Difference between a global, transnational, international and multinational company

Difference between a global, transnational, international and multinational company
We tend to read the following terms and think they refer to any company doing business in another country.
• Multinational
• International
• Transnational
• Global
Andrew Hines over at BNET has brief and clear definitions of each of these terms, Get your international business terms right.
Each term is distinct and has a specific meaning which define the scope and degree of interaction with their operations outside of their “home” country.
• International companies are importers and exporters, they have no investment outside of their home country.
• Multinational companies have investment in other countries, but do not have coordinated product offerings in each country. More focused on adapting their products and service to each individual local market.
• Global companies have invested and are present in many countries. They market their products through the use of the same coordinated image/brand in all markets. Generally one corporate office that is responsible for global strategy. Emphasis on volume, cost management and efficiency.
• Transnational companies are much more complex organizations. They have invested in foreign operations, have a central corporate facility but give decision-making, R&D and marketing powers to each individual foreign market.
Andrews’s advice is if in doubt about the right term to use, try the generic term “international business”.

MARKETING PLAN/ PRODUCT PLAN

ON

POND’S Baby Lotion













Submitted To:

Prof. Dr. Mijanur Rahman
Department Of Marketing
University Of Dhaka


Submitted By:

Ajoy Paul
Roll No. 128
Section : B
MBA (10th Batch)
Department of Marketing
University of Dhaka






Date Of Submission : 16th May, 2009




EXECUTIVE SUMMARY



Unilever Bangladesh Limited is a Argo-Dutch Multinational company has been doing business in Bangladesh since 1964 is getting ready to introduce a new Baby Lotion “POND’S Baby Lotion”. Unilever is the market leader in 13 out of 14 product categories. As a marketing manager I would like to introduce this product with a vision of achieving the top position in the lotion market in future. Keeping this perspective in mind the product will be produced in Bangladesh but the raw materials will be collected from some European countries to ensure customer satisfaction. We will set up a new production plant within our existing logistic capacity to produce the final product. Our major competitors are Meril Baby lotion, Aromatic Baby Lotion, Johnson & Johnson Baby Lotion and Vaseline Lotion because they spend heavily in electronic & print media, merchandising and distribution.

Our marketing strategy will be the reasonable price and the availability of products in all the convenience stores and intensive promotional measure to expand the market which will facilitate the marketing of future products to a considerable extent. The objective of this Marketing Plan is to formulate a proper guideline action plan. Competitive brands were very aggressive and spent huge amount in advertising during the last few years. Furthermore, Johnson & Johnson as a popular and familiar brand entered into Bangladesh market with extensive campaign and also enjoyed the spillover advantages that led them to success.




TABLE OF CONTENTS

Contents Page No.
CURRENT SITUATION OF THE PRESENT MARKET

1-5

OPPORTUNITIES AND ISSUES OF POND’S BABY LOTION

5-6
OBJECTIVES 6-7

MARKETING STRATEGY
8-
ACTION PROGRAM

FINANCIAL PROJECTION


IMPLEMENTATION & CONTROL




I. CURRENT SITUATION OF THE PRESENT MARKET



The estimated market size is approximately Tk. 2000 million. Nearly 25% (Tk. 500million) is occupied by unbranded/loose sector. Major competitors are Square, Aromatic, Keya, Tibet, Johnson & Johnson and Vaseline. Category penetration is almost universal across urban and rural areas. Square, Johnson & Johnson and Aromatic brands have a strong image and popularity and this is due to considerable amount of expenditure on promotion. Between these Johnson & Jonshon and Square brands are prevail in the market since a long period. Recently a new brand named ”Aromatic Baby Lotion” came up with a very strong media campaign and has succeeded to shake the already established branded market.
1.1 ANALYSIS OF MARKET SIZE, SEGMENT, SHARE & GROWTH:

MARKET SIZE

Market size is approximately Tk 2000 million. Lotion market is growing at the rate of 15% per year. Market of this product is urban, semi-urban and also rural oriented. It is relatively a slow moving product.


MARKET SEGMENT


PRODUCT MARKET
POND’S 100ml Urban & Semi urban market and some portion of rural market
POND’S 250ml Urban & Semi urban market and some portion of rural market

MARKET SHARE:

A comparative analysis of the major competitors market share (Source: Container Supplier & estimated) is given below:
Competitor Market Share in 2009
Johnson & Johnson 20.00%
Aromatic 12.00%
Tibbet 10.00%
Meril 15.00%
Vaseline 8.00%
Others* 12.00%

• Other includes Fair & Lovely and Fuji etc.






Main advantages of POND’S Baby Lotion are-

- Nourish, Moisturize and leave skin soft.
- Much more thin & light with nice smell.
- Raw materials are of best quality.
- Free from fortified chemicals.
- It has no artificial colors and perfumes.
- Easy opener.


MARKET SITUATION

POND’S Baby Lotion is expecting market share 20%. It is expected to increase sales over the next few years because the market is expanding. The primary buyers are middle and lower middle class people, aged 4 to 35, who are conscious about their skin. Besides the branded lotion, here is much non-branded lotion available in the market. Consumers also want to buy 100% pure lotion produced by a name they can trust. For this they seek help form different sources like different media, relatives, friends and other sources so that they can take decision in buying right product.

Market size of Branded lotion in 2009 : 2500 million
Market growth rate (per annum) : 12%
POND’S expected turn over : Tk. 50 million
POND’S expected share : 15%
Expected market size :Tk. 2000 million

1.2 ANALYSIS OF COMPETITION
COMPETITION

Current Market of lotion is mineral oil and glycol stearate based and it is very competitive. Few numbers of local and foreign companies are operating in this market. Besides those companies, many new companies are also to enter into the market. Among those companies only a few are holding the majority of the market share.
Major players are also trying to expand their product range in this market to tab different market segment by introducing
1. Normal lotion in plastic container
2. Perfumed lotion with skin protection.
3. Various types of Oil supplementary of lotion.


Strength and Weakness of POND’S Baby Lotion
Strength of the Product

• Nourish, Moisturize and leave skin soft.
• Much more thin & light with nice smell
• Brand loyalty and brand image.
• Company Reputation.
• Competitive pricing.
• Essay Opener
• Produced by mineral oil, glycol stearate and carbomer.

Weakness of the Product

• This product is a late entrant in the market.
• Lack of product awareness.
• Inability to produce on time.
• Lack of availability of raw material.
• Low promotional budget.



II. OPPORTUNITIES AND ISSUES OF POND’S BABY LOTION



2.1 Opportunity in the Market

• Ability to make a more convenient or efficient buying process.
• To collect the more information and advice from customers.
• Immense market size.
• Customize skin care product to meet the customers’ needs.
• 25% market is occupied by loose/unbranded Body Lotion.
• Introducing smaller size and lower priced Lotion to cater for the needs of all range of customers can extend product range.
• Opportunity to increase markets coverage and retail penetration.

2.2 Threats
As we have some opportunities, we also have to consider some threats that may affect our plan and operations as like as follows-
New entrants to come into the market.
Extensive promotion and campaign by the competitions, specially Johnson & Johnson with local and lot of spillover from satellite channels.
Well-built brand image of the competitions.
Imported various lotion like Vaseline and others to take potential market share.

III. OBJECTIVES



3.1 Marketing Objective
Our objectives are divided into three categories as like following:
At the first year we will not earn any profit.
To increase sales next five year volume over by 45%
To establish the POND’S baby lotion expected in the market with 10% shares.

3.2 Financial Objective
To achieve no Net Sales Income (NSI) in first year.
To achieve Gross Margin of Tk. 7.51 million (19.48% of NSI) in second year.
To achieve EBIT of Tk. 1.1 million (2.85% of NSI) in second year.

3.3 Campaign Objective

To create highs quality, positive and permanent brand image.
To establish a brand personality as smart, friendly, reliable and trustworthy.
To create far-reaching awareness among the consumers.
To get the maximum demand from the consumers.
Our campaign will also focus on the quality and adorable fragrance of the product.
Key points of the campaign are as follows.
POND’S BABY LOTION is a quality product.
Objective is to inspire consumers to trial purchase our new better-scented lotion.



IV. MARKETING STRATEGY


POND’S marketing strategies are primarily aimed at increasing market share and establish the brand more dynamically. To implement the strategy we considered a unique product strategy and an extensive promotional strategy. Proper packaging, positioning, pricing and distribution strategy will also assist us to execute our strategy.

Target consumers of POND’S Baby Lotion are both women and men. They take decision to buy it. People of Bangladesh are very conscious about their baby skin. For this reason they search the best product made by renowned company.

TARGET MARKET AND CONSUMER PROFILE OF POND’S BABY LOTION
Demographic Profile

Market :Bangladesh-Urban & Semi- urban
Age : 3+above
Number of Baby : 20 million
Gender : Male and Female
Family life cycle : Married
Income : Tk 6000-18000
Occupation :Housewife, Service etc.
Education : Primary and above


Psychographic Profile

Social Class : Middle and lower middle
Life Style : Conscious about skin.
Search for better lotion and goes to outlets, exposed to newspaper, Radio and TV.

Behavioral Profile

Occasion : Regular
Benefits : Keep skin soft and attractive.
User status : Potential
Usage rate : Slow
Readiness stage : Aware and informed

Purchase Habit

 Once or Two times in 6 months.
 Consumers purchase it as per his/her requirement.

4.1 Positioning Strategy
Touch your baby & make that moment more touching.

4.2 Product Strategy
Our product strategy includes development in product and also in packaging.

A) Product decision - Quality : high quality meat
Feature: different weight

B) Branding - Brand will be positioned on
● Product Attribute – Protect skin.
● Belief and value – Safety & security.

C) Packaging - 250 ml bottle
100 ml bottle.
Ingredients

Water, Propylene Glycol, Myristyl Myristate, Glyceryl Stearate, Oleic Acid, Stearic Acid, Polysorbate 61, C12-15 Alkyl Benzoate, Dimethicone, Isopropyl Palmitate, Sorbitan Stearate, Cetyl Alcohol, Synthetic Beeswax, Stearyl Alcohol, Benzyl Alcohol, Carbomer, Fragrance, Methylparaben, Propylparaben, Butylparaben, BHT, Sodium Hydroxide, Red 33
4.3 Pricing Strategy

Competitive pricing scenario of POND’S Baby Lotion expose that almost all the competitive brands are parallel. Meril Baby Lotion & Aromatic Baby Lotion are offered at lower price. However, we like to follow the normal market practice in this regard.
Product Type Price
POND’S Baby Lotion 100 ml Tk.60
POND’S Baby Lotion 250 ml Tk.100

4.4 Promotion Strategy

Our advertising and promotions will pivot around five key strategies: TV Advertisement, Radio Advertisement, out door advertisement, press advertising, consumer offers.


TV Advertisement
Television is the most effective to create brand assurance. All the premium brands of Baby Lotion are presently focusing through electronic media campaign like BTV. NTV, ATN, CHANNEL- I are the most popular TV Channel in Bangladesh. So, it is obvious for us to choose the TV advertisement as the prime options according to the budget and the promotional expenditure available for the quarter, we will prepare our media planning. POND’S media planning will also include the selection of right program, at the right time for the right group of viewers.
Radio Advertisement

A huge number of our targeted consumers are rural based where radio coverage and listeners are large in number. Some of the special sponsored programs will be developed focusing the stories of our brand.


Outdoor Advertisement

We plan to have an exciting, informative, and actively managed outdoor advertisement. There will be wall painting all around the country.



Press Advertising

We will undertake a considerable amount (based on promotional expenditure) of press advertising in order to advertise our special promotion like consumer offer and to enhance our brand image activity. More often our targeted potential consumers go through daily newspapers, the more likely they are inspired to our brand when they have a need for our type of free offer.

Trade Promotion

A general phenomenon of the competitor activity is trade promotion. So to ensure the width and depth of our products’ stock and also occupy more space in the retail outlets all over the country, we should adopt some trade promotion.

Consumer Promotion

It is important to increase instant volume and make the consumer loyal to the product. Our running consumer promotion is as following 250ml+free 2 color pencil and 100ml+1 color pencil. After that we have some exclusive consumer promotion plan like Extra 10% free, 5 Tk. off with 250 ml & 3 Tk. off with 100 ml etc.
4.5 Distribution Strategy

The target and potential consumers of POND’S Baby Lotion live in all parts of the country. So to reach our product to each and every consumer even at the rural level we will ensure the following activities:
a) Make the product available to maximum possible outlets.
b) Deliver the product at the right time.
c) Increase the depth of stock of each outlet.
d) Smooth delivery of the product to all depots and distributors’ premises.
e) Proper merchandizing i.e., ensuring proper display of our product on the shelf of retail outlet.



V. ACTION PROGRAM

 January-March(2010) :
The company will launch its product into the market .It will follow pull strategy. Under this strategy it will spend Tk.10 lacs in advertising and consumer promotion to build up consumer demand. The company will follow selective distribution to major divisional market in large department stores (Dhaka, Chittagong, Rajshahi, Khulna, Barishal).

 April-June(2010) :

The company will continue advertising and stop consumer promotion. It will start to give trade promotion that will influence the middlemen to carry this product.



 July-September(2010) :

It will continue advertising and trade promotion and start to arrange some events and campaign program in divisional area like big well known outlets .Like art competition.

 October-December(2010) :

The company will take action depending on the situation of sales and competitor action.


VI. Financial Projection

PROJECTED TURNOVER IN FIFTH YEAR:
– Net Sales Income (NSI) of Tk. 50 million.
– Gross margin 20 % of NSI.
Table : COGS Calculation: 100 ml Baby Lotion Plastic Bottle

Sl no. Particulars Amount in Taka
1 NSI 18
2 Raw Material : 9.02
Packaging Material : 2.04
Labor : 2.10
FOH : 1.10
COGS : (79.19%of NSI)




14.26
3 Gross Margin (20.80%of NSI) 3.74

Table : COGS Calculation: 250 ml Baby Lotion Plastic Bottle

Sl no. Particulars Amount in Taka
1 NSI 32
2 Raw Material : 16.50
Packaging Material : 3.05
Labor : 4.34
FOH : 2.05

COGS : (81.06%of NSI)




25.94
3 Gross Margin (18.93%of NSI) 6.06



Table : One Year Projected Income Statement ( In Million Tk.)
Jan-Mar Apr-Jun July-Sep Oct-Dec
Estimated Units (100 ml bottle) 2 4 5 6
Estimated Sales 100 200 250 300
Less: COGS 80 160 200 240
Gross Profit 20 40 50 60
Less: Depreciation 5 5 5 5
Less: Advertising
Admin., R&D, Others 25 20 19 18
Net Income (5) 20 31 42


VII. Implementation & Control

For control purposes, the plan also allows for month by month comparison of actual versus projected sales and expenses. A contingency plan, attached, has been developed for implementation in the case of severe downward pricing pressure. Excellent promotion programs are vital in our type of marketing. Salespeople will also be a fully trained in sale. Additionally, every quarter we will try to “monitor” all the problematic areas by performing customer satisfaction surveys in limited areas. We also prefer to purchase retail store audit report, which would be the key to our strategic advantage in having superior data on market share and prospects.

My BBA Internship Report on BASIC BANK LTD, Credit Division

Credit Risk Management of BASIC Bank LTD :
A Study on BASIC Bank LTD, Dilkusha Branch.













































December 15, 2008

To
Mrs. Usmita Afroz
Internship Supervisor
Department of Marketing
Faculty of Business Studies
University of Dhaka.


Subject: Submission of Internship Report.


Dear Madam,
I have the honor to submit the report on “Credit Risk Management of BASIC Bank LTD : A Study on BASIC Bank LTD, Dilkusha Branch” that you asked me to complete. To provide an insight of the Credit Risk Management I gathered some critical data by means of Questionnaire from the employees of BASIC Bank LTD, Dilkusha Branch, and from the Research Paper of previous study and from the website of the Bank. Basic data and other relevant information have been collected from the Annual Reports of the Bank, various publications, journals and news letters.

I sincerely hope that the report would be worth the efforts that I have put into it.

I enjoyed a lot working on this Report. I would be happy to discuss with you about any aspect of the Report as you might consider necessary.



Sincerely Yours,


Ajoy Paul
Roll. 128
BBA (10th Batch)
Department of Marketing
University of Dhaka.


Acknowledgement

At the very beginning, I thank my All Mighty for guiding me to the right path, which helped me to complete my work successfully. I get support from our institution time to time as and when required. I convey my gratitude to my honorable supervisor Mrs. Usmita Afroz for his guidance and active co-operation in every stage of the study – Preparing a Research Proposal, developing of questionnaire and the final analysis. Her valuable suggestions and contributions make me possible to complete this report.
A.H. Golam Sanjari, DGM, BASIC Bank LTD, Dilkusha Branch, Mr.Saifur Rahman, AGM, Mr.Al-Amin, Manager, Mr.Saidur Rahman Sohel, Manager, Mr.Billal Hossain Akhand, Senior Officer, Mrs.Asia Khanom, officer of BASIC Bank LTD, Dilkusha Branch, deserves thanks for their active participation in responding questionnaires and providing information for the study.
Last but not the least I acknowledge the co-operation and helping hand given by Prof.Dr.Haripada Battacharjee, chairman & Director of Placement, Department of Marketing, University of Dhaka.
Finally I would like to give my heartiest thanks to all of them again who have contributed through their comments, suggestions and valuable time to prepare this Report in a comprehensive manner.


Executive Summary

This Research Paper has attempted to highlight on an evaluation of Credit Risk Management (CRM) in the context of BASIC Bank, Dilkusha Branch. BASIC Bank is among the leading commercial banks of the country. Lending is one of the principal functions of the bank. Sound lending practice therefore, is very important for profitability and success of a bank. . For the sake of sound lending, it is necessary to develop a sound policy and modern credit management techniques to ensure that loans/ advances are safe and the money will come back within the time set for repayment. For this purpose, proper and prior analysis of credit proposals is required to assess the risk. Credit risk analysis is one of the basic to risk management and control, as it is the risk factor inherent in many bank businesses as the quality of credit is critical to sound banking. For the effective application of CRM, expertise and willingness as well as motivation of the bankers are needed. By removing the road blocks of CRM implication through the recommendations that will be mentioned in this paper, BASIC Bank can open a new horizon to better assess the risks for lending bankers and will bring the accountability in financial sector. It is observed that most of executive are dealing in short term secured credit. Both executives and borrowers think that the present system of granting credit should be changed and suggest measures to improve the system that ensure effective Credit Risk Management.



TABLE OF CONTENTS
Chapter Page No.
Letter of Transmittal
Acknowledgement
Executive Summary
List of Tables
Appendices
Chapter 1 : Introduction
1.1 Problem Background
1.2 Literature Review
1.3 Objective of the Study
1.4 Research Background
Chapter 2 : About the Organization
2.1 History of BASIC Bank LTD
2.2 Function
2.3 Organizational Goal, Mission and Vision
2.4 Corporate Strategy
2.5 Organizational Structure
2.6 Performance Indicator
2.7 Achievements
2.8 Activities
2.9 Lending Criteria
2.10 Resources and Capabilities
2.11 Performance at a Glance
2.12 Fiscal Management
2.13 Monetary Policy
2.14 Correspondent Banks
2.15 Credit Rating
2.16 Objectives of the BASIC Bank
2.17 Working Sector of BASIC Bank LTD
Chapter 3 : Credit Management Scenario
3.1 Origin of Credit
3.2 Definition of Credit
3.3 Types of Activities
3.4 Importance of Credit
3.5 Factors related with Credit
Chapter 4 : Emergence of Credit Risk Management
4.1 Credit Risk Management and its Implication in risk analysis
4.2 Different types of risks associated with CRM
4.3 Current scenario of LRA practices in lending decisions in bank
4.4 Interest Rates
Chapter 5: Credit Risk Management of BASIC Bank LTD
5.1 Basic Principles of credit in Loans & Advances
5.2 Practices of Credit Policy
5.3 Loan Department Operation
5.4Credit Delivery System
5.5 Procedure for getting approval of loan
5.6 How to apply for Credit
5.7 Guideline for submission of application form
5.8 Procedure for processing loan application
5.9 Project Appraisal
5.10 Credit Assessment
5.11 Head Office Approval
5.12 Sanction Letter
5.13 Documentation of loans and advances
5.14 Disbursement
5.15 Supervision Procedure
5.16 Classification of loans and advances
5.17 Management of Delinquent Client
Chapter 6 : Result of CRM Practices
6.1 Results of effective Credit Management
6.2 SWOT Analysis of Bank Credit Policy
6.3 Matching of Strength & Opportunities with Weakness & Threats
6.4 Recommendation for further Improvement
6.5 Limitation in Implementing CRM techniques
Chapter 7 : Interpretation of Responses of the Questionnaire
7.1 Profiles of the Respondents
7.2 Credit Policy
7.3 Different Forms of Loan
7.4 Conversion of Short-Term loans into Long-Term loans
7.5 Statements and Documents required by Bank at the time of granting loans
7.6 Profitability and Liquidity of BASIC Bank LTD
7.7 Recovery Pattern of Loans and Advances
7.8 The Nature of Default
7.9 Collection of Credit Information regarding Borrowers
7.10 Different Types of Securities provided by Borrowers
Recommendation
Conclusion






LIST OF TABLES
Table Page No.
1. Capital Position 16
2. Performance Indicator 19
3. Outstanding of Industrial Credit 25
4. Outstanding of Micro Credit 25
5. Export Finance 25
6. Credit Rating 32
7. Investment to small scale Industries 36
8. Review Period of Loan Amount 58
9. Classification of Loans and Provision 60
10. SMA position of Dilkusha Branch 65
11. Classification position of Dilkusha Branch 70
12. Position held by 10 respondents 78
13. Education level of 10 respondents 79
14. Length of experience in Banking of respondents 32
15. Forms of loans used by Borrowers
16. Different types of statements and documents
17. Variety of weight of different statements
18. Attitude of employees towards the structure of Bank
19. Factor that management consider to set out credit limits
20. Document ensure by credit administration before credit disbursement
21. The most important information about Borrowers.
22. Attitude of employees towards the insurance of collaterals.
23. Necessity of on-site inspection/survey of the collaterals held as security. 80
24. Executive practice of collecting credit information about Borrowers.
25. Respondents opinion regarding revaluation of fixed assets.
APPENDICES


Page No.

Appendix- A Questionnaire For Employee 84

Appendix- B Bibliography and References
B- 1 Books
B- 2 Research Reports
B- 3 Journals
B- 4 Other References
B- 5 Online Sources

Problem Background

In Banking environment no reward can be expected without risk. Credit risk analysis is one of the core component of risk management and control, as it is the risk factor inherent in many bank businesses as the quality of credit is critical to sound banking Loans comprise the most important asset as well as the primary source of earning for the banking financial institutions. On the other hand, this (loan) is also the major source of risk for the bank management. A prudent bank management should always try to make an appropriate balance between its return and risk involved with the loan portfolio. An unregulated banking financial institution might be fraught with unmanageable risks for the purpose of maximizing its potential return. In such a situation, the banking financial institutions might find itself in serious financial distress instead of improving its financial health. Consequently, not only the depositors but also the general shareholders will be deprived of their money from the bank. The deterioration of loan quality will also affect the intermediation efficiency of the financial institutions and thus the economic growth process of the country. This establishes the fact that banks should provide increasing emphasis on various analytical tools and techniques for screening proposals and loan decision taking. Credit Risk Management is one of the new management and operational tools for improving the operational efficiency of nationalized and private sector commercial banks, initiated by Financial Sector Reform Program (FSRP) in 1993. It focuses on international changes to the lending process to improve the loan portfolio of banks. FSRP team has designed a new system to assess credit risk called Lending Risk Analysis (LRA) Manual. Bangladesh Bank has made it mandatory for commercial banks to exercise it for large scales loan. Proper credit analysis helped to minimize loan losses by identifying risk/weakness in either prospective or existing loan relationship.


Literature Review



Safety first is the guiding principle of a good banker. As a banker is doing business on depositors’ money, he must take care for it’s safe investment. For a banker, "Liqui¬dity" and "Profitability" are two just opposite principles. Liqui¬dity refers to repayment on demand or at a short notice. Naturally, if a banker goes for more liquid investments of funds, then the banker will not be able to charge high profits which is possible in case of fixed investments. Investments must be done in a broad-based basis. It is too risky to invest in one or two outlets. A banker must adjust his policies with the situations prevailing in the country. Last principle is the "integrity and reliability of the borrower."' To avoid bad debt, it is the basic factor before any loan-proposal can be considered. The success of banking business depends upon the ability of the banker to study borrowers. (S.N. Ghosh-1981)

In July 1994, the Basle Committee on Banking Supervision released guidelines for ‘best practice’ in managing the risks associated with derivatives. They covered the appropriate oversight of the risk management process by boards, management and auditors. They also set out risk-management practices in respect of market, credit and other forms of risk. This followed a somewhat similar report a year earlier from the Group of Thirty (G30), an international group of private bankers and other derivatives market participants. Responses to the Bank’s survey, enable a preliminary assessment to be made of the risk management practices of Australian banks relative to international best practice. Overall, it appears that Australian banks have controls and procedures in place which are appropriate to the nature and extent oftheir derivatives business. There is a good deal of variation in practice among the various banks but, in large part, that reflects differences in the volume and scope of business being done by the various banks. One of the more important recommendations of the Basle Committee concerned the role of a bank’s board of directors in overseeing its derivative activities.Specifically, the Committee proposed that a bank’s board should approve all significant policies relating to the management of derivatives and that these policies should be consistent with the organisation’s broader business strategies, capital strength, management expertise and overall willingness to take risk.
(Australian Banks’ Activities in Derivatives Markets: Products and Risk-Management Practices, September 1994)

There is no iron clad formula to fix and determine the sound guidelines for credit management. As a central bank Bangladesh Bank sets the guidelines for commercial banks in their operations. Such type of guidelines are general in nature. Commercial banks also have their own guidelines or plan of actions for sound credit management. Lending is most profitable business of a commercial bank but at the same time it is highly risky. Loans always accompany credit risk arising out of borrower's default in repaying the money. A banker should, therefore, manage loan business in a profitable and safe manner1. Commercial banks business in Bangladesh are regulated by the guidelines of central bank; the Bank companies Act, 1991 and also the guidelines introduced by the world Bank and the IMF from time to time. How commercial banks in Bangladesh, both in public and private sector, are following such guidelines in their credit management operations. (Sarker, Maksudur Rahman-1996)

Techniques, practices, and tools for credit risk management are evolvingrapidly, as are the challenges that banking organizations face in their business lending activities. For larger institutions, the number and geographic dispersion of their borrowers make it increasingly difficult for such institutions to manage their loan portfolios simply by remaining closely attuned to the performance of each borrower. As a result, one increasingly important component of the systems for controlling credit risk at larger institutions is the identification of gradations in credit risk among their business loans, and assignment of internal credit risk ratings to loans that correspond to these
gradations. The Federal Reserve believes that the use of such an internal rating process is appropriate and, indeed, necessary for sound risk management at large institutions.( FEDERAL RESERVE SYSTEM- September 21,1998)

While financial institutions have faced difficulties over the years for a multitude of reasons, the major cause of serious banking problems continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio risk management, or a lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank's counterparties. This experience is common in both G-10 and non-G-10 countries. Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. The goal of credit risk management is to maximise a bank's risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. Banks need to manage the credit risk inherent in the entire portfolio as well as the risk in individual credits or transactions. Banks should also consider the relationships between credit risk and other risks. The effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organisation.
(Bank for International Settlements- July 1999)

When the Bank lends to public sector borrowers, it generally requires a full sovereign guarantee or the equivalent from the borrowing member state. The credit risk ratings of the bank’s borrowing member states are reviewed quarterly by an independent team of country risk analysts within the credit risk management division. The sovereign credit risk process leverages on the hands-on, in-depth expertise of the Bank's large resource base of field economists.(AFRICAN DEVELOPMENT BANK GROUP- 2007)

The proposal to establish an independent credit risk management unit (CRMU) is in line with the thrust to strengthen credit risk management within the Asian Development Bank (ADB) and is consistent with best practices of good corporate governance. CRMU will be responsible for credit risk policy formulation and assessment, which include the adequacy of equity capital associated with credit risk in ADB’s operations, namely (i)lending, (ii) equity investments, and (iii) guarantee operations, as well as the calculation of loan loss provisioning.2 CRMU will assign internal credit ratings to ADB’s borrowing member countries and assess the credit risk for any/all individual projects, in both public and private sectors. CRMU will also independently assess the credit risk of any/all individual transactions and will work with the project teams to mitigate credit risks associated with any of ADB’s lending, equity investments, and guarantee operations. The separation of the credit risk assessment functions from the operational functions is also a prerequisite to the introduction, on a pilot basis, of new financing instruments3 under the innovation and efficiency initiative,4 and is consistent with the recommendation of the Independent Assessment Panel on ADB’s Reorganization.(IMF- Apr 10, 2008)
The flow of credit in global financial markets has slowed from a glacial pace to a virtual standstill. And credit markets threaten to stay that way despite immense amounts of cash being pumped in by governments and central banks around the world. With confidence in today’s credit market at an all-time low, it is critical for banks to engage in better credit risk management practices that can optimize risk-adjusted pricing and returns throughout the organization.(SAS® Credit Risk Management for Banking)

Objectives

Broad Statement

The broad objective is to focus on the present scenario in the credit risk management process and how it is being carried out at the present.


Specific Components


• Evaluation of credit risk management tools for better effectiveness
• Finding out the feasibility and practical market issues about new credit risk evaluation model and credit pricing model for the commercial banks in Bangladesh.
• To transform from asset based lending to cash flow based lending
• To minimize the portion of non performing assets to performing assets.






Problem Variable


1. Dependent variable  Effective Credit Risk Management

2. Independent Variable  Credit Size
 Credit Growth
 Technological Advancement
 Bank Size
 Financial Capabilities
 Competitive Situation
 Skills and Knowledge
 Assets of the Bank

Research design

Type of research

This will be a two stage research. In the first stage, an exploratory research will be conducted to identify the factors affecting to determine present Credit Control Policy. Then a descriptive research will be conducted for the purpose of introducing new Credit Risk Management Policy for BASIC Bank Limited.


Data collection Method

Data required for this study to identify the present effectiveness of Credit Risk Management which will be conducted by expert survey.

Sampling design



Target Population Elements: Top and Mid-level management
Sample Size: 10
Sampling Unit: BASIC Bank Limited
Extent: Dilkusha, Motijheel, Dhaka.
Time: 2008
Sampling Technique Nonprobability: Judgmental Sampling
Scaling Technique Likert Scale
Data Analysis

Data will be analyzed using multiple regression to develop a mathematical relationship between two or more independent variable and dependent variable.
Cost and Time
This research might incur cost Tk. 2,000 for different purpose. And the cost will be managed from the assignees of the research. It will take approximate 15 days to complete. The days are needed for the following reasons.


Possible starting day: 16-11-08
Possible Completion day: 27-11-08
Possible submission day: 30-11-08
History of BASIC Bank LTD
Bank of Small Industries and Commerce Bangladesh Limited (BASIC) is a banking company registered under the Companies Act 1913. It was incorporated under this Act on the 2nd of August, 1988. The bank started its operation from the 21st of January, 1989. It is governed by the banking Companies Act 1991. The bank was established as the policy makers of the country felt the urgency for a bank in the private sector for financing. Small Scale Industries (SSIs). At the outset, the bank started as a joint venture enterprise of the BCC Foundation with 70 percent shares and the government of Bangladesh (GOB) with the remaining 30 percent shares. The BCC Foundation being nonfunctional following the closure of the BCCI, the government of Bangladesh took over 100 percent ownership of BASIC on 4th June 1992. Thus the bank is state-owned. However the Bank is not nationalized; it operates like a private bank as before.

BASIC is unique in its objectives. It is a blend of development and commercial banks. The Memorandum and Articles of Association of the Bank stipulate that 50 percent of loan able funds shall be invested in small and cottage industries sector.

CAPITAL POSITION

Authorized capital
Paid up capital
Total Reserve and Surplus up to 31.12.2006 Tk. 2000 million
Tk. 945 million.
Tk. 1,294.00 million
The Bank is required to transfer 20 percent of its net profit before Tax to Capital Fund as per the Banking Companies Act 1991.


Slogan of BASIC Bank LTD : “Serving people for progress”
Date of Incorporation : August 2, 1988
Formal Inauguration : January 21, 1989.

Registered Office :
Bana Shilpa Bhaban
73, Motijheel C/A
Dhaka- 1000, Bangladesh
Phone : 9563068,9563069,9559279(PABX)
Telex : 632185 BASIC BJ
SWIFT : BKSIBDDH002

Head Office :
195, Motijheel C/A
Sena Kalyan Bhaban(6th Floor)
Dhaka- 1000, Bangladesh.
Phone : 9564830,9567910,9568190(PABX)
Fax : 880-2-9564829
Telex : 642408 BASIC BJ
e-mail : basicho@citechco.net
website : www.basicbankbd.com





Functions

The Bank Offers:
a. Term loans to industries especially to small-scale enterprises.
b. Full-fledged commercial banking service including collection of deposit, short term trade finance, working capital finance in processing and manufacturing units and financing and facilitating international trade.
c. Technical support to Small Scale Industries (SSls) in order to enable them to run their enterprises successfully.
d. Micro credit to the urban poor through linkage with Non- Government Organizations (NGOs) with a view to facilitating their access to the formal financial market for the mobilization of resources.
In order to perform the above tasks, BASIC Bank works closely with its clients, the regulatory authorities, the shareholders (GOB), banks and other financial institutions.


Organization Goal, Mission & Vision:

Every organization has to set up their organization goal to do business that wills mach up with their strategy. To set up goals is very important task for the organization. Because for doing business it plays an impartment role to cope up with the organizational structure. So the goals of the BASIC Bank are -
• To employ funds for profitable purposes in various fields with special emphasis
• on small-scale industries.
• To undertake project promotion on identify profitable areas of investment.
• To search for newer avenues for investment and develop new products to suit such needs.
• To establish linkage with other institutions which are engaged in financing micro enterprises.
• To cooperate and collaborate with institutions entrusted with the responsibility of promoting and aiding SSI sector.

Company Mission:
To provide best development and commercial banking services to the common people of Bangladesh. And to provide special support to the small-scale business enterprises so that, they can play an important role in the economic development of the country.

Company Vision:
To provide best banking service to all kinds of people, and contribute the economic development of the country.



Corporate Strategy

Financing establishment of small units of industries and business and facilitate their growth
Small Balance Sheet size composed of quality assets.
• Steady and sustainable growth.
• Investment in a cautious way.
• Adoption of new banking technology.
• To employ funds for profitable purposes in various fields with special emphasis on small scale industries.
• To undertake project promotion on identify profitable areas of investment.
• To search for newer avenues for investment and develop new products to suit such needs.
• To establish linkage with other institutions which are engaged in financing micro enterprises.
• To cooperate and collaborate with institutions entrusted with the responsibility of promoting and aiding SSI sector.



Organizational Structure
To achieve its organizational goals, the Bank conducts its operations in accordance with the major policy guidelines laid down by the Board of Directors, the highest policy making body. The day to day operation of the Bank is looked after by the management.

A. BOARD OF DIRECTORS

As stated earlier the Government holds 100 percent ownership of the Bank. All the Directors of the Board are appointed by the Government of Bangladesh. The secretary of the Ministry of Industries is the Chairman of the Bank. Other Directors of the Bank are senior Government and central Bank executives.
The Managing Director is an ex-officio member of the Board of Directors. There are at present 7 Directors including the Managing Director.
The Board of Directors is a bridge between shareholders and the executive body. Its activities concerned with policy formulating, strategic planning, board control over executive functions etc.

There are three committees of the Board of Directors.
• Finance Committee; look after various credit proposals submitted for approval and look after related financial issues.

• Administrative Committee; acts for supervision and review of overall executive’s functions of the bank. This committee also looks promotion of senior executives as well as appointment of the Management Director and the Deputy Managing Directors.

• Technical Committee which functions are analyzing and approving various technical aspects of the Bank emphasizing for particular sectors for business branch expansion organization subtraction computerization etc.


B. MANAGEMENT

The management is headed by the Managing Director. He is assisted by the Deputy Managing Director, General Managers and Departmental Heads in the Head Office. BASIC Bank is different in respect of hierarchical structure from other banks in that it is much more vertically integrated as far as reporting to the Chief Executive is concerned.
The Branch Managers of the Bank report direct to the Managing Director and, for functional purposes, to the Heads of Departments. Consequently, quick decision making in disposal of cases is ensured.


Performance Indicators


1997 1998 1999 2000 2001 2002 2003 2004
At Year End Million Taka
Total Loans and Advances 2474.25 3040.64 3960.11 4618.73 6260.78 7957.04 9282.20 12000.15
Total Investment 645.53 1067.88 730.82 1074.18 870.36 1566.61 1883.42 2252.96
Total Assets 6520.57 5620.57 7173.17 7730.67 9721.93 13019.42 14766.32 19436.57
Total Deposits 3541.60 4551.48 5647.93 5845.15 7512.62 10021.24 11266.54 15509.18
Long-term Debt 273.29 344.61 368.85 555.98 582.82 676.51 690.95 839.61
Total Shareholder's Equity 338.34 474.48 584.43 697.77 761.35 1012.89 1199.79 1491.27
Financial Ratios (Percentage)
Capital Adequacy Ratio * 12.45 14.01 14.27 15.30 12.49 13.20 12.57 12.49
Capital fund to deposit Liabilities 9.55 10.42 10.35 11.94 10.13 10.11 10.65 10.47
Liquid Assets to Total Deposit 59.58 62.29 59.09 59.52 51.47 54.80 51.05 50.56
Loan to total Deposit 69.86 66.81 66.71 75.62 83.34 79.40 82.39 77.37
Earning Assets to Total Deposit 113.69 115.56 85.34 117.74 118.01 119.20 121.10 116.70
After tax return on Average Assets 2.28 2.73 2.50 2.33 2.45 2.21 1.70 1.70
Net Profit to Gross Income 21.48 23.01 20.45 19.75 20.51 19.49 15.17 16.48
Interest Margin Cover 194.64 192.07 112.67 150.67 173.91 191.07 210.87 205.07
Return on Equity (after tax) 27.96 28.69 30.21 27.04 28.06 28.36 21.37 21.27
Industrial Loans including Micro Enterprises to Total Loans 55.00 65.00 54.70 61.83 63.14 63.00 59.16 62.21
Non performing Loans to Total Loans 5.67 5.67 4.21 3.73 3.67 5.12 4.25 3.70
Salary & Allowances Per Unit Million Taka
Deposit (Tk. 100m) 1.21 1.07 1.14 1.29 1.34 1.18 1.27 0.98
Advance (Tk. 100m) 1.73 1.60 1.63 1.63 1.61 1.48 1.54 1.27
Per Employee Million Taka
Deposit 9.98 12.12 13.54 12.90 15.12 19.65 21.54 26.83
Advance 7.50 8.65 9.50 10.20 12.60 15.60 17.75 20.76
Profit 0.49 0.61 0.64 0.67 0.72 0.85 1.06 0.91
Earnings Analysis Million Taka
Total Income 440.46 591.64 782.29 877.47 1041.76 1290.66 1558.52 1768.85
Total Operating Expense 268.83 364.73 515.71 573.29 685.73 856.15 1004.85 1241.63
Profit before Tax 171.63 226.91 266.58 304.19 356.12 434.51 553.67 527.22
Income Tax 77.02 90.76 106.63 130.84 142.45 182.97 317.28 235.74
Net Profit after Tax 94.61 136.15 159.95 173.34 213.67 251.55 236.39 291.48
*Based on risk-weighted assets. The Bank has been calculating the ratio since 1996.
Achievements
The performance of BASIC Bank Limited has been satisfactory since its inception in respect of all the measurement parameters.The total assets of the Bank increased to Taka 29,417 million at the end 2006 from Taka 27,136 million in the previous year. The growth rate was 8.40 percent. Deposit rose from Taka 22,325 million in 2005 to Taka 24,084 million in 2006 showing a growth rate of 7.87 percent. Loans and advances stood at Taka 19,000 million as on December 31, 2006 against Taka 15,339 million at the end of 2005, recording a growth rate of 23.86 percent compared to 29.28 percent in the previous year. All out efforts were made to improve the recovery rate and control non-performing loans and advances. Although the recovery rate of project loans remained stable in the neighborhood of 97 percent the proportion of non-performing loans to total loans was 3.70 percent at the end of the year under review from 4.55 percent in 2005. Emphasis on the maintenance of quality of assets remained the centerpiece of the Bank's business strategy.
Year 2006 was a period of high growth in loans and advances increased by 23.86 percent to Taka 19,000.00 million compared to Taka 15,339.35 million in 2005. Growth of industrial finance was moderate and loans to small and medium industries was 51.70 percent of total loans and advances. The industrial loan of Tk. 998.75 crore was distributed among 13 sectors. Textile sector registered the highest concentration being 36.24 percent of industrial loans and 23.59 percent of total loans. Textile sector is followed by: food & allied industries - 13.73 percent of industrial loans and 8.94 percent of total loans, chemical & allied industries - 12.97 percent of industrial loans and 8.44 percent of total loans and engineering - 11.44 percent of industrial loans and 7.45 percent of total loans.The performance of BASIC Bank Limited has been satisfactory since its inception in respect of all the measurement parameters.
The total assets of the Bank increased to Taka 29,417 million at the end 2006 from Taka 27,136 million in the previous year. The growth rate was 8.40 percent. Deposit rose from Taka 22,325 million in 2005 to Taka 24,084 million in 2006 showing a growth rate of 7.87 percent. Loans and advances stood at Taka 19,000 million as on December 31, 2006 against Taka 15,339 million at the end of 2005, recording a growth rate of 23.86 percent compared to 29.28 percent in the previous year. All out efforts were made to improve the recovery rate and control non-performing loans and advances. Although the recovery rate of project loans remained stable in the neighborhood of 97 percent the proportion of non-performing loans to total loans was 3.70 percent at the end of the year under review from 4.55 percent in 2005. Emphasis on the maintenance of quality of assets remained the centerpiece of the Bank's business strategy.
Year 2006 was a period of high growth in loans and advances increased by 23.86 percent to Taka 19,000.00 million compared to Taka 15,339.35 million in 2005. Growth of industrial finance was moderate and loans to small and medium industries was 51.70 percent of total loans and advances. The industrial loan of Tk. 998.75 crore was distributed among 13 sectors. Textile sector registered the highest concentration being 36.24 percent of industrial loans and 23.59 percent of total loans. Textile sector is followed by: food & allied industries - 13.73 percent of industrial loans and 8.94 percent of total loans, chemical & allied industries - 12.97 percent of industrial loans and 8.44 percent of total loans and engineering - 11.44 percent of industrial loans and 7.45 percent of total loans.


Activities
a. Industrial Credit
BASIC Bank's services are directed towards the entrepreneurs in the small industries sector. A small industry, as per Industrial policy 1999 approved by the Cabinet, has been defined as an industrial undertaking whose total fixed investment is less than Tk.100 million.
The industrial loan reflected a significant growth of 22.59 percent over the previous year. Total outstanding industrial loans including term and working capital stood at Taka 12,243.56 million at the end of 2006 compared to Taka 9,987.50 million of 2005. Total outstanding term loan stood at Taka 3,897.12 million as on December 31, 2006 compared to Taka 3,517.85 million in 2005 reflecting a growth of 10.78 percent. The outstanding working capital finance extended to industrial units stood at Taka 8,346.44 million at the end of the reporting period compared to Taka 6,479.71 million in 2005. Growth rate here was 29.00 percent. BASIC Bank's services are specially directed towards promotion and development of small industries. Its exposure to small and medium industries sector accounted for 53.43 percent of the total loans and advances. During the year total of 159 projects were sanctioned term loan. Out of which 89 were new and the rest were under BMRE of the existing projects. As on 31 December, 647 projects were in the portfolio of the bank. The textile sector including garments being one of the major contributors to national economy dominated the loan portfolio of the Bank. Other sectors financed include engineering; food and allied industries; chemicals, pharmaceuticals and allied industries; paper, board, printing and packaging; glass; ceramic; and other non-metallic goods and jute products. Recovery rate of project loan was 89 percent.
Million Taka
1994 724.70
1995 915.20
1996 914.40
1997 1408.25
1998 2028.50
1999 2062.19
2000 2735.50
2001 3769.00
2002 4654.00
2003 6252.00
2004 7691.20
2005 9987.50
2006 12,243.56
Outstanding at year end
b. Commercial Credit
The Bank also supports development of trade, business and other commercial activities in the country. It covers the full range of services to the exporters and importers extending various facilities such as cash credit, export cash credit, packing credit, short term loans, local and foreign bills purchase facilities. As on December31, 2006 total outstanding commercial loans stood at Taka 6,397.21 million compared to Taka 5,013.55 million in 2005.
c. Micro Credit
BASIC Bank launched a Micro Credit Scheme in 1994. Micro Credit Scheme provides for the poor for generation of employment and income on a sustainable basis particularly in urban and suburban areas. The Bank follows three systems of credit delivery.
These are:
1. Lending to the NGOs who on-lend to their members. At present there are 15 such NGOs.
2.Lending direct to the targets groups or ultimate borrowers under the Bank’s own management.

3. Lending direct to the member-borrowers and NGOs providing nonfinancial services like group formation and monitoring and supervision on exchange for a supervision fee.

At the end of 2006, total amount of Taka 359.24 million remained outstanding as against Taka 338.30 million in 2005. Recovery rate during this period remained at a satisfactory level of 100.00 percent.

Million Taka
1995 4.59
1996 12.31
1997 45.10
1998 68.70
1999 103.90
2000 120.40
2001 183.50
2002 104.00
2003 186.20
2004 284.10
2005 338.30
2006 359.24
Outstanding at year end

d. Foreign Trade
The bank achieved substantial growth in export in 2006 and the performance of the bank in import business was also satisfactory. The Bank handled total export business of Taka 15,463.74 million and import business of Taka 17,804.27 million in 2005. The export and import business grew by 39.34 percent and 26.32 percent respectively. Major items of exports were garments, jute products, textile, leather etc. Items of import included mainly industrial raw materials, garments accessories, capital machinery, food items and other essential commodities.
The Bank became a proud member of SWIFT (Society for Worldwide Interbank Financial Telecommunication) that would pave the way to achieving uninterrupted communication related to banking for international trade. business and fund transfer.


e. Other Activities
The Bank provides services for remittance, underwriting, guarantee, public offering of shares etc. The bank also provides funds to investment and leasing companies. The Bank has recently created a venture capital fund for equity support to innovative but risky projects
Million Taka
Year Import Finance Export Finance
1994 2613.50 1227.08
1995 4657.86 1783.09
1996 4986.10 2609.30
1997 7017.56 3754.87
1998 7208.20 4420.20
1999 7391.10 5060.30
2000 7948.40 5557.00
2001 7542.80 5957.90
2002 8645.00 5557.60
2003 8930.50 6523.00
2004 12508.00 7908.00
2005 11097.23 14094.96
2006 17804.27 15463.74
.Lending Criteria
1. Entrepreneur
Entrepreneur / promoter has to be creditworthy and competent enough to run the proposed industry.
2. Viability of the project
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 percent.
Economic Viability
The project should ensure benefit to the national economy and create sufficient employment opportunity and be environment friendly.
Resources and Capabilities
BASIC Bank Limited is well prepared to and capable of meeting the demand for a broad range of banking services. It has got adequate resources, both human and physical, to provide the customers with the best possible services.
Physical and technological resources

A great deal of investment for developing the physical resource base of the Bank has been made. The Bank has its presence in all the major industrial and commercial hubs of Bangladesh in order to cater to the needs of industry and trade. At present, there are twenty-seven conveniently located branches throughout Bangladesh. There are eleven branches in the capital city of Dhaka, seven in Chittagong and one each in Narayanganj, Narsingdi, Rajshahi, Saidpur, Bogra, Khulna, Jessore, Sylhet, Moulvibazar, Comilla, Barisal and Sirajganj.
Major features of these branches are:
• Fully computerized accounts maintenance.
• Well decorated air conditioned facilities .
• A fully operational computer network which is
currently being implemented. The work of Local Area Network (LAN) and Wide Area Network (WAN) installation having reliable and secured communication between the branches and the Head Office is in progress to facilitate any Branch Banking and ATM Services.
• Money counting machine for making cash transactions easy and prompt.
• Fifteen out of twenty six branches are authorized dealers of foreign exchange. This facilitates speedy disposal of transaction of export and import trade.
Human resources

BASIC has a well-diversified pool of human resource, which is composed of personnel with high academic background. Also, there is a positive demographic characteristic. Most employees are comparatively young in age yet mature in experience. As at end 2006 the total employee strength was 651. The Bank follows a strict recruitment policy in order to ensure that only the best people are recruited. The Bank, so far, has recruited four batches of entry-level management staff, all of whom have got excellent academic background.
Training

Intensive training program, on a regular basis, is being imparted to employees of both management and non-management levels to meet the challenges in the banking industry and to help employees to adapt the changes and new working conditions. Human resource is the main driving force and quality human resources are the key sources for the success of today's banking business. Keeping this view in mind and recognizing the importance of training for professional excellence BASIC Bank Ltd. has established its own training institute in 2005 with modern facilities. In 2006 the institute arranged 17 training courses and provided training to as many as 370 employees of the bank. To cater to the needs of the employees and to keep pace with demand of the time it will continue to arrange regular training courses in the days ahead. During the year 2006, a total of 520 employees of the Bank were provided with training in various fields. Out of them 16 employees participated in training courses held abroad. In 2006 total 93 employees of various stages were given promotion which is almost 14.00 percent of total employees of the bank
Recruitment of New Officers

The Bank follows a strict recruitment policy in order to ensure that only the best people are recruited. The Bank, so far, has recruited four batches of entry-level management staff, all of whom have excellent academic background.

Monetary/Financial Resources
Like any other financial intermediaries, BASIC Bank Limited is no exception in performing its core functions viz. Mobilization of fund and utilizing such mobilized fund for profitable purposes.


A. Mobilization of fund
The main sources of fund for the Bank are:
1. Deposit, and
2. Borrowing

1. Deposit
Deposit is the mainstay of the Bank's sources of funds. Following usual practices, it collects deposit through:
a. Current Deposit
b. Savings Deposit
c. Term Deposit

2.Borrowing
Apart from deposit, BASIC Bank Limited received funds from :
a. Bangladesh Bank
b. Asian Development Bank (ADB)
c. KfW (kreditanstalt fur Wieder-aufbau Credit Institution for Reconstruction), a German development bank. All of these funding sources are for relatively longer period. Receiving the credit lines from ADB and KfW has been a recongniting of the Bank's highly satisfactory performance.

A. Utilization of Fund

BASIC Bank Limited utilizes its funds in accordance with its organizational goals and corporate strategy. Main use is for lending to industrial and trade sectors. Maintenance of cash and statutory liquidity reserve with the Bangladesh Bank covers 20 percent of demand and time liabilities. Placement of funds in Nostro Accounts to handle foreign trade and investment in money market is also done as usual.

Performance At a Glance:

The Board of Directors was happy with the overall performance of the Bank, particularly for maintaining quality of assets and improving shareholders’ value. The total assets of the Bank increased to Taka 38,773.9 million at the end 2007 from Taka 29,417.1 million in the previous year. The growth rate was 31.81 percent. Deposit rose from Taka 24,084.7 million in 2006 to Taka 31,948 million in 2007 showing a growth rate of 32.65 percent. Loans and advances stood at Taka 22,263.3 million as on December 31, 2007 against Taka 19,000 million at the end of 2006, recording a growth rate of 17.18 percent. The bank increased by 89.33 percent to Tk. 680.1 million during the reporting year. The Bank’s financing of import business increased from Taka 17,804 million in 2006 to Taka 21,266.5 million in 2007 registering growth of 19.45 percent. On the other hand, Bank’s export finance increased to Taka 16,795 million in 2007 compared to Taka 15,464 million in 2006 – a growth of 8.61 percent. Bank’s total income rose by 23.66 percent in 2007 which was 28.82 percent in 2006 while its total expenditure increased by 38.24 percent in 2007, largely due to massive growth of deposit, compared to 16.18 percent in 2006. Profit before provision rose by 12.18 percent in 2007 against 25.12 percent in 2006.

Fiscal Management
Revenue performance continues to be buoyant, underpinned by vigorous tax collection and reform measures implemented by the National Board of Revenue (NBR). But administered prices of energy and fertilizer, and post-flood and post- cyclone rehabilitation expenditures pose significant challenges to fiscal management. Government revenue collection by NBR increased by 24.6 percent in first half of FY08 over the corresponding period of FY07.
Monetary Policy

Continuing the declining trend during the past few months, broad money growth reached 14.7 percent in December 2007 down from 22.3 percent in December 2006. This was fostered by a decline in the growth of domestic credit to 15.6 percent. It mainly reflects slowdown in private sector credit growth (17.6 percent) despite strong growth in net foreign assets (34.8 percent) of the banking system because of the continuous increase in workers’ remittances. To support higher economic growth, Bangladesh Bank maintained an accommodating monetary policy stance without adjusting policy rates and reserve requirements. The yield of 28-day treasury bills has remained at 7.3 percent since December 2006.ss
Correspondent Banks
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AMERICAN EXPRESS BANK LTD.
21, HEMANTA BASU SARANI
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Credit Rating
BASIC Bank Limited
Credit Rating Report (Entity Rating)

Long Term : AA- A+
Short Term : ST-1 ST-2
Rating year : 2007 2006


Credit Rating Information and Services Limited (CRISL) has assigned AA- (pronounced as double A minus) rating in the long term and ST-1 rating in the short term to the Bank for the year 2007.

Banks rated AA- in the long term are adjudged to be of high quality, offer higher safety and have high credit quality. This level of rating indicates a corporate entity with a sound credit profile and without significant problems. Risks are modest and may vary slightly from time to time because of economic conditions.

Banks rated ST-1 in the short term are considered as the highest certainty of timely payment. Short-term liquidity including internal fund generation is very strong and access to alternative sources of funds is outstanding, Safety is almost like risk free Government short-term obligations.


Objectives of the BASIC Bank:

• As mentioned earlier, BASIC’s priority is in promoting and financing development of small and cottage industries.
• Besides, the Bank is to provide full range of commercial banking services including collection of deposits, such as current, savings, STD, and FDR; short term trade finance, handling of import and export business.
• BASIC offers Micro credit to the urban poor through linkage with NGO’s with a view to facilitating their access to the formal financial market.



Working Sector of BASIC BANK LTD:

The analysis of basic function of each department of BASIC BANK is mainly covered by the Head office .But I was in Dilkusha Branch so I have mentioned only about the Dilkusha Branch.



















CHAPTER 3: CREDIT MANAGEMENT SCENARIO
Origin of Credit
Imagine the very first credit transaction in history. It certainly took place hundreds of years ago, before the existence of bank, credit bureaus, or credit departments. Perhaps a farmer asked his neighbor for some seeds to grow a crop promising to give the lender some of his produce. Perhaps a family breadwinner simply needed food for his or family and promised to repay with a bonus to compensate the lender for this generosity.

The prospective lender would have been surprised and apprehensive. An element of trust would be needed, of course, and some guarantee of repayment would be nice. How could one evaluate the risk of making this loan? What compensation should be sought for delivering property for another person’s use? How could one collect if repayment was not promptly provided?

If a farmer or businessperson obtains the means to produce employment opportunities and products, certainly the community would benefit. Loans and other credit programs have provided these opportunities throughout history. Financial institutions developed to put funds from savers into the hands of borrowers who used this value to create economic value. Credit has contributed to economic growth of countries throughout the world as it makes goods and services available to consumers, businesspersons, and governments.

Although the basic tasks of evaluating risk, extending credit, and collecting payments have not changed, the mechanisms for marketing and conducting credit programs have changed dramatically over the years. Computers using sophisticated credit scoring systems speed up the disbursement and collection of account balances. Credit bureaus maintain vast database of information about borrowers available online through computer networks. Lenders continue to find more ways to offer more credit options to businesses and consumers.

Definition of Credit

Credit is a contractual agreement, in which a borrower receives something of value now, with the agreement to repay the lender at some date in the future. One of the basic functions of bank is deposit extraction and credit extension. It helps this kind of organizations to earn around 80% of the total revenue. Managing credit operation, thus, is the crying need for any bank


Type of Credit Activities
Depending on the various nature of financing, all the lending activities have been brought under the following major heads;












Importance of credit
Credit plays a very vital role in national economy in the following ways-
1. It provides working capital for industrialization.
2. It helps to create employment opportunities.
3. Credit controls almost all kinds of production activities of the country.
4. People’s purchasing power increases for it.
5. It brings social equity.
6. Cash generation occurs for its successful performance.
7. Business cycle can run well only by the help of lending system.
8. Economic Stabilization
9. Raise standard of living

Factors Related with Credit
• Risk
• Time
• Interest rate
• Security or Collateral
• Operating Expense
• Legal Considerations
• Inflation
• Finance Charge





CHAPTER 4: EMERGENCE OF CREDIT RISK MANAGEMENT
Credit Risk Management is basic to risk management and controlling, as it is the major risk factor in most bank business. Therefore, a bank should assess the degree of risk associated with each loan and its profitability. In this connection prior assessment of and follow up on a loan transaction constitute essential ingredients of the credit risk control process. An in-depth analysis of the borrower financial conditions, expected usage of funds, ability to repay, willingness to repay and sources of repayment all together constitute step one in the risk control processes.

In this chapter all the possible risks that are exposed while sanctioning loans are briefly discussed keeping front the Credit Risk Management. Section 4.2 discusses CRM and its implication in risk analysis. Section 4.3 explains the current scenario of Credit Risk Management (CRM) practices in lending decisions in banks.

Credit Risk Management and its Implication in risk analysis

Credit Risk Management is one of the new management and operational tools for improving the operational efficiency of all banks excepting the foreign banks initiated by “Financial Sector Reform Project (FSRP)” in 1993. It focuses on internal changes to the lending process to improve the loan portfolio of banks. According to FSRP international consultant, in a successful country (in terms of lending), all applications for credit are thoroughly analyzed to assess the risk that the bank might not fully recover the loan. Through the credit risk management (CRM), the banking system will channel the scarce financial resources into those opportunities that will have maximum return. That is profitable enterprises will get fund and grow but loss making enterprises will be refused funding and will go out of business. Through the better practices of CRM, all the banks will be benefited as well as the economy will grow and the people will be benefited.

The same FSRP international consultant further says, in Bangladesh, loan analysis typically covers only 25% of the potential risks that are analyzed by banks in the developed world. Analysis skills are virtually non-existent in the commercial banks. Most of the lending officers do not know how to analyze a set of accounts. So, the ultimate results of the lending process are- the country’s scarce financial resources are not applied effectively, loss making enterprises receive funding and stay in business and allowing them to loss even more.

In these circumstances, FSRP team has designed a new system to assess lending risk called LRA Manual. Bangladesh Bank has already made it mandatory for commercial banks to exercise it for granting loan above Tk 1 core. But, in near future, Bangladesh Bank may suggest for all kinds of loans.

Lending Risk Analysis (LRA) is simply a loan-processing manual. By going through this manual the lending bankers can assess the credit worthiness of their prospective borrowers. Therefore, LRA is such an instrument, which is definitely and directly related with lending information to analyze the borrower’s financial, marketing, managerial and organizational aspects subjectively and objectively and is a part of CRM. It also facilitates the analyst to know the security risk of the credit.

Lending Risk Analysis involves assessing the likelihood of repayment of loans to the bank as per agreement on the basis of analysis of certain risks. LRA, first of all, has divided the various risks into two groups namely, business risk and security risk.


























Different types of risks associated with CRM
Broad divisions of CRM are as follows:























Business Risk
Business Risk is concerned with whether the borrowing company would fail to generate sufficient cash out of business to repay the loan. Business Risk, the main component of lending risk, consists of the Industry Risk and the Company Risk.

A. Industry Risk: Due to some external reasons a business may fail and the risk, which arrives from external reasons of the business, is called industry risk. It has two components:

1) Supply risk:

It indicates the risk of failure of the business due to disruption in the supply of inputs resulting from their price, quantity or quality. The inputs of supply risk are labor, raw materials, machinery and equipment, power, premises etc. The price, quality or quantity of supplies may be disrupted because of the following measures.
The price of supplies may be disrupted due to removal of price control by Government, imposition of import tariffs, adverse fluctuation of foreign exchange rates etc. Scarcity of supplies causes production loss. Supply scarcity causes due to- labor unrest, erratic power supply, imposition of power controls makes supplies scarce, supply of raw materials disrupted by transport difficulties, critical raw materials only available from one supplier, who goes out of business etc.
It is difficult to obtain right quality of supplies, when it is difficult to obtain required quality of raw materials and when there is a shortage of necessary skilled labor.

2) Sales risk: It is another component of industry risk. When the business fails for disruption in sales, this type of risk would generate. Sales may be disrupted due to changes in market size, increased competition, changes in regulations, losing of a single large customer etc. To assess sales risk at first we have to analyzes industry turnover and compare the same with other two major competitors. Next we have to assess how easy it is for new competitors to enter the industry, then we have to assess the risk that changes to regulations will damage sales and then we have to assess the risk that a single large customer switches to a competitor and finally we will assess the risk involve in sales.

B. Company Risk: Company risk is shown for some internal reasons of the business. It has also two main components and four sub components.

1) Company position risk: Each and every company holds a position within an industry. This position is very much competitive. Due to weakness in the company’s position in its industry, a company may fail and the risk of failure is called company position risk. It depends on-



a) Performance risk: If a company fails to perform well enough to repay the loan because of its weakness under given expected external conditions, the company is said to suffer from performance risk. It is a part of company position risk. Assessment of performance risk involves validating the company performance. It depends on competitive position, realistic business strategy, cash generating ability etc.

b) Resilience risk: When a company fails due to lack of its resilience to unexpected external conditions, the resilience risk is generated. The resilience risk of a company depends on company’s leverage, its liquidity and the strengths of the owner/key personnel’s connections.

2) Management risk: If the management of a company fails to exploit the company’s position effectively, the company can fail to and this risk of failure is called management risk. It can be subdivided further-

a) Management competence risk: Management competence risk is the risk that the company fails because the management is incompetent. It is a part of management risk under company risk. The competence of the managers depends on their ability and level of teamwork. To assess the ability of the managers we have to analyze their education, experience, relevant skill etc.

b) Management integrity risk: Management integrity risk is the risk that the company fails to repay its loan due to lack of management integrity. Management integrity is a combination of honesty and dependability.

Security Risk:
Security Risk is the risk that the realized value of the security does not cover the exposure of loan. Exposure means principal plus outstanding interest. Security risk can be divided into two parts. This are-

A. Security control risk: security control risk is the risk that the bank fails to realize the security because of lack of bank’s control over the security offered by the borrowers. The risk of failing to realize the security depends on the difficulty with which the bank can both obtain a favorable judgment and take possession of security.

B. Security cover risk: security cover risk is the risk that the realized security value may not cover the full exposure of loans. Security cover risk depends on speed of realization and liquidation value.

Current Scenario of CRM Practices in Lending Decisions in Banks

Most of the banks in our country use LRA technique for the loan facilities (both funded and non-funded) of Tk 50 lac and above though prescribed loan amount for mandatory application of LRA stands at Tk 1 crore and above. On verification, it was revealed that almost all the banks use LRA technique as a supplementary tool along with the traditional approach for processing loan proposals. Virtually, LRA helps to magnify the use of traditional approach of credit analysis and no conflict is found to exist between these two approaches because of complementing each other. The reason behind this is that the use of LRA technique is dependent on the findings of the traditional credit analysis. This implies that LRA plays an insignificant role in the credit decision-making process. No banks are using LRA following the systematic order as prescribed in the manual. The areas of non-compliance are, risk adjusted loan pricing methodology, follow-up and monitoring mechanism based on completed LRA, early warning system regarding non-payments, auditing practices to identify documentation and security irregularities etc. It is observed that credit officers are generally tempted to put their option on average risk level out of four risk levels in all risk categories without justification. As a result the ultimate risk level comes to “Acceptable” rating which goes in favor of the borrower. The banks are not doing any exercise regarding the extent of the loan classification for the loan cases where LRA has been used.

Interest Rates:

The Lease Financing is a major financial sector of Banking Sector. As BASIC Bank is a leading financial institution in the financial sector in our country it also involves in lease financing. But the procedure of lease financing is sometimes different from the pure leasing companies.




Lease Finance of BASIC Bank Ltd:

Rate of Interest Nature of facility Approved No. Margin &experience
12% SOD 10 Lac
11.50% CC 50 Lac
12% CC 40 Lac
12% TOD BRANCH
10% CC 70 Lac
11% CC 20 Lac
10% CC 15 Lac
11.50% CC 35 Lac
11.50% CC 50 Lac

Consumer Credit Scheme of BASIC Bank Ltd:
Interest Rate:
Electronic Goods : 12%
Microbuses : 11%
Mobile Telephone : 11%
T&T Phone : 11%
House Building : 5%

CHAPTER 5: CREDIT RISK MANAGEMENT OF BASIC BANK


5.1 Basic Principles Of Credit Policy Loans & Advances

1. Aggregate loans and advances shall not exceed times the Bank s net worth or 65% of customers deposits whichever is lower ( excluding loans and advances covered by specific counter - finance arrangements ) .

2. Within the aggregate limit of loans and advances as mentioned in (1) above 50% of lending will be small industry sector in accordance with prescribed norms of the government and the central bank in terms of the banks objectives with 50% to the commercial sector. No term loans will be approved for the commercial sector. Exceptions will be rare and will require approval of the Executive Committee.

3.All lending will be adequately secured with acceptable security and margin requirement as laid down by the Head office credit committee.

4.The bank shall not incur any uncovered foreign exchange risk (currency exposure)
in the lending of funds.

5. The bank shall not incur any risk of exposure in respect of unmatched rates of Interest of funding of loans and advances beyond 15% of outstanding loans and Advances .

6.End- use of working capital facilities will be closely monitored to ensure lending used for the purpose for which they were advanced .

7.Country risk in loans and advances will be accurately identified and shall be within the country limits if any approved for the bank . The same treatment will be given to country risk arising out of contingent liabilities relating to Letters of credit and letters of guarantee .

8.Loans and advances shall be normally funded from customers deposits of a
permanent nature , and not out of short term temporary funds of borrowings
from other banks or through short term money market operations .

9.The aggregate outstanding loans and advances ( excluding loans advances covered By specific counter – finance arrangement ) shall be dispersed according to the following guidelines (subject to item 2 above whereby 50% of lending being to small industry sector ) :

(a) Short term commercial lending ( to include self Liquidating and other short term finance to retail And wholesale business clients to finance their usual Domestic and international trade \ shipping of goods ).This category to include working capital to hotel and tourism 35 . 0.
(b) Facilities to shipping and transport ( facilities for the purchase and construction of ship / vessels And other modes of transport both by land and air 5 . 0
10.Spreads over cost of funds on loans and advances and commissions and fees on other transactions should be commensurate with the rating of the borrower, quality or risk and the prevailing market conditions.


Practices of Credit Policy in BASIC Bank
BASIC Bank, its branches are following the credit policy of the bank.
1. Aggregate Loans and advances are 79% of the total loans and advances:
As we have seen in the credit policy that, it strictly specifies that, at best 65 of the total deposit should only be provide for the loans and advances. Considering both the call deposit and fixed deposit then the figures comes to 79%. And for other private commercial and specialized banks the amount approximately was 80 to 95 percent of the total deposit. So in that case BASIC is taking some sort of risk.

2. Approximately 77% of the loans and advances has been given to small and cottage industries:
In the credit policy it has been specified that, approximately 50% of the loans and advances will be given to small-scale industries. If we take the example of some local private and government banks we can see the following position:

Name of the bank Investment to small scale industries
Arab Bangladesh Bank 4.74 %
Islami Bank 21.21 %
Sonali Bank 10.83 %
Rupali Bank 0.43 %
Dutch Bangla Bank 3.45 %
Agrani Bank 10.45 %

Comparatively that all other banks are investing less amount to small-scale industries. They are maintaining short-term profit but endangering long run profitability.

Head Office of the bank are monitoring all kind of loans and advances:
The Head office of the bank perfectly monitors the banking operation and execution of the credit policy. When we have examine the credit extension procedure of the bank we have find that, every proposal are forwarded to the Head office for granting the loan. And full authority to reject any kind of proposal.
1. Branch managers are fully liable for the selection of the borrower:
Branch managers are made fully liable for the selection of the new borrower in the bank. It prohibits the way to improper selection of the new borrower by the branch manager.
2. Continuous monitoring of the working capital facilities are ensured by the inspection of the stocks:
BASIC bank provide working capital facilities like Cash Credit, in against of stock of manufacturing goods. Usually Cash credit is allowed on 70% on the total stock value.
3. Conservative approach are taken to avoid any kind of foreign exchange exposure:
In credit policy of BASIC it has been specified clearly that no additional risk should be taken in dealing with foreign exchange. There found that excessive measure is taken to avoid any kind risk. Some problems arises because of these excessive measure as new borrowers fears to open an L/C.

4. Documentation Process:
There always find that, in 90% cases standard documentation has been maintained.
5. No credit are extended to customer client Entity, which exceeds in total commitment more than 10% of the Bank’s capital and fees reserves.

6. House building loan facility and other commercial loan facility has been demoralized by the branch authority:

7. Persuasion and monitoring are moderately maintained for ensuring the prompt payment:

8. Head Office decision sometimes creating classified loans:
Regarding the classified loans and other loans between the Head office. There identified that, in some cases those loans becomes classified which the head office has recommended.
9. Credit evaluation techniques are not enough to judge the credibility of the borrower:

Though the classification rate of BASIC Bank is well below of the acceptable rate but its credit techniques to judge the client are not satisfactory. Where all the Nationalized Commercial banks are using LRA procedure, where most of the new private commercial banks are using their own modern rating system and the foreign commercial banks are using international rating procedure ------ BASIC are following the traditional credit evaluation technique. But at present there some different technique applied in various branch. Through the competition there would lot of changes need to create more technique.

Because of the less effective appraisal process sometimes it becomes difficult for the bank to judge whether the borrower can pay off the loan or can maintain effective transaction with the bank. In most of the time the borrower produce imaginary data regarding the projected financial statement. But only because of effective technique it cannot be identified.

Not only that, BASIC Bank does not have any working capital analysis procedure which can ensure the accurate working capital requirement of the client. They are following five years old working capital analysis procedure prescribed by Bangladesh Bank. As a result some borrower get the chance to channel fund on different uses.

10. Excessive measures are taken to reduce foreign exchange risk:
Concern with officer of foreign exchange they have agreed on the issue that excessive control measures are taken to reduce any kinds of foreign exchange risk. They informed that, this only because the head office supervises all kinds of dealing and the concern officer is fully liable for any kind of losses. And to keep the classification rate low additional care also been taken in financing foreign bills.

11. Adequate care should be taken for LIM facility:
Analyzing the practices stated above we have found that, in most of the cases BASIC Bank limited are perfectly following the credit practices except the credit analysis technique. If the Bank can improve that technique it will be able to reduce its classification rate more effectively.

12. Small range of loan portfolio are restricting further improvement:
Comparative to private commercial and foreign commercial banks BASIC Bank have small loan portfolio. Presently it only providing CC (P), CC(H), SOD, LIM, Term loan, Micro Credit, LIM, LBP, FBP, PAD, PC and L/C facility to its clients. Where other commercial banks are offering modern services like Consumer loan, ATM, and Credit card facilities. BASIC Bank has the capability to provide same type of services but the still are not approaching to provide such services. And this policy restricting the bank from further improvement.

13. Less marketing effort to improve credit operation:
BASIC Bank receives funds from ADB, Bangladesh Bank and other government agencies. They collect deposit from general and saving group. But this source is the least costly source of fund. Continuous concentration on costly deposit collection is increasing the cost of fund of the bank. Not only that, BASIC Bank is not marketing its product to the general people which makes it difficult to disburse loans.


Loan Department Operation:

This part of this policy contains instructions covering the details of various types of loans and advances of the Bank, the documents to be obtained, accounting record to be maintained, process of the Loan Department, which is responsible for processing and servicing all advances as well as maintaining the records connected with the function.

Main functions of Credit Department:
a) Interviewing the prospective borrower.
b) Receiving the credit information assembled and placed in the Customer’s Credit File.
c) Processing and sanctioning of credit facilities to the customer.
d) Disbursement of credit facilities to borrowers in accordance with established procedures.
e) Recording credit facilities in the Register / Card.
f) Preparing “ENTRY TICKETS” (Voucher) pertaining to credit facilities disbursed and passing to General Ledger Accounts.
g) Controlling of securities and their proper custody.
h) Maintenance / Filling of Borrower’s Loan Card / Register.
i) Follow up and recovery of credit as per due date.
j) Computation and checking of interest accrued on loans and advances and preparation of entry ticket thereof.
k) Preparing of “ENTRY TICKETS” (Voucher) for credit repaid and passing the same to the corresponding General Ledger Accounts.

Credit Delivery System:
Three alternate delivery systems are being used to reach credit to the urban poor borrowers.
These are:

 BASIC Bank provides loan to NGOs which on-lend to the poor borrowers. NGOs then become responsible to make repayment to the Bank. The sub borrowers repay loan to the NGOs.

 The Bank provides loan to the urban poor borrowers through NGOs or the Bank directly extends loan to the borrowers. The NGOs assist the Bank in motivation, formation of self-help groups and monitoring and supervision of loan utilization. For this the NGO is paid a fee by the Bank.

 BASIC provides loan to the urban poor borrowers direct without the assistance of any NGO. BASIC’s staffs perform all required functions of motivation, group formation and monitoring and supervision of loan utilization Borrowers make repayment to the Bank.

Loan Size:
Loan may be sanctioned to individual members organized in a group as well as to NGOs. The maximum limit of loan per person is Tk. 15,000. It may be relaxed for deserving cases. The minimum loan size is Tk. 2,000 per borrower. There is no size limit for loan to NGOs.

Interest Rate:

For lending to NGO members the Bank charges 10% interest rate. When BASIC Bank handles Micro Credit operation on its own, the interest is charged at the rate of 15% per annum.

Repayment:

Repayment of loans depending on the credit delivery systems are made in the following manner:
 In the case of loan to NGOs which on- lend to the poor borrowers, the loan amount is repaid by NGO within 12 to 36 equal monthly installments with a grace period of 3 to 6 months from the date of disbursement.

 In the case of loan to be provided to the urban poor borrowers, either through NGOs of\r direct without the assistance of nay NGO the loan amount is repaid by NGO within 12 equal monthly installments with a grace period of 3 months from the date of disbursement.

Security/ Collateral:
In all cases stocks/ equipment procured with the loan proceeds remain hypothecated with the Bank. The member borrowers sign D.P mote. However, the loans are collateral free. D.P note and their relevant charge forms are signed by authorized executives of NGOs.
Procedure for getting approval of a loan

The following procedure is applicable for giving loans to the customer.















How to apply for credit

The investor may contact head office or any of the branch offices of the bank for preliminary discussion on his proposal and the facilities provided by the bank. The proposal will then be examined at the branch or head office of the bank and if the proposal appears to be a viable one and the promoter is found creditworthy and proposed project is acceptable then intending investor will be supplied with a prescribed loan application form. The application form should be submitted in triplicate with the requisite project examination fees, which are not refundable. The borrower will be required to deposit equity in advance (partial) with BASIC @ 20% of the total estimated paid-up capital of the proposed company. The deposit will carry interest at the rate applicable to SAVING BANK ACCOUNT. There are three different sets of loan application form- one for investment cost up to taka 2.5 million, one for investment cost above taka 2.5 million and the rest for borrowers of informal sector.

Guidelines for submission of Loan Application Form

The borrower is provided with instruction papers which help him or her to prepare the loan proposal properly.
• Information on loan proposal should be furnished in prescribed FIRST INFORMATION SHEET (FIS) in triplicate properly typed and each page/ set should be duly sealed and signed by the applicants(s)/ sponsor(s).
• Complete information should be furnished in respect of each item supported by documentary evidences, wherever necessary, to avoid further reference/ delay/ rejection of application
• The bank reserves the right to reject the application forthwith if the information given in the form is incomplete and not fully documented in all respects.
• Information may be provided in additional sheets of papers, if required. However ensure that all the pages and annexure are signed under official seal. Also ensures that all the facts/ evidences have been enclosed properly including three feasibility reports/ detailed study reports on loan proposal.
• The clients are required to deposit with the application the project examination fee and also a portion of the equity at the following rate either by cheque or pay order or demand draft drawn in favor of BASIC Bank and payable in any of the scheduled banks within the country. Project examination fee:
Taka 10,000 only in respect of projects having fixed costs above taka 50 lacs
Taka 5,000 only in respect of projects having fixed cost up to taka 50 lac.
• Memorandum and Articles of Association together with the certificates of registration/ incorporation and commencement of business of the company duly certified by the managing director of the company should be submitted. Incase of partnership, the deed duly certified by the managing partners of the firm should be submitted.
• No objection certification from the appropriate authorities for setting up the project on land, wherever required, should be submitted. Title deed of land, together with
• non-encumbrance certificate from the district registrar or sub-registrar should be submitted.
• Certificates from the surveyor for determining the price of land of the proposed project/ price of adjacent land sold during last 3 years should be submitted. Also to be submitted are site map.
• Machinery layout plan, price quotation of 3 suppliers together with illustrated brochures and literatures should be submitted for both imported and local machinery.
• Consent letter from Power Development Board/ Rural Development Board/ Gas Authority/ Pollution Control Board should be submitted wherever required
• Soil test/ water test report (if required)
• Nationality certificate along with attested photographs of the directors/ partners/ proprietor should be submitted
• Declaration of assets and liabilities of the proposed directors/ partners/ proprietor. Declaration about payment of income tax should be submitted.
• Letter addressed by the prime banker of the company/ firm/ person should be issued with a copy to the BASIC as per given annexure.
• Give reasons for seeking additional loan for expansion/ balancing/ replacement/ of the existing unit. Also provide information relating to the existing line of products, rated/ actual annual production capacity for the past operating years, sales performance and financial position of the company/ firm.

Procedure for Processing Loan Application

In setting up procedures for the evaluation/ approval of small projects, the length of processing time becomes a significant factor. Compared to other financial institutions’ usual two months average processing time for its medium and large loan program, the processing/ approval time for small industry loans remains well below the above processing time because of its lesser detailed studies as well as the bank considers that small entrepreneurs look for their sources of credit at their time of need.
• The processing/ approval time for small industry loan is not more than two months from the date of receiving complete application form
• Application in prescribed form is received in triplicate, duly filled in, and sealed and signed by the sponsoring directors along with their attested photographs duly affixed in the space provided for.
• Draft layout plan of the proposed building and the estimate for construction cost is obtained
• In case of the project to be located in any BSCIC industrial Estate, BASIC’s letter of consent, particulars of the land, copy of lease deed is obtained.
• For location of industry in other areas, permission/ no-objection for setting up the small industry is obtained from the appropriate authorities.
• Utility agency’s letter of consent for providing necessary utility services to the unit to be obtained.
• Detailed credit report on the sponsors/ project is prepared i.e. the bank shall carry out detailed credit investigation on the promoters.
• Tentative list of machinery/ work with detailed specification should be obtained supported by 3 price quotation
• The individual project appraisal report for Small Scale and Cottage industry may not be very elaborate and exhausted. However, it covers the basic areas of project viability.
• Joint report between the bank and the borrower is prepared for informal sector.
• The bank sometimes seeks advice from a panel of experts whose services may be hired by the bank as and when required in specific cases.


Project Appraisal

Commercial banks and financial institutions intermediate between lenders and borrowers. The loan and advance should be given to them who has certain and predicted cash flow re-pays the credit. If the credit officer fails to analyze the clients’ viability of repaying the loan and project’s cash flow, possibility of default may arise. In other words, it can be said that the purpose of appraisal is to be sure that the proposed advance will be safe, liquid, and profitable and covered by adequate security. At the time of credit proposal, the bank has to come to an acceptable compromise between over caution and under caution.

BASIC bank was established to provide term loan and other financial assistance including all kinds of banking facilities to accelerate the pace of development to small industry. The financial assistance included short term working capital loan, medium term and long term capital finance to viable new small scale industry (SSI) projects and BMRE of SSI projects which will fulfill the banks criteria of viability and acceptability. Project appraisal in the banking sector is needed for the following reasons:
• To justify the soundness of an investment
• To ensure repayment of bank finance
• To achieve organizational goals

The entrepreneurs of small industry concern/ project requiring financial assistance from BASIC Bank need to fulfill the following criteria:


Credit assessment

A thorough credit and risk assessment should be conducted prior to the granting of loans, and at least annually thereafter for all facilities. The results of this assessment should be presented in a credit application that originates from the Relationship Manager, and is recommended by Branch Credit Committee (BCC). The RM should be the owner of the


customer relationship, and must be held responsible to ensure the accuracy of the entire credit application submitted for approval. RMs must be familiar with the bank’s Lending Guidelines and should conduct due diligence on new borrowers, principals and guarantors.
It is essential that RMs know their customers and conduct due diligence on new borrowers, principals and guarantors to ensure such parties are in fact who they represent themselves to be. All banks should have established KNOW YOUR CUSOMTER (KYC) and Money Laundering guidelines which should be adhered to at all times.

Credit Applications should summarize the results of the RMs risk assessment and include as a minimum, the following details:

• Amount and type of loan(s) proposed
• Purpose of loans
• Loan structure ( Tenor, Covenants, Repayment Schedule, Interest)
• Security arrangements
In addition, the following risk areas are analyzed:
• Borrower analysis
• Industry analysis
• Supplier/ Buyer analysis
• Historical financial analysis
• Projected financial performance
• Account conduct
• Adherence to lending guidelines
• Mitigating factors
• Loan structure
• Security

Head Office Approval

The respective credit officer at ICD appraises the project by preparing a summary named “TOP Sheet”, “Executive Summary” and “Office Note” which contains a brief description of the loan proposal. Then he submits it to the Head Office Credit Committee (HOCC) for the approval of the loan. The Head Office Credit Committee considers the proposal and takes decision whether to approve the project or not.

Sanction Letter

After getting the approval from the head office, the branch issues the sanction letter to the borrower. A sanction letter contains the following particulars amongst other details: name of the borrower, managing partner, and nature of facility, amount, and expiry, rate of interest, purpose, security and the following terms and conditions:

• Before availing the loan all documentation formalities must be completed. Registered power of attorney in favor of BASIC Bank to sell the mortgaged property without the consent of the court or owner of the lender.
• DP note and other usual charge documents/ undertakings etc duly stamped must be signed and submitted to the authority before disbursement of loan
• The loan shall be governed by all other firms and conditions as per policy and practices of the bank that will be acceptable for the sanction to safe guard the interest of the bank.
• The bank reserves the right to amend, modify or withdraw any or all the terms of the loan at any time without assigning any reason whatsoever or to terminate/ call back the loan facility at any time for which bank or its official cannot be held responsible for any loss for such cancellation of the loan.

The borrower receives the letter and returns a copy of this letter duly signed by him/ her as a token of having understood and acceptance of the terms and conditions above.

Documentation of Loans and Advances

In spite of the fact that banker extends credit to a borrower after inquiring about the character, capacity and capital of the borrower, he obtains proper documents executed from the borrower to protect him against willful defaults. Documents contain the precise terms of granting loans and they serve as important evidence in the law courts if the circumstances so desire. The documents for loans and advances can be classified into two categories. Charge documents and Security documents.
Mode of charging securities: BASIC Bank practices following 2 types of securities.
• Primary securities- Cash or cash equivalent that is easily liquidated or convertible into cash. Example- FDR, Sanchaypatra, DP Notes etc
• Secondary Securities- These securities are tangible securities that can be realized from sale proceeds or transfer of property. Example- Immovable properties.

The modes of charging securities are as follows:
Lien: Lien is the right to retain possession and not right of ownership. Bank’s lien is general lien over its own financial obligation to clients. Property under lien cannot be sold without notice to the owner and sometimes without court’s order
Hypothecation: This is mortgage of movables by an agreement and here neither possession nor ownership is transferred. Hypothecated goods cannot be sold out/ disposed off without notice and court’s order. However, if a special power of attorney is taken, in that case, it can be disposed off without going to the court.
Pledge: Pledge is the bailment of goods as security for payment of a debt or performance or promise. Here, title and ownership are not transferred. Pledge goods may be sold out and proceeds thereof may be appropriated towards adjustment of liability in case of failure of the borrower to repay or fulfill the terms and conditions.



Mortgage: Mortgage is the transfer of interest in immovable property to secure the repayment of money advanced. Ownership remains with the mortgager. In case of equitable mortgage, court order is necessary and in case of registered mortgage court’s order is not necessary for sale / disposal of the mortgaged property for adjustment of advance.

Disbursement:

A proper disbursement procedure is essential for implementing a project small or big, within the estimated time and cost.
However, constant monitoring of the projects on the one hand and timely mobilizing the equity on the other hand cannot be under estimated for efficient implementation of a project. The following factors are taken into account.
• After machinery contract is finalized the Bank will open irrevocable letter of credit on behalf of the borrower in the joint names of the Bank and the borrower.
• Disbursement of foreign currency loan is made automatically as soon as irrevocable letter of credit for import of machinery is established and the foreign suppliers make shipment of machinery.
• The local currency loans are to be made available to the project after satisfactory and full utilization of equity by the borrowers by creating required physical facilities (tangible assets) for the project
• The sponsors have to request for release of local currency loan to the Bank supported by papers like progress report, statement of account, documents.
• The local current loan of the Bank to be disbursed in one or more installment according to nature of project
• The borrower must use the loan for the purpose for which the advance is extended
• The borrower shall apply the proceeds of the loan exclusively to finance the cost of the goods and services required to carry out the project. Foreign currency shall be disbursed only for goods and services that have neither been paid for in Bangladeshi currency not were produced in here
• If the completion of the project or its successful operation is hindered or delayed because the funds available are inadequate to ensure its completion, it shall be the responsibility of the borrower to make prompt arrangements in accordance with financial plan approved by the bank to provide the necessary funds.

Supervision Procedure

The supervision of projects includes adequate control procedures in the disbursement of loan and the continuous monitoring of project operations during its period of construction and implementation through report requirement as well as plant visits. A project under implementation is visited every month and progress report is submitted to the management. Bank official on project supervision keeps watch over the estimation made and notes the deviation for taking quick remedial measures. An entrepreneur is encouraged to come to the Bank and talk about his project and problems. It is emphasized for taking up comprehensive insurance policy covering the properties of the project. All sorts of papers, reports, received from the borrowers is promptly reviewed/ scanned for some signals that may need special close attention of Bank Management. Branches of the bank are effectively utilized for project supervision including disbursement of local currency loan in their respective areas.
Recovery is the recurring worry for the bank officials. Moreover, recycling of advances is important without which the bank’s liquidity is in jeopardy. Besides that the community doesn’t get benefited unless new advances and new borrowers are encouraged. Strategic supervision of the loan and advance can ensure the timely recovery of the loan and advances along with the interpersonal relationship with the client. In the time of my attachment in the BASIC Bank Limited, it was observed that the credit officers are timely preparing the report and taking the following supervision techniques:


1. Loan account statement check to find out:
• Whether the limit is within that has been sanctioned
• Satisfactory transaction has been made
• Whether the borrower has sustained a loss of capital
• Significant decrease in the value of security
• Weakening of bank’s position due to any reason
• Used of credit other than the purpose for which it was approved
• Incorrect information supplied by the borrower or bankruptcy of the borrower
• Credit is rescheduled frequently or the rules of rescheduling are violated.

2. Collection of the financial statements of the client and analyzing them and comparing the actual performance with that of projected. If actual is less than projected then the credit officers take the following measures:
• Meet the owner and discuss to identify the reason
• Analyze the business strategy regarding the price, quality and competitors
• Whether the amount disbursed was used properly
• Whether the management has given its full effort in managing the business

No banker wants the loan to be turned into bad; at least they are not bad at the time they are made. However, bank find that invariably a small portion of the loan become delinquent and eventually must be written off. The loan review process is a crucial tool in reducing losses and in monitoring loan quality. It consists of a periodic audit of the ongoing performance of some or all of the active loans in a bank’s loan portfolio. Other than its basic objective of reducing loan losses, some intermediate objectives of the loan review of BASIC Bank are as follows:
• To detect actual or potential bad loans as early as possible
• To ensure that the loan policy is followed
• To inform management and the board of directors about the overall condition of the loan and advance portfolio
At the time of loan review, BASIC Bank follows the Bangladesh Bank guidelines and its credit policy set by the board of directors. The frequency of the review of individual loans is determined by the size and quality of the loan; large and poor loan is reviewed frequently than others.
BASIC Bank is required to submit the loan review report and the state of the loan portfolio to the Bangladesh Bank credit cell. For maintaining this schedule BASIC has set forth a due date for its all branches to send the loan review report to Industrial Credit Division. The concerned officer sends the report to the Bangladesh Bank Credit Department. The schedule is given below:


Loan Amount Review Period Reporting time
Tk 0.1 to 1 million Quarterly By next month 30th day
Tk 1 to 10 million Quarterly By next month 30th day
More than tk 10 million Monthly By next month 30th day

















Classification of Loans and Provisions

The general criterion of the defaulters are as follows :




















Types of Loan Length of Overdue Status of Classification Rate of Provision
Continuous Loan
(OD/CC, PC, LIM, LTR etc) Overdue period will be accounted from the day following the date of expiry of such loan • Less than 6 months
• 6 months or more but less than 9 months
• 9 months or more but less than 12 months
• More than 12 months Unclassified
Sub-Standard

Doubtful

Bad/Loss 1%
20%

50%

100%

Demand Loan
(Forced LIM, BLC/ PAD, EBP etc) Overdue period will be accounted the day following the date of expiry of such loan • Less than 6 months
• 6 months or more but less than 9 months
• 9 months or more but less than 12 months
• More than 12 months Unclassified
Sub- Standard

Doubtful

Bad/ Loss 1%
20%

50%

100%
Term loan payable within 5 years
Overdue period will be accounted from the day following the expiry of the due date of payment of installment of such loan • If default amount of installment is equal to installment payable in 6 months
• In 12 months
• In 18 months Sub- Standard



Doubtful
Bad/ Loss 20%



50%
100%
Term loan payable more than 5 years
Overdue period will be accounted from 6 months following the expiry of the due date of payment of installment of such loan • If default amount of installment is equal to installment payable in 12 months
• In 18 months
• In 24 months Sub- Standard



Doubtful
Bad/ Loss 20%



50%
100%
Overdue Stag/ Micro Credit
period will be accounted from 6 months following the expiry of the due date of payment on installment of such loan • Less than 12 months
• 12 months or more but less than 36 months
• 36 months or more but less than 60 months
• More than 60 months Unclassified
Sub- Standard

Doubtful

Bad/ Loss 5%
5%

5%

100%


5.10-2 Management of Delinquent Client:

When a problem loan is detected the responsible loan officer takes the corrective action and tries to minimize the loan losses by allowing different facilities to the client. The steps followed by BASIC Bank to manage the delinquent clients are:

Persuasion:
This is the first step practiced at BASIC Bank to manage the problem loan. This step involves the following activities:
• Open discussion with the borrower about the problem he is facing
• Discussion with third party to find out the underlying reasons
• Issuing “1st Reminder” letter to inform the due date and due installments
• If the party doesn’t respond, then “2nd Reminder” and “3rd Reminder” IS issued
Negotiation
If the persuasion failed, the loan officer negotiates a plan of action with the borrower to save both the bank and the borrower from possible loss. This calls for certain sacrifices on the part of the bank and borrower in their mutual interest. The plan of action in BASIC Bank consists of the following:
• Revise loan agreement
• Concession of interest (if the client is difficult to manage)
• Rescheduling of the loan and giving installment facility to repay the overdue amount beside the regular installment

Litigation
If the client fails to repay the loan even after rescheduling the loan, BASIC Bank goes for taking legal action against the delinquent client to recover the loan. The branch manager sends a letter to the head office department informing the borrower’s reluctance to repay the loan. Following measures are taken:
• Filing case against the client
Assigning the loan officer for assisting the lawyer.
Chapter-6
RESULTS & COMPARISON OF EFFECTIVE CREDIT MANAGEMENT

RESULTS OF EFFECTIVE CREDIT MANAGEMENT

The credit management process, techniques, effectiveness and comparative analysis of BASIC Bank’s credit policy it showed that, the bank is doing really well, especially on the part of low classification rate. Now we will show how sound credit management of BASIC bank contributing to the development and growth of BASIC Bank.
1) BASIC Bank is the soundest most banks as per CAMEL rating:
As per CAMEL rating of 2007 by Bangladesh Bank BASIC Bank is the second soundest bank in Bangladesh. In every aspect it acquires the highest (5) rating except management efficiency.
2) The classification rate of BASIC Bank decreasing year by year:
The classification of BASIC Bank decreasing year by year. And it proves that, the credit management of BASIC Banks improving day by day.
3) Amount of outstanding loans and advances increasing year by year:
4) The outstanding loans and advances are increasing year by year. This also shows that, credit management policy of BASIC attracting the business concerns and individuals.
5) Satisfactory improvement in call and term deposit:
Call and term deposit have increased. The rate of growth is 16%. Comparative to other Nationalized banks this rate is appreciable.
6) The bank has improved in loan disbursement day by day.
7) Admirable improvement in micro-credit scheme:
To serve the poor urban people BASIC Bank have introduced micro-credit scheme. Under this scheme BASIC Bank is supporting the poor people by disbursing the loan directly or through well-reputed NGO’s.
8) Admirable improvement in foreign exchange business:
BASIC Bank has made admirable improvement in foreign exchange business.
9) Profit of the Bank increasing year by year:
It is relevant that, profit of the banks has increased year by year. It shows sound and steady growth of development of the bank. Where most of the government banks are incurring huge loss it is appreciable that, BASIC Bank is doing really good. It should be also mentioned here that, this profit comes after deducting the provision for classified loans.
From the above analysis it is clear that, for good credit policy, practices and determination of the management BASIC Bank is setting a milestone for the banking institution which are operating under government governance. And the Bank also proves that, it is not always true that, government organization is always inefficient.
10) In most of the cases Branch Managers are also satisfied with the credit policy and practices:
11) Most of the sample borrowers also express positive impression about the credit policy and practices of the bank.
SWOT ANALYSIS OF BASIC BANK’S CREDIT POLICY
STRENGTH
1. Conservative approaches to reduce the risk of classification.
2. Assign adequate power to the top management to monitor credit operation.
3. Clearly specifies the documentation process to reduce the risk of classification.
4. Provide guideline to furnish loans only to small-scale industries for short time, which minimizes huge loss.
5. Clearly defined measure in dealing with foreign exchange transaction.
6. Strong procedure in selection of new borrower.
WEAKNESSES
1. The techniques specified for credit appraisal is not sufficient.
2. More dependency rests on government sources for deposit mobilization.
3. Services offered are not adequate.
OPPORTUNITIES
1. Suitable for small-scale business, which is growing day by day.
2. Government and other International agencies positive attitude toward low classification rate


THREATS
1. Not suitable for future competition in the market.
2. Reduced government support in future.

Explanation of SWOT Analysis
Strength:
The main advantage of BASIC Bank’s credit policy is its conservative approach. The entire policy is designed in a way that, it could always avoid default risk. In the credit policy all kinds of documentation process, appraisal techniques are designed so that the bank officials can take no excess risk.

In the credit policy top management are assigned adequate power to monitor the credit operation at the branch level. In most of the government bank we have seen that, the head office are not contributing more for the supervision of the loans and advances. But in BASIC a handful number of top officers have been engaged to monitor day to day operation, which are reducing the number of errors.

In the credit policy it has been clearly specified that, 50% of the total fund should be invested in the in small and cottage industries for short time. So for this policy BASIC Bank is getting competitive advantage.

All the investors know that, it is very difficult to get loan from BASIC Bank. They have to satisfy concern body and should be very optimistic about the future of their project.
Not only that, BASIC Bank is the one of those banks, which never takes any kind of, uncovered risk in dealing with foreign trade. They provide the foreign trade facilities only to their prime clients.

Weaknesses:
The technique that has been used in credit analysis is not adequate. Now days it is not possible to justify of a client by analyzing only their projects production capacity. It is important to analyze their financial statement and market share make sure that the project will last for long. BASIC’s credit policy does not clearly specify these techniques.
In the credit policy no emphasis has been given for mobilizing deposit from private sources. But private sources are the least costly sources and using it is possible to earn more profit from investment.

Opportunities:
Bangladesh is a country where it is very difficult to establish hi-tech industries because of high capital asset cost. So the government of Bangladesh and other international bodies convincing to establish small and cottage industries first which will make the ground for huge investment. As a result the number of small industries are increasing day by day. And BASIC’s has huge chance to progress if it can hunt this sector.

Not only that, international organizations and donor countries are continuously convincing the government of Bangladesh to attenuate the high classified loan rate. Now days they are including the clause of reducing the classified rate before sanctioning donation or loan to the country. As BASIC bank is successfully keeping the classification rate low it is possible that, it will get international assistance from ADB and from other organizations. And obviously these funds will have lower interest rate by which the bank can earn handful profit.

Threats:

From 1990 the core concept of banking in Bangladesh is changing. Now banks are going to the customer with services and try to convince them by it. Most of the banks have increased its service range significantly to attract its client and to satisfy them properly. Along with that, now the banks are trying to accumulate more funds from the middle class group. Alike insurance company most of the banks also have employ marketing agents to convince the mass. All of said situation is happening because of the increase of number banks in the country and competition among them.

BASIC bank is not very keen in marketing its product. And in credit policy it also not specified significantly. If the government sells its entire share to the private sector the bank will face huge pressure from its competitor.

Matching of Strength and Opportunities with Weaknesses and Threats
In the credit policy we have found everything all right except the techniques used for screening the client. BASIC bank has some very efficient and highly educated professionals who can easily solve the problem if they concentrate on the issue. So the weakness can be eliminated easily through its strength.

The credit policy of BASIC has been perfectly designed depending on the government funds and assistance. But as it is sure that, government will sell its share in near future BASIC has to revise its credit policy by considering alternative source of fund.

International funds can be alternatives for government source if BASIC can continuously reduce its classification rate.

Alike other bank BASIC can enforce its marketing operation to grab the small savings of the middle class. And a small change is enough to do so as the strength of the present credit policy is capable to take any pressure.

So from the SWOT analysis of the credit policy of the bank we have found that, the credit policy of BASIC Bank is sound with some exception. And by small revise of the policy is can be the best policy that can lead a bank to the peak of success.

Recommendation for further Improvement

BASIC Bank is passably following the credit policy and practices set by the management of the bank. And by that they are doing well in reducing the high classification rate and in attaining the profit target of the bank. But as we have seen in some area the credit policy and practices it-self is a problem for BASIC. And changes should be made to eliminate those problems to increase the efficiency and betterment of the bank. Here some recommendation are made to enrich the credit policy and practices of the bank:

1. Loan appraisal technique should be modernized:
In Government commercial banks LRA method have followed to appraise the loan application. And in private commercial banks LRA and other systematic method have followed to judge a client. Compared to those technique BASIC’s loan appraisal techniques (Enclosed in Case study) are relatively traditional and ineffective. And using that technique it is not possible to evaluate the financial soundness of a company. As such it is essential for BASIC to change its loan appraisal technique.

2. Documentation process should be improved:
As we have discussed the documentation process of BASIC Bank is fair relative to other commercial banks operating in Bangladesh. But this process is fair as long as BASIC is interested only in small loan amounts and small loan portfolio. When the volume and amount of loan will increase then this documentation process will not be suitable. As such identical documentation and filling process should be introduced for the betterment of the bank.

3. Customer services should be enhanced:
Every bank’s prime objective is to satisfy its client. Increased customer services is must for it. In Bangladesh all foreign banks and some private commercial banks are now providing excellent services like: ATM, Credit card, phone banking, super saving facilities and other fast service facilities to its client. But in that area BASIC has taken no pragmatic steps. As such they are loosing its valuable client to those which are providing these services. So BASIC should improve its service portfolio and should introduce more technology oriented services to its customer.

4. Marketing for selling the services should be encouraged
Most of the employee of BASIC or the top management of it are not very much interested for marketing for BASIC Bank. Door to door or business to client relationship is not maintained in this respect. The reason behind this may be that, no incentives are given for this job. So special incentive schemes should be introduced for mass marketing of services.

5. Detail manual should be prepared for accurate credit operation:
A common problem we have identified in all branches is that, there is no credit manual for smooth operation. The last edition of credit manual lay bare in the year of 1994. Since then no time tested credit manual has been provided. So top management of the bank should provide appropriate attention for preparation of the credit manual.

6. Adequate training is required for credit officer:
Adequate training is essential for the efficient credit management. Almost all recognized commercial bank have its own training center, where continuous training is given to the managers and credit officers for their improvement. But no such training center has yet been established in BASIC Bank. In our study we have revealed that, the training that has been given to the employees is not adequate. Since 1999 no training is given to the bottom level management. So from our viewpoint adequate training should be arranged for better credit management and implementation of credit policy.

7. LIM facility should be withdrawn by the bank management:
It has been revealed that, because of LIM facility branches are suffering losses. For that facility branches are forced to have godown, extra manpower and obtain risk for the goods. And it is evident that, a handful percentage of LIM facility becomes classified loan. As such it is reasonable for the bank to pause LIM facility as soon as possible.

8. Adequate measure should be taken for small industrial loan:
In our study we have revealed that, most of the small industrial loans become bad or classified. This is due to the weak financial capacity of the firm. So adequate measure should be taken before disbursing the loan. Specially alternative sources of repayment or adequate security coverage should be checked and satisfied in this regard.

9. The bank management should be careful about high liquidity ratio:
As per Bangladesh Bank inspection report it has been revealed that, most of the branches are keeping more funds in their hand, which are affecting the profitability. Also the conservative approach of the bank is affecting its profitability. As such the bank now should involve more of its strength to find new investment area and let its idle funds to be used.

10. Some discretionary power should be given to the branch management:
When we have discussed with the clients of BASIC Bank they have complained us about the extra time needed for sanctioning a loan. They have said that, if no L/C limit is there it takes two days for opening a L/C that creates problems for them. This problem arises, as the branch managers don’t have discretionary power to sanction any advance above Tk.30.00 lac.



Limitations and Drawbacks In Implementing CRM Techniques:
Traditionally, it has been observed that banks in Bangladesh used to operate funds business i.e. lending activities under security-oriented principle. Before 1989, banks used to give more emphasis to the security without considering the business risk of the borrowers at the time of sanctioning loan. But CRM does not give more emphasis on the security rather it gives more emphasis on the business risk of the borrowers. CRM’s unique system of scoring and various analyses give the bankers an opportunity to scrutinize the capable borrowers with due consideration regarding their competence, integrity, repayment capacity and cash flow projection of the project. The criteria specified in the LRA manual are very much appropriate and pragmatic to minimize the risks of lending. But in some cases it becomes very difficult to the bankers because of the following reasons:

a) Inadequate Data: To apply financial data relating to performance of a firm, it is very important to assess its existing or projected strength. In many cases up-to-date and reliable data like production, trade, business raw-materials, total demand and supply of different product of different industries, industry growth, sales turnover, performance data for major competitors are inadequate, which are necessary for assessing risk.

b) Inaccurate data: CRM calls for submission of financial statements by the borrowers. Most of the prospective borrowers are observed not to prepare financial statements. But the lending officer has to depend largely on the Balance Sheet and Income Statement figures. As the business concern of Bangladesh, in most cases they do not maintain proper records of their transactions, so they fail to provide accurate data. Experience shows that even the financial statements submitted by the applicants cannot be relied upon. Inconsistencies are observed in the information provided by applicants. Collection and compilation of these data are very laborious and in many cases problematic. So analysis of performance risk and resilience risk are becoming cumbersome.


c) Lack of auditor’s performance: To minimize chance of unfair presentation of financial statement, lending officers have to rely much on audited financial statements. But in practical situation, the auditing firms too sometimes help the business concerns in providing false and fictitious statements. With few exceptions, audited balance sheets and profit & loss statements follow client instructions.

d) Unwillingness to disclose information: Generally, competitors do not have the habit of disclosing their business information. They always tend to maintain secrecy for their business interest. But LRA calls for submission of competitor’s performance.

e) Non-cooperation between different banks: LRA techniques require information regarding exposure to other banks. Though credit bureau report has an important role in this regard, the non-cooperation between different banks is a real difficulty.

f) Lack of experienced assessor: In most cases, the value of security actually realized is less than what a bank estimates. Sometimes, security also loses value before it is realized. Due to lack of experienced, qualified and reliable surveyor institutions to assess value of security along with its quality and market demand are very scarce in Bangladesh.

g) Lack of skill and knowledge of the personnel: Human resources are the most valuable resources of an organization. The trained and skilled manpower is an important factor for effective and efficient handling of CRM. Preparing CRM requires special skill and knowledge in risk management and knowledge in national and international economy is also required for successful analysis of CRM. But most of the banks are facing the acute problem regarding the skilled and knowledgeable personnel who know the modern tools and techniques of analyzing the financial statements, trend and dynamism of market.

h) Insufficient independence: Banks and financial institutions are not apart from any type of political influence or pressure group in respect of loans and advances.

i) Besides, independence of credit analysis/ risk management section at branch level is not fully ensured.

j) Economic factors: The various components at the macro and micro level of our national economy are not yet stable enough. As a result, the analysis of demand, supply, sales forecast etc. do not contribute enough to the Lending Risk Analysis (LRA).

k) Legal environment: Analysis of security risk often does not become accurate because of lengthy and complicated legal proceedings. However, the law of the country does not make auditing compulsory for all the enterprises accept the joint stock company. In such a situation analysis of lending risk on the basis of un-audited financial statements may become useless.

l) Biasness and Irregularities: In the LRA manual the degree of risks of the borrowers are measured subjectively and as such the question of biasness and irregularities of the concerned personnel cannot be avoided. If they do not apply their judgment ethically, the result of LRA may be misleading.

m) Absence of discounting technique: Term loan is sanctioned for longer period of time for meeting the cost of assets of a capital nature for the establishment, renovation, expansion and modernization of industrial units and also for financing permanent current assets. In this method, each year’s cash inflow is discounted at the required rate of return and these present values are cumulated until they equal or exceed the amount invested. In its simplest terms, this is value today of the money received in future, is not present in this technique, but is very much required for medium and long term loan.

n) Political Pressure: Also at times it is seen that there are many loans which are not sanctioned at the branch level because they are considered too risky or not worthy enough but because of political pressure, they are sanctioned at the Head Office which creates an unnecessary and extra pressure on the Overall financial position of the Bank






PROFILES OF THE RESPONDENTS

Job position of the employee :
The top level people make the decision of all the Bank. They review the activities periodically and adjust all the activities by considering the liquidity and profitability of the Bank. The junior level employees are Management Trainee Officer (MTO) and they take proper training to cope themselves with the Bank environment. The middle level employees are people between top level and junior level. They gain experience about banking and have proper knowledge about Credit Risk Management(CRM).

Educational level :
Educational level is most important in Banking. In the content of my study, the educational level of respondent is most important for Credit Risk Management(CRM). Most of the employees of BASIC Bank LTD. , Dilkusha Branch is post graduate, the other(30% )people are honors degree.

Experience :
Experience plays an important role for any professionals. For proper risk management, job oriented experience is must. In BASIC Bank LTD, Dilkusha Branch 20%have less than 3 years experience, 10 %have 4 to 6 years experience, 30 % have 6 to 9 years experience and 40 % have more than 9 years experience.

Credit Policy :
A “Credit Policy” includes all rules relating to advances made by banks to borrowers. This includes :
a) Types of credit extended by bank
b) Judging the credit-worthiness of borrowers,
c) Types of securities accepted by bank.

Different Forms of Loan :
Bank credits may take any one of the following forms :
a) Short-Term Loans
b) Secured Overdraft
c) Cash Credit
d) Demand Loan
e) LIM (Loan against Imported Merchandises)

Short-Term Loans :
Short-Term Loans are the loan amount sanctioned by the bank for less than one year. Most of these loans are commercial credit.

Secured Overdraft :
In case of advances sanctioned by way of overdrafts, the customer is sanctioned a limit upto which he can overdraw his current account within a stipulated period. In cases where the customer cannot offer any kind of security except his personal security the facility is termed as a “clean Overdraft” . Where the customer offers a security acceptable to the bank, the loan is known as “secured overdraft.”

Cash Credit :
Cash Credit refers to the issue of credits to respectable and trustworthy persons against the guarantee of a third party or parties. The cash credit is a credit specially granted by the banker in favour of a customer, but instead of the customer having to take up whole amount as a demand loan, he can either draw or repay, in whole or in part, the amount advanced at anytime to suit his own convenience.

Demand Loans :
Demand loans normally take the forms of secured loans. Demand loans are granted against gold ornaments, guaranties of scheduled banks, and merchandise.

LIM :
Loan against the security of merchandise imported through the bank may be allowed either on pledge or hypothecation of the goods, retaining a stated margin on their landed cost, depending on their categories and credit restrictions imposed by the Central Bank. Preference is always given to pledge of the goods so that the bank may have the physical control over the goods.

Conversion of Short-Term loans into Long-Term loans :
Bank-executives mentioned more than half a dozen of reason in support of conversion of short-term loan into long-term loan. 40 % support conversion of short-term loan into long-term loan. As commercial banks are working in current and demand deposit it will not wise for them to invest too much on long term basis. Moreover, this conversion of short term loan is a passive long term investment which is not at all desirable.

Statements and Documents required by Bank at the time of granting loans :
At the time of allowing loans, executives relating to the borrowers’ business to judge their credit worthiness. For this bank executives should ask the borrowers to submit some documents. It is of interest to have a list of documents which are used by bank executives at the time of granting loans.
It is clear from the bank executives at time of granting loans use different types of statements and documents from different groups of borrowers. The most important factor influencing the use is the relationship between “ownership and management”. In case of corporation and public limited companies, where ownership is separated from management, bank executives use mostly-
a) Articles of association
b) Memorandum of association
c) Balance sheet
d) Income statement
e) Feasibility Reports

But in case of individuals; sole trader ship and partnership where management is not separated from ownership executives give preference to –
a) Partnership Deed
b) Title Deeds
c) Income Tax Certificate
d) Feasibility Reports and
e) Balance Sheet & Profit & Loss Account.

Profitability and Liquidity Of BASIC Bank LTD.
The basic principles of lending may be summarized as-
I. Safety
II. Liquidity
III. Diversification
IV. Profitability
V. Suitability, and
VI. The Integrity and Reliability of the Borrower.

The study of borrower involves the study of the three “C’s” of the party. They refer to his character, capacity and capital.
Safety first is the guiding principle of a good banker. As a banker is doing business on depositors’ money, he must take care for its safe investment. For a banker, “Liquidity” and “Profitability” are two just opposite principles. Liquidity refers to repayment on demand or at short notice. Naturally, if a banker goes for more liquid investments of funds, then the banker will not be able to charge high profits which is possible in case of fixed investments. Investments must be done in a broad-based basis. It is too risky to invest in one or two outlets. A banker must adjust his policies with the situations prevailing in the country. Last principle is the “integrity and reliability of the borrower.” To avoid bad dept, it is the basic factor before any loan proposal can be considered. The success of banking business depends upon the ability of the banker to study borrowers.


Recovery Pattern of Loans and Advances :
Loans are approved and disbursed through commercial and industrial credit division of the Bank. These department should need to get approval from industrial and credit division of Head Office. Before analyzing the recovery performance of the bank under study the meaning of the following terms should be specific to us.

Disbursement :
Highest outstanding balance on any date during the reporting period minus outstanding balance at the end of the preceding period.
Demand for recovery :
Overdue at the end of the reporting period plus recovery during the reporting period.
Recovery :
Highest outstanding balance on any date during the reporting period minus outstanding balance at the end of the recovery period.
Outstanding :
Outstanding figures in the ledger at the end of the reporting period.
Overdue :
Demand for recovery minus Recovery.

BASIC BANK LTD
DILKUSHA BRANCH
SMA position as on 31.07.2008
(Amount in Lac)
Name of Account Total Exposure Total Outstanding Total value of securities
Prime Jute Industries 1103.83 377.53 192.19
Bari Pipes & Filters 225.79 31.82 156.35
Bari Agro Products 23.66 23.66 100.25
Safa Basic Chemicals 333.37 234.36 302.04
Taj Bricks 133.43 28.22 200.79
Prime Plus 1674.17 748.24 1154.74
Total 3494.25 1443.83 2106.32





BASIC BANK LTD
DILKUSHA BRANCH
Classification position as on 31.07.2008
(Amount in Lac)
Name of Account Total Exposure Total Outstanding Total Recovery Value of Securities
Shikha Chemical 7.82 7.82 - 1.20
Star Maak Ltd. 49.85 49.85 - Personnel Guarantee
Green Ad 233.47 233.47 50 180
Sharp Printing Press 44.92 44.92 - 180
Pata Printing 6.01 6.01 - 180
Aircon Marketing 189.89 189.89 65 199.60
Ocean Trading Co. 68.99 68.99 - 234.50
Update 11.07 11.07 - 36
Bushra Associates 222.89 222.89 25 227
Kh.Mehmood Alam Nadim 61.17 61.17 15 250
UBEC 34.04 34.04 - Personal Guarantee
Total 930.12 930.12 155.00 1488.30

Total outstanding of the Branch as on 31.07.08 was Tk.930.12 lac and they recover only Tk.155.00 lac. They have already filed legal notice to the subject clients and sought Head Office approval for filling suit under AAA-2003.
They have already auctioned the mortgaged property of the subject client under AAA-2003 and recover some of the amount. It is also mentionable that in the auctioned of mortgaged property of Ocean Trading Co. no bidder participated in the subject bid. In a meeting held with the Head Office, some of the clients have committed to adjust the liability by 2008. Farther meeting is required with Head Office management to resolve the matter amicably.

The Nature of Default :

Normally the term ‘default’ refers to thenon-payment of loans and advances within prescribed limit. Those who subsequently default are termed as ‘defaulter’.
Defaulter of BASIC Bank is classified in the following ways:

1.Substandard Defaulter :
A loan is classified as sub-standard(SS) if any one of the following condition is met:
a. If an advance or any portion of advance or interest thereon If overdue for one or more but less than 3 years, then the advance is classified as SS.
b. For an advance of a continuing nature, even if the liaons is not overdue much as one year, but the limit stands overdrawn by 50% for a period of 45 continuous days preceding the reference date for the classification, then it is classified as SS.


c. If the loan has been renewed or rescheduled at least 3 times but is overdue and any of the required payments for the required period have not been made when they fall due, then the loan is classified as substandard.
d. Qualitative criteria based on judgment.


BASIC BANK LTD.
DILKUSHA BRANCH
Sub-Standard Defaulter as on 31.07.2008
(Amount in Lac)
Total Outstanding Total Recovery
Total Security Value
788.14 152.72 1608.68

2. Doubtful Defaulter :

A loan is classified as Doubtful(DF) if any one of the following condition is met :

a. The advance or any portion of the advance or interest thereon remains overdue for 3 years or more but less than 5 years.
b. A loan classified as substandard as per clause 1(b) above has remained SS for @ years or more.
c. A loan action has been initiated.
d. Qualitative criteria based on Judgment.

BASIC BANK LTD
DILKUSHA BRANCH
Special Mentioned Account as on 31.07.2008
(Amount in Lac)
Total Exposure Total Outstanding Total Security Value
3494.25 1443.83 2106.32


3. Bad Defaulter :

A loan is classified as bad if any one of the following condition is met :

a. The advance or any portion of any advance or interest the thereon remains overdue for 5 years or more.
b. A loan classified as DF as per clause 2(b) above has remained doubtful(DF) for 2 years or more.
c. A loan classified as DF as per clause 2© above has remained doubtful for 2 years or more.
d. If legal action has been initiated and court decision has been obtained within 5 years or initiation of action then the loan is classified as bad.
e. Qualitative criteria based on judgment.


BASIC BANK LTD
DILKUSHA BRANCH
Bad Loans as on 31.07.2008

Total Exposure Total Outstanding Total Recovery Total Security Value
930.12 930.12 155.00 1488.30


Collection of Credit Information regarding Borrowers :

Credit-worthiness of borrowers can be found out from the statements and documents submitted by them. The judgment in this area depends upon the ratio analysis like “Liquidity” , “Activity” , “Solvency” and “Profitability” ratios. Borrowers if they like, can manipulate this ratios through window-dressing of financial statements. Moreover, borrowers’ “credit-behavior” cannot be known from financial statements. Thus bank executives should try to collect information relating to intending borrowers from businessmen who have business relation with them.

Source of Credit Information :
The following are the important sources of credit information :

a) Loan Application Form
b) The Accounts of the party with the bank
c) Financial Statements
d) Reports about actions and decrees in Government gazette
e) Information from other banks
f) Personal Interview
g) The Mercantile Agencies (Working in U.K., U.S.A. and Canada)
h) Handbooks on Trade
i) Market Reports (Reports from other businessmen in the locality)


Different Types of Securities provided by Borrowers :

In case of secured advance, bank normally want something as security. This security may take either the form of personal security or “collateral Security”. “The term personal security is applied to an undertaking by the customer or by some third person on his behalf, as a security for the due repayment of an overdraft, and may take the properly stamped promissory note. The term collateral security applies to all types of security other than the personal security.” These two types of securities may be wanted at a time.

 Primary Security :
 Hypothecation of Machineries
 Hypothecation of Stock-in-Trade
 Hypothecation of Goods to be procured, medicine, vaccine etc.

 Secondary Security :
 Registered mortgage of land with building
 Pledge of FDR
 Assignment of bills receivables
 Registered mortgage of factory building
 Registered mortgage of residential apartment
 Registered power of attorney in favor of BASIC Bank LTD to sell the mortgage property with consent of court or owner of the property.

 Guarantee :
 Guarantee from Bangladesh Bank under Credit Guarantee Scheme for small investors.
 Guarantee from co-businessmen.
 Personnel Guarantee
 Personal Guarantee



APPENDIX – A

Table 1: Showing the position held by 10 employees.

Position No. of Employees %
Top Level 5 50
Middle Level 3 30
Junior Level 2 20
Other 0 0
Total 10 100


Table 2 : Showing the level of education of 10 employees.

Level of Education No. of Employees %
Under Graduate 0 0
Graduate 1 10
Honors 3 30
Post Graduate 6 60
Total 10 100


Table 3 : Showing the length of experience in Banking of employees.

Length of Experience No. of Employees %
Less than 3 years 2 20
4 years to 6 years 1 10
6 years to 9 years 3 30
More than 9 years 4 40
Total 10 100


Table 4 : Showing the forms of loans used by borrowers.

Forms of Loans No. of Employees %
Short-Term Loans 5 50
Secured Overdraft 8 80
Cash Credit 10 100
Demand Loan 0 0
LIM(Loan against Imported Merchandises) 2 20
* % might not add to 100 owing to multiple responses.

Table 5 : Showing the distribution of executives using different types of statements and documents at the time of granting loans in case of different forms of business.


Table 6 : Showing the variety of different statements for different types of loans.

Weight No. of Employee %
Equal weight for all types of loans 4 40
Different weight for different types of loan 6 60
Total 10 100


Table 7 : Showing the attitude of employees towards structure of bank for monitoring and control over risks being taken.

Attitudes No. of Employees %
Highly Agree 2 20
Agree 5 50
Neither Agree nor Disagree 1 10
Disagree 2 20
Highly Disagree 0 0
Total 10 100
Table 8 : Showing the factor that management consider to set out credit limits.

Factor to consider No. of Employee %
Client segment 6 60
Economic sector 2 20
Geographical location 2 20
Total 10 100


Table 9 : Showing the document ensure by credit administration before credit disbursement.

Document No. of employee %
Proper approval 4 40
Completeness of documents 5 50
Receipt of Collateral 6 60
Approval of exception 2 20
* might not add to 100 owing to multiple responses.

Table 10 : Showing the most important information about borrowers.

Information No. of Employee %
Borrowers business skill and condition 3 30
Borrowers source of repayment 5 50
Latest data for follow-up 2 20
Total 10 100


Table 11 : Showing the attitudes of employees towards insurance of collaterals.

Attitudes No. of Employee %
Highly Agree 2 20
Agree 3 30
Neutral 0 0
Disagree 4 40
Highly Disagree 1 10
Total 10 100

Table 12 : Showing the necessity of on-site inspection/survey of the collaterals held as security.

Attitude No. of Employee %
Yes 9 90
No 1 10
Total 10 100


Table 13 : Showing the executives practice of collecting credit information about borrowers.

Opinion Respondent %
From borrowers 3 30
From fellow businessmen 2 20
From CIB (Credit Information Bureau) 5 50
Total 10 100


Table 14 : Showing the respondents opinion regarding revaluation of fixed assets.

Opinion Respondent %
In favor of Revaluation 6 60
Against Revaluation 4 40
Total 10 100





Recommendation

After going through a thorough and in-depth analysis and view on the Credit Risk Management scenario of BASIC Bank, it must be said that compared to other Banks in their sector, they are ahead of others in terms of discipline and good management skills too. But even then, there are certain areas or criteria that can be improved for better and efficient functioning of the BASIC Bank. They are listed out as below:

• The awareness that Credit Risk Management is an essential part of modern Commercial Banking should be developed from the top level of the concerned authorities of the Government itself to make the overall Banking Sector more efficient.
• More training should be conducted for the bankers to improve their analytical ability and professional standard regarding the use of CRM and other tools and techniques in selecting the borrowers and analyzing the loan proposals.
• Proper loan classification and provisioning system ensures operational soundness, better asset quality and sound liquidity of the Bank. And it is possible by introducing proper technique to manage the core risk on assets as well as overall operation of the bank.
• Proper implementation of Money Loan Court Act-2003 shall help to reduce classified loan and to manage the present loan portfolio in order.
• Bangladesh Bank should introduce On-line CIB database system among all FIs & NBFIs that all concerned can get available information regarding loan status of the borrower for taking immediate decision.
• All banks and financial institutions should undertake coordinated efforts to urge the Government for taking initiatives to improve the standard of professional services provided by the chartered accountants under the authority of the Institute of Chartered Accountants of Bangladesh (ICAB) in order to facilitate accurate disclosure of facts and figures of the various business entities.
• Top management of the Bank should assign importance to CRM as a principal tool for credit screening of the loan cases where the application of LRA is mandatory. Further CRM should be effectively used as a monitoring devices or early warning signal system at the post disbursement stage in order to locate the deviations and update the risk status.
• For the purpose of realistic assessment of security risk the legal system in terms of realization of security should be reviewed so that the period of realization could be properly estimated.
• In the changing scenario, BASIC Bank should have their own credit vision and accordingly restructure their credit management policies relating to screening, monitoring and recovery. The adoption of CRM as a screening tool should be the integral part of an overall credit management strategy to be followed by the BASIC Bank.


• Credit department of the BASIC Bank should conduct real field studies to analyze the lending risk before final decision is taken. Documents and paper works in LRA should be minimized and market study for lending should gradually be introduced.
• An effective and efficient loan pricing technique on the basis of cost of Fund should be introduced for sound landing.
• Also for better n fast assessing the credit worthiness of the client, there can be different types of Credit Risk Assessing Firms set up who will grade or assess the client and give their report to the concerned banks.
• Government should take steps to grow awareness to the normal public that people who doesn’t repay loan should be treated as enemy of the countries and they should be separated from the society.
• A popular model to evaluate credit risk based on market data is the RAROC model. RAROC –Risk-Adjusted Return on Capital – was pioneered by Bankers Trust and now has been adopted by virtually all the large bank in the United States, Germany, United Kingdom and other European countries, although with some proprietary differences between them. The essential idea behind RAROC is that rather evaluating the actual or promised annual cash flow on a loan (such as net interest and fees), the lending officer balances expected loan income against the loan’s risk. Thus, rather han dividing loan income by assets, it is divided by some measure of asset (loan) risk:






RAROC =



• There should be different departments for approval process, credit administration, credit monitoring and credit recovery. By doing so, the degree of biasness should be reduced and more accurate assessing will be done

If the above mentioned recommendations are followed carefully, the given objectives of the report can be accomplished. The percentage of non performing loan should be reduced and then can slowly divert towards cash flow based lending and also further improve the overall position of the banks.

Conclusion


Credit Risk Management (CRM) reflects the degree of risk of repayment involved with the borrower. Obviously, CRM is not the ready prescription on all ills but it would be helpful to the BASIC Bank to go one step forward of their mission to minimize lending risk. This practice of CRM should be made compulsory for all commercial banks and specialized banks like Bangladesh Shilpa Bank (BSB), Bangladesh Krishi Bank (BKB) and Nationalized Banks also and the special form should be developed for the agricultural lending. Since banks and financial institutions play an important role in the progress of national economy, it is the duty of our bankers to manage their loan portfolio very carefully. Our national economy has been suffering enough for the misuse of banks’ money in loans and advance and wastage of public assets. This is the high time to manage the public assets effectively and contribute to the nation’s progress.





















Department of Marketing
Faculty of Business studies
University of Dhaka



A study on “Credit Risk Management” of BASIC Bank Limited: A Study on BASIC Bank LTD, Dilkusha Branch.
[CONFIDENTIAL: To be used for academic purpose only]









1. Would you please mention the position held by you? (Tick one)
a. Top level
b. Middle level
c. Junior level
d. Other
2. What is the last degree acquired by you? (Tick one)
a. Graduate
b. Post Graduate
c. Honors
d. Under Graduate
3. Would you please mention the length of your experience in Banking? (Tick one)
a. Less than 3 years
b. 4 years to 6 years
c. 6 years to 9 years
d. More than 9 years
4. What are the different forms of loans you are allowing to your customers? (use tick marks)
a. Short-Term Loans
b. Secured overdraft
c. Cash credit
d. Demand loan
e. LIM (Loan against imported merchandises)
5. Have you experienced the conversion of short-term loans into long-term loans? (Tick one)
a. Yes b. No
6.What types of statements or documents are required to be submitted by the borrowers at the time of borrowing from your bank? (use tick marks)
Types of statements/Documents Nature of Business
Sole Trader ship Partnership Corporation Private LTD. Co. Public LTD. Co.
Icome statement (P&L A/C)
a. Balance sheet
b. Feasibility Reports
c. Cash flow statements
d. Income Tax Certificate
e. Title deeds
f. Memorandum of Association
g. Articles of Association
h. Partnership Deed
i. Others (Please specify)
7. Do you give different weights to different statements/documents for different types of loans? (Tick one)
a.Yes b. No
9.Do you give any special importance to either “profitability” or “Liquidity” in case of different types of loans? (Tick one)
a.Yes b. No
10.Does the management recognize all the risks inherent in the bank’s? (Tick one)
a.Yes b. No
11.Is the risk management strategy flexible enough to deal swiftly and adequately, with all risks? (Tick one)
a.Yes b. No
12.Do you feel the structure of the Bank strengthen monitoring and control over risks being taken? (Tick one)

Highly agree Agree Neither agree Disagree Highly
nor Disagree Disagree
13.Does the credit committee periodically review the credit risk strategy and credit policy? (Tick one)
a.Yes b. No
14.Has the management given due consideration to the target market while deriding credit risk policy? (Tick one)
a. Yes b. No
15.Please mention the most and least preferred credit extension beyond prescribed limits? (Tick one)
a.Most preferred b. Least preferred
16. How the management set out credit limits? (Tick one)
a. According to client segments
b. According to economic sectors
c. According to geographical locations.
17.Is the number of bad loans on the part highly rated clients nil or few? (Tick one)
a. Nil b. Few
18. Does the bank have credit risk management committee to oversee credit risk management function? (Tick one)
a. Yes b. No
19. Does the bank have pre-disbursement audit system for the credit facilities? (Tick one)
a. Yes b. No
20. Are the terms and conditions stipulated in the loan agreement meticulously observed? (Tick one)
a. Most observed b. Least observed
21. Has the bank compiled manuals for credit evaluation and approval? (Tick one)
a. Yes b. No
22. Is there any early warning system to alert the management about the loans going to be bad? (Tick one)
a. Yes b. No
23.Before credit disbursement what of the following are ensure by credit administration? (use tick marks)
a. Proper approval
b. Completeness of documents
c. Receipt of collateral
d. Approval of exceptions
24. Does the bank perform its own independent analysis and review in case of syndicate loans? (Tick one)
a. Yes b. No
26. Does the bank check the credibility of financial statements of borrowers? (Tick one)
a. Yes b. No
27. Would you please mention what is the most important information about borrowers? (Tick one)
a. Borrowers business skills and condition
b. Borrowers source of repayment
c. Latest data for follow-up
28. Does the bank obtain information about the borrowers from credit information bureau (CIB)? (Tick one)
a. Yes b. No
29. Do you think collaterals need to be insured against different risks? (Tick one)

Highly agree Agree Neutral Disagree Highly Disagree

30. Does the bank periodically carry out on-site inspection/survey of the collaterals held as security? (Tick one)
a. Yes b. No


31.What types of internal Audit the bank have? (Tick one)
a. Independent from all operational functions
b. Dependent on all operational functions
32. Do you have any suggestion for proper risk management?
(Please mention)……………………………………….






Bibliography and References
A. Books :

1. ROBERT BARTELS, “Credit Management”, Yhe Ronald Press Company(USA) 1967, P# 03
2. Bourke P. & Shanmugham B, “ An Introduction to Bank Lending”, Addision- Wesley Publishing Company, Sydney, 1992.
3. THOMAS D. SIMSON “Money, Banking and Economic Analysis”, Third Edition, The prentice-hall, Inc. (USA) P. # 167.
4. CHRISTOPHE J. GODLEWSK, “Credit Risk Management of Banks”, University Library of Munich, Germany, December-2005.
5. FREDERIC S. MISHKIN, “The Economics of money, Banking and Financial Markets”, Seventh Edition, 2004.
6. NARESH K. MALHOTRA, “Marketing Research”, Fifth Edition, 2008.

B. Research Reports :
1. S.N. GHOSH (1981)- “Banks customer Service and Credit Policy”, Bureau of Business Research, University of Dhaka. P.# 14
2. HABIBULLAH AND S.N. GHOSH(1986)- “Risk Management”,
Bureau of Business Research, University of Dhaka.
3. M.MASUD RAHMAN(1996)- “Role of Financial Institutions Toward Ensuring Environmentally Sound Development Through Lending Behavior” Bureau of Business Research, University of Dhaka.
4. MD.MAKSUDUR RAHMAN SARKER(1996)- “Credit Management of Commercial Banks : A comparative study of public and private Banks” Bureau of Business Research, University of Dhaka. P.#57
5. MD. MIZANUR RAHMAN(1997)- “TV viewing Habits of the House Wives : A Study on Dhaka City” Bureau of Business Research, University of Dhaka.
6. KAZI MOHAMMAD SARWAR JAHAN(October 19, 2003)- “Risk Management by commercial Banks: Mending the cracks”.


C. Journals :

1. Weekly 2000
2. Bangladesh Brand Forum
3. Sound Credit Risk Management and the use of Internal Credit Risk Rating at Large Banking Organization, Board of Governors of the Federal Reserve System, Washington, D.C, September 21, 1998.
4. Establishment of an Independent Credit Risk Management Unit, Asian Development Bank, July-2005.
5. “Risk Management Failures Major cause of crisis” IMF, Washington, April-10, 2008.
6. “Sovereign Credit Risk Management”, African Development Bank.


D. Other References :

1. Annual reports of BASIC Bank LTD.
2. Documentation of loans and advance: importance, precaution in execution and safe-keeping. Prepared by: M.H. Chowdhury, Former Deputy General Manager,BASIC Bank Limited, Dilkusha Branch.
3. BANGLADESH BANK : “Managing Core Risk in Banking- Industry Best Practices”.
4. BANGLADESH BANK : “Internal Control & Compliance”.
5. BANGLADESH BANK : “Asset-Liability Management(ALM)”.
6. The Financial Express.

E. Online Sources :
1. www.domaintools.com/basicbankbd.com.
2. www.bankersacademy.com.
3. en.wikipedia.org.
4. www.report.com/articles/28/1/Private-Bank-Credit-Risk Management.
5. www.crislbd.org/articles. Risk_management.
6. www.afdb.org.
7. http://dsp-psd.pwsc.gc.ca.
8. www.sheshunoff.com.