Southest Bank

CHAPTER ONE
Introduction
Credit Risk Management Policies & Procedures of Southeast Bank Limited 1

1.1 Rationale of the Study
This report is based on the Credit Risk Management Process of Southeast Bank Limited.
Internship program is the pre-requisite for the graduation in BBA. Classroom discussion alone
cannot make a student perfect in handling the real business situation; therefore, it is an
opportunity for the students to know about the real life situation through this program. A report
has to be built for the university and organization requirement. The topic of the report is “Credit
Risk ManagementPolicies and procedures of Southeast Bank Limited”. The main purpose of the
report becomes very clear from the topic of the report. The report discusses about the different
credit facilities, approval process, monitoring and performance. The purpose of this study is to
find and analyze the Credit facilities, approval, monitoring collection and recovery process of
Southeast Bank Limited. It will also include the performance of bank in recent years. Find out
different credit facilities that Southeast Bank is providing for their customers. The main objective
of conducting this project is to show upgrade information to analyze the credit system of
Southeast Bank more conveniently.It will also cover the product and services of retail banking,
corporate banking and SME banking of the bank. This project will show us the implementation
of financial theories. It also provides the opportunity for better understanding the performance of
the credit function of Southeast Bank Limited.
1.2 Objective of the Study
Broad Objective:
The primary objective of this report is to fulfill the requirement of BBA program. This
contains nine credit hours for internship and to apply the theoretical knowledge gained
from the coursework of the BBA program in a specific field.
Specific objective:
 To understand and analyze the credit policy of Southeast Bank Limited.
 To evaluate the existing credit appraisal techniques of Southeast Bank Limited.
 To study the operational efficiency of Southeast Bank Limited.
 To suggest the ways and means for improvement in policy and techniques
 To relate the theoretical leanings with the real life situation

 1.3 Methodologyhe study Methodology of the study
The study requires various types of information - past and present policies, procedures and
methods of Credit Management. Both primary and secondary data available have been used
in preparing this report.
Primary Data sources:
Practical banking work.

Personal discussion with the officers and executives of Southeast Bank Limited.
Personal interview with the customers.
Secondary Data sources:
Annual Report, Publications, Training materials of Southeast Bank
Limited.
Periodical statements of the Bank, Brochures, Booklets etc.
Office circular.
And carefully developed, disguised queries, trend and growth rate analysis, ratio analysis,
graphical presentation such as pie chart, bar, graphs have been used, Raw data collected
from various sources required to be processed, edited for the purpose of the study.
For this study mainly secondary source of data had been relied on, because secondary data
can be an immediate and cost effective means to gaining valuable insight into research
issues; provided that the information comes from reliable and timely sources. Its sample was
small and no representative. The research has been started with secondary data and preceded
to primary data only when the secondary data sources have been exhausted or yield marginal
returns. An analytical approach has been followed to conclude the decisions. At last the study
tries to give a comprehensive picture of the commercial banks' involvement in credit
appraisal. The relevant information regarding this study has been collected primarily from
analyzing different relevant books.

 Secondary Sources of data are Annual Report of SBL, printed forms and documents
supplied by SBL, booklets of Credit Division, relevant books, journals etc.
1.4 Scope of the Study
This report covers SBL’s Credit Policy, Organizational Overview,Management and

Organizational Structure functions performed by SBL. It also covers over view of the Credit
Division, identification of problems regarding credit appraisal process, types of credit extended
and sector of credit allocation of SBL.
1.5 Limitation of the Study
In spite of related peopleswillingness I could not avail the full concentration as I supposed to
have. The officers are extremely busy with their assigned jobs. And even I had to perform the
internship while doing the job. On the way of my study, I have faced the following problems that
may be termed as the limitations/shortcoming of the study. The main limitations encountered in
producing this report are:
I am a full time employee of Southeast Bank Limited. It was difficult for me to allocate
enough time to prepare the report. For an analytical purpose adequate time is
required.Due to the time limit, the scope and dimension of the study has been curtailed.
At the time of preparing my report I tried to gather every details of process but the major
limitation is lack of adequate information.
Due to lack of experience, there may have been faults in the report though maximum
labors have been given to avoid any kind of slip-up.
Load at the work place also stood as a barrier to prepare this report.
Poor Library Facility: Most of the commercial bank have it’s own modern, rich and
wealthy collection of huge and various types of Banking related books, Journals,
Magazines, Papers, Case Studies, Term Papers, Assignments etc. But the library of
Southeast Bank Limited is not well ornamented

CHAPTER TWO
Organization

History of Bank
2.1 Definition of Bank:
Generally bank is referred to an organization that deals in money. The definition of Bank may be
as follows:
1. As per Bank companies act 1991
- Banking Company means any company which transacts the business of banking
in Bangladesh and includes a new bank and specialized bank.
- Banking means the accepting for the purpose of lending or institute of deposit of
money from public repayable on demand or otherwise and withdraw able by draft, order
or otherwise.
02.Provided by Famous Encyclopedia:

 A commercial banker is a dealer in money in substitutes for money, such as check or bill
of exchange.
– New Encyclopedia Britannica
 Establishment for custody of money, which it pays out on customers order.
– The New Oxford Encyclopedia Dictionary
03. Provided by and Ordinances:

 Banker includes a body of person whether incorporated or not, who carry on the business
of banking.
– English Bills of Exchange Act - 1882
 A bank is a person or corporation carrying on bonafide banking business.
– English Finance Act

04. Provided by Banking Institutes:
 A bank performs an essentially distributive task, service or acts as an intermediary
between borrowers & lenders. In broader sense, however, a bank can be considered the
heart of a complex financial structure.
– American Institute of Banking
 Stated very simply, banks deal in money and in that connection offer certain related
financial services.
– Harold Wallgren for American Bankers Association
05. Provided by Famous Economist :

 A Bank is an institution whose debts are widely in sell element of other people debts to
each other – R.S. Sayers.
 A Banker is a dealer in debt his own and other peoples - Crowther
 A Bank is a financial intermediary a dealer in loans and debts – Cairncross.
The above-mentioned characteristics sketched to outline the definition of a “bank” are nowadays
shared by a lot of different types of financial institution. Therefore, because banking activities
now overlap many diverse businesses, we will consider a variety of modern financial institutions
– including commercial banks but also savings-and-loan associations, brokerage firms, and
mutual funds – as “banks”.
Business of Banking Companies are as follows: (Bank company act 1991).

In addition to the business of banking a bank company may engage in any one or more of the
following forms of business.
1. The borrowing, collection or taking of money.
2. The lending or advancing of money either upon on without security.
3. The drawing, accepting, discounting, Bulling, selling, collecting and dealing in Bill of
exchange bonds, promissory notes, coupons drafts, Bill of leading, Railway receipts,
warrants, debentures certificate, term finance certificate Mudaraba certificate and such

other instruments as may be approved by Bangladesh Bank and other instruments and
security whether transferable of negotiable or not.
4. The granting and issuing of letter of credit TC credit Card and circular notes.
5. the buying, selling and dealing in gold silver and other hotel coin,
6. The buying and selling of foreign exchange including foreign bank notes.
7. The ----- holding, issuing on commission, under writing and dealing in stock funds, share
debentures stock bonds obligation, securities term certificate, MUdaraba certificate and
such other instruments as may be approved by the Bangladesh Bank and Investment of all
kinds.
8. The purchasing and selling of bonds or other form of securities participating term
certificate term finance certificate, Mudaraba certificate and such other instrument as may
be approved by Bangladesh Bank on behalf of constitution or other negotiation of loans
and advances.
9. The receiving of all kinds of bonds, scripts of valuable on deposit for safe custody pr
otherwise/
10. The providing for safe deposit vaults.
11. The collecting and transmuting of money as against a certificate of securities.
12. Acting as agents for the Govt. on local authority or any other person on persons.
13. The carrying in of agency business of any description including the clearing and
forwarding of goods giving of receipts and discharged and otherwise acting as an
attorney on behalf of customers but excluding the business of a Managing Agent or
treasure of a company.
14. Constricting for public and private loans negotiating the same.
15. Undertaking issue of share, stock debenture on debenture stock of any company,
corporation on association and the lending of money for the purpose of any such
issuance.
16. Transacting in every kind of guarantee and indemnity business.
17. Purchase of acquisition in the normal courses of its lending business of any property
including patents, desires trademarks and copy rights with or without buying bock
arrangement by the seller on for the sale by way of hire purchase on differed payment

basis with marking for in leasing or licensing or for sharing of income on for any way
financing.
18. Managing selling and realizing any purposely which may come into the processional of
the company is satisfaction or part satisfaction of any of its claim.
19. Acquiring and holding and generally with any property or any right, title or in the rest in
any such property which may be in form of security or part of the security for any loans
and advances or which may be connected with any such security.
20. Undertaking and exacting trust.
21. Undertaking and administration of estates as executor trustee or otherwise
22. Establishing and supplying or aiding in the establishment and support of associations,
institutions, funds, trusts and advantage calculated to the benefit of employees or ex-
employees of the company or the dependents on connections of such persons graduating
pensions and allowances and ---- payments towards insurance.
23. The acquisition, construction, maintenance and alternation of any building on works
necessary or convenient for the purpose of the company. Selling, Improving, developing
exchanging leasing, mortgaging disputing of on Turing into account or otherwise dealing
with all on any part of the properties and rights of the company.
24. Acquiring and undertaking the whole or any part of the business of any person, a
company when such business is of a nature enumerated or described in this sub section.
25. Doing all such other things as incidental on conducive to the promotion on advancement
of the business of the company.
26. Any other form of business which the Govt. may by notification in the official ----
specify as a form of business which is legal for a banking company to be engaged in.

2.2 Objective of a Bank:
The objectives of a Bank can be looked at from 03 different perspectives of the 03 key parties to
the banking activities. The Bank owner, the Govt. and the bank clients.
From the owners perspective.
i) Earning Profit: Just like any owner(s) of a commercial institution, a bank owner’s main
objective is to earn profit, which is achieved mainly through monetary exchanges.
ii) Rendering Service:Banks provide different types of services to the government and people of
the country.
iii) Good Will: In order to earn profit through rendering services, banks need to have a lot of
good will, maybe a bit more than other commercial institutions.
iv) Raising Efficiency:To earn maximum profit, banks need to provide efficient service, for
which they require expert workforce.
From the Government’s perspective:

i) Issue of Notes & Currencies:
Since civilizations have moved along from the barter system, it has been the objective of the
Government of different countries to provide its economy with a proper exchange media through
issuance of notes & currencies through banks, which also take upon the duty of maintaining the
system.
ii) Capital Formation:
The government wants that bank assist in the macroeconomic objective of capital formation by
encouraging people to participate in savings.
iii) Capital Investment & Industrialization:
The government, as a part of their secondary macroeconomic objective, wants the bank to assist
in capital investment & industrialization by lending out their accumulated capital.
iv) Money Market Control:
Government tries to stabilize the money market through banks.

v) Employment:
As part of their primary macroeconomic objectives, they expect banks to provide employment
for its people.
vi) Advice on Financial Matters:
Since banks hire a lot of financial experts and advisors, it often seeks advice from banks to help
them develop policies.
From the Bank Clients’ perspective:

i) Deposit:
One of the banks’ main objectives is to accept its clients’ deposits.
ii) Safety:
Providing safekeeping of its clients’ monetary possessions and valuables is another one of banks’
essential objectives.
iii) Advisors & Consultants:
Banks provide its clients with advisors and consultants to help them chalk out an appropriate
savings plan.
iv) Representatives or Trustees:
Both the clients and government rely on the bank to act as their representatives or trustees of
monetary exchange activities.
v) Raising living standard:
By providing interests against their deposits, banks help their clients to improve their living
standards.
2.3 Banking Operation in Bangladesh:
The development process of a country largely depends upon its economic activities. Banking is a
powerful medium among other spheres of modern socio-economic activities for bringing about
socio-economic changes in a developing country like Bangladesh. Three different sectors like
Agriculture, commerce, and industry provide the bulk of a country’s wealth. The nourishment of
these three is only possible through an adequate banking facility. The banking service facilitates
these three to be integrated in a concerted way. For a rapid economic growth a fully-developed
banking system can provide the necessary boost. The whole economy of a country is linked up
with its banking system.

With the passage of time the functions of the bank has got a multi-dimensional configuration. Of
all the functions of a modern bank, lending is by far the most important. They provide both
short-term and long-term credit. The customers come from all walks of life, from a small
business a multi-national corporation having its business activities all around the world. The
banks have to satisfy the requirements of different customers belonging to different social
groups. The banking business has, therefore, become complex and requires specialized skills.
They function as catalytic agent for bringing about economic, industrial and agricultural growth
and prosperity of the country. The banking can, therefore, be conceived as “a sector of Economy
on the one hand and as a lubricant for the whole economy on the other”. As a result different
types of banks have come into existence to suit the specific requirements.
to regulate the activities of other banks. All the commercial private and/or nationalized, and
specialized banks perform service related activities within the jurisdiction of the central bank. In
our country, Bangladesh the role of the central bank is entitled to be executed by Bangladesh
Bank.
As different banks are in the field to satisfy the customers of different requirement, we can
classify the banks using a diagram which is replicated in the following page.
Some words used in abbreviated form in the following diagram require explanation.
1. BKB = Bangladesh Krishi Bank
2. RAKUB = RajshahiKrishiUnnayan Bank
3. BSB = Bangladesh Shilpa Bank
4. BSRS = BangladeshShilpaRinShangstha
5. BASIC = Bank of Small Industries and Commerce, Bangladesh Ltd.

2.4 A BRIEF OVERVIEW ON SOUTHEAST BANK LIMITED:
2.4.1 Historical Background:

Southeast Bank Limited is a scheduled Bank under private sector established under the ambit of
bank Company Act, 1991 and incorporated as a Public Limited Company under Companies Act,
1994 on March 12, 1995. The Bank started commercial banking operations effective from May
25, 1995. During this short span of time the Bank had been successful to position itself as a
progressive and dynamic financial institution in the country. The Bank had been widely
acclaimed by the business community, from small entrepreneur to large traders and industrial
conglomerates, including the top rated corporate borrowers for forward-looking business outlook
and innovative financing solutions. Thus within this very short period of time it has been able to
create an image for itself and has earned significant reputation in the country’s banking sector as
a Bank with vision. Presently it has thirty branches in operation.
The emergence of Southeast Bank Limited at the junction of liberation of global economic
activities, after the URUGUAY ROUND has been an important event in the financial sector of
Bangladesh. The experience of the prosperous economies of Asian countries and in particular
of South Asia, has been the driving force and the strategies behind operational policy option of
the Bank. The Company Philosophy – “A Bank with Vision” has been preciously the essence of
the legend of bank’s success.
Southeast Bank Limited has been awarded license by the Government of Bangladesh as a
Scheduled Bank in the private sector in pursuance of the policy of liberalization of banking and
financial services and facilities in Bangladesh. In view of the above, the Bank within a period of
10 years of its operation achieved a remarkable success and met up capital adequacy requirement
of Bangladesh bank.
It has been growing faster as one of the leaders of the new generation banks in the private sector
in respect of business and profitability as it is evident from the financial indicators.

2.4.2 Corporate Mission and Vision of Southeast Bank Limited
Mission
 High quality financial services with the help of latest technology.

 Fast and accurate customer service.
 Balanced growth strategy.
 High standard business ethics.
 Steady return on shareholder’s equity.
 Innovative banking at a competitive price.
 Deep commitment to the society and the growth of national economy.
 Attract and retain quality human resource.
Vision
To stand out as a pioneer banking institution in Bangladesh and contribute significantly to the
national economy.
Core Objectives
The bank's overall objective is to have a higher profitability than that of the weighted average of
other banks. As such the main focus of the Bank is on highly profitable business with convincing
growth potential. Vision for the future is the characteristic that differentiates Southeast Bank
from other competitors.
Main Operational Area
As a commercial bank, Southeast Bank does all traditional banking business including the wide
range of savings and credit scheme products, retail banking and ancillary services with the
support of modern technology and professional excellence. The bank has launched a number of
financial products and services since its inception. Among them different types of monthly
savings schemes have achieved wide acceptance among the people.

2.4.3 Comparative financial position of Southeast Bank Limited:
Brief Profile of Southeast Bank Limited:
01. Date of Incorporation : 12th March, 1995
02. Date of Commencement of Business : 12th March, 1995
03. Capital Authorized : Tk. 2500.00 Million

Paid-up : Tk. 677.16 Million
Reserve Funds : Tk.622.99 Million
04. Deposits : Tk. 20,118.82 Million
05. Advances : Tk. 15,548.11 Million
06. Operating Profits : Tk. 665.16 Million
07. Loan as a % of Total Deposits : 77.28%
08. Global Relations : 350 Correspondents Worldwide
09. Number of Employees : 701
10. Capital Adequacy Ratio : 9.20%
11. Ratio of Classified Loans to Total : 2.09%
Loans
12. Return on Assets : 1.11%
13. Name of the Chairman of SEBL : Mr. AlamgirKabir, FCA

14. Number of Branches : 100
15. It is a Publicly Traded Company : Share quoted daily in DSE & CSE
16. Credit Card : Member of Master & VISA Card
17. Banking Operation System : Both conventional & Islamic
Shariah System
18. Technology Used : Member of SWIFT
Online Banking Computer System
2.4.4 Deposit Schemes:

Besides Fixed Deposits, Savings Bank Deposits and Current Account Deposits, the Bank has
introduced the following customer friendly deposit schemes:
a) Pension Savings Scheme (PSS)
b) Education Savings Scheme (ESS)
c) Marriage Savings Scheme (MSS)
d) Savers Benefit Deposit Scheme (SBDS)
e) Fixed Deposits ( 1, 2, 3, 6 & 12 months and 2, 3 years)
2.4.5 Loan Schemes:

The loan portfolio of the Bank is well diversified and covers funding to a wide spectrum of
business and industries including readymade garments, textile, edible oil, ship scrapping, steel
& engineering, chemical, pharmaceuticals, cement, construction, health-care, real-estate and
loans under consumer’s credit schemes allowed to the middle-class people of the country for
acquiring various household items.
Loan Schemes Lending

Categories
Loan to primary
producers
Loan to agricultural
Agricultural Scheme
input traders and
fertilizer
dealers/distributors
Jute Trading
Commercial Lending Others Commercial
Lending
Jute
Working Capital
Other than Jute
Lending
Loan Schemes
Categories
Real Estate
Developers
HouseBuilding Loan
Individual/Housing
Finance Co.
Finance to NBFIs
Consumer Credit
Other Loans
Scheme
Others
Small/Cottage Industry Term Loan
Large/Medium Scale Industry Term Loan
Jute Goods Exports
Loan against Export
Other Exports
Asset of SBL for the year 2006-2011

Total Asset of SBL
60000
50000
40000
In Mill. Tk. 30000
20000 Total Asset
10000
0
2006 2007 2008 2009 2010 2011
Year
Source: Annual Report 2011
Fig in million Tk.
Year 2006 2007 2008 2009 2010 2011
Asset 28042.71 33617.5 36545.28 47148.08 48732.1 49321.2
Total Advance of SBL
25000
20000
In Mill. Tk.
15000
Total Advance
10000
5000
0
Year

Net Profit Trend of NBL
300
250
200
In Mill. Tk.
150 Net Profit

100
50
0
Year
2.4.6 CAMEL Rating of the Bank:
The CAMEL rating system provides a general framework for evaluating and assimilating all
significant financial, operational and compliance factors in order to assign a summery of
composite supervisory rating to each regulated commercial bank. The purpose of the rating
system is to reflect in a comprehensive and uniform fashion an institution’s financial soundness.
In addition, it serves as a useful tool for summarizing the condition of individual institutions.
This rating system is based upon an evaluation of five crucial dimensions of bank’s operations.
These are –

 Capital Adequacy (C)
 Asset quality (A)
 Management (M)
 Earnings (E)
 Liquidity (L)
Each of these dimension is to be rated on a scale of one through five in ascending order of
performance deficiency on the basis of approved formulas. Thus “1” represent the highest and
“5” represent the lowest (and most critically deficient) level of operating performance. On the
basis of average of the above rating, each bank is assigned a composite rating. This composite
rating is based upon a scale of one through five is ascending order of supervisory concern. Thus
“1” represents the highest rating and consequently the lowest level of supervisory concern, while
“5” represent the lowest, most critically deficient level of performance and, therefore, the highest
degree of supervisory concern.
Composite Rating
Composite rating is average of all ratings. This is calculated as follows:
C+A+M+E+L
Rating Composite Rating Description

1 1.00-1.49 Strong
2 1.50-2.49 Satisfactory
3 2.50-3.49 Fair
4 3.50-4.49 Marginal
5 4.50-5.00 Unsatisfactory

2.5 SWOT Analysis:
SWOT is an important part for evaluating the company’s Strength, Weakness, Opportunity and
Threats. It helps the organizationto identify how to evaluate its performance and scan the micro
environment.
In the year 2011, Southeast Bank is celebrating 16 years of its success track record in
Bangladesh. The Strength, Weakness, Opportunities & Threats of the bank are identified as
follows:
Strength (S)
Southeast Bank is having the following strengths.
Transparent and quick decision-Making
Efficient team of performers
Satisfied customers
Internal control
Skilled risk management
Diversification to perform business operation
Weaknesses (W)
Southeast Bank Limited has the following weaknesses:
Poor market share (deposit and lending share around 1.5% in the total industry).
Low geographical coverage of service (only 27 branches at present)
Lack of succession plan
No research and development facilities for innovating new products.
Long management hierarchy
Absence of Total Quality Management(TQM)
Concentration on Large Loan.
Opportunity (O)

Southeast Bank Limited has the following opportunities:
Further diversification of product

Expansion of Branch network
Attraction of more customers through sophisticated service quality.
Threats (T)
Southeast Bank Limited encounters the following threats:
Increased competition in the banking sector

Market pressure to lowering interest rate.
Switching of the customers to other banks.
Threat of Bank Loan default
Globalization of banking business
Change in banking regulation
Political instability in the country.
CHAPTER THREE
Body Part

3.1 Management of Loans in Commercial Banks:
Lending is one of the two principal functions of commercial banks not only because of their
social obligations of catering to credit needs of different sections of the community but also
because lending is most profitable, the rates realized on loans have always been well above those
realized on investments. Having sterilized a portion of deposits in cash reserves and highly liquid
assets which yield little or no earnings for the purpose of satisfying liquidity requirements, a
banker has to deploy the residual funds in profitable outlets so that he may be able to pay interest
on deposits, salary to the staff, meet other establishment expenses, build-up reserves and to pay
dividend to the shareholders. This is why bank loan accounts form a major portion of the residual
funds of a commercial Bank. Some of the important characteristics of bank loans may be

explained as follows which would provide us an insight into lending activities of a commercial
bank.
3.2 Risk:
Definition:
Risk is the potential that a chosen action or activity (including the choice of inaction) will lead to
a loss (an undesirable outcome). The notion implies that a choice having an influence on the
outcome exists (or existed). Potential losses themselves may also be called "risks".
 Risk can be seen as relating to the Probability of uncertain future events.

 The chance that an investment's actual return will be different than expected. Risk includes
the possibility of losing some or all of the original investment. Different versions of risk are
usually measured by calculating the standard deviation of the historical returns or average returns
of a specific investment. High standard deviations indicate a high degree of risk.
A fundamental idea in finance is the relationship between risk and return. The greater the amount
of risk that an investor is willing to take on, the greater the potential return. The reason for this is
that investors need to be compensated for taking on additional risk
3.3 Basics of Credit Risk:
The following risk areas should be considered for analyzing a credit proposal.
 Borrower Analysis (Management/Ownership/Corporate Structure Risk):
The majority shareholders, management team and group or affiliate companies should be
assessed. Any issues regarding lack of management depth, complicated ownership structures or
inter-group transactions should be addressed, and risks mitigated. The following questions may
be asked to assess the Management Risk:

 Who is the borrower? Does any particular/ special characteristic of borrower need
particular attention? For example, if the borrower is a Trust, this calls for examination
of Trust Deed.
 Are there adequate abilities and experience in senior management?
 Is there adequate depth and succession planning?
 Is there any conflict amongst owners/senior managers that could have serious
implications?
 Is the Manager/Credit Officer satisfied about the character, ability, integrity and
experience of the borrower?
 Industry Analysis (Business & Industry Risk):
The key risk factors of the borrower's industry should be assessed. Any issues regarding the
borrower's position in the industry, overall industry concerns or competitive forces (demand
supply gap) should be addressed and the strengths and weaknesses (SWOT Analysis) of the
borrower relative to its competition should be identified. For the above purpose the Credit
Officers/ RM may obtain / collect data from the statistical year book/ economic trends of
Bangladesh Bank / public report / newspaper/ journals etc. The following questions may be
asked to assess the Business and Industry Risk:
 Are there any significant concentrations of sales (by customer, industry, county,
region)?
 How does the borrower rate with its competitors in terms of market share?
 Can increased direct production costs be easily passed on to customers?
 Does the borrower deal in any specific product that may be subject to obsolescence?
 Is the purpose of borrowing consistent with the objectives of the Company?
 Is the purpose legal? Does it contravene any rules and laws of the country and any
instruction issued by the Bangladesh Bank/Head Office?
3.3.1 Supplier/Buyer Analysis/Market Risk:

Any customer or supplier concentration should be addressed, as these could have a significant
impact on the future viability of the borrower.
3.3.2 Market Risk :

Whether there is enough market for the products. The sufficient market data is to be obtained.
The clients’ / borrowers’ market share in the industry is to be ascertained. The demand supply
gap is to be addressed.
3.3.3 Technological Risk :

The product that is manufactured must be technologically viable i.e. whether the technology
applied is updated. The product’s stage in its life cycle must be understood. Technical Aspects
of the products must be addressed. The Credit Officer/ RM must be satisfied with the
mitigating factors of technical and technological risk, associated with the products.
3.3.4 Financial Analysis (Historical/Projected):

An analysis of a minimum of 3 years historical financial statements of the borrower should be
presented. Where reliance is placed on a corporate guarantor, guarantors’ financial statements
should also be analyzed. The analysis should address the duality and sustainability of earnings,
cash flow and the strength of the borrower's balance sheet. Specifically, cash flow, leverage
and profitability must be analyzed. In this regard the Credit Officer/ RM must look into the
status of chartered accountant / audit firm.
Where term facilities (tenor > 1 year) are being proposed, a projection of the borrower's future
financial performance should be provided, indicating an analysis of the sufficiency of cash
flow to service debt repayments. Loans should not be granted if projected cash flow is
insufficient to repay debts. In this regard the possibilities of cost overrun and sensitivity
analysis should be done. The following questions may be asked to assess the Financial Risk:
 Does the borrower produce financial statements on time?

 Is working Capital Adequate?
 Has the customer actual title to stock?

 Have financial covenants been met?
 Has there been any major sale of shares by directors?
 Any significant change in asset conversion cycle? (Account Receivables/
payables / Inventory etc.)
3.3.5 Account Conduct:

For existing borrowers, the historic performance in meeting repayment obligations (trade
payments, cheques, interest and principal payments, etc.) should be assessed. In this regard the
Credit Officer/ RM may look into the account turnover like debit summation / credit
summation, highest debit balance/ highest credit balance (or lowest debit balance), debit
entries/ credit entries for last three years (year wise).
3.3.6 Adherence to Lending Guidelines:

The Credit Applications/ Appraisals must be prepared in line with Bank’s lending guidelines. It
must be clearly stated whether or not the application/ proposal is in compliance with Bank’s
Credit Policy/ lending guidelines. Related questions to be addressed are:
 Is proposed application in compliance with Bank’s guidelines?

 Does the lending to clients also compliant with Central Bank’s guideline?
 What are the Niche Products?
3.3.7 Interest Rate Risk :

The interest rate must be fixed based on different risk factors associated with the type of
business such as liquidity risk, commodity risk, equity risk, loan period risk. Interest rate also
arises from the movements of interest rate in the market. In assessing the pricing and
profitability, the credit officer must consider the income from ancillary business like foreign
exchange business, group business, volume of business etc. Related questions to be addressed
are:
 What is the rate of interest charged?

 Is the rate fixed in consideration to the risk factors?
 Will the rate charged be profitable to the Bank?
3.3.8 Foreign Exchange Risk :

The foreign exchange transaction is associated with foreign currency fluctuation risk.
Therefore the credit officer must take care of for the Forex risk. The questions should be
addressed as:
 Does the business involve foreign currency dealings?
 What are trend of foreign currency fluctuation?
3.3.9 Cost Overrun Risk :
This type of risk is generally involved in taking project finance decision. A high degree of cost
overrun may cause the failure of the project. Therefore the credit officer must consider the cost
components of the project and their chance of devaluation. The questions to be addressed are –
 Whether the construction cost may increase?

 Whether the imported machinery cost may increase for the fluctuation of the
foreign currency.
 Are all types of cost components addressed during preparation of feasibility
report?
 Does sensitivity analysis prove sufficient shock absorbing capability of the
project?
3.4 Mitigating Factors:
The Credit Officer/RM must address to different risks associated with the proposal. The possible
risk include but not limited to market risk, financial risk, foreign exchange risk, risk of cost
overrun, margin sustainability and/or volatility, high debt load (leverage/gearing), overstocking
or debtor issues; rapid growth, acquisition or expansion; new business line/product expansion;
management changes or succession issues; customer or supplier concentrations; and lack of
transparency or industry issues. Mitigating factors for risks identified in the credit assessment
should be described and well understood.

The bankers must assess the critical risks of facilities given / to be given and ways / factors of
mitigation of those risks. Some of the critical factors are:
 Volatility
 High debt
 Overstocking
 Rapid growth
 Acquisition
 Debtors issues
 Succession
3.5 Loan Structure:

The amounts and tenors of financing proposed should be justified based on the projected
repayment ability and loan purpose. Excessive tenor or amount relative to business needs
increases the risk of fund diversion and may adversely impact the borrower's repayment ability.
Related questions to be addressed are:
 Are facilities justified by the borrower’s business?

 Are any capital / long term expenditure being financed by short time borrowing
(either OD or TR)?
 What is the amount required? Is it sufficient or excess for the purpose mentioned?
3.6 Security:
A current valuation of collateral must be obtained from Bank’s approved surveyors and the
quality and priority of security being proposed should be assessed.
Loans should not be granted based solely on security. Adequacy and the extent of the insurance
coverage should be assessed. The RM must look into the client’s interest / dependability on the
collateral offered as security.
 Is security offered acceptable and adequate?

 Has all the security been perfected in accordance with the loan application?
 Have any valuation and inspection been undertaken since the last application?
 If you hold a guarantee, do you consider it has value?
 Is the security fully insured for all risks and the Bank’s nominated as loss payee?
 Has the credit rating of the Borrower deteriorated and have you considered the
requirement for additional security?
 Can a valid charge be obtained on the security?
3.7 Name lending (Relationship Assessment):

Credit proposals should not be unduly influenced by an over reliance on the sponsoring
principal's reputation, reported independent means, or their perceived willingness to inject funds
into various business enterprises in case of need. These situations should be discouraged and
treated with great caution. Rather, credit proposals and the granting of loans should be based on
sound fundamentals, supported by a thorough financial and risk analysis.
 Has the borrower complied with the terms and conditions of the facility?
 Adverse feature include: any past dues / excesses / delays / check returns and or
defaults in covenants and / or failure to meet interest when due.
 Does the account fluctuate with the seasonality of the business?
 Has the relationship strategy and earnings for the last twelve months been met?
3.8 Risk Grading:

Risk grading is a key measurement of' a Bank's asset quality, and all facilities should be assigned
a risk grade. Where deterioration in risk is noted, the Risk Grade assigned to a borrower and its
facilities should be immediately changed. Borrower Risk Grades should be clearly stated on
Credit Applications.
Presently the Bank is following/ conducting the Lending Risk Analysis to assess the risk grade.
The concerned Credit Officer/ RM must clearly indicate the risk grade (as per the finding) in the
specific column of credit appraisal form so that the authority can take decision on the matter.

However an independent Risk Grading System may be introduced in near future for appraisal/
monitoring of the facility. A standard Risk Grading Matrix is depicted as under based on the
Risk Grade Scorecard as discussed below:
Risk Grade Scorecard
Score Risk
Borrower / Group: Grade
Aggregate Score:
Industry Code: 95+ B
75-94 C …………………..
Date of Grading: 65-74 D
55-64 E
Date of Financials: 45-54 F Risk Grade:
35-44 G
Completed by: < 35 H …………………..
Weighted
Criteria Weight Parameter Points Actual Points
Score
< 0.25 100
Gearing 20% 0.26-0.35 95
0.36-0.50 90
0.51-0.75 85
The ratio of a borrower's 0.76- 1.25 80
1.26-2.00 75
Total Debt to Tangible 2.01 -2.25 70
2.26-2.50 65
Net Worth. 2.51 -2.75 60
2.76-3.00 55
> 3.00 0

Liquidity 20% > 3.50 100
3.1.3.49 95
The ratio of a 2.75.2.99 90
borrower's 2.50.2.74 85
Current Assets to 2.00-2.49 80
Current 1.50- 1.99 75
Liabilities. 1.10- 1.49 70
0.90- 1.09 65
1.80.1.89 60
1.70.1.79 55
< 0.70 0
Criteria Weight Parameter Points Actua Points Weighted Score

l (Points*Weight
)
Profitability 20% > 0.30 100

0.25-0.29 95
0.20-0.25 85
The ratio of a borrower's 0.15-0.19 80
Operating Profit to 0.10-0.14 75
Sales. 0.05-0.09 70
0.02-0.04 65

Operating Profit defined 0.0-0.01 50
as Gross Profit minus all <0 0
expenses.
Customer for more

Account Conduct than 2 years, with no
past dues and
10% faultless record. 100
Customer for more

than 6 months up to
2 years with
faultless behavior. 90
New Account with

known satisfactory
dealings with other
banks. 80
Some late payments

or bounced cheque,
though always
cleared in 15 days or 75
less.
Frequent past dues,

irregular items or
bounced cheque. 0

Business Outlook 10% Exceptional
100
A critical assessment of Favorable 90

the medium term
prospects of the Stable 80
borrower, taking into
account the industry, Slightly Uncertain
3.9 Credit Risk Management: Meaning and Necessity
In Banks and Financial Institutions Credit risk is considered as an essential factor that needs to
be managed. Credit Risk is the possibility that a borrower or counter party will fail to meet its
obligation in accordance with agreed terms and conditions. Credit Risk, therefore, arises from the
Bank’s dealings with or lending to corporate, individuals, and other Banks or Financial
Institutions.
Credit Risk Management process enables Banks to proactively manage loan Portfolios in order
to minimize losses and earn an acceptable level of return for shareholders. A comprehensive IT
system is essential which should have the ability to capture all key customer data, risk

management and transactions information including Trade and Foreign Exchange. In order to
establish an effective and efficient management of the credit risk the Bank must have robust
credit risk management policies and procedures.
3.10 Characteristics of Commercial Bank Credit Operations in Bangladesh:
Some of the most important characteristics of bank credits in Bangladesh are given as below:
 Bulk of the bank loans in Bangladesh is provided to trade and industries. Banks are
lackadaisical to agricultural sector because of relatively greater credit risks inherent in it
and inability of agriculturists to furnish good amount of security. However, since
nationalization banks are evincing keen interest in this sector. Nevertheless, industrialists
and traders are the prominent borrowers of the Banks.
 Another striking feature of a bank loan in our country is that the principal portion of it is
given for a period of less than one year. This is essentially because of high liquidity of
such loans. The short-term loans are given for financing seasonal needs of business-men
and also for working capital purposes to facilitate the process of production and
distribution. Seasonal loans are primarily for the purpose of increasing the inventory of a
business firm and are repaid as the inventory is liquidated. Short-term funds are also
borrowed for increasing current assets in general need of expanding production. Such
loans are repaid out of net operating earnings of the firm. Working capital loans are not
always of a year or less maturity but may extend for a period in excess of one year. On
the country, seasonal loans are sought for a few months.
Short-term loans may take the form of cash credit and overdraft, demand loans and
purchase and discount of bills. Among these, cash credit and overdraft are most
prominent form of bank loan.
 Commercial banks in Bangladesh demand sound security for loans. A very high
percentage of advances by Bangladeshi banks are secured by goods, financial assets and

hypothecation. A major portion of the bank credit is given against the security of
commodities which represent short-term security, unsecured credit facilities are given to
firms with sound financial position and stable earning records.
 Bank borrowers mostly lie in average profitability group. A highly profitable firm would
rely less on bank loans for financing expansion or current needs because it has sufficient
earnings to do so. Contrary to this, less profitable concerns or less sustaining concern
need bank support to tide over their grim financial position caused by shortage of liquid
funds. There may be many specific circumstances responsible for tight current position of
a firm, but meager earnings or losses are frequent reasons which call for extreme
carefulness from the bankers while granting loans to firms and taking all protective steps
to minimize the risk.
 Another characteristic of bank borrowers in Bangladesh is that most of the business

concerns borrowing bank money are relatively small, young and growing ones. It is
obvious to find smaller firms to depend more on bank loans for financing their needs
because of their limited access to other sources of financing. Likewise, young concerns
which have established their position but not yet grown old and do not have sufficient
accumulated earnings make frequent trip to banks. Furthermore, growing concerns rely
more on bank creditthan their old counterparts because the former is not capable of
generating income sufficient to take care of the growing financial needs. As a matter of
fact, growth is one of the very best reasons to justify the extension of bank credit. Banker
is averse to loan to firms suffering losses even though they have the remnants of a
reasonably satisfactory current position.
3.11Cardinal Principles of Sound Bank Lending:
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 borrowers default in repaying the money. A
banker should, therefore manage loan business in a profitable and safe manner. He should take
all precautions to minimize the risk associated with loan. In considering loan proposal the banker

must keep in mind certain general principles of lending. As a matter of fact, these principles help
a banker to establish some credit standards by which to judge loan applications of particular
borrowers. Some of these principles are incompatible e.g., liquidity and profitability and an
astute banker strikes a satisfactory compromise between these two. These principles are
discussed below:
 Safety – Safety of funds is the most important guiding principle of a banker. While
lending out funds a banker should ensure that funds being lent out would remain safe
otherwise the bank will not be in a position to repay his deposits and consequently it will
lose public confidence which may subsequently spell death knell of the bank itself. Safety
of funds implies that the borrower would repay the principal sum and interest as per the
terms and conditions provided in the loan agreement. Every care should be exercised to
see that the loan to a particular borrower would not involve risk of non-payment. A bank
follows aggressive policy and more of deposits in its bid to maximize earnings but it has
always to be defensive at the same-time because in cannot afford to loss people’s money.
A banker should always take a calculated risk. This is why a banker always insists upon
collaterals margins and guarantees in additions to personal promise of the borrower.
 Liquidity – Since majority of commercial bank liabilities are payable either on demand
or after short notice the banker should ensure that loan would be liquid, Liquidity as
already defined signifies the readiness with which the bank can convert its assets into
cash with no or insignificant. A loan will be liquid if it has been given for a short period
of finance some purchase of stock, raw materials, etc. A banker should, therefore, provide
short-term advances which could be recalled in time to satisfy the demands of the
depositors. The bank cannot afford to lend short period funds for a long time because in
that case its loans and advances will tend to be less liquid and it would be a great problem
for the banker to realize cash in case of emergency. Furthermore, loans to be liquid
should be provided against security of highly shift able assets so that in the event the
borrower defaults in repaying the principal sum these could be readily converted into
cost.

There is another reason for paying adequate attention to the liquidity principle. The cost
of borrowing from the Reserve Bank of India is related with the net liquidity ratio which
is the ratio of net liquid assets of the borrowing bank to its aggregate demand and time
liabilities. Thus, not liquidity ratio of a bank must be equal to the specified limit or above
it in order to procure loan from the Reserve Bank at the bank rate. With every one percent
drop in not liquidity ratio of the borrowing bank, cost of lending of the Reserve Bank
goes up by one percent.
 Diversification of Risks – A banker should adhere to the principle of diversification

while lending out funds. Diversification implies dispersal of funds over a large number of
borrowing firms situated in different regions of the country Diversification is a means of
minimizing risk inherent in loans. It is not just a defensive policy to protect against the
risk but is also a device of increasing average return from a fund that might otherwise for
the sake of safety be confined in risk free assets providing little or no yield. A banker
should remember that he can face loss with greater equanimity if he does not lay all his
eggs in one basket. If all the eggs are put in one basket he will lose his entire capital in
case the basket is upturned and all the eggs are broken. In view of this banker should
avoid concentrating the bank funds in a few customers. He should diffuse lending at
between firms belonging to different industries which are situated over different
geographical regions so that he may not be affected by the failure of one industry or the
few big borrowers.
The most important form of diversification which a banker should attempt to achieve in
the bank’s loan portfolio is maturity diversification. Under maturity diversification loan
portfolio is staggered over different maturity periods so that a certain amount of loans
mature at regular intervals which could be utilized to meet the depositors demands. If
such funds are not needed, the same can be lent out or invested in securities that best fit
into the bank’s loan and investment portfolio.
 Profitability – Equally important is the principle of profitability in bank advances. Like

other commercial institutions, banks must make sufficient income to pay interest to the

depositors, establishment expenses, to retain a portion of income for future and to pay
dividends to owners. The difference between lending and borrowing rates constitutes
gross profit of the bank and no banker will ordinarily think of an advance without
satisfying margin or profit. There is no hard and fast rule regarding this margin between
lending and borrowing rates. It should, however, be noted that lending rates are affected
by the Bank Rate, Inter-bank competition and the inter-bank agreements where they have
been entered into. Different rates are charged depending on credit risk involved in
lending to borrowers, nature of security, mode of charge, margin requirement and form
and type of advance. While charging interest rates on lending banker must ensure that
liquidity and safety aspects of loans have been adequately cared for. A particular
customer may offer a higher rate of interest but an advance made to him is subject to
imminent risk of default. A banker should avoid making profit at the expense of liquidity
and safety or capital. Within the boundaries of liquidity and safety and national policies
as laid down by the Government and the central bank a banker should strive for
accomplishing profitability objective.
 Purpose – Bankers should inquire into the purpose of the loan for which it is taken. As a
matter of fact safety and liquidity of loan depend on the purpose. If an advance is given
for productive purpose, say for financing purchase of inventories, in all probability-it will
be rapid because grant of loan will a generate additional income sufficient to repay the
loan. On the advance made for non-productive and speculative purpose is subject to
greater credit risk because the purpose for which loan was sought would in no way
improve repaying capacity of the borrower. Banker should, therefore, avoid making loans
for financing wasteful expenditure on social functions and speculative transactions. It is
very difficult to ensure that the loan has been utilized for the purpose for which it was
required, funds borrowed obviously for a productive use may have been spent on
speculation. Banker should, therefore, take follow-up steps to see that the end use of
credit is not for some other purpose.

3.12LoanPolicy of a Commercial Bank:

A bank has social obligation of meeting diverse credit needs of different sections of the
community but it cannot afford to lend the funds of its depositors and owners indiscriminately
and incur losses. It has to conduct its lending business in an orderly and safe manner so that its
loan portfolio remains balanced from the standpoints of size type, maturity and security, and
promises reasonable and steady earnings. This calls for a clear cut and definite credit policy
spelling out detailed guidelines with regard to size of the loan portfolio and its composition,
maturities of loan, acceptable security and creditworthiness liquidation of loans, compensating
balances, limits of lending authority, loan territory and similar other matters. Such a policy
provides a direction to the use of funds, controls the size and make up of loan portfolio and
influences credit decision of the banker. With systematic loan policy banker will find it easy to
reach the goals of the bank and serve the public concurrently. A loan policy is, therefore, a
necessity for a bank.
Bank loan policy may either be written or oral. However, it is advisable to have a written policy
as that would eliminate chances of misunderstanding as between credit department which is
seized with the job of granting credit and to management concerned with formulating policies. It
would also help maintain uniformity and standardization of lending. As against this, oral policies
are easy to forget and there is always a risk of misunderstanding and misinterpretation of what
was said long before. But oral policies have the advantage of being flexible which is absent in
written policies. One of the most important objections hurled against written loan policies is that
it suffers from inflexibility and rigidity. At time a bank with written loan policies may find itself
surely restricted and open to public criticism. Credit officers of the bank may find themselves
tight fisted between to management and the public. If they provide credit facilities exceeding the
maximum limit as set out in the loan policy they would be alleged to have violated the policy, if
they did not do so and kept themselves within the loan limits, the bank and its credit officers will
be the subject of seething public criticism of not caring for the customers. Too much inflexibility
in written polices can be avoided if it is reviewed frequently and attuned to changed conditions.
Formulating and implementing loan policies is amongst the most important responsibilities of
bank directors and management. Since formulating a definite loan policy for the bank calls for
expertise knowledge and experience in various aspects of bank credit, the Board of Directors call

upon the service of the bank credit officers who are well versed with techniques of lending and
are familiar with external and internal forces, that have their bearing on lending activity of the
bank. Thus, credit policy in a bank is the outcome of the joint efforts of Board of Directors and
credit officers of the Bank.
In deciding loan polices for the bank, the policy formulators must be very cautious since lending
activity of the bank interests both the bank and the public at large. They should give serious
consideration to all the factors that are likely to influence the loan policies and workout the
polices accordingly. A discussion in brief of all these factors is, therefore, necessary before
dwelling upon how a bank formulates loan policies.
3.13 Factors Influencing Loan Policy

The important factors which go into the determination of loan policies of a bank are the
following:-
Capital Position
Capital position is probably the most important factor influencing loan policies of a bank. As
observed earlier capital provides cushion to absorb losses that may occur. It serves as a
protective factor against losses for depositors and guarantee fund to creditors. A bank with strong
capital position can assume more credit risk that one with weak capital position. Accordingly, the
former can follow liberal lending policy and provide different types of loans including long
terms loans promising higher interest rates which the latter cannot do so because of the greater
risk involved.
Earnings Requirements

Profit making is one of the principal objectives of a commercial bank. However, some banks
may be in a position to emphasis income, but other may stress on liquidity. These banks who
have set income as the principal goal of their lending would follow aggressive policy of lending
and might make larger amount to term loans or consumer loans which normally are made at
higher interest rates because of relatively greater amount of risks which they accompany. This
should not suggest that banks would take undue risks for accomplishing the objective of
profitability. Where earnings receive greater emphasis in loan policy of a bank, it may mean that
the bank would keep a larger amount of secondary reserves or it would include in its investment
account securities carrying shorter maturity periods and possess relatively less risk.
Deposit Variability
Banks that have experienced credit movement in their deposits will have to follow conservative
lending policy. They cannot afford to incur undue risks by extending term-lending facilities.
Similar policy should also be followed where banks are faced with declining deposits. In a
refreshing contrast with this, liberal lending policy can be pursued by banks whose deposits how
little or no fluctuation and who can easily predict fluctuations in deposits and loan demands and
make provision for them through secondary reserves.
State of Local and National Economy

In formulating lending policy for his banks the banker should also keep in mind economic
conditions that are prevailing in the region served by the bank. A bank operating in area which is
subject to seasonal and cyclical fluctuations can ill afford to adopt liberal policy because that
would entail the bank in hazards of illiquidity. But in stable economy where possibility of
fluctuations in level of deposits and loan demand is limited, the banker can follow liberal loan
policy. Furthermore, consideration should be given to national economy. If economic conditions
of the country are expected to improve and level of business activity is likely to increase banks
can liberalize lending policy by relating credit standards and security requirements to
accommodate these borrowers who were hitherto refused banking facilities due to stiff credit
policy. In the event the economy is likely to recede in future the banker must revise the existing
policy and design a policy with stiffer terms and conditions of lending so that only borrowers of
very high credit character are eligible to obtain banking accommodation.

Monetary Policy
Monetary policy of central banking authorities goes a long way in determining the lending policy
of a commercial bank. Through variation in minimum reserve requirement and net liquidity ratio
central bank influences the lending ability of banks. Thus, by reducing the proportion of
minimum cash reserve which a commercial bank is required to carry with the central bank and
reducing net liquidity ratio the bank would get additional funds which can be utilized in lending
form. In the event the cash reserve ration and net liquidity ratio is increased lending ability of
banks is limited.
Ability and Experience of Loan Officers

Loan officers in a bank play a significant role in execution of loan policies of the Bank. The
Board should, therefore, consider the skill and competence of the bank loan officers while laying
down loan policy. Where a bank is staffed with a larger number of credit officers having
expertise knowledge and rich experience in diverse forms of loans, the banker can afford to
provide different types of lending facilities and formulate the policy accordingly. But this cannot
be done by banks whose credit officers are competent to deal with certain types of loans. This is
why smaller banks have been found limiting their lending business to shout-term loans.
Competitive Position
In formulating loan policy the management should give consideration to the competitive position
of the bank. Where a bank finds that storing competing institutions exist, say in the field of term
lending and the management feels that it cannot afford to provide the loans on terms being
offered by the other existing institutions, it might follow a policy of refraining the bank from
entering in the sphere of term-loans.
Credit Needs of the Area Served

Credit needs of the area served by the bank would also in flounce the loan policy. A bank is
supposed to meet loan demand of all the local borrowers who present logical and economically
sound loan requests and granting of such requests would not violate the prudent banking. If this
cannot be done there will be little justification for an institution to exist in that region. Thus, in

an economy predominantly dependent on agriculture, the bank must tailor its loan policy to meet
the seasonal loan demands of the farmers.
3.14 Contents of Bank Loan Policy

Loan policy of a bank must be definite and board based to include all the important dimensions
of lending business of the bank so that credit officers may not face any problem in evaluating
credit worthiness of the loan applicant and taking credit decisions. A commercial bank should set
down specific guidelines in respect of size of loan portfolio, composition of loan portfolio,
acceptable security and credit worthiness maturities, excess lines, liquidation of loans, interest
rates, compensatory balances, lines of credit and limitations of lending authority. We shall
discuss in the following paragraphs how policies with respect to each of the above aspects are
formulated in a bank.
3.14.1 Size of Loan Account

An intelligent loan policy spells out clearly the amount of total advances that a bank can
sanction. Determining the size of loan account is not an easy job. There is no iron clad formula to
fix size of loan in a bank. The rule that as long as bank has funds for lending should continue to
lend does not provide the logical rule for determining the size of a loan account. The primary
social and business excuse for the commercial banking system is its ability to supply credit to the
community. A commercial bank should lend as long as it is possible to do so prudently. In
deciding question of size of the loan account a banker is in dilemma between profitability and
liquidity. Satisfactory tradeoff between these conflicting goals calls for due consideration of
various factors.
Within the framework of banking legislation regulating the size of loan portfolio of banks, bank
has to determine optimum size of its loan portfolio keeping in mind the environment within
which it is operating.
In Bangladesh, Banking Companies Act does not put any limitation on the size of the loan
account. However, an indirect control over the magnitude of the loan account is provided in
Credit Authorization Scheme which was introduced in November 1965. Under the scheme banks

are required to seek the prior permission of the Reserve Bank before releasing fresh credit limits
in excess of Tk.2 crore or more any single party or any limit that would take the total limits
enjoyed by such party from the banking system as a whole to Tk.2 crore or more on secured or
unsecured basis. Earlier this limit has been stepped up to Tk.2 crore. Since May, 1971 scheduled
banks are also required to seek Reserve Bank’s prior authorization under the scheme for
sanctioning of individual medium or long term loans exceeding Tk.25 lakh repayable over a
period or more than three year to any single party. Further, size of loan account would also
depend upon the central banking policy regarding proportion of funds to be held in cash by a
bank with the central bank and with itself in the form of liquid assets.
3.14.2 Composition of Loan Portfolio

Policy decision regarding type of loans to be made must also be taken different types of loans
carry different degree of risks and degree of risks which a ban k can assume would depend upon
adequacy of its capital fund, structure of deposits and stability of deposits. Where a bank decides
to provide short and long term loans to business, agriculture and other sectors of the society,
policy statement should clearly spell out forms in which these loans will be made and proportion
of each of these forms of loans in total bank loan. If the bank owing to its weak capital position
and deposits variability decides to refrain from making long terms loans, it must be clearly stated
in the policy statement . More often than not, where banks in their attempt to minimize credit
risks decide to diversify their loan portfolio in that case policy statement should clearly set forth
the various board categories of loans amount which the bank loan will be diffused specifying the
proportion of the loan for each such category. Where the management strives to bring about
considerable diversification within these broad categories, the policy statement should set the
maximum amount of loan that could be granted to a particular borrower.
The Bank management should also keep in mind technical acumen and experience of loan officer
of the Bank while taking policy decisions regarding composition of the loan portfolio. If the bank
does not process experienced personnel in that line. Where credit department of a bank is
equipped with personnel specialized in different types of loans, as is the case with large
commercial banks, the bank should make use of its staff and make different type of loans.

3.14.3 Acceptable Security
Banks generally insist on security against loans just of minimize risk of default. Policy statement
regarding type of security, that would be acceptable for different types of loans should be made.
Credit officers must know whether accounts receivable as a security for a loan would be
acceptable in all the circumstances, a loan equal to the full cash value of an insurance policy
would be acceptable or if it should be the full cash value less one year’s premium. Policy
decision in this respect would facilitate the task of lending officers in respect of accepting a
particular thing as security for loans. In order to provide added safety to loan, it is the usual
policy of banking institutions to relate in some way the amount of loan to the estimated value of
the security offered. This is what we call ‘margins’. Margin requirements may vary in case of
different types of banks loans. There should be a clear cut statement about the margins that will
have to be retained in the valuation of the assets to be hypothecated to the bank.
While determining policy regarding security aspect of bank loan the management should see that
the security requirements as stated do not violate the statutory provisions. Banking Regulation
Act 1949 has made the following provisions in respect of security and margins.
i. A banking company cannot provide loan secured or unsecured to director interested

concerns or to any individual for whom a director stands as a guarantor or with whom
a director is a copartner in a firm.
ii. It cannot grant any loans or advances on the security of its own shares.
iii. Unsecured loan in any case cannot exceed 15 percent of total outstanding advances
of a bank.
iv. A bank is required to maintain 50 percent margin in respect of advances against
equity shares.
Besides, the Reserve Bank of India has been authorized by the provisions of the Banking
Regulations Act, 1949 to give directions to banks in respect of the margins to be maintained in
the case of secured loans. Policy regarding margin requirement must be mad within the
directives received from time to time by the Reserve Bank.

3.14.4 Lending Criteria
In order to minimize risks in lending, a bank should make loans only to deserving parties whose
credit character, capacity and integrity are beyond reproach, for that matter, criteria of evaluating
credit character and capacity to generate income should be set forth in the policy statement.
Thus, if borrowers liquidity position is to be judged, the loan policy statement should contain
guidelines of measuring the liquidity. It could sate that study of trends in current ratio and quick
ratio for the past three years should be made, Besides, nature and composition of current assets
and current liabilities should also be looked into. Furthermore for judging borrowers capacity to
generate income and repay the loan the policy statement could set forth the specific tools such as
profitability ratios, cash budget, etc. that could be used for the purpose. Mere statement of ways
and means of evaluating creditworthiness of borrowers may not be sufficient unless credit norms
are spelt out very specifically. For example, to state that borrowers whose financial and earnings
position in the past have been satisfactory may be considered creditworthy may not case the task
of loan officers because they have still no guidelines to determine which state of financial and
earning affairs would be considered satisfactory. an intelligent loan policy contains specific
standards expressed in terms of range of ratios, and percentages. Thus, it could be spelt out in the
policy statement that borrowers liquidity position will be considered satisfactory if current ratio
ranges between 2 : 1-1. 5:1 and quick ratio ranges between 1 5 : 1-1 : 1.
The standard liquidity ratios cannot be uniform for all the groups of industries and trading
concerns, will have to be different depending on the nature of the borrowers business. Similarly,
range of profitability rates could be fixed keeping in mind market rates of return. Norms of
judging funds management capacity of the borrowers firm may also be included in the policy
statement. This will, besides saving the time of the credit department and enjoying the job of the
lending officers, bring about uniformity in the extension of credit and reduction in the risks of
lending.
3.14.5 Maturity
Loan policy should also cover loan maturities. One of the most constructive characteristics of
good loan policy is to make loan for such a period that could be called upon in times of need to

satisfy liquidity needs of the bank and is not exposed to risk. Short-term loans carrying a
maturity period of 30 days, 60 days or 90 days are relatively more liquid and less risky. With
increase in maturities of loans money and credit risk associated with loans would tend to
increase. Some banks may be averse to grant long period loans to business firms ; some may
decide to provide real estate loan but not for more than period of five years. There may be some
banks who wish to grant loans for purchase of automobiles for a period of 2 to 3 years. Definite
policies with regard to maturities of loan to be given for different purposes should, therefore, be
stated. This will serve as useful guidance to the loan officers.
There are banks who have the general policy of making short-term loans in the first stage which
is subsequently renewed depending on the progress done by the borrowers firm and liquidity
needs of the bank. If the bank management wisher to pursue this policy, then the policy
statement should spell out in unequivocal terms types of loans in respect of which renewals
would be granted, circumstances under which renewals would be possible, the period of
renewals and also times renewal facility will be extended. In a sharper contrast, to this, there are
some banks who grant loan straight for a long period, say five years and its repayment schedule
is tailored to yearly income flows of the borrower.
3.14.6 Compensating Balance
Banks often require borrowers to maintain a deposit balance bearing some relationship to the
aggregate amount of loans made of the maximum line of credit. This is done with a view to
increasing effective rate of interest. Furthermore, compensating balance is a protective device to
save the bank against risk of default. If it appears that the default is imminent, the bank can apply
the balance on deposits to the loan. this practice is also known as the right of offset. i.e. right to
use all the deposits balance a bank customer has with the bank, to offset a portion of any loan to
this customer. By virtue of this device the bank funds to get slightly better settlement if it were
general creator of the bankrupt customer.
The compensating requirement may not be common for all the customers. It may not be
applicable in respect of certain customers while some customers may be asked to observe the
minimum rules without fail. In considering a new loan application the banker may be influenced
by the amount of deposits held by the applicant in the bank at the time of loan request. Further,

unsecured borrowers may be asked to carry relatively a larger amount of deposits balance with
the bank in view of greater credit risks.
The policy statement in respect of compensating balance should include, among other things,
manner of computing compensating balance type of borrowers in respect whom the
compensating requirement would apply and specific percentages of loan that different borrowers
would be required to hold as deposits in the bank.
3.14.7 Limitations on Lending Authority

Large scale commercial bank with a big credit organization consisting of a number of loan
officers should decide specifically the loan authority of different officers otherwise there may be
overlapping and duplication in efforts resulting in considerable wastages. Demarcation of
lending authority of different credit officers may take the form of lending limits which could be
prescribed for each lending officer. Thus, some may be given the authority to make loans
involving sums up to what might be considered a moderate amount such as from Rs.5000-25000,
while others may be permitted to lend much larger amounts, say above Tk.1 lakh to Tk.10 lakh
and still others might be authorized to consider loan request of above Tk.10 lakh. Lending limits
as between different lending officers should be based on lending ability of the officer which
itself is a product of his knowledge and experience. Where such limits are fixed, loan requests in
excess of the lending limits of the officer must be submitted to the other officer who has the
authority to make the decision.
3.14.8Loan Territory
Some banks may wish to limit their lending business to certain area. Some others may limit their
lending territory to their country. In such a case loan policy statement of the bank must include
regions to be served by the bank. This will save the time and efforts of the credit department
which will in that case know from whom to receive loan application. Territorial limit to lending
business may be imposed due to the limited size of the resources of the bank, and inadequate
staff to supervise the loan work. A bank whose customers come from certain regions may wish
to limit its lending business to these regions. Where the loan territory clause does not appear in
the policy statement as is the case with larger banks lending officers are free to consider loan
applications pouring in the bank from within the country or outside of it.

3.15Evaluating Credit Applicant
Mere formulation of appropriate loan policy will not help accomplish the overall objective of
maximize earnings while keeping adequate amount of liquidity unless creditworthiness of
applicants is evaluated to ensure that they conform to the standards prescribed by the bank.
Credit evaluation process involves three step, viz. gathering credit information about the credit
applicants, determining the creditworthiness of the applicants and finally taking decision to grant
lending facilities. The following paragraphs are devoted to detail each of these phases of credit
evaluation.
3.15.1 Gathering Credit Information

The credit department of a bank gathers requisite information from different sources on which
customer evaluation must necessarily be based. Two important factors that should be kept in
mind while searching for credit information are cost and time. A bank can not afford to spend a
lot of money in investigation of some loan applicants particularly smaller ones and in such case
the credit officer should take decision on the basis of limited information about the applicant.
Further, how much time credit department of the bank will spend on analysis of credit applicant
must also be considered. Spending lot of time in investigation may be justified in case of new
credit customer.
There are a number of sources of credit information that lend insight into credit worthiness of the
potential borrowers. Their use will depend upon the nature of business of the applicant, form of
loan required and amount of loan request.
a. Interview
An interview with the applicant enables the bank to secure the information about the history of
the borrowers business, its record of growth, types of product made or services rendered,
competitive position of the firm, and markets and check them against other sources. Through
interview the lending officer discovers the purpose of the loan sought and the applicants plan of
repayment. An idea about the applicants honesty and ability may also be had in course to talks
with the applicant. In course of discussions with the credit applicant lending officers endeavor to

find whether the applicant would fulfill the credit standards as established the loan policy. If the
applicant does not satisfy the credit norms, the lending officer may stop making further probe
into his creditworthiness. Where the applicant is considered on preliminary investigation up-to
the standard expected of an applicant the applicant may be asked to submit various financial
reports and records that will help the bank in evaluation of credit worthiness of the applicant.
b.Financial Statements
Financial statements including balance sheet and profit and loss account of the prospective
borrower are invaluable sources of credit information. Such statements are most readily obtained
from the applicant himself. Besides, financial statements of the last few years, proforma Balance
sheet and Income Statement and budgets should also be obtained. An analysis of these financial
statements would provide an insight into the borrower’s financial position, funds management
capacity, liquidity, profitability and loan repaying capacity.
Balance sheet in an aid to the banker to judge the credit, worthiness of the borrower, it is a
snapshot, a photograph of a financial worth of the borrower’s firm at a point of time. It depicts
the financial position of the borrower’s business as on a particular date.
3.15.2 Reports of Credit Rating Agencies

Commercial banks can gather information about the credit worthiness of the applicant by
procuring financial reports of credit rating agencies wherever they exist. These Agencies collect
information about financial, managerial and other aspects of a large number of business concerns
and keep them up-to-date. It is their full time job to get information from all possible sources
(market places, private agencies, newspapers, etc.) to analyses and arrange and incorporate the
information in their periodical reports. The information provided in a typical credit report will
include the name and address of the firm, date of formation, type of business, financial structure,
management, baker sand credit rating.
a. Bank’s Own Records

If the applicant happen to be the customer, the lending officer studies his past records. Every
bank maintain a central file of all depositors and borrowers. And examination of the customer’s
record will provide an insight into his past dealings with the bank i.e. customers paying habits of

previous loans, balances carried in current and saving accounts that would be available. If an
examination of the applicants account reveals that the bills discounted for him have always been
duly honored, it will count as a point in his favor.
b. Market Reports
Reports about the applicant can be obtained from the various markets particularly from
businessmen carrying on the same trade and suppliers – those from whom the borrower buys for
his firm. The bank may correspond with the businessmen and suppliers to ask about the payment
habits of the applicant, promptness of the borrower in repayment, his practice of availing all cash
discounts, etc. Some of the businessmen may happen to be the borrowers friends, others his
rivals. Some may, therefore, give exaggerated reports about the applicant’s means while others
may try to run him down. All such reports, sometimes contradictory to each other, have to be
weighed independently and a balanced opinion has to be formed about creditworthiness of the
applicant.
c. Reports from other banks

The credit department of the bank may check with other banks with which the applicant had
dealings in the past. Such checking with banks reveals the character, ability and management of
the applicant for credit.
d. Other sources
Other sources of credit information on business firms, especially the largest ones might be trade
journals, periodicals, newspapers, trade directories, public records such as income tax statements,
wealth tax returns, sales tax returns, reports about actions and decrees in government gazette,
registration revenue and municipal records.
3.16 Techniques of Credit Analysis

After assembling credit information about the potential customer, the lending officers analyze
these information to evaluate creditworthiness of the applicant and to determine whether he is up
to the standard or not. Such an analysis is known as credit analysis. Thus, credit analysis
involves the credit investigation of potential customer to determine the degree of risk associated
with the loan. For that matter capacity of the applicant to borrow and his ability and willingness
to repay the debt in accordance with the terms of the loan agreement must be studied. Analysis of
credit worthiness of the applicant, therefore, calls for detailed investigation of five c’s of credit
character, capacity, capital, collateral and conditions.
If the applicant firm is not faring well relative to other firms of the like size and age, the bank
may not favor extension of credit of the applicant.
A number of tools have been developed with which a banker can evaluate five Cs of an
applicant. Important amount these are:
 Ratio Analysis
 Cash Flow Projections
 Funds-Flow Statement
A brief discussion of these tools will now be made.
3.16.1 Ratio Analysis

Ratio analysis is an important tools available to a lender to judge liquidity, profitability and funds
management capacity of the credit applicant. Ratio analysis is the process of determining and
presenting in arithmetical terms the relationship between figures and groups of figures from the
financial statements. Ratio may be expressed in either of the three forms: (1) as a pure ratio, e.g.
2 : 1, (2) as a rate, e.g. inventory turnover so many times a year, (3) as a percentage, e.g. return
on shareholders return being 10 percent.
Financial ratios become meaningful to assess financial strength and other related aspects of the
firm only when there is comparison. In fact, analysis of ratios involves two types of comparison
(1) a comparison of present ratio with past and expected future ratios for the same firm, (2)
comparison of the ratios of the firm with those so similar firm or with industry averages.

Ratios as tools of evaluation of creditworthiness must be used with extreme care and considered
judgment because they suffer from certain serious drawbacks. In the first instance ratios can
sometimes be misleading if an analyst does not know the reliability and soundness of the figures
from which they are computed and the financial position of the business at other times of the
year. Secondly, ratios are quantitative measurement. They do not tell us anything about
qualitative aspect of the relationship. A business firm, for example, may have a high current ratio
of 4:1 but a larger part of the current assets is comprised by uncollectible receivables. When
these are deducted, the ratio might by 2 : 1. Thirdly, price level changes make ratio analysis
difficult.
Ratio as tools of measuring liquidity, profitability, efficiency and financial position of a firm can
be classified into four basic types: Liquidity, Leverage, Activity and Profitability.
A.Liquidity Ratio
Bank loan officer is very keen to determine the instant ability of the concern to honor the current
delegations. Calculation of liquidity ratios and their interpretation provide considerable insight
into the present cash solvency of the firm and its ability to remain solvent in times of adversities.
Two commonly used liquidity ratios are : current ratio and quick or acid test ratio.
a. Current Ratio:
Current ratio expresses relationship between current assets (cash, marketable securities, accounts
receivables and inventory turnover) and current liabilities (accounts payable, short-term notes
payable, current maturities of long-term debt, accrued income taxes and other accrued expenses
especially wates). It is computed by dividing current assets by current liabilities. A higher current
ratio is a clue that the company will be able to pay its debts maturity within a year. On the other
hand, a low current ratio points to the possibility that a firm may not be able to pay its short-term

debts. However, from managements point of view higher current ratio is indicative of poor
planning since an excessive amount of funds lie idle. On the country, a low ratio would mean
inadequacy of working capital which may deter smooth functioning of the enterprise.
A current ratio of 2 : 1 was long considered as minimum in a sound business. This rule of thumb
has, however, since succumbed to the rule of reason.
b.Acid Test Ratio or Quick Ratio

It is a measure of judging the immediate ability of the firm to pay off its current obligations. It is
obtained by dividing quick current assets by current liabilities. Quick current assets could
comprise these assets which can be liquidated immediately and at minimum loss in order to meet
pressing financial obligations. Thus, quick current assets consist of cash, marketable securities
and accounts receivable. Inventories are excluded from quick assets because they are slower to
convert into cash and generally exhibit more uncertainty as to the conversion prices.
A ratio of : 1 usually considered adequate. But again while using this ratio as a measure of
immediate ability to pay off its short-term obligations liquidity of receivable which are not
collectable are not adequate to support the liquidity of the concern. Therefore, factors such as the
size, age and location of the accounts receivable must be analyzed before reaching any final
decision.
B.Leverage Ratios
Bank lending for medium and long-term period would like to know the ability of the borrower
from to pay its long-term period would like to know the ability of the borrower from to pay its
long-term loan in future. This is measured with the help of leverage ratios. Under this group is
included (1) Debt to total assets or debt ratio (2) Debt-equity ratio (3) Times interest earned.
 Debt to Total Assets Ratio

This ratio exhibits the proportion of total assets created through debt including short-term
and long-term liabilities. This ratio is computed by dividing total assets into total debt. This
ratio is of considerable significance to the creditors in as much as it highlights the long-run
solvency of the firm. Lower the ratio, the greater the cushion against creditors losses in the
event of liquidation. Bank prefers the moderate ratio.

 Debt Equity Ratio
The ratio relates all the creditor claims on assets to the owner claims. It is computed by
dividing the total debt both current and long-term, of the business by its tangible net worth
consisting of common stock and reserves and surplus. If the ratio is greater it would mean
that the creditors have more invested in the business than the owners. This means creditors
would lose more in times of distress than the owners. This is why creditors prefer low debt
equity ratio. A low debt equity ratio might, however, indicate that the firm is not taking
advantage of a proper mix of debt and equity and may be passing up an opportunity to
engage in financial leverage and thus increase its earnings.
 Long-Term Debt to Total Capitalization

This ratio reflects the relationship between long-term borrowed capital and the owner capital
contribution. This ratio is found by dividing long-term debt into total capitalization (all long
term debt net worth). Although there is no hard and fast rule concerning the proper
relationship that should obtain here, one rough rule of thumb is that the maximum percentage
of long-term debt should not exceed 33.3 percent of capitalization in manufacturing firms
and 50 percent for railroads and public utilities.
 Times Interest Earned

This measure is used to indicate times interest charges have been earned and how much
safety margin is available to the shareholders. It is computed by dividing profits before
interest and taxes (PBIT) by interest charges. A high ratio is a sign of low burden of
borrowings of the business and lower utilization of borrowing capacity.
C.Activity Ratios
Banker is also interested to know how efficiently funds are managed in the firm. For the purpose,
activity ratios are calculated. These ratio express relationships between the level or sales and the
investment in various assets, viz, inventories, receivables, fixed assets etc. The important activity
ratios are (a) Inventory turnover (b) Average Collection period (c) Total assets turnover.
 Inventory Turn-over

Inventory turnover is computed by dividing the cost of goods sold by the average inventory
for the period. This ratio gives the number of times the inventory is replaced during a given
period usually a year. Presumably the higher the turnover the better is the performance of the
company, for it has managed to operate with a relatively small average looking up of funds.
A low sales to inventory ratio may indicate a slow-moving inventory, suffering possible from
obsolescence or a none too aggressive sales force.
 Average Collection Period

Average collection period is a measure of receivable turn-over. Its computation involves two
steps. In the first instance, annual sales are divided by 365 to get the average daily sales. In
the second stage, daily sales are divided into accounts receivable to fund the number of days
sales tied up in receivables. This gives average collection period because it represents the
average length of time that the firm must suit after making a sale before receiving cash
formula is:
Receivables
Average collection period = ----------------
(Net sales) _
No. of days in a year.
Receivables no. of days in a year

or ----------------------------------------
Net Sales
This ratio reflects the credit and collection policies of the firm and the effectiveness of
collection machinery. A longer period of collection indicates the leniency of credit policy

and or the slackness of the collection machinery. In shorter collection period is reflected
unduly restrictive credit policy and or aggressive collection efforts.
This ratio, to be of value, must be compared with the selling terms of the business firm. If
the selling terms of the firm were 2/10 net 30, collection period of 30 days would appear
to be acceptable. If, however the period were 90 days, it would indicate that there were
three months receivables still on hand.
 Total Assets Turnover

This ratio expresses relationship between the amount invested in the assets and the results
accruing in terms of sales. This is calculated by dividing the net sales by total assets.
Total assets turnover indicate the efficiency with which assets of the firm have utilize. A
higher ratio would mean better utilization and vice-versa. However, care should be exercised
in drawing conclusion. Sometimes the purchase of asset may not result in higher sales but
may, however, cause reduction in cost and thereby result in an increase in profits. Under such
cases, even if the ratio declines, the situation is considered favorable.
D. Profitability Ratios
Profitability ratios, as matter of fact, are best indicators of overall efficiency of the business
concern, because they compare return of value over and above the values put into a business
with sale or service carried on by the firm with the help of assets employed. Thus,
profitability ratios are of two types. Profitability as related to sales and profitability as related
to investments.
Profitability as related to Sales

Under this group of profitability ratios are included (a) gross profit to sales (b) operating profit to
sales (c) net profit to sales and (d) final net profit to sales.
a.Gross Profit to Sales

This ratio establishes relationship between gross profit with sales to measure the relative
operating efficiency of the firm and to reflect its pricing policies. It is computed by dividing sales
into sales minus the cost of goods sold.
Sometimes, it is calculated by taking cost of goods sold instead of sales. It indicates the position
of trading result.
b.Operating profit to Sales

This ratio expresses relationship between operating profit and sales. It is worked out by dividing
operating profit by net sales. With the help of this ratio one can judge the managerial efficiency
which may not be reflected in net profit ratio. For example, a firm may have a large amount of
non-operating income in the form of dividend and interest which represents major proportion of
the firms net profit. The net profit ratio may, in such cases, show high efficiency of the
management. However, operating profit ratio will make it crystal clear that the efficiency is
extremely low as non-operating income has not relation with operating efficiency of the
management.
c.Net Profit to Sales

Net profit to sales, also called net profit margin, is calculated by dividing net income (after tax)
by net sales. This ratio provides considerable insight into the overall efficiency of the business. A
higher ratio is an indication of the higher overall efficiency of the business, and better utilization
of total resources. A low ratio, on the country, would mean a poor financial planning and low
efficiency.
d-1Return on Capital Employed

This ratio is computed by dividing net profit figure by total capital employed in the business. Net
profit in this case means net profit before taxes but less interest on short-term borrowing. Capital
employed figure is found out by subtracting from total investments current liabilities. This ratio

is the only dependable measure of overall performance of a firm. A higher ratio is an index of
better utilization of funds.
d-2Return on Net worth

This ratio is obtained by dividing profits before tax by net worth. This measures the productivity
of shareholders’ funds. A higher ratio indicates the better utilizations of owner funds and higher
productivity.
3.16.2Cash Flow Projections

In considering loan application of a firm a banker wanted to know whether the borrowing firm
would have adequate cash earnings to repay the loan requested for. Where it is found that the
firms cash earnings may not be sufficient to repay the debt during the loan period, loan request
would be turned down despite high credit character and fairly good earnings, capacity of the
borrower. This is why the borrowing from is required to prepare a projected cash statement. In
essence, this statement is simply a cash budget. Cash budget of affirm predicts for some further
period of cash receipts from different sources, cash disbursements for different purposes and the
resulting cash position generally on a monthly basis. For a banker, such a statement tends to shed
lurid light on the cash surplus or shout falls, and thus specified the amount of loan and the
duration for which it should be granted.
3.16.3 Funds Flow Analysis

Another technique which has come to be increasingly used by bankers to evaluate
creditworthiness of the borrowing firms is funds flow analysis. This analysis is undertaken to
highlight changes in the financial condition of a business concern over a given period of time.
Funds flow statement is a report which summarizes the events taking place between two
accounting periods; it spells out the sources from which funds were derived and the uses to
which these funds were put. This statement is essentially derived from an analysis of changes
that have occurred in assets and liabilities items between two balance sheet dates. With the help
of this statement analyst can judge of the management. In several instances, a firm has a fairly
good earning record, yet it is experiencing shortage of liquid resources which may often times
simple its liquidation. Contrary to this, despite low profits, a firm is placed comfortably with

respect to working capital. With the help of funds flow statement one can pinpoint the reasons
which resulted change in the net working capital. Furthermore, funds flow statement provides
and insight into financing pattern of an enterprise. An analysis of the major sources of funds in
the pas reveals what portion of the growth was financed internally and what portion externally.
Application side of the funds statement shows whether the firm is expanding its scale of business
by building up additional plant and equipment or else it is involved purely in routine affairs of
disbursing dividends and redeeming long-term debts.
The funds statement prepared on cash concept basis depicts on sources side the following items:
(i) A net decrease in any asset other than cash or fixed assets.
(ii) A gross decrease in fixed assets.
(iii) A net increase in any liabilities.
(iv) Funds provided by operation.
Uses of funds in the statement show the following items:
(i) A net increase in any asset other than cash or fixed assets.
(ii) A gross increase in fixed assets.
(iii) A net decrease in any liability.
(iv) Retirement debt or purchase of stock.
(v) Payment of Cash dividend.
(a) The earnings of the enterprise.

(b) Expansion in liabilities through increased use of borrowed funds or increased trade credit.
(c) Decrease in assets such as liquidation in current assets, sale of fixed, miscellaneous or
intangible assets and earned depreciation on such assets.
(d) Contribution of additional funds by owners of the firm.
Uses of funds side of the funds statement depict all such changes that cause decrease in total
funds of the business. The following items are shown on the ‘uses’ aspect of the statement:
(a) Decrease in liabilities.
(b) Increase in assets.
(c) Decrease in Capital funds

(d) Net losses
In simpler words, only the following changes in fixed part of the balance sheet are shown as
sources of funds in the statement :
(i) Such increase in fixed liabilities that caused decrease in current liabilities or increase
in current assets.
(ii) Such decrease in value of fixed assets that caused increase in current assets or
decrease in current liabilities.
Similarly, under the heading uses of funds the following changes in fixed assets and liabilities
are shown:
(i) Such decrease in fixed liabilities which caused rise in current liabilities or decrease in
value of current assets.
(ii) Such increase in fixed assets which caused reduction in current assets or expansion in
current liabilities.
The following format of the funds flow statement will make the above points more
understandable.
Sources of Fund Uses of Funds

1. Net profit before charging such 1. Net loss (before charging such
expenses as do not affect level of expenses as do not affect level of the
working capital, such as depreciation working capital)
charge to write off goodwill, and other
intangible assets. (+) (-)
2. Increase in Long-term liabilities 2. Decrease in long-term liabilities

(+) (-)
3. Decrease in value of fixed assets. 3. Increase in value of fixed assets.
(-) (+)

4. Acquisition of additional capital. 4. Refund of capital.
(+) (-)
It should be remembered that the statement would not record such changes in fixed assets and
liabilities ad do not affect the level of working capital.
3.17 Credit Decision

After determining creditworthiness of the applicant the lending officer has to decide whether or
not credit facilities should be provided to them. For that matter, creditworthiness to the applicant
should be matched against credit standards set out in loan policy. If the applicant is above or up
to less the standard, loan should be made to the applicant. The difficulty in taking credit decision
arises where the applicant is marginally credit worthy best. In such case, decision should be
taken only after matching potential profitability against cost of bad debt loss. Applicant not
satisfying the standard of accept ability may be explained the banks helplessness in view of the
banks loan policy. The bank may advice such firm to approach for financing institutions whose
terms and conditions might be fulfilled by the firm.
3.18 Organization of Bank Lending

Principal responsibility of formulating loan policy for a bank and its implementation lies with the
board of directors. Since the members of the board being pre-occupied with other important
activities do not attend to day-to-day lending functions of the banks, they constitute a separate
lending body known as ‘credit department’ to carry into effect the loan policies which they
formulate.
Broadly speaking, credit department of a bank performs the following function:
(i) To receive loan applications.

(ii) to collect credit information about the applicants from numerous sources and to
conduct interview with the applicants to solicit additional information and to verify
the accuracy of the information given by them in the application.
(iii) To investigate the credit worthiness of applicants by making use of numerous tools of
credit analysis.

(iv) Once the loan has been granted, to supervise loans by visiting the borrower’s keeping
constant vigil on the borrowers deposit balances, obtaining financial and other reports
and checking with other creditors and calling attention of the borrowers to
unsatisfactory performance.
(v) To maintain records of credit information and revise them constantly so that the bank
officers may come to know the status of their accounts.
(vi) To furnish credit information to other banks and creditors who seek it.

CHAPTER FOUR
Actual Task

4.1 Actual Task
SL NO Department and Descriptions Time line Name of Supervisor Designation

of Tasks
1 General : Account Opening Sept 10 – Md. Faridmolla Junior officer

Sept 25,2013
2 Credit (Loan) Sept 26-Nov Majarulislamnion Senior officer

17,2013
3 Treasury Nov 18-Dec Md.Marufsikder Senior officer

5,2013
Figure: Actual Task Part

I joined in Southeast Bank LTD at Corporate Branch on 9 September 2013 for my internship.
There I was appointed by Majarulislamnion, the senior officer and the last three months I worked
in the General Banking Department, Credit Department and Treasury Department. I
accomplished the tasks which were given by my supervisor in the bank.
4.1.1 General Department

General banking is the starting point of the banking operation. It is the department which
provides day-to-day services to the customers’ main functions of general banking department is:

4.1.1.1 Account Opening
In account opening, I learnt the process of opening an account in the bank:
My Duty:
 Provided account opening information.
 Provided the account opening form to the customers.
 Helped the customers to complete the form.
4.1.2 Credit department:

In Credit department I deal with different work such as Credit risk management, Credit appraisal,
Reporting and foreign exchange transaction etc.
4.1.2.1 Credit Risk Management:

In Credit risk management I evaluate different information of customer:
My Duty:
 Evaluate customer performance with other bank.
 Evaluate Security Value of Customer.
 Evaluate industry/ Business condition.
4.1.2.2 Credit Appraisal:

In Credit appraisal I analyze different information of customer:
My Duty:
 Analyze Business experience of customer.
 Analyze Security Value of Customer.
 Analyze nature of Business.
 Analyze Liability of customer with other banks.
 Analyze Net profit of customer.
 Examine Sales volume of customer.

4.1.2.3 Reporting:
In reporting section report to Bangladesh Bank, Head Office and Audit team:
My Duty:
 Report to Bangladesh Bank.
 Report to Head Office.
 Report to Audit team.
4.2 Treasury Department:

In treasury department I deal with different sort of work like asset liability management, and
security buy–sell.
4.2.1 Asset Liability Management:

I analyze different sort of documents related to the asset liability management.
My Duty:
 Measure duration of risk sensitive asset
 Measure duration of risk sensitive liability
 Gap Analysis
4.2.2 Security buy-sell:
My Duty:
 Help to buy T-bill
 Help to buy T-Bond

CHAPTER FIVE
Research part

5.1 Problem Statement:
SBL faces some problem during the Investment period which is Risky and inconvenient the
Credit Risk Management system. That’s why I wanted to find the reasons behind the problem
and try to give some suggestions. For this reason I am doing this research.
5.2 Project Timeline:
For project purpose, I spend the whole month of July-Week 4 to August Week 3, 2013. I have
Shown my activities by this grant chart.
SEBL Ltd. Date-July-Week 4 to August Week 3, 2013
Description Week 1 Week 2 Week 3 Week 4
Develop the Research Plan Research plan

Develop the Hypothesis Hypothesis
Conduct the Survey Survey
Research Research
Analysis and Interpretation A&I
Table 05: Project Timeline
5.3 Research Methodology:

5.3.1 Sources of Data: Data is inevitable of completing the project. Usually to complete the
report data were collected from the following sources-
 Primary Data Sources:

 Questionnaires with Structure question by the survey of SBL’s staff.
 Secondary Data Sources:

 Annual Report of the Bank
 Website of the Bank
 Published booklet of the Bank.
 Different Documents of the Bank
 Daily Newspaper and relevant journals.
5.3.2 Sampling Plan:

Population: The population of this research is defined below-
 Elements: Existing staffs of SOUTHEAST Bank Ltd.

 Unit: Individual staffs of SOUTHEAST Bank Ltd.
 Extent: Gulshan Branch
 Time: July-Week 4 to August Week 3, 2013
5.3.3 Sampling Frame:

The sample frame of this study has been consisted of the bank employee’s information book of
Southeast Bank Ltd.
5.3.4 Sampling Size:

To conduct this research I have taken my sample as a simple random sampling and the required
sample size for conducting this research is 40, those who are the staffs of Southeast Bank Ltd.
5.3.5 Sampling Procedure:

For conducting this research, the probability sampling procedure was followed in order to select
the sample which is simple random sampling.
5.3.6 Data Analysis:

After collecting all the data I have analyzed all the data individually. Then I had made the
comparison of data and explain it through graph, chart, table etc. I have used MS Word, MS
Excel to analyze data and to make the data meaningful. Also the parametric and non-parametric
statistics / tools and basic statistical techniques have been used. Hypotheses were tested to derive
a meaningful conclusion from the empirical data. Based on my analysis I made findings,
recommendation and conclusion. Finally, I would like to present my research in front of the
audiences.
5.3.7 Instrumentation:
Through face- to- face interview and structured questionnaire with 5 point likert scale questions
the survey process has been done within the required time frame. Developed by RensisLikert,
this is a composite measure in which respondents are asked to choose from an ordered series of
five responses to indicate their reactions to a sequence of statements (e.g. Strongly Disagree ....
Disagree........... Neither Disagree nor Agree......... Agree........... Strongly agree). Likert Scale
was used for this survey research to come up with a quantitative outcome.
5.4 Hypothesis Development:

With a view of fulfilling the objectives some relevant hypothesis have been formulated for this
research:
1. HA: Southeast Bank introduces new credit policy for effectiveness of credit Risk
management policy.
2. HA: Monitoring credit performance is an effective method of Credit Risk Management.

3. HA: Credit Investigation is an effective method of Credit Risk Management.
4. HA: Southeast Bank offer standard credit facility for effectiveness of credit Risk
management policy.
5. HA: New credit product must introduce for betterment of credit Risk management policy.
6. HA: Bank should put emphasis on SME loan.

7. HA: Debt rescheduling is an effective method of Credit Risk Management.

5.5 Hypothesis Testing:
H1 H2 H3 H4 H5 H6 H7 H8 H9 H10
1=Strongly disagree 3 5 3 2 1 3 1 8 9 3
2=Disagree 3 5 2 2 2 1 3 11 12 2
3=Neither agree nor 5 4 5 8 3 4 5 9 6 1
disagree
4=Agree 15 11 13 15 18 14 16 5 6 19
5=Strongly agree 14 15 17 13 16 18 15 7 7 15
Total 154 146 159 155 166 163 161 112 110 161
Average 3.85 3.65 3.98 3.88 4.15 4.08 4.03 2.80 2.75 4.03
Standard Deviation 1.19 1.41 1.19 1.08 0.94 1.15 1.01 1.36 1.41 1.13
Z-test value 7.15 5.17 7.82 8.08 11.14 8.67 9.53 1.39 1.12 8.54
Table-6: Summary of the respondents towards hypothesis

1. HO: Southeast Bank introduces new credit policy for effectiveness of credit Risk
management policy.
HA: Southeast Bank introduces new credit policy for effectiveness of credit Risk
management policy.
HO: µ=2.51
HA: µ>2.5
N=40
Here, X = 3.85
 = 1.19
Z cal=
( X   ) /( / n)
=7.15
At 5% level of significance, follows Z distribution Z 0.05 = 1.645
Since Z cal> Z tab, the null hypothesis is not accepted. So at 5% level of significance, it can
be said that introduces new credit policy for effectiveness of credit Risk management
policy.
H1
8%
35%
8% 1=Strongly disagree
13% 2=Disagree
3=Neither agree nor
disagree
4=Agree
38% 5=Strongly agree
Fig-9: Respondent’s view towards introduces new credit policy for effectiveness of credit
Risk management policy.
1
In a 5-point scale, the mean value is 2.5

2. HO: Monitoring credit performance is not an effective method of Credit Risk
Management.
HA: Monitoring credit performance is an effective method of Credit Risk Management.
HO: µ=2.5
HA: µ>2.5
N=40
Here, X = 3.65
 = 1.41
Z cal=
( X   ) /( / n)
=5.17
be said that credit performance is an effective method of Credit Risk Management.
H2
38% 13% 13%
1=Strongly disagree
2=Disagree
3=Neither agree nor disagree
4=Agree
28% 5=Strongly agree
10%
Fig-10: Respondent’s view towards credit performance is not an effective method of

Credit Risk Management.

3. HO: Credit Investigation is not an effective method of Credit Risk Management.
HA: Credit Investigation is an effective method of Credit Risk Management.
HO: µ=2.5
HA: µ>2.5
N=40
Here, X = 3.98
 = 1.19
( X   ) /( / n)
Z cal=
=7.82
Since Z cal> Z tab, the null hypothesis is not accepted. So at 5% level of significance, it can be said
that Credit Investigation is an effective method of Credit Risk Management.
H3
1=Strongly disagree
5%
43% 8% 2=Disagree
13%
3=Neither agree nor
disagree
33%
4=Agree
5=Strongly agree
Fig-11: Respondent’s view towards Credit Investigation is an effective method of Credit

Risk Management.

4. HO: Southeast Bank offer standard credit facility for effectiveness of credit Risk
management policy.
HA: Southeast Bank offer standard credit facility for effectiveness of credit Risk
management policy.
HO: µ=2.5
HA: µ>2.5
N=40
Here, X = 3.88
 = 1.08
( X   ) /( / n)
Z cal=
=8.08
be said that Southeast Bank offer standard credit facility for effectiveness of credit Risk
management policy.
.
H4
1=Strongly disagree
33% 5%
5% 2=Disagree
20%
3=Neither agree nor
38% disagree
4=Agree
5=Strongly agree
Fig-12: Respondent’s view towards offering standard credit facility for effectiveness of
credit Risk management policy.

5. HO: New credit product must not introduce for betterment of credit Risk management
policy.
HA: New credit product must introduce for betterment of credit Risk management policy.
HO: µ=2.5
HA: µ>2.5
N=40
Here, X = 4.15
 = 0.94
( X   ) /( / n)
Z cal=
=4.14
that credit product must introduce for betterment of credit Risk management policy.
H5
1=Strongly disagree
40% 3% 5% 2=Disagree
8%
3=Neither agree nor
disagree
45%
4=Agree
5=Strongly agree
Fig-13: Respondent’s view towards credit product must introduce for betterment of
credit Risk management policy.

6. HO: Bank should not put emphasis on SME loan.
HA: Bank should put emphasis on SME loan.
HO: µ=2.5
HA: µ>2.5
N=40
Here, X = 4.08
 = 1.15
( X   ) /( / n)
Z cal=
=8.67
that Bank should put emphasis on SME loan.
H6
1=Strongly disagree
10%
8% 3% 2=Disagree
45%
3=Neither agree nor
disagree
35%
4=Agree
5=Strongly agree
Fig-14: Respondent’s view towards Bank should put emphasis on SME loan

7. HO: Debt rescheduling is not an effective method of Credit Risk Management.
HA: Debt rescheduling is an effective method of Credit Risk Management.
HO: µ=2.5
HA: µ>2.5
N=40
Here, X = 4.15
 = 0.94
( X   ) /( / n)
Z cal=
=4.14
that Debt rescheduling is an effective method of Credit Risk Management.
H7
1=Strongly disagree
40% 3% 5% 2=Disagree
8%
3=Neither agree nor
disagree
45%
4=Agree
5=Strongly agree
Fig-13: Respondent’s view towards Debt rescheduling is an effective method of Credit Risk Management.

5.6Findings:
Findings according to the respondents’ opinion toward hypothesis:
1. Southeast Bank introduces new credit policy for effectiveness of credit management
policy. So 32% of respondents agree and 32% of respondents strongly agreed that
Southeast Bank introduces new credit policy for effectiveness of credit management
policy.
2. Monitoring loan performance helps bank to minimize the risk of NPL (Non-Performing
Loan). So 37% of respondents agree and 33% of respondents are disagreeing that
Monitoring credit performance is an effective method of Credit Risk Management.
3. Credit Investigation is a process used by bank to verify and attain a borrower’s identity,
personal background, and financial capability and credit history. Credit investigation also
as security measure that protects creditor from credit identity theft and other fraudulent
credit actions. So 28% of respondents agree and 38% of respondents are strongly agreed
that Credit Investigation is an effective method of Credit Risk Management.
4. Southeast Bank offer standard credit facility for effectiveness of credit Risk management
policy. So 40% of respondents agree and 32% of respondents strongly agreed that
Southeast Bank offer standard credit facility for effectiveness of credit management
policy.
5. New credit product must introduce for betterment of credit management policy. So 48%
of respondents agree and 24% of respondents strongly agreed that new credit product
must introduce for betterment of credit management policy.
6. Bank should put emphasis on SME loan. So 56% of respondents agree and 24% of
respondents strongly agreed that Bank should put emphasis on SME loan.
7. A debt rescheduling is usually less expensive and a preferable alternative to bankruptcy.

Debt rescheduling restructurings typically involve a reduction of debt and an extension of
payment terms. So 45% of respondents agree and 40% of respondents strongly agreeing
that Debt rescheduling is an effective method of Credit Risk Management.

5.7 Recommendation.
As the recent banking trend pursues more towards gradual reduction of reliance on security
in lending activities, the necessity of a sound appraisal process in a bank is being proven as
the ultimate area to concentrate on. The credit appraisal process of Southeast Bank has not
yet been able to reach the desired level of perfection. Besides, to ensure transparency and
corporate governance in the institution some specific measures may also be taken. In light of
the findings of the report the following measures may be taken:
1. New credit policy of southeast bank limited provide a new effective credit policy
which is more relaible than the previous one. So they need to empasize on this policy.
2. Although the bank has attained remarkable development in different operational areas
as far as the introduction of technology is concerned but there has not been much
development in terms of implementing paperless banking concept. Provided the
information technology revolution all around the country is not at all a difficult
assignment to introduce information technology in the credit appraisal and credit
approval process. Credit proposals may be forwarded to Head Office through a
secured intranet instead of the traditional paper form and not only that the approval
process may also be shortened down if the approving authority receive the credit
proposals to their respective desks, provide their comments and recommendations
through the intranet at their convenient time so that the very conventional file
movement process may be eliminated.
3. The credit policy guideline provides the business approach or the philosophy on
which the bank is supposed to be operating. So it becomes very important that this
policy guideline is followed with utmost rigidity and perfection. To oversee the strict
adherence of credit policy guideline within the bank “Internal Control and
Compliance Division.

4. In some cases standard credit policy is showing the benifits of effective Risk
management policy so the management should develop this strategy with more
concentration.
5. Bank bringing new credit product for betterment of Credit Risk policy but in many of
cases it is not enough to make fulfilment of proper output. So the bank authority
should be take more analysis on this type of policy.
6. It is very important to take a look on SME sector. This step can change the overall
transaction image of bank at bringing more benefits at a time.
7. Presently, the ultimate approving authority i.e. The Board of Directors of the Bank
are required to sit at their convenient times, called the “Meeting of the Board of
Directors” for approval of the credit facilities. So, it is very important that the
minimum number of Board members remain present in the “Board Meeting” to fill up
the quorum. But there are occasions when it becomes difficult for the members to
attend “Board Meetings” due to their pre-occupation. This problem may be removed
through introduction of teleconference concept which will enable the members of the
Board to attend the meeting from any place and henceforth, the approval process may
be shortened to the minimum.

5.8Conclusion:
Banking industry has significant role to play in the economic development of a country. The
banker would lead if the purposes of the advance is for overall national development plans
necessitating flow of credit to priority sector in the larger national interest. Sometimes the need
of the borrower may be considered so essential for the benefit of the national economy that
despite heavy risks involved the advance may be granted. In the changing concept of banking,
national interest for financing in some areas, especially in advances to agriculture, small
industries, small borrowers and export oriented industry, are assuming great importance.
Investment is the most important asset as well as the primary source of earning for the banking
institutions. On the other hand this 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 investment portfolio. Close supervision and effective follow up of
investment activities might reduce the risk to a great extent. An unsupervised investment might
be fraught with unmanageable risk and eventually might be stuck up. Consequently not only the
depositors but also the general shareholders will be deprived of getting back their money from
the bank.

CHAPTER SIX
Appendix

6.1 Bibliography:
Books:
 Rose, Peter S. (2005). “Commercial Bank Management” Irwin McGraw-III, New

York, 8th edition
 Brigham, Eugene F and Ehrhardt, Michael C (2001), “Financial Management
Theory and Practice. 10th ed”, pp.75-99.
 Rose, P (1996) “Commercial Bank Management. Boston: McGraw-Hill
Companies Inc.”
 Gorry, G. and Scott Morton, M.S. (1991) A Framework for Management
Information Systems. Sloan Management Review, 13(1), pp.55-70
 Zikmund. , & Thomson. Business Research Methods (8th Ed.)
 “19 banks still crippled by liquidity crisis”, The New Nation, 11th Aug, 2013.
 Abdullah, A. and Khan, A. R. (eds.) (1996),”State, Market and Development”,
the University Press Limited.
 Barrister Harunur Rashid, “How does global financial crisis affect Bangladesh?”,
Former Bangladesh Ambassador to the UN, Geneva.
 Boner, R.A. and Krueger, R. (1991), “The Basics of Antitrust Policy: A Review
of Ten Nations and the European Communities”, the World Bank Technical Paper
160, World Bank, Washington.
 UBL Bank Annual Report 2012
 “Guidelines to Fill in the Banking Statistics Returns SBS-1, 2 & 3(4th Edition)”,
Statistics Department of Bangladesh Bank.
 Jasim Uddin Sarker, “Banks introduce new saving schemes to tackle liquidity
crisis”, The New Age, 7th Aug, 2013.
 The World Bank (2006), “Doing Business 2006”, Washington, D.C.
 Thill and Bovée L. Courtland, “Excellence in Business Communication”, Fourth
Edition, Page: 336-360.

Work Cited:
i. http://www.Southeastbankltd.com
ii. http://www. wikipedia.com/
iii. http://www.bangladesh-bank.org/
iv. http://isqpm.org/2006%20Journal/Government%20policy%20and%20competitive
%20bsiness%20environment%20in%20Bangladesh%20by%20Mondal%20and
%20Ahmad.pdf
v. http://ezinearticles.com/?The-Importance-of-Credit-Risk-Management-for
Banking&id=1102802
vi. http://www.bis.org/publ/bcbs54.html
vii. http://toostep.com/trends/the-importance-credit-risk-management-for-banking

Questionnaire:
Dear Respondent,
I’m Md. Moshiur Rahman, a student of BBA (Major in Finance and Banking) from IUBAT
(International University of Business Agriculture and Technology). I am conducting a report on
topic, “Credit Risk Management Policies & Procedures of Southeast Bank Ltd.” For my
BUS-490 : Practicum course. I need your valuable opinion. Let me assure you that all the
information provided by you will be used only for academic purpose and kept under strict
secrecy.
Information of Interviewee:
Name: ……………………………………………………………………………… i.
Occupation i.
i.
Service Business Student Housewife Others: ………….. i.
i.
Contact Into: …………………………… i.
i.
Identification of sector wise loan limit is an effective method of Credit Risk Management.
Strongly Disagree Neither agree Agree Strongly

Disagree nor disagree agree
1------ 2------ 3------ 4------ 5------
ii. Credit Investigation is an effective method of Credit Risk Management.


1------ 2------ 3------ 4------ 5------
iii. Evaluating 6 C’s of credit is an effective method of Credit Risk Management.

iv.
1------ 2------ 3------ 4------ 5------
v. Monitoring credit performance is an effective method of Credit Risk Management.

1------ 2------ 3------ 4------ 5------

vi. Debt rescheduling is an effective method of Credit Risk Management.

1------ 2------ 3------ 4------ 5------
vii. Non-judicial action is an effective method of Credit Risk Management.

1------ 2------ 3------ 4------ 5------
viii. Judicial proceedings and execution is an effective method of Credit Risk Management.

1------ 2------ 3------ 4------ 5------
ix. Adjust bad debt from Reserve and provision is an effective method of Credit Risk
Management.

1------ 2------ 3------ 4------ 5------
x. Sale of credit to a third party is an effective method of Credit Risk Management.

1------ 2------ 3------ 4------ 5------
xi. Liquidation proceeding is an effective method of Credit Risk Management.

1------ 2------ 3------ 4------ 5------
xii. Do you have any recommendation:
………………………………………………………………………………………………
………………………………………………………………………………………………
………………………………………………………………………………………………
……………………………………………………………………………
Thank You

Southest Bank

Uploaded by

Copyright:

Available Formats

Southest Bank

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Southest Bank

Uploaded by

Copyright:

Available Formats

CHAPTER ONE

Credit Risk Management Policies & Procedures of Southeast Bank Limited 1

1.2 Objective of the Study

Credit Risk Management Policies & Procedures of Southeast Bank Limited 2

Primary Data sources:

Practical banking work.

Credit Risk Management Policies & Procedures of Southeast Bank Limited 3

1.4 Scope of the Study

This report covers SBL’s Credit Policy, Organizational Overview,Management and

1.5 Limitation of the Study

Credit Risk Management Policies & Procedures of Southeast Bank Limited 4

Credit Risk Management Policies & Procedures of Southeast Bank Limited 5

2.1 Definition of Bank:

1. As per Bank companies act 1991

02.Provided by Famous Encyclopedia:

03. Provided by and Ordinances:

Credit Risk Management Policies & Procedures of Southeast Bank Limited 6

05. Provided by Famous Economist :

 A Banker is a dealer in debt his own and other peoples - Crowther

 A Bank is a financial intermediary a dealer in loans and debts – Cairncross.

Business of Banking Companies are as follows: (Bank company act 1991).

Credit Risk Management Policies & Procedures of Southeast Bank Limited 7

Credit Risk Management Policies & Procedures of Southeast Bank Limited 8

Credit Risk Management Policies & Procedures of Southeast Bank Limited 9

From the owners perspective.

From the Government’s perspective:

Credit Risk Management Policies & Procedures of Southeast Bank Limited 10

From the Bank Clients’ perspective:

Credit Risk Management Policies & Procedures of Southeast Bank Limited 11

Credit Risk Management Policies & Procedures of Southeast Bank Limited 12

2.4.1 Historical Background:

Credit Risk Management Policies & Procedures of Southeast Bank Limited 13

 High quality financial services with the help of latest technology.

Main Operational Area

Credit Risk Management Policies & Procedures of Southeast Bank Limited 14

Brief Profile of Southeast Bank Limited:

01. Date of Incorporation : 12th March, 1995

02. Date of Commencement of Business : 12th March, 1995

03. Capital Authorized : Tk. 2500.00 Million

04. Deposits : Tk. 20,118.82 Million

05. Advances : Tk. 15,548.11 Million

06. Operating Profits : Tk. 665.16 Million

07. Loan as a % of Total Deposits : 77.28%

08. Global Relations : 350 Correspondents Worldwide

09. Number of Employees : 701

10. Capital Adequacy Ratio : 9.20%

11. Ratio of Classified Loans to Total : 2.09%

13. Name of the Chairman of SEBL : Mr. AlamgirKabir, FCA

Credit Risk Management Policies & Procedures of Southeast Bank Limited 15

16. Credit Card : Member of Master & VISA Card

17. Banking Operation System : Both conventional & Islamic

Online Banking Computer System

2.4.4 Deposit Schemes:

2.4.5 Loan Schemes:

Loan Schemes Lending

Credit Risk Management Policies & Procedures of Southeast Bank Limited 16

Asset of SBL for the year 2006-2011

Credit Risk Management Policies & Procedures of Southeast Bank Limited 17

Source: Annual Report 2011