Credit Management A Study on Pubali Bank Limited,

Pahartali Branch, Chittagong.

Executive Summary
In Bangladesh now there are as many as 57 banks are functioning. Many of them are very
recently established while many are functioning from the erstwhile Pakistan period. The PBL is
one of the banks which is functioning from the erstwhile Pakistan period. The bank started its
journey as Eastern Mercantile Bank Limited in 1959 as the first erstwhile East Pakistani owned
bank in the then Pakistan. Few Bengali entrepreneurs established the Eastern Mercantile Bank
Limited with the aim and hope of not letting every thing go in the hands of West Pakistanis. The
bank with mostly Bengali staffs and employees was doing reasonably well. After the emergence
of independent Bangladeshthe bank was nationalized and eventually like many other industries
the renamed Pubali Bank Limited became a loosing concern.
In 1984 The Pubali Bank Limited was denationalized and was taken over by a new set of
entrepreneurs with all its assets and liabilities. With 398 branches all over the country it became
the largest private bank in the country.
The objective of the study is to find out the causes for its unreasonable performance.
The report has been prepared based on primary and secondary data collected from the different
branches of PBL (interview of Officials) and furnished by the Head Office officials and the
experience gathered by myself during my working tenure in this bank.
The key parts of the report are credit risk and credit management, principles of sound lending,
recovery of classified loans and advances, present credit position of PBL, performances
evaluation, problem identification and recommendations.
The discussion in the report discloses some problems and I tried my best to recommend some
ways according to me as well as the employees of different banks and creditors and depositors.

 Introduction
Objectives of study
Methodology
Scope of the study
Limitation of the study
CHAPTER- I: INTRODUCTION
1.1

Introduction of the Study:

Private Banks have, of course, a vital role in promoting and accelerating the economic
development process as per the demand of time through the implementation of finance for
industrial & agricultural project, domestic and foreign trade and allocation the fund to various off
farm employment and self-employment generation projects. Focusing the light and considering
the every pros and cons on available statistical data it has been apparently accepted that Pubali
Bank Ltd. continued to register its steady process in the field of deposits, advances & foreign
exchange business. In view of the sluggish nature of the economic activities over the years the
deposit performance of Pubali Bank Ltd. is more or less satisfactory. Pubali Bank Limited gains
maximum advantages for foreign exchange related business. The policy of Pubali Bank Limited
is aimed at the integrated operation of all its outlet at home and abroad.
The low rate of economic growth, high rate of unemployment, illiteracy, growth rate of
population, low rate of recovery etc. are the impediment factor of economic development of a
country.
In spite of the above obligations rather in amongst favorable situation Pubali Bank Ltd. have
flourishing efficient and endeavoring to the maximum of efficiency of its capacity to catch up
with slow growing development of our country.
It has been tried here to highlight the credit procedure and credit management and its evaluation
in the perspective of PBL which also quenched my thirst to know about the lending (Credit)
business and its management.

1.2

Objectives of the Study:

The objectives act as a bridge between the starting point and the goal of the study. The main
objective of my study i.e. to write a report on Credit Management Of Pubali Bank Limited
(PBL) is to disclose the operational procedures of credit recovery system & its contribution to
the people and the nation. The operational procedures include credit application, evaluation of
credit proposal, preparation of credit proposal, forwarding to sanctioning authority, giving
sanction to the client, disbursement, nursing of the credit and finally recovery of the credit from
the client. It is also stated that the report is prepared for serving the academic purposes only but
not to disclose its confidential matters to the public.

In brief, the objectives are as below:

To get idea of the credit management procedure of Pubali Bank Limited

To get idea about the Credit Risk Management of Pubali Bank Limited
To discuss the Credit Disbursement procedure.
To identify policy recommendations for further improvement.

1.3 Methodology :

The report has been prepared based on primary and secondary data collecting from its branches
& furnished by the Head Office officials of PBL and the experience gathered by myself during
my working tenure in this Bank.
The primary data and secondary data have been collected are mentioned below:
Primary Data:-Interviews of different Officials.
Secondary Data:
Different Annual Reports of PBL
Brochures and leaflets of the Bank.
Office files & documents.
Study related Books and Journals.
Data and information in internet
Other publications.

1.4 Scope of the Study:

The focus of the report is on the Credit Management of Pubali Bank Ltd. This Bank is the largest
private bank in Bangladesh and highly progressive one among the private commercial Banks
PBL is running with 398 branches all over the country. For preparing this report attempts have
been particularly made to the investment (loan) giving activities and its recovery system in PBL.

1.5 Limitations of the Study:

The study aims to evaluate the Credit Management activities of PBL .As the report prepared with
a short span of time, the report could not be made comprehensive and conclusive. Mainly the
report could be made descriptive. Some usual constraints I faced during my course of
action/investigation. These are as follows:

The main limitation of the study is time barrier,

All of the data are not found because of confidentiality of Bank.

 PBL Profile
Mission and vision of PBL
Managing Head (MD) and Board of Directors
Employees and clients
Oregano gram of the Bank
Management of PBL
Organization Structure of PBL
Details of Some credit (Loans and advances) of PBL
Types of Loans
Securitization of Loans and Overdrafts
Mortgage
Credit Proposal & Sanction
Disbursement of advance
An overview of Pubali bank Limited, Pahartali branch.

CHAPTER-2
GENERAL DESCRIPTION OF THE PBL
2.1

PBL Profile
Pubali Bank Limited (PBL) was incorporated as Eastern Mercantile Bank Limited in 1959 as per
the companies act 1913 with 60 percent equity owned by the then few East Pakistanis. Rest 40
percent shares were owned by the State Bank of Pakistan. The founding chairman was Mr. O R
Nizam from Chittagong. The other few founding members were Mr. M R Siddiqee, Dr. Naimur
Rahman, Mr. M H Chowdhury and Khan Bahadur Mojibur Rahaman.After the independence, as
per the nationalization policy of the government, this bank was nationalized by the Bangladesh

Bank (Nationalization) Order 1972 (PO no. 26 of 1972) and was renamed as Pubali Bank.
After 12 years of nationalization, according to the privatization policy of the government the
bank was privatized in 1984 and renamed as Pubali Bank Limited (PBL). During the
denationalization 160 rural branches were handed over to Bangladesh Krishi Bank.

2.2 Mission and vision of PBL

From the era of nationalization (1972) until very recent time the bank did not have any written or
unwritten vision. There is no record or any literature available with the bank as to what the
organization was trying to achieve, nor were its employees clear about what they were working
for. Even after denationalization, its new entrepreneurs also did not set any clear vision for the
organization. As usual in the absence of any vision there was also not any clear mission
statement for its work force.
On the contrary the noble entrepreneurs of the Eastern Mercantile Bank had a clear vision for the
bank. Though there is no written record, but it is articulated from the talk with some of the old
employees that the very essential segment of their vision was not letting control of every thing
go in the hands of West Pakistanis, we the Bengalis must retain control on our economy. The
pride was shared by all its employees and there was high sense of owning the bank by its
employees also (this is very much evident from the talk with some of the old retired personnel).
The present Managing Director Mr. Helal Ahmed Chowdhury has taken the total charge of the
Pubali Bank Limited. His mission is to make profit Tk.600 Crore in the year 2010 & Vision is to
reach the No.1 among the private commercial banks.

2.2 Managing Head (MD) and Board of Directors:

Our Present Managing Director Mr. Helal Ahmed Chowdhury joined in Pubali Bank in 1977
when the Bank was nationalized. He joined in the Bank through BCS Exam. He has experience
of banking of about 30 years. He is one of the most experienced bankers in our country.
The Board of director comprises of Totaling 14 Members headed by The Chairman Hafiz Ahmed
Mozumder.Most of the directors are renowned industrialists and are engaged in various social
welfare activities .

2.3 Employees and clients:

In Pubali Bank at present there are about five thousand employees about 4000 of them are
officers and rest of them are sub-staff. The customers of PBL are from all walks of life from
farmers and rickshaw pullers to industrialists.

2.4 Oregano gram of the Bank

Pubali Bank Limited is the largest bank in the private sector of our country. Organ gram of the
PBL as a whole is shown:
Figure 1: Oregano gram of Pubali bank limited

Source: Primary

2.5

Management of PBL

The culture developed during nationalized era could not be totally removed from the
management style of PBL. Currently an excellent management team under the direct supervision
of a competent board of directors (BOD) runs the bank. Under the BOD there is an MD
(Managing Director). A general manager heads each department of the bank. There are total
eleven divisions in the Head Office of PBL. List of various divisions with its functions is as
follows:
Table 1 : Divisions and Respective Functions at Head Office
No

Division

Functions

Board Division

Share Management

Human Resource
Division

Establishment
division

Recruitment, promotion, training, disciplinary action,

dismissal, discharge, retirement, pay and allowances,
career plan, trade union etc.
Engineering, transport, telephone, telex, fax, security
system, real estate etc.

Credit Division

Credit allocation, estimation, sanction etc.

Credit Monitor

Credit monitoring, classification, evaluation and

recovery etc.

and
recovery Division
6

International

Dealing with foreign banks or organizations.

Division
7
8
9

Central Accounts

Financial evaluation and forecast of future financial

Division

events of the bank.

Branch Operation

Branches Management, control, monitoring and

Division

performance evaluation.

Business

Improvisation and strategy promulgation for

Promotion

business promotion and development of the bank.

Division
10

Audit Division

Conduct internal audits of the branches.

11

I T Division

Data management, maintenance of computer and

electronic equipments.

2.6 Organizational Structure of PBL:

Managing Director

Deputy Managing Director

General Manager

Deputy General Manager

Assistant Genera Manager

Senior Principal Officer

Principal Officer

Senior Officer

Officer

Junior Officer
.

2.6 Details of some credit (Loans and advances) of PBL:

There are two types of credits: Funded and Non-Funded. While Letter of Credit, Bank Guarantee
etc. are non-funded credits, the Commercial Banks provide the following funded credits to meet
various requirements of their customers in our country:
Cash credit
Overdrafts
Loan

 Purchase and discounting of bills.

The terms and conditions, the rights and privileges of the borrower and the banker differ in each
case. In Bangladesh the category of loans, cash credits and advances accounts for the bulk of
bank credit. Purchase and discounting of bills is not as popular a means of bank credit as it is in
advanced countries. The following are the existing practices in the country for grant of loans,
cash credits and overdrafts.

2.7 Cash Credit (CC) :

There are two types of Cash Credits (C.C.), CC-Pledge and CC Hypothecation.
2.7.1 Features of Cash Credit-Pledge & Cash Credit Hypothecation:
CC-Pledge is sanctioned against pledge of marketable commodities. When such advance is
allowed to traders or wholesalers the underlying merchandise is pledged with the banker. When a
manufacturing concern is allowed CC Pledge facilities, commodities such as raw materials,
finished products, stores and spares are taken under pledge.
Another type of cash credit is hypothecation - -in short C.C. (Hypo). This is also an advance
against stock of commodities and finished products but C.C. (Hypo) is also extended against
work-in-Process, Bills Receivable, Sundry Debtors, Commercial Vehicles etc. For a borrower
C.C. (Hypo) is quite advantageous because in hypothecation neither ownership nor possession of
goods is transferred to the bank but an equitable charge is created over the movable assets in
favor of the bank. The goods remain under the possession of the borrower who binds himself to
give the possession to the banker whenever the latter requires him to do so.
Hypothecation is a convenient device to create a charge over the movable assets in circumstances
in which transfer of possession is either inconvenient or impracticable. For example, if a
borrower wants to borrow on the security of raw materials or goods-in-process, which are to be
processed into finished products, transfer of possession will impede the functioning of the
borrower's business. By hypothecating such stocks, the borrower may use the same in any
manner he likes, e.g., he may take out the stock, sell it and replenish it by a new one. A floating
charge is created over the movable assets of the borrower on the basis of confidence reposed by
the creditor. Hypothecation is thus only an extended idea of pledge: the creditor permitting the
debtor to retain possession either on behalf of or in trust for him.

2.7.2 Overdrafts:

When a current account holder is permitted by the banker to draw more than what stands to his
credit, such an advance is called an overdraft. The banker may take some collateral security or
may grant such advance on the personal security of the borrower. The customer is permitted to
withdraw the amount as and when he needs it and to repay it by means of deposit in his account
as and when it is feasible for him. Interest is charged on the exact amount overdrawn by the
customer and for the period of its actual utilization.
Generally, an overdraft facility is given by a bank on the basis of a written application and a
promissory note signed by the customer. In such cases an express contract comes into existence.
Regular limit for a specific amount and period of time is sanctioned in case of overdraft. This
type of limit is quite suitable for a single deal like construction work, real estate development,
supply job etc. Usually securities like mortgage of property, assignment of Bills Receivable, Lien
etc., are obtained against overdraft limits.

2.8 Loan System:

Under the loan system, credit is given for a definite purpose and for a predetermined period.
Normally, these loans are repayable in installments. Funds are required for single non-repetitive
transactions and are withdrawn only once. If the borrower needs funds again or wants renewal of
an existing loan, a fresh request is made to the bank. Thus, a borrower is required to negotiate
every time he is taking a new loan or renewing an existing one. Banker is at liberty to grant or
refuse such a request dependi\1g upon his own cash resources and the credit policy of the central
bank.

2.9 Types of Loans

Banks grant loans for different periods--short, medium and long, and for different purposes.
Broadly, the loans granted by banks are classified as follows:
Short term Loans
Medium and Long Term Loans. Bridge loans
Composite Loans
Consumption Loans

2.9.1 Short Term Loans: Short term loans are granted to meet the temporary needs of the
borrowers. These loans are granted against the security of tangible assets, mainly the movable
assets like goods and commodities, shares and debentures etc
2.9.2 Term Loans: Medium and long term loans are usually called 'Term Loans'. These loans
are granted for more than a year and are meant for purchase of capital assets for the
establishment of new units and for expansion or diversification of an existing unit. Banks
sometimes grant such loans together with specialized financial institutions like BSB, BSRS, and
ICB etc. Such loans constitute a part of the 'project finance' which industrial enterprises are
required to raise from different sources. These loans are usually secured by the tangible assets
like land, buildings, plant and machinery, etc.
2.9.3 Bridge Loans: Bridge loans are essentially short term loans which are granted to
industrial undertakings to meet their urgent and essential needs during the period when
formalities for availing of the term loans sanctioned by financial institutions are being fulfilled or
necessary steps are being taken to raise the funds from the capital market. These loans are
automatically repaid out of amount of the term loan or the funds raised in the capital market. The
maximum period of the bridge loan is one year.
2.9.4 Composite Loans: When a loan is granted both for buying capital assets and for
working capital it is called a composite loan. Such loans are usually granted to small borrowers,
such as artisans, farmers: small industries, etc.
2.9.5 Consumption Loans: Though normally banks provide loans for productive purposes
only, but as an exception loans are also granted on a limited scale to meet the medical needs or
the educational expenses or expenses relating to marriages and other social ceremonies etc. of
the needy persons. Such loans are called consumption loans which are also allowed to procure
Consumer Durables and house-hold items.

2.10 Securitization of Loans and Overdrafts

Overdrafts and Loans are secured or unsecured. While such advances are generally secured,
unsecured ones are also sometimes allowed for relatively small amount and for short period of
time. Such loans are given to persons of sufficient means and high social standing and reputation
against their personal obligations and at times against third party guarantee. Overdrafts and
Loans are usually allowed against securities such as land and building, shares, bills receivable,
government, bonds, savings certificates, fixed deposit receipts etc., the market value of which is
not at any time less than the amount of such advances. Charges on these assets offered as

security must be created in favor of the banker. The way charge is created differs from one type
of asset to another and mortgage, lien and assignment are the accepted modes of Securitization.

2.11 Mortgage: When a customer offers immovable property like land and building as security,
charge thereon is created by means of mortgage. The main characteristics of a mortgage are as
follows:
A mortgage is the transfer of an interest in the specific immovable property and differs from sale
wherein the ownership of the property is transferred.
If there are more than one co-owners of an immovable property, every co-owner is entitled to
mortgage his share in the property.
The property intended to he mortgaged must be specific

(i.e., it can be described and identified

by its location, size, boundaries, etc.). A mortgagor must mention which of his properties is
intended to be mortgaged.
The object of transfer of interest in the property must be to secure a loan or to ensure the
performance of an engagement which results in monetary obligation. Thus the property may be
mortgaged to provide security to the creditor in respect of the loans already taken by the
mortgagor or in respect of the loans which he intends to take in future.
The actual possession of the property need not be transferred to the mortgagee.
The mortgagee gets, subject to the terms of the mortgage deed and the provisions of the Transfer
of Property Act, 1882, the right to recover the amount of the loan out of the sale proceeds of the
mortgaged property.
The interest in the mortgaged property is transferred to the mortgagor on the repayment of the
amount of the loan along with interest thereon.

Forms of Mortgages:
There are the following forms of mortgages and specifies different rights and liabilities of the
parties thereto:
Simple mortgage
Mortgage by conditional sale
English mortgage
Mortgage by deposits of Title Deeds
Anomalous Mortgage

2.12 Lien
Lien is created on assets such as Bank balance, Deposit Receipts or Certificates or any
instruments representing financial assets which can be converted into cash at ease. Lien gives the

banker a right to retain the securities handed over to him in his capacity as a banker. The
ownership of such securities is not transferred to the banker but he can dispose of the same for
adjustment of the relevant advance if it is not repaid as per arrangement. A Banker's Lien is a
general lien which empowers the banker to exercise his right of lien on any asset which comes
under his possession in the ordinary course of business.

2.12 Assignment
Assignment is another mode of providing security to (he lending banker. Assignment means
transfer of a right, property or a debt --existing or future. The borrower may assign any of his
rights. Properties or debts to the banker to secure a loan from the latter.
In banking business. a borrower may assign to the banker
The book debts.
money due from Government department or semi-government organization, and
Life insurance policies. In Bangladesh the contractors of the government depal1ment and
agencies normally assign their rights in favour of the bank with the stipulations that the
contractor's bills as approved by the department will be paid by cheque payable to the account of
contractor maintained with the lending bank.

2.13 Credit Proposal & Sanction:

The party seeking a secured advance against any acceptable security must make an application to
the branch where he maintains his operative account. Disbursement may be allowed only after
getting a limit sanctioned by the authorized officials.
Conducting preliminary study: The credit proposal should be evaluated on the basis of the
following documents and parameters:
Borrower's application
Reports in confidence regarding the state of business of the intending borrower through available
means.
Report from Bangladesh Bank CIB regarding the applicant's status of borrowings/exposure with
other banks.

 Statement of accounts of the borrower with own and other banks.

Statement of assets and liabilities ( in detail) .:. Balance sheet/profit & loss accounts (in 'case of
limited company) for 3 years.
Memorandum & Articles of Association.
Approval of limit:

The sanctioning authority on receipt of the proposal shall scrutinize the same and ensure that:
The proposal bears all pertinent information relating to the advance and the borrower.
All necessary papers/documents have been enclosed with the proposal duly checked and verified

by the branch.
The proposal has been duly recommended.
The proposal does not fall within the existing credit
restrictions.
Minimum margin requirement against the advance is proposed.
The primary security has got easy marketability, durability and storability.
Valuation of the property offered as collateral security is judiciously assessed by the engineer and

branch manager as per proforma circulated by Head Office.

The intending borrower is not a defaulter of the Bank/other banks including DFIs.

2.14 Disbursement of advance:

After being fully satisfied about the execution of all documents and observance of all formalities,
the bank shall disburse the advance to the party in accordance with the prescribed procedure.
Advances against Different Kinds of Securities.
2.15 An overview of PBL Pahartai Branch, Chittagong:
PBL , Pahartali Branch Chittagong is a medium category Branch among all the branches of
PBL . It was opened on 24.12.1968 and opening manager was Mr. Md Firoz Khan and present
branch manager Mr. Md Shahjahan. (SPO).
2.16 The Branchs present structure is as follows:
Senior Principal Officer

Principal Officer

Senior Officer

Officer

Junior Officer

Sub-staff

2.17 We have the following Loans and advances in this branch.

1.

CC

2.

OD

3.

HBL

4.

CLS

5.

Lease finance

6.

DL against PPS, PF etc)

7.

SME

 Definition of Credit & Credit Management

The Need of Credit Management in Bangladesh
Basis for Loan Classification
Principles of sound lending used by PBL
CAMEL Rating
New Techniques for assessing soundness of a Loan Proposal
Collection of Credit Information
Supervision and Control of Loans & Advances.

CHAPTER:03
FAMILIARIZATION WITH CREDIT MANAGEMENT
4.1 Definition of Credit & Credit Management

Credit is the ability to obtain goods or services in exchange for a promise to pay for them later.
Similarly, it is the power or ability to obtain money by the borrowing process in return for a
promise to repay the obligation in the future. Properly defined, credit represents the actual or
prospective debtors power or ability to affect an exchange by his promise by future payment. In
defining the credit management we can understand that from the very beginning of the loan
giving activities to the end of the recovery of the loan is all the single part of credit management.
Credit Management enables the bank to run the safe and sound credit activities and to make the
loan receiver fully confident to go forward with a particular bank to achieve a credit facility and
that can only be possible if there is an existence of credit management which is intensifying both
the
bank
and
the
loan
receiver.
4.2 The need of Credit Management in Bangladesh.
In Bangladesh the most serious difficulty facing the financial sector is the high level of interest
rate. Here the lending rate is at the level of 14 % to 16.5 % and inflation rate is 5 % and the real
interest rate is about 10 % . The high interest rate for bank loans drives down the return to capital
and tends to reduce investment. High interest rates also contribute to the difficulty the banks
face in recovering loans as these led defaults. As there is the high tendency of the loan default in
Bangladesh, the need of credit management in our country is inevitable. Having various kinds of
problems in loan giving procedure it is quite needed to have a sound credit Management system
by the commercial Banks in Bangladesh. A loan is not treated as a default loan from the very
beginning. First, a loan is treated a classified, then as sub-standard and then default loan and
then as bad debt . If the credit is supervised carefully the loan may not be bad-debt or default.
For all kinds of bad debt banks have to reserve 100 % provision of the bad debt which is totally
unproductive amount (fund) for the bank. Thats why banks need credit management system.

4.3 Basis for Loan Classification:

The loan classification has been done mainly under two broad heads.

4.3.1 Objective Criteria

The continuous loan and demand loans are classified as different heads of discontinuous loan
after the expiry of scheduled date of payment or if it is not renewed, before its expiry:
From 6 months to 9 months.Substandard loan

From 9 months to 12 monthsDoubtful loan

From 12 months and above. .Bad debt/Loss loan

If any installment of a term loan is not paid within the scheduled date, then that debt will be
termed as installment default.
The term loans, which are to be paid within maximum five years time:
If the amount of installment default is equal to or more than the installment to be paid within
six months will be classified as substandard loan.
If the amount of installment default is equal to or more than the installment to be paid within
12 months will be classified as doubtful loan.
If the amount of installment default is equal to or more than the installment to be paid within
18 months will be classified as bad debt or loss loan.
In case of the loan, which are to be paid within more than five years:
If the amount of installment default is equal to or more than the installment to be paid within
12 months will be classified as substandard loan.
If the amount of installment default is equal to or more than the installment to be paid within
18 months will be classified as doubtful loan.
If the amount of installment default is equal to or more than the installment to be paid within
24 months will be classified as bad debt or loss loan.
If short-term agriculture loan is not paid within the date mentioned in the contract, then it will be
termed as discontinuous loan. It will be discontinuous if it crosses:
12 months ----Substandard loan
36 months-----Doubtful loan
60 Months-----Bad debt/Loss loan

4.3.2 Qualitative Judgment

If any doubt or uncertainty arises for any loan irrespective of whether it is termed as continuous,
demand or term loan under objective criteria, then those loan have to be classified under
qualitative judgment.
If there is any change in terms or conditions under which the loan was sanctioned or if the
principal of debtor is affected for adverse situation or if the value of security is reduced or if the
loan recovery become uncertain, then this loan has to be classified under qualitative judgment.
More over, if without any reason or time and again any loan is rescheduled or the regulations for
rescheduling is broken or if the tendency of crossing the limit of schedule or any case is filed or
any loan is sanctioned without permission of appropriate authority, then this have to be classified
under qualitative judgment.

4.4 Reserve Provision

Bank will reserve provision for continuous, demand and term loan as per following rate:
Unclassified (UC)
1%
Substandard loan (SS)

20%

Doubtful loan (DF)

50%

Bad debt or Loss loan (BL)

100%

4.5 Security Provision

Eligible security includes following:
Lien security against the loan-

100%

Market rate of deposited gold/ ornaments in the bank-

100%

Lien Government Bond/Savings certificate-

100%

Guarantee from Government or Bangladesh Bank-

100%

Easily Marketable Goods Kept under control of Bank-

50%

Market value of secured land and building-

50%

4.6 Laws regarding Bad debt/Loss Loan

If the loan classified as bad debt/loss remained outstanding for 9 years will be written off. But
that particular debtor will still be treated as a defaulter. A case has to be filed against the defaulter
before writing off the bad debt/loss loan. Moreover loan recovery section of the bank will remain
responsible to recover the written off loan.

4.7 Principles of Sound Lending used by PBL.

The three cardinal principles of bank lending are safety, liquidity and profitability. We can now
have a closer look at what these and other principles are:
Safety:

Bank's business consists of dealing in money but, as mentioned above, this money is

borrowed money--borrowed mostly in the form of deposits from the general public. The banks
themselves in general and regulatory authorities in all the countries in particular are, therefore,
vitally concerned with ensuring safety of money invested by banks on loans and advances. By
safety is meant that the borrower is in a position to repay the loan along with interest, according
to the terms of the loan contract. To ensure the safety of lending PBL follows the following
factors.

n
t
y
s
t

Character

Person

Ma

Capacity

Purpose

Capital

Product

Condition

Place

Material

Collateral

Profit

Marke

Reliability
Managemen

Responsibility
Mone

Resources
Respectability
Returns

Repayment : The repayment of a loan depends upon the borrower's (1) capacity to pay and (2)
willingness to pay. The former depends upon his tangible assets, cash-flow and the success of his
business. The willingness to pay depends upon the integrity, good character and reputation of the
borrower. In addition, the banker generally relies on the security of tangible assets owned by the
borrower to ensure the safety of his funds.
Liquidity: Banks are essentially intermediaries for short term funds. Therefore, they lend funds for
short periods mainly for working capital purposes. The loans are, therefore, largely payable on
demand. The banker must ensure that the borrower is able to repay the loan on demand and this
depends upon the nature of assets owned by the borrower and pledged to the banker. For
example, goods and commodities are easily marketable while fixed assets like land and buildings
can be liquidated after a time interval.
Profitability: Commercial banks are profit-earning institutions. The banks must employ their
funds at a suitable rate of interest to earn sufficient income out of which to pay interest to the
depositors, salaries to the staff and to meet various other establishment expenses and generate an
income for the shareholders/owners.
The Purpose of the Loan: While lending his funds, the banker, among other things, enquires from
the borrower the purpose for which he seeks the loan. Banks do not grant loans for each and

every purpose; they ensure the safety and liquidity of their funds by granting loans for productive
purposes only, viz., for meeting working capital needs of a business enterprise. Loans are not
advanced for speculative and unproductive purposes. Loans for capital expenditure for
establishing industries are of long-term nature and the commercial banks may use part of its loan
able funds to provide loans on long term basis for really viable undertakings.
Creditworthiness of the Borrowers: The business of sanctioning unsecured advances is
comparatively risky and needs special attention. In the absence of a charge over any specific
asset, the safety of advance depends upon the honesty and integrity of the borrower as much as
upon the worth of his tangible assets. The banker has therefore, to make proper inquires not only
about the borrower's capacity to pay but also about his willingness to pay the amount of credit.
'Though such inquire is also necessary in case of a secured advance also but it assumes special
significance in case of unsecured advances. This is more important in Bangladesh where the
incidence of default has become almost endemic. The creditworthiness of a person means that he
deserves a certain amount of credit and may safely be granted to him.

Such creditworthiness is judged by the banker on the basis of various parameters but the one that
is frequently cited is the so-called CAMEL rating .

4.8 CAMEL Rating:

Banks lend funds to clients having high or acceptable creditworthiness. An effective way of
judging the creditworthiness of a borrower is to ascertain CAMEL rating. CAMEL stands for
Capital, Assets, Management Earning ratio and Liquidity. These parameters can be briefly
described as follows:
Capital: The borrower must invest his own equity and have his own stake in the business.
Assets: He must have sufficient assets of good quality which he can fall back upon in case of
needs.
Management: The borrower is required to possess managerial capabilities and management
expertise to make his business a success.
Earning: The business must be a profitable one ensuring good returns on investment.
Liquidity: The business is expected to have a positive cash-flow based on good cash and cash
equivalents and its current assets must be enough to meet its current liabilities.

4.9 New Techniques for assessing soundness of a Loan Proposal.

1) Lending risk analysis (LRA)

2) Collection of Credit Information.

4.9.1 LRA : Lending Risk Analysis (LRA) refers to the degree/intensity of risk that the bank
cannot fully recover a loan. Interest from loan is the main source of earnings for the bank but all
loans cannot be easily recovered. It depends upon the correct evaluation of the borrowers. There
are set rules and guidelines from Bangladesh Bank for this evaluation. PBL follows the
instructions for all types of loans that it provides to the customers. So, overall performance of a
bank is dependent upon the sound functioning of the lending system. A venture/project involves
risk. While financing a venture/ project banks have to take into consideration the risk elements
from different angles that are involved in the project.
Regardless of the type of loan, all credit requests goes through a systematic analysis of the
borrowers ability to repay.
The foremost issue in assessing credit risk is determining a borrowers commitment and ability
to repay debts. Commitment is typically evidenced by an individuals honesty, integrity, and
work ethic. While a borrower may sincerely make every effort to repay a loan, the promise is
weak if he or she has misjudged the ability to generate cash for payment. An important facet of
character is thus credibility. Even if the numbers look acceptable, a bank should lend nothing if
the borrower appears dishonest.

Lending Risk Analysis Procedure

The formal lending risk analysis procedure includes a subjective evaluation of the borrowers
request and a detail review of all financial statements. The loan officer may perform the initial
quantitative analysis of lending risk. The process consists of:
Collecting information for the credit file
Spreading financial statements (analyzing financial ratios)
Projecting the borrowers cash flow
Evaluating collateral
Writing a summary analysis and making a recommendation

There is a format, which is used by the banks to analyze the lending risk involved in various
businesses. It consists of mainly two parts i.e. business risk and security risk. Most important
part is business risk, which chiefly includes industry risk and company risk.

Factors influencing Risks:

Components of an LRA format are already mentioned. Again these components are influenced
by some factors. These are as follow:
Table 3: Factors Influencing Risks
Risks

Factors to be considered

Supply Risk

1. Price, Quantity and Quality

2. Review Charges in GOB Policy
3. Obtain cost breakdown

Sales Risk

Sales may fluctuate because,

1.

Market size drops

2.

Increased competition

3.

Changes in regulation
4. Lose of largest customers

Performance Risk
1.

Recent performance history

2.

Competitive position: SWOT as compared to competitor

3.

Strategy adopted in view of above

4. Cash flow forecasts

Resilience risk 1.
2.

Leverage: DER, CIB report, Shareholders further report

Liquidity: Ratio analysis, Flexibility- proportion of variables to fixed cost
3. Connection

Competence Risk1.

Management ability
2. Level of team work

Integrity risk

1.

Honesty
2. Dependability

Control Risk

1.

Ease of obtaining judgment

2. Ease of taking possession of security

Cover Risk

1. Expected realizable value

2. Speed of realization
3. Liquidation value

3.9. 2 Collection of Credit Information

For the purpose of assessing the creditworthiness of a borrower, a banker has to collect
information from a number of sources. In foreign countries specialized agencies collect all
information relating to the status and financial standing of businessmen and supply the same to
the bankers. Bangladesh Bank has developed a system to collect information regarding the
financial position of the borrowers through Credit information bureau.

3.9.3 Credit Information Bureau

The Bureau collects credit information from the banks under Section 42 of the Bangladesh Bank
Order, 1972. Banks are required to provide to Bangladesh bank the data on credit facilities
provided to the clients. Bangladesh Bank maintains a database in its Credit Information Bureau.
The commercial banks enjoy access to these data in respect of their prospective borrowers. Thus,
the banks can find out if any of their customers is having excessive borrowings from the banking
system at any particular moment and how meticulous they are to meet their repayment
obligations. The information is of limited assistance to the banks, but it serves as starting point to
institute further inquires before the loan is granted.
Borrower: Much information may be secured from the borrowers directly. The loan application
form seeks basic information about the borrower and his business. The banker may examine his
account books and note his past dealings with other banks or parties. His statement of accounts
with other banks can show his dealings and the business undertaken in the past. A personal
interview with the borrower will also enable the banker to get a clear picture of his state of
affairs.
Bazar Reports: Banks try to find out the creditworthiness of the party by making inquires from
the brokers, traders and businessmen in the same trade or industry. Their individual opinions may
differ but a balanced opinion may be formed about the borrower on the basis of the feelings
expressed by a number of such persons.
Exchange of credit information amongst banks: It is the practice and customary usage amongst
banks to exchange credit information relating to the constituents in their mutual interest.
Bangladesh Bank has asked the banks to supply information in respect of defaulting borrowers.
Balance Sheet and Profit and Loss Account: An analysis of the Balance Sheet and Profit and Loss
Account of the borrower for the last few years will reveal his true financial position. These
statements should be certified by competent accountants. The procedure followed in analyzing
these financial statements is discussed separately.

3.10 SUPERVISION AND CONTROL OF LOANS & ADVANCES:

Advances allowed should be very closely watched to see whether the same are being conducted
in accordance with the terms and conditions under which the limits were sanctioned or not. The
result of the inspection should be an effective guide in sorting out the measures to be adopted in
respect either of correcting the unsatisfactory operation of the advances or recovery of the same.
In order to ensure safety of advances, all advances shall be kept under strict supervision and
control. This will include supervision at the time of disbursement to ensure proper utilization of
the Bank credit. to supervise end use during the tenure of advance and to ensure that the
repayment is regular. Supervision and control of advances are exercised at different levels in
order to keep the same regular.
3.10.1 Control At Branch Level:
Branches must see and ensure the following:The respective account holder is legally competent
to borrow. All necessary documents have been correctly executed and other formalities duly
complied with. The security is correctly valued, is easily saleable, margin is properly maintained,
turn over of the stock is quick, insurance where necessary has been taken and periodical
inspection carried out. Stock report signed by the borrower shall be obtained periodically and
pledge godown should be regularly inspected and stocks verified as per existing instruction. All
advances accounts must be frequently reviewed particularly when transactions of the account are
not satisfactory.
Financial position of the borrower and guarantor, if any, must be reviewed every year and also as
and when occasion arises. Published audited balance sheet and profit and loss accounts of the
borrowing companies shall be obtained when these are published.
Debt acknowledgement letter duly signed by the borrower, guarantor, shall be obtained in
accordance with existing practice to keep the advances alive in order to save advance from being
barred by limitation.
Due date diary in respect of important matters e.g. due date of payment of insurance premium,
date of collection of interest bearing securities kept under lien, expiry date of sanctioned limits,
limitation period, due date of a company's next balance sheet, expiry date of guarantees issued by
the branch etc. shall be maintained.
Behavior of the borrower in respect of his overall business shall be closely observed. Party's
simultaneous banking with other banks shall be promptly inquired into and immediate measure
should be taken to route entire business with the financing branch.

3.10.2 Control at Head Office

Statements relating to advance shall be submitted to the controlling Officers/Head Office. These
should be carefully examined for the purpose of watching the period of limitation from the
documents executed and securities offered and also the present value of the security offered
against the present outstanding.
Branches should be periodically inspected by the Inspection Teams of the Head Office. During
inspection all advances, documents, security, turnover, observance of the stipulated terms and
conditions of every advance shall be examined.
Where any irregularity in documentation including security arrangements, non adjustment of the
advance within the stipulated period and afterwards and other irregularities which lead the
advance toward being stuck up are observed, the branch should be advised to make all out
efforts, including legal measure, if necessary to recover the stuck up advances.

3.11 Recovery Of Advances:

Advances granted in any form are repayable either on demand or on the expiry of the validity
period or through agreed installments. When repayment is not forthcoming in accordance with
the repayment terms, recovery efforts should be launched.
When the repayment pattern of the advance is such that continuance of the facility is not
worthwhile or while the advance allowed confronts with the following circumstances, advance
should be recalled.
Borrower or the guarantor dies.
Borrower or the guarantor has become insolvent.
Borrowing company has been liquidated.
Partnership has been dissolved.
Borrower does not come forward to renew the documents well before the expiry of the period of
limitation.
Turnover in the account has not improved.
Value of the security has deteriorated.
The borrower does not comply with the legitimate request of the Bank to complete the required
formalities.
Financial position of the borrower has deteriorated alarmingly which is beyond restoration.
The party resorts to heavy over trading/speculation.
The party commits fraud of any sort.
Policy of the Bank has under gone change in relation to certain types of advances.

For the recovery of the advances, branch should take the under mentioned steps:
Make formal demand for repayment in writing.
Put pressure on the borrower by utilizing the most effective and meaningful media that an exert
adequate influence on the borrower.
Intimate the borrower about Bank's ultimate resorting to file suit in the event of non-repayment.
Advise the guarantor, if any, to adjust the advance or have it adjusted by the principal debtor.
If the borrower and his guarantor (if any) come forward and propose repayment arrangement and
the same is. considered to be an acceptable proposal, the branch should seek controlling/B.O.
decision in this regard and act in accordance with the instruction.
When the borrower does not adjust the account, legal notice, under the approval of the controlling
officer/H.O., should be served upon the borrower and the guarantor, through Bank's legal
adviser/panel lawyer. It should be mentioned in the notice that if the outstanding is not adjusted
within the specific time (which shall be mentioned) suit shall be filed for the recovery of the
advance.
When advance to be recovered was allowed against pledge of goods, after giving notice in the
aforesaid manner, arrangement shall be made to sell the goods through auction subject to the
approval from Head Office.
When the charge is by way of hypothecation the branch may, on the strength of the relative
documents, take the stock under own possession and thereafter dispose of the same in the above
manner.
When advance allowed against mortgage, either simple or equitable legal recourse shall have to
be taken to sell the property through court's decree.
When the security obtained against the advance, does not cover the outstanding, attempts must be
made to secure the advance. If it is not possible and borrower does not repay, chance of recovery
must be ascertained and legal action, subject to the approval of the competent authority shall be
taken.
If an advance account of the deceased borrower (individual or proprietary concern) remains
unadjusted the following actions shall be taken. No further withdrawal shall be allowed. If the
borrower's legal heirs approach for the continuance of the facility, the proposal together with

legal opinion shall be referred to the competent authority. In case the authority approves the
proposal, the debit balance of the deceased account shall be transferred to a new account in the
name of his heirs or successors along with securities held in the account: If the desired facility is
declined or no application is made by the successors, the securities if any, may have to be sold
and guarantee if any be invoked in a lawful manner. For shortfall, if any, legal action should be
taken as per advice of the legal advisor/panel lawyer after obtaining approval from Head Office.

3.12 Filing of Suit for Recovery of Loans and Advances:

Suit is the final steps to be taken in respect of recovery of an advance, when all endeavors of the
Bank i.e. personal contact, moral suasion, request, and notice for repayment of the advance
turned fruitless.
As preparatory to filling suit, the branch shall serve legal notice upon the borrower(s),

guarantor(s). Directors of the company (in case of advance against Ltd. Co.) through the legal
adviser/panel lawyer under registered post demanding adjustment of the liabilities within a
specific time.
Documentation of the advance shall be checked to ensure that these are not barred by limitation

for taking legal action. Full particulars of the assets of the borrower and co-obligates of the
advance shall be ascertained.
Review form in respect of each party detailing therein. full particulars about the
borrower, his assets and the advance shall be filled in as per the proforma circulated by Head
Office. While filing in the review form, chance of recovery shall be clearly mentioned. The
review form shall be sent to the competent authority with due recommendation stating the reason
for filing Suit. On receipt of approval immediate steps shall be taken to file suit through the
Bank's legal adviser/panel lawyer. While filing suit it shall be ensured that all the necessary
parties, partners, directors (in case of Ltd. Co.) guarantor, as the case may be are made
defendants in the suit and steps are taken to attach the assets before judgment. In case of
mortgage of immovable property either by way of equitable mortgage/or by registered mortgage,
mortgage/title suit and not money suit shall be filed.

 Credit Risk Grading (CRG)

Functions
Use of CRG
Number and short name of Grades used in the CRG
Credit Risk Grading Score Sheet

CHAPTER-04
CREDIT RISK GRADING (CRG) OF PUBALI BANK LIMITED
As per reference of Bangladesh Bank BRPD Circular no.7 Pubali Bank Limited has followed
some rules and regulation of Credit Risk Management.

4.1 Credit Risk Grading (CRG): The Credit Risk Grading (CRG) is a collective definition
based on the pre-specified scale and reflects the underlying credit-risk for a given exposure.
4.2 Functions of Credit Risk Grading: Well managed credit risk grading systems promote
banks safety and soundness by facilitating informed decision-making. Grading systems measure
credit risk and differentiate individual credits and groups of credits by the risk they pose. This
allows bank management and examiners to monitor changes and trends in risk levels. The
process also allows bank management to manage risk to optimize returns.
4.3 Use of Credit Risk Grading:
The Credit Risk Grading matrix allows application of uniform standards to credits to ensure a
common standardize approach to asses the quality of individual obligor, credit portfolio of a unit,
line of business, the branch or the bank as a whole.
As evident, the CRG outputs would be relevant for individual credit selection, wherein either a
borrower or a particular exposure/facility is rated. The other decisions would be related to
pricing(Credit spread) and specific features of the credit facility.
Risk grading would also be relevant for surveillance and monitoring, internal MIS and assessing
the aggregate risk profile of a Bank.
4.4 Number and Short Name of Grades used in the CRG:
The proposed CRG scale consists of 8 categories with short names and Numbers as provided as
follows:
Grading
Short Name
Number
Superior
SUP
1
Good
GD
2
Acceptable
ACCPT
3
Marginal/Watch list
MG/WL
4
Special Mention
SM
5
Sub standard
SS
6
Doubtful
DF
7
Bad & Loss
BL
8

4.4.1 Superior-(SUP)-1:
Credit facilities, which are fully secured.

Credit facilities fully covered by government guarantee.

Credit facilities fully covered by the guarantee of top tier international Bank.

4.4.2 Good-(GD)-2
Strong repayment capacity of the borrower.
The borrower has excellent liquidity and low leverage.

Very good management skill and expertise.

An Aggregate Score of 85 or greater based on the Risk Grade Score Sheet.

4.4.3 Acceptable-(ACCPT)-3
These borrowers are not as strong as GOOD Grade borrowers.

Borrowers have adequate liquidity, cash flow and earnings.

Acceptable management.

An Aggregate Score of 75-84 based on the Risk Grade Score Sheet.

4.4.4 Marginal/Watch list-(MG/WL)-4

These Grade warrants greater attention due to conditions affecting the borrower, the
industry or the economic environment.
Weaker business credit and early warning signals of emerging business credit detected.

The borrower incurs a loss.

An Aggregate Score of 65-74 based on the Risk Grade Score Sheet.

4.4.5 Special mention-(SM)-5

These grade has potential weakness that deserve managements close attention.

Severe management problem exist.

An Aggregate Score of 55-64 based on the Risk Grade Score Sheet.

4.4.6 Substandard-(SS)-6
Financial condition is weak and capacity or inclination to repay is in doubt.

These weakness jeopardize the full settlement of loans.

An Aggregate Score of 45-54 based on the Risk Grade Score Sheet.

4.4.7 Doubtful-(DF)-7
Full repayment of principal and interest is unlikely and the possibility of loss is extremely
high.
However, due to specifically identifiable pending factors, such as litigation, liquidation
procedures or capital injection, the asset is not yet classified as Bad & Loss.
An Aggregate Score of 35-44 based on the Risk Grade Score Sheet.

4.4.8 Bad & Loss-(BL)-8

Credit of this grade has long outstanding with no progress in obtaining repayment or on
the verge of wind up/liquidation.
Prospect of recovery is poor and legal options have been pursued.
An Aggregate Score of less than 35 based on the Risk Grade Score Sheet.

4.5 How to compute Credit Risk Grading:

Pubali Bank Limited computes Credit Risk Grading by the following Score Sheet:

CREDIT RISK GRADING SCORE SHEET

Borrower
Group Name (if
any)
Branch
Industry/Sector
Date of
Financials
Completed by
Approved by
Number
1

Grading
Superior

2
3
4
5
6
7
8

Good
Acceptable
Marginal/Watchlist
Special Mention
Substandard
Doubtful
Bad & Loss

Aggregate Score:
Risk Grading:
Short

Score

SUP

Criteria

Weight

A. Financial Risk

50 %

1. Leverage: (15%)
Debt Equity Ration()-Time
Total Liabilities to Tangible Net Worth
All Calculation should be based on annual
financial statements of the borrower (audited
preferred)

Fully Cash secured,

secured by
Government/International
Bank Guarantee
GD
85+
ACCPT 75-84
MG/WL 65-74
SM
55-64
SS
45-54
DF
35-44
BL
<35
Para S
mete c
r
or
e
Le
ss
than
0.25

0.2
6to
0.35

1
5
1
4
1
3
1
2

Act
ual
Par
am
eter

Sco
re
Obt
ain
ed

2. Liquidity : (15%)
Current Ration()-Times
Current Assets to Current Liabilities

0.3
6
to
0.50

0.5
1
to
0.75

0.7
6
to
1.25

1.2
6
to
2.00

2.0
1
to
2.50

2.5
1
2.75

M
ore
than
2.75

Gr
eater
than
2.74

2.5
0to
2.74

2.0
0

1
1
1
0
8
7
0

1
5
1
4
1
3
1
2
1
1

3. Profitability: (15%)
Operating Profit Margin (%)
Operating profit
100
Sales

to
2.49

1.5
0
to
1.99

1.1
0
to
1.49

0.9
0
to
1.09

0.8
0
to
0.89

0.7
0
0.79

Le
ss
than
2.75

Gr
eater
than
25
20
%t
o
24%

15
%
to
19

1
0
8
7
0

1
5
1
4
1
3
1
2
1
0
9
7

4. Coverage(5%)
Interest coverage Ration ()Times
Earning before interest & Tax (EBIT)
Interest on debt

Total score-Financial Risk

%
10
%
to
14
7
%
to
9%

4
%
to
6%

1
%
to
3%

Le
ss
than
1%

M
ore
than
2.00

M
ore
than
1.51

less
than
2.00

M
ore
than
1.25

less

5
4
3
2
0
5
0

Criteria

Weight

B. Business/Industry Risk 18 %
1. Size of Business (Sales in BDT Crore)
The size of the borrowers business
measured by the most recent years total sales.
Preferably based on audited financial
statements

2. Age of Business
The number of years the borrower has
Been engaged in the primary line of business.

than
1.50

M
ore
than
1.00

less
than
1.24

Le
ss
than
1.00

Para S
mete c
r
o

Act
ual
Par
re am
eter

>
60.0
0
30.
0059.9
9
10.
0029.9
9
5.0
09.99
2.5
04.99
<2.
50
>
10
year
s

5
4
3
2
1
0

3
2
1
0

Sco
re
Par
am
eter

 510
year
s
25
year
s
<
2yea
rs
3. Business outlook
A critical assessment of the medium
term prospects of the borrower, taking
into account the industry, market share
and economic factor.

4. Industry Growth

Fa
vora
ble
sta
ble
sli
ghtl
y
unce
rtain
ca
use
for
conc
ern

3
2
1
0

str
ong
(10
% +)
Go
od
(>5
%10%
)
mo
dera
te
(1%
5%)

3
2
1
0

 No
Gro
wth
(<1
%)
5. Market Competition

Do 2
min 1
ant
play 0
er
Mo
dera
tely
Com
petit
ive
Hi
ghly
Com
petit
ive

6. Entry/Exit barriers

Di
fficu
lt
Av
erag
e
Ea
sy

Total Score-Business/Industry Risk

Criteria
t
C. Management Risk
%
1.

Experience

Weigh Parameter

2
1
0

12

1
8
Scor
e

12
More than 10 years
in the related line of
business.

Actual
Paramete
r

Score
Obtaine
d

(Management & Management

Team)
The quality of management
based on
the aggregate number of years
that
the senior management team
has
been in the industry.
2.
Second line/succession

3.

Team Work

5-10 years in the

related line of
business.
1-5 years in the
related line of
business.
No experience

Ready succession
Succession within 12 years
Succession within 23 years
Succession in
question
Very Good
Moderate
Poor
Regular Conflict

4
3

2
0

2
0
3
2
1
0

Total Score-Management Risk

12

Criteria
t

Scor
e

Weigh Parameter

D. Security Risk
10
%
1. Security Coverage (Primary)

2. Collateral Coverage

Fully pledged
facilities/substantially
cash covered/Reg.
Mortg. for HBL
Registered
Hypothecation (1st
charge/1st pari
passu charge)
2nd charge/inferior
charge
simple
hypothecation/negativ
e lien on assets
No security
Registered mortgage

2
1
0
4

Actual
Paramete
r

Score
Obtaine
d

on municipal
corporation/prime
area property.
Registered mortgage
on pourashava/semiurban area property
Equitable mortgage
or No property but
plant & machinery as
collateral
Negative lien on
collateral
No collateral
personal guarantee
with high net worth or
strong corporate
guarantee
personal guarantees
or corporate guarantee
with average financial
strength.
No
support/Guarantee

3. Support (Guarantee)

2
1
0
2

1
0

Total Score-Security Risk

Criteria
E. Relationship Risk
%
1. Account Conduct

10

Weight Parameter

Score Actual
Parameter

10
More than 3
(Three) years
accounts with
faultless record.
Less than 3
(Three) years
accounts with
faultless recorded.
Accounts having
satisfactory
dealings with some
late payments.
Frequent past
dues & Irregular

4
2

10
Score
Obtained

2. Utilization of limit
(actual/projection)
3. Compliance of
(Covenants/conditions)

4.

Personal Deposits

The extent to which the bank

maintains a personal banking
relationship with the key
business sponsors/principals.
Total score-relationship risk
Grand Total-All risk

dealings in account
More than 60 %
40 %-60%
less than 40 %
Full compliance
Some Noncompliance
No compliance
Personal
accounts of the key
business
sponsors/principals
are maintained in
the bank, with
significant deposits

2
1
0
2
1
0
1

No depository
relationship
10
100

 Performance Trend (Advance).

Trend of Bad Debt.
Trend of Recovery of Bad Debt Loan.
Problem of Credit Management.

CHAPTER 05
FINDINGS AND THEIR ANALYSIS

To evaluate Credit performance of the Pubali Bank Limited, Pahartali Branch, Chittagong in this
chapter the performance trend of Loans & Advance, Classified & Unclassified Advances, the
trend of bad debt form 2006 to 2010 are discussed below:

5.1 Performance Trend (Advance) of PBL, Pahartali Branch.

Relevant Data:
Performance Trend of PBL 2006~2010(in Lac)
Year

Total Loans & Advance

Classified

Unclassified

2005

486.60

25.56

461.04

2006

569.83

34.05

535.78

2007

740.43

8.60

731.83

2008

427.92

6.34

421.58

2009

489.33

6.34

482.99

Figure: Performance Trend of PBL, Pahartali Branch 2006~2010

Analysis: The challenge of bank management is to maximize shareholders wealth. Banks

profitability is closely linked with the balance sheet. Profitability and soundness is central to the
objective of the bank. The achievement of the objective is directly rated with loans & advances.
Higher the amount of unclassified loans the higher the operating income.

Loans & Advances: Banks major sources of income are the income from loans &
advances that it can make in a financial year. Of course the question of prudent lending remains
closely associated with it. The bank has been able to make steady progress in this aspect also.

Classified loan: The bank generates undisputed income from the unclassified loans. The
sample 5 years period the bank has been able to improve the situation to some extent. This
improvement indicates a remarkable qualitative change in the overall management of the bank.

5.2 Trend of Bad Debt in PBL, Pahartali Branch.

Related data:
Amount of Bad Debt(Fig in Lac)
Year

Bad Debt

% Of Bad Debt

2006

25.56

5.25%

2007

34.05

5.97%

2008

8.60

1.16%

2009

6.34

1.48%

2010

6.34

1.29%

Figure: State of Bad Debt (in %)

Source: PBL Annual Report 2006-2010

Analysis: Among the classified loans, bad debt is the worst of all. There is a mandatory need of
keeping hundred percent provisions for the bad debt. A good amount of debt has been classified
as bad debt and brought forward as a matter of legacy. But now management has taken several
steps to recover the classified debt and also taken some precautionary measure so that no new
loans become classified debt. In a period of 5 years the percentage of bad debt has fallen from
5.25 % to 1.29%, which is a significant improvement in the recovery state.

5.3 Trend of Recovery of Bad Loan in PBL, Pahartali Branch:

Related Data:
Recovery of Bad Debt (Fig in Lac)
Year

Classified Loans

Recovery

% of Recovered

2006

25.56

15.44

60.40%

2007

34.05

4.98

14.62%

2008

8.60

6.99

81.28%

2009

6.34

0.00%

2010

6.34

0.33

5.20%

Figure: State of Recovery (in %)

Analysis: The recovery state of Pubali Bank Limited, Pahartali Branch, Chittagong is not good.

5.4 Problems of Credit Management:

The problems of Credit Management in Pubali Bank Limited are described below:
Centralization: In PBL decision making is mostly centralized. At fields level the branch in
charge usually do not enjoy any discretionary power relating to loan sanctioning, interest rates
and new business.
Delay in Loan Sanctioning Process: The loan and advance department takes a long time to
process a loan because the process of sanctioning loan is manual.

Lack of Supervision: Visits by top and middle ranking management acts as motivating tools for
junior employees. Generally there is lack of such supervision especially in the rural branches.
Corruptions: The employees, some times, unlawfully, help the client deliberately by
overvaluing the securities taken against the loan. As a result if the client fails to repay the loan.
The bank authority cannot collect even the principal money invested by the selling those assets.
Though there is no definite proof, but it is evident from the talk with some retired top and middle

ranking PBL officers that, there are malpractices of taking bribes and other corruptions especially
in credit and purchase departments

Recommendation
Conclusion.

CHAPTER-06
RECOMMENDATIONS & CONCLUTION
6.1

Recommendations:

Banking sector is one of the most important service oriented organization. Each and
every bank is trying to give batter service. If Pubali bank wants to become a market leader
obviously they have to give better service. Though it is observed that credit management of the
bank is quite satisfactory, the following recommendations can be taken into consideration to
make it more effective.
If the deposit of the branch is good in position, Loans & Advances may increase for more profit.
The recovery position of Bad Debt loan is not good enough, So management may take special
care in the recovery section.
Bank may supervise the loans and advances regularly. .
The loan & Advance division may take a short period for processing and sanctioning loans and
advances.

6.2

Conclusion:
The present Pubali Bank Limited started its journey as Eastern Mercantile Bank Limited in
1959 . Now it is growing Bank in the Banking Industry. The Number of Branches of the bank is
398. In spite of having such big net work and experienced set of staffs and employees the bank
even under new entrepreneurs did not make any remarkable good progress. The prospect of the
bank is good if it can overcome some problems like old legacy, lack of modernization, lack of

supervision. These problems enhanced by inherited classified loans. How ever in the study it
revealed that the bank is making steady progress in almost all sectors. The present management
seems to have conceived the idea of modernization. But rapid progress is required.

APPENDIX B

References

Annual Report 2005-2009 PBL. Book of Instructions (General Banking) PBL.

Bank Book of Instructions (Credit) PBL.
Bank Book of Instructions (Foreign Exchange) PBL.
Bank O Arthik Pratishthan Samuher Karzaboli 1999 2005 Ministry of Finance, Peoples
Bangladesh Laws on Banks and Banking.
BCD circular no-34, 16 November 1989.
BCD circular no-20, 27 December 1994.
BCD circular no-12, 04 September 1995.
BRPD circular no-16, 06 December 1998.
BRPD circular no-18, 14 May 2001.
Credit Risk Grading Manual
Import Policy Ministry of Commerce, Bangladesh Government.
Republic of Bangladesh.
Reading Materials of the Course on Lending Risk Analysis (LRA) BIBM.