CREDIT MONITORING, FOLLOW-UP AND SUPERVISION:

Banks Officer checks on the following points:

1. The borrower’s behavior of turnover
2. The information regarding the profitability, liquidity, cash flow situation and trend in sales in maintaining various ratios.

The review and classification of credit facilities starts at Credit Department of the Branch with the Branch Manager and finally with Head office credit division.

LOAN CLASSIFICATION:

Types of loans of a bank fall into following four scales:

 General Provision on unclassified loans and advances.
 Small enterprise financing for good loan.
 Special Mention Account.
 Provision on substandard loans and advances.
 Provision on doubtful loans and advances.
 Provision on bad/loss loans and advances.

PROVISION:

Provision for loans and advances are made on the basis of information furnished by the branches and instructions contained in Bangladesh Bank. BCD Circular No. 12 dated 4 September 1995, BRPD Circular No. 16 dated 6 December 1998, BRPD Circular No. 9 dated 14 May 2001, BRPD Circular No. 20 dated 20 December 2005 and BRPD Circular No. 5 dated 5 June 2006 at the following rates:

Type of classification

Rate of provision

General Provision on unclassified loans and advances.

1%

Small enterprise financing for good loan.

2%

Special Mention Account.

5%

Provision on substandard loans and advances.

20%

Provision on doubtful loans and advances.

50%

Provision on bad/loss loans and advances.

100%



CLASSIFICATION CRITERIA:

1. Overdue (OD)
2. Required Payment (RP)
3. Limit Overdrawn (LD)
4. Legal Action (LA)
5. Qualitative Judgment (QJ)

GUARANTEE:

Banks offers three types of Guarantee, which are as follows:

1. Tender or Bid Bond Guarantee: The tender guarantee assures the tenders that tenders shall uphold the conditions of his tender during the period of the officer as binding and that he /she will also sign the contract in the event of the order being granted.

2. Performance Guarantee: A Performance guarantee expires on completion of the delivery or performance. Beneficiary finds that as a guarantee, the contract will be fulfilled in every respect and can retain the guarantee as per provision for long time. This can be counteracted by including a clause stating that the supplier can claim under the guarantee, by presenting an acceptance certificate signed by the buyer.

3. Advanced payment guarantee (APG): This type of guarantee is given against work order. This idea can be made clear with the help of an example. Before the beginning of Jamuna Bridge construction, the Government collected money from different sources to pay the contractors in advance. But there was a risk for the Government that the contractors might not do there Construction work even they were paid in advance. So the Government asked Bank Guarantee from them. Then the contractors submitted Bank Guarantee to the Government. This type of Guarantee is called Advanced Payment Guarantee.

ISSUANCE PROCEDURE OF GUARANTEE:

Bank guarantee is a contractual relationship between the account (client) and the beneficiary. For issuing Bank Guarantee, a customer has to apply to MTBL in their own pad. Normally the bank prepares the format of the guarantee. The proposal for Bank Guarantee contains the following particulars:

Name of the Borrower with address
I. Nature of Facility
II. Extent of Facility
III. Purpose
IV. Security
V. Margin
VI. Commission
VII. Validity
VIII. Beneficiary
IX. Liability position of the Borrower ----
      a) Nature of Facility
      b) Extent of Facility
      c) Drawing Power
      d) Margin Amount (Tk.)
      e) Outstanding/ Net Exposure (Tk.)
      f) Validity.

The Bank issues Bank Guarantee on Judicial Stamp. The conditions for issuing Bank Guarantee are:

1) The customer must maintain a Current Deposit (CD) account.
2) The customer must keep certain percentage of guaranteed money (usually 2%) as margin.
3) Bank charges 0.50% commission on the guaranteed money per quarter (i.e., 3 months).

After realizing all the above charges, Bank then issues the Guarantee. For this issuance, Banker’s Liability is created and the following entries are given:

Customer’s Liability -------------Dr.
Banker’s Liability ---------------Cr.

When the guarantee is expired, the guarantee is marked as “cancelled” and the following entries are given:

Banker’s Liability---------------Dr.
Customer’s Liability-------------Cr.

Banks also issue Revolving Guarantee.

A Guarantee issues Register is maintained to record following information about Guarantee.

1) Name of Customer
2) Account No.
3) Guarantee No.
4) Issuing Date
5) Date of Approval/Reference No.
6) Beneficiary of the Guarantee
7) Amount of Guarantee
8) Margin (percent and amount)
9) Commission
10) Date of Expiry


STAEMENTS PREPARED BY THE CREDIT DEPARTMENT:

 Daily Statements prepared by Credit Department for Branch.
 Weekly Statements prepared by Credit Department for Head Office.
 Monthly Statements prepared by Credit Department for Bangladesh Bank and Head Office.
 Quarterly Statements prepared by Credit Department for Bangladesh Bank and Head Office.
 Half Yearly Statements prepared by Credit Department for Head Office and Bangladesh Bank.

OBSERVATIONS & RECOMMENDATIONS:

Following dissimilarities between theories and practices have been observed in the credit department:

1. In case of method of granting security against loan, hypothecation is much risky as compared with other charging security. But it is being used massively in MTBL Dilkusha Branch. It is risky because neither the ownership nor possession is passed on it, only a right or interest in the goods is created in favor of the bank. Theoretically, bank provides two types of credit facilities--- direct facilities (funded) and indirect facilities (non-funded). But bank is being covered indirect facilities fully but not direct facilities. For example, Demand Loan is not available in bank practically.

2.  In case of mortgage, only equitable and legal mortgage are commonly used as the charging security in immovable property but theoretically there are other types of mortgage like mortgage by the condition of sales, English mortgage, and anomalous mortgage are not applied in practice.

3. In case of cash credit (pledge), from the theoretical point of view, no collateral security is normally asked for the grant of such credit, but practically security is taken against CC (pledge). Now MTBL is not practices cc (pledge).

4. Interest rates for different types of loan and advances vary to different customers. A prospective customer is allowed to take credit facilities at a lower interest rate. Again, the interest is charged at a higher rate to a customer who is not so prospective. But I think that there should be a transparent interest policy that will be prospective for the bank, the borrower and the country.

5. It is amusing matter that additional security has to be provided by borrower for loan against trust receipt in order to protect the trust of the customers. Of course trust receipt is one of the securities; it is valueless in the context of Bangladesh.

By and large, it can be said that amount of security and charging security are determined by the degree of relationship between the banker and customer.