loan portfolio management. basic bank. report internship

Portfolio Management of BASIC Bank Limited.

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Chapter 1

Introduction

1.1 Background This report is a pre-requisite for the MBA program from the Department of Finance, Jagannath

University. As part of the course completion process, assigned to the Bangladesh Small Industries &

commerce Bank Limited shortly called BASIC Bank Ltd. As it is one of the specialized banks in

our country, it mainly focuses on small and medium industries. The assignment is performed under

the faculty supervision of Assistant Professor, Md. Omar Faruque, Department of Finance. This

report has been prepared in the light of practical as well as theoretical knowledge.

1.2 Objectives

Banking, being the most sophisticated and organized business is an attractive sector for modernization.

Just like other sectors of the economy, our banking sector is also facing challenges and competitions.

Thats why there is a crying need for managers well equipped with banking knowledge. The following are

the main objectives of the report to gather information about the loan portfolio analysis.

1.3 Scope of the study This report emphasizes the sequential activities involved in loan portfolio management of BASIC Bank

Ltd. The report also focuses on the loan monitoring techniques adopted by Bank both in pre-sanction and

post-sanction period of a loan. Finally it incorporates an evaluation of the different aspects of the lending

process in comparison to other competitor banks and recommends some measures to further strengthen its

loan portfolio management.

1.4 Limitation of the study

BASIC Bank Limited has become a large financial institution having 32 branches all over the country. So,

it was not possible to find out the true picture of the bank within a short period of time. Some of those are

mentioned below:

Information was not available for conducting full-fledged survey as most of the

information was sensitive regarding the bank.

Due to time constraint the report has been focusing on bankers view and perception. There

may be some deviation in their view compared to actual position of the bank.


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Chapter 2

An Overview of BASIC Bank Ltd.

Historical Background: BASIC Bank Limited (Bangladesh Small Industries and Commerce Bank Limited) registered

under the Companies Act 1913 on the 2nd of August, 1988, started its operations from the 21st of

January, 1989. It is governed by the Banking Companies Act 1991. The Bank was established as the

policy makers of the country felt the urgency for a bank in the private sector for financing small scale

Industries (SSIs). At the outset, the Bank started as a joint venture enterprise of the BCC Foundation

with 70 percent shares and the Government of Bangladesh (GOB) with the remaining 30 percent

shares. The BCC Foundation being nonfunctional following the closure of the BCCI, the Government of

Bangladesh took over 100 percent ownership of the bank on 4th June 1992.

Activities of the Bank:

Industrial Credit BASIC Bank's services are directed towards the entrepreneurs in the small industries sector.

BASIC Bank's services are specially directed towards promotion and development of small industries.

Its exposure to small and medium industries sector accounted for 56.52 percent of the total loans

and advances. During the year total of 87 projects were sanctioned for term loan. Out of which 26 were

new and the rest were under BMRE of the existing projects. As on 31 December 2012, 850 projects

were in the portfolio of the bank. The textile sector including garments being one of the major

contributors to national economy dominated the loan portfolio of the Bank.

Commercial Credit

The Bank also supports development of trade, business and other commercial activities in the country. It

covers the full range of services to the exporters and importers extending various facilities such as cash

credit, export cash credit, packing credit, short term loans, local and foreign bills purchase facilities.

Micro Credit

BASIC Bank launched a Micro Credit Scheme in 1994. Micro Credit Scheme provides for the poor for

generation of employment and income on a sustainable basis particularly in urban and suburban areas.

The Bank follows three systems of credit delivery.

These are -

1. Lending to the NGOs who on-lend to their members. At present there are 15 such NGOs.

2. Lending direct to the targets groups or ultimate borrowers under the Bank's own management.


3

Foreign Trade The bank achieved substantial growth in export in 2009 and the performance of the bank in import

business was also satisfactory. The Bank handled total export business of Taka 22,270.87 million and

import business of Taka 27,359.77 million in 2009. The export and import business grew by 32.60 percent

and 28.65 percent respectively. Major items of exports were garments, jute products, textile, leather

etc. Items of import included mainly industrial raw materials, garments accessories, capital

machinery, food items and other essential commodities.

Other Activities The Bank provides services for remittance, underwriting, guarantee, public offering of shares etc.

The bank also provides funds to investment and leasing companies. The Bank has recently created a

venture capital fund for equity support to innovative but risky projects.

Monetary & Financial Resources:

Mobilization of Fund:

Like any other financial intermediaries, BASIC Bank Limited is no exception in performing

its core functions viz. Mobilization of fund and utilizing such mobilized fund for profitable purposes.

The main sources of fund for the Bank are:

1. Deposit and 2. Borrowing

Deposit Deposit is the mainstay of the Banks sources of funds. Following usual practices, it collects deposit

through:

A. Current Deposit

B. Savings Deposit

C. Term Deposit

Borrowing

Apart from deposit, BASIC Bank Limited received funds from:

A. Bangladesh Bank

B. Asian Development Bank (ADB)

C. Kfw (kreditanstalt fur Wieder-aufbau Credit Institution for Reconstruction), a German

development bank. All of these funding sources are for relatively longer period. Receiving the credit lines

from ADB and KfW has been a recognizing of the Banks highly satisfactory performance.


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Utilization of Fund: BASIC Bank Limited utilizes its funds in accordance with its organizational goals and corporate

strategy. Main use is for lending to industrial and trade sectors. Maintenance of cash and statutory

liquidity reserve with the Bangladesh Bank covers 20 percent of demand and time liabilities.

Placement of funds in Nostro Accounts to handle foreign trade and investment in money market is also

done as usual.

Strategic Priorities BASIC Bank has been strongly positioned in recent years to take up the opportunities of a growing and

transforming Bangladesh marketplace. Our strategy is to serve the full value chain of customers in our

operations, from the most basic to the most sophisticated of financial services needs, and to maintain high

standards of customer service and cost-effective delivery channels. High standards of customer service

must rank as the ultimate differentiator in the banking industry and we would apply ourselves, as we did

in previous years, with great commitment to this important task in 2010

Credit Ration of the Bank:

Credit Rating Information and Services Limited (CRISL) has upgraded its rating and assigned

(pronounced as double A) rating in the long term and ST-1 rating in the short term to the Bank for the

year 2009.

Year Long Term Short Term 2012 AA ST-1 2013 AA- ST-1

Banks rated AA in the long term are adjudged to be of high quality, offer higher safety and have high

credit quality. This level of rating indicates a corporate entity with a sound credit profile and without

significant problems. Risks are modest and may vary slightly from time to time because of economic

conditions.

Banks rated ST-1 in the short term are considered as the highest certainty of timely payment. Short term

liquidity including internal fund generation is very strong and access to alternative sources of funds is

outstanding. Safety is almost like risk free Government short-term obligations.


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Chapter 3

Loan portfolio Management & Performance Activities

Portfolio Management of loan implies the deployment of loan able fund among alternative opportunities

through proper allocation. The objective of portfolio management of loan is the best and efficient

management of loan to ensure profitability with optimum risk. Designing the size and pattern of loan

portfolio with accuracy is a tough job.

The return on investment of a loan portfolio management system can be measured in production

efficiencies in the short run and profitability in the long run. Loan portfolio management executes

analyses at both the portfolio and individual customer from origination through servicing .

BASIC is facing increasing growth both in industrial and commercial loans. Industrial loan volume is

very high as the Bank is contributing towards project financing. Commercial loan volume growth is

steady. On the contrary, Micro credit is in static condition.

BASIC Bank services are specially directed towards promotion and development of small industries. The

textile sector including garments being one of the major contributors to national economy dominated the

loan portfolio of the Bank. Other sectors financed include engineering, food and allied industries,

chemicals, pharmaceuticals and allied industries, paper, board, printing and packaging, and other on-

metallic goods, leather and jute products. Recovery rate of project loan was 92.00%.

3.1 Sector-Wise Distribution Of Loans And Advances: (Industrial term loan and working capital) Table-1 Industrial Sector 2010(TK in

million) 2011(TK in million)

2012(TK in million)

2013(TK in million)

Food and allied industry 2037.5 1734.5 1681.0 1371.0 Textile 3989.0 2661.6 4432.4 3619.1 RMG 1938.3 1343.4 1267.5 1136.7 Accessories 854.7 833.0 754.1 715.6 Jute products and allied industry

1683.0 1629.3

1191.3

633.4 Forest products and allied industry

60.3 78.2

11.5

12.7 Paper, board, printing, publishing & packaging

893.8 698.4

440.0

402.6

Tannery, Leather and rubber products 547.5 466.2

191.2

140.4

Chemical, pharma and allied 727.2 742.5 643 595.0 Glass, ceramic and other non metal products

197.1 93.2

68.6

71.2


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Source- ICD & CCD, April 2010 Figure-1

Sectoral distribution of Industrial Loan

Food and allied Ind.12%

Textile 20%

RMG10%Accessories

6%Jute products and allied

12%

Forest products and allied 1%

Paper , printing,& packaging 5%

Tannery . Leather and rubber products

3%

Glass , ceramic & other non metal products

1%

Engineering12%

Electrical and electronics1%

Service industries 10%

Misc industries 2%

Chemical , pharma and allied 5%

3.2 Commercial Credit

The Bank also supports development of trade, business and other commercial activities in the country. It

covers the full range of services to the exporters and importers extending various facilities such as cash

credit, export cash credit, packing credit, short term loans, local and foreign bills purchase facilities.

3.3 Micro Credit

BASIC Bank also provides micro credit to the poor for generation of employment and income on a

sustainable basis, particularly in urban and suburban areas.

3.4 Loan Portfolio

Table-2

Year Industrial

(In Mn. Tk) Commercial (In Mn. Tk)

Micro Credit (In Mn. Tk)

Engineering 2002.1 1699.2 1664.9 1143.1 Electrical and electronics 52.30 167.5 122.1 124.9 Service industries 1493.9 1454.2 824.3 627.1 Misc, industries 180.7 48.1 338.2 453.7 Industry not classified 568.9 251.2 326 236 Total 17226.3 13901.4 13956.1 11282.5


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2006 11,282.5 5,013.55 338.30 2007 13,956.1 6,397.21 359.24 2012 13,901.40 7,681.74 680.13

2013 17,226.3 9,278.26 764.46

Source- ICD & CCD, April 2013 Loan Portfolio in Graph Figure-2

Graph shows that the Loan Portfolio has shown a consistent growth over the years and the

proportion of lending in relative sectors (Industrial, Commercial & Microcredit) has been

consistent with lending in Industrial Sector has been the biggest in the loan portfolio. It reflects

the fact that BASIC Bank Limited is especially interested in project based industrial financing.

Figure-3 Source- ICD & CCD, April 2010

Sectorwise Distribution of Loans

Industrial63%

Commercial34%

Micro Credit3%

Industrial Commercial Micro Credit


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Graph shows the sector wise distribution of Loans in the year 2009 for BASIC Bank Limited

where loan in industrial area comprises 63% of the total loan for that year and loans in

Commercial & Micro Credit sector are 34% & 3% respectively. Basic bank is a specialized Bank

as its maximum fund should invest in small industrial sector.

3.5 Income from loan portfolio

The Banks total income was Taka 5,162.30 million in 2009 compared to Taka 5,060.29million

in 2008. Interest income from loans and advances increased to Taka 3,877.17 million in2009

from Taka 3,829.43 million in 2008 .Average yield on lending was 11.72%

Table-3

Year 2006 2007 2008 2009 Income 2278.55 2866.57 3829.43 3877.17

(Tk. in million)

Figure-4

INCOME VS YEAR

0

1000

2000

3000

4000

5000

2006 2007 2008 2009

YEAR

AM

OU

NT(

TK. I

N

MIL

LIO

N)

Income

Incomes from loans are increased from 2006 to 2008 and recovery steps are hardly apply in 2008

according to banks own and Bangladesh bank guidelines but in 2009 loans are disbursed with

mortgaged property in political consideration or non-assessment of client properly as a result

loans are classified consequently incomes increased at a lower rate.

3.6 Geographical location wise loans & advances: Table-4

DIVISION 2010 (Taka in million)

2011 (Taka in million)

2012 (Taka in million)

Dhaka Division 18969 15425 12817.2 Chittagong Division 4405 3631 3141.7 Khulna Division 1536 1064 1061.4 Rajshahi Division 1771 1656 1361.9 Sylhet Division 507 432 573.5


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Barisal Division 80 56 44.2 Total loans & advances 27269 22264 19000

Source- ICD & CCD, April 2013 Most of the branches are in the Dhaka division and the industrial locations of our client are

nearest of the Dhaka city such tongi, Gazipur and Narayangonj also in Keranigonj as a result

huge amount of loans are distribute in Dhaka division. More over no valuable industrial areas in

sylhet, Barishal division for distribute of loan as per BASIC Bank loan policy.

3.7 Non-performing loan

Nonperforming loans are loans that have defaulted or are in danger of defaulting when payments

are no longer able to be made. Typically, loans that have not received payments for three months

are considered to be non performing loans, though specific contract terms may differ

occasionally.

Although making loans are still the most important function for commercial banks; with the

innovation of financial instruments and less activity restriction, banks are expanding their

business scope other than lending in order to obtain higher profitability and larger market power.

Especially when banks have less risk constraints, i.e., less non-performing loans, they have more

freedom to engage in various businesses.

It is argued that the non-performing loans are one of the major causes of the making loan

portfolio. each non-performing loan in the banking sector is viewed as an obverse mirror image

of an ailing unprofitable enterprise. From this point of view, the eradication of non-performing

loans is a necessary condition to improve the economic status. If the non-performing loans are

kept existing and continuously rolled over, the resources are locked up in unprofitable sectors;

thus, hindering the economic growth and impairing the economic efficiency.

Non-performing loans have been viewed to constitute one of the most important factors causing

reluctance for the banks to provide credit. In a high NPL condition, banks increasingly tend to

carry out internal consolidation to improve the asset quality rather than distributing credit. Also,

the high level of NPLs requires banks to raise provision for loan loss that decreases the banks

revenue and reduces the funds for new lending.

3.7.1 Non-performing loan in BASIC Bank Limited

In absolute term classified loans and advances stood at Taka 148.02 crore in 2009 from Taka

92.32 crore in 2008. Additional provision made in 2009 was Taka 28.32 crore against classified


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and unclassified loans and advances. Total cumulative provision made for loans and advances

amounted to Taka 100.14 crore as on December 31, 2009. During the year 2009 loan amount of

Taka 30.33 crore was written off under the guidelines of Bangladesh Bank. Taka .139 crore was

recovered against written-off loans. Table-5

06 Branches have classified loan above Tk.10 crore as on 31-12-2013

Branch Name Classified loan

Amount (crore) %

Bangshal 44.98 21.22

Dilkusha 30.61 11.01

Gulshan 14.97 6.16

Rajshahi 12.08 26.24

Khulna 11.65 13.24

Principal 10.77 3.35

Source : ICD & CCD, April 2010

Table-6 07 Branches have classified loan above 10 % of their loans and advances.

Branch Name Classified loan

Amount (crore) %

Rajshahi 12.08 26.24

Dilkusha 30.61 11.01

Bangshal 44.98 21.22

Uttara 9.54 13.84

Khulna 11.65 13.24

Zindabazar 9.04 18.45

Barishal 2.43 24.77

Source : ICD & CCD, April 2010

Table-7

08 Branches have classified loan less 10 crore as well as 10% of their loans and advances.( Amount Tk.) Branch Name Classified loan

Amount (crore) % Khatunganj 1.12 2.74


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Agrabad 2.91 2.03 Moulvibazar 0.34 0.38

Bogra 6.58 6.06 Jessore .38 .68

Narshindi .12 .15 Dhanmondi 1.06 1.09

Karwanbazar 1.74 2.61 3.7.2 Some Causes of Non-performing loan in BASIC Bank Limited.

Non-performing loan reduces income from loan portfolio so at first management find out the reasons why

loan are going to be classified. BASIC Bank is a State Owned Scheduled Bank as a result reference of

government leader sometimes crate pressure to management for sanctioning loan & probability of such

loans will be classified very high. Some of the reasons are highlighted here:

Poor Corporate Governance

The general administration and the structure of most banks are definitely poor .Without proper

documentation loans are disbursement/ approved by the bank authority under reference, some fake

document are also submitted by the borrower so consequently loans are classified.

Fund not properly used

Lending money to investors to buy shares from the banks which result in the rise in their stock prices and

also led to gross loan debts/defaulting,

Non standard outside circumstances

Effective by National policies , behavior of the local governments social credit environment,

Lacking operational management of borrower Some enterprise lack accurate judgment for the trend of market and enlarge production without

consideration which led to imbalance in supply and demand , some projects go out of production during

construction These factors may create difficult to reclaim loans for banks and turn into non performing

loan

Lacking operational management of Banker

Operational mechanism, credit culture, management skill are not sufficient to analyze the loan proposal.

Timely monitoring and supervision system are not properly continue. Less effective measure to identify ,

quantify control the regional and industrial risk, from historical data. So mainly judgment are completed

on the basis of personal criteria


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3.8 Deposit

Deposit constitutes the core of BASIC Banks fund mobilization. Total deposit of the Bank at the end of

2009 stood at Taka 38,368.23 million (82.22% of Total liabilities) compared to Taka 31,947.98 million

(82.40% of Total liabilities) in 2008. The growth of deposit was 20.09 percent. During 2009, the fixed

term deposit increased to Taka 34,539.71 million from Taka 27,903.72 million in 2008. Savings bank

deposit decreased to Taka 985.51 million in 2009 compared to Taka 886.30 million in 2008. Deposit in

current and other accounts including bills payable increased to Taka 2,873.01 million in 2009 from Taka

2,867.19 million in 2008. At the end of 2012 the deposit mix is showed in the following:

Figure-5

deposit mix at end of 2009

90%

2% 7% 1%

term deposit savings deposit current deposit & others bills payable

Source : Annual report-2012.

Deposit mix has not a good combination because non interest base deposits and Savings deposits are very

poor. There are no attractive product and interest rate offered (as same as private banks are offered)by the

bank as a result banks deposits are based on the corporate deposits specially government institutions and

autonomies body consequently cost of deposit is high.


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3.9 Borrowing

Borrowings were made from various sources for long term funding specially for financing development-

banking activities. The Bank enjoys a credit line facility from KfW (Kreditanstalt fur Wiedraufnbau-

Credit Institution for Reconstruction), a German development bank for financing micro-credit scheme and

small-scale industries. It has also utilized an ADB credit line for financing small industries. Another loan

of Tk 502.94 million was also received from ADB for financing Agro business development. Ministry of

Finance (GOB) and Bangladesh Bank are the other source of finance. Total outstanding borrowing

against utilization of funds from the above sources in 2009 is Taka 1,708.40 million against Taka 1385.81

million in 2008. An amount of Tk 750.00 million was allocated by the GOB and disbursed to BASIC

Bank to finance Agro-based industry. BASIC was included in this scheme for its outstanding

performance.

3.10 Breakup of Loan Portfolio in different sectors of a model branch

As per Bank loan executive committee or management, our Shantinagar branches invested the fund over

all sectors of the economy and make a good portfolio of loan. It is the model branch out of 32branches.

As a result management announces to other branches hardly follow up their policy, guidelines and

internal Activities.

The following are loan portfolio of the branch and its hold 14% of the total loan in 2009.

Table-8 SMI Large Indus. Commercial Micro Trade Staff Total

153.77 16.72 53.24 9.73

119.65

15.92

369.03

(Tk. In Cr.)

Break Up Of Advance Portfolio In Term Of Loan Types

ACCOUNTS HEADS BALANCE TOD(Temporary Overdraft) 0.44 SOD(Secured Overdraft) 23.13 CC(Cash Credit) 60.14 STAFF Loan Against Salary 0.07 STAFF House Building Loan 13.04 STAFF Loan Against P.F 2.19 STAFF Inv. Purpose Loan 0.11


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STAFF consumer Loan 0.52 STL(Short term Loan)/ LADB(Loan Against Documentary Bill) 7.48 Loan General 43.19 T/L(Term Loan) 96.26 REF-HBL(Refinance-House Building Loan) 0.58 PC(Packaging Credit) 9.95 LTR(Loan Against Trust Receipt) 89.56 FBP(Foreign Bill Purchased) 2.35 LBP(Local Bill Purchased) 10.29 MC(Micro Credit) 9.73 Total 369.03

Source- ICD & CCD, April-2012. 3.11 A Comparative Analysis of Loan Portfolio

As BASIC bank is one of the specialized banks, it is mainly focused on small and medium scale

industries. The Memorandum and Articles of Association of the Bank stipulate that 50 percent of loanable

funds shall be invested in small and cottage industries sector. Now we will try to find out the actual

practices against the policy and their sector wise distribution of loan and the problems on disbursement of

loan. Approximately 88% of the loans and advances have been given to small and medium enterprises.

Table-9

Name of the Bank Investment to small scale industries

AB Bank 4.74 % Islami Bank 21.21 % Sonali Bank 10.83 % Rupali Bank 0.43 % Agrani Bank 10.45 % Dutch Bangla Bank 3.45 % Bank Asia 0.74%

Source-Banks Website.

So we have seen that, comparatively that all other banks are investing less amount to small-scale

industries. By this they are maintaining steady short term profit but endangering long run profitability. By


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examining the figures we have found that, for the month ended December 2009, BASIC employed

51.56% of its loanable funds to small-scale industries. In the credit policy it has been specified that,

approximately 50% of the loans and advances will be given to small-scale industries.

3.12 Analysis of Loans and advances from different years in BASIC Bank Ltd.

Maximum revenue of a Bank generated from loans & advances so it is needed to how much loans and

advances increases in a year compared with previous year. From the analysis Bank can decide in which

sector effort should be occurred for combination of a good portfolio.

Table-10 Year 2006 2007 2008 2009 Loans and

advances 15339.35 19000.00 22263.35 27269.13

Source- ICD & CCD, April-2010. (TK. in million)

Figure-7

loans and advances

0

5000

10000

15000

20000

25000

30000

2006 2007 2008 2009

Year

Am

ount

(Tk.

in M

illio

n)

loans and advances

From 2006 to 2009 the distribution of loans and advances are increasing in different sectors especially on

industry. There is different section in the industrial sector. Food and allied industry, Textile, RMG, Jute

products and chemical etc are included. From the analysis we found that the in the textile sector the

disbursement of loan is more than any other sector. Babubazar branch are sufficiently increased the loans

in paper and packaging sector. Khulna branch increased loans in the engineering sector. Dhanmondi

branch are disbursed loan in real estate sector.


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Textile Sector BASIC Bank Limited disbursed loan in the textiles sector. Textiles mills supply their product in the

garments for manufacturing items which are export to outside of the country. Presently it is the most

valuable sector for financing.

Textile Sector loans

3619.1

4432.4

2661.

3989

0 1000 2000 3000 4000 5000

2010 2011 2012 2013 Year

Amou

Textile Sector

From 2006 to 2007the distribution is increasing but in 2008 due to global recession and unfavorable

economic condition it is downward. In 2009 it moves upward because in babubazar branch, sister concern

of Alif group started business of interloop socks & styles. Huge amount of exporting charge or

income from exchange gain credited to bank account. Joydevpurchowrasta , Tanbazar & Savar (EPZ)

Branch are increased the loans in 2009. One of the valued client of Tanbazar Branch is Shohagpur Textile

mills Ltd sister concern of Purbani Group received facilitites Tk. 25 crore but due to some reason in 2008

they go another bank for their business propose but they are not satisfied and return again in last

month of December 2008.

Food and Allied Industry

BASIC Bank also focuses on agricultural sector. As our country is an agricultural country in different

years BASIC Banks disbursement of loan are:

Table-12

Year 2010 2011 2012 2013 Food and allied industry

1371.0 1681.0 1734.5 2037.5

Source-ICD, April 2013 (TK in million) Figure-9


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Food and allied industry Loan

1371 1681 1734

2037

0 500

1000 1500 2000 2500

2010 2011 2012 2013 Year

Amo

Food and allied industry

In every year the disbursement of loan in this sector is increasing. From 2006 to 2007there is a growth of

22.61%. From 2007to 2008 the growth rate is 3.18%. And in 2008 to 2009, 17.47% increase in growth

rate. Dilkusha Branch provided the loan facilities to Atlas Food & Beverage Ltd of Tk.90 million and

Babubazar branch provided Tk. 30 million to IKSL & Multifold Food Ltd.

The above information shows that BASIC Bank Limited has diversified its loans to different category.

This diversification reduced risks of their overall loan portfolio and increased return.

3.13 Internal and external factor for management to assess of loan portfolio:

Managing the loan portfolio includes managing any concentrations of risk by segmenting the

portfolio into pools of loans with similar characteristics; management can evaluate in the light of

the banks portfolio objectives and risk tolerances and, when necessary, develop strategies for

reducing, diversifying or otherwise mitigating risks. In such assessment BASIC Bank Ltd.

consider some internal & external factors given following:

Internal factors 1. Review recent loan review and loan-related audit reports. If there are any adverse trends in

quantitative measures of risk or control weaknesses reported, comment on whether and how

much they may increase risk.

2. Analyze the level, composition, and trend of documentation exceptions and determine the

potential risk implications.

3. Evaluate the level of compliance with laws, rules, and regulations applicable to the lending

function.


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External factors 1. Review the local, regional, and national economic trends and assess their impact on loan

portfolio risk levels.

2. Evaluate the results of any stress testing of the loan portfolio or portfolio segments. Include

review of testing for changes in interest rates, commodity prices, collateral valuations or product

pricing guidelines due to competition or statutory rate controls.

3. Assess the banks exposure to any pending legislative, regulatory, or accounting changes that will materially affect the loan portfolio LPM system that encompasses all the processes used by the board and management to

adequately plan, direct, control, monitor, and evaluate the institutions lending operations is an

essential component of a well-managed institution.


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Chapter 4

Findings & Recommendations 4.1 Findings After analyzing the business performance from disbursed loan in the different sector, loan

classification or Non-performing loan, provision and practices on ground mention the following

findings:

It has been observed that some of the branches of BASIC Bank are being exposed to higher risk due to highly concentrated loan distribution to some selective big parties. Risk of default can be

minimized by diversifying the customer base with small amount in the total portfolio Total loan processing time can be reduced but policy guidelines by Bangladesh Bank require

involvement of different top layers of the Bank. Most of the cases, the delayed loan sanction is

due to non-cooperation by the borrower Small scale industry in our country is not structured in any way. Most of the small scale

entrepreneurs dont have any financial statement of their business. It is difficult and time

consuming to assess the financial strength of the client in a robust manner BASIC Bank is giving special priority on export oriented and import substitution products,

certain types of manufacturing/servicing industries (like essential consumer goods, goods based

on indigenous raw materials, products for linkage industries, export oriented industries, etc.) The interest rate offered by BASIC is as follows:

Industrial Term loan : Interest rate is 13.00%

Industrial working capital loan : Interest rate is 13.00%

Commercial loan : Interest rate is 13.00%

Besides any Adhoc or Excess over limit amount will be charged an additional rate of 1.50% above

the ruling rate mentioned above.

The drawback in the above stated interest rate is that every project has been considered as equally

risky or no risk premium is being added with the prime rate. Interest rate should be adjusted viewing

the risk exposure of the project

BASIC is facing increasing growth both in industrial and commercial loans. Industrial loan

volume is very high as the Bank is contributing towards project financing. Commercial loan

volume growth is steady. On the contrary, Micro credit is in static condition


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Project appraisal techniques are not practiced appropriately due to non availability of information

of the said project

Ninety (90%) percent of the total deposit collected from corporate members as term deposit with

high cost as a result income from loans are not more satisfactory.

The importance of Relationship Manager is realized by the Bank. It has been observed that some

loan becomes problematic due to supervision and monitoring deficiency at the Branch level

Loan products of BASIC Bank Ltd. are traditional & number of products are less than private

commercial banks. Loan offering criteria are not sufficiently matched with customer choice so

bank loose many customers under the reason.

4.2 Recommendations Bank should establish a review process to examine the changing circumstances of borrowers to determine

the position of loans. Attention devoted to these loans is more likely to result in proper action to safeguard

the bank position & to assist the borrower to take appropriate steps in the business to bring back loan performing.

From personal observation in Branch level banking, loans are deteriorating due to lack of

monitoring and supervision activities. There should be a separate unit in Loans and advances

section named as Monitoring and Supervision Unit. Exclusive job responsibilities should be

delegated to RM (Relationship Manager) and feedback from his activities should be

communicated on daily basis to the Branch in-charge. As a matter of fact, he/she is the

Relationship Manager who oversees disbursement of credit to Monitoring and Follow up.

Technical team is essential in assessing Engineering aspects of a Project. Most of the projects are

typically capital intensive and engineering supervision prior to approval of credit is a prerequisite.

Head Office should have a technical team under Industrial Credit Division whose exclusive job

would be to assess the technical matters such as specification of Machinery, knowledge of

vendors of industrial machinery, installation of machinery, factory layout, and environmental

impact assessment etc. The project proposal submitted by the borrowers can be judged from

technical point of view effectively if a technical team exists in Head Office

Bank has not yet started Retail Banking Division as it is the prospects of widely distributed of

loan products.

Seasonal line of credit program may be offered for short term capital to growing companies

needing to finance seasonal buildups of inventory or accounts receivable. The maturity period


21

should not exceed 12 months and the company must repay it form cash flow. Accounts

receivables and inventory can be collateral for the loan.

Only policy prescriptions not the end, if it is not implemented through different measures timely

and properly. How far policy measures are implemented, along with, what effect - desired or not -

such policy measures has had on the development of loan areas/fields should also be monitored

from time to time. This monitoring will provide feedback for taking corrective actions, if

necessary, to ensure desired effect of the policy adopted

BASIC Bank should give more emphasize on their marketing effort and try to increase their sales

force.

BASIC should encourage young entrepreneurs with new business ideas in order to develop the small industries sector of Bangladesh.

Changes in industry trends may directly affect business so that it can no longer completely

profitable. Therefore, the Bank should keep information about the environment of each industry

in which its customers operate.


22

Chapter 5

Conclusion & References

BASIC Bank considers not only the risk posed by each loan but also how the risks of individual

loans and portfolios are interrelated in case of measuring portfolio. These practices provided

management with a more complete picture of the banks risk profile and with more tools to

analyze and control the risk.

BASIC Bank is redefining the traditional banking concepts and transforming it into relationship

banking. BASIC considers the Borrower as clients. The mutual relationship is the essence of

long term success in the banking industry. The ever increasing competitive nature of banking

business determines the direction of the bank. Sustainability in better performance is the prime

focus in BASIC Bank.

Reference: Kothari, C.R. (2005), Research Methodology Methods & Techniques, 2nd Edition, New Age

International (P) Ltd., 4835/24, Ansari Road, Daryaganj, New Delhi 110002.

BASIC Bank Limited, BASIC Bank Annual Report 2009, 17 June 2010

Berger, Allen N. & Robert De Young,(1997) Problem Loans and Cost of efficiency in

Commercial Banks, Journal of Banking and Finance, Vol. 21,

Ernst & Young, Global Nonperforming Loan Report 2004

Barth, James R., Gerard Caprio Jr., & Ross Levine, (2001) Banking Systems Around the Globe:

Do Regulation and Ownership Affect Performance and Stability?,

http://econ.worldbank.org/docs/1079.pdf

Functions of Bank and Other financial institution, 2013, Central Bank of Bangladesh.

BASIC Bank Ltd. (2012), viewed 14th October 2010,

Credit Department, BASIC Bank Ltd, Dhaka, Paper & Documentation of M/S. XY enterprise &

AB Garments (Pvt.) Ltd (2013).

Malhotra, NK (2008), Research Design, Marketing Research An Applied Orientation, 5th

Edition, Prentice-Hall of India Private Limited, M-97, Connaught Circus, New Delhi 110001.

loan portfolio management. basic bank. report internship

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