Executive summary

Credit, in commerce and finance, is a term used to denote transactions involving the transfer of money or other property on promise of repayment, usually at a fixed future date. In todays generation every person needs credit. A businessman also needs credit to run his business smoothly. I my self am completing a report on this credit related topics. My internship report is on Credit Risk Analysis and Credit Performance of Jamuna Bank Ltd in Ring Road Branch. Jamuna Bank is the third generation bank. In this report I tried to find out their credit grading system, their credit risk analysis procedure & also their credit performance. To attain these objectives I have discussed face to face with JBLs officers and also checked their annual report . This report gives the idea about the credit Approval Process, responsibilities of the CRM department , credit principles, types of loan JBL , financial statement analysis, function of credit risk grading, uses of credit risk grading and also the characteristics of different credit risk grades. For continuous smooth activities of the credit Risk Management (CRM) department the Jamuna Bank is taking the necessary initiatives and strategies about the risk assessment process through its credit management framework . This report also focused on the total work flow of corporate business and CRM like originating from the relationship of the clients up to loan sanctioning and disbursing. In this report I also tried to find out credit performance of the Jamuna Bank, based on some ratios, such as credit recovery, non- performing loan monitoring, deposit vs loan. At the end of this study I have found that, lending process of JBL is complex & their loan monitoring & recovery system is not well organized. I think that this recovery & monitoring system should be strict so that their bad debt may decrease day by day. Moreover their loan approval system should be easy so that any individual can take loan from them. This technique may help the bank to redesign the credit & risk assessment.

Table of Content
Serial No. Certificate Declaration Letter of Transmittal Acknowledgement Executive summary Chapter One : Introduction 1.1 1.2 1.3 1.4 Origin of the study Objectives of the study Methodology Limitations of the report Chapter Two : Company Background Company profile 2.1 2.2 2.3 2.4 2.5 History of the Jamuna Bank Company information at a glance Ownership structure Vision, mission, objectives Hierarchy position in Jamuna Bank Ltd Chapter Three: Credit Risk Analysis of Jamuna Bank Ltd Why does credit analysis Types of loan Jamuna Bank Ltd Mission statement of credit department Credit principle Credit risk grading system Credit risk grading Risk grading system Definition of credit risk grading Number & short Name of Grading Used in the CRG Function of Credit Risk Grading Uses of Credit Risk Grading Characteristics of Different Grades How to Compute Credit Risk Grading 1 2 2 2 Topic Name Page No. i ii iii iv v

3 3 5 6 6 8

3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12 3.13

9 10 13 13 16 17 17 18 18 19 19 20 22

3.14

Credit Risk Grading Review Chapter Four : Credit Performance of Jamuna Bank Ltd Deposit and Deposit Mix Loans and Advances Disbursement of Loan & Advance Classified Loan Credit Recovery Non-performing loan monitoring Chapter Five : Summary of Findings, Conclusion& Recommendation Findings Conclusion Recommendations References

29

4.1 4.2 4.3 4.4 4.5 4.6

30 32 34 36 37 38

5.1 5.2 5.3

39 40 41 42

Chapter- 1

01. INTRODUCTION

Topics name

Page no.

1.1 Origin of the study 1.2 Objectives of the report 1.3 Methodology 1.4 Limitations of the report

1 2 2 2

Chapter-1
1.1 Origin

of the report:

Bachelor of Business Administration (BBA) course requires a three month attachment with an organization followed by a report assigned by the supervisor in the organization. I got the opportunity to do my internship in The Jamuna Bank Ltd. This report originated as BBA internship program of World University of Bangladesh(WUB) authorized by Jhumur Deb Roy, Lecturer, WUB. This report is on Credit Risk Analysis & Credit Performance of Jamuna Bank Ltd.

1.2 Objectives

of the study :

The objectives of this report are given below: 1. To explore the credit risk analysis process practiced by Jamuna Bank Limited. 2. To know about their credit performance.

1.3Methodology

To prepare this internship report I have collected data and information both from primary and secondary source.

a. The primary sources are given below: Face to face conversation with officers. Practical work expeience at different desk. b. The secondary sources are given below: Annual report of the Jamuna Bank Limited. Website of the Jamuna Bank Limited. Theoretical books relating bank sector.

1.4 Limitations

of the report

There are some limitation which are given below : Limited access to bank files is also a factor for limitation. Most of the information contained within this report obtained through document or informal interviews during my work at my workplace. Bank authority also prohibits some facts to be included in this report.

Chapter 2

Topics name Company profile 2.1 History of the JAMUNA Bank Limited 2.2 Company information at a glance 2.3 Ownership Structure 2.4 Vision, Mission, Objective 2.5 Hierarchy of position in Jamuna Bank Ltd.

Page no. 3 3 5 6 6 8

Company profile :
We can simply say that bank is financial organization that deals with money. But it is the precise the most definition about the bank. In modern age it is impossible to think a country with out bank. Banks play diversified role in an economy. The most important task that is done by a bank is building of capital. That is the key factor of the development of an economy. Jamuna Bank Ltd. is a third generation bank in Bangladesh. It is playing an important role to develop the business sector. Its authorized capital and paid up capital 122.95 million and 223.00 million and the total equity of the bank stands at 615.78 million on December 31, 2010. The bank take all types of banking transaction to support the development of trade and commerce of the country. The Jamuna Bank serve its with 70 branches all over the country.

2.1 History

of the Jamuna Bank Limited

Jamuna Bank Limited (JBL) is a banking Company registered under the Companies Act,1994 with its Head Office at Chini Shilpa Bhaban, 3, Dilkusha C/A, Dhaka -1000. The Bank started its operation from 3rd June 2001. Jamuna Bank Limited is a highly capitalized new generation bank with an Authorized Capital and paid up capital of Tk 1600.00 and 390 million and the total equity of the bank stands at 725.00 million as on December 31,2005. Jamuna Bank Ltd. the only Bengali named new generation private commercial bank was established by a group of winning local entrepreneurs conceiving an idea of creating a model banking institution with different outlook to offer the valued customer, a comprehensive range of financial service and innovative products for sustainable mutual

growth and prosperity. The sponsor are reputed personalities in the filed of trade, commerce and industries. The Bank is being managed and operated by a group of highly educated and professional team with diversified experience in finance and banking. The management of the bank constantly focuses on understanding and anticipating customer needs. The scenario of banking business is changing day by day, so the bans responsibility is to device strategy and new products to cope with the changing environment. Jamuna Bank Ltd. has already achieved tremendous progress within only ten years. The bank has already ranked at top of the quality service provider & is known for its reputation. Jamuna bank offers different types of Corporate and Personal Banking Service involving all segment of the society within the preview of rules and regulations laid down by the central Bank and other regulatory authorities. As per the provision of Bangladesh Bank license, the Bank has offered initially its shares to public by pre IPO and subsequently sold shares to the public through IPO in the year 2010. the shares of the Bank are listed with both Dhaka Stock Exchange Ltd. & Chittagong Stock Exchange Ltd.

2.2 Company

information at a glance

1. Name : Jamuna Bank Limited 2. Legal Status : Private Bank Limited 3. Date of Incorporation : 3rd June 2001

4. Purpose : To run Banking Business under the banking company act 1994 5. Number of Branches : 73 as at 27th December 2010 6. Total Man power : 2000 7. Authorized Capital : 223.00 crore 8. Paid up capital : 122.95 crore 9. Reserve : Reserve 10. Total Asset : 710.63 crore 11. Net profit : 307 crore 12. Growth Rate : 98.30% 13. Cost of Fund : 11.5% 14. Price Earning Ratio : 4.78 15. Governing Laws : Laws of Bangladesh

The information are stated above as per the annual report of Jamuna Bank Limited 2010.

2.3 Ownership

Structure:

Leading industrialist of the countries having a vast experience in the field of trade and commerce own 52.84% of the share capital and the rest the rest is held up by the general public. Jamuna Bank Ltd board currently consists of 13 directors. Authorized capital is 223.00 and paid up capital is 122.95 crore and total equity stands on 615.78 crore as on December 31, 2010. 2.4 Vision,

mission & objective:

Vision :
To become a leading banking institution and to play a significant role in the development of the country.

Mission :
The bank is committed for satisfying diverse needs of its customer through an array of products at a competitive price by using appropriate technology and providing timely service so that a sustainable growth, reasonable return and contribution to the development of the country can be ensured with a motivated and professional work-force

Objectives & strategies of the Bank :

Remaining a true partner for financial growth and success of Jamuna Bank customer.

Delivering customers desired products and services to create true customers value. Changing the credit portfolio mix to reduce dependence on few corporate customer and thereby diversify the risk. Focusing on maintenance of asset quality rather than its aggressive expansion. Changing the deposit mix thereby reduce cost of deposit. Taking banking to the door step of Jamuna Bank target group. Entering into new avenue of business to increase profitability. Increasing fee based service / activities where costly capital is not charged. Maximizing share holder value. Strengthening risk management technique and compliance culture.

2.5 Hierarchy

of position in Jamuna Bank Ltd.

Chairman

Advisor Managing Director

Board of Director

Senior Executive Vice President Executive Vice President Senior Vice President Vice President Senior Assistant Vice President Assistant Vice President First Assistant Vice Pr esident Junior Assistant Vice President Senior Executive Officer First Executive Officer Officer

Chapter 3
Credit Risk Analysis of Jamuna Bank Ltd
Topics name Page

3.1 Why does Credit Risk Analysis 3.2 Types of loan of Jamuna Bank LTD 3.3 Mission statement of the Credit Department 3.4 Credit principles 3.4.1 Processing of Credit Approval 3.5 Credit Risk Grading System 3.6 Credit Risk Grading 3.7 Risk Grading System 3.8 Definition of Credit Risk Grading (CRG) 3.9 Number & Short Name of Grading Used in the CRG 3.10 Function of Credit Risk Grading 3.11 Uses of Credit Risk Grading 3.12 Characteristics of Different Grades 3.13 How to Compute Credit Risk Grading 3.14 Credit Risk Grading Review

9 10 13 13 15 16 17 17 18 18 19 19 20 22 29

3.1 Definition

Credit Risk

Credit department of any bank is very much important. A bank will collapse or not this important matter depends upon the performance of the banks credit department. Responsibilities of the credit department of Jamuna Bank are many. They have to maintain a lot of security factors. They have to use the deposit collected by the bank in a proper way by giving loans to maintain the liquidity. A huge part of the revenue is generated from the interest received from the loans and advances. Again if they give so many loans then liquidity of the bank many decrease and risk will also increase in the market. Some question must arise when a Jamuna Bank give loan to its clients. Is the client capable enough to repay the loan and interest ? How it will be measured ? On what basis the bank will give the loan to the client ? How will the Jamuna bank recover the loan if it is default ? To get the answer of these questions and maintain the credit activities properly there is no alternative of Credit Risk Analysis the risk associated with the loan gives a clear idea about the next step of the credit department that is what decision they will take further. I am focusing this important factor of the credit department that Credit Risk Analysis of Jamuna Bank Limited that is described broadly in the later part of the report.

3.2 Types

of loan of Jamuna Bank Ltd

Depending on the various nature of financing, all the lend activities have been brought under the following the major heads :

 Loans (General) :
Short term, Medium term, & Long term, loans allowed to individuals / firm/ industries for a specific purpose but for a definite period and generally repayable by installments fall under this head. This type of lending is mainly allowed to accommodate financing under the categories (i) Large & Medium Scale Industry and (ii) small & cottage Industry. Very often term financing for (i) Agriculture & (ii) Others are also included here.

House Building Loan:

Loans allowed to individual/ enterprise for construction of house (residential or commercial) fall under this type of advance. The amount is repayable by monthly installment within a specific period. Such advances are known as loans (HBL-GEN)

Cash Credit (Hypo) :

Advances allowed to individual/ firm for trading as well as wholesale purpose or to industries to meet up the working capital requirement against hypothecation of goods as primary security fall under this type o lending. It is a continuous credit.

Cash Credit (Pledge):

Financial accommodation to individual/ firms for trading as well as for wholesale or to industries as working capital against pledge of goods as primary security fall under this head of advance. it is also a continuous credit and like the above allowed under the categories (i) Commercial Lending and (ii) Working Capital.

Hire Purchase:
Hire purchase is a type of instilment credit under which the Hire-Purchase agrees to take the goods on hire at a stated rental, which is inclusive I the repayment of principal as well as interest for adjustment of the loan within a specific period.

Lease Financing :

Lease Financing is one of the most convenient sources of acquiring capital machinery and equipment whereby a client is given the opportunity to have an exclusive right to use an asset usually for an agreed period of time against payment of rent.

Time Loan :
This is one time financial accommodation for short period maximum 12 month to meet some specific purpose. The loan is adjustable within the validity and not renewable and no transaction is allowed.

Consumer Credit Scheme :

It is a special credit scheme of the Bank to finance purchase of the consumers durable to the fixed income group to raise their standard of living. The loans are allowed on soft terms against personal guarantee and deposit of specified percentage of equity by the customers.

SOD (General):
Advances allowed to individual/ firm against financial obligation (i,e lien on FDR/PSP) .This may or may not be a continuous Credit.

SOD (Others):
Advances allowed against assignment of work order for execution of contractual works falls under this head. This advances is generally allowed for a definite period and specific purpose i.e. it is not a continuous credit. It falls under the category Others.

SOD (Export):
Advances allowed for purchasing foreign currency for payment against L/Cs (Back to Back) where the export do not materialize before the date of important payment.

PAD:
Payment made by the Bank against lodgment of shipping document of goods imported through L/C falls under this head. It is an interim advance connected with import and is generally liquidity against payment usually made by the party for retirement of the document for release of imported goods from the customs authority.

 LIM:
Advances allowed for retirement of shipping document and release of goods imported through L/Cs taking effective control over the goods by pledge in godowns under Banks lock & key fall under this type if advance.

IBP :
Payment made through purchase of inland bills/ cheque to meet urgent requirement of the customer falls under this type of credit facility.

Export Cash Credit (ECC):

Financial accommodation allowed to a customer for export of goods falls under this head and is categorized as Export Credit. The advance must be lquidt out of export proceed within 180 days.

Packing Credit (P.C) :

Advance allowed to a customer against L/Cs/firm contract for processing/ packing of goods to be exported falls under this head and is categorized as Packing Credit.

FDBP:
Payment made to a customer through purchase / negotiation of a Foreign documentary bills falls under this head. This temporary advance is adjustable from the proceeds of the shipping / export document. It falls under he category Export Credit.

IDBP:
Payment made against document representing sell of goods to local export oriented industries which are deemed as export and which are denominated in Local Currency / Foreign Currency falls under this head.

FBP:

Payment made to a customer through Purchase or Foreign Currency Cheques / Drafts falls under this head. This temporary advances is adjustable from the proceeds of the cheque /draft.

3.3

Mission Statement of the Credit Department

To deliver credit facilities to customer to customer of Jamuna Bank Limited with prudence and efficiency and establish JBL as the preferred credit service provider in the country in terms of wide range of credit product, competitive price, adherence to credit norms, exercising due diligence, and effective management of risk asset. 3.4 Credit

Principles

i.

The bank shall provide suitable credit service and products for the market in which it operates. product innovation shall be a continuous process.

ii. iii. iv.

Loans and advances shall normally be financed from customer deposit and not out of temporary fund or borrowing from money market. Credit facilities shall be allowed in a manner so that credit expansion goes on ensuring quality i.e. no compromise with the Banks standard of excellence. All credit extension must comply with the requirement of Banks Memorandum and Articles of Association, Banks companies Act as amended from time to time, Bangladesh Banks instructions Circulars, Guidelines, and other applicable laws, rules and regulations.

v.

The conduct of the loan portfolio should contribute, within defined risk limitation, to the achievement of profitable growth and superior return on the Banks capital.

vi.

Credit advances shall focus on the development and enhancement of customers relationship and shall be measured on the basis of the total yield for each relationship with a customer (on the global basis), though individual transaction should also be profitable.

vii.

Credit facilities will be extended to those companies/persons, which can make best use of the facility thus helping maximize our profit as well as economic growth of the country.

viii.

Diversification : The portfolio shall be well diversified sector wise, Industry

wise, geographical area wise, maturity wise, mode wise, purpose wise. Concentration of credit shall be carefully avoided to minimize risk.

ix.

Remuneration : If credit facilities are granted on a transaction/ one-off basis,

the yield from the facility should be commensurate with the risk.

x.

Loan Pricing: loan pricing shall depend on the level of risk and type of
securities offered. Rate of interest is the reflection of risk in the transaction. The higher the risk, the higher is pricing. Interest rate may be revised from time to time in view of the change in the cost of fund and market condition.

xi.

Proper staffing : proper analysis of credit proposal is complex and required

high level of numerical as well as analytical ability and common sense. To ensure effective understanding of the concept and thus to make the overall credit port-folio of the Bank healthy, proper staffing shall be made through placement of qualified official having appropriate background, who have got the right aptitude, formal training in Credit Risk Analysis, Banks credit procedures as well as required experience.

3.4.1 Processing

of Credit Approval :

Appraisal
Interviewing the clients. Call report. CM report including CIB. Preparing the credit proposal. Landed property valuation by R.M manager.

Pre-disbursement
office. Issuing sanction letter. Acceptance from the clients. Completion of fall documentation formalities as her head

Disbursement
Loan Input. Voucher.

Monitoring
Ensure adjustment as per repayment. Communicate with the clients. Physical visit. Obtain various report regarding clients business.

Repayment
Installment realizes from the clients.

3.5Credit

Risk Grading System

Risk is inherent in all aspects of commercial operation. However for bank and Financial Institution Credit risk is an essential factors that needs to be managed. Credit risk is the possibility that a borrower will fail to meet its obligation in accordance with agreed terms. Credit risk, therefore, arises from the Banks dealings with or lending to corporate, individuals and other Banks or financial institution. Credit risk management need to be a robust process that enables Banks to proactively manage loan port-folio in order to minimizes losses and earn an acceptable level of return for shareholders. Central to this is a comprehensive IT system, which should have ability to capture all key customer data, risk management and transaction information. Jamuna bank Ltdalready has real time on-line Banking system which enables to capture all key customer data. Given the fast changing dynamic global economy and the increasing pressure of globalization, liberalization, consolidation and dis-intermediation, it is essential that bank have robust Credit risk management polices and procedures that are sensitive and responsive to these changes. With a view to bringing about an effective risk management system in Credit operation of the Bank and in compliance to the Directive/ Guideline of Bangladesh Bank given vide BPRD Circular No-17 dated 07.10.2003, the following policy and guidelines are framed. This policy replaces all previous ones, which set out Credit policies of Jamuna Bank Limited.

3.6 Credit

Risk Grading (CRG)

Any deviation from the approved policy in case of any credit proposal in any respect shall be clearly identified and mentioned in the credit proposal with proper justification for approval of the approving authority. The Credit Grading (CRG) is a collective definition based on the pre specified scale and reflect the underlying credit-risk for a given exposure. It deploys a number/ alphabet/ symbol as a primary summary indicator of risk associated with a credit exposure. It is the basic module for developing a Credit Risk Management system. 3.7 Risk

Grading System

Credit risk grading is an important tool for credit risk management as it helps the Banks & financial institution to understand various dimensions of risk involved in different credit transaction. The credit risk grading system is a vital to take decisions both at the presanction stages as well as post-sanction stage. At the pre-sanction stage, credit grading helps the sanctioning authority to decide whether to lend or not to lend, what should be the loan price, what should be the extent of exposure, what should be the appropriate credit facility, what are the various facilities, what are the various risk mitigation tools to put a cap on the risk level. At the post-sanction stages, the bank can decided about the depth of the review or renewal, frequency of review, periodically of the grading, and other precaution to be taken. Having considered the significance of credit risk grading it becomes imperative for the banking system to carefully develop a credit risk grading model which meets the objective outlined above. 3.8 Definition

of Credit Risk Grading (CRG)

The Credit Risk Grading (CRG) is a collective definition based on the pre-specified scale and reflect the underlying credit-risk for a given exposure. A Credit Risk deploys a number/ alphabet/ symbol as a primary summary indicator of risk associated with a credit exposure. Credit Risk Grading is the basic module for developing a Credit Risk Management system. 3.9

Number & Short Name of Grading Used in the CRG

The proposed CRG scale consists of 8 categories with short name and numbered are provide as follows: GRADING Superior Good Acceptable Marginal/ Watch list Special Mention Sub Standard Doubtful Bad & Loss SHORT NAME Sup GD ACCPT MG/ WL SM SS DF BL 3.10 Function NUMBER 1 2 3 4 5 6 7 8

of Credit Risk Grading

Well- managed credit risk grading system promote bank safety and soundness by facilitating informed decision- making. Grading system measure credit risk and different individual credit and group of credit by the risk they pose. This allows bank management

and examines to monitor changes and trends in risk levels. The process also allows bank management to manage risk to optimize returns.

3.11 Uses

of Credit Risk Grading

The Credit Risk Grading matrix allows application of uniform standards to credit to ensures a common standardized approach to assess the quality of individual obligator, credit portfolio of a unit, line of business, the branch or the Bank as a whole.

As evident, the CRG outputs would be relevant for individual credit selection, wherein either a borrower or a particular exposure/ facility is rated. The other decision would be related to pricing (credit-spread) and specific features of the credit facility. These would largely constitute obligator level analysis.

Risk grading would also be relevant for surveillance and monitoring, internal MIS and assessing the aggregate risk profile of a bank. It is also relevant for portfolio level analysis.

3.12

Characteristics of Different Grades

A clear definition of the different categories of credit Risk Grading is given as follows: Superior- (SUP)-1

 Credit facilities, which are fully secured i.e. fully cash covered. Credit facilities fully covered by government guarantee. Credit facilities fully covered by the guarantee of a top tier international Bank.

Good-(GD)-2 Strong repayment capacity of the borrower. The borrower has excellent liquidity and low leverage. The company demonstrate consistently strong earnings and cash flows.

Acceptable- (ACCPT)-3 These borrower are not as strong as GOOD Grade borrowers, but still demonstrate consistent earnings, cash flow and have a good track record. Borrower have adequate liquidity, cash flow and earnings. Acceptable management.

Marginal/ Watch list-(MG/WL)-4 This grade warrants greater attention due to condition affecting the borrower, the industry or the economic environment. These borrower have an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and/or inconsistent earnings. Weaker business credit & early warnings signals of emerging business credit detected. The borrower incurs a loss.

Substandard-(SS)-5

 Financial condition is weak and capacity or inclination to repay is in doubt. These weakness jeopardize the full settlement of loans. Bangladesh bank criteria for sub- standard credit shall apply. Doubtful- (DF)-6 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 or capital injection, the asset is not yet classified as Bad & Loss. Bangladesh Bank criteria for doubtful credit shall apply. Bad & Loss-(BL)-7 Credit of this grade has long outstanding with no progress in obtaining repayment or on the verge of wind up/ liquidation. Prospect of recovery is poor and legal options have been pursued. Proceeds expected from the liquidation or realization of security may be awaited.

3.13 How

to Compute Credit Risk Grading

To measure the actual risk associated with the loan that is going to be paid by the bank to the particular client, we have to follow some steps and get a statistical parameter of the risk. There are six step to compute credit risk grading. Those are given below: Step 1: Identify all the Principal Risk Components. Step 2: Allocate Weight to Principal Risk Components. Step 3: Establish the Key Parameter. Step 4: Assign weigh to each of the key parameter. Step 5: Input data to arrive at the score on the key parameter. Step 6: Arrive at the Credit Risk Grading based on total score obtained.

Step 1: Identify all the Principal Risk Components :

Credit risk for counterparty arises from an aggregation of the following a) Financial Risk b) Business/ Industry Risk c) Management Risk. d) Security Risk. e) Relationship Risk. Each of the above mentioned key risk areas require to be evaluated and aggregated to arrive at an overall risk grading measures a)
Evaluation of Financial Risk:

Risk that counterparties will fail to meet obligation due to financial distress. This typically entails analysis of financial i.e. analysis of leverage, liquidity, profitability, & interest coverage ratio. b) Evaluation of Business/ Industry Risk: Risk that adverse industry situation or unfavorable business condition will impact borrowers capacity to meet obligation. c) Evaluation of Management Risk:

Risk that counterparties may default as a result of poor managerial ability including experience of the management, its succession plan and team work. d) Evaluation of Security Risk:

Risk that the bank might be exposed due to poor quality or strength of the security in case of default. This may entail strength of security & collateral, location of collateral and support. e) Evaluation of Relationship Risk:

These risk areas cover evaluation of limits utilization, account performance, conditions/ covenants compliance by the borrower and deposit relationship.

Step 2: Allocate Weight to Principal Risk Components:

According to the importance of risk profile, the following weight ages are proposed for corresponding principles risk. Principles Risk Components Weights

50% Financial Risk 18% Business / Industry Risk 12% Management Risk 10% Security Risk 10% Relationship Risk

Step 3: Establish The Key Parameter:

Principle Risk Components Key Parameters

a) Financial Risk

Leverage, liquidity, profitability & coverage ratio. Size of business, age of business, Business

b) Business/ Industrial Risk

outlook, Industry Growth, Competition & barriers to Business.

c) Management Risk

Experience, succession, & Team Work.

Security coverage, Collateral Coverage & d) Security Risk e) Relationship Risk support. Account Deposit. Conduct, Utilization of Limit,

compliance covenants/condition & personal

Step 4: Assign weight to each key parameter:

Principle Risk Components 1. Financial Risk..

Key parameter Leverage Liquidity Profitability

Weights 50% 15% 15% 15% 5% 18% 5% 3% 3% 3% 2% 2% 12% 5% 4% 3% 10%

2. Business / Industrial risk ................

Coverage ................................ Size of the business Age of the business Business outlook Industry growth Market competition

3. Management Risk........

Entry/ Exit Barriers .. Experience Succession

4. Security Risk..

Team Work .

 5. Relationship Risk

Security coverage Collateral coverage

4% 4% 2% 10% 5% 2% 2% 1%

Support ... Account conduct Utilization of Limit Compliance covenants Personal deposit

Step 5: Input data to arrive at the score on the key parameters:

After the risk identification & weights assignment process (as mentioned above), the next steps will be to input actual parameter in the score sheet to arrive at the scores corresponding to the actual parameters. This manual also provide a well programmed MS Excel based credit risk scoring sheet to arrive at a total score on each borrower. The excel program requires inputting data accurately in particular cells for input and will automatically calculate the risk grade for a particular borrower based on the total score obtained. The following steps are to be followed while using the MS Excel program. a) b) c) d) Open the MS XL file named, CRG_Score_Sheet. The entire XL sheet named, CRG is protected except the particular cells to input data. Input data accurately in the cells which are BORDERED & are colored YELLOW. Some input cells contain DROP DOWN LIST for some criteria corresponding to the key parameter. Click to the input cell and select the appropriate from the DROP DOWN LIST . e) All the cells provide for input must be filled in order to arrive at accurate risk grade.

f)

We have also enclosed the MS Excel filed named, CRG_Score_Sheet in CD ROM for use.

Step 6: Arrive at the Credit Risk Grading based on total score obtained:
The following is the proposed Credit Risk Grade matrix based on the total score obtained by an obligator. Name 1) Risk Grading Superior Short Name SUP Score 2) 3) 4) 5) 6) 7) 8) Good Acceptable Marginal / Watch list Special Mention Sub-standard Doubtful Bad& loss GD ACCPT MG/WL SM SS DF BL 100% Cash covered Government guarantee International bank guarantee

85+ 75-84 65-74 55-64 45-54 35-44 <35

3.14 Credit

Risk Grading Review

Credit Risk Grading for each borrower should be assigned at the inception of lending and should be periodically updated. Frequencies of the review of the credit risk grading are mentioned below:

Number 1) 2) 3) 4) 5) 6) 7) 8)

Risk Grading Superior Good Acceptable Marginal/ Watch Special Mention Sub- standard Doubtful Bad& Loss

Short SUP GD ACCPT MG/ WT SM SS DF BL

Review Frequency (at last) Annually Annually Annually Half yearly Quarterly Quarterly Quarterly Quarterly

Chapter 4

Credit Performance of Jamuna Bank

Topics Name 4.1 Deposit and Deposit Mix 4.2 Loans and Advances 4.3 Disbursement of loan and Advance 4.4 Classified Loan 4.5 Credit Recovery 4.6 Non- Performing Loan Monitoring

Page 30 32 34 36 37 38

4.1 Deposit

and Deposit Mix

In commercial banks operation starts with mobilization of resources i.e. tapping of deposits and then the said resources are deployed as loans, advances and investments for the purpose of maximizing wealth which -sans deposits have dominance in commercial bank's operations. That is why, there is a common saying that deposit is the lifeblood of a bank. In keeping with this axiom JBL attaches utmost importance to the deposit mobilization campaign and to the optimal deposit mix for minimizing COF as far as practicable. A stiff competition persisted in the market as to deposit mobilization and there was a pressure on interest rate. 3esides, instability in political atmosphere was adversely affecting business, which stood as a hindrance to the smooth operation of banks including deposit mobilization. Despite all these unfavorable factors JBL was able to instill confidence in customers as to its commitments to the depositors and borrowing customer and deposit mobilization campaign and to the optimal deposit mix for minimizing COF as far as practicable. A stiff competition persisted in the market as to deposit mobilization and there was a pressure on interest rate. 3esides, instability in political atmosphere was adversely affecting business, which stood as a hindrance to the smooth operation of banks including deposit mobilization. Despite all these unfavorable factors JBL was able to instill confidence in customers as to its commitments to the deposit or sand borrowing customers and Dep o s i t Mi x CD & OTHER S BP SB FDR STD SC 12 % 1% 6% 68% 4% 9%

Dps M e o it ix

CD&O E TH RS BP SB FD R ST D SC

F i g u r e: d ep o s i t mi x thereby could mobilize a total deposit ofTk.60673.55 million in 2010 against that ofTk.423560.21 million in the preceding year showing an increase of Tk18317.34 million being 127.203 percent. Endeavor is underway for augmenting low cost deposit by accommodating good customers at competitive price. For healthy growth of business JBL puts emphasis on no cost and low cost deposit all the time. A number of savings schemes are in place for mobilizing long term deposits which can be planned to be invested interim loans in-the area lease finance, project finance and consortium finance with a view to having better yields. JBL's such move will motivate the people to have good savings habit, as well. The comparative position of deposit mix of the Bank as on31.12.2010 and 31.12.2009 is depicted below:

Ty p es of d ep os i t

As on 31. 12 .2 010

As on 31. 12 .2 009 4715. 3 1 516. 32 2 891.2 5 2 52 01.52

Ch an ge

Ch an ge i n th e y ear +1 9 1 . 5 4 +2 1 . 7 2 +8 9 . 7 2 +9 5 7 . 7 5

Cu r r en t A/ C &o th er Bi ll s p ay ab le Sa v i n gs Dep os i t Fi x ed Dep o s i t

7013 .7 7 776 .9 7 396 7. 88 366 94. 55

+2 2 98. 46 +2 60.6 5 +1076 .6 3 +1149 3. 03

Sh o r t Term Dep os i t Sch em e dep os i t Fo r ei gn C ur ren c y Dep o s i t To ta l Dep o s i t

70000 60000 50000 40000 30000 20000 10000 0 2010 2009

42 36. 36 7900.3 3 83. 69 6067 3. 55

2 762 .49 6118 .3 2 15 1. 00 42 356.2 1

+147 3. 87 +1782 .01 -6 7. 31 +183 17 .3 4

+1 2 2 . 8 2 +1 4 8 . 5 0 -5.61 12 7 . 2 0 3

year amount

F i g u r e : J am un a B an k P erf or man c e 2 009 - 2 010 4 .2

Loans And Advances

Though there was an unfavorable business environment due to political turmoil throughout the year JBL was in constant efforts to explore different areas of credit operation and could raise the credit portfolios. The comparative position of loan in Jamuna Bank as on 31.12.2009 to 31.12.2010 are given below. Types of credit Credit portfolio Total credit As on 31.12.2009 29644.02 32287.66 As on 31.12.2010 42517.83 49734.800

50000 40000 30000 20000 10000 0 Credit portfolio Total credit

In order to ensure compliance with regulatory requirements for avoiding risk of exposure to single borrower, concentration on large loans, to bring in excellence in credit operation in relation to risk management, yield, exposure, tenure, collaterals, security valuation etc. JBL strived for further diversification of credit portfolios. Its credit facilities were concentrated on Trade Finance, Agriculture and related sector, project finance, wholesale and retail trade, transport sector, hospital & diagnostic centers and syndicate financing for big projects, capacity additions to the manufacturing sector and structured financing for developing infrastructure of the country. Initiatives are underway for helping small and medium entrepreneurs in the ventures for which, in JBL, we are developing SME credit products and strategies. JBL has also increased lending activities to small consumers through Consumer Credit Scheme.

4.3DISBURSEMANT OF LOANS & ADVANCES

Total amount of Loans & Advances for 2010: Though there was an unfavorable business environment due to world economic recession throughout the year JBL was in constant efforts to explore different areas of credit operation & could raise the credit portfolios to Tk. 49734.800 million in 2010 with an increase of Tk. 17447.139 million (55.48%) over that of the preceding year. The total credit was on31.12.2009 was Tk 32287.66million. Year Loan and advances (in million) As on 2009 32287.66 As on 2010 49734.800

50000 40000 30000 20000 10000 0 As on 2009 As on 2010 Loan and advances (in m illion)

Item wise disbursement of Loans & Advances for 2010: From this graph, I can say that the maximum portion of the lending has disbursed in the sector of Term Loans. About 13626.35 million loans & advances have given in this sector. Item PAD LTR Staff Other Term HBL ECC IS CCS LF PL Loans Loan Loan Amount 430.7 4414.04 103.48 1984.28 5286.13 910.15 3.63 (in million)

140.16 52.65 14.97 286.16

PAD LTR Staff Loans Other Loan Term Loan HBL ECC IS CCS LF PL

Figure : Item wise loan and Disbursement

Sector wise Loans, Advances & Lease for 2010: JBLs credit facilities were concentrated on trade finance, agriculture & related sectors, project finance, SME finance, wholesale & retail trade & structured financing for developing infrastructure of the country. Jamuna bank always maintain well-diversified portfolio. Sector Agriculture & Large &Medium Working Fisheries Amount in % 0.50% scale enterprise 17.35% capital 34.05% Export credit 77.2 Commercial credit 38.95 Small Cottage industries 0.49 22.79 & Others

Agriculture & Fisheries Large &Medium scale enterprise Working capital Export credit Commercial credit Small & Cottage industries Others
Figure : Sector wise Loan, Advance & Lease.

4.4 Classified

Loan

The classified loans & advances stood at Tk.710.86 million in 2009 while it wasTk.598.31 million in 2008. The percentage of the same was 2.20% in 2010 & 2.84% in 2009. Loan Amount % Unclassified 0.46 Special Mention Sub Account (SMA) 5.03 standard 5.06 Doubtful 2.84 Bad/ Loss 2.20

Unclassified Special Mention Account (SMA) Sub standard Doubtful Bad/ Loss

Figure : According to Year 2010-2009. 4.5 Credit Recovery

Credit Recovery :
The recovery officer should directly manage account with sustained deterioration (arisk rating of sub standard 6 or worse). JBL 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. Down grading process should be done immediately and should not be postponed until the annual review process. 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 account.

Management of classified loans and special mention.

Accounts and related works writing off B/L loans with the approval off the board. The management of problem loans (NPL s) 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.

4.6 Non -Performing loan monitoring:

Non Performing loan Monitoring:

On a quarterly basis, a classified loan review (CLR) prepared by the RU account manager to update the status of the action /recovery plan, review and assess the adequacy of provision, and modify the banks strategy as appropriate. The head of credit should approve the CLR for NPL s up to 15% of the banks capital, with MD/CEO approval needed for NPLs in excess of 15% the CLRS for NPLS above25% of capital should be approved by the MD/CEO ,with a copy received by the board.

Chapter 5 Summary of Findings, Conclusion & Recommendation Topics Name 5.1 Findings 5.2 Conclusion 5.3 Recommendation Page 39 40 41

5.1 Findings

Some major problem are associated with Jamuna Bank Limited which are given below:

JBL is one of the best bank in our country but although the performance of its disbursement of loan and advance is increasing from 2009-2010 such as in 2009 its advance figure was 32287.66 and it increase 49734.800 in 2010. Jamuna Bank lending operation are too complex its official lending formalities are to high. The interest rate of Jamuna Bank Limited is higher than other bank such as Dutch Bangla Bank offer 18.5% Prime Bank offer 19.2% where as Jamuna Bank offer 19.5%. The procedure of monitoring loans and advances are not well in Jamuna Bank in 2010 . The performance on loan allocation of small and cottage industries are not compared to the other sector such as Jamuna Bank provide loan on Working capital 34.5% , Export Credit sector 77% ,Commercial credit 38.95% where as SME sector provide .49%. The performance of percentage in classification of loans and advances are not sufficient because in 2010 it percentage rate was 2.20% than 2009(2.84%). The item wise disbursement of loan and advance are disbursed more on Term loan 5286.13 than other item and its lower disbursement sector was ECC was 3.63.

5.2

Conclusion

The modern business world is on the fastest flow of competition which is growing wide & wider. To have sustainability in this competitive world the organization are formulating new strategies and business plan with maximum efficiency levels in all sectors. To build a strong base for the bank and to uphold the image of bank determination of firm or customer is not an outsider on their business he/ she is a part of the bank. They should have decrease the knowledge gap that means the gap between customer expectation and management perception of customer expectation. They should also decrease communication gap and ultimately the bank should adjust the customer perception with their expectation. JBL is a modernized bank; goodwill of JBL is increasing day by day. Because it makes a good employment opportunity. It provide high standard and expectation facilities for their customers. It contribute in the economic development of the country. There are many services providing by JBL that is carry out good opportunity for general people of the country and also for savings. Besides the policy and strategies of JBL is high standard than other private bank. But they need to be more careful dynamic to retain the old customer and create new customer in existing competitive situation.

5.3 Recommendations

After discussion the findings of this report I suggest myself some important aspects for Jamuna Bank Limited. JBL should create a bench mark of time line against loan process and approval

period. If the take too much time on loan process & approval period, the clients may move elsewhere. They should increase their efficiency on assessment of borrowers financial soundness and should monitor continually so that the number of defaulter could decrease gradually. JBL should maintain lower interest rate for its customer betterment. JBL should try to increasing its loan allocation on small & cottage industries. By

increasing loan on SME sector JBL can help in reducing unemployment a lot in our country. JBL should maintain a proper plan on classification of loan for every year. JBL should maintain a strong and strict system on monitoring loan and their

performance.

References:

1. Anthony Saunders & M.Milon Cornetts, Financial & Market Institution, (2010) 2nd edition Published by: Tata Hill Graw Company Ltd. 2. Bangladesh Bank Circular & JBL Circular. 3. Credit Policy Manual 2009 of the Jamuna Bank Limited. 4. Dewett, K.K, Modern Economic Theory (2010) 23rd edition, Published by : S.Chand & Company Ltd. 5. Jamuna Bank Ltd.(2009-2010) Annual Report.