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1 Origin of the Report

Bachelor of Business Administration (BBA) Course requires a three months attachment with an organization followed by a report assigned by the supervisor in the organization and endorsed by the faculty advisor. I took the opportunity to do my Project Report on Bank Asia Limited. I have conducted my study on Credit Approval & Monitoring process of Bank Asia Limited with respect to Bangladesh Bank guidelines. My faculty supervisor Mr. Mahmudul Huq, Lecturer of ASA University Bangladesh, also approved the topic and authorized me to prepare this report as part of the fulfillment of Project Report requirement and gave me proper guidance and assistance over time.
1.2 Background of the Report

Four years back Bangladesh Bank undertook a project to review the global best practices in the banking sector and examines in the possibility of introducing these in the banking industry of Bangladesh. Four Focus Groups were formed with participation from Nationalized Commercial Banks, Private Commercial Banks & Foreign Banks with representatives from the Bangladesh Bank as team coordinators to look into the practices of the best performing banks both at home and abroad. These focus groups identified and selected five core risk areas and produced a document that would be a basic risk management model for each of the five 'core' risk areas of banking. The five core risk areas are as follows-
a) b) c)
Credit Risks; Asset & Liability / Balance Sheet Risks; Foreign Exchange Risks;
BUS-498:Project Report
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d) e)
Internal Control & Compliance Risks; and Money Laundering Risks.
Bangladesh Bank in one of its circular (BRPD Circular no.17) advised the commercial banks of Bangladesh to put in place an effective credit approval and monitoring system by December, 2003 based on the guidelines sent to them. While doing internship in the Credit Department of Bank Asia Limited, Banani Branch, and for preparing the report, I will try to make a comparative analysis of Credit Approval & Monitoring process of Bank Asia Limited existing credit policy following Bangladesh Banks suggested guidelines.
1.3 Objectives of the Report

The study has been undertaken with the following objectives:
To fulfill the requirement of the Project Report under BBA program.

To have better orientation on various credit management activities specially credit policy and practices, credit appraisal, credit-processing steps, credit management, financing in various sector and recovery, loan classification method and practices of Bank Asia Limited (BANK ASIA LIMITED). To compare the existing credit approval and monitoring process of Bank Asia Limited with that of Bangladesh Bank guidelines. To identify and suggest scopes of improvement of existing methods of loan approval, maintenance and monitoring in the credit division of Bank Asia Ltd.
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To get an overall idea about the performance of Bank Asia Ltd.
1.4 Scope of the Report

The study would focus on the following areas of Bank Asia Limited. Credit approval system of Bank Asia Limited. Procedure for different credit facilities. Portfolio (of Loan or advances) management of Bank Asia Limited. Organization structures and responsibilities of management.
Each of the above areas would be analyzed in depth in order to determine the efficiency of Bank Asia Limiteds credit approval and monitoring system.
1.5 Sources of Information

The following sources have been used for the purpose of gathering and collecting data as required. i) Primary sources & ii) Secondary sources.
A. Primary sources:
1) Observation & 2) Personal interview
B. Secondary sources:
1) Different Reports of Bank Asia Ltd. 3) Brochures of Bank Asia Ltd. 2) Head Office Circulars
1.6 Methodology of the Report

Both primary and secondary data sources will be used to generate this report. Primary data sources are scheduled survey, informal discussion with
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professionals and observation while working in different desks. The secondary data sources are annual reports, manuals, and brochures of Bank Asia Limited and different publications of Bangladesh Bank.
To identify the implementation, supervision, monitoring and repayment practice- interview with the employee and extensive study of the existing file and practical case observation were done.
1.7 Limitation of the Report

This report will only consider credit risks of Bank Asia Limited. Due to time constrain, it will not cover Asset and liability/ balance sheet risk. Foreign Exchange Risk Internal control and compliance risk Money laundering Risk.
Besides I was not able to visit the different branches of Bank Asia and had to rely mostly on the information gathered from the Banani Branch.
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1.8 Report Organization

This report is divided in five chapters. The following chapter is the organization part ii. e. this chapter will give an overview of Bank Asia Limited. In chapter iii, Credit approval policy and practice of BANK ASIA LIMITED is significantly analyzed with respect to Bangladesh Banks guidelines for credit management in chapter iv. Chapter v deals with findings and recommendations.
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Bank Asia Limited is one of the leading private sector banks in Bangladesh offering full range of Personal, Corporate, International Trade, Foreign Exchange and Capital Market Services. Bank Asia Limited is the preferred choice in banking for friendly and personalized services, cutting edge technology, tailored solutions for business needs, global reach in trade and commerce and high yield on investments, assuring Excellence in Banking Services.
2.1 Background of Bank Asia Limited

Bank Asia started its journey on the 27th of November 1999 with the inauguration of the banks Corporate Office at the Rangs Bhaban. By a great number of public responses has enabled the Bank to keep up the plan of expanding its network. The opening of the Principal Office was the big leap forward and successively the opening of Gulshan and Chittagong Branch expanded the horizon of Bank Asia to bring its services to the valued clients more effectively.
Within a very short period, the Bank has opened 2 more branches in Dhaka and 2 branches in Sylhet and Kishorganj. In February 2001 Bank Asia took over the Bangladesh operation of The Bank of Nova Scotia of Canada, the first acquisition of a foreign bank by a local bank in the history of Bangladesh. Later, Bank Asia took over the Bangladesh operation of Muslim Commercial Bank Limited (MCB) of Pakistan in January 2002. These courageous moves were possible for some visionary decision-makers and also dedicated team of professionals who are constantly putting all their best efforts to establish the bank as one of the leading concern in the industry.
Bank Asia has so far been highly successful in keeping its clientele satisfied with its high quality services, while continuing its expansion to reach more
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people around the whole nation. Bank Asia conducts all types of commercial banking activities. The core business of the bank comprises of import, export, working capital finance and corporate finance. The bank is also rendering Consumer loan, and services related to local and foreign remittances.
The Consumer loan scheme of the bank, which is designed to help the fixed income group in raising standard of living is competitively priced and has been widely appreciated by the customers. The Bank also has ATM services and very lucrative deposit schemes i.e. DG+, DB+, MB+ which have earned the Bank a name in the market. However, these products are temporarily suspended at present.
Bank Asia has also embarked on a new Era of banking automation by migrating to Stelar Software System since January 01, 2004.It is also the first local bank to initiate SMS banking via Citycell and Grameen Phone, Banglalink and Robi. The banks strategy is to gradually cover the total arena of banking. Bank Asia has said its aim high enough: to provide high quality service to its customers, to participate in the growth and expansion of our national economy, to set high standards of integrity, to bring total satisfaction to our clients, shareholders and employees, and to become the most sought after bank in the country, rendering technology driven innovative services by the dedicated team of professionals.
Bank Asia is expecting to concentrate on efforts to set high standards for quality of service at all levels. Highest emphasis is given on quality in recruiting human resources, and in adopting state-of-the-art technology for serving the clients. The management of Bank Asia is determined to maintain and upgrade the quality of these resources through continuous training and upgrading of technology to keep pace with market demands, new developments and practices of the competitors. Bank Asia entered the market
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at a time when the economic policy environment of the country is poised for higher levels of business activities and growth. The prevailing macroeconomic management and the governments determination to carry on reforms in the banking sector provide a supporting and encouraging environment.
The breakthrough was possible for some visionary decision-makers and also dedicated team of professionals who are constantly putting all their best efforts to establish the bank as one of the leading concern in the industry.
2.2 Capital Base

Authorized Capital : Paid up Capital : BDT 4450.00 million. BDT 1116.00 million (as on December 31, 2006)
2.3 Mission Statement

To assist in bringing high quality service to our customers and to participate in the growth and expansion of our national economy. To set high standards of integrity and bring total satisfaction to our clients, shareholders and employees. To become the most sought after bank in the country, rendering technology driven innovative services by our dedicated team of professionals
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2.4 Corporate Objectives

Bank Asias objectives are reflected in the following areas. Highly personalized service Customer-driven focus Total commitment to quality Competitive products with some unique features Contribution in the economy. Quality of human resources Managing the core and support risks
The company believes that communication with, and feedback from, its clients help it achieve its goal of providing world-class products and services. Bank Asia regularly conducts client satisfaction surveys and make immediate accommodations and adjustments where needed. It also constantly monitors its standards, and strives to meet clients requirements.
2.5 Values that are considered as the guiding factors

All the activities and decisions of Bank Asia are based on, and guided by, these values. Placing the interests of clients and customers first. A continuous quest for quality in everything the company does. Treating everyone with respect and dignity. Conduct that reflects the highest standards of integrity. Teamwork from the smallest unit to the enterprise as a whole.
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Being good citizens in the communities, in which they live and work.
2.6 Branches
Bank Asia Limited has 48 conventional Branches in 7 districts & Number of SME Service Centers 10, Number of Agricultural/SME Branch 1, Number of Brokerage Branches 5, Number of Islamic Banking Wing 5. Most of the branches are located on the basis of customer demanded area or commercial or business area, other then few like Bashundhara. One new branch is going to open in Bogra in this month. Out of this 30, 14 branches are located in Dhaka City, 8 branches are located in Chittagong, 2 in Sylhet and 2 in Munshigonj. The other 4 branches are located in Rajshahi, Khulna, Kishoreganj & Noakhali one each. It is also in the process of introducing banking functions on Islamic Banking Principles from the following September and SME is working in many branches. The entire operation of Bank Asia Ltd. is divided into two zones and control of the zone is done by the zonal head. Total operation is monitored by corporate office (Head Office), what was located at Rangs Bhaban (8 th Floor), 113-116 Old Airport Road, Dhaka-1215 has recently shifted to Tea-Board Building, (1st floor) 111-113 Motijheel Commercial Area, Dhaka-1000.
2.7
Management
Information
System
(MIS)
Since its journey as commercial Bank in 1999 Bank Asia Limited has been laying great emphasis on the use of improved technology. It has gone to online operation system since 2003. Previously the Bank used the Banking Software named Bexibank and now the Bank uses new Banking Software named Stelar. As a result the Bank now can provide improved standard of services. Also the internet banking system allows the client to get the banking facility from any branch of the same bank.
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2.8 Correspondent Relationship

The Bank established correspondent relationships with a number of foreign banks, namely Standard Chartered Bank, American Express Bank, Credit Suisse First Boston, CITI Bank NA-New York & London, Arab Bangladesh Bank-India, Bank of Tokyo, Commerz Bank AG, Habib American Bank, Habib Bank AG Zurich, Mashreq Bank plc, National Westminster Bank & Hong Kong Shanghai Banking Corporation etc. The Bank is maintaining foreign exchange accounts in New York, Australia, Germany, Tokyo, Pakistan, Calcutta, and London. The bank has set up letter of credit on behalf of its valued customers using its correspondents as advising and reimbursing Banks. As of end 2006 Bank Asia established correspondence relationship with 206 banks in 173 countries.
2.9 Human Resources Management of BAL

Bank Asia Limited recognizes that their employees are the most important assets. Therefore, the Bank consistently channels a great deal of resources into training and development of managers and employees.
Job satisfaction, growth opportunities, due recognition and good working environment promotes a high level of loyalty and commitment into the employees. Realizing this Bank Asia Limited has placed the utmost importance on continuous development of its human resources, identify the strength and weakness of the employee to assess the individual training needs, they are sent for training for self-development.
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To enhance and update the professional skills and knowledge of the officers and staff, regular training and orientation courses are organized at Bangladesh Institute of Bank Management (BIBM), a few other professional institutions and other correspondent Bank as well as in the Banks own training center. The Bank also sends its Executives outside Bangladesh for specialized training on money, banking and commercial activities.
The remuneration is very competitive in comparison with industry average. Beside these the recruitment procedure is comprehensive. By the end of 2006 the manpower strength increased to 397 from 515 at the end of the previous year.
2.10 SWOT Analysis of Bank Asia Ltd.

Every organization is composed of some strengths and weaknesses, which are its internal factors. The opportunities and threats it encounters are external elements. The following will briefly list some of Bank Asias internal strengths and weaknesses, and external opportunities and threats, as I perceive from my experience.
2.10.1 Strengths
Quality
Bank Asia strives to endow its customers with appreciable quality in every service it provides. Customer satisfaction claims the highest priority, as it should be in any service-oriented organization.
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Adaptability
Bank Asia draws its strength from the adaptability and dynamism it possesses. It has quickly adapted to world class standard in terms banking services. Bank Asia has also adopted state of the art technology to connect with the world for better communication to integrate facilities.
Financial strength
Bank Asia is a financially sound company backed by the enormous resource base of the mother concern RANGS group. As a result customers feel comfortable and more secure while dealing with the bank.
Efficient management
All the levels of management are solely directed to maintain a culture for the betterment of the quality of the service and for developing a brand image in the market through the organizations wide team approach and horizontal communication system.
State of the art technology

Bank Asia utilizes state-of-the-art technology to ensure consistent quality and operation. The evidence of that can be found in one of its branches, Banani that is equipped with Reuters and SWIFT. All these facilities will be introduced in every branch very shortly. Bank Asia Limited has also started using the Stelar Software since January 01, 2004
Human Resource Expertise
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One of the key-contributing factors behind the success of Bank Asia is its HR who is highly trained and most competent in their own respective fields. Bank Asia provides its employees with training both in-house and out side job.
Logistics
Bank Asia is free from dependence from the ever-disruptive power supply. The company generates the required power through generator operating on diesel. Water generation at present is also done by deep tube wells on site and is abundant in quantity. Also support tools, like laser printers, photocopiers, microwave oven etc. that have become essential these days are available at arms length much to the convenience of the users.
First-Rate working environment

Bank Asia provides its workforce an excellent place to work in. The total complex has been centrally conditioned. The interior decoration has been done exquisitely with the blend of tasteful colors and artistic yet useful furniture that is comparable to any multinational bank.
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2.10.2 Weaknesses
Limited workforce
Bank Asia has very limited human resources compared to its financial activities. There are not many people to perform most of the tasks. As a result many of the employees are burdened with extra workloads and works late hours without any overtime facilities. This might cause high employee dissatisfaction that will prove to be too costly to avoid.
2.10.3 Opportunities
Government support
Government of Bangladesh has rendered its full support to the banking sector for a sound financial status of the country, as it is becoming one of the vital sources of employment in the country now. Such government concern will facilitate and support the long-term vision for Bank Asia.
Evolution of e-banking
Emergence of e-banking will open more scope for Bank Asia to reach the clients not only in Bangladesh but also in the global area. It will also facilitate wide area network in between the buyer and the production unit of Bank Asia to smooth operation to meet the desired need with least deviation.
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2.10.4 Threats
Mergers and acquisitions
The worldwide trend of mergers and acquisition in financial institutions is causing concentration in power in the industry and competitors are increasing in power in their respective areas.
Political instability
Unstable political situations cause great distraction in the otherwise smooth flow of business. Sudden hartals and other political programs sometimes present problems for the employees (esp. female employees) in commuting to and from the office. Political instability also promotes a weak law and order system leading to an increase in crime rate in the society. This might also be considered as a potential external threat for a financial institution.
Emergence of competitors
Due to existence of unfulfilled demand in financial sector, it is expected that more financial institutions will be introduced in the industry very shortly. And we have already seen such cases in our country that lots of new banks are coming in the scenario with new services, which signifies the faster rate of growth of competitors. Bank Asia should always be prepared to encounter more competition in the coming years.
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2.11 Product and Services

The product and services that are currently available are given below: Bank Asia Limited launched several financial products and services since its inception. Among them are Monthly Savings Scheme, Monthly Benefit Scheme, Special Savings Scheme, Consumer Credit Scheme, Small Loan Scheme, and Rural Finance Scheme & E-cash ATM. All of these have received wide acceptance among the people.
Monthly Savings Scheme (DG+): The prime objective of this scheme is to
encourage people to build up a habit of saving. In this scheme, one can save a fixed amount of money every month and receive substantial lump sum of money after three or five years.
Monthly Benefit Scheme (MB+): MB+ is a five (05) years scheme that lets
depositors earn monthly benefit of TK. 1000 or its multiple by minimum initial deposit of TK. 100,000 or its multiple and after maturity depositors will get refund of his/her principle amount.
Special Savings Scheme (DB+): DB+ is a six (06) or ten (10) years scheme.
The deposit doubles in 06 years and triples in 10 years.
Bonus Savings Scheme: A savings account with a minimum balance of TK.
50,000 will attract not only the usual savings interest but also a further 10% bonus on interest.
Personal Credit: Consumer loan is a relatively new field of collateral-free
finance of the bank. People with fixed income can avail of these credit facilities to buy household goods, consumer items, buy car or to renovate/expand existing house, etc.
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Credit Loan: If anyone is in possession of BSP (Bangladesh Sanchaya Patra),
which will mature within the next 05 years, but he/she is in need of funds, the scheme can come to rescue.
Rural Development Scheme: Rural Development Scheme has been evolved
for the rural people of the country to make them self-employed through financing various income-generating activities. This scheme is operated through the rural branches of the Bank.
E-Cash Banking Facility: The E-cash card is an ATM card. It can be used as a
combination of debit facility. The E-cash card network offers ball banking requirements without ever setting foot in a bank. Its more than just an ATM service for quick cash withdrawals or account enquiries. E-cash card provides round the clock banking.
2.11.1 Depository Product

Bank Asia Limited is now offering different types product for mobilizing the savings of the general people. Deposit Product Current Deposit Saving Deposit Account Short Time Deposit (STD) Account Fixed Deposit Foreign Currency Deposit Account NFCD Non Resident Foreign Currency Account
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2.11.2
Interest
paid
to
different
Deposits
The revised rate of Bank Asia Ltd. on all types of Deposits viz. Savings, Short Term & Fixed effective from May 01,2004 for new as well as existing deposits from its next maturity are as follows: Tenor 3 months 12.00% P.A. Tenor 6 months 12.25% P.A. Tenor 1 year 12.50% P.A. Short Term Savings Deposit Deposit 5.00% P.A. 7.00% P.A.
2.11.3 Loan Product

The Bank Asia is offering the following loan and advance product to the client for financing different purpose that fulfill the requirements of the bank and have good return to the investment as well as satisfy the client. The loan and advance products are: Name of the Products Consumer loan (PC) Term Loan Small & Medium Enterprise loan Working Capital Financing Import Financing Export Financing Syndicate Loan Industrial Financing
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2.11.4 Personal Banking Products

ATM Card Service Internet Banking SMS Service/Mobile Banking Locker Service
2.12 Financial Performance of BAL

The Bank Asia Limited is one of the most successful private sector commercial bank in our country, though it started its operation only five years back. It has achieved the trust of the general people and made reasonable contribution to the economy of the country by helping the people investing allowing credit facility.
2.12.1 Profit
Bank Asia Limited achieved an operating profit of Tk. 1072 million in 2006 as against an amount of 800 million for the previous year. Amongst the third generation banks, Bank Asia maintained its third position in terms of profitability. This happened in a year of downward pressure on interest rates, and Bank Asia was able to reduce its costs and lending rates keeping spreads at reasonable level.
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2.12.2 Capital
Bank Asia Limited commenced its operation with an authorized capital of Tk. 800 million with paid up capital of Tk. 218 million which amounted Tk.4450.00 million and Tk.1116.00 million respectively by the end of the year 2006. The total shareholders equity as of December 31, 2006 stood at Tk.1950 million (inclusive of 2% general provision on unclassified loans & advances and balances in the exchange equalization account). The Bank maintained a capital adequacy ratio of 11.23% against the requirement of 9.0%.
2.12.3 Deposits
With growing consumer confidence and pro-active marketing Bank Asia increased its deposit base of TK. 25,289 million by the end of 2006 compared to TK. 18,500 as of 2005.
2.12.4 Loan and Advances

The Bank from its inception adopted a credit policy of maximizing return by building up a well-diversified loan portfolio and taking acceptable risks including those for new ventures. The result has been impressive. Loans and advances increased to Tk.22,255 million as of December 2006 compared to Tk. 17,869 million in 2005.
These covered term finance and working capital finance for industries and trade finance. Greater attention was given to small and medium enterprises and to consumer credit, gradually expanding to the retail sector.
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2.12.5 Treasury Operations

Bank Asia has been actively participating in the local money market as well as foreign currency market without exposing the Bank to vulnerable position. The Banks investment in Treasury Bills and other securities went up noticeably making the scope for ensured profit in the context of a regime of interest rate decline. These increased to Tk.3,345 million as on December 2006 from Tk.2,256 million during the previous year.
2.12.6 BANK ASIA AT A GLANCE: 1999, 2009 & 2010

Financial Highlights. (Figures in million Taka )
Authorised Capital Issued, Subscribed Paid up Capital Shareholders Equity Total Assets Deposits Loans & Advances Import Business Export Business Operating profit Investments Dividend Profit before Tax Profit after Tax
&
1999* 800.00 218.00 213.14 632.01 341.91 19.52 (4.86) 557.95
2009 4,450.00 2,144.81 4,954.14 68,663.22 54,832.82 50.267.92 67,378.30 30,953.40 2617.04 9,663.09 30% 2,286.19 1,327.18
2010 4,450.00 3,002.74 7,059.94 105,198. 05 83,601.2 6 79,504.2 3 110,417. 89 57,281.6 7 4,248.86 12,075.7 0 25% 3,579.52 1,929.94
167.85 94.64
* In 1999, there were 35 (thirty Five) days operating days.
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** Subsequent to 31st December 2010, the authorized capital was enhanced up to TK. 4,450.00 million.
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3.1 Overview
The word credit comes from the Latin word Credo meaning I believe. It is a lenders trust in a persons/ firms/ or companys ability or potential ability and intention to repay. In other words, credit is the ability to command goods or services of another in return for promise to pay such goods or services at some specified time in the future. For a bank, it is the main source of profit and on the other hand, the wrong use of credit would bring disaster not only for the bank but also for the economy as a whole. The objective of the credit management is to maximize the performing asset and the minimization of the non-performing asset as well as ensuring the optimal point of loan and advance and their efficient management. Credit management is a dynamic field where a certain standard of long-range planning is needed to allocate the fund in diverse field and to minimize the risk and maximizing the return on the invested fund. Continuous supervision, monitoring and follow-up are highly required for ensuring the timely repayment and minimizing the default. Actually the credit portfolio not only constitutes the banks asset structure but also a vital factor of the banks success. The overall success in credit management depends on the banks credit policy, portfolio of credit, monitoring, and supervision and follow-up of the loan and advance. Therefore, while analyzing the credit management of BAL, it is required to analyze its credit policy, credit procedure and quality of credit portfolio.
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3.2 Principles of Sound Lending

Bank performs different functions. Lending of money to different kinds of borrowers is one 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. But lending is a risky business. The borrower of a bank range from individuals to partnership, companies, institutions, societies, corporations etc. engaged in such activities as business, industry, transport, farming etc. The nature of their activities, the location of business, financial stability, earnings and repaying capacity, purpose of advance, securities all differ and their degree of risks also differ. Although all lending involve risks yet a bank has to go with it for degree profit and economic uplifting as well. But the fact is this while go on lending; a bank must follow certain principles. The principal of sound lending is which where risk involvement may be kept at minimum. The principal of sound lending involves following things:
a) Safety: The survival of a banker and for the matter of that safety of
bank depends on his/her loans and advances. The ideal position is when all the loans and advances positions are fully secured. The safety of the advances should be the first principle of lending. To ensure safety of lending following factors may be considered: Five Cs Five Ps Five Ms Five Rs : : : : Character/conduct, Capacity/capability, Capital/Credit
worthiness, Condition and Collateral Security. Person, Purpose, Product(s), Place and Profit. Man, Management, Money, Materials and Market. Reliability, Responsibility, Resources, Respectability and Returns
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b) Purpose: The purpose of loans helps the banker to determine his

course of action as regards lending. Banker should avoid making loans for unproductive purpose and speculative activities.
c) Liquidity: Liquidity means availability or readiness of banks funds

on short notice. The liquidity of advance means its repayment on demand on due date or after a short notice. The bank while making advances must see to it that the money lent is not locked up for long time because, majority of commercial bank liabilities are payable either on demand or after short notice. So the bank should be sure that the loan would be liquid.
d) Security: The security offered by a borrower for an advance is

insurance to the banker. It serves as the safety valve for an unforeseen emergency. There are different types of security, which call for particular attention and care on part of bank who has to see it that the title he/she gets on them is not unsafe. The security accepted by a bank to cover a bank advance must be adequate, readily marketable, easy to handle and free from any encumbrances. Whatever be the security, a bank must realize that it is only a cushion to fall back upon in case of need, and its adequate alone should not form the sole consideration for judging the suitability of a loan.
e) Profitability: Banks obtain funds from shareholders and if

dividend is to be paid on such shares it can be paid by earning profits. The working funds of a bank are collected mainly from by means of deposits from the public and interest has to be paid on these deposit as well as the bank has to cover establishment charges and other expanses. This is not possible unless funds are employed profitably.
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f) Spread/Dispersal/Diversification: The advances should

be as much broad based as possible and must be in conformity with the deposit structure. There should be spread of advances against different securities, industries/activities, borrowers, areas etc.
g) National Interest/Social benefit: Bank has a significant

role in the economic development process of a country. They should keep in mind the national development plan/program while going for lending but maintaining safety, liquidity and profitability.
3.3 Modern Concept of Good Lending

A. Modern concept of lending presupposes a well-developed loan Organizational, Technical, Marketing, Financial and
proposal/loan case/ project. This covers as many as six pertinent aspects like Managerial, Economic/Socio-economic. These are technically known as feasibility or viability study of a proposal/ loan case/ projects. By studying all these six aspects if a banker is satisfied about the viability of a loan proposal/loan case/ project, then the bank can finance i.e. grant for lending or otherwise not. Managerial feasibility will ensure the character/conduct, capacity/capability to run the project/activity, sincerity/honesty/integrity, education, experience, and reputation of the borrower. Organizational feasibility will see under what type of organization the activities will be undertaken. Whether it is under proprietor/sole trader-ship or partnership or private limited company, public limited company etc Technical side will take care of location of business/activities/project, construction of building; shed etc. requirements to be used like power, fuel, water material etc. Marketing side will ensure about the marketability of the product(s) out of activities/ business project, consider demand, supply etc. Financial aspect will tell total requirement of fund for the
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business/activities/projects and how much will be required from bank, what amount will be given by the borrower himself/herself, cash inflow and cash outflow, sale forecasts, balance sheet, profit and loss account etc. Economic aspect will look into socioeconomic benefit and cost out of the business/activities/project. B. Financial Spread Sheet (FSS) and Lending Risk Analysis (LRA) are the new technique of assessing soundness of a loan proposal/project. With the help of FSS bank analyses the financial statements regarding a loan proposal/project. Credit decision is made by the bankers on the basis of FSS and LRA and it is a new and modern technique. In LRA bankers analyze eight risks such as supplies risk and sales risk which are Industry Risk, performance risk, resilience risk, management competence risk, management integrity risk which are under Company Risk and security control risk and security cover risk which are under Security Risk. Modern approach thus is an integrated approach of lending by bank, which covers safety, liquidity, purpose, security, profitability etc.
3.4 Credit Policy of Bank Asia Limited

Credit policy is the guideline for the credit division which includes the terms and conditions of extending credit, which is followed by the credit division. It is prepared in accordance with the philosophy of the management. Sectors to be covered, steps to be followed, factors to be considered, limits to be maintained and all other relevant matters with expectations relating to the credit extension are clearly described here, which helps the credit division to perform their activities and also in taking the decisions. Bank Asia (BA) makes loan only to reputable clients who are involved in legitimate business activities and whose income and wealth are derived from legitimate sources.
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Bank Asia encourages lending to socially desirable, nationally important and financially viable sectors and will not lend to unproductive purpose or socially undesired projects. At all times a policy of Know Your Customer (KYC) must be foremost in the credit applications process. Bank Asia extends credit in its discretion, only to qualified borrowers where the amount and intended purpose or use if proceeds are clear and legitimate and where the amount and use is reasonable in context of what is known about the particular client and the intended use or purpose. BA requires that borrowers have a source of repayment established at the inception of the credit, and that any exception must be specifically addressed in the credit approval. There should be identified, whenever possible, a secondary source of repayment. As with any funds received, any all repayment sources must be legitimate and consistent with what is known and documented about the client. Borrowers must provide, and the credit approval package must contain, sufficient information on the borrower to approve the extension of credit. Satisfactory security and collateral is required as appropriate. BAs main thrust is on case flow statement of the business rather than on collateral security. BA discourages the client with relatively low or no founds of their own and with a relatively high ratio of borrowed to own founds tend to face liquidity problems, with adverse repercussions on their ability to service their obligations. BA dose not engage in Name Lending based only on the general reputation of the borrower. There are cases however, where certain financial information about private clients is highly confidential and may not be disseminated. Such situations are addressed individually at the discretion of management.
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BA engages primarily in the extension of credit in Bangladesh Taka or in the same currency as the collateral. BA dose not extend any credit facility against cheque (owners cheque) or pledge of goods / merchandise BAs unsecured lending practices favor extensions of credit for short term, self-liquidating transactions. To the extent possible, the maturity of the loan should be matched to the cash conversion cycle of the transaction being financed. General-purpose loans to finance working capital, which are either unsecured or not specifically secured by the assets, financed and have no clean up requirement; represent policy exceptions unless secured by pledged liquid collateral. Overdraft lines should have an annual clean up period unless there is evidence of credit to the accounts annually two times the average credit. Loans secured by cash or readily marketable securities may be renewed at the discretion of the approving officers; however, interest may not be capitalized. BA may consider term loans with maturities up to five years, or longer. None except the President & Managing Director approves such loans. Management reviews the term loan portfolio periodically. BA extends venture capital to start up businesses, which are entirely dependent on new technologies, but is considered with extreme caution and also secured by First Class or other acceptable collateral. BA dose not extend credit where it does not have the industry knowledge or highly specialized skills needed to properly evaluate the proposal. BA extends credit facilities to the area in which the branch located and the size & ability of its supervise and monitor the same also is considered.
3.5 Global Credit Portfolio of BAL

Credit Portfolio means total investments by a bank segregated under the folios of different industries. Bank Asia Limited is operating within its own
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internal environment under skirt of external macro environment, consisting of elements like economic, political/legal, demographic, technological, social etc. The size of loan portfolio is determined by various priorities for banks fund. Besides, the prudent management of Bank Asia Limited has designated its portfolio considering the following factors under two broad categories.
External factors:
Sector based Attractiveness. Government Regulation Credit need of the area or community.
Internal factors:
1. 2. 3. 4. 5. Capital Position Types of Loan Deposit pattern Skills and Expertise of Banks personnel Credit policy of the bank.
Strategies of the Bank Asia Limited are as follows: Invest in those sectors where yield/sector is growing over years. Hold investment in those sectors where yield/sector is high but not growing. Divest in those sectors where yield/sector is diminishing over years.
This is a new generation bank. It is committed to provide high quality financial services/products to contribute to the growth of GDP of the country through stimulating trade and commerce, accelerating the pace of industrialization, boosting up export, creating employment opportunity for the educated youth,
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poverty alleviation, raising standard of living of limited income group and overall sustainable socio-economic development of the country. In achieving the aforesaid objectives of the bank, credit operation of bank is of paramount importance as it generates the greatest share of total revenue of the bank. Maximum risk is centered in it and even the very existence of the bank depends on prudent management of its credit portfolio and is less often the result shrinkage in the value of other assets. As such, credit portfolio not only features dominant in the assets structure of the bank but also the success of the bank.
3.6 Types of Credit

Credit may be classified with reference to -elements of time, nature of financing and provision base.
3.6.1 Classification on the basis of time

Continuous loans
These are the advances having no fixed repayment schedule but have a date at which it is renewable on satisfactory performance of the clients. Continuous loan mainly includes "Cash credit both Hypothecation and Pledge" and "Overdraft".
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Demand loan
In opening letter of credit (L/C), the clients have to provide the full L/C amount in foreign exchange to the bank. To purchase this foreign exchange, bank extends demand loan to the clients at stipulated margin. No specific repayment date is fixed. However, as soon as the L/C documents arrive, the bank requests the clients to adjust their loan and to retire the L/C documents. Demand loans mainly include Payment Against Documents, "Loan Against Imported Merchandise (LIM)" and "Letter of Trust Receipt".
Term loans
These are the advances made by the bank with a fixed repayment schedule. Terms loans mainly include "Consumer credit scheme", "Hire purchase", and "Staff loan". The term loans are defined as follows: Short-term loan: Up to 12 months. Medium term loan: More than 12 months & up to 36 months Long-term loan: More than 36 months.
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3.6.2
Classification
on
characteristics
of
financing
Credit
Funded Overdraft Consumer Credit LTR PAD Term Loan Packing Credit
Nonfunded * Letter of Credit * Bank Guarantee
The varieties used by BAL are briefly described below with the common terms and condition. Banks generally offer different kinds of credit facilities to the customers.
Consumer Credit Scheme:

This loan is allowed for acquiring consumer durable to the fixed income group and other eligible borrowers. The subject facility is known as Consumer loan.
Export Finance:
An exporter requires financial accommodation at two stages, namely: Pre-shipment stage Post-shipment stage.
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Overdraft:
It is an arrangement between the borrower and the Bank, whereby the borrower may overdraw his account up to an agreed amount, within a specified period of time. Overdrafts represent short-term funds and may be extended to business customers to meet a shortfall in their working capital requirements. Requests for financial capital expenditure should be considered under fixed loans. Different types of Overdrafts are Secured overdrafts, Overdraft against pledged of goods/stocks, Overdraft against Hypothecation of good, stocks, plant and Machinery.
Other Advances:
Advanced against import bills: - Bills against L/C are originated from the lodgment of shipping documents received from foreign banks against L/C established by the bank. - Advance against trust receipt - Advance against Export bills purchased/discounted - Advance against work order-advance made to client to perform work order - The credit facilities against cash collateral are FDR/Sanchaya patra/ ICB unit certificates etc.
Fixed Loans:
They represent an arrangement entered into between the borrower and the bank, whereby the borrower is granted a loan for a specified amount with an agreed period. A separate fixed loan account is opened, to which is debited the amount of the loan; the proceeds of the loan being credited to the borrowers current or saving account, from which source repayments are debited on an installment basis under a standing instruction, either monthly,
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bi-monthly, quarterly, half-yearly, annually, or in one lump sum when the loan matures i.e., a bullet repayment.
Project Loans:
Fixed term loans are particularly appropriate for business customers who require finance on a long term basis for the development of their factories, for purchases of plant and machinery and other fixed assets as they are able to match the cost of the assets with the profits expected to be generated over the period. Such loans are invariably subject to the fundamental principle that the Banks funds go in last: this ensures the borrowers have sufficient resources to complete their project and there is no necessity for further resource to bank borrowings. In Hong Kong, construction loans are typical project financing activities.
Syndicated Loans:
There are circumstances when a banks regal lending limit to a particular borrowing group will be exceeded after taking on an additional project loan. In this instance, the bank will invite its correspondent banks to participate in the loan, with it acting as an arranger. Agent and/or Lender, whereby its relationship with customer could be fostered, and generous fee income (i.e., Arranger Fee, Agency Fee, Front-End Fee) could be earned to improve on its return on assets.
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Loan against Trust Receipts (LATR):
Trust receipt accommodation is usually complementary to letter of credit i.e., bills coming forward under a letter of credit established by the bank may be converted into a trust receipt. Under a trust receipt facility, the importer is permitted to take delivery of the inward shipping documents against the execution by him of a trust receipt. Thereafter, he collects the goods, processes them and arranges to sell them over a fixed period of time. Upon releasing the goods to the customer, the Bank undertakes to pay the exporter, while the trust Receipt document duly signed gives a legal undertaking by the importer that will hold the goods or the sale proceeds from any part of the goods to the order of the bank until such times as the loan plus interest has been fully paid.
Guarantees:
Guarantees are undertakings of a bank, up-to a specific amount, guaranteeing a beneficiary the fulfillment of an obligation prior to a certain date. The bank issues guarantee on behalf of their customer. The guarantee is also valid until the validity of a credit limit. There are different forms of guarantee:
Bid Bonds:
They are issued before any guarantees Performance guarantees are given after the bid bond.
Local Guarantees: It is for the client who has business here in Bangladesh. Foreign Guarantees: It is usually used for foreign currencies. Counter Guarantees: They are used to ensure payment.
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Shipping Guarantees: Shipping guarantees are often issued within arranged
and approved LATR limits for the purpose of enabling importers to obtain their goods prior to receipt of the relative documents of title. These guarantees indemnify the transport agent for any loss incurred as a result of releasing shipping documents, and, therefore, the goods without the proper document of title. The bank will confirm that upon receipt of the document of title it will hand them to the transport agent who will then release the guarantee.
3.7 Credit Approving Authority

Credit decisions are heart of all credit works. Generally branch manager and the credit in-charge of a branch are held responsible for appraising of a loan proposal. The customer request for credit limit and the credit officer prepares a credit memo and send it to the head office, credit division. After taking all the relevant information from the branch the head office credit division sent the credit memo to the credit committee. Credit committee of BAL is comprised of Managing Director and other top-level executives, that is, SEVPs and EVPs. If credit committee is convinced about the merit of the proposal then it is sent the broad of directors. The board is final authority to approve or decline a proposal. The whole process takes a month or more.
Branch Credit Section
Head Office Credit Committee
Managing Director
Board of Directors
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3.8 Functions of Credit Department

The responsibilities/ functions performed by the credit department for processing of all types of advances as well as maintaining the records are as follows: Know their borrowers fully. Comply with the applicable instructions, manual, circulars and other rules of the bank as well as those of Bangladesh Bank including Banking Companys act 1991. Take interview of the prospective borrower Assemble the credit information received and place in the customers credit file. Process and sanction credits to the customers. Disburse credit facilities to borrowers in accordance with established procedures. Record the credit facilities. Prepare vouchers pertaining to credit facilities disbursed and maintain records of relevant entries. Tasks of credit departments of both corporate office and branch are interrelated. The branch credit department is responsible for mainly marketing, operational and monitoring, whereas the head office credit department is mainly responsible for credit policy, credit approval and supervising. The zonal office also plays the same role as head office.
BUS-498:Project
Report
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3.9 Delegation of Lending Authority:

Presently Bank Asia Limited has four levels of sanction authorities: 1. Branch: Branch Manager is authorized to approve fully secured credit when credit facility does not exceed 90% of security (en-cashable) value. 2. Zonal Office: Zonal Office approves proposal from the branch up to certain limit. If the limit exceeds its authority, it recommends to higher authority for approval. 3. Credit Committee: The credit committee in corporate office is headed by the Managing Director and Head of Credit and respective members and other departments. The credit committee approves credit facility up to BDT 10.00 million. 4. Board of Directors: The credit proposal beyond BDT 10.00 million is presented to the Board of Directors for approval.
3.10 Documentation of the Loan:

Documentation is obtaining such agreement where all the terms and condition and securities are written and signed by the borrower. It specifies rights and liabilities of both the banker and the borrower. In documentation each type of advances requires a different set of documents. It also differs with the nature of securities. The documents should be stamped according to the stamp Act. There are no hard and fast rules of documentation and it varies from bank to bank. Generally, the documents taken in the case of a secured advance by Bank Asia are: i. ii. iii. Demand promissory note: Here the borrower promises to General Loan & Collateral Agreement. Letter of Continuity.
pay the loan as and when demand by bank to repay the loan.
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iv. v.
Letter of Hypothecation of goods and capital machinery. Stock Report: This report is used for OD and CC. In this
report, information about the quality and quantity of goods hypothecated is furnished. vi. Memorandum of Deposit of Title Deed of property duly signed by the owners of the property with resolution of Board of Directors. vii. viii. ix. x. xi. xii. xiii. Personal Guarantee of the owners of the property with Guarantee of all the directors of the company. Resolution of the board of directors to borrow fund to Form no. XVII/XIX for filling charges with the register of Letter of lien for advance against FDR. Letter of Charge/Lien & Set-Off Memorandum & Articles of Association (for limited PNW Statement.
execute documents and completes other formalities joint stock companies under relevant section.
company Borrower) with Certificate of Incorporation
3.11 Classification of Loan on the Basis of Security

For internal use, banks classify the loan and advance on the basis of how much the bank is secured in respective of the loan: Debts considered good in respect of which the bank is fully secured. Debts considered good for which bank holds no other security than the debtors personal security Debts considered good and secured by the personal security of one or more parties in addition to the personal security of the debtor.
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3.12 Objective Basis of Classification

In classifying the loan and advance there are four classes in the loan review practiced in Bank Asia Limited. They are as follows:
3.12.1 Unclassified
The loan account is performing satisfactorily in the terms of its installments and no overdue is occurred. This type of loan and advances are fall into this class.
3.12.2 Substandard
This classification contains where irregularities have been occurred but such irregularities are temporarily in nature. To fall in this class the loan and advance has to fulfill the following factor. Category of Credit S-T Agri & Micro Credit Continuous loan Demand Loan Time overdue (irregularities) 3 months & above but less than 6 months. Un-recovered for 3 months & above but less than 6 months from the date of the loan is claimed. Repayable within 5years: If the overdue installment Fixed Term loan equals or exceeds the amount repayable within 6 months. Repayable more than 5years: If the overdue installment equals or exceeds the amount repayable within 12 months. The main criteria for a substandard advance is that despite these technicalities or irregularities no loss is expected to be arise for the bank.
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Substandard
These accounts will require close supervision by management to ensure that the situation does not deteriorate further.
3.12.3 Doubtful
This classification contains where doubt exists on the full recovery of the loan and advance along with a loss is anticipated but cannot be quantifiable at this stage. Moreover if the state of the loan accounts falls under the following criterion can be declared as doubtful loan and advance. Category of Credit S-T Agri & Micro Credit Continuous loan Demand Loan Time overdue (irregularities) 6 months & above but less than 12 months. Un-recovered for 6 months & above but less than 12 months from the date of the loan is claimed. Repayable within 5years: If the overdue installment Fixed Term loan equals or exceeds the amount repayable within 12 months. Repayable more than 5years: If the overdue installment equals or exceeds the amount repayable within 18 months.
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Doubtful
3.12.4 Bad and Loss

A particular loan and advance fall in this class when it seems that this loan and advance is not collectable or worthless even after all the security has been exhausted. In the following table the criteria to be fulfilled to fall in this category are summarized: Category of Credit S-T Agri & Micro Credit Continuous loan Demand Loan Time overdue (irregularities) Not recovered within more than 12 months. Un-recovered more than 12 months from the date of the loan is claimed. Repayable within 5years: If the overdue installment equals or exceeds the Fixed Term loan amount repayable within 18 months. Repayable more than 5years: If the overdue installment equals or exceeds the amount repayable within 24 months.
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Bad and Loss
3.13
Qualitative
Judgment
Basis
of
Classification
Beside the above-mentioned objective criteria, Bank Asia Limited has other few qualitative judgment for classifying the loan and advance. This judgement totally depends on the Branch Manger and or the Head Office credit division. If there is any doubt or uncertainty regarding the recovery of any continuous credit, demand loan, fixed term loan and classified or not on the basis of the above mentioned objective criterion then the loan can be classified on the basis of the Qualitative Judgment. The qualitative factors that are considered in Bank Asia Limited are as follows: Borrower sustains a loss of capital. Significant decrease in the value of the security. Weakening of banks position as creditor due to any reason whatsoever. Diversification of the funds to uses other than the facility for which the credit was approved. Incorrect information supplied by the borrower or bankruptcy of the borrower. Credit is rescheduled frequently or the rules of rescheduling are violated or a suit is filed for the recovery of the credit. Last year the classification of the loan and advance of Bank Asia Limited were like this: Table: Classification position last two years. Year 2005 2006 Unclassified 17375 21751 Substandard 60.65 50.3 Doubtful 60.36 .54 (Tk in million) Bad 364.7 453.4
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3.14 Managing Delinquent Client

When a problem loan is detected the responsible branch manager takes the corrective action and tries to minimize the loan losses allowing different facilities to the client. The steps practices in Bank Asia Limited to manage the delinquent loan are: Persuasion: This is the first step practiced in the BAL to mange the problem loan.
Negotiation: If the persuasion failed, the loan officer negotiates a plan

of action with the borrower to try to extract both the bank and the borrower from possible loss. This calls for certain sacrifices on the part of the bank and borrower in their mutual interest. Litigation: If after rescheduling the loan and or failed to negotiate with the delinquent client, BAL go for taking legal action against the delinquent client to recover the loan.
3.15 Provisioning
Specific Provision
Head office credit division prepares a list of credit accounts, which are considered to be totally or partially be unrecoverable & keeps a provision against the outstanding loans.
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Rate of Provisioning
Bank Asia Limited in the time of loan provisioning to get the real picture of the income mainly follows the Bangladesh Bank guideline. The rate of provisioning used in BAL is summarized in the following table.
Table: Rate of provisioning Class Short Term Agriculture credit. Rate of Provisions Unclassified (UC) Substandard (SS) Doubtful Bad or Loss 5% 5% 5% 100% 1% 20% 50% 100% All other credit
3.16 Credit Appraisal System

The function of commercial banks to collect deposit from the common people and to invest deposited money in different sectors for overall development of the economy of the country. So the banks have to be very much careful in credit appraisal. The person who is primarily held responsible for appraising a loan proposal in Bank Asia Limited is called the credit officer. The most important measure of appraising a loan proposal is safety of the project. Safety is measured by the borrower and repaying capacity of him. The attitude of the borrower is also an important consideration; liquidity means the inflow of cash into the project in course of its operation. The profit is the blood for any commercial institution. Before approval of any loan project the bank authority has to be sure that the proposed project will be a profitable venture. Profitability is assessed from the projected profit and loss statement. The security is the only tangible remains with the banker. Securing or
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collateral it is accepting must be easy to sell and sufficient to cover the loan amount. But bank cannot sanction loan by only depending on collateral. The sources of repayment of the project should be a feasible one. During sanctioning any loan bank has to be attentive about diversification of risk. All money must not be disbursed amongst a small number of people. In addition any project must be established for the national interest and growth. Commercial banks and financial institutions intermediate between lenders and borrowers. These financial intermediaries collect deposit and disburse it as loan and advance to the individual people, business, commercial, industrial entity. The loan and advance should be given to them who has the certain and predicted cash flow to repay the credit. If the relationship manager fail to analyze the clients viability of repaying the loan and the projects cash flow possibility of default may arise due to the fact.
So the importance of APPRAISAL, in sanctioning the loan, is the key to identify the borrowers ability, expertise, efficiency, industry analysis, and business performance to ensure the recovery of the credit along with the good supervision, monitoring and the relationship. In a word it can be said that the purpose of appraisal is to be sure that the proposed advance will be safe, liquid, and profitable and for acceptable purpose covered by adequate security. At the time of credit proposal the bank has to come to an acceptable compromise between over caution and under caution.
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3.17
Guiding
Principle
of
Credit
appraisal for Credit Officer

To determine the worth of a client, the following conceptual exercises should be undertaken. There are no fixed and set methods to perform credit marketing, and scope for application of individual judgment/ perception always plays over set rules in such work. For example, drop in revenue of a contractor may indicate the clients failure to get work, or it may be due to adaptation of policy to do higher margin quality jobs.
3.18 Steps Involved in Credit Processing

The credit appraisal process here at Bank Asia limited is a detailed and through one, complying to the central banks standards as well as analyzing all feasible sources of risk. Though there is a prescribed format for appraising the potential borrower, the creativity of the credit officer is very important for identifying various aspects of the investment proposal. Bank Asia therefore allows some room for flexibility, which may enrich the appraisal or make it a more complete one. The credit division follows certain procedures to decide whether or not to allow the credit facilities demanded. The credit division maintains the tight control over credit reports and keeps the proper documentation and records in the files. In general following steps are followed for a standard credit procedure:
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3.18.1 Application for Loan

For any type of credit facility relating to the working capital, trade finance, project finance and contract work, clients/borrowers must fill an application form with following information: Name of firm/ company/ individual, Business address, Permanent address, Constitution/ Status (Proprietorship/ Partnership/ Public Limited Co./ Private Ltd. Co.), Date of establishment and place of incorporation, Background and business experience, Particulars of assets (Land/Building, Bank Deposit, Stock/Shares), Nature of the business, Statement of liabilities with Bank Asia and other banks, Financial statements for the last 3 years explaining the following terms, Capital Funds/ Net Worth (Paid up capital, Retained earnings, General reserve), Balance Sheet Statistics (Current assets, Fixed assets, Term liabilities, Capital/equity, Total liabilities). For working capital finance clients/ borrowers must provide the following information (Annual production, Annual sales, Sources of raw materials, Cash flow statements). Following factors are to be considered while submitting the loan application form to the bank:
Proposed debt/equity ratio

For processing and getting approval of the requested credit facility the client must provide the above information and should fully co- operate with the bank for further information as needed. The analyst should verify the information through both primary and secondary sources. While evaluating the project for approval the analyst should have adequate knowledge of the economic environment in which the project is to thrive. Such as information related to money, banking foreign exchange, reserves, production, price, national income, cost of living indices, govt. policies covering wages, taxation, tariff, import control, investment, marketability of product etc.
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Projected financial statements

For all credit proposals, the borrowers should submit their financial statements including last 3(three) years profit and loss A/C and balance sheet-audited/ statement of affairs. When an individual borrower or guarantor applies for any credit facility, the submitted financial statements must be signed by competent authority and must contain legend to the signatory, the assets and liabilities and sources of income and items of expenses. Here this discussion is like preliminary screening of the plant. So the credit officers need to be cautious about the facility the client is seeking and the available fund in the bank. More over most of the businesses in our country dont have any standard form of accounting department and dont have any audited statement. So the main task of the credit officers is to make a relationship with the client to find out the hidden income sources.
3.18.2 Scrutinizing the documents

In this step the bank collects and correlates the information about the client. After receiving the credit application form, the credit officer thoroughly checks the form and all the submitted documents. Here, the point of importance whether the documents are certified and or attested by the respective authority. General check-whether the required documents are submitted authenticated. Gross verification for identifying consistency.
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3.18.3 Analyzing the information

Appraising the client or Credibility Appraisal
When we talk about good lending portfolio, few principals are highlighted, which are judicious selection or borrower, safety, security, purpose, profitability, liquidity, supervision, national interest. The main task and the first task of the credit officer is to select a good borrower as if the borrower selected is good, the recovery and supervision becomes easy and harmless. Like any other bank, the potential clients approach to Bank Asia Limited for credits are highly appraised for the ensuring the repayment of the amount to be disbursed. The credit policy has a prescribed criterion for selecting a borrower beside this the credit officers take contingent factor analysis and use their analytical ability in the time of selecting the borrower. The credit officer has to check the integrity and the honesty of the client using different suitable tools. Lets take a look some of the most frequently used ones:
Personal interview with the entrepreneur/management

When the client approaches for credit, the credit officer talks to him with a view to identifying whether the client has only need of seeking credit facility or not. The credit officer has to have deep analyzing power to find out the clue. The out come of a personal interview session is to have overall idea about the integrity, experience, and business sense of the borrower. Prompt and consistent information supply, willingness to supply information and other verbal and non-verbal clues can be of value to the credit officer in judging the client. If possible, a visit is made to the proposed/existing plant/factory.
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Report from Bank Asia Limited

If the customer hold an account or is enjoying credit facility from the Bank Asia Limited, the statements of the accounts are collected for analyzing the performance of the existing facility, transaction summary of the accounts along with the integrity of the client.
Report from other banks

The client has to mention whether he has other liability in other bank in the name of the project and or in the name of the sister concern in the time applying for credit. From the given information the credit officer communicates with the respective authority of those banks with which the credit seeker has transaction to collect the information about few things: Whether the client has taken any loan in the name of the proposed project or any other sister concern. The amount outstanding and whether classified or not. The payment behavior of the client.
All the collected information is kept confidential.
Report from Society

Sometimes the credit officer collects in formation on a client from other businessmen having relationship with Bank Asia. Informally the credit officer discusses about the project, the sponsor(s) and the prospects of the project with persons he thinks can provide him with information. Moreover, information about the sponsor is also collected from the socially important person like community representative and chamber representative.
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Contacting the clients supplier can also be another way to verify the payment character of the client.
CIB Report
There is possibility that client conceals information about his/her companys current liability and transaction with other banks. So to get the accurate information about the credibility of the customer the branch office collects CIB report through the head office. The CIB authority provides the relevant information about the client.
3.18.4 Appraising the business

Appraising the business comprises of analyzing the industry outlook, the potential of the business for which credit is being sought, market potential of the products, major competitors, distinctive competitiveness and strategies taken. In analyzing the industry, number of competitors, the current total production, demand and supply position of the industry, prospect of demand growth etc are some of the factors that are looked into. Also assessed is the vulnerability of the industry in the face of changes in government regulation. Overall growth of the business and performance are also looked into, using their financial statements of last three financial years. The trend of sales, net margin, net income etc. is examined. Another important consideration is customer base of the firm and relationship with major buyers. As mentioned earlier, competition in the market is an important factor all through. Major competitors, distinctive competitiveness of the incumbent firm and the strategic taken to combat the competition are also analyzed.
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Management Competence or Capability Appraisal

The ability of the management to run the business smoothly and business background of the promoter and the sponsor directors and the management are crucial factors in determining the success or failure of any business operation. Capability of the borrower in running the business in highly emphasized in the time of selecting a good borrower. As the management of the business is the sole authority to run the business that is use the fund efficiency, effectively and profitability, proper investigation must be carried out in this regard. With this end in view Bank Asia collects the following information from the client: Brief description of the directors educational background & business background. Brief profile of the management. Business performance for the last three years as performance of the business implies the capability of the managers running the business. Equity mobilization of the directors as it implies their risk-taking attitude. Entrepreneurship skills. Managements experience in the business/businesses of similar nature. Resilience or shock absorption.
If it is revealed that the directors are in the business for a long time and have operated the business well are said to have the capability to run the business.
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Financial strength Analysis

Analyzing the financial position of the borrower is one of the most crucial jobs to perform before financing any business. It includes financial base analysis of the borrower/business, liability position analysis in terms of risk and return measures, and lending risk analysis in the specified format of Bangladesh Bank.
Financial base
This part of credit appraisal is concerned with whether there is a strong financial standing of the Borrower Company and its directors. The following information are required: Net-worth statement of all the directors, Paid-up capital, Investment in business, Leverage (Equity Multiplier), Cash flow, Allied deposit in Bank Asia Limited, Tangible net-worth of the business for the lasts three years and projected two years, Total Asset- Total Debt, Overall group strength (if applicable), Business performance. Also, in order to get a clear picture of the financial viability of the business credit is asked for, Bank Asia credit authority emphasizes on financial viability analysis of the client, using some spreadsheet programs. The clients submit last three years audited/un-audited financial statements as well as forecasted income and balance sheet in the time of applying for credit. Using that data and the banks standardized spreadsheet format called Spreadsheet, the credit officer calculates different ratios, cash flow, risk and return measures, working capital, and two standard credit scores (Y Score and Z score). Findings of the Spreadsheet provide the credit section with all the analysis of the financial information, and some guidelines as to whether the client is bankable or not. In a word, it gives the credit appraiser meaningful insight of the financial standing of the borrowing.
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Liability Position Analysis

Facility from Bank Asia & other banks taken by the client must be provided while applying for credit facility. The credit officer looks for-Existing facility enjoying by the Client Company from the Bank Asia Limited and other banks, Existing facilities for the sister concerns (if applicable), Debt to Asset ratio, the amount outstanding are classified or not, Monthly installment payment or fixed charge coverage performance of the client and also look for the nature, limit, outstanding, overdue, CL status, security value of the credit facilities.
Financial Viability Analysis

In this part, NPV and IRR of the project are calculated, and breakeven analysis is also performed in terms of sales volume and capacity utilization. Payback period and modified IRR are also calculated if deemed necessary for the completeness of the analysis.
3.18.5 Evaluation/ Approval

An accurate appraisal of risk in any credit exposure is highly subjective matter involving quantitative and qualitative judgments, where Quantitative factors refer to the analysis of financial statement ratio and Qualitative factors refer to the assessment of management, industry position, customer/ supplier relations, account performance and reputation. In evaluating any credit proposal, the analyst uses the following distinct and logical steps: Evaluating the past performance of the borrowers. Assessing the risk of failure by identifying factors in the borrowers present condition and past performances, which indicates likelihood of success to repay the loan.
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Setting terms and conditions of credit facilities. Forecasting the probable future condition of the borrower and deciding whether to accept or reject a loan proposal.
The most pertinent and prime part of the process is assessment of risk of failure to repay deals with the overall lending risk combining. In all cases, the banks basic lending criteria must be satisfied and its policy of Know Your Customer implemented in full. Once overall risk assessment done credit proposal are forwarded to appropriate authority for approval.
3.18.6 Documentation & Disbursement

Once credit proposal is approved, a sanction letter is issued to client conveying offer to the client-mentioning terms of sanction-type of facility, facility amount, repayment, security, interest rate & fees, positive and negative covenants, etc. Client is advised to complete documentation. It should be mentioned that documentation should be obtained prior to disbursement of any loan. All the necessary documentation required meeting the terms and conditions of the facility in the manner in which it was approved. Apparently there are three parts of documentation, namelya) Obtaining instruments/ documents-charge documents, standard documents & other specified documents as specified in terms and conditions in sanction letter. b) Stamping c) Execution Once documentation is complete, facility is disbursed as per term and conditions in sanctioned advice.
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1. Request for Credit from the client to a Branch
2. Credit Application form filled up by the customer & collection of document
3. Scrutinizing the documents
4. Analyzing the information
5. Preparing the proposal
6. The proposal goes to the Authority through other necessary steps
7. Sanctioning of the credit
8. Informing the client, Loan Disbursement, Supervision and Monitoring
Figure: Steps involved in Credit Processing
3.19 Credit Monitoring and Review

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It is the last step in credit policy and procedure framework. Credit monitoring and review is very important, because it ensures proper utilities and repayment of bank fund. Credit monitoring and review feature of BAL is concerned was assessing the quality of different type of loan. Periodic review and follow up should, inter-alia aims at ensuring: That conduct (Turnover, regularity of repayment etc) of the borrowing accounts during the period under review has been satisfactory or as expected. The terms and condition of the sanctioned letter are strictly followed. The account is not having excess over limit. The value of the collateral security is adequate. There is not any unfavorable situation in market, economy and political conditions, which may endanger the reliability of the borrower account. The analysis of the borrowers business performance and comparison of the projected and actual to find any deviations. Apparent profitability from the loans.
3.20 Security against Advances

The documentation process is depended on types of securities, which are i) primary security and ii) collateral security. The securities can be tangible or intangible, movable or immovable. The securities, which are acceptable to the Bank in respect of the credit facilities are-Pratiraksha Sanchaya Patra, Bangladesh Sanchaya Patra, ICB unit certificate, Wage earners bond, FDR, Shares (Listed in Stock Exchange), Pledge of goods, Hypothecation of goods,
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products and machinery, Fixed assets of manufacturing unit, Shipping documents. Qualities of a good security are clean title, easily saleable, easily valuable, price stable and easily controllable, etc.
3.20.1 Modes of Charging Security

A wide range of securities is offered to banks as coverage for loan. In order to make the securities available to banker, in case of default of customer, a charge should be created on the security. Creating charge means making it available as a cover for advance. The following modes of charging securities are applied in the Bank Asia Limited. Different methods of creating charges over security are lien, pledge, hypothecation, mortgage (legal & equitable), trust receipt, advance against work order, advance against approved shares, advance against FDR etc.
Lien
A lien is right of banker to hold the debtors property until the debt is discharged. Bank generally retains the assets in his own custody but sometimes these goods are in the hands of third party with lien marked. When it is in the hand of third party, the third party cannot discharge it without the permission of bank. Lien gives banker the right to retain the property not the right to sell. Permission from the appropriate court is necessary. Lien can be made on moveable goods only such as raw materials, finished goods, shares debentures etc.
Pledge
Pledge is also like lien but here bank enjoys more right. Bank can sell the property without the intervention of any court, incase of default on loan, But for such selling proper notice must be given to the debtor. To create pledge, physical transfer of goods to the bank is must.
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Hypothecation
In this charge creation method physically the goods remained in the hand of debtor. But documents of title to goods are handed over to the banker. This method is also called equitable charge. Since the goods are in the hand of the borrower, bank inspects the goods regularly to judge it s quality and quantity for the maximum safety of loan.
Mortgage
Mortgage is transfer of interest in specific immovable property. Mortgage is created on the immovable property like land, building, plant etc. Most common type of mortgage is legal mortgage in which ownership is transferred to the bank by registration of the mortgage deed. Another method called equitable mortgage is also used in bank for creation of charge. Here mere deposit of title to goods is sufficient for creation of charge. Registration is not required. In both the cases, the mortgage property is retained in the hank of borrower.
Trust Receipt
Generally goods imported or bought by bank's financial assistance are held by bank as security. Bank may release this lien / pledge these goods against trust receipt. This means that the borrower holds goods in trust of the bank, trust receipt arrangement is needed when the borrower is going to sell this goods or process it further but borrower has no sufficient fund to pay off the bank loan. Here proceeds from any part of these goods are deposited to this bank.
Advance against Work-Order

Advances can be made to a client to perform work order. The following points are to be taken into consideration. The clients management capability, equity strength, nature of scheduled work and feasibility study should be judiciously made to arrive at logical decision. If there is a provision for running bills for the
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work, appropriate amount to be deducted from each bill to ensure complete adjustment of the liability within the payment period of the final bill besides assigning bills receivable, additional collateral security may be insisted upon. Disbursement should be made only after completion of documentation formalities and fulfillment of arrangements by the client to undertake the contract. The progress of work under contract is reviewed periodically.
Advance against Approved Shares

Credit facilities to extend against shares will be called Investment Scheme against Shares. Advance may be allowed against shares of companies listed with the Stock Exchange Ltd. Subject to margin or may other restrictions imposed by Bangladesh Bank/Head Office of the bank from time to time. Value of shares & margin should be worked out as per guidelines issued from time to time by Bangladesh Bank / Head Office of the bank.
Advance against Fixed Deposit Receipts

Advance against Fixed Deposit Receipt will be subject to credit Restrictions imposed from time to time by Head Office / Bangladesh Bank. Scrutinize the Fixed Deposit Receipts with regard to the following points. a) The Fixed Deposit Receipt is not in the name of minor. b) It is discharged by the depositor on revenue stamp of adequate value & his signature is verified. c) Creation of liability on Fixed Deposit issued in joint names by any one of the depositors is regular. d) If the Deposit Receipt is offered as a security for allowing advances, a letter of lien shall be obtained from the depositors, on the appropriate form. e) If the Deposit Receipt has been issued by the branch-allowing advance, lien against that specific Deposit Receipt to be marked in the fixed Deposit Register of the branch.
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f) The discharged receipt, the letter of lien duly verified by the issuing branch & the letter confirming registration of the lien on the deposit receipts shall be kept along with other documents under safe custody of the bank.
3.20.2 Relation between Advance with the Security

Types advance Loans Overdraft Bills purchased of Securities Lien of various kinds of Sanchaya patras, Govt. Securities, FDR, Collateral of immovable property, shares quoted in stock exchange Pledge or hypothecation of machinery, land and building on which machinery are installed, stock in trade, goods products and merchandise. Bills itself
3.21 Lending Risk Analysis (LRA): Modern Technique of Credit Appraisal

The Financial Sector Reform Project (FSRP) has designed the LRA package, which provides a systematic procedure for analyzing and quantifying the potential credit risk. Bangladesh Bank has directed all commercial bank to use LRA technique for evaluating credit proposal amounting to Tk. 10 million and above. The objective of LRA is to assess the credit risk in quantifiable manner and then find out ways & means to cover the risk. However, some commercial banks employ LRA technique as a credit appraisal tool for evaluating credit proposals amounting to Tk. 5 million and above. Broadly LRA package divides the credit risk into two categories, namely --- Business risk and Security risk. A detail interpretation of these risks and the procedure for evaluating the credit as follows:
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3.21.1 Business risk

It refers to the risk that the business falls to generate sufficient cash flow to repay the loan. Business risk is subdivided into two categories.
3.21.2 Industry risk

The risk that the company fails to repay for the external reason. It is subdivide into supplies risk and sales risk.
LENDING RISK BUSINESS RISK INDUSRTY RISK

SUPPLY RISK SALES RISK
COMPANY RISK
MANAGEMENT RISK MANAGEMENT MANAGEMENT
SECURITY RISK
SECURITY CONTROL SECURITY COVER
COMPANY POSITION PERFORMANCE RISK RESILIENCE RISK
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3.21.3 Supplies risk

It indicates that the business suffers from external disruption to the supply of imputes. Components of supplies risk are as raw material, Labor, power, machinery, equipment, factory premises etc. Supply risk is assessed by a cost breakdown of the inputs and then assessing the risk of disruption of supplies of each item.
3.21.4 Sales risk

This refers to the risk that the business suffers from external disruption of sales. Sales may be disrupted by changes to market size, increasing in competition, and change in the regulation or due to the loss of single large customer. Sales risk is determined by analyzing production or marketing system, industry situation, Government policy, and competitor profile and companies strategies.
3.21.5 Company risk

This refers to the risk that the company fails for internal reasons. Company risk is subdivided into company position risk and Management risks.
3.21.6 Company position risk

Within an industry each and every company holds a position. This position is very competitive. Due to the weakness in the company's position in the industry, a company is the risk for failure. That means, company position risk is the risk of failure due to weakness in the companies position in the industry. It is subdivided into performance risk and resilience risk.
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3.21.7 Performance risk

This risk refers to the risk that the companys position is so weak that it will be unable to repay the loan even under Favor able external condition. Performance risk assessed by SWOT (Strength, Weakness, Opportunity and Threat) analysis, Trend analysis, Cash flow forecast analysis and credit report analysis (i.e. CIB repot from Bangladesh Bank).
3.21.8 Resilience risk

Resilience means to recover early injury, this refers to risk that the company falls due to resilience to unexpected external conditions. The resilience of a company depends on its leverage, liquidity and strength of connection of its owner or directors. The resilience risk is determined by analyzing different financial ratio, flexibility of production process, shareholders willingness to support the company if need arise and political and private affiliation of owners and key personnel.
3.21.9 Management risk

The management risk refers to the risk that the company fails due to management not exploiting effectively the companys position. Management risk is subdivided into management competence risk and integrity risk.
3.21.10 Management competence risk

This refers to the risk that falls because the management is incompetent. The competence of management depends upon their ability to manage the company's business efficiently and effectively. The assessment of management competence depends on management ability and management team work. Management ability is determined by analyzing the ability of owner or board of the members first and then key personnel for finance and operation. Management team work is determined by analyzing management structure and its strength and weakness.
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3.21.11 Management integrity risk

This refers to the risk that the company fails to repay the loan amount due to lack of management integrity. Management integrity is a combination of honesty and dependability. Management integrity risk is determined by assessing management honesty, which requires evaluating the reliability of information supplied and then management dependability.
3.21.12 Security risk

This sort of risk is associated with the realized value of the security, which may not cover the exposure of loan. Exposure means principal plus outstanding interest. The security risk is subdivided into two major heads i.e. security control risk and security cover risk.
3.21.13 Security control risk

This risk refers to the risk that the bank falls to realize the security because of bank's control over the security offered by the borrower i.e. incomplete documents. The risk of failure to realize the security depends on the difficulty in obtaining favorable judgement and taking possession of security. For analyzing the security control risk the credit office is required to verify documentation to ensure security protection, documentation completeness, documentation integrity and proper insurance policy. He/she also conducts site visit to verify security existence. Assessment of security control risk requires analyzing the possibility of obtaining favorable judgement and analyzing the case with which the bank could take the possession and liquidate the securities.
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3.21.14 Security cover risk

This refers to the risk that the realized value of security is less than exposure. Security cover risk depends on speed of realization and liquidation value. For analyzing security cover risk, the official requires assessing the power of the customer to prolong the legal process and to analyze the market demand for the security For assessment of security control risk, the officials times the time that would require to liquidate the security and assess the risk and estimates the security value at liquidation and assess the risk. Before completing the LRA form, the relationship manager collects data specially industry specific from published sources and company specific data that not usually published, by personally visiting the company. After collecting the necessary data he/ she prepare financial spreadsheet. This spreadsheet provides a quick method of assessing business trend & efficiency and helps to assess the borrower ability to pay the loan Obligation. Financial spreadsheet includes balance sheet, income statement, cash flow statement and ratios for the purpose of financial statement analysis. Through analyzing data and collected information, the concerned official completes the LRA form and all scores are transferred to the scoring matrix to find the overall risk of lending. The overall matrix provides four kinds of lending risk for decision making
viz.--(I) Good (ii) Acceptable (iii) Marginal and (iv) Poor. The bank does not
provide any credit request having an over all risk as marginal" and Poor" without justification. All credit application rated "Poor" shall require the approval of the Board of Directors regardless of purpose tenor or amount. Therefore-bank can minimize the dangers regarding the bad loan and advances through using the LRA.
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SUMMARY OF CREDIT RISK

Prism of Good Governance
Bangladesh Bank strictly requires the financial institutions to abide by the prism of good governance, which basically explains how to carry out business activities and meeting the targets by maintaining the socio ethical standards and keeping within the regulatory framework. It suggests creating the environment for institutions building in the financial industry- which requires creating sustainable organization that have embedded risk management system which essentially translates to good governance.
Business strategy
Targets and Buds
Regulatory framework
-Asset liability Management -Foreign exchange -Internal control -AML
-HRM -Revenue - ALM standard -Security - InfoTech -Corporate affairs
Policy + People + Process
Socio Ethical Standards
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4.1 POLICY GUIDELINES

This section details fundamental credit risk management policies that are recommended for adoption by all banks in Bangladesh. The guidelines contained herein outline general principles that are designed to govern the implementation of more detailed lending procedures and risk grading systems within individual banks.
4.1.1 Lending Guidelines

All banks should have established Credit Policies (Lending Guidelines) that clearly outline the senior managements view of business development priorities and the terms and conditions that should be adhered to in order for loans to be approved. The Lending Guidelines should be updated at least annually to reflect changes in the economic out look and the evolution of the banks loan portfolio, and be distributed to all lending/marketing officers. The Lending Guidelines should be approved by the Managing Director/CEO & Board of Directors of the bank based on the endorsement of the banks Head of Credit Risk Management and the Head of Corporate/Commercial Banking. (Section 2.1 of these guidelines refers) Any departure or deviation from the Lending Guidelines should be explicitly identified in credit applications and a justification for approval provided. Approval of loans that do not comply with Lending Guidelines should be restricted to the banks Head of Credit or Managing Director/CEO & Board of Directors. The Lending Guidelines should provide the key foundations for account officers/relationship managers (RM) to formulate their recommendations for approval, and should include the following :-
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Industry and Business Segment Focus

The Lending Guidelines should clearly identify the business/industry sectors that should constitute the majority of the banks loan portfolio. For each sector, a clear indication of the banks appetite for growth should be indicated (as an example, Textiles: Grow, Cement: Maintain, Construction: Shrink). This will provide necessary direction to the banks marketing staff.
Types of Loan Facilities

The type of loans that are permitted should be clearly indicated, such as Working Capital, Trade Finance, Term Loan, etc. Single Borrower/Group Limits/Syndication Details of the banks Single Borrower/Group limits should be included as per Bangladesh Bank guidelines. Banks may wish to establish more conservative criteria in this regard. Lending Caps Banks should establish a specific industry sector exposure cap to avoid over concentration in any one industry sector. Discouraged Business Types Banks should outline industries or lending activities that are discouraged. As a minimum, the following should be discouraged: Military Equipment/Weapons Finance Highly Leveraged Transactions Finance of Speculative Investments
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Logging, Mineral Extraction/Mining, or other activity that is Ethically or Environmentally Sensitive
Lending to companies listed on CIB black list or known defaulters Counter parties in countries subject to UN sanctions Share Lending Taking an Equity Stake in Borrowers Lending to Holding Companies Bridge Loans relying on equity/debt issuance as a source of repayment.
Loan Facility Parameters

Facility parameters (e.g., maximum size, maximum tenor, and covenant and security requirements) should be clearly stated. As a minimum, the following parameters should be adopted: Banks should not grant facilities where the banks security position is inferior to that of any other financial institution. Assets pledged, as security should be properly insured. Valuations of property taken as security should be performed prior to loans being granted. A recognized 3rd party professional valuation firm should be appointed to conduct valuations.
Cross Border Risk

Risk associated with cross border lending. Borrowers of a particular country may be unable or unwilling to fulfill principle and/or interest obligations. Distinguished from ordinary credit risk because the difficulty arises from a political event, such as suspension of external payments Synonymous with political & sovereign risk Third world debt crisis
For example, export documents negotiated for countries like Nigeria.
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4.1.2 Credit Assessment & Risk Grading

4.1.2.1 Credit Assessment
A thorough credit and risk assessment should be conducted prior to the granting of loans, and at least annually thereafter for all facilities. The results of this assessment should be presented in a Credit Application that originates from the relationship manager/account officer (RM), and is approved by Credit Risk Management (CRM). The RM should be the owner of the customer relationship, and must be held responsible to ensure the accuracy of the entire credit application submitted for approval. RMs must be familiar with the banks Lending Guidelines and should conduct due diligence on new borrowers, principals, and guarantors.
It is essential that RMs know their customers and conduct due diligence on new borrowers, principals, and guarantors to ensure such parties are in fact who they represent themselves to be. All banks should have established Know Your Customer (KYC) and Money Laundering guidelines which should be adhered to at all times. Credit Applications should summarize the results of the RMs risk assessment and include, as a minimum, the following details: Amount and type of loan(s) proposed. Purpose of loans. Loan Structure (Tenor, Covenants, Repayment Schedule, Interest) Security Arrangements
In addition, the following risk areas should be addressed:
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Borrower Analysis:- The majority shareholders, management team and group or affiliate companies should be assessed. Any issues regarding lack of management depth, complicated ownership structures or inter group transactions should be addressed, and risks mitigated. Industry Analysis:-The key risk factors of the borrowers industry should be assessed. Any issues regarding the borrowers position in the industry, overall industry concerns or competitive forces should be addressed and the strengths and weaknesses of the borrower relative to its competition should be identified. Supplier/Buyer Analysis:- Any customer or supplier concentration should be addressed, as these could have a significant impact on the future viability of the borrower. Historical Financial Analysis:- An analysis of a minimum of 3 years historical financial statements of the borrower should be presented. Where reliance is placed on a corporate guarantor, guarantor financial statements should also be analysed. The analysis should address the quality and sustainability of earnings, cash flow and the strength of the borrowers balance sheet. Specifically, cash flow, leverage and profitability must be analyzed. Projected Financial Performance:- Where term facilities (tenor > 1 year) are being proposed, a projection of the borrowers future financial performance should be provided, indicating an analysis of the sufficiency of cash flow to service debt repayments. Loans should not be granted if projected cash flow is insufficient to repay debts.
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Account Conduct:- For existing borrowers, the historic performance in meeting repayment obligations (trade payments, cheque, interest and principal payments, etc) should be assessed. Adherence to Lending Guidelines:- Credit Applications should clearly state whether or not the proposed application is in compliance with the banks Lending Guidelines. The Banks Head of Credit or Managing Director/CEO should approve Credit Applications that do not adhere to the banks Lending Guidelines. Mitigating Factors:- Mitigating factors for risks identified in the credit assessment should be identified. Possible risks include, but are not limited to: margin sustainability and/or volatility, high debt load (leverage/gearing), overstocking or debtor issues; rapid growth, acquisition or expansion; new business line/product expansion; management changes or succession issues; customer or supplier concentrations; and lack of transparency or industry issues. Loan Structure:- The amounts and tenors of financing proposed should be justified based on the projected repayment ability and loan purpose. Excessive tenor or amount relative to business needs increases the risk of fund diversion and may adversely impact the borrowers repayment ability. Security:- A current valuation of collateral should be obtained and the quality and priority of security being proposed should be assessed. Loans should not be granted based solely on security. Adequacy and the extent of the insurance coverage should be assessed. Name Lending:- Credit proposals should not be unduly influenced by an over reliance on the sponsoring principals reputation, reported independent means, or their perceived willingness to inject funds into various business enterprises in case of need. These situations should be discouraged and
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treated with great caution. Rather, credit proposals and the granting of loans should be based on sound fundamentals, supported by a thorough financial and risk analysis.
4.1.2.2 Risk Grading

All Banks should adopt a credit risk grading system. The system should define the risk profile of borrowers to ensure that account management, structure and pricing are commensurate with the risk involved. Risk grading is a key measurement of a Banks asset quality, and as such, it is essential that grading is a robust process. All facilities should be assigned a risk grade. Where deterioration in risk is noted, the Risk Grade assigned to a borrower and its facilities should be immediately changed. Borrower Risk Grades should be clearly stated on Credit Applications. The following Risk Grade Matrix is provided as an example. The more conservative risk grade (higher) should be applied if there is a difference between the personal judgment and the Risk Grade Scorecard results. It is recognized that the banks may have more or less Risk Grades, however, monitoring standards and account management must be appropriate given the assigned Risk Grade:
Risk Rating Grade Definition:Superior Low Risk (Grade 1) Facilities are fully secured by cash deposits, government bonds or a counter guarantee from a top tier international bank. All security documentation should be in place. Good Satisfactory Risk (Grade2) The repayment capacity of the borrower is strong. The borrower should have excellent liquidity and low leverage. The company should demonstrate consistently strong earnings and cash flow and
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have an unblemished track record. All security documentation should be in place. Aggregate Score of 95 or greater based on the Risk Grade Scorecard. Acceptable Fair Risk (Grade3) Adequate financial condition though may not be able to sustain any major or continued setbacks. These borrowers are not as strong as Grade 2 borrowers, but should still demonstrate consistent earnings, cash flow and have a good track record. A borrower should not be graded better than 3 if realistic audited financial statements are not received. These assets would normally be secured by acceptable collateral (1st charge over stocks / debtors / equipment / property). Borrowers should have adequate liquidity, cash flow and earnings. An Aggregate Score of 75-94 based on the Risk Grade Scorecard.
Marginal - Watch list (Grade 4) Grade 4 assets warrant greater attention due to conditions affecting the borrower, the industry or the economic environment. These borrowers have an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and/or inconsistent earnings. Facilities should be downgraded to 4 if the borrower incurs a loss, loan payments routinely fall past due, account conduct is poor, or other untoward factors are present. An Aggregate Score of 65-74 based on the Risk Grade Scorecard.
Special Mention (Grade 5) Grade 5 assets have potential weaknesses that deserve managements close attention. If left uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower. Facilities should be downgraded to 5 if sustained deterioration in financial condition is noted (consecutive losses, negative net worth, excessive leverage), if loan payments remain past due for 30-60 days, or if a significant petition or claim is lodged against the borrower. Full repayment of facilities is
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still expected and interest can still be taken into profits. An Aggregate Score of 55-64 based on the Risk Grade Scorecard. Substandard (Grade 6) financial condition is weak and capacity or inclination to repay is in doubt. These weaknesses jeopardize the full settlement of loans. Loans should be downgraded to 6 if loan payments remain past due for 60-90 days, if the customer intends to create a lender group for debt restructuring purposes, the operation has ceased trading or any indication suggesting the winding up or closure of the borrower is discovered. Not yet considered non-performing as the correction of the deficiencies may result in an improved condition, and interest can still be taken into profits. An Aggregate Score of 45-54 based on the Risk Grade Scorecard.
Doubtful and Bad (non-performing) Grade 7 full repayment of principal and interest is unlikely and the possibility of loss is extremely high. However, due to specifically identifiable pending factors, such as litigation, liquidation procedures or capital injection, the asset is not yet classified as Loss. Assets should be downgraded to 7 if loan payments remain past due in excess of 90 days, and interest income should be taken into suspense (non-accrual). Loan loss provisions must be raised against the estimated unrealizable amount of all facilities. The adequacy of provisions must be reviewed at least quarterly on all non-performing loans, and the bank should pursue legal options to enforce security to obtain repayment or negotiate an appropriate loan rescheduling. In all cases, the requirements of Bangladesh Bank in CIB reporting, loan rescheduling and provisioning must be followed. An Aggregate Score of 35-44 based on the Risk Grade Scorecard.
Loss (non-performing) Grade 8 Assets graded 8 are long outstanding with no progress in obtaining repayment (in excess of 180 days past due) or in the late stages of wind up/liquidation. The prospect of recovery is poor and legal
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options have been pursued. The proceeds expected from the liquidation or realization of security may be awaited. The continuance of the loan as a bankable asset is not warranted, and the anticipated loss should have been provided for. This classification reflects that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future. Bangladesh Bank guidelines for timely write off of bad loans must be adhered to. An Aggregate Score of 35 or less based on the Risk Grade Scorecard. At least top twenty-five clients/obligors of the Bank may preferably be rated by an outside credit rating agency. The Early Alert Process should be completed in a timely manner by the RM and forwarded to CRM for approval to affect any downgrade. After approval, the report should be forwarded to Credit Administration, who is responsible to ensure the correct facility/borrower Risk Grades are updated on the system. The downgrading of an account should be done immediately when adverse information is noted, and should not be postponed until the annual review process
4.1.3 Approval Authority

The authority to sanction/approve loans must be clearly delegated to senior credit executives by the Managing Director/CEO & Board based on the executives knowledge and experience. Approval authority should be delegated to individual executives and not to committees to ensure accountability in the approval process. The following guidelines should apply in the approval/sanctioning of loans:
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Credit approval authority must be delegated in writing from the MD/CEO & Board (as appropriate), acknowledged by recipients, and records of all delegation retained in CRM.
Delegated approval authorities must be reviewed annually by MD/CEO/Board. The credit approval function should be separate from the marketing/relationship management (RM) function. The role of Credit Committee may be restricted to only review of proposals i.e. recommendations or review of banks loan portfolios. Approvals must be evidenced in writing, or by electronic signature. Approval records must be kept on file with the Credit Applications. All credit risks must be authorized by executives within the authority limit delegated to them by the MD/CEO. The pooling or combining of authority limits should not be permitted.
Credit approval should be centralized within the CRM function. Regional credit centers may be established, however, all large loans must be approved by the Head of Credit and Risk Management or Managing Director/CEO/Board or delegated Head Office credit executive.
The aggregate exposure to any borrower or borrowing group must be used to determine the approval authority required. Any credit proposal that does not comply with Lending Guidelines, regardless of amount, should be referred to Head Office for Approval MD/Head of Credit Risk Management must approve and monitor any cross border exposure risk. Any breaches of lending authority should be reported to MD/CEO, Head of Internal Control, and Head of CRM. It is essential that executives charged with approving loans have the relevant training and experience to carry out their responsibilities effectively.
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As a minimum, approving executives should have: At least 5 years experience working in corporate/commercial Training and experience in financial statement, cash flow and A thorough working knowledge of Accounting. A good understanding of the local industry/market dynamics. Successfully completed an assessment test demonstrating
banking as a relationship manager or account executive. risk analysis.
adequate knowledge of the following areas: Introduction of accrual accounting. Industry / Business Risk Analysis Borrowing Causes Financial reporting and full disclosure Financial Statement Analysis The Asset Conversion/Trade Cycle Cash Flow Analysis Projections Loan Structure and Documentation Loan Management.
A monthly summary of all new facilities approved, renewed, enhanced, and a list of proposals declined stating reasons thereof should be reported by CRM to the CEO/MD.
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4.1.4 Segregation of Duties

Banks should aim to segregate the following lending functions: Credit Approval/Risk Management Relationship Management/Marketing Credit Administration
The purpose of the segregation is to improve the knowledge levels and expertise in each department, to impose controls over the disbursement of authorized loan facilities and obtain an objective and independent judgment of credit proposals.
4.1.5 Internal Audit

Banks should have a segregated internal audit/control department charged with conducting audits of all departments. Audits should be carried out annually, and should ensure compliance with regulatory guidelines, internal procedures, Lending Guidelines and Bangladesh Bank requirements.
4.2 Preferred Organizational Structure & Responsibility

The appropriate organizational structure must be in place to support the adoption of the policies detailed in Section 1 of these guidelines. The key feature is the segregation of the Marketing/Relationship Management function from Approval / Risk Management / Administration functions. Credit approval should be centralized within the CRM function. Regional credit centers may be established, however, all applications must be approved by the Head of Credit and Risk Management or Managing Director /CEO /Board or delegated Head Office credit executive.
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Other Direct Reports (Internal Audit, etc.) Managing CEO Director /
4.2.1 Preferred Organizational Structure Reports Other Direct

(Internal Audit, etc.) The following chart represents the preferred management structure: Managing Director Managing Director/ CEO CEO Other Direct Reports (Internal Audit, etc.) Head of Credit Risk Management (CRM Head of Corporate / Commercial Banking Managing CEO Other Direct Reports (Internal Audit, etc.) Managing CEO Other Direct Reports Business Development (Internal Audit, etc.) Managing CEO Other Direct Reports (Internal Audit, etc.) Managing CEO Director / Director / Director / Director / /
Credit Administration (May report separately To MD/CEO) Credit Approval (Includes regional credit Centers if applicable) Monitoring / Recovery (includes recovery centres if applicable) Monitoring/Recovery (Includes regional recovery centers if applicable) regional
Relationship Management / Marketing (RM) Business Development
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4.2.2 Key Responsibilities

The key responsibilities of the above functions are as follows.
Credit Risk Management (CRM)

Oversight of the banks credit policies, procedures and controls relating to all credit risks arising from corporate/commercial/institutional banking, personal banking, & treasury operations. Oversight of the banks asset quality. Directly manage all Substandard, Doubtful & Bad and Loss accounts to maximize recovery and ensure that appropriate and timely loan loss provisions have been made. To approve (or decline), within delegated authority, Credit Applications recommended by RM. Where aggregate borrower exposure is in excess of approval limits, to provide recommendation to MD/CEO for approval. To provide advice/assistance regarding all credit matters to line management/ RMs. To ensure that lending executives have adequate experience and/or training in order to carry out job duties effectively.
Credit Administration:
To ensure that all security documentation complies with the terms of To monitor insurance coverage to ensure appropriate coverage is in
approval and is enforceable.
place over assets pledged as collateral, and is properly assigned to the bank.
To control loan disbursements only after all terms and conditions of To maintain control over all security documentation.
approval have been met, and all security documentation is in place.
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To monitor borrowers compliance with covenants and agreed terms
and conditions, and general monitoring of account conduct/performance.
Relationship Management/Marketing (RM)

To act as the primary bank contact with borrowers. To maintain thorough knowledge of borrowers business and industry through regular contact, factory/warehouse inspections, etc. RMs should proactively monitor the financial performance and account conduct of borrowers. To be responsible for the timely and accurate submission of Credit Applications for new proposals and annual reviews, taking into account the credit assessment requirements outlined in Section 4. 1.2.1 of these guidelines. To highlight any deterioration in borrowers financial standing and amend the borrowers Risk Grade in a timely manner. Changes in Risk Grades should be advised to and approved by CRM. To seek assistance/advice at the earliest from CRM regarding the structuring of facilities, potential deterioration in accounts or for any credit related issues.
Internal Audit/Control
Conducts independent inspections annually to ensure compliance with Lending Guidelines, operating procedures, bank policies and Bangladesh Bank directives. Reports directly to MD/CEO or Audit committee of the Board.
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4.3 PROCEDURAL GUIDELINES

This section outlines of the main procedures that are needed to ensure compliance with the policies contained in Section 1.0 of these guidelines.
4.3.1 Approval Process

The approval process must reinforce the segregation of Relationship Management/ Marketing from the approving authority. The responsibility for preparing the Credit Application should rest with the RM within the corporate/commercial banking department. Credit Applications should be recommended for approval by the RM team and forwarded to the approval team within CRM and approved by individual executives. Banks may wish to establish various thresholds, above which, the recommendation of the Head of Corporate/Commercial Banking is required prior to onward recommendation to CRM for approval. In addition, banks may wish to establish regional credit centers within the approval team to handle routine approvals. Executives in head office CRM should approve all large loans. The recommending or approving executives should take responsibility for and be held accountable for their recommendations or approval. Delegation of approval limits should be such that all proposals where the facilities are up to 15% of the banks capital should be approved at the CRM level, facilities up to 25% of capital should be approved by CEO/MD, with proposals in excess of 25% of capital to be approved by the EC/Board only after recommendation of CRM, Corporate Banking and MD/CEO.
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The following diagram illustrates the preferred approval process: Credit Application Recommended by RM/ Marketing 1 2 Zonal Credit Officer (ZCO) 3 4
Head of Credit & Head of Corporate Banking (HOBC) 5 7 7 Executive Committee/ Board 1. Application forwarded to Zonal Office for approved/decline 2. Advise the decision as per delegated authority (approved /decline) to recommending branches. A monthly summary of ZCO approvals should be sent to HOC and HOCB to report the previous months approvals sanctioned at the Zonal Offices. The HOC should review 10% of ZCO approvals to ensure adherence to Lending Guidelines and Bank policies. 3. ZCO supports & forwarded to Head of Corporate Banking (HOCB) or delegate for endorsement, and Head of Credit (HOC) for approval or onward recommendation. 4. HOC advises the decision as per delegated authority to ZCO 5. HOC & HOCB supports & forwarded to Managing Director 6. Managing Director advises the decision as per delegated authority to HOC & HOCB. 7. Managing Director presents the proposal to EC/Board 8. EC/Board advises the decision to HOC & HOCB 6
Managing Director
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** Regardless of the delegated authority HOC to advise the decision (approval/decline) to marketing department through ZCO Recommended Delegated Approval Authority Levels HOC/CRM Executives Managing Director/CEO EC/Board all exceed Appeal Process Any declined credit may be re-presented to the next higher authority for reassessment/approval. However, there should be no appeal process beyond the Managing Director. Up to 15% of Capital Up to 25% of Capital 25% of Capital
4.3.2 Credit Administration

The Credit Administration function is critical in ensuring that proper documentation and approvals are in place prior to the disbursement of loan facilities. For this reason, it is essential that the functions of Credit Administration be strictly segregated from Relationship Management/Marketing in order to avoid the possibility of controls being compromised or issues not being highlighted at the appropriate level. Credit Administration procedures should be in place to ensure the following:
Disbursement: Security documents are prepared in accordance with approval terms and are legally enforceable. Standard loan facility documentation that has been reviewed by legal counsel should be used in all cases. Exceptions should be referred to legal counsel for advice based on authorization from an appropriate executive in CRM.
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Disbursements under loan facilities are only be made when all security documentation is in place. CIB report should reflect/include the name of all the lenders with facility, limit & outstanding. All formalities regarding large loans & loans to Directors should be guided by Bangladesh Bank circulars & related section of Banking Companies Act. All Credit Approval terms have been met.
4.3.2.2 Custodial Duties:

Loan disbursements and the preparation and storage of security documents should be centralized in the regional credit centers. Appropriate insurance coverage is maintained (and renewed on a timely basis) on assets pledged as collateral. Security documentation is held under strict control, preferably in locked fireproof storage.
4.3.2.3 Compliance Requirements:

All required Bangladesh Bank returns are submitted in the correct format in a timely manner. Bangladesh Bank circulars/regulations are maintained centrally, and advised to all relevant departments to ensure compliance. All third party service providers (valuers, lawyers, insurers, CPAs etc.) are approved and performance reviewed on an annual basis. Banks are referred to Bangladesh Bank circular outlining approved external audit firms that are acceptable.
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4.3.3 Credit Monitoring

To minimize credit losses, monitoring procedures and systems should be in place that provides an early indication of the deteriorating financial health of a borrower. At a minimum, systems should be in place to report the following exceptions to relevant executives in CRM and RM team: Past due principal or interest payments, past due trade bills, account excesses, and breach of loan covenants; Loan terms and conditions are monitored, financial statements are received on a regular basis, and any covenant breaches or exceptions are referred to CRM and the RM team for timely follow-up. Timely corrective action is taken to address findings of any internal, external or regulator inspection/audit. All borrower relationships/loan facilities are reviewed and approved through the submission of a Credit Application at least annually. Computer systems must be able to produce the above information for central/head office as well as local review. Where automated systems are not available, a manual process should have the capability to produce accurate exception reports. Exceptions should be followed up on and corrective action taken in a timely manner before the account deteriorates further. Refer to the Early Alert Process (section4.3.3.1).
4.3.3.1 Early Alert process:

An Early Alert Account is one that has risks or potential weaknesses of a material nature requiring monitoring, supervision, or close attention by management. If these weaknesses are left uncorrected, they may result in deterioration of the repayment prospects for the asset or in the Banks credit
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position at some future date with a likely prospect of being downgraded to CG 5 or worse (Impaired status), within the next twelve months. Early identification, prompt reporting and proactive management of Early Alert Accounts are prime credit responsibilities of all Relationship Managers and must be undertaken on a continuous basis. An Early Alert report should be completed by the RM and sent to the approving authority in CRM for any account that is showing signs of deterioration within seven days from the identification of weaknesses. The Risk Grade should be updated as soon as possible and no delay should be taken in referring problem accounts to the CRM department for assistance in recovery. Despite a prudent credit approval process, loans may still become troubled. Therefore, it is essential that early identification and prompt reporting of deteriorating credit signs be done to ensure swift action to protect the Banks interest. The symptoms of early alert are by no means exhaustive and hence, if there are other concerns, such as a breach of loan covenants or adverse market rumors that warrant additional caution, an Early Alert report should be raised. Moreover, regular contact with customers will enhance the likelihood of developing strategies mutually acceptable to both the customer and the Bank. Representation from the Bank in such discussions should include the local legal adviser when appropriate. An account may be reclassified as a Regular Account from Early Alert Account status when the symptom, or symptoms, causing the Early Alert classification have been regularized or no longer exist. The concurrence of the CRM approval authority is required for conversion from Early Alert Account status to Regular Account status.
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4.3.4 Credit Recovery

The Recovery Unit (RU) of CRM should directly manage accounts with sustained deterioration (a Risk Rating of Sub Standard (6) or worse). Banks may wish to transfer EXIT accounts graded 4-5 to the RU for efficient exit based on recommendation of CRM and Corporate Banking. Whenever an account is handed over from Relationship Management to RU, a Handover /Downgrade Checklist should be completed.
The RUs primary functions are:

Determine Account Action Plan/Recovery Strategy Pursue all options to maximize recovery, including placing customers into receivership or liquidation as appropriate. Ensure adequate and timely loan loss provisions are made based on actual and expected losses. Regular review of grade 6 or worse accounts. The management of problem loans (NPLs) must be a dynamic process, and the associated strategy together with the adequacy of provisions must be regularly reviewed. A process should be established to share the lessons learned from the experience of credit losses in order to update the lending guidelines.
4.3.4.1 NPL Account Management

All NPLs should be assigned to an Account Manager within the RU, who is responsible for coordinating and administering the action plan/recovery of the account, and should serve as the primary customer contact after the account is downgraded to substandard. Whilst some assistance from Corporate Banking/Relationship Management may be sought, it is essential that the
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autonomy of the RU be maintained to ensure appropriate recovery strategies are implemented.
4.3.4.2 Account Transfer Procedures

Within 7 days of an account being downgraded to substandard (grade 6), a Request for Action (RFA) and a handover /downgrade checklist should be completed by the RM and forwarded to RU for acknowledgment. The account should be assigned to an account manager within the RU, who should review all documentation, meet the customer, and prepare a Classified Loan Review Report (CLR) within 15 days of the transfer. The CLR should be approved by the Head of Credit, and copied to the Head of Corporate Banking and to the Branch/office where the loan was originally sanctioned. This initial CLR should highlight any documentation issues, loan structuring weaknesses, proposed workout strategy, and should seek approval for any loan loss provisions that are necessary. Recovery Units should ensure that the following is carried out when an account is classified as Sub Standard or worse: Facilities are withdrawn or repayment is demanded as appropriate. Any drawings or advances should be restricted, and only approved after careful scrutiny and approval from appropriate executives within CRM. CIB reporting is updated according to Bangladesh Bank guidelines and the borrowers Risk Grade is changed as appropriate. Loan loss provisions are taken based on Force Sale Value (FSV). Loans are only rescheduled in conjunction with the Large Loan Rescheduling guidelines of Bangladesh Bank. Any rescheduling should be based on projected future cash flows, and should be strictly monitored. Prompt legal action is taken if the borrower is uncooperative.
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4.3.4.3
Non
Performing
Loan
(NPL)
Monitoring
On a quarterly basis, a Classified Loan Review (CLR) should be prepared by the RU Account Manager to update the status of the action/recovery plan, review and assess the adequacy of provisions, and modify the banks strategy as appropriate. The Head of Credit sho uld approve the CLR for NPLs up to 15% of the banks capital, with MD/CEO approval needed for NPLs in excess of 15%. The CLRs for NPLs above 25% of capital should be approved by the MD/CEO, with a copy received by the Board.
4.3.4.4 NPL provisioning and Write Off

The guidelines established by Bangladesh Bank for CIB reporting, provisioning and write off of bad and doubtful debts, and suspension of interest should be followed in all cases. These requirements are the minimum, and Banks are encouraged to adopt more stringent provisioning/write off policies. Regardless of the length of time a loan is past due, provisions should be raised against the actual and expected losses at the time they are estimated. The approval to take provisions, write offs, or release of provisions/upgrade of an account should be restricted to the Head of Credit or MD/CEO based on recommendation from the Recovery Unit. The Request for Action (RFA) or CLR reporting format should be used to recommend provisions, write-offs or release/upgrades. The RU Account Manager should determine the Force Sale Value (FSV) for accounts grade 6 or worse. Force Sale Value is generally the amount that is expected to be realized through the liquidation of collateral held as security or through the available operating cash flows of the business, net of any realization costs. Any shortfall of the Force Sale Value compared to total loan outstandings should be fully provided for once an account is downgraded to
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grade 7. Where the customer in not cooperative, no value should be assigned to the operating cash flow in determining Force Sale Value. Force Sale Value and provisioning levels should be updated as and when new information is obtained, but as a minimum, on a quarterly basis in the CLR. Following formula is to be applied in determining the required amount of provision: 1. 2. Gross Outstanding Less: (i) Cash margin held or Fixed Deposits /SP under lien. (ii) Interest in Suspense Account 3. Loan Value XXX (For which provision is to be created before considering estimated realizable value of other security/collateral held) 4. (See Note below) Net Loan Value XXX Less: Estimated salvage value of security/collateral held (XXX) (XXX) (XXX) XXX
Note: The amount of required provision may, in some circumstances, be reduced by an estimated realizable forced sale value of (i.e. Salvage Value) of' any tangible collateral held (viz: mortgage of property, pledged goods / or hypothecated goods repossessed by the bank, pledged readily marketable securities etc). Hence, in these situations, it will be advisable to evaluate such collateral, estimate the most realistic sale value under duress and net-off the value against the outstanding before determining the Net Loan value for provision purposes. Conservative approach should be taken to arrive at provision requirement and Bangladesh Bank guideline to be properly followed.
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4.3.4.5 Incentive Program:

Banks may wish to introduce incentive programs to encourage Recovery Unit Account Managers to bring down the Non Performing Loans (NPLs). The table below shows an indicative incentive plan for RU account managers: Recovery as a % of Principal Recommended Incentive as % of plus interest Net recovery amount If CG 7-8 1.00% 0.50% 0.25% if written off 2.00% 1.00% 0.50%
76% to 100% 51% t0 75% 20% to 50%
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In the previous sections of this report I have critically analyzed Bank Asias existing credit risk management system as well as Bangladesh Banks best practices guidelines for managing credit risk. Comparing Bank Asias current credit risk management system with the Bangladesh Bank guidelines we can evaluate Bank Asia Limiteds existing practices in banking industry -
5.1 Credit Policies/ Lending Guideline:

In the above analysis we have seen that Bank Asia Limited possesses a newly introduced written credit policy, which was prepared in accordance with Bangladesh Bank Guidelines. Corporate Office sent CRM manual to every Branch Managers, Zonal Heads and all Departmental Heads with a circular on 8th July 2004.
The purpose of this document was to provide guidelines to improve the credit risk management and for the credit officers to take quick decision whether to accept or reject a project. The lending guideline includes Industry or business segment focus. Types of loan facilities Details of single borrower/ group limit Lending caps Discouraged business type Loan facility parameters Cross Border risk
As there was no written guideline before therefore Bank Asia has just started implementing the guidelines.
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5.2 Credit Assessment & Risk Grading:

Proper credit processing and risk grading system is present here. Adoption of credit risk grading system is required to ensure account management, structure and pricing to commensurate with the risk involved. Still this grading system does not match completely i.e. lower interest rate for lower risk and vice versa. Therefore pricing should commensurate while processing credit.
5.3 Approval Authority:

In Bangladesh Banks guideline it is written, Approval authority should be delegated to individual executives and not to committees to ensure accountability in approval process. But we see, in Bank Asia Limited, that every credit goes to the Board via credit committee. As a result, wastage of time occurs and no one is held accountable for a bad loan.
5.4 Segregation of Duties:

According to Bangladesh Bank Guideline Banks should aim to segregate the following lending functions to improve the knowledge levels and expertise in each department: Credit Approval/ Risk Management Relationship Management/ Marketing Credit Administration
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But in Bank Asia there is no such departmentalization or segregation of duties. But it has just started its delegation of duties like formation of Credit Administration Division in the Corporate Office. In small branches of Bank Asia only single loan officer do all the tasks relating credit like loan marketing, risk assessing and credit administration.
5.5 Internal Audit:

Bank Asia Limited has a segregated internal audit/ control department charged with conducting audit of all departments as suggested by Bangladesh Bank guideline.
5.6 Preferred Organizational Structure:

Bank Asia is yet to follow the preferred management structure as suggested by Bangladesh Bank guideline. The key feature in the preferred management structure is the segregation of Marketing/ Relationship function from approval/Risk management/ Administration function.
5.7 Approval process:

According to Bangladesh Bank best practices guideline, the recommending or approving executives should take responsibility for and be held accountable for their recommendations and approval. The recommended delegated approval authority levels are as follows Head of Credit/CRM Executives Managing Director/ CEO EC/ Board up to 15% of capital Up to 25% of capital All exceed 25% of capital
But in Bank Asia we see that every credit proposal goes to Executive committee i.e. board.
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5.8 Credit Administration:

Bangladesh Bank guidelines suggest that Credit administration be strictly segregated from relationship management/ marketing. As a result the possibility of controls being compromised or issues not being highlighted at the appropriate level can be avoided. The credit administration has the following functions Disbursement Custodial duties Compliance requirement
In Bank Asia credit officers under supervision of Branch Credit In-charge or Branch Manager carry out all the three functions of credit administration. Therefore Credit Marketing and Administration is yet to be segregated.
5.9 Credit Monitoring:

To minimize credit losses, monitoring procedures and systems should be in place that provides an early indication of the deteriorating financial health of a borrower. Early identification, prompt reporting and proactive management of Early Alert Accounts are prime credit responsibilities of all relationship Managers. An early Alert Account is one that has risks or potential weakness of a material nature requiring monitoring, supervision or close attention by management. In Bank Asia credit monitoring is also done by Credit-In-Charge or branch managers. As they be busy with their day-today activities Early Alert Accounts do not get that much attention as needed.
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5.10 Credit Recovery:

According to Bangladesh Bank guidelines the recovery unit (RU) of CRM should directly manage accounts with sustained deterioration. On a quarterly basis, a Classified Loan Review (CLR) should be prepared by the RU Account Manager to update the action/ recovery plan, review and assess the adequacy of provisions, and modify as appropriate. In Bank Asia the non-performing loan is very low (50,43,00,000 till December 31, 2006) and the recovery unit is yet to be formed. Even for personal loan program, Personal Banking Division also lacks a recovery unit.
5.11 Account Transfer Procedures:

Bangladesh Bank guidelines suggested that within 7 days of an account being downgraded to substandard, a Request for Action (RFA) and a handover/downgrade checklist should be completed by RM and forwarded to RU for acknowledgement. An account manager is to be assigned to review all documentation, meet the customer and prepare a Classified Loan Review (CLR) report within 15 days of transfer. This account transfer is yet to be followed as there is no official Recovery Unit (RU) for this purpose. But at present branch officials perform these activities themselves. Besides according to Bangladesh Bank guidelines, after classifying as substandard or worse actions like withdrawal/restriction of facilities, updating CIB report, changing risk grade, rescheduling of loans or even prompt actions are taken if the borrower is not cooperative.
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5.12 Incentive Program:

The Bangladesh Bank guidelines also encourage Banks to introduce incentive programs for the Recovery Unit Account Managers to bring down the Non Performing Loans (NPLs). Bank Asia Limited currently has no such incentive program as it does not have such a Recovery Unit.
5.13
Non-Performing
Loan
Account
Management:
This also does not comply with Bangladesh Bank Guidelines as the officials for recovery unit is yet to be prepared. The branch officials therefore consulting with higher management initiate coordinating and administering the action plan/recovery of the account. The branch officials/credit officer contacts with the client, tries to negotiate to recover the loan by reducing the interest rate or even waiving the interest to recover the loan capital and finally finding no other alternative goes for legal actions.
5.14 Custodial Duties:

Bangladesh Bank advises disbursement of loan and security documents to be kept centrally in regionally credit centers, maintain insurance coverage and security documents to keep in locked fireproof storage. In Bank Asia security documents are kept in locked in the vault in their own branches and proper insurance coverage is maintained.
5.15 Compliance Requirement:
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Bangladesh Bank suggests submitting all required documents in correct format, maintain circulars, review performance of third party service providers (valuers, lawers, insurers,etc.). Bank Asia sends documents as required by Bangladesh Bank; keep circulars provided by Bangladesh Bank but third party providers are not reviewed as advised.
5.16 Analysis of Other Parameters:

According to Bangladesh Bank guidelines before sanctioning any loan some other important parameters like borrower analysis, industry analysis, supplier/buyer analysis, historical financial analysis, projected parameters, account conduct, security, loan structure etc. have to be done extensively. We have found all of these parameters presence in Bank Asia Limiteds loan proposal format and also the existence in reality.
5.17 CIB Checklist:

According to the Bangladesh Bank guideline, bank has to send every borrowers CIB undertaking after every two months, whoever the borrower is, either a person or an organizational entity. Bank Asia Ltd. does not have any alarming system that CIB of which customer is expired today or going to be expired within a few days. Employees have to keep a closer look everyday on this matter and have to check regularly these huge numbers of accounts. There is a chance to miss some of this inquiry anytime by human mistake and may forget to take CIB for months. In some cases changes in the company directorship makes clash in taking the regular CIB for that company. Most often the refusal comes from the
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Bangladesh Bank for not matching the spelling of the name of the borrower person or the directors of the company. If there is an automated system in the Bank Asia connected with the Bangladesh Bank and a proper alarming system, then it would be easier for the employees to be regularly updated.
5.18 Acceptance in risk rating:

According to Bangladesh Bank risk rating grade definition, a bank can provide the credit till the grade 6 what is named as substandard. Bank Asia is a risk averse bank in this respect and prefers to be in between the 1st two grades and do not like to be bellow good.
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Conclusion
A banker cannot sleep well with bad debts in his portfolio. The failure of commercial banks occurs mainly due to bad loans, which occurs due to inefficient management of the loans and advances portfolio. Therefore any banks must be extremely cautious about its lending portfolio and credit policy. So far Bank Asia Limited has been able to manage its credit portfolio skillfully and kept the classified loan at a very lower rate ---thanks goes to the standard and stringent credit appraisal policy and practices of the bank. But all things around us are changing at an accelerating rate. Today is not like yesterday and tomorrow will be different from today. Given the fast changing, dynamic global economy and the increasing pressure of globalization, liberalization, consolidation and disintermediation, it is essential that Bank Asia Limited has a robust credit risk management policies and procedures that are sensitive to these changes.
Bank Asia Limited is one of the few local banks that have been able to keep non-performing assets below 5% -mainly due to the standard and stringent credit appraisal policy and practices of the bank. The bank has so far been able to make efficient use of the deposit and has the classified loan under control. Loan mix reveals the diversification sought by the bank in its loan placements. While keeping on expanding its reach, Bank Asia aims at maintaining the high quality of services it has already achieved, at the same time being in a sound financial health. The thing is, it is not only a matter of Bank Asia alone, and it is also connected with Bangladesh Bank as well. The technology that Bangladesh Bank is using is too old. Where every bank is going with Microsoft office with the new
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versions, Bangladesh Bank is still running with FoxPro and banks has to work twice for this; one for their updated database and another for FoxPro.
Bank Asia has set its mission high enough: to provide high quality service to its customers, to participate in the growth and expansion of our national economy, to set high standards of integrity, to bring total satisfaction to its clients, shareholders and employees and to become the most sought after bank in the country, rendering technology driven innovative services by the dedicated team of professionals. The management of the bank is working continuously to make their mission a realizable one.
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1.

1 Origin of the Report

1.2 Background of the Report

Internal Control & Compliance Risks; and Money Laundering Risks.

1.3 Objectives of the Report

To fulfill the requirement of the Project Report under BBA program.

To get an overall idea about the performance of Bank Asia Ltd.

1.4 Scope of the Report

1.5 Sources of Information

1.6 Methodology of the Report

1.7 Limitation of the Report

1.8 Report Organization

2.1 Background of Bank Asia Limited

2.2 Capital Base

2.3 Mission Statement

2.4 Corporate Objectives

2.5 Values that are considered as the guiding factors

2.8 Correspondent Relationship

2.9 Human Resources Management of BAL

2.10 SWOT Analysis of Bank Asia Ltd.

State of the art technology

Human Resource Expertise

First-Rate working environment

2.11 Product and Services

Monthly Savings Scheme (DG+): The prime objective of this scheme is to

The deposit doubles in 06 years and triples in 10 years.

Bonus Savings Scheme: A savings account with a minimum balance of TK.

Credit Loan: If anyone is in possession of BSP (Bangladesh Sanchaya Patra),

Rural Development Scheme: Rural Development Scheme has been evolved

2.11.1 Depository Product

2.11.3 Loan Product

2.11.4 Personal Banking Products

2.12 Financial Performance of BAL

2.12.4 Loan and Advances

2.12.5 Treasury Operations

2.12.6 BANK ASIA AT A GLANCE: 1999, 2009 & 2010

1999* 800.00 218.00 213.14 632.01 341.91 19.52 (4.86) 557.95

* In 1999, there were 35 (thirty Five) days operating days.

3.2 Principles of Sound Lending

b) Purpose: The purpose of loans helps the banker to determine his

c) Liquidity: Liquidity means availability or readiness of banks funds

d) Security: The security offered by a borrower for an advance is

e) Profitability: Banks obtain funds from shareholders and if

f) Spread/Dispersal/Diversification: The advances should

g) National Interest/Social benefit: Bank has a significant

3.3 Modern Concept of Good Lending

3.4 Credit Policy of Bank Asia Limited

3.5 Global Credit Portfolio of BAL

3.6 Types of Credit

3.6.1 Classification on the basis of time

Nonfunded * Letter of Credit * Bank Guarantee

Consumer Credit Scheme:

Loan against Trust Receipts (LATR):

Shipping Guarantees: Shipping guarantees are often issued within arranged

3.7 Credit Approving Authority

Branch Credit Section

Head Office Credit Committee

3.8 Functions of Credit Department

3.9 Delegation of Lending Authority:

3.10 Documentation of the Loan:

company Borrower) with Certificate of Incorporation

3.11 Classification of Loan on the Basis of Security

3.12 Objective Basis of Classification