1.

1 Origin of the Report Masters of Business Administration (MBA) Course requires a three months attachment with an organization followed by a report assigned by the supervisor in the organization and endorsed by the faculty advisor. As I am already working for Dhaka Bank Limited (DBL), I took the opportunity to do my internship in my own organization. My organizational supervisor Mr. Syed Abdul Quader, Senior Assistant Vice President and Manager of Islampur Branch asked me to conduct a study on Comparative Analysis between Bangladesh Banks Best practices guidelines and Dhaka Bank Limited existing credit policy. My faculty supervisor Mr. Shama-e-zaheer, lecturer of Institute of Business Administration, University of Dhaka, also approved the topic and authorized me to prepare this report as part of the fulfillment of internship requirement. 1.2 Background of the Report Last year Bangladesh Bank undertook a project to review the global best practices in the banking sector and examines in the possibility of introducing these in the banking industry of Bangladesh. Four 'Focus Groups' were formed with participation from Nationalized Commercial Banks, Private Commercial Banks & Foreign Banks with representatives from the Bangladesh Bank as team coordinators to look into the practices of the best performing banks both at home and abroad. These focus groups identified and selected five core risk areas and produce a document that would be a basic risk management model for each of the five 'core' risk areas of banking. The five core risk areas are as followsa) Credit Risks; b) Asset and Liability/Balance Sheet Risks; c) Foreign Exchange Risks; d) Internal Control and Compliance Risks; and e) Money Laundering Risks. Bangladesh Bank in one of its circular (BRPD Circular no.17) advised the commercial banks of Bangladesh to put in place an effective risk management system by December, 2003 based on the guidelines sent to them. I am working in the Credit Department of Dhaka Bank Limited, Islampur Branch. In this report, I will try to make a comparative analysis between Bangladesh Banks suggested best practices guideline for managing credit risk and Dhaka Bank Limited existing credit policy . 1.3 Objective of the Report The study has been undertaken with the following objectives: 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 DHAKA Bank Limited (DBL). To compare the existing credit policy of Dhaka bank limited with that of best practices guideline given by Bangladesh Bank, the central bank of Bangladesh.

To identify and suggest scopes of improvement in credit management of DBL. To get an overall idea about the performance of DHAKA Bank Ltd. To fulfill the requirement of the internship program under MBA program 1.4 Scope of the Report The study would focus on the following areas of DHAKA Bank Limited. Credit appraisal system of DHAKA Bank Limited. Procedure for different credit facilities. Portfolio (of Loan or advances) management of DHAKA Bank Limited. Organization structures and responsibilities of management. Each of the above areas would be critically analyzed in order to determine the efficiency of DBLs Credit appraisal and Management system. 1.5 Sources of Information Information collected to furnish this report is both from primary and secondary in nature. The secondary information was collected from the different publication, and books. For collecting books and periodicals I have used the following library: IBA Library BIBM Library Bangladesh Bank Library 1.6 Methodology of the Report The following methodology will be followed for the study: Both primary and secondary data sources will be used to generate this report. Primary data sources are scheduled survey, informal discussion with professionals and observation while working in different desks. The secondary data sources are annual reports, manuals, and brochures of Dhaka Bank limited and different publications of Bangladesh Bank. To identify the implementation, supervision, monitoring and repayment practice- interview with the employee and extensive study of the existing file was and practical case observation were done. 1.7 Limitation of the Report This report will only consider credit risks of Dhaka Bank limited. It will not cover Asset and liability/ balance sheet risk. Foreign Exchange Risk Internal control And compliance risk Money laundering Risk. 1.8 Report Organization

This report is divided in five sections. The following section is the organization part i.e. this section will give an overview of Dhaka Bank Limited. In section iii, Credit management policy and practice of DBL is critically analysed followed by Bangladesh Banks Best practice guideline for credit management in section iv. Section v deals with findings and recommendations. 2.15.3 Loan Product The Dhaka bank is offering the following loan and advance product to the client for financing different purpose that fulfill the requirements of the bank and have good return to the investment as well as satisfy the client. The loan and advance products are: Personal Loan Scheme Lease Finance Term Loan Small & Medium Enterprise loan Working Capital Financing Import Financing Export Financing Syndicate Loan Industrial Financing 2.15.4 Personal Banking Products ATM Card Service Credit Card Services Excel Account for Executives 2.16 Financial Performance of DBL The Dhaka Bank Limited is one of the most successful private sector commercial bank in our country, though it started its operation only nine years back. 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. 2.16.1 Profit Dhaka Bank Limited registered a operating profit of Tk. 509.60 million as of 31 December, 2003.Provision for tax for the year amounted to Tk. 240.61 million with a net profit of Tk. 269.01 million compared to 2.16.2 Capital Dhaka Bank Limited commenced its operation with an authorized capital of Tk. 1,000.00 million with paid up capital of Tk. 100.00 million. The paid up capital of the bank amounted to 531.07 million as on December 31, 2003. The total equity (capital & reserve) of the bank as on December Stood at Tk. 1209.97 million. The Capital

Adequacy Ratio is 10.88% as on December 31, 2003which exceed the stipulated requirements for banks in Bangladesh. 2.16.3 Deposits As of December 2003 Total deposits of the bank stood at Tk. 16850.83 million excluding call as against Tk. 14964.01 million excluding call of the previous year. Table 2: Deposit of DBL Tk in million Year 2002 2003 Deposit 14960 16850

2.16.4 Loan and Advances The Bank recorded a 14.94% growth in advances with a total loans and advances portfolio of Tk. 12886.68 million at the end of December 2003 compared to Tk. 11.211.39 million in 2002. Dhaka 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. DBL also participated in a syndicated loan. Table 4: Loans & Advances of DBL Tk in million Year 2002 2003 Loans & Advances 11210 12880

3.1 Overview The word credit comes from the Latin word Credo meaning I believe. It is a lenders trust in a persons/ firms/ or companys ability or potential ability and intention to repay. In other words, credit is the ability to command goods or services of another in return for promise to pay such goods or services at some specified time in the future. For a bank, it is the main source of profit and on the other hand, the wrong use of credit would bring disaster not only for the bank but also for the economy as a whole. 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 management is a dynamic field where a certain standard of longrange planning is needed to allocate the fund in diverse 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. Actually the credit portfolio is not only constitute the banks asset structure but also a vital factor of the banks success. The overall success in credit management depends on the banks credit policy, portfolio of credit,

monitoring, supervision and follow-up of the loan and advance. Therefore, while analyzing the credit management of DBL, it is required to analyze its credit policy, credit procedure and quality of credit portfolio. 3.2 Credit Policy of DBL One of the most important ways, a bank can make sure that its loan meet organizational and regulatory standards and they are profitable is to establish a loan policy. Such a policy gives loan management a specific guideline in making individual loans decisions and in shaping the banks overall loan portfolio. In Dhaka Bank Limited there is perhaps a credit policy but there is no credit written policy. 3.3 Credit Principles In the feature, credit principles includes the general guidelines of providing credit by branch manager or credit officer. In DHAKA Bank Limited they follow the following guideline while giving loan and advance to the client. Credit advancement shall focus on the development and enhancement of customer relationship. All credit extension must comply with the requirements of Banks Memorandum and Article of Association, Banking Companys Act, Bangladesh Banks instructions, other rules and regulation as amended from time to time. Loans and advances shall normally be financed from customers deposit and not out of temporary funds or borrowing from other banks. The bank shall provide suitable credit services for the markets in which it operates. It should be provided to those customers who can make best use of them. The conduct and administration of the loan portfolio should contribute with in defined risk limitation for achievement of profitable growth and superior return on bank capital. Interest rate of various lending categories will depend on the level of risk and types of security offered. 3.4 Global Credit Portfolio limit of DBL The features which deals with how much total deposits would be used as lending the proportion of long term lending, customer exposure, country exposure, proportion of unsecured facility etc. the most notable ones are: The aggregate of all cash facility will not be more than the 80% of the customers deposit Long term loan must not exceed 20% of the total loan portfolio.

Facilities are not allowed for a period of more than 5 (Five) years. Credit facilities to any one customer group shall not normally exceed 15% of the capital fund or TK. 100 crores 3.5 Types of Credit Credit may be classified with reference to elements of time, nature of financing and provision base. 3.5.1 Classification on the basis of time: On the basis of elements of time, bank credit may be classified into three heads, viz. 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: Upto 12 months. Medium term loan: More than 12 months & up to 36 months Long term loan: More than 36 months. 3.5.2 Classification on characteristics of financing: Funded Non-funded

Overdraft Loan Consumer Credit LTR PAD Cash Credit (Pledge & Hypo) Staff Loan Term Loan Packing Credit

* Letter of Credit * Bank Guarantee

The varieties used by DBL are briefly described below with the common terms and condition. Banks generally offer different kinds of credit facilities to the customers. The credit facilities of DBL may be broadly classified into five categories. They are as follows: Loans Cash Credit Overdraft Bills purchased and discounted Consumer Credit/ personal loan They are discussed below accordingly. 3.5.2.1 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 may be demand loan or a term loan. Eligibility: loans are normally allowed to those parties who have either fixed source of income or who desire to pay it in lum sum. Interest Rate: 12%-15% per annum (Quarterly paid). 3.5.2.2 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: 12%-14%. Renew System: it is renewed in periodic basis (yearly). 3.5.2.3 Overdraft Overdraft 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 stock-in-trade, shares, debenture, Government promissory notes, fixed deposit, life insurance policies etc. 3.5.2.4 Bills purchased and discounted Banks grant advances to their customers by discounting bill of exchange or pro-note. 3.5.2.5 Personal Loan (Consumer Credit Scheme) Objectives : The objectives of this loan are to provide essential household durable to the fixed income group (Service Holders) and other eligible borrowers. Car loan, loan for house renovation, vacation loan, marriage loan and loan for household equipment well as entertainment products are governed by personal loan program. The Total amount of loans along with the duration in which these loans taken, need to be repaid is given below: Type of Product 1. Vehicle 2. Household items for Businessman 3.Household items for Service holders 4. Others Loan Amount (Tk) Lac Up to 7.00 1.00 Up to 3.00 Special Considerations Tenure 4 to 5 years 2 years 2 to 3 years Special Considerations

Personal loan is given under personal guarantee of the borrower and another third parson known to the borrower. As this loan is collateral free the rate of interest is little bit high such as 15% to 18%. There is also a processing fee of 1.5% taken at the time of disbursement of the loan. 3.6 Credit Ratification Authority of DBL: Credit decisions are heart of all credit works. Generally branch manager and the credit in-charge of a branch are held responsible for appraising of a loan proposal. The customer request for credit

limit and the credit officer prepares a credit memo and send it to the head office, credit division. After taking all the relevant information from the branch the head office credit division sent the credit memo to the credit committee. Credit committee of DBL is comprised of Managing Director and other top-level executives, that is, DMDs and EVPs. If credit committee is convinced about the merit of the proposal then it is sent the broad of directors. The board is final authority to approve or decline a proposal. The whole process takes a month or more. In DBL broad meeting occurs once in every week. 3.7 Credit Evaluation Principles Some principles or standards of lending are maintained in approving loans in order to keep credit risk to a minimum level as well as for successful banking business. The main principles of lending are given below: 3.7.1 Liquidity: Liquidity means the availability of bank funds on short notice. The liquidity of an advance means it repayment on demand on due date or after a short notice. Therefore, the banks must have to maintain sufficient liquidity to repay its depositors and trade off between the liquidity and profitability is must. 3.7.2 Safety: Safety means the assurance of repayment of distributed loans. Bank is in business to make money but safety should never be sacrificed for profitability, To ensure the safety of loan. The borrower should be chosen carefully. He should be a person of good character & capacity as well as bank must have to maintain eligible number of security from borrower. 3.7.3 Profitability: Banking is a business aiming at earning a good profit. The difference between the interest received on advances and the interest paid on deposit constitutes a major portion of the bank income, Besides, foreign exchange business is also highly remunerative. The bank will not enter into a transaction unless a fair return from it is assured. 3.7.3 Intent: Banks sanction loans for productive purpose. No advances will be made by bank for unproductive purposes though the borrower may be free from all risks. 3.7.4 Security: The security offered for an advance is an insurance to fall bank upon incases of need. Security serves as a safety value for an unexpected emergency. Since risk factors are involved, security coverage has to be taken before a lending.

3.7.5 National interest: Banking industry has significant roll to play in the economic development of a country. The bank would lend if the purpose of the advances can contribute more to the overall economic development of the country. 3.8 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 customers 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 Banks 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 form the borrower (contractor) assigning the work order favoring the DBL 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 DBL. 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. After being satisfied all the above terms and conditions the credit in-charge will disburse the loan amount to the client.

3.9 Documentation of the Loan:

Documentation is obtaining such agreement where all the terms and condition and securities are written and signed by the borrower. It specifies rights and liabilities of both the banker and the borrower. In documentation each type of advances requires a different set of documents. It also differs with the nature of securities. The documents should be stamped according to the stamp Act. There are no hard and fast rules of documentation and it varies from bank to bank. Generally, the documents are taken in the case of a secured advance by DBL: i. Demand promissory note: Here the borrower promises to pay the loan as and when demand by bank to repay the loan. ii. Letter of arrangement. iii. Letter of continuity. iv. Letter of hypothecation of goods and capital machinery. v. Stock report: This report is used for OD and CC. In this report, information about the quality and quantity of goods hypothecated is furnished. vi. Memorandum of deposit of title deed of property duly signed by the owners of the property with resolution of Board of Directors of the company owning the landed. vii. Personal guarantee of the owners of the property. viii. Guarantee of all the directors of the company. ix. Resolution of the board of directors to borrow fund to execute documents and completes other formalities x. Form no. XVII/XIX for filling charges with the register of joint stock companies under relevant section. xi. Letter of Revival xii. Letter of lien for advance against FDR.

3.10 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. Fixed Deposit Receipt iii. Shares quoted in the Dhaka Stock Exchange and Chittagong Stock Exchange. iv. Pledge of goods v. Hypothecation of goods, produce and machinery vi. Fixed assets of manufacturing unit. vii. Shipping documents. 3.10.1 Relation between Advance with the Security Types of advance Loans Overdraft Bills purchased Securities Lien or various kinds of Sanchaya patras, Govt. Securities, FDR, Collateral of immovable property, shares quoted in stock exchange Pledge or hypothecation of machinery, land and building on which machinery are installed, stock in trade, goods products and merchandise. Bills itself

3.10.2 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 Dhaka Bank Limited. 3.10.2.1 Lien A lien is right of banker to hold the debtors 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. 3.10.2.2 Pledge Pledge is also like lien but here bank enjoys more right. Bank can sell the property without the intervention of any court, incase 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.

3.10.2.3 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. 7.10.2.4 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. 3.10.2.5 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 this 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. 3.10.2.6 Advance against Work-Order Advances can be made to a client to perform work order. The following points are to be taken into consideration. The clients management capability, equity strength, nature of scheduled work and feasibility study should be judiciously made to arrive at logical decision. If there is a provision for running bills for the work, appropriate amount to be deducted from each bill to ensure complete adjustment of the liability within the payment period of the final bill besides assigning bills receivable, additional collateral security may be insisted upon. Disbursement should be made only after completion of documentation formalities and fulfillment of arrangements by the client to undertake the contract. The progress of work under contract is reviewed periodically. 3.10.2.7 Advance against Approved Shares: Credit facilities to extend against shares will be called Investment Scheme against Shares. Advance may be allowed against shares of companies listed with the Stock Exchange Ltd. Subject to margin or may other restrictions imposed by Bangladesh Bank/Head Office of the bank from time to time. Value of shares & margin should be worked out as per guidelines issued from time to time by Bangladesh Bank / Head Office of the bank. 3.10.2.8 Advance against Fixed Deposit Receipts:

Advance against Fixed Deposit Receipt will be subject to credit Restrictions imposed from time to time by Head Office / Bangladesh Bank. Scrutinize the Fixed Deposit Receipts with regard to the following points. a) The Fixed Deposit Receipt is not in the name of minor. b) It is discharged by the depositor on revenue stamp of adequate value & his signature is verified. c) Creation of liability on Fixed Deposit issued in joint names by any one of the depositors is regular. d) If the Deposit Receipt is offered as a security for allowing advances, a letter of lien shall be obtained from the depositors, on the appropriate form. e) If the Deposit Receipt has been issued by the branch-allowing advance, lien against that specific Deposit Receipt to be marked in the fixed Deposit Register of the branch. f) The discharged receipt, the letter of lien duly verified by the issuing branch & the letter confirming registration of the lien on the deposit receipts shall be kept along with other documents under safe custody of the bank. Credit Appraisal System The function of commercial banks to collect deposit from the common people and to invest deposited money in different sectors for overall development of the economy of the country. So the banks have to be very much careful in credit appraisal. The person who is primarily held responsible for appraising a loan proposal in Dhaka Bank limited is called the credit officer. The most important measure of appraising a loan proposal is safety of the project. Safety is measured by the borrower and repaying capacity of him. The attitude of the borrower is also an important consideration, liquidity means the inflow of cash into the project in course of its operation. The profit is the blood for any commercial institution. Before approval of any loan project the bank authority has to be sure that the proposed project will be a profitable venture. Profitability is assessed from the projected profit and loss statement. The security is the only tangible remains with the banker. Securing or collateral it is accepting must be easy to sell and sufficient to cover the loan amount. But bank cannot sanction loan by only depending on collateral. The sources of repayment of the project should be a feasible one. During sanctioning any loan bank has to be attentive about diversification of risk. All money must not be disbursed amongst a small number of people. In addition any project must be established for the national interest and growth. Commercial banks and financial institutions intermediate between lenders and borrowers. These financial intermediaries collect deposit and disburse it as loan and advance to the individual people, business, commercial, industrial entity. The loan and advance should be given to them who has the certain and predicted cash flow to repay the credit. If the relationship manager fail to analyze the clients viability of repaying the loan and the projects cash flow possibility of default

may arise due to the fact. So the importance of APPRAISAL, in sanctioning the loan, is the key to identify the borrowers ability, expertise, efficiency, industry analysis, business performance to ensure the recovery of the credit along with the good supervision, monitoring and the relationship. In a word it can be said that the purpose of appraisal is to be sure that the proposed advance will be safe, liquid, and profitable and for acceptable purpose covered by adequate security. At the time of credit proposal the bank has to come to an acceptable compromise between over caution and under caution.
3.18 Guiding Principle of Credit appraisal of DBL for Credit Officer:

To determine the worth of a client, the following conceptual exercises should be undertaken. There are no fixed and set methods to perform credit marketing, and scope for application of individual judgment/ perception always plays over set rules in such work. For example, drop in revenue of a contractor may indicate the clients failure to get work, or it may be due to adaptation of policy to do higher margin quality jobs. 3.18.1 Industry Information:

Gather and evaluate industry information, where the client is, which may be done in the following aspects:

3.18.1.1 Determine the price behavior Of the product/ service of the client.

Records of prices can reveal trend, fluctuations through various lengths of Time in short run/ long run. From the records it should be determined whether The Product/ Service has short term jump in demand and hence in price in the increase / decrease. The effect of such Short Term Increase /Decrease of demand on Sales Volume and Profitability Short Term has to be understood and measured, viz., fluctuation range, fluctuation cycle duration, vis-a-vis clients cost/ revenue, etc. Examples of such products would be Winter clothing, non-essential items like ice cream, fast food, cars, and other luxury items.

If the Product is easily substitutable, then price rise in 3.18.1.2Substituta Dhaka will influence customers to the other, often bility of the market tolerance for short run fluctuation ' for such product. product is very low. Example of this situation may be Paper for Plastic, tea for coffee, etc.

If there are very few sources of procurement, price 3.18.1.3 Diversity fluctuations are often of source of procuremen Wider. Example of this is seen in steel sheet trading. t.

3.18.1.4 Market pact to set price

It often happens to specialized trade centers, to either protect against unhealthy competition, or drive out competition, in which case pricing may be in stress. Existence of monopolist/ oligopolist as client's competitors may Signal prDBLem.

Such industry is susceptible quick change in taste, 3.18.1.5 Item for sharp competition, large investment. Examples could which taste be toy industry, office furniture, fashion design changes very fast. Of clothing, etc.

.18.1.6 The class of the country is important to note, when there is dependenc e on foreign countries for import/ export.

In poorer countries/ or in countries with unstable political environment, Pricing of procurement / sale is more sensitive to political turmoil, natural disasters (flood / storm / earth quake) in the short run for cars, non-essential foods like baby food (branded baby serial), etc. Basic food and clothing demand may not be dented much. Forei country's dependence of Aid /Grant / Investment may influence certain industry such as building materials like cement rod, therefore scrap vessel, etc. Major construction like bridge over river, establishment of large scale production industry of items like fertilizer, car, etc. may influence purchase capacity of consumers, govt. etc. Some points to carefully watch in case of dependency on foreign market may be: (a) Currency fluctuation, (b) Festival Depression/ Boost in market demand, (c) Development of other country competition, (d) Government intervention in stock market, etc.

High dependency on technology, which may change suddenly. technology, which may in Dhaka country may not be as popular in another country), in which case

Examples could be computers/ electronics, unfamiliar brands (popular brand in Dhaka country may not be as popular in another country), in which case large pile up of inventory may result in pricing stress at the least.

3.18.1.7 Possible hazard

Some industries are associated with risk of hazard, such as mining, asbestos plant, industrial boiler, pressurized gas filling, nuclear plant, isotope for medical industry, building construction, etc. Such industry may require lot of safety inspections, certifications, insurance etc., shortage of which may result in serious consequence-, or heavy cost at the least.

3.18.1.8 Long Term Look

Quality of a relationship account may deteriorate due to long run replacement of technology, in computer industry, printing industry, medicine plant, etc. Deep stage of business cycle, world depression, etc. may cause raise in expenditure. Demography, change in population of consumer group may influence business, examples may be education, cars, insurance, baby food, travel, medicare, etc. Client in industry facing sun-set, may eventually become ill quality

3.18.2 Management Capabilities:

There is no set rules to quantify/ confirm management's intentions/ capabilities. Nevertheless, different aspects of the management of the client have to be mentally perceived and recorded on best judgment/ effort basis. Management information can be gathered and evaluated in the following angles:

3.18.2.1 Significanc e of manageme nt profile evaluation.

Survey of relationship gone ill reveals that for many cases, the management was evaluated liberally. Lenders should take management profile of a company very seriously. After all, it is the management who moves the business whether in the right or in the wrong direction. If, as lender, we do not like the Management now, we certainly will not like it when we will ask them to repay.

3.18.2.2 Integrity

This is the prime important criterion. There are no set rules for testing this, however, information/ comments from competitors, creditors, business associations/ clubs, etc. are indicative of the client's integrity.

One man show, 3.18.2.3 Single Autocratic attitude, trouble manageme Lack of delegation, nt Inappropriate positioning of people in different responsibilities, Lack of personnel to act as second line of defense, or succession. Much entrepreneurial attitude, (willing to do several start up projects at a time, constant interest in new projects), etc.

It is important that the owner, the key men have 3.18.2.4 thorough knowledge of the works of the subExperience ordinates. Lack of experience always results in over of owner. dependence on subordinates, and inadequate guidance/ management ability.

External: 3.18.2.5 Information Existence of a well established net work of market information is essential for any business, other wise a System. company loses its touch with the ground Sales team can be a good source of information for market dynamics for retail/ whole sale business. Relationship with competitors/ customers is another source. Use of published information is also very useful.

Internal: Current and on going information system on inventory/ receivable control, financial figures, etc. should be established and correctly interpreted, lack of skill to interpret-data may result in under utilization/ misinformation all together.

3.18.3 Financial Strength:

(C) Accounts /Financial information should be evaluated in the following directions:

It should be marked as change of policy may effect on 3.18.3.1 the profitability/ leverage, etc. Accounting Policy. Often qualifications are not clearly expressed which 3.18.3.2 Auditors may have much impact on the financials. qualificatio n. 3.18.3.3 Other banks limits/ outstandin gs. This should be determined and ensured that client made full disclosure. Existence of other financing facilities is to be netted out from total finance requirements of the client, otherwise over financing, hence over-trading becomes a serious risk.

3.18.3.4 Modus operandi of the business/ deal, vis-vis facilities to be provided.

This has to be matched. Care should be exercised to distinguish between current and term requirements, permanent working capital requirement is often errDhakaously financed by short term Loan, often client's intuition is taken for determining finance requirements, temporary / seasonal raise in requirement is often mistaken for regular requirement, or not at all accommodation. Such mistakes lead to financial mismanagement on the client's part as well as on the part of the financier.

3.18.4 Documentation and Execution of facilities:

3.18.4.1 Credit / Lending is incomplete without proper documentation. 3.18.4.2 Examples of documents to take particularly take care of.

Improper documentation can be really frustrating in times of trouble with the client.

Sanction Letter and Acceptance by client, Correspondence with Credit Administrator/ Lawyer, Security documents -(Lien ,hypothecation, etc.). Undertakings by client, Legal documents (loan agreements, indemnification's, application for facilities, partnership deed, Memo & Article of Associations, registrations with ministry, licenses, specialized authorizations, etc.), Amendments to any documents, Ensure safe custody of the documents, etc. Any terms and conditions should not left as just acceptance of sanction letter, it should be put down in noting through Undertakings, explanation letters, etc.

3.18.4.3 Follow through.

Follow-up of clients facilities movements are integral part of relationship management. Examples of points to follow may be as under: STRL: Swings of total outstanding. Look out for larger than usual debits / credits. Look out for cheque returns. Reason for such should be obtained and documented. Fixed Loans: Relationship officer should maintain his/ her own schedule of dates when payment is due. Look out for any deferrals, reasons should be documented, proper approval should be obtained and filed. . Should determine need /justification and obtain proper approval mfor any change in installment amounts if approached by client.

Bills, L/Cs: Check for unusual items. Short profit making tendency in experimental trade beside regular line of business often put the operational cycle of clients in jeopardy. Larger L/Cs than usual should be looked at carefully, often it may result in stock pileup. Change in frequently in extension and retirement of TR may be indicative. Cancellation of L/Cs may indicate prDBLem in procurement on the exporter's part/ or fund shortage of funds on the client's part. Usage of LBD should be monitored

3.18.5 Review/ Renewal:

3.18.5.1 On going.

Relationship client is to be reviewed as an on going process. Client should be contacted on need as well as on routine basis.

Dhaka a year (or interi 3.18.5.2 Annual Performance of the client must be thoroughly review. reviewed to justify continuation of relationship. Up to date financial statements, fresh credit reports from other banks, statistics of utilization of facilities with own and other banks should be reviewed, facilities requirement should also be reviewed and like wise renewed/ (canceled if necessary)

3.18.6 Socio-economic:

A very important job of the relationship officer is to follow up and maintain information on the client, the business/ industry environment, politico-economic developments within the country of operations as well as globally to look out for early signals of emergence of problems. The following may be some guidance for such follow up:

1. Financial:

Adverse tern in sales and/ or profit, Deviation from planned/ forecasted results, Interim losses, Decline/ appreciation in returns, Lowering of liquidity, Unusual / Lager overdrafts, larger swings, Other cash income (amount and timing), Deviation from usual borrowing circle, Qualified Auditors' comments, Diversion of fund, Delay in submission of financial information. Breaches in terms and conditions of finance, etc.

2. Business

Unplanned divestiture of funds, Over-trading, Cash drain to subsidiaries, Fall in market share, Involvement in litigation by client, Unplanned failure to invest in capital expenditure or R&D, Over reliance on single product, or customer, etc.

3. Management

Key management departure, Key man's long sickness, accidents, High personnel attrition (particularly in management), Too high optimism, excessive life style, usually such attitudes are Displayed in deep crisis., Inefficient staff remain un-removed, etc.

4. Industry

Excess capacity/ supply, Deregulation (causing rise in competition), Change in market norms/ trading patterns, Fast change in technology, Week existence within the industry (in such situation clients tend to cover against weaknesses by making large funds available to the company), Market rumors (though must not be taken as facts, deserve due attention as quite often these are early indications of trouble)

5. External

Observation of stock market up-down, Changing finance market (rise and fall in base rate of central bank, treasury bond issue by govt. or major financing company, etc. within country of operations or abroad) Trade inquiry feed back on client,

Change in lender group, Devaluation of company stocks, Dependency on stronger currency import, Adverse regulatory, political, economic changes.

3.18.7 Overall Portfolio Management:

The term means managing total exposure on different clients, in different industries of product or service, enjoying different types of facilities. The management may take into consideration the following

3.18.7.1 Market shares of different clients within Dhaka industry, sizes of different industries within country of operation.

Relationship personnel should have fair idea of the market sizes in the country of operations at least. He/ she should follow the strategy of the senior management to maintain total exposure on each industry within limit defined by such strategy.

Exposure on individual client should also be planed.

Quality of portfolio should also be determined by classification policy and should try to improve it.

Cross financing clients within the portfolio may result in higher control.

Change in strategy /policy of portfolio should be executed by increase or decrease of exposure in specified fields.

3.19.3 Scrutinizing and Investigation: Bank then starts examination that whether the loan applied for is complying with its lending policy. If comply, than it examines the documents submitted and the credit worthiness. Credit worthiness analysis, ie. analysis of financial conditions of the loan applicant are very important. Then bank goes for Lending Risk Analysis (LRA) and spreadsheet analysis, which are recently introduced by Bangladesh Bank. According to Bangladesh Bank rule, LRA and SA is must for the loan exceeding Dhaka core.

If these two analyses reflect favorable condition and documents submitted for the loan appears to be satisfactory then, bank goes for further action. 3.19.4 Existing process of handling loans: The process of sanctioning loans is as follows: 3.19.5 The Cs of Good & Bad Loan: The Branch manager of DBL try to judge the possible client based on some criteria. These criteria are called the Cs of good and bad loans. These Cs are described below: 3.19.5.1 Character The outcome of analyzing the character is to have overall idea about the integrity, experience, and business sense of the borrower. Two variables; Interaction/interview, and Market Research are used to analyze the character of the borrower. 1. Interaction/interview: the indicators are a) Prompt and consistent information supply, information given has not been found false (Willingness to give information). b) CIB also reveals business character. c) Willingness to give owns stake/equity & collateral to cover. d) Tax payer. 2. Market Research: a) Information on business is verified. b) Dealing with supplier and or customer as supplier is also a kind of lender; the payment character can also be verified. 3.19.5.2 Capital For identifying the capital invested in the business can be disclosed using the following indicators. a) Financial Statements b) Receivable, Payable, statements to practically assess the business positions. Net worth through financial statements or from declaration of Assets & Liabilities. 3.19.5.3 Capacity (Competence) Capability of the borrower in running the business is highly emphasized in the time of selecting a good borrower. As the management of the business is the sole authority to run the business that is use the fund efficiently, effectively and profitably. The indicators help to identify the capacity of the borrower.

a) Entrepreneurship skills i.e. risk taking attitude shown by equity mobilization. b) Management competencies both marketing and products detail, ability to take decision. c) Resilience or shock absorption: Connection, Back up (if first time falls second lines come to help.) 3.19.5.4 Collateral Make sure that there is a second way out of a credit, but do not allow that to drive the credit decision. 3.19.5.5 Cash Follow: Cash flow is the vital factor that is used to identify whether the borrower will have enough cash to repay the loan or advance. Cash keeps the liquidity to ensure repayment. The relationship manager try to identify the annual cash flow from the submitted statements. 3.19.5.6 Conditions: Understanding the business and economic conditions can and will change after the loan is made. 3.19.5.7 Complacency: Do not rely on past history to continue. Stay alert to what can go wrong in any loan. 3.19.5.8 Carelessness: Remember that documentation, follow-up and consistent monitoring are essential to high quality loan portfolios. 3.19.5.9 Communication: Share credit objectives and credit decision making both vertically and laterally within the bank. 3.19.5.10 Contingencies: Make sure that you understand the risks, particularly the downside possibilities and that you structure and price the loan consistently with that understanding. 3.19.5.11 Competition: Do not get swept away by what others are doing. 3.20 Credit Query:

The loans and advance department gets a form filled up by the party seeking a lot of information. The typical credit query form is attached in the appendix iii. 4.1.2 Credit Assessment & Risk Grading 4.1.2.1 Credit Assessment A thorough credit and risk assessment should be conducted prior to the granting of loans, and at least annually thereafter for all facilities. The results of this assessment should be presented in a Credit Application that originates from the relationship manager/account officer (RM), and is approved by Credit Risk Management (CRM). The RM should be the owner of the customer relationship, and must be held responsible to ensure the accuracy of the entire credit application submitted for approval. RMs must be familiar with the banks Lending Guidelines and should conduct due diligence on new borrowers, principals, and guarantors. It is essential that RMs know their customers and conduct due diligence on new borrowers, principals, and guarantors to ensure such parties are in fact who they represent themselves to be. All banks should have established Know Your Customer (KYC) and Money Laundering guidelines which should be adhered to at all times. Credit Applications should summaries the results of the RMs risk assessment and include, as a minimum, the following details: - Amount and type of loan(s) proposed. - Purpose of loans. - Loan Structure (Tenor, Covenants, Repayment Schedule, Interest) - Security Arrangements In addition, the following risk areas should be addressed: - Borrower Analysis. The majority shareholders, management team and group or affiliate companies should be assessed. Any issues regarding lack of management depth, complicated ownership structures or intergroup transactions should be addressed, and risks mitigated. - Industry Analysis. The key risk factors of the borrowers industry should be assessed. Any issues regarding the borrowers position in the industry, overall industry concerns or competitive forces should be addressed and the strengths and weaknesses of the borrower relative to its competition should be identified. - Supplier/Buyer Analysis. Any customer or supplier concentration should be addressed, as these could have a significant impact on the future viability of the borrower. - Historical Financial Analysis. An analysis of a minimum of 3 years historical financial statements of the borrower should be presented. Where reliance is placed on a corporate guarantor, guarantor financial statements should also be analysed. The analysis should address the quality and sustainability of earnings, cash flow and the strength of the borrowers balance sheet. Specifically, cash flow, leverage and profitability must be analyzed. - Projected Financial Performance. Where term facilities (tenor > 1 year) are being proposed, a projection of the borrowers future financial performance should be provided, indicating an

analysis of the sufficiency of cash flow to service debt repayments. Loans should not be granted if projected cash flow is insufficient to repay debts. - Account Conduct. For existing borrowers, the historic performance in meeting repayment obligations (trade payments, cheques, interest and principal payments, etc) should be assessed. - Adherence to Lending Guidelines. Credit Applications should clearly state whether or not the proposed application is in compliance with the banks Lending Guidelines. The Banks Head of Credit or Managing Director/CEO should approve Credit Applications that do not adhere to the banks Lending Guidelines. - Mitigating Factors. Mitigating factors for risks identified in the credit assessment should be identified. Possible risks include, but are not limited to: margin sustainability and/or volatility, high debt load (leverage/gearing), overstocking or debtor issues; rapid growth, acquisition or expansion; new business line/product expansion; management changes or succession issues; customer or supplier concentrations; and lack of transparency or industry issues. - Loan Structure. The amounts and tenors of financing proposed should be justified based on the projected repayment ability and loan purpose. Excessive tenor or amount relative to business needs increases the risk of fund diversion and may adversely impact the borrowers repayment ability. - Security. A current valuation of collateral should be obtained and the quality and priority of security being proposed should be assessed. Loans should not be granted based solely on security. Adequacy and the extent of the insurance coverage should be assessed. - Name Lending. Credit proposals should not be unduly influenced by an over reliance on the sponsoring principals reputation, reported independent means, or their perceived willingness to inject funds into various business enterprises in case of need. These situations should be discouraged and treated with great caution. Rather, credit proposals and the granting of loans should be based on sound fundamentals, supported by a thorough financial and risk analysis. Appendix iv contains a template for credit application