Part 3
Credit Department of Dhaka Bank Limited

3.1 Introduction
The loan and credit department is a very important department of a bank. The money mobilized from ultimate surplus units are allocated through this department to the ultimate deficit unit (borrower).the success of this department keeps a great influence over the profit of a bank. Failure of this department may lead the bank to huge losses or even to bankruptcy. Loan and credit department receive application from client in a prescribed application form supplied by the Dhaka Bank Limited, Uttara branch.
The Bank implemented the system of credit risk assessment and lending procedures by stricter separation of responsibilities between risk assessment, lending decisions and monitoring functions to improve the quality and soundness of loan portfolio. The Bank recorded a 6% growth in advances with a total loans and advances portfolio of BDT 52,910 million at the end of December 2009 compared to BDT 49,698 million at the end of December 2008.

As of 31 December 2009, 94.43% of the Bank’s loan portfolio was regular while only 5.57% of the total portfolio was non- performing as compared to 3.84% of 2008. Bank made required provision as of 31 December against performing and non- performing loans as per rate and classification norm provided by Bangladesh Bank. The volume of non- performing loans stood at BDT 2,946 million in 2009 from BDT 1,908 million in 2008. Of the total loan provision of BDT 2,113 million, BDT 625 million was general provision, which was 30% of the total provision. The rest BDT 1,488 million was against the classified accounts.

3.2 Credit Rating Report
Dhaka Bank Limited was rated by Credit Rating Agency of Bangladesh (CRAB) on the basis of audited financial statements as on December 31, 2009. The Summary of the Ratings is as follows:

Status .......... 2009 ....... 2008
Long Term .... A1 ........... A+
Short Term .. ST-2 ........ ST-2

Commercial Banks rated A1 in the long term are strong banks backed up by good financials and timely payments of financial commitments. ST-2 in the short term for commercial bank characterizes commendable position in terms of liquisidty, internal fund generation and timely repayments.

3.3 Functions of the Credit Department
Lending money is one of the main functions of a commercial bank. In the lending process, selection of borrower is the most crucial and vital job for a banker. Before a customer enjoys credit facilities it is important that the applicant should qualify for five Cs. The five Cs are:
• Character – Intention to pay back the loan
• Capacity – Borrower’s competence in terms of utilizing the fund profitably and generate income
• Capital –Financial strength to cover the risk
• Conditions – General business condition between two parties
• Collateral – Implies additional securities

In addition, objectives of the credit department are managing credit exposure of the bank, maintaining credit risk, compliance of Central Bank Ltd, recovering or collecting dues of retail loans or advances. At present credit division performs following activities:
• Credit Approval Process:
• Corporate Credit
• Retail Credit
• Collection and Monitoring Activity:
• Recovery
• Risk management

The activities of this department include managing the financial books of the bank, checking all entries of the book are according to standards, preparing daily reports for Bangladesh Bank, revenue appropriation and calculations, setting the internal pricing rates etc.

Loan is an asset to any financial institution. That is why it is very much necessary to ensure that a loan does not become bad. The first step in ensuring that is to ask for proper documentation of the loan applicant. A default loan might be very hard to recover due to lack of proper charge documents. This is where the asset operation department of the bank comes into action. Asset operation department of the bank acts as a last frontier to mitigate all loan related risks before disbursement of a loan.
The functions of asset operation department can be broadly categorized under two heads. The first one is the disbursement and monitoring of loans. In this case the department disburses loans after obtaining clean CIB reports of the clients, checking all documents and collecting securities after proper lien and charges creation after terms of approval. This department also periodically review conditions of past due loans, limit, expiry and document deficiency.

The next operation of the department is to act as custodian and compliance of the charge documents and prepare various MIS reports for the central bank and other audit authorities.

The documents that are required by asset operation department (AOD) can be classified into three parts. First one is the business verification and related documents of the applicant. Second one is the basic charge documents like demand promissory note, letter of continuity, letter of pledge letter of hypothecation and some other documents. The third documents that asset operation department need to disburse loan is the security documents like post dated cheque, undated cheque for unsecured loan, fixed deposit or title deed for secured loan.

3.4 Overall Credit Policy of DBL
Lending being the most important function of commercial bank, every bank should have own credit policy. Credit policy generally aims at (a) creating healthy loan assets to ensure goods interest earning for the bank (b) ensuring ultimate safety through judicious selection of based on its salability.

The credit policy of Dhaka Bank Limited has been formulated of the plan of “ALL NEW LOANS TO BE GOODS LOANS”, The plan was formed on the basis of the following objectives:
• To maximize the profit of the bank by making sound lending
• To deliver credit to viable borrowing at a reasonable cost
• To provide satisfactory return on investment
• To assist the social and economic development of the country
• To deliver general banking services to the public and credit to viable borrowers at a reasonable cost

3.5 Types of Loans and Advances
When an advance is made in a lump-sum repayable either in fixed monthly installments or in lump-sum and no subsequent debit is ordinarily allowed except by way in interest and incidental charges etc. is called a loan.

Loan is allowed fir a single purpose where the entire amount may be required at a time or in a number of installments within a period of short span.

After disbursement of the entire loan amount, there will be only repayment by the borrower. A loan once repaid in fill or in part, cannot be drawn again by the borrower.
• Personal Loan
• Car Loan
• Vacation Loan
• Home Loan
• Any Purpose Loan
(Described in details in the previous part)
• Overdraft
• Import Financing
• Export Financing
• Bank Guarantee

3.6 Overdraft (O.D.)
Overdraft is an arrangement between a banker and customer by which the latter is allowed to within over and above his credit balance in the current up to an agreed limit.

This is only a temporary (usually for one year) accommodation usually granted against sufficient security. This facility is renewable after expiry. The borrower is permitted to draw and repay any number of times, provided the total amount overdrawn does not exceed the agreed limit. The interests charged only for the amount drawn and not for the whole amount sanctioned.

O.D. AGAINST HYPOTHECATION OF GOODS:
O.D facility is also extended against hypothecation of goods/stocks. In this case both the ownership and physical possession remain with the borrower. The borrower binds himself to surrender the hypothecated goods to the bank as and when called upon to do so. The bank only acquires a right over the goods. Therefore, the band insists upon the borrower to give other secondary securities. Overdraft facility against hypothecation of goods is allowed go only trustworthy and prudent clients.

O.D. AGAINST PLEDGE OF GOODS:
Overdraft facilities may be provided to the borrowers against pledge of raw materials or finished goods as security. In this matter the borrower surrenders the physical possession of the goods, under effective control of the bank. The ownership of the goods however, remains with the borrower. In case of default by the borrower in repayment if the credit, the bank has the authority to sell the pledged goods and realize the due loan with interest.

But the bank has to give a notice to the borrower before attempting to sell the goods. The following thing must be considered while allowing O.D. facilities against pledge of goods or stocks
• The quality and quantity of the goods,
• The goods are readily sellable and have a stable demand in the market,
• The borrower has an absolute title to the goods,
• Goods must be checked regularly by the authorized representative of the bank,
• The lack of the go-down are to be sealed and keys are to be kept in the branch.

3.7 Import Financing
a) Pre-import financing:
1)Letter of credit (non-refunded)

b) Post import financing:
1) Payments against Documents (PAD)
2) Loans against Imported Merchandise (LIM)
3) Loans against Trust Receipt (LTR)

Loans against Imported Merchandise (LIM):
Loan against the merchandise imported through bank maybe allowed pledge of goods retaining margin prescribed on their landed cost. The branch shall also obtain letter of undertaking and indemnity from the customer before getting goods cleared through L.I.M. account. Clearing should be taken by approved clearing agent of the bank. Merchandise should be insured with specific risk clauses.

The following matters must consider while allowing L.I.M. against secured of goods. The landed cost of the merchandise is measured before the goods are delivered the client against proportionate payments. The landed cost is determined by taking following items:
• Invoice value if the merchandise including freight
• Customs duty
• Sales tax
• Warfare
• Derange agent’s charges
• Railway freight
• Insurance premium
• Other charges

Loans against Trust Receipt(LTR)
Advances against a Trust receipt obtained from the clients are allowed when the documents covering an import shipment are given without prior payment. This type of facility is given only to first class and reliable clients.

The customer holds the goods or their sale proceeds in trust for the bank till the loan allowed against Trust Receipt is fully paid off.

The Trust receipt is a document which creates the banker’s lien on goods and practically amounts to hypothecation of the proceeds of sale in discharge of lien. The period of Trust receipt may be 30, 45, 60, 90 days. The loan is adjustable within the period. Sale proceeds of goods held in trust must be deposited in the bank by the borrower irrespective of the period of the trust receipt.

3.8 Export Financing
Export finance can be allowed in two types or stages, namely-
Pre-shipment;
Packing credit
Back to Back L/C.
Post- shipment.
Through negotiation of documents;
Through purchase of foreign bill.

PACKING CREDIT:
Packing credit is a short-term credit granted by a bank to exporter to help him to purchase, process, pack and ship the goods. Generally, for the movement of goods from hinterland areas to the port of shipment, the bank provided interim facilities by way of packing credit.

BACK TO BACK CREDIT:
It is nothing but a secondary letter of credit by the advising bank in favor of a domestic/foreign supplier on behalf of the beneficiary of original foreign L/C.

NEGOTIATION OF DOCUMENTS:
Negotiation of documents under letter of credit is the usual method of financing exports at the port shipment stage. In this system, after the shipment of goods the export presents the relative documents to the Negotiating bank for negotiation. Normally, an exporter is required to submit following documents drawn in terms of the credit to the bank for negotiation of the bills:
• Bill of exchange or draft
• Bill of fading/Airway Bill
• Invoice
• Packing list
• Certificate of origin
• Insurance policy
• Inspection certificate
• Shipping advice
• Other documents as per terms of Letter of Credit.

PURCHASE OF EXPORT BILL:
The second and one of the most widely used methods of bank finance in export trade is the purchase of an export bill at the post shipment stage. Here the bank extends financial accommodation to the concerned exporter by allowing him to enjoy F.B.P (Foreign Bill Purchase) limit with prior approval of Head office, where necessary. The bank allows the export taka equivalent of the foreign bill amount after deducting its discount, commission and charges as per existing rule.

An export bill may be drawn either at sight or usance basis. In the case of purchase of an export bill the bank carefully scrutinize the exports credit worthiness, business integrity of the drawee bank and nature of goods exported. Further, the bank will meticulously scrutinize all the export documents as to cheek that the documents are not at all discrepant.

3.9 Bank Guarantee
Bank guarantee is nothing but giving a guarantee (commitment) to a certain organization by a bank on behalf of its client stating that if the client of the bank fails to perform certain contractual obligation, the bank will settle the liability of the client to that organization (beneficiary). Commission is realized from the bank’s client for issuing such guarantee.

Bank guarantee is of two types:
• Bid Bond Guarantee,
• Performance Guarantee.

Bid Bond Guarantee:
Bid Bond Guarantee is issued by the bank on behalf of banks client favoring the beneficiary (the company which has request the bids) for the purpose of submitting Tender schedule by the client.

Performance Guarantee:
When a company (client of the bank) is awarded a contract, then the company (beneficiary of bank guarantee) who awarded the contract will request the contractor (bank’s client) to submit a Performance Guarantee. On request of the bank’s client the bank will issue a Performance bank Guarantee favoring beneficiary.

3.10 Impaired Asset Management Department
This department of the bank looks after the default loans and tries to recover them. It is said that the less job load this department has, the better it is for the bank itself. The head of IAM directly reports to the Managing Director of the Bank and this division is an administrative division of the bank. This department of the bank has two wings. One wing looks after the impaired assets of SME wing and another wing looks after the impaired assets of retail business. Normally if a loan installment is six months over due, then the credit department hands over the file to IAM for recovery. IAM first issues a letter in soft language. Then if it does not work, IAM issues further three letters to the defaulter. If it does not work either, then IAM files a case against the defaulter. Usually this case filing is done in the 11 month of the default.

Loan Admin - The posting is done in the system in the Asset Operations Department. Then Loan Admin sends requisition to Fin Admin.
Fin Admin: Fin Admin take care of the other expenses.
Recovery: Recovery Dept. prepares an overdue report and informs the TM. Recovery dept. keeps track of the money. Legal notices are given to the defaulters.
MIS: MIS dept. keeps the total record of loan from its sanction to repayment.

3.11 Ratings of clients/obligors of Dhaka Bank
Dhaka Bank recognizes the fact that capital requirement increases for the Bank if it holds risky assets and decreases significantly if it holds safer portfolios and counterparty credit rating is the primary driver to ensure risk sensitive portfolio. Dhaka Bank is consistently pursuing its clients for credit rating.

As per Bangladesh Bank BRPD Circular No. 05 dated April 29, 2009 Dhaka Bank has nominated two recognized External Credit Assessment Institute (ECAI) namely
(1) Credit Rating Information & Services Ltd. (CRISL) and
(2) Credit Rating Agency of Bangladesh (CRAB)

3.12 Credit assessment
The evaluation process is carried out based on ‘Lending Guideline’ described in this Policy and the clauses and documents checklist as per the PPG. The detailed credit risk assessment should be conducted prior to the approving of any loans. The Credit Risks are detailed in the Risk Management Chapter of this policy.

3.13 Risk grading
Bank shall formulate a separate risk-grading matrix customized for SME financing on the basis of expert opinion taking into consideration the experience of the Bank in lending the SMEs for last few years.

3.14 Reporting to business unit
A monthly summary of all new loans approved, renewed, enhanced, and a list of proposals declined stating reasons thereof shall be reported by Credit Team to the Business Head.

3.15 Rejection database
A rejection database is to be maintained listing the businesses and owners/sponsors to ensure that businesses and owners/sponsors with bad history, dubious integrity and high delinquency rate do not get loan from banks.

3.16 Automation
Bank has already automated the approval process, Risk Grading check, Rejection Database, reporting, compliance with PPG etc. and implementing it phase by phase.