Processing Credit Application & Preparation of Credit Proposal

2013

Submission date: 20.04.2013

IBAIS University

Processing Credit Application & Preparation of credit proposal

Submitted To

Prof. Dr. Sujit R Saha

Professor & Director, Centre for Training & Research IBAISUniversity

Course Teacher: Credit Management

Submitted By

Shah Newous Siddiki

ID: 4026

Sardar Md. Salahuddin Bijoy

ID: 3157

Date of Submission: 20. 04. 2013

Letter of Transmittal

20th April, 2013

To

Prof Dr. Sujit Saha

Professor & Director, Centre for Training & Research IBAISUniversity

Dear Sir,

We are pleased to submit the term paper as a partialfulfillment of a course named as Credit Management. We triedour best to present this term paper on “Credit Applicationprocessing and Preparation of Credit Proposal” according toyour guideline. We tried best to work sincerely to cover allthe aspects regarding the matter. Practical exposure is veryessential for orientation on the basic operation of the bank.Though we faced some limitation and little knowledge aboutloan processing system. We have thoroughly enjoyed inpreparing this term paper which has contributed significantlyto our understanding on the essentials and importance ofpractical knowledge.

However, if you need any clarification, suggestion,directions or recommendations for further improvement of theterm paper we will be obligate to provide with furtherexplanation. We sincerely hope that you will appreciate oureffort.

Sincerely yours

Sardar Md. Salahuddin Bijoy: 3157

Shah Newous Siddik

AcknowledgementDuring the preparation of this report, we had to talk

with different people for query and information. It wouldn’tbe possible to complete the report without their valuablesuggestions, information. So first of all we would like togive special thanks to Mr. Nazrul Islam, Branch Manager ofNational Bank Limited for providing valuable information.Secondly, we would like to thank to Mr. Faisal Ahmed, SeniorExecutive Officer of National Bank Limited for letting usunderstand their loan processing system. Finally, Mr. ZiaulHaque, Office assistance who made everything possible byletting the door of National Bank Limited open for us andassure us for further help.

Executive SummaryThe report is originated in result of our term paper which wehave done as a requirement of BBA program.

The objective of this study is to analyze the creditapplication process, documentation, analyzing client report,reporting procedure, decision making system, terms andconditions, policy guidelines of NBL, Credit Risk managementetc. To prepare this report both primary and secondary sourcesof data have been used.

The first section of this report consists of an introductorypart which has been developed for the proper execution of theentire report. Second part has shown the technical analysis.The remaining part consisted of limitation, findings,recommendations and conclusion.

NBL is one of the leading private banks in Bangladesh. Toserve the nation National Bank performs some activities for

their clients like general banking, loan and advance, capitalmarket operation etc. Bank collects deposit from public andprovides it to other business or individual as loan. Bank paysinterest to deposit holder and take interest from borrowers.Dhaka bank measure all risk components before sanctioning aloan. When all the formalities completed then respectiveofficer disburse the loan. After disburse the loan it is dutyof bank to recover the disbursed loan. This report is based onactual information and working procedure practiced in NBL. Theoverall credit management of NBL has analyzed to give a cleanidea about the policy of NBL and implementation of that policyby various mechanism and process.

After completion of analysis, it is found that NBL creditpolicy is quite lengthy & service charge is quite high. Bankscredit deposit ratio is increasing from previous year. Finallyit can say that honesty, reliability, thoroughness andwillingness to be open to new ideas and new ways of meetingcustomer needs are most important for success.

DescriptionGeneral Objective:

The prime objective of this report is to analyze theProcessing Credit Application & Preparation of CreditProposal.

Specific Objectives:

To understand the Credit Application processing andpreparation of credit proposal of National Bank Limited.

To understand the documentation system. To know the terms and conditions of credit management of

National bank Limited. To make some recommendations for the successful Credit

Operations of National Bank and finally To Taste the flavor of a credit officer.

Credit Policy of NBLLending being the most important function of commercial bank,every bank should have own credit policy. The plan was formedon the basis of the followingobjectives:

• To maximize the profit of the bank by making sound lending• To deliver credit to viable borrowing at a reasonable cost• To provide satisfactory return on investment• To assist the social and economic development of the country• To deliver general banking services to the public and creditto viable borrowers at areasonable cost

But in NBL most of the lending officers are not familiar withtheir written credit policy or lending guidelines. They havegot only some oral instruction from the senior management orin charge of credit. If all the lending officers of DBLthoroughly know and understand their credit policy it will bevery helpful for them to do their job more efficiently.

Function of Credit Division

Money lending is one of the main functions of a commercialbank. In the lending process, selection of borrower is themost crucial and vital job for a banker. Before a customerenjoys credit facilities it is important that the applicantshould qualify for five Cs. The five Cs are:• Character – Intention to pay back the loan• Capacity – Borrower’s competence in terms of utilizing thefund profitably and generate income• Capital –Financial strength to Lending cover the risk• Conditions – General business condition between two parties• Collateral – Implies additional securities

Different types of credit facilitiesThere are different types o credit facilities offered by NBLfrom which some of are explainingbelow:

OverdraftThe word overdraft means the act of overdrawing from the Bankaccount. In other words, the account holder withdraws moremoney from the Current Account than has been deposited in it.The loan holder can freely draw money from this account up tothe limit and can deposit money in the account. The Overdraftloan has an expiry date after which renewal or enhancement isnecessary for enjoying such facility. Any deposit in theoverdraft account is treated as repayment of loan. Interest ischarged as balance outstanding on quarterly basis. Overdraftfacilities are generally granted to businessmen.

Term Loan

This type Banks lend money in this mode when the repayment issought to be made in fixed, pre-determined installments. Theseare the loans sanctioned for repayment in period more than oneyear. This type of loan is normally given to the borrowers foracquiring long term assets.

Short Term loan

Term loan extended for short period usually up to One year isterm as STL. This type of loan may or may not have specificrepayment schedule. However STL with repayment schedule is

preferable. Suppose, Short Term Agricultural Loan and MicroCredit are enlisted by Agricultural Credit division ofBangladesh Bank in its ‘annual loan program’. Loans disbursedin agricultural sector for a period not more than 12 monthsare also included in this category. Short term micro creditsare the credits not exceeding BDT 25,000/- (taka twenty fivethousand) only and repayable within twelve months.

Lease Finance

These types of finance are made to acquire the assets selectedby the borrower (lessee) for hiring of the same at a certainagreed terms and conditions with the bank (lessor). In thiscase bank retains ownership of the assets and borrowerpossesses and uses the same on payment of rental as percontract. In this case no down payment is required and usuallypurchase option is not permitted.Letter of Credit (L/C)This is a pre-import finance which is made in the form ofcommitment on behalf of the client topay an agreed sum ofmoney to the beneficiary of the L/C upon fulfillment of termsand conditions of the credit. Thus at this stage bank does notdirectly assume any liability, as such the same is termed ascontingent liability.

MethodologyIn conducting this study the following methodology was adoptedin collecting data &information as well as preparation of the reports.

Research Type

This is a Descriptive Research, which briefly reveals theoverall activities of the Dhaka Bank Limited and alsocritically analyzes the “Credit Management” of this bank. Toprepare this report all the necessary information collectedfrom both primary and secondary sources of data.

Primary Sources of Data

In the preparation of this report, data was collected fromdifferent primary sources. Thetechniques were used to collect data are:

Secondary Sources of Data

• Internal Sources: Annual Reports of Dhaka Bank, Otherpublished documents of the bank, Dhaka banks Website.• External Sources: Books, Articles, Journals, Newspaper, Webbrowsing.

Policy guidelines:All banks should have established Credit Policies or Lendingguidelines that clearly outlines the senior management view ofbusiness development priorities and the terms and conditionsthat should be adhered to in order for loan to be approved.

Guidelines are generally updated annually in-order toaccommodate with the economic changes. The lending guidelinesshould be approved by the Managing director/CEO & Board ofDirector of the Bank based on the endorsement of the bank’shead of credit risk.

The lending Guidelines should provide the key foundations foraccount officer’s relationship manager to formulate theirrecommendation for approval and should include the following.

Industry and Business Segment Focus:

1) The lending guidelines should clearly identify thebusiness/industry sector that should constitute themajority of the bank’s loan portfolio.

2) Types of loan facilities

The type of loans that are permitted should be clearlyindicated, such as Working Capital, Trade Finance, TermLoan etc.

3) Single borrower/Group Limits/SyndicationDetails of the banks Single Borrower/ Group limit shouldbe included as per Bangladesh bank guidelines.

4) Lending capsBanks should avoid overconcentration in any one industrysector.

5) Discouraged Business TypesBanks should outline industries or lending activitiesthat are discouraged.

6) Loan facility parameters

7) Facility parameter (e.g. maximum size, maximum tenor andcovenant and security requirement) should be clearlystated. As a minimum the following parameters should beadopted.-Banks shouldn’t grant facilities where the bankssecurities position is inferior to that of any otherfinancial institution.

- Assets pledged as security should be properly insured.- Valuation of property taken as security should beperformed prior to leans being granted. A recognized 3rd

party professional valuation firm should be appointed toconduct valuation.

8) Cross border risk

Risk associated with cross border lending.

Credit Assessment & Risk Grading:A throughout credit and risk assessment should be

conducted prior to the granting of loans, and at leastannually thereafter for all facilities. The result of theassessment should be presented in a Credit application thatoriginates from the relationship manager and is approved byCredit Risk Management (CRM).The responsibility of the RM isto ensure the accuracy of the entire credit applicationsubmitted for approval.

Credit application summarized minimum information as Amountand type of loan proposed, purpose of loan, securityarrangement. Later more information are analyzed.

1) Borrower analysis2) Industry analysis3) Supplier/buyer analysis4) Historical financial analysis5) Projected financial performance6) Account conduct7) Mitigating factors8) Loan structure9) Security10) Name lending

Risk GradingThe Credit Risk Grading (CRG) is a collective definition basedon the pre-specified scale and reflects the underlying credit-risk for a given exposure.

Functions of credit Risk Grading

Well managed credit risk grading system promote bank safetyand soundness by facilitating informed decision making.Grading system measure credit risk and differentiateindividual credits and group of credits by the risk theypossess. This allow bank management examine to monitor changesand trends in risk level. This process also allow minimizerisk and optimize return.

The main objectives of calculating the credit Risk Grading tominimize risk. In our country all banks and financialinstitutes maintain and calculate the CRG in two ways

1) First to calculate CRG for manufacturing, trading, Soleproprietorship, Real Estate and Individual

2) Second to calculate CRG for NBFI (Non-Banking Financialorganization.

Credit Risk for counterparty arises from and aggregation ofthe following:

1) Financial risk2) Business / Industry risk3) Management risk4) Security risk5) Relationship risk

1) Evaluation of Financial Risk:

Risk that counterparties will fail to meet obligation due tofinancial distress. This typically entails analysis offinancials e.g. leverage, liquidity, profitability andinterest coverage ratio.

2) Evaluation of industry/Business risk:Risk that adverse situation or unfavorable businesscondition will impact borrower’s capacity to meetobligation. The evaluation of this category of risk looksat parameter such as business outlook, size of business,

industry growth, market competition and barriers toentry/exit.

3) Evaluation of Management Risk:Risk that counterparty may default as a result of poormanagerial ability including experience of themanagement, its succession plan and team work.

4) Evaluation of Security Risk:Risk that the bank might be exposed due to poor qualityor strength of the security in case of default. This mayentails strength of security & collateral, location ofcollateral and support.

5) Evaluation of Relationship Risk:These risk areas cover evaluation of limits utilization,account performance, conditions/covenants by the borrowerand deposit relationship.

There is no exception to National bank who also has theirCredit Risk Grading System.

The proposed CRG scale consists of 8 categories with shortnames and numbers are provided as follows.

GRADING SHOR NAME NUMBER

Superior SUP 1

Good GD 2

Acceptable ACCPT 3

Marginal MG/WL 4

Special Mention SM 5

Sub-standard SS 6

Doubtful DP 7

Bad & Loss BL 8

A. Financial Risk (50%)

Criteriaweight

Financial Risk50%

ActualParameter

Scoreobtained

1. Leverage (15%) 0.03 15

2. Liquidity(15%)

33.00 15

3. Profitability(15%)

16.53 13

4. Coverage (5%) 62 5

Total score-Financial Risk

48

B. Industry Risk/Business Risk (18%)

Industrial Risk Actual Parameter Score

1. Size ofbusiness

3.75 1

2. Age ofBusiness

5 1

3. Businessoutlook

Stable 2

4. IndustryGrowth

Good 2

5. MarketCompetition

ModeratelyCompetitive

1

6. Entry/ Exitbarrier

Average 1

Total Score-Business, industry

8

risk.

C. Management Risk (12%)

Management Risk(12%)

Actual Parameter

1. Experience 1-5 years in therelated line ofbusiness

2

2. Second linesuccession

Succession inquestion

0

3. Team work Very good 3

Total score-Management risk

5

D. Security Risk (10%)

1. SecurityCoverage(Primary)

Simplehypothecation

1

2. Collateralcoverage

Registered mortgageon municipalcorporation/Primearea property

4

3. Support(Gurantee)

Personal guranteewith net worth orstrong corporate

2

gurantee

Total ScoreSecurity Risk

7

E. Relationship Risk (10%)

1. Accountconduct

Less than 3 years account withfaultless record.

4

2. Utilization oflimit

More than 60% 2

3. Compliance ofcovenants

Full compliance 2

4. Personaldeposits

No depository relationship 0

Total score-Relationship Risk

8

Grand Total: Allrisk

76

According to National Banks Risk grading Matrix It has foundthat the risk Grading is Acceptable with total score of 76.

Loan Structuring:

Once the appropriate borrowing arrangement has beenestablished he support and pricing of the loan must be decidedand negotiated with the client. While the financial status ofthe client is the primary measure of support for any loan,collateral, gurantees and loan agreement may be required as ahedge against credit risk.

In the case, Land properties and stocks has been taken assecurity and the Cash Credit is hypothecated. The loaninterest rate has been selected to 17% p.a.

Approval ProcessOnce the analysis is done the Advance group prepare the creditapplication and forwarded to the NBL Branch Executive Panel.The Branch Executive Panel made recommendation on theapplication. If the application is not satisfactory the reportsend back to RM but if it is positive then

FIG: Approval Process of National Bank Limited

It is forwarded to head office executive panel for furtherdecision making. If its shows green signal. The report sendback to Advance group for final analysis. At this stagesecurities are checked. With the satisfactory securitiesstatus the Advance group then go for negotiation with theclient and terms and conditions are placed. If they clientagree with the Banks terms and conditions agreement is made ordeclined.

Recommendation and ConclusionRecommendation

1 Advance Group2 Branch Executive Panel3 Head office executive panel4 Advance Group5 Checking Securities6 Negotiation with client7 Aggrement

To the Bank

1) The bank should lower the interest rate to attractmore client.

2) Commission fee should be reduced.

3) Cash security should be decreased which is currently100%.

To the clients

1) The client need to state the purpose clearly.

2) To provide all the necessary documents to reduce time.

ConclusionNational Bank is a way ahead in terms of its business,strength, vision, management, services. It works in the mostadvance way possible in all their activities that make it easyfor them to achieve their desired goal with a less effort.National Bank Limited promotes broad-based participation inthe Bangladesh economy through the provision of high qualityand modern banking services. Trading loan is one of suchquality product through which they offer entrepreneurs aquality banking services and earn the maximum profit as well.Trading business of NBL has expanding dramatically whichcreates a large employment opportunity for our country. SoNational bank is playing a vital role in the developingeconomic condition of our country.