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INTRODUCTION
1.1 Introduction
1.2 Origin of the report
1.3 Rationale of the study
1.4 Objectives of the report
1.5 Scope of the study
1.6 Methodology of the study
1.7 Limitations of the study
1.1 INTRODUCTION
Financial institutions are very much essential for the overall development of a
country. Especially banks play an important role in the field of promotion of capital,
encouragement of entrepreneurship, generation of employment opportunities etc.
Market economy or free economy is widely used-concept about the present economy
of Bangladesh. The country adopted the concept in the late seventies with the
privatization of significant number of enterprises. The practices of free market
economy started from the eighties with the changing of the world economy. A number
of initiatives were taken from the nineties to increase the competition and efficiency
in money market, relaxation of unwanted rules and regulations, improvement of loan
related law and other situations and improve the financial base of the banks of the
country.
managing credit etc. I would analyze the data on the bank and various programs for
loan recovery, problems in loan in loan recovery, pattern of loan recovery and the
performance of the bank under study in loan recovery, the information in respect to
the classification of unsound credit and provision thereon and also concentrates on the
performance of the bank. And finally I would conclude with the critical evaluation of
the credit management under the guidelines of the Bank Companies Act 1991,
IAS#30 and a discussion on the major findings and recommendations.
1.6 METHODOLOGY OF THE STUDY
The report is descriptive in nature. To fulfill the objectives of this report total
methodology has divided into two major parts:
a) Data Collection Procedure:
Web sites
Chapter Two
LITERATURE REVIEW
2.1 CREDIT MANAGEMENT
2.2 PROCESS OF CREDIT MANAGEMENT
2.2.1. Policy guidelines
2.2.2 Management structure and responsibilities
2.2.3. Program guidelines
2.3 TOOLS OF CREDIT MANAGEMENT
2.3.1 Definition of Credit Risk Grading (CRG)
2.3.2 Functions of Credit Risk Grading
2.3.2 Functions of Credit Risk Grading
2.3.3 Use of Credit Risk Grading
2.3.4 Number and short name of grades used in the CRG
2.3.5 Financial Spread Sheet in Credit Management
The guidelines for credit management may be organized into the following sections:
2.2.1 Policy guidelines:
a.
Lending guidelines
MD/ Board:
Any credit proposal that does not comply with Lending Guidelines,
regardless of amount, should be referred to Head Office for approval.
d. Segregation of Duties:
Banks should aim at segregating the following lending function:
Credit approval/ risk management
Relationship management/ marketing
Credit administration
e. Internal Control and Compliance:
Banks must have a segregated internal audit/ control department charged with
conducting audits of all branches.
Managing Director
HO Business
Development / Corporate
Banking / Marketing
Credit Committee
HO Credit / Risk
Branch Manager
Marketing
Credit Officer
Credit Admin.
Loan Recovery
10
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.
2.3.3 Use of Credit Risk Grading
The Credit Risk Grading matrix allows application of uniform standards to
credits to ensure a common standardized approach to assess the quality of
individual obligor, credit portfolio of a nit, 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
credit facility. These would largely constitute obligor level analysis.
Risk grading also be relevant for surveillance and monitoring, internal MIS and
assessing the aggregate risk portfolio level analysis.
2.3.4 Number and short name of grades used in the CRG
The proposed CRG scale consists of 8 categories with short names and numbers are
provided as follows:
Grading
Superior
Good
Acceptable
Marginal/ Watch list
Special Mention
Sub Standard
Doubtful
Bad and Loss
Short Name
SUP
GD
ACCPT
MG/ WL
SM
SS
DF
BL
Number
1
2
3
4
5
6
7
8
13
At two of the client banks the FSRP consultants could not find 10 bad
loans with 3 consecutive years of financial statements available.
14
Chapter Three
JANATA BANK: A STUDY
15
16
17
funding international trade particularly in boosting export & import of the country.
The Bank finances exports within the frame-work of the export policy of the country.
3.4 CREDIT PROGRAM
General and Industrial Credit:
Janata Bank has formulated its policy to give priority to small and medium business
while financing large scale enterprise through consortium of banks total loan and
advance of the bank stood at BDT 107785.76 million as of December 31, 2005 as
compared to BDT 101,461.88 million in 2004. Increase rate is 6% compared to 2004.
Following the guideline of Bangladesh Bank, credit facilities have been extended to
productive and priority sectors. In extending credit facilities, the Bank has given due
importance to sectoral needs and requirements of both public and private sectors.
Major sectors include Jute, Textile Ind. & trade, Steel & Engineering, Food & Allied,
and Export & Import etc.
Year
2002
2003
2004
2005
Advance
93293.9
99748.7
101461.9
107786
Information related to important products under this program are shown below:
Table: different products under the program
Taka in million
Sl.
No.
1
2
3
4
5
6
7
8
9
10
Name of product
Cyber-caf loan
Credit for forestry/
horticulture nursery
Credit program for
employees
Financing women
entrepreneurship
Financing goat and
sheep farming
Gharoa project
Crop loan program
Doctors loan
Small business Dev.
Loan
Others
total
No of
Outstanding
Amount
36
2005
8.6
.15
754
19.7
.25
46312
1002.00
10
225
44.5
.50
21109
131.8
1.00
2321
335075
55
35.3
5073.8
20.8
.40
52
.35
93
18.0
.35
159335
565315
3374.0
9728.6
35
100
loanees
A vast majority of the Bangladeshis live in the rural areas and their main source of
income is agriculture and agro-business. Janata Bank has opened branches in rural
areas to cater to the banking needs of rural people. Apart from accepting deposits
from the rich and moderately well-off villagers, Janata Bank encourages the poor
people to make small savings through different mechanisms.
So far lending in rural area is concerned; Janata Bank has been financing agricultural
production and poverty alleviation programs since 1977. It also lends to the poor
landless so that they can make a living. The average loan size is about Taka 10,000.00
19
(around US$ 200) and the number of borrowers under rural credit scheme is more
than 500,000.
1.
2.
3.
Fish/Shrimp Production
4.
Horticulture Development
5.
Agro-based Industry
6.
Rural Transport
7.
Weavers Credit
8.
Agri-business Loan
9.
10.
business
development
loan,
Gharoa
project,
credit
for
forestry/Horticulture/Nursery, crop loan project all are designed for this purpose.
Doctors Credit Scheme:
Doctors credit scheme is designed to facilitate financing to fresh medical graduates
and established physicians to acquire medical equipments and set up clinics and
hospitals.
Women Entrepreneurs Development Scheme:
Women Entrepreneurs Development Scheme has been introduced to encourage
women in doing business. Under this scheme, the bank finances the small and cottage
industry projects sponsored by women. Total loan outstanding in 2005 was Tk 39.80
million. The no. of loaned were 216.
As on 31-12-05
26194
1248
53106
88349
168897
As on 31-12-04
22378
1141
48354
79163
151036
Investment:
To earn profit, the Bank Prudently invests its fund to different sectors. The investment
portfolio of the Bank is comprised of Treasury bill, other bonds, Debenture, Shares
etc. The Bank earns a handsome profit from this investment portfolio. Year wise
investment of the Bank is shown in the following table:
21
Year
2002
2003
2004
2005
2004
1 Treasury bill
Tk 18350.0
Tk 16450.0
2. Other bonds
Tk 9993.7
Tk 11057.2
3. Debentures
Tk 636.2
Tk 68.3
4. Shares
Tk 188.1
Tk 185.5
Total =
29168.0
28375.0
Import Business:
For the very beginning the Bank has embarked on extensive foreign exchange
business with a view to facilitating international trade transactions of the country. The
Bank has provided BDT 74919.7 million loan as of December 31, 2005. Import
mainly confined to consumer goods, capital machineries and industrial raw materials.
Export Business:
22
The total export business handled by the bank amounted to BDT 54623.3 million as
of December 31, 2005 as compared to BDT 42865 million in 2004. The bank has
made significant contribution to readymade garments sector which contributed
75.60% of total export of the country in 2004-04. Other items include Shrimps, Tea
and Non-traditional item
Operating Revenue:
The operating revenue of the bank stood to the BDT 2312.9 million as of
December2005 against BDT 2120.9 million in 2004. After necessary provision net
profit stood at BDT 20.9 million as of December 31, 2004.
Year
2002
2003
2004
2005
Sl
1
2
3
4
5
6
7
8
9
10
Name of sector
Jute sector
Textile Ind. & trade
Steel & Engineering
Food & allied
Export credit
Import credit
Industrial credit
Rural, ME & SP
Financing
Housing
others
Grand total
Public
4872.0
775.5
654.5
83.0
16433.7
-
Private
3801.8
4181.0
397.5
1164.2
11256.0
10870.9
14372.4
Total
8673.8
4956.5
1052.0
1247.2
11256.0
27304.6
14372.4
%
7
4
1
1
9
22
12
65.0
9663.6
9728.6
15.0
1577.4
24476.1
7999.2
36284.6
99991.2
8014.2
37862.0
124467.3
6
30
100
Public
6085.3
505.7
Private
2118.1
4414.3
Total
8203.4
4965.0
%
6%
4%
356.7
631.8
988.5
1%
1603.0
1300.0
25850.0
0
70.0
1298.0
12990.3
8377.3
14965.3
10131.8
2901.0
14290.3
34227.3
14965.3
10201.8
2%
10%
24%
11%
7%
1826.7
1826.7
2%
24
10
Others
Grand Total
4930.0
40745.7
40993.2
97746.8
45923.2
138492.5
33%
100%
Rural Credit, Micro Ent. & SP Program Financing (31st December 2006):
Sl
Name of products
No. of Loanees
1
2
334377
2545
Outstanding
Amount 2006
5002.4
119.6
1090
132.6
1.30%
49.03%
1.17%
25
4
5
6
7
8
9
10
11
12
13
14
15
Cyber-Caf Loan
Credit for Forestry/
Horticulture/ Nursery
Credit Program for
Employees
Financing Women
Entrepreneurship
Financing Goat & Sheep
Farming
Gharoa Project
Doctors Loan
Small Business Dev.
Loan
Credit for Disabled
people
Consumers Credit
Agro-based Project/
Industry
Others
Total
32
709
8.5
16.6
0.08%
0.16%
65430
1324.9
12.99%
225
33.3
0.33%
12638
99.9
0.98%
2364
55
93
35.1
24.2
20.8
0.35%
0.24%
0.20%
194
1.6
0.02%
4412
490
102.4
414.0
1.00%
4.06%
145337
569995
2865.9
10201.8
28.09%
100%
Chapter Four
26
CREDIT POLICY
27
It has to be borne in mind that a good loan allowed to a properly selected borrower is
half collected. In order to make a good loan there should have a good loan policy.
customer
dissatisfaction.
5. Market Area: Each bank should establish its proper market area,
based upon, among other things, the size and sophistication of its
organization its capital standpoint, defining ones market area is
probably more important in the lending function than in any other
aspect of banking.
6. Loan Standard: This is a definition of the types of credit to be
expended, wherein the qualitative standards for acceptable loans are set
forth.
7. Credit Granting procedures: This subject may be covered in separate
manual, and usually is in larger banks. At any rate, it should not be
overlooked because proper procedures are essential in loan establishing
policy and standards. Without proper procedure for granting credit and
constant policing the best conceived loan policy will not function and
inevitable, problems will develop.
4.5 LENDING GUIDELINES:
As the bank have a high rate of non-performing loans. Banks risk taking applied
should be contained and our focus should be to maintain a credit portfolio keeping in
mind of banks capital adequacy and recovery strength. Thus banks strategy will be
invigorating loan processing steps including identifying, measuring, containing risks
as well as maintaining a balance portfolio through minimizing loan concentration,
29
30
Chapter Five
FUND INVESTED BY JANATA
BANK
5.1 INTRODUCTION
5.2 ECONOMIC SECTOR WISE DISTRIBUTION OF FUND
5.3 NATURE WISE DISTRIBUTION OF LOANS AND
ADVANCES
5.4 MATURITY GROUPING OF DISTRIBUTION LOANS
AND ADVANCES
5.5 SECURITIES IN CREDIT MANAGEMENT
5.1 INTRODUCTION
The principal function of a bank is to lend. Lending is a dynamic activity. It is through
the medium of lending the banking industry promotes economic activity, instills and
31
encourages, at the individual level, the principal of self-reliance, and yield earnings
for the bank. It is lending alone that brings banking into a more meaningful and
purposeful contract with public and, therefore, has the greatest impact upon them.
Proper utilization of fund is an essential pre-requisite of successful bank management.
The procurements of funds supported by an efficient deployment of that procured
fund lead a bank to the highest point of profitability. I would try to concentrate on
Janata Banks nature, pattern, and allocation of invested resources in this chapter. The
bank under study has divergence in its investment portfolio, loan programs, advances
and recovery rate etc.
Loans
Overdrafts
CC
LIM
LTR
Janata Bank sanctions loans under the above mentioned category. It usually grants
short term advances which are utilized to meet the working capital requirements of
the borrower. Only a small portion of the banks demand and time liability are
advanced on long term basis where the banker usually insists on a regular repayment
32
to be one of the most important factors which determines to a significant extent the
bankers willingness to lend money.
Security is obtained as a line of last defense to fall back upon. It is meant to be
an insurance against emergency. But taking security, bank acquires a claim upon the
assets of the borrower if repayment is not made as planned. But what should be the
significant securities of loans depends in the guidelines prescribed by the Bangladesh
Bank through BCD circular no. 17/1977 and also the negotiation of the respective
branch to its borrowers. The most significant categories of security lodged are as:
Goods and commodities
FDR
Real estate
Stock exchange securities
Life insurance policies
Gold and gold ornaments
Documents of title of goods
Book debts
Supply bills
Janta Bank keeps sufficient security before final sanctioning of loans and advances.
34
Chapter Six
LOAN DISBURSEMENT PROCEDURE OF JANATA
BANK
Janata Bank collects credit information about the applicant to determine the credit
worthiness of the borrower. The bank collects the information about the borrower
from the following sources:
Personal investigation.
Confidential report from other bank Head Office/Branch/chamber of the
commerce.
CIB Report from Central Bank.
6.2 INFORMATION COLLECTION
The loans and advances department gets a form filled by the party seeking a lot of
information. The information is listed below:
Name and address of the borrower (present and permanent).
Constitution or status of the business.
Data of establishment and place of incorporation.
Particulars of properties, partners and Directors.
Background and business experience of the borrowers.
Particulars of personal assets, name of subsidiaries, percentage of share
holding and nature of business.
Details of liabilities in name of borrowers, in the name of any directors.
Financial Statement of the last three years.
Nature and details of business/products.
Details of securities offered.
Proposed debt equity ratio.
Other relevant information.
6.3 ANALYZING THESE INFORMATION
Janata Bank then starts examination whether the loan applied for, is complying with
its lending policy. If comply, then it examines the documents submitted and the credit
worthiness. Credit worthiness analysis, i.e. analysis financial conditions of the loan
applicant is very important. If loan amount is more than 50, 00,000, then bank goes
for Lending Risk Analysis (LRA) and Spreadsheet Analysis (SA) which are recently
36
2. Management Risk:
i. Management Competence Risk- What is the risk of failure due
to lack of management competence?
ii. Management Integrity Risk- What is the risk of failure due to
lack of Management Integrity?
d) Security Risk:
i.
Security Control Risk- What is the risk that the bank fail to realize
the security?
ii.
Security Cover Risk- What is the risk that realized security value is
less than the exposure?
37
38
must not be disbursed amongst a small number of people. In addition any project must
be established for the national interest growth.
39
Chapter Seven
RECOVERY PERFORMANCE OF JANATA BANK
41
Demand for recovery: overdue at the end of the reporting period plus recovery
during the reporting period.
Recovery: highest outstanding balance on any date during the reporting period
minus outstanding balance at the end of the recovery period.
Outstanding: figures in the ledger at the end of the reporting period.
Overdue: Demand for recovery minus recovery.
Table: Recovery performance of Janata Bank
(Tk in crore)
1996
Phase-1
1997 1998 1999
2000
2001
1821
2310
2468
3145
3214
4257
4365
4825
5154
1618
2639
1921
2444
2127
2698
38%
44%
percentage of
62%
DFR
Outstanding
5875
Particulars
Total
disbursement
Demand for
recovery
Recovery
Overdue
Recovery as a
percentage of
2002
Phase-2
2003
2004
2005
3546
3632
5476
5925
6542
5796
5986
6475
6849
7214
7544
2371
2783
2492
3304
2933
3053
2590
3885
3288
3561
3607
3607
3697
3847
47%
46%
43%
49%
40%
48%
50%
49%
56%
53%
54%
57%
51%
60%
52%
50%
51%
5295
5733
7341
8095
9329
9975
10146
10779
12447
DFR
Overdue as a
43
44
responsible
for
non-implementation
and
delayed
All of these reasons discussed above are general reasons for problems loan recovery
of Janata Bank. Besides these, there are some specific reasons for loan recovery
problems faced continuously by Janata Bank. They are as:
Loans are given under fictitious names and enterprise
Loans are given without sufficient securities
Approval of the loans in excess of the branch managers power
Improper monitoring and supervision of credit
Political misuse if loan programs operated by the public sector banks
Lack of timely action against willful defaulter
Loans are sometimes for economically unsound project.
Problems in loan recovery are the outcome of the default on loans disbursements in
the earlier period.
46
Chapter Eight
CLASSIFIED LOANS AND BANKS
PERFORMANCE
8.1 INTRODUCTION
8.2 SIGNS FOR CLASSIFICATION
8.3 LOAN CLASSIFICATION-GUIDELINES FROM
BANGLADESH BANK
8.4 PERFORMANCE OF JANATA BANK
8.5 IMPACT OF PROVISION FOR LOAN ON BANKS PROFIT
47
8.1 INTRODUCTION
Banks are financial service firm, producing and selling professional management of
the publics funds as well as performing many other roles in the economy. But now- adays commercial banks are not performing their activities smoothly for a large burden
of default loan. Every year Janata Bank distributes thousand crore taka among
individuals, organizations etc. but a large sum of these distributed fund cannot be
recovered in due time. The Bank has to classify this loan. In this chapter I would like
to concentrate on classification procedure, provision making for particular
classification, performance of the bank regarding classified loan and recovery of such
classified loan.
8.2 SIGNS FOR CLASSIFICATION
First and foremost requirement for any and all credit managers is to identify a
problem credit in its earlier stages by recognizing the signs of deterioration. Such
signs include but not limited to the following:
1. Non payment of interest or principal or both on due dates or past dues beyond a
reasonable period or recurring past dues.
2. In case of Overdraft no movement in the account beyond a reasonable period.
3. Deterioration in financial condition of the client, as gathered from clients latest
financial statement.
4. A shortfall in collateral coverage, particularly if the collateral was a key factor in
the decision-making.
5. Death or withdraw of key-owners or management personnel.
6. Company filing for bankruptcy or voluntary dissolution.
7. Adverse market report about the company itself or its principal owners.
8.3 LOAN CLASSIFICATION-GUIDELINES FROM BANGLADESH BANK
Classification of overdue loans and advances opened a new era in the credit
management of commercial banks in Bangladesh. Before 1989 no specific guidelines
48
were followed by the commercial banks for this purpose. In 1989, Bangladesh Bank
issued BCD circular No.34/1989 stating specific rules and conditions of loan
classification.
After that each schedule banks except BKB, RAKUB, and BSB would be responsible
for its own loan classification according to the guidelines are presented in the
following table:
TABLE: LOAN CLASSIFICATION SYSTEM*
Length of overdue
Status of
classification
Frequency of
classification
Annual provision
Unclassified
1%
Substandard
10%
Doubtful
50%
Bad/loss
100%
more
For agricultural loan:
Classified,
substandard,
years or more
Loans overdue for 5 years or
doubtful
more
Rate of provision
Bad/ loss
5%
100%
*Source: BCD Circular no. 1989
According to this circular loans and advances were classified on a loan by loan basis
rather sample classification. This process was continued till 1994. Bangladesh Bank
further issued a circular in1995 (BCD circular#20/1994). The title of the circular was
Revised rules of classification and provisioning of loans and advances, which came
into implementation from January 1, 1995.
49
a. types of
1st stage
2nd stage
3rd stage
4th stage
5th stage
Period
Period
Period
Period
Period
overdue
Less than
overdue
Less than
overdue
Less than
overdue
Less than 6
overdue
Less than 3
18 months
18 months
12 months
12 months
19 months
9 months or
months
6 months or
months
3 months or
or more but
or more but
more but
more but
more but
less than 36
less than 24
less than 24
less than 12
less than 6
months
36 months
months
24 months
months
12 months
months
9 months or
months
3 months or
or more but
or more but
or more but
more but
more but
less than 48
less than 36
less than 24
less than 12
less than 6
months
More than
months
36 months
months
36 months
months
24 months
months
12 months
48 months
or more
or more
or more
or more
provision
Unclassified
Substandard
Doubtful
Bad
c. period of
1%
10%
50%
100%
Annual
1%
10%
50%
100%
Half yearly
1%
15%
50%
100%
Half yearly
1%
15%
50%
100%
Quarterly
1%
20%
50%
100%
Quarterly
classification
basis
basis
classification
Unclassified
Substandard
Doubtful
Bad
b. rates of
basis
basis
basis
*Source: BCD circular no. 20 of 27/12/1994
For loan classification Bangladesh Bank also issues circular time to time after
27/12/1994 like BPRD circular no 16,9,2,9 and 17 of 6/12/1998, 14/5/2001,
15/3/2005, 25/8/2005, and 6/12/2005 respectively. Some of these are as follows:
50
loan type
Definition of status
all
current
loans
with
of installment is equal to
installment payable in 6
months
be improved
more than 5 years
If
default
amount
of
installment is equal to
installments payable in 12
months.
Short term agro. credit and overdue is more than 12
Doubtful (DF)
micro credit
months
overdue is more than 6
is uncertain
months
Term loan less than 5 If
years
default
amount
of
installment is equal to
installments payable in 12
months.
If
default
amount
of
installment is equal to
installments payable in 12
to 18 months.
Short term agro. credit and Overdue is more than 36
micro credit
If
default
amount
of
(up to 5 years)
installment is equal to
installment payable in18
months.
If
default
amount
of
installment is equal to
installment payable in 24
months.
Short term agro. credit and overdue is more than 60
micro credit
months
Status of
classification
Unclassified
Sub standard (SS)
Doubtful (DF)
Rate of provision
1%
Frequency of
classification
Quarterly
20%
50%
52
Bad/ loss
12 months or more
100%
Status of
Length of overdue
Less than 3 months
Loans overdue for
3 months but less
classification
Unclassified
Rate of provision
10%-25%
Doubtful (DF)
50%-75%
Bad/ loss
9 months or more
classification
1%-5%
than 6 months
Loans overdue for
Frequency of
100%
Year
Total
Unclassified
Loan
1996
4875
N/A
1997
5295
N/A
1998
5733
3440
(60)
1999
7341
4529
(62)
2000
8095
5145
(64)
2001
9329
6497
(70)
2002
9975
7031
(70)
2003
10146
7881
(78)
2004
10779
8981
(83)
2005
12447
11023
(89)
53
Classified
Loan
N/A
N/A
Bangladesh Bank provides specific guidelines for loan provisioning and bases for
calculating such provisions. Provisions for unclassified as well as classified loan are
as follows:
Table: rates loan provision
Unclassified loan
Small enterprise
financing
Consumer
financing
Except SEF, CF
and SMA
Special account
Provision
Classified
provision
2%
Substandard
20%
2%
Doubtful
50%
1%
Bad or loss
100%
Mention 5%
54
Bank and financial sector may be termed as the vital complementary power of the
economy. But the uncertainty in respect to effectiveness of this sector in the economy
continuously increases over time. Now a days it open secret that JB is under direct
control of the Finance Ministry. Credit management of JB was so meaningless and
corrupted as it is now assumed that more than Tk 30000 crore have become
unrealizable within the last 10 years.
Chapter Nine
GUIDELINES FOR CREDIT MANAGEMENT
9.1 INTRODUCTION
9.2 THE COMPANIES ACT 1991
9.3THE INTERNATIONAL ACCOUNTING STANDARDS (IAS)-30
55
9.1 INTRODUCTION
Commercial banks of Bangladesh are incorporated under Companies Act 1994 and
Bank Companies Act 1991. But none of this act clearly mentions guidelines for
managing credit in commercial banks. Central bank is the controller of money market
in any country. As central bank, Bangladesh Bank controls money market in our
country. Bangladesh bank, time to time, issues some guidelines and regulations for
operation of a banking concern. These guidelines are general in nature. Besides these,
every commercial bank sets credit guidelines for these operations. Whatever be the
guidelines, the aim of it is to reduce the total amount of unsound credit as well as
improve the overall performance of the banks.
9.2 THE COMPANIES ACT 1991
According to the Bank Companies Act 1991, the following rules must be followed by
any commercial bank in our country:
Section
22(1)(a)
Contents
Any bank other than new or specialized
bank will not declare dividend on its
56
27
Discuss
on
some
limitations
and
37
disclose
Janata Bank usually prepares its financial statements as per IAS 30 and forms
prescribed by the bank Companies Act 1991 after 2000. Before 2000 they usually
follow the old format for preparing statements. JB violates the regulations prescribed
in Bank Companies Act 1991.
Generally public banks performance is worse than of private banks. Public banks
specially, Janata Bank shows in its profit and loss account but it is found that if they
make actual provisions on their unsound loan they will incur loss.
Janata Bank is concerned about the unsound credit. They started to maintain credit
risk management division for managing risk of default loan.
Chapter Ten
CREDIT RATING OF JANATA BANK
10.1 INTRODUCTION
10.2 CREDIT RATING
10.3 FACTORS OF CREDIT RATING
59
10.1 INTRODUCTION
Bangladesh Bank has made mandatory from January 2007 for all Banks to have
themselves credit rated by a credit rated agency vide BRPD Circular no. 6 of July
2006 for all banks. The first rating by an external independent rating agency will have
to be completed by June 2007. Accordingly Janata Bank has appointed Credit Rating
Agency of Bangladesh (CRAB) to conduct Credit Rating of the bank which will be
completed invariably by 30th June 2007. With this end and view a memorandum of
understanding has been signed in between Janata Bank and CRAB on 14th May 2007.
Capital Adequacy
ii.
Assets Quality
iii.
iv.
Liquidity Requirements
v.
Earning Quality
vi.
Market Sensitivity
B. Qualitative Factors:
i.
Ownership
ii.
Management Quality
iii.
Risk Management
iv.
v.
Accounting Quality
vi.
vii.
Chapter Ten
FINDINGINGS &ANALYSIS
61
62
usually tempted to take resort of window- dressing that means accounts are so
manipulated that the vital facts are concealed and facts presented are
superficial. So banks have to go through both quantitative and qualitative
analysis.
6. According to the standard and banks credit procedure, credit operation is
started from the customer application to the branch for the loan. But in most
cases, many customers go directly to the directors of the bank and directors
send them to the branch offices with his/her reference. In these cases, proper
appraisal is not possible as directors the most powerful persons and bank
management must give priority towards the decision of the directors. This
phenomenon is very common in the bank which hampers the spontaneous
procedure of credit appraisal.
7. Bangladesh Bank monitors all the policies of all the private and nationalized
banks of the country. According to the Bangladesh Banks strategy, all banks
must possess the standard policies which are designed by the central bank.
Janata Bank also possesses a standard credit proposal form. In that form all
necessary information are required to fill up. But in practice credit officers do
not fill up the proposal form properly. Most of the cases, they use assumption
rather than exact figure. This practice might end up with bad or classified one.
8. A standard policy starts from the customers direct application for the loan in
the branch office. But its a common phenomenon that most of the customers
directly contact with Head office and Head office choose the branch offices to
disburse the loan. It hampers the normal procedure. Branches always stay
under pressure when they get order for disbursement from Head office. When
branches get order from the head office, then appraisal system loses its formal
track. So Head office should not send any order to the branch office without
prior appraisal.
9. Every bank has its own budget and plan regarding loan portfolio. This loan
portfolio must be diversified so that bank could diversify its risk. A proper and
preplanned portfolio can eliminate the risk of huge classified loan or bad loans
as this aspect is very much sensitive toward many external and internal
factors. The bank under study i.e. Janata Bank does not have any proper guide
63
line where to invest; moreover they do not do any future plan to maintain a
well structured portfolio to decrease the possibility of classified loan. This
type of practice is working as an obstacle in smooth credit disbursement as
well as in credit appraisal system.
10. Most of the loans that JB distributes are as cash credit hypothecation and JB
emphasizes less on demand loan.
11. JB distribute loans without sufficient security in some cases. This is violation
of the Bangladesh bank order.
12. In many cases bank face this problem because banks credit officer fails to
value collateral property. Proper valuation means collateral will exactly cover
the risk of bad loan. Officials must do it with due care.
13. The recovery performance of JB is not in a satisfactory level at all and the
position of those in that respect deteriorated heavily during last two phases.
The recovery performance in agriculture is worse than in other sectors. On the
other hand, as private sector banks distribute more loans on short term basis
and relatively better than public sector. But if we compare it from the
efficiency point, then it is clear that they are not still efficient in credit
management as they are unable to recover half of their distributed loan in
different sectors.
14. JB does not keep enough provisions against classified loans and advances.
15. Private sector banks are relatively efficient in processing and executing legal
actions against defaulters for their nonpayment of loans and advances in due
time that of public sector bank.
16. The credit management of JB are not fully conformity with the guidelines
prescribed in the bank companies Act 1991 and International Accounting
Standerd-30(IAS-30)
64
Chapter Eleven
Conclusion
and
recommendation
65
66
2. Lending policies in our country should be geared to grow potentially rather than
being determined by the pre-existing collateral.
3. Changes in lending policies will not suffice the purposes unless it is followed by a
change in the attitude and out look of both the borrowers and the bankers.
4. Improvement of credit management depends on the development of relevant,
adequate, proper and reliable data base at the public sector banks as well as private
sector banks in Bangladesh.
5. For developing a reliable credit management system for the commercial banks
specially Janata Bank, it should require to introduce as improved information system
within bank as well as among the borrowers. Because ultimately it is what a borrower
does with money that should guide the credit plan, the borrowers also have to know
exactly where they are going, what their opportunities and how fast they can move.
6. The security must be valued properly by the independent valuers and constantly
watched so that the value of mortgage property becomes sufficient to recover the
default loan.
7. Publishing the names of defaulter as well as good and regular payers in various
dailies and granting various sorts of facilities to good borrowers will create a moral
persuasion on the borrowers. This may decrease the number of defaulters and the
volume of large outstanding loan amounts as well.
8. Pressure from outsider and influence extorted by borrowers are also a great
impediment in the smooth functioning of loan recovery process. The role of
government in this case is the most important factor required to solve these sorts of
problem.
9. More and more competent personnel must be recruited to reduce the weakness of
credit management. Competent executives will ensure the reduction of wrong
appraisal and evaluation of projects.
10. Prompt legal actions be taken against willful loan defaulters
11. The new entrepreneurs should be encouraged in disturbing loans and those who
have the records of regular payment, should be given preference.
12. Steps should be taken so that guarantors cannot avoid their responsibility.
13. It is observed that the defaulters generally get various sorts of exemptions as
declared by the government from time to time. Government must not show any kind
of mercy to the defaulters in any way which may encourage the default culture. This
type of action may discourse the borrowers to become willful defaulters.
67
14. The existing huge amount of classified loans demand for special and corrective
attention for example:
By obtaining suitable reduction on amount.
Additional security.
More complete financial data concerning the obligors condition or
Other such action as the specific circumstances may require.
15. The attempt to encourage banks to require borrowers comply with banking laws
and regulations and clear up industrial properties prior to granting a loan.
16. JB should follow some straight ward mechanical procedures in assessing the risk
of a borrower.
17. The formulation of a sound credit policy in the possibility of default loans.
18. The formulation of a sound credit policy in the banking sector as a whole has to
take into account all these factors and each bank has to attempt to work out for itself
what it is capable of doing so as best as possible.
Bibliography
1. Annual Report of Janata Bank, 2000-2005
8 Bangladesh Bank BCD &BPRD circulars
2. Chowdury, L.P; A Textbook on Bankers Advances; 2nd Edition; Paradise Printer;
2002
3. Managing Core Risk in Banking: Credit Risk Management, Janata Bank, Head
Office, Dhaka.
68
4. Md. Maksudur Rahman Sarder & Prashanto Kumer Banerjee (December 1996);
Journal of Business Studies; Break Even Point: A Project Appraisal Technique used
in Banking Sector.
5. Md. Maksudur Rahman Sarker, Credit Management of Commercial Banks: A
Comparative study of Public and Private Sector Banks, The Bureau of Business
Research, University of Dhaka, August 1996
6. Rose, Peter. S; commercial Bank Management; Fourth Edition; Irwin-McGrawHill; 1999
7. Zikmund William, G., Business Research Methods; 7th Edition; Thomson SouthWestern; 2003
APPENDIX
Table 01: Rate of Interest for Different Sectors as on 01.10.2006
Sl Name
01 AGRO
CREDIT
Details
All Crops, Sugarcane, Shrimp cultivation, Cattle raising,
poultry, Banana cultivation, Paan cultivation
Equipments for irrigation, Agro- equipment, Salt
production
DDal, Spices, Oil seeds, Maize
02 POVERTY
Multi-purposes based Credit
ALLIVIATI SFDP
ON
Credit for Self employment
Credit for Trained Unemployed Young
Credit for Educated Unemployed Young
Self employment Scheme
NGO Linkage
Gharoa Credit (Agri)/ Gharoa Credit (Non Agri)
Other Personal Micro Credit
03 SPECIALIZ Credit for Storing Crops
ED
Credit for Flower Cultivation & Marketing
CREDIT
BGSDP
Rate
8.0%
10.0%
2.0%
11.0%
11.0%
11.0%
10.0%
10.0%
11.0%
11.0%
10.0%
11.0%
10.0%
10.0%
10.0%
69
PROJECT
04 OTHER
PROJECTS
05 RURAL
PROJECT
06 INDUSTRI
AL
CREDIT
07 SME
PROJECT
08 CURRENT
CAPITAL
LOAN
09 IMPORT
CREDIT
10 OTHER
LTR
Export oriented project/Hypothecation
Intermediate term
Cash Credit
PAD Cash FC
PAD (UF)
PAD (GMT) payable within 3 months
PAD (GMT) payable after 3 months
Other Commercial Credit
10.0%
10.0%
10.0%
10.0%
10.0%
10.0%
14.0%
12.0%
13.50%
13.0%
10.0%
11.0%
10.0%
10.0%
12.5%
11.0%
11.0%
11.0%
12.50%
12.50%
12.0%
12.0%
10.0%
12.0%
12.0%
13.5%
12.0%
7.0%+
1.0%
service
charge
7.0%+
1.0%
service
charge
7.0%+
1.0%
service
charge
14.0%
13.50%
12.50%
13.50%
14.0%
14.0%
14.0%
14.0%
70
COMERCI
AL LOAN
OTHERS
Demand Loan
14.0%
Transportation
Brick Field
Work Order
BADC/BRTC
Loan Against FDR
Loan Against FDR in Other Banks
Loan Against National Investment Bond, ICB Unit,
Insurance policy, Debenture
Loan Against Wage honors Bond
Food industry (for food collection)
Service Industry
Loan Against DPS
Commercial Home loan in Urban areas
Residential Home Loan in Urban areas
Jute Business
Commercial Credit for the project supported by USA
Diagnostic Business
Travel Agency
House reconstruction Loan
Miscellaneous
13.50%
14.0%
14.0%
13.50%
13.0%
14.0%
13.5%
13.0%
13.0%
13.0%
17.0%
15.0%
14.0%
13.0%
13.0%
15.0%
15.0%
14.0%
14.0%
Table 02: economic sector wise distribution of loans and advances during 19962005
Economic
sectors
Jute industries
Jute trade
Tannery
Textile
Transport
Steel &
engineering
Tea
Sugar mills
House building
Rural credit
Bricks
Cold storage
Food
Export credit
Import credit
Industrial credit
Phase-1
1996
1997
1998
Phase-2
1999
2000
2001
2002
2003
2004
2005
718.52
23.69
419.38
349.01
32.27
719.41
19.18
509.03
367.51
29.17
747.87
16.30
423.96
372.76
30.27
778.28
1.32
444.65
369.95
24.54
870.36
12.36
439.60
351.66
24.04
837.10
12.50
361.60
360.10
36.00
855.90
11.50
376.50
495.60
5.20
474.72
212.98
231.01
208.58
265.70
99.80
105.20
15.90
88.46
379.34
556.28
.45.02
5.03
74.28
751.30
634.76
782.62
14.00
80.01
428.82
602.81
41.52
8.45
80.07
856.38
964.98
894.72
14.02
97.17
522.59
667.28
79.64
10.38
160.15
1016.50
1273.06
1099.82
13.99
99.50
584.09
778.50
88.20
9.54
216.20
1019.20
1154.98
1146.35
12.16
113.24
659.82
658.12
90.95
12.32
124.28
1220.78
1507.85
1403.78
12.20
138.20
736.40
831.30
85.90
8.60
116.70
1295.00
1614.40
1381.90
12.50
116.40
801.40
917.20
86.50
15.70
124.70
1125.60
2730.50
1437.20
71
Others
1990.42
2266.15
2566.61
3036.99
Total
7341.00
8095.29
9329.39
9974.87
2379.17
10146.1
2850.90
10778.5
3229.10
12446.70
72
73
74
75