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BACKGROUND OF THE STUDY:

Four years back Bangladesh Bank undertook a project to review the global best practices in the banking sector and examines in the possibility of introducing these in the banking industry of Bangladesh. Four Focus Groups were formed with participation from Nationalized Commercial Banks, Private Commercial Banks & Foreign Banks with representatives from the Bangladesh Bank as team coordinators to look into the practices of the best performing banks both at home and abroad. These focus groups identified and selected five core risk areas and produced a document that would be a basic risk management model for each of the five 'core' risk areas of banking. The five core risk areas are as followsa) b) c) d) e) Foreign Exchange Risks; Internal Control & Compliance Risks; and Money Laundering Risks. Credit Risks; Asset & Liability / Balance Sheet Risks;

Bangladesh Bank in one of its circular (BRPD Circular no.17) advised the commercial banks of Bangladesh to put in place an effective credit approval and monitoring system by December, 2003 based on the guidelines sent to them. While doing internship in the Credit Department, Mutual Trust Bank Ltd, Baridhara Branch, and for preparing the report, I will try to make a comparative analysis of Credit Approval & Monitoring process of Mutual Trust Limited existing credit policy following Bangladesh Banks suggested guidelines.

OBJECTIVES OF THE STUDY.

Broad objective: The broad objective is to know the Credit Administration of Mutual Trust Bank Ltd, Dhaka. Specific objective: In order to reach the broad objective, some specific objectives are identified. In this report, I have attempted to give an overview of Credit operation of MTBL. Following are the main objective: To familiarize with the history and operations of Mutual Trust Bank Limited of Bangladesh. To show an overview of Credit operation of MTBL. To know the effect of export and import performance in their financial ratios as well as in national GDP. To have better orientation on various credit management activities specially credit policy and practices, credit appraisal, creditprocessing steps, credit management, financing in various sector and recovery, loan classification method and practices of Mutual Trust Bank Limited. . To compare the and monitoring process of Mutual Trust Bank Limited with that of Bangladesh existing credit approval Bank guidelines. To identify and suggest scopes of improvement of existing methods of loan approval, maintenance and monitoring in the credit division of Mutual Trust Bank Ltd. To identify and suggest scopes of improvement of existing methods of loan approval, maintenance and monitoring in the credit division of Mutual Trust Bank Ltd.

RATIONAL OF THE STUDY

Any academic course of study has a great value when it has practical application in real life. Only a lot of theoritical knowledge will be a little important unless it is applicable in practical life.So we we need proper application of our knowledge to get some benefit from our theoritical knowledge to make it more fruitful. This is why thesis program is a prerequisite for acquiring BBA Degree in my university. The entire BBA program is divided into twelve trimesters. The thesis program is executed in the last trimester and it has got the same weight as other trimester in the evaluation process. As the classroom discussion alone can not make a student perfect in handling the real business situation. Therefore it is an opportunity for the students to know about real life situation through this internship program. This program consists of two phases:

The project Work : To pertainning to a perticular problem matching with the students capacity and organizations requirement. The report writing: To eptomize the students analysis, findings and achievements, in this connection, I would like to add, this report is completely confidential and prepared with a view to expose myself to the prctical exposure and knowledge.

METHODOLOGY OF THE REPORT

The study is performed MTBLsed on the imformation extracted from different sources collected by using a specific methodology. To perform the study the data sources are to be identified and collected, they are to be classified, analyzed, interpreted and presented in a systematic manner and key points are to be found out.

Population:
Population Definition: Elements: Existing Customers and foreign exchange department of MTBL. Units: Existing Retail Customers of MTBL. Extent: Mutual Trust Bank Ltd. Corporate Head Office, MTB Centre, 26 Gulshan Avenue, Plot 5, Block SE(D), Gulshan 1, Dhaka 1212 Time: Practicum Report was conducted in January 01, 2011 March 10, 2011.

Sampling:
Sampling Method: According to the concept of probability sampling method, each element of the population has a known chance of being selected for the sample (Kinnear & Taylor P 411). In this practicum report the sampling is done by the mathematical decision rules that leave no discretion to the report. As a result, probability sampling method has been chosen for this practicum report. Sampling Procedure: For conducting this practicum report, Cluster sampling procedure has been chosen. Under Cluster sampling procedure, Systematic sampling procedure has been applied with an interval of 5 respondents. Then the account holders were interviewed. If any errors were found in any of the interviews then it was skipped. Sampling Frame: Customer list of MTBL Mutual Trust Bank limited maintained in Head Office & Main Branch, 26 Gulshan Avenue, Plot 5, Block SE (D), Gulshan 1, Dhaka 1212.

FRAMEWORK OF THE OVERALL STRUCTURE OF THE TOTAL WORK

Doing work in different department of MTBL Collecting information from MTBL Preparation of the Final Report

Appointing as an intern Dividing the study work

Selecting the topic of the study Analysis of collected data ninformatio

Preparing outline

Collecting secondary information

LIMITATIONS OF THE STUDY

Financial institutes job is usually full of responsibilities and the officers are usually running against time. Despite these problems, I received whole-hearted cooperation from officers of those institutes and my university faculty supervisor. However; there were some constraints and barriers which I faced during the study of this report.
TIME LIMITATION.

The first obstruct is time itself. Due to the time limit, the scope and dimension of the study has been curtailed. I could spend sufficient time for my study because the time limit given for submitting the report was very short.
INSUFFICIENT DATA.

It was very difficult to collect data which was very essential from some newly established branches of Bas. Therefore they were unable to supply my topicrelated data.
LACK OF RECORDS.

Sufficient books, publications, Facts and Figures narrowed the scope of accurate analysis. Without these the report would have been more useful and attractive.
POOR LIBRARY FACILITY. Most of the commercial Bank have its own modern, rich and wealthy collection of huge and various types of Banking related books Journals, Magazines, Papers, Case Studies, Term Papers, Assignments etc. But the libraries of some Bank are not well ornamented. 7

Inability of cover whole area of information .

During the study it was not possible to visit the whole area are covered by the Bank. Although the financial statements and other information regarding the study have been considered. Confidentiality of data.

Confidentiality of data was another barrier that was confronted during the conduct of the study.

Sensitivity of data.

The major limitation I have faced in preparing this report was the sensitivity of data. As it is a highly competitive market, if the margin imformation is released to other competitors, it may have a negative impect on their business.

Overview of Banking Sector in Bangladesh

Definition of Bank: An institution that acts as a financial intermediary by receiving money from depositors & lenders & also lending to borrowers. Whoever, being an individual firm, company or corporation generally deals in the business of money & credit are called a Bank. Purpose of Banking: The purpose of the Banking is to ensure transfer of money from surplus unit to deficit units. Bas in all countries work as the repository of money. The owners look for safety and amount of interest for their deposits with Bas. Entrepreneurs try to obtain money 9

from the Bas as working capital & for long-term investment. These entrepreneurs welcome effective & forward-looking advice for investment. Banking sector thus owe a great deal to the deposit holders on the one hand and the entrepreneurs on the others. They are expected to play the role of friend, philosopher, and guide for the deposit holders and the entrepreneurs. The opening of private and foreign participants to the Banking sector was intended to obtain desirable results from Banking. The authorization of private Bas was designed to create competition among the Bas & competition in the form of efficiency within and the productivity in enterprises funded by Bas. Unfortunately for the people, at large Banking sector is yet to obtain the credit for efficiency, credibility, and growth.

Banks in Bangladesh:
Number of Branches Name of Banks Inland Abroad

A. Nationalized Commercial Banks. 1. Sonali Bank. 2. Janata Bank. 3. Agrani Bank. B. Specialized Banks. 1. Bangladesh Krishi Ba. 2. Rajshahi Krishi Unnayan Bank. 3. Bangladesh Shilpa Ba (Industrial). 4. Bangladesh Shilpa Sangstha. 5. Grameen Bank. 836 300 15 5 1110 1313 897 978 7 4 -

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C. Private Commercial Banks. 1. Rupali Bank. 2. Pubali Bank Ltd. 3. Uttara Bank Ltd. 4. Arab Bangladesh Bank Ltd. 5. International Finance & Investment & Commerce Bank Ltd. (IFIC). 6. Islamic Bank Bangladesh Ltd. 7. National Bank Ltd. 8. The City Bank Ltd. 9. United Commercial Bank Ltd. 10. Al-Baraka Bank Bangladesh Ltd. 11. Prime Bank Ltd. 12. Dhaka Bank Ltd. 13.Mutual Trust Bank Ltd. 14. South East Bank Ltd. 15. Bank of Small Industries & Commerce 16. Eastern Bank Ltd. 17. Brac Bank 18. Social Investment Bank Ltd. 19. Mercantile Bank Ltd. D. Foreign Commercial Banks. 1. American Express Bank Ltd. 2. Commercial Bank of Ceilon 3. The Standard Chartered Bank. 4. Habib Bank Ltd. 5. State Bank of India. 6. Muslim Commercial Bank. 7. City Bank NY. 8. National Bank of Pakistan. 9. Hanil Bank. 10. Dutch Bangla Bank. 11. HSBC 2 2 19 2 1 2 2 1 1 2 5 82 515 351 198 58 55 103 97 80 79 33 31 35 57 42 21 26 77 31 54 1 1 2 1 -

Banking in Bangladesh:
Banking is the backbone of national economy. All sorts of economic & financial activities revolve round the axis of the Bank. As the industry produces goods & commodities, so does the Bank creates & controls money-market & promotes formation of capital. From this point of view, Banking is a technical profession that can be termed as industry. Services to its customers are the products of banking industry besides being an essential factor in promoting capital formation in the country. As all economic & fiscal activities revolve round this important industry, the role of Banking can hardly be over emphasized.

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Circumstances being such, it becomes imperative to find out the role that now playing in the country & analyze its operational aspects so as to ascertain the importance of this delicate financial sector & its over all impact on our national economy. To ascertain the role of Banks & to analyze its operational aspects & its overall impact on our national economy a through study as to its distribution, expansion and contribution is essential to comprehend its past, present and future bearings for the growth & development of the Banking sector of the country. In the global context, the role of Banks is far reaching & more penetrating in the economic and fiscal discipline, trade, commerce, industry, export & import all carried through the Bank. Banks are the only media through which international trade & commerce emanate and entire credit transactions, both national and international.

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MUTUAL TRUST BANK LIMITED

The Company was incorporated on September 29, 1999 under the Companies Act 1994 as a public company limited by shares for carrying out all kinds of Banking activities with Authorized Capital of Tk. 38,00,000,000 divided into 38,000,000 ordinary shares of Tk.100 each. The Company was also issued Certificate for Commencement of Business on the same day and was granted license on October 05, 1999 by Bangladesh Bank under the Banking Companies Act 1991 and started its Banking operation on October 24, 1999. As envisaged in the Memorandum of Association and as licensed by Bangladesh Bank under the provisions of the Banking Companies Act 1991, the Company started its Banking operation and entitled to carry out the following types of Banking business: (i) All types of commercial Banking activities including Money Market operations. (ii) Investment in Merchant Banking activities. (iii) Investment in Company activities. (iv) Financiers, Promoters, Capitalists etc. (v) Financial Intermediary Services. (vii) Any related Financial Services. The Company (Bank) operates through its Head Office at Dhaka and 67 branches. The Company/ Bank carries out international business through a Global Network of Foreign Correspondent Bas. Registered Name of the Company Mutual Trust Bank Limited 13

Legal Form The Company was incorporated on September 29, 1999 under the Companies Act 1994 as a public company limited by shares for carrying out all kinds of Banking activities with Authorized Capital of Tk. 38,00,000,000 divided into 38,000,000 ordinary shares of Tk.100 each. Company Registration No. c38707 (665)/99 on September 29, 1999 Bangladesh Bank Permission No. BRPD (P)744(78)/99-3081 on October 5, 1999 Registered Office: MTB Centre, 26 Gulshan Avenue Plot 5, Block SE (D), Gulshan 1, Dhaka 1212 SWIFT CODE MTBL BD DH Corporate Website www.mutualtrustBank.com Memberships Metropolitan Chamber of Commerce and Industry, Dhaka (MCCI, D) The Institute of Baers Bangladesh (IBB) Bangladesh Foreign Exchange Dealers Association (MTBLFEDA) Bangladesh Institute of Bank Management (BIBM) International Chamber of Commerce Bangladesh Limited (ICCB) Association of Bankers Bangladesh Limited (ABB) Bangladesh Association of Publicly Listed Companies (MTBLPLC) American Chamber of Commerce in Bangladesh (AMCHAM)

Our Mission
We aspire to be one of the most admired Bas in the nation and be recognized as an innovative and client-focused company, enabled by cutting-edge technology, a dynamic workforce and a wide array of financial products and services.

Our Vision
Mutual Trust Bank's vision is based on a philosophy known as MTB3V. We envision MTB to be: 14

One of the Best Performing Banks in Bangladesh The Bank of Choice A Truly World-class Bank.

MTB Board of Directors

The following are members of the MTBL Board of Directors. To view their brief biographies please click on the names. Mr. Samson H. Chowdhury, Chairman Dr. Arif Dowla, Vice Chairman Mr. Syed Manzur Elahi Mr. Mohammed Abdur Rouf Mr. Md. Abdul Malek Mr. Rashed Ahmed Chowdhury Mr. Md. Hedayetullah Mrs. Yasmeen Haque Mr. Md. Wakiluddin Mrs. Khwaja Nargis Hossain Mr. Md. Nasirullah Mr. Mahaboob Morshed Hassan Mr. Anis A. Khan, Managing Director & CEO

Deposit Products
At MTB we have designed various deposit accounts to service all your different needs. From a straight forward Savings account to Fixed Deposits, we strive to give you the best value for your money. Our accounts enable you to priorities between flexibility, highest interest yield and convenience. So the next time you are shopping for the competitive 15

interest yield or greatest convenience for your hard earned savings, come to us for the answer!

Features and Benefits:

Wide network of branches Access to largest ATM fleet of the country Bank conveniently with facilities like Internet Banking and SMS Banking Free cash withdrawals on any other Bank's ATM Cheque-book facility Opportunity to apply for safe deposit locker facility Collect foreign remittance in both T.C. & Taka draft. Transfer of fund from one branch to another by Demand Draft /Telegraphic Transfer Online Banking service

Regular Savings Account.

Saving for the arrival of your baby, a new car, a well-deserved holiday, or simply for emergencies? Let our Savings Account meet all your saving needs through monthly and flexible savings. An easy-to-operate savings account that allows you to issue cheques, draw Demand Drafts and withdraw cash. Check up on your balances from the comfort of your home or office through Internet Banking and SMS Banking.

Current Account.
A Current account is ideal for carrying out day-to-day business transactions. With the MTB Regular Current Account, you can access your account anytime, anywhere, pay using payable at par cheques or deposit cheque at any MTBL branch.

Brick By Brick.
Drops of water make an ocean. Your habit of regular savings will provide you comfort in the future. Brick by Brick is a unique monthly savings plan which builds up over the years and provides a lump sum amount at maturity.

Features and Benefits:

No initial deposit required

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Monthly installments are Tk. 500/=, 1,000/=, 2,000/=, 5,000/= and thereafter in multiples of Tk. 500 The savings periods are 3,5, 8 and 10 years No hassle of depositing money from long queue, rather option of depositing installment through standing instruction.

MTB Double Saver Plan.

MTB Double Saver Plan offers you an one time savings scheme, which will provide you double the amount of your deposit after six (6) years. You will receive a handsome amount at maturity.

Features and Benefits:

If you are an individual or if your institution is an NGO or an Educational institution or a Trust or Society or any other institution, you may invest your savings in this scheme with a minimum deposit of Tk. 100,000/- for six (6) years with no limit for maximum amount. At maturity you will get double of your deposited amount along with a gift item. You can even avail loan up to 80% of the deposited amount.

Children's Education Plan.

Features and Benefits: No initial deposit required Monthly installments are Tk. 1000 or multiples of Tk. 1000 but not exceeding Tk 20,000 The savings periods are 4, 7, 9 and 12 years No hassle of depositing money from long queue, rather option of depositing installment through standing instruction Overdraft facility against deposited amount

Fixed Deposit.
If you believe in long-term investments and wish to earn higher interests on your savings, NOW is the time to invest your money in our Fixed Deposit. Automatic renewals: Upon maturity, your deposit will be automatically renewed for the same tenor at the prevailing interest rate unless you instruct otherwise. Overdraft facility: You can use your Fixed Deposit as collateral to apply for an overdraft facility at a competitive rate. 17

MTB Millionaire Plan.

Millionaire Plan is a monthly savings plan, which is designed to make you a millionaire in a few years. Features and Benefits: If you are an individual or if your institution is an NGO or an Educational institution or a Trust or Society or any other institution, you may invest your savings in this scheme for 6/8/10/12/15/20 years with different installment sizes. At maturity you will get Tk. 10,00,000/-. You can even avail loan up to 90% of the deposited amount after 1 (one year).

Monthly Benefit Plan.

This plan offers you to generate monthly income out of your deposit. It has been designed to help and assist conscious savers from all strata of the society Features and Benefits: The minimum deposit is Tk. 500,000/= or in multiples thereof There is no upper limit This plan is for 1 (one), 2 (two) & 3 (three) years term that cannot be changed subsequently You will require opening a savings/current account. Monthly income will be credited to your account

MTB Inspire.
Today, when all savings accounts are offering similar services, how would you choose the one that is right for you? Is there a savings account that adds more value to your money and convenience to your daily Banking needs? Sure, there is one that meets your expectations. MTB Inspire provides a range of enhanced services, while letting you enjoy unique benefits of getting return on your deposit monthly instead of traditional half yearly. With extra access and convenience of Banking, enjoy the full convenience of a savings account and access your savings anytime.

Eligibility:
Must be a citizen of Bangladesh Age 18 18

Features:
Interest calculated on daily basis and paid monthly Free Debit Card Free internet Banking Online Banking facility across MTB branches and access to largest ATM network

MTB Ruby.
MTB Ruby enables todays independent women to enjoy hassle-free Banking services. Besides the core MTB Banking advantage, MTB Ruby, an exclusive savings account for women, is packed with special benefits for our women customers. Enjoy your present and plan for the future, with this rewarding savings account.

Features and Benefits:

Interest will add on daily basis and it will be credited monthly Higher interest rate Minimum account opening balance is Tk 10,000. Minimum daily qualifying balance to earn interest is Tk 10,000 No debit card fee for 1st year Free Internet Banking

MTB Junior.
We know how important it is to plan for your child's financial security. MTB has the solution to help you do that while showing the virtue of saving, in your child. MTB Junior is a savings account for minors that offer the opportunity to save for today and the future.

Eligibility:
MTB Junior is a savings account for school and college students below 18 years.

Features:
Attractive interest rate Free debit card Free internet Banking No account maintenance fee

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MTB Graduate.
We understand that starting college or university can be both exciting and challenging. That's why MTB Graduate, a contemporary savings account, is packed with everything you need to meet all your Banking needs, offering monthly income while helping you save for future financial emergencies.

Eligibility:
MTB Graduate is a savings account for college and university students who are 18 years and above.

Features:
Attractive interest rate Interest adds on daily and pays out monthly Free debit card Free internet Banking No account maintenance fee

MTB Senior. Are you seeking a Banking style that complements your status? MTB Senior has been designed keeping in mind the fact that a senior citizen's Banking requirements are wholly different and deserve special attention. We like to empower our senior citizens, so that they can carry out their day-to-day Banking transactions independently, and with dignity and confidence. Now the true pleasure of seniority in your grip!

Eligibility:
Must be a citizen of Bangladesh Age 60 and above

Features:
Lifetime free Debit Card 20

Free internet Banking Attractive discount on locker charge Free cheque books Interest calculated on daily basis and paid monthly Unlimited transactions Online Banking facility across MTB branches and access to largest ATM network

Sources of income of MTBL:

Interest on short-term loan: The main source of income of MTBL is the interest on short term loan. MTBL invest it Majority amount of fund in this sectors. Others loan interest: MTBL not only pays loan in the short-term basis but also it provides loan to the customer for long-term period. Normally Bank invests fixed deposit money (which is long term fixed deposit) to the client for long-term period. Receive from advances: MTBL gives loan to the customer as the form of over draft, cash loan and it receives huge amount of money from this advances as income.

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Purchases of financial instrument: Some time Bank purchase, share debenture government securities from market and earn huge amount of money from this sectors. Rent of Locker: Many client keep their valuable goods and ornament to the Bank for ensure of security. MTBL charge rent from the customer to taking risk of these goods. Income from foreign exchange: Some time MTBL earns huge profit by selling and purchasing of foreign currency. Commission form agent: Many times this Bank acts as the agent of client in many cases. For these types of activities Bank charge money from client. Issue of evidence: MTBL deal about the foreign exchange of client. Basically all the necessary evidence of client for imports and export of goods is transfer by the Bank from this evidence transfer it gets lot of money as profit.

An overview of Organizational Structures:

Management of MTBL: MTBL Bangladesh is one such company that has to overcome a lot of hurdles to reach the position it now holds. Mercantile Banks Board of Directors, Executive Committee, Audit Committee, and Management & Management Committee ensure the effective Corporate Governance, being transparent, accountable and professional in discharging their responsibilities. The Board of Directors ensures that the Management supported by its various committees, runs the functioning of the Bank complying with applicable rules and regulations. They equally contributed to MTBLs superior leadership, by carrying out their unique roles. They worked well together, respecting each others abilities & arguing openly without any resentment when they disagreed.

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Figure: Good Governance Principles

Organizational Chart of Mutual Trust Bank Limited has been shown below:

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Figure-02: Organizational Chart of MTBL.

Each & every employee of MTBL takes pride of being an employee at MTBL & his or her pride comes from the freedom of direct communication with the top management. The management of MTBL is supportive in the sense that the top management deliberately supports the suggestions, values, ideas, innovation and hard work of the employees and officers. Again high amount of employee participation is encountered in the management process. There are also systems for awards, incentives, and status for innovative ideas & hard works. Again the management style can also be termed as collegial as high amounts of team work and participation exists between the top and bottom parts of MTBL. MTBL follows a 4 layers management philosophy in Bangladesh. These are Managers, Executives, Officers and Assistant officers. The CEO is the top most authority of all the levels. Managers are the departmental heads who are responsible for the activities of their departments. They are the heads of the department who formulate strategies department. Officers are the next persons to stand in the hierarchy list. They are the typical mid-level employees of MTBLs organizational hierarchy. These officers are responsible for managing the operational activities and operating level employees of MTBL who are ranked as Assistant officer fill the last layer of this hierarchy. They perform the day-today operational activities of MTBL.

Management Hierarchy of Mutual Trust Bank Limited:

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Figure-03: Management Hierarchy of MTBL. Chief Executive Committee:

Figure-04: Structure of Chief Executive Committee. The organizational structure of MTBL is designed according to the various and functional departments. The CEO heads of the chief executive committee, which decides on all the 25

strategic aspect of MTBL. The CEO is the person who supervises the heads of all the departments and also is the ultimate authority of MTBL. He is responsible for all the activities of MTBL & all its consequences. He administers all the functional departments and communicates with the department heads for smooth functioning of the organization. The MTBL Chief Executive Committee is formed with the heads of all departments along with the CEO. The structure of this top-most, authority is shown in the following figure. Besides the CEO the there are six more managers: Manager of Human Resources, Manager of Services, Manager of Financial Control Department, Chief of Personal Baing and Manager of Marketing.

Segregation of Roles:

Figure-05: Segregation of Roles.

Board Supporting Committees:

The Board has two supporting committees; Executive Committee & Audit Committee. These committees have been formed comprising the members from the Board of Directors as per Central Banks directives. These Committees operate under specific Terms of Reference that set out their responsibilities.

Figure-06: Board Supporting Committees.

Financial Reporting Standard:

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Figure-07: Financial Reporting Standard.

Accountability and Agency Relationship:

Figure-08: Accountability and Agency Relationship.

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Overview
The word credit comes from the Latin word Credo meaning I believe. It is a lenders trust in a persons/ firms/ or companys ability or potential ability and intention to repay. 28

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 not only constitutes the Bas asset structure but also a vital factor of the Banks success. The overall success in credit management depends on the Bas credit policy, portfolio of credit, monitoring, and supervision and follow-up of the loan and advance. Therefore, while analyzing the credit management of MTBL, it is required to analyze its credit policy, credit procedure and quality of credit portfolio.

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Principles of Sound Lending

Bank performs different functions. Lending of money to different kinds of borrowers is one the most important functions of commercial Bank. Not only this, it is the most profitable business of the commercial Bank and the major source of income. But lending is a risky business. The borrower of a Bank range from individuals to partnership, companies, institutions, societies, corporations etc. engaged in such activities as business, industry, transport, farming etc. The nature of their activities, the location of business, financial stability, earnings and repaying capacity, purpose of advance, securities all differ and their degree of risks also differ. Although all lending involve risks yet a Bank has to go with it for degree profit and economic uplifting as well. But the fact is this while go on lending; a Bank must follow certain principles. The principal of sound lending is which where risk involvement may be kept at minimum. The principal of sound lending involves following things:

a) Safety: The survival of a Baer and for the matter of that safety of Bank
depends on his/her loans and advances. The ideal position is when all the loans and advances positions are fully secured. The safety of the advances should be the first principle of lending. To ensure safety of lending following factors may be considered: Five Cs Five Ps Five Ms Five Rs : : : : Character/conduct, Capacity/capability, Capital/Credit worthiness, Condition and Collateral Security. Person, Purpose, Product(s), Place and Profit. Man, Management, Money, Materials and Market. Reliability, Responsibility, Resources, Respectability and Returns

b) Purpose:

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The purpose of loans helps the Baer to determine his course of action as regards lending. Baer should avoid making loans for unproductive purpose and speculative activities.

c) Liquidity:
Liquidity means availability or readiness of Bas funds on short notice. The liquidity of advance means its repayment on demand on due date or after a short notice. The Bank while making advances must see to it that the money lent is not locked up for long time because, majority of commercial Bank liabilities are payable either on demand or after short notice. So the Bank should be sure that the loan would be liquid.

d) Security:
The security offered by a borrower for an advance is insurance to the Banker. It serves as the safety valve for an unforeseen emergency. There are different types of security, which call for particular attention and care on part of Bank who has to see it that the title he/she gets on them is not unsafe. The security accepted by a Bank to cover a Bank advance must be adequate, readily marketable, easy to handle and free from any encumbrances. Whatever be the security, a Bank must realize that it is only a cushion to fall back upon in case of need, and its adequate alone should not form the sole consideration for judging the suitability of a loan.

e) Profitability:
Bas obtain funds from shareholders and if dividend is to be paid on such shares it can be paid by earning profits. The working funds of a Bank are collected mainly from by means of deposits from the public and interest has to be paid on these deposits as well as the Bank has to cover establishment charges and other expanses. This is not possible unless funds are employed profitably.

f) Spread/Dispersal/Diversification:
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The advances should be as much broad based as possible and must be in conformity with the deposit structure. There should be spread of advances against different securities, industries/activities, borrowers, areas etc.

g) National Interest/Social benefit:

Bank has a significant role in the economic development process of a country. They should keep in mind the national development plan/program while going for lending but maintaining safety, liquidity and profitability.

Modern Concept of Good Lending

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Modern concept of lending presupposes a well-developed loan proposal/loan case/ project. This covers as many as six pertinent aspects like Managerial, Organizational, Technical, Marketing, Financial and Economic/Socio-economic. These are technically known as feasibility or viability study of a proposal/ loan case/ projects. By studying all these six aspects if a Baer is satisfied about the viability of a loan proposal/loan case/ project, then the Bank can finance i.e. grant for lending or otherwise not. Managerial feasibility will ensure the character/conduct, capacity/capability to run the project/activity, sincerity/honesty/integrity, education, experience, and reputation of the borrower. Organizational feasibility will see under what type of organization the activities will be undertaken. Whether it is under proprietor/sole trader-ship or partnership or private limited company, public limited company etc Technical side will take care of location of business/activities/project, construction of building; shed etc. requirements to be used like power, fuel, water material etc. Marketing side will ensure about the marketability of the product(s) out of activities/ business project, consider demand, supply etc. Financial aspect will tell total requirement of fund for the business/activities/projects and how much will be required from Bank, what amount will be given by the borrower himself/herself, cash inflow and cash outflow, sale forecasts, balance sheet, profit and loss account etc. Economic aspect will look into socioeconomic benefit and cost out of the business/activities/project. B. Financial Spread Sheet (FSS) and Lending Risk Analysis (LRA) are the new technique of assessing soundness of a loan proposal/project. With the help of FSS Bank analyses the financial statements regarding a loan proposal/project. Credit decision is made by the Bankers on the basis of FSS and LRA and it is a new and modern technique. In LRA Bankers analyze eight risks such as supplies risk and sales risk which are Industry Risk, performance risk, resilience risk, management competence risk, management integrity risk which are under Company Risk and security control risk and security cover risk which are under Security Risk.

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Credit Policy of Mutual Trust Limited

Credit policy is the guideline for the credit division which includes the terms and conditions of extending credit, which is followed by the credit division. It is prepared in accordance with the philosophy of the management. Sectors to be covered, steps to be followed, factors to be considered, limits to be maintained and all other relevant matters with expectations relating to the credit extension are clearly described here, which helps the credit division to perform their activities and also in taking the decisions. Mutual Trust Bank (MTBL) makes loan only to reputable clients who are involved in legitimate business activities and whose income and wealth are derived from legitimate sources. Mutual Trust Bank encourages lending to socially desirable, nationally important and financially viable sectors and will not lend to unproductive purpose or socially undesired projects. At all times a policy of Know Your Customer (KYC) must be foremost in the credit applications process. Mutual Trust Bank extends credit in its discretion, only to qualified borrowers where the amount and intended purpose or use if proceeds are clear and legitimate and where the amount and use is reasonable in context of what is known about the particular client and the intended use or purpose. MTBL requires that borrowers have a source of repayment established at the inception of the credit, and that any exception must be specifically addressed in the credit approval. There should be identified, whenever possible, a secondary source of repayment. As with any funds received, any all repayment sources must be legitimate and consistent with what is known and documented about the client. Borrowers must provide, and the credit approval package must contain, sufficient information on the borrower to approve the extension of credit. Satisfactory security and collateral is required as appropriate. MTBLs main thrust is on case flow statement of the business rather than on collateral security.

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 MTBL discourages the client with relatively low or no founds of their own and with a relatively high ratio of borrowed to own founds tend to face liquidity problems, with adverse repercussions on their ability to service their obligations. MTBL dose not engage in Name Lending based only on the general reputation of the borrower. There are cases however, where certain financial information about private clients is highly confidential and may not be disseminated. Such situations are addressed individually at the discretion of management. MTBL engages primarily in the extension of credit in Bangladesh Taka or in the same currency as the collateral. MTBL dose not extend any credit facility against cheque (owners cheque) or pledge of goods / merchandise MTBLs unsecured lending practices favor extensions of credit for short term, selfliquidating transactions. To the extent possible, the maturity of the loan should be matched to the cash conversion cycle of the transaction being financed. Generalpurpose loans to finance working capital, which are either unsecured or not specifically secured by the assets, financed and have no clean up requirement; represent policy exceptions unless secured by pledged liquid collateral. Overdraft lines should have an annual clean up period unless there is evidence of credit to the accounts annually two times the average credit. Loans secured by cash or readily marketable securities may be renewed at the discretion of the approving officers; however, interest may not be capitalized. MTBL may consider term loans with maturities up to five years, or longer. None except the President & Managing Director approves such loans. Management reviews the term loan portfolio periodically. MTBL extends venture capital to start up businesses, which are entirely dependent on new technologies, but is considered with extreme caution and also secured by First Class or other acceptable collateral. MTBL dose not extend credit where it does not have the industry knowledge or highly specialized skills needed to properly evaluate the proposal.

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 MTBL extends credit facilities to the area in which the branch located and the size & ability of its supervise and monitor the same also is considered.

Global Credit Portfolio of MTBL

Credit Portfolio means total investments by a Bank segregated under the folios of different industries. Mutual Trust Bank Limited is operating within its own internal environment under skirt of external macro environment, consisting of elements like economic, political/legal, demographic, technological, social etc. The size of loan portfolio is determined by various priorities for Banks fund. Besides, the prudent management of Mutual Trust Bank Limited has designated its portfolio considering the following factors under two broad categories.

External factors:
Sector MTBL Attractiveness. Government Regulation Credit need of the area or community.

Internal factors:
1. Capital Position 2. Types of Loan 3. Deposit pattern 4. Skills and Expertise of MTBLs personnel 5. Credit policy of the MTBL. Strategies of the Mutual Trust MTBL Limited are as follows: Invest in those sectors where yield/sector is growing over years. Hold investment in those sectors where yield/sector is high but not growing. Divest in those sectors where yield/sector is diminishing over years. 36

This is a new generation MTBL. It is committed to provide high quality financial services/products to contribute to the growth of GDP of the country through stimulating trade and commerce, accelerating the pace of industrialization, boosting up export, creating employment opportunity for the educated youth, poverty alleviation, raising standard of living of limited income group and overall sustainable socio-economic development of the country. In achieving the aforesaid objectives of the Bank, credit operation of Bank is of paramount importance as it generates the greatest share of total revenue of the Bank. Maximum risk is centered in it and even the very existence of the Bank depends on prudent management of its credit portfolio and is less often the result shrinkage in the value of other assets. As such, credit portfolio not only features dominant in the assets structure of the Bank but also the success of the Bank.

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

Classification on the MTBL of time

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

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Demand loan
In opening letter of credit (L/C), the clients have to provide the full L/C amount in foreign exchange to the MTBL. To purchase this foreign exchange, MTBL 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 MTBL 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 "Letter of Trust Receipt".

Term loans
These are the advances made by the MTBL with a fixed repayment schedule. Terms loans mainly include "Consumer credit scheme", "Hire purchase", and "Staff loan". The term loans are defined as follows: Short-term loan: Up to 12 months. Medium term loan: More than 12 months & up to 36 months Long-term loan: More than 36 months.

Classification on characteristics of financing

Credit

Funded Overdraft Consumer Credit LTR PAD Term Loan Packing Credit

Nonfunded * Letter of Credit * MTBL Guarantee

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The varieties used by MTBLL are briefly described below with the common terms and condition. MTBL generally offer different kinds of credit facilities to the customers.

Consumer Credit Scheme:

This loan is allowed for acquiring consumer durable to the fixed income group and other eligible borrowers. The subject facility is known as Consumer loan.

Export Finance:
An exporter requires financial accommodation at two stages, namely: Pre-shipment stage Post-shipment stage.

Overdraft:
It is an arrangement between the borrower and the MTBL, whereby the borrower may overdraw his account up to an agreed amount, within a specified period of time. Overdrafts represent short-term funds and may be extended to business customers to meet a shortfall in their working capital requirements. Requests for financial capital expenditure should be considered under fixed loans. Different types of Overdrafts are Secured overdrafts, Overdraft against pledged of goods/stocks, Overdraft against Hypothecation of good, stocks, plant and Machinery.

Other Advances:
Advanced against import bills: - Bills against L/C are originated from the lodgment of shipping documents received from foreign MTBL against L/C established by the MTBL. - Advance against trust receipt 39

- Advance against Export bills purchased/discounted - Advance against work order-advance made to client to perform work order - The credit facilities against cash collateral are FDR/Sanchaya patra/ ICB unit certificates etc.

Fixed Loans:
They represent an arrangement entered into between the borrower and the MTBL, whereby the borrower is granted a loan for a specified amount with an agreed period. A separate fixed loan account is opened, to which is debited the amount of the loan; the proceeds of the loan being credited to the borrowers current or saving account, from which source repayments are debited on an installment MTBL under a standing instruction, either monthly, bi-monthly, quarterly, half-yearly, annually, or in one lump sum when the loan matures i.e., a bullet repayment.

Project Loans:
Fixed term loans are particularly appropriate for business customers who require finance on a long term MTBL for the development of their factories, for purchases of plant and machinery and other fixed assets as they are able to match the cost of the assets with the profits expected to be generated over the period. Such loans are invariably subject to the fundamental principle that the MTBLs funds go in last: this ensures the borrowers have sufficient resources to complete their project and there is no necessity for further resource to MTBL borrowings. In Hong Kong, construction loans are typical project financing activities.

Syndicated Loans:
There are circumstances when a MTBLs regal lending limit to a particular borrowing group will be exceeded after taking on an additional project loan. In this instance, the MTBL will invite its correspondent MTBL to participate in the loan, with it acting as an arranger. Agent and/or Lender, whereby its relationship with customer could be fostered, and generous fee income (i.e., Arranger Fee, Agency Fee, and Front-End Fee) could be earned to improve on its return on assets. 40

Loan Against Trust Receipts (LATR):

Trust receipt accommodation is usually complementary to letter of credit i.e., bills coming forward under a letter of credit established by the MTBL may be converted into a trust receipt. Under a trust receipt facility, the importer is permitted to take delivery of the inward shipping documents against the execution by him of a trust receipt. Thereafter, he collects the goods, processes them and arranges to sell them over a fixed period of time. Upon releasing the goods to the customer, the MTBL undertakes to pay the exporter, while the trust Receipt document duly signed gives a legal undertaking by the importer that will hold the goods or the sale proceeds from any part of the goods to the order of the MTBL until such times as the loan plus interest has been fully paid.

Guarantees:
Guarantees are undertakings of a Bank, up-to a specific amount, guaranteeing a beneficiary the fulfillment of an obligation prior to a certain date. The Bank issues guarantee on behalf of their customer. The guarantee is also valid until the validity of a credit limit. There are different forms of guarantee:

Bid Bonds:
They are issued before any guarantees Performance guarantees are given after the bid bond. Local Guarantees: It is for the client who has business here in MTBL Bangladesh. Foreign Guarantees: It is usually used for foreign currencies. Counter Guarantees: They are used to ensure payment. Shipping Guarantees: Shipping guarantees are often issued within arranged and approved LATR limits for the purpose of enabling importers to obtain their goods prior to receipt of the relative documents of title. These guarantees indemnify the transport agent 41

for any loss incurred as a result of releasing shipping documents, and, therefore, the goods without the proper document of title. The MTBL will confirm that upon receipt of the document of title it will hand them to the transport agent who will then release the guarantee.

Credit Approving Authority

Credit decisions are heart of all credit works. Generally branch manager and the credit incharge of a branch are held responsible for appraising of a loan proposal. The customer request for credit limit and the credit officer prepares a credit memo and send it to the head office, credit division. After taking all the relevant information from the branch the head office credit division sent the credit memo to the credit committee. Credit committee of MTBLL is comprised of Managing Director and other top-level executives, that is, SEVPs and EVPs. If credit committee is convinced about the merit of the proposal then it is sent the broad of directors. The board is final authority to approve or decline a proposal. The whole process takes a month or more.

Branch Credit Section

Head Office Credit Committee

Managing Director

Board of Directors

Functions of Credit Department

The responsibilities/ functions performed by the credit department for processing of all types of advances as well as maintaining the records are as follows:

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 Know their borrowers fully. Comply with the applicable instructions, manual, circulars and other rules of the MTBL as well as those of MTBL Bangladesh MTBL including MTBL Companys act 1991. Take interview of the prospective borrower Assemble the credit information received and place in the customers credit file. Process and sanction credits to the customers. Disburse credit facilities to borrowers in accordance with established procedures. Record the credit facilities. Prepare vouchers pertaining to credit facilities disbursed and maintain records of relevant entries. Tasks of credit departments of both corporate office and branch are interrelated. The branch credit department is responsible for mainly marketing, operational and monitoring, whereas the head office credit department is mainly responsible for credit policy, credit approval and supervising. The zonal office also plays the same role as head office.

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Delegation of Lending Authority:

Presently Mutual Trust MTBL Limited has four levels of sanction authorities: 1. Branch: Branch Manager is authorized to approve fully secured credit when credit facility does not exceed 90% of security (en-cashable) value. 2. Zonal Office: Zonal Office approves proposal from the branch up to certain limit. If the limit exceeds its authority, it recommends to higher authority for approval. 3. Credit Committee: The credit committee in corporate office is headed by the Managing Director and Head of Credit and respective members and other departments. The credit committee approves credit facility up to BDT 10.00 million. 4. Board of Directors: The credit proposal beyond BDT 10.00 million is presented to the Board of Directors for approval.

Documentation of the Loan:

Documentation is obtaining such agreement where all the terms and condition and securities are written and signed by the borrower. It specifies rights and liabilities of both the MTBL and the borrower. In documentation each type of advances requires a different set of documents. It also differs with the nature of securities. The documents should be stamped according to the stamp Act. There are no hard and fast rules of documentation and it varies from MTBL to MTBL. Generally, the documents taken in the case of a secured advance by Mutual Trust MTBL are: i. ii. iii. iv. Demand promissory note: Here the borrower promises to pay the loan as and when demand by MTBL to repay the loan. General Loan & Collateral Agreement. Letter of Continuity. Letter of Hypothecation of goods and capital machinery.

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v.

Stock Report: This report is used for OD and CC. In this report, information about the quality and quantity of goods hypothecated is furnished.

vi. vii. viii. ix. x. xi. xii. xiii.

Memorandum of Deposit of Title Deed of property duly signed by the owners of the property with resolution of Board of Directors. Personal Guarantee of the owners of the property with PNW Statement. Guarantee of all the directors of the company. Resolution of the board of directors to borrow fund to execute documents and completes other formalities Form no. XVII/XIX for filling charges with the register of joint stock companies under relevant section. Letter of lien for advance against FDR. Letter of Charge/Lien & Set-Off Memorandum & Articles of Association (for limited company Borrower) with Certificate of Incorporation

Classification of Loan on the Basis of MTBL Security

For internal use, MTBL classify the loan and advance on the MTBL of how much the MTBL is secured in respective of the loan: Debts considered good in respect of which the MTBL is fully secured. Debts considered good for which MTBL holds no other security than the debtors personal security Debts considered good and secured by the personal security of one or more parties in addition to the personal security of the debtor.

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Objective Basis of MTBL Classification

In classifying the loan and advance there are four classes in the loan review practiced in Mutual Trust MTBL Limited. They are as follows:

Unclassified
The loan account is performing satisfactorily in the terms of its installments and no overdue is occurred. This type of loan and advances are fall into this class.

Substandard
This classification contains where irregularities have been occurred but such irregularities are temporarily in nature. To fall in this class the loan and advance has to fulfill the following factor. Category of Credit S-T Agri & Micro Credit Continuous loan Demand Loan Time overdue (irregularities) 3 months & above but less than 6 months. Un-recovered for 3 months & above but less than 6 months from the date of the loan is claimed. Repayable within 5years: If the overdue installment equals or exceeds the amount Fixed Term loan repayable within 6 months. Repayable more than 5years: If the overdue installment equals or exceeds the amount repayable within 12 months. The main criteria for a substandard advance is that despite these technicalities or irregularities no loss is expected to be arise for the MTBL. These accounts will require close supervision by management to ensure that the situation does not deteriorate further.

Substandard
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Doubtful
This classification contains where doubt exists on the full recovery of the loan and advance along with a loss is anticipated but cannot be quantifiable at this stage. Moreover if the state of the loan accounts falls under the following criterion can be declared as doubtful loan and advance. Category of Credit S-T Agri & Micro Credit Continuous loan Demand Loan Time overdue (irregularities) 6 months & above but less than 12 months. Un-recovered for 6 months & above but less than 12 months from the date of the loan is claimed. Repayable within 5years: If the overdue installment equals or exceeds the amount Fixed Term loan repayable within 12 months. Repayable more than 5years: If the overdue installment equals or exceeds the amount repayable within 18 months.

Doubtful
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MTBL and Loss

A particular loan and advance fall in this class when it seems that this loan and advance is not collectable or worthless even after all the security has been exhausted. In the following table the criteria to be fulfilled to fall in this category are summarized: Category of Credit S-T Agri & Micro Credit Continuous loan Demand Loan Time overdue (irregularities) Not recovered within more than 12 months. Un-recovered more than 12 months from the date of the loan is claimed. Repayable within 5years: If the overdue installment equals or exceeds the amount Fixed Term loan repayable within 18 months. Repayable more than 5years: If the overdue installment equals or exceeds the amount repayable within 24 months.

MTBL and Loss

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Qualitative Judgment Basis of Classification

Beside the above-mentioned objective criteria, Mutual Trust Bank Limited has other few qualitative judgment for classifying the loan and advance. This judgment totally depends on the Branch Manger and or the Head Office credit division. If there is any doubt or uncertainty regarding the recovery of any continuous credit, demand loan, fixed term loan and classified or not on the MTBL of the above mentioned objective criterion then the loan can be classified on the MTBL of the Qualitative Judgment. The qualitative factors that are considered in Mutual Trust MTBL Limited are as follows: Borrower sustains a loss of capital. Significant decrease in the value of the security. Weakening of MTBLs 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 Mutual Trust Ba Limited were like this: Table: Classification position last two years. Year 2005 2006 Unclassified 17375 21751 Substandard 60.65 50.3 Tk in million Bad 364.7 453.4

Doubtful 60.36 .54

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Managing 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 practices in Mutual Trust Bank Limited to manage the delinquent loan are: Persuasion: This is the first step practiced in the MTBL 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, MTBL go for taking legal action against the delinquent client to recover the loan.

Provisioning
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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:
Mutual Trust Bank Limited in the time of loan provisioning to get the real picture of the income mainly follows the Bangladesh Bank guideline. The rate of provisioning used in MTBLL is summarized in the following table.

Table: Rate of provisioning Class Short Term Agriculture credit. Rate of Provisions 5% 5% 5% 100% All other credit

Unclassified (UC) Substandard (SS) Doubtful Bad or Loss

1% 20% 50% 100%

Credit Appraisal System

The function of commercial MTBL 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 MTBL have to be very much careful in credit appraisal. The person

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who is primarily held responsible for appraising a loan proposal in Mutual Trust MTBL 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 MTBL 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 MTBL. Securing or collateral it is accepting must be easy to sell and sufficient to cover the loan amount. But MTBL cannot sanction loan by only depending on collateral. The sources of repayment of the project should be a feasible one. During sanctioning any loan MTBL 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 MTBL 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, and 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. 52

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Guiding Principle of Credit appraisal for Credit Officer

To determine the worth of a client, the following conceptual exercises should be undertaken. There are no fixed and set methods to perform credit marketing, and scope for application of individual judgment/ perception always plays over set rules in such work. For example, drop in revenue of a contractor may indicate the clients failure to get work, or it may be due to adaptation of policy to do higher margin quality jobs.

Steps Involved in Credit Processing

The credit appraisal process here at Mutual Trust MTBL limited is a detailed and through one, complying to the central MTBLs standards as well as analyzing all feasible sources of risk. Though there is a prescribed format for appraising the potential borrower, the creativity of the credit officer is very important for identifying various aspects of the investment proposal. Mutual Trust Bank therefore allows some room for flexibility, which may enrich the appraisal or make it a more complete one. The credit division follows certain procedures to decide whether or not to allow the credit facilities demanded. The credit division maintains the tight control over credit reports and keeps the proper documentation and records in the files. In general following steps are followed for a standard credit procedure:

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Application for Loan

For any type of credit facility relating to the working capital, trade finance, project finance and contract work, clients/borrowers must fill an application form with following information: Name of firm/ company/ individual, Business address, Permanent address, Constitution/ Status (Proprietorship/ Partnership/ Public Limited Co./ Private Ltd. Co.), Date of establishment and place of incorporation, background and business experience, Particulars of assets (Land/Building, Bank Deposit, Stock/Shares), Nature of the business, Statement of liabilities with Mutual Trust Bank and other Bas, Financial statements for the last 3 years explaining the following terms, Capital Funds/ Net Worth (Paid up capital, Retained earnings, General reserve), balance Sheet Statistics (Current assets, Fixed assets, Term liabilities, Capital/equity, Total liabilities). For working capital finance clients/ borrowers must provide the following information (Annual production, Annual sales, Sources of raw materials, Cash flow statements). Following factors are to be considered while submitting the loan application form to the MTBL:

Proposed debt/equity ratio

For processing and getting approval of the requested credit facility the client must provide the above information and should fully co- operate with the Bank for further information as needed. The analyst should verify the information through both primary and secondary sources. While evaluating the project for approval the analyst should have adequate knowledge of the economic environment in which the project is to thrive. Such as information related to money, Banking foreign exchange, reserves, production, price, national income, cost of living indices, govt. policies covering wages, taxation, tariff, import control, investment, marketability of product etc.

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Projected financial statements

For all credit proposals, the borrowers should submit their financial statements including last 3(three) years profit and loss A/C and balance sheet-audited/ statement of affairs. When an individual borrower or guarantor applies for any credit facility, the submitted financial statements must be signed by competent authority and must contain legend to the signatory, the assets and liabilities and sources of income and items of expenses. Here this discussion is like preliminary screening of the plant. So the credit officers need to be cautious about the facility the client is seeking and the available fund in the MTBL. More over most of the businesses in our country dont have any standard form of accounting department and dont have any audited statement. So the main task of the credit officers is to make a relationship with the client to find out the hidden income sources.

Scrutinizing the documents

In this step the MTBL collects and correlates the information about the client. After receiving the credit application form, the credit officer thoroughly checks the form and all the submitted documents. Here, the point of importance whether the documents are certified and or attested by the respective authority. General check-whether the required documents are submitted authenticated. Gross verification for identifying consistency.

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Analyzing the information

Appraising the client or Credibility Appraisal
When we talk about good lending portfolio, few principals are highlighted, which are judicious selection or borrower, safety, security, purpose, profitability, liquidity, supervision, national interest. The main task and the first task of the credit officer is to select a good borrower as if the borrower selected is good, the recovery and supervision becomes easy and harmless. Like any other Bank, the potential clients approach to Mutual Trust Bank Limited for credits are highly appraised for the ensuring the repayment of the amount to be disbursed. The credit policy has a prescribed criterion for selecting a borrower beside this the credit officers take contingent factor analysis and use their analytical ability in the time of selecting the borrower. The credit officer has to check the integrity and the honesty of the client using different suitable tools. Lets take a look some of the most frequently used ones:

Personal interview with the entrepreneur/management

When the client approaches for credit, the credit officer talks to him with a view to identifying whether the client has only need of seeking credit facility or not. The credit officer has to have deep analyzing power to find out the clue. The out come of a personal interview session is to have overall idea about the integrity, experience, and business sense of the borrower. Prompt and consistent information supply, willingness to supply information and other bank and non-bank clues can be of value to the credit officer in judging the client. If possible, a visit is made to the proposed/existing plant/factory.

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Report from Mutual Trust Bank Limited

If the customer hold an account or is enjoying credit facility from the Mutual Trust Bank Limited, the statements of the accounts are collected for analyzing the performance of the existing facility, transaction summary of the accounts along with the integrity of the client.

Report from other Banks

The client has to mention whether he has other liability in other bank in the name of the project and or in the name of the sister concern in the time applying for credit. From the given information the credit officer communicates with the respective authority of those banks with which the credit seeker has transaction to collect the information about few things: Whether the client has taken any loan in the name of the proposed project or any other sister concern. The amount outstanding and whether classified or not. The payment behavior of the client.

All the collected information is kept confidential.

Report from Society

Sometimes the credit officer collects in formation on a client from other businessmen having relationship with Mutual Trust Bank. Informally the credit officer discusses about the project, the sponsor(s) and the prospects of the project with persons he thinks can provide him with information. Moreover, information about the sponsor is also collected from the socially important person like community representative and chamber representative. Contacting the clients supplier can also be another way to verify the payment character of the client.

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CIB Report
There is possibility that client conceals information about his/her companys current liability and transaction with other banks. So to get the accurate information about the credibility of the customer the branch office collects CIB report through the head office. The CIB authority provides the relevant information about the client.

Appraising the business

Appraising the business comprises of analyzing the industry outlook, the potential of the business for which credit is being sought, market potential of the products, major competitors, distinctive competitiveness and strategies taken. In analyzing the industry, number of competitors, the current total production, demand and supply position of the industry, prospect of demand growth etc are some of the factors that are looked into. Also assessed is the vulnerability of the industry in the face of changes in government regulation. Overall growth of the business and performance are also looked into, using their financial statements of last three financial years. The trend of sales, net margin, net income etc. is examined. Another important consideration is customer base of the firm and relationship with major buyers. As mentioned earlier, competition in the market is an important factor all through. Major competitors, distinctive competitiveness of the incumbent firm and the strategic taken to complete the competition are also analyzed.

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Management Competence or Capability Appraisal

The ability of the management to run the business smoothly and business background of the promoter and the sponsor directors and the management are crucial factors in determining the success or failure of any business operation. Capability of the borrower in running the business in highly emphasized in the time of selecting a good borrower. As the management of the business is the sole authority to run the business that is use the fund efficiency, effectively and profitability, proper investigation must be carried out in this regard. With this end in view Mutual Trust Bank collects the following information from the client: Brief description of the directors educational background & business background. Brief profile of the management. Business performance for the last three years as performance of the business implies the capability of the managers running the business. Equity mobilization of the directors as it implies their risk-taking attitude. Entrepreneurship skills. Managements experience in the business/businesses of similar nature. Resilience or shock absorption.

If it is revealed that the directors are in the business for a long time and have operated the business well are said to have the capability to run the business.

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Financial strength Analysis

Analyzing the financial position of the borrower is one of the most crucial jobs to perform before financing any business. It includes financial base analysis of the borrower/business, liability position analysis in terms of risk and return measures, and lending risk analysis in the specified format of Bangladesh Bank.

Financial Base
This part of credit appraisal is concerned with whether there is a strong financial standing of the Borrower Company and its directors. The following information are required: Networth statement of all the directors, Paid-up capital, Investment in business, Leverage (Equity Multiplier), Cash flow, Allied deposit in Mutual Trust Bank Limited, Tangible net-worth of the business for the lasts three years and projected two years, Total AssetTotal Debt, Overall group strength (if applicable), Business performance. Also, in order to get a clear picture of the financial viability of the business credit is asked for, Mutual Trust Bank credit authority emphasizes on financial viability analysis of the client, using some spreadsheet programs. The clients submit last three years audited/unaudited financial statements as well as forecasted income and balance sheet in the time of applying for credit. Using that data and the banks standardized spreadsheet format called Spreadsheet, the credit officer calculates different ratios, cash flow, risk and return measures, working capital, and two standard credit scores (Y Score and Z score). Findings of the Spreadsheet provide the credit section with all the analysis of the financial information, and some guidelines as to whether the client is bankable or not. In a word, it gives the credit appraiser meaningful insight of the financial standing of the borrowing.

Liability Position Analysis

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Facility from Mutual Trust bank & other banks taken by the client must be provided while applying for credit facility. The credit officer looks for-Existing facility enjoying by the Client Company from the Mutual Trust bank Limited and other banks, Existing facilities for the sister concerns (if applicable), Debt to Asset ratio, the amount outstanding are classified or not, Monthly installment payment or fixed charge coverage performance of the client and also look for the nature, limit, outstanding, overdue, CL status, security value of the credit facilities.

Financial Viability Analysis

In this part, NPV and IRR of the project are calculated, and breakeven analysis is also performed in terms of sales volume and capacity utilization. Payback period and modified IRR are also calculated if deemed necessary for the completeness of the analysis. Evaluation/ Approval An accurate appraisal of risk in any credit exposure is highly subjective matter involving quantitative and qualitative judgments, where Quantitative factors refer to the analysis of financial statement ratio and Qualitative factors refer to the assessment of management, industry position, customer/ supplier relations, account performance and reputation. In evaluating any credit proposal, the analyst uses the following distinct and logical steps: Evaluating the past performance of the borrowers. Assessing the risk of failure by identifying factors in the borrowers present condition and past performances, which indicates likelihood of success to repay the loan. Setting terms and conditions of credit facilities. Forecasting the probable future condition of the borrower and deciding whether to accept or reject a loan proposal.

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The most pertinent and prime part of the process is assessment of risk of failure to repay deals with the overall lending risk combining. In all cases, the banks basic lending criteria must be satisfied and its policy of Know Your Customer implemented in full. Once overall risk assessment done credit proposal are forwarded to appropriate authority for approval. Documentation & Disbursement Once credit proposal is approved, a sanction letter is issued to client conveying offer to the client-mentioning terms of sanction-type of facility, facility amount, repayment, security, interest rate & fees, positive and negative covenants, etc. Client is advised to complete documentation. It should be mentioned that documentation should be obtained prior to disbursement of any loan. All the necessary documentation required meeting the terms and conditions of the facility in the manner in which it was approved. Apparently there are three parts of documentation, namelya) Obtaining instruments/ documents-charge documents, standard documents & other specified documents as specified in terms and conditions in sanction letter. b) Stamping

c) Execution Once documentation is complete, facility is disbursed as per term and conditions in sanctioned advance.

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1. Request for Credit from the client to a Branch

2. Credit Application form filled up by the customer & collection of document

3. Scrutinizing the documents

4. Analyzing the information

5. Preparing the proposal

6. The proposal goes to the Authority through other necessary steps

7. Sanctioning of the credit

8. Informing the client, Loan Disbursement, Supervision and Monitoring

Figure: : Steps involved in Credit Processing.

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Credit Monitoring and Review

It is the last step in credit policy and procedure framework. Credit monitoring and review is very important, because it ensures proper utilities and repayment of bank fund. Credit monitoring and review feature of MTBL is concerned was assessing the quality of different type of loan. Periodic review and follow up should, inter-alia aims at ensuring: That conduct (Turnover, regularity of repayment etc) of the borrowing accounts during the period under review has been satisfactory or as expected. The terms and condition of the sanctioned letter are strictly followed. The account is not having excess over limit. The value of the collateral security is adequate. There is not any unfavorable situation in market, economy and political conditions, which may endanger the reliability of the borrower account. The analysis of the borrowers business performance and comparison of the projected and actual to find any deviations. Apparent profitability from the loans.

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Security against Advances

The documentation process is depended on types of securities, which are i) primary security and ii) collateral security. The securities can be tangible or intangible, movable or immovable. The securities, which are acceptable to the bank in respect of the credit facilities are-Pratiraksha Sanchaya Patra, Bangladesh Sanchaya Patra, ICB unit certificate, Wage earners bond, FDR, Shares (Listed in Stock Exchange), Pledge of goods, Hypothecation of goods, products and machinery, Fixed assets of manufacturing unit, Shipping documents. Qualities of a good security are clean title, easily saleable, easily valuable, price stable and easily controllable, etc.

Modes of Charging Security

A wide range of securities is offered to banks as coverage for loan. In order to make the securities available to banker, in case of default of customer, a charge should be created on the security. Creating charge means making it available as a cover for advance. The following modes of charging securities are applied in the Mutual Trust bank Limited. Different methods of creating charges over security are lien, pledge, hypothecation, mortgage (legal & equitable), trust receipt, advance against work order, advance against approved shares, advance against FDR etc.

Lien
A lien is right of banker to hold the debtors property until the debt is discharged. bank generally retains the assets in his own custody but sometimes these goods are in the hands of third party with lien marked. When it is in the hand of third party, the third party cannot discharge it without the permission of bank. Lien gives banker the right to retain the property not the right to sell. Permission from the appropriate court is necessary. Lien can be made on moveable goods only such as raw materials, finished goods, shares debentures etc. 66

Pledge
Pledge is also like lien but here bank enjoys more right. Bank can sell the property without the intervention of any court, incase of default on loan, But for such selling proper notice must be given to the debtor. To create pledge, physical transfer of goods to the bank is must.

Hypothecation
In this charge creation method physically the goods remained in the hand of debtor. But documents of title to goods are handed over to the banker. This method is also called equitable charge. Since the goods are in the hand of the borrower, bank inspects the goods regularly to judge it s quality and quantity for the maximum safety of loan.

Mortgage
Mortgage is transfer of interest in specific immovable property. Mortgage is created on the immovable property like land, building, plant etc. Most common type of mortgage is legal mortgage in which ownership is transferred to the bank by registration of the mortgage deed. Another method called equitable mortgage is also used in bank for creation of charge. Here mere deposit of title to goods is sufficient for creation of charge. Registration is not required. In both the cases, the mortgage property is retained in the hank of borrower.

Trust Receipt
Generally goods imported or bought by bank's financial assistance are held by bank as security. Bank may release this lien / pledge these goods against trust receipt. This means that the borrower holds goods in trust of the bank, trust receipt arrangement is needed when the borrower is going to sell this goods or process it further but borrower has no sufficient fund to pay off the bank loan. Here proceeds from any part of these goods are deposited to this bank.

Advance against Work-Order

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Advances can be made to a client to perform work order. The following points are to be taken into consideration. The clients management capability, equity strength, nature of scheduled work and feasibility study should be judiciously made to arrive at logical decision. If there is a provision for running bills for the work, appropriate amount to be deducted from each bill to ensure complete adjustment of the liability within the payment period of the final bill besides assigning bills receivable, additional collateral security may be insisted upon. Disbursement should be made only after completion of documentation formalities and fulfillment of arrangements by the client to undertake the contract. The progress of work under contract is reviewed periodically.

Advance against Approved Shares

Credit facilities to extend against shares will be called Investment Scheme against Shares. Advance may be allowed against shares of companies listed with the Stock Exchange Ltd. Subject to margin or may other restrictions imposed by Bangladesh Bank/Head Office of the bank from time to time. Value of shares & margin should be worked out as per guidelines issued from time to time by Bangladesh Bank / Head Office of the bank.

Advance against Fixed Deposit Receipts

Advance against Fixed Deposit Receipt will be subject to credit Restrictions imposed from time to time by Head Office / Bangladesh Bank. Scrutinize the Fixed Deposit Receipts with regard to the following points. a) The Fixed Deposit Receipt is not in the name of minor. b) It is discharged by the depositor on revenue stamp of adequate value & his signature is verified. c) Creation of liability on Fixed Deposit issued in joint names by any one of the depositors is regular.

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d) If the Deposit Receipt is offered as a security for allowing advances, a letter of lien shall be obtained from the depositors, on the appropriate form. e) If the Deposit Receipt has been issued by the branch-allowing advance, lien against that specific Deposit Receipt to be marked in the fixed Deposit Register of the branch. f) The discharged receipt, the letter of lien duly verified by the issuing branch & the letter confirming registration of the lien on the deposit receipts shall be kept along with other documents under safe custody of the Bank.

Relation between Advance with the Security

Types of advance Loans Overdraft Bills purchased Securities Lien of various kinds of Sanchaya patras, Govt. Securities, FDR, Collateral of immovable property, shares quoted in stock exchange Pledge or hypothecation of machinery, land and building on which machinery are installed, stock in trade, goods products and merchandise. Bills itself

Lending Risk Analysis (LRA): Modern Technique of Credit Appraisal

The Financial Sector Reform Project (FSRP) has designed the LRA package, which provides a systematic procedure for analyzing and quantifying the potential credit risk. Bangladesh Bank has directed all commercial Bank to use LRA technique for evaluating credit proposal amounting to Tk. 10 million and above. The objective of LRA is to assess the credit risk in quantifiable manner and then find out ways & means to cover the risk. However, some commercial Bas employ LRA technique as a credit appraisal tool for evaluating credit proposals amounting to Tk. 5 million and above. Broadly LRA package divides the credit risk into two categories, namely --- Business risk and Security risk. A detail interpretation of these risks and the procedure for evaluating the credit as follows

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Business risk It refers to the risk that the business falls to generate sufficient cash flow to repay the loan. Business risk is subdivided into two categories. Industry risk The risk that the company fails to repay for the external reason. It is subdivide into supplies risk and sales risk.

LENDING RISK BUSINESS RISK INDUSRTY RISK

SUPPLY RISK SALES RISK

COMPANY RISK
MANAGEMENT RISK MANAGEMENT MANAGEMENT

SECURITY RISK
SECURITY CONTROL SECURITY COVER

COMPANY POSITION PERFORMANCE RISK RESILIENCE RISK

Supplies It indicates that the business suffers from external disruption to the supply of imputes. Components of supplies risk are as raw material, Labor, power, machinery, equipment, factory premises etc. Supply risk is assessed by a cost breakdown of the inputs and then assessing the risk of disruption of supplies of each item. Sales risk This refers to the risk that the business suffers from external disruption of sales. Sales may be disrupted by changes to market size, increasing in competition, and change in the 70

regulation or due to the loss of single large customer. Sales risk is determined by analyzing production or marketing system, industry situation, Government policy, and competitor profile and companies strategies. Company risk This refers to the risk that the company fails for internal reasons. Company risk is subdivided into company position risk and Management risks. Company position risk Within an industry each and every company holds a position. This position is very competitive. Due to the weakness in the company's position in the industry, a company is the risk for failure. That means, company position risk is the risk of failure due to weakness in the companies position in the industry. It is subdivided into performance risk and resilience risk. Performance risk This risk refers to the risk that the companys position is so weak that it will be unable to repay the loan even under Favor able external condition. Performance risk assessed by SWOT (Strength, Weakness, Opportunity and Threat) analysis, Trend analysis, Cash flow forecast analysis and credit report analysis (i.e. CIB repot from Bangladesh Bank). Resilience risk Resilience means to recover early injury, this refers to risk that the company falls due to resilience to unexpected external conditions. The resilience of a company depends on its leverage, liquidity and strength of connection of its owner or directors. The resilience risk is determined by analyzing different financial ratio, flexibility of production process, shareholders willingness to support the company if need arise and political and private affiliation of owners and key personnel. Management risk The management risk refers to the risk that the company fails due to management not exploiting effectively the companys position. Management risk is subdivided into management competence risk and integrity risk. 71

Management competence risk This refers to the risk that falls because the management is incompetent. The competence of management depends upon their ability to manage the company's business efficiently and effectively. The assessment of management competence depends on management ability and management team work. Management ability is determined by analyzing the ability of owner or board of the members first and then key personnel for finance and operation. Management team work is determined by analyzing management structure and its strength and weakness. Management integrity risk This refers to the risk that the company fails to repay the loan amount due to lack of management integrity. Management integrity is a combination of honesty and dependability. Management integrity risk is determined by assessing management honesty, which requires evaluating the reliability of information supplied and then management dependability. Security risk This sort of risk is associated with the realized value of the security, which may not cover the exposure of loan. Exposure means principal plus outstanding interest. The security risk is subdivided into two major heads i.e. security control risk and security cover risk. Security control risk This risk refers to the risk that the Bank falls to realize the security because of Bank's control over the security offered by the borrower i.e. incomplete documents. The risk of failure to realize the security depends on the difficulty in obtaining favorable judgment and taking possession of security. For analyzing the security control risk the credit office is required to verify documentation to ensure security protection, documentation completeness, documentation integrity and proper insurance policy. He/she also conducts site visit to verify security existence. Assessment of security control risk requires analyzing the possibility of obtaining favorable judgment and analyzing the case with which the Bank could take the possession and liquidate the securities.

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Security cover risk This refers to the risk that the realized value of security is less than exposure. Security cover risk depends on speed of realization and liquidation value. For analyzing security cover risk, the official requires assessing the power of the customer to prolong the legal process and to analyze the market demand for the security For assessment of security control risk, the officials times the time that would require to liquidate the security and assess the risk and estimates the security value at liquidation and assess the risk. Before completing the LRA form, the relationship manager collects data specially industry specific from published sources and company specific data that not usually published., by personally visiting the company. After collecting the necessary data he/ she prepares financial spreadsheet. This spreadsheet provides a quick method of assessing business trend & efficiency and helps to assess the borrower ability to pay the loan Obligation. Financial spreadsheet includes balance sheet, income statement, cash flow statement and ratios for the purpose of financial statement analysis. Through analyzing data and collected information, the concerned official completes the LRA form and all scores are transferred to the scoring matrix to find the overall risk of lending. The overall matrix provides four kinds of lending risk for decision making viz.--(I) Good (ii) Acceptable (iii) Marginal and (iv) Poor. The Bank does not provide any credit request having an over all risk as marginal" and Poor" without justification. All credit application rated "Poor" shall require the approval of the Board of Directors regardless of purpose tenor or amount. Therefore-Bank can minimize the dangers regarding the bad loan and advances through using the LRA.

SUMMARY OF CREDIT RISK

Prism of Good Governance
Bangladesh Bank strictly requires the financial institutions to abide by the prism of good governance, which basically explains how to carry out business activities and meeting the targets by maintaining the socio ethical standards and keeping within the regulatory 73

framework. It suggests creating the environment for institutions building in the financial industry- which requires creating sustainable organization that have embedded risk management system which essentially translates to good governance.

Business strategy

Targets and Buds

Regulatory framework

-Asset liability Management -Foreign exchange -Internal control -AML

-HRM -Revenue - ALM standard -Security - InfoTech -Corporate affairs

Policy + People + Process

Socio Ethical Standards

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POLICY GUIDELINES
This section details fundamental credit risk management policies that are recommended for adoption by all Banks in Bangladesh. The guidelines contained herein outline general principles that are designed to govern the implementation of more detailed lending procedures and risk grading systems within individual Bas.

Lending Guidelines
All Bas should have established Credit Policies (Lending Guidelines) that clearly outline the senior managements view of business development priorities and the terms and conditions that should be adhered to in order for loans to be approved. The Lending Guidelines should be updated at least annually to reflect changes in the economic out look and the evolution of the Banks loan portfolio, and be distributed to all lending/marketing officers. The Lending Guidelines should be approved by the Managing Director/CEO & Board of Directors of the bank based on the endorsement of the Banks Head of Credit Risk Management and the Head of Corporate/Commercial Banking. (Section 2.1 of these guidelines refers) Any departure or deviation from the Lending Guidelines should be explicitly identified in credit applications and a justification for approval provided. Approval of loans that do not comply with Lending Guidelines should be restricted to the Banks Head of Credit or Managing Director/CEO & Board of Directors. The Lending Guidelines should provide the key foundations for account officers/relationship managers (RM) to formulate their recommendations for approval, and should include the following

Industry and Business Segment Focus

The Lending Guidelines should clearly identify the business/industry sectors that should constitute the majority of the Banks loan portfolio. For each sector, a clear indication of the Banks appetite for growth should be indicated (as an example, Textiles: Grow, Cement: Maintain, Construction: Shrink). This will provide necessary direction to the Banks marketing staff. 77

Types of Loan Facilities

The type of loans that are permitted should be clearly indicated, such as Working Capital, Trade Finance, Term Loan, etc. Single Borrower/Group Limits/Syndication Details of the Banks Single Borrower/Group limits should be included as per Bangladesh Bank guidelines. Bas may wish to establish more conservative criteria in this regard. Lending Caps Bas should establish a specific industry sector exposure cap to avoid over concentration in any one industry sector. Discouraged Business Types Bas should outline industries or lending activities that are discouraged. As a minimum, the following should be discouraged: Military Equipment/Weapons Finance Highly Leveraged Transactions Finance of Speculative Investments Logging, Mineral Extraction/Mining, or other activity that is Ethically or Environmentally Sensitive Lending to companies listed on CIB black list or known defaulters Counter parties in countries subject to UN sanctions Share Lending

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Taking an Equity Stake in Borrowers Lending to Holding Companies Bridge Loans relying on equity/debt issuance as a source of repayment.

Loan Facility Parameters

Facility parameters (e.g., maximum size, maximum tenor, and covenant and security requirements) should be clearly stated. As a minimum, the following parameters should be adopted: Bas should not grant facilities where the Banks security position is inferior to that of any other financial institution. Assets pledged, as security should be properly insured. Valuations of property taken as security should be performed prior to loans being granted. A recognized 3rd party professional valuation firm should be appointed to conduct valuations.

Cross Border Risk

Risk associated with cross border lending. Borrowers of a particular country may be unable or unwilling to fulfill principle and/or interest obligations. Distinguished from ordinary credit risk because the difficulty arises from a political event, such as suspension of external payments Synonymous with political & sovereign risk Third world debt crisis

For example, export documents negotiated for countries like Nigeria.

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Credit Assessment & Risk Grading

Credit Assessment
A thorough credit and risk assessment should be conducted prior to the granting of loans, and at least annually thereafter for all facilities. The results of this assessment should be presented in a Credit Application that originates from the relationship manager/account officer (RM), and is approved by Credit Risk Management (CRM). The RM should be the owner of the customer relationship, and must be held responsible to ensure the accuracy of the entire credit application submitted for approval. It is essential that RMs know their customers and conduct due diligence on new borrowers, principals, and guarantors to ensure such parties are in fact who they represent themselves to be. All Bas should have established Know Your Customer (KYC) and Money Laundering guidelines which should be adhered to at all times. Credit Applications should summarize the results of the RMs risk assessment and include, as a minimum, the following details: Amount and type of loan(s) proposed. Purpose of loans. Loan Structure (Tenor, Covenants, Repayment Schedule, Interest) Security Arrangements

In addition, the following risk areas should be addressed: Borrower Analysis The majority shareholders, management team and group or affiliate companies should be assessed. Any issues regarding lack of management depth, complicated ownership structures or inter group transactions should be addressed, and risks mitigated. 80

Industry Analysis The key risk factors of the borrowers industry should be assessed. Any issues regarding the borrowers position in the industry, overall industry concerns or competitive forces should be addressed and the strengths and weaknesses of the borrower relative to its competition should be identified. Supplier/Buyer Analysis Any customer or supplier concentration should be addressed, as these could have a significant impact on the future viability of the borrower. Historical Financial Analysis An analysis of a minimum of 3 years historical financial statements of the borrower should be presented. Where reliance is placed on a corporate guarantor, guarantor financial statements should also be analyzed. The analysis should address the quality and sustainability of earnings, cash flow and the strength of the borrowers balance sheet. Specifically, cash flow, leverage and profitability must be analyzed. Projected Financial Performance Where term facilities (tenor > 1 year) are being proposed, a projection of the borrowers future financial performance should be provided, indicating an analysis of the sufficiency of cash flow to service debt repayments. Loans should not be granted if projected cash flow is insufficient to repay debts. Account Conduct For existing borrowers, the historic performance in meeting repayment obligations (trade payments, cheque, interest and principal payments, etc) should be assessed. Adherence to Lending Guidelines Credit Applications should clearly state whether or not the proposed application is in compliance with the Banks Lending Guidelines. The Banks Head of Credit or Managing Director/CEO should approve Credit Applications that do not adhere to the Banks Lending Guidelines. Mitigating Factors Mitigating factors for risks identified in the credit assessment should be identified. Possible risks include, but are not limited to: margin sustainability and/or 81

volatility, high debt load (leverage/gearing), overstocking or debtor issues; rapid growth, acquisition or expansion; new business line/product expansion; management changes or succession issues; customer or supplier concentrations; and lack of transparency or industry issues. Loan Structure The amounts and tenors of financing proposed should be justified based on the projected repayment ability and loan purpose. Excessive tenor or amount relative to business needs increases the risk of fund diversion and may adversely impact the borrowers repayment ability. Security A current valuation of collateral should be obtained and the quality and priority of security being proposed should be assessed. Loans should not be granted based solely on security. Adequacy and the extent of the insurance coverage should be assessed. Name Lending Credit proposals should not be unduly influenced by an over reliance on the sponsoring principals reputation, reported independent means, or their perceived willingness to inject funds into various business enterprises in case of need. These situations should be discouraged and treated with great caution. Rather, credit proposals and the granting of loans should be based on sound fundamentals, supported by a thorough financial and risk analysis.

Risk Grading
All Bas should adopt a credit risk grading system. The system should define the risk profile of borrowers to ensure that account management, structure and pricing are commensurate with the risk involved. Risk grading is a key measurement of a Banks asset quality, and as such, it is essential that grading is a robust process. All facilities should be assigned a risk grade. Where deterioration in risk is noted, the Risk Grade assigned to a borrower and its facilities should be immediately changed. Borrower Risk Grades should be clearly stated on Credit Applications. The following Risk Grade Matrix is provided as an example.

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The more conservative risk grade (higher) should be applied if there is a difference between the personal judgment and the Risk Grade Scorecard results. It is recognized that the Bas may have more or less Risk Grades, however, monitoring standards and account management must be appropriate given the assigned Risk Grade:

Risk Rating Grade Definition

Superior Low Risk (Grade 1) Facilities are fully secured by cash deposits, government bonds or a counter guarantee from a top tier international Ba. All security documentation should be in place. Good Satisfactory Risk (Grade2) The repayment capacity of the borrower is strong. The borrower should have excellent liquidity and low leverage. The company should demonstrate consistently strong earnings and cash flow and have an unblemished track record. All security documentation should be in place. Aggregate Score of 95 or greater based on the Risk Grade Scorecard. Acceptable Fair Risk (Grade3) Adequate financial condition though may not be able to sustain any major or continued setbacks. These borrowers are not as strong as Grade 2 borrowers, but should still demonstrate consistent earnings, cash flow and have a good track record. A borrower should not be graded better than 3 if realistic audited financial statements are not received. These assets would normally be secured by acceptable collateral (1st charge over stocks / debtors / equipment / property). Borrowers should have adequate liquidity, cash flow and earnings. An Aggregate Score of 75-94 based on the Risk Grade Scorecard.

Marginal - Watch list (Grade 4) Grade 4 assets warrant greater attention due to conditions affecting the borrower, the industry or the economic environment. These borrowers have an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and/or inconsistent earnings. Facilities should be downgraded to 4 if the borrower incurs a loss, loan payments routinely fall past due, account conduct is 83

poor, or other untoward factors are present. An Aggregate Score of 65-74 based on the Risk Grade Scorecard.

Special Mention (Grade 5) Grade 5 assets have potential weaknesses that deserve managements close attention. If left uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower. Facilities should be downgraded to 5 if sustained deterioration in financial condition is noted (consecutive losses, negative net worth, excessive leverage), if loan payments remain past due for 3060 days, or if a significant petition or claim is lodged against the borrower. Full repayment of facilities is still expected and interest can still be taken into profits. An Aggregate Score of 55-64 based on the Risk Grade Scorecard. Substandard (Grade 6) financial condition is weak and capacity or inclination to repay is in doubt. These weaknesses jeopardize the full settlement of loans. Loans should be downgraded to 6 if loan payments remain past due for 60-90 days, if the customer intends to create a lender group for debt restructuring purposes, the operation has ceased trading or any indication suggesting the winding up or closure of the borrower is discovered. Not yet considered non-performing as the correction of the deficiencies may result in an improved condition, and interest can still be taken into profits. An Aggregate Score of 4554 based on the Risk Grade Scorecard.

Doubtful and MTBLd (non-performing) Grade 7 full repayment of principal and interest is unlikely and the possibility of loss is extremely high. However, due to specifically identifiable pending factors, such as litigation, liquidation procedures or capital injection, the asset is not yet classified as Loss. Assets should be downgraded to 7 if loan payments remain past due in excess of 90 days, and interest income should be taken into suspense (non-accrual). Loan loss provisions must be raised against the estimated unrealizable amount of all facilities. The adequacy of provisions must be reviewed at least quarterly on all non-performing loans, and the Bank should pursue legal options to enforce security to obtain repayment or negotiate an appropriate loan 84

rescheduling. In all cases, the requirements of Bangladesh Bank in CIB reporting, loan rescheduling and provisioning must be followed. An Aggregate Score of 35-44 based on the Risk Grade Scorecard.

Loss (non-performing) Grade 8 Assets graded 8 are long outstanding with no progress in obtaining repayment (in excess of 180 days past due) or in the late stages of wind up/liquidation. The prospect of recovery is poor and legal options have been pursued. The proceeds expected from the liquidation or realization of security may be awaited. The continuance of the loan as a Bankable asset is not warranted, and the anticipated loss should have been provided for. This classification reflects that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future. Bangladesh Bank guidelines for timely write off of bad loans must be adhered to. An Aggregate Score of 35 or less based on the Risk Grade Scorecard. At least top twenty-five clients/obligors of the Bank may preferably be rated by an outside credit rating agency. The Early Alert Process should be completed in a timely manner by the RM and forwarded to CRM for approval to affect any downgrade. After approval, the report should be forwarded to Credit Administration, who is responsible to ensure the correct facility/borrower Risk Grades are updated on the system. The downgrading of an account should be done immediately when adverse information is noted, and should not be postponed until the annual review process

Approval Authority
The authority to sanction/approve loans must be clearly delegated to senior credit executives by the Managing Director/CEO & Board based on the executives knowledge and experience. Approval authority should be delegated to individual executives and not

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to committees to ensure accountability in the approval process. The following guidelines should apply in the approval/sanctioning of loans: Credit approval authority must be delegated in writing from the MD/CEO & Board (as appropriate), acknowledged by recipients, and records of all delegation retained in CRM. Delegated approval authorities must be reviewed annually by MD/CEO/Board. The credit approval function should be separate from the marketing/relationship management (RM) function. The role of Credit Committee may be restricted to only review of proposals i.e. recommendations or review of Banks loan portfolios. Approvals must be evidenced in writing, or by electronic signature. Approval records must be kept on file with the Credit Applications. All credit risks must be authorized by executives within the authority limit delegated to them by the MD/CEO. The pooling or combining of authority limits should not be permitted. Credit approval should be centralized within the CRM function. Regional credit centers may be established, however, all large loans must be approved by the Head of Credit and Risk Management or Managing Director/CEO/Board or delegated Head Office credit executive. The aggregate exposure to any borrower or borrowing group must be used to determine the approval authority required. Any credit proposal that does not comply with Lending Guidelines, regardless of amount, should be referred to Head Office for Approval MD/Head of Credit Risk Management must approve and monitor any cross border exposure risk. Any breaches of lending authority should be reported to MD/CEO, Head of Internal Control, and Head of CRM. It is essential that executives charged with approving loans have the relevant training and experience to carry out their responsibilities effectively. 86

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As a minimum, approving executives should have: At least 5 years experience working in corporate/commercial Banking as a relationship manager or account executive. Training and experience in financial statement, cash flow and risk analysis. A thorough working knowledge of Accounting. A good understanding of the local industry/market dynamics. Successfully completed an assessment test demonstrating adequate

Knowledge of the following areas: Introduction of accrual accounting. Industry / Business Risk Analysis Borrowing Causes Financial reporting and full disclosure Financial Statement Analysis The Asset Conversion/Trade Cycle Cash Flow Analysis Projections Loan Structure and Documentation Loan Management.

A monthly summary of all new facilities approved, renewed, enhanced, and a list of proposals declined stating reasons thereof should be reported by CRM to the CEO/MD.

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Segregation of Duties
Bas should aim to segregate the following lending functions: Credit Approval/Risk Management Relationship Management/Marketing Credit Administration

The purpose of the segregation is to improve the knowledge levels and expertise in each department, to impose controls over the disbursement of authorized loan facilities and obtain an objective and independent judgment of credit proposals.

Internal Audit
Bas should have a segregated internal audit/control department charged with conducting audits of all departments. Audits should be carried out annually, and should ensure compliance with regulatory guidelines, internal procedures, Lending Guidelines and Bangladesh Bank requirements.

PREFERRED ORGANISATIONAL STRUCTURE & RESPONSIBILITIES

The appropriate organizational structure must be in place to support the adoption of the policies detailed in Section 1 of these guidelines. The key feature is the segregation of the Marketing/Relationship Management function from Approval / Risk Management / Administration functions. Credit approval should be centralized within the CRM function. Regional credit centers may be established, however, all applications must be approved by the Head of Credit and Risk Management or Managing Director /CEO /Board or delegated Head Office credit executive.

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Preferred Organizational Structure

The following chart represents the preferred management structure: Managing Director/ CEO

Head

of

Credit

Risk

Management (CRM

Head of Corporate / Commercial Banking

Other Direct Report Internal Audit, etc Other Direct Reports

Credit Administration (May report separately To MD/CEO)

Relationship Management / Marketing (RM) Business Development

(Internal Audit, etc.) Managing CEO Other Direct Reports (Internal Audit, etc.) Managing CEO Other Direct Reports (Internal Audit, etc.) Managing CEO Other Direct Reports (Internal Audit, etc.) Managing CEO Other Direct Reports (Internal Audit, etc.) Managing CEO Director 90 / Director / Director / Director / Director /

Credit Approval (Includes regional credit Centers if applicable) Monitoring / Recovery (includes regional recovery Monitoring/Recovery centres applicable) (Includesifregional recovery centers if applicable)

Business Development

(Internal Audit, etc.) Managing CEO Director /

Key Responsibilities
The key responsibilities of the above functions are as follows.

Credit Risk Management (CRM)

Oversight of the Banks credit policies, procedures and controls relating to all credit risks arising from corporate/commercial/institutional Banking, personal Banking, & treasury operations. Oversight of the Banks asset quality. Directly manage all Substandard, Doubtful & bad and Loss accounts to maximize recovery and ensure that appropriate and timely loan loss provisions have been made. To approve (or decline), within delegated authority, Credit Applications recommended by RM. Where aggregate borrower exposure is in excess of approval limits, to provide recommendation to MD/CEO for approval. To provide advice/assistance regarding all credit matters to line management/ RM s. To ensure that lending executives have adequate experience and/or training in order to carry out job duties effectively.

Credit Administration:

To ensure that all security documentation complies with the terms of approval and is enforceable. To monitor insurance coverage to ensure appropriate coverage is in place over assets pledged as collateral, and is properly assigned to the Bank. To control loan disbursements only after all terms and conditions of approval have been met, and all security documentation is in place. To maintain control over all security documentation. To monitor borrowers compliance with covenants and agreed terms and conditions, and general monitoring of account conduct/performance.

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Relationship Management/Marketing (RM)

To act as the primary Bank contact with borrowers. To maintain thorough knowledge of borrowers business and industry through regular contact, factory/warehouse inspections, etc. RMs should proactively monitor the financial performance and account conduct of borrowers. To be responsible for the timely and accurate submission of Credit Applications for new proposals and annual reviews, taking into account the credit assessment requirements outlined in Section 4. 1.2.1 of these guidelines. To highlight any deterioration in borrowers financial standing and amend the borrowers Risk Grade in a timely manner. Changes in Risk Grades should be advised to and approved by CRM. To seek assistance/advice at the earliest from CRM regarding the structuring of facilities, potential deterioration in accounts or for any credit related issues.

Internal Audit/Control
Conducts independent inspections annually to ensure compliance with Lending Guidelines, operating procedures, Bank policies and Bangladesh Bank directives. Reports directly to MD/CEO or Audit committee of the Board.

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PROCEDURAL GUIDELINES
This section outlines of the main procedures that are needed to ensure compliance with the policies contained in Section 1.0 of these guidelines.

Approval Process
The approval process must reinforce the segregation of Relationship Management/ Marketing from the approving authority. The responsibility for preparing the Credit Application should rest with the RM within the corporate/commercial Banking department. Credit Applications should be recommended for approval by the RM team and forwarded to the approval team within CRM and approved by individual executives. Bas may wish to establish various thresholds, above which, the recommendation of the Head of Corporate/Commercial Banking is required prior to onward recommendation to CRM for approval. In addition, Bas may wish to establish regional credit centers within the approval team to handle routine approvals. Executives in head office CRM should approve all large loans. The recommending or approving executives should take responsibility for and be held accountable for their recommendations or approval. Delegation of approval limits should be such that all proposals where the facilities are up to 15% of the Banks capital should be approved at the CRM level, facilities up to 25% of capital should be approved by CEO/MD, with proposals in excess of 25% of capital to be approved by the EC/Board only after recommendation of CRM, Corporate Banking and MD/CEO.

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The following diagram illustrates the preferred approval process: Credit Application Recommended by RM/ Marketing 1 2 Zonal Credit Officer (ZCO) 3 4

Head of Credit & Head of Corporate Banking (HOBC) 5 7 7 Executive Committee/ Board 1. Application forwarded to Zonal Office for approved/decline 2. Advise the decision as per delegated authority (approved /decline) to recommending branches. A monthly summary of ZCO approvals should be sent to HOC and HOCB to report the previous months approvals sanctioned at the Zonal Offices. The HOC should review 10% of ZCO approvals to ensure adherence to Lending Guidelines and Bank policies. 3. ZCO supports & forwarded to Head of Corporate Banking (HOCB) or delegate for endorsement, and Head of Credit (HOC) for approval or onward recommendation. 4. HOC advises the decision as per delegated authority to ZCO 5. HOC & HOCB supports & forwarded to Managing Director 6. Managing Director advises the decision as per delegated authority to HOC & HOCB. 7. Managing Director presents the proposal to EC/Board 8. EC/Board advises the decision to HOC & HOCB ** Regardless of the delegated authority HOC to advise the decision (approval/decline) to marketing department through ZCO 94 6

Managing Director

Recommended Delegated Approval Authority Levels HOC/CRM Executives Managing Director/CEO EC/Board all exceed Appeal Process Any declined credit may be re-presented to the next higher authority for reassessment/approval. However, there should be no appeal process beyond the Managing Director. Up to 15% of Capital Up to 25% of Capital 25% of Capital

Credit Administration
The Credit Administration function is critical in ensuring that proper documentation and approvals are in place prior to the disbursement of loan facilities. For this reason, it is essential that the functions of Credit Administration be strictly segregated from Relationship Management/Marketing in order to avoid the possibility of controls being compromised or issues not being highlighted at the appropriate level. Credit Administration procedures should be in place to ensure the following:

Disbursement:
Security documents are prepared in accordance with approval terms and are legally enforceable. Standard loan facility documentation that has been reviewed by legal counsel should be used in all cases. Exceptions should be referred to legal counsel for advice based on authorization from an appropriate executive in CRM. Disbursements under loan facilities are only be made when all security documentation is in place. CIB report should reflect/include the name of all the lenders with facility, limit & outstanding. All formalities regarding large loans &

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loans to Directors should be guided by Bangladesh Bank circulars & related section of Banking Companies Act. All Credit Approval terms have been met.

Custodial Duties:
Loan disbursements and the preparation and storage of security documents should be centralized in the regional credit centers. Appropriate insurance coverage is maintained (and renewed on a timely basis) on assets pledged as collateral. Security documentation is held under strict control, preferably in locked fireproof storage.

Compliance Requirements:
All required Bangladesh Bank returns are submitted in the correct format in a timely manner. Bangladesh Bank circulars/regulations are maintained centrally, and advised to all relevant departments to ensure compliance. All third party service providers (valuers, lawyers, insurers, CPAs etc.) are approved and performance reviewed on an annual basis. Bas are referred to Bangladesh Bank circular outlining approved external audit firms that are acceptable.

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Credit Monitoring
To minimize credit losses, monitoring procedures and systems should be in place that provides an early indication of the deteriorating financial health of a borrower. At a minimum, systems should be in place to report the following exceptions to relevant executives in CRM and RM team: Past due principal or interest payments, past due trade bills, account excesses, and breach of loan covenants; Loan terms and conditions are monitored, financial statements are received on a regular basis, and any covenant breaches or exceptions are referred to CRM and the RM team for timely follow-up. Timely corrective action is taken to address findings of any internal, external or regulator inspection/audit. All borrower relationships/loan facilities are reviewed and approved through the submission of a Credit Application at least annually. Computer systems must be able to produce the above information for central/head office as well as local review. Where automated systems are not available, a manual process should have the capability to produce accurate exception reports. Exceptions should be followed up on and corrective action taken in a timely manner before the account deteriorates further. Refer to the Early Alert Process (section4.3.3.1).

Early Alert process:

An Early Alert Account is one that has risks or potential weaknesses of a material nature requiring monitoring, supervision, or close attention by management. If these weaknesses are left uncorrected, they may result in deterioration of the repayment prospects for the asset or in the Banks credit position at some future date with a likely prospect of being downgraded to CG 5 or worse (Impaired status), within the next twelve months. Early identification, prompt reporting and proactive management of Early Alert Accounts are prime credit responsibilities of all Relationship Managers and must be undertaken on 97

a continuous basis. An Early Alert report should be completed by the RM and sent to the approving authority in CRM for any account that is showing signs of deterioration within seven days from the identification of weaknesses. The Risk Grade should be updated as soon as possible and no delay should be taken in referring problem accounts to the CRM department for assistance in recovery. Despite a prudent credit approval process, loans may still become troubled. Therefore, it is essential that early identification and prompt reporting of deteriorating credit signs be done to ensure swift action to protect the Banks interest. The symptoms of early alert are by no means exhaustive and hence, if there are other concerns, such as a breach of loan covenants or adverse market rumors that warrant additional caution, an Early Alert report should be raised. Moreover, regular contact with customers will enhance the likelihood of developing strategies mutually acceptable to both the customer and the Bank. Representation from the Bank in such discussions should include the local legal adviser when appropriate. An account may be reclassified as a Regular Account from Early Alert Account status when the symptom, or symptoms, causing the Early Alert classification have been regularized or no longer exist. The concurrence of the CRM approval authority is required for conversion from Early Alert Account status to Regular Account status.

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Credit Recovery
The Recovery Unit (RU) of CRM should directly manage accounts with sustained deterioration (a Risk Rating of Sub Standard (6) or worse). Bas may wish to transfer EXIT accounts graded 4-5 to the RU for efficient exit based on recommendation of CRM and Corporate Banking. Whenever an account is handed over from Relationship Management to RU, a Handover /Downgrade Checklist should be completed.

The RUs primary functions are:

Determine Account Action Plan/Recovery Strategy Pursue all options to maximize recovery, including placing customers into receivership or liquidation as appropriate. Ensure adequate and timely loan loss provisions are made based on actual and expected losses. Regular review of grade 6 or worse accounts. The management of problem loans (NPLs) must be a dynamic process, and the associated strategy together with the adequacy of provisions must be regularly reviewed. A process should be established to share the lessons learned from the experience of credit losses in order to update the lending guidelines.

NPL Account Management

All NPLs should be assigned to an Account Manager within the RU, who is responsible for coordinating and administering the action plan/recovery of the account, and should serve as the primary customer contact after the account is downgraded to substandard. Whilst some assistance from Corporate Banking/Relationship Management may be sought, it is essential that the autonomy of the RU be maintained to ensure appropriate recovery strategies are implemented.

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Account Transfer Procedures

Within 7 days of an account being downgraded to substandard (grade 6), a Request for Action (RFA) and a handover /downgrade checklist should be completed by the RM and forwarded to RU for acknowledgment. The account should be assigned to an account manager within the RU, who should review all documentation, meet the customer, and prepare a Classified Loan Review Report (CLR) within 15 days of the transfer. The CLR should be approved by the Head of Credit, and copied to the Head of Corporate Banking and to the Branch/office where the loan was originally sanctioned. This initial CLR should highlight any documentation issues, loan structuring weaknesses, proposed workout strategy, and should seek approval for any loan loss provisions that are necessary. Recovery Units should ensure that the following is carried out when an account is classified as Sub Standard or worse: Facilities are withdrawn or repayment is demanded as appropriate. Any drawings or advances should be restricted, and only approved after careful scrutiny and approval from appropriate executives within CRM. CIB reporting is updated according to Bangladesh Bank guidelines and the borrowers Risk Grade is changed as appropriate. Loan loss provisions are taken based on Force Sale Value (FSV). Loans are only rescheduled in conjunction with the Large Loan Rescheduling guidelines of Bangladesh Bank. Any rescheduling should be based on projected future cash flows, and should be strictly monitored. Prompt legal action is taken if the borrower is uncooperative.

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Non Performing Loan (NPL) Monitoring

On a quarterly basis, a Classified Loan Review (CLR) should be prepared by the RU Account Manager to update the status of the action/recovery plan, review and assess the adequacy of provisions, and modify the Banks strategy as appropriate. The Head of Credit should approve the CLR for NPLs up to 15% of the Bas capital, with MD/CEO approval needed for NPLs in excess of 15%. The CLRs for NPLs above 25% of capital should be approved by the MD/CEO, with a copy received by the Board.

NPL provisioning and Write Off

The guidelines established by Bangladesh Bank for CIB reporting, provisioning and write off of bad and doubtful debts, and suspension of interest should be followed in all cases. These requirements are the minimum, and Bas are encouraged to adopt more stringent provisioning/write off policies. Regardless of the length of time a loan is past due, provisions should be raised against the actual and expected losses at the time they are estimated. The approval to take provisions, write offs, or release of provisions/upgrade of an account should be restricted to the Head of Credit or MD/CEO based on recommendation from the Recovery Unit. The Request for Action (RFA) or CLR reporting format should be used to recommend provisions, write-offs or release/upgrades. The RU Account Manager should determine the Force Sale Value (FSV) for accounts grade 6 or worse. Force Sale Value is generally the amount that is expected to be realized through the liquidation of collateral held as security or through the available operating cash flows of the business, net of any realization costs. Any shortfall of the Force Sale Value compared to total loan outstanding should be fully provided for once an account is downgraded to grade 7. Where the customer in not cooperative, no value should be assigned to the operating cash flow in determining Force Sale Value. Force Sale Value and provisioning levels should be updated as and when new information is obtained, but 101

as a minimum, on a quarterly basis in the CLR. Following formula is to be applied in determining the required amount of provision: 1. 2. Gross Outstanding Less: (i) Cash margin held or fixed Deposits /SP under lien. (ii) Interest in Suspense Account 3. Loan Value (For which provision is to be created before considering Estimated realizable value of other security/collateral held) XXX 4. Less: Estimated salvage value of security/collateral held (XXX) (See Note below) Net Loan Value XXX (XXX) (XXX) XXX

Note: The amount of required provision may, in some circumstances, be reduced by an estimated realizable forced sale value of (i.e. Salvage Value) of' any tangible collateral held (viz: mortgage of property, pledged goods / or hypothecated goods repossessed by the Bank, pledged readily marketable securities etc). Hence, in these situations, it will be advisable to evaluate such collateral, estimate the most realistic sale value under duress and net-off the value against the outstanding before determining the Net Loan value for provision purposes. Conservative approach should be taken to arrive at provision requirement and Bangladesh Bank guideline to be properly followed.

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Incentive Program:
Bas may wish to introduce incentive programs to encourage Recovery Unit Account Managers to bring down the Non Performing Loans (NPLs). The table below shows an indicative incentive plan for RU account managers: Recovery as a % of Principal plus Recommended Incentive as % of interest Net recovery amount If CG 7-8 1.00% 0.50% 0.25% if written off 2.00% 1.00% 0.50%

76% to 100% 51% t0 75% 20% to 50%

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104

In the previous sections of this report we have critically analyzed Mutual Trust Banks existing credit risk management system as well as Bangladesh Banks best practices guidelines for managing credit risk. Comparing Mutual Trust Banks current credit risk management system with the Bangladesh Bank guidelines we can evaluate Mutual Trust Bank Limiteds existing practices in Banking industry -

Credit Policies/ Lending Guideline:

In the above analysis we have seen that Mutual Trust Bank Limited possesses a newly introduced written credit policy, which was prepared in accordance with Bangladesh Bank Guidelines. Corporate Office sent CRM manual to every Branch Managers, Zonal Heads and all Departmental Heads with a circular on 8th July 2004.

The purpose of this document was to provide guidelines to improve the credit risk management and for the credit officers to take quick decision whether to accept or reject a project. The lending guideline includes Industry or business segment focus. Types of loan facilities Details of single borrower/ group limit Lending caps Discouraged business type Loan facility parameters Cross Border risk

As there was no written guideline before therefore Mutual Trust Bank has just started implementing the guidelines.

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Credit Assessment & Risk Grading:

Proper credit processing and risk grading system is present here. Adoption of credit risk grading system is required to ensure account management, structure and pricing to commensurate with the risk involved. Still this grading system does not match completely i.e. lower interest rate for lower risk and vice versa. Therefore pricing should commensurate while processing credit.

Approval Authority:
In Bangladesh Banks guideline it is written, Approval authority should be delegated to individual executives and not to committees to ensure accountability in approval process. But we see, in Mutual Trust Bank Limited, that every credit goes to the Board via credit committee. As a result, wastage of time occurs and no one is held accountable for a bad loan.

Segregation of Duties:
According to Bangladesh Bank Guideline Bas should aim to segregate the following lending functions to improve the knowledge levels and expertise in each department: Credit Approval/ Risk Management Relationship Management/ Marketing Credit Administration But in Mutual Trust Bank there is no such departmentalization or segregation of duties. But it has just started its delegation of duties like formation of Credit Administration Division in the Corporate Office. In small branches of Mutual Trust Bank only single loan officer do all the tasks relating credit like loan marketing, risk assessing and credit administration. 106

Internal Audit:
Mutual Trust Bank Limited has a segregated internal audit/ control department charged with conducting audit of all departments as suggested by Bangladesh Bank guideline.

Preferred Organizational Structure:

Mutual Trust Bank is yet to follow the preferred management structure as suggested by Bangladesh Bank guideline. The key feature in the preferred management structure is the segregation of Marketing/ Relationship function from approval/Risk management/ Administration function.

Approval process:
According to Bangladesh Bank best practices guideline, the recommending or approving executives should take responsibility for and be held accountable for their recommendations and approval. The recommended delegated approval authority levels are as follows Head of Credit/CRM Executives Managing Director/ CEO EC/ Board up to 15% of capital Up to 25% of capital All exceed 25% of capital

But in Mutual Trust Bank we see that every credit proposal goes to Executive committee i.e. board.

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Credit Administration:
Bangladesh Bank guidelines suggest that Credit administration be strictly segregated from relationship management/ marketing. As a result the possibility of controls being compromised or issues not being highlighted at the appropriate level can be avoided. The credit administration has the following functions Disbursement Custodial duties Compliance requirement

In Mutual Trust Bank credit officers under supervision of Branch Credit In-charge or Branch Manager carry out all the three functions of credit administration. Therefore Credit Marketing and Administration is yet to be segregated.

Credit Monitoring:
To minimize credit losses, monitoring procedures and systems should be in place that provides an early indication of the deteriorating financial health of a borrower. Early identification, prompt reporting and proactive management of Early Alert Accounts are prime credit responsibilities of all relationship Managers. An early Alert Account is one that has risks or potential weakness of a material nature requiring monitoring, supervision or close attention by management. In Mutual Trust Bank credit monitoring is also done by Credit-In-Charge or branch managers. As they be busy with their day-today activities Early Alert Accounts do not get that much attention as needed.

Credit Recovery:
According to Bangladesh Bank guidelines the recovery unit (RU) of CRM should directly manage accounts with sustained deterioration. On a quarterly basis, a Classified Loan Review (CLR) should be prepared by the RU Account Manager to update the action/ recovery plan, review and assess the adequacy of provisions, and modify as appropriate. 108

In Mutual Trust Bank the non-performing loan is very low (50,43,00,000 till December 31, 2006) and the recovery unit is yet to be formed. Even for personal loan program, Personal Banking Division also lacks a recovery unit.

Account Transfer Procedures:

Bangladesh Bank guidelines suggested that within 7 days of an account being downgraded to substandard, a Request for Action (RFA) and a handover/downgrade checklist should be completed by RM and forwarded to RU for acknowledgement. An account manager is to be assigned to review all documentation, meet the customer and prepare a Classified Loan Review (CLR) report within 15 days of transfer. This account transfer is yet to be followed as there is no official Recovery Unit (RU) for this purpose. But at present branch officials perform these activities themselves. Besides according to Bangladesh Bank guidelines, after classifying as substandard or worse actions like withdrawal/restriction of facilities, updating CIB report, changing risk grade, rescheduling of loans or even prompt actions are taken if the borrower is not cooperative.

Incentive Program:
The Bangladesh Bank guidelines also encourage Bas to introduce incentive programs for the Recovery Unit Account Managers to bring down the Non Performing Loans (NPLs). Mutual Trust Bank Limited currently has no such incentive program as it does not have such a Recovery Unit.

Non-Performing Loan Account Management:

This also does not comply with Bangladesh Bank Guidelines as the officials for recovery unit is yet to be prepared. The branch officials therefore consulting with higher management initiate coordinating and administering the action plan/recovery of the 109

account. The branch officials/credit officer contacts with the client, tries to negotiate to recover the loan by reducing the interest rate or even waiving the interest to recover the loan capital and finally finding no other alternative goes for legal actions.

Custodial Duties:
Bangladesh Bank advises disbursement of loan and security documents to be kept centrally in regionally credit centers, maintain insurance coverage and security documents to keep in locked fireproof storage. In Mutual Trust Bank security documents are kept in locked in the vault in their own branches and proper insurance coverage is maintained.

Compliance Requirement:
Bangladesh Bank suggests submitting all required documents in correct format, maintain circulars, review performance of third party service providers (valuers, lawers, insurers,etc.). Mutual Trust Bank sends documents as required by Bangladesh Bank; keep circulars provided by Bangladesh Bank but third party providers are not reviewed as advised.

Analysis of Other Parameters:

According to Bangladesh Bank guidelines before sanctioning any loan some other important parameters like borrower analysis, industry analysis, supplier/buyer analysis, historical financial analysis, projected parameters, account conduct, security, loan structure etc. have to be done extensively. We have found all of these parameters presence in Mutual Trust Bank Limiteds loan proposal format and also the existence in reality.

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CIB Checklist:
According to the Bangladesh Bank guideline, Bank has to send every borrowers CIB undertaking after every two months, whoever the borrower is, either a person or an organizational entity. Mutual Trust Bank Ltd. does not have any alarming system that CIB of which customer is expired today or going to be expired within a few days. Employees have to keep a closer look everyday on this matter and have to check regularly these huge numbers of accounts. There is a chance to miss some of this inquiry anytime by human mistake and may forget to take CIB for months. In some cases changes in the company directorship makes clash in taking the regular CIB for that company. Most often the refusal comes from the Bangladesh Bank for not matching the spelling of the name of the borrower person or the directors of the company. If there is an automated system in the Mutual Trust Bank connected with the Bangladesh Bank and a proper alarming system, then it would be easier for the employees to be regularly updated.

Acceptance in risk rating:

According to Bangladesh Bank risk rating grade definition, a Bank can provide the credit till the grade 6 what is named as substandard. Mutual Trust Bank is a risk averse Bank in this respect and prefers to be in between the 1 st two grades and do not like to be bellow good.

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Findings of the Study

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When I was working at Mutual Trust Bank Ltd, Baridhara Branch, I have attained to some kind of experience. By analyzing the various data the following finding have been found:

SWOT Analysis:
SWOT analysis means strengths, Weaknesses, opportunities, and threats analysis. In the competitive area of marketing SWOT analysis is MTBL based on product, price, place and promotion of a financial institution like private Bank. By doing the SWOT analysis it is possible to find out the strengths, Weaknesses, opportunities, and threats of the MTBL. From the SWOT analysis we can figure out on going scenario of the Bank.

SWOT Analysis

Internal factors

External factors

Strength

Weakness

Opportunity

Threats

Figure-26: SWOT Analysis SWOT analysis two factors act as prime movers-113

 Internal factors which are prevailing inside the concern which include Strength and Weakness. On the other hand another factor is external factors which act as opportunity and threat. Every organization is composed of some internal strengths and weaknesses and also has some external opportunities and threats in its whole life cycle.

SWOT Analysis Of Mutual Trust Bank Limited:

Strengths:
o MTBL provides its customer excellent and consistent quality in every service. o MTBL is financially sound company. o MTBL utilizes state of the art technology to ensure consistent quality and operation. o MTBL provides its works force an excellent place to work. o MTBL already achieved a good will among the clients. The Bank recently introduce on line banking which enable it to automate all of its operations.

Weaknesses:
o MTBL lacks well trained human resource in some area. o MTBL lacks aggressive advertising. o The procedure of credit facility is too long compare to other Bas. o Employees are not motivated in some areas. o The Bank has no any research and development division. o The credit proposal evaluation process is lengthy. Therefore, sometimes valuable clients are lost and the Bank becomes unable to meet targets. 114

o Computer facility for all the officers is not available. Moreover, all the officers have no computer knowledge.

Opportunities:
o Emergence of on line Banking will open more scope for MTBL. o MTBL can introduce more innovative and modern customer service. o Many branches can be opened in local remote area as its high demand. o MTBL can recruit experienced, efficient and knowledgeable officers and staffs as it offers good working environment. o It can diversity its portfolio by taking new sector.

Threats:
o The worldwide trend of mergers and acquisition in financial institutions is causing problems. o Frequency taka devaluation and foreign exchange rate fluctuation is causing problem. o Lots of new Bas are coming in the scenario with new service. o Local competitors can capture huge market share by offering similar products.

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Regression Analysis: Analysis: Regression Line of Foreign Exchange &Total Income

(BDT in Million)
YEAR 2005 2006 2007 2008 2009 SUM Total Income INCOME FE (x) (y) 296.52 345.63 421.32 458.16 571.22 2092.85 4264.46 5035.45 5465.3 6877.5 8247.81 29890.52 X 87924.11 119460.1 177510.54 209910.59 326292.29 921097.62 Y 18185619.09 25355756.7 29869504.09 47300006.25 68026369.8 188737255.9 XY 1264497.7 1740402.6 2302640.2 3150995.4 4711314 13169850

X = 2092.85 Y = 29890.52 XY = 13169850 Regression Equation Y on X is: Y = a + bX To determine the values of a & b, we shall solve the normal equation: Y = Na + b X XY = a X + b X 116

Substituting the values from the table, the normal equation become 29890.52 = 5 a + 2092.85 b ... (1) 13169850 = 2092.85 a + 921097.62 b........ (2) Multiplying the equation (1) by 2092.85 & equation (2) by 5 and subtracting equation (1) by equation (2), we get the following: 3292875.22 = 225466.977 b b = 14.60 Substituting the value of b in equation (1), we have 29890.52 = 5 a + (2092.85 14.60) a = 133.02 (Total Income) Ys regression equation on X (Foreign Exchange Income) Y = 133.02 + 14.60 x

Regression Line of General Banking &Total Income

(BDT in Million)
YEAR 2005 2006 2007 2008 2009 SUM INCOME GB (x) 3967.94 4689.82 5043.98 6419.34 7676.59 27797.67 Total Income (y) 4264.46 5035.45 5465.3 6877.5 8247.81 29890.52 X 15744548 21994412 25441734 41207926 58930034 163318654 Y 18185619.09 25355756.7 29869504.09 47300006.25 68026369.8 188737255.9 XY 16921121 23615354 27566864 44149011 63315056 175567406

X = 27797.67 117

 Y = 29890.52 XY = 175567406 Regression Equation Y on X is: Y = a + bX To determine the values of a & b, we shall solve the normal equation Y = Na + b X XY = a X + b X

Substituting the values from the table, the normal equation become. 29890.52 = 5 a + 27797.67 b ...... (1) 175567406 = 27797.67 a + 163318654 b........ (2) Multiplying the equation (1) by 27797.67 & equation (2) by 5 and subtracting equation (1) by equation (2), we get the following: 46950218.9 = 43882812.6 b b = 1.07 Substituting the value of b in equation (1), we have 29890.52 = 5 a + (27797.67 1.07) a = 29.40 (Total Income) Ys regression equation on X (Foreign Exchange Income) Y = 29.40 + 1.07 x

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Ratio Analysis of Mutual Trust Bank Limited:

For the Year 2008. Bank Profitability Ratios.
1. Return of Assets (ROA): ROA = Net Income (NI) Average Total Assets (ATA) ROA = TK 686,704,045 TK 45,899,550,000 ROA = 0.1496% # Average Total Assets (ATA) ATA = (Total Assets of 2008+Total Assets of 2007) / 2 ATA = (TK 53,371,247,063 + TK 38,427,853,094) / 2 ATA = TK 45,899,550,000 2. Return on Equity (ROE): ROE = Net Income (NI) Average Shareholders Equity (ASE) ROE = TK 686,704,045 TK 2,985,682,860 ROE = 22.99 % # Average Shareholders Equity (ASE) ASE = (Shareholders Equity of 2008 + Shareholders Equity of 2007) / 2 119

ASE = (TK 3,332,957,347 + TK 2,638,408,373) / 2 ASE = TK 2,985,682,860 3. Profit Margin (PM): PM = Net Income (NI) Operating Income (OI) PM = 686,704,045 2,892,535,557 PM = 23.74 % 4. Return of Deposit (ROD): ROD = Net Income (NI) Average Total Customers Deposit ROD = 686,704,045 35,649,317,740 ROD = 1.92 % 5. Return on Shareholders Capital (ROSC): ROSC = Net Income (NI) Shareholders Contributed Capital ROSC = 686,704,045 1,743,750,000 ROSC = 39.38% 6. Net Operating Margin (NOM): NOM = Operating Income (OI) Interest Income NOM = 2,892,535,557 1,234,094,656 NOM = 2.34

Bank Efficiency Ratios.

7. Interest Income to Expenses (IIE): IIE = Interest Income Average Total Loans & Advances IIE = 1,234,094,656 34,215,971,380 IIE = 3.60% # Average Total Assets (ATA) ATA = (Total Assets of 2008+Total Assets of 2007) / 2 ATA = (TK 53,371,247,063 + TK 38,427,853,094) / 2 ATA = TK 45,899,550,000 8. Operating Expenses to Assets (OEA): OEA = Operating Expenses Average Total Assets 120

OEA = 987,656,984 45,899,550,000 OEA = 2.15% # Average Total Assets (ATA) ATA = (Total Assets of 2008+Total Assets of 2007) / 2 ATA = (TK 53,371,247,063 + TK 38,427,853,094) / 2 ATA = TK 45,899,550,000 9. Operating Income to Assets (OIA): OIA = Operating Income Average Total Assets OIA = 2,892,535,557 45,899,550,000 OIA = 6.30% # Average Total Assets (ATA) ATA = (Total Assets of 2008+Total Assets of 2007) / 2 ATA = (TK 53,371,247,063 + TK 38,427,853,094) / 2 ATA = TK 45,899,550,000 10. Operating Expenses to Revenue (OER): OER = Operating Expenses Operating Income OER = 987,656,984 2,892,535,557 OER = 34.14% 11. Assets Turnover (AT): AT = Interest Income Average Total Assets AT = 1,234,094,656 45,899,550,000 AT = 2.68% # Average Total Assets (ATA) ATA = (Total Assets of 2008+Total Assets of 2007) / 2 ATA = (TK 53,371,247,063 + TK 38,427,853,094) / 2 ATA = TK 45,899,550,000

Assets-Quality Indicators.
12. Provision to Earning Assets (PEA):

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PEA = Provision for Loan Losses Average Total Loans & Advances PEA = 404,707,240 34,215,971,380 PEA = 1.18% #Average Total Loans & Advances (ATLA): ATLA = (Loans & Advances of 2008 + Loans % Advances of 2007) / 2 ATLA = (TK 39,974,998,635 + TK 28,456,944,137) / 2 ATLA = 34,215,971,380 13. Adequacy of Provision for Loans (APL): APL = Allowance for Loans Losses Average Total Loans & Advances APL = 0 34,215,971,380 APL = 0 #Average Total Loans & Advances (ATLA): ATLA = (Loans & Advances of 2008 + Loans % Advances of 2007) / 2 ATLA = (TK 39,974,998,635 + TK 28,456,944,137) / 2 ATLA = 34,215,971,380 14. Write-Off Ratio (WR): WR = Write-Off of Loans during the year Average Total Loans & Advances WR = 0 34,215,971,380 #Average Total Loans & Advances (ATLA): ATLA = (Loans & Advances of 2008 + Loans % Advances of 2007) / 2 ATLA = (TK 39,974,998,635 + TK 28,456,944,137) / 2 ATLA = 34,215,971,380 15. Loan Ratio (LR): LR = Average Total Loans & Advances Average Total Assets LR = 34,215,971,380 45,899,550,000 LR = 74.54% #Average Total Loans & Advances (ATLA): ATLA = (Loans & Advances of 2008 + Loans % Advances of 2007) / 2 ATLA = (TK 39,974,998,635 + TK 28,456,944,137) / 2 ATLA = 34,215,971,380 # Average Total Assets (ATA) 122

ATA = (Total Assets of 2008+Total Assets of 2007) / 2 ATA = (TK 53,371,247,063 + TK 38,427,853,094) / 2 ATA = TK 45,899,550,000 16. Loans to Deposits (LTD): LTD = Average Total Loans & Advances Average Total Customers Deposits LTD = 34,215,971,380 35,649,317,740 LTD = 0.959

Liquidity Ratios.
17. Cash to Assets (CTA): CTA = Cash Average Total Assets CTA = 3,018,782,633 45,899,550,000 CTA = 6.57% # Average Total Assets (ATA) ATA = (Total Assets of 2008+Total Assets of 2007) / 2 ATA = (TK 53,371,247,063 + TK 38,427,853,094) / 2 ATA = TK 45,899,550,000 18. Cash to Deposit (CTD): CTD = Cash Average Total Customers Deposits CTD = 3,018,782,633 35,649,317,740 CTD = 8.46% 19. Deposits to Assets (DTA): DTA = Average Total Customers Deposits Average Total Assets DTA = 35,649,317,740 45,899,550,000 DTA = 77.66% 20. Equity Multiplier (EM)

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EM = Average Total Assets Average Shareholders Equity EM = 45,899,550,000 2,985,682,860 EM = 15.37 # Average Total Assets (ATA) ATA = (Total Assets of 2008+Total Assets of 2007) / 2 ATA = (TK 53,371,247,063 + TK 38,427,853,094) / 2 ATA = TK 45,899,550,000 # Average Shareholders Equity (ASE) ASE = (Shareholders Equity of 2008 + Shareholders Equity of 2007) / 2 ASE = (TK 3,332,957,347 + TK 2,638,408,373) / 2 ASE = TK 2,985,682,860

21. Equity to Deposits (ETD): ETD = Average Shareholders Equity Average Customers Deposits ETD = 2,985,682,860 35,649,317,740 ETD = 8.37% # Average Shareholders Equity (ASE) ASE = (Shareholders Equity of 2008 + Shareholders Equity of 2007) / 2 ASE = (TK 3,332,957,347 + TK 2,638,408,373) / 2 ASE = TK 2,985,682,860 22. Total Liabilities to Equity (TLE): TLE = Average Total Liabilities Average Shareholders Equity TLE = 42,913,867,220 2,985,682,860 TLE = 14.37 #Average Total Liabilities (ATL): ATL = (Total Liabilities of 2008 + Total Liabilities of 2007) / 2 ATL = (TK 50,038,289,716 + TK 35,789,444,721) / 2 ATL = TK 42,913,867,220 # Average Shareholders Equity (ASE) ASE = (Shareholders Equity of 2008 + Shareholders Equity of 2007) / 2 124

ASE = (TK 3,332,957,347 + TK 2,638,408,373) / 2 ASE = TK 2,985,682,860 23. Total Liabilities to Shareholders Capital (TLSC): TLSC = Average Total Liabilities Shareholders Contributed Capital TLSC = 42,913,867,220 1,743,750,000 TLSC = 24.61 #Average Total Liabilities (ATL): ATL = (Total Liabilities of 2008 + Total Liabilities of 2007) / 2 ATL = (TK 50,038,289,716 + TK 35,789,444,721) / 2 ATL = TK 42,913,867,220

24. Retained Earnings to Total Assets (RETA): RETA = Retained Earnings Average Total Assets RETA = 405,555,558 45,899,550,000 RETA = 0.8835% # Average Total Assets (ATA) ATA = (Total Assets of 2008+Total Assets of 2007) / 2 ATA = (TK 53,371,247,063 + TK 38,427,853,094) / 2 ATA = TK 45,899,550,000

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For the Year 2009. Bank Profitability Ratios.

1. Return of Assets (ROA): ROA = Net Income (NI) Average Total Assets (ATA) ROA = TK 1,327,184,458 TK 61,017,223,520 ROA = 2.17% # Average Total Assets (ATA) ATA = (Total Assets of 2009+Total Assets of 2008) / 2 ATA = (TK 68,663,199,976 + TK 53,371,247,063) / 2 ATA = TK 61,017,223,520 2. Return on Equity (ROE): ROE = Net Income (NI) Average Shareholders Equity (ASE) ROE = TK 1,327,184,458 TK 4,143,550,952 ROE = 32.03 % # Average Shareholders Equity (ASE) ASE = (Shareholders Equity of 2009 + Shareholders Equity of 2008) / 2 126

ASE = (TK 4,954,144,557 + TK 3,332,957,347) / 2 ASE = TK 4,143,550,952 3. Profit Margin (PM): PM = Net Income (NI) Operating Income (OI) PM = 1,327,184,458 4,129,503,653 PM = 32.13% 4. Return of Deposit (ROD): ROD = Net Income (NI) Average Total Customers Deposit ROD = 1,327,184,458 23,621,250,940 ROD = 5.61 %

5. Return on Shareholders Capital (ROSC): ROSC = Net Income (NI) Shareholders Contributed Capital ROSC = 1,327,184,458 2,144,812,500 ROSC = 0.6187 6. Net Operating Margin (NOM): NOM = Operating Income (OI) Interest Income NOM = 4,129,503,653 1,749,478,127 NOM = 2.36

Bank Efficiency Ratios.

7. Interest Income to Expenses (IIE): IIE = Interest Income Average Total Loans & Advances IIE = 1,749,478,127 45,121,458,090 IIE = 3.87%% #Average Total Loans & Advances (ATLA): ATLA = (Loans & Advances of 2009 + Loans % Advances of 2008) / 2 ATLA = (TK 50,267,917,439 + TK 39,974,998,635) / 2 ATLA = 45,121,458,030

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8. Operating Expenses to Assets (OEA): OEA = Operating Expenses Average Total Assets OEA = 1,512,465,951 61,017,223,520 OEA = 2.47% # Average Total Assets (ATA) ATA = (Total Assets of 2009+Total Assets of 2008) / 2 ATA = (TK 68,663,199,976 + TK 53,371,247,063) / 2 ATA = TK 61,017,223,520 9. Operating Income to Assets (OIA): OIA = Operating Income Average Total Assets OIA = 74,129,503,653 61,017,223,520 OIA = 1021% # Average Total Assets (ATA) ATA = (Total Assets of 2009+Total Assets of 2008) / 2 ATA = (TK 68,663,199,976 + TK 53,371,247,063) / 2 ATA = TK 61,017,223,520 10. Operating Expenses to Revenue (OER): OER = Operating Expenses Operating Income OER =1,512,465,951 4,129,503,653 OER = 36.62% 11. Assets Turnover (AT): AT = Interest Income Average Total Assets AT = 1,749,478,127 61,017,223,520 AT = 2.86% # Average Total Assets (ATA) ATA = (Total Assets of 2009+Total Assets of 2008) / 2 ATA = (TK 68,663,199,976 + TK 53,371,247,063) / 2 ATA = TK 61,017,223,520

Assets-Quality Indicators.
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12. Provision to Earning Assets (PEA): PEA = Provision for Loan Losses Average Total Loans & Advances PEA = 247,419,670 45,121,458,030 PEA = 0.947% #Average Total Loans & Advances (ATLA): ATLA = (Loans & Advances of 2009 + Loans % Advances of 2008) / 2 ATLA = (TK50, 267,917,439 + TK 39,974,998,635) / 2 ATLA = 45,121,458,030 13. Adequacy of Provision for Loans (APL): APL = Allowance for Loans Losses Average Total Loans & Advances APL = 0 45,121,458,030 APL = 0 #Average Total Loans & Advances (ATLA): ATLA = (Loans & Advances of 2009 + Loans % Advances of 2008) / 2 ATLA = (TK50,267,917,439 + TK 39,974,998,635) / 2 ATLA = 45,121,458,030 14. Write-Off Ratio (WR): WR = Write-Off of Loans during the year Average Total Loans & Advances WR = 0 45,121,458,030 #Average Total Loans & Advances (ATLA): ATLA = (Loans & Advances of 2009 + Loans % Advances of 2008) / 2 ATLA = (TK50,267,917,439 + TK 39,974,998,635) / 2 ATLA = 45,121,458,030 15. Loan Ratio (LR): LR = Average Total Loans & Advances Average Total Assets LR = 45,121,458,030 61,017,223,520 LR = 73.94% #Average Total Loans & Advances(ATLA): ATLA = (Loans & Advances of 2009 + Loans % Advances of 2008) / 2 ATLA = (TK50, 267,917,439 + TK 39,974,998,635) / 2 129

ATLA = 45,121,458,030 # Average Total Assets (ATA) ATA = (Total Assets of 2009+Total Assets of 2008) / 2 ATA = (TK 68,663,199,976 + TK 53,371,247,063) / 2 ATA = TK 61,017,223,520 16. Loans to Deposits (LTD): LTD = Average Total Loans & Advances Average Total Customers Deposits LTD = 45,121,458,030 23,621,250,940 LTD = 1.910%

Liquidity Ratios.
17. Cash to Assets (CTA): CTA = Cash Average Total Assets CTA = 3,760,368,749 61,017,223,520 CTA = 6.16% # Average Total Assets (ATA) ATA = (Total Assets of 2009+Total Assets of 2008) / 2 ATA = (TK 68,663,199,976 + TK 53,371,247,063) / 2 ATA = TK 61,017,223,520 18. Cash to Deposit (CTD): CTD = Cash Average Total Customers Deposits CTD = 3,760,368,749 23,621,250,940 CTD = 15.91% 19. Deposits to Assets (DTA): DTA = Average Total Customers Deposits Average Total Assets DTA = 23,621,250,940 61,017,223,520 DTA = 38.71%

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20. Equity Multiplier (EM) EM = Average Total Assets Average Shareholders Equity EM = 61,017,223,520 4,143,550,952 EM = 14.72 # Average Total Assets (ATA) ATA = (Total Assets of 2009+Total Assets of 2008) / 2 ATA = (TK 68,663,199,976 + TK 53,371,247,063) / 2 ATA = TK 61,017,223,520 # Average Shareholders Equity (ASE) ASE = (Shareholders Equity of 2009 + Shareholders Equity of 2008) / 2 ASE = (TK 4,954,144,557 + TK 3,332,957,347) / 2 ASE = TK 4,143,550,952

21. Equity to Deposits (ETD): ETD = Average Shareholders Equity Average Customers Deposits ETD = 4,143,550,952 23,621,250,940 ETD = 17.54% # Average Shareholders Equity (ASE) ASE = (Shareholders Equity of 2009 + Shareholders Equity of 2008) / 2 ASE = (TK 4,954,144,557 + TK 3,332,957,347) / 2 ASE = TK 4,143,550,952 22. Total Liabilities to Equity (TLE): TLE = Average Total Liabilities Average Shareholders Equity TLE = 59,873,672,560 4,143,550,952 TLE = 14.44 #Average Total Liabilities (ATL): ATL = (Total Liabilities of 2009 + Total Liabilities of 2008) / 2 ATL = (TK 63,709,055,419 + TK 50,038,289,716) / 2 ATL = TK 59,873,672,560 # Average Shareholders Equity (ASE)

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ASE = (Shareholders Equity of 2009 + Shareholders Equity of 2008) / 2 ASE = (TK 4,954,144,557 + TK 3,332,957,347) / 2 ASE = TK 4,143,550,952 23. Total Liabilities to Shareholders Capital (TLSC): TLSC = Average Total Liabilities Shareholders Contributed Capital TLSC = 59,873,672,560 2,144,812,500 TLSC = 27.91 #Average Total Liabilities (ATL): ATL = (Total Liabilities of 2009 + Total Liabilities of 2008) / 2 ATL = (TK 63,709,055,419 + TK 50,038,289,716) / 2 ATL = TK 59,873,672,560

24. Retained Earnings to Total Assets (RETA): RETA = Retained Earnings Average Total Assets RETA = 869,945,964 61,017,223,520 RETA = 1.42% # Average Total Assets (ATA) ATA = (Total Assets of 2009+Total Assets of 2008) / 2 ATA = (TK 68,663,199,976 + TK 53,371,247,063) / 2 ATA = TK 61,017,223,520

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Recommendations
General Recommendations: Complaint Management: MTBL should actively manage the complaints of various customers & encourage customers to give feedback about the services. The management should collect, document complaints, use that information to identify dissatisfied customers, correct individual problems where possible & identify common service failure points. Research showed that this strategy will radically improve the overall customer satisfaction.

Individual Attention & Care:

Individual attention should be given to customers in order to better understand their needs & better satisfy them.

Branches should be introduced: New

Customer showed a huge dissatisfaction with current locations as MTBL provides services from very few branches throughout Bangladesh. New branches should be constructed in Dhaka city & other city satisfying more geographic segments especially towards Uttara as quite a considerable number of MTBL customers live in Uttara. As convenience of branch location was a very important factor for the customers MTBL should consider building new branches & ATMs within Dhaka city as well as other metropolitan cities of Bangladesh.

Concentrate on Branch Location:

Customers showed a huge dissatisfaction with current locations as MTBL provides services from only 5 branches throughout Bangladesh. New branches should be constructed in Dhaka city satisfying more geographic segments.

Reduce Time of ATM Card Delivery:

From the findings regarding secondary data, by the comparison of MTBL with SCB it has found that MTBL takes more time to deliver their ATM cards to the customers. Whereas ATM card is a very handy product for the customers, MTBL should reduce the delivery time of ATM card. 134

Launch of Credit Cards:

Credit card facilities should be given to customers as early as possible. Though they have been giving dates after dates of launching still they have not launched credit cards for customers though the staffs of MTBL are already using the card facility. Many local and foreign banks are currently providing these services and are satisfying customer needs more widely. Defensive Strategy of Quality: MTBL should pursue a defensive service quality strategy that is a go slow strategy rather than offensive service strategy. That is, it should focus on costs of operation, increasing volume of businesses with existing loyal customers, segmentation of the premium customers; foster a positive word of mouth communication in its existing customers, etc. Though these strategies will take time to develop a huge customer base, they will in the long run bring more loyal customers to MTBL.

Establishment More ATM Booths:

From the research findings it has been found that maximum number of customers showed dissatisfaction with the current locations of MTBLs ATM booths. As convenience of ATM locations is very important factor for the customers, MTBL should establish more convenient locations of ATM booths within Dhaka city as well as other metropolitan cities of Bangladesh.

Reduce Processing Fee of Home Loan and Car Loan:

From the comparison it has found that MTBLs Home Loan processing is 1.75% higher than SCB, and the car loan processing fee is 1% more than SCB. So, to survive in the competitive market MBL needs to reduce their Home Loan and Car Loan processing fee up to 1%.

Ensure Uninterruptible ATM Services:

From the client complaint it has found that the ATM processing of MTBL is not smooth enough. So, MBL should improve the ATM machine service which will ensure uninterruptible service.

Improve Customers Car Parking Facilities:

It is factual information that car parking area is remaining mostly occupied by the employees of MTBL. As a result, customers get less opportunity to use car parking facilities. So, MTBL required arranging proper facilities for customers car parking.

Locker Services:
While interacting with the customers at customer service point, a huge amount of customers demanded locker services. With such demand of this service, MTBL should 135

consider of providing locker services to its customers. This will also attract new customers from other banks who are currently offering these services.

Control over the mailing network:

MTBL should strictly monitor the courier services that are engaged in delivering mails and documents. Huge amount of delivery failures is being piled up at branches. Moreover there have been regular customer complaints of non-receipt of statements though the courier showed proof of delivery signed by someone who doesnt even lives at the customers address. So, MTBL should have some control over its couriers and ensure proper delivery of mails and documents. Process Management: The actual procedures, mechanisms and flow of activities at customer service should be well managed & structured in order to form a good experience of the service in the minds of customers. As the services of the Bank are complex in nature, the employees should provide adequate guidance to customers in order to avoid service failures. Thus the whole process should follow a broad service philosophy, which is tailored to customer needs. Faster Delivery: MTBL should reduce the amount of time required to provide new ATM cards. Currently it takes 15 days while some competitors can provide the card within 2 working days. As the MTBL ATM card comes directly from Hong Kong are obvious. MTBL should make necessary arrangements to produce the new cards locally in order to reduce the customer difficulties faced in the absence of ATM card. Faster Delivery of TM PINs: MTBL should reduce the amount of time required to provide new ATM PIN. Currently it takes 10 working days while other banks can provide the pin within 2 working days. MTBL should take necessary steps to deliver the new ATM PINs as early as possible in order to reduce the customer difficulties faced in the absence of ATM PINs. Advertising & Promotion: MTBL should pursue an aggressive advertising campaign in order to build up a strong image and reputation among potential customers. In this context, the valuable strengths that were identified in the survey should be used for positioning the corporate image of the bank. TV ads should be aired to reach a wider array of customers. The ads should capitalize on building strong relationship, needs of customers and quality service of the bank rather than features of products. Thus an offensive marketing strategy emphasizing customer satisfaction and service quality can service quality can bring valuable business for the Bank. Increase the Number of Workforce:

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There is a lacking of manpower in MTBL Main branch. Since this branch is situated in a commercial area and deals with both personal & commercial banking, so, the service should be customized according to this segmentation.

Conclusion:
A banker cannot sleep well with bad debts in his portfolio. The failure of commercial banks occurs mainly due to bad loans, which occurs due to inefficient management of the loans and advances portfolio. Therefore any banks must be extremely cautious about its lending portfolio and credit policy. So far Mutual Trust Bank Limited has been able to manage its credit portfolio skillfully and kept the classified loan at a very lower rate ---thanks goes to the standard and stringent credit appraisal policy and practices of the bank.

But all things around us are changing at an accelerating rate. Today is not like yesterday and tomorrow will be different from today. Given the fast changing, dynamic global economy and the increasing pressure of globalization, liberalization, consolidation and disintermediation, it is essential that Mutual Trust Bank Limited has a robust credit risk management policies and procedures that are sensitive to these changes.

Mutual Trust Bank Limited is one of the few local banks that have been able to keep nonperforming assets below 5% -mainly due to the standard and stringent credit appraisal policy and practices of the bank. The bank has so far been able to make efficient use of the deposit and has the classified loan under control. Loan mix reveals the diversification sought by the bank in its loan placements. While keeping on expanding its reach, Mutual Trust Bank aims at maintaining the high quality of services it has already achieved, at the same time being in a sound financial health.

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The thing is, it is not only a matter of Mutual Trust Bank alone, it is also connected with Bangladesh Bank as well. The technology that Bangladesh Bank is using is too old. Where every bank is going with Microsoft office with the new versions, Bangladesh Bank is still running with FoxPro and banks has to work twice for this; one for their updated database and another for FoxPro.

Mutual Trust Bank has set its mission high enough: to provide high quality service to its customers, to participate in the growth and expansion of our national economy, to set high standards of integrity, to bring total satisfaction to its clients, shareholders and employees and to become the most sought after bank in the country, rendering technology driven innovative services by the dedicated team of professionals. The management of the bank is working continuously to make their mission a realizable one.

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Bibliography
[1] [2] Annual Report of MTBL, 2008, 2009. The Official Website of MTBL < http://www.mutualtrustbank.com/>

[3] [4] [5] [6]

Collyer Gary, ICC Uniform Customs And Practice For Documentary Credits , 3rdEdition, International Chamber Of Commerce, ICC Publication No.600 Kinnear, C. Thomas and James R. Taylor. Marketing Research: An Applied Approach. 5th ed. New York: McGraw Hill, 1996. Zikmund, William G. Business Research Methods. 6 th ed. Florida: Harcourt Inc., 2000. Chowdhury, L.R; A Textbook on Foreign Exchange, Fair Corporation,139, Azimpur, Dhaka, 1205

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