CREDIT MANAGEMENT OF JBL

CREDIT MANAGEMENT OF JBL

Bank’s basic work is to create a channel through depositing money from the surplus unit and provide funding to borrowers. Thus the necessity of credit department in bank occurs. The credit department is a very important department of a bank. The money mobilized from ultimate surplus units are allocated through this department to the ultimate deficit unit (borrower). The success of this department keeps a great influence over the profit of a bank. Failure of this department may lead the bank to huge losses or even to bankruptcy. Jamuna bank’s credit department also tries to do their job perfectly.

Credit Policy of JBL

Lending is one of the most important function of commercial bank, every bank should have own credit policy. The credit policy of JBL has been formulated on the basis of the following objectives:

• Outlines the steps to take to collect from past-due or late-paying customers and how to eliminate bad debt. 
• Provides guidelines to legally collect money that is due to your company from slow or nonpaying customers and from bad checks.
• To ensure that all customers are treated fairly when making credit decisions.

In JBL most of the credit officers are familiar with their written credit policy or lending guidelines but few of them not know about credit policy. So they have got only some oral instruction from the senior management or in charge of credit. If all the Credit officers of JBL thoroughly know and understand their credit policy it will be very helpful for them to do their job more efficiently.

Credit Principles

In the feature, credit principles include the general guidelines of providing credit by branch manager or credit officer. In Jamuna Bank Limited they follow the following guideline while giving loan and advance to the client.

• Credit advancement shall focus on the development and enhancement of customer relationship. 
• All credit extension must comply with the requirements of Bank’s Memorandum and Article of Association, Banking Company’s Act, Bangladesh Bank’s instructions, other rules and regulation as amended from time to time. 
• Loans and advances shall normally be financed from customer’s deposit and not out of temporary funds or borrowing from other banks. 
• The bank shall provide suitable credit services for the markets in which it operates. It should be provided to those customers who can make best use of them. 
• The conduct and administration of the loan portfolio should contribute with in defined risk limitation for achievement of profitable growth and superior return on bank capital. 
• Interest rate of various lending categories will depend on the level of risk and types of security offered

Credit Ratings

As per Bangladesh Banks mandatory requirement vide BRPD circular No. 06 dated July 05 2006 Credit Rating of Jamuna Bank Limited was done by the Credit Rating Agency of Bangladesh Limited (CRAB) on the audited Balance Sheet as on 31.12.2014 CRAB has submitted their report as under: Credit rating agency of Bangladesh Limited (CRAB) Upgrades the rating of Jamuna Bank Limited to AA3 from A-1 and reaffirms short term rating to ST-2. The above rating has been done in consideration of Banks visible improvement in fundamentals such as capital adequacy, liquidity position, profitability, introduction of real time online banking etc. However, the above rating is moderated, to some extent, by limited market share, increase in NPL, high cost of fund, moderate corporate governance, dependency on team deposit etc. Financial institutions rated in this category are adjudged to offer adequate safety to timely repayment of financial obligation. This level of rating indicates a corporate entity with an adequate credit profile. Risk factors are more variable and greater in period of economic stress than those rated in the higher categories. The short term rating indicates well certain of timely payment. Liquidity factors and company fundamentals are sound. Although ongoing funding needs may enlarge total financing requirements, access to capital markets is good. Risk factors are small. 

Credit Facilities of Jamuna Bank Limited

The main focus of Jamuna Bank Limited is financing business, trade and industrial activities through an effective delivery system.

• Jamuna Bank Ltd. offers credit to almost all sectors of commercial activities having productive purpose. 
• The loan portfolio of the Bank encompasses a wide range of credit programs. 
• Credit facilities are offered to individuals including housewives, businessmen, small and big  
• business houses, traders, manufactures, corporate bodies, etc. 
• Loan is provided to the rural people for agricultural production and other off-farm activities. 
• Loan pricing system is customer friendly. 
• Prime customers enjoy prime rate in lending and other services. 
• Quick appreciation, appraisal, decision and disbursement are ensured. 
• Credit facilities are extended as per guidelines of Bangladesh (Central Bank of Bangladesh) and   operational procedures of the Bank.

Lending Criteria of JBL

Entrepreneur has to be creditworthy and competent enough to run the proposed industry. The project should be viable from organizational technical, commercial, financial and economic points of view.

Technical Viability

The project should be technically sound and environment-friendly.

Technology transfer in case of borrowed know-how ought to be ensured.

Building should be well planned and well constructed.

Commercial viability

Market prospect and potential for the product has to be fully assured at competitive prices.

Marketing channel for the product should be accessible to the entrepreneur.

Financial Viability

There should be reasonable debt equity ratio as determined by the Bank on individual case basis.

Debt service coverage ratio should be at least 2.5 times at the optimum level of production.

IRR should preferably be not less than 20%

Economic Viability

The project should ensure benefit to the national economy and create sufficient employment               opportunity and be environment friendly.

Credit Evaluation Principles

 Some principles or standards of lending are maintained in approving loans in order to keep credit risk to a minimum level as well as for successful banking business. The main principles of lending are given below:

Liquidity:

Liquidity means the availability of bank funds on short notice. The liquidity of an advance means it repayment on demand on due date or after a short notice. Therefore, the banks must have to maintain sufficient liquidity to repay its depositors and trade off between the liquidity and profitability is must.

Safety:

Safety means the assurance of repayment of distributed loans. Bank is in business to make money but safety should never be sacrificed for profitability, To ensure the safety of loan. The borrower should be chosen carefully. He should be a person of good character & capacity as well as bank must have to maintain eligible number of security from borrower.

Profitability:

Banking is a business aiming at earning a good profit. The difference between the interest received on advances and the interest paid on deposit constitutes a major portion of the bank income, besides, foreign exchange business is also highly remunerative. The bank will not enter into a transaction unless a fair return from it is assured.

Intent:

Banks sanction loans for productive purpose. No advances will be made by bank for unproductive purposes though the borrower may be free from all risks.

Security:

The security offered for an advance is an insurance to fall bank upon in cases of need. Security serves as a safety value for an unexpected emergency. Since risk factors are involved, security coverage has to be taken before a lending.

National interest:

Banking industry has significant role to play in the economic development of a country. The bank would lend if the purpose of the advances can contribute more to the overall economic development of the country.

Different Types of Credit Facilities

Credit The word "Credit" is derived from the Latin word Credo or Krado meaning I believe. It is usually defined as one's ability to buy to a promise to pay. From the Banker's point of view Credit is the confidence of the lender on the ability and willingness of the borrower to repay the debt as per schedule of repayment. A bank provides loan to a company, with a fixed maturity and often featuring amortization of principal. If this loan is in the form of a line of credit, the funds are drawn down shortly after the agreement is signed.

Otherwise, the borrower usually uses the funds from the loan soon after they become available.

Types of loan of Jamuna Bank Limited: 

Depending on the various nature of financing, all the lending activities have been brought under the following major heads:

Loan (General)

Short term, Medium term & Long term loans allowed to individual/firm/industries for a specific purpose but for a definite period and generally repayable by installments fall under this head. This type of lending is mainly allowed to accommodate financing under the categories

(i) Large & Medium Scale Industry and

(ii) Small & Cottage Industry.

(iii) Very often term financing for (i) Agriculture & (ii) Others are also included here.

House Building Loan (General)

Loans allowed to individual/enterprises for construction of house (residential or commercial) fall under this type of advance. The amount is repayable by monthly installment within a specified period. Such advances are known as Loan (HBLGEN).

House Building Loan (Staff)

Loans allowed to our Bank employees for purchase/construction of house shall be known as Staff Loan (HBL-STAFF).

Other Loans to Staff

Loans allowed to employees other than for House Building shall be grouped under head - Staff Loan (Gen).

Cash Credit (Hypo.)

Advances allowed to individual/firm for trading as well as wholesale purpose or to industries to meet up the working capital requirements against hypothecation of goods as primary security fall under this type of lending. It is a continuous credit. It is allowed under the categories

(i) "Commercial Lending" when the customer is other than a industry and

(ii) "Working Capital" when the customer is an industry.

Cash Credit (Pledge)

Financial accommodations to individual/firms for trading as well as for whole-sale or to industries as working capital against pledge of goods as primary security fall under this head of advance. It is also a continuous credit and like the above allowed under the categories

(i) "Commercial Lending" and

(ii) Working Capital".

Hire Purchase

Hire-Purchase is a type of installment credit under which the Hire-Purchaser agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of Principal as well as interest for adjustment of the loan within a specified period.

Lease Financing

Lease Financing is one of the most convenient sources of acquiring capital machinery and equipment whereby a client is given the opportunity to have an exclusive right to use an asset usually for an agreed period of time against payment of rent. It is a term financing repayable by installment.

Time Loan

This is one time financial accommodation for short period maximum 12 months to meet some specific purpose. The loan is adjustable within the validity and not renewable and no transaction is allowed.

Consumers Credit Scheme

It is a special credit scheme of the Bank to finance purchase of consumers' durable to the fixed income group to raise their standard of living. The loans are allowed on soft terms against personal guarantee and deposit of specified percentage of equity by the customers. The loan is repayable by monthly installment within a fixed period.

SOD (General)

Advances allowed to individual/firms against financial obligation (i.e. lien on FDR/PSP/ BSP/Insurance Policy/Share etc). This may or may not be a continuous Credit.

SOD (Others)

Advances allowed against assignment of work order for execution of contractual works falls under this head. This advance is generally allowed for a definite period and specific purpose i.e. it is not a continuous credit. It falls under the category "Others".

SOD (Export)

Advance allowed for purchasing foreign currency for payment against L/Cs (Back to Back) where the exports do not materialize before the date of import payment. This is also an advance for temporary period which is known as export finance and falls under the category "Commercial Lending".

PAD

Payment made by the Bank against lodgment of shipping documents of goods imported through L/C falls under this head. It is an interim advance connected with import and is generally liquidated against payments usually made by the party for retirement of the documents for release of imported goods from the customs authority. It falls under the category "Commercial Lending".

LIM

Advances allowed for retirement of shipping documents and release of goods imported through L/C taking effective control over the goods by pledge in godowns under Bank's lock & key fall under this type of advance. This is also a temporary advance connected with import which is known as post-import finance and falls under the category "Commercial Lending".

LTR

Advance allowed for retirement of shipping documents and release of goods imported through LC falls under this head. The goods are handed over to the importer under trust with the arrangement that sale proceeds should be deposited to liquidate the advances within a given period. This is also a temporary advance connected with import and known as postimport finance and falls under the category "Commercial Lending".

IBP

Payment made through purchase of inland bills/cheques to meet urgent requirement of the customer falls under this type of credit facility. This temporary advance is adjustable from the proceeds of bills/cheques purchased for collection. It falls under the category "Commercial Lending".

Export Cash Credit (ECC)

Financial accommodation allowed to a customer for exports of goods falls under this head and is categorized as "Export Credit". The advances must be liquidated out of export proceeds within 180 days. 

Packing Credit (PC)

Advance allowed to a customer against specific L/C/firm contract for processing/packing of goods to be exported falls under this head and is categorized as "Packing Credit". The advances must be adjusted from proceeds of the relevant exports within 180 days. It falls under the category "Export Credit".

IDBP

Payment made against documents representing sell of goods to Local export oriented industries which are deemed as exports and which are denominated in Local Currency / Foreign Currency falls under this head. This temporary liability is adjustable from proceeds of the Bill

How Jamuna bank recover their Loan

When Jamuna Bank sanctions loans and advances to its customers, they clearly state the repayment pattern in the loan agreement. But some credit holders do not pay their credit in due period. The nationalized and private sector commercial banks have to face this sort of problems. This situation is also found in Jamuna Bank. To overcome the problem of overdue loan, the bank has taken particular loan recovery programs. Recovery Programs taken by Jamuna Bank Limited:

       

•  Establishing credit supervision and monitoring cell in the bank. 
•  Re-structuring  the loan  sanctioning and distributing policy of the bank 
•  Sanctioning  loan  and  advances  against  sufficient  securities  as best as possible. 
•  Giving   more powers to the branch manager in credit management decision making process. 
• Offering a package of incentives to the sound borrowers. 
•  Giving more emphasis on short term loan and advances. 
•  Imposing restrictions on loans and advances for sick industries. 
•  Taking legal actions quickly against unsound borrowers as best within the period specified by the law of limitations.

Problems in Loan Recovery

Though Jamuna bank is performing better in managing loan and advances, still 12.39% of total loan and advances are classified. There are a lot of reasons for which the loan recovery of the bank is still now defective. In most cases, problems may be raised from sanctioning procedures of loan, investigation of the project, and investigation of the loans etc. that is, the problem in loan recovery proves the outcomes of the default process in loan disbursement. The main reasons of poor loan recovery are categorized in four broad types as follow:

A. Problems created by economic environment

The following problems arise from the effect of economic environment:

i. . Changing in the management pattern: Changing of management patterns may delay the recovery of mature loan.

ii. Changing in industrial patterns: The banks sometimes sanction loan to the losing concern for further improvement of the respective sector, but in most cases, they fail to achieve progress.

iii. Operation of open market economy: In our country mainly industries become sick and also close their business on account of emerging of open market economy. The cost of production is high and the quality of goods is not of required of standard. As a result, they become the losing concerns and the amount of bad loan increases.

iv. Rapid expansion of business: There are many companies which expand their business rapidly, but the expansion is for short time. In the long run, the amount of classified loan increases.

B. Problems created by government:

The following problems are arisen by the government:

i. External pressure: Jamuna Bank has also faced many problems in the loan recovery process as a part of continuous pressure from various interested groups.

ii. Legal problems: Existing rules and regulations are insufficient to cover the legal aspects of loan recovery. As a result, defaulters can get release easily from all charges against them.

iii. Instability of Govt. policy: Frequent changes in government policies in regard to recovery of loan.

C. Problems created by the bank:

 The following problems are created by the banks:

i. Lack of analysis of business risk: Before lending, Sometime Jamuna Bank fails to properly analyze the business risk of the borrowers and the bank cannot forecast whether the business will succeed or fail. If it fails to run well, the loan becomes classified.

ii. Lack of proper valuation of security or mortgage property: In some cases, bank fails to determine the value of security against the loan. As a result, if the loan becomes classified, the bank cannot recover its loan through the sale of mortgage.

Overall Procedure for Sanctioning Loan

The following procedure need to be followed for giving advances to the customer. These are:

a. Party’s application

b. Filling form-A

c. Collecting CIB report from Bangladesh Bank

d. Processing loan proposal

e. Project appraisal

f. Head office approval

g. Sanction letter

h. Documentation

i. Disbursement

a. Party’s application

At first borrower had to submit an application to the respective branch for loan, where he has to clearly specify the reason for loan. After receiving the application form the borrower Bank officer verifies all the information carefully. He also checks the account maintains by the borrower with the Bank. If the official becomes satisfied then he gives form-X (prescribed application form of Bank) to the prospective borrower.

 b. Filling Form -X

After satisfying with party’s application the applicant need to fill Form-X. It is the prescribed form provides by the respective branch that contains information of the borrower. It contains- Name with its factory location, Official address and telephone number, details of past and present business, its achievement and failures, type of loan needed etc.

c. Collecting CIB Report from Bangladesh Bank

After receiving the application for advance, Jamuna Bank sends a letter to Bangladesh Bank for obtaining a report from there. This report is called CIB (Credit Information Bureau) report. Jamuna Bank generally seeks this report from the head office for all kinds of investment. The purpose of this report is to being informed that whether the borrower has taken loan from any other Bank.

d. Processing loan Proposal

After receiving CIB report from Bangladesh Bank, then respective branch prepare an Investment proposal, which contains terms and conditions of Investment for approval of Head Office. Documents those are necessary for sending Investment proposal are:

Necessary Documents

While advancing money, banks create a lot of documents, which are required to be signed by the borrowers before the disbursement of the loan. Of them some are technically called charge documents. Necessary steps and documents:

i. Loan application form duly signed by the customer.

ii. Acceptance of the term and conditions of sanction advice.

iii. Trade license.

iv. In Case Of Partnership Firm, copy of registered partnership deed duly certified as true copy or a partnership deed on non-judicial stamp of taka-150 denomination duly Notarized.

v. Demand promissory notes.

vi. Letter of hypothecation of stocks and goods.

vii. Letter of hypothecation of books debts and receivable.2

viii. Letter of hypothecation of plant and machinery.

ix. Personal letter of guarantee.

e. Project Appraisal

It is the pre-investment analysis. Project appraisal in the Banking sector is important for the following reasons:

• To achieve organizational goals

• To recommend if the project is not designed properly

• To justify the soundness of an investment

• To ensure repayment of Bank finance

Techniques of Project Appraisal

An appraisal is a systematic exercise to establish that the proposed project is a viable preposition. Appraising officer checks the various information submitted by the promoter in first information sheet, application for Investment and Investment proposal. The Head Office (HO) mainly checks the technical, commercial and financial viability of the project. For others, HO is dependent on branch’s information. But when the investment size is big, then the HO verifies the authenticity of information physically.

 f. Head Office Approval

When Head office receive appraisal from the branch then, Head Office again appraises the project. If it seems to be a viable one, the HO sends it to the Board of Directors for the approval of the Investment. The Board of Directors (BOD) considers the proposal and takes decision whether to approve the Investment or not. If the BOD approves the investment, the HO sends the approval to the concerned branch.

The respective officer of Head Office appraises the project by preparing a summary named “Top Sheet” or “Executive Summary” and then he sends it to the Head Office Credit Division for the approval of the Loan. The Head Office Credit Division considers the proposal and takes decision whether to approve the Investment or not. If the committee approves the investment; the HO sends the approval to the concerned branch.

g. Sanction Letter

After getting the approval of the HO the branch issues sanction letter to the borrower. A sanction letter contains:

• Name of borrower,

• Facility allowed,

• Purpose,

• Rate of interest,

• Period of the Investment and mode of adjustment,

• Security and Other terms and condition.

h. Documentation

If the borrower accepts the sanction letter, the Documentation starts. Documentation is a written statement of fact evidencing certain transactions covering the legal aspects duly signed by the authorized persons having the legal status. The most common documents used by the Jamuna Bank for sanctioning different kinds of Investment are:

• Joint Promissory Note,

• Letter of Arrangement,

• Letter of Disbursement,

• Letter of Installment,

• Letter of Continuity,

• Trust Receipt,

• Counter Guarantee,

• Stock Report,

• Letter of Lien,

• Status Report,

• Letter of Hypothecation,

• Letter of Guarantee

• Documents Relating to Mortgage.

I. Disbursement

After sanction and completion of all formalities the respective officer disburses the loan. The officer writes cheque and provides it to the borrower. For this borrower has to open an account through which he/she can withdraw the money.

Strategies for Recovery: Recovery of loan can be made in the following three methods:

i. Persuasive Recovery: The first step in recovery procedure is private communication that creates a mental pressure on borrower to repay the loan. In this situation bank can provide some advice to the borrower for repaying the loan. 

ii. Voluntarily: In this method, some steps are followed for recovering loan. These are:

• Building Task Force

• Arranging Seminar

• Loan Rescheduling Policy

• Waiver of Interest Rate 

iii. Legal Recovery: When all steps fail to keep an account regular and the borrower does not pay the installments and interests then the bank take necessary legal steps against the borrower for realization of its dues. In this case “Artha Rin Adalat Law 2003” plays an mportant role for collecting the loan.

 

Computation of Credit Risk Grading

To measure the actual risk associated with the loan that is going to be paid by the bank to the particular client, we have to follow some steps and get a statistical parameter of the risk. There are five steps follow the JBL to compute credit risk grading. Those are given and described below:

 Step 1: Identify all the Principal Risk Components

 Credit risk for counterparty arises from an aggregation of the following:

 a) Financial Risk

 b) Business/Industry Risk

 c) Management Risk

 d) Security Risk

 e) Relationship Risk Each of the above mentioned key risk areas require be evaluating and aggregating to arrive at an overall risk grading measure.

a) Evaluation of Financial Risk

Risk that counterparties will fail to meet obligation due to financial distress. This typically entails analysis of financials i.e. analysis of leverage, liquidity, profitability & interest coverage ratios. To conclude, this capitalizes on the risk of high leverage, poor liquidity, low profitability & insufficient cash flow.

b) Evaluation of Business/Industry Risk

Risk that adverse industry situation or unfavorable business condition will impact borrowers’ capacity to meet obligation. The evaluation of this category of risk looks at parameters such as business outlook, size of business, industry growth, market competition & barriers to entry/exit. To conclude, this capitalizes on the risk of failure due to low market share & poor industry growth.

c) Evaluation of Management Risk

Risk that counterparties may default as a result of poor managerial ability including experience of the management, its succession plan and team work.

d) Evaluation of Security Risk

Risk that the bank might be exposed due to poor quality or strength of the security in case of default. This may entail strength of security & collateral, location of collateral and support.

e) Evaluation of Relationship Risk

These risk areas cover evaluation of limits utilization, account performance, conditions/covenants compliance by the borrower and deposit relationship.