Chapter One

INTRODUCTION

1.1 Introduction
1.2 Origin of the report
1.3 Rationale of the study
1.4 Objectives of the report
1.5 Scope of the study
1.6 Methodology of the study
1.7 Limitations of the study

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1.1NTRODUCTION
Now a day, education is not just limited to books and classrooms. In today’s world,
education is the tool to understand the real world and apply knowledge for the
betterment of the society as well as economy. From education the theoretical
knowledge is obtained from courses of study, which is only the half way of the subject
matter. Practical knowledge has no alternative. The perfect coordination between theory
and practice is of paramount importance in the context of the modern business world in
order to resolve the dichotomy between these two areas. Therefore, an opportunity is
offered by Dept. of Accounting & Information systems, University of Dhaka, for its
potential business graduates to get three months practical experience, which is known,
is as “Internship Program”. For the competition of this internship program, the author
of the study was placed in a bank namely, “Janata Bank Limited”internship Program
brings a student closer to the real life situation and thereby helps to launch a career with
some prior experience.

1.2 ORIGIN OF THE REPORT

This paper is entitled “Credit Management of Janata Bank Limited” originated from
the fulfillment of the internship program. For the internship program, each student is
attached with an organization. My internship was at Janata Bank Ltd., Nawaubpur
branch Dhaka. During my internship, I had to prepare a report under the supervision of
Taslima Nasreen, Assistant Professor, Dept. of Accounting & Information systems,
University of Dhaka.

1.3 RATIONALE OF THE STUDY

Due to the increased competition of the increased number of commercial banks and the
growing economy, the expectations of the customers have also increased than ever
before. Realizing the present condition, banks, especially the commercial banks are
trying to elevate their loan giving service as much as reachable to their customers. The
most serious difficulty facing the financial sector is the high level of interest rate and
inflation rate. So it is the duty of the top management of the commercial banks to work
with the situation.

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1.4 OBJECTIVES OF THE REPORT
The objectives of the report are to determine how credit policy applied in sanctioning
and recovering loans and advances. Credit policy varies in terms of loan sector, status
of the organization, government policy, fiscal budget and guidelines etc.

Specific objectives:
To present an overview of Janata Bank Limited(JBL)
► To assess the credit structure of the JBLin practice.
► To measure the effectiveness of the bank in the utilization of available resources.
► To identify the recovery performance of JBL.
► To point out the problems in fund utilization and recovery thereon.
► To make a critical reasoning in respect to the treatment of provision for bad and
doubtful credit.
► To assess and highlight on the legal actions followed by the JBL.
► To find out the extent of similarities and dissimilarities in the course of action
followed by Janata Bank.Limited.
► To compare the credit supervision of. JBL
► To compare the quantitative change from phase-1 (1998-2002) to phase-2 (2003-
2007).
► To find out problems and suggesting recommendations for further improvement.

1.5 SCOPE OF THE STUDY

Janata Bank Limited is the second largest commercial Bank in Bangladesh. Janata
Bank Limited operates through 848 branches including 4 overseas branches at United
Arab Emirates. It is linked with 1221 foreign correspondents all over the world. I am
assigned to learn practical knowledge from Janata Bank Limited, at Nobawabpur
Branch. In this study I would try to concentrate on the theoretical aspect of credit
management, that is, the definition of credit management, policy of credit management,
tools for managing credit etc. I would analyze the data on the bank and various
programs for loan recovery, problems in loan in loan recovery, pattern of loan recovery
and the performance of the bank under study in loan recovery, the information in
respect to the classification of unsound credit and provision thereon and also

3
concentrates on the performance of the bank. And finally I would conclude with the
critical evaluation of the credit management under the guidelines of the Bank
Companies Act 1991, IAS#30 and a discussion on the major findings and
recommendations.

1.6 METHODOLOGY OF THE STUDY

The study is performed based on the information extracted from different sources
collected by using a specific methodology. To fulfill the objectives of this report total
methodology has divided into two major parts:

A) Data Collection Procedure:

In order to make the report more meaningful and presentable, two sources of
data and information have been used widely.

The “Primary Sources” are as follows:-

 I have made questionnaire survey of both managers of credit department and the
customers who have taken loans from Janata Bank Limited.
 Relevant file study as provided by the officers concerned.
 Sharing practical knowledge of officials.
 In-depth study of selected cases.

The “secondary Sources” are as follows:-

 Annual report of Janata Bank Limited
 Periodicals Published by Bangladesh Bank
 Office files and documents
 Study related books and journals
 Web sites

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 b) Data Processing & Analysis:
Collected information have then processed & compiled with the aid of MS Word,
Excel & other related computer software. Necessary tables have been prepared on
the basis of collected data and various statistical techniques have been applied to
analyses on the basis of classified information. Detail explanation and analysis have
also been incorporated in the report.

1.7 LIMITATION OF THE STUDY

To prepare a report on the topic like this in a short duration is not easy task.From the
beginning to end,the study has been conducted with the intention of making it as a
complete and truthful one. In preparing this report some problems and limitations have
encountered which are as follows:
a) The main constraint of the study was insufficiency of information, which was
required for the study. There are various information the bank employee cannot
provide due to security and other corporate obligations.
b) As the data, in most cases, are not in organized way, the bank failed to provide
all information.
c) Due to time limitation, many of the aspects could not be discussed in the present
report.
d) Since the bank personnel were very busy, they could not pay enough time.
e) Lack of opportunity to access to internal data.
f) I had to base on secondary data for preparing this report.
g) Legal action related information was not available.
h) Lack of in-depth knowledge and analytical ability for writing such report.

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 Chapter Two

LITERATURE REVIEW

2.1 CREDIT MANAGEMENT

2.2 PROCESS OF CREDIT MANAGEMENT
2.2.1. Policy guidelines
2.2.2 Management structure and responsibilities
2.2.3. Program guidelines

2.3 TOOLS OF CREDIT MANAGEMENT

2.3.1 Definition of Credit Risk Grading (CRG)
2.3.2 Functions of Credit Risk Grading
2.3.2 Functions of Credit Risk Grading
2.3.3 Use of Credit Risk Grading
2.3.4 Number and short name of grades used in the CRG
2.3.5 Financial Spread Sheet in Credit Management

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2.1 CREDIT MANAGEMENT
Loans or credits comprise the most important asset as well as the primary source of
earning for the banking institutions. On the other hand, loan/credit is also the major
source of risk for the bank management. A prudent bank management should always try
to make an appropriate balance between its return and risk involved with the loan
portfolio. Credit appraisal process is the tool, which helps the bank to predict the risk
and return on the proposed project for credit disbursement.. To get a clear idea about
credit appraisal process we need to know the key factors of credit appraisal procedures.
Credit:
The word credit is derived from the Latin word “credo” which means “I believe” and is
usually defined as the ability to buy with a promise to pay. It consists of actual transfer
and delivery of goods and services in exchange for a promise to pay in future. It is
simply the opposite of debt. Diversification of banking service has accelerated the use
of credit in the expansion of business operation. It is a fundamental precept of banking
everywhere that advances are made to customers in reliance on his promise to pay
rather than the security held by the banker.

. Principles of Credit A prudent Banker should always adhere to the following general
principles of lending funds to his customers.
 Background, Character and ability of the borrowers
 Purpose of the facility,
 Term of facility,
 Safety,
 Security,
 Profitability,
 Source of repayment,
 Diversity.

2.2PROCESS OF CREDIT MANAGEMENT

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Credit management must be organized in such a process that the bank can minimize its
losses for payment of expected dividend to the shareholders. The purpose of this
process is to provide directional guidelines that will improve the risk management
culture, establish minimum standards for segregation of duties and responsibilities, and
assist in the ongoing improvement of concerned bank.

The guidelines for credit management may be organized into the following sections:
2.2.1 Policy guidelines:
a. Lending guidelines
b. Credit assessment and risk grading
c. Approval authority
d. Segregation of duties
e. Internal control and compliance

2.2.2 Management structure and responsibilities

2.2.3. Program guidelines:

a. Approval process
b. Credit administration
c. Credit monitoring
d. Credit recovery

Now the guidelines are discussed in the following:

2.2.1. Policy guidelines

a. Lending guidelines: The lending guidelines include the following:
 Industry and Business Segment Focus
 Types of loan facilities
 Single borrowers/ group limits/ syndication
 Lending caps
 Discouraged business types

As a minimum, the followings are discouraged:

o Military equipment/ weapons finance

8
 o Highly leveraged transactions
o Finance of speculative investments
o Logging, mineral extraction/ mining, or other activity that is ethically or
environmentally sensitive
o Lending to companies listed on CIB black list or known
o Counter parties in countries subject to UN sanctions
o Lending to holding companies.
b. Credit Assessment and Risk Grading:
A thorough credit and risk assessment should be conducted prior to the granting of
loans, and at least annually thereafter for all facilities.

Credit Applications should summaries the results of the risk assessment and include, as
a minimum, the following details:
 Environment or social risk inputs
 Amount and type of loan (s) proposed
 Purpose of loans
 Loan structure ( tenor, covenants, repayment schedule, interest)
 Security arrangement
 Any other risk or issue
 Risk triggers and action plan-condition prudent, etc.

Risk is graded as per Lending Risk Analysis (LRA), Bangladesh Bank’s Guidelines of
classification of loans and advances.

c. Approval Authority:
Approval authority may be as the following:
 Credit approval authority has been delegated to Branch Manager, Credit
Committee by the MD/ Board
 Delegated approval authorities shall be reviewed annually by MD/
Board.

MD/ Board:

9
  Approvals must be evidenced in writing. Approval records must be kept
on file with credit application
 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.

d. Segregation of Duties:
Banks should aim at segregating the following lending function:
 Credit approval/ risk management
 Relationship management/ marketing
 Credit administration

e. Internal Control and Compliance:

Banks must have a segregated internal audit/ control department charged with
conducting audits of all branches.

2.2.2. Management structure and responsibilities

The following chart presents an example of credit management structure:

Managing Director

HO Business
Development / Corporate Credit Committee HO Credit / Risk
Banking / Marketing

Branch Manager

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Marketing Credit Officer Credit Admn. Loan Recovery

2.2.3. Program guidelines

a. Approval process: The following diagram illustrates an example of the approval

process:

Credit application recommended by Branch Manager /

Relationship Manager / Corporate

Head Office, Credit Division

Head Office Credit Committee

Executive Committee of Board of Directors

b. 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.

c. Credit monitoring: To minimized credit losses, monitoring procedures and systems

should be in place that provides an early indication of the deteriorating financial health
of borrower.

d. Credit recovery: The recovery unit of branch should directly manage accounts with
sustained deterioration (a risk rating of sub-standard or worse). The primary functions
of recovery unit are:

▪ Determine account action plan/ recovery strategy

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 ▪ 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.
2.3 TOOLS OF CREDIT MANAGEMENT
For credit management, a firm may use tools available to them. Such tools include
Credit Risk Grading (CRG) and Financial Spread Sheet (FSS). Credit risk grading is an
important for credit risk management as it helps the banks and financial institutions to
understand various dimensions of risk involved in different credit transactions. The
aggregation of such grading across the borrowers, activities and the lines of business
can provide better assessment of the quality of credit portfolio of a bank or branch.

The Lending Risk Analysis (LRA) manual introduced in 1993 by the Bangladesh Bank
has been in practice for mandatory use by the banks and financial institutions for loan
size of BDT 1.00 crore and above. However, the LRA manual suffers from a lot of
subjectivity, sometimes creating confusion to the lending bankers in terms of selection
of credit proposals on the basis of risk exposure. Meanwhile in 2003 end, Bangladesh
Bank provided guidelines for credit risk management of banks wherein it
recommended, interalia, the introduction of Risk Grade Score Card for risk assessment
of credit proposals.
Bangladesh Bank expects all commercial banks to have a well defined credit risk
management system which delivers accurate and timely grading. In practice, a bank’s
credit risk grading system should reflect the complexity of its lending activities and the
overall level of risk involved.

2.3.1 Definition of Credit Risk Grading (CRG)

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

2.3.2 Functions of Credit Risk Grading

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Well-managed credit risk grading systems promote bank safety and soundness by
facilitating informed decision-making. Grading systems measure credit risk and
differentiate individual credits and groups of credits by the risk they pose. This allows
bank management and examiners to monitor changes and trends in risk levels. The
process also allows bank management to manage risk to optimize returns.

2.3.3 Use of Credit Risk Grading

◘ The Credit Risk Grading matrix allows application of uniform standards to credits
to ensure a common standardized approach to assess the quality of individual
obligor, credit portfolio of a nit, 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
decisions would be related to pricing (credit-spread) and specific features of
credit facility. These would largely constitute obligor level analysis.
◘ Risk grading also be relevant for surveillance and monitoring, internal MIS and
assessing the aggregate risk portfolio level analysis.

2.3.4 Number and short name of grades used in the CRG

The proposed CRG scale consists of 8 categories with short names and numbers are
provided as follows:

Grading Short Name Number

Superior SUP 1
Good GD 2
Acceptable ACCPT 3
Marginal/ Watch list MG/ WL 4
Special Mention SM 5
Sub Standard SS 6
Doubtful DF 7
Bad and Loss BL 8

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2.3.5 Financial Spread Sheet in Credit Management

1. Financial Spread Sheet provides a quick method of assessing business trends and
efficiency
▪ Assess the borrowers ability to repay
▪ realistically show business trends
▪ Allow comparisons to be made within industry

2. Borrowers that provide Financial Spread Sheets are more likely to be good
borrowers
 At two of the client banks the FSRP consultants could not find 10 bad loans
with 3 consecutive years of financial statements available.
 Out of 25 good loans reviewed by the FSRP consultants, at two of the client
banks, 3 consecutive years of financial statements were available on all of
them.
 The willingness of the customer to provide detailed financial information
and to answer question regarding that information, is indication of the
cooperation the bank will receive in the future.

3. A Financial Spread Sheet is an important tool in a discipline of organized approach to

credit analysis.

4. The historic financial reports of a company are a primary indicator of its future
financial position. Spread sheets allow proper analysis of financial statements.

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 Chapter Three

JANATA BANK LTD: AT A GALANCE

3.1 History of Janata Bank Ltd.

3.2 Mission of Janata Bank Ltd.
3.3 Services provided by Janata Bank Ltd.
3.4 Credit program
3.5 Performance of Janata Bank Ltd.
3.6 Loans and advances

3.1 HISTORY OF JANATA BANK LTD

.
Janata means people. This is a progressive Bank. Immediately after the emergence of
Bangladesh in 1971, the erstwhile United Bank Limited and Union Bank Limited were
nationalized and renamed as Janata Bank. It has been operating since it's inception in

15
1972 both in Bangladesh and overseas. Janata Bank Ltd. has been playing a significant
role in the economic development of the country by mobilizing savings and
channelizing funds into different productive sectors. It is also a major player in the
fields of micro-credit and software development.
Janata Bank Ltd, the second largest commercial Bank in Bangladesh, has an authorized
capital of US$ 145.45 million, paid up capital of US$ 47.16 million and reserve of US$
6.67 million . The Bank has a total asset of Tk. 24406.11 crore (approx. US$ 3562.94
million) as on 31st December 2007.

Janata BankLtd. operates through 848 branches including 4 overseas branches at

United Arab Emirates. It is linked with 1221 foreign correspondents all over the world.
The Bank employs more than 15(fifteen) thousand persons. The corporate head office is
located at Dhaka with 35 (thirty five) Divisions. As a part the conscious development of
existing Human Resources, Janata Bank through its three training institutes during the
year 2003 imparted training to 4699 officers and staffs. It computerized 90 important
branches; non stop services introduced in 88 branches; ONLINE Banking in 60
important branches under important branches under implementation; ATM, EFT
facilities.

The Board of Directors is composed of 7 (seven) members headed by a Chairman. The

Directors are representatives from both public and private sectors. The Bank is headed
by the Managing Director (Chief Executive), who is a reputed banker.

3.2 MISSION OF JANATA BANK LTD.

The mission of the bank is to actively participate in the socio- economic development
of the nation by operating a commercially sound banking organization, providing credit
to viable borrowers, efficiently delivered and competitively priced, simultaneously
protecting depositor’s funds and providing a satisfactory return on equity to the owners.

3.3 SERVICES PROVIDED BY JANATA BANK LTD.

Janata Bank Ltd. offers all the major banking facilities and services to its customers.
The Bank with it's network spreading throughout the country has a unique feature of

16
ploughing back savings from those places and then investing them into different loan
portfolios.

Janata Bank Ltd. with its wide ranging branch network and skilled personnel provides
prompt and personalized services like issuing:
a. Demand Draft
b. Telegraphic Transfer
c. Mail Transfer
d. Pay Order
e. Security Deposit Receipt
f. Transfer of fund by special arrangement,
i) Normal transfer
ii) Electronic transfer through Ready Cash Card.

The Bank provides the following Internet facilities:

 Current/Savings/STD account status
 FDR account status
 Advance account status
 Loan account status
Remittance services are available at all branches and foreign remittances may be sent to
any branch by the remitters favoring their beneficiaries. Remittances are credited to the
account of beneficiaries instantly or within shortest possible time. Janata Bank Ltd. has
correspondent banking relationship with all major banks located in almost all the
countries/cities. Expatriate Bangladeshis may send their hard earned foreign currencies
through those banks or may contact any renowned banks nearby ( where they
reside/work) to send their money to their dear ones in Bangladesh.
Janata Bank Ltd. has already established a world wide network and relationship in
international Banking through its 4 (four) overseas branches and 1221 foreign
correspondents. The Bank has earned an excellent business reputation in handling and
funding international trade particularly in boosting export & import of the country. The
Bank finances exports within the frame-work of the export policy of the country.
3.4 CREDIT PROGRAM

General and Industrial Credit:

17
Janata Bank Ltd. has formulated its policy to give priority to small and medium
business while financing large scale enterprise through consortium of banks total loan
and advance of the bank stood at BDT 121204.45 million as of December 31, 2007as
compared to BDT 138492.5127 million in 2006. Increase rate is 6% compared to 2007.
Following the guideline of Bangladesh Bank, credit facilities have been extended to
productive and priority sectors. In extending credit facilities, the Bank has given due
importance to sectoral needs and requirements of both public and private sectors. Major
sectors include Jute, Textile Ind. & trade, Steel & Engineering, Food & Allied, and
Export & Import etc.

Year Advance
2004 107786
2005 99748.7
2006 101461.9
2007 121204.4549

Rural Credit, Micro Ent. & SP. Program Financing:

Loan is provided to the rural people for agricultural production and other off-farm
activities.
 Loan pricing system is customer friendly.
 Prime customers enjoy prime rate in lending and other services.
 Quick appreciation, appraisal, decision and disbursement are ensured.
Credit facilities are extended as per guide-lines of Bangladesh Bank (Central Bank of
Bangladesh) and operational procedures of the Bank.The rates may, however, change
from time to time depending on the level of competition in the financial sector.
As a nationalized Bank it has a social responsibility to improve the financial condition
of the poor/unemployed people. With a view to perform that social responsibility, Bank
has initiated rural credit program since 1974. Now under this rural portfolio there are
33 products.

Information related to important products under this program are shown below:

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 Table: different products under the program
Taka in million

Outstanding
Sl. No of
Name of product Amount %
No. loanees
2006
1 Cyber-café loan 36 8.6 .15
Credit for forestry/
2 754 19.7 .25
horticulture nursery
Credit program for
3 46312 1002.00 10
employees
Financing “ women
4 225 44.5 .50
entrepreneurship”
Financing goat and
5 21109 131.8 1.00
sheep farming
6 Gharoa project 2321 35.3 .40
7 Crop loan program 335075 5073.8 52
8 Doctor’s loan 55 20.8 .35
Small business Dev.
9 93 18.0 .35
Loan
10 Others 159335 3374.0 35
total 565315 9728.6 100

A vast majority of the Bangladeshis live in the rural areas and their main source of
income is agriculture and agro-business. Janata Bank Ltd. has opened branches in rural
areas to cater to the banking needs of rural people. Apart from accepting deposits from
the rich and moderately well-off villagers, Janata Bank Ltd. encourages the poor people
to make small savings through different mechanisms.

So far lending in rural area is concerned, Janata Bank Ltd. has been financing
agricultural production and poverty alleviation programs since 1977. It also lends to the
poor landless so that they can make a living. The average loan size is about Taka

19
10,000.00 (around US$ 200) and the number of borrowers under rural credit scheme is
more than 500,000.

1. Short Term Crop Production Loan

2. Irrigation and Agricultural equipment
3. Fish/Shrimp Production
4. Horticulture Development
5. Agro-based Industry
6. Rural Transport
7. Weavers Credit
8. Agri-business Loan
9. Tea Production & Processing Loan
10. Different Micro Credit Programs

SME Financing Scheme:

Small and Medium Enterprise (SME) Financing Scheme has been introduced to assist
new or experienced entrepreneurs to invest in small and medium scale industries. Small
business development loan, Gharoa project, credit for forestry/Horticulture/Nursery,
crop loan project all are designed for this purpose.
Doctors’ Credit Scheme:
Doctors’ credit scheme is designed to facilitate financing to fresh medical graduates and
established physicians to acquire medical equipments and set up clinics and hospitals.

Women Entrepreneurs Development Scheme:

Women Entrepreneurs Development Scheme has been introduced to encourage women
in doing business. Under this scheme, the bank finances the small and cottage industry
projects sponsored by women. Total loan outstanding in 2007 was Tk 3552.07 crore
The no. of loaned were 31

3.5 PERFORMANCE OF JANATA BANK LTD.

Janata Bank Ltd. is the second largest commercial bank in Bangladesh. The aim of the
Bank is to actively participate in the socio-economic development of the nation by

20
operating a commercially sound Banking system. It provides credit to deserving
borrowers and at the same time, protects depositor’s interest.

Deposits:Janata Bank Ltd. mobilized total deposit of BDT 198,635.89 million in 2007
as compare of BDT 182946.5359 million in 2006 . Comparative interest rates deposit
mobilization efforts of the bank and confidence reposed by the customer in the bank
contributed to the notable growth in deposit. The bank evolved a number of attractive
deposit schemes to care to the requirement of small and medium services. This
improved not only the quantum of deposits, it also brought about qualitative change in
the depositors structure.
Deposit and Deposit Mix:
Break-up of Deposit and Deposit Mix

Taka in million
Type As on 31-12-06 As on 31-12-07
Current and others account deposits 28388.2688 35510.83478
Bills payable 1558.985159 1880.79648
Savings Bank Deposit 59817.08979 62723.70393
Term Deposit 93182.1912 98520.55685
Total 182946.5359 198635.892

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Investment:
To earn profit, the Bank Prudently invests its fund to different sectors. The investment
portfolio of the Bank is comprised of Treasury bill, other bonds, Debenture, Shares etc.
The Bank earns a handsome profit from this investment portfolio. Year wise investment
of the Bank is shown in the following table:

Year Investments (Tk. in million)

2004 20455.8
2005 28375
2006 24785.38603
2007 55862.93039

Portfolio wise investment is described below:

(Taka in million)
2007 2006
1. Govt.securities 17.889622 24253.04462

2. Other bonds Wise 94.689602

Percentage 532.341418
Investment-2006-07
20

1%
3. Pre-lib debentures 20.473602
2%
4. Shares 22.985151 34%
Total =156.037739 24785.386038

63%
22
Other Bonds Treasury Bill Debentures Shares
Import Business:
For the very beginning the Bank has embarked on extensive foreign exchange business
with a view to facilitating international trade transactions of the country. The Bank has
provided BDT 84065.40 million loan as of December 31, 2007. Import mainly confined
to consumer goods, capital machineries and industrial raw materials.

Export Business:
Export growth of Janata Bank Limited (2002-
2006):
(Taka in Core)
Achievement
Year Target Achievement Growth
Rate
2002 4000.00 3445.46 78.84% +6.38%
2003 4000.00 4286.49 107.16% +24.40%
2004 4800.00 5462.33 113.80% +27.43%
2005 6825.00 5839.48 85.56% +6.90%
2006 7000.00 7089.66 101.28% +21.40%
Jan-
7,798.38 3492.20 44.78%(June) +5%(June)
June/2007

Operating income:

23
The operating revenue of the bank stood to the BDT4656.0042December 2007
against8340.84 million as 2006.y provision net profit stood at BDT 15.4764 million as
of December 31,2007.

Year Operating Profit (Tk. in million)

2004 2120.9
2005 2312.9
2006 8340.84
2007 4656.00

3.6 LOANS AND ADVANCES:

The main focus of Janata Bank Ltd. Credit Line/Program is financing business, trade
and industrial activities through an effective delivery system. Janata Bank Ltd. offers
credit to almost all sectors of commercial activities having productive purpose. The
loan portfolio of the Bank encompasses a wide range of credit programs covering about
200 items. Credit is also offered to 15 (fifteen) thrust sectors, as earmarked by the
govt., at a reduced interest rate to develop frontier industries. Credit facilities are
offered to individuals, businessmen, small and big business houses, traders,
manufactures, corporate bodies, etc.

Following the guidelines of Bangladesh Bank, credit facilities have been extended to
productive and priority sectors. The outstanding advance of the bank is Tk121,204.45
million on 31st December 2007.In credit facilities, the Bank has given due importance
to sectoral needs and requirements of both public and private sector.
Sector wise Advances are shown below:
Credit constitutes 50% of banks assets and this portfolio is the most

important objective of the Bank of which 16.38% is classified. The

elaborate status is as follows:

(Figure in TK)

BL DF SS SMA Standard Total

1577.30 108.20 300.31 293.90 9840.74 12120.45

24
13.01% .89% 2.48% 2.43% 81.19% 100.00%

(Taka in crore)
Sl Name of sector Total
1 Bangladesh PC 1545.15
2 BJMC 727.02
3 Steel & Engineering 51.36
4 Food & allied 156.19
2140
5 Export credit

1434
6 Import credit

1596
7 Industrial credit

983
Rural, ME & SP
8
Financing

843
9 Staff loan

6,720
10 General cerdit

11 BCIC 1020.66
Grand total 17216.38

25
26
 Chapter Four

CREDIT POLICY

4.1 MEANING OF CREDIT POLICY

4.2 OBJECTIVE OF CREDIT POLICY
4.3 FORMULATION OF CREDIT POLICY
4.4 ESSENTIAL COMPONENTS OF A SOUND CREDIT
POLICY
4.5 LENDING GUIDELINES:
4.5.1 Industry and business segment focus
4.5.2Types of credit facilities

27
 4.1 MEANING OF CREDIT POLICY

4.1 MEANING OF CREDIT POLICY

Policy entails projected course of action. Janata Bank Ltd. have its own policy granting
credit although credit is always a matter of judgment applying common sense in the
light of one’s experience.
A sound credit policy includes among other things safety of funds invested vis-à-vis
profitability of the bank. Encouraging maximum number of small loans is better than
concentration in a particular type of advances, which ensures sufficient liquidity with
least incidence of bad debts.
It has to be borne in mind that a good loan allowed to a properly selected borrower is
half collected. In order to make a good loan there should have a good loan policy.

4.2 OBJECTIVE OF CREDIT POLICY

There are some objectives behind a written credit policy of Janata Bank Ltd. that are as
follows;
 To provide a guideline for giving loan.
 Prompt response to the customer need.
 Shorten the procedure of giving loan.
 Reduce the volume of work from top level management.
 Delegation of authority of work from top level of management.
 To check and balance the operational activities

4.3 FORMULATION OF CREDIT POLICY

One of questions that should arise in a discussion of credit is who should formulate the
policy. Although the ultimate responsibilities lay at the highest level in the organization
i.e. the board of directors. Yet the actual drafting shall have to be done by the senior
lending office in consultations with the chief executive officer and with contribution
from senior officers, associates and subordinates. Obviously the level of origin will
vary with the size and structure of the organization. The matter then referred to the
board for approval after careful examination consideration and discussion.

28
4.4 ESSENTIAL COMPONENTS OF A SOUND CREDIT POLICY:
There can be some variations based on the needs of a particular organization, but at
least the following areas should be covered in any comprehensive statement of credit
policy and JBL’s policy also covers these areas:
1. Legal consideration: The bank’s legal lending limit and other
constraints should be set forth to avoid inadvertent violation of banking
regulations.
2. Delegation of authority: Each individual authorized to extend credit
should know precisely how much and under what conditions he or she
may commit the bank’s funds. These authorities should be approved, at
least annually, by written resolution of the board of directors and kept
current at all times.
3. Types of credit extension: One of the most substances parts of a loan is
a delineation of which types of loans are acceptable and which type are
not.
4. Pricing: In any profit motivated endeavor, the price to be charged for
the goods or services rendered is of paramount without it, individuals
have few guidelines for quoting retag or fees, and the variations
resulting from human nature will be a source of customer
dissatisfaction.
5. Market Area: Each bank should establish its proper market area, based
upon, among other things, the size and sophistication of its organization
its capital standpoint, defining one’s market area is probably more
important in the lending function than in any other aspect of banking.
6. Loan Standard: This is a definition of the types of credit to be
expended, wherein the qualitative standards for acceptable loans are set
forth.
7. Credit Granting procedures: This subject may be covered in separate
manual, and usually is in larger banks. At any rate, it should not be
overlooked because proper procedures are essential in loan establishing
policy and standards. Without proper procedure for granting credit and
constant policing to ensure that these procedures are meticulous carried

29
 out, the best conceived loan policy will not function and inevitable,
problems will develop.
4.5 LENDING GUIDELINES:
As the bank have a high rate of non-performing loans. Banks risk taking applied
should be contained and our focus should be to maintain a credit portfolio keeping in
mind of bank’s capital adequacy and recovery strength. Thus bank’s strategy will be
invigorating loan processing steps including identifying , measuring , containing risks
as well as maintaining a balance portfolio through minimizing loan concentration ,
encouraging loan diversification , expanding product range , streamlining security ,
insurance etc. as buffer again unexpected cash flow .

4.5.1 Industry and business segment focus

Industry segment focuses on Textile, Pharmaceuticals, Agro-based, Food and allied,
Telecommunication, Power generation and distribution, Health care, Entertainment
Services, Chemicals, Transport, Infrastructure development, Linkage industry,
Information technology, Ceramics, Others as decided from tome to time. And business
segment focuses on Distribution, Brick field, Rice mill/ flour mill/ oil mill, Work order,
Yarn trading, Cloth merchant, Industrial spares, Hardware, Electronic and electrical
goods, Construction materials, Fish trading, Grocery, Wholesale/ retail, Others as
dedicated from time to time

4.5.2 Types of credit facilities: Bank will go for

 Term financing for new project had BMRE of existing projects (large,
medium, SME, SCI).
 Working capital for industries, trading services and others (large ,
medium, SME, SCI).
 Trade finance for import and export
 Lease finance
 Small loan for traders, micro enterprise and other productive small
venture.
 Consumer finance
 Fee business

30
 Chapter Five

FUND INVESTED BY JANATA BANK

LTD.

5.1 INTRODUCTION
5.2 ECONOMIC SECTOR WISE DISTRIBUTION OF FUND
5.3 NATURE WISE DISTRIBUTION OF LOANS AND
ADVANCES
5.4 MATURITY GROUPING OF DISTRIBUTION LOANS
AND ADVANCES
5.5 SECURITIES IN CREDIT MANAGEMENT

31
 5.1 INTRODUCTION
The principal function of a bank is to lend. Lending is a dynamic activity. It is through
the medium of lending the banking industry promotes economic activity, instills and
encourages, at the individual level, the principal of self-reliance, and yield earnings for
the bank. It is lending alone that brings banking into a more meaningful and purposeful
contract with public and, therefore, has the greatest impact upon them.

Proper utilization of fund is an essential pre-requisite of successful bank management.

The procurements of funds supported by an efficient deployment of that procured fund
lead a bank to the highest point of profitability. I would try to concentrate on Janata
Bank Ltd.’s nature, pattern, and allocation of invested resources in this chapter. The
bank under study has divergence in its investment portfolio, loan programs, advances
and recovery rate etc.

5.2 ECONOMIC SECTOR WISE DISTRIBUTION OF FUND

Janata Bank Ltd. is engaged in extending long, medium and short term loans to various
economic sectors in the country. As Janata Bank Ltd. extends its credit programs all
over the economy such as agricultural credit program, industrial credit program and
commercial financing, the bank tries to achieve significant profit from its operations
and also to improve the economic conditions of the general public of the country.

Table: economic sector wise distribution of loans and advances during 1998-2007

Economic Phase-1 Phase-2

sectors 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Jute industries 718.52 719.41 747.87 778.28 870.36 837.10 8,997.5
0

32
 Jute trade 23.69 19.18 16.30 1.32 12.36 12.50
75.40

4,150.6
Tannery 419.38 509.03 423.96 444.65 439.60 361.60 0

4,725.0
Textile 349.01 367.51 372.76 369.95 351.66 360.10 0

Transport 32.27 29.17 30.27 24.54 24.04 36.00

40.20

Steel & 1,484.7

474.72 212.98 231.01 208.58 265.70 99.80 0
engineering

Tea 15.90 14.00 14.02 13.99 12.16 12.20

85.80

1,561.9
Sugar mills 88.46 80.01 97.17 99.50 113.24 138.20 0

1,264.9
House building 379.34 428.82 522.59 584.09 659.82 736.40 0

9,825.3
Rural credit 556.28 602.81 667.28 778.50 658.12 831.30 0

Bricks .45.02 41.52 79.64 88.20 90.95 85.90

Cold storage 5.03 8.45 10.38 9.54 12.32 8.60 157.00

1,209.6
Food 74.28 80.07 160.15 216.20 124.28 116.70
0
14,835.
Export credit 751.30 856.38 1016.50 1019.20 1220.78 1295.00
90
14,216.
Import credit 634.76 964.98 1273.06 1154.98 1507.85 1614.40
50
15,963.
Industrial credit 782.62 894.72 1099.82 1146.35 1403.78 1381.90
90
41,467.
Others 1990.42 2266.15 2566.61 3036.99 2379.17 2850.90
20
10146.1 10778.5 121,204
Total 7341.00 8095.29 9329.39 9974.87
9 0 .40

5.3 NATURE WISE DISTRIBUTION OF LOANS AND ADVANCES

33
Sanctioning advances to customers and others is one of the principal services of a
modern bank. Advances by the commercial banks are made in different forms:
 Loans
 Overdrafts
 CC
 LIM
 LTR
 Bills purchase and discounted

Janata Bank Ltd. sanctions loans under the above mentioned category. It usually grants
short term advances which are utilized to meet the working capital requirements of the
borrower. Only a small portion of the bank’s demand and time liability are advanced on
long term basis where the banker usually insists on a regular repayment by the
borrower in installments. While lending fund, a banker, therefore, follows a very
cautious policy and conduct his business on the basis of well-known principles of
sound lending in order to minimize the risk.

5.4 MATURITY GROUPING OF DISTRIBUTION LOANS AND ADVANCES

At the very beginning of taking decision for giving credit, Janata Bank Ltd. mainly
concentrates mainly on liquidity. As it is doing business by public deposits, it is bound
to pay the money when people want. A sizable portion of bank advances are, therefore,
granted to meet the working capital requirements of the borrower rather than to meet
the fixed capital requirement, i.e., construction of building or purchase of fixed
deposits. A banker would be failing in his duty to safeguard the interest of his
depositors and shareholders if his credit policy does not provide a method of gradual
repayment and final recovery of the money advanced.

For liquidity reasons, Janata Bank Ltd.is giving credit on short period basis and against
security. Short term loans ensure liquidity to a greater extent than long term loan. We
can classify the bank loans and advances under the following maturity stage:
► Payable on demand
► Payable within 3 months
► Payable within 3 months to 12 months

34
 ► Payable within 1 year to 5 years
► Payable in more than 5 years

5.5 SECURITIES IN CREDIT MANAGEMENT

One of the most important functions of a bank is to employ its fund by way of
loans and advances to its customers and a bank’s strength depends considerably on the
quality of its loans and advances. In order times, when the bankers knew the customers
personally and intimately and had complete confidence in the integrity and honesty of a
customer, they used to allow loans and advances without a security. The position is
quite different today. Banks having a large number of officers over a wide area cannot
allow loans and advances without retention of security in one form or the other.
Though the banks are now expected to lay greater emphasis on the purpose for
which the borrower needs rather than security he can afford to give, security continues
to be one of the most important factors which determines to a significant extent the
banker’s willingness to lend money.
Security is obtained as a line of last defense to fall back upon. It is meant to be
an insurance against emergency. But taking security, bank acquires a claim upon the
assets of the borrower if repayment is not made as planned. But what should be the
significant securities of loans depends in the guidelines prescribed by the Bangladesh
Bank through BCD circular no. 17/1977 and also the negotiation of the respective
branch to its borrowers. The most significant categories of security lodged are as:
 Goods and commodities
 FDR
 Real estate
 Stock exchange securities
 Life insurance policies
 Gold and gold ornaments
 Documents of title of goods
 Supply bills
Janta Bank Ltd. keeps sufficient security before final sanctioning of loans and
advances.

35

Chapter Six
LOAN DISBURSEMENT PROCEDURE OF JANATA
BANK LTD.

6.1 GETTING CREDIT INFORMATION

6.2 INFORMATION COLLECTION
6.3 ANALYZING THESE INFORMATION
6.4 LENDING RISK ANALYSIS (LRA)
6.5 PROPOSAL ANALYSIS
6.6 COLLATERAL EVALUATION
6.8 PROPER SUPERVISION OF THE PROJECT
6.7 FINAL DECISION ABOUT THE PROJECT
6.9 DOCUMENTATION OF THE LOAN
6.10 CREATION OF CHARGES FOR SECURING LOAN

6.1 GETTING CREDIT INFORMATION

Janata Bank Ltd. collects credit information about the applicant to determine the credit
worthiness of the borrower. The bank collects the information about the borrower from
the following sources:
 Personal investigation.

36
 Confidential report from other bank Head Office/Branch/chamber of the commerce.
 CIB Report from Central Bank.

6.2 INFORMATION COLLECTION

The loans and advances department gets a form filled by the party seeking a lot of
information. The information is listed below:
 Name and address of the borrower (present and permanent).
 Constitution or status of the business.
 Data of establishment and place of incorporation.
 Particulars of properties, partners and Directors.
 Background and business experience of the borrowers.
 Particulars of personal assets, name of subsidiaries, percentage of share
holding and nature of business.
 Details of liabilities in name of borrowers, in the name of any directors.
 Financial Statement of the last three years.
 Nature and details of business/products.
 Details of securities offered.
 Proposed debt equity ratio.
 Other relevant information.

6.3 ANALYZING THESE INFORMATION

Janata Bank Ltd. then starts examination whether the loan applied for, is complying
with its lending policy. If comply, then it examines the documents submitted and the
credit worthiness. Credit worthiness analysis, i.e. analysis financial conditions of the
loan applicant is very important. If loan amount is more than 50, 00,000, then bank
goes for Lending Risk Analysis (LRA) and Spreadsheet Analysis (SA) which are
recently introduced by Bangladesh Bank. According to Bangladesh Bank Rules, LRA
and SA are a must for the loan exceed of one crore.
If these two analyses reflect favorable condition and document submitted for the loan
appeared to be satisfactory, then bank goes for further action.

6.4 LENDING RISK ANALYSIS (LRA)

37
LRA is a very important and vital analysis for deciding whether the loan proposal is
potential or not. Many types of scientific, mathematical, statistical and managerial tools
and devices are required to perform this analysis. Janata Bank Ltd. maintains a
prescribed format for Lending Risk Analysis, which includes a spreadsheet to analyze a
lot of things. It is not possible to discuss the entire LRA in this report.

Lending Risk Analysis (LRA)

b) Industry Risk:
i. Supply Risk- What is the risk of failure to disruption in the supply of
input?
ii. Sales Risk- What is the risk of failure due to disruption sales?
c) Company Risk:
1. Company Position Risk:
i. Performance Risk- What is the risk if the company position is so
weak that it can not perform well enough to repay the loan, given
expected external condition?
ii. Resilience Risk- What is the risk of failure due to lack of
resilience to unexpected external condition?
2. Management Risk:
i. Management Competence Risk- What is the risk of failure due to
lack of management competence?
ii. Management Integrity Risk- What is the risk of failure due to
lack of Management Integrity?
d) Security Risk:
i. Security Control Risk- What is the risk that the bank fail to realize the
security?
ii. Security Cover Risk- What is the risk that realized security value is
less than the exposure?
6.5 PROPOSAL ANALYSIS
The Project Proposal is analyzed and decision about the project is taken. The loans and
advance department is responsible for the analysis. After preliminary appraisal of the
loan project the final approval is obtain from the manager. If the loan amount crosses a
certain amount (no found), managers send the loan project to the principal office for
final approval. The experts in principal office find out different projected ratios and

38
developed and understanding about the potentiality of the project. Bank evaluates a
loan proposal by considering few predetermined variables. These are:

 Safety
 Liquidity
 Profitability
 Security
 Purpose of the loans
 Sources of repayment
 Diversification of risk etc.

The most important measure of appraising a loan proposal is safety of proposal. Safety
is measured by the security offered by the borrower and repaying capacity of the
borrower. The attitude of the borrower is also important consideration. Liquidity means
the inflow of cash into the project in course of its operation. The profit is the blood of
any commercial institution. Before approval of any loan project the bank authority has
to ensure that the proposed project will be profitable venture. Profitability is assessed
from the projected Profit and Loss Statement. The security is the only tangible asset
remains with the banker. Securing of collateral is the only weapon to recover the loan
amount. So bank has to see that the collateral is easy to sale and sufficient to recover
the loan amount. Bank can not sanction loan by only depending on collateral.
The sources of the payment of the project should be a feasible one. During sanctioning
any loan Bank 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 growth.

6.6 COLLATERAL EVALUATION:

Janata Bank Ltd. is very cautious about valuation of the collateral. The bank officials
simultaneously evaluate the collateral of the party offered by the private firm. The
valuation of the collateral increases the accuracy of its value estimated. Three types of
value of the collateral are assumed:
 Current market price
 Distressed price

39
  Price after five years
The legal officers of the bank check the document ascertain their impurity.

6.7 FINAL DECISION ABOUT THE PROJECT

If the loan decision remains with the branch level, that branch sanctions the loan and if
the approving authority is Head Office then the decision comes to the branch by telex
or fax.

6.8 PROPER SUPERVISION OF THE PROJECT

If such provision is kept in the sanction contracts, the Janta Bank officials Ltd. go to the
project area to observe how the loan is utilized. If no such clause to supervise the loan
is added, even then the bank can see the performance of the project.

6.9 DOCUMENTATION OF THE LOAN

These are the most frequently used and common documents of above mentioned
charged and for other formalities for sanctioning the loan:
 Demand Promissory Note: Here the borrower promises to pay the loan as and
when demanded by the bank to repay the loan.
 Letter of Arrangement: Here the written amount of the loan sanctioned to the
borrower is specified.
 Letter of Continuity: It is used to take continuous facilities as providing
continuous securities.
 Letter of Hypothecation: It is the written document of the goods hypothecated
thus to put in case of need.
 Stock Report: This report is used for SOD and CC. In this report information
about the quality and quantity of goods hypothecated have furnished.
 Personal guarantee: It is the additional confirmation of the borrower to repay.
 Guarantee of the Directors of the company.
 Resolution of the board of directors: It is used to borrow the fund to execute
documents and complete other documents.
 Letter of disclaimer: By this letter, the borrower withdraws his all claim on the
property/mortgaged.
 Letter of Acceptance: Letter indicating the acceptance of the sanction proposal
by the borrower.

40
  Letter of Pledge: It is the written document of the goods pledge thus the
legality of holding the goods.
 Letter of Disbursement: This is the document through which the payment of
sanctioned loan indicates.
 Letter of partnership: In case of partnership firm, the partnership deeds are to
be provided.
 Letter of Installment: The amount of installment that is to be paid at certain
intervals.
 Tax Paying Certificate.
 Any document if described, as essential in the sanctioned advice sanctioned
by the Head Office.

6.10 CREATION OF CHARGES FOR SECURING LOAN

For the safety of loan, Janata Bank Ltd. requires security from the loaner so that it can
recover the loan by selling security if borrower fails to repay. Creation of a charge
means making it available as a cover for an advance. The method of charging should be
legal, perfect complete. Importance of charging securities is as:
 Protection of interest.
 Ensuring the recovery of the money lent.
 Provision against unexpected change.
 Commitment of the borrower.
Securities are of two types:
a) Primary Security-Security deposited by the borrower himself to cover the loan
such as FDR, cash, PSS, PSP, easily cashable items.
b) Collateral Security-Any type of security on which the creditor has personal
right of action on the debtor in respect of advance.

41
 Chapter Seven

RECOVERY PERFORMANCE OF JANATA BANK

LTD.

7.1 PROGRAMS FOR LOAN RECOVERY

7.2 RECOVERY PROGRAMS TO BE TAKEN BY JANATA BANK
LTD.
7.3 RECOVERY PATTERNS AND LOAN AND ADVANCES
7.4 PROBLEMS IN LOAN RECOVERY

7.1 PROGRAMS FOR LOAN RECOVERY

When Janata Bank Ltd. sanctions loans and advances to its customers, they clearly state
the repayment pattern in the loan agreement. But some credit holders do not pay their

42
credit in due period. The nationalized and private sector commercial banks have to face
this sort of problems. This situation is, especially severe in Janata Bank Ltd. To
overcome the problem of overdue loan, the bank need take particular loan recovery
program.

7.2 RECOVERY PROGRAMS TO BE TAKEN BY JANATA BANK LTD.

 To establish credit supervision and monitoring cell in the bank
 To re-structure the loan sanctioning and distributing policy of the bank
 To sanction loans and advances against sufficient securities as best as
possible
 to give more powers to the branch manager in credit management decision
making process
 To offer a package of incentives to the sound borrowers
 To give more emphasis on short term loans and advances
 To impose restrictions on loans and advances for sick industries
 To take legal actions quickly against unsound borrowers as best as possible
within the period specified by the law of limitations.

7.3 RECOVERY PATTERNS AND LOAN AND ADVANCES

Generally Janata bank Ltd. sanctions loans and advances to every sector of an
economy. Before going into details of recovery performance, we have to be familiar
with some terms used in recovery performance:
Disbursement: highest outstanding balance on any date during the reporting
period minus outstanding balance at the end of the preceding period.
Demand for recovery: overdue at the end of the reporting period plus recovery
during the reporting period.
Recovery: highest outstanding balance on any date during the reporting period
minus outstanding balance at the end of the recovery period.
Outstanding: Outstanding figures in the ledger at the end of the reporting
period.
Overdue: Demand for recovery minus recovery.
Table: Recovery performance of Janata Bank Ltd.
(Tk in crore)

43
 Phase-1 Phase-2
Particulars
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Total
1821 2310 2468 3145 3214 3546 3632 5476 5925 6542
disbursement
Demand for
4257 4365 4825 5154 5796 5986 6475 6849 7214 7544
recovery
3,794
Recovery 1618 1921 2127 2371 2492 2933 2590 3288 3607

Overdue 2639 2444 2698 2783 3304 3053 3885 3561 3607 3847
Recovery as a
percentage of 38% 44% 47% 46% 43% 49% 40% 48% 50% 49%
DFR
Overdue as a
percentage of 62% 56% 53% 54% 57% 51% 60% 52% 50% 51%
DFR
Outstanding 5875 5295 5733 7341 8095 9329 9975 10146 10779 12447

7.4 PROBLEMS IN LOAN RECOVERY

There are a lot of reasons for which the loan recovery of the bank is very defective. In
most cases, problems may be raised from sanctioning procedures of loan, investigation
of the project, and investigation of the loans etc. that is, the problem in loan recovery
proves the outcomes of the default process in loan disbursement. The main reasons of
poor loan recovery are categorized in four broad types as follow:

A. Problems created by economic environment

The following problems arise from the effect of economic environment:
1. Changing in the management pattern: Changing of management patterns may
delay the recover of mature loan.
2. Changing in industrial patterns: The nationalized banks sometimes sanction
loan to the losing concern for further improvement of the respective sector, but
in most cases, they fail to achieve progress.
3. Operation of open market economy: In our country mainly industries become
sick and also close their business on account of emerging of open market

44
 economy. The cost of production is high and the quality of goods is not of
required of standard. As a result, they become the losing concerns and the
amount of bad loan increases.
4. Rapid expansion of business: There are many companies which expand their
business rapidly, but the expansion is for short time. In the long run, the amount
of classified loan increases.

B. Problems created by government

The following problems are arisen by the government:
1. External pressure: Janata Bank Ltd. has also faced many problems in the
loan recovery process as a part of continuous pressure from various
interested groups.
2. Loan to government organization: Janata Bank Ltd. is bound to sanction
loan to government organization, though these are losing concern. For
this reason, banks faced problems in loan recovery.
3. Legal problems: Existing rules and regulations are insufficient to cover
the legal aspects of loan recovery. As a result, defaulters can get release
easily from all charges against them.
4. Frequent changes in government policies in regard to recovery of loan.

C. Problems created by the bank:

The following problems are created by the banks:
1. Lack of analysis of business risk: Before lending, Janata Bank Ltd. does
not properly analyze the business risk of the borrowers and the bank
cannot forecast whether the business will succeed or fail. If it fails to run
well, the loan becomes classified.
2. Lack of proper valuation of security or mortgage property: In most
cases, bank fails to determine the value of security against the loan. As a
result, if the loan becomes classified, the bank cannot recover its loan
through the sale of mortgage.

D. Other general causes of poor loan recovery:

45
Apart from the specific reasons creating problems to recoup loan, there exists some
other general causes which have a great impact on creating the problems which are
faced by the Janata Bank Ltd. under study in the loan recovery process. These are:
1. Early sanction and disbursement of loan to the borrowers without proper
inspection of the project by the bank on account of pressure from
lobbying group.
2. Lack evaluation of technical and economic feasibility of the program.
3. Delay in disbursement of credit.
4. Credit is not allowed to actual entrepreneurs.
5. Lack of proper supervision.
6. Illiteracy of borrowers.
7. Negative attitude of borrowers to repay the loan.
8. Deterioration of the value system of the borrowers.
9. Money borrowers use their loan-money other than specified project, i.e.,
if the loan is sanctioned for industrial purpose; they use the money in
house building or purchase of land for their own purpose.
10. Sometimes borrowers invest their money outside the country. Many
borrowers transfer loan money to abroad where they deposited this
money in their own account or spent some other purpose.
11. Sometimes local borrowers are found to be so much compelled to grant
them loan without proper study due to some unexpected reasons. Since
these borrowers are capable of getting loan by exercising their influence,
they can also escape the repayment liability.
12. Problems responsible for non-implementation and delayed
implementation of project for which the entrepreneurs of the project
cannot repay the loan. The causes of failure may be:
▫ Failure to ascertain the economic availability of the projects
▫ Time lag between approval and sanctioning of the projects
▫ Import of machinery and raw materials both are the problems of
paucity of foreign exchange and procedures of licensing.

All of these reasons discussed above are general reasons for problems loan recovery of
Janata Bank Ltd. Besides these, there are some specific reasons for loan recovery
problems faced continuously by Janata Bank Ltd. They are as:

46
 Loans are given under fictitious names and enterprise
Loans are given without sufficient securities
Approval of the loans in excess of the branch manager’s power
Improper monitoring and supervision of credit
Political misuse if loan programs operated by the public sector banks
Lack of timely action against willful defaulter
Loans are sometimes for economically unsound project.

Problems in loan recovery are the outcome of the default on loans disbursements in the
earlier period.

47
 Chapter Eight

CLASSIFIED LOANS AND BANK’S

PERFORMANCE

8.1 INTRODUCTION
8.2 SIGNS FOR CLASSIFICATION
8.3 LOAN CLASSIFICATION-GUIDELINES FROM
BANGLADESH BANK
8.4 PERFORMANCE OF JANATA BANK LTD.
8.5 IMPACT OF PROVISION FOR LOAN ON BANK’S PROFIT

48
8.1 INTRODUCTION
Banks are financial service firm, producing and selling professional management of the
public’s funds as well as performing many other roles in the economy. But now- a-days
commercial banks are not performing their activities smoothly for a large burden of
default loan. Every year Janata Bank Ltd. distributes thousand crore taka among
individuals, organizations etc. but a large sum of these distributed fund cannot be
recovered in due time. The Bank has to classify this loan. In this chapter I would like to
concentrate on classification procedure, provision making for particular classification,
performance of the bank regarding classified loan and recovery of such classified loan.

8.2 SIGNS FOR CLASSIFICATION

First and foremost requirement for any and all credit managers is to identify a problem
credit in its earlier stages by recognizing the signs of deterioration. Such signs include
but not limited to the following:
1. Non payment of interest or principal or both on due dates or past dues beyond a
reasonable period or recurring past dues.
2. In case of Overdraft no movement in the account beyond a reasonable period.
3. Deterioration in financial condition of the client, as gathered from client’s latest
financial statement.
4. A shortfall in collateral coverage, particularly if the collateral was a key factor in
the decision-making.
5. Death or withdraw of key-owners or management personnel.
6. Company filing for bankruptcy or voluntary dissolution.
7. Adverse market report about the company itself or its principal owners.

8.3 LOAN CLASSIFICATION-GUIDELINES FROM BANGLADESH BANK

Classification of overdue loans and advances opened a new era in the credit
management of commercial banks in Bangladesh. Before 1989 no specific guidelines

49
were followed by the commercial banks for this purpose. In 1989, Bangladesh Bank
issued BCD circular No.34/1989 stating specific rules and conditions of loan
classification.
After that each schedule banks except BKB, RAKUB, and BSB would be responsible
for its own loan classification according to the guidelines are presented in the following
table:

TABLE: LOAN CLASSIFICATION SYSTEM*

Status of Frequency of
Length of overdue Rate of provision
classification classification
All loans except
Annual provision
Agricultural loans:
Less than 1 year Unclassified 1%
Loans overdue for 1 year but
Substandard 10%
less than 3 years
Loans overdue for 3 years
Doubtful 50%
but less than 5 years
Loans overdue for 5 years or
Bad/loss 100%
more
For agricultural loan: Classified,
Loans not overdue for 5 substandard, 5%
years or more doubtful
Loans overdue for 5 years or
Bad/ loss 100%
more
*Source: BCD Circular no. 1989

According to this circular loans and advances were classified on a loan by loan basis
rather sample classification. This process was continued till 1994. Bangladesh Bank
further issued a circular in1995 (BCD circular#20/1994). The title of the circular was
“Revised rules of classification and provisioning of loans and advances,” which came
into implementation from January 1, 1995.

50
 Table: schedule of loan classification and provision program*
a. types of
1st stage 2nd stage 3rd stage 4th stage 5th stage
classification
Period Period Period Period Period
overdue overdue overdue overdue overdue
Less than Less than Less than Less than 6 Less than 3
Unclassified
18 months 12 months 19 months months months
18 months 12 months 9 months or 6 months or 3 months or
or more but or more but more but more but more but
Substandard
less than 36 less than 24 less than 24 less than 12 less than 6
months months months months months
36 months 24 months 12 months 9 months or 3 months or
or more but or more but or more but more but more but
Doubtful
less than 48 less than 36 less than 24 less than 12 less than 6
months months months months months
More than 36 months 36 months 24 months 12 months
Bad
48 months or more or more or more or more
b. rates of
provision
Unclassified 1% 1% 1% 1% 1%
Substandard 10% 10% 15% 15% 20%
Doubtful 50% 50% 50% 50% 50%
Bad 100% 100% 100% 100% 100%
c. period of Annual Half yearly Half yearly Quarterly Quarterly
classification basis basis basis basis basis
*Source: BCD circular no. 20 of 27/12/1994

For loan classification Bangladesh Bank also issues circular time to time after
27/12/1994 like BPRD circular no 16,9,2,9 and 17 of 6/12/1998, 14/5/2001, 15/3/2005,
25/8/2005, and 5/07/2006 respectively. Some of these are as follows:

Table: status, type and definition of classification*

Status loan type Definition of status

51
Unclassified . all current loan all current loans with
required eligible security
Sub standard (SS) Continuous/demand/ term overdue is more than 3
loan months but less than 6
When degree of risk for months if default amount
non-payable is high but (less than 5 years) of installment is equal to
there is reasonable respect installment payable in 6
that the loan condition can months
be improved
more than 5 years If default amount of
installment is equal to
installments payable in 12
months.
short term agri. credit and overdue is more than 12
micro credit months but less than 36
months
Doubtful (DF) Continuous and demand overdue is more than 6
When chance of recovery months but less than 9
is uncertain months

Term loan less than 5 If default amount of

years installment is equal to
installments payable in 12
months.
More than 5 years If default amount of
installment is equal to
installments payable in 12
to 18 months.
Short term agri. credit and Overdue is more than 36
micro credit months but less than 60
months.
Bad/ loss (BL) Continuous and demand overdue is more than 12
months

52
No security held, borrower
not traceable, time barred
loans, no hope of recovery

Term loan If default amount of

(up to 5 years) installment is equal to
installment payable in18
months.
more than 5 years If default amount of
installment is equal to
installment payable in 24
months.

Short term agri. credit and overdue is more than 60

micro credit months

Source: Bangladesh Bank, BRPD Circular No. 16 of 1998*

Table: loan classification system, 2006*

Standard: Rate
General provision maintained on unclassified Loans and Advances 1%
( all other credit)
General provision maintained on House Finance (HF) and Loan for 2%
Professional (LP)
General provision maintained on other than (HF) & (LP) 5%
General provision maintained on Short Term Agriculture Credit & 5%
Micro Credit
General provision maintained on Small Enterprise financing 2%
Special Mention Account:
Special Mention account Loans & Advances 5%

Classified loan and advances

Substandard Loans & Advances 20%
Doubtful Loans & Advances 50%
Bad /Loss Loans & Advances 100%

53
 *Source: Bangladesh Bank, BRPD Circular No. 5 of 2006

Table: loan classification system (international standard)

Status of Frequency of
Length of overdue Rate of provision
classification classification
Less than 3 months Unclassified 1%-5%
Loans overdue for
Sub standard (SS)
3 months but less 10%-25%
than 6 months
Loans overdue for
Doubtful (DF)
6 months but less 50%-75%
than 9 months
Loans overdue for
Bad/ loss 100%
9 months or more
*Source: Studies in Bangladesh Banking, BIBM, 2005

8.4 PERFORMANCE OF JANATA BANK LTD.

From my analysis it is found that during first phase (1998-2002) total loan of Janata
Bank Ltd. was TK 51285 crore of which classified loan was TK 8055 crore. That is,
15.71% of total credit is classified. During second phase (2003-2007), total loan of the
bank was TK 52676 crore of which classified loan was TK 12163 crore. That is 23.09%
of total credit is classified.

Table: Classified loan of Janata Bank Ltd.

Year 2002 2003 2004 2005 2006 2007
Total 8095 9329 9975 10146 10779 12447
Unclassified 5145 6497 7031 7881 8981 11023
Loan (64) (70) (70) (78) (83) (89)
Classified 2950 2832 2944 2265 1798 2887.3
Loan (29) (30) (30) (22) (17) (31)
Source: annual report of Janata Bank Ltd. 2002, 2003, 2005,2007

54
8.5 IMPACT OF PROVISION FOR LOAN ON BANK’S PROFIT
Provisioning by the bank has not been isolated action, but represents one component in
an ongoing set of negotiations and relationships between borrowers and the banks,
while the borrowers wish to minimize their servicing obligations without damaging
their prospect of future market access, the lending bank wish to maximize their
receipts. Such maximization may involve agreeing to terms which are not so stringent
as to encourage borrowers to opt for all out default. Provisioning has the effect of
bringing the bank’s actual balance sheet more in line with the market perception of
what they should look alike.

Bangladesh Bank provides specific guidelines for loan provisioning and bases for
calculating such provisions. Provisions for unclassified as well as classified loan are as
follows:

Table: rates loan provision

Unclassified loan Provision Classified provision

Small enterprise
2% Substandard 20%
financing
Consumer
2% Doubtful 560%
financing
Except SEF, CF
1% Bad or loss 1000%
and SMA
Special account Mention 5%

Bank and financial sector may be termed as the vital complementary power of the
economy. But the uncertainty in respect to effectiveness of this sector in the economy
continuously increases over time. Now a days it open secret that JBL is under direct
control of the Finance Ministry. Credit management of JBL was so meaningless and
corrupted as it is now assumed that more than Tk 30000 crore have become
unrealizable within the last 10 years.

55
56
 Chapter Nine

GUIDELINES FOR CREDIT MANAGEMENT

9.1 INTRODUCTION
9.2 THE COMPANIES ACT 1991
9.3 THE INTERNATIONAL ACCOUNTING STANDARDS (IAS)- 30
9.4 GUIDELINES FOLLOWED BY BANK UNDER STUDY

57
9.1 INTRODUCTION
Commercial banks of Bangladesh are incorporated under Companies Act 1994 and
Bank Companies Act 1991. But none of this act clearly mentions guidelines for
managing credit in commercial banks. Central bank is the controller of money market
in any country. As central bank, Bangladesh Bank controls money market in our
country. Bangladesh bank, time to time, issues some guidelines and regulations for
operation of a banking concern. These guidelines are general in nature. Besides these,
every commercial bank sets credit guidelines for these operations. Whatever be the
guidelines, the aim of it is to reduce the total amount of unsound credit as well as
improve the overall performance of the banks.

9.2 THE COMPANIES ACT 1991

According to the Bank Companies Act 1991, the following rules must be followed by
any commercial bank in our country:

Section Contents
22(1)(a) Any bank other than new or specialized
bank will not declare dividend on its
share until the bank as written off its
previous losses preliminary expenses and
other deferred revenue expenses.

22(2)(c) Bank will declare dividend whatever be

stated elsewhere if and only if bank will
take proper steps for their bad and
doubtful credit in accordance with the
satisfaction of their auditors.
27 Discuss on some limitations and
restrictions on the distribution of loans
and advances
29 Without prior approval of the Bangladesh

58
 Bank, commercial banks will not extend
its credit policy any way.
37 Bangladesh Bank can disclose
collectively or in any other form the
information about the overdue loans and
advances which fall due to the BB that
those information are required to be
disclosed only in public interests.

9.3 THE INTERNATIONAL ACCOUNTING STANDARDS (IAS)- 30

In our country Institute of Chartered Accountants of Bangladesh (ICAB) has so far
adopted 21 IASs out of 40 issued so far. The original IAS 30 was issued in January
1995. IAS 30 is a Generally Accepted Accounting Standard intended for application in
the financial statements of the bank and similar financial institutions. It is a special
purpose; disclosure based accounting standard catering to the need for proper
presentation of disclosures in the financial statements of bank. It enumerates the
accounting principles and disclosure requirements of published financial statements of
banking companies. It thereby provides definitive guidance to corporate management
with regard to the preparation and to independent auditors for audit of financial
information of banks.
Bangladesh Bank issued a circular entitled Amendment of First Scheduled Forms of the
Bank Companies Act 1991, (BRPD Circular No. 03 dated 18 April 2000). Under this
circular, newly amended forms have been made mandatory for all concerned banks and
financial institutions since 30 March 2000 in Bangladesh. The new forms have been
introduced with a view to ensuring the discipline in the banking sector, to minimize the
unforeseeable risk, to provide true, relevant and reliable information to the depositors
and shareholders and to meet the financial disclosures in compliance with the
International Standards. However, the financial institutions should be easy to
understand, informative and transparent. The new forms will reflect all these aspects in
reporting financial information.
The features of the newly introduced formats of IAS 30 are as follows:

59
 a. To provide vertical form of financial statements. This form complies with
the international accounting standards though the heads of accounts are
same as those of the previous forms;
b. To disclose the assets and liabilities according to their relative liquidity;
c. To bring more transparency in reporting financial position of banks and
financial institutions, it is required to disclose gross loans and advances and
bills discounted and purchased after charging the necessary provisions
thereon. The new format of balance sheet provides the relevant policies for
this practice;
d. To disclose the required provisions on securities investments under the new
system;
e. To disclose the loan loss provisions on the profit and loss account separately
and then show the earning per share (EPS) of the banks;
f. To show the contingent and contra items (i.e off balance sheet items) on
separate statement and enclose with the balance sheet;
g. To make comparison between the performance of two financial years, the
immediate previous year’s financial statements to be furnished along with
the current year’s financial statements in the annual report; and
h. To furnish one additional statements viz. cash flow statements as per
international accounting standards.

9.4 GUIDELINES FOLLOWED BY JANATA BANK LTD.

Janata Bank Ltd. usually prepares its financial statements as per IAS 30 and forms
prescribed by the bank Companies Act 1991 after 2000. Before 2000 they usually
follow the old format for preparing statements. JBL violates the regulations prescribed
in Bank Companies Act 1991.
Generally public bank’s performance is worse than of private banks. Public banks
specially, Janata Bank Ltd. shows in its profit and loss account but it is found that if
they make actual provisions on their unsound loan they will incur loss.
Janata Bank Ltd. is concerned about the unsound credit. They started to maintain credit
risk management division for managing risk of default lo

60
 Chapter Ten

CREDIT RATING OF JANATA BANK LTD.

10.1 INTRODUCTION
10.2 CREDIT RATING
10.3 FACTORS OF CREDIT RATING

61
10.1 INTRODUCTION
Bangladesh Bank has made mandatory from January 2007 for all banks to have
themselves credit rated by a credit rated agency vide BRPD Circular no. 6 of July 2006
for all banks. The first rating by an external independent rating agency will have to be
completed by June 2007. Accordingly Janata Bank has appointed Credit Rating
Agency of Bangladesh (CRAB) to conduct Credit Rating of the bank which completed
invariably by 30th June 2007. With this end and view a memorandum of understanding
has been signed in between Janata Bank and CRAB on 14th May 2007.

10.2 CREDIT RATING

Credit Rating of Banks provides opinion on the types of risks associatesd with the
relative ability of a bank for timely servicing its debts and other obligations. The rating
exercise is done through a quantitative cum qualitative approach following a structured
methodology.

10.3 FACTORS OF CREDIT RATING

The major factors considered in rating analysis are as follows:

A.Quantitative Factors:
i.Capital adequacy
ii.Assets Quality
iii.Funding & Leverage
iv.Liquidity Requirements
v.Earning Quality
vi. Market Sensitivity

B. Qualitative Factors
i.Owership
ii.Management Quality
iii.Risk Management
iv.Compliance with the Statutory
v.Accounting Quality
vi.Size & Market Pressure
vii. Govt. Support etc.

62
Evaluation of credit management of Janata Bank Ltd. from the
customers’ point of view:

During my internship period in Janata Bank Ltd, I asked a number of customers

regarding the credit management of the bank. The interpretation of the data (at a
glance) is given below:

Subject of asking questions:

1. Image of the Janata Bank Ltd. to the customers is satisfactory.

2. Bank’s relation with customers is good.
3 The formalities followed by the bank providing loan are necessary.
4. The processing of providing loan is quick.
5. The bank keeps customers informed about when loans and advances are provided.
6. The bank’s authority tries to provide its services at the same time it promises to do so.
7. You feel safe in your loan-transaction with JBL.
8. When problems arising from loan facilities the JBL authority shows sincere concern on it.
9. The terms and conditions are flexible regarding loan sanction.
10. The loan interest rate is competitive
11. The amount of security against loan amount is tolerable.
12. Circumstances arising from loan default are strict.

Total number of sample is 10 in every subject.

In this table all the attributes are having specific points.

The table ratings are as follows:

Strongly agree 5
Agree 4
Neutral 3
Disagree 2
Strongly disagree 1

63
 Table-1

Image of Janata Bank Ltd. to the customer is satisfactory

SL No. Parameters No. of respondents Percentage

1 Strongly agree 1 10
2 Agree 7 70
3 Neutral 1 10
4 Disagree 1 10
5 Strongly disagree 0 0
Source: survey of primary data

Calculation:
Total points = 10*5+70*4+10*3+10*2+0*1 = 380
The weighted average is 380/15 = 25.33

Interpretation of the data:

In the point “Image of the Janata Bank Ltd. to the customers is satisfactory”, 10% of
the sample customers strongly agree, 70% agree, 10% neutral, 10% disagree with this.

Table- 2
Bank’s relation with customers is good

64
 SL No. Parameters
1 Strongly agree
2 Agree
3 Neutral
4 Disagree
5 Strongly disagree
No. of respondents Percentage
1 10
8 80
0 0
1 10
0 0
Source: survey of primary data

Calculation:
Total points = 10*5+80*4+0*3+10*2+0*1 = 390
The weighted average is 390/15 = 26

Interpretation of the data:

In the point “Bank’s relation with customers is good” as answer of this question, 10%
of the sample customers strongly agree, 80% agree, and 10% disagree with this.
Table- 3
The formalities followed by the bank providing loan are necessary.

SL No. Parameters No. of respondents Percentage

1 Strongly agree 1 10
2 Agree 2 20
3 Neutral 6 60

65
 4 Disagree 1 10
5 Strongly disagree 0 0
Source: survey of primary data

Calculation:
Total points = 10*5+20*4+60*3+10*2+0*1 = 330
The weighted average is 330/15 = 22

Interpretation of the data:

In the point “The formalities followed by the bank providing loan are necessary” as
answer of this question, 10% of the sample customers strongly agree, 20% agree, 60%
neutral, 10% disagree with this.
Table- 4

The processing of providing loan is quick.

SL No. Parameters No. of respondents Percentage
1 Strongly agree 0 0
2 Agree 1 10
3 Neutral 1 10
4 Disagree 7 70
5 Strongly disagree 1 10
Source: survey of primary data

66
Calculation:
Total points = 0*5+10*4+10*3+70*2+10*1 = 220
The weighted average is 220/15 = 14.67

Interpretation of the data:

In the point “The processing of providing loan is quick” as answer of this question,
10% of the sample customers agree, 10% neutral, 70% disagree, and 10% strongly
disagree with this.

Table- 5

The bank keeps customers informed about when loans and advances are provided.
SL No. Parameters No. of respondents Percentage
1 Strongly agree 0 0
2 Agree 2 20
3 Neutral 7 70
4 Disagree 1 10
5 Strongly disagree 0 0
Source: survey of primary data

Calculation:
Total points = 0*5+20*4+70*3+10*2+0*1= 310
The weighted average is 310/15 = 20.67

67
Interpretation of the data:
In the point “The bank keeps customers informed about when loans and advances are
provided” as answer of this question, 20% of the sample customers agree, 70% neutral,
and 10% disagree with this.
Table-6

The bank’s authority tries to provide its services at the same time it promises to do so.
SL No. Parameters No. of respondents Percentage
1 Strongly agree 0 0
2 Agree 2 20
3 Neutral 7 70
4 Disagree 1 10
5 Strongly disagree 0 0
Source: survey of primary data

Calculation:
Total points = 0*5+20*4+70*3+10*2+0*1 = 310
The weighted average is 310/15 = 20.67

68
Interpretation of the data:
In the point “The bank’s authority tries to provide its services at the same time it
promises to do so” as answer of this question, 20% of the sample customers agree, 70%
neutral, and 10% disagree with this.
Table-7
You feel safe in your loan-transaction with JBL.

SL No. Parameters No. of respondents Percentage

1 Strongly agree 2 20
2 Agree 7 70
3 Neutral 1 10
4 Disagree 0 0
5 Strongly disagree 0 0
Source: survey of primary data

Calculation:
Total points = 20*5+70*4+10*3+0*2+0*1= 410
The weighted average is 410/15 = 27.33

69
Interpretation of the data:
In the point “You feel safe in your loan-transaction with JBL” as answer of this
question, 20% of the sample customers strongly agree, 70% agree, and 10% neutral
with this.
Table-8
When problems arise from loan facilities, the JBL authority shows sincere concern on
it.

SL No. Parameters No. of respondents Percentage

1 Strongly agree 0 0
2 Agree 0 0
3 Neutral 7 70
4 Disagree 3 30
5 Strongly disagree 0 0
Source: survey of primary data

Calculation:
Total points = 0*5+0*4+70*3+30*2+0*1=270
The weighted average is 270/15 = 18

70
Interpretation of the data:
In the point “When problems arise from loan facilities, the JBL authority shows sincere
concern on it” as answer of this question, 70% is neutral, and 30% disagree with this.
Table-9
The terms and conditions are flexible regarding loan sanction.

SL No. Parameters No. of respondents Percentage

1 Strongly agree 0 0
2 Agree 8 80
3 Neutral 2 20
4 Disagree 0 0
5 Strongly disagree 0 0
Source: survey of primary data

Calculation:
Total points = 0*5+80*4+20*3+0*2+0*1 = 380
The weighted average is 380/15 = 25.33

Interpretation of the data:

In the point “The terms and conditions are flexible regarding loan sanction”, as answer
of this question, 80% of the sample customers agree, 20% neutral with this.

71
 Table- 10

The loan interest rate is competitive

SL No. Parameters No. of respondents Percentage
1 Strongly agree 2 20
2 Agree 8 80
3 Neutral 0 0
4 Disagree 0 0
5 Strongly disagree 0 0
Source: survey of primary data

Calculation:
Total points = 20*5+80*4+0*3+0*2+0*01= 420
The weighted average is 420/15 = 28

Interpretation of the data:

In the point “The loan interest rate is competitive” as answer of this question, 20% of
the sample customers strongly agree, and 80% agree with this.
Table- 11

The amount of security against loan amount is tolerable.

72
 SL No. Parameters No. of respondents Percentage
1 Strongly agree 0 0
2 Agree 0 0
3 Neutral 0 0
4 Disagree 6 60
5 Strongly disagree 4 40
Source: survey of primary data

Calculation:
Total points = 0*5+0*4+0*3+60*2+40*1 =160
The weighted average is160/15 =10.67

Interpretation of the data:

In the point “The amount of security against loan amount is tolerable” as answer of this
question, 60% of the sample customers disagree, and 40% strongly disagree with this.
Table- 12

Circumstances arising from loan default are strict.

SL No. Parameters No. of respondents Percentage
1 Strongly agree 2 20
2 Agree 5 50
3 Neutral 3 30
4 Disagree 0 0

73
 5 Strongly disagree 0 0
Source: survey of primary data

Calculation:
Total points = 20*5+50*4+30*3+0*2+0*1 = 390
The weighted average is 390/15 = 26

Interpretation of the data

In the point “Circumstances arising from loan default are strict” as answer of this
question, 20% of the sample customers strongly agree, 50% agree, and 30% neutral
with this.

From the survey, we can conclude that sometimes without proper investigation, the
management values the security randomly which is less than the actual value of the
security. The customers also criticize the margin rate of the bank.

From my survey, I also find that the customers, who are also involved in getting loan
from another private bank, complain the loan giving procedure of Janata Bank Ltd.
They comment that the procedure of getting loan is slower than the private bank. And
the cooperation of the private banks is comparatively better. Sometimes the customers
need lobbying with top management to get loan.

74
Though the customers complain the valuation process of security, which is pledged
against the loan, they choose Janata Bank Ltd. to get loan and advances because of its
competitive interest rate. Though the problems are faced by the customers, they prefer
Janata Bank Ltd. for its comparative lower interest rate, safety of their security, and
availability of the branches of the bank.

So the decision-making body, i.e. BOD/ Top Management should take proper steps in
all aspects of loan giving procedures and overall banking systems. The security
valuation system must be transparent and accurate and verified by the independent and
the efficient persons. The terms and conditions must be flexible from now. The
authority may arrange different programs and publish bulletin for the loan providing
procedure and which sectors are emphasized more as most of the people do not know
the loan procedure of the Janata Bank Ltd. In fine, all the employees must be more
amicable and cooperative.

75
 Chapter Eleven

Findings and Analysis

76
Findings and analysis

Every bank has its own credit procedure. Bank under study possesses a standard credit
procedure. As the objective of my study is to make a comment on the credit
management of Janata Bank Ltd, I try my best to collect data for the study and find out
the reality. Based on the data generated during my study period I will sum up my
findings here and I think this will help me to achieve my objectives.

1. If we look at the historical background of Janata Bank, we see that, the

objective of JBL is to earn profit as well as to improve the economic welfare of
the people as a whole.
2. Janata Bank Ltd. has a significant role in long term project financing in both
agriculture and industrial sectors. Again JBL has a deep concern for rural
farmers.
3. Private sector usually concentrates in the urban areas where as public sector i.e.
JBL spread their banking network all over the world.
4. With a view to implementing government policies, JBL has been maintaining its
position in extending credit to government bodies, sector corporations and
private enterprises.
5. Though bank required both quantitative and qualitative analysis but for big
loans bank emphasizes on the lending risk analysis (LRA). But LRA is not a
perfect measure of credit analysis. Because businessmen in our society are
usually tempted to take resort of window- dressing that means accounts are so
manipulated that the vital facts are concealed and facts presented are superficial.
So banks have to go through both quantitative and qualitative analysis.
6. According to the standard and bank’s credit procedure, credit operation is
started from the customer application to the branch for the loan. But in most
cases, many customers go directly to the directors of the bank and directors
send them to the branch offices with his/her reference. In these cases, proper
appraisal is not possible as directors the most powerful persons and bank
management must give priority towards the decision of the directors. This
phenomenon is very common in the bank which hampers the spontaneous
procedure of credit appraisal.

77
7. Bangladesh Bank monitors all the policies of all the private and nationalized
banks of the country. According to the Bangladesh Bank’s strategy, all banks
must possess the standard policies which are designed by the central bank.
Janata Bank Ltd. also possesses a standard credit proposal form. In that form all
necessary information are required to fill up. But in practice credit officers do
not fill up the proposal form properly. Most of the cases, they use assumption
rather than exact figure. This practice might end up with bad or classified one.
8. A standard policy starts from the customer’s direct application for the loan in
the branch office. But it’s a common phenomenon that most of the customers
directly contact with Head office and Head office choose the branch offices to
disburse the loan. It hampers the normal procedure. Branches always stay under
pressure when they get order for disbursement from Head office. When
branches get order from the head office, then appraisal system loses its formal
track. So Head office should not send any order to the branch office without
prior appraisal.
9. Every bank has its own budget and plan regarding loan portfolio. This loan
portfolio must be diversified so that bank could diversify its risk. A proper and
preplanned portfolio can eliminate the risk of huge classified loan or bad loans
as this aspect is very much sensitive toward many external and internal factors.
The bank under study i.e. Janata Bank Ltd. does not have any proper guide line
where to invest; moreover they do not do any future plan to maintain a well
structured portfolio to decrease the possibility of classified loan. This type of
practice is working as an obstacle in smooth credit disbursement as well as in
credit appraisal system.
10. Most of the loans that JBL distributes are as cash credit hypothecation and JBL
emphasizes less on demand loan.
11. JBL distribute loans without sufficient security in some cases. This is violation
of the Bangladesh bank order.
12. In many cases bank face this problem because bank’s credit officer fails to value
collateral property. Proper valuation means collateral will exactly cover the risk
of bad loan. Officials must do it with due care.

78
13. The recovery performance of JBL is not in a satisfactory level at all and the
position of those in that respect deteriorated heavily during last two phases. The
recovery performance in agriculture is worse than in other sectors. On the other
hand, as private sector banks distribute more loans on short term basis and
relatively better than public sector. But if we compare it from the efficiency
point, then it is clear that they are not still efficient in credit management as they
are unable to recover half of their distributed loan in different sectors.
14. During first phase 15.71% of the total loan of JBL became classified and this
classified loan came down to 23% in the second phase.
15. JBL does not keep enough provisions against classified loans and advances.
16. Private sector banks are relatively efficient in processing and executing legal
actions against defaulters for their nonpayment of loans and advances in due
time that of public sector bank.
17. The credit management of JBL are not fully conformity with the guidelines
prescribed in the bank companies Act 1991 and International Accounting
Standerd-30(IAS-30)

79
 Chapter Twelve

Conclusion and
recommendation

80
Conclusion and recommendation
I have discussed so far about the different aspects of credit management Janata Bank
Ltd.. For my report, I have selected Janata bank Ltd. JBL plays an important role in the
banking sector as well as in our economy. The success of a bank depends largely on the
efficient credit management. A successful credit management is not only need for a
bank’s own performance but also it is needed for the smooth development of an
economy. In any strategy of economic development, therefore, it is essential to
emphasize the evaluation of a sound and well integrated credit management system
from the view point of both resources mobilization and efficient allocation of funds. In
conclusion it can be suggested a number of recommendations in order to overcome the
problems and how to remove the causes of problem in credit management.

Since this an exploratory research, hence the recommendation given are not decisions
rather they are only suggestions to improve the default rate. The recommendations are
made on the basis of survey findings.

1. Central Bank should take proper actions for ensuring equivalent distribution of loans
and advances.
2. Lending policies in our country should be geared to growth potential rather than
being determined by the pre-existing collateral.
3. Changes in lending policies will not suffice the purposes unless it is followed by a
change in the attitude and out look of both the borrowers and the bankers.
4. Improvement of credit management depends on the development of relevant,
adequate, proper and reliable data base at the public sector banks as well as private
sector banks in Bangladesh.

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5. For developing a reliable credit management system for the commercial banks
specially Janata Bank Ltd, it should require to introduce as improved information
system within bank as well as among the borrowers. Because ultimately it is what a
borrower does with money that should guide the credit plan, the borrowers also have to
know exactly where they are going, what their opportunities and how fast they can
move.
6. The security must be valued properly by the independent valuers and constantly
watched so that the value of mortgage property becomes sufficient to recover the
default loan.
7. Publishing the names of defaulter as well as good and regular payers in various
dailies and granting various sorts of facilities to good borrowers will create a moral
persuasion on the borrowers. This may decrease the number of defaulters and the
volume of large outstanding loan amounts as well.
8. Pressure from outsider and influence extorted by borrowers are also a great
impediment in the smooth functioning of loan recovery process. The role of
government in this case is the most important factor required to solve these sorts of
problem.
9. More and more competent personnel must be recruited to reduce the weakness of
credit management. Competent executives will ensure the reduction of wrong appraisal
and evaluation of projects.
10. Prompt legal actions be taken against willful loan defaulters
11. The new entrepreneurs should be encouraged in disturbing loans and those who
have the records of regular payment, should be given preference.
12. Steps should be taken so that guarantors cannot avoid their responsibility.
13. It is observed that the defaulters generally get various sorts of exemptions as
declared by the government from time to time. Government must not show any kind of
mercy to the defaulters in any way which may encourage the default culture. This type
of action may discourse the borrowers to become willful defaulters.
14. The existing huge amount of classified loans demand for special and corrective
attention for example:
 By obtaining suitable reduction on amount.
 Additional security.
 More complete financial data concerning the obligor’s condition or
 Other such action as the specific circumstances may require.

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15. The attempt to encourage banks to require borrowers comply with banking laws and
regulations and clear up industrial properties prior to granting a loan.
16. JBL should follow some straight ward mechanical procedures in assessing the risk
of a borrower.
17. The formulation of a sound credit policy in the possibility of default loans.
18. The formulation of a sound credit policy in the banking sector as a whole has to
take into account all these factors and each bank has to attempt to work out for itself
what it is capable of doing so as best as possible.

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 Bibliography

Annual Report of Janata Bank Ltd. 2000-2007

Bangladesh Bank BCD &BPRD circulars

Chowdury, L.P; “A Textbook on Banker’s Advances”; 2nd Edition; Paradise Printer;

2002

Managing Core Risk in Banking: Credit Risk Management, Janata Bank Ltd, Head
Office, Dhaka.
Md. Maksudur Rahman Sarder & Prashanto Kumer Banerjee (December 1996);
Janata Bank Ltd., Head Office Circularss
Journal of Business Studies; “Break Even Point: A Project Appraisal Technique used in
Banking Sector.”

Md. Maksudur Rahman Sarker, “Credit Management of Commercial Banks: A

Comparative study of Public and Private Sector Banks”, The Bureau of Business
Research, University of Dhaka, August 1996

Rose, Peter. S; “commercial Bank Management”; Fourth Edition; Irwin-McGraw-Hill;

1999

Zikmund William, G., “Business Research Methods”; 7th Edition; Thomson South-
Western; 2003
WWW.janatabank-bd.com

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 APPENDIX

Questionnaire for Managements of Janata Bank:

1. What is the main objective of credit program?

a) Only profit motive

b) Profit motive as well as social welfare
c) Others
2. What kind of loans is provided by Janata Bank Ltd.?
a) General credit
b) Rural credit
c) Foreign commercial loan
d) Special program financing
3. Is there existence of delegation of authority in case of sanctioning loan?
a) Yes
b) No
4. Do you think that the credit policy is flexible to attract the customer?
a) Yes
b) No
5. Who are the target customers of Janata Bank Ltd.?
a) Business man
b) Farmers
c) Entrepreneurs
d) Others
6. At what point / points will you give more emphasis in case of loan
disbursement procedure?
a) Credit information of the customers
b) Nature of the security of the customers
c) Lending risk analysis
7. Would you think that the procedure is more familiar with the customers?
a) Yes
b) No
8. What are the basic tools of credit management?
a) GRG
b) Financial spreadsheet
c) Others
9) Is there any provision to calculate “N” score and “Z” score in case of
choosing business or firm for giving loan?
a) Yes
b) No
10. Is there any option to sanction personal loan?
a) Yes
b) No

11. What are the sectors in which JBL gives more priority?

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 a) Industrial Financing Program
b) Import and Export Financing Program
c) Agricultural financing program
d) General Credit Program

12. In what maturing stages JBL classifies the bank loans and advances?
a) According to Bangladesh Bank
b) Own procedure
13. Does Janata Bank Ltd. permit any loan without any collateral security?
a) Yes
b) No
14. Does the credit department supervise and monitor recovery performance of
the distributed loans and advances?
a) Yes
b) No
15. What are the main reasons to default loan?
a) Loan given to fictitious name
b) Loan given without sufficient securities
c) Political misuse of loan program
16. Is IAS # 30 strictly followed in preparing financial statements?
a) Yes
b) No
17. Are the forms of financial statements prescribed by Bank Companies Act
1991 followed?
a) Yes
b) No
18. Do you think that enough provision against classified loans and advances
are kept?
a) Yes
b) No
19. Is there any latest loan program?
a) Yes
b) No
20. Standard Credit Proposal Forms designed by Central Bank are filled up
Credit Officer with…
a) Exact figure
b) Assumed figure
21. May the loan disbursement procedure be hampered arising from any
situation?
a) Yes
b) No

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 Table 01: Rate of Interest for Different Sector as on 1.10.2007

Sl Name Details Rate

01 AGRO All crops, sugarcane, shrimp cultivation, cattle 8.0%
CREDIT raising, poultry, banana cultivasion, paan
cultivasion
Euipment for irrigation, Agro-equipment, Salt 10.0%
production
Dal, Spices, Oil seed, Maize 2.0%
02 PROVERTY Muli-purposes based credit 11.0%
ALLIVITION SFDF 11.0%
Credit for Self employment 11.0%
Credit for Trained Unemployed Young 10.0%
Credit for EducatedUnemployed Young 10.0%
Self employment skill 11.0%
NGO Linkage) 11.0%
Ghoroa Credit (Agri)/ Ghoroa Credit (Non Agri) 10.0%
Other personal Micro Credit 11.0%
03 EPECILIZED Credit for Strong crops 10.0%
CREDIT Credit for flower Cultivation and Markeeting 10.0%
PROJECT BGSDP 10.0%
Goat raising Project 10.0%
Credit for production of HERBS 10.0%
Credit for Genetically Modified cow rasing 10.0%
Credit for Fisherish 10.0%
Credit for Hadicaps / Disables 10.0%
ATDP 10.0%
04 OTHER Consumer credit 14.0%
PROJECT Cyber café credit 12.0%
Specials credit for Job holder 13.5%
Doctors Loan 13.0%
Wemen Entrepreneurs’ Credit 10.0%
Small business development scheme 11.0%
05 RURAL Rural transportation 10.0%
PROJECT Land Mortgage Loan 10.0%
06 INDUSTRIAL Daily, Poultry, Fisherish (above 3 core Taka) 12.5%
CREDIT Term loan for Agri based Industry 11.0%
Export Oriented Business 11.0%
Cold storage for Potatoes 11.0%
Other Industry 12.5%
Lasing companies 12.5%
07 SME Industry having capital less than 3 core 12.0%
PROJECT Orher SME Loan 12.0%
Loom Industry 10.0%
08 Agro based Industry 12.0%
Cold stroage 12.0%

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 CURRENT Other current Capital Loan 13.5%
Husking Loan 12.0%
CAPITAL
LOAN
09 IMPORT Readymade garments, Frozen foods, Agro 7.0% + 1.0%
products, Leather made products
CREDIT sevice charge
Packing credit 7.0% + 1.0%
sevice charge
Other export credit 7.0%+ 1.0%
sevice charge
LTR 14.0%
Export oriented project 13.5%
Intermidate term 12.5%
Cash credit 13.5%
PAD Cash FC 14.0%
PAD (UF) 14.0%
PAD (GMT) payable within 3 months 14.0%
PAD (GMT) payable after 3 months
10 OTHER Other Commercial Credit 14.0%
Demand Loan 14.0%
COMMERCIA
L LOAN
11 OTHERS Transportation 13.5%
Brick Field 14.0%
Work Order 14.0%
BADC/ BRTC 13.5%
Loan Againest FDR 13.0%
Loan Against FDR in Other Banks 14.0%
Loan Against National Investment Bonds, ICB 13.5%
Unit, Insurance policy, Debenture
Loan Against Wage, Honors Bond 13.0%
Food industry 13.0%
Service Industry 13.0%
Loan Against DPS 17.0%
Commercial Home Loan in Urban Areas 15.0%
Residential Home Loan in Urban Areas 14.0%
Jute Business 13.0%
Commercial Credit for the project supported by 13.0%
USA
Diagonstic Business 15.0%
Travel Agency 15.0%
House Reconstraction Loan 14.0%
Miscellaneous 14.0%

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