credit management practices of bdbl

WELCOME

To The Presentation on,

Credit Management Practices of

Bangladesh Development Bank Limited

Definitions

Credit- The loans and advances made by the bank to its customers or borrowers.

Credit Management-Supervision of the bank’s philosophy, standards, and guidelines that its employees must observe in granting or refusing a loan request

Introducing

BANGLADESH DEVELOPMENT BANK LIMITED

Name : Bangladesh Development Bank, a state-owned commercial Bank (formed through merger of Bangladesh Shilpa Bank & Bangladesh Shilpa Rin Sangstha)

Legal Status : Public Limited Company

Date of incorporation : November 16, 2009

Banking License obtained

: November 19, 2009 issued by Bangladesh Bank

Vendors’ Agreement Signed

: December 31, 2009 between the Government and Board of Directors of BDBL nominated by the Government.

Formal Inauguration : January 03, 2010

Registered Office : BDBL Bhaban, 8, Rajuk Avenue, Dhaka-1000

Authorized Capital : Tk.10000 million

Paid Up Capital : Tk. 4000 million

Reserve (As on 01.01.2010)

: Tk. 2270 million

Total Assets (As on 01.01.2010)

: Tk. 16747 million

Total Human Resource : 781

Number of Zonal Office : 3

Number of Branch Office

: 17

Membership : Dhaka Stock Exchange & Chittagong Stock Exchange Ltd.

Web Site : www.bdbl.com.bd

BDBL Lending Philosophy

Permitted & Restricted Lending

Uniform Credit Standard & Approval Process

Define Responsibilities

Specify terms of Maturity, Collateral, Risk and Return etc.

Profit Generation

Outlining Legal Procedures

Minimizing Lending Risk

Building up a Balanced Portfolio

A. Industry and Business Segment Focus• Industrial Loan• Public Private Partnership (PPP) Project• Small and Medium Enterprise (SME) Financing• Trade and Commerce• Consumer Credit• Lease Financing• Real Estate Financing• Agro-based ventures

Guidelines of Lending Policy

B. Green Banking Transition to resource efficient Industries Transition to low-carbon Industries Impact on environmental sensitive sectors


C. Types of Loan Facilities

(a)Term Loan

Project Loan

Small Business

Loan

House Loan

Personal Loan

Lease Finance

Transport Loan


(b)Working Capital

Cash Credit (Hypothecation)

Cash Credit (Pledge)

Secured Advances (General)

Secured Advances (Financial

Obligation)


C. Types of Loan Facilities

(c)Foreign Trade

Finance

Export Cash Credit

Packing Credit

Purchase of Documentary

Bills

Payment Against

Documents

Loan Against Imported

Merchandise

Loan Against Trust Receipt

CREDIT EXPOSURE TO SINGLE BORROWER/ GROUP LIMIT

1. - FOR IMPROVING RISK MANAGEMENT THROUGH RESTRICTION2. - TO FIX LIMIT ON LARGE CREDIT EXPOSURE

LENDING BUDGET

Proper Allocation of Annual Budget is made to maintain a Balanced Portfolio Mix.

DISCOURAGED BUSINESS/ INDUSTRIAL SECTOR

Highly Leveraged Transactions

Finance of Speculative Investments

Lending to companies which are CIB black listed or known defaulters

Counterparties in countries subject to UN sanctions

Lending to Holding Companies

Bridge Loans relying on equity, etc. as a source of repayment.

THRUST SECTORSA credit policy will be successful until there is a predetermined target BDBL has their target to acquire the following markets by providing loan and advances.

Trade Finance Solar energy generationWorking Capital Bio-gas plantLease Finance Automatic brick manufacturingAgriculture Eco-friendly projectsAgro-Based Industry Computer Software & IT/Date exportNatural Resources Work order finance favoring contractorsSmall and Cottage Industry Export oriented industriesCNG station Construction MaterialsTourism Paper and paper productElectronics Power sectorConstruction Urban housingExport oriented garments Chemical, Pharmaceutical products

LOAN PORTFOLIO MANAGEMENT

Loan Review

Problem Situations Faced by

BDBL

Loan Workout by BDBL

-Review on a periodical basis

-Record of borrowers payments

-Quality & condition of collateral

-Completeness of documentation

-Evaluation of situation

-Assessment of loan program

-Accelerating the loan review scheduleLoan

Rev

iew

Prob

lem

Situ

ation

s

Unusual delays in receiving documents.

Changes in methods: depreciation.

Restructuring in of dividends, credit rating.

Changes in stock’s price.

An over-eager owner

Questionable start date

An ostentatious business name

Unexpectedly robust financial statements

Atypical trade references

Trade references all from one industry

Business principals involved in other failed or fraudulent

enterprises

Net losses in more than one year.

Changes in capital structures, liquidity or activity level.

Deviation of actual sales from projected sales.

Unexpected changes in deposits balanced maintained

by the customers.

Firmly in mind: full recovery of funds.

Examine the largest loans outstanding routinely.

Rapid detection and reporting.

Workout responsibilities should be different from lending policies of BDBL.

Workout specialists should confer the troubled customer quickly.

Estimation of available resources to collect the troubled loan

Tax and litigation search.

Quickly, competence and integrity of management.

Consideration of all possible alternatives.

Loan Workout

GUIDING PRINCIPLES OF LOAN FACILITY

i. Evaluate the tenure of loans and advances.

ii. Determine the size of loan facilities.

iii. Execute Security Documents.

iv. Properly insure of Inventory/Stocks.

v. Valuation of Property.

CROSS BORDER RISK

• JUDICIOUS OF PRODUCT RELATIVE RISK.• OBTAINING THE CREDIT REPORT AND CONFIDENTIAL OPINION.• AVOIDING COUNTRIES BURNED WITH DEBTS.• OBTAINED THE INSURANCE AND OTHER COVERAGE• BDBL WILL NEED TO BE CAUTIOUS WHILE CONSIDERING INSURANCE.

Loan Approval Process

Loan Proposal/Application

Processing of Proposal

Sanction of Loan

Loan Proposal/Application

Before receiving any credit proposal, the following particulars will have to be examined with due care for their incorporation:

Name of Product

Proposal

Service

Entrepreneur

Sponsors

Processing of Proposal

Full attention on the following issues:

Selection of project land.

Right selection of entrepreneurs and their ability.

Entrepreneur’s image and track record including financial strength.

Appropriateness of technology and machinery.

Scope of marketability in free market economy.

Over all Viability.

Credit Worthiness

6C’s

of B

anki

ng Character

Cash

Capacity

Condition

Control

Collateral

Capability to mobilize working capital: Satisfy BDBL’s availability of working capital Need to assess working capital requirement

Sufficiency/Credit exposure: Financed only if there is full coverage for its

financing total capital cost including sponsors’ equity and the Bank’s investment

Leverage: working capital requirement of a project will be

separately assessed Debt-equity ratio for business entities should

not exceed the ratio of 60:40

Security:• Security documents relating to ownership of assets must be

verified• Coverage of the Bank’s exposure, by acceptable tangible

assets, shall not any time be less than 1.5 times of the principal exposure.

• Property/assets of any Trust will not be acceptable as security against loan

• Revaluation of assets done in 5 years interval• Extended collateral security for the projects risky in nature• Movable properties will not be considered as collateral

security.• Security arrangements may also be made based on Bank-Client

relationship Landed properties acceptable as collateral security:

• Well-identified land and landed property may be accepted as security • Third party collateral may be accepted

Verification/ valuation of security:• will be verified and valued by an enlisted valuer/

surveyor• Loans up to Tk.30.00 lack will rest with Bank officials

at branch level.

Credit Committee:Unless otherwise specified, Managing Director or the senior most General Manager at Head Office will preside over the Committee meeting

Chairman

All General Managers at Head Office Member

Managing Director will nominate a secretary to the committee from amongst the officers nit below the rank of Principal Officer

Secretary

Sanction of Loans

• After a thorough examination will be placed before the appropriate authority with recommendation of the Credit Committee

• All loans and advances sanctioned shall comply with – Bank’s Memorandum and Article of Association Banking companies Act in 1991 Bangladesh Bank’s instructions

• Loan shall be sanctioned following certain terms & conditions – Before signing loan agreement Before 1st disbursement of loan or opening of L/C Re-imbursement of capital expenditure will be considered Approval must be signed by approving authority Database must be maintained both at Head office and Braches.

Any credit proposal that does not come with the credit guidelines must be referred to the managing director or board of directors

LOAN TRACKING THROUGH ADMINISTRATION AND MONITORING CHART

• Monitoring and review of all accounts• Monitoring of delinquent accounts

The scope of credit administration function basically will include the following chart:

Documentation. Disbursement

Compliance Credit monitoring

Credit recovery Early warning signals analysis.

Documentation of loans• Starts just after the sanction of loan• BDBL maintains a standard set of documentation forms and formats

Disbursement • Ensure the documentation formalities.• Sponsor’s investment would be assessed by BDBL inspection team.• Insurance policies covering risk- depending on the nature of project is

to be obtained.

Compliance Requirements:• As per Bangladesh Bank’s guidelines, all requirements would be

submitted in a correct format in a timely manner.• All approved service providers’ performance be reviewed on an

annual basis.

Credit Monitoring after Implementation • To minimize investment losses monitoring procedures

and systems should be placed to indicate the financial health of a borrower.

• BDBL’s IT systems must produce this information for Head Office as well as for branches for review.

Past due principal or interest payments Past due trade bills Account excesses, and breach of loan covenants. Loan terms and conditions Timely correction actions should be taken. Borrowers’ loan facilities are reviewed at least

annually

Credit Recovery-Is a dynamic process.The Recovery Unit’s primary functions at Head office or Branch are to:

Recovery Strategy Pursue all options to maximize recovery

Early Warning Signals Analysis Early Warning Signals (EWS) indicate risk or potential weakness of an

exposure requiring monitoring, supervision, or close attention by the management.

Early identification and prompt reporting of deteriorating credit sings done to insure swift action to protect the Bank’s interest.

Internal Audit• Audit shall be carried out annually• Shall ensure compliance with credit policy,

procedural guidelines, regulatory guidelines and Bangladesh Bank requirement.

Credit Rating by outside agencies• Required for large loans

CREDIT RISK MANAGEMENT

The bank will follow core risk management guidelines according to the instructions of Bangladesh Bank.

Credit Risk Management

Foreign Exchange Risk Management

Asset-Liability Management

Internal Control and Compliance management

Money Laundering Management

CORE RISK

RECOMMENDATIONSfor

BDBL

Recognize Potential Frauds

Avoid Underestimating How Much Existing Customers Contribute to Bad Debt

Proper Allocation of Time and Money on Credit Evaluations

Taking Full Advantage of Technology

Ignore ‘Getting Caught Off-guard by Bankruptcies’