Credit Risk Management of Pubali Bank Limited

CHAPTER ONE: INTRODUCTION

1.1

INTRODUCTION

Financial institution like Bank is committed to provide high quality financial services/ products to contribute to the growth of the country through stimulating trade and commerce, accelerating the pace of industrialization, boosting up export, creating employment opportunity for the youth, poverty alleviation, raising standard of living of limited income group and overall sustainable socio-economic development of the country. In achieving the aforesaid objectives of the Bank, Credit Operation of the Bank is of paramount importance as the greatest share of total revenue of the Bank is generated from it, maximum risk is centered in it and even the very existence of Bank depends on prudent management of its credit portfolio. Loans comprise the most important asset as well as the primary source of earning for the banking financial institutions. On the other hand, loan 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. The failure of a commercial Bank is usually associated with the problem in credit portfolio and its less often the result of shrinkage in the value of other assets. As such, credit portfolio not only features dominant in the assets structure of the Bank, it is crucially importance to the success of the Bank also. Credit Risk Management process permits the banks to proactively manage loan portfolios in order to minimize losses and earn a satisfactory level of return for shareholders. So, Banks and Financial Institutions have high exposure to credit risk. To this consequence Pubali Bank Ltd has established its own credit policy to guide them in achieving their target of maximum value addition through an efficient and effective credit risk management. Prepared By: Pranab Chowdhury, SUST.

1.2 BACKGROUND

OF THE STUDY

The principal function of the bank is to lend. Lending comprises a very large portion of a banks total activities. Sound lending practice therefore, is very important for profitability and success of a bank. Like other financial intermediary, commercial banks also intermediate between the savers and borrower to mobilize the financial surplus of the savers and allocate these savings to the creditworthy borrowers of different sectors of the economy. As the banks do business by lending

Credit Risk Management of Pubali Bank Limited

their depositors' money, they have even more responsibility to manage their credit portfolio smoothly. Bank's reputation is a critical factor for its success and therefore modern banks must follow appropriate guidelines, policies and relevant manuals regarding credit extension and recovery. The usage of banking service for any type of financial activities is increasing day by day. People are taking loans to start different types of businesses. So management of credit portfolio is one of the major operations of the banks. Therefore, as a 1st generation bank, Pubali Bank Limited should give much attention to this area and this study will attempt to analyze their efforts and draw a complete picture of their practices.

1.3 SCOPE

OF THE STUDY

The scope of the study is entire Pubali Bank Limited. Pubali is the largest commercial bank in Bangladesh which has over 400 branches all over the country. I got an opportunity to work as an intern in this banks Kalighat Road Branch. Here I got chance to work different section of this branch. This report covered the overall Credit Risk Management of Pubali Bank Limited. It will not focus on the comparable credit practices of other banks. This report is a descriptive study which tries to focus on the theories and practices of credit risk management of Pubali Bank Limited.

1.4 SCHEDULE OF INTERNSHIP

I was assigned for practical orientation at Kalighat Road Branch, Sylhet of Pubali Bank Limited. On the very first day at the Bank, I was welcomed by the Manager of Kalighat Road Branch, Mr Suman Chandra Das. During my practical orientation, I was guided by all the officers of the branch. They gave me some direction in choosing, schedule or orientation at various departments of the branch. Although I started with General Banking Department but after getting topic of my report from my supervisor, I fully started my task with credit department. The schedule, although not water-tight has given below: Date of Orientation 10 November 2011 - 05 December 2011 06 November 2011 09 February 2012 Departments General Banking Loans & Advances

Credit Risk Management of Pubali Bank Limited

Prepared By: Pranab Chowdhury, SUST.

1.5 OBJECTIVES

OF THE STUDY

The main objective of the report is to have an overview on credit approval and risk management techniques adopted by Pubali Bank Ltd, and the other objectives are as below:

To fulfill the partial requirement of BBA program; To have a sound understanding of credit risk management system and procedure followed
in the Pubali Bank Limited;

To analyze in detail the credit risk management process of the bank and to make
recommendations if needed; and

To focus on the credit risk grading system for analyzing the credit assessment procedure of
Pubali Bank Limited.

1.6 METHODOLOGY

OF THE STUDY

To prepare this report both the primary and secondary data were used. As a part of primary data collection, the manager and officers of the bank were interviewed. Customers have provided the primary sources of information. Furthermore the secondary sources of information were the different annual reports kept in the Bank. PRIMARY SOURCE: The primary sources include interviews with the bankers;

Face-to-face conversations with the respective officers and staffs of the Branch; Informal conversation with the clients; Various organizational procedures; Various unstructured papers and weekly report of the bank etc.
SECONDARY
SOURCES :

The secondary sources of data are the annual reports, general reports and official documents of the bank. Also different type of journal, selected books and other publications are used to enrich this report..

Credit Risk Management of Pubali Bank Limited

Study of the previous research report; Working papers, Office files, Printed forms; Different books and periodicals related to the banking sector; Newspapers and Internet; Annual Reports (2008, 2009, 2010) published by PBL.
DATA ANALYSIS The credit risk management data of Pubali Bank Limited will be analyzed in a descriptive manner.

1.7 LIMITATIONS

OF THE STUDY

The limitations of the study are as follows:

The credit policies and manuals of PBL are of confidential nature and thus it is difficult to
collect the necessary literature and documents within this short time;

The bank officials though helpful in every respect do not have much time to explain the
internal procedures;

A structured filing procedure is often neglected which also poses difficulty in

understanding the sequential procedure;

Borrowers do not often have the time to cooperate in the information gathering process; Non-availability of the most recent statistical data; Deficiency in data required for the study; Inaccurate or contradictory information and Time provided for conducting the study is another important constraint.

Prepared By: Pranab Chowdhury, SUST.

Credit Risk Management of Pubali Bank Limited

CHAPTER TWO: CONCEPTUAL FRAMEWORK

2.0 CREDIT RISK MANAGEMENT: A THEORETICAL FRAMEWORK
Commercial banks are in the risk business. In the process of providing financial services, they assume various kinds of financial risks. Contemporary banking organizations are exposed to a diverse set of market and non-market risks, and the management of risk has accordingly become a core function within banks. Banks have invested in risk management for the good economic reason that their shareholders and creditors demand it. But bank supervisors, such as the Bangladesh Bank, also have an obvious interest in promoting strong risk management at banking organizations because a safe and sound banking system is critical to economic growth and to the stability of financial markets. Indeed, identifying, assessing, and promoting sound risk management practices have become central elements of good supervisory practice.

2.1 CREDIT
In banking terminology, credit refers to the loans and advances made by the bank to its customers or borrowers. Bank credit is a credit by which a person who has given the required security to a bank has liberty to draw to a certain extent agreed upon. It is an arrangement for deferred payment of a loan or purchase.
(Wikipedia dictionary)

Credit means a provision of, or commitment to provide, funds or substitutes for funds, to a borrower, including off-balance sheet transactions, customers lines of credit, overdrafts, bills purchased and discounted, and finance leases.
(Guideline on credit risk management, Bank of Mauritius)

2.2 CREDIT

RISK

Credit Risk Management of Pubali Bank Limited

Credit risk is an investor's risk of loss arising from a borrower who does not make payments as promised
(Wikipedia dictionary)

Credit risk means the risk of credit loss that result from the failure of a borrower to honor the borrowers credit obligation to the financial institution.
(Guideline on credit risk management, Bank of Mauritius)

Credit risk arises from the potential that a banks borrower will fail to meet its obligations in accordance with agreed terms. Credit risk also refers the risk of negative effects on the financial result and capital of the bank caused by borrowers default on its obligations to the bank.
(Risk Management Guidelines for Banks by Bangladesh Bank, February 2012)

The constituent elements of credit risk can be viewed from the following flowchart:

What is the risk that the bank does not fully recover the loan?

Cr edi t Ris k

Credit Risk Management of Pubali Bank Limited

Business risk
What is the risk that the business fails to generate sufficient cash to repay the loan?

Security Risk
What is the risk that the realized value of the security does not cover the exposure?

Industry risk

Company risk

Control risk

Cover risk

Supplies risk

Sales risk Position risk Management risk

Performance risk

Management competence risk

Management integrity risk

Figure 2.1: Flowchart of Credit Risk

Source: Chowdhury, L.R., (2002), A Text Book on Banker's Advances, 2nd edition

BIBLIOGRAPHY
1. Abeyrante, S. (2001) Banking and Debt Recovery in Emerging Markets: The Law Reform Context, Adlershot, Ashgate found in www.bog.us 2. Ahmed, S.M.H. (2004), Artha Rin Adalat Ain, 2003, 1st edition, New Warsi Book Corporation, Bangladesh. 3. Bangladesh Bank. (2004) Prudential regulations for consumer financing found in http://www.bangladesh-bank.org/

Credit Risk Management of Pubali Bank Limited

4. Bangladesh Bank. (2005) Credit Risk Management: Industry Best Practices found in http://www.bangladesh-bank.org/ 5. Bangladesh Bank. (2012) Risk Management Guidelines for Banks found in http://www.bangladesh-bank.org/ 6. Bank for International Settlements Publications found in

http://www.bis.org/publ/pub_list.htm 7. Bank of Mauritius. (2003) Guideline on credit risk management found in http:// www.bom.mu.Guideline_on_Credit_Risk_Management.pdf 8. Basel Committee on Banking Supervision, (2000), Principles for the Management of Credit Risk, found in www.bis.org 9. Bernanke, B.S. (2006), Modern Risk Management and Banking Supervision, found in www, protiviti.com 10. Bhargava, A. (2000). Credit Risk Management Systems in Banks, found in www.sas.com 11. Burns, P., and Stanley, A., (2001), Managing Consumer Credit Risk, found in www.rmahq.org 12. Chowdhury, L.R., (2002), A Text Book on Banker's Advances, 2nd edition, Fair Corporation, Bangladesh 13. Credit Risk Grading Manual, June 2007 14. Focus Group on Credit Risk Management, (2005), Managing core risks in banking: Credit risk Management, Industry best practices, Bangladesh Bank found in www.bangladeshbank.org 15. Glantz, M. (2002), Managing Bank risk: An Introduction to Broad-Base Credit Engineering, Academic Press, California, US 16. Oesterreichische National bank. (2005) Credit Approval Process and Credit Risk Management, Otto Wagner Platz 3, 1090 Vienna, Austria

Credit Risk Management of Pubali Bank Limited

17. Oesterreichische Nationalbank. (2004) Guidelines on credit risk management, Otto Wagner Platz 3, 1090 Vienna, Austria 18. Official Website of Pubali bank Limited on www.pubalibangla.com 19. Pirok, K. R. (1994), Commercial Loan Analysis: Principles and Techniques for Credit analysts and Lenders, Chicago, Probus Pub Corp. 20. Pubali Bank Limited. (2009) Credit Policy 21. Pubali Bank Ltd. (2010) Annual Report 22. Saunders, A. (1999), Credit Risk Measurement: New Approaches to Value-at-risk and other Paradigms, New York, Willy 23. The Federal Reserve Bank of NY: The Credit Process: A Guide for Small Business Owners

found in www.ny.frb.org/pihome/addpub/credit.html 24. Wikipedia, the free encyclopedia at en.wikipedia.org/

APPENDIX
Key Financials as on 31 December, 2010 (Figures in million taka) Sl. 1. 2. 3. 4. 5. 6. Particulars Authorized Capital Paid-up Capital Reserve Fund & other Reserves Total Deposits Total Advances Total Investment 2006 5000 1200 3327.50 48675.93 40386.65 4982.10 2007 5000 2100 3832.09 57996.82 50549.17 5556.58 2008 5000 2940 4606.82 73016.51 61788.15 8375.59 2009 5000 3822 5687.25 88466.46 74203.33 12168.65 2010 10000 4968.60 9411.27 98850.50 89106.21 16516.39

Credit Risk Management of Pubali Bank Limited

7. Import Business 8. Export Business 9. Bridge Finance 10. Total Income 11. Total Expenditure 12. Pre-tax Profit 13. Net Profit 14. Total Assets 15. Fixed Assets Other Information 16. Number of Employees 17. Number of Shareholders 18. Number of Branches Earnings per Ordinary Share(tk.) 19. ( EPS for tk.10 Face Value)

37316.50 17701.80 7.14 5494.49 3684.43 1810.06 845.53 58401.14 1369.07 5141 11697 356 7.05

48345.41 19907.50 6.89 7087.63 4145.67 2941.97 1353.51 71560.66 1367.23 5270 19009 361 6.45

58009.10 24795.65 6.89 9009.25 5563.39 3445.86 1515.23 89884.70 1383.36 5321 24153 371 5.15

60493.85 24739.65 6.89 10663.81 6824.34 3839.47 2092.23 107579.6 1443.50 5375 30899 386 5.47

85683.53 33909.78 6.89 12828.53 7343.48 5485.05 3233.09 128462.6 3330.32 5534 86200 399* 6.51

Table 8: Key Financials of PBL on December, 2010 * According to the official website of PBL, current branch no is 406. Table 3.3: Deposit Mix Category Current deposit Bills payable Savings bank deposit Fixed deposits Short term deposits Pension schemes others Taka in million 16.79% 2.52% 34.10% 22.91% 11.91% 6.68% 5.09%

Table 3.4: Deposit Trend (Taka in millions) Year 2005 2006 2007 2008 2009 2010 Taka in million 44503.33 48675.93 57996.82 73016.51 88466.46 98850.49

Credit Risk Management of Pubali Bank Limited

Table 3.5: Advance Trend (Taka in millions) Year 2005 2006 2007 2008 2009 2010 Prepared By: Pranab Chowdhury, SUST. Taka in million 32639.68 40386.65 50549.17 61788.15 74203.33 89106.21