Credit Policy and Risk Management A Case Study On Bank Asia Limited

4.1 Introduction
Credit facilities, principals, procedures and lending guidelines should provide a clear and
consistent point of reference for all employees and prevent misunderstanding, confusion
or omission by personal dealing with credit issues. Additionally, credit policies help
prevent deviation from the overall lending principles and credit culture.
Credit procedures support the delivery of credit products, help to avoid undue process
and serve as an efficient mechanism in granting of facilities and the administration of the
risk asset portfolio.
Figurer-4.1Different Types of Credit Facility

Credit Facilities

Funded Business

Non-Funded Business

Letter of Credit
Industrial Finance and Other Project
Loans

Letter of Guarantee
Syndicate Loan

Personal credit
Different Types of Overdrafts
Advance Against Import Bills (BLC)

Advance Against Imported

Merchandise (LIM)
Advance Against Trust Receipt (TR)
Advance Against Export Bills
Purchased / Discounted
Advance Against Work Order

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Credit Policy and Risk Management A Case Study On Bank Asia Limited

4.2 Types of Credit Facility by Bank Asia

Bank Asia offers both funded and non-funded credit facilities. Among all the funded and
non funded facilities Bank Asia does not provide all but those, which are commensurate
with the Banks policy and strategy. The various funded and non funded credit facilities
that Bank Asia provides to its borrowers are:

4.2.1 Funded Facilities

The funded credit facilities are those, which involve direct cash. In other words any type
of credit facility, which involves direct outflow of Banks fund on account of borrower is
termed as, funded credit facility. The following funded credit facilities are provided by
Bank Asia:
Industrial Finance and Other Project Loans
Project loan normally has fixed maturity and it relates to term investment. As such it
requires appraisals of those proposals to have a rational decision. Appraisal may be
termed as assessment of viability over a period of time.
These loans are usually made for:

Setting up of industries and to meet working capital

Balancing, Modernization, Replacement and Expansion (BMRE) of

existing industries.

Construction of commercial / Residential Building / Warehousing etc.

Over Draft
Over draft facility is also a continuous loan arrangement on a customers current account
permitting him/her to overdraw up to a certain approved limit for an agreed period. Here
the withdrawal of deposits can be made any number of times at the convenience of the
borrower, provided that the total overdrawn amount does not exceed the agreed limit.
Customer can return any amount at any time within the pre-fixed time of the facility. Turn
over of an Over Draft facility is the most important phenomenon on which renewal of the
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Credit Policy and Risk Management A Case Study On Bank Asia Limited

facility depends. Over Draft facility is given to the businessmen for financing working
capital requirement and high net worth individual to overcome temporary liquidity crisis.
Secured Over Draft
This is a type of over draft facility given to the borrowers keeping sufficient collateral
from the customer in the most liquid form. This facility provides specific right to a client
to overdraw within a pre fixed limit for a certain period of time. Secured Over Draft is
normally granted against the security of tangible asset such as lien of Fixed Deposit
Receipt (FDR), Bonds, Sanchaya Patra but currently Secured Over Draft is given only
against Fixed Deposit Receipt because Bangladesh Bank has recently prohibited Secured
Over Draft against Bonds and Sanchaya patra. Interest charged on the Secured Over Draft
is calculated on the basis of the security lined.

Term Loan
Terms loans are given to finance the acquisition of capital assets. Loan agreements often
contain restrictive covenant and loan is repayable in accordance to amortization schedule.
Collateral is must for term loan. Under term loan there are three categories:
Short term loan- loans having maturity less than one year falls under this
category.
Midterm loan- this loan facility is extended for loans having maturity more than
one year but less than three years.
Long term loan- tenure of long term loans is more than three years.

Personal Credit
Bank Asia also offers personal credit facility to its customers for buying household
appliances. No securities are kept for such type of credit facility but a guarantee from
third party is required who ought to be a prominent person or government service holder.
Anyone with continuous employment for a reasonable length of time in an organization is
entitled to enjoy this facility. A quotation needs to be submitted on the office pad from
where the goods will be purchased. Limit of personal credit ranges from Tk. 50,000 to
Tk. 3, 00,000 and interest rate is 16.25%, which is subject to change.
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Credit Policy and Risk Management A Case Study On Bank Asia Limited

The objective of this loan is to provide essential Household durables to the fixed income
group (Service holders) and other eligible borrowers under the scheme.

Items of Investment
i.

Refrigerator / Deep Freeze

ii.

Television / VCR / VCP / Dish Antenna

iii.

Music Center

iv.

Motor Car / Motor Cycle

v.

Air Cooler / Air Conditioner

vi.

Personal computer

vii.

Washing Machine

viii.

Household Furniture & Fixtures

ix.

Sewing Machine

x.

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

xi.

Any other item not specified above but considered essential.

Eligibility
The criteria to become eligible for availing the facility under the scheme are given below.
The borrower must be confirmed official of any of the following organizations:
a) Government Organization.
b) Semi-Government Organization / Autonomous body.
c) Multinational Organizations.
d) Banks & Insurance Companies.
e) Reputed Commercial Organizations.
f) Professions.

Loan against Trust Receipt (LTR)

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Credit Policy and Risk Management A Case Study On Bank Asia Limited

Loan against trust receipt is given on good faith on the importer. This is a loan facility up
to a satisfactory limit to the traders/customers by Bank Asia against security of the value
of the imported goods. Customer holds the goods or their sales proceeds in trust for the
bank for certain period of time till the loan allowed against such trust receipt is fully paid.
The duration of LTR ranges from thirty days (30 days) to three hundred and sixty days
(360 days).
4.2.2 Non-Funded Facilities
Non funded facilities are also known, as contingent facilities are those where banks fund
is not required directly. A non-funded facility can be turned to a funded facility as per
situation creates. Bank receives commission rather than interest income by providing
non-funded facilities. Following non-funded facilities are provided by Bank Asia:
Letter of Credit (L/C)
A letter of credit can be defined as a Credit Contract whereby the buyers bank is
committed (on behalf of the buyer) to place an agreed amount of money at the sellers
disposal under some agreed upon conditions. Since the agreed upon conditions include,
amongst other things, the presentation of some specified documents, the letter of credit is
called Documentary Letter of Credit. The Uniform Customs & Practices for
Documentary Credit (UCPDC) published by International Chamber of Commerce (ICC,
1993) Revision, Publication No. 500 defines Documentary Credit.
Any arrangement however named or described, whereby a bank (the issuing bank),
acting at the request and on the instructions of a customer (the applicant) or on its own
behalf,
1) Is to make a payment or to the order of third party (the Beneficiary), or is to
accept and pay bills of exchange (Drafts) drawn by the Beneficiary, or
2) Authorized another bank to effect such payment, or to accept and pay such bills
of exchange (Drafts),
3) Authorizes another bank to negotiate, against stipulated document (s), provided
that the terms and conditions are complied with.
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Credit Policy and Risk Management A Case Study On Bank Asia Limited

Bank Asia provides only irrevocable letter of credit (L/C) facility.

Guarantee
Bank Asia offers guarantee for its reliable and valuable customer as per requirements.
This is also a credit facility in contingent liabilities.
Features of Bank Guarantee

It is a written document on non-judicial stamp.

Expiry date is mentioned specifically with other terms and conditions.

Bank Asia receives commission quarterly @ 0.50% of the guaranteed amount.

Syndicate Loan
A Bank can lend upto 15% of its paid up capital without any approval by Bangladesh
Bank. If the loan amount exceeds 50% of the paid up capital then Bank goes for
Syndicate loan. Lead Bank makes the arrangement and Head Office makes the facility
agreement by the Banks lawyer. All terms and conditions such as security sharing, mode
of creating charges, mode of repayment, covenants of the loan are written on the facility
agreement.

4.3 Principles of Lending

Banks are profit oriented organization for which a bank invests its funds in many ways to
earn income. At the same time bank runs the risk of default in repayment. As such the
banks are required to follow certain basic principles of lending. The lending principles of
Bank Asia govern its extension of credit facilities. These principles are strictly followed
to shape and define the acceptable risk profile of Bank Asia. These principles are:

Know Your Customer: Know Your Customer (KYC) is the most important
guiding principle of Bank Asia for extending credit facilities to its prospective

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Credit Policy and Risk Management A Case Study On Bank Asia Limited

borrowers. Complying with this principle helps the bank to avoid money
laundering crime and adverse selection of borrowers.
Safety: Safety depends first upon (i) the security and its value offered by the
borrower and (ii) the repaying capacity and willingness of the borrower to repay
the loan with interest.
Liquidity: It refers to the ability of an asset to be converted into cash without
loss and within a short time to meet depositors demand for cash.
Profitability: Bank Asia must employ its fund in such a way that they will bring
adequate return for the bank, which should be more than cost of the funds.
Purpose: The purpose for which Bank Asia will provide loan should be
productive so that the money not only safe but also provides a definite source of
repayment.
Spread: It refers to the diversification of advance. So far Bank Asia could
maintain considerable margin on its disbursed loan but recently Bangladesh Bank
has imposed restriction on lending rate and to comply with Bangladesh Bank
policy guidelines, Bank Asia lowered its lending rate.

4.4 Strategies of Lending Procedure

A loan policy gives loan officers, relationship managers and the Banks management
specific guidelines in making individual loan decisions and in shaping the Banks overall
loan portfolio. One of most important ways a Bank can make sure its loans meet
regulatory standard and are profitable is to establish a written loan policy.
Bank Asia also has a good loan policy and the most important elements of the policy are
stated below:

A goal statement for the Banks loan portfolio (in terms of types, maturities,
sizes, and quality of loans).

Specification of the lending authority given to each loan officer and loan
committee (measuring the maximum amount and types of loan that each person
and committee can approve).

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Credit Policy and Risk Management A Case Study On Bank Asia Limited

Lines of responsibility in making assignments and reporting information within

the loan department.

Operating procedures for soliciting, reviewing, evaluating, and making decisions

on customer loan applications.

The required documentation that is to accompany each loan application and what
must be kept in the Banks credit files (required financial statements, security
agreements etc).

Lines of authority within the bank regarding who is responsible for maintaining
and reviewing the Banks credit files.

Guidelines for taking, evaluating and perfecting loan collateral.

A presentation of policies and procedures for setting loan interest rates and fees
and the terms for repayment of loans.

A statement of quality standards applicable to all loans.

A statement of the preferred upper limit for total loans outstanding (i.e. the
maximum ratio to total loans to total assets allowed).

A description of the Banks principal trade area, from which most loans should
come.

A discussion of the preferred procedures for detecting, analyzing and working

out problem loan situations.

A written loan policy statement carries a number of advantages for the bank adopting it. It
communicates to employees working in the loan department what procedures they must
follow and what their responsibilities are. It helps the Bank moves forward a loan
portfolio that can successfully blend multiple objectives such as promoting the banks
profitability, controlling its exposure and satisfying regulatory requirements.

4.5 Classification of Loans and Provisioning

Loan classification is a process by which the risk or loss potential associated with the
loan accounts of the Bank on a particular date is identified and quantified. It is done to
determine the level of reserves to be maintained by the Bank for the probable loss on that
risky loan account.
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Credit Policy and Risk Management A Case Study On Bank Asia Limited

Figure 4.2 Classifications of Loans

Unclassified

4.5.1

Loan

Unclassified Loans

An unclassified loan or commitment is one that is set by Bangladesh Bank or the Head

Classified

Office of the Bank. Unclassified loans are those loans in which repayment is regular.
4.5.2. Classified Loans
A classified loan or commitment is one that is classified as substandard, Doubtful or Loss
as per policy of loan classification set by Bangladesh Bank or Head Office of the bank.
Loan Classification means to categorize the debt information in a systematic manner. But
in true sense it is defined in terms of degree of risk associated with these loans. The
objectives/importance of loan classification are:

To find out Net Worth of a bank;

To assess financial soundness of a bank;

To calculate the required provision and the amount of interest suspense;

Strengthen credit discipline;

To improve loan recovery position and

To put the bank on sound footing in order to develop sound banking practice in
Bangladesh.

Position of classified loans and advances and other assets should be placed before the
Board of directors of the bank.

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Credit Policy and Risk Management A Case Study On Bank Asia Limited

4.6 Evaluation of the Bank Asias Loan Products, Principals and

Strategies
4.6.1 Loan Products Evaluation
Now is the period of innovations. There are 52 commercial banks operating in the
country excluding other non banking financial institutions. In this competitive banking
arena a bank must come up with new and easily accessible customer focused loan
products. Bank Asia offers a limited number of loan products to its customers. Bank Asia
has been operating in the market for the last five years starting from mid 1999 and yet to
develop new and innovative loan products.
The loan mix of the bank is very conventional. It has been observed that the existing loan
products are insufficient to meet up the existing borrowers need. The bank has no loan
products for the religious Muslim borrowers. It has caused the bank to lose a large
segment of the potential borrowers. The bank has yet to establish credit card facility
which could pull a large number of borrowers because due to safety need, increasing
number of people are being interested in having this facility. Bank Asia is still lagging
behind the other private commercial banks in terms of product diversity in credit.
But Bank Asia has promised to incorporate new loan products in its loan mix portfolio.
Lease financing and credit card are under processing. The bank has established WAN
(Wide Area Network) to bring all the branches under online banking system. The bank
can use its online system for easy access of the customer to the loan products like
personal credit and credit card.
4.6.2 Evaluation of Lending Principles
Bank Asia follows well constructed lending principles starting with KYC or Know Your
Customer and ending with Spread. KYC is getting increasing emphasis in the banking
arena because loan default rate is high in our country. Proper compliance with KYC can
help the banks to avoid bad loans. The Bank Asia still maintains adequate safety in its
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Credit Policy and Risk Management A Case Study On Bank Asia Limited

loan portfolio, which is reflected in its low default rate. The bank was able to establish
confidence in the minds of the customers regarding maintaining adequate liquidity to
meet up the borrowers requirement.
At the same time the bank was able to remain profitable in terms of interest income
maintaining a higher spread. So far Bank Asia was able to perform well in its loan
portfolio but the scenario is changing very rapidly. Lending rate is being decreased under
the policy guidelines of the Bangladesh Bank and the bank has to adopt necessary
strategy to maintain its profitability from the loan portfolio.
4.6.3 Strategy Evaluation
Strategy provides guidelines to Bank Asia to device a smooth lending procedure. As
mentioned earlier, Bank Asia does not have a very diverse loan products but it provides
short term, mid term and long term loans. Size of the credit varies from fifty thousand
taka for personal credit to several crores for syndicated loans. Bank Asia has a preference
for corporate customer and loan mix is mostly provided for working capital financing.
Bank Asia also finances SME (Small and Medium Enterprise), provides personal credit,
export and import finance. Bank Asia is in constant search of profitable business sector
for extending credit line. Bank has also taken safe guard against predicted alteration in
the world trade policy. As MFA (Multi Fiber Agreement) was phased out from December
2004, many of the countrys garments factories were under the threat of lay off. The
experts of the bank are anticipating that the situation after last year were seriously
jeopardize the banking sector because most of the banks have heavily financed in the
export oriented RMG (Ready Made Garments) sector. Bank Asia, keeping in mind the
impact of the phasing out of MFA has reduced its reliance on RMG sector.

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