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A WORKING REPORT ON CREDIT OPERATION & MANAGEMENT OF PRIME BANK LTD

by

Fatima Prodhan ID # 0710011

An Internship Report Presented in Partial Fulfillment of the Requirements for the Degree

Bachelor of Business Administration

INDEPENDENT UNIVERSITY, BANGLADESH April 2011

A WORKING REPORT ON CREDIT OPERATION & MANAGEMENT OF PRIME BANK LTD

by

Fatima Prodhan ID # 0710011

has been approved

April, 2011

Ms. Sylvana Maheen Ahmed Lecturer

School of Business Independent University, Bangladesh

LETTER OF TRANSMITTAL 21 April, 2011

To

Ms. Sylvana Maheen Ahmed

Lecturer,

Independent University, Bangladesh

Subject: Submission of Internship Report.

Dear Madam,

With due respect I am very please to enclose herewith the internship report on “Credit Operation

and Management of Prime Bank LTD. ” I have tried my best to prepare a good report with

providing all of my effort and to cover all aspects regarding the matter. I think that the report

contains the information that you need to get an idea about Credit Operation and Management of

Prime Bank Ltd.

I, therefore, hope that you would be kind enough to accept my internship report and oblige there

by.

Sincerely Yours,

Fatima Prodhan

ID # 0710011

ACKNOWLEDGEMENT

First of all I would like to pay all my sincere gratitude to the creator of this universe Almighty

Allah for giving me the required patience, energy and little bit knowledge to prepare this report.

I am also very much grateful to my supervisor Ms. Sylvana Maheen Ahmed for her tips

containing prime guideline regarding the preparing the report successfully.

I am very much grateful to the authority of Prime Bank Limited for assigning me as an internee

in this reputed bank and having the opportunity to learn theoretical as well as practical

knowledge related to overall banking system and complete such an ambitious study for my

internship program as well as for preparation of this report.

I am grateful to all concerned persons who provided valuable guidance, suggestions and advices

in collecting information, analyzing and preparing the report. I am particularly indebted to them

whose efforts and cordial cooperation made the report possible.

Finally I would like to thank bank staffs for providing information and additional elements.

Executive Summary

PRIME BANK is “a bank with a difference” incorporated as a public limited company on 17th

April 1995 under the company acts 1994. Prime Bank limited is a full service commercial bank

with local and international institutes. Prime bank has been striving to provide best-in-the-class

services to its diverse range of customers spread across the country under an on-line banking

platform. I have worked one of the major departments of this bank.

The main objectives of this study are to give a brife idea about credit operation and management

of Prime Bank and explain my duties and responsibilities in Prime Bank over this three months.

For collection of data for this report I have used both primary and secondary sources. I had

collected data from personal observation and informal discussion with the employees of Prime

Bank Narayanganj Branch, relevant books, newspapers etc. PBL annual report, 2008 – 2009,

published documents, office circular.

In this report chapter one is about introduction of PBL and the objectives of this report. Chapter

two is talked about the policy of credit operation and management of PBL. Third chapter is about

my responsibilities and duties in PBL and the last chapter is conclusion.

During analysis of data I have noticed some positive and negative aspects of Prime Bank Ltd.

like strong manpower, branch network, work environment problems, administrative problem and

technological problem.

After observing over these three months in Prime Bank Ltd. I can say that if PBL centralize their

monitoring system it could be more active to maintain classified loan to a minimum level. PBL

should open more new exchange houses abroad for enhancing remittance business. PBL should

arrange job rotation in branch level to get overall banking knowledge for their employee.

Table of Content Letter of Transmittal

Acknowledgement

Executive summary

Pg No.

Chapter 1: Introduction

1.1 Introduction …...…………………………………………………………………….…. 1

1.2 Objective of the Report …………………………………………………………….….. 2

1.3 Data Collection ……………………………………………………………………….….. .2

1.4 Limitations of the Report ….…………………………………………………………....... 2

Chapter 2: Credit Operation & Management

2.1 Credit…………………………………………………………………………….…….….. 3

2.2 Credit Operation……………………………………………………………………..…..... 3

2.3 Credit Management………………………………………………………………....…….. 3

2.4 Background of Credit Operation & Management of Prime Bank………….……...…… …4

2.4.1 Credit Operation & Management of Prime Bank…………………………………………4

2.4.2 CREDIT RISK MANAGEMENT OF PRIME………… ……………………….....…….4

2.4.3 CREDIT POLICY OF PRIME BANK LIMITED………………….………….….......… 5

2.4.4 Types of CREDIT OF PRIME BANK……………………………….………….….….... 5

22.5 Steps in the Lending Process………………………………….….……………………….. 6

2.6 Creditworthiness of the Borrower………………………………….………………..….… 7

2.6.1 Computation of CRG…………………………………………………….……………….. 8

2.7 Structure of the Loan Agreement………………………………………….……………….. 10

2.8 DOCUMENTATION OF LOAN AGREEMENT……………………...…..…………..….11

2.9 Information About the loan Customers…………………………………….…...………….14

2.10 Mechanism of Credit Distribution of the Prime Bank……………………………….……..14

2.11 Disbursement…………………………………………………………….……………...….15

2.12 Loan Classification-Provisioning…………………………………………………………...15

2.13 Recovery Policy of the Prime Bank………………………………………………………...16

2.14 Conclusion………………………………………………………………….....…..………..16

Chapter 3: Working Experience

3.1 Introduction…………………………………………………………………….………..17

3.2 General Banking Division……………………………………………………………….17

3.3 Cash Section……………………………………………………………………………..18

3.4 Credit Division……………………………………………………….…………………..18

3.5 Findings……………………………………………………………………….………….19

3.6 Recommendations……………………………………………………………………….20

3.7 Conclusion……………………………………………………………………………….20

References

Appendix

A Working Report on Credit Operation & Management of Prime Bank Ltd

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Prime Bank Limited

Chapter 1

1.0 Introduction

1.1 Introduction Prime Bank Limited was incorporated as a scheduled Bank under the Companies Act 1994,

initiated its operation on April 17,1995 with target to play the vital role on the socio-economic

development of the country (Prime Bank, “n.d.”). It availed its registration as a Banking

company under the Banking Company Act, 1993 from the Bangladesh Bank dated February 12,

1995. PBL focuses on a wide range of financial products and services, which include

commercial banking through both Conventional and Islamic mode, Merchant and Investment

Banking, SME & Retail banking, Credit Card and off-shore banking. It plays leading role in

Syndicated Financing. It has expertise in corporate credit and trade finance and made extensive

market penetration with continuous growth in corporate, Commercial and Trade Finance sectors.

It has a fully owned exchange house at Singapore focusing on remittance inflow to Bangladesh

(Prime Bank, “n.d.”). The vision of Prime Bank Limited is to be the best private commercial

bank in Bangladesh in terms of efficiency, capital adequacy, asset quality, sound management

and profitability having strong liquidity. The chairman of Prime Bank is Mr. Azam J.

Chowdhury. The Prime Bank Group has a large and well distributed branch network of 94 fully

fledged branches and 39 Booths in Bangladesh with a strong tradition of service excellence.

Prime Bank Narayanganj Branch has stablished at 15th March 1998 and the manager of the

branch is MD. Farhad Ahmad Khan(Senior Assistant Vice President & Head of Branch). Prime

Bank offers a number of products and services. The Deposit Schemes are Contributory Savings

Scheme, Monthly Benefit Deposit Scheme, Education Savings Scheme, Fixed Deposit Scheme,

Short Term Deposit, Lakhopati Deposit Scheme, Double Benefit Deposit Scheme, House

Building Deposit Scheme, Prime Millionaire Scheme. Loan Schemes are General Loan Scheme,

Consumer Credit Scheme, Personal Loans, Lease Finance, Hire Purchase, Small and Medium

Enterprise (SME). Other Services of PBL are On-line Banking, Information Technology in

Banking Operation, SWIFT Service and Western Union Money Transfer (Prime Bank, “n.d”.).


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1.2 Objectives of the Study The main objectives of this study are:

• To give a brief idea about credit operation and management of Prime Bank.

• To explain my duties and responsibilities in Prime Bank.

1.3 Data Collection Data were collected from both primary and secondary sources. Primary data were collected from

personal observation and informal discussion with the employees of Prime Bank Narayanganj

Branch. Secondary data were collected from relevant books, newspapers etc. PBL annual report,

2008 – 2009, published documents, office circular.

1.4 Limitations Some limitations were faced while conducting this study. The limitations were --

The employees in Prime Bank Limited are so much busy in their responsible fields; they

could hardly provide little time to discuss with them.

Another limitation of this report is Bank’s policy of not disclosing some data and

information for obvious reason, which could be very much useful.

Actually to cover whole credit operation and management of PBL it needs more time. As

I had only three month I tried to cover the basic things only.


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Chapter 2

2.0 Credit Operation & Management

2.1 Credit The word credit comes from the Latin word ‘Credo’ meaning ‘I believe’. It is a lender’s trust in a

person’s/firm’s or company’s ability or potential ability and intention to repay. The fundamental

nature of credit is that an element of trust exists between buyer and seller-whether of goods or

money. In other words credit is the ability to command the goods or services of another in return

for a promise to pay such goods or services in some specified time in the future (Investorwords,

“n.d.”).

2.2 Credit Operation Bank is a financial intermediary whose prime function is to move scarce resources in the form of

credit from savers to those who borrow for consumption and investment. The main use of bank

fund is to collect money from surplus unit and lend it to deficit economic unit as credit. A bank’s

main earning source is interests on different credits. In order to ensure the effectiveness and

efficiency of utilization of bank fund in the form of credit, the bank has to carry out a certain

course of action that is known as credit operation (Wikipedia, “n.d.”).

2.3 Credit Management Credit Management is a dynamic field in banking industry where a certain standard of long-

range planning is needed to allocate the fund in diverse field and to minimize the risk and

maximize the return on the invested fund. While sanctioning of credit undergoes some steps like

collecting of related documents and information with duly filled-up credit application form,

scrutinizing, investigation, preparation of proposal, sanctioning, pre-disbursement compliance,

disbursement, supervision, monitoring. Credit Management deals with all this process. Effective

credit administration can ensure good recovery of loan and advances and good yield. (Wikipedia,

“n.d.”).


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2.4 Background of Credit Operation & Management of Prime Bank This chapter will give a brief idea about the credit operation and management of Prime Bank

Limited. Credit operation means to give loans and advances to the customers who have the

ability to repay the loan. Credit management means the process of giving loans, assessment the

credit worthiness of the customer and the actions taken by the bank when the customer defaults

to repay the loans. Credit operation and management is a huge issue and it covers a big area of

banking operation. The focus of this study is limited to the basic things of the credit management

of PBL due to time constrain.

2.4.1 Credit Operation & Management of Prime Bank

Prime has been established with the objective of providing efficient and innovative banking

services to the people of all sections of our society. Towards attainment of its goals and

objectives, the bank pursues diversified credit policies and strategic planning in credit

management. To name a few, the bank has extended micro credit, consumers durable scheme

loans, house building loans etc. to cater to the needs of the individuals, which turn has helped

thousands of families. The bank also extends loan in the form of trade finance, industrial finance,

and project finance, export & import finance etc (PBL, 2005 November. Credit Risk

Management Policy).

2.4.2 CREDIT RISK MANAGEMENT OF PRIME This is one of the major risks that can be described as potential loss arising from the failure of a

counter party to perform as per contractual agreement with Prime Bank. A separate corporate

division has been formed at Head Office, which is entrusted with the duties of maintaining

effective relationship with the customer, marketing of credit products, exploring new business

opportunities etc. The Prime Bank has segregated the functions of credit approval,

administration, monitoring and recovery by forming three separate units within Credit Division.

In determining the credit limit, the instructions of Bangladesh Bank are strictly followed. Internal

audit conducted on periodic interval to ensure compliance of Bank’s and Regulatory policies.

Class of Loans is made as per Bangladesh Bank guidelines (PBL, 2005 November. Credit Risk

Management Policy).


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2.4.3 CREDIT POLICY OF PRIME BANK LIMITED The credit policy pursed by Bangladesh Bank is to be aimed at ensuring development of scare

Bank resources in the best possible manner for increasing production, employment and Real

income within its objective and justice need for containing money supply within a safe limit

(informal discussion):

Take deposit from surplus unit and give loans to the deficit unit with higher interest rate to earn

profit. (personal letter, February 15, 2011).

Prime Bank takes the policies, which help the development of several sectors of the country

under general credit division. For achieving the proposed goals of the principles of development

of a number of sectors such as Agricultural, Economical, Industrial and Trade the bank follow

the guidelines of Bangladesh Bank; this is the credit policy of Prime Bank. This policy is

changeable. If Bangladesh Bank resists providing credit in any sector Prime Bank does not

provide any credit in those sectors (PBL, 2005 November. Credit Risk Management Policy).

2.4.4 Types of CREDIT OF PRIME BANK Portfolio management of credit implies the deployment of loan able fund among alternative

opportunities through proper allocation. Credit portfolio of the Bank consists of Trade financing,

Project Loans for new projects and existing projects, Working Capital financing and Small Scale

Industries financing. Besides, the Bank is financing the need of individual borrowers under

Consumer Credit scheme. Loans and advances have preliminary been divided into two major

groups:

1) Fixed Term Loan: These are the loans made by the Bank with fixed repayment schedule.

Fixed term loans are categorized into 3 based upon its tenure which is defined as follows:

Short Term : Upto 12 months

Medium Term : More than 12 and up to 36 months

Long Term : More than 36 months

2. Continuing Loan: These are loans having no fixed repayment schedule, but have an expiry

date at which it is renewable on satisfactory performance of the customer.


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a. Lease Financing: This facility is given to the business enterprises to meet up midterm and

long term fund requirements. These facilities are usually provided to acquire capital machinery.

However, Loan facility may be allowed for some other purposes such as factory construction etc.

b. Back-to-Back L/C: This facility is given to the exporter to procure raw materials from local

and overseas sources for execution of export L/C. Since L/C is opened backed by another master

L/C, this type of L/C is termed as Back to Back L/C.

c. Packing Credit: This facility is given to the exporter for payment of wages, salaries, freight

and other factory overhead expenses during execution of an Export L/C.

d. L/C (Sight) / Deferred Payment L/C: This facility is given to the importer to procure raw

materials or capital machinery from local and overseas sources for trading or manufacturing

purpose (PBL, 2005 November. Credit Risk Management Policy).

e. LTR: This facility is given to the importer to retire of shipping documents against import of

raw materials or capital machinery. This facility is given for the short time usually for 90-120

days for commercial purpose and maximum 180 days for industrial purpose.

f. CC (H)/ CC (P)/ OD (General)/SOD (Work Order): This facility is given to the business

enterprises to meet up working capital requirements. It may be for commercial purpose or

manufacturing purpose.

g. IDBP/IBP/FBP/FDBP: This facility is given to the exporter to meet up short term fund

requirements. Bank purchases the bill. This facility is also for the short time maximum 180 days.

h. House Building Loan (Commercial): Banks provide this facility to construct building for

commercial purposes (PBL, 2005 November. Credit Risk Management Policy).

2.5 Steps in the Lending Process Once a customer decides to request a loan, an interview with a loan officer usually follows right

away, giving the customer the opportunity to explain his or her credit needs. That interview is

particularly important because it provides an opportunity for the bank’s loan officer to assess the

customer’s character and sincerity of purpose. The approval process must reinforce the

segregation of Relationship Management/Marketing from the approving authority.

The responsibility for preparing the Credit Application should rest with the RM within the

corporate/commercial banking department. Credit Applications should be recommended for


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approval by the RM team and forwarded to the approval team within CRM and approved by

individual executives. Banks may wish to establish various thresholds, above which, the

recommendation of the Head of Corporate/Commercial Banking is required prior to onward

recommendation to CRM for approval. In addition, banks may wish to establish regional credit

centers within the approval team to handle routine approvals. Executives in head office CRM

should approve all large loans. The recommending or approving executives should take

responsibility for and be held accountable for their recommendations or approval. Delegation of

approval limits should be such that all proposals where the facilities are up to 15% of the bank’s

capital should be approved at the CRM level, facilities up to 25% of capital should be approved

by CEO/MD, with proposals in excess of 25% of capital to be approved by the EC/Board only

after recommendation of CRM, Corporate Banking and MD/CEO (PBL, 2005 November. Credit

Risk Management Policy).

Fig: Steps in the Lending Process

2.6 Creditworthiness of the Borrower

The question that must be dealt with before any other is whether or not the customer can service

the loan-that is, pay out the credit when due, with a comfortable margin for error. This usually

involves a detailed study of six Cs of the loan application- character, capacity, cash, collateral,

Credit Planning or customer decides to request a loan

Portfolio Management of Credit

Preliminary Screening of a Credit Proposal

Selection of Borrower Pricing of Loan Analysing of Financial &

Cash Flow of the Customer

Credit Risk Grading (CRG)

Proposal sending to CBD

Sanction letter prepared by CRM

Loan documentation and sending checklist for DA

Loan Disbursement Supervision- Monitoring-Recovery of Credit


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conditions, and control. All must be satisfactory for the loan to be a good one from the lender’s

point of view.

Character: Market reputation, morality, family background and promptness in repayment.

Capacity: Ability to manage the business, ability to employ the fund in the right way, ability to

overcome unforeseen problems.

Capital: Equity strength, assets and properties.

Collateral: The easy marketability of the property given security.

Conditions: The loan officer and credit analyst must be aware of recent trends in the borrower’s

line of work or industry and how changing economic conditions might affect the loan.

Control: The last factor in assessing a borrower’s creditworthy status is control which centers

on such questions as whether changes in law and regulation could adversely affect the borrower

and whether the loan request meets the bank’s and the regulatory authorities primes for loan

quality.

As this six C’s analysis is now a traditional method there is another method to understand the

creditworthiness of the customer called Credit Risk Grading (CRG) (Mishkin, F. S. (2008). The

economic money, banking, financial markets. Pearson Addison Wesley).

2.6.1 Computation of CRG Step 1: Identify all the Principal Risk Components

Step 2: Allocate weightages to Principal Risk Components

Step 3: Establish the Key Parameters

Step 4: Assign weightages to each of the key parameters.

Step 5: Input data to arrive at the score on the key parameters

Step 6: Arrive at the Credit Risk Grading based on total score obtained

An example of CRG of Prime Bank Ltd. Has been attached in the appendix.


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Principal Risk Components Key Parameters: Weight:

Financial Risk……………………..….…………………..……... 50%

Leverage 15%

Liquidity 15%

Profitability 15%

Coverage 5%

Business/Industry Risk……………………………………………18%

Size of Business 5%

Age of Business 3%

Business Outlook 3%

Industry growth 3%

Market Competition 2%

Entry/Exit Barriers 2%

Management Risk ………………………………………………...12%

Experience 5%

Succession 4%

Team Work 3%

Security Risk…………..…………………………………………...10%

Security coverage 4%

Collateral coverage 4%

Support 2%

Relationship Risk………………………..………………………....10%

Account conduct 5%

Utilization of limit 2%

Compliance of covenants 2%

Personal deposit 1%


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No. Risk Grading Short Name Score

1 Superior SUP 100% Cash Covered, Government Guarantee and

Int’l Bank Guarantee

2 Good GD 85+

3 Acceptable ACCPT 75-84

4 Marginal/Watchlist MG/WL 65-74

5 Special Mention SM 55-64

6 Sub-standard SS 45-54

7 Doubtful DF 35-44

8 Bad BL Below 35

(PBL, 2005 November. Credit Risk Management Policy).

2.7 Structure of the Loan Agreement The six Cs of credit aid the loan officer and bank credit analyst in answering the board question.

Is the borrower creditworthy? Once that question is answered, however, a second issue must be

faced: can the proposed loan agreement be structured and documented to satisfy the needs of

both borrower and bank?

A properly structured loan agreement must also protect the bank and those it represents

principally its depositors and stockholders- by imposing certain restrictions on the borrower’s

activities then these activities could threaten the recovery of bank funds. The process of

recovering the bank’s funds- when and where the bank can take action to get its funds returned

also must be carefully spelled out in a loan agreement (PBL, 2005 November. Credit Risk

Management Policy).

2.7.1 Securities:

Security means anything that is deposited by borrower to secure the loan or advance. Security

may be of the following types:


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Primary security: Primary security is the one for which the advance is made and the security

has been deposited by the borrower. For example, in case of House Building loan, primary

security is the land & building.

Collateral security: Collateral security is the one for which the advance has not been made but

the security has been deposited by the borrower. For example, in case of House Building loan,

primary security is the land & building. Collateral security may be post dated cheque, FDR etc.

2.7.2 Margin:

Definition of Margin varies from situation to situation. In case of security, Margin means the

value of the securities and the amount up to which the borrower can draw. For example, value of

security is Tk. 100/- and amount of the advance is Tk. 50/-. The margin is Tk. 50/- or 50% of the

security.

In case of Purchase, Margin means the equity participation.

The percentage of margin to be kept differs from one security to another because of: Price

fluctuation, Marketability, Depreciation, Possible loss such as fire, burglary etc (PBL, 2005

November. Credit Risk Management Policy).

2.7.3 METHODS FOR CREATING CHARGE OVER SECURITIES:

Charge: Charge means right of payment out of certain property.

Types of Charge:

Fixed Charge: It is a charge on property which is fixed in nature, e.g., charge on land &

building.

Floating Charge: It is a charge on property which is constantly changing, e.g., charge on stock.

Pari passu Charge (Latin: with equal step): It is a charge on property which gives equal rights

to all the lenders on the property. No first charge or second charge.

Second Charge: It is a second time charge on charged property.

2.7.4 Charging of securities:

Charging of securities means the manner by which some articles or commodities or properties

are made available to a banker as security is known as charging of securities.


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Second Mortgage: It is the mortgage of mortgaged property by the mortgagor to another person

as security for further borrowing.

Sub Mortgage: It is the mortgage of mortgaged property by the mortgagee to another person as

security for further borrowing (PBL, 2005 November. Credit Risk Management Policy).

2.8 DOCUMENTATION OF LOAN AGREEMENT Section 3 of Evidence Act, 1872 states: Documentation means any matter expressed or described

upon any substance by means of letters, figures or marks or by more than one of those means

intended to be used for the purpose of recording that matter. Simply, documents mean any

written record which serves as evidence in respect of transaction. Depending on three factors,

such as Legal status of the borrower, Type of the securities and Type of loan, necessary

documents are obtained.

2.8.1 Charge Documents: Following charge documents are compulsory while giving loans.

2.8.2 Letter of guarantee: This is a document given by the proprietor, directors or the third

party in favor of the principal debtor. The beneficiary of this document is the bank. Surety is

bound to pay the guaranteed amount if such situation arises.

2.8.3 Counter guarantee: This is a document given by the proprietor, directors or the third

party in favor of the principal debtor. The beneficiary of this document is the bank. Surety is

bound to pay the guaranteed amount if such situation arises.

2.8.4 Letter of authority: By this letter, the principal debtor gives the authority to the bank to

debit the current account or investment account of the principal debtor for the following cases:

I. Wages of the go-down keeper and go-down guard.

II. Rent of the go-down.

III. Insurance premium and

IV. Any other expenses regarding these functions.

2.8.5 Letter of recall the loan: This letter is given to the bank by the borrower, giving the bank

the right of recalling the loan amount at any time if the borrower fails to repay any one of the

installments and the borrower cannot protest such recalling.


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2.8.6 Letter of continuity: By this letter, the borrower agrees that the promissory note given by

the bank will act as security for the repayment of the ultimate balance or sum remaining unpaid

on account of the overdraft or advance.

2.8.7 Letter of revival: By this letter, the borrower agrees that he will be liable to bank for

payment of the promissory note with interest in respect of all present and future indebtedness

liabilities secured thereby which promissory note is to remain in force with all relative securities,

agreements and obligations.

2.8.8 Joint promissory note: This promissory note is given to the bank by the borrower if the

borrowers are more than one person.

2.8.9 Single promissory note: The borrower to the bank gives this promissory note if the

borrower is a single person.

2.8.10 Letter of undertaking: This document is given to the banker by the borrower

acknowledging the right to cancel the facility at any time with or without intimation to the

borrower.

2.8.11 Loan disbursement letter: By this letter, the borrower request to disburse the loan

sanctioned in his favor by the bank. All the persons, in whose names the account is opened,

should sign the letter.

2.8.12 Charge over bonds or of shares etc: It is a document given by the borrower to the

banker declaring that the stocks, shares, debentures, securities and investments which are now

deposited to the bank and which may from time to time be deposited by the borrower shall stand

charged and hypothecated to bank as security for the payment to bank on demand of the balance

of the loan amount and of any other indebtedness and liability to the bank of any kind whether

mature or accruing and whether incurred alone or jointly with others and whether as principal or

surety including all interest document, commission, expenses, charges and costs incurred by the

bank in relation any such indebtedness or liability.

2.8.13 Letter of lien against fixed deposit receipt: By this letter, the borrower gives the right

to the bank to hold the Fixed Deposit Receipt (FDR) if the borrower fails to repay or adjust the

loan on demand or discharge the liabilities to bank. In this letter, FDR number, issuing branch,

name of the favoring person and amount are writer.


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2.8.14 Letter of authority to en-cash FDR: By this letter, the borrower gives the right to bank

to encash the FDR in case of need. Here the amount and address of the bank of issue and the

signature of the holders are given.

2.8.15 Memorandum of deposit of title deeds: It is a deed that is necessary in case of

mortgage by deposit of title deed or equitable mortgage. Here the mortgagor agrees that he has

deposited necessary documents of the property to the bank.

Hypothecation of goods to secure a demand cash credit or overdraft or loan account: Here the

amount of loan, interest, and the name of the borrowers are written. Here the bank and the

borrowers agree on the following terms: Security, Balance due to the Bank, Surplus, Borrowers

not to the encumber or parts of the goods, Inspection, Sale, Margin, Repayment, Sale of goods,

Deficiency, Insurance, Statement of account, Continuing security, Saving, Change of borrowers

and notices, Interest rate.

2.8.16 Guarantee by third party: Sometimes third party guarantee is needed for allowing loan.

Here third party gives the guarantee that of the principal debtor fails to repay the loan, and then

the guarantor will be bound to repay the loan to bank.

2.8.17 Hypothecation of vehicle: This document is necessary in case of transport loan. Here the

borrower hypothecated the vehicle to the bank. In case of failure of repay the loan, bank will sell

the vehicle to collect the money (PBL, 2005 November. Credit Risk Management Policy).

2.9 Information About the loan Customers The bank relies principally on outside information to assess the character, financial position, and

collateral of a loan customer. Such an analysis begins with a review of information supplied by

the borrower in the loan application. The bank may contact other lenders to determine their

experiences with this customer regarding the following information:

• Were all scheduled payments in previous loan agreements made on time?

• Were deposit balances kept at high enough levels?

• How much was borrowed previously and how well were those earlier loans handled?

• Is there any evidence of slow or delinquent payments?

• Has the customer ever declared bankruptcy?


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2.9.1 Sources of Information about the Loan customers:

• Physical Investigations

• Customer financial statements

• Experience of other lenders with this customer

• Customer Annual Report

• Local or regional credit bureaus

• Local Newspapers

• Local chamber of commerce.

2.10 Mechanism of Credit Distribution of the Prime Bank The primary factor determining the quality of the bank’s credit portfolio is the ability of each

borrower to honor, on a timely basis. The authorizing credit personnel prior to credit approval

must accurately determine this. If the report of the project appraisal is very satisfactory to

approve the loan proposal, then the following steps furnish the approval procedure: • Make a proposal by the client to the bank

• Give all the necessary documents.

• Bank will send the parties statement to the Bangladesh Bank, their CIB (Credit

Information Bureau) will inquiry that whether this party is defaulter or a new one.

• Bank will take the collateral from the party and analysis that how much it will cover the

total loans.

• Bank will send this proposal to the head office. In the head office the Board of Directors

and Managing Director will approve the loan.

• Head Office will send the approval to the branch office.

2.11 Disbursement:

After completing all the necessary steps for sanctioning loans bank will create a loan account by

the name of the party and deposit the money to that account. Bank will give cheque books to the

party and advice them to draw the money and use it as soon as possible, because whenever the


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Prime Bank Limited

money will transfer to the account interest will count from that time (PBL, 2005 November.

Credit Risk Management Policy).

2.12 Loan Classification-Provisioning a. Classification: Classification of loan is mandatory for all scheduled commercial bank. It has

been observed that sometimes bank income is being calculated by showing the unrealistic

expected income. Loans are classified into 3 categories on the basis of the length of overdue.

These are –

SMA: If the loan remains overdue for 3 months and above

Substandard: If the loan remains overdue for 6 months and above

Doubtful: If the loan remains overdue for 9 months and above

Bad or Loss: If the loans remain overdue for 12 months and above

b. Provisioning: To get real picture of the income, provisioning is made as under-

- 1% for all loans

- 5% for SMA

- 20% for Substandard loans

- 50% for Doubtful loans

- 100% for Bad loans

2.13 Recovery Policy of the Prime Bank First of all PBL try to recover all loans and advances regularly. If any installment over due PBL

officers make phone calls to the customers and if it is overdue for two months they personally go

to customers mailing address. In the basis of overdue installments PBL categorize provision. In

case of SMA loans determined to have high probability of recovery within 6 months; recovery

efforts to continue on an on-going basis. In case of substandard loans determined to have

moderate probability of recovery within 1 year; review recovery efforts on a 3 months basis. For

doubtful loans it determined to have moderate probability of recovery within 1 year; review

recovery efforts on a 3 months basis. Loans determined to have low and remote probability of


17

Prime Bank Limited

recovery; review case on a 6 months basis. Lastly for those loans have virtually no chance of

recovery: charge-off the books. However in these situations proper approval from the appropriate

approving authorities should be obtained and also shall be guided by Bangladesh Bank

instructions and subject to complete analysis of: Banking practice, Legal and tax implication and

Status of each individual credit (PBL, 2005 November. Credit Risk Management Policy).

2.14 Conclusion Prime Bank Limited celebrates its 12th anniversary on 17th April 2007 (started its operation in

1995). Within this tangible period, the Bank is now graded as the top ranking Bank in the

country and it hold top position in CAMEL rating published by Bangladesh Bank in 2005. Credit

Management System of PBL is successful. This success lies on its selection of good borrower

and close credit monitoring system which reflects on its profitability.

Credit is an utmost important factor for a Bank and core income generating source as well as it is

involved with risk. So, decision regarding credit is very important in all respect of the Bank. PBL

has proper credit management policies that describes what type of loans protect the Bank’s

soundness and also help to meet the needs of the communities the Bank serves.

PBL should capitalize its present successful credit management system and try to give better

service to its stakeholders in days to come which can ensure its sustainable growth and

development.


18

Prime Bank Limited

Chapter 3

3.0 Working Experience

3.1 Introduction The BBA program is designed to focus on theoretical and professional development of people

open to take up business as a profession as well as service as a career. The course is designed

with an excellent combination of theoretical and practical aspects. This internship provides the

students to link up their theoretical knowledge into practical fields. In this connection, I was

assigned to Prime Bank Ltd. Narayangonj Branch credit operation for my practical orientation.

This chapter will give a brief idea about my duties and responsibilities over the three month in

Prime Bank Ltd Narayanganj Branch. From the first day of my joining in Prime bank I have

given some responsibilities. At first I started from the general banking and after that I was shifted

to different departments. Through this internship program I have gathered practical knowledge

about the corporate world.

3.2 General Banking Division General banking is the starting point of all the banking operations. General banking is the front-

side banking service department. It deals with those customers who come frequently and those

customers who come one time in banking for enjoying ancillary services. In some general

banking activities, there is no relation between banker and customers who will take only one

service from bank. It opens new accounts, remit funds, issues bank drafts and pay orders etc.

3.2.1 Account Opening Prime Bank Ltd opens Savings, STD, Current and different deposit accounts. To open this

accounts they have account opening forms for each accounts. For Savings, STD and Current

accounts the form required detail information about the customer. My duty was to help the

customers to fill up the form. If the customer was not able to fill up the form I had to fill it on the

behalf of them.


19

Prime Bank Limited

3.2.2 Issue Pay Orders and Demand Drafts To issue pay orders and demand drafts first I have to receive the application form from the

applicant. Then I have to write the date, amount and the name to which these pay orders and DD

are issued on the block. In case of DD I have to write down the branch code and the branch name

to which these DD will be issue. I have also written the date, amount and commission on the DD

register in case of demand draft. Then I have to collect two signatures from two authorized

officer on the DD block. The general banking officer ensures the applicant deposit the amount

and after that I give the issued pay order or demand draft to the applicant with a signature on the

block.

3.2.3 Cheque Books and ATM cards In the morning when the MICR check books come from the head office I have to sort out them

by the first character of the names. When the customers come to get their cheque book or ATM

card it was my responsibility to give them their check books or ATM card by taking their

signature in the received file.

3.2.4 Giving Information When the customers come it was my responsibility to give them the proper information about the

deposit accounts. Like if a customer wants to open a savings account the required documents and

number of photos.

3.2.5 Daily Expenditure Voucher It was my responsibility to write down the daily expenditure voucher of Prime Bank Limited like

local convince, refreshment, cash remittance account etc.

3.3 Cash Section Cash section demonstrates liquidity strength of a bank. It is also sensitive as it deals with liquid

money. Maximum concentration is given while working on this section. As far as safety is

concerned special precaution is also taken. Tense situation prevails if there is any imbalance in

the cash account. For the safety reason I have no duties in the cash section.


20

Prime Bank Limited

3.4 Credit Division As the credit division of Prime Bank Limited is fully based on software system there was a little

scope for me to work. I have filled up some part of the retail loan form like the personal

information of the customer. I have to observe the proposals and documentation of different

types of credit.

3.5 Findings While doing my Internship Program I could find some positive and negative aspect faced by the

customers. Those are:

1. Positive Aspect:

Strong manpower: The Bank has strong management system. As a result bank got skilled

employee and the all work properly.

Online Service: Now Bank has an online service in all their branches that also have a strong

network. Now client can transaction easily whichever branch they want within Bangladesh.

Through the online service client also can transfer their fund in all over the Bangladesh.

Branch network: Now presently Bank has almost 64 branches in all over Bangladesh, which is

a very impact for a bank to growing faster and increase reserve fund.

2. Negative Aspect:

Customer related problems: the Bank has no segmentation to handle different types of

customer. They are equally treating of all the customers to provided service. But high status

clients seek on extra honor from Bank or instituted.

Work Environment Problems: The work environment is noisy and full of crowd sometimes. It

is bad for any financial organization and also bad for security. There is no sitting arrangement for

a large number of people.

Administrative problem: the procedure to open an account is full of fast and regulations .But

compare to other Bank, Prime Bank is not as flexible as they are doing to open A/C or attract

customer.


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Prime Bank Limited

Technological problem: The branches only one photocopy machine which is sometimes in

client’s death. The output of this machine is not ensuring the quality of original documents. So it

is an image problem of the Bank. The most important problem is that most of the time clients

come with the problem that they punch their ATM card on the machine and it deduct money

from their account but they do not get any money. When they come to the bank they fill up a

form after that they get back their money in their account from the head office.

Product related problem: Compare to other Bank Prime Bank offer low interest rate to

depositor. So, they are not interested to keep their money in low rate of interest. The PBL

management is only hunting to ward low cost and no cost deposit.


22

Prime Bank Limited

Chapter 4

4.0 Conclusion & Recommendations

4.1 Conclusion Prime Bank is an emerging bank. The bank has only completed almost 15 years of banking

services. At the initial stage of business, every institution has to go through the difficult path of

survival. The main objectives of this study are to give a brief idea about credit operation and

management of Prime Bank and explain my duties and responsibilities in Prime Bank over this

three months. I have noticed some positive and negative aspects of Prime Bank Ltd. like strong

manpower, branch network, work environment problems, administrative problem and

technological problem. The bank should redesign all sorts of banking procedures to be more

user-friendly, attractive and impressive.

4.2 Recommendations Considering the findings and analysis in the earlier chapters, PBL can do the following for

further growth and development:

Central monitoring system should be more active to maintain classified loan to a

minimum level.

PBL should establish ATM Booth countrywide as soon as possible.

PBL should open more new exchange houses abroad for enhancing remittance business.

PBL should reduce hierarchy of management to retain its employee.

PBL should give more emphasis on HR development that is vital for its overall success.

PBL should arrange job rotation in branch level to get overall banking knowledge for

their employee.

References

1. Prime Bank, (“n.d.”) The Bank

<https://www.primebank.com.bd/ the_bank.jsp> (5 February 2011)

2. Investorwords,( “n.d.”) Credit

<http://www.investorwords.com/> (6 February 2011)

3. Wikipedia, (“n.d.”) Credit Operation

<http://en.wikipedia.org/wiki/> ( 6 February 2011)

4. Wikipedia, (“n.d.”) Credit Operation

<http://en.wikipedia.org/wiki/> ( 6 February 2011)

5. PBL, 2005 November. Credit Risk Management Policy. Credit Operation and Management,

38-47.

6. Mishkin, F. S. (2008). The economic money, banking, financial markets. Pearson Addison

Wesley

7. http://www.iub.edu.bd/

8. Annual Report of PBL 2008 & 2009.

Appendix

Reference No.: Prime/NGJ/CR/

Name of the Borrower

Key Person

Group Name (if any)

Branch:

Industry 75.50

Sector

Date of Financials

Originated by (RO/SRO) Acceptable

Completed by (RM/SRM)

Approved by (CO/SCO)

Numeric Grade Grade Short

1 Superior SUP

2 Good GD

3 Acceptable ACCPT

4 Marginal/Watchlist MG/WL

5 Special Mention SM

6 Substandard SS

7 Doubtful DF

8 Bad/Loss BL

Score Summary

RMG

31.12.2009

Mr. A

35-44

<35

Score

Fully cash covered, secured by

Government/International Bank

Guarantee

85+

75-84

Prime Bank LimitedNarayanganj Branch

Risk Grading:

Credit Risk Grading Model

Aggregate Score:

06.10.2010

55-64

45-54

Compact-O-Style Ltd.

Mr. X

N/A

Narayanganj

]

RMG

Mr. B

Mr. C

65-74


Criteria Weight Parameter Score Actual ParameterScore

Obtained

A. Financial Risk 50%

A-1 Leverage 10%

A-1.1 Debt-Equity (x) - Times 5% < 0.25 x 5.00 0.60 4

0.26× to 0.35 x 4.50

0.36× to 0.50 x 4.25

0.51× to 0.75 x 4.00

0.76× to 1.25 x 3.50

1.26× to 2.00 x 3.25

2.01× to 2.50 x 3.00

2.51× to 2.75 x 2.50

> 2.75× 0.00

A-1.2 Debt-Total Asset (x)- Times 5% < 0.25× 5.00 0.37 4.25

0.26× to 0.35 x 4.50

0.36× to 0.50 x 4.25

0.51× to 0.75 x 4.00

0.76× to 1.25 x 3.50

1.26× to 2.00 x 3.25

2.01× to 2.50 x 3.00

2.51× to 2.75 x 2.50

> 2.75× 0.00

A-2 Liquidity 10%

A-2.1Current Ratio (x) -Times 5% > 2.74× 5.00 1.71 4

2.50× to 2.74 x 4.50

2.00× to 2.49 x 4.25

1.50× to 1.99 x 4.00

1.10× to 1.49 x 3.50

0.90× to 1.09 x 3.25

0.80× to 0.89 x 3.00

0.70× to 0.79 x 2.50

< 0.70× 0.00

A-2.2 Quick Ratio (x) -Times 5% > 2.00× 5.00 0.71 3

1.75× to 2.00 x 4.50

1.50× to 1.74 x 4.25

1.25× to 1.49 x 4.00

1.00× to 1.24 x 3.50

0.75× to 0.99 x 3.25

0.50× to 0.74 x 3.00

0.25× to 0.49 x 2.00

Less than 0.25× 0.00

A-3 Profitability 20%

A-3.1 Operating Profit Margin (%) 5% > 25% 5.00 11.12% 3

23% to 25% 4.50

20% to 22% 4.00

17% to 19% 3.50

14% to 16% 3.25

11% to 13% 3.00

8% to 10% 2.50

< 8% 0.00

Score Calculation Sheet (Considering 31.12.2009)

(Operating Profit/Sales) X 100

Quick Assets to Current Liabilities

Current Assets to Current Liabilities

Total Liability to Total Assets

Total Liabilities to Tangible Net worth



ObtainedA-3.2 Net Profit Margin (%) 5% > 15.00% 5.00 11.12% 4

13% to 15% 4.50

11% to 12% 4.00

9% to 10% 3.50

7% to 8% 3.25

5% to 6% 3.00

3% to 4% 2.50

< 3% 0.00

A-3.3 Retrun on Asset 5% > 30% 5.00 17.59% 3.25

26% to 30% 4.50

22% to 25% 4.00

18% to 21% 3.50

14% to 17% 3.25

8% to 13% 3.00

5% to 7% 2.50

< 5% 0.00

A-3.4 Return on Equity 5% > 15.00% 5.00 28.15% 5

13% to 15% 4.50

11% to 12% 4.00

9% to 10% 3.50

7% to 8% 3.25

5% to 6% 3.00

2% to 4% 2.00

< 2% 0.00

A-4 Coverage 10%

A-4.1 Interest Coverage (×) - Times 5% > 2.00× 5.00 3.00 5

1.51× to 2.00× 4.00

Earning before interest & tax (EBIT) 1.25× to 1.50× 3.00

Interest on debt 1.00× to 1.24× 2.00

< 1.00× 0.00

A-4.2 Debt Service Coverage 5% > 2.00× 5.00 3.00 5

1.51× to 2.00× 4.00

1.25× to 1.50× 3.00

1.00× to 1.24× 2.00

< 1.00× 0.00

Total Score- Financial Risk 50.00 40.50

B. Business/ Industry Risk 18%

B-1 Size of Business (in BDT crore) 4% > 60.00 4.00 5.06 2

30.00 – 59.99 3.50

10.00 – 29.99 3.00

5.00 - 9.99 2.00

2.50 - 4.99 1.00

< 2.50 0.00

B-2 Age of Business 3% > 10 Years 3.00 11 3

6 - 10 Years 2.00

2 - 5 Years 1.00

< 2 Years 0.00

B-3 Business Outlook 2% Favorable 2.00 Favorable 2

Stable 1.50

Slightly Uncertain 1.00

Cause for Concern 0.00

Number of years the borrower is

engaged in the primary line of business

Critical assesment of medium term

prospects of industry, market share and

economic factors.

(Net Profit/Sales) X 100

(Net Profit/Total Asset) X 100

(Net Profit/Total Equity) X 100

EBITDA/(Total Interest+CMLTD)

Size of the borrower's business

measured by the most recent year's

total sales. Preferably audited numbers.



Obtained

B-4 Raw Material Availability 2% Locally available 2.00 Locally available 2

Partially import dependent 1.00

Fully import dependent 0.50

Scarce 0.00

B-5 Industry Growth 3% Strong (10%+) 3.00 Good (>5% - 10%) 2

Good (>5% - 10%) 2.00

Moderate (1%-5%) 1.00

No Growth (<1%) 0.00

B-6 Market Competition 2% Dominant Player 2.00 Moderately Competitive 1

Moderately Competitive 1.00

Highly Competitive 0.00

B-7 Entry/Exit Barrier 2% Difficult 2.00 Difficult 2

Average 1.00

Easy 0.00

Total Score- Business Risk 18.00 14.00

C. Management Risk 12%

C-1 Experience 5 More than 10 years 5.00 1–5 years 2

6–10 years 3.00

1–5 years 2.00

No experience 0.00

C-2 Trackrecord 2 Very Good 2.00 Very Good 2

Moderate 1.00

Poor 0.50

Marginal 0.00

C-3 Second Line/Succession 3 Ready Succession 3.00 Ready Succession 3

Succession within 1-2 years 2.00

Succession within 2-3 years 1.00

Succession in question 0.00

C-4 Team Work 2 Very Good 2.00 Very Good 2

Moderate 1.00

Poor 0.50

Regular Conflict 0.00

Total Score- Management Risk 12.00 9.00

(Technology, capital, regulation etc)

Total length of experience of the senior

management in the related line of

business.

Reputation, commitment, trackrecrod of

onwers in business.

Consider market share, demand supply

gap etc.



Obtained

D. Security Risk 10%

D-1 Security Coverage (Primary) 4% Fully covered by underlying

assets/substantially cash

covered

4 Simple hypothecation /

Negative lien on assets

1

Registered Hypothecation (1st

Charge/Pari passu Charge)

3

2nd charge/Inferior charge 2

Simple hypothecation /

Negative lien on assets

1

No security 0

D-2 Collateral Coverage (Property

Location)

4% R/M on Municipal

corporation/Prime Area

property

4 No collateral 0

R/M on Pourashava/Semi-

Urban area property

3

E/M or No property but other

Plant & Machinery as

collateral

2

Negative lien on collateral 1

No collateral 0

D-3 Support (Guarantee) 2% Personal Guarantee with high

net worth or Strong

Corporate Guarantee

2 Personal Guarantee

with high net worth or

Strong Corporate

Guarantee

2

Personal Guarantees or

Corporate Guarantee with

average financial strength

1

No support/guarantee 0

Total Score- Security Risk 10 3

E. Relationship Risk 10% 10%

E-1 Account Conduct 5% More than 3 years Accounts

with faultless record

5.00 More than 3 years

Accounts with faultless

record

5

Less than 3 years Accounts

with faultless record

4.00

Accounts having satisfactory

dealings with some late

payments.

2.00

Frequent Past dues &

Irregular dealings in account

0.00

E-2 Utilization of Limit 2% More than 80% 2.00 90.00% 2

61% - 80% 1.50

40% - 60% 1.00

Less than 40% 0.00


Obtained

E-3 Compliance of Covenants 2% Full Compliance 2.00 Full Compliance 2

Some Non-Compliance 1.00

No Compliance 0.00

E-4 Personal Deposits 1% Personal accounts of the key

business Sponsors/ Principals

are maintained in the bank,

with significant deposits

1.00 No depository

relationship

0

No depository relationship 0.00

Total Score- Relationship Risk 10.00 9.00

Grand Total - All Risk 100.00 75.50

(actual/projection)-Consider both

revolving & non-revolving limits.

Note: All calculations should be based on annual financial statements of the borrower (audited preferred).


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