1.0 Introduction

Bank is a service-oriented organization. With the wide networking and geographical area

coverage it emphasizes on its improved services for existence and prosperity. Private sector

commercial banks are private companies, operated under the legislative framework, which

covers both company Act, and Banking Company Act. Like all business entities, bank's main

objective is also profitability and solvency.

The Government of Bangladesh has The City Bank Ltd., as a scheduled bank in the private

sector is pursuance of the policy of liberalization of banking and financial services in

Bangladesh. The bank was incorporated as a public limited company on 14th March 1983 under

Companies Act 1913 and commenced banking operations through the Principal Branch at 10,

Dilkusha Commercial Area, Dhaka on 27th March 1983.

Being the financial intermediary, it is an important task of bank to channel surplus fund from the

surplus saving unit to the deficit saving unit. Credit department is related to the latter part of the

process. Credit department is engaged in the income generating activities of commercial banks.

In the current situation of reducing interest rate, importance and activities of credit department

has widened.

The research will concentrate on the recovery of loans and advances of the city bank ltd.  

1.1 Origin of the Study

This report has been prepared as a requirement of the internship program of School of Business,

Independent University Bangladesh (IUB). The organization attachment started on 31st July 2005

and it will be ended on 30th October 2005. This project on “critical analysis of credit recovery

performance of The City Bank Limited compare with Prime Bank Limited” is assigned by Md

Saiful Islam, Assistant Vice President, Mouchak Branch, The City Bank Limited (TCBL) and it

was approved by institution supervisor Mr. Rushdi Md. Rezzaul Razzaque, Junior Lecturer,

School of Business, Independent University, Bangladesh (IUB).

2.0 Statement of the Problem

Loan is the major source of income as well as risk for the bank management. So the deterioration

of loan recovery may affect Banks financial health. In such situation, the banking financial

institution might find itself in serious financial distress.

In this research the researches intend to analysis critically the credit recovery performance of The

City Bank Limited compare with prime bank limited.

3.0 Purpose of the Study

Loan comprises the most important asset as well as the primary source of earning for the banking

financial institutions. At the same time the function of credit division of a bank is totally

different from its other divisions. So it is important to get a general idea about the whole function

of the credit department of any bank. Since this part is about the credit recovery and loan

management, study of credit function will provide a broad guideline to the whole objective and

the operation of the credit division of a commercial bank.

2

The research will conduct to know how efficient the credit department of The City Bank Limited

is to recover the loan given by the bank.

Literature review

Loan

From an accounting perspective, loans should be recognized as being impaired, and necessary

provisions should be made, if it is likely that the bank will not be able to collect all the amounts

due – principal and interest – according to the contractual terms of the loan agreement(s). Loan

loss provisioning is thus a method that banks use to recognize a reduction in the realizable value

of their loans. Bank managers are expected to evaluate credit losses in their loan portfolios on the

basis of available information – a process that involves a great deal of judgment and is subject to

opposing incentives. Sometimes banks may be reluctant to account for the whole amount of

incurred losses because of the negative effect of provisions on profits and on shareholders'

dividends. In other cases, if provisions are tax-deductible, banks have an incentive to overstate

their loss provisions and to smooth profits over time in order to reduce the amount of tax liability

(Laurin and Majnoni, 2003).

Bad debt

An uncollectible loan/advance for the banking business is not only a loss of revenue, but also a

loss of capital. The uncollectable interest receivable is the loss of revenue and the uncollectable

principal is the loss of capital. An analogy between the uncollectable account receivable and the

uncollectable interest receivable can be drawn as:Equation 1So, the provision against the

interest receivable can be treated as a normal business expense since it reflects the probable loss

3

of revenue. The conflict may arise that the nature of banking business is different from the nature

of other businesses and banks are not utilizing the capital directly to generate revenue-generating

goods whereas other businesses do. But the banks take collateral against the loans and advances

mainly to create pressure for timely repayment of loans and advances. From this it is evident that

the loss of capital is the fault either of the legal system or of the political system or of

management efforts but neither of the shareholders nor of the depositors. Under protectionist

banking systems like Bangladesh there is less chance that the depositors will be deprived in case

of a bank failure. So, the loss is of the owners (shareholders). Proper assessment of the probable

losses of revenue is required to make proper provision and to determine the net realizable asset

position:

Loan loss provision

There is always a requirement for banks to systematically and realistically identify their problem

assets and provide adequate reserves for possible losses. To accomplish this, Bangladesh Bank

issued guidelines in 1989 (vide BCD Circular No. 34, dated 16.11.89) regarding classification

and provisioning procedure. Subsequently, a revised policy was introduced in 1994 (vide circular

No. 20, dated 27.12.94) to be implemented by banks in five phases commencing 31st December

1994. The introduction of this program was aimed at bringing loan loss provisioning and

classification in line with international standards by the end of 1998. Prior to 1989, there were no

clear-cut policy guidelines to enforce adequate provision by the banks. In the majority of cases,

banks simply did not identify problem assets, establish realistic provisions for potential losses or

suspend interest on non-performing assets. As a result, the balance sheet did not reflect the

bank's actual condition and the income statement overstated profits upon which dividends and

4

taxes were paid. However, during the mid-eighties a norm was fixed by the Central Bank to raise

the level of provisions by 0.5% of total loans each year till it reached 4%. Obviously, it had no

relation to loans classified. Interestingly, the banks on the whole did not comply with this

requirement. The situation ultimately led to unreasonable developments regarding keeping of

provisions by the bank (Choudhury et al., 1997, pp. 43-4).

Lending process

The main difference between public debt and private bank debt is the number of lenders involved

in the financing process. While the ownership of public debt is diffused widely, the ownership of

private bank debt rests in the hands of only one lender. Out of this distinguishing characteristic

flow most of the economic benefits of using bank loans. For instance, issue costs for private

debts and bank loans are lower than public debts since fewer lenders are involved in the issuing

process (Beston and Smith, 1976; Blackwell and Kidwell, 1988). The small number of investors

involved also facilitates bonding between the lenders and borrowers. The bank-client relationship

allows the bank to maintain the confidentiality of proprietary information (Campbell, 1979),

monitor the firm more efficiently (Leland and Pyle, 1977; Diamond, 1984), generate reliable

information on the firm (Campbell and Kracaw, 1980; Fama, 1985), and effect future loan

renegotiations (Berlin and Loeys, 1988; Chemmanur and Fulghieri, 1994).

Since bank reserve requirements impose additional costs on bank borrowing, Fama (1985) posits

that there must be something special about bank loans relative to other credit contracts. The

uniqueness of bank debt is substantiated by several event-studies on stock price response to

announcements involving bank financing. In contrast to the negative or zero excess return

5

associated with other means of raising corporate funds, Mikkelson and Partch (1986), James

(1987), Lummer and McConnell (1989), Brown et al. (1993) and Slovin et al. (1992) find that

stock prices respond positively to announcements involving bank financing. In addition, Houston

and James (1996) and Johnson (1997) find important differences between the determinants of

bank debt and non-bank debt.

Examining the mix of private and public debt employed by 250 US public corporations between

1980 and 1990, Houston and James (1996) concentrated on the potential hold-up problem

associated with borrowing from a single bank[1]. They find that for firms with a single bank

relationship, the level of growth opportunities has an inverse effect on the bank debt ratio.

Nevertheless, among firms borrowing from multiple banks, they observe a positive relationship

between the bank debt ratio and growth opportunities. Houston and James interpret their results

as consistent with the hypothesis that multiple banking relationships can mitigate the hold-up

problem associated with borrowing from a single bank. In addition, their discovery that firm size

and overall leverage are negatively related to bank borrowing suggests that banks specialize in

lending to smaller, less risky firms.

Johnson (1997) recently studied the debt source choices of 847 US firms. Using tobit regressions

with limits at zero and unity, he examined the relationship between several firm characteristics

with the proportions of long-term bank debt, long-term private non-bank debt, and long-term

public debt in the firm’s capital structure. By partitioning private debt, Johnson was able to show

important differences between bank debt and private non-bank debt. Johnson also observed the

systematic use of bank debt by firms with access to public debt, which he interpreted to indicate

that the benefits attributed to bank debt in theoretical models remain important after the firm has

gained access to the public debt markets. The results of his study further suggest that the firm’s

6

debt source choices are influenced by monitoring and information costs, the likelihood and costs

of inefficient liquidation, and the borrower’s incentive to take actions which are harmful to the

lenders.

The current empirical study on the determinants of debt ownership choice is in essence quite

similar to the study carried out by Johnson. Nevertheless, there are some key differences that

distinguish the present research from Johnson’s. First, our study focuses on property companies

in the UK while Johnson’s is on general corporations in the USA. Second, our study employs

pooled data of 366 firm-year observations. This allows us to include macro-economic variables

as well as firm-specific characteristics in our investigation on the determinants of bank

borrowing. Johnson, however, used averages over the study period to measure the dependent and

independent variables in his estimation models. While averaging may help to mitigate the

problem of extreme values in any one year, it can obscure important information if the firm’s

characteristics and the target bank debt ratio are not constant throughout the study period

(Easterwood and Kadapakkam, 1991). Averaging also does not facilitate an examination of the

impact of macro-economic factors on the firm’s ownership decision over time. Third, we also

extend the regression analyses to test whether the choice between bank and non-bank debt is

affected by corporate ownership considerations. This is a new area that has not been addressed

before in the finance literature.

7

A funding crisis for small and medium-sized enterprises?

The effects of these changes in policy can be seen in terms of the availability and cost of bank

loans and the conditions under which such loans are made.

Lending criteria

“The banks…have become more cautious in their lending decisions. They admit that their

lending criteria have tightened, and they are aware of the possibility that their central guidance

may have had an exaggerated effect at branch level, leading to some viable propositions being

turned down by over-cautious managers” (Bank of England, 1994, p. 7).

Two changes in bank attitudes are of particular note. First, they have sought to limit the access of

small firms to overdraft facilities because of their frequent use by undercapitalized businesses as

a substitute for equity rather than as working capital (Gapper, 1993a, 1993b; Plender, 1993); in

the two years since December 1992 term loans have increased from 50 per cent to 60 per cent as

a proportion of total lending to small firms (Bank of England, 1995). The implication is that

businesses can no longer expect to obtain what is in effect equity finance but at overdraft rates of

interest (Batchelor, 1991). Second, the banks are now requiring greater security for loans and

placing greater importance on the level of gearing which, in turn, increases the need for firms to

raise additional equity finance, in many cases beyond that which can be raised from the personal

resources of the small business owner (Deakins and Hussain, 1991).

The experience of the recession, involving sharp declines in property and asset values, has

prompted the banks to place conservative values on security, thereby exacerbating the long-term

8

problem of the limited borrowing capacity of small businesses on account of insufficient

collateral. The Midland Bank (1992) highlighted SMEs with already high levels of gearing built

up in the late 1980s and weak profitability caused by the recession as having particular problems

in raising finance in the economic recovery as a result of these changes. Without an increase in

working capital such companies are at risk from overtrading to meet increased sales.

Risk assessment

Recession has encouraged the banks to develop more sensitive risk pricing systems. There is

some evidence that the better-quality proposals are getting lower margins (Bank of England,

1995). Business size and the associated perception of security is an important determinant of

bank attitudes in its own right, with bank managers regarding the bigger businesses as “better”

than the smaller businesses (Vyakarnam and Jacobs, 1991). Indeed, larger small firms are more

likely to obtain lower rates of interest on their borrowings than the very smallest businesses

(Bank of England, 1993). Keasey and Watson (1993) have also noted that small firms which

provide security backed by tangible assets were able to obtain significantly reduced interest

charges. In similar vein, Cressy (1993) found that start-ups which provided security were

generally charged a lower margin over base than those which did not provide security.

Lending profitability

Lending to small businesses has been unprofitable on account of the low margins plus high

losses (Bannock and Partners Ltd, 1994). Sir Brian Pearce, former chairman of Midland Bank,

9

claims that the banks have probably broken even on lending to small businesses in the past ten

years (Financial Times, 1994). Thus, in an attempt to make this activity profitable the banks have

raised charges on services such as cheque clearing and unauthorized borrowing and have adopted

a more thoroughgoing attitude towards implementing such charges (Bank of England, 1993).

However, despite claims to the contrary, there is no evidence that the banks have systematically

widened their margins on loans by failing to pass on reductions in interest rates to their small

business customers (Bank of England, 1993). Nevertheless, the heavy reliance on short-term debt

finance by SMEs in the UK imposes significant costs on the sector: one recent study, for

example, concluded that SMEs were paying between 1.9 per cent above base (the average of the

lowest interest rates charged) and 4.5 per cent above base (the average of the highest interest

rates charged) for loans, and equivalently, between 2 per cent and 6 per cent for overdrafts,

although some loans were made at 7 per cent and 8 per cent above base (Scottish Enterprise,

1993, p. 38). These loadings serve to emphasize the already high real interest rates being

experienced in the UK compared with Germany, Japan and the USA (Scottish Enterprise, 1993).

Prospect-based lending

The banks are increasingly taking the view that lending decisions should be based primarily on

an analysis of the borrower’s cash flow and business plans, with the availability of security being

regarded as an important, but secondary, consideration (Bank of England, 1994). However, such

a change is not costless, requiring greater commitment of staff resources by the banks. “If

detailed analysis of business prospects is to become more prominent, and the routine taking of

security less so, then more high quality staff resources will be needed in the small business areas

10

by banks. Increased monitoring of borrowers will also place a strain on resources. Training,

especially through secondments, is expensive” (Bank of England, 1994, p. 7). It is therefore

ironic that the need for more detailed information necessary for an improvement in bank-SME

relationships imposes additional costs on the banks in order to obtain it, which will, inevitably,

result in an increase in bank charges; providing a further stimulus to the deterioration in bank-

SME relationships on cost, not relationship, grounds (Ennew and Binks, 1993).

GB

An effective credit process is the one which allows both borrowers and lenders to be better off. Lenders must generate enough revenue from lending to cover the costs of funds that they mobilize. On the other hand, for the credit process to make sense, borrowers must be able to repay the principal and interest, as well as to generate some profits.

Financial intermediaries produce loans using savings as an input. Like any other input, savings have a price. Therefore, for the financial process to be sustainable, banks have to generate enough revenue to meet savings costs. The rate of interest plays a key role in this process. Interest rate flexibility is crucial to determine the sustainability of credit programmes.

The borrower view. Availability of credit, under certain circumstances, may enable the economic agents to accumulate capital. Small and large firms depend on credit to increase investment in capital assets. Banks play the role of intermediaries between surplus units that consume less than what they earn, and those individuals and firms that need money to generate output. The Baker-Hoping Model describes the relationship between equity capital (wealth) and credit in the following equation (Baker and Hopkins, 1969):

“Peer monitoring is a system in which loans are given to a group of borrowers who are mutually

responsible for repayment and agree to guarantee others in the group” (quoted from Mahabub-

ul Islam et al., 1993, p. 25). The key feature of group lending is the joint liability involved. Every

11

group member receives an individual loan, but everyone is responsible for the other peer

members. Collective responsibility substitutes collateralized assets. The bank explicitly requires

that borrowers form a group of five people, who then simultaneously apply for a loan.

4.0 Research Methodology

4.1 Research Design

This research is completely based on exploratory research. The study will evaluate the

performance of the credit department of the City bank Limited through a comparative,

quantitative and qualitative analysis.

To explore the problem statement prudently the research had obtain data particularly from

existing and potential clients (borrowers) of The City Bank Limited and The City Bank Limited

management.

4.2 Sampling Method

This study will be conducted only for The City Bank’s credit department to see the performance

of the credit department compare with the Prime Bank Limited. So the sampling frame of this

study is the borrower of The City Bank Limited (TCBL) and Prime bank limited (PBL).

12

A Nonprobability sampling method will be used to select the clients (borrowers) and employees

of the credit department of TCBL. Under Nonprobability sampling method convenient

sampling method will be used to collect data.

4.3 Source of data

To complete this report data will be collected from primary and secondary sources. The primary

data will be gathered by taking interview of the credit officials and borrowers. Also all practical

information used in this report is more or less collected through the day-to-day orientation in the

credit division.

Some secondary data will be collected to make the report more concrete. These data will be

collected from different financial statements, annual reports, newspapers, books, and business

outlets and materials etc.

4.4 Sample size

To conduct this study the sample size has been limited within 40 people for qualitative study.

The predicted sample size is small because in- depth interview method is time consuming.

4.5 Survey Instrument

Interview

13

An open and close both discussion method has been followed here to gather primary

information. The interviews were face-to-face interpersonal situation in which one person.

Questions designed to obtain answer pertinent to research problems.

4.6 Data Analysis Procedure

As this is an exploratory research, the out come of this research is restricted to only the

development of an initial understanding. For the exploratory research the unstructured data

collection has been made include and the non-statistical data analysis has been executed for data

analysis. For these reason the researcher will collect data by using qualitative method.

Particularly the qualitative data will be gathered from in depth personal interview and counter

analysis has been properly utilized.

Data analysis will be made based on the respondent’s answers. For the optimum results every

single question will be analyzed with different calculations (e.g. mean value). Different sorts of

bar charts, pie diagram, and other related graphs would be provided in this section.  

For the analytical part, researcher will use a framework tool to obtain useful data through the

method of observation and interview.

1.5 Limitations of the Study

The major limitations of this study are given as follows

14

There were some restrictions to have access to the information confidential by concern authority.

Respondents were selected from Mouchak branch only.

Respondents were very much busy so they were not interested to fill the questionnaire

attentively.

Sufficient records, publications were not available as per my requirement.

5.0 Significance of the Study

The study will help The City Bank Limited to compare their current recovery management status

with other competitive financial institution at the same time understand their problem areas. By

the comparing with others, TCBL can take necessary actions to reduce debt more efficiently and

minimize their risk.

INTRODUCTION

A banker is a dealer in money and credit. The business of banking consists of borrowing and

lending. Bank acts as financial intermediaries between savers (lenders) and investors (borrowers)

15

by accepting deposits of money from large number of customers and then on lending a major

portion of accumulated pool of money to those who wish to borrow. Successful deployment of

bank credit requires a philosophy of lending, a scientific and methodical approach to and

upgrading of skills in credit appraisal, assessment of credit needs of borrowers, proper and

adequate documentation to ensure safety and security of funds and a mechanism for monitoring

and controlling loans and advances after the funds are disbursed, apart from well-planned

nursing and effective recovery proceedings where needed. It has been said that a bank never

makes a bad loan-- a loan goes bad after it has been made. The account of a borrower when he

has defaulted in his commitment is considered a sticky account. Recovery of dues in growing

number of sticky accounts is emerging a nerve-wrecking problem for banks. Generally speaking,

those advances would be recalled where repayment is doubtful and nursing the account is not

considered workable. Other circumstances in which a bank would recall its advance are death,

insanity or insolvency of a customer, and winding up of a corporate borrower. Commercial

lending, lending to a business, is often very different from lending to a personal customer. The

main reason for this difference is that the risk of not being paid has an added dimension in

commercial lending. In both cases, there is risk concerning the character, commitment and

capability of the person borrowing money, but in commercial lending there is additional risk

associated with the business. A highly capable person may do badly in business because of

factors like- the state of economy, trend in demand for the product or service provided

competition from other suppliers, technological changes etc. which no-one could have

reasonably expected. From the bank's point of view such unexpected problems result in a bad

debt. So a banker with a watchful eye can often help a business customer steer clear of financial

difficulty before it begins, thus holding problem loans to a minimum. In providing loans to both

16

personal and business customers, the bank's aim is to make profit. To lend too incautiously will

mean losses from bad debts. To be too cautious will mean missed opportunities for profitable

business. So after making credit to outsiders every banker should follow up recovery

management in order to have systems for monitoring all credits, even those it believes to healthy,

and to highlight those borrowers whose quality is either deteriorating.

AN OVERVIEW OF BANK CREDIT FUNCTIONS

Go to PREMIUR BANK Report.

The function of credit division of a bank is totally different from its other divisions. So it is

important to get a general idea about the whole function of the credit department of any bank.

Since this part is about the credit recovery and loan management, study of credit function will

provide a broad guideline to the whole objective and the operation of the credit division of a

commercial bank. The following steps are discussed below:

There are many banks opened for the people in the banking sector. As many doors are opened for

them they first try to understand the bank's present and future prospective whether the selected

bank is well reputed or not. Like the customer the bank also tries to identify a suitable customer.

Before extending credit to a customer, bank gathers information about the customer from various

17

sources like newspapers, magazines, trade bodies, chamber of commerce and analysis of market

segments etc.

Once a suitable client is identified, the credit and the marketing officer try to solicit business for

his/her bank. This requires calling on the prospect, visiting the place of business and selling

bank's products and services to meet his/her present and future needs. This is a vital starting

point in bank's credit process and demands a good application of imagination and selling skills

on the part of bank's marketing personnel. When both the prospective customer and the bank

official decide to business with each other, the credit department of a bank collects some basic

information about the business need of the client. These includes the purpose of credit facilities,

amount, period, method of repayment, profit, security margin etc.

2.1 Types of Bank Credit Facilities:

There are two types of bank credit facilities that are used in every commercial bank in our

country:

Funded and

Non Funded

18

Funded Credit Facilities:

It is an actual disbursement of cash offered by banks to the customer directly. Every bank has to

incur real liability beforehand in order to provide credit facilities to the customer means the bulk

of resources of a bank primarily come through accepting customer deposits that affects the

balance sheet of the bank both in terms of increase in liability and assets.

The City Bank Ltd. rendering services to its valuable customers by providing a various types of

funded credit facilities. There are many kinds of funded credit facilities of which the major are

discussed below:

i. Overdraft (O/D):

In this case, the customer is allowed on the basis of prior arrangements to overdraw his Current

Account by drawing cheques for amount exceeding the available balance up to agreed limit

within a certain period of time not exceeding one year, against acceptable securities. These

facilities are granted after the credit standing, financial ability and status of the customer as well

as the purpose have been favorably established. The overdraft limit is based on "Advised Line Of

Credit" available on a revolving basis, subject to review prior to expiration of agreed period of

such drawings.

This facility includes the following types:

19

O/D Against Pledge of Goods: Overdraft facility may be extended to the borrowers against

pledge of raw materials/finished products as security, subject to credit and margin restrictions

imposed by Bangladesh Bank / Head office from time to time. In this case, the client by signing a

duly stamped letter of Pledge and surrenders the physical possession of the goods under effective

control of the bank. The ownership of the goods, remains with the borrower, and the outstanding

liabilities are to be adjusted out of the sale proceeds. If there remains any shortfall between the

drawing power and outstanding, the same may be recovered from the client.

O/D Against Hypothecation of Goods (stocks): Under this arrangement credit facility is

extended to the borrower subject to credit and margin restrictions imposed by Bangladesh Bank /

Head Office, from time to time, on his/her signing a duly stamped Letter of hypothecation

creating a charge against the raw materials / finished products / plant and machinery etc.

hypothecated to the bank as primary security against the advance. In this case both the ownership

as well as the physical possession of the goods hypothecated remain with the borrower, who

binds himself by an agreement to surrender physical possession of the goods to the bank as and

when called upon to do so. The bank only acquires a right over the goods hypothecated. The

bank, therefore, generally insists upon the borrowers to furnish collateral securities by way of

legal or equitable mortgage of immovable property and / or third party guarantee where deemed

fit.

20

Loan against Imported Merchandise (L.I.M):

Loan against imported merchandise through the bank may be allowed, retaining margin

prescribed on their landed cost, depending on their categories and credit restrictions imposed by

the Bangladesh Bank / Head Office from time to time. Clearance of the goods should be taken

through Approved Clearing Agent of the bank. Generally part delivery is not allowed from LIM

Account. Storage of imported goods under LIM facility may be allowed for specified time within

which period importer should take delivery of the goods against payment. Generally the

management of the bank discourages the LIM facility.

Loan Against Trust Receipt (LTR):

Two different types LTRs are used to cover the following area of credit lines: -

LTR (For Release of shipping Documents): The borrowers execute this to release shipping

documents for taking delivery of merchandise that is hypothecated to the bank. In this case the

borrower(s) agree to take delivery of the merchandise as the bank's agent(s) and acknowledge(s)

that the bank remains owner of the goods and they will be holding the goods on behalf of the

bank, as trustees until complete repayment of the debts to the bank.

LTR (For Pre-shipment Financing): The Trust Receipt is a document, which creates the

banker's lien over the goods and practically amounts to hypothecation of the proceeds of sale in

discharge of the lien. Basically the borrowers for availing pre-shipment finance execute this by

21

creating lien on the original Letter of Credit. The borrower also undertakes that the credit

facilities will be utilized to purchase / process the merchandise for shipment as per terms of the

credit. Advances against Trust Receipt to the clients are allowed when the documents covering

an import shipment are given without payment. However, for such advances prior permission

from Head Office must be obtained.

Loans and Overdrafts against Shares:

Credit facilities are sanctioned against shares is called "Investment Scheme against Shares".

Loans and overdrafts are allowed to those shares of companies listed with the Stock exchange

Ltd., subject to margin or any other restrictions imposed by Bangladesh Bank. Before allowing

the advance, the shares tendered, as security for advance must be registered in the name of the

transferee. The bank puts a lien on the shares of the respective companies and informs this to the

concerned companies and asks the company to return the shares to the bank as the bank has

obtained a lien on them.

v. Advance against Work Order:

Advances are made to a client to perform work order by the bank considering the following

points-

The client's management capability, equity strength, nature of the scheduled work and feasibility

study is judiciously made to arrive at a logical decision.

22

If there is a provision for running bills for the work, appropriate amount to be deducted from

each bill to ensure complete adjustment of the liability within the payment period of the final

bill.

Disbursement is made only after completion of documentation formalities and fulfillment of

arrangements by the client to undertake the contract.

vi. Advance against Fixed Deposit Receipts (FDR) and Bearer Certificates of Deposit

(BCD):

FDR: When the bank provides advance against FDR the following points are considered:

The FDR cannot be in the name of a minor.

A lien is issued by the bank on the specified amount of the FDR that indicates the bank has a

right over it and informs this to the concerned authorities holding the FDR when the FDR is used

as a security for availing the credit facility.

Creation of liability on FDR issued in joint names by any on of the depositors is irregular.

BCD: Incase of allowing advance against BCD the following points are considered-

A letter is to be obtained from the borrower for depositing BCD to the bank.

Lien is to be marked on the face of the certificate.

Margin to be calculated on the tendered amount.

Lien is also to be marked in the BCD.

23

Consumer Credit Scheme (CCS):

The objective of this loan is to provide essential household durable to the fixed income group

(Service holders) and other eligible borrowers under the scheme. The abbreviated name of the

scheme is "Consave". Under this scheme loans are also extended to the employees of the bank

and the dues are recovered from the salary account.

CCS program includes the following items:

Refrigerator / Deep freeze.

Television, VCR, VCP, Dish Antenna.

Music Center.

Motorcar, Motor Cycle.

Air-cooler, Air-conditioner.

Personal Computer.

Washing Machine

Household Furniture & Fixtures.

Sewing Machine.

Kitchen appliances like Oven, Toaster, Pressure Cooker, Blender, etc.

Mode of CCS Recovery: When advances are provided under CCS program dues are recovered

in the following manners-

In equal monthly installments.

Through deduction from the monthly salary of the client wherever applicable, by his employer.

24

Industrial Loans and Project Loans:

As these types of loans generate most of the earnings in the credit division The City Bank Ltd.

has actively participated in providing industrial loans and project loans to its corporate clients.

Being a new bank the active participation of its marketing division the number of project loans

and industrial loans increasing day by day. Since the size of the loan is very big, The City Bank

Ltd. has been financing corporate clients in collaboration with other banks. The word Project can

be used in many senses. It can be narrowed down to scheme of capital investment to develop

facilities to provide goods and services. Project / Term Loan normally has fixed maturity and it

relates to term investment. As such it requires appraisal of those proposals to have a rational

decision. Appraisal may be termed as assessment of viability over a period of time.

Appraisal: There can be no fixed or standardized approach to Project Appraisal. Numerous and

diverse elements come under the process of appraisal. In practice, project appraisal involves

investigation on the following five different aspects of a project:

Technical Aspect: The technical aspects of an Industrial Project are appraised to determine

whether the project is sound with regard to every engineering and technological consideration

Commercial / Market Aspect: The market aspect is concerned initially with the study of

demand for the project's output. An industrial project is to bring in some goods or services for a

community. However the community's demand for such goods and services is limited and at a

given price. The objective of market analysis is to see how much of these goods and services the

community is disposed to acquire and at what prices.

25

Financial Aspect: The main purpose of financial appraisal is to assess if the proposed project is

viable in terms of its operation in the future year and its financial soundness.

Economic Aspect: The economic appraisal / social cost benefit analysis is concerned with

judging a project from the large social point of view. In such an evaluation, the focus is on the

social cost & benefits of a project, which may often be different from the monetary cost, &

benefit to the firm.

Management Aspect: The management aspect of a project appraisal is very important, as the

man behind the machine is vital. An assessment of the promoters in respect of their integrity,

experience and capabilities to implement and run the project is of prime importance before

extending a credit of any amount. There are no set rules to find out if the borrowers are men of

integrity. It has to be done by direct and indirect investigation.

Export Finance:

This is another type funded credit facility that The City Bank Ltd. provides to its clients. In this

finance an exporter requires financial accommodation at two stages, namely: -

Pre-shipment Stage: In this case credit facilities are extended to the exporters prior to the

actual shipment of goods for export. Pre-shipment credit facilities are essentially a short-term

credit, which is to be liquidated by negotiation / purchase of export bills covering the particular

shipment. It is also allowed either against Irrevocable Letter of Credit from reputed foreign bank

26

or against firm contracts from reputed foreign buyers. Pre-shipment credit normally takes the

following forms:

Packing Credit.

Red Clause Letter of Credit.

Post-shipment Credit: It is a financial accommodation extended to an exporter against export

documents after shipment of the goods. When shipment of goods has already been made the

exporters may require waiting for some time to receive payment of the proceeds from foreign

buyers. But an exporter - be a manufacturer or regular supplier, has to make immediate payment

to the suppliers of raw materials, local seller of goods or to procure goods for further shipment.

So, an exporter always feels the necessity of Post-shipment Bank's finance to overcome his

revolving need of working capital in the process of export trade. Before extending post-shipment

credit to the exporters, bank should take into consideration the credit worthiness and export

performance of the exporters.

b) Non-Funded Credit Facility:

This is a bank commitment to a third party on behalf of the customer, which does not involve

any cash outflow from the bank. In this case when a client contracts with the bank the

commitment states that the bank shall pay a specific amount of money to the third party within a

prescribed time limit and against stipulated documents. Therefore, a non-funded credit facility is

a contingent liability for the bank, which may or may not turn into a real liability with in a future

27

date. A non-funded facility does not affect the balance sheet of the bank at the time of

commitment but continues the possibility.

Some of the major non-funded credit facilities of The City Bank Ltd. along with explanations are

listed below:

Letter of Credit (L/C):

Letter of Credit is a written undertaking by a bank (Issuing bank) given to the seller

(Beneficiary) at the request, and on the instruction, of the buyer (Applicant / Opener) to effect

payment (By making a payment, deferred payment, or by accepting or negotiating bills of

exchange) up to a stated sum of money within a prescribed time limit and against stipulated

documents.

Bank Guarantee:

A guarantee is a contract between the guarantor and the beneficiary where in the guarantee

undertakes collateral for the debt, default or miscarriage of a third party. According to the

definition, a guarantee is a contract to perform a promise or discharge the liability of a third

person in case of his / her default. In banking, it is an irrevocable obligation of a bank to pay a

stated sum of money in case of violation of contract by the third party. The basis of a bank

guarantee is always a contractual relationship between the principal debtor and the creditor.

28

Back to Back Letter of Credit:

Generally The City Bank Ltd. extends back-to-back credit facility for the ready-made garment

industries of Bangladesh. This form of credit facility is provided in a situation when the client of

the bank is the seller of goods receives an irrevocable L/C from one party in his/her favor where

the seller has to purchase the goods from another party to complete the order. In a back to back

credit, the seller as beneficiary of the first credit, offers it as security to the advising/confirming

bank for it to open a second credit in favor of the seller's own suppliers. Basically this type of

credit facility is provided under the strict regulations of Bangladesh Bank.

The City Bank Ltd. takes into consideration of the following points while providing a back-to-

back credit facility.

Only recognized units of ready-made garments or specialized textile units having licensed

bonded warehouse facilities will be provided with the back-to-back credit facility.

The L/C is valid for a reasonable period of time to cover export o merchandise keeping in view

the validity of shipment period of the master L/C.

The industry requesting for the credit facility must be an export oriented unit.

29

3.0 SECTOR WISE DISTRIBUTION OF LOANS AND ADVANCES

The outstanding amount of loans and advances as on 31st December 2005 stood at TK. 23,326

million with a record growth of Tk. 6298 million (37 percent).

The outstanding amount at the same period of previous year (2004) was Tk. 17027 million and in

2003 the loan and advance was Tk. 14778.55 million.

Year Loan amount (in

million)

Percentage increase

than previous year

2005 23326 37%

2004 17028 15%

2003 14778.55 6%

Continued emphasis on quality assets resulted in more than hundred percent increase in assets

that have paved the way for building of a sound asset base for the bank. Trade-related and

working capital financing were the principal areas where lending activities were concentrated.

Table-VII depicts sector wise break-up of loans and advances position and Table-VIII shows the

sector wise distribution of advances in 2001 & 2002 of The City Bank Ltd., which is also

represented graphically in the figures VI & VII.

30

A critical analysis on credit department of City Bank Limited.

Nature wise Loans & Advances of City bank

SL. NO Sector (figure in ‘000) 2003 2004 2005

1 Continous (CC, Hypo,

Pledge)

5439696 6418899 8630703

2 Demand Loans 5266447 6099573 8349109

3 Term loan (Up to 5 year) 2389766 2468247 3058051

4 Term loan (Over 5 year) 1463863 1739560 2910246

5 Short term agriculture &

microcredit

- - -

6 Staff loan 218776 301558 378229

7 Total 14778548 17027837 23326338

31

Figure Error! No text of specified style in document.-1

32

Table-VII

Sector-wise break-up of Loans and Advances position (as of December 31, 2005)

Sectors Amount (Tk. In million) Percentage Distribution

Agriculture 171.00 0.73

Term loan to large &

medium scale industries

3542.30 15.19

Housing 224.46 0.96

Working capital &

commercial lending

8739.79 37.47

Import 4094.61 17.55

Export 3762.40 16.13

Other Loan 2797.74 11.97

Total 3402.21 100%

Source: Annual Report

-Table-VIII

Sector Wise Distribution of Advances of The City Bank Ltd.of the years 2001 & 2002

2001 2002

Sector Percentage Distribution Percentage Distribution

Working Capital (OD) 53% 57%

Outstanding Import Bills 1% 2%

Export Finance & Others 1% 1%

33

Post Import Finance 15% 10%

Term Loan 28% 29%

Consumer Loan 2% 1%

Source: Annual Report

Sector Wise Distribution of Advances of The City Bank Ltd.of the years 2003 & 2002

Sector 2003 2004 2005

Taka % Taka % Taka %

Term loan

(Industrial loan)

289,500,110 2 2,422,300,000 14 3,542,378,000 15

Working capital

(Industrial loan)

2,009,800,000 17 2,477,900,000 15 2,330,565,000 10

Export credit 1,379,800,000 11 981,800,000 6 3,762,400,000 16

Commercial

credit

6,486,500,000 54 6,031,200,000 35 10,503,900,000 45

Small and

cottage industry

38,300,000 1.96 0 24,900,000 0.11

Other 1,971,648,000 14.04 5,114,636,839 30 3,162,195,550 13.89

Total 14,778,548,110 100 17,027,836,839 100 23,326,338,550 100

34

Figure

Figure Error! No text of specified style in document.-2

35

Figure Error! No text of specified style in document.-3

36

Figure-VI

37

Figure-VII

38

Execution to the Study

4.0 RECALL AND RECOVERY OF LOANS & ADVANCES OF THE CITY BANK

LTD.: A GENERAL DIRECTION OF ANALYSIS

It has been mentioned earlier in the second section of my paper that a bank never makes a bad

loan-- a loan goes bad after it has been made. Since lending is the most important function of a

bank and usually holds the highest position in the total asset of a bank generates the highest level

of operating income. On the other hand lending is also one of the major risks for the bank

management. So, it is very important for the management to take appropriate steps to recall and

recover both the unclassified as well as the classified loans (discussed later) with close watching

in order to balance between its return and risk involved with the portfolio. Similarly, The City

Bank Ltd. has been also actively involved in carrying out its lending functions through its

prudent recovery management. Among the all divisions, the strongest division of The City Bank

Ltd. is considered as the credit division of the bank that has been quite aggressive in

strengthening its loan portfolio by extending loans and advances to the corporate clients. It

should be mentioned that The City Bank Ltd. established a good will in the banking sector

among the new comers through its quality services. In my project part, I tried to compare the

monthly recovery performance of The City Bank Ltd. with the monthly recovery performance of

Prime Bank of the year 2002 of both unclassified and classified loans.

Before going to the detail analysis, we need to know the following definition:

39

Unclassified Loans: Unclassified loans are normal accounts or having an overdue but will not

be reported as classified up to the months from the time of expiration of the loan.

Classified Loans: Classified loans are those types of accounts, which have crossed the overdue

period of six months and are reported as classified clients to the Bangladesh Bank. This type of

loan includes the following stages:

Substandard Loan: A loan portfolio will be considered as a substandard loan for 6-12 months

when the bank management still considers there are some hopes of realizing the money.

Doubtful Loan: A loan is considered to be doubtful between the period 12-24 months. The bank

management still tries to recover the loans through various means.

Bad Loan: A loan portfolio is considered to be a bad loan and is written off from 24 months and

above. The bank writes off the loan.

Overdue Loan: Overdue loans are those loans whose term of repayment has expired and

according to Bangladesh Bank regulations, a bank can declare a loan portfolio as overdue if no

installment for the loan has been paid with in six months after the expiry of the loan.

As on December 31, 2002 the credit division of The City Bank Ltd. comprised with 3 (three) bad

loan accounts of Tk. 131.12 lac, 8 (eight) doubtful loan accounts of Tk. 29.61 lac, and 22

(twenty-two) substandard loan accounts of Tk. 140.09 lac.

40

Table-IX

Monthly Recovery of Overdue Loans and Advances of The City Bank Ltd. in 2002:

(Fig. In Lac)

Month Overdue amount Recovery amount Percentage

Recovery

January 193.47 0.00 0%

February 193.47 0.00 0%

March 351.84 103.03 29.28%

April 333.08 9.38 2.82%

May 327.50 5.58 1.70%

June 314.41 24.13 7.67%

July 293.72 20.69 7.04%

August 286.49 7.20 2.51%

September 308.06 8.83 2.87%

October 301.89 6.14 2.03%

November 300.82 2.36 0.78%

December 304.23 6.09 2.00%

41

Figure-VIII

Analysis:

Figure-VIII corresponds to the table IX shows that the recovery of overdue loans and advances

over the months is not satisfactory in 2002 of The City Bank Ltd.. There has been no consistency

in the recovery pattern or rate in the collection from the overdue loans. The rate of recovery

throughout the year is very small except the month of March, which is 29.28%.

The performance of the bank in recovery of overdue loans has been reflected here. There has

been several ups and downs throughout the year and the recovery rate was totally zero in the first

two months reflects bad recovery performance of the bank. It is clear in the figure that the rate of

recovery suddenly goes up at an abnormal rate in the month of March and then gave a big

nosedive to 2.82% in April and 1.70% in May. In the next two months June and July the rate rose

42

up to 7.67% and 7.04% respectively then again goes down near to 2% over the next months of

the year except 0.78% in November. So, it is clear that the management of The City Bank Ltd. is

not that much aware of the recovery of overdue loans.

Figure-IX

Analysis:

Figure IX corresponds to the table X shows the quarterly sector wise recovery of loans and

advances of The City Bank Ltd. in 2002. The recovery position during the first two quarters was

around 50% but the rate fall to 42.65% in the third quarter showing the bad performance of the

bank in recovering its loans and advances. In the table above I have shown the data of first three-

quarters excluding the last quarter because of unavailability of data. It is clear in the table that of

The City Bank Ltd. extends loans and advances for large & medium industries, export credit,

43

commercial lending and other purposes in order to earn higher return. Large and medium scale

industrial

loans are provided for industrial purposes such as term loan and working capital financing. This

is an important portfolio for the bank. The recovery amount of large and medium scale loans and

export credit shows a remarkable performance during the quarters in the table. Over all, there is a

highly satisfactory recovery rate prevailing against these two sectors. On the other hand,

commercial loans are advances for varied reasons such as over draft and other credit facilities

recovered a substantial amount during the quarters. Though in the last two quarters the recovery

amount decreased consistently compare to the first quarter, yet the recovery rate is satisfactory

Of The City Bank Ltd. And in the case of other types of loans, which include CCS, IBP etc.,

shows an unsatisfactory performance in collection of loans and advances during the quarters.

Figure-X

Analysis:

The explanation of unclassified loans has been mentioned earlier in this section of my paper.

44

Figure-X shows the recovery rate of unclassified loans and advances between The City Bank

Ltd. and Prime Bank Ltd. Comparison shows that how the peer banks performing in recovering

the unclassified loans and advances over the year 2002. Any way, the recovery pillars show a

mixed trend with ups and downs for both the banks. It is clear from the graph that the recovery

performance of Prime Bank Ltd. is far better than that of The City Bank Ltd. Prime Bank Ltd.

recovered the unclassified loans and advances about three times higher in January, one and half

times higher in February, seven times higher in July, more than two times higher in September,

two times higher in November and nine times higher in December than The City Bank. Which

reflects a very good recovery position of Prime bank as a peer bank of The City Bank Ltd. in the

banking sector. On the other hand, the recovery rate is almost close to each other in the rest of

the months, where Prime Bank Ltd. again dominates.

45

Figure-XI

Analysis:

Figure-XI represents the comparison of monthly recovery position of classified loans and

advances of The City Bank Ltd. and Prime Bank Ltd. Classified loans, as we know from the

definition that those accounts, which cross the overdue period of six months. Since it is very

difficult to recover the classified loans and advances, the whole banking sector in Bangladesh is

facing from this problem with its 20%-30% of its loan portfolio considered to be unrest. The

graph depicts that the recovery performance of classified loans and advances of The City Bank

Ltd. is quite better than that of Prime Bank Ltd. There have been several ups and downs in

recovery rate for both the banks. In January and February there has been absolutely zero

recovery for The City Bank Ltd. whereas Prime Bank Ltd. recovered 1.01% in January and

2.04% in February. But in March the rate shot up to 53.25% for The City Bank Ltd. whereas

46

Prime Bank Ltd. recovered only 0.89%. It should be mentioned that The City Bank Ltd. made a

big realization from the classified accounts in that month. The recovery rate is almost close to

each other separately for the months of April, August, October and November. The City Bank

Ltd. recovered the classified loans and advances about three times higher in June, two times

higher in July, three times higher in December but seven times lesser in May than that of Prime

Bank Ltd.

47

5.0 FINDINGS

The detailed analysis of the project part on the credit recovery of The City Bank Ltd. indicates

that the bank is performing moderately well in recovery of its outstanding loans and advances.

The City Bank Ltd. is basically performing well in collection of its large and medium scale loans

and export credit. But in other sectors like the small borrowers are creating major problems for

the bank in terms of non-repayment and classification. The collection of overdue loans over the

months of 2002 shows unsatisfactory results. As it is a new bank, the problem of recovery will

be quite insignificant in course of time but as the bank is gradually expanding this problem of

recovery would become more significant. Regarding the performance evaluation of classified

and unclassified credit between the Prime Bank Ltd. and The City Bank Ltd. The main thing that

I have found from the comparison of credit recovery that Prime Bank Ltd. did better in recovery

of unclassified loans than The City Bank Ltd. the months in 2002. The credit recovery of The

City Bank Ltd. is not that much satisfactory because their credit monitoring and recovery

procedures are extremely poor and insignificant. Since there are no portfolio officers in the credit

department, proper monitor and follow up of loans are not taken after the disbursement of loan.

As the management does not know the exact amount of security mortgaged by the borrower

severe problems with documentation of loans exists in the credit department. It is very important

for a bank to analyze the risk after lending. Analysis of lending risk helps a bank to reduce the

level of classified loans. Despite having a form of lending risk analysis it is not implemented at

The City Bank Ltd. properly. That is why most of the loans are disbursed without the analysis of

lending risk.

48

6.0 CONCLUSION

Banking has changed enormously in the last decade. Management of bank credit is becoming

complex because of fast growing needs of the economy in the context of changing business

scenario in the increasing competitive environment of today in which the banks are functioning.

Banking sector is considered to be one of the key areas of financial institutions. I tried to discuss

the organizational issues highlighting the positive and negative aspects and opportunities as well

as the basic orientation of the bank in the first section. Then I mainly focused on the recovery

performance of various types of loans of The City Bank Ltd. as well as tried to compare the

credit recovery of classified and unclassified loans and advances between The City Bank Ltd.

and Prime Bank Ltd. in the center part of the report. During the analysis I have seen that Prime

Bank Ltd. is doing better than The City Bank Ltd. in the recovery of unclassified loans and

advances but The City Bank Ltd. is ahead in the recovery field of classified loans. The over all

view is that The City Bank Ltd. is moderately doing better in the recovery of its outstanding

loans and advances. Since the banking sector is getting competitive The City Bank Ltd. must

follow a strong recovery and loan management system for faster service to its customers. It is

expected that The City Bank Ltd. continues to prosper in the coming days and the management

should boldly navigate the organization in this turbulent ocean of competition as the bank

embarks in to a new millennium.

49

BIBLIOGRAPHY

1. Philip Kotler, MARKETING MANAGEMENT, 8th ed., New Delhi: Prentice Hall of India

(Pvt.) Limited, 1991.

Pettit Lesiker, BUSINESS COMMUNICATION, 6th Edition, Richard D. IRWIN Inc. 1994.

Hampton J. John, FINANCIAL DECISION MAKING, 4th Edition, Pretice Hall Inc., 1990.

Annual Report of THE CITY BANK LIMITED..

Eric R. Reiden bach, Robert E. Pitts, BANK MARKETING, Prentice Hall Englewood Cliffs,

NY, 1986.

BANGLADESH BANK STATISTICS.

E.P Doyle, PRACTICE OF BANKING, 2nd Edition.

COMMERCIAL BANK MANAGEMENT, by Peter S. Rose.

Resume of Financial Institutes of Bangladesh.

50

THE BANK COMPANIES ACT.-1991, by Md. Abul Hasnat Mullah

COMMERCIAL BANKING, by Brick, John R.

Annual Reports of PRIME BANK LIMITED.

      

51