CREDIT OPERATING PROCEDURE OF BASIC BANK LTD.doc

7/28/2019 CREDIT OPERATING PROCEDURE OF BASIC BANK LTD.doc

http://slidepdf.com/reader/full/credit-operating-procedure-of-basic-bank-ltddoc 1/104

INTERNSHIP REPORT

ON

CREDIT OPERATING PROCEDURE OF BASIC BANK LTD.

ASIC Bank Limite

S e r v i n g p e o p l e f o r p r o g r e s s

1



Submitted to: Department of Management Studies

University of Dhaka

Supervisor- PROFESSOR SYED GOLAM MAOLA

Department of Management Studies

University of Dhaka.

Submitted by:

RUBANA NASRIN M.B.A (HRM), 6 TH Batch

Roll no.- 438, SL. no.-59

Department of Management Studies

UNIVERSITY OF DHAKA.

Date of Submission: 15 February, 2007.

2



LETTER OF TRANSMITTAL

Date: 15.02.07

To

Syed Golam Maola

Professor

Department of Management StudiesUniversity of Dhaka.

Sub: Submission of Internship Report.

Dear Sir,

I am highly satisfied to submit my report on “credit operating system” of BASIC

Bank Limited. This report is an integral part of our academic courses in

completion of the MBA program, which has given me the opportunity to have an

insight into the nature of loan, credit policy & practice, loan recovery and credit

problems of BASIC Bank Ltd. For preparing this report I tried my level best to

accumulate relevant and up graded information from all available sources.

In completing the Report I have tried my best in imparting every available details

of the Bank avoiding unnecessary amplification of the report. I hope that this

report will meet the standards of your judgments.

Faithfully yours,

_______ Rubana Nasrin

M.B.A (HRM), 6th Batch

3



ACKNOWLEDGEMENT

First of all I would like to express my gratitude to omnipotent and almighty Allah, whose

invisible guidance helped me to complete this report. Although, time was very limited for

getting the sufficient knowledge about all of banking service, but the short experience

that I gathered as an internee, in BASIC Bank Limited is an asset for all the time to come

in my life. I take the opportunity to express my deep sense of gratitude of my reverend

supervisor, Professor Syed Golam Maola for his invaluable suggestions and guidance

during the study period that has greatly inspired me in preparing this report successfully.

I am very much grateful to the authority of BASIC Bank Limited to assign me as an

internee in this reputed bank and have the opportunity to learn theoretical as well as

practical knowledge related to overall banking system and complete such an ambitious

study for my internship program as well as for preparation of this report. I am deeply

grateful to all concerned persons who provide valuable guidance, suggestions and advises

in collecting information, analyzing and preparing the report. I am particularly indebted

to them whose efforts and cordial cooperation made the report possible.

It couldn’t possible to thank all of those marvelous people who have contributed for the

preparation of this report. All of BASIC Bank employees are very frank and helpful. I

couldn’t think a single moment that I am working here as an internee. They helped me astheir employee. There are of course some very special people who can’t go without

mention. I am grateful to Mr. Mobarak Hossain Chowdhury, Deputy General Manager,

Mr.Masum Ahmed, Manager, Mr. Faruque Ahmed, Manager, Mr.Saidur Rahman Sohel,

Deputy Manager, Mr. Al-Amin, Deputy Manager and Mr. Motin Hossain, Officer, Mrs.

Asia Khanam, Assistant Officer, Mr. Billal Hossain, Officer of Dilkusha Branch of

BASIC for their cordial attitude and extending their helping hand to my problem

regarding internship program. Without their generous support I could hardly achieve my

cherished goals.

I am grateful to the Department of Management Studies, University of Dhaka for

providing me such opportunity to come closer to real situation. Finally, I want to express

my deep gratitude to my family members and also remember my friends whose enormous

help assisted me to complete my report.

4



Executive Summary

The present Internship Report “Credit Operating System”- A case study on Bangladesh

Small Industries and Commerce Bank Limited (BASIC) has been prepared under the

dynamic supervision of Professor Syed Gulam Maola, Department of Management

studies, University of Dhaka. The period of internship lasted for three months.

BASIC Bank Limited started its operation from January 21, 1989. Although the

Government of Bangladesh took over 100 percent ownership of BASIC in the year 1992,

the bank is yet not nationalized; it operates like a private bank. One of the significant

characteristics of BASIC is that the Bank’s Memorandum and Articles of Association

stipulates that 50 percent of loan -able fund is required to be invested in Small and

Cottage industries sector.

Credit is the most fundamental issue in our banking sector. Default culture is the most

common phenomenon in the banking sector of Bangladesh. Like other Govt. banks,

private banks also suffer from this problem. But, the Credit Management in BASIC is

relatively sound compared to all other similar banks operating in the country. As a result,

the bank has a very low rate of classified loans, which is around 4% only.

Although the amount of classified loans in BASIC is less than that of other banks, it stillremains a concern for the management because of its increasing trend during the last

three years. One of the major causes of classified loans in BASIC is the unwillingness of

the borrowers to repay loans in the backdrop of political unrest of the country. Other

causes include high rate of interest, entrepreneur’s inability to market their products, lack

of proper supervision by the bank officials, sickness of industries due to loss of

competitiveness in price with the similar imported products, lengthy bureaucratic

procedures of the other govt. agencies etc.

Since the process of recovery of classified loan involves lengthy legal procedures, the

percentage of recovery of such loans is very low. BASIC therefore emphasizes on

persuasion rather than going for legal action in order to recover its classified loans. Bank

considers the practical aspects of the projects being sick and extends further finance or

reschedules the repayment period.

5



BASIC should therefore establish a review process to examine the changing

circumstances of borrowers to determine the position of loans. The bank should also keep

in touch with any changes in the management structure of borrower organizations,

changes in industry trend and changes in overall economy of the country.

Before sanctioning a loan, the Bank should make survey on customers, suppliers and

competitors. Regular visits to borrower’s places and close monitoring of the activities of

the borrowers are more useful than having meetings in the bank.

6



CONTENTS

CHAPTER – 1 [Introduction] PAGE

NO.

[1.1] Background of the Study 1

[1.2] Objective of the Study 2

[1.3] Scope of the Study 2[1.4] Methodology of the Study 2

[1.5] Limitations of the Study 4

CHAPTER – 2 [Company Profile] 5-13

[2.1] Historical Background 5

[2.2] Functions 5

[2.3] Corporate Strategy 5

[2.4] Organizational Goal 6

[2.5] Lending Criteria 6

[2.6] Organizational Structure 6

[2.6.1] Board of Directors 6[2.6.2] Management 7

[2.7] Resources & Capabilities 9

[2.7.1] Physical & Technological Resources 9

[2.7.2] Human Resources 9

[2.8] Financial Resource 10

[2.8.1] Mobilization of Fund 10

[2.8.2] Utilization of Fund 11

[2.9] Performance of Bank 13

[2.10] Dividend 13

CHAPTER – 3 [Commercial Banking in Bangladesh] 14-17

[3.1] Historical Perspective of the Commercial Bank 14[3.2] Commercial Banking at Present 15

[3.3] Some Selected Indicator of Commercial Bank 16

[3.3.1] Branch Expansion 16

[3.3.2] Employment Generation 16

[3.3.3] Net Profit Performance 17

[3.3.4] Total Productivity 17

CHAPTER – 7 [Findings of the Study] 46-51

[7.1] Credit Policy of BASIC Bank 46

[7.2] Comparative Analysis of BASIC’s Credit Policy with other Bank 49

[7.3] SWOT Analysis of BASIC 51CHAPTER – 8 [Recommendation and Conclusions] 56-59

Conclusion 56

Recommendation 59

Appendix 60

Bibliography 63

7



CHAPTER ONE

1.1 Origin of the report

1.2 Background of the report

1.3 Objective of the report

1.4 Reason for the report

1.5 Scope of the report

1.6 Methodology of the report

1.7 Limitations of the report

8



1.1 Origin of the report

Reporting means the written presentation of the evidence and findings of a research.

After completion of the internship program report submission is essential. The report is

based on a topic that can satisfy both organization and my academic institution.

Internship is the last part of my MBA course. Being a MBA student internship and report

submission is essential for me. Without completion of internship and submission of

report I cannot be able to complete my MBA course.

This report is submitted to my internship supervisor, Syed Gulam Maola, Professor,

Department of Management Studies, University of Dhaka, after completion of the three

months internship program in the BASIC Bank Limited ( Dilkusha Branch). I have

assigned a topic “Credit Operating Procedure of BASIC Bank Ltd.” and the BASIC Bank

authority gave me the opportunity to work at the Dilkusha Branch for three months on

the topic.

1.2 Background of the Study

In the later 19th century, finance was a part of the Economics. But due to the globalization

and more expansion of international trade, Finance plays the major role for the economic

development. The development of a modern economy would not have been possible

without the use of money. Bank is an important and essential financial institution for the

necessity of the use of money and the protection of money.

Due to the globalization and technological innovation, banking business has become

competitive. To cope up with this, Bankers should have professional knowledge as well

as technical basic. As a MBA student Bank is one of the most appropriate field to gather

the experience. With a view to supply skilled personnel in Banking arena, DhakaUniversity has undertaken the internship training program for MBA students. As a part of

the MBA program, I was sent to BASIC Bank Ltd., Dilkusha Branch for having practical

exposure in the Bank for three months internship program.

9



1.3 Objective of the Report

The main objective of practical orientation is to get a clear-cut idea about Ban, how it

runs and what function it does i.e., to be acquainted with practical everyday function of

banking business. Along with the main objective, other objectives of report are:

1. To apply theoretical knowledge with practical situation.

2. To familiar with banking environment, clients, working hours, values, conditionsand other things related to bank

3. To understand the real management situation and to gather practical knowledge.

4. To explain the procedures, systems of credit management of BASIC Bank.

5. To determine the factors that influences the choice of a bank by the customers.

6. To evaluate the various loan programs of BASIC bank

7. To identify the problems faced by the customers and the bankers.

8. To evaluate whether the customer service provided by BASIC Bank is goodenough for its congenial existence and growth.

9. To get acquainted with the loan structure, size, system of loan sanction,classification and recovery of BASIC Bank.

10. To examine the profitability and productivity of the bank.

11. To acquire knowledge about the everyday banking operation of BASIC Bank.

12. To have a glance at the commercial banking system in Bangladesh.

1.4 Reason for the report

Bankers are the most important part for the economy. They play a vital role in the

economic development of the country. They keep the wheel of the economy for movingforward. So, efficient and qualified persons are needed for doing such development. To

build up potential future Banker MBA program can help a lot. Internship program can

help to be acquainted with day-to-day affairs of such people.

10



1.5 Scope of the report

There is certain boundary to cover this report. To achieve the objective of the report, i.e.

through knowledge about the organizational functions and its management, it is not

possible to cover each and every activity performed in the organization. The report has

covered only the general overview of the organization. Moreover the company itself and

financial institutions have got some confident information which are not possible to

disclose publicly, so those data and information had to be ignored for this report.

1.6 Methodology of the report

For making any report or statistical survey most of the data should be taken that reflect

actual situation. For my report I have collected various types of primary and secondarydata while I was performing my job. I have collected various data from various sources.

In a disciplined way I can say that the report input were collected from two sources-

Primary Sources:i) Practical deskwork

ii) Face to face conversation with the officers.

iii) Face to face conversation with the clients.

Secondary Sources:

i) Annual report of BASIC Bank

ii) Brochures of BASIC Bank iii) Prospectus of BASIC Bank

iv) Published or unpublished or personally collected data from

officers, Dilkusha Branch and Head Office of BASIC Bank v) Training institution’s papers those are supplied to the trainee.

vi) Various files and documents of credit division of BASIC Bank

Ltd.vii) Articles related to credit management in different journals and

magazines.

1.7 Limitations of the report

The study is done on the basis of survey in only one branch

Unavailability of relevant data and information.

Up-to- date information were not so available

Time is important issue in report writing. Schedule time span was not sufficient to

carry out an internship project of this big magnitude.

Some essential data could not be gathered because of confidentiality concerns.

11



The report was limited by the size of sample.

CHAPTER – TWOCOMMERCIAL BANKING IN BANGLADESH

2.1 Historical perspective of the commercial Banking

2.2 Commercial Banking and Recent Changes of Banking Sector

2.3 Some selected Indicators of Commercial Banks

12



2.1 Historical perspective of the commercial Banking

At the time of liberation there were around thirteen domestic scheduled banks and a few

foreign banks operating in the region of Bangladesh. Two of the smaller commercial

banks, namely, Eastern Banking Corporation and Eastern Mercantile Bank had their headoffices in the East Pakistan. The major banks only had their regional offices in Dhaka.

The management accepts the two East Pakistani banks were, however, almost solely in

the hands of non-Bangalis. All these banks except National Bank of Pakistan were in the private sector. The Government owned even National Bank of Pakistan only to the extent

of 25 percent. However, the management of the National Bank of Pakistan was almost

totally free from interference by the Government. Interestingly, the then central bank namely, the State Bank of Pakistan was owned by general public to the extent of 49

percent.

After the emergence of Bangladesh, all the banks except the foreign banks were

nationalized. The commercial banks were merged into six larger banks namely, Sonali,Janata, Agrani, Rupali, Pubali and Uttara bank. With the exodus of Pakistanis who

manned the top and upper middle echelon of management, a sudden vacuum emerged inthe effective top management of the nationalized banks. As the banks departed from

following the standard norms and practices, the state of affairs of the banks became

vulnerable leading to large-scale loan defaults. The loans taken by the public sector bodies like Bangladesh jute Mills Corporation, Bangladesh Textile mills corporation and

other state- owned enterprises were stuck- up at these institutions used bank loans mostly

for loss- financing.

During early 1980s the role of banks in the private sector was felt as an important factor

to invigorate the economy. A good number of new private banks were allowed tofunction. Banks following Islamic tends also started functioning. Most notabledevelopment was de-nationalization of two of the six NCBs, namely, Uttara and Pubali.A

few more foreign banks were also allowed to operate in the capital and port cities. During

mid 1980s when the private banks started to expand its lending activities, these banksexperienced somewhat new situation. The sponsor directors were especially interested to

use their influences for taking the loans for their own business houses or for enterprises

owned by their relatives or accomplices. Though the executives were free from thedictates of the bureaucrats, but had to show their allegiance to their new masters.

To correct the above-mentioned problems and to ensure the maximum benefits that

should be achieved from banking sector in 1990, the Bangladesh Government startedwith a five-year Financial Sector Reform Project (FSRP) with the following ten agenda:

I. Introduce a more liberal interest rate policyII. Introduce and implement an improved loan classification system

III. Introduce capital adequacy requirement and enforce these on the banking system

IV. Develop improved supervision systems for identify problem areas within the banking system

13



V. Develop money market instruments and initiate the auctioning of a short term

money market instrument

VI. Improve the operation of the capital markets and take the regulatory steps neededto improve such markets

VII. Clean up the jute debt in the commercial banking system and eliminate any risk to

the commercial bank portfolioVIII. Reform the NCBs in a three step process: 1) Recapitalize the NCBs2) Improve

their operating systems 3) Develop strategic approaches to their future

developmentIX. Improve loan recovery through introduction of better legislation

X. And courts to collect delinquent loans, improve the bankruptcy law to ease the

problems of liquidating companies, improve the flow of credit information for

new loans, and required the NCBs to improve their debt collectionXI. Initiate an immediate program of improvement to manpower through upgraded

training for bankers

2.2 Commercial Banking and Recent Changes of Banking Sector

Bangladesh Bank, the central bank of the country is the guardian of banking institutionsof Bangladesh. Bangladesh Bank (BB) head office is located at Motijheel, Dhaka. There

are two branches in Dhaka and there is one branch in each of the divisions. The structure

of the banking system is present in table-1.In Bangladesh around 75% people live in rural areas. Urban- rural ratio for NCBs is 585,

which is in line with the necessity of rural branches in our country. There are no FCBs in

rural area and PCBs had very few branches in rural area. FCBs are guided by the policyof their parent company but private banks should open their branches in rural areas.

Table 1: The Structure of Commercial Banking System In BangladeshType Number of institution.

Nationalized Commercial Banks (NCBs) 4

Specialized Bank/Dev.Banks 5

Foreign Commercial Banks (FCBs) 10

Private Commercial Banks (PCBs) 30

Source: Annual Report 2002-2003,Bangladesh Bank, GOB

Recent Changes:

Rupali Bank is a Government and public joint ownership bank, transformed from

nationalized to Public Ltd Company with 51% government ownership, which is

increased to94.5% in 1996.

RAKUB, created by the bifurcation of BKB in march1987.

ANZ Grindlays bank has merged in the Indian sub-continent and Middle East,

with standard Chartered Bank and has become ANZ Grindlays StandardChartered Bank in 2000.

Woori Bank is the renamed bank in Jan 2003,of Hanvit Bank Ltd, of formerly

Hanil Bank of South Korea, renamed in May1999.

14



Muslim Commercial Bank Ltd. (Pakistan) recently merged with Bank Asia in

2003.

Shamil Bank E.C (merged bank of Faisal Islamic Bank of Bahrain)

Credit Agricole Indosuez is the French Bank, formerly known as Bank Indosuez,

now this has been purchased by the Commercial Bank of Cylon.

2.3 Some selected Indicators of Commercial Banks

There are many indicators of commercial banking; some of the important ones are as

follows:

Branch expansion by commercial banks: Branch expansion by NCBs shows that they

are growing very slow. Compared to other two categories of Bank PCBs has grown very

fast in the period 1990-2001.Particularly in years 95 and 96 the highest number of commercial banks have been opened. FCBs show the slowest branch expansion rate

among the three categories of commercial banks. Their urban-based operation strategy isthe main reason for their slow growth.

Employment generation by the commercial banks: The most employment-creating

bank under the study period is PCBs. As their branches grow more in number other than

two categories of banks so they create more employment other than two categories of banks. In case of NCBs a cutback strategy of their manpower was found to restore

viability among them. It is evident from the tale that in year 1994 a huge number of

employees (1580) have joined their jobs in NCBs and simultaneously 208 employees lefttheir job from PCBs. More interestingly, in the following year 823 left from NCBs and

978 joined in PCBs. As number of branches grows slowly in case of FCBs so their

employment generation rate is also slow. However, from 1997 and onwards there aresome changes in this track.

Table: The position of banking institutions as on 30-06-04

Variables NCBs PCBs SBs FCBs Total

Deposits - 41.06 - - -

Resources 42.25 39.46 7.57 10.18 100

Loan 29.03 12.43 47.41 2.68 100Branches 3391(vill-2147) 1458(vill-377) - - -

Branches in Village 63.31 25.86 88.58 - -

Sources: Features in the daily news paper/Resume of the activities of financial institutes

of Bangladesh.

Net profit performance

Net profit figures show that FCBs are the most profitable banks. They make a positive

net profit. But NCBs make loss for the years 2001 to 1993 and PCBs mades loss for the

year’s 1991 to1994. Also the profit figures for NCBs and PCBs does not show trend, they

15



are volatile over the years. But the profit figures for FCBs are gradually increasing year

after year.

Total Productivity

Total productivity measures the ratio of input and output. In case of banks productivity

means the ratio of income and expenditure. If income substantially outweighsexpenditure then productivity of the bank is good. If productivity ratio is above one it is

an admirable indication. This ratio for foreign banks shows that they are executing at a

very good level of productivity. Productivity of private banks is reasonable.

Nationalized Commercial banks are impotent for the years 91, 92 and 93. Comparison

among foreign banks, nationalized commercial banks and private banks show that foreign

banks are most productive, then private banks, and then nationalized commercial banks.The lesson that should be learnt from this analysis is that PCBs, NCBs should

substantially reduce their expenditure. Expenditure can be curtailed by installing

computer database, reducing human resource expenditure can be curtailed by installing

computer database, and installing computer based internal control system

16



Chapter- Three

3.1Profile of BASIC Bank

3.2 Objectives of BASIC

3.3 BASIC’s Approach

3.4 Strategies of the BASIC Bank

3.5 Mission & Vision of BASIC

3.6 Organizational Goal

3.7 Organizational Structure

3.8 Corporate Culture of BASIC Bank

3.9 Human And Financial Resources of BASIC

3.10 Performance of The BASIC Bank limited

3.11 View of BASIC Bank, Dilkusha Branch

17



3.1 Profile of BASIC

The Bank of Bangladesh Small Industries & Commerce Limited (BASIC) established as

a Banking Company under the Companies Act 1913 launched its operation 1989, 21

January, incorporated by 1988, August 2. It is governed by The Banking companies Act

1991. The Bank started as a joint venture enterprise of the Bangladesh Credit Commerce

(BCC) foundation with 70 percent shares and the Government of Bangladesh (GOB) with

30 percent shares. The BCC Foundation being nonfunctional following the closure of the

BCCI, the Government of Bangladesh took over 100 percent ownership of the Bank on

4th June 1992.

Adjudged as one of the soundest banks in Bangladesh, BASIC Bank is unique in its

objectives. . It is a blend of development and Commercial Banking functions.

Steady growth in client base and their high retention rate since Bank’s inception testify to

the immense confidence they repose on its services. Diversified products in both liability

and assets sides particularly a wide range of lending products related to development of

small industries and micro enterprises, and commercial and trading activities attract

entrepreneurs from varied economic fields. Along with promotion of products special

importance is given to individual clients through providing personalized services. In fact

individuals matter in this Bank. This motto has been followed for development of clientele as well as human resources of the Bank.

The bank was established as the policy makers of the country felt the urgency for a bank

in the private sector for financing Small scale Industries (SSI). The memorandum and

Articles of Association of the Bank stipulate that 50% of Loan- able funds shall be

invested in Small and Cottage industries Sector.

BASIC Bank Ltd. at a Glance:

Established 1989Activity Starts Incorporated January 21, 1989

August 2, 1988

Legal Status Public Limited Company

Authorized Capital Tk. 2000.00 (Million) –2005

Paid-up Capital Tk.810.00 (Million) –2005

Deposit, Loans & Advances and Profit (Million) of BASIC Bank

18



2005 2004 2003

Deposit 22,326 15,509 11,267

Loans & Advances 15,339 12,000 9,283

Profit 872 689 616

* Profit before tax & provision

3.2 Objectives of BASIC :

BASIC Bank fully appreciates the importance and implication of the rapidly emerging

competition in the banking and finance sector of Bangladesh. It intends financing its

customer Suited to his or her place in the market. In this regards BASIC Bank

emphasizes competence among its Banking professional to cater to varied customer

requirements to the modern time.

The core objectives are:

- To carry on transact, undertake and conduct the business of Banking in all its

branches and to transact and do all matters and things incidental there to in

Bangladesh and abroad.

- To receive, borrow or raise money on deposits, loan or otherwise, upon such terms as

the company may approve and to hive guarantees and indemnities in respect of all

debts and contracts.

- To establish welfare oriented Banking systems.

- To play a vital role in human development and employment generation.

- To invest money in such manner as may from time to time be thought proper

- To carry on the business of buying and selling bullion, gold, and other valuable

assets.

3.3 BASIC’s Approach:

As a blend of development and commercial banking BASIC provides their clients with

full range of service to help them grow their assets and net worth. BASIC places

particular emphasis on small balance sheet size composed of quality assets and Steady

and sustainable growth. BASIC offers term loans to clients especially to develop small-

scale enterprises and also provide full-fledged commercial banking services like

19



collection of deposits, short term trade finance, working capital finance in processing and

manufacturing units and financing and facilitating international trade.

BASIC attaches special importance to technical and advisory support to small scale

industries in order to enabling them to run their enterprise successfully.

Micro Credit to the urban poor through linkage with NGO’s with a view to facilitating

their access to the formal financial market for the mobilization of resources is another

diversification of our services.

We provide an environment in which our staff members feel they can exercise their

initiative and judgement within a clearly established framework. Our Bank is the leader

in offering excellent career opportunity in transparent and participate management

culture.

Coping with the competitive and rapidly changing financial market of the country,

BASIC Bank maintains close connections with its clients, the regulatory authority

authorities, the shareholders (the government of Bangladesh), other banks and financial

institutions.

3.4 Strategies of the BASIC Bank:

The business of banking consists of borrowing and lending. As in other businesses,

operation must be based on capital, but Bank employs comparatively little of their owncapital in relation to the total volume of their transactions. The purpose of capital and

reserve accounts is primarily providing an ultimate cover against losses on loans and

investments.

Introduction of online Banking services, ATM cards, etc. are something that the Bank

looks forward to introducing as soon as possible because of the current demand in the

market place. Hence rapid innovation is definitely a key strategy of this Bank.

3.5 Vision and Mission of BASIC Bank:

Vision of the Bank

The gist of our vision is ‘Together towards Tomorrow’. BASIC Bank of Bangladesh

Limited, as the name implies, is not a type of Bank in some countries on the globe, but is

the first of its kind in Bangladesh. It believes in togetherness with its customers, in its

20



march on the road to growth and progress with services. to achieve the desired goal, there

will be pursuit of excellence at all stages with a climate of continuous improvement,

because, in BASIC Bank, we believe, the line of excellence is never ending. Bank’s

strategic plans and networking will strengthen its competitive edge over others in rapidly

changing competitive environments. Its personalized quality services to the customers

with the trend of constant improvement will be cornerstone to achieve our operational

success.

Mission of the Bank

The bank has chalked out the following corporate objectives in order to ensure smooth

achievement of its goals:

-To be the most caring and customer friendly and service oriented bank.

-To create a technology based most efficient banking environment for our customers.

-To ensure ethics and transparency in all levels

-To ensures sustainable growth and establish full value of the honorable shareholders and

-Above all, to add effective contribution to the national economy

As a part of the said issues, the bank also emphasizes on the following area of

services, such as: - Provide high quality financial services in export and import trade

-provide defect free quality customer service

-Maintenance of corporate and business ethics

-Become trusted repository of customers’ money and their financial advisor

-Make our stock superior and rewarding to the customers

-Display team spirit and professionalism

-Sound Capital Base

-Enhance shareholders wealth

2.6 Organizational Goal

• To employ funds for profitable purposes in various fields with special emphasison small-scale industries.

• To undertake project promotion to identify profitable areas of investment.

• To search for newer avenues for investment and develop new products to suit

such needs.

• To establish linkage with other institutions which are engaged in financing micro

enterprises.

21



• Adoption of new banking technology

3.7 Organizational Structure

To achieve its organizational goals, the bank conducts its operation in accordance with

the major policy guidelines laid down by the Board of Directors, the highest policy

making body. The management looks after the day-to-day operation of the bank.

3.7.1 Board of Directors

The Government holds 100% ownership of the bank. The Government of Bangladeshappoints all the directors’ of the Board. The Secretary of the Ministry of Industries is the

chairman of the bank. Other directors of the bank are high government and central Bank

executives. The Managing Director is an ex.-official member of the Board of Directors.There are at present 7 directors including the Managing Directors of the Board. The

present Board of Directors of the Bank consists of the following members.

[1]

Mr.Md. Nurul Amin

Chairman,BASIC Bank Limited& Secretary, Ministry of

Industries, Govt. of the People’sRepublic of Bangladesh.

[2]

Mr. Md. Sikander Ali Mondal

Director BASIC Bank Limited &Chairman, Bangladesh Small and

Cottage Industries Corporaion

[3]

Dr.Mohammad Tareque

Director, BASIC Bank Limited& Joint Secretary, Ministry of Finance, Govt. of the Peoples’

republic of Bangladesh

[4]

Mr. Mahmudul Karim

Director, BASIC Bank Limited

& Economic Minister, PermanentMission to the United Nations

[5]

Mr. Md. Mosharraf Hossain

Bhuiyan

Director, BASIC Bank Limited &Joint SecretaryMinistry of Commerce

Govt. of the ÿÿopleÿÿRepublic of Bangladesh

[6]

Mr. Asaduzzaman Khan

Director BASIC Bank Limited

&Executive Director

Bangladesh Bank.

[7] Mr. A. H. EKBAL HOSSAIN.

Managing Director

BASIC Bank Limited.

Head Office

Dhaka.

3.7.2 Management

The management is headed by the Managing Director. He is assisted by the General

Manager and Departmental heads in the head office. BASIC is different in respect to

hierarchical structure from other bank in that it is much more vertically integrated as for as reporting to the chief Executive is concerned. The Branches in charge of the Bank

report directly to the Managing Director and for functional purposes, to the Head of

Department consequently, quick decision making in disposal of cases is ensured.

22

NAME OF BOARD OF DIRECTORS:



[ORGANOGRAM OF BASIC BANK ]

23

GM(Operation)

Industria

l Credit

Division

Perso

nal

Central

Accounts

Establishment &

Branch Control

GM(Audit & Inspection)

DEVELOPMENT

GM

Credit

Division

Internati

onal

Division

BOARD OF DIRECTORS

Manager

Deputy Manager

Assistant Manager

Assistant Officer

Senior Officer

Officer

Clerical Staff:• Banking Staff

-

Non-Clerical Staff:• Messenger Staff



1996

1998

2000

2002

2004

2006

463 497 510 523 578 601

No. of employees

Y e a r

3.8 Corporate culture of BASIC Bank

This bank is one of the most disciplined Banks with a distinctive corporate culture. Here

we believe in shared meaning, shared understanding and shared sense making. Our

people can see and understand events, activities, objects and situation in a distinctive way

.They mould their manners and etiquette, character individually to suit the purpose of the

Bank and the needs of the customers who are of paramount importance to us. The people

in the Bank see themselves as a tight knit team/family that believes in working together

for growth. The corporate culture we belong has not been imposed; it has rather been

achieved through our corporate conduct.

3.9 Human And Financial Resources of BASIC

BASIC has a well-diversified pool of human resources, which is composed of people

with high academic background. Also, there is a positive demographic characteristic -

most employees are comparatively young in age yet mature in experience. In the

increasingly competitive market for highly skilled staff, BASIC focuses on providing a

stimulating compare environment and an attractive compensation package. The number

of employees has increased gradually to 453, 497, 510, 523,578 and 601 at the end of

2000, 2001, 2002, 2003, 2004 and 2005 respectively.

24



Mix of deposit at the end of 2005

793

207019462

Savings

Current

Term

582.82676.51 690.95

839.61937.52

0

500

1000

2001 2002 2003 2004 2005

Borrowing (million Tk.)

Financial Resources

Like any other financial intermediaries, BASIC is no exception in performing its curefunction viz. Mobilization of fund and utilizing such mobilized fund for profitable

purposes.

Mobilization of Fund

The main sources of fund for BASIC are:

1) Deposit

2) Borrowing

(1) Deposit: Deposit is the mainstay of BASIC’s sources of fund. Following usual

practices, it collects deposit through:

• Current Deposit

• Saving Deposit

• Fixed Deposit

(2) Borrowing for Development Finance: Apart from deposit BASIC received fundsfrom the following sources:

• Bangladesh Bank.

• Asian Development Bank.

• KfW (Kreditanstalt fur Wieder-aufbau- Credit Institution for Reconstruction), a

German Development Bank.

All of these funding sources fund are for relatively longer period. Receiving the credit

lines from ADB and KfW has been recognition of BASIC’s highly satisfactory

performance.

25



Assets Composition end of 2005

17%

4%

1%

1%

56%

15%6%

Investment

Cash

Other

Premises & Fixed assets

Advance

Balance with other banks

Money at call & Short notice

Utilization of Fund

Utilization of bank’s fund was more of less satisfactory during the year 2005. Given the

difficult economic situation, the management of bank focused on the consolidation and

quality of assert rather than in growth. The total assets of the Bank increased to Taka

27,136.37 million at end 2005 from Taka 19,436.57 million in the previous year. Deposit

rose from Taka 15,509.18 million in 2004 to Taka 22,325.58 million in 2005

Bank’s Assets

During the year 2005, total assets of the bank increased to Taka 27,136.37 million from

Taka 19,436.57 million in 2004.

3.10 Performance of The BASIC Bank limited:

The performance of BASIC has been satisfactory since its inception in respect to all the

measurement parameters. The Board of Directors are also happy with the overall

performance of the Bank, particularly for maintaining quality of assets and improvingshareholders value.

1. Deposit

A strong deposit base is necessary for the success of a Bank. During the year 2005 theBank mobilized a substantial amount of deposits from mid-level income group people

under Deposit Savings Scheme.

After critical handling the Bank mobilized total Deposit of 22,325.58 million as at 31-

12-2005 , where it was 15,509.18 million as at December 31, 2004which is an increase of

48.44%.

26



2. Capital and reserve fund:

The authorized capital of the Bank is 2,000.00 million. Total shareholders equity at theend of December 2005 stood at 1,726.14 million. The capital and reserve of the Bank as

on December 2005 stood at 916.14 million and paid up capital of 810.000 million. The

Bank also made provision on unclassified investment which is amounted to 10,236.82

million.

3. Investment

The total investment of the Bank stood at Tk. 4,540,550,760 as on 31-12-2005 as against

Tk. 2,252,964,460 in the previous year showing an increase of Tk. 22,875,863 with

growth rate of 100%. Investment is the core asset of a Bank. The bank gives emphasis toacquire quality asset and does appropriate lending risk analysis while approving

commercial and trade investment to clients.

4. Advance

The Bank’s Loans &Advances portfolio also indicates an impressive growth. Total loansand advances amounted to Tk. 12,000.15 million in 2004 as against Tk. 15,339.35million in 2004 and the growth is 27.08%. This is due to increased commercial and trade

financing, term lending and working capital support. The classified loan position is

almost nil. This was achieved by rendering due attention and monitoring high-risk advances. The Bank is trying to operate its credit activities with the target of achieving

Zero classified loans. The sectors financed include manufacturing, trading, construction,

transport, agriculture, fishing & forestry, edible oil, pharmaceutical, information

technology, consumer credit amongst others.

5. Dividend

As per Article number 130 the Memorandum and Articles of Association of Bank, unlessotherwise decided by the shareholders at least fifty percent (50%) of the net profit (after

tax)

to be reinvested in the capital of the company and to that extend bonus shares to beissued to the shareholders in lieu of cash divided. Also in maintaining the competitive

edge and creating a strong financial base the Board of directors with a view to improving

its equity by issuing bonus shares to its existing shareholders and accordingly, is pleasedto propose to its sole shareholders, the Ministry of Finance, subject to approval of the

Annual General Meeting, one bonus share against each 5 shares General Meeting, one

bonus share against each 5 shares amounting to Tk. 162.00 million and 6.25% cash

dividend amounting to Tk. 50.63 million.

6. Foreign Exchange Business

International Trade constitutes the main stream of business activities of BASIC Bank. It

offers a full range of trade financial services namely, Issue, Advice and Confirmation of

Documentary credit; arranging forward exchange coverage; Pre-shipment and Post-shipment finance; Negotiation and Purchase of Export Bills; Discounting bill of

Exchange; collection of bills, and outward remittance etc.

27



Import Business

In 2005 the Bank opened 14,094.96 million import letter of credit and the import volume

stood at Tk. 12,508 million with a growth of 12.00% in comparison with previous year.

Export Business

The growth of the export business has significantly been increased by40%. It stood at Tk.

11,097.23 million as on December 31, 2005 against Tk. 7,908.00 million of the previous

year.

Foreign Correspondents

BASIC Bank has correspondent Banking relationships with over 78 Banks spread across68 countries to facilitate trade and payment related services. So far the Bank’s total

correspondents are 180. The Bank has maintained relationship with leading internationalBanks and has successfully established credit lines with major Banks to support globalForeign Trade Business.

The Bank has earned an operating profit (after tax) of Tk. 285,494,793 during 2005 after

all provisions including the 1% General Provision on unclassified Loans Advances.

Provision for Income tax for the year amounted to Tk. 342,943,664 resulting in a net profit, after tax, of Tk. 285,494,793.

28



Performance at a glance (BASIC Bank limited):Particulars 2005 2004

From the Balance Sheet(Million Taka)

Authorized Capital 2,000.00 2,000.00Paid-up Capital 810.00 675.00

Reserve and Surplus 9,116.14 816.23

Shareholder’s Equity 1,726.14 1,491.23

Fixed Assets 135.00 101.41

Total Assets 27,136.37 19,436.57

Deposits 22,325.58 15,509.18

Long term Debt. 937.51 839.61

Loans & Advances 15,339.35 12,000.15

Placement & Investment 10,236.82 6,098.51

From the Income Statement

Gross Income 2,228.21 1,758.85

Gross Expenditure 1,599.77 1,241.63

Profit before tax 628.44 527.22Profit after tax 285.49 291.48

Tax paid (Cumulative) 1,777.70 1,434.76

Others (Million taka)

Income Business 14,094.96 12,508.00

Export Business 11,097.23 7,908.00

Financial Ratios (Percentage)

Capital Adequacy ratio 11.66 12.49

Capital fund to deposit liabilities 10.36 10.47

Liquid assets to deposit liabilities 58.01 50.36

Loan to Deposit Liabilities 69.74 77.37

Earning Assets to Deposits Liabilities 114.56 116.70

After tax return on average assets 1.23 1.70 Net Profit to gross income 12.81 16.48

Interest margin cover 214.56 205.07

After tax return on equity 17.75 21.27

SM/SSI Loan & Micro credit 67.00 62.21

Number of Branches 29 29

Number of Employees 601 601

3.11 View of BASIC Bank (Dilkusha Branch):

In the world of consumerism, the business organization of the world try for the consumer

satisfaction as a number one business strategy whatever may be the product of the

organization either service or non-service. Service is the product of Bank. There is a

saying that fustom service starts right from the stairs of the Bank building. The guard at

the door is the first person represents the Bank, receives a customer with wishes in

smiling face.

29



There are mainly three divisions in this Branch. The General Banking Division deals the

day-to-day transactions. The loan and advance division gives advance to the customer a

monitor whether he repays regularly or not. The Foreign Exchange Division is the highest

earning division among all the three division that deals their operations by two sub

departments Export (EXP) and (IMP).

Structure of BASIC Bank (Dilkusha Branch):

Deputy General Manager

Manager

Deputy Manager

Assistant Manager

Officer

Assistant Officer

CHAPTER- FOUR

CREDIT OPERATING SYSTEM OF BASIC BANK LTD.

30



Part- (i) Introduction

Part-(ii) Different type of credit facilities of BASIC Bank Ltd.

Funded and Non-funded Credit.

Part-(iii) Selection of Borrower, Preparation of credit reports, Processing of credit proposal.

Part- (iv) Selection, Valuation , Control & Charges on Securities

Part-(v) Documentation: Importance, execution, and safe-keeping

Part-(vi) Credit Planning, Pricing, Monitoring

Part-(vii) Micro Finance Scheme of BASIC Bank Limited

Part-(viii) Loan Classification, Provisioning and Declassification

Part- (ix) Supervision and Recovery of loans and advances of BASIC Bank Ltd.

Part-(i)

Introduction

BASIC Bank Limited is a new generation Bank. It is committed to provide high quality

financial services/products to contribute to the growth of G.D.P of the country through

stimulating trade & Commerce, accelerating the pace of industrialization, boosting up

export, creation employment opportunity for the educated youth, poverty alleviation,

raising standard of living of limited income group and overall sustainable socioeconomic

31



development of the country. In achieving the aforesaid objectives of the Bank, Credit

operation of the Bank is of paramount importance as the greatest share of total revenue of

the Bank is generated from it, maximum risk is centered in it and even the very existence

of Bank depends on prudent management of its credit portfolio.

Purpose and Importance of Bank Credit:

Bank performs various functions. Lending of money to different kinds of

borrowers is one of the most important functions of commercial bank. Not only this, it is

the most profitable business of the commercial bank and the major source of income.

Although all lending involve risks yet a bank has to go with it for earning profit and

economic upliftment as well.

The principal reason banks are chartered by state is to make loans to their customers.Banks are expected to support their local 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 if banks-to fund consumption and investment spending

by business, individuals, and units of government.

For most banks, loans account for half or ore of their total assets and about half to two-

thirds of their revenues. When banks get into serious financial trouble, its problems

usually spring from loans that have become uncollectible due to mismanagement, illegal

manipulation of loans, misguided lending policies, or an unexpected economic downturn.

Banks make a wide variety of loans to a wide variety of customers for many different

purposes-from purchasing automobiles and buying new furniture, taking dream vacations

or pursuing college education to construction homes and office buildings. In practice

most of the banks make following types of loans:

1. Real Estate Loans

2. Financial Institutions Loans

3. Agriculture Loans

4. Commercial and Industrial Loans

5. Loans to Individuals

6. Lease Financing Receivables

32



Regulation of Lending

The loan portfolio of any bank is heavily influenced by regulation, because the quality of

a bank’s loan portfolio has more to do with risk and safety than any other aspect of the

banking

business. Some loans are restricted or prohibited by law.

When an examiner finds some loans that carry an immediate risk of not paying out as

planned, these credits are adversely classified. Typically, examiners will place adversely

classified loans into one of the three groupings: Sub-standard Loans, Doubtful Loans and

Loss Loans

A common procedure for examiners is to multiply the total of all substandard loans by

0.20, the total of all doubtful loans by 0.50 and the total of all loans by 1.00, then sum

these weighted amounts and compare their grand total with the bank’s sum of loan-loss

reserves and equity capital.

The quality of loans and other bank assets is only one dimension of a bank’s

performance. Numerical ratings are also assigned based on examiner judgement of the

bank’s capital adequacy, management quality, earnings record, liquidity position, and

sensitivity to market exposure. All five dimensions of bank performance are combined

into one overall numerical rating popularly referred to as the CAMELS rating. The letters

CAMELS are derived from:

C=Caspital adequacy

A=Asset q\uality

M=Management quality

E= Earnings record

L= Liquidity positiopn

S= Sensitivity to market risk

Banks whose overall CAMELS rating is toward the low, riskier end of the numerical

scale- an overall rating of 4 to 5- are examined more frequently than the highest –rated

banks, whose ratings of 1,2, or 3.

Credit Policy:

33



“Credit is a promise of future payment in kind or in money given in exchange for present

money, goods, or services.”

Or,“In general credit means the granting of a period of time by a creditor to a debtor at the

expiration of which the latter must pay the debt due.”

The credit policy of any banking institution is a combination of certain accepted time

tested standards, and some other dynamic factors determined by the realities of varying

and changing situations in the market place. The accepted standards relate to the aspects

of security and liquidity whereas the dynamic factors relate to such other aspects as the

nature of risk, interest margins, credit concentration, credit dispersal, and bank’s own

capabilities.

It is, therefore, necessary that the credit policy be kept under constant review by the Head

office Credit committee that is responsible for evolving and recommending a sound,

healthy and realistic credit policy and its due implementation.

As is true for any other institution, BASIC may have certain unique characteristic relating

to its operations, such as its age, and geographical concentration. These unique features

may require certain amount of flexibility in the credit policy, but as a rule, the general

standards of security and liquidity should not be allowed to be impaired and the

operations must be carried out in strict conformity with local laws and supervisory

requirements as stipulated. Credit policy lays down the basic principal and broad

parameters of the lending operations.

The key to a sound, healthy and profitable credit operation, however, lies in the quality

of judgment and sense of proportion of the officers making lending decisions, and their

knowledge of the borrowers and the market place. The following pages contain only a

statement of the basic principles of BASIC’s credit policy. Reference may be made to the

following other documents existing for the operation and administration aspects of

management of the credit function:

Basic Principles of Loans & Advances in BASIC Bank

“Loans and Advances” shall mean any debit balances on customer’s accounts excluding

debit balances on the accounts of other banks and excluding loans under specific counter finance arrangement. Basic Principles of Loans & Advances in BASIC Bank are:

34



1. Aggregate loans and advances shall not exceed the Bank’ s net worth or 65% of

customers deposit whichever is lower (excluding loans and advances covered by specific

counter - finance arrangements).

2. Within the aggregate limit of loans and advances as mentioned in (1) above 50% of

lending will be small industry sector in accordance with prescribed norms of thegovernment and the Central Bank in terms of the banks objectives with 50% to the

commercial sector. No term loans will be approved for the commercial sector. Exceptions

will be rare and will require approval of the Executive Committee.

3. All lending will be adequately secured with acceptable security and margin

requirement as laid down by the Head office credit committee.

4. The bank shall not incur any uncovered foreign exchange risk (currency exposure) in

the lending of funds.

5. The Bank shall not incur any risk of exposure in respect of unmatched rates of Interestof funding of loans and advances beyond 15% of outstanding loans and Advances.

6. End - Use of working capital facilities will be closely monitored to ensure lending used

for the purpose for which they were advanced

7. Country risk in loans and advances will be accurately identified and shall be within the

country limits if any approved for the bank.

The same treatment will be given to country risk arising out of contingent liabilities

relatingto Letters of credit and letters of guarantee.

8. Loans and advances shall be normally funded from customers’ deposits of a permanentnature, and not out of short-term temporary funds of borrowings from other banks or

through short-term money market operations.

9. The aggregate outstanding loans and advances (excluding loans advances covered by

specific counter – finance arrangement) shall be dispersed according to the following

guidelines (subject to item above whereby 50% of lending being to small industry

sector):(a) Short term commercial lending (to include self Liquidating and other short term

finance to retail and wholesale business clients to finance their usual Domestic and

international trade \ shipping of goods). This category to include working capital to hoteland tourism

(b) Facilities to shipping and transport (facilities for the purchase and construction of

ship / vessels and other modes of transport both by land and air)10. Spreads over cost of funds on loans and advances and commissions and fees on other

transactions should be commensurate with the rating of the borrower, quality or risk and

the prevailing market conditions.

35



11. Credit risk evaluation will include an accurate appraisal of risk in any credit exposure

is highly subjective matter involving quantitative and qualitative judgments. The

financial statements of the borrower do not always provide a complete picture of the borrower.

Therefore the bank has to use all financial data available and combine this with a number of qualitative factors analyzing the borrower’s financial position.

Part-(ii) Different type of credit facilities of BASIC Bank Ltd.

Funded and Non-funded Credit

The Government of Bangladesh has incorporated several changes in its Industrial policy2005. Let’s have a look of the major changes made in redefining small, medium and large

industries as under:

Scale of Industry Criteria

Small Fixed asset vale/replacement cost is less than Tk.1.50

Crore excluding land & Building

36



Loan Portfolio

338.3

5,013.55

9,987.50

Commercial Credit Micro Credit Industrial

Medium Fixed asset vale/replacement cost is in between Tk.1.50 Crore and 10.00 Crore excluding land &

Building

Large Fixed asset vale/replacement cost is more than Tk.

10.00 Crore excluding land & Building

Due to this radical change, BASIC Bank also had to amend its Articles of Association

regarding finance. In line with the government’s intention, amendment has been made byreplacing “Small & Cottage industry sector” with “Small & medium industry sector” .

So, now BASIC is entitled to finance a small scale industry as well as medium scale

industry.

BASIC Bank offers following credit facilities:

a. Project loans to small scale and medium scale industry.

b. Full-fledged commercial banking service including short term trade finance,working capital finance in processing and manufacturing units and financing andfacilitating international trade.

c. Micro credit to the urban poor through linkage with NGO.

Industrial credit:

The main concern of the basic bank is industrial/manufacturing loan. The industrial loan

reflected a significant growth of 29.85% over the previous year. Total outstanding

industrial loans including term and working capital stood at Taka 9,987.50 million at the

end of 2005 compared to Taka 7,691.20 million of 2004. BASIC Bank’s services are

specially directed towards promotion and development of small & medium industries. Its

exposure to small industries sector accounted for 51.70 percent of the total loans and

advances. During the year total of 175 projects were sanctioned term loan. Out of which

109 were new and the rest were under BMRE (Balancing Modernization, Revamping and

Expansion) of the existing projects.

The textile sector including garments being one of the major contributors to national

economy dominated the loan portfolio of the Bank. Other sectors financed include

engineering, food and allied industries, chemicals, pharmaceuticals and allied industries,

paper, board, printing and packaging, glass, ceramic and other non-metallic goods , jute

yarn and jute products. Recovery rate of project loan was 89 percent.

37



b. Commercial Credit

The Bank also supports development of trade, business and other commercial activities in

the country. It covers the full variety of services to the exporters and importers extending

various facilities such as cash credit, LTR, LIM, packing credit, short term loans, local

bills purchase and foreign bills purchase facilities. As on December 31 2005, total

outstanding commercial loans stood at Taka 5,013.55 million compared to Taka 4,024.70

million Crore in 2004.

c. Micro Credit :

BASIC Bank launched a Micro Credit Scheme in 1994. Micro Credit Scheme provides

for the poor for generation of employment and income on a sustainable basis particularly

in urban and suburban areas. At the end of 2005,total amount of Tk. 338.30 million

remained outstanding as against Tk. 284.10 million in 2004.Recovery rate during this period remained at a satisfactory level of 100.00 percent.

Perhaps we have got the essence of the credit portfolio of BASIC bank .Now we may go

to the topic: Funded and non funded Credit facilities.

Funded facilities are the credit facilities where bank has to outlay cash. non-funded

facilities are those in which bank has not to put in any cash, rather than merely giving acommitment or promise to pay.

Funded facilities:

Term Loan:

Term loan is allowed for procuring fixed assets of the project; hence term loan can be

said as project loan also. Right now BASIC Bank is in practice to finance term loan @49:51 debt-equity ratio. But, this is not hard and fast rule. There are occasions that bank

finances @ 60:40, 70:30 or 80:20. But for new project, if the debt portion is less than the

equity portion, that is well and good practice. Generally bank doesn’t finance land, land

38



development and civil construction. Generally Bank shows more interest to finance a

portion /full value of capital machinery.

Term loan is secured by registered mortgage of immovable property i.e. land, building,hypothecation of machinery. Term loan is generally disbursed once (or several times in

special cases). Repayment of term loan is generally made into some installments.

Generally grace period is allowed before commencement of installment. Generally 6months grace period is allowed. But it may be more or less depending on the tenure of

construction period, nature of industry and obviously on cash in flow of the project.

In BASIC Bank monthly repayment installment is common practice for term loan.

Followings are the type of Term loan:

• Short term loan

• Mid Term Loan

• Long Term Loan

Short term loan: The tenure of Short term loan is one year. Generally short term loan is

allowed to an existing project for procuring additional equipment/machinery where cashin flow is adequate to repay the loan within a year.

Mid term loan: The tenure of mid term loan is greater than one year up to 3 years.Generally Mid term loan is allowed where the bank thinks the project has a higher rate of

return (IRR).

Long term Loan: Long term loan is allowed for 5 years. Most of the cases we sanction

this sort of term loan. For a new project where substantial capital machinery is to be

financed by a bank and IRR is not too much high to repay the loan within less than 5

years.

So, we must do financial analysis i.e. to calculate financial parameter like NPV, IRR and

pay back period. In this regard cash flow statement should be observed verymeticulously.

Working Capital:

Working capital is needed by a concern for its current operational purposes. It is regarded

as life blood of the concern. The banker needs to assess the working capital requirement

in prudent and positive way. Several factors to be considered while assessing the workingcapital requirement of a concern like operating cycle, manufacturing cycle, operating

efficiency, market credit policies, competition in market, growth and expansion, pricehike etc.

Forms of working capital finance:

• Secured Over Draft(SOD)

• Cash Credit(Hypothecation)

• Cash Credit(Pledge)

• Loan General

39



Secured Over Draft (SOD):

This is an over draft facility secured by encashable securities like FDR, Government

Bond, wage earner bond etc. It represents permission to overdraw in current account upto

a sanctioned limit. The loan is allowed keeping some margin, generally 5%. Sometimes,overdraft is allowed without any security for a very short period to meet the exigency of

the trusted client with high standing and integrity. Bankers must ensure proper turnover

in an overdraft limit account.

Cash Credit

Like overdraft credit it is a continuous loan which is usually sanctioned for 6 months/oneyear, which is further renewable as per requirement of the borrower. After assessing the

working capital requirement and keeping proper margin (say 30%), a limit is sanctioned

and the borrower use to do withdrawal and deposit in the account provided that theoutstanding is within the sanctioned limit.

Two types of Cash Credit are discussed below:

Cash Credit (Hypothecation):

When cash credit facility is sanction under hypothecation of stock of goods it is called as

CC (Hypo). In the case of hypothecation, the stock remains under the possession andownership of the borrower. Only the right belongs to the bank through creating charge of

hypothecation. In case of CC (H) the client has to submit stock report regularly which is

to be verified by the bankers time to time. As the nature of security is movable type,

bankers are encouraged to take collateral security in case of hypothecation. In BASICBank hypothecation is more preferable practice than pledge.

Cash Credit (Pledge):In case of Cash Credit (Pledge), only the ownership belongs to the borrower. The

possession, control and right remain with bank. The nature of operation in CC (Pledge)

account is different than that of CC (H). CC (Pledge) is not a common practice in BASICBank. In fact CC (P) is more preferable in case of commercial trading rather than

industrial project.

Loan General:

In nature Loan general facility is like term loan. But, the purpose of this loan is meeting

requirement of working capital. It is generally given for 1-year period. Repayment is

made in installment basis or lump sum basis. The loan general facility some time may becalled as short-term loan.

International Trade Finance

International Trade dealings are one of the major business activities undertaken by

BASIC Bank Ltd. To facilitate international trade transactions, it has arrangedcorrespondent relationship with large number of international banks, which are active

across the globe. The Bank with its worldwide correspondent network and close

40



relationships with key financial institutions provides an extensive trade services network

to handle transactions efficiently.. BASIC offers following trade finances:

• Issuing, advising and confirming of Documentary Credits.

• Pre-shipment and post-shipment finance.

• Negotiation and purchase of Export Bills.

• Discounting of Bills of Exchange.• Collection of Bills.

Import finance:

Loan is given to the importer to provide liquidity for buying imported items. Each loan

must be related to one specific import transaction and the term of the financing can varydepending on the type of products imported on the needs of the importer.

BASIC Bank extends finance to the importers in the form of:

1. Opening of Import L/C

2. Payment against document(PAD)

3. Loan against Imported Merchandise (LIM)

4. Loan against Trust Receipt for retirement of import bills. (LTR)

5. Short term, medium term & Long term loans for installation of imported

machineries & production thereof.

Payment against document (PAD):

After establishing the Letter of Credit, the bank is bound to honor its commitment to pafor import bills when these are presented for payment. The foreign correspondent, who

negotiates the documents, gets payment as per stipulated reimbursement terms of the L/Cto the debit of the account of L/C opening bank ‘s F.C. account .The opening bank lodgesthe shipping documents in their books and responds debit advice originated by foreign

correspondent to the debit of payment against document (PAD) account. In fact, the

amount stands as advance to the importer which is adjusted by delivery of documents

against cash payment or by allowing post import finance such as LIM, LTR or even byterm loan /Loan general (if sanction is made so).

Loan against Imported Merchandise (LIM):

Loan against Imported Merchandise (LIM) is allowed against imported merchandise

storing the same in bank’s custody. There may be an existence of agreement or the partymay propose to the bank for having LIM facilities after arriving the goods in the port.

The merchandise is cleared by the bank through its approved clearing agent. . If the party

doesn't have any godown facilities or he has the shortage of money to clear the goods

from the port, then he wants bank loan. The advance is adjusted by delivering the goodsagainst payment by the importer. The documents remain with the bank. LIM facilities are

usually allowed for 90 days for each case. It may vary depending on the marketability of

the goods. A party may have LIM limit for one year but each LIM must have to beadjusted within the specific expiry date of that particular LIM.

41



Loan against Trust Receipt for retirement of import bills. (LTR)

Depending on the relationship with the client, he may ask for LTR facilities instead of

LIM. Party has to submit proper securities. Documents are given to the party to retire

goods from the port on good faith. After selling the goods to the market the party adjustthe LTR alongwith the interest. It is a form of short-term loan. LTR facilities are usually

allowed for 90 days for each case. For trading purpose the tenure may be shorter like 60

days. Each LTR must have to be adjusted within the specific expiry date of that particular LTR.

Export Finance:

Preshipment finance

Loan given by BASIC Bank to the exporter to provide liquidity for buying or processing

Goods to be exported.

Pre-Shipment finance in the form of:

• Back-to-Back L/C

• Packing credit (PC)

Back-to-Back L/C: Will be discussed in the non-funded facility section.

Packing credit (PC):

Pre-shipment finance allowed under the name of "Packing Credit", is essentially a very

short-term advance granted by the bank to an exporter to enable him to procure, process,manufacture pack and ship the goods to the buyers abroad in conformity with the termsof export L/C /contract.

Post-shipment Finance:

Loan provided to the exporters against their export receivables.

Post-shipment finance in the form of:

• Foreign bills purchase (FBP)/ Local Bill Purchase (LBP)

•Loan Against Foreign /Local Bill

• Finance against cash incentive

Foreign bills purchase (FBP)/ Local Bill Purchase (LBP): The Foreign /Local Bills Purchased or

Discounted is a facility granted by the bank to its customer whereby the bank purchasesor discounts the customer’s sight export documents.

42



Loan against Foreign /Local Bill :In case of a usance bill (i.e. bills drawn on local/foreign

BBLC) maturing after a period of time, the banker retains the bill for that period and

realize the amount of the bill from the drawee on its due date. This practice is calleddiscounting of bills. However instead of discounting BASIC Bank makes short-term

advances to the extent of a certain percentage (say 90%) of a bill amount against the

security of the accepted usance bill. This practice is also usually termed as purchase of bills, though it is not right.

Loan against Foreign /Local Bill (LADB):

In some cases when we get local currency instead of foreign currency (in case of sight

foreign bill), we don’t purchase /discount the bill rather we make short term advances to

the extent of a certain percentage (say 90%) of a bill amount.

Loan General against cash incentive:

In case of fund shortage of our exporter we even allow loan against lien of pending

claimed cash incentive. Loan is adjusted from receivable cash incentive proceeds. Cashincentive Payment is a time consuming procedure and there is always uncertainty. So,

unless a sever exigency of the client to avail this sort of loan, the loan is not a common

practice.

Besides the bank accomplish Trade Collections namely:

• Local Bill collection

• Foreign Bill Collection

Note: above two are not at all credit facilities and there is no obligation for the bank to

pay to the exporter until funds are received.

Micro Credit:

BASIC Bank works closely with its clients (NGO) by following ways:

• In direct Lending to the NGOs who on-lend to their members.

• Direct lending to the ultimate borrowers.

Besides there are other funded facilities of BASIC Bank towards its employee:

Staff Loan:

• 3 basic Salary loan

• Consumer Credit

• Loan against Provident Fund (P.F. Loan)

• Staff House Building Commercial Loan

• Staff House Building Loan

• Loan against secured bond (LASB)

43



Non-Funded facility:

• Letter of guarantee (Bank Guarantee, performance guarantee, Bid Bond etc.)

• Letter of credit (L/C)

Letter of guarantee:

A letter of guarantee is a written promise issued by the Bank to compensate (pay a sum of

money) to the beneficiary (third party, local or foreign) in the event that the obligor

(customer) fails to honor its obligations in accordance with the terms and conditions of the guarantee/agreement/contract. This is issued by the Bank at the request of contractors,

wholesalers, companies involved in transaction, etc. for the purpose of handling the

guarantee request they receive in their operation.

Types of Bank Guarantee:

Bank Guarantee- is an irrevocable obligation in the form of written undertaking of a Bank to pay an agreed sum, in case of default by a third party in fulfilling their obligations

under the terms of the Bank Guarantee.

Types of Bank Guarantee:

According to the very purpose of issuance of guarantee, Bank Guarantee can be classifiedin following ways:

• Bid Bond

• Performance Bond /Guarantee

• Guarantee for advance payment

• Shipping Guarantee

• Custom Duty Guarantee

• Suppliers credit Guarantee

• Retention Guarantee

1) Bid Bond:

Bid bond or tender guarantee is a surety bond issued by the Bank upon the request by the

bidder/tenderer expressing the Bank's commitment to meeting the claim of the

beneficiary (the party who invites tender) in case the bidder withdraws from the bid

during the bid period or fails to accept the award when he/she becomes a winner.

2) Performance Bond /Guarantee:

Performance bond is an undertaking issued by the Bank in favor of a buyer/employer

(The beneficiary) at the request of a supplier /service provider, whereby the bank

44



undertakes to make payment to the beneficiary in the event of default by the principal

(supplier /service provider) in due performance of the terms of the contract .

3) Advance Payment Guarantee

This is issued by the Bank in favor of a buyer (who makes the advance) and at the request

of the seller/contractor ( who receives the advance), representing the Bank's commitmentto repay the sum in the event that the seller/contractor fails to honor the contract terms in

their entirety or in part.

4) Shipping Guarantee:

A type of BG which is needed to move goods out of the port in case of missing B/Lconsignment. These guarantees are issued by the Bank at the request of the buyer in favor

of a carrier in circumstances where the bill of lading is missing/ delayed but the

goods/cargo arrives earlier.

5) Customs duty guarantee

These guarantees are issued by the Bank to meet the requests of the beneficiary (CustomsAuthority) in respect of customs duties in circumstances where the goods /machinery are

imported without payment of customs duties in various cases such as pending test report,

duty free export oriented capital machinery etc.

6) Suppliers' Credit Guarantee

Such guarantee is issued by the Bank to meet any claims to be made by the local or

foreign supplier (beneficiary) in case the debtor (local buyer) fails to repay in accordancewith the terms and conditions of the contract.

7) Retention Guarantee

A guarantee issued at the request of contractor to secure repayment of the retention moneyheld by the employer during different phases of the project, when the project is finalized

(at the time of provisional delivery).

Securities:

o Cash margin

o FDR

o Acceptable collaterals like land, building etc.

o Letter of counter Guarantee

45



o Other usual charge forms

Some aspects in the light of rules and practices of BASIC Bank:

• BASIC always do prefer to keep 100% cash margin. If not possible, then the bank

even issues B/G @ 10% margin or nil margin at the request of its regular and valued

clients (those who are availing composite facilities) .

• But BASIC has to keep in mind that, if 100% margin (cash /FDR) can’t be kept as

security, then adequate collateral security should be ensured.

• There is another trend to keep FDR as margin against bank guarantee which is

preferable by customer.

Commission/Handling charge of Bank Guarantee:

As per circular # BASIC/HO/GEN/2002/16 Dt. July 01, 2002:

Nature of transaction Charges

Issuance of guarantee in local currencyagainst margin less than 100%

0.50% per quarter or part thereof minimum Tk. 500/=

Against 100% cash margin No commission, only handling

charge Tk. 250/=

Shipping guarantee against L/C in absence of

original import document

Tk. 500/= flat

Shipping guarantee against BB L/C inabsence of original import documen

t

Tk. 500/= flat

Delegation power reading issuance of Bank Guarantee:

As per circular # BASIC/HO/2001/4641, July 22,2001.In case of cash margin:

Margin Amount Sanctioning authority

100% Cash Margin Any Amount GM, Branch–In Charges (MinimumManager Rank)

>=50% CashMargin but <100%

Tk. 50 Lac GM

>=20% CashMargin but <50%

Tk. 20 Lac GM

In case of pledge of 100% FDR:

Authority GM DGM (Br.-

In-Charge)

AGM (Br.-In-

Charge)

Manager (Br.-In-

Charge)

Amount of BG Any amount Tk. 50 Lac Tk. 30 Lac Tk. 10 Lac

46



Letter of Indemnity:

Indemnity means security against or compensation for loss or damage. As defined in sec#

124 of the Contract Act, the contract of indemnity is “a contract by which one party

promises to save the other from loss caused to him by the conduct of the promissoryhimself, or conduct of any other person”

In another language the letter of Indemnity can be defined as below:

An agreement whereby one party agrees to secure another against an anticipated loss or

damage.

Letter of Credit - A letter of credit is a document issued by a bank stating its commitment

to pay someone (supplier/exporter/seller) a stated amount of money on behalf of a buyer

(importer) so long as the seller meets very specific terms and conditions. Letters of creditare more formally called documentary letters of credit because the banks handling thetransaction deal in documents as opposed to goods.

Letters of credit are the most common method of making international payments, becausethe risks of the transaction are shared by both the buyer and the supplier.

Documentary letters of credit are subject to the Uniform Customs and Practice for Documentary Credits (UCPDC), Brochure No. 500, of the International Chamber of

Commerce (ICC) in Paris.

Basic Letters of Credit:There are two basic forms of a letter of credit:

a)Revocable Credit

b)Irrevocable Credit: the Irrevocable Credit not Confirmed,

and the Irrevocable Confirmed Credit.

Special Letters of Credit

(a) Standby letter of credit

(b) Revolving letter of credit

(c) Deferred payment letter of credit

(d) Red clause letter of credit

(e)Green Clause L/C

(f)Telegraphic Transfer Clause

47



(g) Transferable Letter of Credit

(f) Back-to-Back Letter of Credit

Part-(iii) Selection of Borrower, Preparation of credit reports, Processing of credit proposal:

In the affair of bank credit, nothing is more significant than the character and

responsibilities of the borrower. Practical bankers, and theoreticians alike, suggest that

the safest and the most dependable security that could be obtained are the integrity and business-like dealings of the customers.

• The integrity and reliability of the borrower:

To be safe advance should be granted to a reliable and honest borrower, who has the

capacity to conduct his business. The study of a borrower involves the study of the three“Cs” of the party, i.e. his Character, Capacity and Capital or, in other words, his

Reliability, Responsibility and Resourcefulness.

Character: It denotes integrity of the borrower, i.e. he or she should have willingness to

repay the money borrowed.

Capacity: It means the ability to employ the funds profitably and repay the advance

according to the terms and conditions of the sanction.

Capital: It denotes financial soundness.

48



Sources of Credit Information:

The bankers have to collect information from different sources about a prospective borrower to assess creditworthiness. In 1992, Bangladesh Bank established a full-fledged

Credit Information Bureau (CIB) with a view to strengthen credit discipline and

streaming all sorts of data relating to loans and advances of borrower.As a matter of policy, all scheduled banks are required to submit data on quarterly basis

and other financial institutions on half-yearly basis on each borrower having outstanding

credit facility of Tk.1.00 lac and above to Bangladesh Bank on a specially designed form(CIB 01). In addition, Bangladesh Bank also collects information from the scheduled

borrowers having outstanding of Tk. 1.00 crore and above on monthly basis. The

information so far collected by CIB are:

i) Debtors / Borrowers Information (Segment-1)ii) Owners Information (Segment-2)

iii) Group/Affiliations Information (Segment-3)

iv) Credit/Exposure Matrix or Financial Information (Segment-4)

v) Third Party Guarantors Information (Segment-5)

CIB is also collecting data relating to the CRR (Credit Risk Rating), Financial Scores,viz. Y-Score and Z-Score from the sche3duled banks. This information will ultimately be

tetrieved to the scheduled banks in order to provide more helpful tools to them to decide

issues regarding sanction of loan more promptly and smoothly.

Bankers of course, have their own ways to collect information about the prospective

borrower from the following sources to assess their judgement before proposal for any

credit facility is taken into consideration:

1. Loan Application: A banker first studies the loan application made by the borrower.

2. Market reports: Reports can be obtained from various markets, particularly, from

businesspersons carrying on the same trade as the borrower does, some of whom may be

his friends, others his rivals or enemies.

3. Study of account: If the borrower is the customer of the bank, a study of the

borrower’s account and his or her past dealings will throw light about his or her financial

position, character, and capacity to do business.

4. Financial statement etc.: Financial statements are indicators of two significantfactors i) Profitability and ii) financial soundness. The borrower should be requested to

supply the latest statement about his or her assets and liabilities.

5. Other sources: Other sources of information about the borrower include press reportsregarding purchase and sale of property, auctions and decrees, registration, revenue and

municipal records etc.

6. Personal Interview: The banker should be able to know from the interview thecustomer’s specific requirements, the prospects of his employing the funds prudently, his

capacity to repay and the suitability of the security offered, if any.

• Preparation of credit report:

49



The main idea behind credit investigation is to assess net worth of the borrower from his

assets and liabilities. Credit information to be obtained will differ according to the type of

the customer. In the case of fully secured advances it may not be necessary to preparedetailed credit reports. In other cases detailed credit reports need to be prepared and kept

on record.

• Processing of loan proposal in BASIC Bank Ltd.

Recently Bangladesh Bank has provided a policy guideline categorizing loans and

advances into Small Enterprise and Medium Enterprise based on project cost or sizeof business in terms of total assets of a particular client. BASIC Bank Ltd. is one of the

participating members in financing SMEs .

Generally, all credit proposals shall be rooted from branch. The relationship

manager(RM) at the branch shall conduct a thorough credit and risk assessment prior to

forwarding any proposal to Head Office with due observation/recommendation of the

branch credit committee (BCC). The results of this assessment shall be presented in thecredit line proposals. The RM shall be the key person of the customer relationship, and

must be held responsible for the accuracy of the entire credit application submitted for

approval. RMs must be familiar with the bank’s Credit Policy and Procedural Guidelinesand should conduct due diligence on borrowers, principals, and guarantors.

However, BASIC Bank Limited has been preparing a policy guideline for loan processing at Branch and Head Office level with documentation procedure

Part- (iv)

Security: Selection, Valuation , Control & Charges on Securities

Security:

When Banker ordinarily takes as things assets, goods, valuables, financial papers, any

surety, guarantee, against the risk of lending is called security. Security fortifies or makes

secure a person’s under taking, particularly to pay or repay money.

An element of risk is always present in every advances, in whatever degree a banker

knew his customer personally and intimately, in whatever degree he has the confidence in

the integrity and honesty of a customer. Though a banker always lay stress on the

50



integrity and honesty of the customer and on the genuinity of the purpose for which the

borrower needs money, but till today securities continues to be one of the most important

factors that determines to a significant extent the banker’s willingness to lend money.

Types of security:

Security

Personal Tangible

Primary Collateral

Direct

Indirect

• Personal Security:

Security by which a borrower is personally made liable to repay the loans and advances.

Demand Promissory Note, Personal Guarantee, Bill of Exchange etc. Guarantee by the

third party for repayment of loan in case of demand by the original borrower is also

consider as personal security. Bakers obtain the right of taking action against the

borrower personally by taking personal security.

• Tangible Security:

Tangible asset like stock of goods, Bonds, deposits receipts, bill of lading, bills

receivables, warehouse receipts, real state, shares, assignable insurance policies etc. are

taken as security against lending. When debts are not repaid by the borrower, the

outstandings are realised by sale or transfer of the tangible assets.

51



Tangible security sometimes called as Real Security. Tangible security is divided into

two parts. They are primary and collateral security

Primary Security:

The security, which is deposited by the borrower himself against lending’s, is called

Primary Security. Stock in trade, industry plants, land and building, bills receivables,

deposits receipts, shares etc that are deposited by the borrower shall be treated as primary

security.

• Collateral Security :

Additional, subsidiary or secondary security in addition to primary security is called

collateral security. Collateral Security runs parallel to or side by side with the primary

security. In case of default by the borrower to repay the loan, and when loan amount can’t

be realized in full/ partially by selling primary security, the amount / or rest of the loan

amount are realized by selling the collateral securities.

Direct Collateral Security:

Collateral security obtained from the borrower himself to secure his own account is

known as Direct Collateral Security.

Indirect Collateral Security:

Collateral Security given by the third party/ person to secure a customers loan account is

called Indirect Collateral Security.

Categories of Collateral Security

The most significant categories of securities lodged as cover of loans are:

Real State

Deposit Receipts

52



Bills Receivables

Share and Securities

Life insurance Policies

Documents of title of goods

Goods and Commodities

Gold and Gold OrnamentsIn our country, collateral security is usually taken against trade finance (hypothecation of

stock) which is considered as weak security.

• Collateral Securities as securities:

Collateral Security is not a must and in all loan cases the Collateral Security are not

insisted upon. In loan cases where bank feels that loan amount can’t be realized in full by

selling the Primary Security, the collateral security is asked for.

Where the credit risk is high, a protective device is the pledge of specific collateral does

not eliminate the credit risk fully, but it provides the additional resource to the pledge

property and the status of secured creditor ship in the event of default. Collateral free

loans are justifies on the basis of high credit ratings only included by reliable financial

statements.

Collateral Security serves two purposes for a lending bank; first, if the borrower can’t or

doesn’t repay loan and can’t be realized by selling the primary security, collateral gives

the right to the lender to seize or sell those property to cover the amount of unrealized

portion of loan. Secondly, Collateral security gives the lender a psychological advantage

over the borrower. The borrower in this situation feels more obliged to work hard to

repay the loan to avoid loosing valuable assets.

Selection of Security

To be a good security, it should fulfill certain requirements. Before selection of security,

53



There must be a critical appraisal of the same. Before selection of a security, a banker

should check the legal side regarding the validity and enforceability and secondly

marketability, durability, price, etc of the security.

A tangible security should possess the following attributes for selection of the same

against lending: -

Clear and undisputed title

Validity of title

Easy Transferability of title

Marketability

Easy ascertainment of value

Stability of value/Price

Durability Transportability

Low storing/ supervisory cost (For pledge Godown, insurance, supervision cost)

Yield/ Productivity (Income from security, value yield from security)

Advance of contingent liabilities (Lease property not fully paid fully, paid shares,etc)

Margin/ Equity:

Hardly any security posses all the above-mentioned attributes, there is always exist the

risk of deterioration of the value of the security. So bankers must keep a cushion against

possible fluctuation of prices, shortage and depreciation in storing, for increasing of loan

amount due to application of interest and other charges.

Selection of Real state as security:

Selection of a security is a very important task for the relative Bank officer in prospect of

securing the loans and advances. There must be some propaganda for making the real

state as security that is describe below-

Property should be situated in municipal Areas/ Commercially important areas/

Developed areas outside Municipality/ Industrial areas and other developed areas.

Residence house at village/ Lowland /ponds etc should not be taken as security.

54



Vacant land outside Municipal Area from which no earnings comes also should

not be taken as security.

Property identified and clearly demarcated property.

Ownership must be clear and transferable and there should not be any defect in

title or documents.

The property should be under possession of the owners. In case of third party mortgage, consent from the owner of the property to

mortgage the same against the loan is to be obtained .

Valuation of Security

Valuation of the securities is important since the loan amount or withdrawal limit is fixed

/ considered on the basis of the value of securities less stipulated margin/equity. Methods

of valuation of different categories of securities should be different based on the market

value, invoice value and controlled value.

Government securities, shares and debenture : Prices is to be ascertained frommarket quotations- where the price of a particular share suffers from wide fluctuation,

the value of its should be fixed slightly lower then the market value. Higher margin

should be kept.

Seasonal Commodities : Current market price or controlled prices, whichever

is lower.

Finished/ Manufactured goods : Cost price or market prices whichever is lower . Trade Goods: Market price or invoice prices whichever is lower .

Stock in Process: To be ascertained from the record of stock.

Controlled Commodities: Controlled prices are fixed by the government / respectiveauthority or market price, whichever is lower.

Imported Goods: At landed cost or market value, whichever is lower.

Life Policies: At surrendered value, the value of which the company/ corporation is prepared to pay.

Valuation of Real States:

• Location: Commercial/ Industrial/ Residential

• Construction: Age/ Used Materials/ Design

• Approaches:

• Surroundings: Nearby market/ school, college or administrative area etc.

• For construction, services of architects, engineer and brokers may be obtained to

determine the value.

55



• Valuation of the real state should not be done on the present cost of construction and

prevailing price of land; it should be done under the force sale value.

• Valuation of machineries should be fixed by employing reputed engineering/

surveying firms.

• For valuation of land, information may be obtained from concerning the Sub Registry

Office.

Control of Security:

• Control over hypothecated goods – control over godown.

• Proper mortgage /lien on security papers / bond / shares/ deposit receipts

• Control over real state as security:

Possession by the owner.

Acquisition or the notice of acquisition. Demarcation of mortgage of property, signboard of bank as mortgage of property. Clearance of / up to date payment of rent/ Municipal tax and other Govt. duties.

Transformation without the knowledge of the bank.

Sale/ transfer without the knowledge of the bank.

Insurance of Goods:

Insurance may be defined as a contract of indemnity. Bank generally deals with the

moveable and immovable securities and securities are insured against risks they bear. For

insurance of goods, bank generally obtains insurance covering the risk of fire, thief/

burglary, RSD, flood/cyclone, tidal bore/earthquake.

For security of the goods carried by sea marine insurance is taken. So mainly the

insurance policy are taken for-

Policy to be taken covering all the risk asks for.

Policy to be taken in the joint name of the bank and the borrower or assigning to

the bank.

Policy to be taken covering “Bank Clause” (Mortgage Clause).

Policy to be got renewed before expiry.

Policy to be obtained covering full value of the stock (including margin).

56



Goods and properties & the storage godowns must be correctly described in the

policy.

Any event of damage of stock must be intimated immediately in writing.

Policy to be taken from insurance companies on the on the bank’s approved list.

It is to be ensured that all the desired terms and co0nditions are incorrect in the

policy. Reinsurance is to be obtained by the insurance companies in case amount of

insurance beyond its limit.

Money receipt and the Original Cover Note / policy to be kept with the bank.

Attributes to a good security:

Basic requirements of securities to be act as a good securities are-

Valuation:

- Easy to value

- Amount of advance should be less then the value of the security- Force sale value in distress situation

- Whether saleable easily/ timely- Tendency of rising / declining of value of the item

- Possible fluctuation of value

Title:

- Borrower have good title to the good

- Borrower have possession on the securities /owner possession in case of third party mortgage

- Bank must have a security interest in the securities / collateral and have the

legal rights to get possession of the securities and the to sell the securities.- The title has not been transferred / assigned to other earlier/ not charged

against some earlier debts or debt to other.

Control:

- Easy to keep control by the lender

- Easy to know experience, location and value to keep proper control/

constant watch.- Hypothecated / pledged goods to properly maintained and keep to fully

insured against possible risks.

Marketability:

- Easily marketable or realizable

- Marketable under adverse circumstances and with minimum experiences.

- Not perishable in short time / within the life period of credit.

Charges on Securities:

57



Banks lend money to the borrower for an agreed period of time. The borrower repays the

loan with interest. Borrowers borrow, but sometimes do not repay the loan and interest.

Bank therefore wants protection. They want “security” – an interest in the borrower’s

asset giving preferential status or default or insolvency. Usually security means a charge

created over asset(s) held by the business vis-à-vis sponsor (s) to guarantee fulfillment of

an obligation especially the assurance that the debtor will repay (usually with interest) the

money or credit intended to him.

Charge means right of payment out of certain property. In a charge there is no transfer of

interest or property. It is a transaction as a result of which the lender acquires certain

rights over the property and the borrower is refrained from dealing in them. In a charge

there must be a notice to the subsequent transferees, otherwise the charge is not effective

as to the subsequent transferees.

• A charge may be classified as:

(i) Fixed charge

(ii) Floating charge

Fixed charge:

A charge is said to be fixed if it is made especially to cover definite and ascertained asset

of a permanent nature or asset capable of being ascertained and defined, e.g. charges on

land and building or heavy machinery. It prevents the loanee from dealing with the

property charged without consent of the charge holder.

Floating charge:

58



It is a charge on the property, which is constantly charging e.g. stock. A company can

deal with such property in normal course of its business until it become fixed on the

happening of an event. Thus, it is a charge on the assets of a company in general.

The Other classification of charges are:

Pari Passu Charge:

Pari passu charge is created in favour of several creditors, with the condition that they

have equal priority. It is generally created in case of consortium accounts.

Second charge:

A creditor holding a second charge by way of mortgage, is entitled to the proceeds after

the first charge is met. He must inform to the prior mortgagee of his charge because the

first mortgagee can’t part with the proceeds or title of the property if he has notice of the

second charge.

• The modes of charges securities:

Pledge: According to section 172 of contract act 1872 when goods are handed

over to the lending bank by the trader / manufacturer who borrow against thosegoods and produces for short term i,e for working capital, will be treated as pledge. Pledge is the bailment of goods as security for payment of a debt or

performance or promise. Here, title and ownership are not transferred. Pledge

good may be sold out and proceed thereof may be appreciated towards the

adjustment of liability in case of future of the borrower to repay or fulfill theterms and conditions.

Hypothecation: Hypothecation is a charge on a property for debt but neither

possession nor ownership passes to the creditor. This facility is granted by banksnormally to the first class parties. Hypothecation good can’t be sold out / disposed

off without notice and court’s order. However, if a special power of attorney is

taken in that case can be disposed off without going to the court.

Mortgage: Mortgage is the transfer of interest in immovable property to securethe repayment of money advanced. Ownership remains to the mortgagor. In case

of equitable mortgage courts order is not necessary for sale / disposal of the

mortgaged property for adjustment of advance.

59



• Lien: lien is the right to possession and no right of ownership. Banks lien is

general lien over its own financial obligation to client. Property under lien can’t be sold without notice to the owner and sometimes without court’s order.

• Right of set off: The right of set off is the right of a creditor to the total or partialmerging of a claim against the counter claim of the debtor. Banker should givereasonable notice to the customer of its intention to exercise its right of set off

otherwise it may face troubles.

• Assignment: An assignment means a transfer of right of property or debt

(existing or future) by one person to another person. In banking the usual subject

of assignment is actionable claim. Assignments are of two types: legal andequitable assignments.

Part-(v)

Documentation: Importance, execution, and safe-keeping

Document is the acknowledgement of the parties concerned and their involvement in the

credit/transaction. It is the acknowledgement of the debt and confirmation to repay from

the part of a borrower/mortgager/owner of the security to be liable in the court of law and

can be enforced the court of law.

60



Documentation-Definition and importance: The whole process of completion of the

documents to secure the credit is called documentation. It is necessary for

acknowledgement of debt by the borrower/grantor/mortgagor and for charging of

securities in favor of the bank by them. Documentation must be proper and correct for the

safety of a credit. Proper document is essential to safeguard Bank’s interest. It is made

covering its all legal aspects.

Documentation may be described as the process or technique of obtaining the relevant

documents. A banker must obtain proper documents executed from the borrower to

protect himself against willful default. Moreover, when money is lent against security of

some assets, the document must be got executed in order to give to the banker a legal and

binding charge against those assets. Documents contain the precise terms of granting

loans and advances and they serve as important evidence in law of courts if the

circumstance so require. It is therefore absolutely necessary for a banker to obtain proper

documents from the borrower while granting a loan or advance to him.

• Execution of Documentation

Depending on the nature of credit nature of security, nature of constitutes, various

documents are required. The chart of various types of documents required for various

facilities as par BASIC Bank Ltd. Head office circular letter no.

BASIC/HO/ADV/98/2395, dated November 03, 1998 to be executed by the

borrower/grantor/ related persons in respect of credit.

Documents for Advances: Documents for advances can broadly be classified into the two

categories:

1) Charge documents

2) Security Documents

Charge documents: Charge documents are generally prescribed printed forms used by

the bank against credit to be executed by the borrower/party concerned. They are:

1) Demand promissory note (DP note)

a. DP note – (ADV - F – 25) b. DP note – (ADV - F – 26)

c. DP note – (ADV - F – 27)

d. Joint DP note

2) DP note delivery letter

3) Letter of arrangement

4) Letter on continuity

61



5) Revival letter – I

6) Revival letter – II

7) Letter of guarantee

8) Letter of Hypothecation of goods

9) Letter of Hypothecation of machinery

10) Letter of Hypothecation of bills

11) Letter of Hypothecation of debt assets

12) Letter of pledge – goods

13) Letter of lien – 1st party

14) Letter of lien - 3rd party

15) Letter of counter guarantee.

16) Letter of trust receipt

17) Letter of ownership

18) Memorandum of deposit of title deeds

19) Disbursement letter 20) Letter of disclaimer

21) Letter of undertaking and declaration with other bank liability

Branch should obtain initially two sets of charge documents. One set is to be duly filled

in signed, stamped and witness. Before every renewal / enhancement / or reschedule of

loan, Branch should obtain another set of charge document.

Documents required for various types of facilities/constitutes are as under:

Mortgage of landed properties:

1) Original title deed (S) With chain of documents (All bhaya deed)

2) CS (Cradastal survey) parchas (1909-1922)

3) SA (State acquisition) Parcha (1955-1962)

4) RS (Revised survey of SA) parcha (1969-1978)

5) Mohanagar Jarip Parcha

6) Non-encumbrance certificate from SRO

7) Mutation parchas with DCR

8) Upto date khajna/ rent receipt

9) Upto date municipal tax receipt, gas and WASA bill10) In case of lease hold property “NOC” should be obtained from the

RAJUK/KDA/CDA/Cantonment board/Ministry or the concerned authority for

creation of mortgage in Bank’s favour.

11) In case of vacant land, certificate from the RAJUK/KDA/CDA/Cantonment

board/Ministry of works or the concerned authority to the effect that the land is free

62



from acquisition plan to be obtained. (Bank shall also not accept any vacant land

against loan as security without HO approval)

12) All Mauza map (if necessary)

13) Court order of case and degree (if necessary)

14) Location/site map

15) Approval plan for construction for the RAJUK/KDA/CDA/Cantonment board or

concerned authority (if necessary)

After receiving above documents from the borrower and land owner, bank authority must

obtain lawyer certificate/opinion regarding clean title from bank’s lawyer or legal advisor

over the land to be mortgaged.

Then bankers execute the following documents:

1. Letter of acceptance of terms of loan2. Registered deed of mortgage (drafted by bank’s lawyer and registered from SRO)

3. Registered deed of power of attorney to sell the property as per law of Artha Rin

Adalat 2003 (drafted by bank’s lawyer and registered from SRO)

4. Memorandum of deposit title deed

5. Affidavit (In the court of magistrate first class) to be obtained

6. Valuation certificate from enlisted surveyor (Bank approved) as well as inspection

report submitted by bank’s official as per circular no HO/ADV/98/18 dated

September 22, 1998.

7. If the land property belongs to limited company, the mortgage/charge created in

bank’s favor must be registered with registrar of Joint stock companies within 21

days from the date of its creation/execution.

Where advance are allowed to limited company

1. Board resolution of company to open and operate the Bank

account, covering , corporate borrowing power and execution of

security documents

2. Memorandum of association (copy)

3. Article of association (copy)

4. Certificate of incorporation (copy)

63



5. Certification of commencement (public limited company)

6. Personal guarantee of the directors (jointly and severely)

7. Registration of charge with RJSC

8. All share certificates of directors along with form 117

9. Photograph of all directors duly attested

10. Any other documents as per sanction advice

Where advance are allowed to partnership firm

1. copy of trade license duly attested

2. original copy of partnership deed

3. Photograph of each partners

4. Undertaking as required sanction letter

5. Personal Guarantee of all partners.

Where advance are allowed against third party property

As per obtaining approval of HO, If the property belongs to third party, third party

guarantee is obtained to secure the property the following additional documents should be

obtained.

a. Double party D.P. note delivery letter

b. Letter of guaranteec. Revival letter – II in addition to revival letter – I

d. 2 copies photographs of the 3rd party land owner offering the security

should be obtained after due attestation by well known persons.

NB. Property offered as security must be thoroughly investigated for the legal point.

LIST OF ADVANCES DOCUMENTS

(Common documents to be obtained for different types of advances)

64



SOD (security as FDR)

1) original instrument duly discharged by-holder onrevenue stamp on the back of the FDR

2) Usual charge documents3) Letter of authority to lien4) Letter of authority from borrower to encash the

instrument for adjustment of outstanding

liabilities5) Letter of lien (1st or 3rd Party)6) Lien confirmation from issuance authority

Term Loan

1) Usual charge documents2) Security documents3) Letter of acceptance of the term of loan and

disbursement request4) Repayment schedules accepted by borrower

5) Hypothecation of goods/stock 6) Hypothecation of machinery

7) Cheque receive from borrower as per repaymentschedule to be adjusted the term loan

8) Insurance policy in the joint names of the bank

and the borrower 9) other documents to be obtained depending on the

security

Bank guarantee

1) Request letter 2) Usual charge documents

3) Letter of counter guarantee4) If collateral security is obtained5) Other documents to be obtained depending on the

security

6) Letter of lien and authority if financial collateralsecurity is offered

All guarantees must be recorded in the register with

details. Terms of guarantee must be examinedcarefully. No guarantee will be issued with unusual

clauses that bind the bank eternally

Transport loan

1) Request letter 2) Usual charge documents3) Hypothecation of above Transport4) Photocopy of blue book, route permit, and Tax

token5) Letter of undertaken6) Comprehensive 1st party insurance policy in the

name of the bank and borrower

Cast credit (Pledge/Hypo.)

1) Letter of acceptance of the terms of loan2) usual charge documents

3) if collateral security is obtained4) Stock report (monthly / quarterly) from the

borrower and verified by bank official5) Agreement for pledge/hypo of goods

6) Letter of hypo/pledge of goods7) Letter of disclaimer singed by the owner of the

godown8) Insurance policy in the joint names of bank and

the borrower

LTR

1) Usual charge documents

2) Disbursement request3) Letter of trust receipt

4) Hypothecation of imported goods5) Insurance policy

6) Security and other documents to be obtaineddepending on the security.

Packing Credit1) Usual charge documents2) Lien over export L/C

3) Disbursement request4) Hypothecation of stock of goods5) Letter of packing credit

LBP

1) Usual charge documents2) Disbursement request3) Lien over export L/C

4) EXP form (one set)5) Letter acceptance is to be obtained from the local

drawee bank in respect of honor of bill of exchange drawn on them on maturity as per L/C

terms6) Hypothecation of bill

Letter of credit

1) Request letter 2) Usual charge documents

3) Letter of guarantee for opening L/C4) Hypothecation of import of goods5) Marine insurance policy6) Letter of undertaken

Loan against imported merchandise (LIM)

1) Request letter and letter of acceptance2) Usual charge documents

3) Pledge of goods to secure loan4) Instruction to C&F agent5) Joint insurance coverage on goods under lien6) if collateral security is obtained

Stock position of LIM goods must be recorded in

the LIM register

Precautions:

65



A banker should take the following precautions while getting the various documents

executed from the borrower in order to ensure safety of his funds:

1) All the documents / papers / title deeds should be searched through DC office

record room, registry office, Tahsil office and AC land office as required by banks

legal adviser/ retainer and have to be attested or verified as it being correct and

genuine.

2) The money should be advance only when the borrower has duly filled in all the

required documents and completion of all legal formalities

3) All the prescribed documents should be stamped as per stamp act

4) Documents are invariable singed by the borrower in the presence of a bank officer

5) Documents should be obtained on the banks standard forms. The date on the

promissory note and the date on other documents should be the same

6) No addition, deletion or replacement should be done in the printed language of the

document without consulting the legal adviser of the banker since the banker

himself may not know the adverse legal consequences of such an act.

7) The documents should be renewed well in advance of the limitation dates. The

period of limitation is three years after which the debts will become time barred

8) All alteration, addition, striking or interlinings, if any, appearing the documents

must be authenticated by full signatures of all executants.

9) All documents should be properly dated

10) If there are two or more pages/sheets in a documents each page /sheet should be got

signed at the bottom from all the executants in addition to the signature at the end

of the documents.

11) Bank to be obtained the following documents every year from the borrower

a. Upto date khajna receipt

b. Insurance policy

c. Loan balance confirmation certificate12) Bank to be obtained the following documents of every renewal /enhancement/

reschedule of loan

a. One set of charge document

b. Insurance policy (for enhancement)

c. Floating charge (for enhancement)

d. Further charge (for enhanced amount)

66



e. Letter of acceptance for renewal / enhancement/reschedule

• Safe Keeping

Original deeds, stitched at the corner, along with charge documents must be kept in the

vault in separate plastic files according to the location of the properties. These files must

bear file number, quantity of land, name of the owner of land, and name of the borrower

written on their cover. All these files names must be registered in the “safe in safe out

register” orderly and singed with Advance-in-charge and Branch in charge. Every plastic

file must contain a checklist and this list must be duly filled and signed by the authorized

officer. Remember that charge documents and deed must not be punched.

Only custodian can give the original deed to any one required with permission from head

office.

After adjustment of all the liabilities, deed can be returned to the owner of deed with permission from Head Office after taking request letter from the owner and receiving

signature in the “Safe in safe out register”. In this case custodian can keep a photo copy

of the all the documents in a closed file.

Part-(vi)

67

Care: Credit facility should be extended only after completion of documentation formalities.

Non completion of documentation in respect of their loans will be considered unforgivable

offence.



Credit Planning, Pricing, Monitoring

Credit Planning

Credit planning means estimating first the total loanable resources that are likely to be

available within the given period and then allocation the same amount is using variousalternatives in conformity with national plan and priorities.

Necessity of credit planning in context:

Demand for credit is much higher than its supply

Providing credit to the right person at the right time at the right quantity

Getting maximum output as a result of credit allocation

Ensuring the best of investment alternative available

Achieving declared objectives such as providing credit to priority sectors.

Credit planning at the macro level: The basic objective of credit planning at the macrolevel is to have an estimate of the total resources available at the national level during the

budget year and then to ensure that these resources which consist deposit resources flowto areas and sectors in consonance with objectives coins deposit resources and currency

components.

Credit planning at micro level: In ultimate analysis, credit budget at micro level is an

aggregation of the credit budgets of the individual banks put together. As matter of fact,the macro level planner should indicate the thinking to the banks about the magnitude of

the macro plan. At the time of sending guidelines to the banks and asking them to prepare

their credit budget, the central bank should issue guidelines to banks indicating their

assessment of different industries.This will obviously assist individual banks in preparing their credit plans but

unfortunately this is not being done in our country. At branch level:

1) Adherence to the policy guidelines of the head office and the supplementary

policy guidelines of the regional office.

2) Analysis of the command area.3) Determination of the requirements of the incremental loan able funds.

4) Allocation of the said funds to different sectors and client groups during the

budged period.

At regional level:

1. Analysis and settlement of the branch credit plan in a branch managers’ meeting

and in a democratic way2. Transmission of the regional credit plan to the head office.

At head office level:

1. Adherence to the policy guidelines of the central bank regarding

deployment of credit.

2. Correction of regional as well as sect oral imbalances if any.

2. Settlement of the credit plan of the concerned back for the budget year.

68



Loan Pricing

A manufacturer offers the market goods as its product. Like this a bank offers the market

a loan as its product. the price of a good is determined by the cost to make it plus profit

on it. Similarly, the price of a loan is determined by the cost to make the loan plus a profit

or risk premium on it.Lending is the primary business of a bank and profit is a measure of its success. So the

main objective of lending is to earn profit on loans for the on going viability of the loan.

Price of loan –How to determine:

The price of a loan is the interest rate the borrower must pay to the bank, in addition tothe amount borrowed (principal). The price/interest rate of a loan is determined by the

TRUE COST (BASE RATE) of the loan to the bank plus PROFIT/RISK PREMIUM for

the bank’s services and acceptance of risk.Base rate is the bank’s break-even point, at which income and expenses are equal each

other or profit = 0 of a loan.

True Cost ( base rate) and its components:

There are three primary components of the cost of a loan that must be determined:

a) Interest expenses (For deposit and borrowings)

b) Administration expensesc) Cost of capital

Here, TRUE COST (BASE RATE) = (a) + (b) + (c)

That is, Base rate = Interest expense (2 components) + Admn. Exp. +Cost of capital

Note

a) Interest expense = Interest in deposit + Interest on borrowings from B.B, etc.

FormulaThe weighted average interest rate = [(% of deposit in total liabilities 5 Average rate of

interest) + (% of borrowings in total liabilities 5 Average rate of interest)]

b)Administrative expenses

The bank must pay salaries, rent and other overheads for head office, zonal office and branches as deposit and loan administration costs.

Formula

69



Total Admn.Exp.

% of admn. Exp. to Loan = 5 100

Total Loans

c) Cost of capital = Investors’ Expected rate of return

Formula

ERR 5 Proportion of Bank Capital in Total LiabilitiesCost of capital =

Proportion of loans in total assets.

Risk Premium:

The price a borrower must pay to the bank for assessing and accepting repayment risk iscalled the ‘Risk Premium’.

Losses

Risk Premium =Total category loans

Credit Monitoring

Post loan activity: Caring for the loan at post sanction stage in order to ensure the safety

of the money lent.

Why credit monitoring:

• Minimize credit losses

• Return on funds

• Compliance of terms and conditions• Problem solving

• Feed back

• Taking timely corrective action

• Review of borrower relationships/loan facilities

Methods for credit monitoring:

70



Off-site Monitoring: Periodic reports

-Discussion-Operating statements and cash flow statements

On-site Monitoring:-Visits

-Nominee Directors

Early warning system (EWS) to be in place to identify Early Alert Accounts (EAA):

• Address problems

• Prevent loan classification, Int. Rev loss

• Obtain support for redress

Part-(vii) Micro Finance Scheme of BASIC Bank Limited

Objective of the Scheme:

The objective of the scheme is to provide credit to the poor people, particularly the

landless and asset-less urban poor with a view to creating self-employment. The bank

has limitation of addressing the problem of rural poor; one of the reasons of which is the

absence of any branches in the rural areas. The bank has been providing credit to the

urban poor in a limited scale. The has been drawn based on the experience of the Bank in

providing credit to poor people and also on the experiences of other banks and NGOs in

the country.

Target Group:The target group of the scheme mostly consists of the poor people in urban areas,

particularly in the urban informal sector. They mostly live in city slums and shanty

towns. The rural poor, particularly artisan groups who can be easily organized are also to

be covered by the scheme. Following poor and/or disadvantaged groups fall within the

definition of target group:

71



• Those employed in self employed income generating activities having knowledge in

the trade and marketing.

• The individuals should not have assets in the form of machines, tools and equipment,

other movable assets domestic livestock of worth and use exceeding Tk. 30000.00.

• Those individuals whose monthly income does not exceed Tk. 5000.00.

Activities Financerd:

The urban poor rely heavily, for their livelihood, on work in small enterprises in the

informal sector. A huge number of activities can be included in the tentative list. A few of

these are tailoring, handicrafts, embroidery, sweet meet box making, rubber slipper strap,

jute bag, paper bag and envelopes, bangle manufacturing, hair cutting saloon, shoe

making and polishing, push cart, sugar cane juice making, tea shop/hawking, pan and biri

shop, chanachur selling, chatpati, jhalmuri, peanut selling and fresh flower selling shop

etc.

Credit Delivery System:

Three alternate delivery systems are being used to reach credit to the urban poor

borrowers. These are:

• BASIC provides loan to NGOs which on-lend to the poor borrowers. Credit risk is

borne by the NGOs which are responsible to make repayment to the Bank. The end-

borrowers repay loan to the NGOs.

• The Bank provides loan to the urban poor borrowers through NGOs or the bank

directly extends loan to the borrowers. The borrowers repay loan direct to the Bank.

The NGOs assist the Bank in motivation, formation of self help groups and

monitoring and supervision of loan utilization. For such service the NGO will be

paid a fee by the Bank.

72



• BASIC provides loan to the urban poor borrowers direct without assistance of any

NGO. BASIC’s staffs perform all required functions of motivation, group formation

and monitoring and supervision of loan utilization. Borrowers make repayment to the

Bank.

Loan size:

Loan may be sanctioned to individual members organized in a group as well as to NGOs.

The maximum limit of loan per person is Tk. 15,000.00. The minimum loan size is Tk.

2,000.00 per borrower.

Interest size:

Monitoring and supervision cost of small loans are high. It is reported that NGOs require

10% - 12% interest spread to cover their cost. As far as possible market rates should be

charged. In the case of providing fund to NGOs for on lending interest rate charged to

NGOs vary from 7% to 10% per annum. For direct lending to NGO members the Bank

charges 16% interest rate. Also in the case where we handle microfinance operation

entirely on our own, the interest is charged at the rate of 16% per annum.

Growth in Microfinance:

The growth in microfinance of the Bank during last five years is shown in the following

table:

Microfinance 2001 2002 2003 2004 2005 (up to June)Amount in million tk. 183.80 186.20 181.00 284.10 310.50

Growth - 1.3% 12% 57% 9.3%

% of total loans &

advances

2.9% 2.3% 2.00% 2.4% 2.3%

Table:Lending portfolio of BASIC to microfinance scheme

73



Description Numbers

Total districts covered by other credit programs All districts

Total districts covered by microfinance programs 30 Districts

Total branch 29

Branch with microfinance operations 11

Table:Area covered by the NGOs financed by BASIC Bank

Future plans:

The experience of BASIC Bank has lend support to actively consider the following in

respect of its microfinance scheme:

• Rural poor are out of focus of the scheme. As such, BASIC Bank will introduce some

special schemes for rural micro industries to offer the benefit of the scheme to the

rural poor too.

• Growth in microfinance shall be at least equal to the growth of total loans and

advance.

• Strategic network will be developed with premier stakeholders in the sector.]

• periodical program to exchange views with participatory NGOs on strategic changes

and other vectors of the micro enterprise development and poverty alleviation.

• Regular training of officials engaged with microfinane operation in head office as

well as in the branches shall be arranged.

74



Part-(viii)

Loan Classification, Provisioning and Declassification

A Loan account generates interest earning and reasonably treated as the most vital asset

of the bank. To have a substantial profit, a bank should always maintain a sound loan

portfolio. To do so, bankers have to monitor the loan accounts meticulously with a view

to keeping its assets safe side. In practice, some of the loan accounts are found to be

performing; some are non-performing. A loan account is said to be ‘unclassified’ if its

status is good; otherwise it is called ‘classified’. There are some classification categories:

primary stage is termed as ‘Substandard’, secondary stage is ‘Doubtful’ and the worst oneis ‘Bad or Loss’. Classification of loan primarily depends on the non-repayment

behavior for a certain time frame; details will be discussed later. When a loan account

functions non-performing for some specific period, we cannot consider taking interest

into income account; we accumulate the interest and keep it into suspense account since

the time of its ‘Substandard’ status. If at any stage, the loan is regularized, then we

reverse the suspense account into income account. If it reaches at Bad Loan, keeping the

suspense interest unchanged, we will no more charge interest on the loan account. We

will better go for legal action. Upon court’s decision, we will calculate unpaid principal,

up-to-date interest along with other charges.

75



BASIC Bank LimitedHead Office, Dhaka

Category InterestDeposit

1.Savings

2.STD

5.00%

3.00%

Effective from 01.05.2004

3.Fixed

a. 3 Months and above b. 6 Months and above

c. 12 Months and above

d.24 Months and above

6.00%

6.25%

6.75%

7.00%

Effective from 01.03.2005

Lending

1. Agriculture

Primary Products.

2.Industrial Term Lendinga. Agro-Based Industries

b.Micro Industries with project cost up to Tk. 50.00 lacc.Other Small Scale Industries

d.Large & medium scale industries

3. Working capital (Indutrial)

a. Agro-based Industriesb. Micro industries with project cost up to Tk. 50.00 lac

c. Other small scale industries

d.Large & medium scale industries

4. Export

a. Export (Direct)

i) Readymade garments, frozen food, agro-based industries.

ii) Others

b. Advance against inland documentary bills accepted by banksi)Payment in foreign currencyii) Payment in local currency

5. Commercial Lending

a. Internal trade/import

financing/other short term demand loan

6. OD against

a. Bank’s own FDR

b. Other bank’s Fixed Deposit Receipt

c. PSP/SP/Other Govt. Bonds

10.00%

10.50%11.00%

12.00%12.00%

11.00%

12.00%12.50%

13.00%

7.00%

7.00%

10.00%13.00%

14.00%

2% above FDR rate

14.00%

12.00%

13.00%

76



d. Unit Certificate

7. Housing loan

8. Micro Credit through NGOs and other special programs

14.00%

11.00%

Importance of Loan Classification :

International best practices require that a loan will be classified as non-performing if its principal and/or interest are three months or more in arrears. For the moment, banks in

Bangladesh as prescribed by the Central Bank follow classification rules based on a tine

frame of six months, still away from International best practices. On introducing special

mention account, we are trying to emphasize regularization of the loan accounts not yet

been classified but acts like a non-performing loan.

Special Mention Account:

A continuous credit, demand loan or a term loan which will rnain overdue for a period of

90 days or more will be put into the “Special Mention Account” and interest accrued on

such loan will be credited to interest suspense account, instead of crediting the same to

income account. This will act as Early Warning Signals of shadow classification.

Basis of Classification:

There are only 2 (Two) criteria to categorize the loan to be classified or not

a. Objective Criteria,

b. Qualitative Criteria

Objective Criteria concentrates the following :-

-Limit Expiry

– Required Payment.

77



Qualitative Criteria is entirely judged by the Branch-in-Charge. In case the loan account

is unclassified by Objective Criterion, this could be even treated as ‘classified’ by

Qualitative Criterion. Some instances of such criteria may be like these: low transactionin a newly disbursed loan, fund diversification or non-traceability of the borrower, etc.

Some other discussions of loan classification:

Total loans and advances are divided into 4 (four ) categories under new system. These

are:-

1. Continuous Loan.

2.Demand Loan.3.Fixed Term Loan.

4. Short Term Agricultural and Micro Credit.

CL1 is the consolidated statement of all the break-up of CL2,CL3,CL4 and CL6

CL1= CL2+CL3+CL4+CL6

CL2= Continuous Loan(TOD,SOD,C.C(H),C.C(P))

CL3= Demand Loan(PC,PAD,LTR,LIM,FBP,LBP,LAFB,Demand)

CL4= Term Loan up to 5 Years (Term-SSI, Term-MSI,Loan General having any specific

Repayment Schedule)

CL5= Term Loan over 5 Years (Term-SSI, Term-MSI,Loan General having any specific

Repayment Schedule)

CL6= Short Term Agricultural and Micro Credit (Direct Individual)

Some Important Notes:

For CL4 & CL5: Amount in Arrears = Amount Due-Amount Paid

Time Equivalent = Amount in Arrears* Installment Frequency (months)/Installment Size.

78



Procedure of Loan Classification:

1. Objective Criterion:

Category Limit expiry exceedsInstallment default (time equivalent equals)

StatusCL-2 6 months or above but <9months

9 months or above but >12months

12 months or above

SS

DF

BL

CL-3 6 months or above but <9months

9 months or above but >12months12 months or above

SS

DFBL

CL-4

6monthly installments or above but<12

monthly installments

2quarterly installments or above but<4quarterly installments

1half yearly installments or above but<2 half

yearly installments

12monthly installments or above but<18monthly installments

4quarterly installments or above

but<6quarterly installments

2 half yearly installments or above but<3 half yearly installments

18 monthly installments or above

6 quarterly installments or above

3 half yearly installments or above

SS

DF

BL

CL-5 12monthly installments or above but<18



but<6quarterly installments

2 half yearly installments or above but<3 half

yearly installments

1 yearly installments or above but< 1.5 yearly

installments

18monthly installments or above but<24


6 quarterly installments or above but< 8

quarterly installments

3 half yearly installments or above but< 4 half

SS

DF

79



yearly installments

1.5 yearly installments or above but< 2 yearly

installments

24 monthly installments or above


4 half yearly installments or above

2 yearly installments or above

BL

CL-6 12 months or above but < 36

months

SS

36 months or above but < 60

months

DF

60 months or above BL

2. Qualitative criterion: Uncertainty of loan. To be judged by the Branch-in-charge.

Loan Provisioning:

There is every risk when we lend money to the customer. If any loan extended to a

customer is not returned, we need to take some precautions before giving the loan. In

general, we ask for good security from the borrower. Further, we follow some extra

measures to safeguard the loan portfolio. As a matter of fact, we try to maintain some

reserve fund to cover the risk to be involved by loss due to classified loans of the bank

and the entire procedure is loan provisioning. The effort helps reduces the possibility of

losses of such assets.

Base for Provisioning;

Base for provision = Balance outstanding – Interest Suspense – Eligible Security

Interest Suspense = Interest not credited as income account. (under Sundry Creditors

Head liability side.)

Eligible security:

Matter RateDeposit 100%Gold 100%Govt. bond/savings certificate 100%Guarantee by the Govt./ Bangladesh Bank 100%

80



Easily saleable goods under Bank’s control 50%Mortgaged land, building (market value) 50%

Provision for general credit:

Category Base Rate

Unclassified Balance outstanding

excluding staff loan

1%

Unclassified (special mention account 5%

Substandard Base for provision 20%

Doubtful Base for provision 50%

Bad loan Base for provision 100%

Provision on agro credit and micro credit:

Category Base Rate

Unclassified Balance outstanding 5%

Substandard Base for provision 5%

Doubtful Base for provision 5%

Bad loan Base for provision 100%

• Declassification:

Borrower in some specific cases may be the victim of the circumstances and they do not

default of any loan willingly. Many a times, it has been seen that, due to political unrest,

turbulence, natural calamity, particular business constraints, bureaucratic bottlenecks,

entrepreneurial problem and industry hazard may result a loan account to get it classified.

However, BASIC will not concentrate more on the matter in accordance with the purview

of the subject paper: rather we will focus on the rules and regulations of declassification

of a loan.

As per BRPD circular no.01 dated 13.01.03 regarding Reschedule Policy of classified

loan, there are some guidelines to be followed as under:

a) If the default borrower is a habituated one, then the bank consider its declassification.

81



b) The bank has to take into consideration of the default borrower’s other banks’

liability before go for declassification.

c) The bank will look into the cash flow statement, audited accounts, revenue and other

financial statement as to test the client’s solvency to adjust the exciting liability.

d) The bank official will physically visit the business concern and maintain some

reports.

e) If all the above guidelines are complied with meticulously and also if the bank is fully

satisfied with good repayment performance, then rescheduling is possible.

f) Re-scheduling to be made on actual basis; it is wise to give a minimum time frame.

g) If Re-scheduling is needed to place before the Board, then a through study will be

required for its ultimate implication over the bank’s profit, costing and other

measures.

Rescheduling Procedure:

Type of loan

(B)

Stage

(A)

Overdue amount

(C)

Outstanding

Balance (D)

Down-payment

(E)Term Loan 1st

2nd

3rd

15% of (C)

30% of (C)50% of (C)

10% of (D)

20% of (D)30% of (D)

Minimum of (C)

& (D)

Demand &

ContinousLoan

1st

2nd

3rd

Up to Tk. 1 crore

Tk 1 crore to Tk. 5

crore

Tk. 5 crore &

above

15% of (D)

10% of (D) subject

to a minimum of

Tk. 15 lac

5% of (D) subjectto a minimum of

Tk. 50 lac.

If anydemand or

continuous

reconstructedas a term

loan

1st

2nd

30% of (C)50% of (C)

20% of (D)30% of (D)

Minimum of (C)& (D)

82



Part- (ix)Supervision and Recovery of loans and advances of BASIC Bank Limited

Supervision and follow-up of advances are the direct responsibilities of the branch.

Branch is the unit wherefrom the proposal is made for any advance, disbursements are

made. The borrower maintains his account with the branch, operations are conductedthrough the account, reports and returns are submitted by the borrower to the branch. So,

success depends on how effectively the branch ensures supervision and follow up of the

advances.

In conducting supervision and follow up, branches have to follow the under noted

common methods:i) Keep watch over the ledgers and accounts to ensure that operations are regular and as

per procedure. Particular care should be taken when the balance in the account remains

very near or goes beyond the drawing limit or there is no good turnover.

ii) Ensure that inputs/materials are purchased/procured as per procedure/terms of sanction

and are used properly and outputs are sold properly.

iii) Keep watch over the inflow and out flow of fund.

iv) Collect periodical reports, returns and information about the borrower and examine

the activities of the project/enterprise financed.

v)Ensure that security/collaterals have been obtained as per terms of sanction and

valuation has been assessed correctly and security is maintained properly.

vi) Ensure that security has been properly insured where required as per policy, procedure

and practice.

83



vii)Ensure that the documents have been obtained as per terms of sanction and as per

procedure for such type of advances. If not, get the documents regularized.

viii) Keep regular contact with the borrower both formally and informally and pay

regular visits to the project/enterprise financed.

ix) Keep watch over the repayment trend and see that the advance does not turn up as

irregular or stuck up and becomes time-barred.

x) Ensure that appropriate actions are taken in time to regularize the irregularities and

recover the loan as per schedule.

xi) Obtain periodical balance confirmation from the borrower and where a necessary

fresh document is obtained as per procedure/practice.

BASIC Bank Limited has been following a series of measures, both in Head Office and branch level, to follow up and supervision of loans and advances to avoid and minimize

performing loan of the bank.

At Branch Level:

In order to ensure an effective supervision all branches are instructed to take care

following factors:

1) End-use of fund: To see that the funds lent to the borrower are used for the purposefor which they have been given. Any diversion of funds and deviation by the

borrowers from the terms and conditions stipulated by banks have to be noticed and

timely action to be taken. Branch in charges are instructed to be cautious and guardagainst any misuse of credit facilities.

2) Monitoring of borrower’s account: All branches are advised to keep the borrower’s

account under close watch as it is helpful for effective credit management.

3) Security: The branches are instructed to see that the security offered is safe and

continues to remain available for repayment of loan. Security may be in the form of i)Fixed Assets ii) Goods iii) Bills etc.

All branch in charges are also advised to diarized all important dates in regard to an

account, to ensure that an advance does not breach any provision of law of lending and toreview all advances every six month or once in twelve months.

At Head Office level:

In order to control and supervise credit, Head Office prepares a consolidated statement of

loans and advances every month to indicate bank’s exposure in each types of loans and

advances on the basis of risks involved and sectoral distribution for purposes of controlling excessive exposure in unwanted portfolios.

84



Head office effectively monitors all loans and advances through inspection to the branch

(including surprise visit), examine different periodical statements (weekly, fortnightly,

monthly, quarterly and half-yearly).

a) Periodical inspection: Branches are periodically inspected by internal

auditors/inspectors by head office and external auditors, during each inspection theinspector makes a comprehensive and detailed examination of all advances including

documents, security and turnover of the account and whether the terms and conditions

the sanction have been complied with.Spot inspection is also conducted by vigilant team from Head Office by a surprise

visit when specific and urgent information are needed by the management. This report

will be short and cover specific area.

b)Periodical statement: All branches are instructed to submit different statement relating

to loans advances in weekly, monthly, quarterly, half-yearly basis. If anything found

adverse against any branch, Head office instantly asked the branch to clarify its position.

Head office takes necessary measures against branch which found committedirregularities and damaged bank’s interest.

c) Arranging meeting with branch in – charge: Besides regular meetings of the branch

managers with Head office for overall review of loans and advances of each branch

arranged under the chairmanship of Managing Director of the bank for guidancereducing overdue loans and recovering classified loan and sanction of new loans.

Recovery of loans and advances:

Bank generally recalls its advances under the following cases:

i i) If death occurs either of the borrower or the guarantor.

ii) If the borrower is reported to have committed an act of

insolvency or has filed application for his insolvency.

iii)Dissolution of the partnership.

iv) Liquidation of the borrowing company.

v) Failure to renew the documents sufficiently before the expiry of the limit.

vi) If there is any serious deterioration in the security charged to the bank and want

of satisfactory turnover in the account.

85



vii) There has been deterioration in the financial position of the party. If the banker

comes to know that his client has committed a fraud or indulged in speculation, it

will be invisible to continue the advance.

viii) Failure to adhere to the terms and conditions of the sanction in spite of

repeated reminders to the borrower.

ix) If the borrower fails to maintain the stipulated margin and does not restore the

shortfall in spite of repeated reminders.

x) Change in the bank’s policy of certain types of advances.

xi) The policy of ‘Selective Credit Control’ by Bangladesh Bank.

xii) Detection of any undesirable features in the account.

xiii) There may also be other reasons for withdrawing the facility, i.e., the law and

order situation at a certain place is such that it may be risky to continue the advance.

Procedure for recovery:

If a borrower fails to make repayment of dues the bank has to consider what steps need to

be taken to recover the debt. Banker will eventually have to take the following steps to

recover the stuck-up advances.

i) Exerting moral pressure: The banker will visit the borrower’s place of business and

find out the cases of non-payment of the bank’s dues. The banker may also request someinfluencer customers of the area to exert pressure on the borrower to clear bank’s dues. If

there is a guarantor, he is also called upon to adjust the account or have it adjusted by the

principal.

ii) Incase the borrower does not adjust the account as desired , the only course left open

to the bank would be to send a notice by registered post to the last known address of the

borrower and guarantor, if any, preferably through a lawyer. In that notice, it has to statethe undesirable character of the advance and recall it and ask the party to liquidate it

within a stipulated period, say 30 days. Presently banks are empowered to dispose off the

security without intervention of the court under the ‘Artha Rin Adalat Ain 2003’. Thislaw empowered the financial institutions to sell property kept with them as lien, pledge,

mortgage or hypothecation without any intervention of the court in order to adjust default

loan from sale proceeds followed by filing of law suits. Another important feature of thisact is the limitation of the financial institution that it would not file any suit claiming

interest more than two hundred percent of the principal amount of loan(Section-12).

86



iii) Filing a suit: If the advance is not fully secured and where there is a shortfall to adjust

the advance after disposal of securities, the decision has to be taken by the bank whether

to keep the borrower in business or file a suit against him for recovery of bank’s dues.It is well known that once the suit is filed, the borrower ceases to be cooperative.

BASIC Bank Limited has been followed a series of measures to recover the defaultamount of loans and advances both in Branch and Head Office level. All branches are

kept under serious pressure through circular, circular letter, verbal instruction etc in

regular basis to take necessary precautions to avoid new default loan in the branch.

Besides, branches have been given yearly target to recover dues from the existing default

borrower to reduce the classified loans and advances up to minimum level. Head Office

monitors each branch whether it is performing in accordance.

The scenario of loans and advances of BASIC BANK Ltd. as on December 31, 2005

is as follows (at a glance):

1. Total Loans and advances

a) Term loan

b) Commercial loan

c) Micro credit

Total

Tk. 978.76 crore

Tk. 501.34 crore

Tk. 33.83 crore

Tk. 1533.93

2. Total Classified loan Tk. 69.84 crore

3. Rate of CL to total advance 4.55%

4. Total claimed amount against suit Tk. 35.02 crore

5.Recovery from the account under suit Tk. 2.38 crore

6. Number of suit feild 57 no.

87



Chapter- Five

FINDINGS OF THE STUDY

88



Attempt has been made to find out the actual practices of the Bank against the

credit operating procedure specified in previous chapters. We will verify whether BASICBank Ltd. is following the credit operating procedure that are specified by Bangladesh

Bank and as well as specified by itself.

1. Aggregate Loans and advances are 79% of the total Deposit:

As we have seen in the credit policy that, it strictly specifies that, at best 65 of the total

deposit should only be provide for the loans and advances. If we consider the call depositand fixed deposit then the figures comes to 79% at June 2003. So in that case BASIC istaking some sort of risk. But as the amount of non-performing asset is low this rate is

acceptable. And when we have examined this rate for other private commercial and

specialized banks the amount approximately was 80 to 95 percent of the total deposit.

2. Approximately 77% of the loans and advances have been given to small and

cottage industries:

In the credit policy it has been specified that, approximately 50% of the loans and

advances will be given to small-scale industries. By examining the figures we have found

that, for the month ended June 2003, BASIC employed 77% of its loan able funds to

small-scale industries. If we take the example of some local private and government banks we can see the following position.

Name of the bank Investment to small scale industriesArab Bangladesh Bank 4.74 %

Islami Bank 21.21 %

Sonali Bank 10.83 %Rupali Bank 0.43 %

89



Dutch Bangla Bank 3.45 %

Agrani Bank 10.45 %

So we have seen that, comparatively that all other banks are investing fewer amounts to

small-scale industries. By this they are maintaining steady short-term profit but

endangering long run profitability.

3. Head Office of the bank are monitoring all kind of loans and advances:

The Head office of the bank perfectly monitors the banking operation and execution of the credit policy. When I have examined the credit extension procedure of the bank I

have found that, every proposal are forwarded to the Head office for granting the loan

and Head office has the full authority to reject any kind of proposal. Thus any kind of ill

practices at the branch level are restricted. Along with that, some power has also beenforwarded to the branch manager most of whom also are well conversant about the credit

policy of the bank.

4. Branch managers are fully liable for the selection of the borrower:Branch managers are made fully liable for the selection of the new borrower in the bank.

It prohibits the way to improper selection of the new borrower by the branch manager.

5.Continuous monitoring of the working capital facilities are ensured by the

inspection of the stocks:

BASIC bank provide working capital facilities like Cash Credit, in against of stock of

manufacturing goods. I have checked the inspection file of 5 branches and am informed

that, continuous supervision is held to ensure that appropriate stocks are there to support

the financing. Usually Cash credit is allowed on 70% on the total stock value.

6. Conservative approach are taken to avoid any kind of foreign exchange exposure:

In credit policy of BASIC it has been specified clearly that no additional risk should betaken in dealing with foreign exchange. I have visited 5 branch of BASIC and I have

found that excessive measure is taken to avoid any kind of risk. Some problems arise

because of these excessive measures as new borrowers fears to open an L/C.

7. Documentation Process:

To judge whether the branches are following the credit policy for documentation I have

visited 5 branch and made sample test. In that we have taken four borrowers in each branch and compare the documentation process with the standard one. There we have

find that, in 90% cases standard documentation has been maintained.

8. No credit is extended to customer client Entity, which exceeds in total

commitment more than 10% of the Bank’s capital and fees reserves.

9. House building loan facility and other commercial loan facility has been

demoralized by the branch authority:

As per credit policy of the bank the branch credit committee always demoralize loan

facility to commercial sector. It has been revealed from the interview and from the

90



balance sheet. The reason behind that is the non-productiveness of the house-building

loan.

10. Persuasion and monitoring are moderately maintained for ensuring the prompt

payment:

There are some cases where effective monitoring and persuasion are needed especiallyfor substandard and doubtful cases. I have evaluated 5- branch persuasion chart and have

seen that, persuasion and monitoring are effectively performed by the branch manager.

11. Head Office decision sometimes creating classified loans:

I have analyzed the written communication regarding the classified loans and other loans

between the Head office and our 5-sample branch. There I have identified that, in some

cases those loans becomes classified which the head office has recommended. So to someextent it is true that, sometime Head office decision is also creating classified loans.

12. Credit evaluation techniques are not enough to judge the credibility of the

borrower:Though the classification rate of BASIC Bank is well below of the acceptable rate but its

credit techniques to judge the client are not satisfactory. Where all the NationalizedCommercial banks are using LRA procedure, where most of the new private commercial

banks are using their own modern rating system and the foreign commercial banks are

using international rating procedure. BASIC is following the traditional credit evaluationtechnique. When we have visited and evaluated the credit evaluation techniques we have

found that, those techniques neither prove the economic viability of the project nor prove

the future prospects of the potential borrower. In our sample 5-branch I have found that,

60% of the borrower firm does not properly submit their financial statement. The reason behind this is that, the Bank is not following effective credit management technique.

Because of the less effective appraisal process sometimes it becomes difficult for the

bank to judge whether the borrower can pay off the loan or can maintain effectivetransaction with the bank. In most of the time the borrower produce imaginary data

regarding the projected financial statement. But only because of effective technique it

cannot be identified. Because of lack of financial statement analysis perfect action aredelayed to protect the classification. Not only that, BASIC Bank does not have any

working capital analysis procedure which can ensure the accurate working capital

requirement of the client. They are following five years old working capital analysis

procedure prescribed by Bangladesh Bank. As a result some borrower get the chance tochannel fund on different uses.

13. Excessive measures are taken to reduce foreign exchange risk:

I have interviewed 5-branch manager and concern officer of foreign exchange. All of

them have agreed on the issue that excessive control measures are taken to reduce any

kinds of foreign exchange risk. They informed that, this only because the head officesupervises all kinds of dealing and the concern officer is fully liable for any kind of

losses. And to keep the classification rate low additional care also been taken in financing

foreign bills.

91



14. Credit analysis techniques for LIM facility:

Among five of the sample branch I have found that, in those cases where branches

provide loans for PAD, LTR and converted the facility to LIM as the borrower fails torelease imported goods than problem arises. In those cases we have found that, because

of prompt action from the branch and Head Office huge amount become classified.

Analyzing the practices stated above we have found that, in most of the cases BASICBank limited is perfectly following the credit practices except the credit analysis

technique. If the Bank can improve that technique it will be able to reduce its

classification rate more effectively.

15. Small range of loan portfolio are restricting further improvement:

Comparative to private commercial and foreign commercial banks BASIC Bank have

small loan portfolio. Presently it only providing CC (P), CC(H), SOD, LIM, Term loan,Micro Credit, LIM, LBP, FBP, PAD, PC and L/C facility to its clients. Where other

commercial banks are offering modern services like Consumer loan, ATM, and Credit

cards.

16.Lack of up-to-date credit manual:A common problem I have identified in all branches is that, there is no credit manual for

smooth operation. The last edition of credit manual lay bare in the year of 1994. Sincethen no time tested credit manual has been provided.

Chapter-Six

6.1 Comparative analysis of BASIC’s credit policy with other bank

6.2 SWOT analysis of BASIC

92



6.1 Comparative analysis of BASIC’s credit policy with other bank

The organizational structure of BASIC Bank is totally different from other banks

operating in Bangladesh. Not only is that, in terms of services provided by the banks to

some extent different from other banks. As we have stated earlier that, this bank is the

only government bank which is established for the betterment of the small-scale businessenterprises. So no direct comparison can be made in credit policy and practices with other

banks. But we can compare them by analyzing the efficiency in credit management. Inthat, we will segregate the banks operating procedure in Bangladesh into four types: (i) Nationalized Commercial banks (2) Specialized Banks (3) private commercial Banks (4)

Foreign commercial Banks. And then we will analyze and compare BASIC Bank with the

credit management efficiency of those banks.

Nationalized Commercial Banks

In Bangladesh the credit management of Nationalized Commercial Banks are most

debated issue. Almost 85% of the total classified loan belongs to the Nationalized

commercial banks. Before 1991 no steps has been taken to reduce this rate. Dishonesty of

the Bank managers, Pressure of political leaders, dishonesty of directors, improper

supervision and inefficient management techniques are the main reason behind highclassification rate of Nationalized Commercial Banks.

BASIC Bank Ltd is also Nationalized Bank but due to its effective management and time

tested credit supervision and due to its modern organizational structure it becomes able to

reduce its classification rate well below to those Nationalized Commercial Banks. Beinga specialized bank it does not have huge services to offer. It does not have huge branches

or set business or receive huge loan facility from Bangladesh Bank like those banks but

93



yet it has set a milestone in banking. When I have talked with the Officials of

Nationalized Commercial banks they have informed me that, one major problem of those

banks is the CBA of the respective government banks.

They have stated that because of this organization sometimes it becomes impossible to

initiate any strong policy to wipe out inefficiency of the nationalized banks. They havealso stated that, the salary structure of the Nationalized Commercial Banks is another

problem for what the operational manager become less inspired for collecting the

classified loans.

In BASIC Bank there is no CBA or any kind of employee organization so it becomes

possible to take any action against inefficiency. And the salary structure of BASIC is well

above of any nationalized banks so employees get inspired to work for the betterment of the bank.

Specialized Commercial Banks

In Bangladesh there are four specialized commercial banks (except BASIC) named:

Bangladesh Krishi Bank, Bangladesh Krishi Unnayan Bank, and Bangladesh Shilpa RinSangstha. These banks are providing subsidies and other improvement facilities for

poverty alleviation, industrialization and agricultural development. The rate of

classification of Bangladesh Krishi Bank is 35%, Bangladesh Shilpa Bank 29% andBangladesh Shilpa Rin Sangstha 21%. It shows that, from classification of loans point of

view these banks are less efficient than BASIC.

Private Commercial Banks

There are 30 scheduled local private commercial banks operating in Bangladesh. Among

them 14 banks starts its operation during 1995 to 2004. In sense they are modern in their nature and activity. These banks gain knowledge and lessons from those banks incepted

before 1995. If we focus on the credit management techniques of these banks we can find

that, literally they are great. These banks introduced some brilliant package, which areattractive to the borrower and also to the depositor. But from our point of view it is

difficult to comment or compare these banks with BASIC Bank, because the

effectiveness of the credit policy can only be judged after 6 or 7 years. But so far they are

doing well than the BASIC Bank. Among other banks incepted before 1995 some bankslike EBL, Dhaka, Prime and National bank are doing well. If we compare them from the

classification of loans and advances point of view then we can see that, BASIC is in good

position. But if we judge the level of service provided, management skills, volume of loans, technical knowledge and number of valuable client handled then we can find that,

these banks are doing really well. Especially these banks have introduced modern

techniques, which is essential for loan appraisal.

Foreign Commercial Banks

94



There are 10 foreign commercial banks operating in Bangladesh. Among them two banks

named Standard Chartered Grind lays Bank, and HongKong Shanghai Banking

Corporation are providing excellent services to its client. The have introduced moderncredit management techniques to select the best client. They have global credit appraisal

system that ensures low classification rate.

In every aspect their credit policy and practices are superior to that of BASIC Bank. This

is to some extent also true for other foreign commercial banks Foreign commercial

bank’s monitoring and supervision technique is also superior to BASIC Bank. The reasonof this efficiency is that, the performance evaluation of the manager of the foreign

commercial banks depends largely on this. And because of selective sector selection it

becomes possible. Not only that, because of modern technology and excellent recruitment

procedure it becomes possible for them to have competitive efficiency.

6.2 SWOT analysis of BASIC

From my observation, file and document studies and interviews with the officials of

BASIC Bank Ltd, I have found the SWOT of BASIC in the following fields:

Strengths

Conservative approaches to reduce the risk of classification.Assigning adequate power to the top

management to monitor credit operation.

Clear specification of documentation processto reduce the risk of classification.

Providing guideline to furnish loans only to

small-scale industries for short time.Clear definition of measures in dealing with

foreign exchange transaction.

Strong procedure in selection of new

borrower.

Weaknesses

Techniques specified for creditappraisal is not sufficient.More dependency on Government

sources for deposit mobilization.

Services offered are in adequate.

Opportunities

Suitable for small-scale business, which isgrowing day by day.

Government and International agencies’

positive attitude toward low classificationrate.

Threats

Not suitable for future competition inthe market.

Reduced Government support in

future.

95



• SWOT ANALYSIS OF BASIC BANK

Strengths:

The main advantage of BASIC Bank’s credit policy is its conservative approach. The

entire policy is designed in a way that, it could always avoid default risk. In the credit

policy all kinds of documentation process, appraisal techniques are designed so that the bank officials can take no excess risk. In the credit policy top management are assigned

adequate power to monitor the credit operation at the branch level. In most of the

government bank we have seen that, the head office is not contributing more for thesupervision of the loans and advances. But in BASIC a handful number of top officers

have been engaged to monitor day to day operation, which are reducing the number of

errors. In the credit policy it has been clearly specified that, 50% of the total fund should be invested in the in small and cottage industries for short time. And we all know short-

term loans are more secured than the long term. And also small investors are much more

honest than the large investors. So for this policy BASIC Bank is getting competitive

advantage.

All the investors know that, it is very difficult to get loan from BASIC Bank. They have

to satisfy concern body and should be very optimistic about the future of their project. If any kind of loopholes exist in their procedure it will be very tough for them to get any

loan from the bank. This policy gives the bank small but strong borrower portfolio that is

important to keep the classification rates low. Not only that, BASIC Bank is the one of those banks, which never takes any kind of, uncovered risk in dealing with foreign trade.

They provide the foreign trade facilities only to their prime clients.

Weaknesses:

The technique that has been used in credit analysis is not adequate. Now days it is not

possible to justify of a client by analyzing only their projects production capacity. It isimportant to analyze their financial statement and market share make sure that the project

will last for long. BASIC’s credit policy does not clearly specify these techniques. In the

credit policy no emphasis has been given for mobilizing deposit from private sources. But private sources are the least costly sources and using it is possible to earn more profit

from investment.

Opportunities:

Bangladesh is a country where it is very difficult to establish hi-tech industries because of

high capital asset cost. So the government of Bangladesh and other international bodiesconvincing to establish small and cottage industries first which will make the ground for

huge investment. As a result the numbers of small industries are increasing day by day.

And BASIC’s has huge chance to progress if it can hunt this sector. Not only that,international organizations and donor countries are continuously convincing the

96



government of Bangladesh to attenuate the high classified loan rate. Now a day they are

including the clause of reducing the classified rate before sanctioning donation or loan to

the country. As BASIC bank is successfully keeping the classification rate low it is possible that, it will get international assistance from ADB and from other organizations.

And obviously these funds will have lower interest rate by which the bank can earn

handful profit.

Threats:

From 1990 the core concept of banking in Bangladesh is changing. Now banks are going

to the customer with services and try to convince them by it. Most of the banks have

increased its service range significantly to attract its client and to satisfy them properly.

Along with that, now the banks are trying to accumulate more funds from the middleclass group. Alike insurance companies most of the banks also have employ marketing

agents to convince the mass. All of said situation is happening because of the increase of

number banks in the country and competition among them.

BASIC bank is not very keen in marketing its product. And in credit policy it also notspecified significantly. Not only that, it does not have any marketing plan to grab the

market after 5 or 10 year. So if the banks do not change this attitude its profit will bereduced for the abnormal competition in the market. And also if the government sells its

entire share to the private sector the bank will face huge pressure from its competitor.

Matching of Strength and Opportunities with Weaknesses and Threats:

In the credit policy we have found everything all right except the techniques used for screening the client. BASIC bank has some very efficient and highly educated

professionals who can easily solve the problem if they concentrate on the issue. So theweakness can be eliminated easily through its strength.

The BASIC has been perfectly designed its credit operating system depending on the

government funds and assistance. But as it is sure that, government will sell its share innear future BASIC has to revise its credit policy by considering alternative source of

fund. International funds can be alternatives for government source if BASIC can

continuously reduce its classification rate.

Alike other bank BASIC can enforce its marketing operation to grab the small savings of

the middle class. And a small change is enough to do so as the strength of the present

credit policy is capable to take any pressure.

So from the SWOT analysis of the credit policy of the bank we have found that, the credit

policy of BASIC Bank is sound with some exception. And small revise of the policy can be the best policy that can lead a bank to the peak of success.

97



Chapter-Seven

• Conclusion

• Recommendation

98



Conclusion

The BASIC Bank Limited has been trying to operate its business successfully inBangladesh since 1994. Basic Bank has already developed goodwill among its clientele

by offering its excellent services through General banking, Credit division and Foreign

Exchange divisions. This success has resulted from the dedication, commitment anddynamic leadership among its management over the periods. The working atmosphere of

the BASIC Bank Limited is very simulating. During the short span of time of its

operation, the bank has been successfull to the position itself as a progressive anddynamic financial institution in the country. The banking sector of Bangladesh is passing

through a tremendous reform under the economic deregulation and opening up the

economy. Currently this sector is becoming extremely competitive with the arrival of

multinational banks as well as emerging and technological infrastructure, effective creditmanagement, higher performance level and utmost customer satisfaction. From my

survey I have found that, all branches of BASIC Bank fairly follows the credit policy and

practices set by the management of the bank. And by that they are doing well in reducingthe high classification rate and in attaining the profit target of the bank. It has been

observed that BASIC Bank Ltd has been maintaining an encouraging trend of overall

performance in the country. High employee efficiency, high profitability, rapid growth of

deposit and advances and high loan recovery prove evidence of sound financial conditionof BASIC. Findings are encouraging in the sense that it shows efficient management can

lead to successful banking business in Bangladesh. This could be source of useful lessonsto the total banking sector. BASIC being the best among the Government owned banks

and should go hand in hand with the modern banking system and culture to retain and

improve the present position in the financial arena. The implementation of the suggested

ideas in the organization will undoubtedly lead it to be an efficient and sustainablefinancial institution. But as we have seen that in some areas the credit policy and

99



practices are problems for BASIC. Changes are necessary to eliminate those problems to

increase the efficiency and betterment of the bank. The top management can make

changes by taking the suggestions of the management (Medium and lower level) and also by taking into consideration the responses of the clients regarding each area of credit

policy of the bank.

Recommendations:

Banks should establish a review process to examine the changing circumstances of

borrowers to determine the position of loans. Attention devoted to these loans is morelikely to result in proper action to safeguarded the Banks position and to assist the

borrower to take appropriate steps in their business to bring back loan performing. . Here

some recommendations are made to enrich the credit policy and practices of the bank:

1. Loan appraisal technique should be modernized:

In Government commercial banks LRA method have followed to appraise the loanapplication. And in private commercial banks LRA and other systematic method have

followed to judge a client. Compared to those technique BASIC’s loan appraisal

techniques are relatively traditional and ineffective. And using that technique it is not

possible to evaluate the financial soundness of a company. As such it is essential for BASIC to change its loan appraisal technique.

2. Documentation process should be improved:

As I have discussed the documentation process of BASIC Bank is fair relative to other

commercial banks operating in Bangladesh. But this process is fair as long as BASIC is

interested only in small loan amounts and small loan portfolio. When the volume and

amount of loan will increase then this documentation process will not be suitable. Assuch identical documentation and filling process should be introduced for the betterment

of the bank.

3. Customer Services should be enhanced:

Every bank’s prime objective is to satisfy its client. Increased customer services are must

for it. In Bangladesh all foreign banks and some private commercial banks are now providing excellent services like: ATM, Credit card, phone banking, super saving

100



facilities and other fast service facilities to its client. But in that area BASIC has taken no

pragmatic steps. As such they are loosing its valuable client to those which are providing

these services. So BASIC should improve its service portfolio and should introduce moretechnology-oriented services to its customer.

4. Marketing for selling the services should be encouragedMost of the employees of BASIC or the top management of it are not very much

interested for marketing for BASIC Bank. Door to door or business to client relationship

is not maintained in this respect. The reason behind this may be that, no incentives aregiven for this job. So special incentive schemes should be introduced for mass marketing

of services.

5. Detail manual should be prepared for accurate credit operation:

A common problem I have identified in all branches is that, there is no credit manual for

smooth operation. The last edition of credit manual lay bare in the year of 1994. Since

then no time tested credit manual has been provided. So top management of the bank

should provide appropriate attention for preparation of the credit manual.

6. Adequate training is required for credit officer:

Adequate training is essential for the efficient credit management. Almost all recognized

commercial bank have its own training center, where continuous training is given to the

managers and credit officers for their improvement. But no such training center has yet been established in BASIC Bank. In our study we have revealed that, the training that has

been given to the employees is not adequate. Since 1999 no training is given to the

bottom level management. So from our viewpoint adequate training should be arranged

for better credit management and implementation of credit policy.

7. LIM facility should be withdrawn by the Bank Management:

It has been revealed that, because of LIM facility branches are suffering losses. For thatfacility branches are forced to have godown, extra manpower and obtain risk for the

goods. And it is evident that, a handful percentage of LIM facility becomes classified

loan. As such it is reasonable for the bank to pause LIM facility as soon as possible.

8. Adequate measures should be taken for small industrial loan:

In our study I have revealed that, most of the small industrial loans become bad or

classified. This is due to the weak financial capacity of the firm. So adequate measureshould be taken before disbursing the loan. Especially alternative sources of repayment or

adequate security coverage should be checked and satisfied in this regard.

9. Management should be careful about high liquidity ratio:

As per Bangladesh Bank inspection report it has been revealed that, most of the branches

are keeping more funds in their hand, which are affecting the profitability. Also theconservative approach of the bank is affecting its profitability. As such the bank now

should involve more of its strength to find new investment area and let its idle funds to be

used.

101



10. Some discretionary power should be given to the branch management:

When we have discussed with the clients of BASIC Bank they have complained us about

the extra time needed for sanctioning a loan. They have said that, if no LC limit is there ittakes two days for opening a LC that creates problems for them. This problem arises, as

the branch managers don’t have discretionary power to sanction any advance above BDT

30.00 lac. So the branch manager should be given discretionary power to furnish loansmore than 1 crore.

11. Adequate care should be taken for LIM facility:

Among 5 of our sample branch we have found that, in those cases where branches

provide loans for PAD, LTR and converted the facility to LIM as the borrower fails to

release imported goods than problem arises. In those cases we have found that, because

of prompt action from the branch and Head Office huge amount become classified.

Analyzing the practices stated above we have found that, in most of the cases BASIC

Bank limited is perfectly following the credit practices except the credit analysis

technique. If the Bank can improve that technique it will be able to reduce itsclassification rate more effectively.

12. Others:

Banks should establish a review process to examine the changing circumstances

of borrowers to determine the position of loans. Attention devoted to these loans

is more likely to result in proper action devoted to these loans is more likely toresult in proper action to safeguarded the Banks position and to assist the

borrower to take appropriate steps in their business to bring back loan performing.

Major problems in a business arises when changes in management (Businessconcern) occurs. The loan officer should observe that whether there is loss of the

top executive, demand, or any other most important new one has entered andoften the change may be worse.

Bank should also be aware of significant changes in the personal habits of current

management.

Changes in industry trends may directly affect business so that it can no longer

completely profitable. Therefore, the Bank should keep information about theenvironment of each industry in which its customers operate.

Deterioration in the overall economy can turn a good loan a week one. During

unusual inflation or depression, many companies experiences difficulties. Theloan department should be aware of it.

From the beginning of the relationship, the loan officer should know who thecompany’s major trade suppliers are. If he can discover that a major supplier is

reducing credits to the customers, this could be a sign that the borrowing company

is facing serious financial difficulties. Bank should start credit inquiries fromtrade suppliers.

102



Real value of business can come from making regular visits to the customer’s place of business rather than holding all meetings in the Bank.

For improving the recovery position and reducing huge over due loans, first

action needed to attract political support and urge upon the govt. and political parties to take necessary steps for repayment of defaulted loans within a limit.

Against big willful defaulters legal action should be taken promptly. This stepshould be taken as soon as one installment is defaulted without waiting for default

of total loan.

New credit culture needs to be developed in place of default culture. Efforts to be

taken as soon as possible to safeguard the interest of banking sector

Bibliography

Koch, Timothy W, Bank Management, The Dryden Press, New York

Ahmed, Dr. Jamal Uddin, “Credit Management by Commercial Banks in

Bangladesh. Mimeograph, November 2000.

Bahar, Habibullah, “The Structural growth of Banks deposits in Bangladesh,1973-1992.

Chowdhuri, Nurul Islam and Chowdhury, Toufic Ahmed, “Performance of

Private Commercial Banks vis-a vis Bank Parikrama, 1993 (52-63).

Khalily, M.A. Baqui; Meyer, Richard L; Hushak Leroy J. “Deposit

Mobilization in Bangladesh: Implication for Rural Financial Institutions andFinancial Policies”. The Bangladesh Development Studies Vol. XV, NO. 4,

December 1987, (85-117).

Credit Manual and various Booklets, Credit Division, BASIC Bank Limited.

Annual Report 2001, 2002, 2003, 2004 of Basic Bank Ltd, Bangladesh.

Behrens, Robert H., Commercial lending, Bankers Publishing Company, Rolling

Meadows, Illinois, 1990.

103



Date post:	03-Apr-2018
Category:	Documents
Upload:	alamin-bali
View:	222 times
Download:	0 times