3.1 Overview

The word credit comes from the Latin word “Credo” meaning “I believe”. It is a lender’s trust in a person’s/ firm’s/ or company’s ability or potential ability and intention to repay. In other words, credit is the ability to command goods or services of another in return for promise to pay such goods or services at some specified time in the future. For a bank, it is the main source of profit and on the other hand, the wrong use of credit would bring disaster not only for the bank but also for the economy as a whole.
The objective of the credit management is to maximize the performing asset and the minimization of the non-performing asset as well as ensuring the optimal point of loan and advance and their efficient management. Credit management is a dynamic field where a certain standard of long-range planning is needed to allocate the fund in diverse field and to minimize the risk and maximizing the return on the invested fund. Continuous supervision, monitoring and follow-up are highly required for ensuring the timely repayment and minimizing the default. Actually the credit portfolio is not only constitute the banks asset structure but also a vital factor of the bank’s success. The overall success in credit management depends on the banks credit policy, portfolio of credit, monitoring, supervision and follow-up of the loan and advance. Therefore, while analyzing the credit management of DBL, it is required to analyze its credit policy, credit procedure and quality of credit portfolio. 

3.2 Credit Policy of DBL

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

3.3 Credit Principles

In the feature, credit principles includes the general guidelines of providing credit by branch manager or credit officer. In DHAKA Bank Limited they follow the following guideline while giving loan and advance to the client.

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

 All credit extension must comply with the requirements of Bank’s Memorandum and Article of Association, Banking Company’s Act, Bangladesh Bank’s instructions, other rules and regulation as amended from time to time.

 Loans and advances shall normally be financed from customer’s deposit and not out of temporary funds or borrowing from other banks.

 The bank shall provide suitable credit services for the markets in which it operates.

 It should be provided to those customers who can make best use of them.

 The conduct and administration of the loan portfolio should contribute with in defined risk limitation for achievement of profitable growth and superior return on bank capital.

 Interest rate of various lending categories will depend on the level of risk and types of security offered.

3.4 Global Credit Portfolio limit of DBL

The features which deals with how much total deposits would be used as lending the proportion of long term lending, customer exposure, country exposure, proportion of unsecured facility etc. the most notable ones are:

 The aggregate of all cash facility will not be more than the 80% of the customers deposit

 Long term loan must not exceed 20% of the total loan portfolio.

 Facilities are not allowed for a period of more than 5 (Five) years.

 Credit facilities to any one customer group shall not normally exceed 15% of the capital fund or TK. 100 crores

3.5 Types of Credit

Credit may be classified with reference to  elements of time, nature of financing and provision base.

3.5.1 Classification on the basis of time:

On the basis of elements of time, bank credit may be classified into three heads, viz.

Continuous loans:

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

Demand loan:

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

Term loans:

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

• Short term loan: Upto 12 months.

• Medium term loan: More than 12 months & up to 36 months

• Long term loan: More than 36 months.