performance appraisa & credit term of eastern bank ltd

8/10/2019 Performance Appraisa & credit term of Eastern Bank Ltd

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Thesis Paper on Credit Terms andPerformance Appraisal of Eastern Bank

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CHAPTER- 01

INTRODUCTION


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1.1 INTRODUCTION

After completion of 36 credits in the regular MA Program of the !acult" of usiness

#tudies$ A#A %ni&ersit" angladesh$ ' prepared m" Thesis paper on Credit Ris(

Management and Performance Appraisal of Eastern an( )td* prepared on the Credit Ris(

Management +CRM, department of the an(* 'n the report it has gone through the standard

operating procedures carried out " the an( and understood them .ell* Pro/ect paper has

tried to understand the regulator" compliance issues proposed " angladesh an( +,

regarding credit management practices*

1.2 OBJECTIVE OF THE REPORT

To pro&ide a thorough understanding of the Credit Ris( Management Practice follo.ed "

CRM and Performance of Eastern an( )imited last fi&e "ears for performance e&aluation*

The report attempts to sho. .hether the .hether the Credit Ris( Management Practice

follo.ed " Eastern an( is in compliance .ith angladesh an( guidelines* #ome core

issues li(e Classification procedures and on-performing )oan handling procedures .ill alsoe discussed thoroughl"* Credit Ris( grading procedure proposed " angladesh an( has

also een intended to e scrutinied in the report .ith the e2isting ris( rating s"stem follo.ed

" Eastern an( )imited*

1.3 SCOPE OF THE STUDY

The scope of the stud" is limited to CRM* There .as no intention .hatsoe&er$ to focus on

ho. the loan and ad&ances .ere mar(eted to the customers$ ho. the relationships .ere uilt

and ho. each customers .ere follo.ed up or handled " the Relationship Managers* Purpose

of the report .ould e to focus on ho. the credit management practice is eing carried out "

the respecti&e department li(e .hat is modus operandi$ .hat is the e&aluation techniues

follo.ed " the officers during e&aluating a loan proposal and so on so forth* Also the report

.on4t co&er &arious legal issues regarding disursement and reco&er" procedures of a loan*

And finall" entire ris( management issues in the report .ill re&ol&e around #ME loan

proposals onl"*

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1.4 SOURCES OF DATA & METHODOLOGY

Primary Sources of Data: 5irect con&ersation .ith the emplo"ees of Eastern an( )imited*

Secondary Sources Of Data: Annual Reports of the an($ different reports$ operational

manual for the emplo"ees$ angladesh an( Circulars$ an( 5ataase and &arious other

pulications and .esites* !or the anal"sis part$ data ha&e een collected from the loan

proposals and other documentation pac(ages of the an(* 'nter&ie. method to the E)

fficials has een used for getting information* A case stud" has een used to present the

Credit Ris( Assessment process of Eastern an( )imited*

1.5 LIMITATIONS

The follo.ing limitations are apparent in the report- Time is the first limitation as the

duration of the program .as of 17 .ee(s onl"* Another limitation of this report is an(4s

polic" of not disclosing some data and information for o&ious reason$ .hich could ha&e

een &er" much useful*

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4

CHAPTER- 07

OVERVIEW OF EASTERN AN! "TD


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#$% FOR&ATION

'n pursuance of the 8an( of Credit and Commerce 'nternational +&erseas, )imited in

angladesh +Reconstruction, #cheme$ 1997:$ framed " the angladesh an( and appro&ed

" the ;o&ernment of angladesh$ the Eastern an( )imited .as formed as a pulic limited

compan" incorporated in angladesh .ith primar" o/ecti&e to carr" on all (inds of an(ing

usiness in and outside the countr"* Eastern an( )imited had also ta(en o&er the usiness$

assets and liailities of erst.hile an( of Credit and Commerce 'nternational +&erseas,

)imited ranches in angladesh .ith effect from 16th August$ 1997*

#$# VISION OF E"


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large loan portfolios .ith the o/ecti&e to ensure etter operation and control of all functions

of the an(*

5espite such situation the "ear .as a remar(ale one for Eastern an( )imited +E), .hen

the an( finall" completed the introduction of a state-of-the art 'T technolog" platform of

!le2cue$ a .orld class an(ing soft.are* All of an(4s 77 ranches .ere connected to this

'T platform gi&ing an en&iale opportunit" to all the E) customers to otain the most

co&eted ser&ices that no other an( could offer them "et*

Customers of ne. centur" are self-moti&ated$ &igilant and informed aout the mar(et

conditions$ further more de&elopment of information technolog" and telecommunication

s"stems created an en&ironment .here" customers demand con&enience$ reasonal" priced

etter ualit" financial products and personalied ser&ices* Customer demand together .ith

technological ad&ancement created ne. challenges and opportunities in the an(ing sector in

angladesh* Adapting realistic and timel" usiness policies$ in&estments in 'T are no.

pre/udice to sta" at the edge of this asserti&e and competiti&e an(ing usiness of the countr"*

'n&ention of ne. financial products and ser&ices and introduction of ne. deli&er" methods

are the (e" concern of sta"ing close to customers*To cope .ith the status uo$ Eastern an( )imited .elcomed these de&elopments and

restructured the an( to meet the challenges in future* The ranches of the an( are no.

termed as the 8#ales ? #er&ices Center: .hich are solel" concentrated pro&iding ser&ice to

the corporate and consumer clients and maintain relationship .ith them* The strategic

changes that initiated ac( in 7007 to face this changing circumstance ha&e een completed

in 700>* As a result$ this ne. usiness structure supported .ith the roust an(ing solution

.ill allo. the an( to focus on customers4 needs and pro&ide the est ser&ices and products

to customer4s doorstep at an attracti&e price*

@eeping in mind such changed circumstances the an( concentrated not onl" on .holesale

an(ing ut also on other alternati&es* !or e2ample$ introducing ne. products di&ersif"ing

an(4s acti&ities in consumer and retail an(ing simultaneousl" securing lo. cost deposits

to sustain profitailit"$ increase shareholders4 .ealth rationaliing the e2penses and

optimiing fruitful use of the funds* The cost to operating income ratio of the an( in 700>

.as at the lo.est rac(et compared .ith other an(s*

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CHAPTER- 03

CREDIT SECTION PRODCEDURE OF

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3.1 Int!"#$t%!n

Credit Ris( Management is one of the most crucial components of the d"namics of an(

management as credit lending is the principal acti&it" for the commercial an(s* 'n this

segment of the report Credit Ris( management practice of Eastern an( )imited .ill e

thoroughl" discussed and then it .ill e compared and contrasted .ith Prudential ;uidelines

of angladesh an(* Then t.o of the (e" credit management practicesB Handling of on-

performing loans and procedures for loan classification .ill e discussed simultaneousl"*

3.2 CREDIT RIS

Ris( is inherent in all aspects of a commercial operation ho.e&er for an(s and financial

institutions$ credit ris( is an essential factor that needs to e managed* Credit ris( is the

possiilit" that a orro.er or counter part" .ill fail to meet its oligations in accordance .ith

agreed terms* Credit ris($ therefore$ arises from the an(4s dealings .ith or lending to

corporate$ indi&iduals and other an(s or financial institutions*

Eastern an( )imited has categoried its credit ris(s into four road categories for its ris(

management purpose* Each class of ris( has their uniue management techniue* !ollo.ing

are the four road categories of ris(s defined internall" " the an(B

Class- A

Class- Class- C

Class- 5

'$#$% C"ASS - A:

Credit facilities e2tended to clients .hich are secured "B

100 cash co&ered " ha&ing the funds a&ailale in E)4s cash margin account

100 E) !i2ed 5eposits full" lined ? pledged in fa&or of the an(

100 in the form of ;o&t* #anch"a Patra full" lined ? pledged in fa&or of the an(*

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110 cash co&ered if credit facilities are in different currenc" than that of collateral*

'$#$# C"ASS - :

Credit facilities e2tended to clients .hich are secured "B

H"pothecation of usiness assets li(e 'n&entor"$ oo( dets ? assets$ Plant ?

Machiner"

Mortgage of fi2ed assets li(e !actor" )and ? uilding and other real assets

Partiall" cash co&ered or other collateral

;uarantee from acceptale !inancial 'nstitution or )ien on fi2ed deposits issued "

them

Personal or Corporate ;uarantees

;o&ernment ;uarantee through Ministr" of !inance

'$#$' C"ASS - C:

Credit facilities e2tended to co&er or to hedge foreign currenc" ris( against )etters of Credit

are called e2change fluctuation ris(* The product$ .hich E) sells to its customers$ is called

!or.ard Contract +!=5 !D, and can e further e2plained as follo.sB

E2change !luctuation Ris(

!or.ard Contract against )etters of Credit

Hedge !D ris( of E)ther an( )etters of Credit

Ris( for Ma2* 1F0360 da"s

'$#$( C"ASS - D:

This class of ris( is concerned onl" .ith ris(s ta(en on a an(ing financial institution and can

e further e2plained as follo.sB

Ris( on an(ing financial institutions +!', including angladesh an(

Call#T5Time placement .ith an(ing financial institutions

Term E2posure on an(ing !inancial 'nstitutions

!inancing against an(ing !inancial 'nstitution4s acceptances

egotiation of E2port documents against &alid e2port lcees

Purchase of Pa" rder5emand 5raft dra.n " a an(ing financial institutions

ostro Account .ith other an(ing !inancial 'nstitutions

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Purchase of Treasur" ills from angladesh an(

'$' CREDIT RIS! &ANA)E&ENT PRACTICE

Credit lending is the principal acti&it" for a commercial an(* 'n this competiti&e usiness

mar(et it has ecome &er" crucial for a an( to ma(e prudential decisions .hile disursing

an" loan e it in corporate sector$ in #ME sector or e it consumer financing* =hile a an(

cannot ma(e a loan decision .himsicall" it also has to measure the cost and price against

disursement of a loan* Thus credit ris( management needs to e a roust process that should

enale an(s to proacti&el" manage loan portfolio in order to minimie losses and earn an

acceptale le&el of return for shareholders* 'n this ac(ground it is &er" essential that a an(

maintains a credit Ris( Management department and that is the case for Eastern an(

)imited$ .hich has a full-fledged Credit Ris( Management +CRM, unit e2clusi&el" to focus

on the Corporate and #ME loans of the o&erall portfolio*

'$( CREDIT RIS! &ANA)E&ENT DEPART&ENT

The credit ris( management department is placed suital" in the organiational d"namics so

that ma2imum output can e generated from it* All corporate and #ME proposals of the an(

are appro&ed through this particular department of the an(* The acti&ities of the department

includeB

&ersight of the an(4s credit policies$ procedures and controls relating to all credit

ris(s arising from corporatecommercialinstitutional an(ing$ personal an(ing$ ?treasur" operations*

&ersight of the an(4s asset ualit"*

5irectl" manage all #ustandard$ 5outful ? ad and )oss accounts to ma2imie

reco&er" and ensure that appropriate and timel" loan loss pro&isions ha&e een made*

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time* A .ee(l" report from the dataase is pro&ided to the Head of CRM and also a monthl"

report on #ME proposals is placed to the Head of #ME from it* After gi&ing entr" into the

dataase$ proposals are placed to respecti&e credit officers*

The credit officers then start to re&ie. the loan proposal* The asic intention is to measure the

e2act financial need of the customer and disurse the amount accordingl" and to minimie

the ris( e2posure of the an( in the process* 'n terms of regularit" the proposals ma" e

roadl" classified as one time and regular* ne time proposals include )P5$ !P5$ )C$ and

an( ;uarantee and so on* The regular proposals refers to appro&al for fresh credit li(e Cash

Credit$ 5emand )oan$ Time loan Pa" order$ Time loan .or( order$ restructuring of e2isting

facilities etc* n an a&erage follo.ing is the time needed " each of the officers to re&ie.

these t.o road t"pes of proposalsB

Proposal T"pe Reuired Re&ie. Time +5a"s,

ne time 7

Regular 9

oteB The data ha&e een collected from the pre&ious 3 months re&ie. performance as is

recorded in the


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'$2 ANA"/SIS OF A RENEWA" PROPOSA" 3A CASE STUD/4

Rene.al is a (ind of proposal in .hich the e2isting relationship is rene.ed for a further

period of time* The pre&ious relationship .as appro&ed for a certain period of time for

e2ample$ for one "ear* After the stipulated time period if the client .ants to continue .ith the

relation$ he or she contacts the RM of the concerned ranch* The RM then as per standard

format prepares the rene.al proposal* 't is to e mentioned here that .hen the pre&ious limit

is to e increased for the current "ear then it is called


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usiness d"namics as elaoratel" as efore$ .hen he sanctioned the proposed limit for the

first time* Regarding the e&aluation of account performance the officer tries to identif"

.hether the account statements reflect the operational performance of the client* There are

some ratios to consider in this case* These areB

3.8.1 Deposit Ratio

5eposit ratio is defined as Credit #ummation to #ales* The credit summation figure is readil"

a&ailale in the account profitailit" part of the CM pac(age* This can also e &erified from

the account statement of the client* The purpose of this ratio is to measure ho. much amount

.as deposited in the account out of the entire sales proceeds during the stated period* 't is

e2pected that the client regularl" deposit his mone" into the account*

3.8.2 Average Utilization Ratio

A&erage utiliation ratio captures .hether the client is utiliing the sanctioned limit properl"*

'f the utiliation ratio is good then it is e&ident that he is doing so and &ice &ersa* A&erage

utiliation is arri&ed " di&iding the interest income for the "ear .ith respecti&e interest rate*

This amount is then di&ided " the total limit*

Apart from these ratios account statement of the client is strictl" scrutinied to find if there

are an" irregularities* The account statement should reflect the operations of the usiness for

the client* The monthl" credit summation should coincide .ith the a&erage monthl" sales

figures* Also the officers chec( the source of the deit and credit transaction and their

regularities* Also an" .indo. dressing in the account performance are tried to e figured out*

The call report of the CM pac(age states the current usiness position of the client and his

usiness needs in detail* 't is prepared " the RM disclosing his e2perience during his &isit to

the clients4 premises* The portfolio re&ie. asicall" pro&ides a periodical statement of the

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financial health of the usiness* Also some ueries regarding the operations of the usiness is

reported in this part of the proposal*

#toc( inspection report is another important section of the proposal$ .hich is to e strictl"

monitored in case of a rene.al proposal* The report mentions the date of stoc( inspection$ the

rea(up of stoc(s and oo( det as on that date$ total &alue of securit"$ and amount of e2cess

securit" and so on*

3.8.3 Calculation of excess security:

!unding utstanding as on stoc( inspection dateB DDD

#ecurit" Ialue on same dateB DDD

5ra.ing po.erB +#ecurit" &alue, D 5ra.ing po.er +G0,

E2cess #ecurit" J !unding outstanding K 5ra.ing po.er*

!inall" ased on the data from the CM pac(age the officers calculate the .or(ing capital

reuirement of the usiness and chec( .hether it supports the proposed limit*

n an a&erage these are the things that are eing anal"ed for appro&ing a rene.al proposal

of a client* These parts are addressed at its &er" asic if not an"thing more for the stated

purpose* Ho.e&er$ the anal"sis ma" not follo. the same chronological order as is mentioned

ao&e* !ollo.ing is the chec(list that is pursued during the e&aluation process +figure

represents the e2cel model used to do the tas(s,B

=hether the proposal is placed .ithin e2pir" date +'f not$ collect a time e2tension proposal,

The e2isting proposal has a stipulated time period for .hich it .as sanctioned pre&iousl"*

After that date the limit .ill ecome past due if not settled full"* This .ould e detrimental

for the client$ as it .ill e reported in the C' report of angladesh an(* #o it is &er" much

necessar" that the rene.al proposal e sumitted .ell .ithin the e2isting e2pir" date*

Ho.e&er$ if there are an" issues li(e mortgage modification or so on$ a time e2tension

proposal ma" e appro&ed for the client to a&oid the emarrassment* 'nsurance co&erage +do

.e ha&e rene.ed insurance polic"L

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The an( needs to ha&e adeuate insurance co&erage on its securit" against fire$ flood and

other ris(s* The specific amount of insurance is 110 of the securit" &alue* 't is to e

chec(ed during e&aluation .hether the insurance co&erage has een rene.ed .ith the

compan"*

'nterest rate +=hether J1> or N

The minimum interest rate is re&ised from time to time* !or e2ample current sla for interest

rate in E) is 1 for the regular #ME clients* #o the officer must ma(e sure .hether stated

interest rate is as per regulation of the an(* Also the reduction of interest rate reuires

appro&al from higher authorit" so it is also to e chec(ed .hether interest rate is eing

reduced or not*

Chec( the correspondenceB - The address of the customer is usuall" mentioned ut the officer

needs to chec( .hether there is an" change in it or nonetheless it is mentioned or not*

5eclaration from Credit AdminB - Another important component of chec(list is to loo( for

an" declaration from Credit Administration 5epartment* The declaration regarding

documentation and other procedures needs to e in place efore sanction of the limit* #o the

officer chec(s .hether all the declarations are in place or not* The declaration of the Credit

Administration regarding the proposals is as follo.ingB

C' report otainedB - Another important thing is to chec( is .hether C' report has een

otained or not* This is &er" important ecause from this report status of client4s all loans can

e identified* 't is a standard practice that current C' report +not older than 6 months, should

accompan" a loan proposal*

Account #tatement .ith other an(sB - 'f the client has other loan relationships then the

account statements of other an(s needs to e otained*

3.8.4 Conclusion

After all the anal"sis if the credit officer is satisfied .ith the /ustification of limit he prepareshis recommendation* The recommendations are then sumitted to his immediate super&isor

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for his appro&al* !inall" all the documents are sumitted to HCRM for his appro&al* After

getting the appro&al from HCRM the officer then prepares a sanction letter as per standard

format of the an(* ne cop" of the sanction letter is sent to the Credit Administration

department +this department is responsile for loading the limit into the s"stem so that the

clients gets his loan, and another cop" +original documents, is then stored in the Credit !ile

of the client* This is ho. the credit officer carries out a t"pical rene.al anal"sis*

1

CHAPTER- 0>

NON5PERFOR&IN) "OAN

C"ASSIFICATION CRITERION


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4.1 Int!"#$t%!n

P) +on-performing )oans, include those loans$ .hich are sho.ing signs of .ea(ness in

the credit ualit" of the loans* =hen the ualit" of a loan deteriorates$ the first signal comes

as irregularit" in client4s loan repa"ment* ften a loan account starts ha&ing past dues*

'nternational est practices reuire that a loan e classified as non-performing if its principal

andor interest are three months or more in arrears* an(s in angladesh are allo.ed to

classif" non-performing loans ased on a time frame of three months* Earl" recognition of

non-performing loans stimulates collection efforts and helps reduce the possiilit" of loss of

such assets*

4.2 NON'PERFORMING LOAN( ELABORATION

)oans ma" e termed as on-Performing oth from the o/ecti&e and su/ecti&e /udgment*

/ecti&e criteria for loan classification are grossl" set " angladesh an(* #u/ecti&e

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/udgment " the an( officials are guided " the 'nstruction Circulars from the top

management*

The follo.ing o/ecti&e criteria .ere prescried " angladesh an( for loan classification

&ide RP5 Circular o* 16$ dated 06 5ecemer$ 199F .ith suseuent amendments &ide

RP5 Circular o* 9 of 7001$ RP5 Circular o*07 dated 1 !eruar"$ 700 and RP5

Circular o* 09 dated 70 August$ 700*

T"pe of )oan &erdue period Classification

Continuous )oan O 90 da"s #M

O 1F0 da"s ##

O 7G0 da"s 5!

O 1 "ear )

5emand )oan O 90 da"s #M

O 1F0 da"s ##

O 7G0 da"s 5!

O 1 "ear )

!i2ed Term )oan +Q ears, O 90 da"s SEui&alent 'nstallments #M

O 1F0 da"s SEui&alent 'nstallments ##

O 7G0 da"s SEui&alent 'nstallments 5!

O 1 "ear SEui&alent 'nstallments )

#M J #pecial Mention$ ## J #u #tandard$ 5! J 5outful$ ) J ad ? )oss

esides the o/ecti&e criteria$ E) uses the follo.ing su/ecti&e criteria to classif" loans* 't

can e noted here that$ loans are classified primaril" " o/ecti&e criteria* Ho.e&er$ officials

are encouraged to follo. the su/ecti&e criteria side-"-side the o/ecti&e criteria* rief

descriptions of the four classification categories are pro&ided in the follo.ing tale*

#pecial Mention +#M, #pecial Mention assets ha&e potential .ea(nesses that deser&e

management4s close attention* 'f left uncorrected$ these .ea(nesses ma" result in a

deterioration of the repa"ment prospects of the orro.er* !acilities should e do.ngraded to#M if sustained deterioration in financial condition is noted +consecuti&e losses$ negati&e net

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.orth$ e2cessi&e le&erage,$ or if a significant petition or claim is lodged against the orro.er*

!ull repa"ment of facilities is still e2pected* #ustandard +##, !inancial condition is .ea(

and capacit" or inclination to repa" is in dout* These .ea(nesses /eopardie the full

settlement of loans* )oans should e do.ngraded to ## if the customer intends to create a

lender group for det restructuring purposes$ the operation has ceased trading or an"

indication suggesting the .inding up or closure of the orro.er is disco&ered* The correction

of the deficiencies ma" result in an impro&ed condition* 5outful +5!, !ull repa"ment of

principal and interest is unli(el" and the possiilit" of loss is e2tremel" high* Ho.e&er$ due

to specificall" identifiale pending factors$ such as litigation$ liuidation procedures or

capital in/ection$ the asset is not "et classified as )* Assets should e do.ngraded to 5! if

the client is non-cooperati&e after recurrent reuests for regulariing*

Pa"ment The an( should pursue legal options to enforce securit" to otain repa"ment or

negotiate an appropriate loan rescheduling* 'n all cases$ the reuirements of angladesh an(

in C' reporting$ loan rescheduling and pro&isioning must e follo.ed*

ad ? )oss +),* Assets graded ) are long outstanding .ith no progress in otaining

repa"ment or in the late stages of .ind up liuidation* The prospect of reco&er" is poor and

legal options ha&e een pursued* The proceeds e2pected from the liuidation or realiation of

securit" ma" e a.aited* The continuance of the loan as a an(ale asset is not .arranted$

and the anticipated loss should ha&e een pro&ided for* This classification reflects that it is

not practical or desirale to defer .riting off this asicall" .orthless asset e&en though partial

reco&er" ma" e affected in the future* angladesh an( guidelines for timel" .rite off of

ad loans must e adhered to*

A rief description of the acti&ities of different departments other than CRM for etter

understanding of the P) management function is presented elo.* esides these

departments$ Relationship Managers of Corporate an(ing %nits and #ME units +#mall ?

Medium Enterprises, also pla" an acti&e role in the P) management*

4.3 CREDIT ADMINISTRATION DEPARTMENT )CAD*

Acti&ities of Credit Administration 5epartment include the follo.ing at its &er" asicB

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A* 5ocumentation of loans*

* 5isursement of loans*

C* Credit Monitoring*

5* Earl" Alert process*

E* reporting to angladesh an(

4.4 SPECIAL ASSET MANAGEMENT DEPARTMENT )SAMD*

#pecial Asset Management 5epartment is responsile for all accounts classified in the an(4s

loan portfolio* The three t"pes of classification maintained " the department are gi&en

elo.B

i* #ustandard*

ii* 5outful and*

iii* ad ? )oss*

#AM54s responsiilit" sectorsB

+A,Monitoring and controlling the classified accounts through monthl" reporting and

uarterl" re&ie.update*

+, Acti&el" follo. up .ith the orro.ers for reco&er"*

+C, egotiating and restructuringrescheduling dets .here&er feasile$ on its o.n and or

in association .ith the concerned Relationship Manager %nit HeadArea Head)ine

of usiness and Head ffice Credit Ris( Management*

+5,Re&ie. for reschedulerestructure.ai&er.rite-off is presented " #AM5 .ith$ if

deemed necessar"$ inputs from the related unit or ranchline of usiness* Proposal is

placed as per the format .ith all rele&ant supportdocuments information to facilitate

the process for appro&al from the appropriate authorit" dul" recommended " Head ofCredit Ris( Management and Managing 5irector ? CE*

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+E, Ad&ise client the reschedule restructure .ai&er letter after proper appro&al from the

E) oard*

+!, Head ffice Credit Ris( Management releases the appro&ed restructure

reschedule.ai&e.rite-off proposal to Credit Administration 5epartment .ho are

responsile for communicating the decision /ointl" .ith Head of #AM5 to client as

.ell as initiating action on the oo(s of account of the unit or the ranch

+;,!ollo. up responsiilit" on such .ai&erreschedule .rite off loans is assigned to

#AM5*

#AM5 also prepares a Consolidated Report of all ad loans .ritten off on a uarterl"

asis and sumit the report to the Head of Credit Ris( management and Managing

5irector ? CE*

4.5 DETECTION PROCESS OF NPL

!irst and foremost reuirement for an" and all Relationship Managers #ales ? #er&ice

Managers and Credit Managers is to identif" a prolem credit in its earliest stages "

recogniing the signs of deterioration* #uch signs include$ ut not limited to$ the follo.ingB

a, on-pa"ment of interest or principal or oth on due dates or past dues e"ond a

reasonale period or recurring past dues*

, 'n case of &erdrafts$ +or Cash Credits or similar facilit",$ no mo&ement in the

account e"ond a reasonale period*

c, 5eterioration in financial condition of the client$ as gathered from client4s latest

financial statements*

d, A shortfall in collateral co&erage$ particularl" if the collateral .as a (e" factor in the

decision-ma(ing or the loan .as predicated on the sole factor of collateral +i*e*$ full"

secured transactions,*

e, 5eath or .ithdra.al of (e" o.ner+s, or management personnel*

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f, Compan" filing for an(ruptc" or &oluntar" dissolution*

g, Ad&erse mar(et report aout the compan" itself or its principal o.ners*

4.+ STEPS TO FOLLO, FOR CLASSIFICATION

#teps to follo. in such situations areB

+A,CA5 rechec(s the account$ for all outstanding$ including an" outstanding in allied or

sister compan" or in o.ner4s or partners4 or directors personal name+s,*

+, CA5 thoroughl" re&ie.s loan documentation to confirm that 8the an( has .hat the

an( needs:$ documents are in proper form$ properl" e2ecuted and current +i*e* not

time arred,* A re&ie. of the documentation ser&es as a good reminder of the an(4s

legal rights against the detor$ principal o.nerguarantors etc*

+C, CA5 otains current figures to re&ie. these on strict liuidation asis$ to ta(e a close

loo( at the assets and liailities to determine .ho has the preferential right or prior

lien to .hat assets* !or )imited )iailit" companies$ a title search at the RU#C office

.here all charges are filed is carried out*

+5,'f ;uarantors are in&ol&ed$ CA5 loo(s closel" at the net .orth statement and ta(e

steps to protect E)4s interests4 &is-V-&is other creditors* 'n other .ords$ if possile$

perfect liens on ;uarantor4s assets or gi&e demand notice to guarantor*

+E, Concurrentl" .ith the assessment of situation$ once the account is classified

sustandard$ credit lines are froen .ith notice to all concerned$ on a 8damage

control: concept*

+!, A report in the prescried form as per standard format is sumitted to classif" the

account* A concurrent initial Action Plan to upgrade or reco&er the outstanding is also

sumitted in the Portfolio Re&ie. !ormat for appro&al*

+;,A full assessment of the prolem situation surrounding the account leads the re&ie.er

to decide options a&ailale to the an(B &i* =or( out$ .ith no rescheduling

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=or( out$ .ith rescheduling$ under proper rescheduling agreement and if needed .ith

fresh documentation and renegotiated collateral securit"* )egal action$ .hich if

situation so .arrant$ is ta(en immediatel" +.ith prior appro&al from appropriate

appro&ing authorit", .hen the need is recognied to pre empt" an" dissipation or

transfer of the assets of the orro.er or the guarantor*

4.- CLASSIFICATION PROCESS

!or the purpose of determining the 8Classified: status of an account$ follo.ing guidelines are

oser&ed

'* The process of Classification of an account starts .ith strict application of the ris(

rating assessment that is compulsor" for each orro.ing relationship* Account

deemed to e classified are su/ect to Portfolio Re&ie. !orm sumission or a direct

classification " Head ffice Credit Ris( ManagementB #pecial Mention #ustandard

5outful ad ? )oss*

''* Ho.e&er$ unpaid 'nterest or Principal or E2pired )imit for a period of 90 da"s ormore or recurring past dues +of Principal, remain the most significant Rules of Thum

triggering the classification*

4. DO,N GRADING/UPGRADING CLASSIFIED ACCOUNTS

The follo.ings are the procedures for upgrading or do.ngrading the classified accountsB

+A, Primar" responsiilit" lies .ith the concerned Relationship Manager to initiate the

classification " sumitting the Portfolio Re&ie. !orm in a timel" manner*

+, This responsiilit" first mo&es laterall" to Relationship Managers and escalates

up.ards to %nit Head#ales ? #er&ice Manager$ if an"one ha&ing responsiilit" for

the account in the la"ers fail to identif" and report a classified name*

+C, 'f and .hen a Portfolio Re&ie. !orm is sumitted$ the concerned Relationship

Manager%nit HeadArea Head$ Head of )ine of usiness$ re&ie.s it promptl"* The

latter finall" recommends the categor" or se&erit" of classification along .ith Action

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Plan to upgradereco&er outstanding* Head of Credit Ris( Management and

Managing 5irector ? CE re&ie.s and agrees to the classification and the related

Action Plan for reco&er"upgrade* Head ffice Credit Ris( Management is

responsile to release and distriute copies of appro&ed Portfolio Re&ie. !orm toB

Area Head$ Corporate an(ing Head of )ine of usiness*

Concerned %nit Head #ales ? #er&ice Manager*

Head of #pecial Asset Management 5epartment*

+5, Head ffice Credit Ris( Management ma" also independentl" classif" an account in

the normal course of inspection of a ranch or unit4s loan portfolio* 'n such e&ent$

the Portfolio Re&ie. !orm .ill then e filled in " Head ffice Credit Ris(

Management and .ill e referred to the respecti&e Relationship Manager %nit Head

Area Corporate Head Head of )ine of usiness andor Head of #pecial Asset

Management 5epartment for information* Action Plan for reco&er"upgrade .illthen e presented " Head of #pecial Asset Management 5epartment in consultation

.ith RM %nit Head Area Head Head of )ine of usiness to the Head of Credit

Ris( Management ? Managing 5irector ? CE for appro&al*

+E, #uch classification ma" e superseded " a more se&ere classification i*e* do.n

grading$ " the regulator" od" +angladesh an(,*

+!, =here&er reuired an independent assessment of the classified credit ma" e

conducted " Head ffice Credit Ris( Management or " internal auditor

documenting as to .h" the credit deteriorated and .hat .ere the lapses*

+;, nl" the Head of Credit Ris( Management ? Managing 5irector ? CE is

empo.ered to upgrade a classified account ut the recommendation has to originate

from the Head of #pecial Asset Management 5epartment* Continuation of usiness

strateg" +if an", for the upgraded account .ill reuire the consent of Area Head K

Corporate an(ing Head of )ine of usiness .ith proper /ustification*

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+H, %pgrading of a classified account has to e .ell /ustified diligentl" and o/ecti&el"

" all recommending officers* Essentiall"$ complete remo&al of the reason+s, for

classification should e the asis of an" upgrading*

+', Classified Accounts are passed on to #pecial Asset Management 5epartment in the

follo.ing mannerB

An" and all accounts$ .hich ha&e een do.ngraded to #u #tandard status*

An" and all accounts$ .hich ha&e een do.ngraded to 5outful or ad ?

)oss status*

=ithin G da"s of an account eing do.ngraded to sustandard +##-,$ a Reuest

for Action and a Hando&er5o.ngrade Chec(list are completed " the RM and

for.arded to #AM5 for ac(no.ledgment* The account is assigned to an account

manager .ithin the #AM5 .ho .ill then in consultation .ith concerned

Relationship Managers%nit HeadArea Head Head of )ine of usiness prepare

Action Plan for reco&er" or upgrade and get it appro&ed " Head of Credit Ris(

Management and Managing 5irector ? CE*

fficer in #pecial Asset Management 5epartment get the credit files transferred

to their 5epartment from Corporate an(ing)ine of usiness and under their

custod" for account eing classified #ustandard$ 5outful and ad ? )oss$ and

.ill monitor all upgradedo.ngrade*

fficer in #pecial Asset Management 5epartment must sign on the )oan

5ocumentation Chec(list to ensure re&ie. of loan documentation at hisher end*

fficer in #pecial Asset Management 5epartment must re&ie. the #toc( Report

and #toc( 'nspection Report of classified accounts to arri&e at an effecti&e action

plan for reco&er"upgrade* #pecimen of #toc( Report and #toc( 'nspection

Report attached*

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#pecial Asset Management team in the standard .ai&er format processes

proposal for restructurereschedule.ai&er for the classified accounts* The

proposal should accompan" copies of pre&ious appro&als$ recent accepted

#anction )etter " client$ )a."er4s opinion and updated status on )oan

5ocumentation*

+U, Head of #pecial Asset Management in H** interfaces .ith Head ffice Credit Ris(

Management ? Managing 5irector ? CE on all up gradingreco&er" efforts in the conte2t

of Reco&er"$ )oan )oss Pro&ision and RestructureReschedule=ai&ers=rite-offs*

4.0 REPORTING OF CLASSIFIED ACCOUNTS

The reporting procedure for classified accounts has een outlined elo.B

1* Accounts$ .hich are$ once classified ut not up-graded or reco&ered are to e

separatel" reported on a monthl" asis to Head ffice Credit Ris( Management and

Managing 5irector ? CE* Complete accurac" is to e ensured .hile reporting these

names* #uch reports originate from Credit Administration 5epartment*

7* Head of #pecial Asset Management 5epartment sumits monthl" results on reco&er"

status on all e2isting and ne.l" Classified Accounts to Head ffice Credit Ris(


3* Head of #pecial Asset Management 5epartment sumits uarterl" report on Classified

Accounts to Head ffice Credit Ris( Management and Managing 5irector ? CE*

4.1 NON' EARNING LOANS

!ollo.ing guidelines are strictl" oser&ed for treatment of unpaiduncollected interest in

classified accountsB

A, 'f interest is o&erdue " more than 90 da"s the outstanding must e classified #pecial

Mention on-Earning or e&en lo.er +such as #u-standard,$ if not alread" so

classified*

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, 'f an" loan is classified as #pecial Mention#ustandard5outful$ interest is charged

on this loan$ ut this cannot e treated as income* All such interest is credited to

'nterest #uspense +Credits, AWC* or an" other account speciall" designated for this

purpose " angladesh an(*

C, 'f a loan is classified as ad ? )oss$ charging of interest thereafter is suspended from

the date of ad ? )oss classification* A contingentmemo entr" is ta(en up for the

interest eing suspended .hich is re&ersedrought ac( as actual liailit" at the time

of suit eing filed for reco&er" or if restructure.ai&ersettlement ta(es place* Head of

#pecial Asset Management 5epartment ensures that these contingentmemo items are

monitored and reported on a uarterl" asis to Head of Credit Ris( Management and

Managing 5irector ? CE*

5, A properl" conducted o&erdraft facilit" can e considered earning as long$ as

outstanding .ith interest deited to the account remain .ithin appro&ed and &alid

limit* ut$ it is not permissile to increase o&erdraft limits to asor interest charges

unless specificall" appro&ed " Head of )ine of usinessArea Head Corporate#ales

? #er&ice Managers pro&ided such interest is settled " cash deposit into the account

.ithin 60 da"s of such deits*

E, #ometimes$ #ustandard loans ma" e restructured or rescheduled$ .ith the

stipulation that as part of the rescheduling$ accrued unpaid interest e capitalied*

nl" in these situations$ e2ceptions to the foregoing rule ma" e allo.ed ut strictl"

on the follo.ing conditionsB

The restructuring or rescheduling is appro&ed " the appropriate appro&ing

authorities on the asis of a 8=or(-out: credit proposal*

The interest to e capitalied .ith principal is reser&ed from interest suspense

accounts onl" after full completion of documentation related to rescheduling

and compliance of all conditions precedent related to rescheduling*

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!, Classified accounts for .hich restructurerescheduled appro&ed ma" e

upgradeddeclassified to Marginal=atchlist-3 i*e* placed under earning status

pro&ided the follo.ing t.o criteria are met*

orro.er displa"s sustained repa"ment performance in accordance .ith the

repa"ment plan*

All principal and interest amounts contractuall" due are assured of repa"ment

.ithin a reasonale period*

Ho.e&er$ return of such accounts to earning status on this prete2t must ha&e Head

ffice Credit Ris( Management4s pre fact concurrence*

;, Earlier$ accounts .hich ha&e een classified " angladesh an( auditors during

their course of inspection .ould reuire pre-fact appro&al from angladesh an( for

declassificationupgrade as per their reuirement* ut in a recent amendment from

states that the oard of directors of the an( can de-classif" an account* 'n this case$

ho.e&er$ this phenomenon has to e reported to *

4.11 APPLICATION OF PAYMENTS INTO CLASSIFIED LOANS

'f a classified loan or part of an" classified loan is collected than accrued interest and

suspended interest should e settled first an" residual .ill e applied for settlement of

Principal )oan*

4.12 REVIE, OF CLASSIFIED ACCOUNTS

Classified Accounts +li(e #ustandard$ 5outful and ad ? )oss, are re&ie.ed on a uarterl"

asis in the manner and as stipulated in the ligor Ris( Rating +RR, guidelines of the

an(*

'f Relationship Manager feels that due to irregularities or o&er dues$ etc*$ regular lines should

not e rene.ed ut e2isting outstanding should e placed on liuidation asis +i*e* ad/ustment

purpose,$ a rene.al .or( out CM co&eringX

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1* The outstanding$ .ith specific maturities$

7* Anticipated date of liuidation +or e2pir" of the facilities, and

3* Action plan to either upgrade or complete reco&er"

Must e sumitted in the normal manner ? account should e rated #pecial Mention K >*

'f up-to-date financials are not a&ailale$ Relationship Manager should sumit rene.als ased

on latest a&ailale ones* More than perfunctor" tradean( chec(ing must accompan" the

CM*

4.13 CREATION OF LOAN LOSS PROVISION

As part of pragmatic and conser&ati&e approach to sustain the ualit" of the an(4s loan

portfolio and hence$ the earning stream$ )oan )oss Pro&ision e2ercise is eing made

mandator" for all )ine of usiness and Head of #pecial Asset Management of the an(*

#uch e2ercise is dictated "B

;enerall" accepted an(ing practice*

Conser&ati&e approach to assess the ualit" of Ris( Assets .here" the most accurate

health of the )oan Portfolio is reflected on the oo(s of the an( and*

To e guided " angladesh an( instructionsguidelines on pro&isioning*

!ollo.ing guidelines are oser&edB

1* The prudential Pro&ision Practice dictates that rather than .ait until the close of the

fiscal "ear pro&ision e2ercise .ould e an ongoing one$ .ith the needed pro&ision

created$ .hen an account is classified and continues to remain classified* The

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pro&ision e2ercise is to e carried out " each uarter end$ ased on reports on

Classified Accounts related to pre&ious uarter*

7* angladesh an( instructionsguidelines are follo.ed for the purpose of )oan )oss

Pro&ision e2ercise*

3* %nless other.ise enhanced " angladesh an( regulator" od"$ )oan )oss

pro&ision polic" as per the matri2 gi&en elo. is adopted and follo.ed " the line of

usiness and #pecial Asset Management 5epartment of the an(*

ligor Ris(

Rating Past 5ue #

E2pired Credit

+CR'TER'A, Classification #tatus Pro&ision to e held against et )oan Ialue

G 90 da"s$ 1F0 da"s$ 7G0 da"s$ 360 da"s #pecial Mention$ #ustandard$ 5outful

ad ? )oss

70

0

100

!ollo.ing formula is applied in determining the reuired amount of pro&isionB

;ross utstanding DDD

)essB +i, Cash margin held or !i2ed

5eposits#P under lien* + DDD ,

+ii, 'nterest in #uspense Account + DDD ,

)oan IalueB +!or .hich pro&ision is to e created efore considering

estimated realiale &alue of other securit"collateral held, DDD

)essB Estimated sal&age &alue of securit"collateral held + DDD ,$ et )oan Ialue

DDD

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!or the purpose of pro&ision against classified loans$ 8Eligile #ecurities: mean the

follo.ingB

100 of deposit under deposit against the loan

100 of the mar(et &alue of gold or gold ornaments pledged .ith the an(

100 of the &alue of ;o&t* ond#ancha"apatra under lien

0 of the mar(et &alue of easil" mar(etale commodit" (ept under the control of the

an(

0 of the mar(et &alue of land and uilding mortgaged .ith the an(

0 of the a&erage mar(et &alue for last 06 months or 0 of the face &alue

.hiche&er is less$ of the shares traded in stoc( e2change* The amount of reuired

pro&ision ma"$ in some circumstances$ e reduced " an estimated realiale forced

sale &alue of +i*e* #al&age Ialue, of an" tangile collateral held +&iB mortgage of

propert"$ pledged goods or h"pothecated goods repossessed " the an($ pledged

readil" mar(etale securities etc,* Hence$ in these situations$ it .ill e ad&isale to

e&aluate such collateral$ estimate the most realistic sale &alue under duress and net off

the &alue against the outstanding efore determining the et )oan &alue for pro&ision

purposes* Conser&ati&e approach is ta(en to arri&e at pro&ision reuirement and

angladesh an( guideline to e properl" follo.ed$ Pro&idedB

+A,The classification criteria are strictl" and o/ecti&el" applied and

+, Classified accounts are monitored in the manner as stipulated in this .rite-up a

concerted focused attention on the classified loans is e2pected* 'f an account is thus

re&ie.ed and rated sa" #u-standard and 70 pro&ision is made there against$ in

suseuent assessments if the account sho.s further signs of deterioration$

do.ngrading to 85outful: is .arranted* This should then prompt$ as per the matri2$

a 0 pro&ision of the et )oan Ialue*Therefore$ the process of4 classification

should trigger the Prudential )oan )oss Pro&ision e2ercise*

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+C, The action is not completel" a 8lind faith: one$ since uniue circumstances and

reco&er" prospects ma" still lead the assessor to pro&ide for less than the prudential

le&el* Uudgmental e&aluation should accordingl" pla" the desired role and final

decision for the e2tent of loss pro&ision .ill rest .ith the Head of Credit Ris(


+5,Ho.e&er$ onl" the Managing 5irector ? CE can appro&e the )oan )oss Pro&ision$

.hether specific +against each classified account, or general reser&es on the strength

of recommendation from #pecial Assets Management and Head of Credit Ris(

Management*

4.14 PROBABLE LOSS

nl" for the purpose of Prudential Pro&ision E2ercise 8Proale )oss: categor" of rating is

to e determined* 'n general$ accounts .hich are alread" classified 85outful: ut ha&e not

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Readil" saleale prospects at mar(et &alue +Higher of realiale &alue .ill mean

lo.er* ris( and &ice &ersa, 0 to >0

oteB An account scoring more than 0 ma" ualif" to e high as a 8Proale )oss: and

.ould despite eing classified 85outful ma" deser&e a higher pro&ision on a et )oan &alue

asis*

4.15 RECOVERY PROBABILITY CATEGORIES TO BE ASSIGNED TO ALL

CLASSIFIED LOANS

A, )oans determined to ha&e high proailit" of reco&er" .ithin 6 months reco&er"

efforts to continue on an ongoing asis*

, )oans determined to ha&e moderate proailit" of reco&er" .ithin 1 "ear re&ie.

reco&er" efforts on a 3 monthl" asis*

C, )oans determined to ha&e lo. and remote proailit" of reco&er" re&ie. case on a 6

monthl" asis*

5, )oans determined to ha&e &irtuall" no chance of reco&er"B charge off the oo(s*

Ho.e&er in this situation proper appro&al from the appropriate appro&ing authorities

should e otained and also shall e guided " angladesh an( circularsinstructions

+if an", and su/ect to complete anal"sis ofB

an(ing practice$

)egal and ta2 implication and

#tatus of each indi&idual credit*

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35

CHAPTER- 0

CR& PO"ICIES RECO&&ENDED

/ AN)"ADES* AN!


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5.1 INTRODUCTION

This section details fundamental credit ris( management policies that are recommended for

adoption " all an(s in angladesh " angladesh an( and E)4s compliance status .ith

these guidelines* The guidelines outline general principles that are designed to go&ern the

implementation of more detailed lending procedures .ithin indi&idual an(s* E)4s practice

regarding general credit ris( management has een e2plained in the follo.ing section .ith

their congruence .ith the regulator" guidelines*

5.2 LENDING GUIDELINES

The an( has its estalished Credit Policies +8)ending ;uidelines:, that clearl" outline the

senior management4s &ie. of usiness de&elopment priorities and the terms and conditions

that should e adhered to in order for loans to e appro&ed* The )ending ;uidelines is

updated at least annuall" to reflect changes in the economic outloo( and the e&olution of the

an(4s loan portfolio$ and is distriuted to all lendingmar(eting officers* The )ending

;uidelines is appro&ed " the Managing 5irectorCE ? oard of 5irectors of the an(

ased on the endorsement of the an(4s Head of Credit Ris( Management and the Head of

CorporateCommercial an(ing*

An" departure or de&iation from the )ending ;uidelines is e2plicitl" identified in credit

applications and a /ustification for appro&al is pro&ided* The )ending ;uidelines pro&ides the

(e" foundations for Relationship Managers +RM, to formulate their recommendations for

appro&al$ and includes the follo.ingB

5.3 INDUSTRY AND BUSINESS SEGMENT FOCUS

The )ending ;uidelines clearl" identif" the usinessindustr" sectors that should constitute

the ma/orit" of the an(4s loan portfolio* This .ill pro&ide necessar" direction to the an(4s

mar(eting staff*

5.4 TYPES OF LOAN FACILITIES

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The t"pe of loans that are permitted is clearl" indicated and defined$ such as =or(ing Capital$

Trade !inance$ Term )oan$ etc* A full list of E) credit products for #ME and consumer

clients has een attached in the appendi2*

5.5 SINGLE BORRO,ER/GROUP LIMITS

'n case of single orro.er e2posure limit the an( strictl" follo.s angladesh an(

guidelines* The regulation regarding the stated purpose communicated &ides RP5 circular

no dated April 09$ 700 is pro&ided elo.B

8As a result of increase in capital of almost all the an(s$ no. it has een decided to reduce

the single orro.er e2posure limit from 0 to 3$ thusB

The total outstanding financing facilities " a an( to an" single person or enterprise or

organiation of a group shall not at an" point of time e2ceed 3 of the an(4s total capital

su/ect to the condition that the ma2imum outstanding against fund ased financing facilities

+funded facilities, do not e2ceed 1 of the total capital*

on funded credit facilities e*g* letter of credit$ guarantee etc* can e pro&ided to a single

large orro.er* ut under no circumstances$ the total amount of the funded and non-funded

credit facilities shall e2ceed 3 of a an(4s total capital*

Ho.e&er$ in case of e2port sector single orro.er e2posure limit shall remain unchanged at

0 of the an(4s total capital* ut funded facilities in case of e2port credit shall also not

e2ceed 1 of the total capital*:

5.+ DISCOURAGED BUSINESS TYPESThe guideline ad&ices that an(s should outline industries or lending acti&ities that are

discouraged* As a minimum$ the follo.ing should e discouragedB

Militar" Euipment=eapons !inance*

Highl" )e&eraged Transactions*

!inance of #peculati&e 'n&estments*

)ogging$ Mineral E2tractionMining$ or other acti&it" that is ethicall" or

en&ironmentall" sensiti&e*

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)ending to companies listed on C' lac( list or (no.n defaulters

Eastern an( limited follo.s the guideline and also in addition the" ha&e a list of the

discouraged usiness of their o.n .hich cannot e printed for the sa(e of confidentialit"*

5.- LOAN FACILITY PARAMETERS

!acilit" parameters +e*g*$ ma2imum sie$ ma2imum tenor$ and co&enant and securit"

reuirements, are clearl" stated* As a minimum$ the follo.ing parameters +mentioned in the

guideline, are adoptedB

an( does not grant facilities .here the an(4s securit" position is inferior to that of

an" other financial institution*

Assets pledged as securit" is al.a"s properl" insured* 'n fact$ E) ensures 110

insurance on the h"pothecated securit" for a particular facilit"* The an( also has its

o.n list of insurance companies from .hich the client can ta(e insurance*

Ialuations of propert" ta(en as securit" is performed prior to loans eing granted*

Also recognied 3rd part" professional &aluation firm is appointed to conduct the

&aluations*

.$2 CREDIT ASSESS&ENT

A thorough credit and ris( assessment is conducted prior to the granting of loans$ and at least

annuall" thereafter for all facilities* The results of this assessment are presented in a Credit

Application that originates from the relationship manageraccount officer +8RM:,$ and is

appro&ed " Credit Ris( Management +CRM,* The RM is the o.ner of the customer

relationship$ and is held responsile to ensure the accurac" of the entire credit application

sumitted for appro&al* RMs are familiar .ith the an(4s )ending ;uidelines and should

conduct due diligence on ne. orro.ers$ principals$ and guarantors*

't is essential that RMs (no. their customers and conduct due diligence on ne. orro.ers$

principals$ and guarantors to ensure such parties are in fact .ho the" represent themsel&es to

e* The an( has its estalished @no. our Customer +@C, and Mone" )aundering

guidelines .hich are adhered to at all times*

Credit Applications summarie the results of the RMs ris( assessment and include$ as a

minimum$ the follo.ing detailsB

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Amount and t"pe of loan+s, proposed*

Purpose of loans*

)oan #tructure +Tenor$ Co&enants$ Repa"ment #chedule$ 'nterest, #ecurit"

Arrangements*

.8.1 !orro"er Analysis- The ma/orit" shareholders$ management team and group or affiliate

companies is assessed* An" issues regarding lac( of management depth$ complicated

o.nership structures or inter-group transactions are addressed$ and ris(s mitigated*

.8.2 #n$ustry Analysis- The (e" ris( factors of the orro.er4s industr" are assessed " the

RM* An" issues regarding the orro.er4s position in the industr"$ o&erall industr" concerns

or competiti&e forces is addressed and the strengths and .ea(nesses of the orro.er relati&e

to its competition should e identified*

.8.3 %upplier&!uyer Analysis- An" customer or supplier concentration is reported in the

credit application$ as these could ha&e a significant impact on the future &iailit" of the

orro.er*

.8.4 'istorical (inancial Analysis- An anal"sis of a minimum of 3 "ears historical financial

statements of the orro.er is presented in an(4s specified format* The anal"sis should

address the ualit" and sustainailit" of earnings$ cash flo. and the strength of the

orro.er4s alance sheet* #pecificall"$ cash flo.$ le&erage and profitailit" must e anal"ed*

.8. A$)erence to *en$ing +ui$elines- Credit Applications should clearl" state .hether or

not the proposed application is in compliance .ith the an(4s )ending ;uidelines*

.8., -itigating (actorsMitigating factors for ris(s identified in the credit assessment is

identified and reported in the application*

.8./ *oan %tructureThe RM ma(es sure that the amounts and tenors of proposed financing

are /ustified ased on the pro/ected repa"ment ailit" and loan purpose* E2cessi&e tenor or

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amount relati&e to usiness needs increases the ris( of fund di&ersion and ma" ad&ersel"

impact the orro.er4s repa"ment ailit"*

.8.8 %ecurityA current &aluation of collateral is otained and the ualit" and priorit" of

securit" eing proposed is assessed* )oans are not granted ased solel" on securit"* Adeuac"

and the e2tent of the insurance co&erage are also ta(en into consideration*

.8.0 ae *en$ing 'n this case an( also follo.s the prudential guidelines .hich sa"s

8Credit proposals should not e undul" influenced " an o&er reliance on the sponsoring

principal4s reputation$ reported independent means$ or their percei&ed .illingness to in/ect

funds into &arious usiness enterprises in case of need* These situations should e

discouraged and treated .ith great caution* Rather$ credit proposals and the granting of loans

should e ased on sound fundamentals$ supported " a thorough financial and ris( anal"sis:*

5.0 APPROVAL AUTHORITY

The prudential guidelines regarding appro&al authorit" " is stated elo.B

8The authorit" to sanctionappro&e loans must e clearl" delegated to senior credit e2ecuti&es

" the Managing 5irectorCE ? oard ased on the e2ecuti&e4s (no.ledge and e2perience*

Appro&al authorit" should e delegated to indi&idual e2ecuti&es and not to committees to

ensure accountailit" in the appro&al process* The follo.ing guidelines should appl" in the

appro&alsanctioning of loansB

Credit appro&al authorit" must e delegated in .riting from the M5CE ? oard +as

appropriate,$ ac(no.ledged " recipients$ and records of all delegation retained in CRM*

5elegated appro&al authorities must e re&ie.ed annuall" " M5CEoard*The credit appro&al function should e separate from the mar(etingrelationship management

+RM, function* The role of Credit Committee ma" e restricted to onl" re&ie. of proposals

i*e* recommendations or re&ie. of an(4s loan portfolios* Appro&als must e e&idenced in

.riting$ or " electronic signature* Appro&al records must e (ept on file .ith the Credit

Applications* All credit ris(s must e authoried " e2ecuti&es .ithin the authorit" limit

delegated to them " the M5CE* The 8pooling: or comining of authorit" limits should

not e permitted* Credit appro&al should e centralied .ithin the CRM function* Regional

credit centers ma" e estalished$ ho.e&er$ all large loans must e appro&ed " the Head of

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Credit and Ris( Management or Managing 5irectorCEoard or delegated Head ffice

credit e2ecuti&e* The aggregate e2posure to an" orro.er or orro.ing group must e used to

determine the appro&al authorit" reuired* An" credit proposal that does not compl" .ith

)ending ;uidelines$ regardless of amount$ should e referred to Head ffice for Appro&al

M5Head of Credit Ris( Management must appro&e and monitor an" cross-order e2posure

ris(* An" reaches of lending authorit" should e reported to M5CE$ Head of 'nternal

Control$ and Head of CRM*

A monthl" summar" of all ne. facilities appro&ed$ rene.ed$ enhanced$ and a list of proposals

declined stating reasons thereof should e reported " CRM to the CEM5:*

The an( tries to follo. the ao&e guidelines as perfectl" as possile* The e2isting appro&al

authorit" for appro&ing credit proposals is summaried elo.B

T"pe of Credit Amount Tenor Appro&ing Authorit"*

!unded on-funded %p to T@ 1*00 Crore 17 month Head of CRM*

!unded on-funded %p to T@ 1*0 Crore 17 month Head of CRM ? Head of

Corporate an(ing +/ointl",*

!unded on-funded %p to T@ 3*00 Crore 17 month 5M5 +singl",*

!unded on-funded %p to T@ *00 Crore 60 month 5M5 ? M5 +/ointl", Cash

against #ecurit"*

+Class A- E) !5Rs, %p to T@ 7*00 Crore 60 month 5M5 ? M5 +an" one, Cash

against #ecurit"*

+Class - !5Rsother an(, %p to T@ 10*00 Crore 60 month 5M5 ? M5 +an" one,

Consumer an(ing All products +E2ceptions, 60 month 5M5 ? M5 +an" one,

5.1 SEGREGATION OF DUTIES

E) segregates the follo.ing lending functionsB

Credit Appro&alRis( Management*

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Relationship ManagementMar(eting*

Credit Administration

The purpose of the segregation is to impro&e the (no.ledge le&els and e2pertise in each

department$ to impose controls o&er the disursement of authoried loan facilities and otain

an o/ecti&e and independent /udgment of credit proposals*

5.11 PREFERRED ORGANISATIONAL STRUCTURE &

RESPONSIBILITIES

The guideline proposes that appropriate organiational structure must e in place to

support the adoption of the policies of the guidelines* The (e" feature is the

segregation*

Mar(etingRelationship Management functions from Appro&alRis(*

ManagementAdministration functions* 't also proposes credit appro&al should e

centralied .ithin the CRM function* Regional credit centers ma" e estalished$

ho.e&er$ all applications must e appro&ed " the Head of Credit and Ris(

Management or Managing 5irectorCEoard or delegated Head ffice credit

e2ecuti&e*

The organiational structure of E) +credit related, is compared elo. .ith that of the

guideline* E) ensures that all credit appro&als are centralied .ithin the CRM function*

There are three regional corporate ases t.o in 5ha(a and the other one in chittagong$

ho.e&er$ all applications are sumitted to CRM of 5ha(a Head office and appro&ed " the

oard$ M55M5 or HCRM as appropriate* !or the #ME sector$ all proposals come to

5ha(a #ME center and then appro&ed through CRM* The follo.ing chart represents the

preferred management structure in the guideline* The credit related structure of E) is as

follo.sB

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.11.1 ey Responsiilities: @e" responsiilities of concerned parties as mentioned in the

prudential guidelines are discussed elo.B

Cre$it Ris5 -anageent 6CR-7&ersight of the an(4s credit policies$ procedures

and controls relating to all credit ris(s arising from corporatecommercialinstitutional

an(ing$ personal an(ing$ ? treasur" operations*

versig)t of t)e an59s asset uality5irectl" manage all #ustandard$ 5outful ?

ad and )oss accounts to ma2imie reco&er" and ensure that appropriate and timel"

loan loss pro&isions ha&e een made* To appro&e +or decline,$ .ithin delegated

authorit"$ Credit Applications recommended " RM* To pro&ide ad&iceassistance

regarding all credit matters to line managementRMs* To ensure that lending

e2ecuti&es ha&e adeuate e2perience andor training in order to carr" out /o duties

effecti&el"*

Cre$it A$inistrationTo ensure that all securit" documentation complies .ith the

terms of appro&al and is enforceale* To monitor insurance co&erage to ensure

appropriate co&erage is in place o&er assets pledged as collateral$ and is properl"

assigned to the an(* To control loan disursements onl" after all terms and

conditions of appro&al ha&e een met$ and all securit" documentation is in place* To

maintain control o&er all securit" documentation* To monitor orro.er4s compliance

.ith co&enants and agreed terms and conditions$ and general monitoring of account

conductperformance*

Relations)ip -anageent&-ar5eting 6R-7 To act as the primar" an( contact .ithorro.ers* To maintain thorough (no.ledge of orro.er4s usiness and industr"

through regular contact$ factor".arehouse inspections$ etc* RMs should proacti&el"

monitor the financial performance and account conduct of orro.ers*

To e responsile for the timel" and accurate sumission of Credit Applications for ne.

proposals and annual re&ie.s$ To highlight an" deterioration in orro.er4s financial standing

and amend the orro.er4s Ris( ;rade in a timel" manner* Changes in Ris( ;rades should e

ad&ised to and appro&ed " CRM*

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5.12 APPROVAL PROCESS

The appro&al process segregates the .or( of Relationship ManagementMar(eting from the

appro&ing authorit"* The responsiilit" for preparing the Credit Application rests .ith the RM

.ithin the corporate#ME an(ing department* Credit Applications are recommended for

appro&al " the RM team and for.arded to the appro&al team .ithin CRM and appro&ed "

indi&idual e2ecuti&es*

The recommending or appro&ing e2ecuti&es ta(e responsiilit" for and are held accountale

for their recommendations or appro&al*

.12.1 Approving %-; proposals

The RM first sends the credit application to the #ME center in Head office 5ha(a* The #ME

center then chec(s the documents and ma(e sure the" are .ell .ithin the lending guidelines

of the an(* The" also pro&ide additional condition for sanction as appropriate* After

re&ie.ing the" send the proposal to the CRM department* The respecti&e credit officers

re&ie. the proposal and get the appro&al from the appro&ing authorit"*

5.13 CREDIT MONITORING

To minimie credit losses$ monitoring procedures and s"stems are in place that pro&ides an

earl" indication of the deteriorating financial health of a orro.er* At a minimum$ s"stems

are in place to report the follo.ing e2ceptions to rele&ant e2ecuti&es in CRM and RM teamB

Past due principal or interest pa"ments$ past due trade ills$ account e2cesses$ and

reach of loan co&enants*

)oan terms and conditions are monitored$ financial statements are recei&ed on a

regular asis$ and an" co&enant reaches or e2ceptions are referred to CRM and the

RM team for timel" follo.-up*

Timel" correcti&e action is ta(en to address findings of an" internal$ e2ternal or

regulator inspectionaudit*

All orro.er relationshipsloan facilities are re&ie.ed and appro&ed through the

sumission of a Credit Application at least annuall"*

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E) has an e2cellent 'T ac(one$ .hich produces the ao&e information for

centralhead office as .ell as local re&ie.*

5.14 CONCLUSION

Compliance .ith the guidelines of circulars or directions is a must for all the scheduled

an(s in the countr"* E) is no e2ception is this case* All the circulars related to credit are

properl" filed in the department* 't is made sure from the top management that each and

e&er" credit officer understands all the circulars and directions and e2ercise due diligence

during operation regarding the stated issue* The follo.ing section discusses a similar topic$

.hich necessaril" reuires an(4s strong compliance regarding it*

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46

CHAPTER- 06

PERFOR&ANCE EVA"UATION

OF EASTERN AN! "TD


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+.1 Stt%$ %!%t6 !7 EBL

!urther impro&ement of asset ualit"*

!urther change in deposit mi2 to increase pie of lo. cost deposits*

To ecome cost efficient organiation*

Moderate gro.th in con&entional products*

Pursue inorganic gro.th through merger and acuisition*

'ncrease off-alance sheet usiness through product inno&ation*

Careful presentation in the capital mar(et*

'ncrease intrinsic &alue of the compan" " strengthening internal controls through

installation of clearl" laid do.n policies$ procedures and processes*

5i&ersit" corporate usiness to ta(e ad&antage of PPP* 'ncreased and focused Corporate #ocial Responsiilit" +C#R,*

'ncrease shareholders4 &alue*

#trengthen ris( management*

'mpro&e ualit" of human capital " strengthening their competencies*

Create .orld class 'T infrastructure to deli&er superior ser&ice to our customers*

+.2 Bn8 P!7%t9%:%t6

)i(e all usinesses$ an(s profit " earning more mone" than .hat the" pa" in e2penses* Thema/or portion of a an(Ys profit comes from the fees that it charges for its ser&ices and the

interest that it earns on its assets* 'ts ma/or e2pense is the interest paid on its liailities*

The ma/or assets of a an( are its loans to indi&iduals$ usinesses$ and other organiations

and the securities that it holds$ .hile its ma/or liailities are its deposits and the mone" that it

orro.s$ either from other an(s or " selling commercial paper in the mone" mar(et*

To anal"e performance of Eastern an( )imited +E), " calculating different financial

ratios$ .e use follo.ing ratios-

1* RE +Return on Euit",

7* RA +Return on Asset,

3* Profit Margin

>* Asset %tiliation

* et 'nterest Margin

6* Pro&ision for )oss Ratio

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G* )oan Ratio

F* Temporar" 'n&estment Ratio

9* EP# +Earning Per #hare,

10* 5P# +5i&idend Per #hare,

11* PE +Price Earning, Ratio

+.3 P7!;n$ E


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for "oan

"osses

Tota9

"oans +

"eases

1G$GG$9F$66 7$9G3$9F1$7F0 30$F9$G06$79> 39$>7G$3F3$F91 >6$179$77$0F3

Net "oan 1G$1G>$7F$36 7$0>6$619$796 30$19>$1G1$>36 3F$637$0F3$300 >$7GG$71$1F

Treasury

i99

>$60$000$000 3$6F0$000$000 1$1G0$000$000 - -

In=estment

? % year

- 7$967$G3>$GG3 1$79F$1F0$16F >>0$0G9$70 7GF$30$6G

Due from

Ot@er

an7

G>$7F$>0 97G$301$G79 1$>0$31$9FG 3$>06$373$97 6$GGG$716$3

No$ of

S@ares

Issue

F$7F0$000 F$7F0$000 10$30$000 13$F69$000 7>$96>$700

Pro;osed

Di=idend

331$700$000 3G7$600$000 31$900$000 - -

&ar7et

;rice of ;er

S@are

1777*G G97*0 10G0*G F9*30 6>>*7

o.$

R; 6Return on ;uity7:

REJ +et 'ncome Z Total Euit", [ 100

/ear #662 #668 #6%6 #6%% #6%#

Net

Income

>6$1$07F 13$733$6F0 >1F$6>F$10 G9F$33$19G 1$>F$991$937

Tota9

Euity

3$0G1$336$910 3$31>$G73$16> 3$G10$917$939 >$G33$3F$666 F$>3>$1F1$F0>

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ROE 1G*G9 1*>F 11*7F 16*FG 1G*3

" this ratio .e see that in 7009 ? 7010 E)4s RE is relati&el" lo.er than others* ut in

7011 its increasing ? also continuous increasing is going on* Therefore$ in&estors .ill attract

more effecti&el" to in&est*

RA 6Return on Asset7:

RAJ +et 'ncome Z Total Asset, [ 100

/ear #662 #668 #6%6 #6%% #6%#

Net

Incom

e

>6$1$07F 13$733$6F0 >1F$6>F$10 G9F$33$19G 1$>F$991$937

Tota9

Asset

7G$399$9>$>6

9

3$93>$F33$11

0

>7$0G$07$0

>

>$31$G9$9F

3

6F$330$333$10

3

ROA 1*99 1*>3 0*99 1*>G 7*1>

Managing asset or handling asset is the most important part of an organiation* Here$ .e see

that Eastern an( )td* Managing their asset in a&erage at 1** And also in 7017$ RA is

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Profit

&ar*3> 7>*37 1>*F> 71*G 31*60

E)4s profit margin ratio in 700F is 3>*3> ut it decreases in 7006$ 7009$ 7010$ 7011 and

it4s o&ercome in 7017* #o$ E) is doing .ell in 7017

Asset Utilization:

Asset %tiliationJJ +perating Re&enue Z Total Asset,

/ear #662 #668 #6%6 #6%% #6%#

Tota9

Asset

7G$399$9>$>6

9

3$93>$F33$11

0

>7$0G$07$0

>

>$31$G9$9F

3

6F$330$333$10

3

O;eratin

< re=enue

1$91$610$77 7$110$G>G$379 7$F70$66G$70 3$G01$637$F79 >$61G$633$13F

Asset

Uti9iatio

n

0*0F 0*09 0*066 0*06F 0*06G

E)4s asset utiliation capailit" is increasing 0*0F to 0*06G* That4s a &er" good sign to an"

financial organiation*

et #nterest -argin:et 'nterest MarginJ +Total 'nterest 'ncome K Total 'nterest E2pense, Z A&erage Earning

Asset

/ear #662 #668 #6%6 #6%% #6%#

Tota9 Interest

Income

7$0G$>17$77 7$F79$337$63

7

3$F0F$903$03

6

$77>$>13$1>

6$1F6$163$1

90

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Tota9 Interest

E>;ense

1$36$>$6>7 7$160$0GF$1>

7

7$>9F$06F$11

G

3$6G$3F0$G

1

>$037$G11$6

17

A=era>

9*1G$G6F$076$F

G9

71$067$0>F$9

>

76$967$$F

79

33$97>$>1G$

>07

Net Interest

&ar


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7$G>7 773$369$7F F>$39>$00F >7$6F6$0G3 767$11$377

Tota9 9oans

+"eases

1G$GG$9F

$66

7$9G3$9F1$7

F0

30$F9$G06$7

9>

39$>7G$3F3$F9

1

>6$179$77$0F

3

Pro=ision for

"oss Ratio

0* 0*F6 1*F9 1*1 0*G

Pro&ision for loan losses is doing etter .hen it4s decreasing* Here .e see that in 7009$ 7010$

7011 this rate is increase ? in 7017 its rate ecome lo.er* #o$ E) is standing in a lo. ris(

position*

*oan Ratio:

)oan RatioJ J +et )oan Z Total Asset, [ 100

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/ear #662 #668 #6%6 #6%% #6%#

Net

9oan

1G$1G>$7F$

36

7$0>6$619$79

6

30$19>$1G1$>3

6

3F$637$0F3$30

0

>$7GG$71$1F

Tota9

Asset

7G$399$9>$>

69

3$93>$F33$11

0

>7$0G$07$0

>

>$31$G9$9F

3

6F$330$333$103

"oan

Ratio

67*69 69*G G1*03 G1*0F 66*76

E) use their asset against loan &er" .ell li(e more than 0* #o$ it is the good sign to E)*ut in 7017 it decreases* #o$ E) must ha&e to concentrate on this ? sol&e the prolem*

=eporary #nvestent Ratio:

Temporar"

'n&estment RatioJ +Treasur" ill \ 'n&estment Q 1"ear \ 5ue from other an(, Z Total Asset

/ear #66. #660 #661 #662 #668Treasury Bi99 >$60$000$00

0

3$6F0$000$000 1$1G0$000$00

0

- -

In=estment ?

%year

- 7$967$G3>$GG3 1$79F$1F0$16

F

>>0$0G9$70 7GF$30$6G

Due from

ot@er an7

G>$7F$>0 97G$301$G79 1$>0$31$9F

G

3$>06$373$9

7

6$GGG$716$

3

Tota9 Asset 7G$399$9>$>

69

3$93>$F33$110 >7$0G$07$

0>

>$31$G9$

9F3

6F$330$333$

103

Tem;orary

In=estment

Ratio

0*19 0*71 0*09> 0*0G1 0*1

Temporar" in&est ratio of E) in 7009 is running lo.* E) must ha&e to (eep concentrate on

it*

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;1F$6>F$10 G9F$33$19G 1$>F$991$937

No$ of

S@ares

Issue

F$7F0$000 F$7F0$000 10$30$000 13$F69$000 7>$96>$700

EPS 66 61*9F >0*0 G*6 F*>>

EP# of E) 700F ? 7009 is good ut in 7010 it is too much lo.er* 'n 7011 E) ma(e o&er

the prolem for EP# is increasing ? also (eep it in 7017*

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*7

Annua9

Earnin0*0 G*6 F*>>

PE 3Price

Earnin> 10*7> 11*07

EP# of E) 700F$ 7010 is good ut in 7009$ 7011$ 7017 it is too much lo.er* #omeho.

e2ternal factors are not .or( properl" for that PE ratio decreasing*

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5

CHAPTER- 0G

FINDIN)S +

RECO&&ENDATIONS


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-.1 M=! F%n"%n>

) has started to di&ersif" its usiness into different areas of the countr"* The gro.th of

the E) has so far een &er" stead" and &er" high*

E) is maintaining stead" profitailit"*

E) is maintaining good credit polic"*

E) has good in&estment structure ut in some sector it does not perform &er" .ell*

E)4s liuidit" performance is satisfactor"*

Eastern an( )imited follo.s the guideline regarding discouraged lending acti&ities

and also in addition the" ha&e a list of the discouraged usiness of their o.n*

E)4s credit appraisal process is pleasing ut some correcti&e measure has to e ta(en*

The an( tries to adhere to the prudential guidelines regarding appro&

performance appraisa & credit term of eastern bank ltd

Documents