Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
Background of the Study 1.1 Origin of the Report:
Internship Program brings a student closer to the real life situation and thereby helps to launch a career with some prior experience. It is also a part of our education. In our university we learn only theoretical knowledge but to collect practical knowledge we have to do intern. One of the main objectives of the BBA program is to create skilled professional for various sectors. This program is designed to meet the needs of each student who want to develop their career as executives in the field of different business areas as well as teaching and research positions in different institutions. BGC Trust University Bangladesh offered an opportunity to do intern. For the competition of this internship program, the author of the study was placed in a bank namely, “National Credit & Commerce Bank Limited”. My paper topic is monitoring and evaluation of credit of NCC Bank. My internship was at NCC Bank Ltd., Anderkilla Branch, Chittagong. During my internship, I had to prepare a report under the supervision of Mrs .
1.2 Objective of the Report:
Project Objective: Presenting and Emphasizing on credit operation, credit risk management and credit performance including the credit payment system. Secondary objective: Objectives assist the researcher to advance objectively. The followings objectives may be with this identified study as presented below: Knowing the credit policy and credit operation model. Knowing lending products of the NCC Bank. Knowing the interest rates and fees of loans. Knowing the process of selecting borrowers. Prepared By: Zillur Rahman, ID-0913175, BBA (Finance), FBA, BGCTUB
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
Knowing about the loan recovery System. Knowing about the loan classification. Knowing about overall idea about the performance of NCC Bank Ltd. To fulfill the requirement of the internship program under BBA program. To analysis the pros and cons of the conventional ideas about credit operation of a Bank. To have better orientation on credit management activities specially credit policy and practices, credit appraisal, credit processing steps, credit management, financing in various sector and recovery, loan classification method and practices of National Credit and Commerce Bank Ltd.
1.3 Methodology of the Report:
The study is performed based on the information extracted from different sources collected by using a specific methodology. There are various methods of conducting such studies. These are library method, interview method, observation method etc. This report is analytical in nature. The methodology is: Population: All the Branches of NCCBL located in everywhere in Bangladesh has been taken into consideration as population. Sample: NCC Bank, Anderkilla Branch’s Client is the vivacious sample. Employee of that branch is also sample of this report. Two approaches have been mainly used in this report. Conceptual Approach: A theoretical section is given in this report (i.e. the organization part) to give an insight to the various information concerning the operational function. It is given in relevance with the organization in context i.e. National Credit & Commerce Bank Ltd. Every single portion is discussed in order to understand the empirical section.
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
Empirical Approach: This refers to the information that has been directly collected and interpreted from the survey on NCC Bank Ltd. The report is prepared by interviewing the officials of NCC Bank Ltd. The reports of NCC Bank Ltd and documents are also been studied to do the report. For preparing this paper, I used both Secondary and Primary data. Collection of Primary Data: Many of the data and information were collected from my practical. Experience queries from the executives while doing my internship at NCC Bank Ltd. Information and data regarding Overview of the NCCBL. Interviewing officers and staffs. Direct communication with the clients. Collection of Secondary Data: Annual Reports. Brochures, Manuals and Publication of the NCC Bank Ltd. Internet and websites.
1.4 Scope of the Report:
As I am working in the National Credit & Commerce Bank Limited, Anderkilla Branch, I got the opportunity to learn different part of banking system. Management of the bank divided the whole banking system in three parts; as a result I got the opportunity to work in all the three divisions. My main concern was to deal with credit management system. As I was attached to the credit & general division, I had to deal with so many customers who come to take loan or already took loan from NCC Bank. This report also focuses on different product and services provided to the customer, different problems associated with advances, credit appraisal system, procedure for different
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
credit facilities, portfolio (of Loan or advances) management, organization structures and responsibilities of management etc.
1.5 Limitations of the Report:
Data Insufficiency: It was very difficult to collect data from such a big organization. Lack of Records: Sufficient books, publications, facts and figures are not available. These constraints narrowed the scope of accurate analysis. Credit Management is Too Big to Cover: Credit management is a too big to cover wholly in this limited scope. It required huge time and huge space to cover. So, I have covered only some important topics of credit management. Confidential matter: It is not possible to get all sorts of information due to official confidentiality. Data are not available in a systematic way. The duration of the internship is only 2 months (8 weeks) is not enough for the study. Asset and liability/ balance sheet risk management. Internal control And compliance risk management. Money laundering Risk Management.
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
Overview of NCC Bank Limited
NCC Bank Limited is the leading private sector bank in Bangladesh offering full range of Personal, Corporate, International Trade, Foreign Exchange, Lease Finance and Capital Market Services. NCC Bank Limited is the preferred choice in banking for friendly and personalized services, cutting edge technology, tailored solutions for business needs, global reach in trade and commerce and high yield on investments, assuring Excellence in Banking Services.
2.1 Background of NCC Bank Limited:
National Credit and Commerce Bank Ltd. bears a unique history of its own. The organization started its journey in the financial sector of the country as an investment company back in 1985. The aim of the company was to mobilize resources from within and invest them in such way so as to develop country's Industrial and Trade Sector and playing a catalyst role in the formation of capital market as well. Its membership with the browse helped the company to a great extent in this regard. The company operated up to 1992 with 16 branches and thereafter with the permission of the Central Bank converted in to a fully fledged private commercial Bank in 1993 with paid up capital of Tk. 39.00 corer to serve the nation from a broader platform. Since its inception NCC Bank Ltd. has acquired commendable reputation by providing sincere personalized service to its customers in a technology based environment. The Bank has set up a new standard in financing in the Industrial, Trade and Foreign exchange business. Its various deposit & credit products have also attracted the clients-both corporate and individuals who feel comfort in doing business with the Bank. Within this short time the bank has been successful in positioning itself as progressive and dynamic financial institution in the country. Prepared By: Zillur Rahman, ID-0913175, BBA (Finance), FBA, BGCTUB
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
This is now widely acclaimed by the business community, from small entrepreneur to big merchant and conglomerates, including top rated corporate and foreign investors, for modern and innovative ideas and financial solution.
2.2 Mission Statement:
Mission: To mobilize financial resources from within and abroad to contribute in Agriculture's, Industry & Socio-economic development of the country and to play a catalytic role in the formation of capital market. Vision: To become a bank of choice in serving the nation as a progressive and socially responsible financial institution by bringing credit and commerce together for profit and sustainable growth. Slogan: “Where Credit & Commerce Integrates.” Motto: The Bank will be a confluence of the following three interests: Of the Bank Of the Customer Of the Society Objectives: : Profit Maximization and Sustained Growth. : Maximum Benefit and Satisfaction. : Maximization of Welfare.
⇒ Be one of the best banks of Bangladesh. ⇒ Achieve excellence in customer service next to none and superior to all competitors. ⇒ Cater to all differentiated segments of Retail and Wholesale Customers. ⇒ Be a high quality distributor of product and services. ⇒ Use state-of the art technology in all spheres of banking. Prepared By: Zillur Rahman, ID-0913175, BBA (Finance), FBA, BGCTUB
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
Values:
Customer focus Integrity Team Work Respect for individual Quality Responsible citizenship
2.3 Goals of NCC Bank Ltd:
General goal: To share significant portion of the banking sector by utilizing available manpower and state of the art technology for maximizing the shareholders wealth. Long term goal: To maximize the wealth of shareholders. Short term goal: To earn satisfactory rate of return on investment by providing wide range of banking service.
2.4 Special Feature of NCC Bank Ltd:
The bank is assuring to its customers, best cooperation and service all the time with attractive & competitive rates. To act official liquidator and receiver. To provide for safe deposit vaults and deposit custody of valuable of all kinds. To act as an agent for the sale and purchase of any stock, share and securities or for any other monetary or mercantile transaction. To promote or take part in the formation, management, supervision or control of the business or operation of any company or undertaking in Bangladesh or elsewhere and to render all assistance in this regard. Prepared By: Zillur Rahman, ID-0913175, BBA (Finance), FBA, BGCTUB
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
2.5 Departments of NCCBL:
If the jobs are not organized considering their interrelationship and are not allocated in a particular department it would be very difficult to control the system effectively. If the departmentation are not fitted for the particular works there would be haphazard situation and the performance of a particular department would not be measured. NCC Bank Limited has does this work very well. Different departments of NCCBL are as follows:
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
2.6 Branch Network of NCC Bank Ltd:
NCC is the private bank in Bangladesh. There are 92 Branches over the country. We can show them in the following diagram.
Figure: 2 Branch Network of NCCBL
2.7 Human Resources Management of NCCBL:
NCC Bank Limited recognizes that a productive and motivated work force is a prerequisite to leadership with its customers, its shareholders and in the market it serves. NCC bank treats every employee with dignity and respect in a supportive environment of trust and openness where people of different backgrounds can reach their full potential.
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
The bank’s human resources policy emphasize on providing job satisfaction, growth opportunities, and due recognition of superior performance. A good working environment reflects and promotes a high level of loyalty and commitment from the employees. Realizing this NCC Bank limited has placed the utmost importance on continuous development of its human resources, identify the strength and weakness of the employee to assess the individual training needs, they are sent for training for self-development. To orient, enhance the banking knowledge of the employees NCC Bank Training Institute (NCCBTI) organizes both in-house and external training. The remuneration is very competitive in comparison with industry average. Beside these the recruitment procedure is comprehensive.
2.8 Management Information System
Since its journey as commercial Bank in 1985 NCC Bank Limited has been laying great emphasis on the use of improved technology. It has gone to online operation system since 2003. And the new Banking Software Flexible is under process of installation. As a result the bank will able to give the services of international standards.
2.9 Correspondent Relationship
The Bank established correspondent relationships with a number of foreign banks, namely American Express Bank, Bank of Tokyo, Standard Chartered bank, Mashreq Bank, Hong Kong Shanghai Banking Corporation, CITI Bank NA-New York and AB Bank Ltd. The Bank is maintaining foreign exchange accounts in New York, Tokyo, Calcutta, and London. The bank has set up letter of credit on behalf of its valued customers using its correspondents as advising and reimbursing Banks. The Bank maintains a need based correspondent relationship policy, which is gradually expanding.
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
2.10 Organogram of NCC Bank Limited, Anderkilla Branch, Chittagong.
BRANCH MANAGER & AVP MD. MUJIBUR RAHMAN
DEPUTY MANAGER & AVP MOHAMMAD SALIM
CREDIT & LOAN ADMINISTRATION DIVISION MD. SHAHNEWAZ CHOWDHURY- SPO MD SAIFUL ISLAM - SO MD. ABU SAYEM SIDDIK - SO MD. DIDARUL ALAM - AO
GENERAL BANKING DIVISION
MRS. SAYEMA NAZNIN CHOWDHURY – SPO MD SAIFUL ISLAM CHOWDHURY – SO JAYANTI RANI PAL –SO MD. MURAD SHAH ALTAMAS - JO MD. KHALILURRAHMAN - JO
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
2.11 Product Services Information:
The NCC Bank provides the following product/ services to their customers: Following types of account are generally opened by the NCCBL:
Savings Account (SB A/C) Current Deposit Account (CD A/C) Fixed Deposit Receipt Account (FDR A/C) Short Term Deposit (STD A/C) NCC Bank Special Savings Scheme Money Double/Triple Program (MDP)/(MTP) A/C Foreign Currency Account (Resident/ Non-Resident) 2.11.1 Savings Bank Account (SB A/C)
Interest rate 6 % p.a. Minimum deposit Tk : 500/-. For the people of lower and middle classes, wishes to save a part of their Income. Two withdrawal permitted but more than that no interest will be paid on rest amount for that month
2.11.2 Current Deposit Account (CD A/C)
No interest is given and charge for incidental charges. Minimum deposit is Tk: 1000/Running and active account which can be operated any number of times during a working day. No restriction on the number and the amount of withdrawal
Interest Rate 4 % p.a. Payable on a Short Notice Short Notice Deposit Account bears the features of current account and savings account.
2.11.5 NCC Bank Special Saving Scheme
Deposit Pension Scheme" Monthly Installment of Tk. 500/- to Tk. 25,000/-. Duration of the scheme is 5 or 10 years No withdrawal shall usually be allowed before maturity date If account is needed to be closed before maturity, interest at prevailing rate on saving A/C shall be paid along with the principal Maximum up to 80% loan on deposit may allowed to the A/C holder
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
2.11.6 Categories of Loans and Advances The loans product through which NCC Bank is serving to its customers: Continuous Loan: Secured Over Draft Against Financial Obligation {(SOD) (FO)} Secured Over Draft Against Work Order/Real State etc. {(SOD) (G)} Cash Credit (Hypothecation) Cash Credit (Pledge) Export Cash Credit (ECC) Demand Loan: Loan General. Demand Loan against Ship breaking. Payment Against Documents (PAD) Loan Against Imported Merchandise (LIM) Loan Against Trust Receipt (LTR) Forced Loan Packing Loan Secured Over Draft Against Cash Incentive Foreign Documentary Bills Purchased (FDBP) Local Documentary Bills Purchased (LDBP/IDBP) Festival Business Loan. Term Loan: Project Loan. Transport Loan. House Building Loan. Small business Loan. Consumer Finance Scheme. Lease Finance, Personal Loan, Staff Loan etc.
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
Small Loan Scheme NCCBL introduced three new small loan scheme are: House Renovation Loan Personal Loan SME Loan
2.11.7 Other Products of NCCBL Cards ATM Card Credit Card (Local, International and Dual) Remittance Products Special Interest rate on Savings and Term Deposits Wage Earners Welfare Deposit Pension Scheme Loans for Real Estate (Land purchase and construction/renovation) Advance against Regular Remittance 2.11.8 Retail / consumer loan Product Consumer finance scheme Personal loan Education loan House repairing & renovation loan House improvement loan Car loan scheme Treasury Service Primary Dealer of Govt. Approved Securities Remittance Service Correspondence arrangement with more than 330 Financial Institutions all over the World For Wage Earners Remittance we have Agency arrangement with 12 reputed Exchange Houses covering major Locations of our Expatriates. Prepared By: Zillur Rahman, ID-0913175, BBA (Finance), FBA, BGCTUB
House
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
2.11.9 NCCBL securities & financial service NCCB Securities & Financial Services Limited-a newly incorporated fully owned subsidiary company of National Credit & Commerce Bank Limited having paid up capital of TK. 200 crore is a member of Dhaka Stock Exchange Ltd. & Chittagong Stock Exchange Limited bearing Membership no. 61 & 132 respectively. All the branches are well designed & equipped with modern equipment related to stock broking business like highly configured projector, trading work station and price displaying board. Mentionable that our brokerage house is a full-fledged depository Participant of Central Depository of Bangladesh Ltd. (CDBL). Our Stock Broking business has been running since 1993 under the umbrella of parent company NCC Bank Ltd. And presently we have a dedicated team of 65 officers & executives who are experienced and skilled as fund manager, financial analyst and stock broking advisor. So to speak, all of them have got highest degree of professionalism.
2.11.10 Off Shore Banking Unit:
Our Off-shore banking units are free to accept deposit from or to borrow from persons/institutions not resident in Bangladesh including Bangladeshi national working abroad, Type-A (wholly foreign owned) units in the Export processing Zones in Bangladesh Table: 3 FC Deposit Rates for USD as under
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
2.11.11 Foreign Exchange:
Non Resident Foreign Currency Deposit Account (NFCD) Non Resident BDT Deposit Account (NRTA) Resident Foreign Currency Deposit Account (RFCD) Foreign Currency Deposit Account Money Gram UAE Exchange Placid Express Arab National Bank (ANB) Dhaka Janata Habib Qatar Al Fardan
2.12 Financial Performance of NCCBL:
The NCC Bank Limited is one of the most successful private sector commercial bank in our country. It has achieved the trust of the general people and made reasonable contribution to the economy of the country by helping the people investing allowing credit facility. Authorized Capital: The bank has a strong capital base. The authorized capital of the banks stands at TK. 10000.00 million in 2011 where as it was Tk. 2500 million in 2006. The authorized capital has increased by 200% during the period. Paid up Capital: NCC Bank Ltd. has a paid up capital of Tk. 5941.65 million in 2011 which gradually increased over the period. Reserve fund & other fund: Reserve fund increased to Tk. 6638.67 million in 2011 from Tk. 1216 million in 2006.
Performance of the bank: Banks performance may be termed as satisfactory in respect of deposit mobilization & profit earning. At the Prepared By: Zillur Rahman, ID-0913175, BBA (Finance), FBA, BGCTUB
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
end of the year 2011, operating profit of the bank stood at Tk. 4214.76 million from Tk. 1268 million in 2006. Deposit: Total deposit stood Tk. 81127.17 million in 2011 consisting 68.85 % in fixed deposit, 57.85% in savings deposit, 11.00% in current deposit and the rest was maintained in other forms of deposit.
Credit: Total credit in 2011 Tk. 72733.54 million which was increased from 2006 by 24678 million. Credit Administration: The rate of classified loans during the year 2011 was 2.27% and those were 4.95 % in 2006. The trend of NPL ratio indicates that Credit Administration Division was doing well over the period. Investment: Investment figure of the bank as on 31st December, 2011 stood at Tk. 20840.29 million consisting 94.18% in Government Treasury Bond, 1.27% in Government Treasury Bills, 4.55% in Share investment.
Operational Result: Profit after tax Tk. 2198.96 million in 2011 but it was Tk. 479.22 million in 2006.
Dividend: NCC Bank Ltd. declared dividend at 10.00 % (cash) &17.00% (bonus) per share in 2011, 32.00% in 2010, 47.00% in 2009, 30.00 % per share in 2008 & 2007, and 12.50% per share in 2006.
Credit Deposit Ratio: The credit deposit ratio was 83.00% in 2011 and 87.68% in 2006. NCC Bank Ltd. is committed to maintain present CDR ratio as directed by Bangladesh Bank.
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
NCC BANK AT A GLANCE: 2009-20011
Three years Financial Highlights
Taka in Million (where applicable)
2009 Authorized Capital Paid up Capital Reserve fund and other Reserve Equity fund Deposits Loans and Advances Investments Import Business Export Business Remittance Operating Income Operating Expenses Operating Profit Profit before Tax Profit after Tax Retained Profit Total Assets Fixed Assets Number of Branches Number of Employees Earnings per Share Dividend: Bonus (%) Return on Equity (%) Return on Assets (%) Capital Adequacy Ratio (%) Non-performing Loans as % of Total Advances Volume of Non-performing Loans Amount of provision Classified Loans Amount of provision Unclassified Loans Amount of provision Off-balance sheet exp. Advance Deposit Ratio (%) 111.93 93.48% 509.67 720.22 1,420.57 2.84 13.55 Cash (%) 5,000.00 2,284.90 4,371.62 6,656.52 53,900.15 50,387.68 9,671.53 33,078.44 11,903.72 13,392.00 9,333.03 6,195.33 3,137.70 2,686.49 1,719.50 46.47 65,937.49 849.10 65.00 1,496.00 7.53 --47.00 28.49 2.61
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
2.13 SWOT Analysis of NCC Bank at a Glance:
SWOT stands for Strength, Weakness, and Opportunity & Threat. The SWOT of NCC Bank has been shown below: Internal Factors: Strength: ⇒ NCCBL has 92 well equipped branches. ⇒ Qualified mid level officials and talented management teams are operating the overall business. ⇒ Agreement with foreign banks and financial institutions. ⇒ The Banking network. ⇒ Quality of services. ⇒ Realistic decisions by management. ⇒ Ability to afford huge investments in business when needed. ⇒ Reputation of the Bank. Weaknesses: ⇒ Lack of Advertising and promotional activities. ⇒ Lack of employee satisfaction. ⇒ Relatively uncomfortable working environment comparing to industry competitors. ⇒ Lack of resources when needed. ⇒ Manual working techniques in some vital stages (Remittance processing). ⇒ Lack of real qualified employees in junior level. ⇒ Lack of administrative control over all level of the bank. External Factors: Opportunities: ⇒ The bank easily can capture the largest market share in Bangladesh. ⇒ Opportunity of introducing new generation banking in Bangladesh. ⇒ Opportunity of customer service improvements. ⇒ Opportunity of improve quality of service by modifying weak wings of the bank. ⇒ Opportunity to improve employee quality by proper training and ensuring discipline in all levels of the bank. ⇒ Opportunity to enter and invest innovative business sectors. Threats: ⇒ Rapid growth of industry competitors. ⇒ Innovation skill of industry competitors. ⇒ Political environment. ⇒ Bureaucracy in government decisions. ⇒ Weak filtering process in time of recruitment (Lower Level). Prepared By: Zillur Rahman, ID-0913175, BBA (Finance), FBA, BGCTUB
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
Credit Management in NCCBL
The term credit management covers core risk area of Banking viz, credit risk, liquidity risk, operational risk and reputation risk arising from money laundering incidences. The prime objectives of risk management is that the bank evaluates and takes well calculative business risk and thereby safeguarding the bank capitals, it’s financial resource and profitability from various business risk through its own measures and through implementing Bangladesh bank guidelines and following some of the best practice as under. Credit risk mainly arises from lending, trade finance, and leasing and treasury business. This can be described as potential loss arises from the failure of s counter party to perform as per counter party of decline in his or her financial condition there for the banks credit risk management activities have been designed to address all the issues. The bank has segregated duties of the officers / executives involved in credit related activities a separate corporate division has been formed at head office that is entrusted with the duties of maintaining effective relation with the customer, marketing of credit product, exploring new business product opportunities etc. moreover credit approval, administration, monitoring and recovering function have been segregated.
3.1 Objectives of credit Management:
National Credit & commerce Bank Ltd is a new generation bank, which is committed to provide high quality financial services/ products to contribute to GDP through stimulating trade & commerce accelerating the pace of the loan and industrialization and boosting up export by allowing credit facilities. The failure of the commercial bank is mainly occurs due to bad loans, which occurs due to inefficient management of the loan and advance portfolio. The objective of the credit management is to maximize the performing asset and the minimization of the non performing asset as well as ensuring the optimal point of loan and advance and their efficient management. Credit Prepared By: Zillur Rahman, ID-0913175, BBA (Finance), FBA, BGCTUB
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
management is a dynamic field and to minimize the risk and maximizing the return on the invested fund. Continuous supervision, monitoring and follow-up are highly required for ensuring the timely repayment and minimizing the default. 3.2 Types of Credit Credit may be classified with reference to elements of time, nature of financing and provision base. 3.2.1 Classification on the basis of time: On the basis of elements of time, bank credit may be classified into three heads. Continuous loans: These are the advances having no fixed repayment schedule but have an date at which it is renewable on satisfactory performance of the clients. Continuous loan mainly includes "Cash credit both hypothecation and pledge" and "Overdraft". Demand loan: In opening letter of credit (L/C), the clients have to provide the full L/C amount in foreign exchange to the bank. To purchase this foreign exchange, bank extends demand loan to the clients at stipulated margin. No specific repayment date is fixed. However, as soon as the L/C documents arrive, the bank requests the clients to adjust their loan and to retire the L/C documents. Demand loans mainly include “Payment Against Documents,” "Loan against imported merchandise (LIM)" and Later of Trust Receipt. Term loans: These are the advances made by the bank with a fixed repayment schedule. Terms loans mainly include "Consumer credit scheme", "Lease finance"," Hire purchase", and "Staff loan". The term loans are defined as follows: • Short term loan: Up to 12 months. • Medium term loan: More than 12 months & up to 36 months • Long term loan: More than 36 months.
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
3.2.2 Classification on characteristics of financing:
On the basis of nature of financing, bank credit may be classified into the following tables. Table 4: Classification on characteristics of financing Funded Overdraft Loan & Advance Consumer Credit PAD LTR Cash Credit( Pledge & Hypo) Staff Loan Packing Credit Non Funded Letter of Credit Bank Guarantee
The varieties used by NCCBL are briefly described in next chapter with the common terms and condition.
3.2.3 Provision Base:
Specific Provision: Head office credit division prepares a list of credit accounts, which are considered to be totally or partially be unrecoverable & keeps a provision against the outstanding loans. Rate of provision:
NCC Bank Limited in the time of loan provisioning to get the real picture of the income mainly follows the Bangladesh Bank guideline. The rate of provisioning used in NCCBL is summarized in the table.
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
Table 5: The rate of provision Particular Rate
General provisions on unclassified general 1% loans and advances General provision on unclassified small 2% enterprise financing General provision on unclassified loans for 2% housing finance and on loans for professionals General provision on unclassified consumer 5% financing other than housing finance and loans for professionals General provision on special mention 5% account Specific provision on substandard loans and 20% advances Specific provision on doubtful loans and 50% advances Specific provision on bad / loss loans and 100% advances
3.3 Credit to deposit Ratio Analysis:
Credit deposit ratio measures the portion of deposit used for credit. The more the ratio the more the bank is capable to uses its deposit as credit. Credit to deposit ratio= Total Credit/ Total Deposit. Table6:CredittodepositRatioAnalysis Year Total Credit Total Deposit (Tk in Millions) Credit/deposit Ratio 2007 2008 2009 2010 2011 32,687.75 46,332.69 50,387.68 63,230.14 72,733.54 34,901.77 46,904.66 53,900.15 67,961.24 81,127.17 93.66% 98.78% 93.48% 93.04% 89.65%
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
Graph 1:
Credit/Deposit ratio From the figure it can be said that the collection of deposit is increasing year by year that form into loan & advances increasing year by year subsequently. If we noticed that from year 2010 to 2011 credit deposit ratio has decreased significantly which is negative sign that the bank is not successfully utilizing its deposit collected from the people into in the form of loan and advances which is main source of Bank’s income.
3.4. Sector Distribution of Advances:
The Loan & Advances have taken from various sources. The information is given below: Table 7: Distribution of Advances Source Agricultural loan Industrial loan Construction loan Transport & Communication loan Storage loan Business loan others Amount(Tk.) 440,322,358 25,332,812,459 1,154,285,657 413,285,749 294,585,953 14,815,268,492 447,003,444 Percentage 1.03% 59.05% 2.69% 0.96% 0.69% 34.54% 1.04%
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
The graph of sector distribution of Advance can be shown belowGraph 2:
From the figure it can easily be said that NCCBL provides more loan in industry sector, in 2011 it provided 59.05% of total loan and advances to industry sector but in agriculture sector they discourage to sanction loan because they think this sector is risky, in 2011 it was 1.03%. In Business sector it was 34.54%
3.5 Portfolio of credit:
Loan mix reveals the diversification sought by the NCCBL in its loan placement. As we know diversification reduces the level of default risk that is associated with large concentration of loans in a single category. The loan mix should be quantified and described in the credit policy.
3.6 Mode wise Credit:
NCCBL offered loan in almost all the mode. They are cash credit, overdraft, LIM, LTR, lease finance, payment against document, HBL and loan etc. The credit disbursed in every mode for the last year is summarized below:
3.7 Liquidity and Maturity:
In NCCBL they follow the following guideline while giving loan and advance to the client The aggregate of all cash facility will not be more than the 80% of the customers deposit Long term must not exceed 20% of the total loan portfolio Facilities are not allowed for a period of not exceeding 5 (Five) years.
3.8 Loan Classification:
In classifying the loan and advance there are four classes in the loan review practiced in NCC Bank Limited. They are as follows Unclassified: The loan account is performing satisfactorily in the terms of its installments and no Overdue is occurred. This type of loan and advances are fall into this class. Prepared By: Zillur Rahman, ID-0913175, BBA (Finance), FBA, BGCTUB
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
Substandard: This classification contains where irregularities have been occurred but such irregularities are temporarily in nature. The main criterion for a substandard advance is that despite these technicalities or irregularities no loss is expected to be arise for the bank. These accounts will require close supervision by management to ensure that the situation does not deteriorate further. To fall in this class the loan and advance has to fulfill the following factor.
Category of Credit
Time overdue (irregularities) S-T Agri & Micro Credit 3 months & above but less than 6 months. Continuous loan Demand Loan Un-recovered for 3 months & above but less than 6 months from the date of the loan is claimed. Repayable within 5years: If the overdue installment equals or exceeds the amount repayable within 6 months. Repayable more than 5years: If the overdue installment equals or exceeds the amount repayable within 12 months.
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
Doubtful: This classification contains where doubt exists on the full recovery of the loan and advance along with a loss is anticipated but cannot be quantifiable at this stage.
Category of Credit S-T Agri & Micro Credit
Time overdue (irregularities) 6 months & above but less than 12 months. Un-recovered for 6 months & above but less than 12 months from the date of the loan is claimed. Repayable within 5years: If the overdue installment equals or exceeds the amount repayable within 12 months. Repayable more than 5years: If the overdue installment equals or exceeds the amount repayable within 18 months.
Doubtful
Continuous loan Demand Loan
Fixed Term loan
Bad and Loss:
A particular loan and advance fall in this class when it seems that this loan and Advance is not collectable or worthless even after all the security has been exhausted. In the following table the criteria to be fulfilled to fall in this category are summarized:
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
Category of Credit S-T Agri & Micro Credit
Time overdue (irregularities) Not recovered within more than 12 months. Un-recovered more than 12 months from the date of the loan is claimed. Repayable within 5years: If the overdue installment equals or exceeds the amount repayable within 18 months. Repayable more than 5years: If the overdue installment equals or exceeds the amount repayable within 24 months.
Bad and Loss
Continuous loan Demand Loan
Fixed Term loan
3.9 Security against Advances:
The different types of securities that may be offered to a banker are as follows: (a) Immovable property (b) Movable property i. Pratiraksha Sanchaya Patra, Bangladesh Sanchaya Patra, ICB unit certificate, wage earner development bond. ii. iii. Fixed Deposit Receipt Shares quoted in the Dhaka Stock Exchange and Chittagong Stock Exchange. iv. v. vi. vii. Pledge of goods. Hypothecation of goods, produce and machinery Fixed assets of manufacturing unit. Shipping documents
Monitoring & Evaluation of Credit
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3.10 Overall Procedure for Sanctioning Loan:
The following procedure need to be followed for giving advances to the customer. These are: Party’s application Filling form-A Collecting CIB report from Bangladesh Bank Processing loan proposal Project appraisal Head office approval Pre-disbursement Compliance Disbursement of loan & advance. 3.10.1 Party’s application:
At first borrower had to submit an application to the respective branch for loan, where he/she has to clearly specify the reason for loan. After receiving the application form the borrower Bank officer verifies all the information carefully. He also checks the account maintains by the borrower with the Bank. If the official becomes satisfied then he gives form-A (prescribed application form of Bank) to the prospective borrower. 3.10.2 Filling Form –A
After satisfying with party’s application the applicant need to fill Form-A. It is the prescribed form provides by the respective branch that contains information of the borrower. It contains- Name with its factory location, Official address and telephone number, details of past and present business, its achievement and failures, type of loan needed etc.
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3.10.3 Collecting CIB Report from Bangladesh Bank:
After receiving the application for advance, NCC Bank sends a letter to Bangladesh Bank for obtaining a report from there. This report is called CIB (Credit Information Bureau) report. NCC Bank generally seeks this report from the head office for all kinds of investment. The purpose of this report is to being informed that whether the borrower has taken loan from any other Bank; if ‘yes’ then whether the party has any overdue amount or not. 3.10.4 Processing loan Proposal:
After receiving CIB report from Bangladesh Bank, then respective branch prepare an Investment proposal, which contains terms and conditions of Investment for approval of Head Office. Documents those are necessary for sending Investment proposal are: Necessary Documents: While advancing money, banks create a lot of documents, which are required to be signed by the borrowers before the disbursement of the loan. Of them some are technically called charge documents. Necessary steps and documents: ⇒ Loan application form duly signed by the customer. ⇒ Acceptance of the term and conditions of sanction advice. ⇒ Trade license. ⇒ In Case Of Partnership Firm, copy of registered partnership deed duly certified as true copy or a partnership deed on non-judicial stamp of taka-150 denomination duly notarized. But in case of individual a stamp of taka 625 duly charged from the party’s amount. ⇒ In Case Of Limited Company, I. Copy of memorandum and articles of association of the company including certificate Of incorporation duly certified by Registered Joint Stock Companies (RJSC) and attested by the managing director and accompanied by an up-to-date list of directors. Prepared By: Zillur Rahman, ID-0913175, BBA (Finance), FBA, BGCTUB
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II. Copy of board resolution of the company for availing credit facilities and authorizing managing director/chairman/director for execution of documents and operation of the accounts. III. An undertaking not to change the management of the company and the Memorandum and article of the company without prior permission. IV. Copy of last audited financial statement up to last 3 years. V. Personal guarantee of the directors including the chairman and managing director. VI. Certificate of registration of charges over the fixed and floating assets of the company duly issued by RJSC. VII. Certificate of registration of amendment of charges over the fixed and floating assets of the company duly issued by RJSC in case of repeat loan or change in terms and conditions of sanction advice regarding loan amount and securities etc. ⇒ Demand promissory notes. ⇒ Letter of hypothecation of stocks and goods. ⇒ Letter of hypothecation of books debts and receivable. ⇒ Letter of hypothecation of plant and machinery. ⇒ Personal letter of guarantee. 3.10.5 Project Appraisal:
It is the pre-investment analysis. Project appraisal in the Banking sector is important for the following reasons: To achieve organizational goals. To recommend if the project is not designed properly. To justify the soundness of an investment. To ensure repayment of Bank finance.
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Techniques of Project Appraisal:
An appraisal is a systematic exercise to establish that the proposed project is a viable preposition. Appraising officer checks the various information submitted by the promoter in first information sheet, application for Investment and Investment proposal. The Head Office (HO) mainly checks the technical, commercial and financial viability of the project. For others, HO is dependent on branch’s information. But when the investment size is big, then the HO verifies the authenticity of information physically. 3.10.6 Head Office Approval When Head office receive appraisal from the branch then, Head Office again appraises the project. If it seems to be a viable one, the HO sends it to the Board of Directors for the approval of the Investment. The Board of Directors (BOD) considers the proposal and takes decision whether to approve the Investment or not. If the BOD approves the investment, the HO sends the approval to the concerned branch.The respective officer of Head Office appraises the project by preparing a summary named “Top Sheet” or “Executive Summary” and then he sends it to the Head Office Credit Division for the approval of the Loan. The Head Office Credit Division considers the proposal and takes decision whether to approve the Investment or not. If the committee approves the investment; the HO sends the approval to the concerned branch. 3.10.7 Sanction Letter: After getting the approval of the HO the branch issues sanction letter to the borrower. A sanction letter contains: 1. Name of borrower, 2. Facility allowed, 3. Purpose, 4. Rate of interest, 5. Period of the Investment and mode of adjustment, 6. Security and Other terms and condition. Prepared By: Zillur Rahman, ID-0913175, BBA (Finance), FBA, BGCTUB
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3.10.8 Pre-disbursement Compliance:
When the credit proposal are approved the credit officer must have to be ensured that the disbursement of the credit facilities must comply with the directions written in the credit policy and circular made by time to time along with checking all the following terms and conditions. The officer of Loan Administration must collect the acceptance of the customer’s of the terms and conditions on the duplicate copy of the sanctioned advice. They will thoroughly examine and ensure that the subject credit facility does not contradict to any law, rules and regulation of the country, Bangladesh Bank and Deed Of the Mortgage and power of the Attorney to be drafted and executed under the Supervision of the Bank’s Legal Advisor. Lawyers certificate to the effect that all the legal formalities (Equitable/ Registered Mortgaged) has been properly created on the land and building in favor of the bank & bank has acquired the effective title of the property. Registered power of attorney has been collected from the borrower (contractor) assigning the work order favoring the NCCBL and the power of attorney has been registered with the work order given agency and they have agreed that they will issue all the cheques favoring NCCBL. The legal documents of the vehicle have been obtained. Collection of the satisfaction certificate in respect of all the documents both legal and banking from the lawyer. Entry has been made in the Safe-in and Safe-out register and the documents are preserved. 3.10.9 Disbursement of loan and charge documents:
After issuing the sanction advice and if the borrower accepts the sanction letter, the disbursement starts, then the bank will collect necessary charge documents, which vary on the basis of types of facility, types of collateral. If the borrower accepts the sanction letter, the disbursement starts. It includes 3 steps: Prepared By: Zillur Rahman, ID-0913175, BBA (Finance), FBA, BGCTUB
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• Charge Documentation • Charge on Securities • Disbursement of Loan amount Charge Documentation:
If the borrower accepts the sanction letter, the Documentation starts. Documentation is a written statement of fact evidencing certain transactions covering the legal aspects duly signed by the authorized persons having the legal status. The most common documents used by the NCC Bank Ltd: Joint Promissory Note, Letter of Arrangement, Letter of Disbursement, Letter of Installment, Letter of Continuity, Trust Receipt, Counter Guarantee, Stock Report, Letter of Lien, Status Report, Letter of Hypothecation, Letter of Guarantee Document relating to mortgage. Modes of Charging Security:
A wide range of securities is offered to banks as coverage for loan. In order to make the securities available to banker, in case of default of customer, a charge should be created on the security. Creating charge means making it available as a cover for advance. The following modes of charging securities are applied in the NCC Bank Limited.
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I. Lien A lien is right of banker to hold the debtor’s property until the debt is discharged. Bank generally retains the assets in his own custody but sometimes these goods are in the hands of third party with lien marked. When it is in the hand of third party, the third party cannot discharge it without the permission of bank. Lien gives banker the right to retain the property not the right to sell. Permission from the appropriate court is necessary. Lien can be made on moveable goods only such as raw materials, finished goods, shares debentures etc. II. Pledge Pledge is also like lien but here bank enjoys more right. Bank can sell the property without the intervention of any court, in case of default on loan, But for such selling proper notice must be given to the debtor. To create pledge, physical transfer of goods to the bank is must. III. Hypothecation In this charge creation method physically the goods remained in the hand of debtor. But documents of title to goods are handed over to the banker. This method is also called equitable charge. Since the goods are in the hand of the borrower, bank inspects the goods regularly to judge it s quality and quantity for the maximum safety of loan. IV. Mortgage: Mortgage is transfer of interest in specific immovable property. Mortgage is created on the immovable property like land, building, plant etc. Most common type of mortgage is legal mortgage in which ownership is transferred to the bank by registration of the mortgage deed. Another method called equitable mortgage is also used in bank for creation of charge. Here mere deposit of title to goods is sufficient for creation of charge. Registration is not required. In both the cases, the mortgage property is retained in the hank of borrower. V. Trust Receipt Generally goods imported or bought by bank's financial assistance are held by bank as security. Bank may release this lien / pledge these goods against trust receipt. This means that the borrower holds goods in trust of the bank; trust receipt arrangement is needed when the borrower is going to sell these Prepared By: Zillur Rahman, ID-0913175, BBA (Finance), FBA, BGCTUB
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goods or process it further but borrower has no sufficient fund to pay off the bank loan. Here proceeds from any part of these goods are deposited to this bank. VI. Assignment: Assignment means transfer of any existing or future right, property or debt by one person to another person. Usually assignment is made of actionable claims such as book debts, insurance claims. VII. Set off: It means the total or partial merging of claim of one person against another in a counter claim by the latter against the former. Disbursement: After sanction and completion of all formalities the respective officer disburses the loan. The officer writes cheque and provides it to the borrower. For this borrower has to open an account through which he/she can withdraw the money.
3.11Strategies for Recovery:
Recovery of loan can be made in the following three methods: Persuasive Recovery: The first step in recovery procedure is private communication that creates a mental pressure on borrower to repay the loan. In this situation bank can provide some advice to the borrower for repaying the loan. Voluntarily: In this method, some steps are followed for recovering loan. These are: i. ii. iii. iv. Building Task Force Arranging Seminar Loan Rescheduling Policy Waiver of Interest Rate
Legal Recovery: When all steps fail to keep an account regular and the borrower does not pay the installments and interests then the bank take necessary legal steps against the borrower for realization of its dues. In this case “Artha Rin Adalat Law 2003” plays an important role for collecting the loan. Prepared By: Zillur Rahman, ID-0913175, BBA (Finance), FBA, BGCTUB
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3.12 Factor should be considered to sanction a loan:
Risk involvement with advance may be kept at minimum if sound lending principles are followed: Characteristics: • Market reputation • Morality • Family background • Promptness to pay loan Capacity: • Management skill • Ability to execute the fund in right way • Prudence to tackle unpredictable situation Capital: • Equity strength • Asset and properties Collateral: They give any marketable of the property as security that can be sold in case of failure of payment of the borrower. Condition: The overall economic condition correlated with the fluctuation of the business activity. We can show them in the following diagram.
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These are the components of 5 C’s:
Figure 5: 5 C’s of the risk of lending
3.13. Credit Administration:
The administration function is critical in ensuring that proper documentation and approvals are in place prior to the disbursement of loan facilities. For this reason it is essential that the function credit administration be strictly segregated from relationship management/ marketing in order the possibility of controls being compromised of issues not being highlighted at the appropriate level.
3.14 Credit Monitoring
To minimize credit losses, monitoring procedures and systems shall be in place that provides an early indication of the deteriorating financial health of a borrower. At a minimum, systems shall be in place to report the following exceptions to relevant executives in CRM and RM team: 1. Past due principal or interest payments, past due trade bills, account excesses, and breach of loan covenants.
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2. Loan terms and conditions are monitored, financial statements are received on regular basis, and any covenant braches or exceptions are referred to CRG and the RM team for timely follow-up. 3. Timely corrective action is taken to address finding of internal, external or regulator inspection/audit. 4. All borrower relationships/loan facilities are reviewed and approved through the submission of a credit proposal at least annually.
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Details of some Major Advances
Bank is an institution where clients keep their surplus deposits and these deposits are invested in trade, commerce and industries in the form of Loans & Advances to earn profit. Apart from earning profit, by lending to priority sector, Bank also helps country’s economic development. Loan and Advance can be classified into four categories. They are as follows: Loan Overdrafts Cash Credits Discounts Each of these are classified into the following categories, they are described below:
4.1 Loan:
In case of loan the banker advances a lump sum for a certain period at an agreed rate of interest. The entire amount is paid on an occasion either in cash or by crediting in his current account, which he can draw at any time. The interest is charged for the full amount sanctioned whether he withdraws the money from his account or not. The loan may be repaid in installments or at expiry of a certain period. Loan is allowed for a single purpose where the entire amount may be required at a time or in a number of installments within a period of short span. 4.1.1 Loan General:
When an advance is made in lump sum repayable either in fixed monthly installment and no subsequent debit are ordinarily allowed expect by way of interest, incidental charges etc called general loan.
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4.1.2 House Building Loan: Bank shall allow credit facilities under such portfolio strictly as per PPG within the Prudential Regulations of Bangladesh Bank for Consumer Financing. In order to solve financial incompatibility to make a house, the bank offers this loan to middle class people. Period of loan is maximum 5 years. Limit of the amount of the loan depends on the customer banker relationship. 4.1.3 Consumer finance scheme: The scheme aims at improving the standard of living of the fixed income group. Under the scheme may secure loan facilities at easy installment to procure household amenities. It meets household needs of service holders. Furniture/TV/Refrigeration& others household durables. Its Credit Ceiling is up to tk.1. Lac and term is 2 years. 4.1.4 Lease finance scheme: An entrepreneur, under this scheme may avail of lease facilities to procure industrial machinery and equipments, Vehicles etc. (without having to purchase it by down payment) with easy repayment schedule on case to case basis. Rate of interest under this Scheme is 16% P.A. 4.1.5 Small business loan: This loan is introduced for smooth running/expansion of business of small entrepreneurs who are honest, sincere & promising. This type of loan diversifies banks lending with the requirement of the time. Its credit ceiling is up to tk. 5.00 Lac and term is 2-5 years. 4.1.6 House Renovation loan:
The purpose of the loan is to help genuine house or flat owners (not developers) to undertake repairing or renovation works for better living or increased rental income. Credit ceiling of the loan is up to tk. 5.00 Lac and term is 3- 5 years. Prepared By: Zillur Rahman, ID-0913175, BBA (Finance), FBA, BGCTUB
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4.1.7 Loan Revolving:
Basically it is not a loan actually. It is one type of facilities the bank provided to its customer and collect in circle. 4.1.8 Demand loan:
Bank provides this sort of loan to clients with certain conditions. The customer has to repay this loan. 4.1.9 Personal loan A loan facility for the service holders to meet the emergency expenses of the following occasions: To bear the cost of Medical treatment / Surgical Operation / Maternity / Marriage. Eligibility of the applicant Only Permanent salaried employees with at-least 3 years of confirmed service. Age Limit Minimum Age 21 years to Maximum 50 years. Loan Limit Minimum: BDT 25,000 and Maximum BDT 100,000. Loan Application Fees BDT 600 Loan Tenure Minimum 6(six) months but not exceeding 3(three) years.
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4.1.10 Consumer’s credit scheme: Loans allowed servicing people for purchasing domestic / household items repayable on monthly installment basis. 4.1.11 Car loan: A facility to ease the burden of high cost as well as to fulfill the dream of acquiring Eligibility of the applicant Salaried employees at least three years of confirmed service. Self-Employed Professionals having at-least 3 years of independent practice experience Businessperson having at least 3 years business experience Homeowners or property income holder Age Limit Minimum Age 21 years to Maximum 60 years. Loan Limit Minimum: BDT 200,000 and Maximum BDT 2,000,000. Loan Application Fees BDT 600 Loan Tenure Reconditioned Vehicle: maximum 60 Months and Brand New Vehicle: maximum 72 months.
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4.1.12 Small and medium enterprise loan (SME) NCC bank issue small and medium enterprise loan to develop the economic conditions of middle and lower level of organization. People can take loan up to 5 Lac to their organization without any mortgage. Generally it provides Tk. 50 Lac to small organization and Tk. 80 Lac to medium organization with collateral security. 4.1.13 Festival Business Loan: The scheme designed to help the genuine businessmen to meet the extra finance required during festivals like, Eids, Puja. Disbursement of this loan is made in recycling order which is to be stopped 15 days before the festival day. Maximum Tk.10.00 lac is allowable under this Scheme @ 16% interest P.A. at quarterly rest. Application fee is Tk.500 4.1.14 Festival Personal Loan: The scheme formulated to meet emergency financial expenses of the service holders at the time of festivals like Eids. Puja. Any salaried employee aged between 20- 50 years and working in Govt. Semi - Govt. Autonomous organization, corporate bodies, Insurance Co., etc. are eligible to avail of this loan. The disbursement of this loan starts before 1 month of festival and continues till festival. Borrower may be allowed to avail of maximum Tk. 15,000/- only for minimum 6 months but not more than 15 months @ 16% interest P. A. at quarterly rest. Application fee is Tk. 100/-. 4.1.15 Housing Loan Scheme: In order to enable the service holders/ professionals/ businessmen in purchasing Flat/House, Construction of Building and renovation, the Bank launched Housing Loan Scheme from September 2004. The tenure of the loan is maximum 12 years and maximum amount of loan is tk.50.00 lac with interest @ 16% P.A.
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4.1.16 Transport loan: NCCBL may extend Transport Loan on close scrutiny of the purpose, Feasibility, experience of the borrower, credit/trust worthiness and above all security aspect as per its guidelines in this regard. 4.1.17 Project loan: NCCBL shall allow Loans for longer duration to enable its investment to be returned by way of repayment after detailed assessment and feasibility study as per its guideline for entrepreneurs and investors willing to come to an arrangement in setting up industries and different production unit complying to rules and regulations of government’s Investment & industrial policy.
4.2 Overdrafts:
Overdrafts are those drawings which are allowed by the banker in excess of the balance in the current account up to a specified amount for definite period as arranged for. These advances are secured. The loan holder can freely draw money from this account up to the limit and can deposit money in the account off course, this loan has an expiry date after which renewal or enhancement is necessary for enjoying such facility. Any deposit in the OD account is treated as repayment of loan. Interest is charged as balance outstanding on quarterly basis. Overdraft facilities are generally granted to businessmen for expansion of their business, against the securities of stockin-trade, shares, debenture, Government promissory notes, fixed deposit, life insurance policies, DPS and MDP. 4.2.1 SOD (FO): . It is allowed against financial obligation for promotion of economic and business activities. 4.2.2 SOD (GE): It is allowed to the traders for business promotion and economic activities.
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4.3 Cash Credit:
In Cash credit, banker specifies a limit called the cash credit limit, for each customer, up to which the customer is permitted to borrow against the security of tangible assets or guarantees. Cash credit is given through the cash credit account. The purpose of cash credit is to meet working capital need of traders, farmers and industrialists. Cash credit in true sense is against pledge of goods. Cash credit is also allowed against hypothecation of goods. In case of hypothecation the ownership and possession of the goods remain with the borrower. By virtue of the hypothecation agreement bank can take possession of the goods hypothecated, if the borrower defaults. Rate of Interest: 18% Renew System: it is renewed in periodic basis (yearly). 4.3.1 Cash Credit (Hypothecation):
This facility shall be available both for Trading Houses and. Manufacturing concerns against primary security of hypothecated inventory/ stocks of Finished, Raw Materials and machineries. However, as the primary security remains at the disposal of the borrower with practically no control of the lending institution, NCCBL shall extend such facility only against retention of adequate eligible Collateral Security favoring bank. Criteria of such Eligible Security shall be as per circular of Head Office and within the guideline set by Bangladesh Bank in this regard. 4.3.2 Cash Credit (Pledge): NCCBL shall retain the provision to extend WC finance under the head. As the Primary Security i.e. Finished or Raw by regulation is supposed to be under strict control of the bank, the arrangement on practical experience eventually proves cumbersome due to numerous difficulties in maintaining the formalities related to strict supervision and monitoring. Therefore, NCCBL shall prefer to consider such facility only under Hypothecation unless assurance and arrangements are available about compliance on the spirit of the portfolio. Prepared By: Zillur Rahman, ID-0913175, BBA (Finance), FBA, BGCTUB
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4.4 Discounts:
Apart from the usual loans and advances, purchase and discounting of bills of exchange is another way of enjoying bank funds. Such bill of exchange arises out of commercial transaction both in inland trade and foreign trade. Although it has various types, PAD is a major one that is discussed as under: 4.4.1 PAD (payment against documents):
This facility originates against payment of Import Bills on lodgment of CLEAN shipping documents received from Foreign Correspondent against Letter of Credit opened on behalf of the customers. PAD loan is created in the name of the importer in order to reconcile the entries so debited by the Reimbursing Bank. The maximum period of repayment of this loan is one month. 4.4.2 Import: The Bank allows credits to the importer in the following forms: 4.4.3 Loan against imported merchandise (LIM): Loan against the security of merchandise imported through bank shall be allowed against Pledge of goods. The procedure and conditions for allowing such facility under prior arrangement or forced circumstances shall be strictly as per related guideline of the bank. Due to inherent complexities, the portfolio should be discouraged. The importer has to keep the goods in bank’s custody for getting this loan. 4.4.4 Loan against trust receipt (LTR): Bank shall be selective in extending the facility but shall prefer due to comfort in binding the customer legally. Generally such facility shall be against arrangement and preferable against collateral security favoring the Bank. Normally this sort of loan is provided for 90 days. After sanction of LTR, import bills are handled over to the importer who will clear the goods from the customer authorities by making payment duty, VAT and other charges. Prepared By: Zillur Rahman, ID-0913175, BBA (Finance), FBA, BGCTUB
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4.4.5 Export: The bank allows credit to the exporters to help performing their exports under the following categories: 4.4.6 ECC: It is allowed to provide with working capital for production of items of export. 4.4.7 PC: It is allowed to the exporter for packing the goods before shipment. 4.4.8 Loan against packing credit: This facility also relates to financing at Pre shipment stage. NCCBL shall consider such facility under defined guidelines against export of various commodities. 4.4.9 IBP & FBP (Inland &Foreign Bills Purchased): The facility relates to extension of credit at the post Shipment stage. NCCBL shall consider facility under the portfolio to relieve the exporter strictly on complying standing conditions attached to it. 4.4.10 Foreign Document Bill Purchased: When any loan is given to exporter against any foreign documentary bills then it is known as Foreign Documentary Bills Purchased. 4.4.11 Back – to – Back L/C: Back to Back L/C may be defined as a credit which is opened at the instruction and request of the beneficiary of the original Export L/C on the basis of strength of that L/C. Readymade garment industries and specialized textile units are allowed the facility of importing fabrics and other materials needed for manufacture of garments/ specialized textiles against back to back L/C arrangement. Back to Back L/C is of two types. • • Foreign back letter of credit Inland back - to - back letter of credit.
Sector of loan in Anderkilla Branch: In this Graph, it can be said that NCCBL provides more loan in trading sector. In housing sector, it was 15%. In garments &construction sector, it was 7% and others sector, it was 5% in 2011.
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Year wise total deposit Year wise deposits of NCC are increasing year by year. In 2007 the total deposit was 34,901.77million. It was increased to Tk. 81,127.17 million. From the graph it is seen that the growth rate from year 2010 to 2011 is 19.37% which indicates positive perception toward NCCBL from client’s point of view.
4.7 Loan and Advances
The Bank recorded a 15% growth in advances with a total loans and advances portfolio of Tk 72, 733.54million at the end of December 2011 compared to Tk. 63,230.14 million in 2010. NCC Bank is making loan and advances in different areas. The bank continues to explore and diversify its loan distribution with the objective of efficient use of resources and take utmost precaution to safeguard it. NCCBL also participated in a syndicated loan. The table & graph of loan & advances can be shown below: Table 9: Loans & Advances of NCCBL (Tk. in millions) Year 2007 2008 2009 2010 2011 Graph 5: Loan& Advance 32,687.75 46,332.69 50,387.68 63,230.14 72,733.54
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Year wise total loans & advances : Year wise total loans & advances of NCCBL are also increasing day by day. In 2007 the total loan was TK 32687.75 million. It was increased to TK 72,733.54 million in 2011.from the graph it is seen that growth rate from year 2010 to 2011 is 15%.
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Credit Risk Management Unit
5.1 Credit Risk Grading:
While providing credit facility to a customer, bank undertakes many risks, among which credit risk is considered to be the most important one. As such, an in-depth study should be conducted on the borrower’s creditworthiness which will help the bank to identify all possible risks underlying in a particular credit transaction. A formal evaluation of borrower’s financial health and ability to repay debt obligation is called credit rating. And risk identified through credit rating is quantified for better understanding and taking appropriate mitigating technique. Besides, it helps the bank to charge commensurate risk premium on a particular credit facility. Therefore, it is important to accurately measure the risk in a transaction and rate/grade the facility accordingly.
5.2 NCC Bank’s Risk Grading Framework:
All credit proposals must be supported by a comprehensive risk analysis. It will encompass the following three things :( a) Lending risk analysis (LPA), (b) Risk grading scorecard and (c) Risk grading. No proposal can be put up for approval unless there has been a complete written analysis subject to the condition that LRA will be conducted where it is applicable as per Bangladesh Bank Guideline. It is the absolute responsibility of the proposal originating officer to conduct comprehensive risk analysis and affix it’s result e.g. Risk Grading score, Risk Grade etc in the proposal.
5.3 Function of Credit Risk Grading:
Well managed credit risk grading systems promote bank safety and soundness by facilitating informed decision making. Grading systems measure credit risk and differentiate individual credits and groups of credits by the risk they pose. This allows bank management and examiners to monitor changes and trends in risk levels. The process also allows bank management to manage risk to optimize returns. Prepared By: Zillur Rahman, ID-0913175, BBA (Finance), FBA, BGCTUB
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5.4 Application of Credit Risk Grading:
NCC bank is currently involved in; they have modified the credit risk grading framework and developed their own credit risk grading Manual in line with the CRGM of Bangladesh Bank. • The Credit Risk Grading matrix allows application of uniform standards to credits to ensure a common standardized approach to assess the quality of individual obligator, credit portfolio of a unit, line of business, the branch or the bank as a whole. • As evident, the CRG outputs would be relevant for individual credit selection wherein either a borrower or a particular exposure/ facility is rated. The other decisions would be related to pricing (credit- spread) and specific features of the credit facility. These would largely constitute obligator level analysis. • Risk Grading would also be relevant for surveillance and monitoring, internal MIS and assessing the aggregate risk profile of a bank. It is also relevant for portfolio level analysis.
5.5 Objective of doing CRG:
Every work has some specific objective. The main objective of doing CRG is to evaluate credit policy of the NCC Bank Ltd. Credit risk is a vital factor that needs to be addressed properly for minimizing risk in credit in credit operation. Therefore to be more specific the CRG scoring is very useful to the examiners and bank managements. To make quick screening of the client's risk factor- risk identification and risk assessment. To understand the clients creditworthiness. To determine the average lending rate (ALR). To monitor the changes- the tendency in risk level and in the recovery. To reveal the discrepancies if incur and to take necessary steps.
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5.6 Risk Grading Scorecard:
As per instruction of Bangladesh Bank, NCC Bank Ltd has developed risk grading scorecard which will be used to find out rating of all credit facilities and /or customer of the bank except the loans under Retail Credit Division. The score of the risk grading scorecard will be weighted one. There are 10 rating criteria and separate parameters have been set to measure borrower’s position against each criterion. After analyzing the borrower’s financials or other relevant document, the relationship officer will first find out the points the borrower earns against each criterion based on the parameters set and multiply the points obtained by the relevant risk weight which will produce weighted score. A snapshot of criteria and weight assigned to each criterion is as follow: Table 10: Number 1
Risk Grading Superior
Short Name SUP
2 3 4 5 6 7 8
Good Acceptable Marginal Special Mention Sub – Standard Doubtful Bad & Loss
GD ACCPT MG SM SS DF BL
Score • 100% covered. • Government guarantee • International guarantee. 85+ 75-84 65-74 55-64 45-54 35-44 Less than 35
cash
Bank
The relationship Officer of the Branch will prepare Risk Grading Scorecard in case of new proposal, renewal and /or enhancement of existing facility, any deterioration in the borrower’s business position, any breach of contract by the borrower or as and when he/she feel it necessary. In addition, aggregate weighted score of the customer is to be affixed in the relevant field of the Credit Assessment Sheet.
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These grading scorecards are explained below: 5.6.1 Superior – Low Risk (Grade 1) Facilities are fully secured by cash deposits, government bonds or a counter guarantee from a top tier international bank. All security documentation should be in place. 5.6.2 Good - Satisfactory Risk (Grade2) The repayment capacity of the borrower is strong. The borrower should have excellent liquidity and low leverage. The company should demonstrate consistently strong earnings and cash flow and have an unblemished track record. All security documentation should be in place. Aggregate Score of 85 or greater based on the Risk Grade Scorecard. 5.6.3 Acceptable – Fair Risk (Grade3) Adequate financial condition though may not be able to sustain any major or continued setbacks. These borrowers are not as strong as Grade 2 borrowers, but should still demonstrate consistent earnings, cash flow and have a good track record. A borrower should not be graded better than 3 if realistic audited financial statements are not received. These assets would normally be secured by acceptable collateral (1st charge over stocks / debtors / equipment / property). Borrowers should have adequate liquidity, cash flow and
earnings. An Aggregate Score of 75-84 based on the Risk Grade Scorecard. 5.6.4 Marginal (Grade 4) Grade 4 assets warrant greater attention due to conditions affecting the borrower, the industry or the economic environment. These borrowers have an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and/or inconsistent earnings. Facilities should be downgraded to4 if the borrower incurs a loss, loan payments routinely fall past due, account conduct is poor, or other untoward factors are present. An Aggregate Score of 65-74 based on the Risk Grade Scorecard.
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
5.6.5 Special Mention (Grade 5) Grade 5 assets have potential weaknesses that deserve management’s close attention. If left uncorrected, these weaknesses may result in deterioration of the repayment prospects of the borrower. Facilities should be downgraded to 5 if sustained deterioration in financial condition is noted (consecutive losses, negative net worth, excessive leverage), if loan payments remain past due for 30-60 days, or if a significant petition or claim is lodged against the borrower. Full repayment of facilities is still expected and interest can still be taken into profits. An Aggregate Score of 55-64 based on the Risk Grade Scorecard. 5.6.6 Substandard (Grade 6) Financial condition is weak and capacity or inclination to repay in doubt. These weaknesses jeopardize the full settlement of loans. Loans should be downgraded to 6 if loan payments remain past due for 60-90 days, if the customer intends to create a lender group for debt restructuring purposes, the operation has ceased trading or any indication suggesting the winding up or closure of the borrower is discovered. Not yet considered non-performing as the correction of the deficiencies may result in an improved condition, and interest can still be taken into profits. An Aggregate Score of 45-54 based on the Risk Grade Scorecard. 5.6.7 Doubtful (Grade 7) Full repayment of principal and interest is unlikely and the possibility of loss is extremely high. However, due to specifically identifiable pending factors, such as litigation, liquidation procedures or capital injection, the asset is not yet classified as Loss. Assets should be downgraded to 7 if loan payments remain past due in excess of 90 days, and interest income should be taken into suspense (non-accrual).In all cases, the requirements of Bangladesh Bank in CIB reporting, loan rescheduling and provisioning must be followed. An Aggregate Score of 35-44 based on the Risk Grade Scorecard.
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
5.6.8 Bad & Loss (Grade 8) Assets graded 8 are long outstanding with no progress in obtaining repayment (in excess of 180 days past due) or in the late stages of windup/liquidation. The prospect of recovery is poor and legal options have been pursued.
5.7 Credit Risk Grading Review:
Credit Risk Grading for each borrower should be assigned at the inception of lending and should be periodically updated. Frequencies of the review of the credit risk grading are mentioned below: Table 11: Number
Risk Grading
Short
1 2 3 4 5 6 7 8
Superior Good Acceptable Marginal Special Mention Sub-Standard Doubtful Bad & Loss
The Relationship officer will insert the risk grade of the customer in the concerned field along with Risk Grading Score and forward the same trough paper channel to the credit risk management unit, for approval.
5.8 Component of Risk Grading:
CRG has five different components which are required to evaluate the credit worthiness of the applicants. These risks are calculated according to the available information. These are the five risks, which are required to consider getting overall risk measurement and the five components are:
Monitoring & Evaluation of Credit
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Figure 6: The 5 components of risk These five different components have different weight to measure the risk. The most important among them is financial risk which consists of 50%. These weights of risk component can be shown in the graph. Graph6: Weight of Risk Components
Monitoring & Evaluation of Credit
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Findings, Recommendation & Conclusion
6.1 Major Findings of the Study:
After go through the whole report we come up with some finding. Some of the tasks which NCC Bank does is very much traditional. In today’s modern banking system much different from that. If we compare them with other local banks like City bank, Eastern Bank, Brac Bank, Prime bank we came to know about this. With the modern computerized system they make their works more easier than the NCC Bank. NCC Bank follow the same old process to save their data and they do their whole operation manually where other banks are doing with their computer. Some findings are given below:
Year wise total loans & advances and deposits of NCCBL are also increasing day by day and received higher attention in 2011.so, the current trend of growth of the Bank is in satisfactory level. The NCC Bank offers lucrative loan products having long term and short benefits. NCC Bank Limited has been able to manage its credit policy skillfully and kept the classified loan at a very lower rate. NCCBL’s both loan processing service charge and loan processing time is quite high compare to their competitors. Maximum amount of loan is provided to the long-term industrial sectors. They intentionally ignore the agriculture sector. Banks Credit deposit ratio is decreasing from previous year that means banks can not invest properly and not utilize more funds to maximize their profit. Right now, for every loan decision is made by Area office or Head office which takes time lengthy to sanction a loan. Their training facilities are not adequate for the new employees who are dangerous both for the bank and the branch office. They save their all kinds of data in papers. Prepared By: Zillur Rahman, ID-0913175, BBA (Finance), FBA, BGCTUB
Monitoring & Evaluation of Credit
Where Credit & Commerce Integrates
They find the interest suspense account through their computer but manually they check those out. Some times very simple work is done by the head office which takes time and make difficult. Some times verification is done by a new officer which dangerous both for the bank and the branch office
6.2 Recommendation:
From different analysis and discussion of my study we can know that the current trend of growth of the bank is in satisfactory level. Nevertheless the bank can take the following steps to gain competitive advantages. These steps are as follows: The Bank should have to set a standard rate of service charge and make the process fast in order to attract new customers as well as retain existing customer. For the overall economic development of the country, the bank should diversify their loans in agriculture as well as SME sectors. Top authority should take necessary measures for increasing its deposit collected from the people by the lowest interest rate into in the form of loan & advance so that the credit deposit ratio improves in future. Giving authority to the Branch officials to take decision to sanction a loan. in order to faster the speed of loan sanction the branch should be authorized to take decision. Bank should provide more training facilities for the new employees to upgrade their skill level. NCCBL has only 90 branches all over the country. Since day by day their demand is increasing so it is quite hard to provide full range services with those branches. So they need to put more attention toward the expansion of branch network as well as ATM Booths.
