Chapter 1

Introduction

1
1.1. Introduction of the report

It has long been recognized that credit is an important tool in increasing productivity and thereby
increasing the income of borrower. Adequate flow of credit can remove the financial constraints
on the borrower. There has been phenomenal growth in the flow of credit after liberation due to
government’s desire to increase productivity in the country. All the credit institutions were glared
up through a dynamic credit performance Analysis to disburse both short term and long term
credit. As a result, the flow of credit has increased significantly. As the volume of the loans has
increased substantially over the years, the percentage of loan default increased gradually. This
study is kind of analyzing the Loan Management of Sonali Bank. It is providing different types of
Loan Secured Overdraft (SOD), Loan (general), House Building Loan (Staff), Term Loan
(Industrial), Term Loan (Others), Staff Loan against Provident Fund, Consumer Credit Scheme
(CCS), LTR and Cash Credit (CC) Trade Finance.

1.2. Origin of the report

Bachelor of Business Administration (BBA) course requires 12 weeks attachment with an

organization followed by a report assigned by the supervisor in the organization and endorsed by
the faculty advisor. I took the opportunity to do my internship in Sonali Bank Limited (SBL). My
faculty supervisor Zinat Sultana, Lecturer of Department of Finance, Bangladesh University of
Business and Technology (BUBT), also approved the topic and authorized me to prepare this
report as part of the fulfillment of internship requirement.

1.3. Background of the report

Learning becomes perfect when it is associated with theory and practice. For that organizational
attachment is required. After completion of BBA program of faculty of Business Studies,
Department of Finance, Bangladesh University of Business of Technology (BUBT), three months
organizational attachment is must. So the preparation and submission of this report is partial
requirement for the completion of Bachelor of Business Administration (BBA). This report is
outcome of the three months long internship program conducted in Standard Bank Limited at
Principal Branch. This report is design on the topic “Credit Management of Sonali Bank
Limited”. Banking institution helps to economic growth of a country by their banking service.

I chose a bank to complete my internship program that helped me to learn practical knowledge
and gather experience about financial task.

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1.4. Scope of the study

Scope means area of operations or field of the study. The scope of this report was extended to the
Credit Management of Sonali Bank Limited. The study encompasses the followings:

 An overview of Sonali Bank Limited.

 Credit activities of Sonali Bank Limited.
 Credit performance of Sonali Bank Limited.

1.5. Objectives of the report:

The broad objective of this report is to analyze the Credit Management of Sonali Bank Limited.

1.5.1 Specific Objectives:

The specific objectives of the report are-

 To assess the lending & credit recovery procedure of Sonali Bank Limited.
 To analyze the trend of credit disbursement over the years of Sonali Bank Limited.
 To assess the sector wise & division wise concentration of credit of Sonali Bank
Limited.
 To evaluate the classified loans & advances of Sonali Bank Limited over the years.
 To compare the credit performance of Sonali Bank Limited with fourth generation banks.

1.6. Methodology of the study

1.6.1. Research Design

The study analysis of credit management of SBL is descriptive in nature which is mainly based on
secondary data. The study focuses on loan disbursement activities & recovery performance of
SBL.

1.6.2. Data Used in the Study

In order to prepare the report secondary data are mainly used. The secondary data are collected
from annual report of SBL, annual report of Bangladesh Bank, website and book. The data are
collected for the period of 5 years from 2011 to 2015. The use of primary data is very limited in
the report. Some information has been collected from observation and discussion with officials of
Sonali Bank Limited.

3
1.6.3. Data Analysis & Reporting Teacher

The study, Loan disbursement and recovery performance of Sonali Bank Limited, is conducted
using trend analysis and comparative analysis. Computer Software-Microsoft Word, Microsoft
Excel and Microsoft Power Point are also used for analyzing and reporting purpose of collected
data.

1.7. Limitations of the report:

Despite all out co-ordination from the bank officials, I faced some limitations. The main problem
I faced in preparing the paper was the inadequacy and lack of availability of required data. This
report is an overall view of the performance analysis of credit policy of Sonali Bank Ltd. But
there is some limitation for preparing this report. These barriers, which hinder my work, are as
follows:
 Time Limitation: It was one of the main problems that have affected covering all aspect
of the study.
 Lack of Secondary Information: Secondary source of information was not sufficient for
the completion of the report.
 Limitation of the Scope: Much confidential information was not disclosed by respective
personnel of the branch.
 Restriction: There is very hard restriction to provide their information out of the office in
Sonali Bank Limited.

With all of this limitation I tried my best to make this report as best as possible. So it is my
request to consider these limitations while reading and justifying any part of my study.

4
 Chapter 2
An Overview of Sonali Bank
Limited

2.1 A Brief Overview of Sonali bank Limited

After the independence of the country Sonali Bank emerged as the largest and leading
Nationalized Commercial Bank by proclamation of the Banks' Nationalization Order 1972
(Presidential Order-26) liquidating the then National Bank of Pakistan, Premier Bank and Bank of
Bahawalpur. As a fully state owned institution, the bank had been discharging its nation-building
responsibilities by undertaking government entrusted different socio-economic schemes as well as
5
money market activities of its own volition, covering all spheres of the economy. The bank has
been converted to a Public Limited Company with 100% ownership of the government and started
functioning as Sonali Bank Limited from November 15, 2007 taking over all assets, liabilities and
business of Sonali Bank. After corporatization, the management of the bank has been given
required autonomy to make the bank competitive & to run its business effectively.

Sonali Bank Limited is governed by a Board of Directors consisting of 11 (Eleven) members. The
Bank is headed by the CEO & Managing Director, who is a well-known Banker and a reputed
professional. The corporate head quarter of the bank is located at Motijheel, Dhaka, Bangladesh,
the main commercial center of the capital.

2.2 Corporate Profile of Sonali Bank Limited

Name of the company Sonali Bank Limited

Chairman Mr. Md. Ashraful Moqbul

CEO & Managing Director Mr. Md. Obayed Ullah Al Masud

Date of Incorporation 03 June, 2007

Head office 35-42, 44 Motijheel Commercial Area, Dhaka, Bangladesh

Number of Branches 1209
Authorized capital 60,000 millions

Paid up capital 38,300 millions

Phone +88-02-9550426-31, 33, 34.+88-02-9552924

Fax 88-02-956141 o.88-02-9552007

E-mail itd@sonalibank.com.bd

Official Website http://www.sonalibank.com.bd/

(Source- Official Sonali Bank Website)

2.3 Role of Sonali bank Limited in the National Economy

Economy and Banking industry go together and are inseparable. Sonali Bank Limited has been
playing an important role in the economic development of the country. As many as 26,085 people
are in the employment of the Bank as on December 31, 2008. Besides, Sonali Bank Limited has
generated employments for hundreds of people in the projects and industries established under
finance. The Bank has been financing the trade and commerce of the country since inception of
the Bank in 1997. We have handled a volume of countries exports and imports. The deposits our
Bank mobilized through the outlets of branches helped in the formation of capital in the country.
Our lending to borrower reached Tk. 23163.18 million as on June 30, 2009. It has contributed to
6
the industrialization and improvement of trade and commerce of the country which ultimately
accelerated economic growth and national welfare through multiplying effect. We have collected
VAT and tax on interest/ profit earning of customers of the Bank. For relief and rehabilitation of
natural calamity-hit people of the country in 2007 the bank has donated a denoted amount of
money.

2.4 Foreign Remittance

To develop national infrastructure and economy of Bangladesh Sonali Bank Limited has been
playing dominant role to bring hard earning of Bangladesh expatriates working/living abroad
through banking channels. For this purpose, Sonali Bank Limited has established a bank named
Sonali Bank (U.K) and an exchange house named Sonali Exchange Company Inc. (SECI), USA.
Our Bank has also established drawing arrangement with various exchange house / banks in
Middle East, Canada and Malaysia. Under this arrangement, remitters can easily send their hard
earning to the beneficiaries in Bangladesh through 1209 Sonali Bank Limited Branches across the
country. They can remit their money through Demand Drafts (DD), Telegraphic Transfers (TTs),
SWIFT and / or Computerized Payment Instructions (PC to PC via dial up modem) on Sonali
Bank Limited selective branches.

2.5 Investment Banking:

Central Accounts & Fund Management Division at Head Office maintains Investment Portfolio of
the Bank. With a view to implementing Government policies & decisions and accelerating the
growth of the capital market of the country, surplus funds of Sonali Bank are utilized in the
following areas:

A) Short Term:

1. Call loans: An overnight investment to other Banks & Financial Institutions.

7
 2. Treasury Bills: Investment made to the Government through Treasury bills.

B) Long Term:

1. Government/ Public Bonds: Sonali Bank Limited purchases bonds issued by the Govt.
of Bangladesh and other Public Bodies.

2. Shares/ Equity Participation: Sonali Bank Limited participate in the IPO and extend
bridge finance to the equity of public limited companies, institutions and public bodies.

Debentures: Sonali Bank Limited purchases debentures issued by the public bodies and financial
institutions under Government.

2.6 Vision

Socially committed leading banking institution with global presence.

2.7 Mission

Dedicated to extend a whole range of quality products that support divergent needs of people
aiming at enriching their lives, creating value for the stakeholders and contributing towards socio-
economic development of the country.

2.8 Organogram

Board of Directors

CEO & Managing Director

Deputy Managing Director

at Head Office
8
 General Managers General Managers General Managers
At Head Office and Local Office At Field GM Office

Deputy General Managers Deputy General Managers

At Divisional Head of Head Office At Field Office (GMO, PO and Corp. Br.)

Assistant General Managers Assistant General Managers

At Head Office At Field Office

Other Executives Other Executives

SPO, PO, SO, Officer at Head Office
SPO, PO, SO, Officer at Field Office

Other Staffs Other Staffs

At Head Office
At Field Office

2.9 Core Strengths

 Transparent and Quick Decision Making.

 Efficient Team of Performer.
 Satisfied Customers.
 Internal Control.
 Skilled Risk Management.
 Diversification.

2.10 Core Competencies

 Knowledge
 Experience & Expertise.
9
  Customer Orientation/ Focus.
 Transparency.
 Determination.
 Zeal for Improvement.
 Reliability.

2.11 Ethical Principles

Sonali Bank Limited believes that it will become a leading bank in the government sector. They
believe that their aims and objectives can only be realized fully and sustained overtime by
faithfulness to ethics that cannot always be built into sets of rules and regulations. In this belief in
ethics that motivates the bank in its dealings with customer, regulators and employees .

2.12 Commitment to Clients

Sonali Bank Limited has trying to concentrate on modern banking through continuous using
modern technology. We also trying to help more to customer by providing various savings
schemes like as EDS, MES and DBS etc. Our commitments to the clients are the following:

 Provide service with high degree of professionalism & continuous use of modern
technology through proper use of young generation officers.
 Create long-term relationship based on mutual trust with customers.
 Share customer’s values & beliefs.
 Provide product and service at competitive pricing.
 Ensure safety and security of customer’s valuables in trust with us.

2.13 Corporate Social Responsibility (CSR)

Sonali Bank Limited (SBL) has been rendering various services for attaining greater social goals
and objectives. For this process, we aim to contribute towords sustainable development of the
society as a whole and fulfillment of corporate social obligation in particular. To reinforce CSR
activities, the bank has undertaken fresh initiatives in line with Bangladesh Bank guidelines in the
areas of social services, empowerment of women and poor, sports & culture, banking for the
disadvantaged groups, disaster & relief activities.

Social Services:

10
SBL has been rendering social services through distribution of various allowances to the Freedom
Fighters, Widows, Old–age citizens, vulnerable groups, Disabled peoples etc. as per laid down
criteria of the government. Besides, the bank has been disbursing pension of govt. employees,
monthly salary of teachers, and govt. and semi govt. officials without charges.

Empowerment of women and poor:

SBL has been providing wholesale credit facilities to different micro credit institution who are in
turn lending amongst the women and poor people in different Income Generating Activities
(IGA).

Sports and Cultural Activities:

Sonali Bank Limited has a tradition of patronizing and sponsoring sports and cultural activities at
home and abroad. In 2007, Sonali Bank Limited became Champion in the Victory Day Hockey
Tournament and Runners’ up in the Office Hockey League, Dhaka.

Banking service for the Disadvantaged Groups:

With 1209 branches all over Bangladesh, SBL could reach the banking services to the
disadvantaged groups with the aim to encourage them in mobilization of their hard earned savings
and creation for them investment opportunities.

Employee welfare:

SBL offers annual stipends and scholarships to the brilliant children of the employees of the bank.

Disaster Relief:

SBL always stands beside the helpless people at the times of natural calamities and extends
helping hands to the sufferers. SBL donated Tk. 10.5 million to help the victims of cyclone
‘Sidor’ to the relief fund of the Chief Advisor. Sonali Bank Limited has collected funds from
Bangladeshis residing abroad and remitted over Tk. 150 million at free of charge through Sonali
Exchange Company (SECI), USA and Sonali Bank (UK) Limited. SBL has also donated to
establish a Cancer Hospital in Dhaka. It has helped a number of Foundations and Organizations
for raising funds through lottery and other means.

Future Plan:
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SBL will continue to patronize sports and culture at home and abroad. Arrangements will
be made for rendering better social services to the community apart from core banking
activities. Specific action plans will be initiated to expand CSR programs in line with the
guidelines of Bangladesh Bank and Securities & Exchange Commission (SEC).

2.14 Loans and Advances:

The main focus of Sonali Bank credit line/program is financing business, Trade and industrial
activities through an effective delivery system. Sonali Bank offers credit to almost all sectors of
commercial activities having productive purpose. The loan portfolio of the bank encompasses a
wide range of credit programs covering about 200 items. Credit is also offered to 15(fifteen)
thrust sectors, as earmarked by the govt. at a reduced interest rate to develop frontier industries.
Credit facilities are manufactures, corporate bodies, etc. Following the guidelines of Bangladesh
Bank, credit facilities have been extended to productive and priority sectors. The outstanding loan

12
& advance of the bank is Tk 346346 million on 31 st December, 2015. Loan & Advances for the
year 2011 to 2015 are given below:

Year Total Loans & advances (Tk. in million)

2011 345991
2012 378147
2013 343451
2014 337554
2015 346346
Table 2.4: Total Loans & Advances of Sonali Bank on 31th December, 2015.

2.15 Investment:

To earn profit, the Bank prudently invests its fund to different sectors. The investment portfolio of
the Bank is comprised of treasury bill, other bonds, Debenture, share etc. The Bank earns a
handsome profit from this investment portfolio. Year wise investment of the Bank is Shown in the
following table:

Year Total Investments (Tk. in millions)

2011 134076
2012 148910
2013 272256
2014 322726
2015 407955

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 Table 2.5: Total Investment of Sonali Bank on 31th December 2015.

Sonali Bank Limited emphasizes highest priority on SME financing for eliminating poverty by increasing
SME loan flow at economically underdeveloped area and peoples. Setting up priority base SME credit Policy
for Women and underprivileged entrepreneurs, Sonali bank working for the improvement of their socio-
economic condition.

2.16 Lending Policy:

1) Loan Limit:
BDT 50,000/-(Fifty thousand) to BDT 5,00,00,000/-(Five Cores)
Criteria of Borrower:
2)
 Bangladeshi Citizen minimum 18 (eighteen) years old;
 Loan defaulter, Bank-rupt, Mentally wreaked person cannot apply for loan;

 Women Entrepreneurs highly encourage to apply.

Nature of Project/Enterprise:
3)
 Proprietorship Enterprise;

14
  Registered Partnership Enterprise;

 Private Limited Company;

 Joint Venture Company except Public Limited Company.

Period:
4)
 Project/Term Loan: Maximum 5 years (project period may flexible according to Project
nature)

 Working capital/Trading Loan : 1 year, renewable at the end of period.

Loan: Equity Ratio:
6)
 Project/Term Loan: 70:30
 Working capital/Trading Loan : 75:25

Repayment procedure:
7)
 Project/Term Loan: monthly/quarterly basis repayable within loan period.

 Working capital/Trading Loan: Daily basis or fully repayment within loan period.

2.17 Net Profit:

Year Profit(in million)

2011 9957
2012 (24959)
2013 3580
2014 6055
2015 587

Table2.6: Net profit of Sonali Bank on 31st December 2015

2.18 Branch Information

15
 Particulars
a) Location Mirpur Section 1
b) Name of the branch Manager Syed Quamruzzaman (AGM)
c) Number of staff 46
d) Total Deposit 2,19,00,00,000
e) Total Loan and Advances 23,00,00,000
f) Total Expenditure 36,16,00,000
g) Total Income 37,13,00,000
h) Profit 9,60,00,000

Source: Statement of Affairs of SBL Mirpur Section 1 Branch as on 31/12/2016

Chapter 3
16
 Theoretical Aspects

3.1 Definition of Credit

Their money to borrowers from whom it can expect high degree of stable return. They
must have policy to invest their wealth in shares and stocks those possess high de
A bank loan is an extension of credit, to a consumer or business, in the form of borrowed funds
which has to be paid back with interest.
Credit generally refers to the ability of a person or organization to borrow money, as well as the
arrangements that are made for repaying the loan and the terms of the repayment schedule.

3.2 Definition of Credit Risk

Credit risk refers to the risk that a borrower may not repay a loan and that the lender may lose the
principal of the loan or the interest associated with it. Credit risk arises because borrowers expect
to use future cash flows to pay current debts; it's almost never possible to ensure that borrowers
will definitely have the funds to repay their debts. Interest payments from the borrower or issuer
of a debt obligation are a lender's or investor's reward for assuming credit risk.

3.3 Credit Management

17
Credit management is the process for controlling and collecting payments from customers. This is
the function within a bank or company to control credit policies that will improve revenues and
reduce financial risks. A credit management is a person employed by an organization to manage
the credit department and make decisions concerning credit limits, acceptable levels of risk and
terms of payment to their customers. In companies, the role of Credit manager is variable in its
scope.

3.4 Credit Management Objectives & Importance

Objectives of Credit Management:

The objectives of the credit management are-
 To maximize the performing asset and the minimization of the non-performing asset as
well as ensuring the optimal point of loan and advance and their efficient management.
 To allocate the fund in diverse field and to minimize the risk and maximization the return
on the invested fund. Continuous supervision, monitoring and follow-up are highly
required for ensuring the timely repayment and minimizing the default.
The overall success in credit management depends on the banks credit policy, portfolio of credit,
monitoring, supervision and follow-up of the loan and advance. Therefore, while analyzing the
credit policy, credit procedure, how they are managing credit and quality of credit portfolio. To
implement procedures which ensure the collection of debt, meeting of service targets and the
prevention of escalation in arrear debt. To facilitate financial assistance and basic services for the
community’s poor Customer Care, Credit Control, Debt Collection and Indigent Policy and
provide incentives for prompt payment as well as ensuring limited risk levels by means of
effective managements tools.

Importance of Credit Management:

 Maintaining good cash flow
 Reduce the risk of bad debt
 Manage the company’s assets
 Minimize the cost of granting credit
 Promote good customer relations and prompt payment
All these contribute to maintaining healthy bank’s profits.

3.5 Process of Credit Management

The guideline for credit management must be organized into the following sections:

18
 1. Lending guidelines
2. Credit assessment and Risk Grading
3. Credit Approval
4. Credit Administration
5. Credit Monitoring
6. Credit Recovery

3.6 Classification of Loan

Unclassified Loan:
There are loans that do not have greater than normal risk and do not possess the characteristics of
classified loans. The borrower has the apparent ability to satisfy his obligations in full and
therefore no loss in ultimate collection is anticipated.
 Classified Loan:
Any bank loan that is in danger of default. Classified loans have unpaid interest and
principal outstanding, and it is unclear whether the bank will be able to recoup the loan
proceeds from the borrower. Banks usually categorize such loans as adversely classified
assets on their books. Classified loans have failed to meet acceptable credit standards
according to bank examiners.

There are three types of classified loans. They are discussing below:

1. Substandard Loan: A classification for a loan that is expected to result in a loss

of interest for the lender, because the borrower is unlikely to be able to
completely pay back the loan for some reason. A lender will occasionally agree to
a substandard loan even through it means some revenue will be lost, because
typically no principal is lost on a substandard loan, only some interest.
2. Doubtful Loan: A loan where full repayment is questionable and uncertain.
Degree of repayment of loans in question range from a complete loss to certain
loss unless corrective actions are taken. Doubtful loans are usually non-
performing loans on which interest is overdue and full collection of principal is
uncertain.

19
 3. Bad/Loss Debt: Bad debt is usually a product of the debtor going into
bankruptcy or where the additional cost of pursuing the debt is more than the
amount the creditor could collect. This debt once considered to be bad, will be
3.7 Loan classification and provision
written off by system
the company as an expense.

3.7 Loan classification and provision system

Length of overdue Status of classification Rate of provision

Less than 3 months Unclassified 1%-5%

Loan overdue for 6 months or beyond but

Sub-standard 5%-20%
less than 9 months

Loan overdue for 6 months or beyond but

Doubtful 5%-50%
less than 9 months

Loan overdue for 9 months or beyond Bad-loss 100%

3.8 Principles of Sound Lending

There are few general principles of good lending which every banker follows when appraising an

3 advance proposal. These general principles of good lending are explained below:

.  Safety: Safety means the assurance of repayment of distributed loans. Bank is in business to
make money but safety should never be sacrificed for profitability, to ensure the safety of
loan, the borrower should be chosen carefully.
 Liquidity: Liquidity means the availability of bank funds on short notice. The banks should
always ensure that there is enough liquidity and cash available with them to be able to repay
the depositors as and when the demand arises. Banks are generally there for short term funds
and they lend funds for short term projects or working capital related purposes .
 Profitability: Banking is a business aiming at earning a good profit. Banks need to ensure
they use their funds properly to earn profit so that they can repay the depositors, pay salaries

20
 to their employees and pay dividends to their shareholders. Banks should not grant loans to
unsound customers even when they are ready to pay high amount of interest rates.
 Purpose: The main reason of lending loans is to use the money for productive purpose. Bank
advances for the safety of its money and guarantee of recovery of loan. Therefore before
approving a loan, bank ensures the purpose of lending and its use in productive way. Banks
do not grant loans for each and every purpose – they ensure the safety and liquidity of their
landings for productive use only.
 Diversification: It follows the famous saying “Do not keep all eggs in one basket”. A bank
should be very careful while lending loans because if the bank lends to a non-creditworthy
customer, it will affect the survival of the bank. To diversify the lending risk they should lend
loans to customers from different sectors such as agriculture, housing, educational, etc. The
lending should be spread across the various industries, various form of investment, various
form of trades in different geographical location.
 Security: Security of safety means the borrower is able to repay the loan and pay the interest
in regular interval of time without default. Security serves as a safety value for an unexpected
emergency. The repayment of loan and advances depends on the nature of security, financial
standing of borrower and his ability to payback. It also depends on characteristic of the
borrower. Ba gree of price stability.
 National Interest: Banking industry has significant role to play in the economic development
of a country. The bank would lend if the purpose of the advances can contribute more to the
overall economic development of the country.

3.9 Credit Risk Grading (CRG)

3.9 Credit
Risk Grading
The Credit Risk Grading (CRG) is a collective definition based on the pre-specified scale and
reflects the underlying credit-risk for a given exposure. At the pre-sanction stage, credit grading
helps the sanctioning authority to decide whether to lend or not to lend. This framework is
essential to avoid the limitations associated with a simplistic and broad classification of loans into
“good” or a “bad” category. It provides detailed and formalized credit evaluation process for risk
identification, measurement, monitoring and control, risk acceptance criteria, credit approval
authority, maintenance procedures and guidelines for portfolio management. It also helps a bank
to understand various dimensions of underlying risk involved in different credit transactions. No
proposal will be processed until Risk Grading is completed, submitted for approval and the result
is shown in proposal. It is the responsibility of the originating officer to ensure that analysis has
been carried out with authentic and reliable information

21
 3.10 Components of Credit Risk Grading (CRG)

3.10
Compone  Financial risk: The uncertainty of future incomes due to the company’s financing.
Financial risk management refers to the practices used by corporate finance managers
and accountants to limit and control uncertainty in the firm’s total portfolio. Financial
risk management aims to minimize the risk of loss from unexpected changes in the
prices of currencies, interest rates, commodities, and equities.
 Business/Industry risk: The risk related to the inability of the firm to hold its
competitive position and maintain stability and growth in earnings. It is generally
measured by the variability of the firm’s operating income over time.
 Management Risk: The risks associated with ineffective destructive or under-
performing management, which hurts shareholders and the company or fund being
managed.
 Security risk: Security risk mainly depends on the potential owners or other source.
There is some Security risks are given below:

1. Perishability,

2. Enforceability/Legal structure, and

3. Forced Sale Value.

 Relationship risk: Relationship risk mainly based on supplier and customer relation
to the entrepreneur. If the entrepreneur can make a good relation to the customer or
supplier he or she also gets the loan at a lower rate.

22
 3.11 Grades use in the Credit Risk Grading (CRG)
3
The proposed CRG scale for the banks consists of 8 categories with Short names and Number are
.
provided as follows:
Grading Short Name Number
Superior SUP 1
Good GD 2
Acceptable ACCEPT 3
Marginal/Watch list MG/WL 4
Special Mention SM 5
Sub Standard SS 6
Doubtful DF 7
Bad & Loss BL 8

23
Chapter 4
Loan Disbursement and Recovery
Process

24
4.1 Credit

The word credit comes from the Latin word “credo” meaning “I believe”. It is a lender’s trust in a
person’s or firms or company’s ability or potential ability and intention to repay. 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 the bank is deposit
extraction and credit extension. Managing credit operations is the crying need for any bank. The
objective of the credit management is to maximize the performing asset and the minimization of
the non-performing asset as well as ensuring the optimal point of loans and advances and their
efficient management.

4.2 Factors Related with Credit

 Risk
 Time
 Interest Rate
 Security or Collateral
 Operating Expense
 Legal Considerations
 Inflation
 Finance Charge

4.3 Importance of Credit

Credit plays a vital role in national economy in the following ways-

 It provides working capital for industrialization

 It helps to create employment opportunities
 Credit controls almost all kinds of production activities of the country
 It brings social equity
 Cash generation occurs for its successful performance
 Business cycle can run well only by the help of lending system
 Economic stabilization
 Raise standard of living
25
4.4 Credit Management

Credit management is a dynamic field where a certain standard of long-range planning is needed
to allocate the fund in diverse field and to minimize the risk and maximizing the return on the
invested fund. Continuous supervision, monitoring and follow-up are highly required for ensuring
the timely repayment and minimizing the default. Actually, the credit portfolio is not only
constituted the bank’s asset structure but also a vital factor of the bank’s success. The overall
success in credit management depends on the banks credit policy, portfolio of credit, monitoring,
supervision and follow-up of the loan and advance.

Therefore, while analyzing the credit management of TBL, it is required to analyze its credit
policy, credit procedure and quality of credit portfolio.

4.5 Credit Policy of SBL

One of the most important ways, a bank can make sure that its loans meet organizational and
regulatory standards and they are profitable. It is important to establish a loan policy. Such a
policy gives loan management a specific guideline in making individual loans decisions and in
shaping the bank’s overall loan portfolio. In Sonali bank Limited there is perhaps a credit policy
but is no credit written policy.

4.6 Modes of credit

Loan and advance have primarily been divided into major groups:

Continuous loan:

These are the advances having no fixed repayment schedule but have a date at which it is
renewable on satisfactory performance of the clients. Continuous loan mainly includes “Cash
credit both hypothecation and pledge” and “overdraft”.

Demand loan:

In opening letter of credit (L/C), the clients have to provide the full L/C amount in foreign
exchange to the bank. To purchase this foreign exchange, bank extends demand loan to the clients
at stipulated margin. No specific repayment date is fixed. However, as soon as the L/C documents
26
arrive, the bank requests the clients to adjust their loan and to retire the L/C documents. Demand
loans mainly include “payment against documents,” Loan against imported merchandise (LIM)”
and “Later of trust Receipt”.

Term loan:

These are the advances made by the bank with a fixed repayment schedule. Terms loans mainly
include “Consumer credit scheme”, “Lease finance”, “Hire purchase”, and “Staff loan”. The term
loans are defined as follows:

 Short- term loan ; Up to 12 months.

 Medium term loan : More than 12 months & up to 36 months.
 Long-term loan : More than 36 months.

4.7 Credit principles

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

 Credit advancement shall focus on the development and enhancement of customer

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

27
4.8 Principles of Sound Lending

It should be clearly understood that the criteria/principles are not inflexible laws & are given as
guidelines for protecting credit. In a practical competitive world, risk is defined, accepted and
credit is often granted even through a proposal does not strictly with some of the criteria described
below:

The basic lending criteria can be considered as eight main headings, as follows:

 Principle of Safety
 Principle of Liquidity
 Principle of purpose
 Character and ability of the borrower
 Principle of Security
 Principle of profitability
 Source of repayment
 Principle of National Interest

Each of the headings will now be discussed further in the following paragraph:

 Principle of Safety:

The First lending principle of sound lending is safety. The very existence of a bank depends upon
the safety of its advances. Safety should not be sacrificed for profitability. So utmost care should
be exercised to ensure that the funds go to the right type of borrower, are utilized in such a way
that they remain safe and repayment comes in the normal course.

 Principle of Liquidity :

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

 Principle of purpose:

28
The bank should not lend money for any purposes for which a borrower may be free from all risks
but if the funds borrower are employed for unproductive. Purpose like marriage ceremony,
pleasure trip etc or speculative activities, the repayment in the normal course will become
uncertain. Banks therefore discourage advances from boarding stocks and refuse advances for
speculative activities.

 Character and ability of the borrower:

The primary responsibility of the leading banker is “know your customer and his business”. While
considering the character and ability of a borrower, the following point must be kept in mind.

 Do know your customer already?

 Was he respectively introduced?
 If he was previously customer of another bank, has he come to Trust Bank Ltd. Try to see
previous bank statement?
 Have you made the account opening inquiries required by the bank?
 What are the business ownership?
 What is the customer’s background and financial track record?
 Customer’s honesty & integrity and personal stability?
 How has the customer managed his financial circumstances in the past?

The branch manager should have the answer of the above queries and should be to judge his
ability to use the credit facilities to his advantage. Advance should be granted only to those
borrowers in whom the branch manager has full confidence. Integrity of the borrower and his
ability to conduct business are of paramount importance and take precedence over the value of
securities offered.

 Principle of Security:

The security offered by a borrower for an advance is insurance to the banker. It serves as the
safety value for an unforeseen emergency. So another principle of sound lending is the security of
lending. The security accepted by a banker to cover a bank advance must be adequate, readily
marketable, easy to handle and free from any encumbrance.

 Principle of profitability:

29
Banking is essentially a business, which aims at earning of a good profit. The working funds of a
bank are collected mainly by means of deposit from the public and interest has to be paid on those
deposits. Banks have also to meet their establishment charges and other expenses. Interest earned
by a bank on its advance is the main source of its income. The different between the interest
received on advances and the interest paid on deposits constitute a major portion of the banker’s
income. Besides foreign exchange business is also highly remunerative. The bank will not enter
into a transaction unless a fair return form it is assured.

 Source of repayment:

After the branch manager has ensured that the credit will be a profitable propositioning for the
bank, he should then turn his attention to the cash flow situation of the borrower. The bank’s
credit can be classified into three main categories as follows:

 A very short-term advance will be liquidated by the funds received in the very near future,
such as advances against foreign or local bills or bridge functioning where evidence of
credit sanction from another financial institution is available.
 Provision for current assets; this type facility is needed for trading and or manufacturing
activities.
 Long-term loans, generally over 5 year; example of such facilities as investment in plant
and machinery, a farm or a shop, generally, a long term is repaid out profit generated by
the business.

 Principle of national interest :

The development of banking has reached a stage where a banker is required to identify his
business with national policies. Banking Industry has significant role to play in the economic
development of a country. So, the savings of the people, which are mobilized by banks, must be
distributed to those sectors, which require development in the country’s planning program.

4.9 Process of Loan Recovery in short:

30
 Recovery plan is one of the components of performance plan. It is a future intended
action in respect of recovery. In other words, it is a conscious and deliberate effort to
recover all current dues and overdue loans.

Days past Due Collection Action

1-14 Soft call requesting payment.

15-29 st
1 reminder letter

30-44 nd
2 reminder letter + Single visit

rd
3 reminder letter

 Group visit by team member

 Follow up over phone

45-59
 Letters to Guarantor, Employer, and Reference all
above effect follows.
 Call up loan

 Final reminder & Serve legal notice.

60-89
 Legal proceedings begin.

 Telephone calls/Legal proceedings continue.

 Collection effort continues by officer & agent

90 and above

4.10 The 6 C’s of Good and Bad Loan in credit management

31
The Branch manager of SBL try to judge the possible client based on some criteria. These criteria
are called the C’s of good and bad loans. These C’s are described below:

Character:

The outcome of analyzing the character is to have overall idea about the integrity, experience, and
business sense of the borrower. Two variables; Interaction/interview, and Market research are
used to analyze the character of the borrower.

1.Interaction/ interview: the indicators are:

 Prompt and consistent information supply, information given has not been found false
(Willingness to give information).
 CIB also reveals business character.
 Willingness to give owns stake/equity & collateral to cover.
 Tax payer.

2.Market Research:

 Information on business is verified.

 Dealing with supplier and or customer as supplier is also a kind of lender; the payment
character can also be verified.

Capital:

 For identifying the capital invested in the business can be disclosed using the following
indicators: Financial Statements
 Receivable, payable, statements to practically assess the business positions.Net worth
through financial statements or from declaration of Assets & Liability statement.

Capacity (Competence):

Capability of the borrower in running the business is highly emphasized in the time of selecting a
good borrower. As the management of the business is the sole authority to run the business that is
use the fund efficiently, effectively and profitability. The indicators help to identify the capacity of
the borrower.

 Entrepreneurship skills i.e. risk talking attitude shown by equity mobilization.

 Management competencies both marketing and products detail, ability to take decision.
 Resilience or shock absorption: connection, back up (if first time falls second lines come
to help
32
Collateral:

Make sure that there is a “second way out” of a credit, but do not allow that to drive the credit
decision.

Cash Flow: Cash flow is the vital factor that is used to identify whether the borrower will have
enough cash to repay the loan or advance. Cash keeps the liquidity to ensure repayment. The
relationship manager tries to identify the annual cash flow from the submitted statements.

Conditions: Understanding the business and economic conditions can and will change after the
loan is made.

Complacency: Do not rely on past history to continue. Stay alert to what can go wrong in any
loan.

Communication: Share credit objectives and credit decision making both vertically and laterally
within the bank.

Credit Query: The loans and advance department gets a form filled up by the party seeking a lot
of information.

Condition:

 Other loans and liabilities of the borrower.

 The creditors enough profit or assets he can pay the loan statement.

Control:

 Whether loans borrowed by the customers previously and how those earlier loans
were handled.
 Whether there is any loan default earlier.
 Whether legal action has ever taken against him for recovery of default loan.

4.11 Loan classification

Monitoring can be done through loan classification. Loan is mainly classified to understand that
which loan account are performing well (regularly interest payment, timely repayment, and timely

33
renewal etc.) and which are not. In classifying the loan and advance there are two classes in the
loan review practiced in SBL

They are as follows as the table.

 Unclassified: The loan account is performing satisfactory in the terms if its installment
and no overdue is occurred.
 Classified: The loan account is not performing satisfactory in the terms of installments
and overdue is occurred. These types of loan need close monitoring to stop the
deteriorating position.
 Substandard: The main criteria for a substandard advance are that despite these
technicalities or irregularities no loss is expected to be arise for the bank. These accounts
will require close supervision by management to ensure that he situation does not
deteriorate further.
 Doubtful: This classification contains where doubt exists on the fully recovery of the
loan or advance but cannot quantifiable at this stage.
Bad & Loss: A particular loan or advance fall in this class when it seems that this loan or advance
is not collectable or worthless even after all security has been exhausted.
In the following table the criteria to be fall in classified category are summarized:

4.12 General procedure of sanctioning loan:

The following procedure is applicable for giving advance to the customer. These are:

34
a) Party’s application
b) Filling form
c) Collecting CIB report From Bangladesh Banks
d) Processing loan proposal
e) Project appraisal
f) Head office approval
g) Sanction letter
h) Documentation
i) Disbursement

a) Party’s application:

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

B. Filling Form:

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

C. Collecting CIB Report from Bangladesh Bank:

After receiving the application for advance, Trust banks end a letter to Bangladesh Bank for
obtaining a report from there. This report is called CIB (Credit Information Bureau) report. Trust
bank generally seeks this report from the head office for all kinds of investment. The purpose of
this report is to being informed that whether the borrower has taken loan from any other Bank; if
‘yes’ then whether the party has any overdue amount or not.

D. Processing loan proposal:

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

35
Necessary Documents:

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

Necessary steps and documents:

1) Loan application from duly signed by the customer.

2) Acceptance of the term and conditions of sanction advice.
3) Trade license.
4) In case of Partnership Firm, copy of registered partnership deed duly certified as true
copy or a partnership deed on non-judicial stamp of taka-150 denomination duly
notarized.
5) In Case of Limited Company
a. Copy of memorandum and articles of association of the company including
certificate of incorporation duly certified by registered Joint stock Companies
(RJSC) and attested by the managing director and accompanied by an up- to –
date list of directors.
b. Copy of board resolution of the company for availing credit facilities and
authorizing managing director/chairman/director for execution of documents and
operation of the accounts.
c. An undertaking not to change the management of the company and the
memorandum and article of the company without prior permission.
d. Copy of last audited financial statement up to last 3 years.
e. Personal guarantee of the directors including the chairman and managing director.
f. Certificate of registration of amendment of charges over the fixed and floating
assets of the company duly issued by RJSC in case of repeat loan or change in
terms and conditions of sanction advice regarding loan amount and securities etc.
g. Certificate of registration of charges over the fixed and floating assets of the
company duly issued by RJSC.
6) Demand promissory notes.
7) Letter of hypothecation of stocks and goods.
8) Letter of hypothecation of books debt and receivable.
9) Letter of hypothecation of plant & machinery and personal letter and gurantee.

Required Doc’s for Retail (Individual) Loan:

 Photograph-2 Copies

36
  Passport/National ID/Driving License
 Visiting card/ Company ID
 Tin
 Trade License(for Businessman)
 LOI (For service holder)
 Utility Bill( Electricity/WASA/Gas)
 Bank statement-last 6 months
 Quotation (for Auto or HHD)
 Partnership Deed ( For partnership firm)
 Company memorandum
 Rental/lease/Title deed
 Certificate of professional degree
 Guarantor
 Spouse-photo with signature, Attested by applicant
 Eligible photo with signature, Attested by applicant ,visiting card, TIN
 Sanction letter with related Bank statement (If Enjoying any Loan)

Required Doc’s for SME:

 Total stock
 Total sale for 1 year
 Guarantor
 Photograph
 Visiting card
 TIN
 Trade license

E. Project Appraisal:

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

 To achieve organizational goals.

 To recommend if the project is not designed properly
 To justify the soundness of an investment.
 To ensure repayment of Bank finance.

Techniques of Project Appraisal:

37
An appraisal is a systematic exercise to establish that the proposed project is a viable preposition.
Appraising officer checks the various information submitted by the promoter in first information
sheet, application for investment and Investment proposal.

Sonali bank considers the following aspects in appraising a proposal.

 Technical viability
 Commercial viability
 Financial viability

The Head office (HO) mainly checks the technical, Commercial and financial viability of the
project. For others Ho is dependent on branch’s information. However , when the investment
size is big, then the HO verifies the authenticity of information physically.

F. Head Office Approval:

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

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

G. Sanction letter:

 After getting the approval of the HO, the branch issues sanction letter to the borrower.
A sanction letter contains:
 Name of borrower,
 Facility allowed
 Purpose,
 Rate of interest,
 Period of the Investment and mode of adjustment,
 Security and Other terms and condition.
38
H. Documentation:

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

 Joint Promissory Note,

 Letter of arrangement,
 Letter of Disbursement,
 Letter of Installment,
 Letter of Continuity,
 Trust Receipt.
 Counter Guarantee,
 Stock Report,
 Letter of Lien,
 Status Report,
 Letter of Hypothecation,
 Letter of Guarantee,
 Documents Relating to Mortgage,

I .Disbursement:

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

4.13 Programs for Loan Recovery:

When Sonali Bank sanctions loans and advances to its customers, they clearly state the repayment
pattern in the loan agreement. But some credit holders do not pay their credit in due period. The
nationalized and private sector commercial banks have to face this sort problems. This situation
is, especially severe in Sonali Bank. To overcome the problem of overdue loan, the bank need
take particular loan recovery program.

4.14 Recovery patterns of Loan and advances:

Generally Sonali Bank Ltd. Sanctions loans and advances to every sector of an economy. Before
going into details of recovery performance, we have to be familiar with some terms used in
recovery performance:

39
  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 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,

4.15 Problems in Loan Recovery:

There are many reasons for which the loan recovery of the bank is very defective. In most cases,
problems may be raised from sanctioning procedures of loan, investigation of the project and
investigation of the loans etc. that is, the problem in loan recovery proves the outcomes of the
default process in loan disbursement. The main reasons of poor loan recovery are categorized in
four board types as follow:

A Problems created by economic environment:

The following problems arise from the effect of economic environment:

1. Changing in the management pattern: Changing of management patterns may delay the
recovery of mature loan.
2. Changing in industrial patterns: The nationalized banks sometimes sanction loan to the
losing concern for future improvement of the respective sector, but in most cases they fail
to achieve progress.
3. Operation of open market economy: In our country, mainly industries become sick and
also close their business on account of emerging of open market economy. The cost of the
production is high and the quality of goods is not of required of standard. As a result, they
become the losing concerns and the amount of bad loan increases.

B. Problems created by the Pressure Group:

The following problems are arisen by the government:

1. External pressure: Sonali Bank Ltd. has also faced many problems in the loan recovery
process as a part of continuous pressure from various interested groups.
2. Loan to the pressure group organization: Sonali Bank Ltd. Is bound to sanction loan to
government organization, though these are losing concern. For this reason, banks faced
problems in loan recovery.

40
 3. Legal problems: Existing rules and regulations are insufficient to cover the legal aspects of
loan recovery. As a result, defaulters can get release easily from all charges against them.
4. Frequent changes in government policies concerning recovery of loan,

C. Problems created by the bank:

The following problems are created by the banks:

1. Lack of analysis of business risk: Before lending, Sonali Bank Ltd. Does not properly
analyze the business risk of the borrowers and the bank cannot forecast whether the
business will succeed or fail. If it fails to run well, the loan becomes classified.
2. Lack of proper valuation of security or mortgage property: In most cases, bank fails to
determine the value of security against the loan. As a result, if the loan becomes classified,
the bank cannot recover its loan through the sale of mortgage.

D. Other general causes of poor loan recovery:

Other general problem of poor loan recovery are given below,

1. Lack evaluation of technical and economic feasibility of the program.

2. Delay in disbursement of credit.
3. Credit is not allowed to actual entrepreneurs.
4. Lack of proper supervision.
5. Illiteracy of borrowers.
6. Negative attitude of borrowers to repay the loan.
7. Sometimes local borrowers are found to be so much compelled to grant them loan without
proper study due to some unexpected reasons. Since these borrowers are capable of getting
loan by exercising their influence, they can also escape the repayment liability.
8. Sometimes borrowers invest their money outside the country. Many borrowers transfer
loan money to abroad where they deposited this money in their own account or spent some
other purpose.

There are some specific reasons for loan recovery problems faced continuously by Sonali Bank
Ltd. They are as:

 Loans are given under fictitious names and enterprise

 Loans are given without sufficient securities
 Approval of the loans in excess of the branch manager’s power
 Improper monitoring and supervision of credit
41
  Political misuse if loan programs operated by the public sector banks
 Lack of timely action against willful defaulter
4.15 Strategies for Recovery:

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

 Persuasive
 Voluntarily
 Legally

Persuasive Recovery:

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

Voluntarily:

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

a. Building Task Force

b. Arranging seminar
c. Loan Rescheduling policy
d. Waiver of Interest Rate

Legal Recovery:

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

42
Chapter 5
Analysis

43
5.1 Total Deposit of SBL

Year 2011 2012 2013 2014 2015

Total Deposits (tk. in 533192 599294 685895 778043 866012
millions)
Growth Rate of Deposit 11.52% 12.40% 14.45% 13.43% 11.30%

Table:5.1: Trend of Deposit

Graphical Presentation:

Figure-5.1: Total Deposit

Figure 5.2: Growth Rate of Deposit

Interpretation: The above graph shows an upward trend in total deposit mobilization of SBL
from 2011 to 2015. The total deposit was Tk. 533192 million in 2011 but in 2015 its increases to

44
Tk. 866012 million. However, the Growth rate of deposit was 14.45% in 2013 which was the
highest and it decreased to 11.30% in 2015 which was the lowest.

5.2: Year -wise Loans and Advances

Year 2011 2012 2013 2014 2015

Loans and Advances (in million) 345991 378147 343451 337554 346346
Growth Rate of Loans and Advances 20.93% 9.23% -9.18% -1.72% 2.60%

Table:5.2: Trend of Loans and Advances for last five years.

Graphical Presentation:

Figure5.3: Loans & Advances.

Figure5.4: Growth Rate of Loans & Advances.

Interpretation: In 2011 the total loans and advances was Tk. 3,45,991 million but it was
increased to Tk. 3,78,147 million in 2012. After that, the Loans & Advances decreased from
3,78,147 million in 2012 to 3,37,554 million in 2014. But it increased slightly to 3,46,343 million
in 2015. However, the Growth rate of deposit was -9.18 % in 2013 which was the lowest and it
increased to 2.60% in 2015.
45
5.3: Credit to Deposit Ratio:

Credit to deposit ratio measures the portion of deposit is in the form of loans and
advances.

Credit to Deposit = (Total Credit / Total Deposit)* 100

Year 2011 2012 2013 2014 2015

Total Credit (in million) 345991 378147 343451 337554 346346
Total Deposits (in million) 533192 599294 685895 778043 866012
Credit to Deposit Ratio 64.90% 63.10% 50.07% 43.38% 39.99%

Table:5.3: Year-wise Credit to Deposit Ratio

Figure 5.5: Credit to Deposit Ratio

Interpretation: From the figure, we saw that the credit to deposit ratio was decreasing year by
year. The credit to deposit ratio was 64.90% in 2011 and it decreased to 63.10% in 2012, which
eventually decreased to 50.07% in 2013. After that it kept decreasing and at last it reached to
39.99% in 2015.

46
5.4 Geographical Location-wise disbursement of loans and advances in 2015:

Particulars Percentage (%)

Dhaka Division 63.68%

Chittagong Division 6.40%

Comilla Division 4.07%

Faridpur Division 4.13%

Khulna Division 1.08%

Mymensingh Division 5.84%

Rajshahi Division 6.75%

Rangpur Division 8.05%

Total 100.00%

Graphical Presentation:

Figure 5.6: Geographical Location – wise disbursement of loans and advances in -2015

Interpretation: The above diagram shows that in 2015, Sonali Bank Limited distributed a large
portion of credit in Dhaka Division. SBL distributed 64% in Dhaka Division and 6% in
Chittagong and Mymensingh division. It has been seen that SBL disbursed 4% credit in both

47
Comilla and Faridpur Division. In both Rangpur and Rajshahi Division, SBL disbursed 8% and
7% respectively and only 1% in Khulna Division.

5.5 Sector-wise Loans and advances:

Particulars In percentage

Rural Credit 11%

Micro credit 3%

Industrial Credit 18%

Agro-based Industrial credit 8%

International Trade 22%

SME Finance 7%

General Advance & Others 30%

Total 100%
Table 5.5: Distribution of loan in Dhaka and Chittagong division

Graphical Presentation:

48
 Figure-5.7: Sector wise Loan & Advances in-2015

Interpretation: The above pie chart shows that Sonali Bank Limited uses large portion of fund in
General Advance & Other which is 31% of total credit. The SBL distributed 18/% in industrial
Trade. The SBL provided loan in agro-based industrial credit and Rural credit respectively 8%
and 11% in 2015.

5.6 Year wise Classified Loan as a percentage of Total Loans:

Classified Loan Total Loan Classified Loan as a percentage of

Year
(BDT Million) (BDT Million) Total Loans
2011 61,588 3,45,991 17.80%
2012 1,25,975 3,78,147 33.31%
2013 1,03,769 3,43,451 30.21%
2014 86,437 3,37,554 25.61%
2015 86,850 3,46,346 25%
Table 5.6: Year wise Classified Loan as a percentage of Total Loans
Graphical Presentation:

Figure 5.8: Year wise Classified Loan as a percentage of Total Loans

Interpretation: From the above graph, in 2011, it was 17.80% of total loan. After that it was
increasing and at last it reached to 33.31% of total loan in 2012. After that it was decreasing and

49
 became 25% of total loan in 2015. From this we can say that, from 2012, the bank is trying it’s
best to manage classified loans and has been able to reduce classified loans from 33.31% in 2012
to 25% in 2015.

5.7 Category wise Classified Loan as a % of Total Classified Loan (for 2014-2015):

Types of Classified 2014 2015

Loans and BDT in % of Total BDT in % of Total
Advances Millions classified Loan Millions classified Loan
Sub-standard 6025.51 6.97% 8963.7 10.32%
Doubtful 11361.25 13.14% 4580.5 5.27%
Bad/Loss 69049.88 79.89% 73305.5 84.41%
Table 5.7: Category wise Loan Classified Loan as a percentage of Total Classified Loan
Graphical Presentation:

Figure 5.9: Category wise Loan Classified Loan as a percentage of Total Classified Loan

Interpretation:

50
From the above table we saw that, most of the classified loan was in the bad/loss category. In
2014, sub-standard loan was 6.97% of total classified loan which increased to 10.32% by 2015.
Also in 2014, Doubtful loan was 13.14% of total loan which also decreased to 5.27% by 2015. So
we saw that the bank is effectively managing their doubtful and sub-standard loans. But the
percentage of bad loan increased from 79.89% in 2014 to 84.41% in 2015.

5.8 Provisions kept against classified loan

Year 2011 2012 2013 2014 2015

Provision kept against classified 37,568 73,675 70,055 52,393 39,652

loan (Taka in million)
Table 5.8: Provision Kept against classified loan

Graphical Presentation:

Figure 5.10: Provision kept against classified loan

Interpretation:
The above graph shows that provision for against classified loan was fluctuating year by year. In
2011 it was 37568 million and it increased to 73675 million in 2012. After that it kept decreasing
and at last it reached 39652 million in 2015.
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5.9 Recovery Rate

Classified Loan Total Loan

Year Recovery rate
(BDT Million) (BDT Million)
2011 61,588 3,45,991 82%
2012 1,25,975 3,78,147 67%
2013 1,03,769 3,43,451 70%
2014 86,437 3,37,554 74%
2015 86,850 3,46,346 75%

Table 5.9: Recovery Rate (%)

Graphical Presentation:

Figure 5.11: Recovery Rate (%)

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Interpretation:
The above graph shows that; the recovery rate was 82% which was highest in 2011. In 2012, the
recovery rate was lowest. After 2012, the recovery rate increased gradually from 67% to 75% in
2015.

5.10 Income from Investment

Year 2011 2012 2013 2014 2015

Income from 7,562 10,842 15,536 23,136 27,400
Investment (tk. In
millions)

Table 5.10: Income from Investment

Graphical Presentation:

Figure 5.12: Income from Investment

Interpretation:
The above graph shows that, in 2011 income from investment was 7562 millions. After that it
started to increase and reached to 27400 millions in 2015.

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Chapter 6
Findings, Recommendations and Conclusion

54
6.1 Major Findings:

 Although Total Deposit of SBL was increased from 533192 million in 2011 to 866012
million in 2015, but growth rate of deposit was fluctuating over the years. In 2013, the
growth rate of deposit was 14.45% which was the highest and in 2015 the growth rate
decreased to 11.30%.

 There was a fluctuating trend in loan and advances of Sonali Bank Limited over the years.

 The credit to deposit ratio of Sonali Bank Limited was decreasing over the years.

 SBL concentrated more on Dhaka and Chittagong division to provide loan and advances.

 The Sonali Bank Ltd distributed the highest amount of loan in General Advance & Other
Sector which was 31%. SBL provided least amount of loan in Micro credit sector which was
3% in 2015.

 Classified loan as a percentage of total loans was fluctuated over the years. The highest
classified loan in 2012 which was 33.31%. After that, it decreased from 33.31% in 2012 to
25% in 2015.

 Recovery rate of SBL was fluctuating over the years. The recovery rate was 82% which was
highest in 2011. In 2012, the recovery rate was lowest. After 2012, the recovery rate
increased gradually from 67% to 75% in 2015.

 Income from Investment of SBL increased over the years. In 2011 income from investment
was 7562 million. After that it started to increase and reached 27400 million in 2015.

55
6.2 Recommendations:

The failure of commendable banks occurs mainly due to bad loans, which occurs due to
inefficient management of the loans and advances portfolio. Therefore, any bank must be
extremely cautious about its lending portfolio and credit policy. In the light of the above findings,
following recommendations are proposed:

 As the growth rate of Deposit of SBL was fluctuating over the years. So in order to increase
the growth rate, the Bank should provide better quality services and introduces the new
deposit scheme.

 The growth rate of credit decreased significantly from 2012 to 2013. But it increased slightly
in 2015. In order to increase growth rate, the bank should be more concerned about
disbursing more credit to eligible borrowers.

 Sonali Bank Limited provides most of its loan to Dhaka and Chittagong division. It should
diversify more credit in other divisions too.

 It has been observed that Sonali Bank Limited was focusing more General Advance & Other
Sector. To minimize the credit risk, SBL should focus on every other sectors while providing
loan, such as rural credit.

 To maintain the declining trend of classified loans, Bank made continuous communication
with the client and properly scrutinize the documents of the borrower before disbursing any
loan.

 In the classified loan, the portion bad or loss increased from 2014 to 2015. So Bank should
take necessary steps to lower the rate of bad loans to decrease the overall rate of classified
loans. To decrease bad loans, the bank must observe whether every aspect of formalities
maintained or not. It should monitor the borrower regularly.

6.3 Conclusion:

56
The bank is currently doing average. By analyzing its performance, it is observed that, the
potential growth of this bank might be accelerated through effective implications of competitive
strategies. It couldn’t perform well in all the sectors specially, managing the growth of Deposit.
But it can hedge poor performance of one sector by some other sectors by its wide range of
offering.

The Bank has been able to create a decent loan portfolio. However, the bad loans and sub-
standard loans are increasing for the lack of monitoring and other internal causes. The bank is
trying to increase its loan quality by accelerating its recovery policy. The Bank can concentrate on
loan sector where default risk is low and investment is profitable. Bank has to take steps
necessary to maintain and improve their credit performance and to boost their profit margin.

The Bank’s current number of loan schemes are not enough. In order to increase loan
disbursement with its current deposit, the bank must increase the number of its loan scheme.

However, the bank is quite sincere in their approach to managing the consumer credit though
there are rooms for improvement. They have to be more cautious in the record; they follow an in-
depth procedure in assessing the credit by using the credit risk grading techniques, which provides
them a solid ground in the time of any settlement. From the discussion in this report, it has
become clear that credit management is a complex and ongoing process and therefore financial
institutions must take a serious approach in addressing these issues. They have to be up to date in
complying with all the required procedures and must employ competent people who have the
ability to deal with these complex matters. Utmost importance should be given to environment
and obviously for efficient and effective credit management process.

6.4 Bibliography

57
Lawrence, J. G. (1997). Principles of Managerial Finance, 13th Edition. New York:
Longman Publishing Group.

Sonali Bank Annual Report (2011-2015)

Bangladesh Bank Annual Report (2015)

http://www.sonalibank.com.bd/profile.php

http://www.sonalibank.com.bd/overview.php

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Appendix

59