Banks are exposed to five core risks through their operation, which are-credit risk, asset/liability risk, foreign exchange risk, internal control & compliance risk, and money laundering risk. Among these risks management of credit risk gets most attention. Credit risk arises due to the possibility that the borrower may fail to repay the loan. Following the recent global financial crisis, which originated from poor management of credit risk, credit risk is the most discussed topic in banking industry.
Credit risk is one of the most vital risks for any commercial bank. Credit risk arises from non performance by a borrower. It may arise from either an inability or an unwillingness to perform in the pre-commitment contracted manner. The real risk from credit is the deviation of portfolio performance from its expected value. The credit risk of a bank is also effect the book value of a bank. The more credit of a particular is in risk, the more probability of a bank to be insolvent. Therefore, the status of depositor in the bank is at risk and probability of incurring loss from their deposited value.
In my whole report, I was working on the credit risk management practices of Prime Bank Limited. During the preparation of the report, I provide the last five years information of PBL from 2006-2010. In the whole report I also explained detailed credit policy and credit risk management of PBL.
If I make focus on the ratio analyses I found that, PBL was quite good in those selected ratios. The various ratios of PBL indicate that the credit risk in those years was in tolerable limit. In the comparison part, I make compare the credit risk of PBL with the industry average of the present time. In Capital Adequacy Ratio, PBL has shown great consistency and the ratio is more than the Bangladesh Bank requirement of 10%.
Finally, I like to conclude that PBL is one of the most promising and fast growing bank in our country. According to its operational excellence, it is now competing with some renowned foreign commercial banks which are operating in our country. Hopefully it may achieve its target to simplify the banking system in Bangladesh.
IntroductionRisk is inherent in all aspects of a commercial operation. However, for Banks and financial institutions, credit risk is an essential factor that needs to be managed. Credit risk is the possibility that a borrower or counter party will fail to meet its obligations in accordance with agreed terms. Credit risk, therefore, arises from the bank’s dealings with or lending to corporate, individuals, and other banks or financial institutions. Credit risk management needs to be a robust process that enables banks to proactively manage loan portfolios in order to minimize losses and earn an acceptable level of return for shareholders. It is essential for banks having robust credit risk management policies and procedures that are sensitive and responsive to these changes. Bangladesh Bank issued guidelines on the Credit risk management function and it emphasizes on – Policy guidelines, organizational structure and responsibility and procedural guidelines.
Background of the study
Bank is the most important financial institution in the economy. It plays vital role in the economy by providing means of payment and in mobilizing resources. The economic development of a country depends on the development of banking sector to a great extent. The dependence of banking sector in modern economy is increasing day by day because this sector ultimately contributes to run the wheel of development in a more dynamic way. Today’s modern banks are not only provides traditional banking, rather banks are expanding the menu of financial services, banks are making the untouchable service touchable for their customers. The changing and expanding role of banking has made the banking business more complex and competitive. For survival and growth of this business demands creativity, specialization and knowledge and adoption of new technology are used. But technology, creativity, specialization all these cannot support a bank to survive unless the services are marketed in the right track. For this banks need experts who will able to run the business even in against the wind.
Banks provide important capital in the form of loan and advances which are subject to non repayment which is termed as credit risk, the chance that a loan will not be repaid timely. Hence the main concern of the banks is credit risk and its management as credit or loans and advances are the main source of income for them.
Prime Bank Limited is one of the leading banks in this sector which arranges corporate and retail credit. This Bank is very much concerned with the credit risk and its management and has a credit risk management department. The success of the banks is hidden in the proper management of the all the sorts of risk related to the banking business. Hence credit risk and its management has become a vital part of the bank. This report will give us an overall idea about the credit risk and its management as practiced by the Prime Bank Limited
Objective of the Study
There had been some objectives set forward in doing this report so that it can be determined what task I have to perform in the bank. The objective of the report can be divided into two parts-
Methodology of the Study
A) Sources of data:
There are two sources of data have been used and most of the data are collected from the secondary sources. The sources are-
B) Data analysis techniques:
This report is an analytical one. Different statistical tools are used in analysis and presentation of data throughout the report. The overall analysis techniques are-
This overall process of the study is as follows:
Rationale of the Study
Credit risk is one of the most vital risks for any commercial bank. Credit risk arises from non performance by a borrower. It may arise from either an inability or an unwillingness to perform in the pre-commitment contracted manner. The credit risk of a bank is also effect the book value of a bank. The more credit of a particular is in risk, the more probability of a bank to be insolvent. Therefore, the status of depositor in the bank is at risk and probability of incurring loss from their deposited value. That’s why; I am interested to prepare the report on the basis of Credit Risk Management Practices of the Commercial Banks in Bangladesh.
Scope of the Study
Each of the above areas would be critically analyzed in order to determine the efficiency of PBL’s Credit appraisal and Management system.
Limitations of the Study
Though I tried my level best to produce a comprehensive and well-organized report on the Credit Risk Management practices of Prime Bank Ltd., some limitations were yet present there:
Overview
The word credit comes from the Latin word “Credo” meaning “I believe”. It is a lender’s trust in a person’s/ firm’s/ or company’s 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. Credit risk 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 probability of default. Actually the credit portfolio is not only constituted the bank’s asset structure but also a vital factor of the bank’s success. The overall success in credit risk and its 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 risk management of PBL, it is required to analyze its credit policy, credit procedure and quality of credit portfolio.
History of incorporation of The Organization
Prime Bank Limited is a fast growing private commercial bank of Bangladesh. The Bank has already at the top slot in terms of quality service to the customers and the value addition to the shareholders. Prime Bank Ltd. was incorporated under the Companies Act, 1994 on February 12, 1995 and on this day, filed a duly verified declaration in the prescribed form that the condition of section 150(1)(a) to (d) of the said Act, have been compiled with, is entitled to commence business as a public limited company.
Prime Bank Ltd. being a banking company has been registered under the Companies Act 1913 with its registered office at 5, Rajuk Avenue, Motijheel commercial area, Dhaka 1000. Later it was shifted to Adamjee Court Annex building, 119-120, Motijheel Commercial Area, Dhaka-1000. The bank operates as a scheduled bank under banking license issued by Bangladesh Bank, the central bank of the country on April 17, 1995 through opening of its Motijheel branch at Adamjee Court Annex Building, Motijheel commercial area, Dhaka-1000.
The Bank made satisfactory progress over the years after its starting. Despite difficult circumstances it became able to sustain with some achievements. The bank further expected and consolidated its customer base in both of its core business and retail banking. The bank retained its lead position with the capital adequacy ratio of 12.43% as on December end 2002, which is well above the stipulated requirement of 8%. The return on Asset (ROA) was 3.73% well above the industry average.
Commencement of Operation
Prime Bank Ltd. was established on 17th April 1995 with an authorized capital of Tk.1000 million and paid up capital of Tk.100 million (raised to Tk.200 million in 1997) by a group of highly successful entrepreneurs from various fields of economic activities such as shipping, oil, finance, garments, textiles and insurance etc. It is a full licensed scheduled Commercial bank set up in the private sector in pursuance of the policy of the Government to liberalize banking and financial services. The former governor of Bangladesh Bank Mr. Lutfar Rahman Sarkar was the first managing director of the bank. Highly professional people having wide experience in domestic and international banking are managing the bank. The network of branches increased to 120 including 15 SME center and licenses for few more branches are in hand which will be opened soon. Prime Bank Ltd. is the pioneer in providing consumer loans as well as financing to the industries and transport sectors through attractive leasing and hire purchase scheme. Prime is catering both conventional interest based banking and banking under Islamic Sharia Principles. The Islamic banking operations are completely separated from the conventional banking.
Vision Mission and Strategic Properties of Prime Bank Ltd.“A Bank with a difference”is the motto of Prime Bank Limited. The Bank is prepared to meet the challenge of the 21 century well ahead of time. To cope up with the challenge of the new millennium it has hired experienced and well-reputed banker of the country from the inception. So the Bank defined:
Vision: To be the best Private Commercial Bank in Bangladesh in terms of efficiency, capital adequacy, asset quality, sound management and profitability having strong liquidity.
Mission:To build Prime bank limited into an efficient, market driven, customer focused institution with good corporate governance structure.
Continuous improvement in our business policies, procedure and efficiency through integration of technology at all levels.
Focus of Efforts: “on delivery of quality service in all areas of banking activities with the aim to add increased value to shareholders’ investment and offer highest possible benefits to our customers”
Strategic priorities of Prime Bank Limited: To have sustained growth, broaden and improve range of products and services in all areas of banking activities with the aim to add increased value to shareholders’ investment and offer highest possible benefits to our customers.
Objectives of the Bank
The objectives of the Prime Bank Limited are specific and targeted to its vision and to position itself in the mindset of the people as a bank with a difference.
Key financial indicators – At a Glance (Of last five years)
Key Financial Data & Key Ratios Particulars
2006
2007
2008
2009
2010
Interest income5199
7170
9096
10831
12,023
Interest expenses3698
5267
7126
8426
7,790
Net interest income1500
1903
1970
2405
4,234
Non-interest income1732
2913
3808
5790
5,447
Non-interest Expenses1101
1559
1931
2907
3,603
Net Non-interest income631
1354
1877
2883
1,844
Profit before provision and tax2131
3257
3847
5289
6,078
Provision for loans and assets390
910
1384
700
540
Profit after provision before tax1741
2347
2463
4589
5,538
Tax including deferred tax689
946
1232
1805
2,535
Profit after tax1052
1401
1232
2784
3,003
Balance Sheet Authorized Capital4000
4000
10000
10000
10,000
Paid-up Capital1750
2275
2844
3555
5,776
Total Shareholder’s equity3860
5273
6697
11745
16,769
Deposits54724
70512
88021
106956
124,519
Long-term liabilities16877
15267
31044
38209
47,918
Loans and advances45010
57683
75156
89252
111,167
Investments7844
12698
23103
19934
20,484
Property, Plant and Equipment412
660
1375
1573
1,692
Earning Assets55458
72798
100261
109905
132,688
Net current assets5286
1338
9962
3435
7,349
Total assets60899
79588
110437
124806
152,797
Current ratio0.88
0.97
0.88
0.96
1.09
Equity Debt ratio7.00%
7.10%
6.45%
10.39%
12.33
Other Business Import52639
70617
91424
96452
147,704
Export41801
51316
68550
76097
106,943
Remittance15050
15905
22669
26447
28,433
Guarantee Business5386
7033
10010
13673
29,000
Capital MeasuresTotal risk weighted assets44324
55485
72253
82710
183,747
Core capital (Tier-I)3860
5261
6265
9057
15,793
Supplementary capital (Tier-II)549
1122
1594
3112
5,692
Total Capital4409
6383
7859
12168
21,485
Tier-I capital ratio8.71%
9.50%
8.67%
10.95%
8.60
Tier-II capital ratio1.24%
2.00%
2.21%
3.76%
3.09
Total capital ratio9.95%
11.50%
10.88%
14.71%
11.69
Credit Quality Non performing loans (NPLs)367
777
1323
1149
1,368
NPLs to total loans and advances(%)0.82%
1.35%
1.76%
1.29%
1.23
Provision for unclassified loans545
895
1040
1303
1,463
Provision for classified loans309
478
734
631
642
Share Information Market price per share (Taka)529
924
540
653
945
No. of shares outstanding(Million)17.50
22.75
28.44
35.55
57.76
No. of shareholders (actual)5262
7368
9180
10339
19,748
Earnings per share (Taka)60.11
61.57
43.32
78.33
56.90
Dividend30%
35%
25%
40%
40%
Cash0.00%
10.00%
0.00%
10%
Bonus30%
25%
25%
30%
35%
Effective dividend ratio33.33%
40.00%
27.78%
44.44%
49.52
Market capitalization9253
21021
15349
23212
54,572
Net asset value per share (Taka)221
232
235
330
290
Price earning ratio (times)8.80
15.01
12.46
8.34
16.60
2.97%
2.28%
2.31%
3.49
2.11%
2.17%
2.72%
1.52
Earning base in assets (average)90.71%
91.29%
91.07%
89.34%
87.39
Cost income raito34.07%
32.37%
33.42%
35.47%
37.22
Credit deposit raito82.25%
81.81%
85.38%
83.45%
89.28
8.41%
8.55%
8.41%
6.39
13.96%
13.69%
13.18%
11.92
1.99%
1.30%
2.37%
2.16
30.68%
20.58%
30.19%
21.06
Other information No of BranchesNo of SMENo of employees1172
1400
1551
1844
2,139
No of foreign correspondents517
553
518
602
621
Average earning assets46448
64128
86530
105083
121,296
Average total assets51203
70244
95013
117622
138,802
Average depostis45373
62618
79266
97488
115,737
Average advance38463
51347
66420
82204
100,210
Average equity3334
4566
5985
9221
14,257
Table 3.1: Key Financial Indicators of Prime Bank Limited
Corporate Profile
Core Business
PBL focuses on a wide range of financial products and services which include commercial banking through both conventional and Islamic mode, Merchant and Investment Banking, SME & Retail banking, Credit Card and Off-shore Banking. It plays Leading Role in Syndicated Financing. It has expertise in Corporate credit and Trade Finance and made extensive market penetration with continuous growth in Corporate, Commercial and Trade Finance sectors. It has fully owned exchange houses at Singapore and UK focusing on remittance inflow to Bangladesh.
Corporate Ranking
PBL ranked 8th in Dhaka Stock Exchange (DSE) by market capitalization and stood at Tk.54,572 million as at the end of 2010. It has been ranked as 3rd company by DSE-20 Index. Balance Sheet Size of around Tk 306 billion equivalent to USD 4.4 billion. With wide customer base PBL established itself as the Market Leader among the conventional private commercial banks for deposit and advances.
Credit Rating
CRISL upgraded long term rating to PBL to “AA+” from “AA” and reaffirmed short term rating to “ST-1” based on financials up to December 31, 2009 and other relevant quantitative and qualitative information.
LONG TERM
SHORT TERM
Surveillance Rating 2009AA+
ST-1
Surveillance Rating 2008ST-1
OverlookStable
Date of declarationMay 10, 2010
Prime Bank Limited Network
PBL has a large and well distributed network of branches in Bangladesh. It has 104 branches and 15 SME branches covering strategic financial centers. It has 3 Off-shore banking units at different EPZs in Bangladesh. It has fully owned exchange houses at Singapore and UK facilitating inward remittance to Bangladesh. It has active presence in Capital Market through Prime Bank Investment Limited.
Efficient Capital and Strong Asset Quality
PBL has a strong capital base and capital adequacy stands at 11.69 percent of the risk weighted assets against the regulatory requirement of 9 percent. The bank is also well positioned to maintain capital under BASEL-II as it has raised subordinated Bond and issued right shares to strengthen capital base. The bank has a good asset quality and maintaining an NPL ratio below 2 percent.
Focused Business Strategies
The bank is focused on few strategic issues encompassing change in management in the short to long period through the implementation of various policies, processes and activities to ensure continuous, sustainable and qualitative growth, with the sole objective of “InstitutionBuilding”. An effective cluster Management program was implemented. Branch management is now being continually exposed to mature thoughts and ideas through Mentors resulting in qualitative improvement of their business and operational activities. Organizational and structural changes were made in managing the bank’s operations more effectively. Business units like corporate/commercial, Retail, SME, Cards were restructured and established to provide sharper business focus to each of these revenue earning sources. Credit approvals, quality and recovery departments were strengthened and separated from business sales to facilitate faster growth and maintain quality simultaneously. Support services to ensure greater customer satisfaction with a wider range of products and services are implemented. New departments like Alternate Delivery Channels, cards back office, call centers, operational support were established
Overview
Credit planning implies efficient utilization of scarce (loanable fund) to generate earning for the bank. Constituents of credit planning are: forecasting of loanable fund likely to be available in a particular period of time and allocation of the same amongst alternative avenues in a prudent way. Credit planning has got a serious importance because –Loanable fund comes out of deposit mobilized from the people. So safety of people’s money should be ensured carefully. Unplanned lending may create harm in two ways; firstly, excess lending may create liquidity crisis for the bank. Secondly, too much conservative lending may make the loanable fund idle. Idle but cost bearing fund again incurs operating cost for the bank. Excess liquidity led by unplanned inadequate lending push the profitability to decline. Planned credit helps to maintain conformity with the national priority. Unplanned credit may upset the total economic stability from macro point of view either by making inflation or deflation.
Loan Products of PBL
Depending on the various nature of financing, all the credit facilities have been brought under two major groups: (a) Funded Credit and (b) Non-funded Credit. Under non-funded credit, there are basically two major products namely Letter of Credit and Letter of Guarantee.
Funded Credit Products
Under Funded Credit, there are the following products:
Loan (General): Short, Medium & Long term loans allowed to individual/firm/industries for a specific purpose but for a definite period and generally repayable by installments fall under this type. These are mainly allowed to accommodate financing under the categories (I) Large & Medium Scale Industry and (ii) Small & Cottage Industry. Very often term loans for (I) Agriculture & (ii) Others are also included here.
Housing Loan (Commercial): Loans allowed to individual/enterprises for construction of house for commercial purpose only fall under this type. The amount is repayable by monthly/quarterly installments within a specified period.
Home Loan: Loans allowed to individuals for purchase of apartment or construction of house for residential purpose fall under this type. The amount is repayable by monthly installments within a specified period.
House Building Loan (Staff): Loans allowed to our Bank employees for purchase of apartment/construction of house shall be known as House Building Loan (Staff) or HBL (Staff).
Other Loans to Staff: Loans allowed to employees other than House Building Loan are grouped under Staff Loan (Gen).
Cash Credit (Hypo): Advances allowed to individual/firm for trading as well as wholesale purpose or to industries to meet up the working capital requirements against hypothecation of goods as primary security fall under this type of lending. It is a continuous credit. It is allowed under the categories (I) “Commercial Lending” when the customer is other than an industry and (ii) “Working Capital” when the customer is an industry.
Cash Credit (Pledge): Financial accommodations to individual/firms for trading as well as for whole-sale or to industries as working capital against pledge of goods as primary security fall under this type of advance. It is a continuous credit and like Cash Credit (Hypo) allowed under the categories (i) “Commercial Lending” and (ii) Working Capital”.
Hire Purchase: Hire Purchase is a type of installment credit under which the customer agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of Principal as well as interest for adjustment of the loan within a specified period.
Lease Financing: Lease Financing is one of the most convenient sources of acquiring capital machinery and equipment whereby a customer is given the opportunity to have an exclusive right to use an asset usually for an agreed period of time against payment of rental. It is a term financing repayable by lease rental.
Consumer Credit Scheme (CCS): It is a special credit scheme of the Bank to finance purchase of consumer durable by the fixed income group to raise their standard of living. The loans are allowed on soft terms against personal guarantee and deposit of specified percentage of equity by the customers. The loan is repayable by monthly installments within a fixed period.
Secured Overdraft (Financial Obligation): SOD (Financial Obligation) is allowed to individuals/firms against financial obligations (FDR, MBDR, Scheme Deposits of our Bank or similar products of other banks). This is a continuous loan having usual maturity period of 1 (one) year and renewable for further periods at maturity.
Secured Overdraft (General): SOD (General) is allowed to individuals/firms for miscellaneous purpose. This is a continuous loan having usual maturity period of 1 (one) year and renewable for further periods at maturity
Secured Overdraft (Work Order): Advances allowed against assignment of work order for execution of contractual works falls under this type. This advance is generally allowed for a definite period and specific purpose. It falls under the category “Others”.
Secured Overdraft (Export): Advance allowed for purchasing foreign currency for payment of Back to Back L/C liability where the exports do not materialize before due the date of import payment. This is categorized as “Export Finance”.
Payment against Documents: Payment made by the Bank against lodgment of shipping documents of goods imported through L/C falls under this type. It is an interim advance connected with import and is generally liquidated against payments usually made by the customer for retirement of the documents towards release of imported consignment from the customs authority. It may fall under anyone of the category “Agriculture/Export Finance/Commercial Lending/Others”.
Loan Against Import: This is funded credit facility allowed for retirement of shipping documents and release of goods imported through L/C taking effective control over the goods by pledge in godowns under Bank’s lock & key. This is a temporary advance connected with import which is known as post-import finance and falls under the category “Commercial Lending”.
Loan Against Trust Receipt: Advance allowed for retirement of shipping documents and release of goods imported through LC falls under this type. The goods are handed over to the importer on trust with the arrangement that sale proceeds will be deposited to liquidate the loan account within the stipulated time.
Inland Bills Purchased: Payment made through purchase of inland bills/cheques denominated in local currency to meet urgent requirement of the customer of other than Export Sector falls under this type. This temporary advance is adjustable from the proceeds of bills/cheques purchased and sent for collection. It may fall under any of the categories.
Export Cash Credit (ECC): Funded credit facility allowed to a customer for export of goods falls under this type and is categorized as “Export Cash Credit”. The advances must be liquidated out of export proceeds within 180 days.
Packing Credit (P.C.): Advance allowed to a customer against bills under BTB L/C and/or firm contract for processing/packing of goods to be exported falls under this type and is categorized as “Packing Credit”. Packing Credit must be adjusted from proceeds of the relevant exports within 180 days. It falls under the category “Export Credit”.
Foreign Documentary Bills Purchased: Payment made to a customer through purchase/negotiation of a Foreign Documentary bill falls under this type. This temporary advance is adjusted from the proceeds of the shipping/export documents. It falls under the category “Export Credit”.
Inland Documentary Bills Purchased: Payment made against documents representing sell of goods to Local export oriented industries which are deemed as exports and denominated in Foreign Currency falls under this type. This temporary liability is adjustable from proceeds of the Bill.
Foreign Bills Purchased: Payment made to a customer through Purchase or Foreign Currency Cheques/Drafts falls under this type. This temporary advance is adjustable from the proceeds of the cheque/draft.
Non-funded credit products
Under non-funded credit products there are-
Letter of Credit
Letter of Guarantee
Islamic Banking investment products
Car Investment
Swapna Neer (Home Investment)
Household Durable Investment
Product Parameters
There are some parameters of the loan products which can be termed as characteristics. They are as follows:
Maximum Size: Maximum size of any funded credit facility to a single customer shall at best be 15% of the total capital of the Bank. And maximum size of any non-funded credit facility shall at best be 35% of total capital and 50% of the total capital of the Bank for the non-export sector customers and export sector customers respectively.
Maximum Tenor: Maximum tenor for any continuous loan shall be 1 (one) year which is renewable at maturity or within the validity period upon satisfactory performance of the customer. And period of any term loan shall be fixed on case to case basis considering repayment capacity, projected cash flow etc.
Security: Bank will try to have as much security coverage as possible against each and every credit facility sanctioned to the customers. Security requirement will be determined on case to case basis based on customer’s business strength, level of risk bank is undertaking. However, Bank will always prefer to have security equivalent to 1.25 times of the total funded limit except for the following products: SOD (FO), SOD (WO), SOD (EM), SOD (EDF), SOD (CI), FDBP, IDBP, Bid Bond. Security may be in the following forms:
i) Bank deposit
ii) Gold / gold ornaments
iii) Government Bond / Sanchayapatra
v) Bank Guarantee
vi) Pledgeable goods
vii) Land and Building
viii) Share
ix) Stock
x) Machinery and Equipment
xiv) Personal Guarantee
xv) Bill or Receivables
xvi) Ownership of vehicles / assets
xvii) Life Insurance Policy.
xix) Trust Receipt
Pricing Loan Products
The process followed by the PBL as guided by the BB regarding the pricing of the loan products are discussed below:
Loan Pricing
Credit facilities to the customer are the prime source of the Bank’s income. More specifically, interest from loans accounts the lion share of the total revenue of the Bank. On the other hand, financial market of our country is apparently very competitive due to participation of 49 (forty nine) banks in our small financial market. As such, pricing is very crucial for business growth of the Bank. Prime Bank Limited has been fixing/re-fixing price of different credit facilities from time to time considering changes in the market condition.
Basis of Pricing
Price of all credit facilities will be fixed based on the level of risk and type of security offered. Rate of interest will be the reflection of risk inherent in a particular transaction i.e. the higher the risk, the higher the rate of interest. Therefore, loan pricing will be directly correlated with the risk grade of the customer.
Types of Rate
Usually, Bank will charge fixed interest rate which will be subject to changes by the Management. In this respect, all loan contracts will contain a provision to the effect that rate of interest is subject to changes by the Management. And, interest rate will be revised as and when a significant fluctuation occurs in the cost of fund of the Bank due to volatility of interest rate in the market. The Bank will charge floating interest only in SOD (EDF). In all other cases, fixed interest rate will be applied.
For fixed interest rate, the Board of Directors will fix a Band for a particular Sector/Industry/Product. Customers will be allowed a fixed rate within that band. Any deviation from the approved interest rate band will be mentioned in the Credit Assessment Form with proper justification. The Managing Director may sanction a credit facility at a rate within the Band. However, other executives will exercise their delegated authority to sanction credit facility at the highest rate of the approved Band.
Revision of Rates
The Management of the Bank will continuously monitor interest rate situation in the market and discuss the same in the Asset Liability Management Committee (ALCO) meeting at least once in a month. As per decision of the Asset Liability Management Committee (ALCO), the Management of the Bank may approach the Board of Directors to revise rate of interest, commission, charges etc.
Loan Approval Process
Like every other banks the PBL follows the loan approval process. This process is consists of some steps which describes the ways in which the loan or credit asked from the bank is approved. The process is discussed in the following paragraphs.
Step-1: A potential customer collects prescribed Credit Application Form from the Relationship Officer of Branch/Regional Corporate Banking Department/Corporate Banking Division, Head Office/Web address of the Bank. Later, he/she submits the filled in Credit Application Form along with necessary papers and documents.
Step-2: The Relationship Officer scrutinizes the Credit Application Form and other documents submitted by the customer and make a preliminary assessment on creditworthiness of the potential borrower. He/she collects further information from the customer if it is felt necessary. And, if he/she finds the proposal not bankable, he/she sends a refusal letter to the customer immediately. On the other hand, if he/she finds it acceptable, he/she forwards the application to the concerned Relationship Manager.
Step-3: The Relationship Manager, singly or jointly with Relationship Officer, visit the customer’s business premise and try to acquire proper understanding about the business position, actual credit requirement, repayment capacity etc. Besides, he/she negotiates with the customer about the structure of the proposed credit facility. Apart from this he/she assesses the value of the security to be offered and prepares Valuation Report. Finally, the Relationship Manager summarizes all these information in the Pre-sanction Inspection Report/Call Report/Visit Report in the Bank’s prescribed format in which he/she recommends for some specific credit facility for the customer.
Step-4: The Relationship Manager sends the Pre-sanction Inspection Report to the Corporate Banking Division, Head Office or to the Regional Corporate Banking Department, if any. The Head of Corporate Banking Division/Regional Corporate Banking Department assesses the credit proposal. He/she might contact with the Relationship Manager or directly to the customer for any query. Finally, if he/she decides to refuse the proposal or to proceed further with the proposal and communicates his /her decision to the Relationship Manager.
Step-5: If the Head of Corporate Banking Division/Regional Corporate Banking Department refuses, the Relationship Manager sends a refusal letter to the customer. If he/she is positive, the Relationship Officer collects duly filled in CIB Inquiry Form from the customer and submits it to the Credit Information Bureau of Bangladesh Bank for latest CIB Report through Credit Administration Department, Head Office. Everything may stop here if CIB report shows that the customer has classified liability in its name and/or in the name of its sister concern(s). In that case, the customer is regretted accordingly.
Step-6: Meanwhile, the Relationship Officer rates the customer as per Risk Grading System of the Bank. Finally, the Relationship Manager originates a formal Credit Proposal in which the Head of Corporate Banking Division affixes his/her recommendation regarding the proposal.
Step-7: The Head of Corporate Banking Division, Head Office then forwards the proposal to the Credit Risk Management Department, Credit Division along with necessary papers. The concerned Credit Officer conducts in-depth Credit Analysis (Due Diligence) and affixes his/her comments/observations/findings.
Step-8: The Credit Officer places the proposal along with his/her comments/observations/findings before the Head of Credit/Head Office Credit Committee. The Head of Credit may contact with the Head of Corporate Banking for his/her queries. He/she may also express his/her reservation on a particular issue/risk and ask the Head of Corporate Banking to clarify his/her position and/or risk minimization technique(s). Finally, he might decline the proposal. And, if he/she is fully satisfied he/she may approve the facility if it is within his/her delegated authority. If it is beyond his/her delegated authority, he /she would recommend the proposal to the Managing Director.
Step-9: The Managing Director may decline the proposal if he/she is not satisfied about the proposal. If he/she is satisfied and if it is within his/her delegated power, he/she approves the proposal. If the proposal exceeds his/her delegated authority, he/she recommends it to the Executive Committee of the Board of Directors, which has the supreme authority to sanction any loan.
Step-10: If the facility is approved (whoever is the approval authority), the Credit Risk Management Department of Credit Division issues sanction letter to the Corporate Banking Division/Branch along with a Documentation Check List which clearly spells out what are the documentation formalities required to be completed before disbursement. A copy is sent to Credit Administration Department, Credit Division.
Step-11: The Corporate Banking Division/Branch then issues sanction letter to the customer in line with the letter of Credit Risk Management Department and requests the customer to complete documentation formalities.
Credit Approval Authority
Each and every bank, as per the requirements of BB, must delegate authority of approving loans of certain limit. The authority clearly indicates who can approve the loan and up to what amount and who will be responsible for the approval of the loan. The detail of the practices of the PBL is discussed here.
Delegation of Approval Authority:
Credit approval authority to the proper body and/or executive is a precondition for ensuring smooth and transparent credit operation in the Bank. Since inception, credit approval authority has been delegated to different tiers of both the Board of Directors and the Management. Authorities who enjoy delegation of business power i.e credit approval authority are as follows:
Credit Approval Authority
Credit approval authority may be delegated to the following body/Executive:
The Board of Directors: The Board of Directors will have the authority to sanction any loan for the amount not exceeding the regulatory limit the Bank can provide to a single customer. Besides, all proposals for waiver of interest, commission, charges etc and principal must be approved by the Board of Directors. Any proposal for reduction of rate of interest by more than one percent from minimum level of approved interest rate band must be approved by the Board.
The Executive Committee of the Board: The Executive Committee of the Board of Directors may sanction any loan for the amount not exceeding the regulatory limit the Bank can provide to a single customer. However, it will not have the authority to approve any proposal for waiver of interest, commission; charges etc and principal must be approved by the Board of Directors. Any proposal for reduction of rate of interest by one percent or less from the minimum level of approved interest rate band may be approved by the Executive Committee of the Board. Any proposal beyond the delegated authority of the Managing Director will be placed before the Executive Committee of the Board for approval.
The Management: Different tier of the Management may be delegated credit approval authority to ensure timely disposal of the credit proposals at root level. In the Management, the following executives may be delegated credit approval authority:
Composite Limit
Credit Limit to a single customer comprising of more than one facility/product will be treated as a Composite Limit. Different tier of the Management may be delegated authority to sanction a composite credit limit to a customer which the respective executive will exercise after complying with all preconditions set in different chapters of this policy document and in the relevant circulars in force. Specially, any executive having delegated authority to sanction a composite limit will exercise this provided that the subject composite limit is covered by collateral security having forced sale value which is at least 1.25 times of the total funded limit. However, the executives having approval authority may sanction following facilities without taking collateral security within their authority: SOD (FO), SOD (WO), SOD (EM), SOD (EDF), SOD (CI), FDBP, IDBP, Bid Bond and the Managing Director may sanction following facilities without taking collateral security within his authority: SOD (FO), SOD (WO), SOD (EM), SOD (EDF), SOD (CI), FDBP, IDBP, LIM, LTR and all non-funded facilities. Different tiers of the Management may be delegated the following authority for approving composite credit limit:
Fig. in Lac TkSl. NoDesignationAuthority to be delegatedMaximum TotalFundedNon-fundedManaging Director250.00300.00300.00Deputy Managing Director200.00250.00250.00Senior Executive Vice President150.00200.00200.00Executive Vice President100.00150.00150.00Senior Vice President75.00100.00100.00Vice President50.0080.0080.00Senior Assistant Vice President40.0060.0060.00Assistant Vice President25.0050.0050.00Credit Risk Management (CRM) Department
The Credit Risk Management Department shall perform the following duties:
a) Assess risks inherent in the credit proposal sent by Corporate Division and also evaluate proposed facility pricing based on risks, security, structuring and terms and conditions to suit the business condition and to protect Bank’s interest.
b) Compliance to the existing rules and regulations of the Bank and all regulatory authorities and laws of the country and to advise the Corporate Division for rectification, if required.
c) Advise the Corporate Division about changes, if required, in the structure and terms and conditions of the proposed facility.
d) Process credit proposal for approval of the competent authority.
e) Issue sanctions advice for credit facilities or decline.
f) Maintain Limit Sanction Register.
g) Review the performance of the customer on Off-site Basis and prescribe appropriate remedial measures, if required until the loan account becomes a “Special Mention” one.
h) Review/revise risk grading of the customer from time to time based on the “Early Alert Report” and Downgrade Proposal submitted by Corporate Division.
i) Handover loan to the Recovery Department as and when it is degraded to Special Mention or below.
Major Functions of CRM
a) To update Bank’s Credit Policy/Lending Guideline, procedures and control mechanisms related with all credit risks arising from corporate/commercial banking and retail banking etc.
b) To approve/decline credit proposal received from Corporate Division (presently from Branches) within delegated authority and to recommend to the higher authority if it is beyond delegation.
c) To provide advice/assistance regarding all credit matters to Corporate Division/Branches.
d) Periodical review of different types of credits, maintain effective follow-up and supervision and take all possible measures in time to save from classification.
Credit Risk Review and Monitoring Process
The credit review and monitoring process of PBL mainly based on the risk grading and its review. The overall process is discussed here.
Credit Risk Grading
While providing credit facility to a customer, Bank undertakes many risks among which credit risk is considered to be the most important one. As such, an in-depth study should be conducted on the borrower’s creditworthiness which will help the bank to identify all possible risks underlying in a particular credit transaction. A formal evaluation of borrower’s financial health and ability to repay debt obligation is called credit rating which helps the Bank to grade the concerned customer. As such, it is also called credit risk grading. And, risk identified through credit rating/risk grading is quantified for better understanding and taking appropriate mitigating technique. Besides, it helps the Bank to charge commensurate risk premium on a particular credit facility. Therefore, it is important to accurately measure the risks in a transaction and rate/grade the facility accordingly.
Credit Risk Grading
To assess the borrower’s creditworthiness, an in-depth study should be conducted that will help the bank to identify all possible risks underlying in a particular credit transaction.
Basic Frame Work:
Bangladesh Bank made it mandatory for the Banks to conduct a “Credit Risk Grading (CRG)” in the prescribed format before sanction of a loan. In the said Guideline, Bangladesh Bank provided a sample Risk Grading Model and advised Banks to design their own model in line with that one.
Credit AdministrationObjectives:
Duties and Responsibilities:
Recovery Process
The recovery department is responsible for the recovery of the loan. The Recovery Department of Credit Division manages accounts with sustained deterioration (a Risk Grade of Sub-Standard (6) or worse). Sometimes, as per recommendation of the Credit Risk Management Department and Corporate Banking Division the Management decides to transfer some EXIT accounts graded 4-5 to the RU for efficient exit. Whenever an account is handed over from Corporate Banking Division/Relationship Management to RU, a Handover/Downgrade Checklist is prepared. Down grading process is done immediately and is not postponed until the annual review process.
The RU’s primary functions are to:
The recovery of problem loans is a dynamic process, and the associated strategy together with the adequacy of provisions is regularly reviewed.
NPL Account Management
All NPLs is assigned to Account Manager(s) within the Recovery Department, who is responsible for coordinating and administering the action plan/recovery of the account, and serves as the primary customer contact after the account is downgraded to substandard. The Recovery Department sought assistance from Corporate Banking/Relationship Management if required to ensure that appropriate recovery strategies are in force.
Account Transfer Procedure
Within 7 days of an account being downgraded to substandard (grade 6), a Request for Action (RFA) and a handover/Downgrade Checklist is prepared by the RM and forwarded to Recovery Department for acknowledgment. The account is assigned to an account manager within the Recovery Department, who will review all documentation, meet the customer, and prepare a Classified Loan Review Report (CLR) within 15 days of the transfer. The CLR is approved by the Head of Credit, and copied to the Head of Corporate Banking and to the Branch/office where the loan proposal was originated. This initial CLR highlights any documentation issues, loan structuring weaknesses, proposed workout strategy, and should seek approval for any loan loss provisions that are necessary.
Recovery Departments ensures that the following is carried out when an account is classified as Sub Standard or worse:
Non-Performing Loan (NPL) Monitoring
On a quarterly basis, a Classified Loan Review (CLR) is prepared by the Recovery Department Account Manager to update the status of the action/recovery plan, review and assess the adequacy of provisions, and modify the bank’s strategy as appropriate. The Head of Credit approves the CLR for NPLs up to 15% of the banks capital, while MD’s approval is required for NPLs in excess of 15%. The CLR’s for NPLs above 25% of capital is approved by the MD/CEO, with a copy presented before the Board of Directors.
Strengths of Prime Bank Limited:
Weaknesses of Prime Bank Limited:
Opportunities of Prime Bank Limited:
PBL took a strategic shift towards developing and expanding the SME financing which has received considerable attention of policy makers.
Implementation of world class CBS T24 in number of branches will reduce fraud and forgeries and other operating risks arising from human error.
this bank has establish remittance arrangement with 24 leading exchange companies and banks including the global money transfer agency Western Union in 2007.
The bank introduced direct selling service recruiting highly trained and customer focused professionals.
Finance Act of 2007-08 has withdrawn the withholding tax on purchases by credit card and it is expected that credit card business will expand rapidly in near future.
Threats of Prime Bank Limited:
Comparison of PBL with Industry Norm
Here in this section I have tried to provide a brief idea at a glance on how PBL is performing in terms of some selected ratio compare to the other banks in the industry. Here I have taken the averages of Private Commercial Banks ratios which are available.
Capital Adequacy Ratio
The capital adequacy ratio is measured by the ratio of banks capital to risk weighted asset. This ratio indicates the bank’s safety position to meet up the depositor demand in case any emergency