trust bank
TRANSCRIPT
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07 June, 2006
Begum Khaleda Khanam
Supervisor
ProfessorDept. of Accounting & Information Systems
University of Dhaka.
Subject: Submission of BBA Project Paper.
Dear Sir
With suitable respect I would like convey to your knowledge that as per our BBAProgram I have prepared my project paper under the topic of Credit Operations and
Performance Evaluation of The Trust Bank Limited under your kind supervision. Now I
like to submit my paper to you. I have tried my best to prepare the paper in consistence
with the optimal standard under your valuable direction..
I request you modestly to accept my paper as it may suffer from some shortcomings. Idesired and endeavored to make this paper a complete one. Therefore, I hope that this
will meet the standard of your judgment.
Thanking you for your kind supervision
Sincerely yours
Md. AhsanuzzamanBBA 7th Batch
Roll No. 159 (B)Dept. of Accounting & Information SystemsUniversity of Dhaka
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Acknowledgement
It was a great pleasure to prepare project paper on the various aspects of credit activities
and operations by The Trust Bank Limited. I would like to thank and convey my
gratitude to honorable Supervisor, Begum Khaleda Khanam, Professor, Dept. ofAccounting & Information Systems, University of Dhaka, for letting me to prepare this
report I would also like to express my sincere appreciation to her for his wholehearted
support and guidance.
I am also grateful to the management of The Trust Bank Limited for offering me the
Internship training. My special thanks to Mr. Saaduddin Ahmed, Senior Vice President &
Manager (SKB Branch), Mr. Mohammad Mosaddequl Haque, Vice President (Head ofMarketing & HRD), and Mr. Abdul Motalib Patwary, Senior Assistant Vice President &
Sub Manager (SKB Branch) of The Trust Bank Limited, and the staffs who have given
me the practical knowledge about the Banking operations.
I am also owed to each person who I bothered inside and outside of TBL, SKB Branch, in
carrying out this report.
EXECUTIVE SUMMARY
The principal reason banks are chartered by the government and the central bank is tomake loans to their customers. Banks are expected to support their communities with an
adequate supply of credit for all legitimate business and consumer financial needs and to
price that credit reasonably in line with competitively determined interest rates. Indeed,making loans is the principal economic function of banks to fund consumption and
investment spending by businesses, individuals, and units of government. How well a
bank performs its lending function has a great deal to do with the economic health of fits
region, because bank loans support the growth of new businesses and jobs within the
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banks trade territory and promote economic vitality. Moreover, bank loans often seem to
convey positive information to the marketplace about a borrowers credit quality,
enabling a borrower to obtain more and perhaps somewhat cheaper funds from othersources.
For most banks, loans account for half or more of their total assets and about half to two-thirds of their revenues. Moreover, risk in banking tends to be concentrated in the loan
portfolio. When a bank gets into serious financial trouble, its problems usually spring
from loans that have become uncollectible due to mismanagement, illegal manipulationof loans, misguided lending policies, or an unexpected economic downturn. No wonder,
then, when examiners appear at a bank they make a thorough review of the banks loan
portfolio. Usually this involves a detailed analysis of the documentation and collateral for
the largest loans, a review of a sample of small loans, and an evaluation of the banksloan policy to ensure that it is sound and prudent in order to protect the publics funds
The Trust Bank Ltd. started their operation more than 6 years ago. They gained success
from the very beginning of their operation and were capable enough to hold the successyear after year. They gained success very early because they have a very strong backup to
provide them financial support and they are the Army Welfare Trust. Total loans &
advances of the bank as on December 312005 was Tk. 9,738.32 million as against Tk.6,804.45 million in FY2004, showing an increase by 43.12% over the preceding year.
The credit portfolio of the bank is a mix of scheme loans, namely Micro credit,
Consumers durable scheme loan (CDS), Marriage Loan, Car Loan, HBF Loan andCommercial Loans. Commercial Loans comprise Trade financing in the form of working
Capital and industrial loans (both large and medium scale industries) in the form of Term
loans and other funded & non-funded credit facilities. Term financing indicates theparticipation in the industrial development of our country while by extending small loans
TBL has fulfilled the borrowing needs of the low and medium income groups of our
society. The classified loans & advances accounted for only 3.16% of the total Loans &
Advance of Tk. 1897.63 million in FY 2002. The bank as a matter of priority in its thepolicy wants to ensure quality of its Loan Portfolio by strengthening post disbursement
recovery measures as well as by prioritizing on Early Warning System (EWS) to check
the growth of non-performing assets.
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INTRODUCTION
Credit it is a very similar word for the bank. It contents a huge meaning. A banks mainearning source is credit. If banks credit management is not good then the bank will never
ever achieve its proper goals. Question may arise what are the proper goals for the bank?
The proper goals for the banks are profit maximization and shareholders wealth
maximization. The fundamental nature of credit is that an element of trust exists betweenbuyer and seller whether of goods or money. The main use of bank fund is to collect
money from surplus unit and lend it to deficit economic unit. The Trust Bank Limited is a
newly established bank, which is incorporated in 1999. The TBL has been established
with the objective of providing efficient and innovative banking services to the people ofall sections of our society. One of the notable strengths of this bank is that it is backed by
the disciplined and strongest Institution of Bangladesh i.e. Bangladesh Army and there isa synergy of welfare and profits in the dynamics of this institution. Towards attainment of
its goals and objectives, the bank pursues diversified credit policies and strategic
planning in credit management. To name a few, the bank has extended micro credit,
consumers durable scheme loans, house building loans etc. to cater to the needs of theindividuals, which in turn has helped thousands of families. The bank also extends loan in
the form of trade finance, industrial finance, and project finance, export & import finance
etc. The banks credit polices aimed at balanced growth and harmonious development ofall the sectors of the countrys economy with top most priority to ensure quality of
lending by averting growth of non-performing assets.
Origin of the report
Now a days, education is not just limited to books and classrooms. In todays world,education is the tool to understand the real world and apply knowledge for the betterment
of the society as well as business. From education the theoretical knowledge is obtained
from courses of study, which is only the half way of the subject matter. Practicalknowledge has no alternative. The perfect coordination between theory and practice is of
paramount importance in the context of the modern business world in order to resolve the
dichotomy between these two areas. Therefore, an opportunity is offered by Dept. of
Accounting & Information Systems, University of Dhaka, for its potential business
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graduates to get three months practical experience, which is known as Internship
Program. For the competition of this internship program, the author of the study was
placed in a bank namely, The Trust Bank Limited. Internship Program brings a studentcloser to the real life situation and thereby helps to launch a career with some prior
experience.
This paper is entitled Credit Operations and Performance Evaluation of The Trust Bank
Limited originated from the fulfillment of the internship program. For the internship
program, each student is attached with an organization. My internship was at The TrustBank Ltd., Sena Kalyan Bhaban Branch, Dhaka. During my internship, I had to prepare a
report under the supervision of Begum Khaleda Khanam, Professor, Dept. of Accounting
& Information Systems, University of Dhaka.
Objectives of the Study
To present an over view of The Trust Bank Ltd.
To analysis the Lending procedures maintained by the TBL
To observe principal Lending activities of The Trust Bank Ltd.
To evaluate Lending performance of The Trust Bank Ltd.
To measure the actual position in classified Loan and provisions maintained bythe TBL
To appraise the actual Recovery position of the TBL
To compare the classified conditions of the NCBs vs. PCBs vs. FCBs inBangladesh.
To evaluate the success of credit operations compare with other Banks.
To identify problems in credit operations of The Trust Bank Ltd.
To recommend suggestions for the successful Lending Operations of the TrustBank Ltd.
Methodology
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For preparing this paper, I used both Secondary and Primary data.
Collection of Primary Data:
Many of the data and information were collected from my practical experience andqueries from the executives while doing my internship at The Trust Bank Ltd.
Information and data regarding Overview of the TBL, interest rates & charges, credit
operations, performance measurement in Lending, SWOT Analysis, credit policies, LoanAgreement etc. were collected from these sources.
Collection of Secondary Data:
Data regarding the Credit operations and Performance Evaluation of The Trust Bank Ltd.
were collected from secondary sources like: Annual Reports, Brochures, Manuals and
Publication of The Trust Bank Ltd., Bangladesh Bank Library, BIBM Library, DSE
Library, News paper etc. were the major sources of secondary date.
Limitation of the study
The main problem faced in preparing the paper was the inadequacy and lack of
availability of required data. This report is an overall view of Credit Operations of The
Trust Bank Ltd. But there is some limitation for preparing this report. Firstly this bank isvery new so they do not have enough data, thats why I did not make vast compare this
bank with other banks. Secondly when I was doing my internee then there internal and
Bangladesh Bank auditing is going on thats why I did not get the after closing data thatis available data of 2005. With all of this limitation I tried my best to make this report as
best as possible. So readers are requested to consider these limitations while reading and
justifying any part of my study.
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An Over View of The Trust Bank Limited
The Trust Bank limited (TBL), a private commercial bank sponsored by the Bangladesh
Army Welfare Trust, started its operations in November 29, 1999.The authorized capital
of the bank is Tk. 2,000 million. The Army Welfare Trust (AWT) is the majorshareholder of the Trust Bank Ltd. Total shareholders equity at the end of December
2005 stood at Tk.991.97 million, where Paid-up capital is Tk 500 million, statutory
reserve is Tk 113.14 million and Retained Earnings is Tk. 178.83 million and sharemoney deposits Tk 200 million. The Paid- up capital is indicative of the face value of
5,000,000 ordinary shares of Tk.1,00/-each fully subscribed by the shareholders.
Status of The Trust Bank
The Trust Bank Limited is a scheduled commercial bank established under the Bank
Companies Act, 1991 and incorporated as a Public Limited Company under the
Companies Act, 1994 in Bangladesh on June 1999 with the primary objective to carry on
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all kind of banking business in and outside Bangladesh. The Bank had twenty one (21)
branches operating in Bangladesh now. It renders all types of personal, commercial and
corporate banking services to its customers within the purview of the Bank CompaniesAct, 1991 and in line with the directives and policy guidelines laid down by Bangladesh
bank.
Objective of the Bank
The Trust Bank Limited has been established with the objective of providing efficient
and innovative banking services to the people of all sections of our society. One of thenotable strengths of this bank is that it is backed by the disciplined and strongest
Institution of Bangladesh i.e. Bangladesh Army and there is a synergy of welfare andProfits in the dynamics of this institution.
Bank is service-oriented industry and we on our part are committed to ensure customized,
qualitative and hassle free services in our banking operations along with the focus tobroaden the clientele base. The bank has extensively in the countrys industrial and
agricultural sectors in the coming days. The bank is committed to contribute as such as
possible within its limitations for the economic growth and for ensuring value of itsavailable resources.
Performance of the TBL
TBL a blend of expertise and technological excellence is in place to meet varied needs of
modern customers. The bank aims at mobilizing untapped money of the country andprudent deployment for productive activities in the form of lending at a competitive
interest rates/loan pricing. Towards attainment of its goals and objectives, the bank
pursues diversified credit policies and strategic planning in credit management. To namea few, the bank has extended micro credit, consumers durable scheme loans, house
building loans etc. to cater to the needs of the individuals, which in turn has helped
thousands of families. The bank also extends loan in the form of trade finance, industrialfinance, project finance, export & import finance etc. The banks credit polices aimed at
balanced growth and harmonious development of all the sectors of the countrys
economy with top most priority to ensure quality of lending by averting growth of non-
performing assets.
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Reserves
The policy of the Trust Bank Ltd is to keep statutory reserve at 20% on profit before tax.
The Bank raised its Statutory Reserve from Tk 43.26 million in FY 2004 to Tk. 45.26
million in FY 2005.
Profit and Operating Results
Total operating income of the bank in FY 2005 was Tk. 511.45 million against a total
operating expenditure of Tk. 215.19 million. Total profit before provision stood at Tk.296.26 million during FY 2005. After keeping Tk. 69.97 million as provision against
classified loans & advances, and Tk. 105.00 million as provision for income tax, the net
profit stood at Tk. 121.29 million during FY 2005. Net profit after income tax in the year
2004 posted by the bank was Tk. 216.38 million. There is a significant increase in profitin 2005 over the preceding FY 2004. The earning per share was Tk. 24.26 in FY 2005.
The retained earning increased by 174% to Tk 178.33 million in FY 2005 compared toTk. 102.80 million in FY 2004.
Deposits
In FY 2005, the deposits of TBL shot up to Tk. 12704.90 million from Tk. 9314.65million as recorded in FY 2004. During this period, the deposit base was increased by
36.40% compared to the preceding year. The combination of competitive interest rates,
depositors trust in the bank and mobilization efforts of the bank resulted in this growth
of deposits. Efforts are a foot being made to further increase deposit base of the bank
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through promotion of business and exploring of potential scope.
Deposits of the TBL during the year
2000-2005 (in million)
1,111.182,478.82
2,975.73
4,483.259,314.65
12,704.90
A(2000)
B(2001)C(2002)
D(2003)
E(2004)
F(2005)
Loans & Advances
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Total loans & advances of the bank as on December 31, 2005 was Tk. 9,738.32 million as
against Tk. 6804.45 million in FY2004, showing an increase by 43.12% over thepreceding year. The credit portfolio of the bank is a mix of scheme loans, namely Micro
credit, Consumers durable scheme loan (CDS), Marriage Loan, Car Loan, HBF Loan and
commercial Loans. Commercial Loans comprise Trade financing in the form of workingcapital and industrial loans (both large and medium scale industries) in the form of Term
loans and other funded & non-funded credit facilities.
Loans & Advances of TBL during the year
2000-2005(in million)
525.74
1,603.95
1,897.63
4,358.31
6,804.45
9,738.32
A(2000)
B(2001)C(2002)
D(2003)
E(2004)
F(2005)
Term financing indicates the Banks participation in the industrial development of our
country while by extending small loans the TBL has fulfilled the borrowing needs of thelow and medium income groups of our society. The bank in the year 2005 is not extendedrepair & reconstruction of dwelling house. The classified loans & advances accounted for
only 1.32% of the total Loans & Advance of Tk. 9,738.32 million in FY 2005. The bank
as a matter of priority in its policy wants to ensure quality of its Loan Portfolio bystrengthening post disbursement recovery measures as well as by prioritizing on Early
Warning System (EWS) to check the growth of non-performing assets.
Branch Expansion
The TBL has taken up a programmed to expand its branches. The bank has already 21
branches in many different places in Bangladesh; most of them are inside the different
cantonments. The management is filling that they need more branches all over theBangladesh. So very recent they will open a branch in Gulshan, Dilkusha, Chittagong and
Sirajgonj. As per Bangladesh Bank circular that if any banks open a branch in Dhaka then
they have to be open a branch in out side Dhaka.
Information Technology (IT) & Automation
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All the branches of the TBL are fully computerized. New software is now in use to
provide faster, accurate and efficient service to the clients. The bank is continuously
striving for better services through extensive automation of its branches. We are soongoing to launch One Branch Banking through on-line connectivity. The bank has set up
a full-fledged IT division to keep abreast of the latest development of IT for better service
in the days to come.
Foreign Correspondents
Foreign correspondent relationship facilities foreign trade operation of the bank, mainly
in respect of export, import and foreign remittance. The number of foreigncorrespondents and agents of the bank in the year 2005 stood at more than 300, which
covers important business and trade centers of the world. The bank maintains excellent
relationship with the leading international banks, for handling all foreign correspondent
and maintaining all foreign business there is an International Division, which is called ID.
SWOT Analysis of the TBL
SWOT Analysis is an important tool for evaluating the companies Strengths,
Weaknesses, Opportunities and Threats. It helps the organization to identify how toevaluate its performance and can scan the macro environment, which is turn would help
the organization to navigate in the Turbulence Ocean of competition. Following is given
the SWOT analysis of The Trust Bank:
Strengths
1. Top Management:
The top management of the bank, the key strength for The Trust Bank has contributed
heavily towards the growth and development of the bank. The top management officials
are armys highest position holder, so they have a good idea about the current situation.
2. Company Reputation:
The Trust Bank has created a good reputation in the banking industry of the country.Their main customers are army persons. The popularity of this bank is increase day by
day also in the general public area.
3. Sponsors:
The Trust Bank has founded by The Army Welfare Trust. The main sponsors for this
bank are Sena Kalyan Sangstha. The chairperson of this bank is Chief of Army Staff and
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directors are also appointed by the sangstha, thats why the sponsor does not have any
problem for the fund.
4. Modern Facilities and Computer:
From the very beginning The Trust Bank tries to furnish their work surroundings withmodern equipment and facilities. For speedy service to the customer, The Trust Bank had
installed money-counting machine in the teller counter. The bank has computerized
banking operation under software called PC banking. More over computer printedstatements are available to internal use and occasionally for the customers. The Trust
Bank is equipped with telex and fax facilities.
5. Stirring Branches:
From the formative stage of The Trust Bank tried to furnish their branches by the
impressive style. Their well-decorated branches gets attention of the potential customer,
this is one kind of positioning strategy. The Sena Kalyan Bhaban Branch is alsoimpressive and is comparable of foreign banks.
6. Interactive Corporate Culture:
The corporate culture of The Trust Bank is very much interactive compare to other localorganization. This interactive environment encourages the employee to work attentively.
Science the banking jobs is very much routine work oriented and lovely environment
boots up the work capability of the employees.
Weaknesses
1. Limitation of Information System (PC Bank):
PC bank is not comprehensive banking software. It is desirable that a more
comprehensive banking system should replace PC bank system.
2. Hierarchy Problem:
The hierarchy problem treated as a weakness for The Trust Bank, because the employeewill not stay for a long. So there will be a chance of brain drain from this bank to other
bank.
3. Advertisement Problem:
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There is another weakness for The Trust Bank is advertisement. Their media coverage is
so much low that people do not know the bank thoroughly.
Opportunities
1. Diversification:
The Trust Bank can pursue diversification strategy in expanding its current line of
business. They do not serve not only the army but also the general people.
2. Business Banking
The investment potential of Bangladesh is foreign investors. So EBL has opportunity to
expand in business banking.
3. Credit Card
There is an opportunity to launch Credit Card in Bangladesh by EBL. Beside this, EBLcan acquire services for cards like VISA, MASTER CARD etc. So that they can enhance
the market based card service
Threats
1. Contemporary Banks:
The contemporary banks of The Trust Bank like: Dhaka Bank, Dutch Bangla Bank,
National Bank, Mutual Trust Bank, Mercantile Bank are its major rivals. They arecarrying out aggressive campaign to attract lucrative clients as well as big time
depositors. The Trust Bank should remain vigilant about the steps taken by these banks,
as these will in turn affect The Trust Bank strategies.
2. Multinational Bank:
The Rapid expansion of multinational bank poses a potential threat to new PCBs. Due tothe booming energy sector, more foreign banks are expected to operate in Bangladesh.
Moreover, the existing foreign banks such as HSBC, AMEX, CITI N.A, and Standard
Chattered are now pursing an aggressive branch expansion strategy. Since the foreignbanks have tremendous financial strength, it will pose a threat to local bank to a certain
extant in terms of grabbing the lucrative clients.
3. Default Culture:
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Default culture is very much familiar in our country. For a bank, it is very harmful. As
The Trust Bank is new, it has not faced it seriously yet. However as the bank grows older
it might become big problems.
Types of Credit made by the TBL
Modern banking operation touches almost every sphere of economic activity. The
extension of bank credit is necessary for expansion of business operations. Bank credit is
a catalyst bringing about economic about economic development. Without adequatefinance there can be no growth or maintenance of a stable output. Bank lending is
important to the economy, for it makes possible the financing of commercial and
industrial activities of a nation. The credit facilities are generally allowed by the bank
may be in two broad categories. They are as follows:
A. Funded Facilities:
Funded facilities can also be divided into the following categories
Term Loans:
The term of loan is determined on the basis of gestation period of a project generation of
income by the use of the loan. Such loans are provided for Farm Machinery, Dairy,Poultry, etc. It is categorized in three segments:
Types of Term Loan Time (Period)
Short Term 1 to 3 years
Medium Term 3 to 5 tears
Long Term Above 5 years
Over Draft (OD):
OD is some kind of advance. In this case, the customer can over draw from his/hercurrent account. There is a limit of overdraw, which is set by the bank. A customer can
with draw that much amount of money from their account. For this there is a interestcharge on the over draw amount. This facility does not provide for every one, the bank
will provide only those who will fulfill the requirement. It means that only real customer
can get this kind of facility.
Cash Credit (Hypo):
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It allows to individuals or firm for trading as well as whole-sale purpose or to industries
to meet up the working capital requirements against hypothecation of goods as primarysecurity fall under this type of lending. It is a continuous credit. It allowed fewer than two
categories:
1. Commercial Lending2. Working Capital
Cash Credit (Pledge):
Financial accommodation to individual/firm for trading as well as whole sale purpose or
to industries as working capital against pledge of goods primary security falls under this
head of advance. It also a continuous credit and like the above allowed under thecategories:
1. Commercial Lending
2. Working Capital
SOD (General):
Advance allowed to individual/firm against financial obligation (i.e. lien of FDR/PS/BSP
etc.) and against assignment of work order for execution of contract works fall under this
head. This advance is generally allowed for allowed for definite period and specific
purpose. It is not a continuous credit.
SOD (Imports):
Advances allowed for purchasing foreign currency for opening L/C for imports of goods
fall under this type of leading. This is also an advance for a temporary period, which is
known as preemptor finance and falls under the category Commercial Lending.
PAD:
Payment made by the bank against lodgment of shipping documents of goods imported
through L/C falls under this type head. It is an interim type of advance connected with
import and is generally liquidated shortly against payments usually made by the party forretirements of documents for release of import goods from the customer authority. It falls
under the category Commercial Lending.
LTR:
Advances allowed for retirement of shipping documents and release of goods imported
through L/C without effective control over the goods delivered to the customer fall under
this head. The goods are handed over the importer under trust with arrangement that sales
proceed should be deposited to liquidate the advances within a given period. This is also
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temporary advance connected with import that is known post-import finance under
category Commercial lending.
IBP:
Payment made through purchase of inlands bill to meet urgent requirements of customer
fall under this type of credit facility. This temporary advance is adjusted from the
proceeds of bills purchased for collection. It falls under the category CommercialLending.
FDBP:
Payment made to a party through purchase of foreign documentary bills fall under this
head. This temporary advance is adjustable from the proceeds of negotiable
shipping/export documents. It falls under category Export Credit.
LDBP:
Payment made to a party through purchase of local documentary bills fall under this
head. This temporary liability is adjustable from proceeds of the bill.
Bank Guarantee:
The exporters pay of the imported goods on behalf of the importer through bank
guarantee. If the exporter fails to make the fulfill payment at the moment the bank willtake the liability and pay to the exporter. This type of guarantee is also needed to attend
in any tender.
Micro Credit:
Loan has given only to the Army Person for the purpose of Repairing and Reconstructionof dwelling Houses.
CDS:
A credit facility is available for Armed Forces officials (Major and above or equivalent
Ranks and Status with minimum length 12 years of services). Car loan and Marriage loan
are also included as CDS.
HBL:
A credit facility is available for the retired Armed Forces officials.
B. Non Funded Facilities:
Non funded facilities are divided into the following categories:
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Bank Guarantee:
A credit facility in contingent liabilities from extended by the banks to their clients forparticipation in development work, likes supplies goods and services.
Letter of Credit:
A credit facility in contingent liabilities from provided to the clients by the banks for
import/procurement of goods and services.
Components of the Lending operationsMaintained by the Bank
Written Loan Policy
One of the most important ways a bank can make sure its loans meet regulatory standardsand are profitable is to establish a written loan policy. Such a policy gives loan officers
and the banks management specific guidelines in making individual loan decisions and
in shaping the banks overall loan portfolio. The actual make up of a banks Loan
portfolio should reflect what its loan policy says. Otherwise, the loan policy is notfunctioning effectively and should be either revised or more strongly enforced by senior
management.
1. A goal statement for the banks loan portfolio (i.e., statement of the characteristics
of a good loan portfolio for the bank in terms of types, maturities, sizes, and quality ofloans)
2. Specification of the lending authority given to each loan officer and loan
committee (measuring the maximum amount and types of loan that each person and
committee can approve and what signatures are required).
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3. Lines of responsibility in making assignments and reporting information within
the loan department.
4. Operating procedures for soliciting, reviewing, evaluating, and making decisionson customer loan applications.
5. The required documentation that is to accompany each loan application and what
must be kept in the banks credit files (required financial statements, security agreementsetc.).
6. Lines of authority within the bank, detailing who is responsible for maintaining
and reviewing the banks credit files.7. Guidelines for taking, evaluating, and perfecting loan collateral.
8. A presentation of policies and procedures for setting loan interest rates and fees
and the terms for repayment of loans.
9. A statement of quality standards applicable to all loans.10. A statement of the preferred upper limit for total loans outstanding (i.e. the
maximum ratio of total loans to total assets allowed).
11. A description of the banks principal trade area, from which most loans should
come.12. A discussion of the preferred procedures for detecting, analyzing, and working
out problem loan situation.
Steps in the Lending Process
Most bank loans to individuals arise from a direct request from a customer who
approaches a member of the banks staff and asks to fill out a loan application. Business
can requests, on the other hand, often arise from contacts the banks loan officers andsales representatives make as they solicit new accounts from firms operating in the banks
market area. Sometimes loan officers will call on the same company for months before
the customer finally agrees to give the bank a try by filling out a loan application.
Once a customer decides to request a loan, an interview with a loan officer
usually follows right away, giving the customer the opportunity to explain his or her
credit needs. That interview is particularly important because it provides an opportunityfor the banks loan officer to assess the customers character and sincerity of purpose.
If a business or mortgage loan is applied for, a site visit is usually made by an
officer of the bank to assess the customers location and the condition of the property and
to ask clarifying questions. The loan officer may contact other creditors who havepreviously loaned money to this customer to see what their experience has been.
If all is favorable to this point, the customer is asked to submit several crucial
documents the bank needs in order to fully evaluate the loan request, including complete
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financial statements and, in the case of a corporation, board of directors resolutions
authorizing the negotiation of a loan with the bank. Once all documents are on file, the
credit analysis division of the bank conducts a thorough financial analysis of them aimedat determining whether the customer has sufficient cash flows and backup assets to repay
the loan. The credit analysis division then prepares a brief summary and
recommendation, which goes to the loan committee for approval.
If the loan committee approves the customers request, the loan officer or the
credit committee will usually check on the property or other assets to be pledged ascollateral in order to ensure that the bank has immediate access to the collateral or can
acquire title to the property involved if the loan agreement is defaulted. This is often
referred to as perfecting the banks claim to collateral. Once the loan officer and the
banks loan committee are satisfied that both the loan and the proposed collateral aresound, the note and other documents that make up a loan agreement are prepared and are
signed by all parties to the agreement.
Credit Analysis:
The division of the bank responsible for analyzing and recommendations on the fate of
most loan applications is the credit department. Experience has shown that this
department must satisfactorily answer three major questions regarding each loan
application:1. Is the borrower creditworthy? How do you know?
2. Can the loan agreement are adequately protected and the customer has a high
probability of being able to service the loan without excessive strain?3. Can the bank perfect its claim against the assets or earnings of the customer so
that, in the event of default, bank funds can be recovered rapidly at low cost and with low
risk?Lets look in turn at each of these three key issues in the yes or no decision a bank
must make on every loan request.
Is the Borrower Creditworthy?
The question that must be dealt with before any other is whether or not the customer can
service the loan-that is, pay out the credit when due, with a comfortable margin for error.
This usually involves a detailed study of six aspects of the loan application- character,capacity, cash, collateral, conditions, and control. All must be satisfactory for the loan to
be a good one from the lenders point of view.
Character. The loan officer must be convinced that the customer has a well-defined
purpose for requesting bank credit and a serious intention to repay. If the officer is not
sure exactly why the customer is requesting a loan, this purpose must be clarified to thebanks satisfaction.
Responsibility, truthfulness, serious purpose, and serious intention to repay all monies
owed make up what a loan officer calls character.
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Capacity. The loan officer must be sure that the customer requesting credit has the
authority to request a loan and the legal standing to sign a binding loan agreement. This
customer characteristic is known as the capacity to borrow money. For example, in moststates a minor (e.g., under age 18 or 21) cannot legally be held responsible for a credit
agreement; thus, the bank would have great difficulty collectors on such a loan.
Cash. This key feature of any loan application centers on the question: Does the
borrower have the ability to generate enough cash, in the form of cash flow, to repay the
loan? In general, borrowing customers have only three sources to draw upon to repaytheir loans: or (a) cash flows generated from sales or income, (b) the sale or liquidation of
assets, or (c) funds raised by issuing debt or equity securities. Any of these sources may
provide sufficient cash to repay a bank loan.
Collateral. In assessing the collateral aspect of a loan request, the loan officer must ask,
does the borrower possess adequate net worth or own enough quality assets to provide
adequate support for the loan? The loan officer is particularly sensitive to such features as
the age, condition, and degree of specialization of the borrowers assets.
Conditions. The loan officer and credit analyst must be aware of recent trends in theborrowers line of work or industry and how changing economic conditions might affect
the loan.
Control. The last factor in assessing a borrowers creditworthy status is control whichcenters on such questions as whether changes in law and regulation could adversely
affect the borrower and whether the loan request meets the banks and the regulatory
authorities standards for loan quality.
Can the Loan Agreement Be Properly Structured and Documented?
The six Cs of credit aid the loan officer and bank credit analyst in answering the broad
question: Is the borrower creditworthy? Once that question is answered, however, asecond issue must be faced: Can the proposed loan agreement be structured and
documented to satisfy the needs of both borrower and bank?
A properly structured loan agreement must also protect the bank and those it represents-
principally its depositors and stockholders- by imposing certain restrictions (covenants)
on the borrowers activities then these activities could threaten the recovery of bankfunds. The process of recovering the banks funds- when and where the bank can take
action to get its funds returned-also must be carefully spelled out in a loan agreement.
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Needs for Collateral
Most Borrowers at one time or another will be asked to pledge some of their assets or topersonally guarantee the repayment of their loans. Getting a pledge of certain borrower
assets as collateral behind a loan really serves two purposes for a lender. If the borrower
cannot pay, the pledge of collateral gives the lender the right to seize and sell those assetsdesignated as loan collateral, using the proceeds of the sale to cover what the borrower
did not pay back. Secondly, collateralization of a loan gives the lender a psychological
advantage over the borrower.
The goal of a bank taking collateral is to precisely define which borrower assets are
subject to seizure and sale and to document for all other creditors to see that the bank has
a legal claim to those assets in the event of nonperformance on a loan.
Sources of Information about Loan Customers
The bank relies principally on outside information to assess the character, financial
position, and collateral of a loan customer. Such an analysis begins with a review of
information supplied by the borrower in the loan application. The bank may contact otherlenders to determine their experiences with this customer. Were all scheduled payments
in previous loan agreements made on time? Were deposit balances kept at high enough
levels? How much was borrowed previously and how well were those earlier loanshandled? Is there any evidence of slow or delinquent payments? Has the customer ever
declared bankruptcy?
Sources of Information about the Loan customers
Physical Investigations
CIB of Bangladesh Bank
Customer financial statements
Experience of other lenders with this customer
Customer Annual Report
Local or regional credit bureaus
Local Newspapers
Local chamber of commerce
Mechanism of Credit Distribution of the TBL
The primary factor determining the quality of the banks credit portfolio is the ability of
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each borrower to honor, on a timely basis. All credit comities made to the bank. The
authorizing credit personnel prior to credit approval must accurately determine this. If the
report of the project appraisal is very satisfactory to approve the loan proposal, than thefollowing steps furnish the approval procedure:
Make a proposal by the client to the bank Give all the necessary documents
Bank will send the parties statement to the Bangladesh Bank, their CIB (Credit
Information Bureau) will inquiry that whether this party is defaulter or a new one.
Bank will take the collateral from the party and analysis that how much it will
cover the total loans.
Bank will send this proposal to the head office. In the head office the Board of
Directors and Managing Director will approve the loan.
Head office will send the approval to the branch office.
Branch office will give the sanction letter to the party.
Bank will take the security and make it in their favor.
Loan Disbursement
After completing all the necessary steps for sanctioning loans bank will create a loanaccount by the name of the party and deposit the money to that account. Bank will give
cheque books to the party and advise them to draw the money and use it as soon as
possible, because whenever the money will transfer to the account interest will count
from that time.
Analyzing the Year Wise Loan Disbursement by the TBL
YEAR AMOUNT OF LENDING
(in million/Tk.)2000 525.75
2001 1,603.95
2002 1,897.63
2003 4,358.31
2004 6,804.45
2005 9,738.32
TOTAL 24,928.41
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Year-wise Total Amount of Lending
(million/Tk)
1,603.95 1,897.63
4358.31
6804.45
9,738.32
0
2,000
4,000
6,000
8,000
10,000
12,000
A(2001) B(2002) C(2003) D(2004) E(2005)YEAR
AMOUNT
Year-Wise Loan Disbursment
(Percentage)
7%8%
18%
28%39%
A(2001)
B(2002)
C(2003)
D(2004)E(2005)
From the graph we can say that in the year 2005 the total loan disbursement is 39% (Tk9738.32 million) to compare with other financial years. In the year 2004 the loan
disbursement was 28% (Tk 6804.45 million) and in the year 2001, 2003 & 2003 the loan
disbursement was 7% (Tk 1603.95 million), 8% (Tk 1897.63 million) & 18% (Tk
4358.31 million). So according to this graph we can easily say that the banks loandisbursement is increasing day by day. It is a positive sign for the bank. After
establishing the bank, disbursement of loan is not so high because of their inexperience
and inadequate loan disbursement policy. Now the bank has an attractive loan policywhich attracts the customers. If we see the percentage increase by the year then in the
loan disbursement is 39% and in the previous year it was 28%. So the percentage
increases by 11% only. In the year 2003 & 2004 the percentage increased by 10%. Incompare, the increasing percentage is about to same that is in 2005 the increasing
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percentage was 11% which is more then 1% in the previous year. It may be the good sign
for the bank because the loan disbursement is increasing or steady not decreasing. Banks
main earning source is loan disbursement, like: interest earning. It is a big part of thebanks total earning. So the bank should take care in this loan side.
Analyzing the Sector-wise LendingBy the TBL (million/Tk)
SECTOR 2003 2004 2005
Cash Credit 179.92 165.83 257.06
Cash Collateral 148.59 199.53 220.66
Overdraft 355.07 529.89 736.52
SOD 1,676.17 2,153.63 3,011.33
Marriage Loans (ML) 87.35 81.90 74.03
Car Loan (CL) 17.00 26.26 28.28
House Building Loan(HBL) 89.16 100.23 397.73
Term Loans 284.34 834.56 1,744.04
Staff Loans 11.23 20.94 46.16
Consumer Durable Scheme (CDS) 33.04 25.70 25.87
Repair & Recon. of Dwelling House (RRDH) 247.38 233.35 222.08
Loan Against Trust Receipts (LTR) 987.85 2,044.41 1,823.81
Payment Against Documents (PAD) 209.01 257.49 114.46Bill Purchased & Discounted 30.49 114.04 354.86
Other Loans 1.72 16.69 681.42Total Loans & Advances 4,358.31 6,804.45 9,738.32
Analyzing the Sector-Wise Loan Disbursement
Of the TBL in the year 2003
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SECTOR WISE LENDING IN 2003
328.
51
2031.24
247.
38
33.0
4
87.
35
17 8
9.1
6
987.85
209
30.
49 2
84.3
4
11.2
3
1.7
2
0
500
1000
1500
2000
2500
Amt. Of Lending (million/Tk)
Cash Credit
Overdraf t
RRDH
CDSML
CL
HBL
LTR
PAD
IBP
Term Loan
Staf f Loan
Other Loan
In the year 2003, The Trust Bank Ltd. only passes three years experience with loan
disbursement. This is not enough experience for lending loan disbursement. From thegraph, we can say that the TBL was not able to maintain a good lending operation in the
year 2003, though it was the fourth year of the TBL Banking operations. The maximum
portion of the lending has disbursed in the sector of Overdraft. About 43.63% of total hasgiven in this sector. The second position of loan disbursement was 22.67% on Loans
against Trust Receipts (LTR). Repair & Reconstruction of Dwelling House which another
name is Micro Credit has given up a big portion of total loan disbursement. More than19% of total loans have disbursed as other Loans (SOD, RRDH, ML, CL Letter of Credit
etc.). About 6.52% loans has given in the sector as Long Term Loan and 7.54% loanshave given as cash credit.
Analyzing the Sector-Wise Loan Disbursement
Of the TBL in the year 2004SECTOR WISE LENDING IN 2004
365.36
2683.52233.35
25.7
81.9
26.26100.23
2044.41
257.49
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114.04
834.56
20.9416.69
0
5001000
1500
20002500
3000
Amt. Of Lending (million/Tk)
Cash CreditOverdraft
RRDH
CDS
MLCL
HBLLTR
PAD
IBP
Term LoanStaff Loan
Other Loan
In the year 2004, from the graph we can say that the maximum portion of lending has
disbursed to the Overdraft sector which was 39.45% of total loan disbursement. The total
loan disbursement amount of Overdraft was increased but the percentage was decreased.
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In the year, loan disbursement of RRDH (Micro Credit) was decreasing. The second
highest percentage of lending was 30% of the total in Loans against Trust Receipts. Term
Loans has maintained the third position in loan disbursement by the TBL. The amount ofloan was 834.56 million, which was about12.26% of the total lending. A large amount of
loans was also disbursed as Cash Credit. Loan has also disbursed as short-term loans,
cash credit, House-building loans, Staff loans etc.
Analyzing the Sector-Wise Loan Disbursement
Of the TBL in the year 2005
SECTOR WISE LENDING IN 2005
477.
72
3747.85
222.0
8
25.
87
74
.03
28.2
8397.
73
1823.81
114.
47
354.8
6
1744.04
46.1
66
81.
42
0
500
1000
1500
2000
2500
3000
3500
4000
Amt. of Lending (million/Tk)
Cash Credit
Overdraf t
RRDH
CDS
ML
CL
HBL
LTR
PAD
IBP
Term Loan
Staf f Loan
Other Loan
In the year 2005, from the graph we can say that the maximum portion of lending has
disbursed to the Overdraft sector. Total percentage of Overdraft was 38.49%. Though
total amount of this sector was continue to increase but the percentage of the sector wasdecreasing. RRDH or Micro Credit was highly decreased. Loan against Trust receipt and
Term Loan are the second and third position in this year. The percentage of lending in
LTR was 18.73% of the total in this sector. This year long term Loans have maintainedthe third position in loan disbursement by the TBL. The amount of loan was 1744.04
million which about 17.91% of the total lending. Loan has also disbursed as Cash credit,
House building loans, Marriage loan, Car loan, Consumer Durable Scheme etc.
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LOAN-PRICING POLICY USED BY THE TBL:
In pricing a business loan, Bank management must consider the cost of raising loan able
funds and the operating costs of running the Bank. This means that Banks must know
what their costs are in order to consistently make profitable, correctly priced loans of anytype. There is no substitute for a well-designed management information system when it
comes to pricing loans.
The Trust Bank Limited is generally used the simplest loan-pricing model which assumesthat the rate of interest charged on any loan includes four components: (1) the cost to the
Bank of raising adequate funds to lend, (2) the Banks no funds operating costs
(including wages and salaries of loan personnel and the cost of materials and physical
facilities used in granting and administering a loan), (3) necessary compensation paid tothe Bank for the degree of default risk inherent in a loan request, (4) Banks desired profit
margin.
LOAN Marginal cost of raising No funds
loanable funds to lend + operating costs
INTEREST = Bank to the Borrower (including wages andSalaries of Bank Personnel)
RATE
Estimated margin to Bank
+ Compensate the Bank + desiredFor default risk profit margin.
Chart of Interest rate of The Trust Bank for Lending
SL Sector-Wise Lending
01 Agriculture/ Agro-Based Industry
a Loan to Primary Producer
b
Loan to Agriculture input Traders/Fertilizer
Dealers/Distributors
c Agro Processing Industries / Firms
02 Large & Medium Scale Industry (Term Loan)
03 Working Capitala Jute
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b Other than Jute 1
04 Export Financing
a Jute and Jute Products
b Other Exports 7%
05 Commercial Lendinga Loan against work order & brick manufacture
b Commercial Loan (Garments)
c Commercial Loan (Others)
d Small and Medium Scale Enterprise
06 Term Loan
a Small and cottage industries
b Urban Housing (Residential)
c Urban Housing (Commercials)
d
Loan for dwelling house repair & reconstruction ( Banks
scheme loan for low income bracket)
e Transport Loan
f Customer durable scheme
g Car and Marriage Loan
h House building scheme loan for in service Army Officers
07 Loan against FDR issued by TBL 2.5% above FDR rate but not less than 12%
08 Loan against Lien/ Pledge on saving certificates WEBD & other financial assets issued by TBL
09Loan against lien/ pledge on FDR , Saving Certificates, WEBD &Other allowable financial assets issued by TBL/ Financial Institution.
Revised on May, 2006
These sector-wise interest rates have been introduced by the Head Office of the Trust
Bank Limited. They use cost-plus pricing method in case of pricing the loans. The Head
office and the twenty (21) branches of the Trust Bank Limited have maintained theserates strictly except in case of some quality and credit-worthy lenders. After judging the
lenders credit-worthiness, the Trust Bank Limited gives some beneficiary to this kind of
lenders. They can enjoy a decreasing interest rate, which maintained by the Trust Bank
Limiteds branches internally. Other wise, the scheduled rates are maintained by all the
TBL branches. In case of Micro Credit, as the loan amount is not so large thats why thescheduled rate is maintained by the Bank. Actually, the Lending rate is based on the
prescription, which is given by Bangladesh Bank. Recently TBL has revised their lendinginterest rate on April, 2006. The revised lending interest rates have been effective from
May 01, 2006 for all existing and fresh sanction of credit facilities.
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Sector-wise Interest Income of the TBL During the year 2003-2005(million/Tk)
INTEREST INCOME SECTOR 2003 2004 2005
Interest on Consumer Durable Scheme 6.76 3.02 2.87
Interest on Over Draft 5.79 11.72 15.30
Interest on SOD (Industrial ) 75.27 236.45 351.35
Interest on Cash Credit 27.29 17.85 24.68
Interest on Marriage Loan 13.76 9.93 8.55
Interest on Car Loan 2.98 3.00 3.94
Interest on Payment Against Document (PAD ) 15.52 32.61 33.05
Interest on Reair&Recon. of dwelling House(RRDH) 31.43 24.55 22.51
Interest on House Building Loan 9.08 11.34 24.37
Interest on Term Loan 28.24 58.34 157.48
Interest on Time Lone - 1.35 27.38Interest on Inland Bills Purchased & Other Loan 109.17 5.20 23.35
Interest on Cash Collateral 6.58 17.32 31.60
Interest on Other Loans 0.95 235.99
Interest from Banks & Other Financial
Institutions
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Interest on FDR 66.92 112.37 122.40
Interest on Bangladesh BankForeign Currency Accounts
0.12 1.04 2.59
Interest Received From Local Banks 1.39 0.75 4.71
Interest on Call deposits 2.30 1.57 5.38
Interest Received from Foreign Bank 0.26 0.42 2.74
Total Interest Income 403.82 749.03 1,100.21
Analyzing the Year-Wise Total Interest Income
Of the TBL
Year-Wise Total Interest Income (million/Tk)
189.71276.41
403.83
749.03
1100.21
0
200
400
600
800
1000
1200
A(2001)
B(2002)
C(2003)
D(2004)
E(2005)
YEAR
AMOUNT
From the graph we can say that in the year 2005 the total interest income is 1100.21
million to compare with other two financial years. In the year 2004 the interest income
was 749.03 million and in the year 2003 the total interest income was only 403.83 millionwhich is more than the interest income year 2000 &2001. So according to this graph we
can easily say that the banks total interest income is increasing day by day. It is a
positive sign for the bank. But there is one thing that if we see the percentage increase bythe year then in the interest income is 76.16% in year 2005 and in the previous year 2004
it was 71.00%. So the percentage increases by 5.17% only. The total interest income was
75.40% in year 2003. In the year 2005 to 2004 the percentage increased but in compare
with year 2003 to 2004, the total percentage of interest income decrease. It may be not a
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good sign for the bank, because banks main earning source is interest earning. So the
percentage of total interest income should be steady & increase year after year. It is a
main part of the banks total earning. So the bank should take care in this interest incomesectors.
Analyzing the sector-wise Interest Income of
The TBL in the year 2003
SECTOR WISE INTEREST INCOME IN 2003
33.87
81.06
31.43
15.8
16.74
4.63 1
5.5
28.4
104.35
71.69
0.26
0
20
40
60
80
100
120
Amount (million/Tk)
Cash Credit
OD & SOD
RRDH
CDS & HBL
ML &CLIBP
LTR & PAD
Term Loan
Other Loan
Local Instit.
Foreign Bank
According to the graph, we see that in the year 2003, the total interest income was Tk403.83 million. In this year, the highest interest income was come from the Overdraft &
SOD which was Tk 81.06 million. Next position for the interest income was held from
the Local financial institution & banks. Cash credit and Repair & Reconstruction ofDwelling House (RRDH) which another name is Micro credit were about to same
contribution of the total interest income in this year. Interest income from consumer
durable scheme, IBP, Foreign exchanges also influence strongly on the TBLs total
interest income in this year.
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Analyzing the sector-wise Interest Income of
The TBL in the year 2004
SECTOR WISE INTEREST INCOME IN 2004
35.1
248.18
24.5
14.3
6
12.9
2
5.2
232.26
59.6
0.5
5
115.7
3
0.4
2
0
50
100
150
200
250300
Amount (million/Tk)
Cash CreditOD & SOD
RRDH
CDS & HBL
ML &CL
IBP
LTR & PAD
Term Loan
Other Loan
Local Instit.
Foreign Bank
According to the graph, we see that in the year 2004, the total interest income was Tk749.03 million. In this year, the highest interest income was come from the Overdrafts
and Loan against Trust Receipts (LTR) & Payment Against Document (PAD) which was
Tk 248.18 & Tk 232.26 million. In this year, the interest income of RRDH that meansMicro Credit was continuing to decrease. Next position for the interest income was held
from the local financial institution & banks. Interest on Term loans & Cash Credit also
has the large impact on the total interest income in this year. Interest income from
Marriage & Car Loan, IBP, Foreign exchanges etc also influence strongly on the TBLstotal interest income in this year.
Analyzing the sector-wise Interest Income ofThe TBL in the year 2005
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SECTOR WISE INTEREST INCOME IN 2005
24.7
1
366.65
22.
51
52.4
4
12.4
9
23.7
8
234.61
164.8
7
60.3
6135.0
5
2.7
4
0
50
100
150
200
250300
350
400
Amount(million/Tk)
Cash Credit
OD & SOD
RRDH
CDS & HBLML &CL
IBP
LTR & PAD
Term Loan
Other Loan
Local Inst it .
Foreign Bank
According to the graph, we see that in the year 2005, the total interest income was Tk
1100.21million. In this year, the highest interest income was come from the Overdraft &
SOD which is Tk 366.65 million that was 33.23%. In this year, Micro credit sectorcontinue decrease the interest income. Next position for the interest income was held
from loans against trust receipts (LTR) & payment against document (PAD) and local
financial banks & financial institution and the amount were Tk 234.61 & Tk 136.05million. Interest on Term loans also has a large impact on the total interest income in this
year. Interest income from Cash credit, IBP, Foreign exchanges and other loans also
influence strongly on the TBLs total interest income in this year.
Loan Classification and the TBL Bank
Signs for Classification
First and foremost requirement for any credit managers is to identify a problem credit in
its earliest stages by recognizing the signs of deterioration. Such signs include but notlimited to the following:
01. Non-payment of interest or principal or both on due dates or past dues beyond a
reasonable period or recurring past dues.02. In case of Overdraft no movement in the account beyond a reasonable period.
03. Deterioration in financial condition of the client, as gathered from clients latest
financial statement.
04. A shortfall in collateral coverage, particularly if the collateral was a key factor inthe decision-making.
05. Death or withdrawal of key owner(s) or management personnel.
06. Company filing for bankruptcy or voluntary dissolution.
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07. Adverse market report about the company itself or its principal owners.
Steps to follow for Classification
Steps to follow in such situations would be:
01. Recheck the account, for all outstanding, including any outstanding in allied or
sister company or in owners or partners or directors personal names.
02. Thoroughly review loan documentation to confirm, We have what we need,documents are in proper from, properly executed and current (i.e. not time barred).
03. If possible take current market value of the securities according to liquidation
basis. And take a close look at the assets and liabilities to determine who has the prior
right on those assets.04. If Grantors are involved, look closely at the net worth statement and send
demand notice.
05. Once the account is classified Sub-Standard, credit lines must be frozen.
Classification Process
For the purpose of determining the Classified status of an account, following guidelinesare to be observed
01. The process of classification of an account will start with strict application of the
risk rating assessment that isi. Sub-standard
ii. Doubtful
iii. Bad or Loss02. However unpaid interest or Principal or Expired Limit for a period of 180 days or
more or recurring past dues will remain the most significant rules for classification.
CLASSIFICATION AS SUBSTANDARD:
A loan is classified as substandard if any one of the following conditions is met:
(a) If an advance or any portion of an advance or interest thereon remains overdue for
180 days or more but less than 270 days then the advance is classified as substandard.
(b) For an advance of a continuing nature, even if the loan is not overdue as much as180 days, but the limit stands overdrawn by move than 50% for a period of 45 continuous
days preceding the reference date for the classification, then it is classified as
substandard.(c) If a loan has been renewed or rescheduled at least three times but is not overdue,
and any of the required payments for the required period have not made when they fall
due, then the loan is classified as substandard.
CLASSIFICATION AS DOUBTFUL:
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A loan is classified as doubtful if any one of the following conditions is met:
(a) The advance or any portion of the advance or interest thereon remains overdue
for 270 days or more but less than 360 days.
(b) A loan classified as substandard per clause 6 (b) above has remained substandardfor 180 days or more.
(c) A loan classified as substandard per clause 5 (c) above has remained substandard
for 180 days or more.(d) Legal action has been initiated.
(e) Qualitative criteria based on judgment.
CLASSIFICATION AS BAD.
A loan is classified as bad if any one of the following conditions is met:(a) The advance or any portion of an advance or interest thereon remains overdue for
360 days or more.(b) A loan classified as doubtful per clause 6 (b) above has remained doubtful for
180 days or more.
(d) A loan classified as doubtful per clause 6 (c) above has remained doubtful for180 days or more.
(e) If legal action has been initiated and no court decision has been obtained within
360 days of initiation of action then the loan is classified as bad.(f) Qualitative criteria based on judgment.
Classified Loan conditions of the TBL (million/Tk)
Particulars 2000 2001 2002 2003 2004 2005
Unclassified
Loans &Advances
525.74 1583.21 1837.63 4,271.20 6,704.10 9,609.36
Sub-Standard
Loans &Advances
- 14.95 29.86 40.75 33.43 48.85
Doubtful Loans
Advances
- 4.42 23.63 21.22 8.28 5.00
Bad/Loss Loans
& Advances
- 1.37 6.51 25.14 58.64 75.11
Total 525.74 1603.95 1897.63 4,358.31 6,804.45 9738.32
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Ratio of classified Loans to Total Loans of the TBL
PARTICULARS 2000 2001 2002 2003 2004 2005
Classified Loan 0% 1.29% 3.16% 2.00% 1.48% 1.32%
Unclassified Loan 100% 98.71
%
96.84
%
98.00
%
98.52
%
98.68
%
Total 100% 100% 100% 100% 100% 100%
Year-Wise Classified Loan (Percentage)
1.29
3.16
2
1.48
1.32
0 1 2 3 4
A(2001)
B(2002)
C(2003)
D(2004)
E(2005)
YEAR
Percentage
Classified Loan
The Trust bank Limited recorded a satisfactory level of performance in all the areas of its
operations in the year 2001- 2005. The success due to the combined and concerted efforts
of the management and staff of the bank under the able guidance, support and patronageof the members of the Board. But these were not enough in case of the Lending
operations.
The graph shows that the percentage of classified Loan in the year 2001 was 1.29% (Tk20.74 million), but in the year 2002, it was vastly increased and went up to 3.16% (Tk
60.00 million). After that TBL decreased their classified loan. In the year 2003, the
classified loan was 2.00% (Tk 87.11 million). Then in the year 2004 & 2005, the
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classified loan was 1.48% (Tk 100.35 million) & 1.32% (Tk 128.96 million). According
to international rules, a bank may have a maximum limit of classified Loans as 5% of the
total Lending. Though TBL did not pass this limit, but it is not a good sign for the Bank.In year 2002 TBLs CAMEL rating was 3, which means the Bank was only in a fair
position. The main problem of the TBL was that it was not able maintain a good Loan
policy. As a result, classified loans of this Bank have increased. After that TBL tooksome good loan policy which improves percentage of classified loan that is decrease the
percentage. It may notice that though the percentage of classified loan decrease every
year but the total amount of classified loan increase every year. TBL must have toimprove in this area and has to decrease the amount of classified Loans by a well-
designed recovery policy.
What are the main reasons behind classification
of the TBL?
01. New Banker or lacking of experience.
02. Most of the time bankers have to relay on the documents provided on the client.
But what is the purity of these data. Although the CA firm certifies the dates but financialjugulating is practicing around the world.
03. Clients over confidence about the project.04. Change in National and International Political scenery.
05. Sometimes borrower talks about some other repayment source out of the proposed
project but they dont keep the source as security to the bank.
06. Sometimes other than land or building banks also keep furniture and machinery assecurity. Later on when bank come to sell those, they found that the market value of those
assets is much lesser than the book value.
07. Sometimes bankers dont go through the financial figures properly.08. Most of the cases clients have done some financial jugulating on their data.
09. Sometimes Client caught by some unavoidable circumstances like- ship sink,
10. Sometimes bank dont take appropriate security from the client or grantor.11. Sometimes bank dont put concentration about the insurance.
12. Most of the cases the bankers fail to forecast the future business condition of the
clients.
Provision for Loans and Advances maintained
By the TBL
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Loan Loss Provision Procedure
As pert of pragmatic and conservative approach to sustain the quality of the Banks loanportfolio, Loan Loss Provision exercise made mandatory for all Line of Business. Such
exercise is decided by: a) generally accepted banking practice, b) conservative approach
to assess the quality of Risk Assets whereby the most accurate health of the LoanPortfolio is reflected on the books of the Bank and c) to be guided by Bangladesh Bank
instructions on provisioning.
Following guidelines are to be observed:
i. The prudential Provision Practice dictates that rather that wait until the close of
the fiscal year; provision exercise would be an on-going one, with the needed provisioncreated, when an account is classified and continues to remain classified. The provision
exercise is to be carried out by each quarter end, based on reports on Classified Accounts
related to previous quarter.
ii. Bangladesh Bank instructions are to be followed for the purpose of Loan LossProvision exercise.
iii. Unless otherwise enhanced by Bangladesh Bank regulatory body, Loan Loss
Provision Policy as per the matrix given below is to be adopted and followed by the
Bank:
Past Due O/S
Expired Credit
(CRITERIA)
Classification
Status
Maximum Provision to be held
against Net Loan Value
180 days
270 days 360 days
Substandard
DoubtfulBad / Loss
20%
50%100%
iv. Following formula is to be applied in determining the required amount of
provision:1. Gross Outstanding XXX
2. Less: (I) Cash margin held or fixed
Deposit (XXX)(II) Interest in Suspense Account ( XXX )
3. Loan Value
(For which provision is to be created before
considering estimated realizable value of othersecurity/collateral held) XXX
4. Less: Estimated salvage value of security / collateral held (XXX)
Net Loan Value XXX
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gone up 3.16%. After that the next three years classified loan amount was decreasing and
the percentage was 2%, 1.48% & 1.32%. Though the percentage of classified loan was
decreasing but the total amount of classified loan increased as the loan amount every yearincreased. In the year 2004, total provision of loans have created Tk 108.12 million
where provision of classified loan Tk 8.52 million & unclassified loan Year 2003 as Tk
60.23 million. In the year 2005, the classified loan increased to double as Tk 16.71million which is the bad sign for the bank. In this year provision against special
maintenance account was Tk 2.5 million. And provision against unclassified loan created
1% of total unclassified loan amount.
Provisions can be positive for the Bank
Although provisioning is associated with classified loans but it has a positive effect on
the banks. The Income Statement shows net profit after deduction of provisioning fund.
As a result tax goes down. But the most important thing is, it doesnt affect the dividend.Although naturally banks pay dividends from net profit but some times they pay
dividends from previous retained earnings. Moreover banks dont keep money as idlefund for provisioning. Money circulates among the operations. They just show this fund
to cover actual loss. So the bottom line is nothing is wrong to provision though it is
associated with classified loans.
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Recovery Policy of the TBL
Recovery Performance:
The recovery performance of the bank was not so good during the period 1999-2002.
Because the bank was recently established and the management was new &inexperienced in the banking sector. Also the credit administration and monitoring of this
bank was inexperienced. This bank is monitoring and all the loans are sanction by the
high authority whose are high officials of Bangladesh Army. This Bank has a common
thinking that the people who taking loan from this bank always think that this is an armybank so if I failed to pay then it will be a very big problem for me. But this thinking did
not work properly. Thats why the management have to think about a well-designed
Recovery Policy.
TBL Introduces A New Recovery Policy In 2003
TBL has introduced a new department called Early Warning System Department(EWSD). The bank as a matter of priority in its policy wants to ensure quality of its Loan
Portfolio by strengthening post disbursement recovery measures as well as by prioritizing
on Early Warning System (EWS) to check the growth of non-performing assets.
The secondary task of this department is to collect money from the classified clients. But
in the other banks the Branch Manager does this job. Other than that the recovery criteriaare more or less same for the banks. At the very begging they send reminder letter. Then
they send letter to inform them that they (bank) are going to sue against the client. Finally
the banks sue against the client.
Early Warning System Department (EWSD)
TBL has a special department called EWSD who are responsible for all accountsclassified in the banks portfolio. Actually they have work like CID officers. However
EWSDs responsibility will cover the areas of
01. Monitoring and controlling the classified accounts through monthly reporting and
quarterly review.
02. Actively follow the borrowers for recovery.03. Negotiate and reschedule the debts.
04. If the client dont utilize the new offer than it is the EWSDs responsibility to file
suit against the client.
EWSD will also prepare a Consolidated Report of all bad loans written-off on a quarterly.
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TBLs Recovery Probability Categories to be Assigned To All Classified Loans
Category
I. Loans determined to have high probability of recovery within 6 months; recovery
efforts to continue on an on-going basis.
II. Loans determined to have moderate probability of recovery within 1 year; review
recovery efforts on a 3 months basis.III. Loans determined to have low and remote probability of recovery; review case on
a 6 months basis.
IV. Loans determined to have virtually no chance of recovery: charge-off the books.
However in these situation proper approval from the appropriate approving authoritiesshould be obtained and also shall be guided by Bangladesh Bank instructions and subject
to complete analysis of:
Banking practice.Legal and tax implication andStatus of each individual credit.
Notes for assessment of category
Estimate the cost of continued collection efforts against any money, which can be
reasonably expected to be recovered. Include in the cost (i) employee man-hour, (ii) legal
expenses, (iii) charge of any external collection agency if used.
Why Recovery takes so much time
Only because of existing rules and regulation recovery is a time consuming procedure. I
think an example will make this thing clear. Let, Mr. X took loan from Y bank by giving
a land as registered mortgage and become bad. Now bank cannot sell the land without thepermission of court though the land was as registered mortgage to bank. So bank has to
sue against Mr. X and court send notice to Mr. X. But Mr. X can delay his coming by
saying he is sick and asking for more time. Court gives new date to settle the matter.Then on new date a person came to the court saying that he is the brother of the client and
the land is their fathers property. And most importantly, client didnt notify him before
give the land to the bank. So court asks him to prove his claim. Finally, if court gives
injunction in favor of bank, they face problem to sell the land. Because client put mussel-
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men protect the land from bank. Moreover people are not interested buy land on occasion
from court. Finally the interesting thing is most of the time the same client but the land in
another name
A COMPARATIVE STUDY TO EVALUATE THE LENDING PERFORMANCE OF
THE BANKING SECTOR IN BANGLADESH
NCBs vs. FCBs vs. PCBs
In our country there are basically three types of banks- Nationalized Commercial Banks
(NCBs), Private Commercial Banks (PCBs) and Foreign Commercial Banks (FCBs).
According to last 5 years (2001-2005) data among the total loans 23% loans becomeclassified. Now among the three types of banks, the lowest amount of classified loans is
hold by the FCBs, which is followed by PCBs and NCBs respectively. Now the question
arises why the FCBs are most efficient and the NCBs are the most inefficient.
Nationalized Commercial Banks
Currently there are four NCBs- Sonali, Agrani, Rupali and Janata. These banks are
inefficient because of the employees. As they are not responsible for their activities, theycan do whatever they wish. The easiest way to take loan from these banks is to give bribe
to top officers. Most of the cases they dont go for the feasibility studies of the borrower.
But recently Govt. become aware about this factor and takes several strong steps toremove this culture. But they dont successful until and unless, Govt. impose punishment
for the responsible employees. The punishment may be sack from job and jail. Now the
Govt. banker thinks whatever may be the case they dont loose their job. If Govt. couldremove this idea from them then they would become more careful about their activities.
Foreign Commercial Banks
Now lets put our attention to the FCBs. Currently twelve foreign banks operates in thecountry. Among them Standard Chartered Bank takes the leading role. Whatever maybe
the case, again here we try to find out why these banks hold less classified loans.
Firstly, out of twelve only five are effectively engaged in corporate banking, one is newly
established and others are basically doing foreign transactions job. As a result their
amount of classified loans becomes smaller then the other two types of banks.
Secondly, their cost of fund is less than others banks. So they can charge less interest
against the loan. As a result the demand for their loan is high and they have more options
to choose clients than other banks.
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Finally and most importantly because of their organization structure their employees are
more efficient and responsible to their activities. The ultimate result is that they hold lessclassified loans.
Private Commercial Banks
At last, lets put our concentration to the PCBs. Among the three types of banks, these
banks have about 26.10% classified loans because of two reasons.
First of all, their cost of fund is not cheaper than the FCBs. So they cant compete withthem.
Secondly and finally, the employees of these banks are not Govt. employees. They should
to be responsible for their activities. Moreover the borrowers have to wait long to getloans. But because of the efficient employees the PCBs hold less classified loans than the
NCBs.In a nutshell, we can say that the FCBs and NCBs enjoy better facilities than the PCBs.
The elite customers, who look for cheaper source of money, nock the FCBs doors. The
customers, who looks for quick source of money looks for the NCBs. PCBs have to deal
with the rest of the clients. Another point is that the numbers of PCBs are several timeshigher than the FCBs and NCBs. So a strong competition is moving around in the market
and the competition is not equal.
A COMPARATIVE STUDY TO EVALUATE THE LENDING PERFORMANCE THE
TRUST BANK LIMITED VS. PRIME BANK LIMITED
PBL vs. TBL
At the end of each year there a rating is done by Bangladesh Bank called CAMEL rating.
CAMEL i.e. five components are considered at the time of rating. Example C for Capital,
A for Asset, M for Management, E for Earning and L for Liquidity. Those who arestronger on these categories, their given number is 1 (one), satisfactory is 2 (two), fair is
3 (three), marginal is 4 (four) and unsatisfactory is 5 (five). CAMEL rating determines all
banks positions.
Now the reasons for which these two banks are selected for this comparison is their
position in the CAMEL rating. PBL (only PCB) located in the 1 category and TBL holds
the 2 or satisfactory position in the rating. Here I try to put our attention the reasons for
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which PBL holds number 1 position and what are the wrongs with the TBL management
that they hold only number 2 or satisfactory position.
Prime Bank vs. Trust Bank
Prime Bank Limited
Prime Bank Limited is a fast growing private sector. And the Bank is already at the top
slot in terms of quality service to the customers and value addition for the shareholders.The Bank made satisfactory progress in all areas of business operation in 2005. In 2005,
the percentage of lending to deposits was about 88.60%, which increased in 2004 as
82.72%. The amount of total operating income of the PBL shows it different from the
other Banks. In 2005, the amount of total operating income was Tk 2,406.43 million,which was in 2004 about Tk 1,970.37 million which was slightly increased and the
amount was Tk 436.06 million.
Prime Bank Limited at a glance (million/Tk)
Particulars 2004 2005
Deposits 28,069.24 36,022.46
Loans & Advances 23,219.67 31,916.11
Total Operating Income 1,970.37 2,406.43
Profits 1,064.24 1,200.83
Loans as (%) of total deposits 82.72% 88.60%
Provisions 58.35 20.28
Unclassified Loans 22,866.94 31,402.58
Classified Loans 246.23 308.21
Ratio of classified Loans to total Loans 1.25% 0.96%
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Total Deposits, Loans & Profits (million/Tk)
36022.46
28069.24
31916.11
23219.67
1200.8
1064.2
0
5000
10000
15000
20000
25000
30000
35000
40000
A(2005) B(2004)
YEAR
AMOUN
DEPOSITS
LOANS
PROFITS
Prime Bank Limited, it is the only private commercial bank in the 1st position in the
CAMEL rating. At the same time it holds negligible number of classified loans becauseof two reasons.
First of all, their loan sanction system is simple and easier then other banks. If anybodywants to take loan than he or she would contract with the branch manager. The managers
took the necessary documents form the client and send it to the Credit division located at
Head Office. The credit division verifies the documents and the client and sends theproposal to the Board of Directors for approval or rejection. If the board approved the
loan then Branch Manager will proceed next and continue to communicate with the
client. And he has to take all responsibility against the client, none else. As a result, he
becomes conscious about his job.
Secondly and finally, Prime Bank Limited put more concentration on the consumer client
than corporate client. Here consumer client means the borrower is a person rather thanlimited or proprietor based business organizations. And it is easy task to handle those
consumer clients. Moreover their client selection is better for which they are able to take
this position.
The Trust Bank Limited
The Trust Bank Limited at a glance (million/Tk)Particulars 2004 2005
Deposits 9,314.95 12,704.90
Loans & Advances 6,804.45 9,738.32
Total Operating Income 427.43 511.46
Profits 216.38 226.29
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Loans as (%) of total deposits 73.05% 76.65%
Provisions 47.89 69.97
Unclassified Loans 6,704.10 9,579.68
Classified Loans 100.35 128.97
Ratio of classified Loans to total Loans 1.48% 1.32%
Total Deposits, Loans & Profits (million/Tk
12704.9
9314.9
9738.32
6804.45
226.2
9
216.3
8
0
2000
4000
6000
8000
10000
12000
14000
A(2005) B(2004)YEAR
AMOUNT DEPOSITS
LOANS
PROFITS
The Trust Bank Limited is one of the latest names in the PCBs. It started its operation justfive years back. In 2000, the percentage of lending to deposits was 48%, which increased
in 2005 as76.65%. In 2004, the amount of total operating income was about Tk 427.43
million but in 2005 it was vastly increased by Tk 84 million and the amount was Tk511.46 million. In the year2004 total loan & advances and the deposits was Tk 6804.45 &
Tk 9314.90 million which increased in year 2005 to Tk 9738.32 & Tk 12704.90 million.
These are too difficult to make a comparison with the PBL. Here I tried to find out thereasons for the difference with PBL.
First of all, their organization structure. Here basically the branch manager seeks the
clients and sends documents to the Head Office Credit Division. Then credit division
verifies those papers and send proposal to the Board of Directors. If the proposalapproved then the client communicate with the head office to continue their facility and
for money contract with t