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An Overview of Credit Performance of

Prime Bank Limited

31 October 2011

An Overview of Credit Performance of

Prime Bank Limited

Submitted To
Professor Dr A. A. Mahboob Uddin Chowdhury
Chairman & Professor
Department of Finance
Faculty of Business Studies
University of Dhaka.

Submitted By
Md. Asaduzzaman Khan
Roll: 13-010
BBA, 13th Batch
Department of Finance
University of Dhaka.

31 October 2011

Supervisors Certificate

This is to certify that the internship report on An Overview of Credit Performance of


Prime Bank Limited in the bona-fide record is done by Md. Asaduzzaman Khan,
ID.No:13-010 as a partial fulfillment of the requirement of BBA Degree from the
Department of finance, University of Dhaka.

The report has been prepared under my guidance and is a record of the bona-fide work
carried out successfully.

Supervisor
Professor Dr A. A. Mahboob Uddin Chowdhury
Chairman
Department of Finance
Faculty of Business Studies
University of Dhaka.

Declaration

I do hereby solemnly declare that the work presented in this study report has been
carried out by me and has not been previously submitted to any other
University/College/Organization before.

I further undertake if indemnify the university against any loss or damage arising from
breach of the forgoing obligation.

Md. Asaduzzaman Khan


Roll: 13-010
BBA, 13th Batch
Department of Finance
University of Dhaka.

LETTER OF TRANSMITTAL
31 October 2011
Professor Dr A. A. Mahboob Uddin Chowdhury

Chairman

Department of Finance
Faculty of Business Studies
University of Dhaka.
Subject: Submission of Internship Report on An Overview of Credit Performance of
Prime Bank Limited
Dear Sir,
I am glad to inform you that here is the report you assigned me to prepare for the
completion of our internship course after completion BBA theoretical program. In my
report, I have tried my best to show the Theoretical, Empirical and performance
analysis of Prime bank limited. I have tried to match my theoretical knowledge with
the practical field. I hope that my report will be able to represent a transparent
scenario of An Overview of Credit Performance of Prime Bank Limited. I also confess
that my report has some limitations because I am still student and I am in a process of
developing my skills. So I hope that you will be kind enough to consider the
limitations of this report.
Thank you for giving me such an opportunity for working on the topic. I will be
honored if you provide me any additional information, if necessary.

Sincerely yours

Md. Asaduzzaman Khan


Roll no: 13-010
BBA 13th Batch
Department of Finance
University of Dhaka.

ORIGIN OF THE REPOTR

This report is prepared for internee under the internship program arranged by
Department of Finance, Faculty of Business Studies, University of Dhaka. After the
completion of theoretical course Department of Finance arranges internship of every
student for three months in attachment with different business organization.

Each and every student has to prepare an internship report assigned by the supervisor.
I have the opportunity to complete my internship in Prime Bank Limited. Then my
supervisor, Professor Dr A. A. Mahboob Uddin Chowdhury, assigned me with the
internship report on An An Overview of Credit Performance of Prime Bank
Limited.

Our honorable supervisor helped me time to time by showing me the direction and
giving his suggestion. So I would like give him my humble gratitude. I am also
grateful to the authority of Prime Bank HR department for providing me the required
information. Without the co-operative support from them preparing this report would
not be possible.

ACKNOWLEDGEMENT
At first I want to admit that, I would not be able to prepare this report without the help
of some persons. So I am indebted to a number of people for their help, advice and
suggestion that made me able to complete this report.

This report has been assigned by Professor Dr A. A. Mahboob Uddin Chowdhury.


So at the beginning of my report I would like thank him from the bottom of my heart
for giving me such an interesting topic and also for his valuable advice. He has helped
time to time by showing me the direction and giving his suggestion. I am most
grateful to him for his close guidance.. Then I would like thank each and every
member of this organization for providing me such a warm working environment.

I have prepared this report with the help of some text book, articles, web sites a list of
then is given in the bibliography section. Finally would like to thank each and every
person who contributed to prepare this report by their valuable idea, advice,
suggestion, guidance and help.

TABLE OF CONTENT
PARTICULARS
Chapter 1: Introduction
1.1 Introduction
1.2 Scope & Objectives of the Study
1.3 Methodology & Limitation
Chapter 2: Theoretical Development
2.1 Liquidity Management
2.2 Credit Management
2.3 ALM
Chapter 3: Administration of Credit by Prime bank Limited
Chapter 4: Empirical Analysis Performance Analysis
Chapter 5: Summary and Conclusion

Bibliography

PAGE

Executive Summary
Bank as a financial institution deals with financial instruments. Its primary function is
to bridge between surplus units and the deficit units of the country by collecting
deposits from one and lending another with a view to making profit. But lending is not
as easy as it sounds. Lending involves high degree of risk of non-repayment of interest
or principal or both. Hence this risk may jeopardize banks overall profitability as well
assets. It is highly pronounced that a bad loan can eat up profits of good loans. So
lending itself is very risky but mandatory function for a bank. To safeguard from
lending risk bank must adhere to some principles like safety, profitability, security,
sources of repayment, diversity, national interest. To encompass these principles, an
integrated sound lending policy is must. A sound lending policy is nothing but a
prescription while intending to lend. Lending policy focuses mainly three stages of
lending process: Pre-Sanction stage, Sanctioning stage and Post-Sanction stage. At
Pre-Sanction stage, potential borrowers from targeted business segments are offered
different financial products according to their need and purpose as per the policy of
bank. And would be borrowers are evaluated qualitatively and quantitatively to assess
their capacity and willingness of repayment of loan with interest in due time. Credit
risk grading is done with due diligence based on supporting documents. In addition to
that a policy of keeping security is included in the pre-sanction stage of lending policy
to mitigate risk associated with a particular borrower. These reports are sent for further
scrutiny and approval to the higher authority of bank. If these authorities find all
things accordingly and non-conflicting with bank policy as well as Bangladesh Bank
regulation or any other regulations in force for time being, they fix up the price of the
loan considering the associated risk and value of security and finally approve the loan
and disburse the fund in the Sanction stage. In the Post-sanctioning stage, bank
officials follow up and keep records the borrowers activities by monitoring and
administrating the loan. To manage credit risk, risk grading is done continuously to
assess the borrowers present financial position and financial soundness. As per risk
grading, non-performing loan is identified and reported separately from performing
loan in the books of accounts with appropriate provisioning.

Chapter 1

INTRODUCTION
At first, we know the Bank is a financial institution. Every country has a central bank;
it is guardian of the financial system. Monetary policy is formulated & implemented
by the Central bank; it is concerned with supply of money that is controlling the
money supply. All private banks are called commercial bank. A bank have some
financial assets such as fixed deposit, Bond, Savings account, pay order and different
types of loans, it is contributing toward the development of any economy and is
treated as an important Service industry in the modern world.
Bank plays a vital role in the economy by providing means of payment and in
mobilizing resources. Bank is the most important financial institution in the economy.
The economic development of a country depends on the development of banking
sector. Todays modern banks are not only providing traditional banking but also
expanding the many financial services. In todays world the life of the people directly
or indirectly are within the arena of banking whether conventional or Islamic banking.
Although Islamic banking is not a newer concept in Bangladesh as it has started its
operation since 1983. Islamic Banking is also getting popular in the country.
Prime Bank Limited is a second-generation private commercial bank established in
Bangladesh in the year 1995 under the Companies Act, 1994. Since inception, it is
committed to provide high quality financial services to the countrymen with a view to
accelerate economic development of the nation.
As such, it has been working for stimulating trade and commerce, accelerating the
pace of industrialization, boosting up export, creating employment opportunity,
alleviating poverty, raising standard of living of the people etc and thereby
contributing to the sustainable development of the country.
At present, the bank has a network of 111 (one hundred and eleven) branches stationed
in both rural and urban areas of the country and this are further extended every year by
4/5 new branches. Since inception, the Bank has been making significant profit every
year and positioning itself as second highest profit-making bank in the country for last
five consecutive years. This has been possible due to significant credit growth of the
bank. On an average, credit portfolio of the bank has been growing @ 40% every year.
However, asset quality of the Bank was never compromised for this high growth. It
has been well maintained which is reflected in its classification rate that never
exceeded 2% in its 10 (Ten) years of life. As the lion share of the total revenue comes
from credit operation and the existence of the Bank depends on quality of asset
portfolio, efficient management of credit risk is of paramount importance.
A banker should employ his funds in such a way that they will bring him adequate
return because like all other commercial institutions banks are run for profit. But its
policy must comply with current growth of loan portfolio and market position.

Scope & Objective

To analyze the Theoretical Development of Liquidity, Credit, ALM


To overview of Administration of Credit by Prime Bank limited
To analyze the Performance Analysis/Empirical Analysis of Prime Bank Ltd.
To summarize the report & Conclusion of the report.
To get an overall idea about the performance of Prime Bank Limited.
To fulfill the requirement of the internship program under BBA program.
The study would focus on the following areas of Prime Bank Limited:
Credit performance of Prime Bank Limited.
Organization structures and responsibilities of management.
Financial statement of Prime Bank Limited

Methodology & limitation


Methodology:
The study will require a systematic procedure from selection of the topic to final
report preparation. To perform the study, data sources will be identified and collected
as clearly as possible. They will be classified, analyzed, interpreted and presented in a
systematic manner and key points are to be found out. Which given as following
Primary Sources
Face to face conversation with the employees
Informal conversation with the client
Study relevant file provided by the officers
Secondary Sources
Banks Annual Repot
PBL employ activity policy
Different circulars, manuals and files of the bank
PBL Database
Different books and periodicals related to the Banking sector
Online journals

Limitation:
The study requires high costs, time and temperament that I failed to give
in many cases
Inexperience in preparing internship report may put some limitations but I try my
best to overcome these limitations
Relevant up-to-date information is/has not found when required
The PBL bank authority is not frequent to exposure of their confidential data.

Chapter 2
Theoretical Development
Liquidity, Credit, ALM

Liquidity Management:
The concept of liquidity is well known in business namely, the ability to sell asset on
short notice with minimal loss in value. However bank liquidity management is a
much more complex concept then liquidity per, se. in general liquidity management
consists of two interrelated parts.
First, management must estimate fund needs, which is based on deposit inflows and
outflows and varying level of loan commitments. Deposit flows are affected by
financial instruments as well as the competitive rates posted by bank in their
respective geographic markets.
The second part of liquidity management involves meeting liquidity needs. Two type
of liquidity are available to meet potential liquidity requirements asset management
and liability management.
Asset management refers to meeting liquidity needs by using near-cash asset,
including net funds sold to other bank and money market securities. Also asset-backed
securities derived from securities loans is a growing source of asset liquidity in the
banking industry.
Liability management refers to meeting liquidity needs by using outsources of
discretionary funds. However in order to access these sources of liquidity , a bank
must maintain sound financial condition. In general, smaller banks trend to emphasize
asset management in meeting liquidity needs, in contrast to large bank with an
emphasis on liability management.

Estimating Liquidity Needs


The first step in any analysis of bank liquidity is the estimation of liquidity need.
These needs primarily arise from deposit needs and withdrawal. To estimate the need
bank should focus on the demand of liquid asset and the supply of deposits. In
generally loan growth does not exceed the deposit but difference can arise temporarily
specially in the urban areas where there is huge opportunity of trade and commerce. A
recent trend in liquidity management is the ability to meet cash needs arising from
securities activities which in many cases are off balance sheet exposure for hedging or
market making purposes. It is prudent to adjust the estimated liquidity needs to some
extent to avoid a liquidity squeeze in the form of a cash shortage that could result in
the lost opportunity of lending, reduced depositors confidence.
There are two common methods that commercial banks use in these days to estimate
the required fund for liquidity. They are -

Sources and Uses of Funds Method


Structure-Of-Deposit method

Sources and Uses of Fund method


One method of estimating future liquidity is the sources and uses of fund method.
Under this method management evaluates the potential changes in the individual asset
and liability accounts. That is loan amount may be divided into several sectors that is
commercial, individual, industrial etc. Management estimates demand of those loans
from past data of the loan portfolio. Deposit levels are influenced by the economic and
competitive market condition. As interest rates rises depositors try to move funds to
get the maximum return therefore the management also experiences the increasing
completion for deposit funds especially from non bank financial institutions. During
low interest rates depositors try to invest in bonds and stocks causes increase demand
in the bank. At the same time change in monetary policy as well as change in the
international financial market. In our country we also experience increase in the loan
demand at harvesting period for agricultural loan. In this method decrease in the loan
and increase in the fund is the sources of fund and both increase in the loan and fund
deposits are the uses of the fund method. Subtracting loan changes from the deposit is
the liquidity needs for the bank. In this method there are both discretionary and
nondiscretionary items based on the ability of the management to control the flow of
funds. Deposit withdrawals are nondiscretionary items as bank cannot control the
amount of withdrawal as loans are discretionary as bank management can control the
amount of loan disbursement.

Structure-Of-Deposit Method
Another way to measure the liquidity needs is the structure-of-deposit method. The
idea of this approach is to list the different types of deposits that the bank is using to
acquire then assign a probability of withdrawal to each type of deposit within a
specific time period. High risk liquidity requires extensive liquidity to support them
where as low risk deposit requires low liquidity to support them. Generally a strong
and positive relationship exists between the bank and these depositors. If other
competing banks increase interest rates, then these funds can rapidly be withdrawn
and thereby cause liq1uidity demand on the bank.
The major strength of this method is that it directs the management attention to the
probable cause of management pressure. On the other hand its drawback is the
ignoring other liquidity demands stemming from the loan. The evaluation of the
probability of withdrawal must be estimated on a case by case basis. Stability
characteristics of each source of fund management are necessary due to avoid the
large difference.

Credit Risk Management:


The Credit Risk Management Department shall perform interlaid the following duties:

(a) Assess risks inherent in the credit proposal sent by Corporate Division and also
evaluate proposed facility pricing based on risks, security, structuring and terms
and conditions to suit the business condition and to protect Banks interest.
(b) Compliance to the existing rules and regulations of the Bank and all regulatory
authorities and laws of the country and to advise the Corporate Division for
rectification, if required.
(c) Advise the Corporate Division about changes, if required, in the structure and
terms and conditions of the proposed facility.
(d) Process credit proposal for approval of the competent authority.
(e) Issues sanction advice for credit facilities or decline.
(f) Maintain Limit Sanction Register.
(g) Review the performance of the customer on Off-site Basis and prescribe
appropriate remedial measures, if required until the loan account becomes a
Special Mention one.
(h) Review/revise risk grading of the customer from time to time based on the Early
Alert Report and Downgrade Proposal submitted by Corporate Division.
(i) Handover loan to the Recovery Department as and when it is degraded to Special
Mention or below.

Major Functions of CRM:


(a) To update Banks Credit Policy/Lending Guideline, procedures and control
mechanisms related with all credit risks arising from corporate/commercial
banking and retail banking etc.
(b) To approve/decline credit proposal received from Corporate Division (presently
from Branches) within delegated authority and to recommend to the higher
authority if it is beyond delegation.
(c) To provide advice/assistance regarding all credit matters to Corporate
Division/Branches.
(d) Periodical review of different types of credits, maintain effective follow-up and
supervision and take all possible measures in time to save from classification.

Duties and Responsibilities of CRM:


(a) Examine/review credit proposals (new/renewal) sent
division/branches to:
(b) Revise and ratify borrowers risk grade developed
Division/branches.

by

corporate

by

Corporate

(c) Review delegated credit approval authorities on an annual basis


(d) Review approval procedures of Retail Credit from time to time
(e) Review and update banks credit manual and credit operating procedures on an
annual basis.
(f) Conduct industry analysis and detect risk involved with each industry.
(g) Formulate strategy to minimize risk of lending to specific industry.
(h) Guide and educate officers of all Departments of Credit Division and Corporate
Division/branches.

Computation of CRG:
The following step-wise activities outline the detail process for arriving at credit risk grading.

Step I
Step II
Step III
Step IV
Step V
Step VI

:
:
:
:
:
:

Identify all the Principal Risk Components


Allocate weight ages to Principal Risk Components
Establish the Key Parameters
Assign weight ages to each of the key parameters.
Input data to arrive at the score on the key parameters.
Arrive at the Credit Risk Grading based on total score obtained.

Credit risk components and key parameters

Figure: Credit Risk Components

Each of the above mentioned key risk areas require be evaluating and aggregating to
arrive at an overall risk grading measure.
Evaluation of Financial Risk: Risk that counterparties will fail to meet obligation
due to financial distress. This typically entails analysis of financials i.e. analysis of
leverage, liquidity, profitability & interest coverage ratios. This capitalizes on the
risk of high leverage, poor liquidity, low profitability & insufficient cash flow.
Evaluation of Business/Industry Risk: Risk that adverse industry situation or
unfavorable business condition will impact borrowers capacity to meet obligation.
The evaluation of this category of risk looks at parameters such as business
outlook, size of business, industry growth, market competition & barriers to
entry/exit. To conclude, this capitalizes on the risk of failure due to low market
share & poor industry growth.
Evaluation of Management Risk: Risk that counterparties may default as a result
of poor managerial ability including experience of the management, its succession
plan and team work.
Evaluation of Security Risk: Risk that the bank might be exposed due to poor
quality or strength of the security in case of default. This may entail strength of
security & collateral, location of collateral and support.
Evaluation of Relationship Risk: These risk areas cover evaluation of limits
utilization, account performance, conditions/covenants compliance by the
borrower and deposit relationship.

Asset / Liability Management:


Bankers make decisions everyday about buying and selling securities, about whether
to make particular loans, and about how to fund their investment and landing
activities. These decision are based on
(1) Their outlook for interest rate-the direction of change in interest rates in the future.
Two other factors: that they must take into account include.
(2) The composition of their asset and liabilities.
(3) The degree of risk that they are willing to take.

Collectively these decisions affect the banks net interest income and balance sheet
values. The process of making such decision about the composition of asset and
liabilities and risk assessment is knows as asset liability management (ALM).
The decisions are usually made by the asset/liability management committee (ALCO)
that is responsible for the overall financial direction of the banks. The ALCOs goal is
to manage the source and use of funds on the balance sheet and off balance sheet
activities with respect to interest rate risk and liquidity. ALM is generally viewed as
short run in nature, focusing on the day-to-day and week-to-week balance sheet
management necessary to achieve near-term financial goals. The traditional purpose of
ALM has been to control the size of the banks net interest income. This goal is
associated with dollar gap. ALM also considers the affects of the changes on the value
of balance sheet item.
Roles of Asset / Liability Management
Asset Liability Management is not the only responsibility of management, but rather a
team effort between the board and management. That said, it is important to separate
the responsibilities of each. The board has a responsibility to shareholders and
regulators to establish policy and monitor the decisions of management.
Roles of Asset Liability Management (ALM)
1.
2.
3.
4.

To manage liquidity and interest rate risk of the bank.


To understand the market position and competition etc.
To assume overall responsibilities of Money Market activities.
To provide inputs to the Treasurer regarding market views and update the balance
sheet movement.
5. To comply with the regulations of Bangladesh Bank in respect of statutory
obligations as well as thorough understanding of the risk elements involved
within the business.

Chapter-3
Administration of Credit by Prime Bank limited

Credit Administration process:


Limit Creation Process of CAD
Branch

Proposal
Corporate

CRM

Bangladesh Bank Policy


Our Bank Policy

Corporate

HOCRC/MD

EC Board

Corporate

CRM

Board of
Directors

Office Note

For Sanction

Sanction
Check List
Branch

CAD

Approach

Memo Place
Limit Creation

Credit Administration Department


Objectives:
a) To separate documentation and disbursement activity from credit approval
process.
b) To ensure discipline in Credit Management.

Duties and Responsibilities:


Documentation: To ensure that security documents are prepared in accordance
with approval terms and are legally enforceable.
Disbursement: To allow disbursements under loan facilities only after completion
of all documentation formalities. The branches shall send a copy of Certificate of
Documentation (Check list) to Credit Administration Department, Head Office
seeking approval for disbursement. In respect of business credit facilities allowed
by the Head of branch under the business power delegated to him, Certificate of
documentation (check list) along with a copy of sanction advice to be also sent to
the Credit Administration Department for disbursement authority. They shall send
it by fax followed by mail. The Credit Administration Department shall promptly
response for advising about disbursement preferably on the same day. If
disbursement authority is given to the Branch with some exception i.e. incomplete
documentation with the undertaking of the Head of Branch to get it completed
within a given time frame having approval from the competent authority, the
Credit Administration Department shall continuously follow-up with the concerned
Branch to ensure completion of the documentation within the given time frame. In
the cases of Large Loan the representative of Credit Administration Department
may visit the Branch to verify the status of documentation.
Custodial Duty: To ensure safekeeping of all security documents. Presently, the
document files shall be preserved by the branches under joint custody. Credit
Administration, HO shall supervise, control and monitor the custodial matter.

CIB Related Function: To collect CIB report of the borrower as and when asked
by the Corporate Division/branches. They shall submit CIB statement to
Bangladesh Bank and perform all CIB related activities.
Compliance: To prepare and submit all required Bangladesh Bank returns in the
correct format in a timely manner. To ensure that all Bangladesh Bank
circulars/regulations are maintained centrally, and advised to all relevant
departments to ensure compliance.
Enlistment:

To enlist and manage

all third

party

service

providers

(Surveyors/values, lawyers, insurers, CPAs etc.) and review their performance on


an annual basis.
Others: To prepare all monthly statements as required by the Management.

Accountabilities of CAD:
1.

Ensure loan documentation and securities are duly completed and in


place prior to disbursement of loans.

2.

Ensure accurate and timely submissions of returns of both the Central


Bank and the Bank's Head Office.

3.

Act on exception reports and ensure timely receipt of loans


installments.

4.

Ensure the adequate insurance is in place on all pledged assets, all


approval conditions have been met, and any exceptions are appropriately
approved prior to disbursement of loans.

5.

Ensure that department operations, including the preparation of loan


documentation, recording of charges, and reporting of exceptions are done in a
timely and efficient manner.

6.

Ensure compliance with internal policies and procedures and external


regulatory requirements, and that all internal and external audit documentation
are implemented.

Credit Administration Flowchart


Functions of
Credit Administration Department

Disbursement

Custodian

Monitoring

Comp

Returns to BB, CIB Report


Obtaining Security Documentation
Conditions
as per approval
& Covenant Branch Monitoring
Approval from CRM

Safely
Storing Loans/Security
Monitoring
Documents
of Past Due,
(fire proof)
Limit, Expiry
Maintain
& Documents
BB Circulars
Deficie
& en
Completion of Security
Documentation

Ensure all values, lawyers, insurers are approved,


Ensure adherence to approve terms & other requirements before disbursement.
Audit, Internal/BB Inspection Compliance
Periodic review of documentation*

Limit Creation & Complying Disbursement


Ensure Collateral
Check
is List
Insured & Property Valued.

Disbursement

* Periodically means:
Risk Grade

Review Frequency

>6
4-5
1-3

Quarterly
Semi-Annually
Annually

Recovery Department Major Functions:


i)

ii)
iii)
iv)
v)
vi)
vii)
viii)

Recovery of Non performing and under performing loan from risk grade special
mention account to below. With this end in view take all necessary measures
inter-alia meeting with the customers, negotiate for restructuring, rescheduling
settlement by way of extension of time, waiver of partial interest, serving legal
notice, foreclosure and sale of mortgaged / hypothecated / pledged property
filing suit in time, follow up suits, publishing sale notice in the News Paper, best
effort to be made to keep classified loan within the minimum possible level.
To ensure that adequate provision against classified and unclassified loan is
maintained as per Bangladesh Banks guidelines.
All work related to loan classification in line with Bangladesh Banks guidelines.
The recovery Department shall review documentation of non performing and
under performing loans, meet the customers and prepare classified loan review
report within 15 days of transfer and be approved by the Head of Credit.
Classified loan review should be prepared by Recovery Department on quarterly
basis to update the status of the action/recovery plan and modify Banks strategy.
Where required proper legal action be taken in time.
Court cases are regularly followed up and necessary steps are taken for early
resolution.
Recovery Department shall determine the Forced Sale Value (FSV) for accounts
grade 6 and worse.

Organizational Structure of Prime bank Limited


Smooth and transparent credit operation requires segregation of duties so that relevant
activities e.g. credit marketing, approval, documentation, disbursement etc become
independent of each other. It is important that these activities are not pooled within
one or two Departments/divisions in the organization. Rather, it is preferable that all
the above activities rest with separate Departments/Divisions. As such, these require
some independent departmental set-up both at Branch and Head Office level within
the Bank.

1. Organizational Set-up at Head Office:


MD

Corporate Division

Credit Division

General
Credit
Dept.

SME
Dept.

Export
Dept.

Leasing
Dept.

Syndicat
ion
Dept.

CRM
Dept.

Credit
Administra
tion Dept.

Recovery
Dept.

Figure: Organizational Set-up at Head Office

2. Organizational Set-up at Branch:


Head of Branch

Corporate
Banking Unit

Credit
Risk
Management Unit

Credit
Administration Unit

Credit Recovery
Unit

Figure: Organizational Set-up at Branch


At the minimum, one officer shall be placed in the Credit Administration Unit
immediately in each branch who shall work independent of the Branch Management
and under administrative and working control of Credit Administrative Department,
Head Office.

3. Segregation of Duties:
From now onward, credit related activities of the Bank are segregated/separated and to
be done by separate Departments/set of people. These are as follows:
i.
ii.
iii.
iv.

Credit marketing/Relationship (Corporate Banking Division);


Credit Approval/Credit Risk Management (CRM);
Credit Administration (Documentation & Disbursement);
Credit Recovery.

The purpose of the segregation is to improve the knowledge level and expertise in
each department, to impose control over the disbursement of sanctioned loan facilities
to avoid conflict of interest, compromise and to ensure quality of assets through
transparent process.

4. Corporate Banking Division Functions:


a) To solicit customers and maintain effective relationship with them.
b) To collect sufficient credit information and process the same to conduct due
diligence (Credit Analysis).

c) To prepare well-dressed credit proposal and recommend the same to the Credit
Risk Management Department of the Credit Division.

4.1. Duties and Responsibilities:


Broadly the responsibilities of the division are, but not limited to, the following:
a) To set short, medium and long term business goals and forward the same to the
Credit Risk Management (CRM) Department of Credit Division for its ratification.
b) To formulate plans and strategies to achieve specific business goals.
c) To identify target customers, initiate/establish new customer relationships and
renew/strengthen existing ones.
d) To study market and competitive position and customize business plans &
strategies with changing environment on an on-going basis.
e) To carry out credit analysis with due diligence, assess credit requirement of the
customer, structure credit facilities, identify potential credit risks and mitigating
factors thereto.
f) To appraise and recommend proposals for participation in loan syndications
arranged by other banks.
g) To prepare well-dressed credit memo, addressing credit worthiness of borrower.
h) To structure loan terms/agreement to reasonably ensure borrowers capacity to
repay loans as well as protection of interest of the bank and thereby interest of
the depositors.
i) To ensure compliance of banks own policies and regulatory requirements;
j) To coordinate with Credit Administration Department for accomplishment of
proper documentation and disbursement.
k) To coordinate with Recovery Department of Credit Division to facilitate effective
monitoring of existing loans.
l) To collect latest credit information and revised risk grade of the borrower and
place the same before the CRM Department for ratification.
m) To minimize credit losses through risk assessment and timely identification of
deteriorating credit risk of the customers.
n) To develop new products and formulate means of mobilizing and allocating short,
medium and long term resources.
o) To ensure customer satisfaction in all respects.
The Head of Branches shall act as Relationship Manager for his Branch for doing the
function of Corporate Banking Division. Officers of Credit Marketing Team of the
Branch shall work as members of corporate banking functions. They shall do
marketing of Banks credit products, explore new business opportunities, negotiate
terms and conditions, process credit proposals, maintain effective relationship with

customers and submit proposals to CRM, Head Office for approval of business credit
facilities beyond their delegated business power.

Chapter- 4
Empirical Analysis /Performance Analysis

Empirical analysis:
-

Financial analysis

Ration analysis

Financial analysis:
The analysis of financial statement is the traditional way that bank evaluate business
loan for the following reasons. The first reasons in determine the financial condition
and credit worthless of potential and existing customers: Making loans results in credit
risk to the bank. Credit risk means that the customers to whom credit has been
extended may default on their payment for the goods and services they received
resulting in a loss to the bank. The second reason for using financial analysis is to
monitor the financial behavior of customer after credit has been extended. This is
necessary to detect activities that could impair their ability to pay their loans and
accounts payable or their ability firm in distress might liquidate inventory at
unprofitable price in order to increase their cash flow in the short run. An increase in
sales at unprofitable price can only result in bankruptcy over time.

Ratio analysis
Profitability ratio
Profitability is the ultimate test of the effectiveness of management profitability can
measure in terms of returns on asset, net asset, equity, and sales. All of the measures
presented here indicate that Prime Bank profitability declined.

Return on asset (ROA):


The return on asset in the most comprehensive measure of profitability, measure the
productivity for shareholders, bondholders, and other creditor, ROA is calculated
dividing net income (NI) by total asset.
ROA=

Net Income
Total asset

Return on Asset
year
Profit after tax
Total assets

2006
1052
60899

2007
1401
79588

2008
1232
110437

2009
2784
124806

2010
3,003
152,797

ROA

2%

2%

1%

2%

2%

ROA
3%
2%

2%

2%
2%
2%
Axis Title

2%

1%

1%

1%
0%
2006

2007

2008

2009

2010

Interpretation
ROA of Prime Bank Ltd. is showing a Random trend which implies that in 2008 ROA
is decrease but all the time in 2006 to 2010 ROA are same. The less income is
generated by a given level of assets in 2008. Companys asset is not efficient in 2008
generating return.

Return on Equity:
Return on equity (ROA) mean the rate of return on the stockholders invest must in the
corporation, which include their paid-in capital as well as retained earnings. ROE is
calculated by dividing net income by total stockholders equity.
ROE=

Net Income
Common stockholders equity

ROE of prime Bank

Return on Equity
year
Profit after tax
Total Shareholder's
equity
ROE

2006
1052

2007
1401

2008
1232

2009
2784

3860
27%

5273
27%

6697
18%

11745
24%

2010
3,003
16,76
9
18%

ROE
30%
25%

27%

27%
24%

20%

ROE

18%

15%

18%

10%
5%
0%

2006

2007

2008

2009

2010

Interpretation
Prime Bank Ltd. Generated 27% profit out of the total equity capital
invested by the shareholders in 2006 & 2007 .ROE decrease in
2008but increase 2009 slightly. This decrease in ROE reveals that
Prime Bank generated less return in 2011 with the money
shareholders have invested.

Earnings per share


Earnings per share (EPS) is the statistic that is often quoted when profitability is
discussed the reason for its popularity is that it is relatively easy to understand and
easy to relate to stock price. Earnings per share are derived by dividing income
available for common stock by the number of shares outstanding.
Earnings per share=

Net income available for common stock


Number of shares outstanding

Earnings per share


year
Earnings per share
(Taka)

2006

2007

2008

2009

2010

60.11

61.57

43.32

78.33

56.9

Earnings per share (Taka)


100

78.33

80
60
EPS

60.11

40

61.57

56.9
Earnings per43.32
share (Taka)

20
0
2005.5 2006 2006.5 2007 2007.5 2008 2008.5 2009 2009.5 2010 2010.5
year

Interpretation
Prime Bank Ltd. EPS are lowest in 2008 and height value in 2009
but in 2010 Earnings per share was decreasing.

Liquidity Ratios
Current ratio:
Current ratio is a board measure of liquidity derived by liabilities. It is considered a
board measure because it includes all current asset and current liabilities.
Current ratio=

Current asset
Current liabilities

Prime Bank Current ratio 2006 to 2010

Current ratio
year
Current ratio

2006
0.88

2007
0.97

2008
0.88

2009
0.96

2010
1.09

1.2

1.09

0.97

0.88

0.88

0.96

0.8
0.6
0.4
0.2
0

2006

2007

2008

2009

2010

Current ratio

Interpretation
We know that the standard current ratio is 2:1 but the actual current ratio of Prime
Bank for the fiscal year 2010 is 1.09:1 which indicates that Prime Bank has 1.09 taka
current assets to meet every taka current liabilities. On the other hand for the fiscal
year 2009 the ratio is .96:1 and for the fiscal year 2008 the ratio was .88:1. We see the
current ratio has decreased from the previous two years, and so has the liquidity
position of the company.

Financial leverage
Debit ratio:
The debit ratio indicates the proportion of a firms total asset that is financial with
borrowed funds. It is calculated by dividing total liabilities by total assets.
Debit ratio=

Total liabilities
Total asset

Debit ratio of prime bank in 2006 to 2010

Debt Ratio
year
Long-term liabilities

2006
16877

2007
15267

2008
31044

2009
38209

Loans and advances

45010

57683

Total assets
Debt Ratio

60899
102%

79588
92%

75156
11043
7
96%

89252
12480
6
102%

2010
47,918
111,16
7
152,79
7
104%

Debt Ratio
110%
105%

102%

102%

100%
Axis Title

Debt Ratio

96%

95%
92%

90%
85%
2005

104%

2006

2007

2008

2009

2010

2011

Axis Title

Interpretation
The Debt-to-asset ratio of Prime Bank Ltd in 2010 was very high compared to other
following four years. This higher debt-asset ratio means higher financial risk and thus
weaker solvency. But Prime Bank Ltd reduced this ratio in the following four years
and thus better financial condition and lower financial risk

Equity Debt ratio


Equity Debt ratio =

Equity
Total Liabilities

Equity Debt ratio


year
Equity Debt ratio

2006
7.00%

2007
7.10%

2008
2009
6.45% 10.39%

2010
12.33%

Equity Debt ratio


Equity Debt ratio
12.33%
10.39%
7.10%

7.00%

2006

2007

6.45%

2008

2009

2010

Interpretation
The equity -to- debt ratio for Prime Bank was just .07 which implies lower financial
risk. But the ratio increased and reached to 0.1233 in 2010 which indicates that Prime
Bank is going to face lower financial risk and thus indicates strong solvency.

Times interest earned


By reducing the amount of debt outstanding, Prime Bank was better able to cover its
outstanding debts, thereby reducing its financial risk. Debt coverage is measured by
times interest earned, which is computed by dividing earnings before interest and
taxes by interest expenseTimes interest earned=

EBIT
Interest Expense

Times Interest earned


year
EBIT
Interest expenses
Times Interest
earned

2006
5199
3698

2007
7170
5267

2008
9096
7126

1.406

1.361

1.276

2009
2010
10831 12,023
8426
7,790
1.285

1.543

Times Interest earned


1.800
1.600
1.400
1.406
1.200

1.361

1.000
0.800
0.600
0.400
0.200
0.000
2006

2007

1.543
1.276

1.285

2008

2009

2010

Times Interest earned

Credit deposit ratio


Credit deposit ratio
year
Credit deposit
ratio

2006

2007

2008

2009

2010

82.25%

81.81%

85.38%

83.45%

89.28%

Credit deposit raito


89.28%

90.00%
88.00%
85.38%

86.00%
84.00%

83.45%
82.25%

82.00%

81.81%

80.00%
78.00%
2005.5 2006 2006.5 2007 2007.5 2008 2008.5 2009 2009.5 2010 2010.5
Credit deposit raito

Interpretation
The Credit deposit ratio for Prime Bank in 2006 was 82.25% but in next four year it
was increase randomly. And finally in 2010 it was 89.28%. We saw that it is
increasing trend. So companies deposits against loan are higher in recent years.

Cost income ratio

Cost income ratio


year
Cost income ratio

2006
34.07%

2007
32.37%

2008
33.42%

2009
35.47%

2010
37.22%

Cost income raito


Cost income raito
37.22%
35.47%
34.07%

33.42%
32.37%

2006

2007

2008

2009

2010

Interpretation
Cost income ratios indicate that total income against total cost. Prime Bank cost
income ratios are increasing in recent year. In 2010 cost income ratio is 37.22%.

Performance at a Glance
Key Financial Data & Key Ratios
Particulars
Interest income
Interest expenses
Net interest income

2006

2007

2008

2009

2010

5199
3698
1500

7170
5267
1903

9096
7126
1970

10831
8426
2405

12,023
7,790
4,234

Non-interest income
Non-interest Expenses
Net Non-interest income
Profit before provision and tax
Provision for loans and assets
Profit after provision before tax
Tax including deferred tax
Profit after tax
Balance Sheet
Authorized Capital
Paid-up Capital
Total Shareholder's equity
Deposits
Long-term liabilities
Loans and advances
Investments
Property, Plant and Equipment
Earning Assets

1732
1101
631
2131
390
1741
689
1052

2913
1559
1354
3257
910
2347
946
1401

3808
1931
1877
3847
1384
2463
1232
1232

4000
1750
3860
54724
16877
45010
7844
412
55458

4000
2275
5273
70512
15267
57683
12698
660
72798

10000
2844
6697
88021
31044
75156
23103
1375
100261

5286

1338

9962

Total assets

60899

79588

110437

Current ratio
Equity Debt ratio
Other Business
Import
Export
Remittance
Guarantee Business
Capital Measures
Total risk weighted assets
Core capital (Tier-I)
Supplementary capital (Tier-II)
Total Capital
Tier-I capital ratio
Tier-II capital ratio
Total capital ratio

0.88
7.00%

0.97
7.10%

0.88
6.45%

52639
41801
15050
5386

70617
51316
15905
7033

91424
68550
22669
10010

96452 147,704
76097 106,943
26447 28,433
13673 29,000

44324
3860
549
4409
8.71%
1.24%
9.95%

55485
5261
1122
6383
9.50%
2.00%
11.50%

72253
6265
1594
7859
8.67%
2.21%
10.88%

82710 183,747
9057 15,793
3112
5,692
12168 21,485
10.95%
8.60
3.76%
3.09
14.71%
11.69

Net current assets

Credit Quality

5790
2907
2883
5289
700
4589
1805
2784

5,447
3,603
1,844
6,078
540
5,538
2,535
3,003

10000 10,000
3555
5,776
11745 16,769
106956 124,519
38209 47,918
89252 111,167
19934 20,484
1573
1,692
109905 132,688
3435

7,349

124806 152,797
0.96
10.39%

1.09
12.33

Nonperforming loans (NPLs)


NPLs to total loans and advances(%)
Provision for unclassified loans
Provision for classified loans
Share Information
Market price per share (Taka)
No. of shares outstanding(Million)
No. of shareholders (actual)
Earnings per share (Taka)
Dividend
Cash
Bonus
Effective dividend ratio
Market capitalization
Net asset value per share (Taka)
Price earnings ratio (times)
Key Financial Ratios
Operating Performance Ratio
Net interest margin on average earning
assets
Net non-interest margin on average
earning assets
Earning base in assets (average)
Cost income raito
Credit deposit raito
Cost of funds on average deposits
Yield on average advance
Return on average assets
Return on average equity
Other information
No of Branches
No of SME
No of employees
No of foreign correspondents
Average earning assets
Average total assets
Average depostis
Average advance
Average equity

367
0.82%
545
309

777
1.35%
895
478

1323
1.76%
1040
734

1149
1.29%
1303
631

1,368
1.23
1,463
642

529
17.50
5262
60.11
30%
0.00%
30%
33.33%
9253
221
8.80

924
22.75
7368
61.57
35%
10.00%
25%
40.00%
21021
232
15.01

540
28.44
9180
43.32
25%
0.00%
25%
27.78%
15349
235
12.46

653
35.55
10339
78.33
40%
10%
30%
44.44%
23212
330
8.34

945
57.76
19,748
56.90
40%
5%
35%
49.52
54,572
290
16.60

3.23%

2.97%

2.28%

2.31%

3.49

1.36%

2.11%

2.17%

2.72%

1.52

90.71%
34.07%
82.25%
8.15%
13.52%
2.05%
31.55%

91.29%
32.37%
81.81%
8.41%
13.96%
1.99%
30.68%

91.07%
33.42%
85.38%
8.55%
13.69%
1.30%
20.58%

89.34%
35.47%
83.45%
8.41%
13.18%
2.37%
30.19%

87.39
37.22
89.28
6.39
11.92
2.16
21.06

50
1172
517
46448
51203
45373
38463
3334

61
1400
553
64128
70244
62618
51347
4566

70
1551
518
86530
95013
79266
66420
5985

84
5
1844
602
105083
117622
97488
82204
9221

94
14
2,139
621
121,296
138,802
115,737
100,210
14,257

Chapter- 5
Summery & Conclusion

Summery and conclusion


Credit is the main source of income of a bank. Credit exposes banks to credit risk
which must be managed prudently. Recent global financial crisis has shown the dire
effect of reckless lending. Following the global financial meltdown regulatory bodies
all over the world have become conscious about implementing stricter credit risk
management policies. During this crisis Bangladeshi banks have enjoyed relative
safety as they were following Bangladesh banks credit risk management guidelines.
Still, many experts demand to close any loopholes that may be present in this policy.
Prime Bank Limited has been following Bangladesh Banks credit risk management
guideline. Being a fast growing bank PBLs loan portfolio is increasing rapidly. With
its superior service and quick decision making ability, PBL has established itself as a
prominent lending institution. In year 2009, PBLs loan portfolio increased by 53.48%
to Tk. 3288.77 crore. Therefore, necessity for credit risk management is higher than
ever for PBL.
PBL has managed to decrease the ratio of non-performing loan to total loan portfolio.
In the year 2009, non-performing loan has decreased by 22.54% to Tk. 71.09 crore.
This is the effect of active credit risk management. It has been possible due to better
credit risk assessment, grading, and constant monitoring.
Recently the bank has been able to develop a coordinated system of Analyzing,
Processing, Sanctioning, Controlling and Monitoring the Credits backed by fully
automated system, which facilitates management of credit risk in an efficient manner.
The quality of assets of the Bank improved gradually as a result of effective
management of credit risks in recent time which would help to recoup the downturn
and to boost up PBLs overall financial conditions.
For efficient Management of Credit Risks the Bank emphasizes on building cordial
rapport and relationship with the customers to ensure that neither the business nor the
business relationship between the Banker and the Customer is hampered in any
manner whatsoever.
Rather it gives an impetus to enhance the same and improves the standard of
Customers service of the Bank. Constant monitoring and supervision of the credit
plays a vital role for keeping the credit portfolios out of risk. Bank exerts constant
efforts on keeping the existing credits up to the mark through regular follow-up and
visiting to the customer that can help the Bank to identify any possibility of default

much earlier. Early treatment by taking preventive/ remedial measures might save the
accounts from being classified.
The banking industry is extremely competitive and constantly changing. Rival banks
are introducing new products and services and taking new measures to manage credit
risk.
Therefore it becomes mandatory for each market player to know what others are
doing. This requires R&D activities and proactive action to meet challenges.
There is no alternative of providing adequate training to the employees. More credit
analysts may be recruited to reduce pressure on existing employees. Workshops may
be arranged for employees working in credit department to keep them up-to-date. This
will also increase their efficiency.
Credit risk management is an ever evolving subject. Banks must be flexible enough to
incorporate any new practice in its credit risk management policy.

Bibliography
1. Commercial Banking (The Management of Risk), 3 rd Edition by GUP &
KOLARI
2. Bangladesh Bank, Managing Core Risk in Banking: Credit Risk Management,
Dhaka, 2005.
3. Prime Bank Limited, Credit Risk Management Policy 2005.
4. Annual Report of Prime Bank Limited 2006 to 2010.
5. http:// www.bangladeshbank.org
6. http://www.primebank.com.bd