Chapter: 1

Introductory Aspects

1.1 Introduction
Banking system in Bangladesh has evolved from the British banking in undivided India. Banking as
such, however, was not unknown to this part of undivided India, and then called East Bengal.
Indigenous banking in Bangladesh is as old as banking in other parts of the world. Money used to be
accepted on deposit and advances used to be given. During Mughal period, indigenous banking
flourished. The Subrana baniks, a bulling tradipg community used to do banking in the then Bengal.
Subsequently, larger banking was gradually taken over by the upcountry bankers who were known as
Sheth, Shah etc. But Subrnabaniks continued to operate in rural Bengal. With the British gradually
coming over to Bengal and setting here, banking in the form of Agency Houses started flourishing in
Calcutta. Entry of the Bengalees into banking started in the early part of this century, especially in
the wake of Swadeshi movement.

1.2 Methodology of the study:

The main source of information for developing these project activities has been collected from
banking day-to-day operations.
The details of the work plan are furnished below:
Data collection method

Relevant data for this report has been collected primarily by direct investigations of different

records, papers, documents etc. operational process and different concerned personnel.
No structured questionnaire has been used.
Information regarding office activities of the bank has been collected through consulting
bank records and discussion with office personnel.

Data sources

Information and data for this report have been collected from both the primary and
secondary sources.

Primary Sources:

From personal observation during direct working experience with officials of Brac Bank
Limited.

Secondary Sources:

Procedure Manual published by Bank.

Annual report of Bank.
Various documents provided by Brac Bank Limited.
Web site of Bank.

Data Processing

Data collected from secondary sources have been processed manually and qualitative
approach has been used throughout the study.

1. Scope
3

Ive tried to acquire knowledge about the overall banking system at Brac Bank Cheragi pahar
branch. Ive worked with all of sections to acquire knowledge about the operations, procedures of
the work followed by the bank.
Analyzing the different deposits, loans and advances, customer services, profitability of the bank is
one of the objectives of the study.
In addition of the principal objective, the following are some of the common but significant
objectives of the study:

1.4 Limitations
This study of a short course of time is not free from harriers. I have faced some obstacles while
conducting the study, these are:
a.
b.
c.
d.
e.
f.
g.
h.
i.

Lack of sufficient knowledge:

Time limits:
Collection of data:
Lack of financial assistance:
Unwillingness in giving full information:
More formalities:
Unwillingness of Customers:
Difference between actual and budgeted figure:
The data requires for sufficient analysis for report writing could not be collected due to
excessive workload.
Officially it is restricted to supply the outsider any necessary documents of the Bank, which

is so confidential. So I used conversation method to collect data and write on it. Certainly it hindered
the process of collecting data. The officials used to remain very busy with their day-to-day tasks and
hence it becomes very difficult to find out the required data according to my requirements.
Despite all of my efforts, here may remain some errors.

Chapter: 2
Theoretical Aspects

2.1 Credit Risk

Credit risk refers to the risk that a borrower will default on any type of debt by failing to make
payments which it is obligated to do. The risk is primarily that of the lender and include
lost principal and interest, disruption to cash flows, and increased collection costs. The loss may be
complete or partial and can arise in a number of circumstances.[ For example:

A consumer may fail to make a payment due on a mortgage loan, credit card, line of credit,
or other loan
A company is unable to repay amounts secured by a fixed or floating charge over the assets
of the company
A business or consumer does not pay a trade invoice when due
A business does not pay an employee's earned wages when due
A business or government bond issuer does not make a payment on a coupon or principal
payment when due
An insolvent insurance company does not pay a policy obligation
An insolvent bank won't return funds to a depositor
A government grants bankruptcy protection to an insolvent consumer or business

To reduce the lender's credit risk, the lender may perform a credit check on the prospective borrower,
may require the borrower to take out appropriate insurance, such as mortgage insurance or
seek security or guarantees of third parties, besid
Mitigating credit risk
Lenders mitigate credit risk using several methods:

Risk-based pricing: Lenders generally charge a higher interest rate to borrowers who are
more likely to default, a practice called risk-based pricing. Lenders consider factors relating to
the loan such as loan purpose, credit rating, and loan-to-value ratio and estimates the effect on
yield (credit spread).
Covenants: Lenders may write stipulations on the borrower, called covenants, into loan
agreements:

Periodically report its financial condition

Refrain from paying dividends, repurchasing shares, borrowing further, or other

specific, voluntary actions that negatively affect the company's financial position
Repay the loan in full, at the lender's request, in certain events such as changes in the

borrower's debt-to-equity ratio or interest coverage ratio

Credit insurance and credit derivatives: Lenders and bond holders may hedge their credit
risk by purchasing credit insurance or credit derivatives. These contracts transfer the risk from
6

the lender to the seller (insurer) in exchange for payment. The most common credit derivative is
the credit default swap.
Tightening: Lenders can reduce credit risk by reducing the amount of credit extended, either
in total or to certain borrowers. For example, a distributor selling its products to a
troubled retailermay attempt to lessen credit risk by reducing payment terms from net 30 to net
15.
Diversification: Lenders to a small number of borrowers (or kinds of borrower) face a high
degree of unsystematic credit risk, called concentration risk. Lenders reduce this risk
bydiversifying the borrower pool.
Deposit insurance: Many governments establish deposit insurance to guarantee bank
deposits of insolvent banks. Such protection discourages consumers from withdrawing money
when a bank is becoming insolvent, to avoid a bank run, and encourages consumers to hold their
savings in the banking system instead of in cash.

Chapter-Three
COMPANY PROFILE

3.1 Brac Bank Ltd.

8

BRAC Bank Limited, with institutional shareholdings by BRAC, International Finance Corporation
(IFC) and Shorecap International, has been the fastest growing Bank in 2004 and 2005. The Bank
operates under a "double bottom line" agenda where profit and social responsibility go hand in hand,
as it strives towards a poverty-free, enlightened Bangladesh.
As an operational Commercial Bank, BRAC Bank focuses on pursue unexplored market niches in
the Small and Medium Enterprise Business, which hitherto has remained largely untapped within the
country. In the last five years of operation, the Bank has disbursed over BDT 1500 crore in loans to
nearly 50,000 small and medium entrepreneurs. The management of the Bank believes that this
sector of the economy can contribute the most to the rapid generation of employment in Bangladesh.
Since inception in July 2001, the Bank's footprint has grown to 22 branches, 327 SME unit offices
and 16 ATM sites across the country, and the customer base has expanded to 200,000 deposit and
45,000 advance accounts through 2006. In the years ahead BRAC Bank expects to introduce many
more services and products as well as add a wider network of SME unit offices, Retail Branches and
ATMs across the country. Over the years, the bank is expanding its service coverage through
introducing new branches at different strategically important areas of the country. It is
sponsored by a number of entrepreneurs representing various business groups with exposure in
Garments, Textile, Steel & Engineering, Financial, Insurance, Electronics, and Cement and
Construction Sectors. The bank has its authorized capital Tk. 2,00 cores. It provides a wide
range of commercial banking services. As a whole, corporate loans account for 40% of the
bank's loan portfolio, while retail loans account for the rest 60% as on 31st December 2004.
The bank has 22 branches, with staff strength of 925 as on 31st December 2004.

3.2. Objective & Goals

BBLs main objective is to maximize profit through customer satisfaction, which very much reflexes
the idea of marketing concept. Its objective is to remain competitive. The Bank will support all
constructive reforms that are in the national interest and encourage more competition and choice for
the people. Besides investment in trade and commerce, the Bank will participate in the socioeconomic development of the priority sectors like agriculture, industry, housing and selfemployment in the country. It also wants to ensure high return on investment, sound growth and
profit and service with different service products.
9

3.3 Mission of BBL

Sustained growth in 'small & Medium Enterprise' sector

Continuous low cost deposit growth with controlled growth in Retained Assets

Corporate Assets to be funded through self-liability mobilization. Growth in Assets through

Syndications and Investment in faster growing sectors

Continuous endeavor to increase fee based income.

Keep our Debt Charges at 2% to maintain a steady profitable growth

Achieve efficient synergies between the bank's Branches, SME Unit Offices and BRAC field
offices for deliver of Remittance and Bank's other products and services

Manage various lines of business in a fully controlled environment with no compromise on

service quality

Keep a diverse, far flung team fully motivated and driven towards materializing the bank's
vision into reality

3.4 Vision of BBL

Building a profitable and socially responsible financial institution focused on Markets and
Business with growth potential, thereby assisting BRAC and stakeholders build a "just, enlightened,
healthy, democratic and poverty free Bangladesh"..

3.5 Nature of the Business

Brac bank is a progressive commercial bank in privet sector-in Bangladesh.

It creates new

opportunities for its clients. It gives customized service and harmonious banker-client relationship.
It contributes towards formation of national capital, growth of saving and investment in trade,
commerce and industrial sectors. It provides different types of commercial banking and services
to the customer of all strata in the society with in the stipulation laid down in the Bank Company Act
1991. Rules and regulations framed by the Bangladesh bank from time to time.

3.6 Products & Services

10

The bank offers a wide range of products and services. Under conventional deposit schemes it
renders savings account, current account, fixed deposit, short-term deposit account, special savings
and fixed deposit scheme etc and it also renders consumer financing, lease financing, small
business loan, house renovation loan, personal loan, foreign remittances etc. The Bank finances in
project loan, working capital loan, trade financing, house building financing, contractors financing,
cash credit, overdraft, trust receipt, guarantee, letter of Credit etc.

In 2004 the bank

introduced some new products such as Festival Business Loan, Festival Personal loan, Housing
Loan Scheme-2004 etc. The BBL has plans to launch credit card (Visa card) and reintroduce
SDS (Special Fixed Deposit Scheme) in 2005.

3.7 Departments of BBL

If the jobs are not organized considering their interrelationship and are not allocated in a particular
department, it would be very difficult to control the system effectively. If the department is not fit
for the particular works, there would be haphazard situation and the performance of a particular
department would not be measured. Brac Bank Limited has does this work very well. Different
departments of BBL are as follows:

Human Resources Department

Marketing

Treasury Division

General Services division

Computer and Information Technology Department

Credit Division

Accounts Division

Trade Finance Division

3.8 Features of BBL

11

Bank is an intermediary institute. Like other commercial bank BBL also has some special
features. They are as follows:

Legal Entity: It is compulsory matter for a bank to achieve legal entity. The stronger legal
entity leads to effective banking program. BBL has a strong legal entity.

Organizational Structure: BBL has a well-set organizational structure. Organizational

structure is a precondition of effective banking activities.

Financial Solvency: Though BBL is a new bank; its ratio of liquidity is well and strong.
So, the clients get greater confidence in the bank.

Location of The Bank: Location is very useful for bank. The Head Office and the branches
of BBL are located in the central point of the capital and the other district towns.

Relation with the Central Bank: As the BBL is the government-registered bank, so it
maintains a friendly behavior with the Bangladesh Bank.

Security: the BBL is totally a secured bank. The clients of the bank get a heavy security on
their deposit.

Management of the Bank: The executives and the officers of BBL are very experienced.
Maximum executives are ex-government bank officers.

Foreign Exchange: BBL operates foreign exchange business promptly. There are 13
branch deals with foreign exchange.

Security: the BBL is totally a secured bank. The clients of the bank get a heavy security on
their deposit.

3.9 Network of Branches

The BBL has 22 branches located at different areas of Bangladesh. Out of these, 13 branches are
located in Dhaka Division, 3 branches in Chittagong division, 6 branches in Sylhet division and
they has the plan of opening 4 branches at different prime locations of the country like Rajshahi,
Jessore, Comilla and Chittagong (Halishahor) during YE 2006.

3.10 Organizational Flow

12

Board Of Directors

Managing Director

Deputy Managing
Director (Operations)

EVP, F&AD

SVP,
Operations
Division

Senior Vice
President

Vice President

Vice
President

Deputy Managing Director

(Credit & risk management)

SVP, Financial
institution
Division

VP

Ass. Vice
President

VP, Personal
Banking Division

SVP, Audit &

Risk
Management

FAVP,
HRD

Senior
Assistant Vice
President

FAVP

Assistant Vice
President

First Assistant
Vice President

Figure: Organization Chart of Brac Bank Limited

3.11 Corporate Profile

13

Address

BRAC
1

Bank
Gulshan

Limited
Avenue

Gulshan
Phone
Fax
E-Mail
Web Site
Chairman
Managing Director
Auditors

,
-1

Dhaka 1212
+880-2-8824051-4
+880-2-8813543
enquiry@bracbank.com
www.bracbank.com
Fazle Hasan Abed
Imran Rahman
Rahman Rahman Huq. Chartered Accounts
9 Mohakhali C/A Dhak-1212.

14

Chapter-Four
CREDIT RISK MANAGEMENT IN BBL

4.1 CREDIT RISK MANAGEMENT IN BBL

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
15

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.
Brac Bank Limited is a third generation bank, which is committed to provide high quality financial
services/products to contribute to GDP through stimulating trade & commerce, accelerating the pace
of industrialization and boosting up export by allowing credit facilities.

The failure of the

commercial bank is mainly occurs due to bad loans, which occurs due to inefficient management of
the loan and advance portfolio. The objective of the credit management is to maximize the
performing asset and the minimization of the non-performing asset as well as ensuring the optimal
point of loan and advance and their efficient management. Credit management is a dynamic field
where a certain standard of long-range 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.
Therefore, while analyzing the credit management of BBL, it is required to analyze its credit
policy, credit procedure and quality of credit portfolio. These three aspects of credit management are
now discussed in the following section.

4.2 Credit Policy of BBL

One of the most important ways, a bank can make sure that its loan meet organizational and
regularity standards and they 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.

4.3 Credit Principles

In the feature credit principles includes the general guidelines of providing credit by relationship
manager. In Brac 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.
16

 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.
The bank shall provide suitable credit services for the markets in which it operates.
It should focus on the development and enhancement of customer relationship.
It should go 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.

4.4 Global Credit Portfolio limit of BBL

The features which deal 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 must not exceed 20% of the total loan portfolio.
Facilities are not allowed for a period of not exceeding 5 (Five) years.

4.5 Types of Credit

Credit may be classified with reference to elements of time, nature of financing and provision base.

4.5.1 Classification on The Basis of Time

Continuous loans

These are the advances having no fixed repayment schedule but have a 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

Demand loan is used as one of the import finances. 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
17

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 "Loan against imported
merchandise (LIM)" and "Later of Trust Receipt".

Term loans

These are the advances made by the bank with a fixed repayment schedule. Terms loans mainly
include "Consumer credit scheme", "Lease finance"," Hire purchase", and "Staff loan". The term
loans are defined as follows:
Short-term loan: Up to 12 months.
Medium term loan: More than 12 months & up to 36 months
Long-term loan: More than 36 months.

4.5.2 Classification on The Basis of Characteristics of Financing

The making of loan and advance is always profitable to the bank. As the bank mobilize savings
from the general people in the form of deposit the most important task of it is to disburse the said
deposit as loan or advance to the mass people for the development of commercial, industrial,
agricultural, who are in need of fund for investment. Like other business firm, the main purpose of
the commercial banking is making profit. The profitability of the banks depends on the efficient
manner and avenues in which the resources are employed. The Brac Bank Limited has made so far
efficient use of the deposit and classified rates are almost zero. The BBL disburse loan in different
form. It varies in purpose wise. Mode wise and sector wise.
The varieties types of credit facilities provided by BBL are briefly described below with the
common terms and condition. The credit facilities of BBL may be broadly classified into five
categories. They are as follows:

Loans

Cash Credit

Overdraft

Bills purchased and discounted

Consumer Credit

18

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 credit 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 normally allowed to those parties who have either fixed source of income or
who desire to pay it in lump sum.
Interest Rate: 14%-16% per annum (Quarterly paid).

Cash Credit

In Cash credit, banker specifies a limit called the cash credit limit, for each customer, up to
which the customer is allow to borrow against the security of tangible assets or guaranteesThe
distinction between the current account and a cash credit account is that the former is intended to be
an account with credit balance and the latter an account for drawing of advances. Operation of cash
credit is same as that of overdraft. 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: 15%-16%.
Overdraft
Overdrafts are those drawings, which are allowed by the banker in excess of the balance in the
current account up to a specified amount for definite period as arranged for. These advances are
secured, immovable, like land & building and hypothecation of trade, if it is for working capital
finance. The overdraft may extend against finished product of any industry as against pledge of the
products. 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

19

necessary for enjoying such facility. Overdraft facility is given to the businessmen for increasing
their business activity.
Eligibility: 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 policies etc.

Bills purchased and discounted

Banks grant advances to their customers by discounting bill of exchange or pro-note.

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 under the scheme. The abbreviated name of the
scheme will be Consumer. In CCS, the work involves giving the clients loans on various schemes,
such as car loan, household items, office equipment and entertainment products. 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
3. Office Equipments
4. Entertainment items
5. Others

Loan Amount (Tk) Lac

6.00
1.00
2.00
1.00
Special Considerations

Tenure
3 years
2 years
2 years
2 years
Special Considerations

4.6 Credit Ratification Authority of BBL

Credit decisions are heart of all credit works. The person who is held responsible for appraising
a loan proposal is called the relationship manager. The customer request for credit limit and the
relationship manager must decide whether to accept or refuse proposal. Making this decision is the
most important credit activity; all other activities of the credit Department are supportive to this
decision. To ensure the proper and orderly conduct of the business of the bank, the Board of
Directors authorized the Managing Director and other top-level executive, that is, DMD and EVP to
sanction the credit. It is mentionable that principal branch operates the credit division under the
supervision of VP. The relationship manager of principal branch furnishes the credit proposal with
the required information and sends it to the final authority, i.e. EVP, DMD & MD, of head office for
final approval.
20

4.7 Credit Evaluation Principles

In order to get the optimum returns from the deployed funds in different kinds of lending, more
emphasis shall be given on refund of loans and advances out of fund generated by the borrower from
their business activities instead of realization of money by disposing of the securities held against the
advance which is very much uncertain and time consuming . Some principles or standards of
lending are maintained loans in order to keep the risk to a minimum level and for successful banking
business. The main principles of lending are:

4.7.1 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.

4.7.2 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,

4.7.3 Profitability
Banking is a business aims at earning a good profit. The difference between the interest received
on advances and the interest paid on deposit constitute 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 assured.

4.7.4 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.

21

4.7.5 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.

4.7.6 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.

4.8 Loan Administration

The functions of Loan Administration start after the sanction of a credit. BBL Loan
Administration covers mainly maintenance of credit files and charge documents. Broadly Loan
Administration of BBL engulfs the work of documentation and monitoring. Loan Administration of
BBL follows some principles to deal with documentation, supervision, follow-up and monitoring.

4.9 Security Against Advances

The different types of securities that may be offered to a banker are as follows:
(a) Immovable property
(b) Movable property

Pratiraksha Sanchaya Patra, Bangladesh Sanchaya Patra, ICB unit certificate, wage earner
development bond.

Pledge of goods

Hypothecation of goods, produce and machinery

Fixed assets of manufacturing unit.

Shipping documents.

4.9.1 Modes of Charging Security

A wide range of securities is offered to banks as cover for loan, in case of borrower inability to
repay, the banker can full upon the securities. In order to make the securities available to banker, in
22

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 Brac Bank.

Lien

A lien is right of banker to hold the debtors property until the debt is discharged bank generally
retain the assets in his own custody but sometimes these goods is 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. Lien can
be made on moveable goods only such as raw materials, finished goods, shares etc.

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.

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.

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 bank of borrower.

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

23

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.

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.
The lien assets generally are held in the banks go-down. Sometimes it is held in the go-down of
debtor with control of the bank. The debtor can take goods from it only with the permission of bank.
For such taking, bank created another charge documents called Trust Receipt. By Trust Receipt,
debtor holds the goods in favor of bank and when any cash flow comes from these goods, it must be
deposited in the bank

4.10 Credit Monitoring and Review

It is the last step in credit policy and procedure framework of BBL. Credit monitoring and
review is very important, because it ensures proper utilities and repayment of bank fund. Credit
monitoring and review feature of BBL is concerned was assessing the quality of different type of
loan. Periodic review and follow up should, inter-aria aims at ensuring:
That conduct (Turnover, regularity of repayment etc) of the borrowing accountis

during

the

period under review has been satisfactory or as expected.

The account is not having excess over limit
The terms and condition of the sanctioned letter are strictly followed.
24

 The value of the collateral security is adequate.

There is not any unfavorable situation in market, economy and political conditions, which may
endanger the reliability of the borrower account.
The analysis of the borrowers business performance and comparison of the projected and actual
to find any deviations.
Apparent profitability from the loans

25

Chapter-Five
CREDIT APPRAISAL PROCESS OF BBL

5.0 CREDIT APPRAISAL PROCESS OF BBL

The function of commercial bank is to accept 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 held responsible for
appraising a loan proposal in Brac Bank Limited is called the relationship manager. The customer
request for credit limit and the relationship manager must decide whether to accept or refuse
proposal. Making this decision is the most important credit activity; all other activities of the credit
Department are supportive to this decision. To ensure the proper and orderly conduct of the business
of the bank, the Board of Directors authorized the Managing Director and other top-level executive,
that is, DMD and EVP to sanction the credit. It is mentionable that principal branch operates the
credit division under the supervision of VP. The relationship manager of principal branch furnishes
26

the credit proposal with the required information and sends it to the final authority, i.e. EVP, DMD &
MD, of head office for final approval.
The most important measure of appraising a loan proposal is safely 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 is accepting is easy to sell and sufficient to cover
the loan amount. 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, and 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,
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.

5.1 Guiding Principle of Credit appraisal of BBL

The main objective of the relationship manager is to establish long-term relationships with
clients with the expectation for on going commercial business. This type of business is expected to
provide stability and growth in earnings in the short run as well as to continue in the long run, and

27

therefore, also, should be diversified to avoid over reliance on any particular client group / industry
segment.
To determine the worth of a client for such a relationship and thereby decide on development of
the relationship, the following conceptual exercises should be undertaken. There are no fixed and set
methods to perform credit-marketing job, 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.

5.2 Steps Involved In Credit Processing

There are several steps involved in credit processing in BBL. The steps are as follows:
5.2.1 Application for loan
Applicant applies for the loan in the prescribed form of bank. The purpose of this forms is to
eliminate the unwanted borrowers at the first sight and select those who have the potential to utilize
the credit and pay it back in due time.
5.2.2 Getting Credit information
Then the bank collects credit information about the borrower from the following sources:
1. Personal Investigation
2. Confidential report from other bank/ Head office/Branch/Chamber of commerce
3. CIB report from central bank
5.2.3 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, i.e. analysis of financial conditions of the loan applicant is 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 one core. If these two analyses reflect favorable condition and documents submitted
appears to be satisfactory then, bank goes for further action.
28

5.2.4 The Cs of Good & Bad Loan

The relationship managers of BBL 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:

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.
a) Interaction/interview: the indicators are
a) Prompt and consistent information supply, information given has not been found false
b) CIB also reveals business character.
c) Willingness to give owns stake/equity & collateral to cover.
d) Tax payer.
b) 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.

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.

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.
29

c) Resilience or shock absorption: Connection, Back up (if first time falls second lines come to
help.)

Collateral

Make sure that there is a second way out of a credit, but do not allow that to drive the credit
decision.

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
managers try to identify the annual cash flow from the submitted statements.

Conditions

Understanding the business and economic conditions can and will change after the loan is made.

Complacency

Do not rely on past history to continue. Stay alert to what can go wrong in any loan.

Carelessness

Remember that documentation, follow-up and consistent monitoring are essential to high quality
loan portfolios.

Communication

Share credit objectives and credit decision making both vertically and laterally within the bank.

Contingencies

Make sure that you understand the risks; particularly the downside possibilities and that you
structure and price the loan consistently with that understanding.

5.3 Lending Risk Analysis (LRA): Modern Technique of Credit Appraisal

The Financial Sector Reform Project (FSRP) has designed the LRA package, which provides a
systematic procedure for analyzing and quantifying the potential credit risk. Bangladesh Bank has
directed all commercial bank to use LRA technique for evaluating credit proposal amounting to Tk.
10 million and above. The objective of LRA is to assess the credit risk in quantifiable manner and
30

then find out ways & means to cover the risk. However, some commercial banks employ LRA
technique as a credit appraisal tool for evaluating credit proposals amounting to Tk. 5 million and
above. Broadly LRA package divides the credit risk into two categories, namely ----- Business risk
and Security risk.
A detail interpretation of these risks and the procedure for evaluating the credit as follows
Business risk
It refers to the risk that the business falls to generate sufficient cash flow to repay the loan.
Business risk is subdivided into two categories.
Industry risk
Risk; that the company falls for external reason. It is subdivide into supplies and sales risk.
Supplies risk
It indicates that the business suffers from external disruption to the supply of imputes.
Components of supplies risk are as raw material, Labor, power, machinery, equipment, factory
premises etc. Supply risk is assessed by a cost breakdown of the imputes and then assessing the risk
of disruption of supplies of each item.
Sales risk
This refers to the risk that the business suffers from external disruption of sales. Sales may be
disrupted by changes to market size, increasing in competition, and change in the regulation or due
to the loss of single large customer. Sales risk is determined by analyzing production or marketing
system, industry situation, Government policy, and competitor profile and companies strategies.
Company risk
This refers to the risk that the company fails for internal reasons. Company risk is subdivided
into company position risk and Management risks.
Company position risk
Within an industry each and every company holds a position. This position is very competitive.
Due to the weakness in the company's position in the industry, a company is the risk for failure.
That means company position risk is the risk of failure due to weakness in the companies position in
the industry. It is subdivided into performance risk and resilience risk.
31

Performance risk
This risk refers to the risk that the companys position is so weak that it will be unable to repay
the loan even under Favor able external condition. Performance risk assessed by SWOT (Strength,
Weakness, Opportunity and Threat) analysis, Trend analysis, Cash flow forecast analysis and credit
report analysis (i.e. CIB repot from Bangladesh Bank).
Resilience risk
Resilience means to recover early injury, this refers to risk that the company falls due to
resilience to unexpected external conditions. The resilience of a company depends on its leverage,
liquidity and strength of connection of its owner or directors. The resilience risk is determined by
analyzing different financial ratio, flexibility of production process, shareholders willingness to
support the company if need arise
Management risk
The management risk refers to the risk that the company fails due to management not exploiting
effectively the companies position. Management risk is subdivided into management competence
risk and integrity risk.
Management competence risk
This refers to the risk that falls because the management is incompetent. The competence of
management depends upon their ability to manage the company's business efficiently and effectively.
The assessment of management competence depends on management ability and management
teamwork. Management ability is determined by analyzing the ability of owner or board of the
members first and then key personnel for finance and operation.
Security risk
This sort of risk is associated with the realized value of the security, which may not cover the
exposure of loan.

Exposure means principal plus outstanding interest.

The security risk is

subdivided into two major heads i.e. security control risk and security cover risk.

32

Management integrity risk

This refers to the risk that the company fails to repay the loan amount due to lack of management
integrity.

Management integrity is a combination of honesty and dependability. Management

integrity risk is determined by assessing management honesty, which requires evaluating the
reliability of information supplied and then management dependability.
Security control risk
This risk refers to the risk that the bank falls to realize the security because of bank's control over
the security offered by the borrowers i.e. incomplete documents. The risk of failure to realize the
security depends on the difficulty in obtaining favorable judgement and taking possession of
security. For analyzing the security control risk the credit office is required to verify documentation
to ensure security protection, documentation completeness, documentation integrity and proper
insurance policy.
Security cover risk
This refers to the risk that the realized value of security is less than exposure. Security cover risk
depends on speed of realization and liquidation value. For analyzing security cover risk, the official
requires the assessing power of the customer to prolong the legal process and to analyze the market
demand for the security.
Before completing the LRA form, the relationship manager collects data specially industry
specific from published sources and company specific data that not usually published by personally
visiting the company. After collecting the necessary data he/ she prepares financial spreadsheet.
This spreadsheet provides a quick method of assessing business trend & efficiency and helps to
assess the borrower ability to pay the loan obligation. Financial spreadsheet includes balance sheet,
income statement, cash flow statement and ratios for the purpose of financial statement analysis.
Through analyzing data and collected information, the concerned official completes the LRA form
and all scores are transferred to the scoring matrix to find the overall risk of lending. The overall
matrix provides four kinds of lending risk for decision-making viz.--(I) Good (ii) Acceptable (iii)
Marginal and (iv) Poor. The bank does not provide any credit request having an over all risk as
marginal" and " Poor" without justification. All credit application rated "Poor" shall require the
33

approval of the Board of Directors regardless of purpose tenor or amount. Therefore-bank can
minimize the dangers regarding the bad loan and advances through using the LRA.

5.4 Credit Appraising & Presentation of Credit Proposal For Final Approval
When relationship manager is satisfied with applicant's credit worthiness, financial capability,
management ability and feasibility of the project through credit appraisal on the basis above guiding
principle, the applicant may hope for credit from the bank. Then relationship manger sent this credit
proposal (Credit Memorandum) to higher authority (EVP, DMD & MD) for final approval.

5.5 Credit Issue Procedure Flowchart

Application received
from customer

Sales / branch scrutinizes

the application

Yes

Application
Meets basic
PPG
criteria ?
Sales officer/Manager recommends
the loan and sends to credit

Application is received at
credit and assessed

Yes

Credit Approved?

Yes

No
Documents
in order?

34

Loan disbursed and

application lodged in

Application sent back

to source

safe custody

5.6 Case Study on Sanctioning of BDT 3.90 Crores To Silk Line Paribahan Under
Large Loan Scheme
Md. Salauddin, proprietor of M/s. Silk Line Paribahan, is the pioneer in introducing Luxury Airconditioned Bus Service in Bangladesh in the year 1994 with 10 Hino buses. M/s. Silk Line
Paribahan is the only company, which is operating bus services from its own terminal located at
Arambag, Dhaka.
Mr. Salauddin is running his world-class air-conditioned coach service with 26 Luxury Airconditioned Buses in Dhaka-Chittagong-CoxsBazar-Dhaka, Dhaka-Benapole-Dhaka & DhakaSylhet-Dhaka routes.

He is also the pioneer in introducing Luxury Air-conditioned Buses in

Bangladesh.
For the first time in Bangladesh, M/s. Silk Line Paribahan is going to introduce WORLD CLASS
SINGLE DECK AIR CONDITIONING BUS [Sweden Origin & Fabricated in Malaysia].
Limit Justification
The term loan facility will enable the client to procure the said 04 nos. buses. The client has
requested to allow him repaying the loan within a period of 49 months (including 1-month grace
period). The grace period of 01 month has been requested by the client for making the buses ready
for operation [fitting, registration, route permit, insurance etc.].
Pricing Per Unit of Single Deck Air Conditioning Bus
[Sweden Origin & Fabricated in Malaysia]

Sl.No. Item
01.
04 Unit Buses @ BDT 1.30 Crore
Total

Pricing
BDT 5.20 Crore
BDT 5.20 Crore
35

DEBT (75%)
BDT 3.90 Crore

EQUITY (25%)
BDT 1.30 Crore

Projected Cash Flow of SLP For The 1st Year

Summery Of Cash Flow Analysis
*Annual Sales Revenue @ 375.00 per seat
BDT 3,60,00,000.00
*Annual Expenses
BDT 1,49,70,000.00
Yearly Installments including amount of interest during grace BDT 1,16,87,220.00
period of 1-month (BDT 10,27,020.00x11)+BDT 3,90,000.00
Excess of Income over Expenditure & Loan Installments (p.a.)
*Figures obtained from the client

BDT 93,42,780.00

Assumptions
Utilization of capacity is 88.89% i.e. 40 out of 45 seats (per trip)
25 operating days per month
300 operating days per year

Details of Daily Sales Revenue Per Bus

Nature (2-Way Per Bus /Day)

Daily Sales Revenue From Each Bus

(In BDT)

Ticket [80 seats (Both Way) @ BDT 375.00]

(Per trip seat utilization={45X88.89%}=40)

BDT 30,000.00

(Fair per seat per trip=BDT 375.00)

Details of Daily Expenses Per Bus
Nature Of Expense [2-Way Per Bus/ Day]
Driver /Helper (1000+300)
Supervisor/Guide
Tyre

Daily Expense For Each Bus in BDT

1,300 .00
500.00
1,000.00
36

Fuel (Diesel 225 liters @ BDT 23.00)

Toll
Insurance [1st Party]
Maintenances
Other Expenses
Total

5,175.00
2,000.00
500.00
1,000.00
1,000.00
12,475.00

Daily Excess of Earning Over Expenses: Single Bus

Daily Sales Revenue
BDT 30,000.00

Daily Expense
BDT 12,475.00

Excess of Earning over Expenses

BDT 17,525.00

Daily Excess of Earning Over Expenses: 04 Buses

Daily Sales Revenue
BDT 1,20,000.00

Daily Expense

Daily

Excess

BDT 49,900.00

Expenses
BDT 71,000.00

of

Earning

over

Monthly Excess of Earning Over Expenses: 04 Buses (25 Days/Month)

Monthly Sales Revenue Monthly Expense

Monthly Excess of Earning over

BDT 30,00,000.00

Expenses
BDT 1,77,500.00

BDT 12,47,500.00

Yearly Excess of Earning Over Expenses: 04 Buses (300 Days/Year)

Yearly Sales Revenue
BDT 3,60,00,000.00

Yearly Expense

Yearly

Excess

of

BDT 1,49,70,000.00

Expenses
BDT 2,10,30,000.00

Earning

over

Net Excess of Earning Over Expenses after Deduction of Installments of BBL

Monthly Installment

Yearly Installment & Yearly

Amount

Amount of Interest Expenses Yearly BBL Installment

during

Excess

of

Earning

over

01-month Amount

grace period
(1st Year)
37

BDT 10,27,020.00

BDT 1,16,87,220.00

BDT 93,42,780.00

Cash flow shows that the 04 Buses [to be procured] will generate BDT 2,10,30,000.00 only (as
excess of income over expenditure) per annum and the client will be able to repay the loan along
with interest through 48 Equated Monthly Installments quite comfortably.
CREDIT AND RISK ANALYSIS
FINANCIAL HIGHLIGHTS : HISTORICAL
AUDITOR

: ISLAM NURUL & COMPANY

M/S. SILK LINE PARIBAHAN

TRADING AND PROFIT & LOSS ACCOUNT
FOR THE YEAR ENDED 30TH JUNE 2005
PARTICULARS
EXPENSES
Salary
Wages
Fuel
Tyre
Bridge Toll
Reg./Rent/Tax
Subscription
VAT
Interest
Misc.
Repair & Maint.
Print & Stationery
Insurance Premium
Office Rent
Medical Exp
CB/Radio Charges
Telephone Bill
Electricity Bill
WASA Bill
GAS Bill
Staff Welfare
Depreciation
NET PROFIT
Total Expenses

AMOUNT IN BDT
25,46,400.00
30,37,500.00
1,71,00,550.00
11,40,300.00
22,75,300.00
1,58,400.00
5,85,000.00
1,14,28,747.00
43,73,648.00
3,41,350.00
5,21,700.00
1,55,260.00
10,45,000.00
16,21,435.00
37,300.00
1,20,000.00
8,64,520.00
4,19,755.00
84,630.00
10,250.00
1,61,300.00
1,54,16,662.00
3,18,92,148.00
9,53,37,155.00

PARTICULARS
INCOME
Sales Revenue

AMOUNT IN BDT

Total Income

9,53,37,155.00

9,53,37,155.00

38

M/S. SILK LINE PARIBAHAN

BALANCE SHEET
AS AT 30TH JUNE 2005

CAPITAL & LIABILITIES

AMOUNT IN BDT

CAPITAL:
Capital
Add: Net Profit for the Year

12,03,18,048.00
3,18,92,148.00
15,22,10,196.00
3,78,000.00

Less: Drawing for the Year

LIABILITIES:
Medium/Long Term Received from Bank/NBFI
Less: Refund
Short-Term

9,81,23,297.00
2,48,61,167.00
TOTAL

PROPERTY & ASSETS

Cash in Hand
Cash at Bank:
Standard Chartered
Janata Bank
South East Bank
Current Assets
Fixed Assets

15,18,32,196.00

7,32,62,130.00
3,88,475.00
22,54,82,801.00
18,75,425.00

2,57,757.00
1,460.00
17,992.00
TOTAL

2,77,209.00
11,93,780.00
22,24,13,596.00
22,54,82,801.00

Risk Factors and their Mitigation

Risk Issues

Mitigates
39

Financial Risk

Since the ticket sell is made on cash basis (daily), the vehicles
have 1st Party Insurance Coverage, and the above stated financial
analysis & highlights indicate financial soundness & business

Management Risk

prudence of the client, no financial risk is expected in future.

M/s. Silk Line Paribahan is supervised and managed mainly by the
Proprietor himself with the help of a team of highly motivated &
well-trained, well experienced personnel.
Specific Market is ensured since a good number of people
traveling to and fro Dhaka & Chittagong prefer Luxurious Air-

Industry/Market Risk

Conditioned Bus Service.

Since M/s. Silk Line Paribahan is the pioneer in providing World
Class Luxurious Air-Conditioned Bus Service, inclusion of
SINGLE DECK AIR CONDITIONING BUSES [Sweden Origin
& Fabricated in Malaysia] in the fleet will definitely help them
maintaining their superiority in the industry.
There is a high demand for Luxurious Air-Conditioned Bus
Services in Bangladesh, especially to the people traveling to and

Business Risk

fro Capital & Port City due to expensive but poor & inconvenient
services of Air Lines & Railways.
So, introduction of World Class Luxurious Air-Conditioned Buses
like SINGLE DECK AIR CONDITIONING BUSES [Sweden
Origin & Fabricated in Malaysia] will open a new era of comfortin-travel & help them maintaining market leadership.

Structure/Facility Risk

The entire Term Loan will be utilized in full at the time of

procurement of the buses from A1 Trade Centre.

In view of the clients financial strength, nature of business, and market reputation and opportunity
to grow further, the account is considered as a good relationship account and recommend for
approval of the said facility.

40

Chapter-Six
LOAN CLASSIFICATIONS AND PROVISIONING
SYSTEM OF BBL

6.1 Introduction
Banks may fall into engulfing crisis or may wind up with consumption of capital if they do not
practice proper loan classification and provisioning system on their advances. The Central bank, as a
controller of financial discipline, usually issues guidelines on classification and provisioning system
41

and supervises the same for making the credit discipline strong and confident. This paper attempts
to discuss the guidelines of loan classification and provisioning system prescribed so far by
Bangladesh Bank with a view to ensuring financial soundness of the banking sector. An expectation
has also been made to see the status of classified loans by years with the changing scenario of
classification guidelines. It is observed that Bangladesh Bank has issued a number of circulars on
loan classification system from 1989. But the question of ensuring robust banking system through
proper application of classification rules on the non-performing loans is yet to be established.

6.2 Loan Classification

Loan classification means giving each and every loan case a status like unclassified, substandard,
and doubtful or bad/loss through verification of borrowers repayment performance on a particular
date (at present, the quarter ended date;) while provisioning means setting aside fund from the profit
against possible loan loss, This is done for safeguarding the depositor's money, protecting owners,
equity and ensuring proper recycling of funds so as to accelerate the economic growth of a country.
Besides, a proper loan classification and provisioning system ensures credibility of the financial
system that in turn restores trust and confidence in the minds of the depositors. Being a developing
country, banking sector in Bangladeshi also took the responsibility of enhancing economic growth
by way of expanding bank branches in the rural Bangladesh and disbursing credit both in the
agricultural and industrial sector in relatively easier term. Further, it also took the burden of state
owned enterprises that was indiscipline and loss making at that time. Again, the banking sector was
assigned the task of developing a new Bangladeshi entrepreneurial class to complement the
government efforts of productive investments through the state run economy.

Major Aims of Loan Classification

The objectives of loan classification and provisioning are as follows:
To regularize follow-up and monitoring activities.
To strengthen the credit discipline and to bring trust and confidence in the financial system.
42

 To improve recovery position and to transfer necessary amount from the income as interest
suspense.
To raise a fund (reserve for provision) gradually, may help the bank to lessen the burden of
loan loss in a single year.
To comply with Bangladesh Bank's instructions.

To consolidate and provide necessary data, which will help the concerned authority of the
bank as well as the government, and Bangladesh Bank in formulating and activating
necessary policies.

According to the qualitative judgment, a bank can classify any loan if it forecasts the uncertainty
of recovery, of the loans due to the following reasons:
Credit extended without the approval of competent authority or without any logical basis
(under pressure).
Incomplete documentation.
Insufficient security or drastic fall in the value of security.
Borrower sustains heavy loss in capital due to natural calamity or business

condition.

Frequent overdrawn of limit.

Rescheduling terms are not maintained.
Borrower cannot be traced out or death of the borrower.
Filing a suit against the borrower for the recovery of credit.
Basis of Loan Classification
In classifying the loan and advance there are four classes in the loan review practiced in Brac
Bank Limited.

They are as follows:

Types of loan

Length of Overdue

Status
of Rate
of
Classification Provision
43

Continuous Loan:

Less than 6 months

(OD /CC, PC, LIM, 6 months or more but less than 9
months
LTR etc.) Overdue
9 months or more but less than 12
period
will
be
months
accounted from the More than 12 months
day following the date

Unclassified
Sub-Standard

1%
20%

Doubtful

50%

Bad/Loss

100%

Unclassified
Sub-Standard

1%
20%

Doubtful

50%

Bad/Loss

100%

of expiry of such loan.

Demand Loan:

Less than 6 months

(Forced
LIM, 6 months or more but less than 9
months
BCL/PAD, IBP etc.)
9 months or more but less than 12
Overdue period will be
months
accounted from the More than 12 months
day following the date
of expiry of such loan.

Term loan payable If default amount of installment is Sub-Standard

within 5 years

20%

equal to installment payable of 6

Overdue period will be

accounted
day

months
the If default amount of installment is Doubtful
equal to installment payable of 12
the

from

following

expiry of the due date

of

payment

installment

of

of
such

loan.

months
If default amount of installment is Bad/Loss

100%

equal to installment payable of 12

months

Term loan payable If default amount of installment is Sub-Standard

more than 5 years

50%

20%

equal to installment payable of 12

months

44

Overdue period will be If default amount of installment is Doubtful

accounted

from

expiry of the due date

of

payment

installment

of

equal to installment payable of 18

months following the

50%

months
If default amount of installment is Bad/Loss

of
such

equal to installment payable of 24

100%

months

loan.

6.3 Qualitative Judgment

Beside the above-mentioned objective criteria, Brac Bank Limited has other few qualitative
judgment for classifying the loan and advance. This judgement totally depends on the Relationship
Manger and or the Head office credit division. Whether any continuous credit, demand loan, fixed
term loan are classified or not on the basis of the above mentioned objective criterion but if there is
any doubt or uncertainty as regarding their recovery then the loan can be classified on the basis of
the Qualitative Judgment. The qualitative factors that are considered in Brac Bank Limited are as
follows:
Borrower sustains a loss of capital.
Significant decrease in the value of the security.
Weakening of banks position as creditor due to any reason whatsoever.
Diversification of the funds to uses other than the facility for which the credit was approved.
Incorrect information supplied by the borrower or bankruptcy of the borrower.
Credit is rescheduled frequently or the rules of rescheduling are violated or a suit is filed for the
recovery of the credit.

6.4 Status of Classified Loans, Sub-standard Loans and Bad/Loss Loans for all Banks
(Taka in billion)
Year

Total

Total

Classified

Substandard Doubtful

Bad/Loss
45

Loans

loans

as

Classified

of Loan as % loan as %

Loans

Total

of TCL

of TCL

Loans
1995
310.29
99.42
32.04
13.08
12.36
1996
351.00
110.54
31.49
13.42
12.27
1997
462.27
173.32
37.49
7.88
11.70
1998
312.95
199.03
39.18
4.66
7.72
1999
342.04
238.79
41.11
5.26
8.27
2000
552.65
164.84
29.83
4.37
6.62
2001
641.64
169.35
26.39
5.60
5.87
Source: Banking Regulation & Policy Department, Bangladesh Bank, 2001

loan as %
of

Total

TCL
74.56
74.31
80.42
87.62
86.47
89.01
88.53

6.5 Loan Provisioning system of BBL, 2001

After getting list of the classified accounts where no loss is anticipated, partial or total loss is
anticipated, audit report by Audit division and Bangladesh bank, previous and current portfolio by
external auditors and branch managers comments on the classified accounts, Head office credit
division prepares a list of credit accounts which are considered to be totally or partially be
unrecoverable.
Brac Bank Limited in the time of loan provisioning to get the real picture of the income mainly
follow the Bangladesh Bank guide line. The rate of provisioning used in BBL is summarized in the
following table.
Length of Overdue

Status

of Rate

Classification
Less than 6 months
Unclassified
Loans overdue for 6 months but less than 9
Substandard
months
Loans overdue for 9 months but less than
Doubtful
12 months
Loans overdue for 12 months or more
Bad/Loss

Provision
1%

of Frequency

of

Classification
Quarterly

20%
50%
100%

Source: Annual Report of BBL, 2005

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Chapter-Seven
FINDINGS, RECOMMENDATION & CONCLUSION

7.0 FINDINGS, RECOMMENDATION & CONCLUSION

The study is on Credit Appraisal, Loan Classification and Provisioning System of Brac Bank Ltd..
On the basis of excellent success and performance, skillful management of its credit portfolio and
keeping the classified loan at a very lower rate, it was considered that credit appraisal system and
credit management of Brac Bank Limited is good one. Therefore- the aim of the study was to
explore the credit appraisal system and credit management of Brac Bank Limited.
The study on credit appraisal system and credit management of Brac Bank limited has given
exposure to few problems. These problems impede the effectiveness of credit appraisal system and
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credit management by hindering the achievement of investment banking objectives and these are the
main findings of this project, which are analyzed in the following part.

7.1 Findings

To provide the loan it need appropriate loan security and its proper valuation. But as the
organization that performs the valuation of those securities is paid by the banks, they are not
independent in providing proper valuation of security. Sometime they do valuation by forcing of
some credit officers and these are happening because of the lobbing from upper management.

Proper loan classification and provisioning system ensures operational soundness and
liquidity of the bank. But enforcement of laws is essential for bringing credibility in the
financial system. If a borrower knows that the existing laws will not be able to touch him within
10 years of his/ her loan defaults, the entrepreneurs will simply loot the capital and dissolve the
business willingly leaving no hope for the bankers. In this case loan classification system will
not bring desired results.

There is no provision of trend analysis in the existing proposal format of BBL. Trend analysis
is an analysis of a firms financial ratios over time used to determine the improvement or
deteriorate in its financial situation. Trend analysis provides information about whether the
firms financial position is more likely to improve or deteriorate in the future. Trend analysis is
done by changing the percentage and comparing the current year with the previous years. BBL,
at present does not do trend analysis.

To appraise the credit proposal, the credit application form requires several financial
information from the clients. But the clients disclose those rarely. Again, most of the business
concern does not maintain proper records of transaction and financial statement. Therefore the
inadequate financial data hinder the credit appraisal system.

According to the standard and Banks credit procedure Credit operation started from the
customer application to the branch for the loan. But in most of the 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 are the owner of the bank
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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.

The loan officers of banks hardly remain in touch with the borrower beyond routine
correspondence after the loan is approved and disbursed. It is very common scenario that the
loan officers are remaining busy with their day to day work, especially in loan disbursing. But it
is also true that after getting the loan clients are loosing their interest in repaying the installment.
In this case it very necessary to keep continuous persuasion with those clients, which is not
present in this organization.

As disbursement of a loan banks required both quantitative and qualitative analysis but for big
loans bank emphasizes on the lending risk analysis. But LRA is not a perfect measure of credit
analysis. Because businessmen in our society are usually tempted to take resort to windowdressing.

7.2 Recommendation
This study suggests that some development-oriented steps can be considered to make the credit
appraisal system and credit management more effective further. These steps will help to keep the
appraisal system and credit management ready to meet any possible challenge and to grab any
further opportunity as well as to remove the problems lying with the existing credit appraisal system
and credit management currently can be as follows:

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As credit is the major source of earning of the bank. The bank should maintain an
adequate process to select the officer for this job. Because the performance of this institution
depends on the quality and the performance of loan officers. If banks fail to select the proper
employee for the proper position, they will fall in a big trouble.

In credit management, it is conventional that credit proposal must be supported by a complete

qualitative and quantitative analysis. More importance should be given on refund of loans out of
funds generated by the borrower from their business activities (Cash flow) instead of realization
of money by disposing of the securities held against the advance, which is very much uncertain
in the present context of Bangladesh.

While investigating a loan proposal the banker should give due emphasis on the character of
the borrowers.

Among the five Cs (character, capacity, capital, conditions and collateral)

character should come before the credit proposal in evaluation by bankers. Character here means
the willingness of the borrowers to repay the loan. Business people having good character will
make their best efforts to repay the loans in time and will work with open mind and
cooperatively with their bankers even if their businesses face serious financial difficulties.

Non-professional handling of credit disbursement has some type of relation with loan default;
therefore Banks should give proper guidelines to the employees in sanctioning a loan.

They

should arrange special training program only for the employees working under loan division to
give knowledge about different loans and how to handle it. If the requirements have been
practiced properly, that will definitely increase the skills of employees in sanctioning the loans.

It is observed that banking sector follows one rigid period in each case for considering a loan
sub-standard, doubtful and bad/loss. This is permissible but in the context of Bangladesh it is not
logical to term a loan bad/loss when it exceeds 12 months. Rather it would be logical to divide
the period of doubtful loans in terms of different stages like doubtful for more than 9 months and
less than 12 months, doubtful for more than 12 months but less than l8 months and doubtful for
more than 18 months. The rate of provision is to be charged according to this slap. After
practicing this technique, when the provisioning shortfall of the banks will be over, banking
sector should finally adopt international standard.

Management lobbing has unique and deeper relation with loan default. Though the impact is
negative but it has significant relationship with loan default. As it is an internal problem of the
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banks, so the individual top level employees should value law and order of the banks. The top
level employees should use their power properly and should not illegally relate with the
borrowers in sanctioning loans.

Sensitivity analysis shows how the value of criteria (say NPV, IRR etc.) changes with the
changes in the value of any variable in the analysis. This analysis is applicable only in project
finance. For example A is a project and the bank is going to finance in that project. We have
seen earlier that the bankers do forecasted cost of good sold, financial ratios etc. but if later
increase in raw material costs or decrease in sales revenue or increase in manufacturing overhead
how sensitive will be the projects profitability and debt service coverage capacity that is
calculated in sensitivity analysis. So BBL should include sensitivity analysis in proposal format
to analyze project finance.

Prevention is better than cure. This should be the watchword for monitoring and supervising
loan accounts of a bank. Making Classifications and pursuing borrowers to regularize the
accounts rarely meet successes. The cost of such exercise is also heavy. Therefore the banks
should evolve appropriate system to detect deficiencies in the management of credit operations
well before it call for classification. In this regard an effective supervision system should be in
place both in the scheduled & the central bank.

7.3 Conclusion
A banker cannot sleep well with bad debts in his portfolio. The failure of commercial banks
occurs mainly due to bad loans, which occurs due to inefficient management of the loans and
advances portfolio. Therefore any banks must be extremely cautious about its lending portfolio and
credit policy. So far BBL has been able to manage its credit portfolio skillfully and kept the

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classified loan at a very lower rate, thanks goes to the standard and stringent credit appraisal policy
and practices of the bank.
But all things around us are changing at an accelerating rate. Today is not like yesterday and
tomorrow will be different from today. Given the fast changing, dynamic global economy and the
increasing pressure of globalization, liberalization, consolidation and disintermediation, it is
essential that BBL robust credit risk management policies and procedures that are sensitive to these
changes. To improve the risk management culture further, BBL should adopt some of the industry
best practices that are not practiced yet.
The effectiveness of the credit appraisal system depends not only the on the well- defined
documents but also on the well-structured administration, proper application and continuous feed
back and monitoring system.

The major tasks for banks are to survive in this competitive

environment is by managing its assets and liabilities in an efficient way. To make the assets
especially loan and advances banks must have to more cautious and otherwise this asset will become
a burden for the bank. To have fruitful deal bank must to do the credit review rightly.

References
Adhikery, B.K. (2003), Loan Classification and Provisioning System of the Banking
Sector, Journal of the Institute of Bankers Bangladesh, 50 (1), 45-58.
Chowdhury, O. (2003), Banks Non Performing Loan- Some Lesson for Bank Lending,
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Journal of the Institute of Bankers Bangladesh, 50 (2), 183-193.

Annual Report of BBL, 2005
www.bracbank.com
Banking Regulation & Policy Department, Bangladesh Bank Act, 2001

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