additional requests are duly approved by two authorized Officers one of which must be the Manager or SubManager. f) Securities offered should also be thoroughly verified/inspected once in a month and stock report prepared. g) Where the loan agreement calls for restrictive covenants and ongoing conditions, the Manager must not only satisfy himself that these are adhered to at the outset of the transaction (i.e. date of initial takedown) but assure himself, at regular intervals, that these are not being violated. h) Since the Manager together with the Credit Officer is fully responsible for documentation, they will formally sign a check list. Under no circumstances may anyone permit drawings under any facilities, until they have signed off the check list.

I) The Manager/Sub-Manager should ensure that appropriate steps are being taken to keep loan documentation current for all assets Of the Bank. The loan documentation check-list, should, therefore, be reviewed at regular intervals.

.J) Lines of credit should, as a rule, be confirmed in writing to the borrower. A Specific expiration date for the line should be included. Moreover every letter of sanction must contain the Bank's standard clauses.

K) The borrower must explicitly undertake that all information supplied by him to Bank in connection with the approved lines Of credit is correct.

L) Any material or adverse change in business conditions will cause the amount due to Bank from the client immediately repayable. The Bank reserves the right to call back the facilities extended at any time without assigning any reason whatsoever.

3.7.12 Collateral: Collateral is the lender’s secondary source of repayment or security in the case of default. Having an asset that the bank can seize and liquidate when a borrower defaults reduces loss, but does not justify lending proceeds when the credit decision is originally made.

3.7.12.1 Characteristics of Good Collateral: The following five items determine the suitability of items for use as collateral. The suitability depends in varying on standardisation, durability, identification, marketability and stability of value.

a) Standardization: The standardisation leaves no ambiguity between the borrower and the lender as to the nature of the asset that is being used as collateral. b) Durability: Durability refers to the ability of the assets to withstand wear. or it can refer to its useful life. Durable goods make better collateral than non-durable. Stated otherwise crushed rocks make better collateral than fresh flowers. c) Identification: Certain types of assets are readily identified because they have definite characteristics or serial numbers that cannot be removed. Two examples are a large office building and an automobile that can be identified y make, model and serial number.

d) Marketability: In order for collateral to be of value to the bank, the collateral must be marketable. That is the borrower must be able to sell it. Specialised equipment is not as good as collateral as are dump trucks, which have multiple uses. e) Stability of value: Bankers prefer collateral whose market values are not likely to decline dramatically during the period of the loan such as common stock.

3.7.13 Different Kinds of Collateral: Secure loans have a pledge of some of the borrower’s property behind them (such as home or an automobile) as collateral that may have to be sold if the borrowers have no other way to repay the bank. Some of the most popular collaterals are: 1. Account Receivable: The banks take a security in the form of a stated percentage of the borrower’s balance sheet. When the borrowers credit customers send in cash to retire their debts this cash payments are applied to the balance of borrowers loans. The bank may agree to lend more money as new receivable arise from the borrowers sells to its customers thus allowing the loan to continue as long as the borrower has need for credit and continuous to generate and adequate volume of sales 2. Factoring: bank can purchase a borrowers account receivable based upon some percentage of the book value because the bank takes over the ownership of the receivable, it will inform the borrowers customers that hey should send their payments to the purchasing bank.

3. Inventory: A bank will lend only a percentage of the estimated market value of a borrower’s inventory in order to leave a substantial cushion in case the inventories value begins to decline. The inventory pledged may be controlled completely by the borrower using a so-called floating line approach.

4. Real Property: A bank may take a security interest in land and / or improvements on land own by the borrower and records its clime-a mortgage-with a government agency in order to define against successful claim by others.

5. Personal Property: Bank takes a security in jewellery, securities and other forms of personal property owned by a borrower.

6. Personal Guarantees: A pledge of the stock deposits or other personal assets held by the major stock holders or owners of a company may be required as collateral to secured a business loan

3.7.14 Recovery and follow up If a borrower fails to make repayment of the dues, Pubali Bank Ltd considers the following steps to recover the stuck up advances.

1. Exerting Moral Pressure: The Bankers visit the borrower’s place of business and find out the causes of non-payment of the bank’s dues. The banker may also request some influential of the area to exert pressure on the borrower to clear bank’s dues.

2. Notice: In case the borrower does not adjust the account as desired, the only course left open to the bank would be to sent a notice by registered post to the last known address of the borrower and the guarantor, if any, preferably through a lawyer.

Loan follow-up means the technique of supervision (of loan). The branch manager keep a close and constant watch on all their loans and advances to ensure that timely action is initiated in each case for adjustment of account or its renewal, if it is decided to continue the facility.

For this purpose each branch maintain a diary or card in prescribed format in which the due date of expiry of loan facilities are noted down. At least thirty days before the date of expiry of any loan facility, a notice send to the borrower reminding him of the due date of repayment and making formal demand of repayment are renewal as the case may be. Vigorous follow up actions there after taken by issuing repeated reminders and putting pressures on the borrower by calling on him personally.

4.1 PRINCIPAL OF CREDIT Pubali Bank Limited adheres to the following general principles of lending funds to their customers.

•

 Background, Character and ability of the borrowers

•

 Purpose of the facility

•

Term of facility

•

Safety

•

Security

•

Profitability

•

Source of repayment

•

Diversity

Bank should never put “All its eggs in one basket”. It should be note that selection of appropriate borrowers proper follow-up and end-use supervision through constant close contact with the borrowers, are the corner stones for timely recovery of credit.

4.2 FACTORS OF CREDIT POLICY: Credit policy of all banks cannot be developed on same lines because of differences in their operational needs and resource structures. In designing a credit policy, considerations should be given to following: 1) Total deposit resources of the bank and rate of fluctuation of resources.

2) Trend of growth in deposit and economic growth rate of the country.

3) Capital fund and other reserves. Large bank’s capital fund and secondary reserve in investment can permit its loan policy to be liberal in respect of its limit of lending in high risk-high returns loans while a relatively new small bank would stress more on liquid and highly secured loans at lower interest in its policy.

4) Capability of loan administration shall have to be given due weight in the credit policy. A large bank is able to hire numbers of highly skilled specialists/experts in different areas to advise the bank in loan making but smaller banks relying on usual credit managers cannot venture into sectors that require expert appraisal of loan applications and also that requires intensive post implementation monitoring of large and complex industrial loans.

5) Investment size of the bank and its nature.

4.2.1 Risk Factors of credit When a customer requests a loan, bank officers analyse all available information to determine whether the loan meets the bank’s risk-return objectives. Credit analysis is essentially default risk analysis in

which a loan officer attempts to evaluate a borrower’s ability and willingness to repay. The banker has to identify three distinct areas of commercial risk analysis related to the following questions: 1. What risks are inherent in the operations of the business?

2. What have managers done or failed to do in mitigating those risks?

3. How can a lender structure and control its own risks in supplying funds?

The first question forces the banker to generate a list of factors that indicate what could harm a borrower’s ability to repay. The second recognizes that repayment is largely a function of decision made by a borrower. Is management aware of the important risks and has it responded? The last question forces the banker to specify how risks can be controlled so that bank can structure an acceptable loan agreement. Therefore, Bankers look into key risk factors or Qualitative analysis which has been classified according to the five Cs of credit: 1. Character: Character refers to the borrower’s honesty and trustworthiness. A banker must asses the borrower’s integrity and subsequent intent to repay. If there are any serious doubts, the loan should be rejected.

2. Capital: Capital refers to the borrower’s wealth position measured by financial soundness and market standing. It helps cushion loses and reduces the likelihood of bankruptcy.

3. Capacity: Capacity involves both borrower’s legal standing and management’s expertise in maintaining operations so the firm or individual can repay its debt obligations. Under capacity an individual must be able to generate income to repay the cash.

4. Condition: A condition refers to the economic environment or industry specific supply, production and distribution factors influencing a firm’s operations. Repayment sources of cash often vary with the business cycle or consumer demand.

5. Collateral: Collateral is the lender’s secondary source of repayment or security in the case of default. Having an asset that the bank can seize and liquidate when a borrower defaults reduces loss, but does not justify lending proceeds when the credit decision is originally made.

4.3 DIFFERENT TYPES OF LOAN AND ADVANCES: Two main functions of a commercial bank are: 1) to receive deposit and 2) to advance loans. One of the most important sources of income of a bank is interest gain from loans. Government and Central Bank formulate the principles of loan. Commercial banks give loans on the basis of these principles.

Generally seven principles are followed in giving of loan: *Safety *Security *Liquidity *Purpose *Margin or Profit *Diversity *National Interest.

Figure: 4.1 Types of Loan and Advances

Advances Staff Loan

Staff House Building Loan

Term Loan

Staff Loan against Provident Fund

Overdraft

Agricultural or other Loan

House Building Loan

Transport Loan

Cash Credit or Working Capital

Secured Overdraft

Loan General

CC-Hypothecation

Bank Guarantee

Bid Bond

Industrial Loan

Performance Bond

Bills Purchase and Discounted

CC- Pledge

Scheme

Customer Credit Scheme

Investor’s Account

It is not possible to discuss all these types of advances in details in this report but an attempt has been made to analyze the basic difference and characteristics of these advances all in the following manner There are five types of credit available in Pubali Bank Ltd Limited. Those are: 1. Loan General 2. Overdraft 3. Cash credit 4. Packing Credit 5. LIM 6. Consumer Credit Scheme 7. Executive Loan

On the basis of credit six ways of security is received:

• • • • • •

Pledge Hypothecation Mortgage LIM Assignment Set-Off

4.3.1 Loan General General loan is disbursed against specific project like factory renovation, expansion or establishment.

The special features of Pubali Bank Ltd’s general loan are a) Special Features 1. This loan is disbursed for a certain period of time.

2. The total loan amount is disbursed at a time.

3. Interest is applied on the full amount of sanctioned loan.

4. This type of loan is repayable in installment basis or at a time basis. b) Sectors of Loan General 1. Personal 2. Commercial 3. Industrial c) Types of Loan General 1. Term Loans 2. Participation Loans 3. Personal Loans d) Documents Required for Loan General 1. Letter of Disbursement.

2. Letter of Installment (if necessary) 3. Letter of Authority 4. Demand Promissory Note 5. Letter of Undertaking 6. Letter of Guarantee 7. Letter of Continuity (if necessary) 8. All necessary documents of collateral security 9. Application for loan 4.3.2 Over Draft Such kind of loan provides the facility to a CD account holder of withdrawing excess money over the amount deposited in his account. When such loan is given against any in cashable security then it is known secured over draft. If no security is provided then the loan is known as Clean Over draft. In Pubali Bank Limited the practice of sanctioning Clean over Draft is very much limited. Only most valued client may get it. But the mostly practiced overdraft is secured over Draft. Its special features are:

a) Secured Over Draft (SOD) There are two types of SOD. Those are— 1. SOD (FO) 2. SOD (WO) b) SOD (FO): Here FO stands for Financial Obligation. Securities that are easily in cashable are taken to sanction such kind of overdraft. FDR, Monthly Benefit Scheme and Sonchoypotro are used as security in this kind of loan. 90% of the security amount can be sanctioned as SOD. But if the FDR is almost matured then 100% loan can be sanctioned. c) SOD (WO) Here WO stands for Work Order. Usually such kind of loan is provided against any work order. The contractors are the clients of such loan. In Pubali Bank Ltd Limited SOD (WO) practice is rare.

4.3.3 Cash Credit In such kind of credit system a certain amount of money is sanctioned for a certain period of time.

Usually goods and collaterals are taken as security against such kind of loan. There are two types of Cash Credit. Those are: 1. Cash Credit Hypothecation 2. Cash Credit Pledge. Both type Cash Credit Loan has been described below: 1) Cash Credit Hypothecation Hypothecation as a process of creating equitable charge on specific movable property or goods as a security for the amount of debt but ownership or possession of movable property or goods are not transferred to the creditor. a) Special Features of Hypothecation 1. It involves creation or equitable charge on movable property as a security for the amount of debt.

2. The charge is floating, present or future.

3. In hypo the ownership right of the property or possession is not transferred to the creditor.

4. The hypothecator takes personal responsibility of handing over the rights on

hypothecated

property whenever hypothecate makes demand for the same.

5. The hypothecate gets all the rights of a pledge.

6. The hypothecator retains the ownership rights and possession of the movable property.

7. The hypo. is executed by a deed legally called Letter of Hypothecation.

b) Documents to be taken •

D.P Note

•

Letter of agreement

•

Letter of continuity

•

Stock report duly signed by the hypothecator

•

Letter of Hypothecation

•

Insurance cover note.

4.3.4 Cash Credit Pledge Pledge/ Pawn mean bailment of goods as security for the payment of a debt or performance of a promise. (According to U/s-172, the contract act, 1872) a) Features of Pledge 1. Bailment of goods is always based on contract act.

2. Ownership of goods is not transferred.

3. Bailment as security of debt.

4. Possession of goods with the pledgee.

5. Head Office permission is a must. b) Documents Required •

Letter of pledge

•

Stock report duly signed by the pledger.

•

Invoice/ Cost memo of goods pledged.

•

Insurance cover note with banks mortgage clause.

•

Letter of disclaimer

•

DP Note

•

Letter of disbursement

•

Letter of authority

•

Letter of lien of stocks

4.3.5 Packing Credit In this type of credit system bank authority provides “Pre-Shipment Packing credit” for conventional goods (Jute, Leather and tea) and as well as for unconventional goods. In other hand, the credit provided for the shipment of goods for the exporter is known as “Post- shipment Packing Credit”.

4.3.6 LIM (Loan against Imported Merchandise) When an importer becomes unable to release his goods from customs house due to financial crisis, he may approach to his bank in writing for loan. This loan provided by the bank is known as Loan against Imported Merchandise (LIM). In this type of loan Head Office, approval is necessary. The

duration of LIM is one month. The interest is 16.5%. Beyond this period 2% overdue interest is added.

4.3.7 Consumers Credit Scheme This scheme is for midlevel income people. It is not necessary to have an account with the bank to open this scheme. Generally electronics items, computers, cars etc. fall in this scheme.

4.3.7.1 Procedure required for Consumers Credit Scheme The applicant will approach to bank with a writing containing the following particulars:  Name  Address  Service Address  Income  The product which he/she want to buy There is a prescribed form for Consumer Credit Scheme. The party will fill it up. The branch will send this form to the Head Office for permission. Generally this scheme is adjusted within 36 installment.

4.3.8 Executive Loan The staffs of Pubali Bank Ltd. can get loan against their provident fund. This type loans are repayable in installment basis.

4.4 CREDIT ANALYSIS: Under credit analysis Bank also does Quantitative analysis which refers to the analysis of financial statement ratios to know the past performance of a company. Some of the key ratios which serve as a tool for financial analysis are classified as

1) Financial Ratio 2) Turnover Ratio 3) Profitability Ratio 1) Financial Ratios Financial ratios indicate about the financial position of the company. A company is deemed to be financially sound if it is in a position to carry on its business smoothly and meet its obligations-both long-term as well as short term-without strain. Some of the important ratios which are calculated in order to judge the financial position of the company are: i)

Fixed Asset Ratio =

ii)

Current Ratio =

iii)

Quick Ratio =

Fixed Assets Long − term funds

Current Assets Current Libilities

Quick Asset (current assets − inventory ) Current Libilities

Long −term Debt

iv)

Debt Equity Ratio = Shareholders Fund

2) Turnover Ratio The turnover ratios indicate the efficiency with which the capital employed is rotated. They are also known as Activity or efficiency ratio. The overall profitability of the business depends on the turnover i.e. the speed at which the capital employed in the business rotates. Higher the rate of rotation the grater the profitability. In order to find out which part of capital is efficiently employed and which part not, different ratios are calculated. These are:

i)

Net Sales

Fixed Asset Turnover Ratio = Fixed Assets Net Sales

ii) Working Capital Turnover Ratio = Net Working Capital

3) Profitability Ratio Profitability is an indication of the efficiency with which the operations of the business are carried on.

Poor operational performance may indicate poor sales and hence poor profits. Bankers look at the profitability ratio as an indicator whether or not the firm/company earns substantially more than it pays interest for the use of borrowed funds and whether the ultimate repayment of their debt appears reasonably certain. The important profitability ratios are: Operating Pr ofit

i)

Overall Profitability Ratio = Capital Employed ×100

ii)

Gross Profit Ratio =

iii)

Gross Pr ofit ×100 Net Sales Net Operating Pr ofit ×100 Net Profit Ratio = Net Sales

4.5 PROCEDURE OF LOAN DISBURSEMENT If any individual or group wants to get loan from this bank, they have to submit an application form to the bank authority for their subsequent approval. There are two types of form maintained in Pubali bank.

•

Application for advances (For individual and firms) –- FL-59

•

Credit proposal and approval form – FL-60

A filled up application form is presented to the bank by the customer for sanctioning of loan. Then credit proposal and approval form is prepared and basing on the credit limit subsequently from branch manager it goes even up to the board of directors for necessary approval. Information, which is included in these forms, can be summarized as follow:

4.5.1

Information Regarding Entrepreneur, Ownership and Management:

4.5.2

4.5.3

•

Details of project

•

Ownership of project

•

Details of Entrepreneur, managers and their activities

Details of the Project: •

Name of the product/ service

•

Land/ Building

•

Machinery/ Equipment

•

Raw materials

•

Manpower

Details of Project Expenditure and Source of Fund: •

Expenditures on different items

•

Details of source of fund

4.5.4 Additional Information. In addition to this few more things are included to these forms.

These are as follow:

4.5.5

•

Assets and liabilities of the entrepreneurs/directors

•

Bio data of the entrepreneurs/ directors

•

Personal net worth statement

LOAN WITH INTEREST RATE

Pubali Bank provides loan in different sectors. Heads of loan disbursement including interest rates are as follow:

Table 4.1: Rates of Interest Serial

Heads

Interest Rates

1.

Agriculture

13%

2.

Term loan for large and medium industry

15%

3

Working Capital

14%

4

Export loan

10%

5

Commercial loan

11-15%

6

Other special loan

16%

7

Various Deposits

15-18%

Rates of Interest

Ag ric u W Te ltu r or rm e kin g loa C n Co Ex api m po tal Sm me rt lo a rci a n O ll & al l o th er C o an t Va spe ta g rio cia ... us l l De oa n po sit s

18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

Figure 4.2: Rates of Interest 4.6 LOAN CLASSIFICATION AND PROVISION Just Like other scheduled banks of Bangladesh Pubali bank also offers four types of loan i.e. continuous loan, demand loan, term loan, short-term agriculture and micro credit. Whenever a particular loan becomes classified interest of that loan is taken into a separate account and called interest suspense. Base for a particular classified loan is calculated after deducting value of the security collateral and amount of interest suspense. Required provision is calculated as per particular percentage of the classified loan as shown above. Every year the reserve for provision is maintained from the amount of profit. So it becomes very difficult for a bank with high amount of classified loan to achieve profit at the end of the year.

4.6.1 Loan Classification Bangladesh Bank has circulated a revived policy to all scheduled banks of Bangladesh through BRPD Circular No-16, dated 06 December 1998. All loans and advances are classified into four parts: •

Continuous Loan

•

Demand Loan

•

Fixed Term Loan

•

Short Term Agricultural and Micro Credit

a) Continuous Loan.

The limited loans with expiry date of loan payment, which can be transacted

without any particular payment schedule, are termed as continuous loan, i.e.; CC, OD etc. b) Demand Loan. The loans, which become eligible for payment when demanded by the bank, are termed as demand loan. If contingent or any other debt becomes forced loan, then those are also termed as demand loan, i.e. Forced Lim, PAD, FBP, and IBP etc. c) Fixed Term Loan.

The loans, which are to be paid within limited term with a particular payment

schedule, are termed as fixed term loan. d) Short-Term Agricultural Loan and Micro-credit.

The short-term loans, which are listed in

yearly loan disbursement schedule served by the loan department of Bangladesh Bank, are termed as short-term agricultural loan and micro-credit. The loan given to the agricultural sector for less than 12 months is also included in this loan. By short-term loan we mean the loan below 10000 taka, to be paid within 12 months. It is immaterial that in whatever name it is called as non-agricultural loan, handloom loan, sonirvor loan, are also classified under this category.

Pubali Bank Ltd followed the revised policy of Bangladesh Bank for loan classification and provisioning, which was introduced from January 1999. The Revised policy calls for an independent assessment of each loan based on qualitative factors and objective criteria. Each loan is branded with the worst level of classification resulting from these independent assessments.

If a Continuous Credit or a Demand Loan, remains non-performing for 6 months or more it is classified Sub-standard.

It is classified as Doubtful if it remains non-performing for 9 months and classified as Loss if nonperforming for 12 months or more.

In the case of a Term Loan, which is repayable within a maximum period of 5 years, if any installment is not repaid within the specified period and if the time-equivalent of such unadjusted balance is 6 months, it is classified Sub-standard.

A Term loan is classified Doubtful and Loss if the time-equivalent of unadjusted balance is 12 months and 18 months respectively.

Agricultural Loan and Micro-Credit is classified Sub-standard if non-performing for 12 months, Doubtful if non-performing for 36 months and Loss if non-performing for more than 60 months.

Under the existing system, Pubali Bank Ltd is required to maintain provisions against unclassified and substandard loans in addition to doubtful and loss loans. Whether a credit is classified or not under the objective criteria, it is subjected to classification under qualitative judgment if any doubt arises regarding repayment of loan.

The loan classification has been done mainly under two broad heads.

4.6.2

Objective Criteria.

a) The continuous loan is classified as discontinuous loan after the expiry of scheduled date of payment or if it is not renewed before its expiry.

•

From 6 months to 9 months……… Substandard loan

•

From 9 months to 12 months……. Doubtful loan

•

From 12 months and above………. Bad/Loss loan

b) If any demand loan is not paid or declared forced loan: •

From 6 months to 9 months…..Substandard loan

•

From 9 months to 12 months….Doubtful loan

•

From 12 months and above…….Bad/Loss loan

c) If any installment of a term loan is not paid within the scheduled date, then that debt will be termed as installment default.

d) The term loans which are to be paid within maximum five years time: •

If the amount of installment default is equal to or more than the installment to be paid within six months will be classified as substandard loan.

•

If the amount of installment default is equal to or more than the installment to be paid within 12 months will be classified as doubtful loan.

•

If the amount of installment default is equal to or more than the installment to be paid within 18 months will be classified as bad or loss loan.

e) In case of the loan, which are to be paid within more than five years?

•

If the amount of installment default is equal to or more than the installment to be paid within 12 months will be classified as substandard loan.

•

If the amount of installment default is equal to or more than the installment to be paid within 18 months will be classified as doubtful loan.

•

If the amount of installment default is equal to or more than the installment to be paid within 24 months will be classified as bad or loss loan.

f) If short-term agriculture loan is not paid within the date mentioned in the contract, will be termed as discontinuous loan. It will be discontinuous if it crosses: •

12 months ----Substandard loan

•

36 months----Doubtful loan

•

60 Months----Bad/Loss loan

4.7 CALCULATION OF INTEREST RATE OF CLASSIFIED LOAN If any advance or loan becomes substandard or doubtful, then the interest rate will be applicable as per the type of the loan. But that interest cannot be taken as income of the bank. These whole interests will be reserved as “Interest suspense”. When any advance or loan becomes bad or loss, the application of interest rate on that loan will be ceased. If any case has to be filed against this type of loan, then interest will be calculated up to the date of filing case. Then case will be filed on the total interests and principal. But this interest will be treated as interest suspense. If for other reason interest rate is applied on bad or loss loan, then that will be also treated as interest suspense. If classified loan is recovered, then first non-applied and applied interest will be adjusted, then the principal will be adjusted.

4.7.1 Reservation of Provision: Bank will reserve provision for continuous, demand and term loan as per following rate: •

Unclassified (UC)

•

Substandard loan (SS) - 20%

•

Doubtful loan (DF)

•

Bad or Loss loan (BL) - 100%

- 1% - 50%

Reservation for Provision 100%

100% 80% 60%

50%

40% 20% 0%

20% 1% UC

SS

DF

BL

Figure 4.3: Reservation for Provision The aforesaid provision will be applicable on the remaining loan, deducting the suspended interest and value of eligible security from the main loan. 1% provision will be reserved for declassified loan.

4.7.2 Aforesaid eligible security includes following:

4.7.3

•

Lien security against the loan-100%

•

Market rate of deposited gold/ ornaments in the bank-100%

•

Lien Government Bond/Savings certificate-100%

•

Guarantee from Government or Bangladesh Bank-100%

•

Easily Marketable Goods Kept under control of Bank-50%

•

Market value of secured land and building-50%

Provision has to be maintained for short-term agricultural loan and micro-credit: •

All classified loan other than bad or loss-5%

•

Bad or loss loan-100%

5.1 LENDING RISK ANALYSIS Lending Risk analysis (LRA) is simply a loan processing manual and has done when the amount of loan is above 1 core. By going through this manual the lending bankers can asses the creditworthiness of their prospective borrowers.

Therefore, LRA is such an instrument which is definitely and directly related with lending information to analyze the borrower’s financial, marketing, managerial and organisational aspects subjectively and objectively. It also facilitates the analyst to know the security risk of the credit.

Lending risk Analysis involves assessing the likelihood of repayment of loans to the bank as per agreement on the basis of analysis of certain risks. To analyze these risks bankers will need to fill-up a 16-page LRA form. The form leads to scoring various risk factors involved in lending.

There are mainly two components of LRA form i.e. Business risk and security risk. Business risk is again subdivided into two parts, Industry risk and Company risk. Details of the format are shown below:

Lending Risk

Business Risk

Industry Risk

Security Risk

Company Risk

Supply Risk Sales Risk

Company Position

Performance Risk

Resilience Risk

Security Control Security Cover Risk Management Risk

Management Competence Risk

Management Integrity

Figure 5.1: Flow Chart of Lending Risk Analysis 1) Business Risk Business Risk is concerned with whatever the borrowing company would fail to generate sufficient cash out of business to repay the loan Business Risk, the main component of lending risk, consists of the Industry Risk and the company Risk

A. Industry Risk Due to some external reasons a business may fail and the risk which arrives from external reasons of the business is called Industry Risk. It has two components: i) Supplies Risk: When the business fails due to disruption in the supply of inputs, the consequent risk which would arise is known as Supply Risk ii) Sales Risk: When the business fails for disruption in sales, this type of risk would generate.

B. Company Risk Company Risk is shown for some internal reasons of the business. It has also two main components and four sub-components i) Company position Risk Each and every company holds a position within an industry. This position is very much competitive. Due to weakness in the company’s position in its industry, a company may fail and the risk of failure is called Company Position Risk. It depends on(a) Performance Risk If a company fails to perform well enough to repay the loan because of its weakness under given expected external conditions, the company is said to suffer from performance risk. (b) Resilience Risk When a company fails due to lack of its resilience to unexpected external conditions, the resilience risk is generated. ii) Management Risk If the management of a company fails to exploit the company’s position effectively, the company can fail and this risk of failure is called management Risk. It can be subdivided further(a) Management Competence Risk Management competence risk is the risk that the company fails because the management is incomplete (b) Management Integrity Risk Management integrity risk is the risk that the company fails to repay its loan due to lack of management integrity.

2) Security Risk Security risk is the risk that the realised value of the security does not cover the exposure of loan.

Exposure means principal plus outstanding interest. Security risk can be divided into two parts: (a) Security Control Risk: Security control Risk is the Risk that the bank fails to realise the security because of lack of bank’s control over the security offered by the borrowers. (b) Security Cover Risk: Security cover risk is the risk that the realised security value may not cover the full exposure of loans.

5.1.1

Factors influencing Lending Risk Analysis

Components of an LRA format are already mentioned. Again these components are influenced by some factors. These are as follow: Table 5.1: Factors Influencing Lending Risk Analysis Risks

Factors to be considered

Supply Risk

Price, Quantity and Quality Review Charges in GOB Policy Obtain cost breakdown

Sales Risk

Sales may fluctuate because, Market size drops Increased competition Changes in regulation Lose of largest customers

Performance Risk

Recent performance history Competitive position: SWOT as compared to competitor Strategy adopted in view of above Cash flow forecasts

Resilience risk

Leverage: DER, CIB report, Shareholder’s further report Liquidity: Ratio analysis, Flexibility- proportion of variables to fixed cost Connection

Competence Risk

Management ability Level of team work

Integrity risk

Honesty Dependability

Control Risk

Ease of obtaining judgment Ease of taking possession of security

Cover Risk

Expected realizable value Speed of realization Liquidation value

5.2 STATE OF LOAN CLASSIFICATION AND PROVISION Table 5.2: State of Loan Classification and Provision last 5 years (2006-2010) (Figures in million taka) SL No 1.

2.

3.

4.

5.

Particulars

2006

2007

2008

2009

2010

Deposit Total Loans & Advance a) Unclassified b) Classified c) % Of Classified Loans d) Recovery of Classified Loans & Advances a) Reserve for Bad Debt b)% Of Bad Debt a) Required amount of Provision b) Provision Obtained Net Profit

48675 40386 886 741 45% 125

57996 50549 962 769 44% 97

73016 61788 1185 766 39% 107

88466 74203 1397 760 35% 120

98850 89106 1629 729 30% 161

697.86 42% 372

685.64 39% 351

646.75 33% 350

605.36 28% 344

520.45 22% 311

44.09 845.33

84.19 1353.51

119.79 1515.23

154.79 2092.23

208.79 3233.09

With the passage of time the bank is expanding day by day. Due to expansion the bank is offering more loans to its clients. That is what we see that the amount of loan is increasing gradually from year 2006 to 2010. Bangladesh Bank is promulgating improved and renewed rules to check the loan default and enhance recovery. Accordingly Pubali bank is also enacting newer policies. Here the amount of classified loan is remaining static that is nearer to 50%. As the offering of loan is increasing day by day, so it is quite encouraging that the amount of classified loan is checked and it is becoming less than half.

Recovery of Classified Loan 800 700 600 500 400 300 200 100 0

2006

2007

2008

2009

2010

Figure 5.2: Recovery of Classified Loan Net Profit 3500 3000 2500 2000 1500 1000 500 0

2006 2007 2008 2009 2010 Net Profit for 5- Years

Figure 5.3: Net Profit for 5 Years Again from the figures and graphs above we see that, recovery of classified loan was on an average 10% to 15%, which is not at all satisfactory. Though the amount of classified loan is controlled the amount of recovery has not been increased as it is expected. It seems that there is a lack in either rules of recovery or lack in incentives for the officers and employees to recover the classified loan. Even then it is quite encouraging to see that recovery rate of last year was 22%. Afterwards the amount of profit is increased gradually. Last year in 2010, total income of the bank was 12828 million taka and expenditure was 7343 million taka.

So overall credit management of Pubali bank is quite satisfactory. There is a huge amount of long outstanding bad/Loss loan. While calculating net profit of the bank it has been added to the total figure. For this reason, net profit figure of the bank is not actually a net one; it is quite inflated and also misleading. So to reflect the true profit of the bank the long outstanding bad/loss loan has to be written off.

5.3 Standard Procedure of Credit Followed by Pubali Bank Limited Most of the procedure of credit management system are standardised under the supervision of Bangladesh Bank but my experience in the credit department could revealed some ill practice in the appraisal procedure which can drive the bank in a uncertain condition in the long run related to the recovery of given loans. The entire bank tries to keep their recovery rate100% percent as they deal with the money of general people. To achieve that rate banks have to have more careful during loan disbursement and meantime a good appraisal procedure can ensure a good recovery though there are many internal and external factors with may influence the rate of recovery.

Pubali Bank Ltd does have the same vision towards their loan disbursement. Although their vision is positive but observed the following objectionable practices in the credit appraisal procedure: 5.3.1 Credit Policy Credit policy is a guideline for bank. It includes the terms and conditions of existing credit, which is followed by the personnel of the credit division. Pubali Bank Ltd has written loan policy which is very similar to the Standard one. In fact every bank follows the same credit policy which known as standard credit policy written in the banks guide line. But the difference is seen in the practice of the policy. Like Standard credit policy Pubali Bank Ltd has the following credit policy:

•

A goal statement for the banks loan portfolio.

•

Specification of the lending authority given to each loan officer.

•

Lines of responsibility in making assignment and reporting information with in the loan department.

•

The required documentation that is to accompany each loan application and what must be kept in the banks credit files.

•

Lines of authority within the bank detailing who is responsible maintaining and reviewing the banks credit files.

5.3.2 Procedure of Credit Have mentioned that the loan procedure starts from the client and than it goes to branch (according to standard procedure and existing procedure). But practically client goes to the higher management of the bank and proposes the loan first than the head office send the client to the branch office for loan appraisal.

The Standard Procedure of Credit of a Bank is completed through the following Steps:

Step 1: Any request for credit facilities, must be made by the borrower in the Bank's prescribed standard form properly filled in and completed in all respect and duly signed by the prospective borrower.

Step 2: For all credit proposals, the borrowers and guarantors (if any) should, wherever Possible submit past 3 years Profit & Loss A/C and Balance sheet duly audited by a recognized and competent Chartered Accountant containing unqualified opinions. Some borrowers may not have audited financial statements at all. In either case, the lending officer must interview the potential borrower or Guarantor and obtain satisfactory, accurate and complete financial information supporting any prior financial statements either audited or not audited. In the case of an individual borrower or guarantor, the financial statements must be signed by competent authority and must contain legend to the signatory, all assets and liabilities both direct and contingent and all sources of income and items of expenses. For all un-audited statements provided by a Company, financial Officer of the Company must execute such legend.

Step 3: On all new credit arrangements and annual reviews emanating in Branches, an analysis of the credit worthiness of the borrower and guarantor (if any) should be prepared by the Credit Department at the Branch where credit monitoring responsibility lies and a copy thereof forwarded to the Head of Credit Division at 'Head Office for pre-factor or post-factor review as the case may be. In case such credit originates in the Head Office, it will be forwarded to the Branch Manager for record and action.

Here again the bank differ its operation from procedure. One thing has seen practice is more stabilised than procedure.

5.3.3 Collateral Collateral is one of the important factors in credit management procedure. If bank can get a good security against the loan, local bank never think twice to disburse loan. In the standard procedure we have seen different types of collateral can issued against loan. Such as: a. Account Receivable The banks take a security in the form of a stated percentage of the borrower’s balance sheet. When the borrowers credit customers send in cash to retire their debts this cash payments are applied to the balance of borrowers loans. The bank may agree to lend more money as new receivable arise from the borrowers sells to its customers thus allowing the loan to continue as long as the borrower has need for credit and continuous to generate and adequate volume of sales

b. Factoring Bank can purchase a borrowers account receivable based upon some percentage of the book value because the bank takes over the ownership of the receivable, it will inform the borrowers customers that they should send their payments to the purchasing bank.

c. Inventory A bank will lend only a percentage of the estimated market value of a borrower’s inventory in order to leave a substantial cushion in case the inventories value begins to decline. The inventory pledged may be controlled completely by the borrower using a so-called floating line approach. d. Real Property A bank may take a security interest in land and / or improvements on land own by the borrower and records its clime-a mortgage-with a government agency in order to define against successful claim by others. e. Personal Property Bank takes a security in jewellery, securities and other forms of personal property owned by a borrower. f. Personal Guarantees: A pledge of the stock deposits or other personal assets held by the major stock holders or owners of a company may be required as collateral to secured a business loan But I have seen that Pubali Bank Ltd never accept the risky security like personal guarantee, factoring, account receivable and even some times inventory.

5.4 FINDINGS AT A GLANCE Every Bank’s has it’s own procedure. Pubali Bank Ltd possesses a standard credit procedure. But there exists a huge difference between Bank’s policy and practice. Major findings of this report are as follows: a) Bank Emphasise LRA Highly for Disbursement of Big Loans: Through banks required both quantitative and qualitative analysis but for big loans bank emphasises on the lending risk analysis. But LRA is not a perfect measure of credit analysis. Because businessmen in our society are usually tempted to take resort to window-dressing. Window-dressing means account are so manipulated that the vital facts are concealed and facts presented are superficial.

So banks have to go through both quantitative and qualitative analysis.

b) Customer Goes to Directly to Director: According to the standard and Bank’s credit procedure Credit operation started from the customer application to the branch for the loan. But in most of the cases I have seen many customers go to directly to the directors of the bank and directors send them to the branch offices with his/her

reference. In these cases proper appraisal is not possible as directors are the owner of the bank and bank management must give priority towards the decision of the directors. This phenomenon is very common in the bank which hampers the spontaneous procedure of credit management c) All the things in the proposal form are in order but practice is not perfect: Bangladesh Bank monitors all the policies of all the private and nationalised Banks of the country.

According to the Bangladesh Bank’s strategy all Banks must possess the standard policies which are designed by the Central Bank. Pubali Bank Ltd also possesses a standard Credit proposal form. In that form all necessary information are required to fill up. But in practice credit officers do not fill up the proposal form properly. Most of the cases they use assumption rather than the exact figure. This practice might end up with bad loan or classified one. d) Head Office Send the Order to Give Loan to Specific Customer before doing Appraisal.

A standard credit policy started from the customer’s direct application for the loan in the branch office. But it’s a common phenomenon that most of the customer directly contact with head office and head office choose the branch offices to disburse the loan. It hampers the normal procedure. Branches always stay under pressure when they get order for disbursement from head office. When branches get order from the head office then the management system is loss it’s formal track. So head office should not send any order to the branch office without prior appraisal. e) Does not follow pre-plan Loan Portfolio which Diversify Risk: Every Bank has its own budget and plan regarding loan portfolio. This loan portfolio must be diversified so that bank could diversify its risk. A proper and pre planned portfolio can eliminate the risk of huge classified loan or bad loans as this aspect is very much sensitive toward many external and internal factors. So far I have observed Pubali Bank Ltd does not give emphasise on it. They does not have any proper guide line where to invest, more ever they do not do any future plan to maintain a well structured portfolio to decrease the possibility of classified loan. They are giving loans to the Garment sectors but its future is uncertain. If they would have any pre planned portfolio for their loans they won’t emphasis on this sector. These types of practice are work as an obstacle in smooth credit disbursement as well as in credit appraisal system.

f) New and Small Entrepreneurs are not Getting the Priority: Pubali Bank Ltd does not provide loans to the small entrepreneur. It mainly circulates its loans to the big shots. As a result their loan is not diversified in to the small scale portfolios. This may cause high financial loss in future.

g) Small Loans are given without Proper Appraisal: In the small scale loan bank is just concern with the collateral. But bank should remember these if those small loan defaults it will cause lot of opportunity and legal cost to recover those loan. h) Bank Does Not Possess Competent Employees Expert in Ratio Analysis: In the Pubali Bank Ltd I have seen that most of the bankers are come from non-commerce education background. So, they have very little knowledge over the credit management and appraisal procedure.

As a result they just follow the instructions and can not implement their own judgement. i) Subjective Analysis is getting emphasis in Appraisal: I have mentioned that head office tightly control the credit management. So, credit analysis is just a procedure and nothing more than that. Branch office some time manipulates the customer’s performance analysis to disburse loan. So bank gives loan on the basis of customer’s name not on the basis of customer’s financial performance. j) Collateral are Taken with Out Proper Valuation Judgement: In many cases bank face this problem because Bank’s credit officer fails to valued the collateral properly. Proper valuation means collateral will exactly cover the risk of bad loan. Officials must do it with care. k) Here exist various rules and also prescribed format for offering loans and advances to the customers. In maximum of the case these are not followed properly. Lending Risk Analysis (LRA) is not done regularly and properly.

l) Assessing the five years credit statement of the bank, it is found that recovery rate of classified loan is only 20% to 25% which is very much alarming. Though it slightly increased last year, a coordinated effort has to be undertaken by the bank to increase the recovery rate.

6.1 CONCLUSION Banking sectors no more depends on only on a traditional method of banking. In this competitive world banking sector has stretched its wings wide enough to cover any kind of financial services. Not only from the local banks but also from the foreign banks, the banks of today face a tough competition. The major task of banks is to survive in this competitive environment is by managing its assets and liabilities in an efficient way. To make the assets especially loan and advances banks must have to more cautious and otherwise these asset will became a burden for the bank. To have fruitful investment bank must have to do the credit management perfectly. Otherwise this loan default culture will never end.

Pubali Bank Ltd is not much different from other commercial bank of Bangladesh. It follows the same practice and procedure which is followed by its elders. But one thing should be mentioned new loan reformation have slightly changed in the credit management. This Lending Risk Analysis makes the procedure better than previous.

The standard credit management procedure is nearly perfect. But banks have to practice this procedure rather following their own procedure. If bank follow the standard credit procedure hopefully the chances of credit default will be decline in future.

6.2 RECOMMENDATION: Though it is observed that credit management of the bank is quite satisfactory, the following recommendations can be taken into consideration to make it more effective.

•

More training should be conducted for the bankers to improve their analytical ability and professional standard regarding the use of LRA and other tools and techniques in selecting the borrowers and analysing the loan proposals.

•

Authority should be delegated to the lower level with adequate measures for the necessary control and follow-up for making the lending decision and recovery

•

One proper standard procedure should be developed for all types of clients and no interpersonal relationship should be involved in approve a loan

•

Bank should fixed-up specific types of client strategy according to the different character of client.

•

Interest income occupies the major part of the total earnings of a bank and bank’s profitability mainly depends on interest earning capacity, so bank should establish a research and development cell for the purpose of lending analysis and recovery of loans.

•

Application forms of the customers remain erroneous and full of wrong information. It has been observed that the information given by the customer regarding business, property holding, inventory, bio data of entrepreneur do not tally on ground. Even after that the banker provides these customers with loans after doing necessary correction in the customer’s application by the banker. Close monitoring and supervision has to be ensured by the bank authority in this respect.

•

The bank itself should be much more cautious before sanctioning loan. The bank authority should strictly follow the credit management procedure, and also ensure that all the information provided by the clients is correct.

•

Credit information bureau (CIB) should act more efficiently. All the necessary information of a prospective borrower should be available to the bank authority also. Here the bank should use upgraded computer software for this purpose.

ANNEXES Annexes 1 APPLICATION PROPOSAL FORM FOR PERSONAL LOAN (To be filled in by the applicant) The Manager, Pubali Bank Limited I/We wish to apply for a loan of Rs._________________only) for__________________ I/We agree to abide by all the terms and conditions prescribed by the Bank, from time to time. I/We agree to execute all the necessary documents and to create securities in Bank’s favour as desired by the Bank.

To enable the Bank to consider my/our request, I/We furnish below the required particulars/information and undertake to furnish to the Bank any other information/particulars required for the purpose from time to time till the loan is repaid in full.

Part A: (Particulars of Applicant) – Details of first applicant to be given unless specified otherwise.

1. (i)

Name in full (First Applicant/Borrower) Mr./Mrs./Ms._______________________________________________________ (Surname) (Name) (Middle-name) (Joint Borrower, if any):-

(ii)

Mr./Mrs./Ms._______________________________________________________ (Surname) (Name) (Middle-name)

2.

Date of Birth

(i) ________________ (ii) ______________

3.

Age

(i) ________________ (ii) ______________

4.

Marital Status: Married/Unmarried

6.

If spouse working: Yes/No

7.

If yes, his/her monthly income (Gross) Rs._______________ Net

8.

Residential Address (Present)_____________________________________________

5. Number of Dependents

__________________________________________________________________ __________________________________________________________________ __________________________________________Tel.No.__________________ How many years you have been staying at above address?__________years House/Flat owned/rented/in the name of _________________________________ 9.

If the present address is not the permanent address, give details of Permanent address : __________________________________________________________________ House/Flat owned/rented/in the name of _____________________Tel.No.______

10.

11.

Ration Card No._______________issued on _______________by_____________ Whether holding Passport? Yes/No

If yes, details thereof: (i) Number

12.

1st applicant

(ii)

Date of issue

(iii)

Date of Expiry ____________________

(iv)

Issuing Authority

2nd applicant

____________________ ____________________

Occupation : Service/Business/Self employed Since __________years If employed, details about the employment: Name & Address of the employee_____________________________________ __________________________________________Tel.No.__________________ Employed since ________________Designation__________________________ Gross Annual Salary: Rs._______________________________________ Present monthly net take home pay: Rs.___________________________ Income-Tax payer: Yes/No,________________________ If having business/self-employed, details about the same:Nature of business/Self-employment activity:_____________________________ Type of organisation: Proprietary/Partnership Business Registration/Licence No.______________________________________ Business Address __________________________________Tel.No._________ Business premises owned/rented/in the name of____________________________ If business/self-employment is in partnership, please provide details of names of Partners and their addresses: Name/s of the partner/s and address __________________________________

13.

14.

Gross/Net Annual Income: Gross Rs._____________________Net Rs._______ Whether 1st applicant maintains account/s with the branch : Yes/No If yes, details: - S/B a/c. no.______________ since ________ present bal.______ Other A/C: type._______________________ since ________ present bal.______ Details of Accounts maintained with other branches/Banks a) Name & Address of other Bank _______________________ __________________________________________________________________ __________________________________________________________________ Savings Bank a/c. no._____________ since ___________ present bal.__________ Other a/cs : type.________________ since ___________ present bal.__________ b) Name & Address of other Bank/s where deposits are maintained:Savings Bank a/c. no._____________ since ___________ present bal.__________ Other a/cs: type.________________ since ___________ present bal.__________

15.

Whether presently a borrower of Bank/Other Banks/Institutions: Yes/No If yes, please furnish following details: Name & address of the Bank/institution_________________________________ __________________________________________________________________ Purpose for which loan is availed_______________________________________ Amount borrowed: Rs._______________________ since date_______________ Present outstanding: Rs.___________________Repayment due by___________ Repayment terms: - Monthly/Quarterly/Half-yearly instalment Rs._____________

16.

Details of sources of monthly & annual income/outgo : (As per salary slip/certificate/personal balance sheet/income tax return etc.)

Gross income Deductions/outgo Net 17. i) ii) iii) iv) v) vi) vii) viii)

18) i) ii) iii) iv) v) vi) vii) viii) 19)

Principal sources (i) (ii) Rs.___________ Rs.___________ ___________

other sources (i) (ii) ________________ ________________ ________________

Position of Assets and Liabilities of 1st applicant : as on Details of assets/savings (Rs.) Details of liabilities/dues(Rs.) LIC policies : _______________ i) dues to bank : ______ Bank Deposits : _______________ ii) dues to employer : ______ Others Deposits : _______________ iii) dues to others : ______ Shares/Deb. Units : _______________ Land/Building/House : _______________ Car : _______________ Gold & Silver/Jewellery: _______________ Other assets : _______________ ____________ Total assets Total liabilities =============== ============ Position of Assets and Liabilities of 2nd applicant : as on ____________________ Details of assets/savings (Rs.) Details of liabilities/dues (Rs.) LIC policies : _______________ i) dues to bank : ______ Bank Deposits : _______________ ii) dues to employer : ______ Others Deposits : _______________ iii) dues to others : ______ Shares/Deb. Units : _______________ Land/Building/House : _______________ Car : _______________ Gold & Silver/Jewellary: _______________ Other assets : _______________ Total assets: Total liabilities: Bank details of the 2nd applicant (maintained with branches / Bank) a) Name & Address of other branch/es of ___________________ Savings Bank a/c. no._____________ since ___________ present bal._____________ Other a/cs: type.________________ since ___________ present bal._____________ b) Name & Address of other Bank/s where deposit a/c. maintained:________________________________________________________________ Savings Bank a/c. no._____________ since ___________ present bal.__________ Other a/cs: Type._______________ since ___________ present bal.__________

PART B (Details about the proposed loan) 1) 2) 3) 4) 5)

Amount of Loan required Rs._________________________________________ Purpose of the loan :_________________________________________________ Cost / Expenses to be incurred : Rs._____________________________________ Source of the repayment of the proposed loan : ____________________________ Security proposed to be offered for the said loan :_________________________ (Enclose details of expenses made / to be incurred)

PART C (Details of the Guarantor for the proposed) 1) Name & address of the guarantor proposed to be offered Mr./Mrs./Ms. (Surname) (Name) (Middle-name)

Address:-----------------------------------------------------------------------------------------------Date of Birth : Age : Years 2) Relationship with the 1st applicant 3) Occupation of the guarantor: 4) Details of Income (Annual) Gross Rs.________________ Net Rs._______________ (Please enclose proof of Income of the Guarantor) PART D (Declaration by applicants) 1) I/We declare that the proposed loan is required by us for _________________ And that the loan would be utilised only for the said purpose.

2) The foregoing information provided by me/us is true and correct and provided to the Bank to enable the Bank to take decision about granting or otherwise of the loan to me/us.

3) I/We undertake that if, based on the information provided by us / my our guarantor/s, Bank sanctions loan/s to me/us and in case at any point of time hereinafter it transpires that any information provided / to be provided by me/us/our guarantors is found to be incorrect/false or that the loan availed of by me/us is not used for the purpose mentioned above, the bank shall be at liberty to recall the advance forthwith, irrespective of the contracted terms of the loan and charge me penal/additional interest as deemed fit. I/We would repay forthwith, the entire loan outstanding then together with interest/penal additional interest and other charges.

4) I/We undertake to provide further information as Bank may ask from me/us from time to time.

5) I/We undertake to execute necessary documents for the loan at my costs and to create adequate security for the loan as desired by the Bank prior to disbursement of the loan.

Yours faithfully, Signature of the 1st Applicant______________________ Signature of the 2nd Applicant______________________ Annexes 2 SECURITY AGREEMENT Lender's Name:--------------------------------------------------------------------------------------Lender's Address:------------------------------------------------------------------------------------Borrower's Name:------------------------------------------------------------------------------------Borrower's Address:---------------------------------------------------------------------------------1. Whereas the Borrower executed a Promissory Note in favor of the Lender on the ______ day of _________________20____ in the principal amount of ________(____________________________). In consideration of this Note and as inducement to the Lender to extend a loan to the Borrower, the Borrower grants the Lender a security interest in the following goods: (Hereinafter referred to as "the Collateral") 2. The Collateral shall be kept at the following address: (Hereinafter referred to as "the Premises")

3. The Borrower warrants that the Collateral shall not be removed from the Premises without prior written consent by the Lender.

4. The Borrower warrants that he/she is the lawful owner of the Collateral, that it is free of any and all encumbrances and that no other party has any right to the Collateral.

5. The Borrower agrees not to sell, dispose of or transfer the rights to the Collateral to another party without the prior written consent of the Lender.

6. The Borrower shall insure the Collateral against all risks with a recognized insurance company at his/her cost. The Borrower shall furnish proof of such an insurance policy to the Lender.

7. The Borrower waives all defenses based on surety ship or impairment of collateral.

8. The Borrower shall affect all maintenance and repairs to the Collateral at his/her cost where necessary in order to keep the Collateral in the condition at which it was first offered as Collateral.

9. The Borrower shall effect at his/her cost the filing of a financing statement (UCC) at the relevant public offices within 5 (five) days of signing this agreement and shall furnish proof of such filing to the Lender.

10. Upon default by the Borrower under the terms of the Note and within 3 (three) days of demand by the Lender, the Borrower shall deliver the Collateral to the Lender, failing which the Lender my enter the Premises and take possession of the Collateral.

11. The Lender shall then have the right to sell the Collateral in any manner which he/she may deem fit and to apply the proceeds to the repayment of monies due under the Note.

12. The Lender agrees that proceeds from the sale of the Collateral shall first be applied to repayment of monies due under the Note and that any surplus money shall be transferred to the Borrower.

13. The Borrower agrees that he/she shall remain liable for any shortfall if the proceeds from the sale of the Collateral are not sufficient to repay all monies due under the Note.

14. No relaxation, indulgence, waiver, release or concession extended to the Borrower by the Lender and no delay or omission in the enforcement or exercising of the Lender's right under the Note shall affect the rights of the Lender under this security agreement.

15. This agreement shall be binding upon and accrue to the benefit of the parties, their successors, legal representatives and assigns.

16. This agreement shall be construed, interpreted and governed in accordance with the laws of the State of _______________ and should any provision of this agreement be judged by an appropriate court of law as invalid, it shall not affect any of the remaining provisions whatsoever.

Signed at ________________ on this _______ day of _____________________20___.

Lender's Signature: _________________________________ who warrants his/her full authority to enter into this agreement.

Borrower's Signature: _________________________________ who warrants his/her full authority to enter into this agreement.

Signed in the presence of: (1) Witness Name _____________________________ (1) Witness Signature __________________________________ (2) Witness Name _____________________________ (2) Witness Signature __________________________________

Annex 3 Employee Loan Agreement Employer/Company Details

Employee Details

1. The Employee hereby acknowledges a debt to the Employer/Company in the amount of ________________________________) for the following reason(s):

2. The Employee acknowledges and agrees that interest at a rate of ________________%) per annum shall accrue on any outstanding amount and that repayment shall first be applied to interest and thereafter to the principal amount.

3. The Employee hereby authorizes the Employer/Company to deduct the amount of ______________________________) per week/month from the Employee's salary starting from _________________20____ until the amount is paid in full.

4. The Employee further agrees that the entire outstanding amount will be deducted from the Employee's final salary upon resignation or termination of employment with the Employer/Company.

Signed at ____________________ on this ________day of 20_____.

Employee's Signature: ________________________ Witness1 Signature: __________________________ Witness2 Signature: __________________________

Annex 4 NOTICE OF DEFAULT Date: _____________________ To: _______________________

Re:

Promissory

Note dated _____________________20____ in the

original

amount

of----------------------You are hereby notified that you are in default under the terms of the Note referenced above in that the installment due on the _____ day of ________20_____ in the amount of __________(__________________) has not been paid.

As per the terms in the Note, demand is hereby made upon you for full payment of the entire outstanding balance in the amount of __________(________________________ inclusive of interest accrued to date and any other outstanding fees.

If payment of the entire amount is not received on or before the ______day of ___________________20____legal proceedings shall be instituted against you and the costs of collection and attorney's fees shall be added to your account.

Your prompt attention to this matter is anticipated.

Yours truly, Name of Note holder: ___________________________ Signature: ____________________________________

Annex 5 PUBALI BANK LIMITED NAME OF DIVISION/DEPARTMENT.........................................

HEAD OFFICE.

APPLICATION FOR LOAN HOUSEHOLD DURABLES.

UNDER

1. Name of applicant : 2. Date of Birth : 3. Designation : 4. Place of Posting : 15. Date of joining : 6. Date of Confirmation : 7. Total Salary and Allowances : 8. Net Salary drawn after deduction of P.F. Contribution and recovery of Installment of existing loan : 9. Total deduction : 10. Amount of loan required : 11. Purpose of loan : 12. Period of loan : 13. Mode of repayment : 14. Security offered : 15. CLS last sanction on : 16. Branch where the loan required : 17. Name of Guarantor his designation and place of posting : 18. Total outstanding of my existing loans: Nature of loan Purpose Authority Limit of loan with date Loan against PF Staff-HBL Motor car/ Motor Cycle Any other loan

CONSUMERS’

Validity

CREDIT

SCHEME

FOR

Amount of Outstanding installment

19. I declare that the particulars given above are correct & and agree to abide by the terms & conditions as will be laid down for sanction of the loan.

20. I hereby authorize the bank to deduct the required installment of the loan from my monthly salary.

Signature of the Applicant.

Contd..... P/2.

Page No.2 We certify that the employee concerned (a) has utilized his her HBL/Motor Car/ Motor Cycle/ BiCycle loan 7 other loans for the purpose for which such loan/advances was allowed (b) securities and documents of existing loan(s) have been obtain as per terms and conditions of sanction and (c) monthly recovery of installment of existing loan(s) as per terms of sanction is regular and there is no as per recovery schedule-I have personally verified and checked the prepare are correct and Regd. token Mortgaged and Regd. P.A. have been executed as per terms and condition.

DEPARTMENT HEAD/MANAGER DEPARTMENT/DIVISION/BRANCH

Dated: -----------------(In case of Branch Manager Certificate to be furnished by the .......................... Zonal Head)...............

(For the use of Branch Manager/ Zonal Head, Departmental/ Divisional Head).........................In confirm that (a) the particulars given overleaf by the employee concerned are correct to the best of my knowledge and (b) the employee concerned has a clean service records/ has been exonerated from the charge(s) framed against him/her. I recommend that a loan of Tk-------- only be granted to the applicant.

BRANCH MANAGER / ZONAL HEAD/DEPARTMENT/ DIVISIONAL HEAD DATE: -------(Clearance to be furnishes & from the personal file at the Officer/ Staff from Human Resources Division, Head Office, Dhaka G.M./D.G.M Human Resources Division, Head Office Dhaka.

N.B:- (To be submitted in Principal Office) References 1. Bangladesh Institute of Bank Management: Reading Materials of the Course on Lending Risk

Analysis (LRA) 2. Bangladesh Bank Porikrama: September-December 2000.

3. Chowdhury, L.R: A Textbook on Banker’s Advances: 2nd Edition; Paradise Printer; 2002 4. Chowdrury, L.R: Credit Investigation, National Bank Training Institute.

5. Fraser, Donald R: Commercial Banking, 5th Edition, West Publishing Company; 2002 6. Macdonald, S. Scott: Bank Management, 4th Edition, the Dryden Press, 2000.

7. Pubali Bank Limited: Bank Book of Instructions ,Credit Management 8. Pubali Bank Ltd Limited: Annual Report, 2010.

9. Qureshi, A A: Higher Management in Banks, 1st edition, The Pioneer Printing press Ltd, 2000.

10. Rose, Peter. S: Commercial Bank Management, Fourth Edition, Irwin-McGraw-Hill, 2001.

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