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PROFITABILITY ANALYSIS OF MTB MTB is the most successful bank and jointly stood first in he CAMEL rating with

HSBC published. MTB earned satisfactory return from the inception. The Return on Equity (ROE) model is an effective model to analyze the banks overall performance. In analyzing the profitability of MTB, last three years data.

Table Profitability Ratios of MTB for last three years Types

Year
2009 2010 30.8% 2011 40.2% Net Profit after Tax Equity 12.6%

ROE

ROA

Net Profit after Tax Asset

1.82%

2.36%

2.81%

Nt Margin

Net Income Total Revenue

15% 12.07%

20% 11.82%

24% 11.80%

Asset Utilization Ratio Equity Multiplier Net Margin Non margin Operating Efficiency Ratio Earning Employee Per interest Interest

Total Revenue Total Asset Asset Equity Net Interest earned


Total Asset

6.94X

13.02X

14.32X

3.55%

3.70%

3.86%

Non Interest revenue- Non interest Expense Total Asset

3.1%

1.3%

1.9%

Total Operating Expense Total Operating Income Total Net Income No. of Employee

90.1%

34.3%

29.2%

0.029 crore

0.046 crore

0.070 crore

Return on Equity Return on equity measures the return that the businesses are earning on the investment of the shareholders or on equity capital. MTB has shown a significant ROE over the years. In the above table the ROE of MTB are calculated. The ROE for the last three years are 12.6%, 30.8%, and 40.2%.

Return on Asset Return on Asset is the measure of banks overall operating efficiency. It is calculated by dividing profit after tax by total asset. This ratio is basically indicates how capable the management of the bank has been converting the institutions assets into net earnings. The return on assets for the year 2009, 2010, 2011 are 1.82%, 2.36% and 2.81%. The ability of the managements are improving day by day.

Asset Utilization Ratio It measures the asset management efficiency of the bank. It implies the managements ability of allocating the assets to the highest yielding loans and investments while avoiding excessive risks. The AUR of the Mutual Trust Bank for the last three years are 12.07%, 11.82%, and 11.80% respectively. It is obvious that the asset management efficiency is lessening than past.

Net Margin The ratio of net income to total revenue is called the net profit margin. it is subject to some degree of management control and direction. It reminds that management can increase their earnings and their returns by successfully controlling expenses and maximizing the revenues. The net margin of the

MTBshows 20% growth last year. The net margin for the year of 2009, 2010, 2011 is 15%, 20%, and 24%.

Net Interest Margin Net interest margin measures how large a spread between interest revenue and interest costs management has been able to achieve by close control over the banks earning assets and the pursuit of the cheapest sources of funding. The NIM was 3.55%, 3.7% and 3.86% for the year of 2009, 2010, and in 2011.

Non Interest Margin Non interest margin on the other hand measures the amount of non-interest revenues streaming from deposit service charges and other service fees the bank has been able to collect (called fee income) relative to the amount of non-interest costs incurred (salaries, allowances, repair maintenance cost, etc.). The noninterest margin of the MTB is increasing. The margin was 3.1%, 1.3% and 1.9% respectively in the year of 2009, 2010, and 2011. So the bank is earning more than the non-interest expense from the non-interest income.

Equity Multiplier The multiplier is the direct measure of the banks degree of financial leveragehow many dollars of assets must be supported by each dollar of equity capital and how much of the banks resources therefore must rest in debt. Because equity must absorb the losses. So the larger the multiplier, the greater the risk of banks failure. However the larger the multiplier, the greater the banks potential for higher return for its stakeholders. The equity multipliers of the MTB for the last three years are 6.94, 13.02, 14.32 times. The bank is more prone to the risk on the other hand has the potential for returns.

Efficiency Ratio In effort to maximize profitability and the valu of the share holders investment in bank, many banking organizations recognize the need for greater efficiency in their operations. Thus to reduce the operating expense and increase the employee productivity MTB has introduced the most modern automated machinery. The operating efficiency ratio measures what percentage of the operating income is used for paying the operating expenses. If the bank reduces cost and (overhead), increase the productivity, the percentage will be lower. In Mutual Trust Bank Limited, the operating efficiency ratio was 90.1%, 34.3% and 29.2% in the year of 2009, 2010, and 2011. So the MTB cost management strategy is satisfactory. MEASURING RISK OF MTB Risk to banker means the perceived uncertainty connected with some event. Bankers may be most interested in achieving high stock values and high profitability, but none can fail to pay attention to the risks they are accepting as well. The more volatile the economy and the recent problem in the default culture led the banker to focus on the risk arises from taking any decision and how the banking risks can be measures and minimize. In the following section different risks of Mutual Trust Bank Limited are discussed.
Table Risk of MTB

Category Liquidity Risk Credit Risk Interest rate risk

Procedure ST securities Deposit Medium Loans Asset I.S Asset I.S Liabilities 2009 10% 44% 1.28

Year 2010 13% 47% 1.34

2011 14% 46% 1.55

Credit Risk The probability that some of the bank assets, especially its loans, will decline in values and perhaps become worthless is known as credit risks. Because banks hold relatively little owners capital relative to the aggregate of their assets, only a relative small percentage of total loans need to turn bad in order to push any bank to the brink of failure. The credit risk is increasing for MTB Liquidity Risks Liquidity risks is concerned about the danger of not having sufficient cash and borrowing capacity to meet the deposit withdrawals, net loan demand, and other cash needs. It is calculated dividing short-term deposit (govt. securities, prize bond, T-bill) by deposit. Liquidity risk is decreasing as the ratio shows increasing trend over the last three years. The ratios are 10%, 13% and 14% for the year 2009, 2010, and 2011.

Interest Rate Risk Movements in the market interest rate can have potent effects on a banks margin of revenues over operating cost. Rising interest rates can lower a banks margin of profit if the structure of the institutions assets and liabilities is such that interest expense on borrowed money increase more rapidly than interest revenues on loans and security investment. If the bank has less interest sensitive asset than interest sensitive liabilities, during rising interest rate it will suffer a loss. The ratio of interest sensitive assets to interest sensitive liabilities are 1.28, 1.33, and 1.54 in the year of 2009, 2010, and 2011 respectively. So it can be said that MTB in good position in terms of ISA and ISL matching and achieving good return.

Credit Management in MTB


Objective Mutual Trust Bank Limited is a new generation bank, which is committed to provide high quality financial services/products to contribute to GDP through stimulating trade & commerce, accelerating the pace of industrialization and boosting up export by allowing credit facilities. The failure of the commercial bank is mainly occurs due to bad loans, which occurs due to inefficient management of the loan and advance portfolio. 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 is not only constitute 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, supervision and follow-up of the loan and advance.

Portfolio of Credit Loan mix reveals the diversification sought by the MTB in its loan placements. As we know diversification reduces the level of default risk that is associated with large concentration of loans in a single category. The loan mix should be quantified and described in the credit policy.

Mode-wise Credit MTB offered loan in almost all the mode. They are Cash Credit, Overdraft, LIM, LTR, FDBP, lease finance, Payment against Documents, House Building Finance, Loan etc. The credit disbursed in every mode for the last few years are summarized below.
Table Mode wise credit disbursed

Mode SOD Cash Credit Loan (general) HBL LTR PAD CCS Lease Finance Inland Bill Purchase FDBP Others credit

2010 Tk. 108.5 Tk. 138.00 Tk. 48.22 Tk. 31.29 Tk. 71.58 Tk. 37.93 Tk. 18.08 Tk. 26.73 Tk. 10.53 Tk. 167.50 Tk. 1083.95

2011 Tk. 65.62 Tk. 104.06 Tk. 45.6 Tk. 24.84 Tk. 51.96 Tk. 34.52 Tk. 12.07 Tk. 12.13 Tk. 4.78 Tk. 97.25 Tk. 58.53

Liquidity and maturity In Mutual Trust Bank Limited they follow the following guideline while giving loan and advance to the client.

The aggregate of all cash facility will not be more than the 80% of the customers deposit

Long term must not exceed 20% of the total loan portfolio. Facilities is not allowed for a period of not exceeding 5 (Five) years. Credit facilities to any one customer group shall not exceed 15% of the capital fund or TK. 10 crores

The maturity wise grouping of the loan and advance of MTB are summarized in the following table:

Table Maturity wise Credit

Maturity Payable on Demand Maturity < 3 Month Maturity >3Month but< 1year Maturity > 1 year but <5year Maturity > 5 year 2010(TK. In croreu) 131.81 89.58 175.04 80.82 34.86

Year 2011(TK. In crore) 205.94 126.78 269.72 113.03 51.29

Credit standards Types of loan The making of loan and advance is always profitable to the bank. As the bank mobilize savings from the general people in the form of deposit the most important task of it is to disburse the said deposit as loan or advance to the mass people for the development of commercial, industrial, agricultural, who are in need of fund for investment. Like other business firm, the main purpose of the commercial banking is making profit. The profitability of the banks depends on the efficient manner and avenues in which the resources are employed. The Mutual Trust Bank Limited has made so far efficient use of the deposit and has the classified rates under control. The MTB disburse loan in different form. It varies in purpose wise. Mode wise and sector wise. The varieties used by MTB are briefly described below with the common terms and condition and performance in each mode. Credit can be of different types MTB offer loan in the following mode: SOD (against Share, Workorder, Financial Obligation, FDR, DPS, Export) Cash Credit Loan (general) HouseBuilding Finance

Loan Against Trust Receipt Payment against document Consumer Credit Scheme Lease Finance Inland Bill purchase Foreign Documentary Bill Purchase Others. Secured & Unsecured Guide line MTB currently offer both secured and unsecured loan to the clients both individual and corporate to help investment.

MTB does allow maximum 30% of the loan portfolio to corporate or individual customers, which are not secured by collateral and given on the basis of the integrity and financial strength of the client

Collateral Although there are customers having excellent business performance and reputation can get unsecured loan, many business borrowers have to post collateral. The amount of collateral and type depends on the customers performance and familiarity and the proposed businesss acceptability, the size and maturity of the loan. Because of risk factors involved in some types of term credit, term loans are more apt to be secured than are short-term loans. For ensuring the recovery of the loan if the client failed to repay the loan due to the death or disability, strikes, catastrophic fire or flood or even the business failure due to the mismanagement of the business, MTB take collateral security from the client that works as second source of repayments. MTB takes the assets as collateral that does not comply with its policy and Bangladesh banks policy as well. In general they take PSP, MBDS, DPS, FDR, Share, Stock, Land, building, Equipment.

Loan authorities & Approvals The loan policy should establish the lending limit for all loan officers and combination of officers and loan committee. Limit for individual officers are normally predicted on the basis of the previous experiences and length of services as lender. In general like any other bank in MTB secured loans will carry higher limit than the unsecured loans for comparable purpose, seasonal working capital loans, might carry higher limit than term loan. In MTB certain norms are followed:

Individual officers lending authorities are for any one borrower are determined by totaling all of the borrowers existing loan, credit lines, and credit requests under consideration.

Joint authorities are used to approve larger loans than the officers involved is permitted to approve individually although an officer is assigned to monitor the performance and supervision of the loan.

Sanctioning of credit After proper evaluation, the credit officer submit the proposal to the credit incharge for the sanctioning of the credit or send to the Head office credit department for the approval and sanctioning of the credit facilities with signed by all the members of the branch credit committee. Before sanctioning of the credit facilities the authorities must be sure about that the proposal does not dishonor any of the following guidelines which are set by the Board of Directors and the policy Committee of the Mutual Trust Bank Limited.

The proposal submitted contains all the pertinent information relating to the proposed credit facilities and the borrower, duly signed by the members of the branch credit committee and properly recommended, and the proposal is viable and stands all the tests.

The proposal meets all the provisions/ requirements of the Bank Companies Act/ rules of Bangladesh Bank/ other laws. The credit will be sanctioned and distributed according to the terms and conditions of the credit manual and operational manual of the MTB. The terms and conditions of the circulars of the credit division (time to time new norms are set or restructured and informed to the different branch through the memo) and all other relevant circulars must be followed in the time of sanctioning loan and advance to the client. The client must be in the trade area of the branch level of the bank and in no means the credit wont be sanctioned to the client which doesnt fall under the trade area of the bank, if so proper justification should be made and explained. No sanction officer can sanction any credit to that business in which any of his relatives has financial interest. The sanctioning officer must maintain a register of the detail description of the credit facilities sanctioned by him as he will be responsible for recovery and will have to deal in the time of any legal procedure. All the approval of credit facilities must be sanctioned under dual signature and the signatory must have the lending authorities.

Credit Administration Effective Credit Administration can ensure good recovery of loan and advance and good yield. MTB has written policy that clearly states how to deal with documentation, supervision, follow-up and monitoring. Beside this the authorized credit officer has to show his level of managerial capability in efficiently managing the loan and advance. The Credit In-charge along with the branch manger monitor and follow up the loans according the Head Office order uses their discretionary power in the branch level.

Pre-disbursement Compliance When the credit proposal are approved the credit officer must have to be ensured that the disbursement of the credit facilities must comply with the directions written in the credit policy and circular made by time to time along with checking all the following terms and conditions. a) The credit officer must collect the acceptance of the customers of the terms and conditions on the duplicate copy of the sanctioned advice. b) They will thoroughly examine and ensure that the subject credit facility does not contradict to any law, rules and regulation of the country, Bangladesh Bank and other Bank. c) NOC from other bank where the client is enjoying the credit facility and the CIB report. d) Non Encumbrance certificate from the registration department of the Mortgaged property e) Deed of the Mortgage and power of the Attorney to be drafted and executed under the Supervision of the Banks Legal Advisor. f) Lawyers certificate to the effect that all the legal formalities (Equitable/ Registered Mortgaged) has been properly created on the land and building in favor of the bank & bank has acquired the effective title of the property. g) Registered power of attorney has been collected form the borrower (contractor) assigning the work order favoring the MTB and the power of attorney has been registered with the work order given agency and they have agreed that they will issue all the cheques favoring MTB. h) Insurance policies covering risks as per sanctioned terms and conditions and two sets of charged documents must be fill upped by the client. i) The legal documents of the vehicle have been obtained. j) Collection of the satisfaction certificate in respect of all the documents both legal and banking from the lawyer.

k) Entry has been made in the Safe -in

and Safe-out register and the

documents are preserved under joint custody of the two authorized Executives/officers. After being satisfied all the above terms and conditions the credit in-charge will disburse the loan amount to the client. Documentation Standards Loan policy of the Mutual Trust Bank Limited has prescribed uniform credit files maintenance and documentation procedures. Such requirements are routine and for most of the financial intermediaries. In small banks the documentation procedures are determined by the preferences of the lending officer. Though there is prescribed guidelines for documentation procedures, practice does deviate in branch level in Mutual Trust Bank Limited. In the documentation standards two types that is Credit File Maintenance and Facility Evidence Maintenance are described below. Credit File Maintenance: Credit file must provide all the pertinent information relating to that particular credit on the spot monitoring if required. The maintenance of the credit files shall be disciplined to force the lending officer to obtain all relevant documents and encourage him to consider all relevant information in the time of analyzing customer risk. The credit files, in MTB must contain the following documents Credit application and credit approval notes/analysis. The analysis should cover 1. Information about the borrower and purpose of credit 2. General economic and competitive environment of the borrowers industry. 3. Brief description about the competencies and capabilities of the management. 4. Details of the collateral security & Valuation.

Evidence of the credit approval and the data upon which approval was granted (later it can be used to calculate the deviation from projected to actual) and copy of the sanction letter & loan agreement. A checklist along with copies of all Legal and Banking documents obtained/to be obtained. Information about the last six monthly updated information of all the related facilities enjoyed by the client. Financial statement analysis, credit investigation result, CIB and other bank reports. Correspondences, call reports, site visit reports, stock reports. Charged documents Maintenance: In the time of sanctioning credit MTB, like any other bank, collects charged documents, collateral security to be in the safe side if any thing unfavorable situation occurs. So maintaining these documents in a secured place is essential for the bank. In MTB following arrangement is practiced for ensuring the optimal security of the facility evidence (charge documents). All the Legal and Banking documentation and the register of security is stored in optimal secured level as the documents are the main bargaining power if the party default. All charged documents created in the time of loan sanctioning along with the loan agreement. The original documents of the title reports on the collateral security concerning its existence, location, valuation is kept in the place of utmost security. All legal and banking documents is kept in the fire proof safe under dual custody of the branch manager or his designated alternate and another credit officer, along with a checklist of the charge documents is maintained in the credit file.

Supervision procedure Recovery is the recurring worry for the bank managers. Moreover, recycling of advances is important, without which the banks liquidity is in jeopardy, beside that the community doesnt get benefit unless new advances and new borrowers are encouraged. Strategic supervision of the loan and advance can ensure the timely recovery of the loan and advances along with the interpersonal relationship with the client. In the time of my attachment in the Mutual Trust Bank Limited, Motijheel Branch, it was observed that the credit officers are timely preparing there report and taking the following supervision techniques; 1. Loan account statement check Whether the limit is within that have sanctioned, Satisfactory Transaction has been made. 2. Other account statement checking 3. Tracking the next installment date and reminding the client. 4. Reviewing the security value 5. Collection of Stock Report 6. Collection of the financial statements of the client and analyzing them and comparing the actual performance with that of projected. If actual is less than projected then the credit officers follow the following procedures: Meeting with the owner and discussion to identify the reason. Analyzing the business strategy regarding the price, quality, market, and competitors. Try to find out whether the management has giving their full effort in managing the business or shunning concentrating in other business. The amount disbursed was used properly.

Monitoring & Follow-up Monitoring is tracking the risk aspect of the loan and advance portfolio to be sure that the portfolio is complying with the criteria set down in the credit policy. For

analyzing and monitoring the loan portfolio branch manager is the main responsible authority. In MTB the branch managers have to submit different

reports to the head office credit department after reviewing the loan accounts with comments and account statement. Factors analyzed in loan monitoring Credit policy of the Mutual Trust Bank Limited has set forth the guidelines and issues that must be followed in the time of loan review. After getting the review of the loan portfolio form the branch level the assigned officer of the head office credit department starts analyzing and preparing the report. The account is not having excess over limit The terms and condition of the sanctioned letter are strictly followed. 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

Loan Review Function It is said that banks never made bad loans; ate least they are not bad at the time of they are made. However, banks find that invariably a small portion of the loan become delinquent and eventually must be written off. The loan review process is a crucial tool in reducing losses and in monitoring loan quality. Loan review consists of a periodic audit of the ongoing performance of some or all of the active loans in a banks loan portfolio. Other than its basic objective of reducing loan losses, some intermediate objectives of the loan review of MTB, like any other financial institutions are as follows: To detect actual or potential loans as early as possible

To enforce uniform documentation To ensure that the loan policy is followed To inform management and the board of directors about the overall condition of the loan and advance portfolio.

In the time of loan review MTB follow the Bangladesh bank guideline and its credit policy set by the board of directors and the policy committee. The frequency of the review of individual loans is determined by the size and quality of the loan; large; poor quality of the loan are reviewed frequently than others. In MTB it has a loan classification criteria for evry mood they are financing. Reporting schedule After a predetermined interval period, all the schedule bank in Bangladesh has to submit the loan review report and the state of the loan portfolio to the Bangladesh Bank credit cell. For maintaining this schedule MTB has set forth a due date for its entire branches to send the loan review report to the head office credit division. Head office credit division is the main authority to compile the entire loan accounts and review to send it to the Bangladesh Bank Credit department. The purpose of the loan review is to monitor lending performance and to identify the delinquent credits.

Table 1 Reporting schedule Loan Amount (in million TK) Tk 0.1 to 1 million Tk 1 to 10 million More than Tk 10 million Review period Quarterly Quarterly Monthly Reporting time By next month 30th day By next month 30th day By next month 10th day

Classification of the loan A formal assessment is carried on regular basis to ascertain the repaying ability of each customer. Advance is based on the current value of the underlying asset. Classification on the basis of security For internal use, they classify the loan and advance on the basis of how much the bank is secured in respective of the loan:

Table 2 Classification on the basis of security

Security
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. Debts considered doubtful or bad

2010(Tk in million) 7295.2 23.09 349.36

2011(Tk in million) 4965.4 5.8 149.78

--

--

Category in Classification In classifying the loan and advance, it will be categorized into four different categories. They are a) Continuous Loan: The loan, which has no particular repayment schedule, but contains date of expiry, credit limit etc., will be termed as continuos loan. Cash credit, Over draft etc. will fall under this criterion. b) Demand Loan: The loan, which is considered repayable only after it is claimed, will be termed as demand loan. If contingent or any other liability is converted to compulsory loan or forced loan.(that is the loan

without having prior as regular loan), then it will be termed as demand loan. Forced LIM, PAD, FBP, IBP etc. c) Fixed Term Loan: the loan, which is repayable within a particular period of time as per repayment schedule, will be termed as Fixed Term Loan. d) Short Term Agriculture & Micro Credit: Those credits, which are enlisted as short term credit under the annual credit program declared by the ACD of Bangladesh Bank, will be termed as short term agricultural credit. It will also include credit extended to agricultural sector and repayable wothin a period not exceeding 12 months. The short-term micro credit will be that, which will not exceed of Tk.10000/= and will be repayble within a period not exceeding 12 months. Basis of Classification Objective Basis: In classifying the loan and advance there are four classes in the loan review practiced in Mutual Trust Bank Limited. They are 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. 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.

S-T Agri& Micro Credit Continuous loan Demand Loan

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.

Substan dard

Category of Credit

Time overdue (irregularities)

Fixed Term loan

Repayable within 5years: If the installment equals or exceeds the repayable within 6 months. Repayable more than 5years: If the installment equals or exceeds the repayable within 12 months.

overdue amount overdue amount

The main criteria for a substandard advance is that despite these technicalities or irregularities no loss is expected to be arise for the bank. These accounts will require close supervision by management to ensure that the situation does not deteriorate further. Doubtful: This classification contains where doubt exists on the full recovery of the loan and advance along with a loss is anticipated but can not be quantifiable at this stage. Moreover if the state of the loan accounts fall 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 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.

Fixed Term loan

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:

Substandard

Cat Ti ego me ry ove of rdu Cre e dit (irr egu lari ties )

S u b s t a n d a r d
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 amount repayable within 18 months. Repayable more than 5years: If the overdue installment equals or exceeds the amount repayable within 24 months.

S-T Agri& Micro Credit Continuous loan Demand Loan

Fixed Term loan

Qualitative Judgment: Beside the above-mentioned objective criteria, Mutual Trust Bank Limited has other few qualitative judgment for classifying the loan and advance. This judgement totally depends on the Manger and or credit in-charge of the branch level or the Head office credit division. Whether any continuous credit, demand loan, fixed term loan are classified or not on the basis of the above mentioned objective criterion but if there is any doubt or uncertainty as regarding their recovery then the loan can be classified on the basis of the Qualitative Judgment. The qualitative factors that are considered in Mutual Trust Bank 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 Mutual Trust Bank Limited were like this
Table 3 Classification position last year.

Category Continuous Demand Loan T/L upto 5years T/L more than 5years Agri Loan

Outstanding Tk. 3145060 Tk.2890835 Tk.1364718 Tk.265941 0

UC Tk. 3103198 Tk. 2862857 Tk. 1326989 Tk. 263466 0

SS Tk. 6742 Tk. 10828 Tk. 6681 Tk. 2475 0

Doubtful Tk. 8315 Tk. 10421 Tk. 7014 0 0

Bad Tk. 26803 Tk. 6727 Tk. 24033 0 0

Correcting Problem Loans The loan policy requires the diligence on the part of all loan personnel to detect and attempt to correct the problem loans. Although loan review personnel are important in the early detection of the problem loans, individual loan officers frequently have special ongoing knowledge to contribute. There are few clues that can help to identify the potential delinquent accounts at the early stage. An unexplained change in the borrowers attitude toward the loan officer or the bank.

Unexpected declines in deposit balances or occurrences of overdrafts are sign of financial difficulties. Late payment of installments Abnormal delays in submitting the periodic financial statements as required by the loan agreement. (Delays might indicate the a reluctance to submit the unfavorable financial result.) The value of the underlying security may decrease and help to create the delinquency of the loan account in case of the secured loan. This type of securities may be stock exchange securities. Management turnover and cancellation of the insurance policy. Security interest filed against borrower by other creditors, Natural disaster.

After detecting the problem loan the responsible loan officer should take immediate action. Whenever any officer in lending or non lending function gets information on a borrower which affects the quality of a credit he must write a memo recording the information addresses to the branch manger with a copy to the Head office.

Management of Delinquent Client When a problem loan is detected the responsible loan officer takes the corrective action and tries to minimize the loan losses allowing different facilities to the client. The steps practice in Mutual Trust Bank Limited to manage the delinquent loan are: Persuasion This is the first step practiced in the MTB to mange the problem loan. This steps involves Open discussion with the borrower about the problem he is facing, Discussion with third party to find out the underlying reasons.

Issuing 1st Reminder letter to inform the due date and ever due installments. If the party doesnt response issuing 2nd Reminder and then 3rd Reminder letter. 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. The plan of action in MTB consist of Revise loan agreement Concession of interest (if the client was difficult to manage) Rescheduling of the loan and giving installment facility to repay the overdue amount beside the regular installment. Litigation If after rescheduling the loan and or failed to negotiate with the delinquent client, MTB go for taking legal action against the delinquent client to recover the loan. The branch managers send a letter to the head office credit department informing the borrowers reluctance to repay and negotiate the loan. Filing case against the client Assigning the loan officer for assisting the lawyer. As soon as an account is classified delinquent a detailed report will be sent to the Head Office Credit Division by the branch manager. After that, a monthly report on all delinquent facilities is to be sent to the head office credit division jointly signed by the Branch manager with the second officer/credit officer. Beside this the branch manager should include the action plan taken against the delinquent account and status report. Provisioning Specific Provision: After getting list of the classified accounts where no loss is anticipated, partial or total loss is anticipated, audit report by Audit division and Bangladesh bank,

previous and current portfolio by external auditors and branch managers comments on the classified accounts, Head office credit division prepares a list of credit accounts which are considered to be totally or partially be unrecoverable. Rate of Provisioning Mutual Trust Bank Limited in the time of loan provisioning to get the real picture of the income mainly follow the Bangladesh Bank guide line. The rate of provisioning used in MTB is summarized in the following table.
Table 4: Rate of provisioning

Class

Unclass (UC) Substandard (SS) Doubtful Bad or Loss

Short Term Agriculture All other credit credit. Rate of Provisions 5% 1% 5% 20% 5% 50% 100% 100%

Accounting Procedure of Interest of Classified Loan The accounting procedure in dealing the interest earned on the classified loan is very important because the treatment may overestimate the earning of the bank. In MTB the accounting procedure that are followed in dealing with the interest fee earned are pointed out below: a) If any credit or advance is classified as substandard or doubtful, the interest will be charged on the credit account but such interest is not transferred to the income account rather it is kept on the interest suspense account. b) If any loan or advance is classified as Bad and Loss, the interests of that account are suspended instantly. If any suit is required to be filed for recovery of such credit, the is filed on the total amount of the principal including the interest calculated upto the period before the suit is filed. Such interest is kept on the interest suspense account.

c) If any classified loan or part of that loan is recovered, the interest will be adjusted first then the original loan will be adjusted.

Quality of credit Analysis Selection of Borrower When we talk about good lending portfolio, few principles are highlighted, which are judicious selection of borrower, safety, security, purpose, liquidity, profitability, 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 approached to MTB 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 psychological power in the time of selecting the borrower. The key factors considered in the time of judging are summarized below: Character The outcome of analyzing the character is to have overall idea about the integrity, experience, and business sense of the borrower. Two variables; Interaction/interview, and Market Research are used to analyze the character of the borrower. 1. Interaction/interview: the indicators are a) Prompt and consistent information supply, information given has not been found false (Willingness to give information). b) CIB also reveals business character. c) Willingness to give owns stake/equity & collateral to cover. d) Tax payer. 2. Market Research:

a) Information on business is verified. b) Dealing with supplier and or customer as supplier is also a kind of lender; the payment character can also be verified. Capital For identifying the capital invested in the business can be disclosed using the following indicators. a) Financial Statements b) Receivable, Payable, statements to practically assess the business positions. Net worth through financial statements or from declaration of Assets & Liabilities. Capacity (Competence) Capability of the borrower in running the business is 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 efficiently, effectively and profitably. The indicators help to identify the capacity of the borrower. a) Entrepreneurship skills i.e. risk taking attitude shown by equity mobilization. b) Management competencies both marketing and products detail, ability to take decision. c) Resilience or shock absorption: Connection, Back up (if first time falls second lines come to help.)

Collateral The assets offered as collateral are the second source of repayment and it is offered to the bank is to cover the additional risk that arise due to the default culture. Cash Follow: Cash flow is the vital factor that is used to identify whether the borrower will have enough cash to repay the loan or advance. Cash keeps the liquidity to

ensure repayment. The credit officers try to identify the annual cash flow from the submitted statements. Performance of credit (%) In the time of sanctioning credit facility, the bank or other lending organizations do not make bad loan. But as the future is uncertain the some of the loan and advance may become non-performing due to uncontrollable factors or the managements failure and reluctance to maintain the business. In Mutual Trust Bank the performance of loan portfolio is satisfactory due to the proper appraisal in the time of sanctioning procedure. In the following table Mutual Trust Bank

From the above graph it reveals that only a few percentage of the total loan and advance are non- performing in the Mutual Trust Bank Limited. The classification rate of MTB is one of the ever lowest in the banking industry.

Interest Rate Policy One of the most difficult task in lending to business firm and other borrowing customers is deciding how to price the loan that is what will be the interest rate charge to the borrower. The lenders want to charge a high enough rate to ensure that each loan will be profitable and compensate the bank fully for the risk involved. However the loan rate must also be low enough to accommodate the business borrower in such a way that he or she can successfully repay the loan and not be driven away to another lender or into open market for credit. The more competition the bank faces for customers loan business, the more it will have to keep the price of that loan at a reasonable level consistent with

competition in the market place. With deregulation of banking in the countries like Bangladesh, deregulated competitions have significantly narrowed the profit margin. This makes correct pricing of loans even more imperative bankers today than in the past. In MTB, the loan pricing policy are guide line are summarized below: In MTB interest on various lending categories will depend on the level of risk and type of security offered. It should be borne in the mind that rate of interest is the reflection of risk in the transaction. The higher the risk, the higher is the interest rate. Interest rate for different loan and advance products are reviewed in every six-month or less if required. Fixed interest rate is discouraged. The rate must be reflected by the cost of fund (COF). That is the variation in the COF can cause the change in the loan rate. Effective yield can be enhanced to the extent the borrowers are required to maintain the deposit to support borrowing activities. Yield is increased by the commitment fee and service charge where possible. All pricing of loan must have the relevance with market condition.

The loan price equation or the interest rate is as follows in Mutual Trust Bank:

Interest Rate = COF + Administration Cost +Risk Premium + Expected profit Classified Loan The classification reports require by the Bangladesh Bank along with the head office. From the branch level, the credits submit the CL along with the condition or performance of the loan. When a bank sanctions and disburses a loan, it anticipates that the loan will be repaid in due time in accordance with the terms

and conditions of the contract. However, some of the borrowers will prove unable to meet the payment schedules due to factors that are not predictable in the time of sanctioning. As evident from the borrower business performances and repayment behavior becomes available, it may appear that the chance of loan being recovered is considered reduced. The intention of the classification process is to determine, on the basis of performance to date, if it is less likely for a particular loan to recovered, than for the average loans in the rest of the portfolio. In the overall banking industry the classified loan is 35. The Mutual

Trust Bank Limited though new in the country is maintaining a classification rate at the lowest level. The bank has the policy to prepare the classification report quarterly for their management purpose and continuous monitoring of the loan portfolio. The quarterly classified loan in MTB starting from January 2011 to first quarter of 2011 is summarized in the following table.
Table Quarterly Classified loan.

Date 31.03.2011 30.06.2011 30.09.2011 31.12.2011

% of classified loan 1.96 1.32 1.40 1.43

Credit Appraisal System


Abstract 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 credit officer 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, 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, 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.

Types of Projects Financed Mutual Trust Bank Limited finances new projects along with the BMRE. MTB has general procedure for appraising the projects. The induction of the borrower may arise from any employee of the bank, any client of the bank or the client himself can approach for credit. 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 vehicle for which the loan is sought. The MTB give loan in different purposes that are previously mentioned. Industrial, commercial, export, import, working capital and House building finance are sectors the bank is financing.

Working Capital Finance Long Term Finance

Delegation of Authority To assure proper and orderly conduct of the banking operation, the board of directors empowered the Managing Directors and executives of the bank to lend up-to certain under certain terms and conditions at their discretion. The landing officers are broadly categories among the designations. The mode-wise delegation of the sanctioning limit are given below that re practiced in MTB:

Table 5: Delegation of Lending Authority Type Margin 100% 50% 40% 30% 20% 10% 50% 25% 20% 10% MD WL 150 125 100 75 50 100 75 50 40 100 DMD WL 100 75 50 40 50 40 30 50 EVP WL 75 50 30 25 30 20 15 25 SVP WL 30 20 17 15 20 10 8 15 VP AVP Figure in Million Taka WL WL 20 10 15 8 12 7 10 6 15 7 6 10 10 5 4 10

Performance Guarantee

Bid Bond

Purchase of Inland Document Bill Purchase of Govt. checks, pay orders, Draft Issued to scheduled Bank

75

50

40

25

10

Beside this there are some restriction about this delegation of lending authority. Important point is that an officer will not be delegated certain power on the basis of his position. In other words, an officer does not automatically get lending authority by virtue of his corporate /functional title. Specified lending authority will be delegated by the Managing Director to various Executives after taking

into consideration his proven credit judgment, Knowledge, and experience. The Managing Director will review all lending authority with the Executive committee. Approving Authority In MTB the credit proposal go through certain steps that are ordered in terms of hierarchy. The board of directors is the ultimate authority and it delegates different power to the different committees. In MTB there are following hierarchies in approving credit facilities.

Branch Credit Committee

Head Office Credit Committee

Executive Committee

Board of Directors

Branch Credit Committee The branch credit committee is headed by the branch manager and the other members are second man, credit in-charge, and other members are nominated by the branch manager and the credit officer who prepare the proposal and appraised the client has to be present in the meeting. As the ultimate performance of the branch depends on the loan and advance portfolio the committee extensively analyzes the proposal and if the credit amount is under the delegated power of the manager is sanctioned by the committee. If the credit amount sought is not under the sanctioning authority of the branch committee, it is sent to the Head Office Credit Committee for approval.

Head Office Credit Committee After receiving the loan proposal from different branches, credit committee (HO) seats after certain interval for analyzing the proposal. The credit officers review the proposal and look for what other information is needed to provide with it to

present before the executive committee. Here they also appraise the loan proposal in the same way the branch does. The HO credit committee is headed by the Managing Directors of the bank and other members are selected by him. Mainly the HO credit committee is responsible for the following activities:

Reviewing, analyzing, and approving extension of credit under the umbrella of the authority established and delegated by the board of directors.

The committee evaluates the quality of the lending staff posted in the branch and take appropriate steps to made them efficient and effective.

After getting the credit proposal from branches, HO credit committee analyze it and recommend it to the Executive Committee.

Ensuring that all the required information and documents are collected and are in order.

Confirming that the credit proposal is consistent with the existing credit policy of the bank and not inconsistent wit the Bangladesh Bank guideline.

Executive Committee If the limit of the loan proposal exceeds the authority delegated to the HO credit committee, the loan proposal is forwarded to the executive committee for sanction. In MTB every Saturday the EC meeting is held at the boardroom for doing the following responsibility:

Approving the credit facility as delegated by the Board of Directors. Supervising implementing the directives of the Board of Directors. Reviewing of each extension of the credit approval by the HO credit committee or Managing Director.

Communicate the result of all the above function to the Board of Directors.

Board of Directors If the credit demand of the client crosses the delegated power of the executive committee, the proposal is sent to the board of directors for approval. The Board

of Directors has, in the MTB, retain the following credit related responsibilities in their hand:

Delegating authority to approve and review credit The board of directors will approve the credit for which authority is not delegated to anybody.

If the credit proposal/extension for credit is contrary to the MTBs written credit policy, board of directors will analyze and approve it.

The board of directors will establish the credit-related, policy and procedures.

Steps in Loan Processing Before sanctioning credit, there are some stages the proposal has to come across. The steps are

1. Request for Credit from the client 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. Presentation of the proposal 7. Sanctioning of the credit

8. Informing the client, Implementation Supervision, Monitoring

Credit Request In general the client having an account approached the bank official for financial help in the form of credit. The client may directly go to the credit department or talk with the manger of the branch. While talking with the client the officer try to find out the following cues:

Borrowers identity, Family background, Character, Capacity and integrity. Reputation in business circles, friends, and competitors and employees. Educational qualifications, Business Experiences. Physical Fitness and Eagerness. Purpose of the Loan, Popularity and marketability of the product.

Availability of the raw materials, transport and communication. Owen Stake in business and security offered. Expected terms of repayment Other sources of income. Lifestyle of the Borrower Declaration of the assets and liabilities. Whether reason for credit facility seeking is justifiable. Tendency to disclose the information.

. Here this discussion is like preliminary screening of the client. So the credit officers need to be cautious about the facility the client is seeking and the available fund in the bank. Moreover most of the businesses in our country dont have any standard form of accounting department and dont have any audited statements. So the main task of the credit officers is to make a relationship with the client to find out the hidden income sources.

Credit Application form The client is given a credit application form if and only if the credit officer is satisfied discussing with the client when he approached. This can be said the preliminary screening of the client. The MTB credit application request form is said to be a standard one. A sample Credit Application Form is given in the appendix. The client has to provide the following information in the credit application form

Mode of financing and amount of credit sought. Primary information of the business

Directors name along with their shareholding percentage and networth and the filled up networth statement.

Sister concerns information and working capital related basic information.

Collection of Documents MTB request the client to provide the following documents when the complete credit application form is submitted. These documents are used to collect information for processing the loan proposal. These also help the credit analyst to appraise the client and to prepare proposal. The information or documents that must be given by the clients are as follows.

Broad Resolution for availing credit facility from Mutual Trust Bank Certified copy or photo copy of the Memorandum of Articles of Association/certificate of incorporation Photocopy of the directors duly attested. Personal Networth of the directors Copy of the TIN and Trade License duly attested Last three years audited balance sheet Group brochure/Machinery list/stock report/list of buyers Short description of the products of the company Project Profile (if new project) Name and address of the present bankers Name address of the sister concern Quotation Marketing Distribution System/Export Target Short Profile of the Directors mentioning their business experiences Brief Description of the management of

Property Document
Copy of the original title deed of the landed property offered for mortgages Bia Deed of the previous owner of the same property CERTIFIED copy of the Mutation Khatian Duplicate Carbon Copy (DCR) Up-to-date rent receipt and Municipal Tax Receipt Certified copy of CS, S.A, and RS Khatian. Up-to-date Non-Encumbrance Certificate. Valuation certificate by an engineer. RAJUK approved plan of the building with the approved letter. Photograph of the land from the three different sides. Photograph of the owner of the land Board resolution of mortgaging the property if the same belongs to any limited company

the company mentioning their educational and professional experiences. A latest liability position of all the business concerns of the group with other bank or financial Institutions.

Scrutinizing the documents In this step bank collect and correlate the information about the client. After receiving the credit application form, the credit officer thoroughly checks the form and all the submitted documents while talking with the client for the second time. 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 and duly authenticated by the concerned authority.

Cross verification for identifying Consistency

Appraising the client or Credibility Appraisal The credit officer has to check the integrity and the honesty of the client that is the management and the other allied company as well. The integrity is checked through different ways. They are as follows Personal interview: When the client approached for credit, the credit officer talked with him to identify whether the client has any need of seeking credit facility. The credit officer has to have deep analyzing power to find out the clue.

Report form MTB If the customer hold an account or is enjoying credit facility from the MTB, the statements of the accounts are collected for analyzing the performance of the

existing facility, transaction summery of the accounts along with the integrity of the client. Report from other bank: 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 contact, communicate with the respective authority of those banks with which the credit seeker has the 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 habit of the client

All the collected information is kept confidential.

Report from society: Some times the credit officer collect information from other businessman having relationship with MTB. Informally the credit officers discuss about the project and the initiator and the potentiality with the businessman. Moreover the information about the sponsor are also collected from the socially important person like community representative, chamber representative.

CIB Report: There is possibility of hiding information about the current liability and transaction with other bank. So to get the appropriate information about the creditability of the customer. The branch office collects CIB report through the head office. It is known that all the banks have to send liability position of the client. The CIB authority provides the related information for which he is asked for.

Financial strength Analysis Analyzing the financial position is one of the main factors to be identified before financing any business. In the application form the client has to furnish the total investment made by him in the said project he is seeking loan facility. The Networth of the client must be found out by the credit officer.

Look for the net-worth of all the directors Paidup capital Investment in business Leverage (Equity Multiplier) Cash flow Allied deposit in MTB. Tangible net-worth of the business for the lasts three years and projected two years.

Total Asset-Total Debt

Overall group strength (if applicable ) The strength also appraised by the business performance.

Liability Position Analysis Facility from MTB& 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 MTB and other banks.

Existing facilities for the sister concerns if applicable. Debt to Asset ratio.

Table Typical Liability information collection Sheet


Company / Trade Name Nature

Existing Facilities
Outstanding

Security Value
Expiry
Over dues CL status FDR Property Others Total

Li mi t
Total Cash
TotalContg
Total
(Group) Grand Total

Cash Contg

Here the credit officers need to look for the Nature, limit, outstanding, overdue, CL status, security value of the credit facilities

Whether the amount outstanding are classified or not Monthly installment payment or fixed charge coverage performance of the client.

Management Competences or Capability Appraisal The ability of the management to run the business smoothly and business background of the promoter and the sponsor director and the management are important. As most of the established businessman are traditional and has not business education it is very difficult to find out. To identify and judge MTB collect the following information from the client:

Brief description of the directors educational background & business back ground

Brief profile of the management Business performance for the last three years as performance of the business implies the capability of the managements running the business.

Equity mobilization of the directors as it implies their risk-taking attitude.

If it is revealed that the directors are in the business for a long time and have operated the business well is said to have the capability to run the business.

Appraising the Business The main task of the credit officer is to analyze the vehicles (for which the credit is sought) market potentiality, competitors, distinctive competitiveness and the strategy taken.

Business Appraisal In appraising the business, the main concern is whether there is any prospect of the business. MTB look for

Industry outlook 1. Number of competitors 2. Prospect of the business 3. Influence technology changes Clients business Appraisal 1. Initialization of the business 2. Customer base (increasing trend) 3. Relationship with the customer 4. Work done so far and the value 5. Annual income at least stable 6. Overall growth of the business 7. Basis of competition (guessed) 8. Quality of services (guessed)

Product Appraisal The client has to furnish brief description of the product or services; he or she is producing or going to produce or rendered. After getting the product description, the credit officer in MTB has the job is to find the Attribute USER Reason/look for Customer base must be large and the client has to have good relationship in case of the garments Last three years Volume and Look for increasing or at least stable growth. amount of Sales. At least stable Rate of Growth Major competitors and position Though the competitor is identified, position is Judged on estimation basis and some times avoided. of the customer Volume of market demand and Not done or most of the time done on estimation basis. Supply Prospect of increase in demand Depending on the related information the credit officer gives his own view. for the product(s)/service(s)

Security Appraisal & Valuation Asset that will be offered as security must be analyzed thoroughly on the basis of few criteria as different assets as different influencing factors. The factor that has to be considered in the time of asset valuation are briefly discussed

Liquidity: In a word it means, How quickly an assets can be converted into cash. The more liquid the asset the greater its value as collateral. Stocks, bonds, and other marketable securities are easily sold and for this reason, these represent attractive value as collateral and highest liquidity.

Depriciability: Some types of assets lose their values rapidly than others. Computers and other electronic assets are continuously upgraded so that last years models are technically obsolete. Dresses suits and apparels also quickly lose their values as publics fashion taste change frequently. But however real estate and certain other fixed assets may increase in value day by day. These assets are attractive sources as collateral.

Marketability: The market available for purchasing liquid assets is a vital part of having a good collateral value. Secondary market is necessary for buying and selling the liquid assets. If secondary market is not available the bank has to lose the value of the asset and has to sell it at discount. So if there exists secondary market for the collateral assets, it can yield an attractive value.

Controllability: This refers to the banks ability to locate and hold the assets. Bonds and stocks posted as collateral can be held in the banks volt easily and highly controllable by the bank. Therefore, prior lien, offsets, warranties & other legal claims should be investigated by the credit officer before taking any thing as collateral as the higher the complexity in realizing the collateral the lower the value. Once the collateral loan value is established the commercial loan officer should deduct the costs that can be expected to be incurred if the collateral is liquidated. The bank may absorb forecasting cost (Legal & Appraisal) and holding cost (Including tax and maintenance costs) before proceeds are realized from the sale of the collateral assets. The amount remaining after deducting all this cost, the bank can expect to apply to the principal, interest and cost of the loan.

In providing loan MTB take mortgage of land and buildings along with PSP, FDR, MBDS. In the time of taking documents the borrower has to disclose all the information related to the land and buildings, which will be offered as collateral against the loan.

The credit officer must collect all the documents to verify the lands actual owner and the updated government fees paid receipt.

For justification the documents should be communicated with the banks lawyer.

Whether the site plan of the land are permitted by the RAJUK (if applicable). The client must have to submit valuation certificate from an engineering firm. Valuation by the two Credit officers must be submitted after visiting the land and discussing with the neighborhood about the value, and the market value and the forced value of the land and /or building must be submitted in prescribe form and duly signed by them as well.

Three photographs from three different angles of the mortgage land should be submitted photographs must be duly attested by the credit officer.

Invoice /Quotation Verification While taking loan from banks, the instances of over invoicing and underinvoicing are common. But the privatized commercial banks are strict in monitoring this.

Two or three price quotations from three different suppliers are collected and judged.

Two or three invoices from suppliers collected by the borrower must be submitted and the borrower has to take all the responsibility about the quality of the machinery or goods to be purchased.

Taking ideas about the price from other branches or banks, which has already financed this type of projects.

Taking Internet facility

Credit Demand Assessment The client may seek for credit in terms of working capital, work-order finance, and Project loan. The credit officer has to analyze the required amount though the client revealed their credit demand in the credit application. The calculated or assessed amount by the credit officer may be lower than the clients demand. MTB analyze the financial statements and the amount required as working capital. The credit officers analyze earning forecast, expense estimation.

Working Capital Assessment Apart from fixed investment in business, liquid funds are needed to invest in current asset like stocks. The portion of fund which remains invested in the current assets of a concern is called its working capital. Business houses need short-term credit to meet the raw material and administrative cost. The MTB has the option to finance working capital both for existing business and new projects. As the financial data related to the business are not available and not usually provided by the client, the credit officer do follow a pre-set procedure for calculating the working capital requirements. Though there has a standard format for calculating the WC, due to lack of available information the credit officer is using this crude method for the working capital assessment. Two sample of calculating WC is given below that are currently being followed in MTB. WORKING CAPITAL ASSESSMENT Production capacity 1 shift 1 year Average FOB price = = = = 290 Dz. sweaters per day 8 hours per day 300 days $60. - Per dozen

Export value

$52,20,000. $39,15,000. $13,05,000. eqv. Tk.6.28 crore

Import entitlement (75%) = 4 months Tied up period =

If there the production capacity is not available the WC assessment of MTB can be formulated in the following way:

NWC= (EAR-EANP)/TP Here, EAR= Expected Annual Revenue EANP= Expected Annual Net Profit TP= Tied-up Period NWC= Net Working capital Requirements.

This is the portion of working capital requirement in the business and after that the customers portion of contribution is estimated and then those portions is subtracted from the NWC and thus get the banks WC loan. If any party provide the exact information, the standard format of calculating the WCR is followed. (Current asset-Current Liabilities).

Limit Enhancement/Renewal If the client approach for limit enhancement or time extension, his previous performance of the loan account is highly emphasized and analyzed. In that case for analyzing the account, the performance is measured din the in the following way: Recycle Time = Credit Turnover/ Limit Debit Turnover = summation of credit transaction Credit Turnover = summation of debit transaction

Adjustment Time = How many times the party has adjusted the accounts, which implies that the party has made reasonable transactions. The standard is that party will adjust the account every quarter. Beside this the working capital assessment is same as new credit request analysis.

Project Cost Analysis MTB finance new projects along with BMRE and short-term financing. Though banks dont finance in long-term as because the bulk of the banks fund are of short term. Project cost is the vital cost driver in project finance. MTB is following a standard format for project cost analysis. Land, building, /construction, Procurement of machinery, Preliminary Expense, allowances for unseen costs, are specially analyze and verified to get the exact cost figure.

Financial Viability Analysis The MTB credit authority emphasizes on the ratio analysis of the client. The clients submit last three years audited/ unaudited financial statements and two forecasted income and balance sheet in the time of applying for credit. Using that data the credit officer calculate the growth rate of the sales, net profit, expense, equity, liabilities and other heads along with the following ratios. Current Ratio Quick Ratio Gross Profit Margin Net Profit Margin Sales to Fixed Assets Sales to Total Assets Sales to Working Capital Return on Assets (ROA) Return on Equity (ROE)

Growth of Revenue, Net profit, Asset etc.

Loan Proposal After proper appraisal has been done by the credit officer, a formal proposal is prepared to present before the credit committee for sanctioning the credit. The information about the client and his business are collected from the documents and papers submitted while applying for credit. The proposal format of MTB is said to be one of the best in the industry. The proposal contains the following information:

Passport size photograph of the intending borrower. Complete address and the title of the account. TIN/Latest returns of the income tax receipts. Investment in business Name of the directors, Shareholding and networth. Authorized and paid-Up capital in case of limited company. Type of loan sought Deposit/ FDR/ allied deposit. Existing facility enjoyed with MTB and performance of the loan account. Comment of CIB report Liability with other banks. Overall group liability Forecasted income for the next 12 months from the client Last three years business performance and forecasted income statements for coming three years with ratio analysis. (audited/ unaudited) Working capital calculation and or other credit need assessment. Insurance coverage Legal opinion of the on the property and the valuation certificate of the property offered for collateral. Detailed of the sister concerns. Brief description of the customer, business, and product.

Justification for the proposed facility.

Suitability Appraisal After analyzing the related documents and information the credit in-charge along with the branch manger has to take decision whether MTB will allow credit facility to the client and send it to the head office for sanctioning. The decisions are based on the following criteria:

Whether the proposed advance are remunerative to the bank. (Interest, commission, fees,)?

Whether MTB can recover the advance with interest in time? Whether the bank has applied its knowledge, skills, tact and business motive in relation to the advance in question?

Whether the advance is in conformity with the bank budget, Govt. policies, credit restrictions imposed by Bangladesh bank and is not detrimental to social and national interest.

If the replies of the above questions are favorable on the basis of the available information then the banks will arrive at the decision of providing credit facility to the client.

Cost of Credit Management


Abstract Cost of credit management is very vital factor in a bank or financial institution. In the time of loan pricing the bank charge a certain percentage as administration cost. If the supervision/administration cost can be kept lower the spread of the loan will be higher. In the cost of credit management procedure the components are cost of fund (Deposit), Total working hour cost for the time employed by the employees engaged in the loan product processing. Time budget analysis is very effective one to apportion the time. The bank or other financial institution

should calculate the cost of credit management to get the true picture of the spread.

Loan and Advance Products The product or services for which the cost will be calculated is the Loan & Advance. In a bank there are different loans and advance product against which the borrower are given financial facilities. Though the name Credit implies

that providing loan facilities to the client is the job of the Credit department only. But International trade finance facilities is the job of the Foreign Exchange section/department. In the following table department- wise product list is given: Loan and advance products are given from both credit and foreign exchange department. The loan product of both the departments are given arranged in the following table. The time given for different products does vary according to the formalities required. In MTB the loans are given mostly to the known customers. So some formalities are done when the client approached first.

Table Loan and Advance Product Credit Department Consumer Credit Scheme Lease Finance Hire-Purchase Small & Medium Enterprise HBL(Corporate Client) Cash Credit Working Capital Financing Industrial Financing Overdraft Foreign Exchange Department PAD (Payment Against Document) LIM (Loan Against Imported Materials) LTR (Loan Against Trust Receipt Materials) Packing Credit FDBP (Local) FDBP (Foreign) SOD(Export) SOD(General- cash incentive) Letter of Credit Export Section

Steps in loan processing Sanctioning loan facilities is a process-based work. Before sanctioning loan and advance to the client, there are some steps to be completed. is followed by some steps. The steps are as follows;

Pre-Approval Super Vision

Import Section

1. Preliminary Interview to select the real borrower. Identifying the needs Performance Experience Source of repayment Credit Application Form and 2. Collection and Scrutinizing the documents 3. Appraising the client Analyzing the business prospect Creditworthiness of the borrower Other bank report, CIB Analyzing the Management performance. Site visit Correspondence Investigation through Lawyers 4. Preparation of the Proposal 5. Approval (Branch Level Committee or Head office) 6. Pre-disbursement Formalities 7. Disbursement Post approval Supervision. Borrower are drawing the credit facility regularly Using the credit for the business it has been sanctioned. Loan account statement check Whether the limit is within that have sanctioned, Satisfactory Transaction has been made. Other account statement checking Tracking whether the client repays the loan regularly and the next installment date and reminding the client. The client is making satisfactory communication with the bank. Reviewing the security value Collection of Stock Report, Financial statements and other documents according to the loan agreement. Analyzing the financial statements of the client and comparing the actual performance with that of projected. If Deviation is found credit officers follow the following procedures: Meeting with the owner and discussion to identify the reason. Analyzing the business strategy regarding the price, quality, market, and competitors.

Whether any change in the management took place and try to find out whether the management has giving their full effort in managing the business or shunning concentrating in other business. The amount disbursed was used properly. Continuous Communication with the client Preparation of classification report. Supporting Department: Though the loan and advance are given from the credit and foreign exchange department, the procedure required from different departments, as this is a process-based product. General Banking: From the general banking department, sometimes the payments of loans are given in Pay-order, Demand Draft. So the respective employee has to allocate time for preparing the pay-order of the credit department. Computer Department: Starting from the loan account opening, the computer department provides service to both the credit and foreign exchange department for monitoring and supervision and till closing of the accounts. As all the MTB branches are computerized, every day the computer expert has to print out the existing loan and advance sheet of different mode.

Cost Drivers Salary and allowances Rent Office supplies, Consumable for office equipment Depreciation. Telephone, Fax, courier. Utility Expense Lawyer charge. Cost of fund calculation

The cost of the fund largely dominates the fixation of the loan interest rate. Mainly the sources of the bank fund are deposit, borrowing from other banks or financial institution. Obviously the deposit collected from the people are the main sources of banks fund. In MTB the administrative cost are added to the cost of deposit to calculate the cost of fund.

Cost of Deposit: There are different types of deposit collected from the individuals and business houses. Deposit in the MTB at the end of 2011 was 1116.94 crore, including the inter-bank deposit. The core deposit collected from the customer not the borrowings from the financial institution are considered in the calculation of the deposit as customer deposit holds the larger portion. For calculating the cost of deposit the average deposit holds by MTB are collected from the statements of affairs of the MTB. The average balance in the MTB during the year 2011 are given in the following table: After collecting four weekly average deposits in a month datas are used to calculate average the monthly deposit. Then the interest expenses are divided till date by the average deposit. This way the cost of deposit is calculated.
Table Monthly Average Deposit.

At the end of January February March April May June July August September October November December

Deposit(in crore) 752 756 769 786 805 824 846 863 879 895 957 970

Interest Expense during the last year TK 67.78 crore. The Nominal Cost of Deposit (NCD)= Interest Expense/Average Deposit(1) = 67.78 crore/970crore=6.98% Impact of reserve requirement: Though the nominal cost of deposit is 6.98%, the real interest on deposit will be higher. Central bank has a reserve requirement that has to be maintain in cash or cash equivalent form. Currently the Bangladesh Bank has the order to maintain 20% of the deposit as a reserve in terms cash and cash equivalent which is namely called SLR (Statuary Liquid Reserve) and CRR (Cash reserve requirement. So to maintain this requirement the actual loanable funds available in hand reduce. So actually the interest is given on less amount available in hand and thus there is an opportunity cost of that fund retain as reserve requirement. The impact of this reserve requirement increase the cost of deposit and thus the real interest rate will be higher than the nominal cost of deposit 6.9%. Real rate of interest (RRI)=NCD/(1-RR) ..(2) Here NCD =Nominal Cost of Deposit = 6.98% RR= Reserve Requirement = 20% Putting all this value in the equation 2, the RRI =6.98%/(1-20%) = 7.51%

TIME BUDGET ANALYSIS Time budget analysis will be used for calculating the total tome employed for loan and advance product or for credit management procedure. In the time of loan processing the works are divided in to two phases. The pre-approval supervision and the post approval supervision elements. As it is mentioned earlier that both foreign exchange department and credit departments are

engaged in giving loan and advance. So in the following section the cost will be calculated in the department wise. As it is mentioned earlier that the sanctioning and monitoring of the loan proposal are process based, the procedure go step by step. In the following section the time allocated in both the departments are described: CREDIT DEPARTMENT: In credit department there are 6-credit officer in the Motijheel branch of credit who deal with the credit department loan product except the CCS as it does has other section in this department. But in most of the branches the number of credit officer may be smaller and the CCS section may not exist individually.
Table Pre-approval time calculation

Element
1. 2. 3. 4. 5. 6. 7. Preliminary Interview to select the real borrower. Collection and Scrutinizing the documents Appraising the client Preparation of the Proposal Approval (Branch Level Committee or Head office) Pre-disbursement Formalities Disbursement

Person Involved
Credit in-charge and or credit officer Credit officer Credit officer Credit officer Credit officer, Branch Manager, Second Man, Credit In-charge, Credit officer Computer officer, Credit officer

Post Approval Supervision In post approval part, the main job of the credit department is to see whether the loans are becoming EOL (Excess over limit). To do this job the assigned credit officer checks whether the client has given the installment on time,
Table POST APPROVAL SUPERVISION

Element
Monitoring, Follow-up Loan Review Preparation of classification report.

Responsible Persons.
Credit Officer Credit Incharge, Officer Credit Officer, Incharge. Credit Credit

Time calculation Pre & Post Approval Supervision In this part, the time employed by each of the employee in the credit department is the main point of consideration. The total time consumed for all the elements of pre & post approval supervision cost allocated in a formula or general

guideline for calculating the cost of credit management procedure. Time calculation of an employee. For doing an element of the credit management process, the different officials are assigned. In most of the cases it can be known from the job description (if available). Say, for every element e the employee p of the credit department takes T times. If a survey is conducted through a questionnaire, the summation of the times employed for each elements will be the total time employed by employee p of the credit department. The formula will be Cp=Tpe e = Element in loan processing in the credit department Tpe = Time given by an employee p of the credit department for doing each e element in the credit management process. Cp = Total time given by the employee p of the credit department for performing all the elements. Total time calculation: In the above equation total time given by an employee of the credit department are calculated. Now its time to calculate the total working hour employed by the credit department official in a branch. If we sum-up the time given by an each personnel in the credit department, we will have the total working hour employed by the credit department employee. TWHc= Cp ..(1) Here; TWHc= Total time given by all the employee of the credit department for doing all the elements in the credit management process.

INTERNATIONAL TRADE FINANCE: In the foreign exchange department the number of loan product are offered to the exporter and importer which is namely called the international trade finance. Though in true sense the FDBP can not be said as loan. The actual loan is LTR, LIM, PAD, Packing Credit, SOD (Export), SOD (General-Cash incentive). MODE of Advance
PAD (Payment Against Document) LIM (Loan Against Imported Materials) LTR (Loan Against Trust Receipt Materials) Packing Credit FDBP (Local) FDBP (Foreign) SOD(Export) SOD(General- cash incentive)

Responsible Authority Import Section Export Section


Import officer, Import Incharge, FexIncharge, Computer operator. DO DO FEX Incharge, Computer operator. FDBP officer, Computer operator. Export officer, Export Incharge, FexIncharge, Computer operator. Payment officer, Computer operator. Officer, Computer operator.

Time calculation in International Trade Finance Basically in the foreign exchange department the in import and export department the loans are given.

Time calculation of Import Section

In the import section, goods are imported to be of 100% margin if possible. But in sometimes in MTB, like other banks, has to allow a loan facility for post import finance which is called LIM (loan Against Imported Materials) and LTR (loan Against Trust Receipt).

Ia= Mae e = Elements in loan processing in the import section.

Mae = Time given by an employee a of the Import section for doing each e element in the credit management process. Ia = Total time given by employee a of the import section for performing all the elements. If total time are calculated it will be; TWHi= Ia ..(2) Here; TWHi= Total time given by all the employee of the import section for doing all the elements of the pre-approval and post approval supervision. a= Total number of the employee in the import section.
Time calculation of Export Section

From the export section there are some loan products namely foreign documentary bill purchase, inland documentary bill purchase, SOD against cash incentive package. Elements in the export sanction for credit management are less in number than that of the credit department. As when the clients approach for loan, they seek for limit in every mode they need. So the credit appraisal and proposal preparation is not the work of the export employee. Foreign exchange incharge along with credit incharge look over these elements. The main elements done in the export department for credit management purpose: Preparation of purchase sheet. Loan sanction Disbursement Reconciliation Monitoring Loan review and Classification report. Eb=Mbe e = Elements in loan processing in the export section

Mbe = Time given by an employee b of the Export section for doing each e element in the credit management process. Eb = Total time given by employee b of the Export section for performing all the elements. Total time employed by the employees in the export department for credit management tasks are; TWHe= Eb ..(3) Here; TWHe= Total time given by all the employee of the Export section for doing all the elements of the pre-approval and post approval supervision. b= Total number of the employee in the export section.

Time calculation of other employee

There are other employees contributions in the credit management process of the foreign exchange department. The are Payment officer, Computer operator. Payment officer (PO): This officer is responsible for payment against the imported raw materials, and back to back credits. Whenever the main proceeds of export LCs is not arrived in due time and there arise a situation to pay the Back to Back LCs payment, there is policy to create a forced loan for the payments of this kind. TWHpoc= DIpc + DEFL..(4) Here; TWHpoc= Total working hour employed of the payment officer for the payment of LIM and LTR and forced loan creation and disbursement. DIpc = Total time required for the payment of LIM and LTR of the import section. DEFL = Total time required for the creation of forced loan and payment.
Computer operator

Computer operator of the credit department are highly required for writing the proposal for international trade finance and renewal of the sanction along with limit enhancement. So this officer employed time for the preparing of the proposal in the credit management process of the international trade finance. TWHco= Jp*N..(5) Jp= Average Time employed for writing proposal. TWHco= Total time employed by the computer operator for writing proposal during his total working hour.
Total time in the FEx

Total time given in the foreign exchange department for credit management purpose can be summarized as follows TWFFEX= TWHI+ TWHe+ TWHpoc+TWHco Here; TWHco= Total time employed by the computer operator for writing proposal during his total working hour. TWHpoc= Total working hour employed of the payment officer for the payment of LIM and LTR and forced loan creation and disbursement. TWHe= Total time given by all the employee of the Export section for doing all the elements of the pre-approval and post approval supervision. TWHi= Total time given by all the employee of the import section for doing all the elements of the pre-approval and post approval supervision. TWFFEX= Total working hour employed in the foreign exchange department for international trade finance product.

Calculating Time of Supporting Department

General Banking:

There is a relationship of credit department with the general banking department. Some times credit department needs the service of the officer responsible for writing Pay order. TWHpoc= Fp* N..(6) Here, Fp = Average time required for preparing a pay order or DD by the Pay order officer. TWHpoc= Total time given by the employee responsible for preparing pay order for the credit department.

Computer Department: Computerization has helped the banking system to a great extent. In past all the documents and information are written and required huge time of the official. Now a day the information technology has eased the procedure. In general the computer department helps the loan and advance management procedure by doing the following tasks. Opening of the loan Account Managing and closing the loan account Printing out the information sheets mode wise. Namely SOD, HBL, Lease, FDBP etc. Say, there are

COj=Tjt t = tasks in loan processing done by the computer officer. Tjt = Time given by an employee j of the computer department for doing each t tasks in the credit management process. COj = Total time given by the employee j of the computer department for performing all the elements. TWHcom= COj..(7)

Here; TWHcom= Total time given by all the employee of the computer department for doing all the tasks in the credit management process.

Time calculation of Top Level Executive Here I would like to design the Branch Manager, Second Man, Foreign ex-change incharge, Managing Director as top level executive who are indirectly related with the credit management process and perform the work element. AL= TLe e = Element in loan processing. TLe = Time given by a top level executive L for doing each e element in the credit management process. AL = Total time given by a top level executive L for performing all the elements. TWHTE= AL..(8) Here; TWHTE= Total time given by all top-level executive all the tasks in the credit management process. L= 1 to number of top level executive

Total time budget for credit management. In the above section time employed by different departments and individuals are calculated. So if all the working hour are get together TTCM= TWHc+ TWFFEX+ TWHcom+ TWHpoc+ TWHTE.(9) Here; TTCM = Total time for credit Management. TWHc= Total time given by all the employee of the credit department for doing all the TWFFEX= Total working hour employed in the foreign exchange department for international trade finance product.

TWHcom= Total time given by all the employee of the computer department for doing all the tasks in the credit management process. TWHpoc= Total time given by the employee responsible for preparing pay order for the credit department. TWHTE= Total time given by all top-level executive all the tasks in the credit management process. Cost of Credit Management From the above generalize idea, the cost of credit management can be calculated. To calculate the cost of credit management, at first we have to calculate the cost of the time employed by the different employees of different departments. If we multiply the total time employed by average salary per hour, we will get the cost of the time employed for credit management. So the; CTTCM= AS*TTCM Here, CTTCM= Cost of total time employed for credit management. AS= Average Salary/hour TTCM= Total Time Employed for credit management (in hour). So the cost of credit management will be; CCM=COF+CTTCM+ Here, CCM= Cost of Credit Management COF= Cost of Fund CTTCM =Cost of Total time employed for credit management. = Other cost Remarks: The method described above is not the absolute method for calculating the cost of credit management. If other costs are also be calculated the picture will be more realistic.

Application of the Formula The formula formed above was used to calculate time employed by the employee of Motijheel Branch where I was appointed as an employee. To avoid the error I used this branch as a model. The activities of this branch is huge in volume. Total loan and advance of this branch was Tk 221.57 crore which was around 29% of the total loan and advance of the branch. Structure of the Motijheel Branch The manager of the branch is an Senior vice president to executive vice president ranks. The second incharge is said to be the manager operation an last two years the position is hold by KaziSaifulHoque, AVP and also MBA from IBA.

Time Budget Analysis As the cost of Fund is known I tried to find out the time employed for loan and advance in the Motijheel branch as sample branch of MTB for the calculation of

the cost of credit management. I did a survey where I tried to find out the time given by the employee against each element of the credit management. Assumption: I have assumed that total working day in a year is 300, and working hour/day is 10 hour starting from 9.AM in the morning to 7 PM. Time of Credit Department In credit department, I have interviewed three-sample employee. Mr. HasanUddin Ahmed, CCS incharge, Mr. Imrul Islam, MTO, Mr. MukhlesurRahman EO, to estimate the time. On the basis of that discussion I have come out with the following figure:
Table Time calculation of the Credit Department Time Calculation of the credit Department. Total Working Day Working hour/day (9Am to 7PM) Element 1. Preliminary Interview to select the real borrower. 2. Collection and Scrutinizing the documents 3. Appraising the client 4. Preparation of the Proposal 5. Approval (Branch Level Committee or Head office) 6. Pre-disbursement Formalities 7. Disbursement 8. POST APPROVAL SUPERVISION. -up 300 10 Time Given.(in hour) 1 0.5 0.5 3 1 1 1.5

Total Time employed by each credit officer in a working day Credit officer in Motijheel Branch Total working hour employed by all the credit employee in a day

9 9 81 Hour.

As it is traditional in banking sector that the employee of the bank can not leave till seven in the evening starting from 9 AM. The total man-hour employed by the entire nine-credit department employee is 81 hour in a day.

Time Calculation of the International Trade Finance In international trade finance, Mr. Amir UddinChowdhury is the incharge and also Mr. SaifulHoque look after this department as well. There are mainly 4 departments- Remittance, Import, Export, LC for local Import. But in export there are two section like IBP (Dealing with local export) and Export (Foreign Documentary section). After discussing with the concerned employee of the related department, I have come out with the following figure;
Table Time budget in the International Trade Finance

Time calculation in International Trade Finance


Time Given in Hour /day IMPORT SECTION Formalities for PAD Formalities for LIM Supervision Total Time employed by each officer of the import section in a working day Personnel in the import section in Motijheel Branch Total working hour employed all the import employee in a day EXPORT SECTION 2 1.5 1 4.5

3 13.5 3 1 1.5 2 1 0.5 9 3 27 1 3 1 1 1 7

Total Time employed by each officer of the export section in a working day Personnel in the Export section(FDBP & IBP) in Motijheel Branch Total working hour employed all the export employee in a day CASH INCENTIVE Document collection Investigation of the document Preparation of the proposal Sanction Supervision, Monitoring Total Time employed by each officer of the cash incentive section in a working day Personnel in the cash incentive in Motijheel Branch Total working hour employed all the export employee in a day OTHER EMPLOYEE Payment officer

2 14

Payment for Import Finance Computer operator Preparation of the proposal Foreign Exchange Incharge Discussion with the client Sanctioning of credit Supervision Loan Review Total time given by the other Employee for International Trade Finance Total Time employed in the International Trade Finance in a working day

2 3 1.5 0.5 1 2 10 64.5

Beside this there is another section in the foreign exchange department named Cash incentive. Though the main task is to distribute the incentive given by the Bangladesh Bank among the exporter, the fund is not available through out the year. For this reason MTB offer loan against the document of the export 80% of the cash incentive that the exporter can get. Here two employees are working. They give 7 working hour per day for this purpose. From the above table the total time employed by the employee of the foreign exchange department is 64.5 WH per day for international trade finance. Supporting departments Time In the loan and advance procedure both general banking and computer division help to complete the credit management procedure. Pay-order officer of the general banking prepares PAY ORDER, if required for the credit department. On the other hand the need of Computer division is indescribable in the credit management procedure. Every day the computer officer has to print out the loan status sheet of each mode and distribute it to the respective section, accounts opening, data input etc. after interviewing Mr. Shah Alam, Computer incharge and Ms. Shahina, computer operator I have come out with the following figure:
Table Time calculation of the Supporting Department Time Given in Hour /day GENERAL BANKING Pay-order section COMPUTER DEPARTMENT Account Opening and data posting Print out of the loan sheet for each mode(Computer incharge) Total time of supporting department 1 3 2 6

The total time given by the supporting department is 6 WH/day. Top-Level Executive Time The branch manager and Second Man (manager-operation) are considered by top-level executive. Though they are busy managing the overall branch, they give some time to the procedure of credit management.

Table Top level Executive Time Time Given in Hour /day Second man of the branch Interview and Discussion with the client Preparation of the proposal Credit sanctioning Loan review Total time given by Second Man Branch Manager Interview and Discussion with the client Credit Approval Total time given by Manager Man Total time given by top level Executive 1 2 0.5 1 4.5 1 0.5 0.5 1 5.5

After observation and interviewing with the Manager (operation) and Manager I have the above figure. So it is clear that the top-level executive give 5.5 WH in a day.

Total Time for Credit Management Using the above data that was collected through interview and observation is used for calculating the total time for credit management. Total working hour per day employed for credit management procedure is TTCM= TWHc+ TWFFEX+ TWHcom+ TWHpoc+ TWHTE.(9) = 81WH+64.5WH+ 6WH+ 5.5WH = 157WH/Day Number of Working day =300

Total time employed per year by the employee of the Motijheelbarnch for credit Management purpose: =157*300 = 47100 CTTCM= AS*TTCM Here, CTTCM= Cost of total time employed for credit management. AS= Average Salary/hour TTCM= Total Time Employed for credit management (in hour). Average salary/employee/year= Tk 250324 Average salary/employee/WH= Tk 250324/300*10= Tk. 83.44 CTTCM=47100*83.44 = Tk. 39.30 lac.

Limitation Joint Costs are not allocated due to the unavailability of the data. They are like Stationery, legal, security expense, Electricity bill, telephone expense, rent, Medical expense, and entertainment. These figures will be the vital in calculating the cost of credit management. Obviously there is time allocated and employed time of the head office credit department in monitoring, supervising, and loan review to the head office credit department. There are also top executives (like MD, AMD, and DMD) time for the credit management of the branch under experiment.

Findings & Recommendations

Mutual Trust Bank limited though performing very well and jointly hold the first position in the CAMEL rating published by the Bangladesh Bank, should be careful and control its costs. No doubt this is the good management that this bank comes to this stage only by six years. But now the time to lengthen this time and made its capital base stronger with having insignificant percentage of nonperforming assets. Though the appraisal and proposal system of the Mutual Trust Bank is said to the best one in this kind certain factors are overlooked. In appraisal system the competitive position analysis is not focused while doing the appraisal system. The product appraisal is done on the customer base not any comparison is done with other product. The suppliers influence is overlooked. Due to the data unavailability the credit demand assessment is not properly done.

Recommendation 1. Using the five force model the client must be appraised to identify the what is the competition like and how strong each of the competitive forces are on the business of the client where the following things must be highlighted; The rivalry among the competitor The potential entry of new competitors-interms of economies of scale, technological Know-how, Experience curve effect,

resources requirements, access to the distribution network. Bargaining power of the buyer Suppliers influences and bargaining power over the business of the client. Potentiality of the substitute products.

1. Product comparison should be done between competitors in terms of Characteristic, Price, packaging, Ingredients, Unique selling Proposition (in case of services what they are offering quality of the service analysis) 2. As it has been observed that, during there are some inconsistency in post approval and pre-approval monitoring. Most of the clients dont submit the stock report, monthly statements, and overall stage report in case of large project. To reduce the difficulties in project implementation and supervision and monitoring following clue can be implemented. A time budget for the project to be implemented with mentioning the exact time of beginning and ending must be collected. So that time over-run while project completion can be avoided. For reducing the cost problem the credit officer must look for whether the construction are given contract and turn-key basis. Disbursement of fund procedure must be improved the credit officer must become sure that the funds are going to the project it is sanctioned. There must be an credit officer assigned to the project and he will be responsible for completing the Stage Completion Report Form which will mainly deal with the details of the cost incurred in the previous period. And percentage of project work completed. Justification whether the portion of the project works are completed in time. The management must introduce project progress reporting form for better disbursement procedure. Most of the time the client doesnt channel their proceeds through the accounts with the Mutual Trust Bank though they supposed to. Revenue Cascade and hierarchy of payment must be maintain to ensure that the installments are in time in right amount as there is a potentiality that the client will default. The risk that can be arise while implementation of the project must be analyzed and mitigated through the perfect risk taker. Different types of risk that can be arise are

Table 6Project Risk and Mitigation

Risk Construction Risk

Result Incomplete project Construction delay Cost overrun

Features to be checked

Operation and Market Risks Credit Risk

Legal risks

Date certain completion contract, cost, performance of the contractor Late Supply of the Suppliers reliability input. and influence Management ability Equipment warranty Lower Equipment and guarantee. performance Insurance for the Force Majeure (Acts force majeure. of good) Failure to pay the Prospect of the debt in time goods or services to Insufficient Cash be produced. flow Buyers payments habit & creditworthiness. Insufficient collateral Proper valuation of value to pay the the collateral and debt. lending amount Banks take-over must be lower than problem in case of the forced sale value. default. Banks power to participate in the management meeting and analyzing and suggestion.

In case of cost of credit management the job description must be clearly written so that the employees do know what they do, how they do, and why they do. As during my attachment period in the Motijheel branch of the MTB, the jobs are done in a unstructured way and more time is required. As the employees times are employed to do a job and more time is given the cost of credit management will increase. More structured way and assigned system will be helpful to reduce the cost.

The assignment system to supervise and monitor the loan account can reduce the default tendency. If each credit officer are assigned certain amount of client for close contract and supervision-there will be ggod relation with the clients and the recovery will be in time.

The last word is that lack of date for related product and industry appraisal is the main problem in appraisal system. The importance of the creation of Research and Development Cell must be realized by the management of the Bank.