3.14 Qualitative Judgment Basis of Classification

Beside the above-mentioned objective criteria, Dhaka Bank Limited has other few qualitative judgment for classifying the loan and advance. This judgement totally depends on the Branch Manger and or the Head office credit division. Whether any continuous credit, demand loan, fixed term loan are classified or not on the basis of the above mentioned objective criterion but if there is any doubt or uncertainty as regarding their recovery then the loan can be classified on the basis of the Qualitative Judgment. The qualitative factors that are considered in Dhaka Bank Limited are as follows:

 Borrower sustains a loss of capital.

 Significant decrease in the value of the security.

 Weakening of bank’s position as creditor due to any reason whatsoever.

 Diversification of the funds to uses other than the facility for which the credit was approved.

 Incorrect information supplied by the borrower or bankruptcy of the borrower.

 Credit is rescheduled frequently or the rules of rescheduling are violated or a suit is filed for the recovery of the credit.

Last year the classification of the loan and advance of Dhaka Bank Limited were like this

Table: Classification position last three years.   Tk in million

Year

Unclassified

Substandard

Doubtful

Bad

2002

10940

12

5

250

2003

12470

200

20

200

3.15 Management of Delinquent Client

When a problem loan is detected the responsible branch manager takes the corrective action and tries to minimize the loan losses allowing different facilities to the client. The steps practice in Dhaka Bank Limited to manage the delinquent loan are:

 Persuasion: This is the first step practiced in the DBL to mange the problem loan.

 Negotiation: If the persuasion failed, the loan officer negotiates a plan of action with the borrower to try to extract both the bank and the borrower from possible loss. This calls for certain sacrifices on the part of the bank and borrower in their mutual interest.

 Litigation: If after rescheduling the loan and or failed to negotiate with the delinquent client, DBL go for taking legal action against the delinquent client to recover the loan.

3.16 Provisioning

Specific Provision:

Head office credit division prepares a list of credit accounts, which are considered to be totally or partially be unrecoverable & keeps a provision against the outstanding loans.

Rate of Provisioning

Dhaka Bank Limited in the time of loan provisioning to get the real picture of the income mainly follow the Bangladesh Bank guideline. The rate of provisioning used in DBL is summarized in the following table.

Table 4: Rate of provisioning

Class

Short Term Agriculture credit. 

All other credit

Rate of Provisions

Unclassified (UC)

5%

1%

Substandard (SS)

5%

20%

Doubtful

5%

50%

Bad or Loss

100%

100%


3.17 Credit Appraisal System

The function of commercial banks to collect deposit from the common people and to invest deposited money in different sectors for overall development of the economy of the country. So the banks have to be very much careful in credit appraisal. The person who is primarily held responsible for appraising a loan proposal in Dhaka Bank limited is called the credit officer.

The most important measure of appraising a loan proposal is safety of the project. Safety is measured by the borrower and repaying capacity of him. The attitude of the borrower is also an important consideration, liquidity means the inflow of cash into the project in course of its operation. The profit is the blood for any commercial institution. Before approval of any loan project the bank authority has to be sure that the proposed project will be a profitable venture. Profitability is assessed from the projected profit and loss statement. The security is the only tangible remains with the banker. Securing or collateral it is accepting must be easy to sell and sufficient to cover the loan amount. But bank cannot sanction loan by only depending on collateral. The sources of repayment of the project should be a feasible one. During sanctioning any loan bank has to be attentive about diversification of risk. All money must not be disbursed amongst a small number of people. In addition any project must be established for the national interest and growth.

Commercial banks and financial institutions intermediate between lenders and borrowers. These financial intermediaries collect deposit and disburse it as loan and advance to the individual people, business, commercial, industrial entity. The loan and advance should be given to them who has the certain and predicted cash flow to repay the credit. If the relationship manager fail to analyze the clients viability of repaying the loan and the projects cash flow possibility of default may arise due to the fact. So the importance of APPRAISAL, in sanctioning the loan, is the key to identify the borrowers ability, expertise, efficiency, industry analysis, business performance to ensure the recovery of the credit along with the good supervision, monitoring and the relationship. In a word it can be said that the purpose of appraisal is to be sure that the proposed advance will be safe, liquid, and profitable and for acceptable purpose covered by adequate security. At the time of credit proposal the bank has to come to an acceptable compromise between over caution and under caution.