credit management procedure of southeast bank limited

8/9/2019 Credit Management Procedure of Southeast Bank Limited

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Credit Management Procedure of SEBL

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CHAPTER-01

INTRODUCTION


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1.1 Introduction

Loans comprise the most important asset as well as the primary source of earning for the banking

financial institutions. On the other hand this !loan" is also the ma#or source of risk for the bank

management. $ prudent bank management should always try to make an appropriate balance

between its return and risk in%ol%ed with the loan portfolio. $n unregulated banking financial

institution might be fraught with unmanageable risks for the purpose of ma&imi'ing its potential

return. (n such a situation the banking financial institutions might find itself in serious financial

distress instead of impro%ing its financial health. Conse)uently not only the depositors but also

the general shareholders will be depri%ed of their money from the bank. *he deterioration of loan

)uality will also affect the intermediation efficiency of the financial institutions and thus the

economic growth process of the country. *his establishes the fact that banks should pro%ideincreasing emphasis on %arious analytical tools and techni)ues for screening proposals and loan

decision taking. Credit +orthiness $nalysis is one of the most important acti%ities before

sanctioning any credit to a new borrower as well as e&isting borrower to a%oid any default risk

and for impro%ing the operational efficiency of nationali'ed and pri%ate sector commercial

banks.

1.2 Origin of the Reort

Bachelor of Business $dministration !BB$" Course re)uires a three months attachment with an

organi'ation followed by a report assigned by the faculty super%isor. ( took the opportunity to do

my internship in Southeast Bank Limited Bandar Ba'ar Branch. *he organi'ation attachment

started on $pril , -, and finished on /une 0, -,. $ctually this is a feedback which

department accepts from the students who #oin in an organi'ation after the completion of

theoretical part of the BB$ program. My faculty super%isor T!h"in! H!#ue $i%u Lecturer

1epartment of Business $dministration Shah /alal 2ni%ersity of Science and *echnology asked

me to prepare a report on &Credit '!n!ge%ent Procedure of $outhe!"t (!n) *i%ited+ as

part of the fulfillment of internship re)uirement.

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1., Oecti/e of the Reort

*he study has been undertaken with the following ob#ecti%es3

•

*o ha%e better orientation on credit management acti%ities.

• *o find out the strengths and weakness of the credit procedure method.

• *o identify the factors that must be considered and analy'ed by the bank and financial

institutions in determining the credit worthiness of the client.

• *o get an o%erall idea about the performance of Southeast Bank Ltd Bandar Ba'ar

Branch Sylhet.

,.4 $coe of the Reort

*he study would focus on the following areas of Southeast Bank Limited3 Credit management

system of Southeast Bank Limited Procedure for different credit facilities Portfolio !Loan or

ad%ances" management of Southeast Bank Limited Organi'ation structures and responsibilities

of management.

Each of the abo%e areas would be critically analy'ed in order to determine the efficiency andeffecti%eness of Credit Management System of Southeast Bank Limited.

1. 'ethodoog of the Reort

Both primary and secondary data sources were used to generate this report. Primary data sources

are informal discussion with professionals and obser%ation while working in different desks. *he

secondary data sources are annual reports manuals and brochures of Southeast Bank Limited

and different publications of Bangladesh Bank. *o identify the implementation super%isionmonitoring and repayment practice5 inter%iew with the employee and e&tensi%e study of the

e&isting file was and practical case obser%ation was done.

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1. *i%it!tion of the Reort

( did my best and there has no dearth of sincerity on my part to make the report. But ( had some

limitations also.

• *his report only considers Credit Management System of SEBL.

• *ime frame for the research was %ery limited.

• (n many cases up to date information is not published.

• 6etting 7ele%ant papers and documents were strictly prohibited.

• 1ue to lack of practical e&perience some errors might be occurred during the study.

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CHAPTER-02

Org!ni4!tion! o/er/ie5

of $outhe!"t (!n) *i%ited


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2.1 An O/er/ie5 of $outhe!"t (!n) *i%ited 6$E(*7

Southeast Bank Limited !SEBL" is the leading pri%ate sector bank in Bangladesh offering full

range of Personal Corporate (nternational *rade 8oreign E&change Lease 8inance and Capital

Market Ser%ices. Southeast Bank Limited is the preferred choice in banking for friendly and

personali'ed ser%ices cutting edge technology tailored solutions for business needs global reach

in trade and commerce and high yield on in%estments assuring e&cellence in Banking Ser%ices.

2.2 $t!tu" of $outhe!"t (!n) *i%ited

Southeast Bank Limited is a modern bank that was established in ,99: with a dream and a %ision

to become a pioneer banking institution of the country and contribute significantly to the growth

of the national economy. *he Bank;s #ourney began when it was incorporated as a Public Limited

Company on March ,- ,99:. *he 7egistrar of /oint Stock Companies and 8irms issued the

Certificate of Commencement of Business of the Bank on the same date. *he Bank recei%ed its

Banking License from Bangladesh Bank on March -0 ,99:. *he Bank;s first branch was opened

by Late M. Saifur 7ahman the then .,? million as on 1ecember 0,

-9. *he Bank had ,4- Staff of whom ,,0 were E&ecuti%es. ,,4, were Officers and ,4@ were

other staff as on 1ecember 0, -9.

2., Core !ue"9 Core $trength" !nd Core Co%etencie" of the $E(*

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*he Core Aalues Core Strengths and Core Competencies of the SEBL are gi%en below3

Core Values Core Strengths Core Competencies

(ntegrity *ransparent and )uick

decision making

nowledge

7espect Efficient team of performers E&perience and E&pertise

8airness Satisfied customers Customer Orientation

8ocus


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*he financial statement and an o%er%iew of Southeast Bank Ltd is gi%en below3

Table-1: Southeast Bank at a glane

P!rticu!r"

200>

T!)! in

'iion

2008

T!)! in

'iion

200=

T!)! in

'iion

200:

T!)! in

'iion

200

T!)! in

'iion

$uthori'ed Capital

,. 0:.

0:. -:. -:.

Paid5up Capital

04--.?4 -@:-.-

--@,.>? -,,-.>4 ,:?.0>

7eser%e 8und

?:4.:- 4@4.@,

4,@?.? -@-@.,@ ,,@.4>

E)uity 8und !Capital and7eser%e"

99->.,? >?:>.,[email protected]? 494.9- --0?.@4

1eposit

9???9.: ?@>,4.?>

::4>4.: 4?:?.,@ 0@-:@.,:

$d%ance

>>49>.:> ?-@,.-?

4@,?4? 4,,4>.-@ 0-::,.9

(n%estment

-,0:.-0 ,--99.?,

@4?-.@? ?-?:.:: :,,0.,4

(mport Business

?9:@-.9- :@,9.>>

0@4>.04 0:,-:.,- -9>9.0

E&port Business

4?>-4.4> 4-,>@.?

-@>>,.0? -:@>4.?, ,0:,,.,

6uarantee Business

,,9,?.>4 ,:>@.99

[email protected] @?:?.@ >9>:.

*otal (ncome

,0>4.4: ,-:.,0

@?>.4> ?>??.,, 4?@9.::

*otal E&penditure

9@>.>9 >-0>.::

:>:4.-> 4>?.4: 0-,?.,,

Operating Profit

4?,4.?? 0,-.:@

-9,?.- -?-.?? ,4>0.44

Get Profit after5*a& and

Pro%ision ,@>.,9 @@>.-4

,---.9> 99.@@ 0>4.-

8i&ed $ssets

400@.@: -?@:.:?

,>@.,, ,0.09 >9.?-

*otal $ssets

,,-?>?.9- @,,@,.:0

?40> :0>?.,- 40-94.@,

Earning per Share !*aka" :4.?4

0,.,,

4.@@ :9.>, 0:.4-

1i%idend Cash !H"

,:H

,:H -H

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Bonus Shares 0:H!-3>"

-H!:3,"

-:H !43," @H!,-.:3," -H!:3,"

7eturn on E)uity !7OE" ,?.:,H

,-.?H

,9.9H ,>.9@H ,>.?4H

7eturn on $ssets !7O$" ,.??H

,.9H

,.9 H ,.??H .@?H

Gon performing Loans as H of

*otal Loans

0.>0H

4.,-H

0.>>H 0.9>H 4.0>H

Capital $de)uacy 7atio ,,.>-H

,,.,-H

,0.H ,,.:H ?.9H

Gumber of Correspondent

Banks

,4?

,4:

,4 ,0@ ,0

Gumber of 8oreign

Correspondents

:@9

:@>

:9@ :0? :>

Gumber of Shareholders --,:-,-:0?

9?0? @@:: :>:

Gumber of Employees

,-:4 ,@

9?4 @4: >:9

Gumber of Branches

:? 4?

0@ 0, 0,

Source: Annual Report 2009, Southeast Bank Ltd.

2.8 $outhe!"t (!n) *td9 (!nd!r (!4!r (r!nch 6I"!%ic (!n)ing7

Southeast Bank Limited has started its operation as a Con%entional Bank on May ,99:. But pretty soon afterwards within few months the Bank has taken up the Challenge to start (slamic

Banking Operations. *he Challenge is not so much as in operating (slamic Banking but in

maintaining both the forms in Parallel. 8rom its inception as an (slamic Bank the bank has

pro%en itself to be worthy of its slogan of IBank with a %ision= through successful operation of

(slamic Banking.

Southeast Bank has started its (slamic Banking operation through its first Branch being

inaugurated at Chagalnaya 8eni on -@ /uly -0.Southeast Bank Limited Bandar Ba'ar Brach

is the second (slamic banking branch which was inaugurated at arimullah Market Sylhet on 4

1ecember -0.Since then it has so far has established three more branches at different

locations in the Country. Because of its popularity and management=s commitment toward social

well being gradual e&pansion of Southeast Bank=s (slamic Banking operations is assured.

8ollowing are the salient features of (slamic Banking as is practiced in Southeast Bank Limited3

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,. $ll acti%ities are conducted according to (slamic Shariah.

-. (nterest free monetary operations.

0. Building partnership relation between the Bank and its customers.

4. 8ollowing (slamic principles in its in%estment portfolio.

:. +hile in%esting special consideration to social needs is gi%en.

?. *hrough small and long term deposit schemes pro%iding hope to the poor income

group of the society.

>. Client ser%ice centric banking through which making the clients feel special.

2.!.1 Se"#ie $o"t%olio:

Southeast Bank Limited Bandar Ba'ar Branch pro%ides following ser%ices under (slamic Banking3

!7 Deo"it3 (n this case Bank collects money from its customer by two types of account.

One is $l5+adiah where depositors are not gi%en any profit. $nother one is Mudaraba

where profit and loss is di%ided into two parties bank and customer.

7 In/e"t%ent? Bank in%ests into different sector by pro%iding loan to reasonable client.

c7 Re%itt!nce !nd ;und Tr!n"fer? (n this case bank pro%ides foreign remittance ser%ice

to the customer and also pro%ides fund transfer ser%ice to the customer.

2.!.2 Va"ious T&'es o% (ounts at Bana)a" Ba*a" B"anh+ SEBL:

Southeast Bank Limited Bandar Ba'ar Branch maintains different types of account. *he list of

different types of account is gi%en below3

Table-2: Va"ious T&'es o% (ount at Ban)a" Ba*a" E"anh+ SEBL as ,n 3/21

Aic!tion Tot! Account"

$l5+adiah Current $ccount ,,::

Mudarabah Sa%ings 1eposit 0@0

Mudaraba Sa%ings 1eposit Staff 0

Mudaraba Short *erm 1eposit >,

Mudaraba *erm 1eposit 7ecpt!, Month" -

Mudaraba *erm 1eposit 7ecpt!0 Month" ->4

Mudaraba *erm 1eposit 7ecpt!? Month" -4

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Mudaraba *erm 1eposit 7ecpt!,- Month" ,-9

Mudaraba *erm 1eposit 7ecpt!0? Month" @

Millionaire 1eposit Scheme5 4J -

Millionaire 1eposit Scheme5 :J -

Millionaire 1eposit Scheme5 ?J 4

Millionaire 1eposit Scheme5 >J ,Millionaire 1eposit Scheme5 9J -

Millionaire 1eposit Scheme5 ,J ,

Mudaraba Pension Sa%ings Scheme5?J 0,

Mudaraba Pension Sa%ings Scheme5@J --

Mudaraba Pension Sa%ings Scheme5,J ,::

Mudaraba Marriage Sa%ings Scheme ?

Mudaraba Monthly Sa%ings Scheme!MMSS"5B ??

Mudaraba Monthly Sa%ings Scheme!MMSS"5$ -->

Mudaraba Education Sa%ings Scheme!MMSS"5B 0

Mudaraba 1ouble Benefit Scheme 9:

Mudaraba


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,.1 O/er/ie5

*he word credit comes from the Latin word CredoF meaning ( belie%eF. (t is a lender=s trust in

a person=s firm=s or company=s ability or potential ability and intention to repay. (n other words

credit is the ability to command goods or ser%ices of another in return for promise to pay such

goods or ser%ices at some specified time in the future. 8or 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.

*he ob#ecti%e of the credit management is to ma&imi'e the performing asset and the

minimi'ation of the non5performing asset as well as ensuring the optimal point of loan and

ad%ance and their efficient management. Credit management is a dynamic field where a certain

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standard of long5range planning is needed to allocate the fund in di%erse field and to minimi'e

the risk and ma&imi'ing the return on the in%ested fund. Continuous super%ision monitoring and

follow5up are highly re)uired for ensuring the timely repayment and minimi'ing the default.

$ctually the credit portfolio is not only constituted the banks asset structure but also a %ital factor

of the bank=s success. *he o%erall success in credit management depends on the banks credit

policy portfolio of credit monitoring super%ision and follow5up of the loan and ad%ance.

*herefore while analy'ing the credit management of SEBL it is re)uired to analy'e its credit

policy credit procedure and )uality of credit portfolio. 8rom the %iew of (slamic banking the

term credit is known as (n%estment.

,.2 The oecti/e" !nd rincie" of in/e"t%ent of I"!%ic (!n)ing

*he special feature of the in%estment policy of (slamic Banking is to in%est on the basis of

profit and loss sharing system in accordance with the tenets and principles of (slamic Shariah.

Earning of profit is not the only moti%e and ob#ecti%e of the (slamic Banking in%estment policy

rather emphasis is gi%en in attaining social welfare and creating employment opportunity.

*he ob#ecti%es and principles of in%estment of (slamic Banking are3

,. *o in%est fund strictly in accordance with the principles of (slamic Shariah.

-. *o di%ersify its in%estment portfolio by si'e by sector by economic purpose by

securities and by geographical area including industrial commercial and agricultural

in%ol%ement.

0. *o ensure mutual benefit for both the Bank and the in%estment client.

4. *o make in%estment keeping in %iew of the socio economic re)uirement of the country.

:. *o increase the number of potential in%estors by making participatory and producti%e

in%estment.

?. *o finance %arious de%elopment schemes for po%erty alle%iation income and

employment generation with %iew to accelerate sustainable socio5economic growth.>. *o in%est in the form of goods and commodities rather than gi%e out cash money to the

in%estment clients.

@. *hough all mode of in%estment is practiced in the (slamic Banks are fully permissible

Musharaka and Mudaraba are the pristine mode of (slamic in%estment. *he ob#ecti%e

would be to increase in%estment through these modes.

,., 'ode" of In/e"t%ent under I"!%ic (!n)ing $"te%

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(slamic Bank in purport and nature is an in%estment house. $n (slamic Bank mobili'es

deposits from the masses according to Mudarabah principles and deploys the same in %arious

in%estment acti%ities under different modes permitted by (slamic Shariah. *he Profits deri%edfrom such in%estment operations are di%ided among the bank and depositors according to the

ratio as declared in the beginning of a particular financialbanking year. Some Popular modes

of (slamic (n%estments are practiced in Southeast Bank Bangladesh are mentioned below3

Southeast Bank Bandar Ba'ar Branch conducts its in%estment portfolio mainly under three

mechanisms. *hese are as follows3

,. Bai Mechanism !Buying Selling mode"

-. Share Mechanism !profit Loss sharing mode"

0. (#ara !7ent Sharing mode"

*here are some other forms of in%estments which can be categori'ed as miscellaneous.

3.3.1 $"o)ut List

*he product list of Southeast Bank Ltd is shown below3

Table 3: Total $"o)ut List o% Southeast Bank Lt)+ at Ban)a" Ba*a" B"anh

C!""ific!tion of

(!i 'ech!ni"%

C!""ific!tion of

$h!re 'ech!ni"%

C!""ific!tion

of I!r!

'i"ceeneou"

,.Bai5Murabaha ,.Mudaraba ,.(#ara ,.$l5uard5ul5


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Bai5Murabaha can be defined as a contract between a Buyer and a Seller under which the Seller

sells certain specific goods permissible under (slamic Shariah and the Law of the land to the

Buyer at a cost plus agreed profit payable in cash or in lump sum or by installments on any fi&ed

future date. *he profit marked5up may be fi&ed in lump sum or in percentage of the cost price of

the goods.

3.0.1 m'o"tant eatu"es:

,. (t is permissible for the Client to offer an order to purchase by the Bank particular goods

describing its specification and committing him to buy the same from the Bank on Murabaha

i.e. cost plus agreed upon profit.

-. (t is permissible to make the promise binding upon the Client to purchase from the Bank that

is he is to either satisfy the promise or to indemnify the damages caused by breaking the

promise without e&cuse.

0. (t is permissible to take cash collateral security to guarantee the implementation of the

promise or to indemnify the damages.

4. (t is also permissible to document the debt resulting from Bai5Murabaha by a 6uarantor or a

mortgage or both like any other debt. Mortgage6uarantee Cash Security may be obtained

prior to the signing of the $greement or at the time of signing the $greement.

:. Stock and a%ailability of goods is a basic condition for signing a Bai5Murabaha $greement.

*herefore the Bank must purchase the goods as per specification of the Client to ac)uire

ownership of the same before signing the Bai5Murabaha agreement with the Client.

3.0.2 ules o% Bai-Mu"abaha:

*he Bai5Murabaha has some legal rules. *hese rules are mentioned below3

1. (t is permissible for the client to offer to purchase a particular commodity deciding its

specifications and committing itself to buy it on Murabaha for the cost plus the agreed upon

profit.

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2. (t is permissible that the mutual agreement shall contain %arious conditions agreed upon by

the two parties especially with respect to the place of deli%ery the payment of a cash security to

guarantee the implementation of the operation and the method of payment.

3. (t is permissible to stipulate the binding nature of the promise to purchase.

0. (t is a condition that the bank purchases the re)uested commodity !first purchase contract"

before selling it on Murabaha to the buyer.

5. (t is permissible for the bank to authori'e a second party including the buyer to recei%e the

commodity on its behalf.

/. Once the bank takes ownership of the goods it is responsible for any damages or defects.

4. (t is a condition that the Bai5Murabaha contract be drawn at the last phase.

!. *he legal rules of Bai5Murabaha must be obser%ed in drawing the contract of the Murabaha

sale connected with a promise to purchase.

. (t is permissible to document the debt resulting from Bai5Murabaha by a guarantor or a

mortgage like any other sale on credit.

3.0.3 Ste's o% Bai-Mu"abaha :

;ir"t $te? *he client submits a proposal regarding his re)uirements of the bank. *he client

sends a proposal with the specifications of the commodity to be ac)uired from the bank. *he

proposal also indicates details regarding the date time and place of deli%ery as well as price and

form of payment information. *he bank responds by sending a counter proposal either accepting

the buyer=s price or stipulating a different price.

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$econd $te3 *he client promises to buy the commodity from the bank on a Bai5Murabaha basis

for the stipulated price. *he bank accepts the order and establishes the terms and conditions of

the transaction.

Third $te3 *he bank informs the client !ultimate buyer" of its appro%al of the agreement to

purchase. *he bank may pay for the goods immediately or in accordance with the agreement.

*he seller e&presses its appro%al to the sale and sends the in%oice!s".

;ourth $te? *he two parties !the bank and the client" sign the Bai5Murabaha Sale contract

according to the agreement to purchase.

;ifth $te? *he Bank authori'es the client or its nominee to recei%e the commodity. *he seller

sends the commodity to the place of deli%ery agreed upon. *he client undertakes the receipt of

the commodity in its capacity as legal representati%e and notifies the bank of the e&ecution of the

pro&y.

,. (!i-'u!!

*he terms BaiF and Mua##alF ha%e been deri%ed from $rabic words عيب and . *he wordلجا عيب

means purchase and sale and the word لجا means a fi&ed time or a fi&ed period. Bai5Mua##alF

means sale for which payment is made at a future fi&ed date or within a fi&ed period. (n short it

is a sale on Credit.

Bai5Mua##al is a contract between the Bank and the client !Seller and Buyer" under which the

Bank !Seller" sells to the client !Buyer" certain specified goods !permissible under Shariah and

Law of the country" purchased as per order and specification of the client at an agreed price

payable within a fi&ed future date in lump5sum or by fi&ed installments.


,. Bank is not bound to declare cost of goods and profit mark5up separately to the client.

-. Spot deli%ery of the item and payment is deferred.

0. Ownership and possession of the goods is transferred by the Bank to the client before

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receipt of sale price.

4. Client may offer an order to purchase by the Bank any specified goods and committing

himself to buy the same from the Bank on Bai5Mua##al mode.

:. (t is permissible to make the promise binding upon the client to purchase from the Bank.

*hat is he is to either satisfy the promise or to indemnify the damages caused by breaking

the promise.

3.5.2 Ste's o% Bai-Mua66al:

*his type of financing by the bank is considered to be more risky than the other (slamic modes of

in%estment. *herefore the applicationproposal for Bai5Mua##al in%estment must be re%iewed

%ery carefully to ensure the client can ultimately make payment. . *he following steps may be

taken to ensure the Bai5Mua##al (n%estment is a good proposition for the bank3

,. *he bank may meet with the prospecti%e client regarding his in%estment needs and

business e&perience prior to an application proposal is submitted.

-. *he bank may re%iew the client=s past performance and other financing arrangements he

may ha%e had with the bank in the past.

0. *he bank may re%iew its current in%estment policy regarding this type of financing

arrangement to ensure the proposal meets bank guidelines.

4. (t should be remembered that if the Bai5Mua##al in%estment is not secured by first class

collateral securities it becomes more risky than in%estments under other modes of

(slamic banking.

*he following points should recei%e attention before making any in%estment decision under Bai5

Mua##al.

a" +hether the goods that the client intends to purchase are marketable and ha%e steady

demand in the market.

b" +hether the price of the goods is sub#ect to fre)uent and %iolent changes.

c" +hether the goods are perishable in short or in long5term duration.

d" +hether the )uality and other specifications of the goods as desired by the client can be

ensured.

e" +hether the goods are a%ailable in the market and the bank will be in a position to

purchase the 6oods in time and at the negotiated price.

f" +hether the sale price of the goods is payable by the client at the specified future date in

lump sum or in (nstallments as per the agreement.

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,.: (!i-$!!%

Bai5Salam is a contract between a buyer a seller under which the seller sells in ad%ance the

certain commoditiesproducts permissible under (slamic Shariah and the Law of the land to the

buyer at an agreed price payable on e&ecution of the said contract and the commoditiesproducts

are deli%ered as per specification si'e )uality )uantity at a future time in a particular place.

(n other words Bai5Salam is a sale whereby the seller undertakes to supply some specific

commoditiesproducts to the buyer at a future time in e&change of an ad%anced price fully paid on

the spot. IPrice is paid in cash and deli%ery of the goods is deferred.=

*he Bai5Salam sales ser%e the interests of both parties !(bid".

,. *he seller recei%es ad%ance payment in e&change for the obligation to deli%er thecommodity at some later date.


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?. *he seller !manufacturer" client may be made agent of the bank to sell the goods

deli%ered to the bank by him and a separate agency agreement is to be e&ecuted between

the bank and the client !$gent".

3./.2 ules an) Con)itions:

,. *here must be a contract which will be the principal instrument to go%ern the ad%ance selling

and buying. *he agreement should be signed before two witnesses !Surah $l5Ba)arah5-@-".

-. Game specification brand )uality )uantity si'e etc. of the goods must be specified clearly.

0. 2nit price and total price of the commodity must be fi&ed and mentioned.

4. E&act time and place of deli%ery must be specified.

:. Mode of transportation cost and other charge if any must be specified.

?. *he name of party who will bear those costs to be mentioned.

>. Price shall be paid to the seller in full at the time of signing the contract.

@. 1eli%ery of the commodityproduct can be made taken in installment or at a time within the

contract period if mentioned in the contract.

9. uantity of the commodityproduct shall be in une)ui%ocal terms.

,. *he supplier !client" is bound to repay the price recei%ed in ad%ance if failed to deli%er goods.

,,. Only purchase price of the commodityproduct may be mentioned.

,-. Buyer Bank shall bear the risk until disposedeli%ery of the same to the ultimate buyer.

3./.3 Ste's o% Bai-Salam:

1. C!"h "!e or $!e on Credit

*he bank pays the agreed upon price at the time of the contracts inception. *he seller agrees

to the deli%ery of the commodity some specified date in the future.

2. Dei/er !nd Receit of the Co%%odit on the $ecific due D!te

*here are se%eral options for deli%ery a%ailable to the bank3

a" *he bank may recei%e the commodity and resell it to another party for cash or

credit. b" *he bank may authori'e the seller to find another buyer for the commodity.

c" *he bank may direct the seller to deli%er the commodity directly to a third party

with whom the bank has entered into another agreement.

,. The $!e Contr!ct

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*he bank agrees to sell the commodity for cash or a deferred price which is higher than the

Salam purchase price. *he buyer agrees to purchase and to pay the price according to the

agreement.

,.= 'ud!r!!

Mudaraba may be defined as a contract between two parties under which one party !Bank"

supply capital and another party !client" in%est his efficiency labor e&perience and necessary

business acti%ities. (n such a business Bank is called ISahib5$l5Mall= and the client is called

IMudarib=.

(n Mudaraba both the parties share the profit as per agreed upon ratio and the losses if any being

borne by the pro%ider of funds. But if the loss is due to breach of trust i.e. misconduct

negligence or %iolation of the conditions agreed upon by the Mudarib then the loss is fully borne

by the Mudarib.


,. Bank supplies capital as ISahib5$l5Maal= and the client as the Mudarib in%ests in business

using hisher skill e&perience and e&pertise.

-. $dministration and Management is maintained by the MudaribClient.

0. Profit is di%ided as per agreement.

4. Bank bears the actual loss alone.

:. Client can not take another in%estment for that specific business without the permission of

the Bank.

3.4.2 ules o% Mu)a"aba :

*here are some legal rules that go%ern the business relationship Mudaraba which are as

follows.

,. (t is a condition in Mudaraba that the capital be specific in nature.

-. (t is a condition that capital must be in the form of currency in circulation.

0. (t is a condition that the capital cannot be sub#ect to indebtedness.

4. (t is a condition that the capital of the Mudaraba is deli%ered to the Mudarib.

:. (t is permissible for the capital owner to deli%er capital to two Mudharibs in a single contract.

?. (t is permissible to impose restrictions on the Mudarib as long as the restriction is beneficial

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and does not hinder the agent=s ability to make a profit.

>. (t is permissible for the Mudarib to hire an assistant to perform difficult work .

@. *he Mudarib is not re)uired to contribute any capital to the Mudaraba contract e&cept when

he is found to be negligent in the way the funds are handled.

9. (t is a condition that profits be carefully and properly accounted for to a%oid confusion by the

parties to the contract.

,. *he Mudarib shall collect his share of the profit only after obtaining the permission of the

capital owner.

,,. *he Mudarib does not recei%e his share of the profits until the final settlement of theMudaraba.

,-. *he Mudaraba agreement may be terminated if one of the two parties decides to rescind the

agreement.

3.4.3 Ste's o% Mu)a"aba:

*he bank pro%ides the capital as a capital owner. *he Mudarib pro%ides the effort and e&pertise

for the in%estment of capital in e&change for a share in profit that is agreed upon by both parties.

1. The Re"ut" of 'ud!r!!? *he two parties calculate the earnings and di%ide the profits at the

end of Mudaraba. *his can be done periodically in accordance with the terms of the agreement

sub#ect to the legal rules that apply.

2. P!%ent of 'ud!r!! C!it!? *he bank reco%ers the Mudaraba capital it contributed

before di%iding the profits between the two parties because the profit is considered collateral for

the capital.

,. Di"triution of 5e!th re"uting fro% 'ud!r!!? (n the e%ent a loss occurs the capital

owner !the bank" is responsible for the entire loss. (n the e%ent of profits they are di%ided

between the two parties in accordance with the agreement between them sub#ect to the capital

being reco%ered first.

,.8 'u"h!r!)!

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*he term MusharakaF ha%e been deri%ed from $rabic words ShirkatF and SharikatF. *he

word shirkat or sharikat means partnership of sharing. *hus the word MusharakaF mean a

partnership established between two or more partners for purpose of a commercial %enture

participated both in the capital and management. +here the profit may be shared between the

partners as per agreed upon ratio and the loss if any incurred is to be borne by the partners as

per capitale)uity ratio.

(n case of in%estment through Bank MusharakaF means a partnership between the Bank and

the Client for a particular business in which both the Bank and the client pro%ide capital at an

agreed upon ratio and manage the business #ointly share the profit as per agreed upon ratio and

bear the loss if any in proportion to their respecti%e e)uity.

3.!.1 T&'es o% Musha"aka:

Musharaka in the conte&t of (slamic modes of financing may be of two types3

i. Permanent Musharaka and

ii. 1iminishing Musharaka.

*hese are discussed below3

i7 Per%!nent 'u"h!r!)!? (n this type of Musharaka the period for termination of contract is

not specified. *hus it is also called continued Musharaka. *hough this type of Musharaka is

intended to continue up to the dissolution of the enterprisecompany but one can sell hisher

share of e)uity before dissolution.

Ste's o% $e"manent Mush"aka:

*he three steps to establishing Permanent Musharaka are discussed below.

1. P!rtner"hi in C!it!? *he bank tenders part of the capital re)uired in its capacity as a partner

and authori'es the customerpartner to manage the pro#ect.

2. Re"ut" of the Proect"? *he intent of the pro#ect is growth.


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ules %o" $e"manent Musha"aka:

*he following is a discussion of those legal rules that apply to the Musharaka relationship3

,. (t is a condition that the capital pro%ided by each partner is specific e&istent and easily

accessible.

-. (t is permissible for partners to ha%e une)ual ownership in the pro#ect.

0. (t is a condition that the capital of the company is money and %aluables.

4. (t is impermissible to impose conditions forbidding one of the partners from work.

:. $ partner is a trustee of company funds in his possession and is responsible for their proper

use.

?. (t is a condition that each partners= share of the profits be known to a%oid uncertainty.

>. (n principle profit must be di%ided among partners in ratios proportionate to their shares in

capital but some of the #urists permit %ariation in profit shares so long as it is agreed to by all of

the partners.

@. (n principle a partnership is a permissible and non5binding contract.

(''liation o% $e"manent Musha"aka:

Permanent Musharaka is helpful in pro%iding financing for large in%estments in modern

economic acti%ities. (slamic banks can engage in Musharaka partnerships for new or established

companies and acti%ities. (slamic banks may become acti%e partners in determining the methods

of production cost control marketing and other day5to5day operations of a company to ensure

the ob#ecti%es of the company are met.

ii7 Di%ini"hing 'u"h!r!)!? (n this type of Musharaka the share of capital or ownership to the

assetsproperty of the Bank gradually reduces and goes to the account of the Client with the

payment of share %alue by the Client in addition to share in profit as per agreement.

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$te" of Di%ini"hing 'u"h!r!)!?

(t appears that there are four steps of the diminishing partnership. *hose are mentioned below3

,. P!rtici!tion in C!it!? *he bank 5 tenders part of the capital re)uired for the pro#ect in its

capacity as a participant and agrees with the customerpartner on a specific method of

gradually selling its share in capital back to the partner.

-. *he partner 5 tenders part of the capital re)uired for the pro#ect and agrees to pay the agreed

upon amount in return for the ultimate full ownership of the business.

0. Re"ut" of the Proect"? *he intent of the pro#ect is capital growth. *he pro#ect may be

profitable or lose money.

4. The di"triution of the @e!th !ccrued fro% the Proect"3 (n the e%ent of loss each

partner bears his share in the loss in his e&act proportionate share of capital. (n the e%ent that

the pro#ect is successful profits are distributed between the two partners !the bank and the

customer" in accordance with the agreement.

:. The !n) "e" it" $h!re of C!it!? *he bank e&presses its readiness in accordance with

the agreement to sell a specific percentage of its share of capital.

?. *he partner pays the price of that percentage of capital to the bank and the ownership is

transferred to the partner.*his process continues until the bank has been fully compensated

for it=s capital share of the business. (n this way the bank has its principal returned plus the

profit earned during the partnership and %ice %ersa.

Rue" for Di%ini"hing 'u"h!r!)!?

*here are some legal rules for diminishing Musharaka as gi%en below3

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(n addition to all the legal rules that apply to the permanent partnership which also apply to the

decreasing partnership the following rules also must be obser%ed.

,. (t is a condition in the decreasing partnership that it shall not be a mere loan financing

operation.

-. (t is a condition that the bank must completely own its share in the partnership and all rights

of ownership with regard to management of the business.

0. (t is impermissible to include in the contract of decreasing partnership a condition that

ad#udges the partner to return to the bank the total of its shares in capital in addition to profits

accruing from that share because of resemblance to 7iba !usury".

4. (t is permissible for the bank to offer a promise to sell its shares in the company to the

partner if the partner pays the %alue of the shares.Aic!tion of Di%ini"hing 'u"h!r!)!

*he decreasing Musharaka is suitable for the financing of industrial businesses that ha%e regular

income. (t can be considered to be the appropriate mode to finance collecti%e in%estment. (n this

arrangement the bank earns periodic profits throughout the year and it encourages the partner to

participate in the #oint in%estment. (n addition it fosters indi%idual ownership by allowing the

partner to gradually buy the bank=s ownership interest. (n terms of society as a whole it corrects

the course of the economy by de%eloping a mode of positi%e partnership instead of the negati%erelationship of indebtedness. (n addition it assists in the e)uitable distribution of society=s

wealth.

,.> I!r!h

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8u)aha !#urists" ha%e defined (#araha as ownership of a benefit for consideration. *his is also

known as lease or


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,:. (t is permissible to purchase an $sset bearing a lease contract. *he lease contract may

continue since the purchased agrees to its continuity up to the end of the lease term.

,?. $s soon as the lease period terminates the lessee is under obligation to return the $sset to

the owner or if the lessor agrees he may enter into a fresh lease contract or purchase if from the

lessor on payment of agreed upon price as per market rate.

,>. *he lease contract is binding and no one party shall unilaterally rescind e&cept reasons that

abrogate binding contracts such as damage or destruction.

,@. (f the leased asset is damaged or destructed by the act of $llah and if the lessor offers a

substitute with the same specifications agreed upon in the lease contract the contract does not

terminate.

,.10 Hire Purch!"e


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uard means loan without interest and


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*he criteria to become eligible for a%ailing the facility under the scheme are gi%en below3

• $ny Citi'en of Bangladesh ha%ing age in between ,@K:: falling under the following

categories are eligible for a%ailing of credit facilities under the scheme3

• Confirmed Officers of go%ernment organi'ation Semi 6o%ernment organi'ations

$utonomous bodies Banks Leasing Companies (nsurance Companies any other

financial business organi'ations and public pri%ate organi'ations ha%ing corporate

structure.

• Professionals %i'. 1octors Engineers $rchitects Chartered $ccountants Cost

$ccountants Lawyers /ournalists and *eachers etc.

• Members of $rmed 8orces B17 Police $nsar sub#ect to fulfillment of terms and

conditions as per circular Go. 0-K47$6 !PSK," dated 0.0.99 of


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8or client already a%ailed facility and fully repaid in the full satisfaction at the bank second time

loan disbursement e)uity amount is to be minimum -H and this rate the may be minimum at

,:H and ,H for -nd time and more respecti%ely.

,.1, $t!ff Hou"e (uiding *o!n

One of the basic human needs is to ha%e a house to li%e in. $ house is an abode of peace and

happiness.


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(n case of purchase of apartmentflatbuilt house the staff shall ha%e to deposit the e)uity

money in the Branch or produce documentary e%idence in support of his in%estment up

to the satisfaction of the concerned Branch.

(n case of construction of house on the staff;s own land or for e&tension of the e&isting

house the %aluation of the Bank as regards staff;s in%estment shall be considered final.

*he staff shall ha%e to submit to the Bank the construction plan appro%ed by the

competent authority and also the re)uired permission to mortgage the property where

necessary.

*he staff must e&ecute all necessary documents including mortgage deed and complete

all necessary documentation formalities to a%ail the in%estment. 7elated documents of

mortgage agreement of sale and other documents must be %etted by the penal lawyer of

the Bank.

$"oe)u"e %o" (''liation:

(nterested persons shall ha%e to apply in prescribed form of the Bank through the Branch of the

concerned area. *he Bank shall sanction in%estment if the proposal is found acceptable after

e&amination of its %iability and profitability. *he Bank reser%es the right to sanction or re#ect any

in%estment proposal.

,.13 $ource" of ;und"

*he financial resources of the banks consist of ordinary capital resources comprising paid5up

capital and reser%es and funds rose through borrowings from the central bank and other banks

!inter5bank borrowing" and issue of (slamic financial instruments. *he ma#or part of their

operational funds is howe%er deri%ed from the different categories of deposits accepted on the

(slamic principles of Mudaraba and $l5+adiah which are discussed in the pre%ious chapter.

,.1 Credit Poic of $E(*

*he credit policy of SEBL is a combination of certain accepted time tested standards and other

dynamic factors dictated by the realities of changing situations in different market places.

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*he accepted standards relate to safety li)uidity and profitability of the ad%ance whereas the

dynamic factors relate to aspects such as the nature and e&tent of risk interest or margin credit

spread and credit dispersal. 6eneral guidelines about the conduct of ad%ances are issued by


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Some principles or standards of lending are maintained in appro%ing loans in order to keep credit

risk to a minimum le%el as well as for successful banking business. (t should be clearly

understood at the outset that these factors are not infle&ible and are gi%en as guidelines for

protecting the ad%ances. $ prudent banker should always adhere to the following general

guidelines of lending funds to his customers e.g.

a" Background Character and ability of the Borrowers

b" Purpose of the facilityc" Li)uidity

d" Safety

e" Gature of Securityf" Profitability

g" 1i%ersity

h" Gational interest

,.18 Deter%in!nt" for $eection of (orro5er

*he business of sanctioning ad%ances whether secured or unsecured is risky and needs special

attention. (n the absence of a charge o%er any specific asset the safety of ad%ance depends upon

the honesty and integrity of the borrower as much as upon the worth of his tangible assets. *he

banker has therefore to make proper en)uiries about the borrower. *his is more important in

Bangladesh where the incidence of default has become almost endemic.


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*he outcome of analy'ing the character is to ha%e o%erall idea about the integrity e&perience

and business sense of the borrower. *wo %ariables (nteractioninter%iew and Market 7esearch

are used to analy'e the character of the borrower.

C!it!

8or identifying the capital in%ested in the business can be disclosed using the following

indicators3

a" 8inancial Statements

b" 7ecei%able Payable statements to practically assess the business positions.

C!!cit

Capability of the borrower in running the business is highly emphasi'ed in the time of selecting a

good borrower.

Co!ter!

Make sure that there is a second way out of a credit but do not allow that to dri%e the credit

decision.

C!"h ;o5

Cash flow is the %ital factor that is used to identify whether the borrower will ha%e enough cash

to repay the loan or ad%ance.

Condition"

2nderstanding the business and economic conditions can and will change after the loan is made.

Co%!cenc

1o not rely on past history to continue. Stay alert to what can go wrong in any loan.

C!ree""ne""

7emember that documentation follow5up and consistent monitoring are essential to high )uality

loan portfolios.

Co%%unic!tion

Share credit ob#ecti%es and credit decision making both %ertically and laterally within the bank.

Contingencie"

Make sure that you understand the risks particularly the downside possibilities and that you

structure and price the loan consistently with that understanding.

Co%etition

1o not get swept away by what others are doing.

3.1!.2 Colletion o% C"e)it n%o"mation:

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Credit information can be collected from the following sources3

Per"on! Inter/ie5

$fter ha%ing collected all the information from outside source it is ad%isable to arrange for a

personal inter%iew with the borrower. *he inter%iew should be conducted in a free and pleasant

atmosphere.

*o!n Aic!tion

+hen a loan proposal has to be processed a banker first studies the loan application made by the

borrower. $ loan application usually contains information pertaining to the name of the concern

constitution nature and place of business year of establishment borrower=s e&perience in the

line particulars of assets and liabilities purpose of ad%ance amount re)uired the period of

ad%ance applied for nature of security offered sources of repayment etc.

'!r)et Reort"

7eports can be obtained from the %arious markets particularly from businessman carrying on

the same trade as the borrower does some of whom may be hisher friends others hisher ri%als

or enemies.

$tud of !ccount

(f the borrower is the customer of the bank a study of the borrowers account and hisher past

dealings will throw light on the aspect of keeping up commitments borrowing else5where etc.

which will assist a banker in #udging about creditworthiness of the borrower.;in!nci! "t!te%ent

*he borrower should be re)uested to supply the latest statement in regard to hisher assets and

liabilities. (t is always preferable to ha%e audited statements for the last three years.

Credit Infor%!tion (ure!u 6CI(7 Reort

*he Credit (nformation Bureau !C(B" was created in on august ,@ ,99-. $fter establishment of

Credit (nformation Bureau !C(B" at Bangladesh Bank collection of information about the

borrower has become easier. Bankers of course ha%e their own ways to collect information

about the prospecti%e borrower. *he Credit (nformation Bureau !C(B" of Bangladesh Bank has

undertaken the task of collecting collating and storing detailed credit information from

scheduled Banks and other financial institutions in its proper prospecti%e so that these can be

e&changed among the scheduled banks financial institutions and Bangladesh Bank for )uick

processing of new loan proposals and re5scheduling of e&isting loans.

*he information so far collected by C(B is3

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,. 1ebtor=sBorrower=s information

-. Owner=s information

0. 6roup $ffiliation information

4. Credit E&posure Matri& or 8inancial information

:. *hird Party guarantors information

Other "ource"

Other sources of information about the borrower include press reports regarding purchase and

sales of property auctions and decrees. 7egistration re%enue and municipal records can also be

referred to with ad%antage to %erify the properties owned by the borrower and charges thereon if

any.

,.1> Docu%ent!tion of the *o!n

Before disbursement of loan correct 1ocumentation is essential for the safety of an ad%ance.

1ocumentation is obtaining such agreement where all the terms and condition and securities are

written and signed by the borrower. (t specifies rights and liabilities of both the banker and the

borrower. (n documentation each type of ad%ances re)uires a different set of documents. (t also

differs with the nature of securities. *he documents should be stamped according to the stamp

$ct. *here are no hard and fast rules of documentation and it %aries from bank to bank.

6enerally following documents are taken in the case of a secured ad%ance by Southeast Bank

Limited3

i. 1emand promissory note3 of 82


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i&. 7esolution of the board of directors to borrow fund to e&ecute documents and completes

other formalities.

&. Letter of 7e%i%al.

&i. Letter of lien for ad%ance against 817.

3.1.1 ,b6eti#es o% 9oumentation against loana)#ane:

• (t procures a written e%idence of transaction.

• *he 1ocument will help the bank to include protecti%e clauses to safeguard the interest of

the bank.

• (t identifies the borrowers co5borrowers guarantors.

• (t defines the security.

• (t also identifies the nature of charge created by the bank.

3.1.2 Ste's %o" 9oumentation:

*he following steps are followed in case of taking documentation

,. 1rafting of 1ocuments.

-. 8illing of 1ocuments

0. E&ecution of 1ocuments

4. +itnessing

:. Stamping

?. 7egistration

>. Signature Aerification

@. Safe eeping of 1ocuments

3.1.3 ;hen 9ouments beome n#ali):

,. $lteration and (nterlineations in documents3 (f it is done after e&ecution.

-. 1eed misled by the miss5statement.

0. (f the party is blind or illiterate and if the documents is read falsely.

4. *he party e&ecuting the documents in not competent

:. (mproper stampingunder stamping

?. +ant of attestation or witnessing if necessary.

>. 8ailure to register with competent authority within specific time.

@. $mbiguous schedule of the offered security

9. 8orgery tempering deleting of documents.

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,. 1eed e&ecuted by undue influence or forcefully.

,,. (nstrument e&ecuted in blank !amount. security and liability" with a bad intention.

,-. +hen documents ha%e become time barred.

,.20 $ecurit !g!in"t Ad/!nce"

Security means things deposited as a guarantee of an undertaking or loan to be forfeited on case

of default. $lso means documents as e%idence of a loan certificate of stock bonds etc. it is also

means to be an insurance against an emergency. *he customer should own it.

3.2.1 T&'es o% seu"ities:

*he different types of securities that may be offered to a banker are as follows3

a" Personal security

b" *angible security

c" Primary security

d" Collateral security Per"on! "ecurit? 6uarantee of a respectable third party as personal security.

T!ngie $ecurit? *hat can be reali'ed from the sale or transfer e.g. shares stocks land

goods life policy etc.

Pri%!r $ecurit? Main co%er for an ad%ance. Primary security is the Principal or direct

security against which loan is sanctioned. *he banks get their charge noted o%er this securityin the form of pledge or hypothecation or mortgage.

Co!ter! "ecurit? $ collateral security is an additional security taken for ad%ance.

Collateral security may be two types3

i. Direct co!ter! "ecurit? 1irect collateral security means security obtained from the

borrower himself to secure his own account.

ii. Indirect co!ter! "ecurit? (ndirect collateral security means any form of security

gi%en by a third person to secure a customer=s account.

3.2.2 (tt"ibutes o% a oo) Seu"it&:

*here are certain )ualities which a good tangible security should posses. Some of the important

attributes are gi%en below3

a" 7eady Marketability

b" Easy $scertainment of Aalue

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c" Stability of Aalue

d" 1urability

e" Storability

f" Low cost of Labor and Super%ision

g" *ransportability

h" $scertainment of *itle

i" Easy transfer of title

#" $bsence of contingent liability

k" Jield

,.21 'ethod of Cre!ting Ch!rge"

Charge means +here in a transaction for %alue both parties e%idence an intention that property

e&isting or future shall be made a%ailable as security for payment of a debt and that the creditors

shall ha%e a present right to ha%e it made a%ailable there is a charge e%en though the present

legal right which is contemplated can only be enforced at some future date and though the

creditor gets no legal rights to property either absolute or special or any legal right to possession

but only gets the right to ha%e the security made a%ailable by an order of the court.N

3.21.1 T&'es o% Cha"ges:

i" ;iBed Ch!rge? $ charge is said to be fi&ed if it is made specially to co%er definite and

ascertained assets of a permanent nature or assets capable of being ascertained and defined

e.g. charge on Land and building or hea%y machinery. (t precludes the company from

dealing with the property charged; 5without the consent of the shareholder.

ii" ;o!ting Ch!rge"? (t is charge on property which is constantly changing e.g. stock5in trade.

*he company can deal with such property in normal course of its business until it becomes

fi&ed on the happening of an e%ent. *hus it is a charge on the assets of the company in

general.

3.21.2 Lien:

$ lien is right of banker to hold the debtor=s property until the debt is discharged. Bank generally

retains the assets in his own custody but sometimes these goods are in the hands of third party

with lien marked. +hen it is in the hand of third party the third party cannot discharge it without

Page 32 of 82


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the permission of bank. Lien gi%es banker the right to retain the property not the right to sell.

Permission from the appropriate court is necessary. Lien can be made on mo%eable goods only

such as raw materials finished goods shares debentures etc.

Te" of *ien?

*here are two types of Lion3

P!rticu!r *ien? Particular lien retains the particular commodity by the creditor in respect of

particular debt.

ener! *ien? *he characteristics of the general lien are

• 7ight for a general balance

• 1oes not ha%e the right to sell the property

• Simply the right to retain

3.21.3 $le)ge:

Pledge is the NBailment of goods as security for payment of a debt or performance of a

promiseN!sec5,>- of Cont. $ct"

Bailment is the deli%ery of goods by one person to another for some purpose under a contract

that the goods shall when the purpose is accomplished be returned or otherwise disposed of

according to the direction of the persons deli%ering them.!sec5,>- of Cont. $ct"

;e!ture" of Pedge?

• 6oods bailedpledged must be mo%able property

• Ownership remains with pledgor !borrower" Possession retains with pledgee !bank".

3.21.0


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• Borrower binds himself to gi%e possession of the hypothecated goods to the Bank 5when

called upon to do so.

• (t is a floating charge.

•

(t is rather precarious.

3.21.5 Mo"tgage:

Mortgage is created on the immo%able 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. $nother method called e)uitable mortgage is also used in bank for creation of

charge.


45/82


Purpose of loan !s".

7esult of financial analysis

Loan Structure !*enor Co%enants 7epayment Schedule (nterest"

Security $rrangements =>C Cone't:

*he credit officers7M must know their customers and conduct due diligence on new borrowers

principals and guarantors to ensure such parties are in fact who they represent themsel%es to be

i.e. now Jour Customer !JC".

$t first the Banker5Customer relationship would be established through opening of C1SB

accounts. Proper introduction photographs of the account holders signatories passports etc. all

the re)uired papers as per Bank;s policy are to be obtained during account opening. Physical

%erification of the address is to be made. $ declaration regarding appro&imate transaction in the

account is to be obtained during opening of account. (nformation regarding business pattern

nature of business %olume of business etc are be ascertained. $t least three Cs i.e. Character

Capital Capacity must be confirmed. $ny suspicious5transaction must be timely addressed and

brought down to the notice of


46/82


• Present and future business potentiality for optimum deployment of Bank=s fund to increase

return on assets.

• Preference for self li)uidating 2$L(*J business.

•

$%oiding Marginal performers.• 7isk dispersion is basic to sound credit principles and policies. Bank should be careful

about large and undue concentration of credit to industry one obligor and common product line

etc.

• Managing the amount si'e nature and soundness of one obligor e&posures relati%e to the

si'e of the borrower and Bank=s position among his other lenders.

• Personal guarantees of the principal partners or the 1irectors of the companies and where

necessary subordination agreement should be obtained.• 7ecogni'e impact of fee income through 7emittances Letter of Credit Letter of

6uarantee 8oreign E&change business in enhancing return on assets.

• *he asset5con%ersion or transaction flow cycle and the net5trading cycle of the customer i.e.

the terms on which they conduct the business.

3.22.3 Basis o% C"e)it isk:

One of the most significance risks is e&posed to is what is generally termed as ICredit 7isk=.

Since the largest slice of income generated by a bank and a ma#or percentage of assets is sub#ect

to this risk. (t is ob%ious that prudent management of this risk is fundamental to the sustainability

of a bank. So the following risk areas should be considered for analy'ing a credit proposal3

Borrower $nalysis !ManagementOwnershipCorporate Structure 7isk"

• (ndustry $nalysis !Business (ndustry 7isk"

• SupplierBuyer $nalysisMarket 7isk

• *echnological 7isk

•(nterest 7ate 7isk

• 8oreign E&change 7isk

• Cost O%errun 7isk

• 8inancial $nalysis !


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Mitigating 8actors

Loan Structure

• Security

• Game lending ! 7elationship $ssessment"

3.22.0 C"e)it isk "a)ing ?C@:

*he Credit 7isk 6rading !C76" is a collecti%e definition based on the pre5specified scale and

reflects the underlying credit5risk for a gi%en e&posure.

Credit risk grading is an important tool for credit risk management as it helps the Banks

financial institutions to understand %arious dimensions of risk in%ol%ed in different credit

transactions. *he aggregation of such grading across the borrowers acti%ities and the lines of

business can pro%ide better assessment of the )uality of credit portfolio of a bank or a branch.

*he credit risk grading system is %ital to take decisions both at the pre5sanction stage as well as

post5sanction stage.

U$E O; CREDIT RI$ RADIN?

• *he Credit 7isk 6rading matri& allows application of uniform standards to credits to

ensure a common standardi'ed approach to assess the )uality of indi%idual obligor credit

portfolio of a unit line of business the branch or the Bank as a whole.

• $s e%ident the C76 outputs would be rele%ant for indi%idual credit selection wherein

either a borrower or a particular e&posurefacility is rated. *he other decisions would be

related to pricing !credit5spread" and specific features of the credit facility. *hese would

largely constitute obligor le%el analysis.

• 7isk grading would also be rele%ant for sur%eillance and monitoring internal M(S and

assessing the aggregate risk profile of a Bank. (t is also rele%ant for portfolio le%el

analysis.

NU'(ER AND $HORT NA'E O; RADE$ U$ED IN THE CR?

*he proposed C76 scale consists of @ categories with Short names and Gumbers are pro%ided as

follows3

Table-0: C"e)it isk "a)ing

Page 3= of 82


48/82


Source: #redit Risk %radin& 'anual 2009.

CREDIT RI$ RADIN DE;INITION$?

$ clear definition of the different categories of Credit 7isk 6rading is gi%en as follows3

$uerior - 6$UP7 F 1? Credit facilities which are fully secured i.e. fully cash co%ered.

Credit facilities fully co%ered by go%ernment guarantee.

Credit facilities fully co%ered by the guarantee of a top tier international Bank.

ood - 6D7 F 2?

Strong repayment capacity of the borrower

*he borrower has e&cellent li)uidity and low le%erage.

*he company demonstrates consistently strong earnings and cash flow.

Borrower has well established strong market share.

Aery good management skill e&pertise.

$ll security documentation should be in place.

Credit facilities fully co%ered by the guarantee of a top tier local Bank.

$ggregate Score of @: or greater based on the 7isk 6rade Score Sheet.

Page 38 of 82

Grading Short Name Numbe

rSuperior $UP 1

Good D 2

Acceptable ACCPT ,Marginal/Watchlis

t

'G@* 3

Special Mention $' Sub standard $$ :

Doubtful D; =Bad & Loss (* 8


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50/82


*hese weaknesses #eopardi'e the full settlement of loans.

Bangladesh Bank criteria for sub5standard credit shall apply.

$n $ggregate Score of 4:5:4 based on the 7isk 6rade Score Sheet

Doutfu - 6D;7 F =?

8ull repayment of principal and interest is unlikely and the possibility of loss is e&tremely

high.


51/82


Source: #redit $olicy %uide 2009.

,.23 Aro/! Proce""

Page 1 of 82

(o!rd of Director"

Pre"ident '!n!ging Director

Deut '!n!ging

Director - 1

He!d of Coror!teG

Co%%erci!

(!n)ing

6'!r)eting7

He!d of Credit

Ad%ini"tr!tion

De!rt%ent

He!d of Credit6Credit Ar!i"!

Aro/!7

Di"ur"e%ent

6Ensuringcompliance with

terms conditions ofappro%al (ssuing

1isbursementLetter"

Cu"todi!

Dutie"

6C(B 7eportcollection

1ocumentationformalities"

Co%i!nce

!C(B CLreturns

Producing all

statementsre)uired by

theManagement"

'onitoring

Reco/er

!ManagingSM$ SS 18

BL accounts1ealing legal

matters"

EBecuti/e"GOfficer"

EBecuti/e

Officer"

EBecuti/e"GOfficer"

Re!tion"hi

'!n!ger" 6R'7

Deut '!n!ging

Director -

2

EBecuti/e

Officer"

EBecuti/e

Officer"

EBecuti/e

Officer"


52/82


(n appro%al process the Bank segregates its relationship Management Marketing from the

appro%ing authority. *he e&isting appro%al authorities are


53/82


$ flow chart of appro%al process of loan is gi%en below3

Source: #redit $olicy %uide 2009, Southeast Bank Ltd.

3.20.1 (''eal $"oess:

Page , of 82

(RANCH 'ARETIN TEA'

6EECUTIE$ O;;ICER$7

HEAD O; (RANCH

!$PP7OA$L1ECL(GE"

$S PE7 1ELE6$*(OG

BEJOG1 C$P$C(*J

7ECOMMEG1E1 *O

D'D

!$PP7OA$L1ECL(GE"

$S PE7 1ELE6$*(OG

HEAD O; CREDIT

($PP7OA$L 1ECL(GE"

$S PE7 1EL(6$*(OG

HEAD O;

CORPORATEGCO''ERCIA*

BANKING (MARKETING)

(MARKETING)

BEJOG1 C$P$C(*J

7ECOMMEG1E1 *O

BEJOG1 C$P$C(*J

7ECOMMEG1E1 *O

BEJOG1 C$P$C(*J

7ECOMMEG1E1 *O

BEJOG1 C$P$C(*J7ECOMMEG1E1 *O

8O7+$71E1 *O

EECUTIE CO''ITTEE O;

DIRECTOR$

!$PP7OA$L1ECL(GE"

$S PE7 1EL(6$*(OG

'D

!$PP7OA$L1ECL(GE"$S PE7 1ELE6$*(OG

(OARD O; DIRECTOR$

!$PP7OA$L1ECL(GE"


54/82


$ny declined credit may be represented to the ne&t higher authority for reassessmentappro%al.


55/82


*he functions of Credit $dministration 1epartment !C$1" are gi%en below by using a 8low

Chart3

;unction of Credit Ad%ini"tr!tion ;o5ch!rt

Source: #redit $olicy %uide 2009, Southeast Bank Ltd.

,.2: Di"ur"e%ent Proce""

Page of 82

;unction" of Credit Ad%ini"tr!tion

1epartment

Di"ur"e%ent Co%i!nceCu"todi!n 'onitoring

$ppro%al from

competent

authority

7eturns to BBC(B 7eporting

default list

circulation

Conditions Co%enant

Breach

Monitoring

Obtaining Security

1ocumentation as

per appro%al

Completion of

Security

1ocumentation

Safely Storing

LoanSecurity 1ocuments

!fire5proof"

Monitoring of Past 1ue

Limit E&piry

1ocuments 1eficiency

Maintain BB Circulars

ensure compliance

by all 1epts.

Limit Creation Complying1isbursementCheck List

Ensure all %aluerslawyers insurers are

appro%ed enlisted

their performance are

re%iewed periodically

$udit(nternalBB

(nspection

Compliance

Periodic 7e%iewof 1ocumentation

Ensure adherenceto appro%ed

terms other

re)uirements

before

disbursement.

1isbursement

Ensure Collateral is(nsured Properly

Aalued


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Security documents are to be prepared in accordance with appro%al terms and to be legally

enforceable. Standard loan facility documentation is to be drafted prepared by the legal counsel.

1isbursements under loan facilities should be made when all security documentation is in place.

C(B report should reflectinclude the name of all the lenders with facility limit outstanding.

$ll formalities regarding large loans loans to 1irectors is guided by Bangladesh Bank

circulars related section of Banking Companies $ct. $ll Credit $ppro%al terms must be met.

*he check list certificate is to be signed by Credit (n5charge and


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,.28 CREDIT 'ONITORIN

*o minimi'e credit losses monitoring procedures and systems should be in place which will

pro%ide an early indication of the deteriorating financial health of a borrower. *he credit

monitoring process in Bank is %ested on C$1. *he


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,.,0 Reco/er !nd ;oo5 u of Non Perfor%ing *o!n" 6NP*7 !nd Ad/!nce"

Loans and ad%ances in whate%er form granted by the Bank to its clients are repayable either on

demand or at the e&piry of fi&ed period or as per repayment schedule agreed upon while granting

the facilities. (f loan is repayable on installment basis default may be purely an o%ersight on the

part of borrower but in other cases it may be much more serious gi%ing the Bank the first

tangible e%idence that the borrower is in financial difficulty. $t this point the procedure for

dealing with potential loan losses comes into operation. *he Branch Managers !


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3.3.2 EAE;(L (A9 ST(TS VEC(T,A:

On e&piry of a facility the borrower may come forward with a proposal either for renewal of the

facility for a further period or for enhancement of the e&isting facilities. of 82


60/82


Page :0 of 82

CHAPTER-03

Trend An!"i" through '!or

Perfor%!nce Indic!tor" of Credit

'!n!ge%ent Oer!tion" of the (!n)


61/82


3.1 An!"i" of *o!n" !d/!nce" of (!nd!r (!4!r (r!nch9 $outhe!"t (!n)

$ detailed analysis of loans and ad%ances of Southeast Bank Ltd Bandar Ba'ar Branch is gi%en

below3

0.1.1 The Sena"io o% 9e'osit at Ban)a" Ba*a" B"anh ?Last i#e >ea"s@:

Table-5: Sena"io o% 9e'osit ?ig. in Tk.@

e!r A%ount

200: 4:@:990-

200= 4@0@::-9:

2008 :@9?0:40?

200> ,4@>99490

2010 6Uto June7 @-:,?---,

Source: Annual Report 2009 and Daily Affairs June 0, 20!0, Bandar Ba"ar Branch, S(BL

*he amount of deposit has been increased in each year. (n -? the total amount of

deposit was appro&imately *k.4:.@? Crore has raised up to abo%e appro&imately

*k.,4@.@ Crore by the year -9 and appro&imately @-.:- crore in -, !/une". So

there is a positi%e increasing rate of the total deposit.

"a'h-1: Sena"io o% 9e'osit

0.1.2 (mount o% Va"ious =in)s o% 9e'osit at Ban)a" Ba*a" B"anh+SEBL ?Last i#e >ea"s@:

Page :1 of 82


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Table- /: (mount o% Va"ious =in)s o% 9e'osit ?ig. in Tk.@

e!r De%!nd Deo"it $!/ing" Deo"it Ti%e Deo"it

200: 44-000 ,-4,-,>0 -94:4-?9

200= 0>,:?,,0 ,0-?9 0,??>9,,4

2008 4>>0:?4 ,,>0.:?,,@ 4-4:40>,4200> 4000:@ @>-:--,4 :>:,09>:

2010 6Uto June7 049-0?: 4>,4,--4> 0-0-:>?9

Source: Annual Report 2009 and Daily Affairs June 0, 20!0, Bandar Ba"ar Branch, S(BL.

8rom the abo%e table we can see that People are %ery interested about *ime 1eposit among

%arious 1epository Schemes. *he amount of time deposit is increasing year by year. (t is

Goticeable that the amount of sa%ing deposit was increased in a great amount by -9. *he

amount of demand deposit of this branch is not in satisfactory le%el compare to others.

"a'h-2: (mount o% Va"ious =in)s o% 9e'osit

0.1.3 (mount o% Total Loans an) ()#anes at Ban)a" Ba*a" B"anh+SEBL ?Last i#e >ea"s@:

Table- 4: (mount o% Total Loans an) ()#anes ?ig. in Tk.@

Year Amount

Page :2 of 82


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2006 0:?-?>2007 4:00@@,,92008 :4:>0?-9@2009 ,,@944--002010 (Upto June) ?@-9?@94


*otal loan and ad%ances of this branch was not satisfactory before -9. (n -@ the total

amount of loan and ad%ances was appro&imately :4 crore :@ lac. $fter that the amount of loan

and ad%ances was grown year by year.

"a'h-3: Total Loan an) ()#anes

0.1.0 Va"ious T&'es o% Loans an) ()#anes at Ban)a" Ba*a" B"anh+SEBL ?Last i#e >ea"s@:

Table-!: (mount o% #a"ious T&'es o% Loans an) ()#anes ?ig. in Tk.@

e!r (!i-

'ur!!h!

?Comme"i

(!i-'u!!

?Comme"ial@

Hire Purch!"e

?eal estate@

A-u!rd-

u-H!"!n

Con"u%r

Credit

$che%e

$t!ff

Hou"e

(uiding

Page :, of 82


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al@ *o!n

200: 0949:?4 ,,-4- --4:9?:4> ,:>09:: ,4@,@,? 5

200= -,0:? ,,?4:40@: 0,?,:@:4 ,>@-,-- ,:?-:4@ 5

2008 5 ,00?-9-4, 0?@@:>- 4-,9,?- ,?4>0: 5

200> 5 ,44,,?:@ 4044?: ?:@@9,:: >0?>> 0

2010

6Uto

June7

5 90,4-9 4:00,?: ,?::@>@- 4?,:@0 -9404:


*he most popular modes of disbursement of this branch are Bai5Mua##al and


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0.1.5 (mount o% Sho"t Te"m+ Mi) Te"m an) Long Te"m Loan at Ban)a" Ba*a" B"anh+SEBL:

Table-: (mount o% Sho"t Te"m+ Mi) Te"m an) Long Te"m Loan ?ig. in Tk.@

e!r $hort-ter% *o!n 'id-ter% *o!n *ong-ter% *o!n

200: ,->-@> --0:9@ 5200= ,0>--9-?: 0,?,:@@:4 5

2008 ,::-:-@?? ?0:->@> 0-?9::?-:

200> ,44,,?:@ 044>@> ,@,9@:>@@

2010 6Uto June7 409,?- ,0->4> :?0:@@?>


8rom the chart we can see that the amount of Long *erm loan is so negligible in -? and ->

compare to others. But it was increased in a noticeable amount by the year -@ -9 and -,.

But the amounts of in%estment in Short *erm Loans are %arying from year to year. *he amount of

Mid term Loan is in a good position by -? and ->. But it was started to gradually decline by

-@. $nd by -9 the amount of this loan was so poor that it was only more than 0.44 lac.

"a'h-5: (mount o% Sho"t Te"m+ Mi) Te"m an) Long Te"m Loans

Page : of 82


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0.1./ $e"entage o% Sho"t Te"m+ Mi) Te"m an) Long Te"m Loan at Ban)a" Ba*a"

B"anh+SEBL ?Last i#e >ea"s@:

Table-1: $e"entage o% Sho"t Te"m+ Mi) Te"m an) Long Te"m Loan

e!r $hort-ter% *o!n 'id-ter% *o!n *ong-ter% *o!n

200: 0?H ?4H 5

200= 0H >H 5

2008 -@H ,-H ?H

200> @.>:H .-:H 9,H

2010 6Uto June7 >.-:H .-:H 9-.:H


*he percentage of short term loan on the basis of total loan is decreasing year by year. $nd last

year it was only >.-:H. *he percentage of mid term loan was better by the year -> and it was

>H but last year it declined to .-:H only. 8rom the abo%e table we can say that the branch

gi%e more preference to long term loan from last - years. $nd in -@ ? percent of total loan

was long term loan.

"a'h-/: $e"entage o% Sho"t+ Mi)+ Long Te"m Loan

Page :: of 82


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0.1.4 ("ea o% 9isbu"sement at Ban)a" Ba*a" B"anh+SEBL ?Last i#e >ea"s@::

Table-11: 9isbu"sement in 9i%%e"ent Seto"s o% this B"anh ?ig. in Tk.@

e!r (u"ine""GTr!de Re! E"t!te Con"u%er

*o!n

$t!ff

*o!n

Co%%unic!tion

200: ,-4:4>>,9 9:9?:4> ,4@,@,? 5 ,-9:

200= ,0:??>?> ,-,@,4:@ ,:?-:4@ 5 ,940:>4?

2008 ,>:@-@44 ,,,4>9>- ,?4>0: 5 -:>0>,

200> >::0@,0 ,-,@???: >0?>> 0 0@:0@

2010

6Uto

June7

04@-,>> >,0:044: -0@44- ?:- ,@-40?


*he Southeast Bank Ltd Bandar Ba'ar Branch is financing most of its disbursement on the

communication real estate and for the businesstrade sectors. (n these three sectors this branch

in%esting more than 9H of its total loans and ad%ances. Consumer loan is another important

segment where this branch is also keeping a significant role on the total economy. *his branch is

also financing on staff loan sector which has an influence on its total disbursements.

Page := of 82


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"a'h-4: 9isbu"sement in 9i%%e"ent Seto"s

0.1.! $"o#isioning:

$ecific Pro/i"ion?


69/82


ener! Pro/i"ion On?

2nclassified Loans and $d%ances 1K

Small Enterprise 2K

Consumer 8inance for ea"s@:

Table- 13: eo#e"& o% Loan ?ig. in Tk.@

e!r Reco/er6A%ount7

-? ,:,

-> ,@

-@ -@>4

Page :> of 82


70/82


-9 :?9

-, !2pto /une" ->0-:


*he reco%ery of loan of this branch was not in a satisfactory le%el before the period -@. (n

-? the amount of total reco%ery loan was only *.,:., crore. $fter that the amount of

reco%ery was decreasing in ne&t financial year though the trend was %ery slow after -?. (n the

year -@ the amount of reco%ery was increased and the total reco%ery of this branch was more

than *. -@.>4 crore. But in -9 the amount of total reco%ery again decreased and the figure

stood only :.?9 crore.

"a'h-: eo#e"& o% Loan

0.1.1 Classi%ie) Loans o% Ban)a" Ba*a" B"anh+ Southease Bank Lt) ?Last i#e >ea"s@:

Table- 10: Total Classi%ie) Loans ?ig. in Tk.@

Te" 200: 200= 2008 200> 2010 6Uto June7

$eci! 'ention

Account

,:, ?-

$u $t!nd!rd :? ::, ,,>49 -,,-0:

Doutfu >0 @- :4?

Page =0 of 82


71/82


(!dG*o"" 90 994, ,9,4

Tot! -@ ,44 ?,4 -,?9 0,@,,


*he amount of classified loan increased in the year -9.8rom the Chart it has been seen that

classified loan was decreased from the period of -? to ->.But in -@ and -99 it wasincreased.

"a'h-1: Total Classi%ie) Loans

0.1.11 (mount o% $"o%it at Ban)a" Ba*a" B"anh+ Southeast Bank Lt) ? Last i#e >ea"s@:

Table-15: (mount o% $"o%it ?ig. in Tk.@

e!r Profit

200: ,--

200= -,::0,0

2008 ,@@4?@-?

200> -@0->>?

2010 6Uto June7 @,,4-


Page =1 of 82


72/82


*he amount of profit of this branch is in a satisfactory le%el each year then the other branches of

Southeast Bank Ltd of Sylhet. *he amount of Profit is higher in -9 and it was more than -.

credit management procedure of southeast bank limited

Documents