Professional Documents
Culture Documents
Chapter: 1
Introduction
Introduction
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1.1 INTRODUCTION:
The Credit Operations Department will primarily service the lending teams in Shanghai and also
serve as the repository of best practices and act as a consultant to all branches for any queries
they may have on credit operations matters. These include ensuring effective delivery of credit
services and products to customers, monitoring credit limits, providing proper mechanism for
document tracking and capturing and maintaining credit-related information in the recording
systems.
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To make the Report more meaningful and presentable, two sources of data and
information have been used widely.
Source of Data
PRIMARY
DATA
SECONDARY
DATA
Face-to-face conversation with the respective officers and staffs of Prime Bank.
Practical work exposures from the different desks of the departments of the
department.
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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.
ii)
The bank officials though helpful in every respect do not have much time to explain the
internal procedures.
iii)
Many operations relating to the credit extension run simultaneously by different credit
officials and it is difficult to capture the sequence of any particular credit proposal.
iv)
A structured filing procedure is often neglected which also poses difficulty in understanding
the sequential procedure.
v)
Borrowers do not often have the time to cooperate in the information gathering process.
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Chapter: 2
Overview
Overviewofofthe
theBank
Bank
The word bank is originated from Italian word Banca. Banca means long tool. In ancient time
Italian Jews merchant used to do business of lending money by sitting on the tools. To meet the
expense of war of 1171 one type credit certificate was launched in Italy at an interest rate of 5%
which was called as Monte in Italian language and Banke in German language. Then the German
language was widely used in Italy. As a result the word Banke gradually changed to the word
Banca from which the word Bank originated.
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Bank system was practiced in Indian subcontinent by the Indian subcontinent merchants;
Goldsmith Moneylenders were the primary bankers. During the mughal period banking and
credit business was enchanted rapidly.
Indigenous banking in Bangladesh is as old as banking in other parts of the world. During
mughal period, indigenous banking flourished. The Subarna Banik, the bullion trading
community used to do banking in the then Bengal.
Banking in Bangladesh was gradually taken over by the upcountry bankers who were known as
Seth, Shah etc. But Subarna Banik continued to operate in rural Bengal. The British gradually
came to Bengal and operated
The Prime Bank Limited (PBL) is a national banking group that is incorporated on February 12,
1995 as a consequence of persistent efforts of a group of entrepreneurs having excellence of
experience exposure in the different fields of industry, trade and commerce of the country. It
started operation as a commercial bank on April 17, 1995 with a branch at Motijheel. At present,
the bank has 110 branches spread all over the country. It renders all types of commercial banking
services to the customers of all strata in the society within the stipulations laid down the bank
company act 1991 and rules and regulations formed by Bangladesh Government from time to
time. Diversification of products and services and innovation of products suited to the needs of
the customers in keeping with relevant rules and laws have made it different from other
commercial banks of the country.
PBLs national business in personal banking, corporate banking and its markets are its special
strengths. It maintains correspondent relationship with all over the banks in countries. Prime
Bank Limited is a forward looking and modern local bank with a record of sound performance. It
is discarding its erstwhile conservative mould and in response to the current dynamic trends in
locally financial activities, adopting an aggressive customer focused system. The effort that
Prime Bank makes in order to portray the bank as a brand image is very strong and successful.
The general image is that it is trustworthy, efficient, helpful and committed. The logo of the
bank depicts the merger of confidence.
Prime Bank Ltd. has already made significant progress within a very short period of its
existences. The bank has been graded as a top class bank in the country through internationally
accepted CAMEL rating. The bank made satisfactory progress in all areas of business operation
in 2010.
Prime Bank Limited was designed to provide commercial and investment banking services to all
types of customer ranging from small entrepreneur to big business firms. Besides investment in
trade and commerce, the bank participates in the socioeconomic development through the
participation in priority sectors like agriculture, industry, housing, and self-employment. Prime
Bank Limited wants to establish, maintain, and conduct all types of banking, investments and
businesses in Bangladesh and abroad with superior service quality and performance.
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Prime Bank Ltd. has planned to improve its customer services further through diversity in
products and services. Offering customers a variety of options to fulfill their banking needs will
remain an important component of PBLs long-term business plans. Exercise will continue to
reform the systems and to develop back-office support capabilities. Management has decided to
focus more on small and medium sized enterprises by providing a broad range of financial
options. PBL has further deepened its stack in retail banking by introducing new products.
Efforts in Merchant banking are further intensified to generate more profits as Prime Bank Ltd.
has acquired Merchant-banking license.
Prime Bank Ltd. is able to remain competitive and enjoyed continued growth, which in some
extent depends on financial sector reforms of the government. Prime Bank Ltd. is in complete
agreement with Bangladesh Bank's plans to review and to asses thoroughly the financial sector
and to set the future framework for the industry. Prime Bank Ltd. is willing to support all
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constructive reforms that are in the national interest and encourage more competition and choice
for the people. This Bank always stays tuned to the realities of rapidly changing markets.
Management of PBL strongly believes that this bank will grow and prosper in the days to come.
Ongoing researches to innovate products and to fine-tune the existing products will lead to
advantageous position. MasterCard credit cards business and newly introduced ONLINE
banking have opened up new possibilities not only for improved customer service but several
windows for profit generation. Installation of SWIFT and integration of treasury functions in
both local money market and international foreign exchange market are expected to yield better
growth in volume and earnings.
While banking is undergoing changes to accommodate increasing needs of customers,
technology is considered as a key element for achieving competency based on reliability. PBL is
working to further improve its computer system in order to provide clients with new IT products
and services such as ATM, Online Banking and Point of Sales transactions. From PBLs
perspective, Technology will help Prime Bank Ltd. to operate more efficiently and improve its
productivity. Therefore, investment in technology infrastructure receives highest priority. While
technology takes care of much of the routine functions, employees will have more time to spend
with their customers providing greater range of advice and services.
At present Prime Bank Ltd. has a small network of branches and therefore manages these
branches in a manner, which maximizes profit and brings added values for shareholders.
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2.4.3 Operation:
Prime Bank Limited, since its inception, is a fully focused Bank depending on technology. The
bank has now a network of 52 branches strategically located in different cities. All the branches
are functioning in computerized environment and integrated through Wide Area Network (WAN)
.The branches are full-fledged units and can provide all commercial and investment banking
service ranging from small and medium enterprises to big conglomerates and houses.
The Bank will try to reduce its dependence on interest earnings by giving more emphasis on the
fee-based income through introduction of capital market operation and leasing. The Capital
Market operation will include Portfolio Management, Investors Account, and Underwriting
Mutual Fund Management etc.
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The Bank will introduce modern system of Leasing Operation same as in practice with Banks in
all other countries of the world. The lease finance portfolio of the bank will be the first of its kind
in a Commercial Bank in Bangladesh.
A warehousing system will be developed in the country through private entrepreneurs. The
conventional go down system of the Banks will gradually be done and a modern system of
warehousing will be encouraged for pledge of goods of the clients. Investment Counsellors of
PBL will give all sorts of advice to their Customers as they may require from time to time for
protecting their assets and safeguard to their interest.
Entrepreneurship Development Training will be arranged to impart operational skill and modern
technique of management to introduce new entrepreneurs in the field of industrialization on the
basis of participating finance.
Prime Bank Limited is one of first few Bangladeshi Banks who have become members of
SWIFT (Society for Worldwide Inter-Bank Financial Telecommunication) in 1999. SWIFT is a
member owned co-operative which provides a fast and accurate communication network for
financial transactions such as letters of credit, fund transfer etc. By becoming a member of
SWIFT, the bank has opened up possibilities for uninterrupted connectivity with over 8,700 user
institutions in 160 countries around the world.
Prime Bank Limited is operating branches on both conformist interest based Banking and
Islamic Sariah Principle based Banking. The Islamic Sariah Principle Banking is completely
different from the conventional banking.
The Bank is Maintaining separate set of accounts for Islamic Banking branches according to the
standard adopted by financial Accounting and Auditing organization for Islamic Financial
Institution.
Prime Bank Training Institute (PBTI) was set up in July 22, 1998 with an aim to create a strong
and skilled work force.
The Institute had played a significant role in making skilled and efficient human resource. It is
constantly working on improvement of training methods and materials. During 2010 it had
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conducted 4 Foundation Training Courses, 4 short, courses, and 24 workshops for new recruits,
junior level management, mid level management, and senior executives. The Training Institute
also provided a Foundation course for 30 trainee officers of Jamuna Bank Limited at their cost.
Prime Bank Limited will try to achieve excellence in customer service. The customer is most
important for them. Their policy is customer driven. The Bank will introduce Inland Travellers
Cheque and launch Special Savings Schemes; Special Credit Scheme will also be devised for the
benefit of the low-income group, especially for the self -employment of the educated youth.
Mission:
To build Prime Bank Limited into an efficient, market driven, customer
focused institution with good corporate governance structure.
Continuous improvement of our business policies, procedure and efficiency
through integration of technology at all levels.
13
Chairman
Top Management
Board of Directors
Executive Committee
Managing Director
Executive Level
Management
Mid Level
Management
Senior Officer
Junior Level
Management
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Board of Directors
Executive Committee
Managing Director
Deputy Managing Director
Senior Executive Vice President
Executive Vice President
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Since commencement of banking operation, prime bank Limited has not only gained enormous
popularity but also been successful in mobilizing deposit and loan products. The bank has made
significant progress within a very short time period due to its dynamic management and
introduction of various consumer-friendly loan and deposit products. All the products and
services offered by the bank can be classified under three major heads:
i) Multi Currency Account
ii) Deposit Products:
Contributory Savings Scheme
Monthly Benefit Deposit Scheme
Special Deposit Scheme
Education Savings Scheme
Fixed Deposit Scheme
Prime Bank Money Scheme
Prime Bank Insured Fixed Deposit Scheme
Saving Deposit Account
STD Account
Foreign Currency Deposit Account
Non Resident Taka Account
NFCD Account
NITA
iii) Loan Products:
Consumers Credit Scheme
Lease Finance
Hire Purchase
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On-line Banking:
The bank has set up Wide Area Network (WAN) across the country within its all branches to
provide on-line branch banking facility to tits valued customers. The service named
PRIMELINE has opened up several possibilities of improved customer services. Under this
facility client of one branch are able to do banking transaction at any other branch of the bank.
The bank hosted its Web Site (www.prime-bank.com) to facilitate dissemination of information
about the banking services and facilities of Prime Bank Limited all over the world.
Information Technology in Banking Operation:
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Prime Bank Limited has adopted automation in banking operation from the first day of its
business. The main objective of this automation is to provide efficient and prompt services to its
valued clients. At present all the branches of the bank are computerized under UNIX operating
system to provide best security to the information. Prime Bank Limited is providing
comprehensive range of banking services with utmost care and efficiency to its customers. ATM
is used to count money properly to save clients valuable time as well. The customer can draw
money/cash from their account within a minute. Very recently the bank has launched the world
famous banking software T24 which is very user friendly. It will no doubt help the bank to attain
the objectives more efficiently.
SWIFT Service:
Prime Bank Limited is one of the first few Bangladeshi Banks to obtain membership of SWIFT
(Society for Worldwide Inter-bank Telecommunication). SWIFT is a members owned
cooperative which provide a first and accurate communication network for financial transactions
such as Letter of Credit, Fund Transfer etc. By being a member of SWIFT, the bank has opened
up possibilities for uninterrupted connectivity with over 8700 user institutions in 160 countries
all over the world.
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Chapter-3
Literature
LiteratureReview
Review
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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. Therefore, from the above definition it is clear that credit appraisal is a very
important factor for banks. To get a clear idea about credit appraisal process, we need to know
the key factors of credit appraisal procedures. In this chapter, we will have a brief idea on the key
factors of standard credit appraisal procedures.
3.1 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.
According to the Encyclopaedia of Banking & Finance by Charles J. Woelfel, Bank credit is
the earning asset of the commercial banks, including the variety of short and long term loans
made to individuals, partnership, corporation, other business firms, banks, and governmental
units and agencies; the banks holdings of investments.
One of the two primary functions of a commercial bank is to extend credit to the deficit
economic unit that comprises borrowers of all types. Bank credit is a catalyst of economic
development. Without adequate finance, there can be no growth in the economy. Bank lending is
important for the economy in the sense that it can simultaneously finance all of the sub-sectors of
financial arena, which comprises agricultural, commercial and industrial activities of a nation.
Therefore, a bank is supposed to distribute its loan able fund among economic agent-in-deficit in
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a manner that it will generate sufficient income for it and at the same time benefit the borrower
to overcome his/her deficit.
Loans
ii)
Overdrafts
iii)
Cash Credit
Whatever the form, advances are primary types of bank lending and major sources of income for
banks. In Bangladesh, amount of advances (excluding the inter-bank) by the scheduled bank is
about 97 percent of total credit.
Loans:
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When an advance is made, with or without security, in a lump sum repayable either in fixed
monthly instalment or in lump sum and no subsequent debit is ordinarily allowed except by the
way of interest, incidental charges etc, it is called a loan. A loan once repaid in full or in part,
cannot be drawn again by the borrower. It is given for a fixed period at an agreed rate of interest.
The whole amount of loan is debited to the customers name on a loan account to be opened in
the ledger and, is paid to the borrower either in the form of cash or by the way of credit to his
current or savings account.
Overdrafts:
The overdraft is a kind of advance always allowed on a current account operated upon by
cheques. The customer may be sanctioned a certain limit upon which, he/she can overdraw his
current account within a stipulated period. Here, withdrawals or deposit can be made any number
of times at the convenience of the borrower, provided that the total amount of overdrawn does
not, at any time, exceed the agreed limit. Interest is calculated and charged only on the actual
debit balance on daily product basis.
Cash credit:
A cash credit is an arrangement by which a banker allows his customer to borrow money up to a
certain limit. Cash credit arrangements are usually made against the security of commodities
hypothecated or pledged with the bank.
Hypothecation: In case of hypothecation the possession of goods remain at the disposal and in
the go down of the borrower. The borrower is given access to goods whenever it so desires. The
borrower furnishes periodical return of stock with the bank.
Pledge: In case of pledge, the goods are placed in custody of the bank with its name on the go
down where they are stored. The borrower has no right to deal with them.
2. Bills Discounted and Purchased :
According to the Encyclopaedia of Banking & Finance by Charles J. Woelfel, Bill discounted is
The aggregate of notes, acceptances and bill of exchanges which a bank has discounted for its
customers, as distinguished from loans.
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The banks also give advances to their customers by discounting or purchasing their bills of
exchange. Such bills of exchange arise out of commercial transactions both in inland trade and
foreign trade. Bills are classified as i) Clean bills and ii) Documentary bills.
When the drawer of a bill encloses with the bill the documents of title to the goods, such as, Bill
of Lading, Railway Receipt, Steamer Receipt, to be delivered to the
Drawee of the bill on payment against acceptance of bill, as the case may be, the bill is called a
documentary bill. In the absence of such document it is termed as a clean bill. By the nature of
payment, bills can also be classified into two categories named i) Demand bills and ii) Usance
bills
Where a bill is payable at sight or on demand or on presentation it is called a demand bill. If
a bill matures for payment after a certain period of time, like 30, 60, or 90 days after the date, it
is called a usance bill.
In case of purchase or discounting of bills, the banker credits the customers account with the
amount of the bill after deducting his charges or discount. Bankers purchase the demand bills but
discount the usance bills. In purchasing the income is interest but in discounting the income is
discount.
Term of facility,
Safety,
Security,
Profitability,
Source of repayment,
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Diversity.
Bank should never put all its eggs in one basket. It should be noted that selection of
appropriate borrowers, proper follow-up and end-use supervision through constant close contact
with the borrowers, are the corner stones for timely recovery of credit.
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b) A copy of the letter of sanction addressed to the customer and his acceptance thereof.
c) All necessary documentation required to meet the terms and conditions of the facility in the
manner in which it was approved.
d) Before disbursement, it should be satisfied that all legal formalities have been completed.
e) Disbursement of all facilities shall be made on an Offering Sheet basis to ensure that all
additional requests are duly approved by two authorized Officers one of which must be the
Manager or Sub-Manager.
f) Securities offered should also be thoroughly verified / inspected once in a month and stock
report prepared.
g) Where the loan agreement calls for restrictive covenants and ongoing conditions, the Manager
must not only satisfy himself that these are adhered to at the outset of the transaction (i.e.
date of initial takedown) but assure himself, at regular intervals, that these are not being
violated.
h) Since the Manager together with the Credit Officer is fully responsible for documentation,
they will formally sign a check list. Under no circumstances may anyone permit drawings
under any facilities, until they have signed off the check list.
I) The Manager/Sub-Manager should ensure that appropriate steps are being taken to keep loan
documentation current for all assets Of the Bank. The loan documentation check-list, should,
therefore, be reviewed at regular intervals.
J) Lines of credit should, as a rule, be confirmed in writing to the borrower. A Specific
expiration date for the line should be included. Moreover every letter of sanction must
contain the Bank's standard clauses.
K) The borrower must explicitly undertake that all information supplied by him to Bank in
connection with the approved lines Of credit is correct.
L) Any material or adverse change in business conditions will cause the amount due to Bank
from the client immediately repayable. The Bank reserves the right to call back the facilities
extended at any time without assigning any reason whatsoever.
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repay. The banker has to identify three distinct areas of commercial risk analysis related to the
following questions:
1. What risks are inherent in the operations of the business?
2. What have managers done or failed to do in mitigating those risks?
3. How can a lender structure and control its own risks in supplying funds?
The first question forces the banker to generate a list of factors that indicate what could harm a
borrowers ability to repay. The second recognizes that repayment is largely a function of
decision made by a borrower. Is management aware of the important risks and has it responded?
The last question forces the banker to specify how risks can be controlled so that bank can
structure an acceptable loan agreement.
Therefore, Bankers look into key risk factors or qualitative analysis which has been classified
according to the five Cs of credit:
1. Character:
Character refers to the borrowers honesty and trustworthiness. A banker must asses the
borrowers integrity and subsequent intent to repay. If there are any serious doubts, the loan
should be rejected.
2. Capital:
Capital refers to the borrowers wealth position measured by financial soundness and market
standing. It helps cushion loses and reduces the likelihood of bankruptcy.
3. Capacity:
Capacity involves both borrowers legal standing and managements expertise in maintaining
operations so the firm or individual can repay its debt obligations. Under capacity an individual
must be able to generate income to repay the cash.
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4. Condition:
A condition refers to the economic environment or industry specific supply, production and
distribution factors influencing a firms operations. Repayment sources of cash often vary with
the business cycle or consumer demand.
5. Collateral:
Collateral is the lenders secondary source of repayment or security in the case of default.
Having an asset that the bank can seize and liquidate when a borrower defaults reduces loss, but
does not justify lending proceeds when the credit decision is originally made.
Under credit analysis Bank also does quantitative analysis which refers to the analysis of
financial statement ratios to know the past performance of a company. Some of the key ratios
which serve as a tool for financial analysis are classified as
1) Financial Ratio
2) Turnover Ratio
3) Profitability Ratio
1) Financial Ratios:
Financial ratios indicate about the financial position of the company. A company is deemed to be
financially sound if it is in a position to carry on its business smoothly and meet its obligationsboth long-term as well as short term-without strain. Some of the important ratios which are
calculated in order to judge the financial position of the company are:
Fixed Assets
i)
ii)
iii)
Quick Ratio =
iv)
Current Assets
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2.Turnover Ratio:
The turnover ratios indicate the efficiency with which the capital employed is rotated. They are
also known as Activity or efficiency ratio. The overall profitability of the business depends on
the turnover i.e. the speed at which the capital employed in the business rotates. Higher the rate
of rotation, greater the profitability. In order to find out which part of capital is efficiently
employed and which part not, different ratios are calculated. These are:
Net Sales
3. Profitability Ratio:
Profitability is an indication of the efficiency with which the operations of the business are
carried on. Poor operational performance may indicate poor sales and hence poor profits.
Bankers look at the profitability ratio as an indicator whether or not the firm/company earns
substantially more than it pays interest for the use of borrowed funds and whether the ultimate
repayment of their debt appears reasonably certain. The important profitability ratios are:
Operating Pr ofit
i)
ii)
Gross Pr ofit
100
Net Sales
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Lending Risk Analysis (LRA) is simply a loan processing manual and has done when the amount
of loan is above 1 core. By going through this manual the lending bankers can asses the
creditworthiness of their prospective borrowers.
Therefore, LRA is such an instrument which is definitely and directly related with lending
information to analyze the borrowers financial, marketing, managerial and organisational
aspects subjectively and objectively. It also facilitates the analyst to know the security risk of the
credit. Lending risk Analysis involves assessing the likelihood of repayment of loans to the bank
as per agreement on the basis of analysis of certain risks. To analyze these risks bankers will
need to fill-up a 16-page LRA form. The form leads to scoring various risk factors involved in
lending. LRA has divided the various risks into two groups namely, Business Risk and Security
Risk.
Business Risk:
Business Risk is concerned with whatever the borrowing company would fail to generate
sufficient cash out of business to repay the loan Business Risk, the main component of lending
risk, consists of the Industry Risk and the company Risk
A. Industry Risk:
Due to some external reasons a business may fail and the risk which arrives from external
reasons of the business is called Industry Risk. It has two components:
i) Supplies Risk:
When the business fails due to disruption in the supply of inputs, the consequent risk which
would arise is known as Supply Risk
ii) Sales Risk:
When the business fails for disruption in sales, this type of risk would generate.
B. Company Risk:
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Company Risk is shown for some internal reasons of the business. It has also two main
components and four sub-components
i) Company position Risk:
Each and every company holds a position within an industry. This position is very much
competitive. Due to weakness in the companys position in its industry, a company may fail and
the risk of failure is called Company Position Risk. It depends on(a) Performance Risk:
If a company fails to perform well enough to repay the loan because of its weakness under given
expected external conditions, the company is said to suffer from performance risk.
(b) Resilience Risk:
When a company fails due to lack of its resilience to unexpected external conditions, the
resilience risk is generated.
ii) Management Risk:
If the management of a company fails to exploit the companys position effectively, the company
can fail and this risk of failure is called management Risk. It can be subdivided further-
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Security Risk:
Security risk is the risk that the realised value of the security does not cover the exposure of loan.
Exposure means principal plus outstanding interest. Security risk can be divided
Into two parts
(a) Security Control Risk:
Security control Risk is the Risk that the bank fails to realise the security because of lack of
banks control over the security offered by the borrowers.
(b) Security Cover Risk:
Security cover risk is the risk that the realised security value may not cover the full exposure of
loans.
3.9 Collateral:
Collateral is the lenders secondary source of repayment or security in the case of default.
Having an asset that the bank can seize and liquidate when a borrower defaults reduces loss, but
does not justify lending proceeds when the credit decision is originally made.
Characteristics of Good Collateral:
The following five items determine the suitability of items for use as collateral. The suitability
depends in varying on standardisation, durability, identification, marketability and stability of
value.
Standardization:
The standardisation leaves no ambiguity between the borrower and the lender as to the nature of
the asset that is being used as collateral.
Durability:
Durability refers to the ability of the assets to withstand wear. Or it can refer to its useful life.
Durable goods make better collateral than non-durable. Stated otherwise crushed rocks make
better collateral than fresh flowers.
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Identification:
Certain types of assets are readily identified because they have definite characteristics or serial
numbers that cannot be removed. Two examples are a large office building and an automobile
that can be identified y make, model and serial number.
Marketability:
In order for collateral to be of value to the bank, the collateral must be marketable. That is the
borrower must be able to sell it. Specialised equipment is not as good as collateral as are dump
trucks, which have multiple uses.
Stability of value:
Bankers prefer collateral whose market values are not likely to decline dramatically during the
period of the loan such as common stock.
Different Types of Collateral:
Secure loans have a pledge of some of the borrowers property behind them (such as home or an
automobile) as collateral that may have to be sold if the borrowers have no other way to repay
the bank. Some of the most popular collaterals are:
1. Account Receivable: The banks take a security in the form of a stated percentage of the
borrowers balance sheet. When the borrowers credit customers send in cash to retire
their debts this cash payments are applied to the balance of borrowers loans. The bank
may agree to lend more money as new receivable arise from the borrowers sells to its
customers thus allowing the loan to continue as long as the borrower has need for credit
and continuous to generate and adequate volume of sales.
2. Factoring:
percentage of the book value because the bank takes over the ownership of the
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receivable, it will inform the borrowers customers that hey should send their payments to
the purchasing bank.
3. Inventory: A bank will lend only a percentage of the estimated market value of a
borrowers inventory in order to leave a substantial cushion in case the inventories value
begins to decline. The inventory pledged may be controlled completely by the borrower
using a so-called floating line approach.
4. Real Property: A bank may take a security interest in land and / or improvements on
land own by the borrower and records its clime-a mortgage-with a government agency in
order to define against successful claim by others.
5. Personal Property: Bank takes a security in jewellery, securities and other forms of
personal property owned by a borrower.
6. Personal Guarantees: A pledge of the stock deposits or other personal assets held by the
major stock holders or owners of a company may be required as collateral to secure a
business loan.
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Classification
Types of loan
Agricultural
Continuous
Demand
short term
Unclassified
12
Substandard
Overdue
Overdue
months
months
12 months
amount of amount
installment
of
installment
is equal to is equal to
36 months
Overdue
more
36
Overdue
than months
months 12 months
to 12 months
amount of or more
installment
is equal to
60 months
12 months
more
Overdue 12 12
than months
60 months
payables
months 12 months
Overdue
Bad loan
than
payables
Doubtful
years)
12
to 5 years)
or below
more
Term
payables
months Overdue of Overdue of
or or more
more
18 months 24 months
payables
payables
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Provision
5%
Bad/Loss
(2) All other loans
100%
Unclassified
1%
Substandard
20%
Doubtful
50%
Bad/Loss
100%
Source: BRPD circular no.16 dated 06.12.1998
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2. As per existing interest rate policy, banks are empowered to determine interest rate on lending
(except export credit) by themselves. In order to inform their clients, banks announce
information relating to interest rate. It may be mentioned that banks can differentiate on interest
rate not more than 3% in the same sector considering comparative risk among the borrowers.
3. In order to establish more transparency in determining interest rate and also to make it easily
understandable and clear to their clients, it has been decided that henceforth banks will announce
mid rate of interest rate band (if any) on respective sector while declaring interest rate on
lending. Banks may charge interest rate 1.5% lower or higher than the declared rate considering
comparative risk from client to client.
4. Refer to our BRPD Circular No. 02, dated 15 February, 2005 on the captioned subject. In
order to strengthen credit discipline and bring classification policy in line with international
standards, Bangladesh Bank has from time to time revised its prudential norms for loan
classification and provisioning. As part of the process, Bangladesh Bank has already introduced
'Special Mention Account' vide the above circular so that banks can raise early warning signals
for accounts showing first signs of weakness. As a further move towards this end, Bangladesh
Bank feels that appropriate provisioning against such accounts is necessary.
Accordingly, the following amendments have been made to the above circular:
(1) Banks will be required to make General Provision @ 5% on the outstanding amount of loans
kept in the 'Special Mention Account' after netting off the amount of Interest Suspense.
(2) The status of the loan should be reported to the Credit Information Bureau (CIB) of
Bangladesh Bank. As such, there will be five categories of loan classification status instead of
existing four for reporting to CIB. However, it is reiterated that loans in the 'Special Mention
Account' will not be treated as defaulted loan for the purpose of Section 27KaKa(3) Of the Bank
Company Act, 1991
5. Banks had been instructed to conduct loan classification activities and also to maintain
provisions on quarterly basis vide BRPD circular no.16, dated 06, December 2008.
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It has been observed that though banks are conducting loan classification activities on quarterly
basis, some banks are not maintaining provision on quarterly basis which is not consistent with
the instructions given in the said circular.
Under the circumstances, banks are again instructed to maintain provision on quarterly basis as
per existing policies while conducting loan classification activities on the said basis.
6. Bank Companies are hereby advised to submit a Statement of loans extended to the Directors
of the Financial Institutions as per Annexure "A" to the Financial Institutions Department of
Bangladesh Bank at the end of each quarter within next 15(Fifteen) days of the following month
of the quarter to which the statement relates. The first statement will be based on 30th June,
2010. To this end, up to date list of the Directors of Financial
Institutions may be collected from the Financial Institutions Department of Bangladesh Bank.
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Chapter- 4
Credit
CreditOperation
OperationofofPBL.
PBL.
Like all other commercial banks one of the most two important operations of Prime Bank Ltd.
(PBL) is the credit operation. Prime Bank is extending its credit operation day by day. Through
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the credit operation it is not only making profit but also performing an important role in the
economic development of our country. Throughout this chapter we shall find how the credit
operation of Prime Bank Ltd. is being performed.
b)
c)
d)
e)
SOD (FO)
f)
g)
h)
i)
SOD (General)
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j)
Packing Credit
k)
Forced loan
l)
Others
b) Demand Loan:
The loans that become repayable on demand by the bank will be treated as Demand Loans. If any
contingent or any other liabilities are turned to forced loans (i.e. without any prior approval as
regular loan) those too will be treated as Demand Loans:
b)
c)
d)
e)
SOD (Export)
f)
g)
Bridge Loan
h)
i)
Factoring
j)
Others
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a)
L/C (Sight)
b)
c)
d)
Inland L/C
e)
Bid Bond
f)
Retention Bond
g)
Performance Guarantee
h)
Payment Guarantee
i)
j)
k)
Others
Letter of Credit (L/C): This product is within the purview of the Trade Service. Details about
it are available in the Wish List provided by the Trade Service Group.
Letter of Guarantee (L/G): There are basically two types of Guarantee: (a) L/G (Local), and (b)
L/G (Foreign). Besides Guarantees may be in the following forms:
a. Bid Bond
b. Retention Bond
c. Performance Bond
d. Payment Guarantee
e. Advance Payment Guarantee
f. Admiralty Bond
g. Others
Features of L/G (Local):
a. Usually, L/G (Local) is issued against margin, collateral security. However, there
might be some deviation approved by the competent authority.
b. Commission is charged on quarterly basis at an approved rate.
Features of L/G (Foreign):
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Assets are built based on customers deposit, which should not exceed 80% of
Credit operations are carried out in branch through branch credit committee as
per authority delegated to head of branch and through Head Office Credit
Committee in respect of credit sanction authority delegated to the CEO.
Aggregate long-term credit facilities shall not exceed 20% of total credit
portfolio.
Single customers exposure should not exceed 50% of the Banks Capital Funds.
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Lease Finance
Hire Purchase
The loans allowed to individual/firm/industries for a specific purpose but for a definite period
and generally repayable by installments fall under this head. This type of lending are mainly
allowed accommodating financing under the categories (i) Large & Medium Scale Industry and
(ii) Small & Cottage Industry and very often term financing for (1) Agriculture (ii) others.
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make lease payments until the expiration of the lease agreement, which corresponds to the useful
life of the asset.
In a capital scarce economy like ours, Lease Financing is suitable for firms to acquire Capital
Machinery, Equipments, Medical Instruments, and Automobiles etc. And thereby they employ
their own resources more advantageously in some other investments. Lease financing also helps
a firm to reap significant economic benefit through tax saving and by reducing the risk of the
equipments becoming obsolete due to the technological advancement.
Objectives:
Prime Bank Ltd. has introduced the lease finance with the following objectives:
To assist the genuine and capable entrepreneurs for acquiring capital machinery and
equipments to undertake enterprises without equity.
To encourage the new and educated young entrepreneurs to undertake productive venture
and demonstrate their creativity and thereby participate in the national development.
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To finance the Small and Cottage Industries for Industrialization and also to create
employment opportunities.
It may be mentioned here that as per decision of the Board of Directors in its 78th meeting held
on 17.11.1999 a Small & Medium Enterprise (SME) Cell has already been established at Head
Office under the Credit Division.
If we look at South East Asia, China, Taiwan, Hong Kong, South Korea etc we will find that
small and Medium Businesses are the real engine of growth in those countries.
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In view of the above a credit scheme titled Small and Medium Enterprise Credit Scheme
has been formulated as follows. It may also be mentioned that USAID has approved our bank to
receive their guarantee facility to lend money to Small and Medium business Houses. 50% of
losses, if any, are paid by USAID.
Objectives :
To provide credit facilities to the small and medium size entrepreneurs located in Urban
& Sub-urban areas and easily accessible by the branches.
To encourage the new and educated young entrepreneurs to undertake productive venture
and demonstrate their creativity and thereby participate in the national development.
To assist potential entrepreneurs to take part in economic activities so that they can
improve their living standard.
To inspire for undertaking small projects for creation employment through income
generating activities.
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Prime Bank Limited started the Consumer Credit Scheme program with a view to fulfil
its benevolent institutional objectives through financing the middle class limited income
group.
To ensure the credit facility to the both middle class limited income group and upper class
income group.
To improve the living standard of limited income group through financing in purchasing
necessary goods.
Government Organizations.
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Employees having take home salary less than taka 10,000 per month.
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The intending client will have to apply for the credit in Banks printed application form, which
is available in respective branch on payment of Taka 10 only. Customers will submit the
application form dully filed-in with 2(two) photographs and sign along with quotation for
purchase of desired article or any other relevant documents.
The customers name/other name(s) including nickname, if any should be mentioned in every
loan application.
Processing of applications:
On proper scrutiny of the application, branch will inform the initial decision (acceptable for
processing /decline) to the applicant within 3(three) working days from the date of receiving
application. Applicant will submit the above dully filed-in with the following additional papers:
Attested photocopies of current tax receipt, electric bill etc & lease agreement (if any)
when the source of income is house rent as a land lord.
Branch will inspect the given information with respect to eligibility, feasibility and security. After
completion of all necessary formalities, the branch shall disburse the loan or refuse the proposal
within 7(seven) working days from receiving the additional papers. Price of the items (down
payment + loan amount) should be given to the respective supplier through Payment order (PO)
after completion of necessary documentation.
Mode of Repayment:
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Repayment of loans including accrued interest will be made by equal monthly installments,
which will start from the following month of the disbursement of loan. Before disbursement of
loan, the customer will deposit crossed cheque covering the total number of monthly installments
in favors of bank which will have to be presented for collection on the due date. Instilments will
be paid within 7th day of each month. However, prepayment is allowed.
Judgment process of credit proposal under CCS:
To disburse the loan, the credit officer has to verify the following factors of the potential
borrowers
i) Borrowers income:
ii) Estimated Housing Expenses:
iii) Location:
iv) Assessment of credit History:
v) Social Status:
Under the CCS, credit is offered by taking personal guarantors from a third party. The guarantor
will be liable for the default of loan. So guarantors designation, type of job, monthly salary,
period of service, office address, and the consent of the guarantors regarding the matters are also
evaluated.
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Contacting the employers of the defaulting customers (after three overdue installments)
Issuance of legal notice to the customers and guarantors prior classification of loans.
Legal actions to be taken after all possible efforts to recover the Banks dues go in vain.
Telephone contact
Letter of guarantors
Letter to authority
Suit notice
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Prime Bank uses the most common loan amortization method that is Capital Recovery
Method. Under this method constant monthly payment is calculated on an original loan amount
at affixed interest for a given term.
Example:
Loan Amount: BDT 100,000 (PV)
Interest rate: 15%
Number of Installments (monthly): 24
So monthly install will be: PV/MPVIFA* (15%, 24months)
So Monthly installment: 100,000/20.62423451=BDT 4848.66
*MPVIFA=Monthly Present Value Annuity Factor.
Month Beginning
Monthly Interest
Monthly
Monthly
Balance
(1)
(3)=(2)*(.15/12)
Payment
Amortization
(6)=(2)-
(4)
(5)=(4)-(3)
(5)
Balance(2)
100,000
1250
4848.66
3598.66
96,401.34
96,401.34
1205.02
4848.66
3643.65
92,757.69
92,757.69
1159.47
4848.66
3689.19
89,068.49
89,068.49
1113.36
4848.66
3735.31
85,333.18
Prepayment:
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Customer can repay the loan before the maturity of the loan. Prime usually welcomes the early
payment of loan and no prepayment penalty is to be charged. Prime bank always tries to avoid
classified loan even at a cost of losing profit and receiving risk just to maintain its credit history
and good CAMEL rating.
Motor Cycle
Personal Computer
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Television
Refrigerator
Audio-Video Equipment
Furniture
Loan Limit
Tk. 1,00,000
Tk. 1,00,000
Tk. 1,00,000
Tk. 5,00,000
Required Documents:
Employer Certificate for Service Holders
Photocopy of Trade License for Businessmen
Photocopy of Tin Certificate, if any
Bank Account Statement of last six months
Photocopy of Passport, Telephone (T&T) Bill, if any
Security:
Two Personal Guarantees
Undated Cheques
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b) Doctors Loan:
Any Bangladesh citizen who is a graduate in Medical Science / Dentist / Eye / Allopathic /
General Practioners desiring to set up chamber, medical store with necessary medical
equipments and to become self-employed have the opportunity to take this loan.
Type of Customer
General Practitioner MBBS/BDS/
Specialized Doctor
Loan Limit
Tk. 5,00,000
Tk. 10,00,000
Required Document:
Attested Photocopy of the Certificates of the last degree and BMA membership
certificate
Security:
The ownership of medical equipments to be purchased must be hypothecated to the Bank under
hire purchase mode:
Undated cheques
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This scheme is to meet the emergency need for fund by fixed income group of salaried person in
Govt./Semi
govt.
/Autonomous
bodies/
Multinational
Co./
Banks/Insurance/Financial
Inst./Educational Inst. with confirmed 3-years service ahead. Letter of introduction including
name, fathers name, designation, date of birth, date of joining, place of posting, date of last
promotion, date of retirement, basic salary, total emolument, take home salary etc. will be
required. This scheme is only for service holder.
Loan Limit
Tk. 200,000
Required Documents:
Employer Certificate
Security:
Undated Cheques
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person
in
Govt./Semi
govt.
/Autonomous
bodies/
Multinational
Type of Customer
Loan Limit
Duration
Tk. 60,000
Loan
1.5-yrs
Tk. 1,00,000
1.5-yrs
of
the
Required Documents:
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Security:
One or two personal guarantee from family member (effective member i.e. spouse / father
/ mother / brother / earning son, Corporate guarantee in the case of Company or as the
case may be acceptable in the bank).
e) Car Loan:
Car Loan will be sanctioned against Registration of the Vehicle in the name of the Bank. Instead
of down payment, the Customers shall have option to avail loan against their FDR or any other
savings instruments up to 90% of the loan amount.
Eligible Items / Articles
Car
Jeep
Station Wagon
Pick up Van
Cover Van
Loan Limit
Tk. 40,00,000
Tk. 15,00,000
Tk. 40,00,000
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Security:
Undated Cheques
Loan Limit
Tk. 3,00,000
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Required Documents:
Security:
Undated Cheques
g) Education Loan:
This scheme is for meeting the fund requirement for higher education of children of salaried
persons in Govt./Semi govt. /Autonomous bodies/ Multinational Co./Banks/Insurance/Financial
Inst./Educational Inst. with confirmed 3-years service ahead and businessman having adequate
cash flow.
Loan Limit and Period of loan:
Type of Customer
Salaried Person/Business
Loan Limit
Tk. 3,00,000
Required Documents:
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Evidence thereof
Security:
Undated Cheques
h) Marriage Loan:
This scheme is to meet the fund requirement for marriage purpose of salaried person in
Govt./Semi
govt.
/Autonomous
bodies/
Multinational
Co./Banks/Insurance/Financial
Inst./Educational Inst. with confirmed 3-years service ahead and businessman having adequate
cash flow.
Loan Limit and Period of loan:
Type of Customer
Salaried Person/Business
Loan Limit
Tk. 3,00,000
Required Documents:
Evidence thereof
Security
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Undated Cheques
i) Hospitalization Loan:
Hospitalization loan will be provided for treatment purpose or surgery where hospitalization is
necessary. The loan shall be available for the salaried person, i.e., employee of the Govt.
Organizations / Semi-Government Organizations / Autonomous Bodies / Multinational
Companies / Banks / Insurance Companies / Educational Institutions / Corporate Bodies.
Loan Limit
Tk. 5,00,000
Required Documents:
Security:
Personal guarantee from an individual having means, standing and social status
acceptable to the bank and another from his/her family
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The banks loans and advances grew steadily during 2010. The growth rate was 42.46% during
the year. The ratio of non-performing loans at total loans declined during the year and stood at
1.39% and at the end of the year 2010 this was Tk.19, 897.52 million.
Here we shall find the graphical presentation of credit portfolio of the year 2010 on different
bases.
Amount in Taka
Loans
66,222,432,595
Cash Credit
14,915,766,110
Overdrafts
23,052,864,474
Concentration
Amount in Tk.
Commercial lending
19,564,268,060
Export financing
9,363,160,717
3,435,341,726
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Retail loan
9,290,648,830
5,757,282,961
Staff loan
13,776,232
17,204,586,886
Amount in Tk.
% of total Loan
Urban Area
108,132,434,821
97.27
Rural Area
3,034,954,071
2.73
Amount in Tk.
% of total Loan
Public Sector
421,075,350
0.378
Co-operative
Private Sector
110,746,313,542
99.622
So, in category-wise portfolio, we find that Prime Bank is mostly interested in extending its
credit as loans (66.5%) rather than as cash credit (19.08%) and overdrafts (14.42%). In
concentration-wise portfolio, we find that engage most of its concentration of credit on industry
(42.49%) then on commercial lending (27.00%). In geographical location-wise portfolio we find
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that Prime Bank Ltd, to say, ignores the rural area for their lending decision as the loan in rural
area is only 1.1% whereas that in urban area is 98.9%. The main reason is that most of the
business operation of our country occurs in urban area. In sector-wise portfolio we find that the
bank concentrates mostly on private sector (99.42%) for its lending purpose than on co-operative
and public sector.
Agricultural Credit
10-12
Project Lone
12-13.5
12.5-13.5
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Export Financing
7.00
Commercial Lending
12.5-14
SME
12-14
CCS
14-15
12.5-14
14-15
12.5-14
Rate of interest
Risk Fund
Service charge
Household durables
15%
1%
1%
Car Loan
15%
Nil
1%
Doctors Loan
15%
Nil
1%
Advance Loan
15%
1%
1%
15%
1%
1%
Educational Loan
15%
1%
1%
Travel Loan
15%
1%
1%
Marriage Loan
15%
1%
1%
15%
Nil
2%
Hospitalization Loan
15%
1%
1%
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Prime Bank Limited does not earn profit at any cost. So it has raised its interest rates on both
deposits and advances by up to 2% recently in line with a central bank directive. As a result the
spread rate between deposits and lending does not increase.
Although the spread of interest rate is not increased, Prime Bank Limited continued to lead in the
field of most profitable and attractive growth areas, compared to peer group, despite the
slowdown in the economy, decline in interest spread and fee based earnings. The remarkable
progress in many lines of business resulted to a 33.45% growth in the assets position and Return
on Average Equity of 30.44%. The banks loan and advances grew steadily during 2008. The
growth rate was 40.79% during the year 2008.Total loans and advances have also been increased
during the year 2009 because the bank has also extended long-term loan to a number of projects
under structured financing scheme with banks and financial institutions. The bank has all along
encouraged small business group and supported SME, Agriculture and IT sectors both got
priority fro the bank in line with the national interest.
Though the interest rate of lending is increased, the loans and advances position is also increase.
The amount of General loans, CCS, Hire purchase, Lease finance etc. are increasing day by day
but the amount of SOD, House-Building Loan etc. are reducing during the year 2005.The interest
rate is directly linked to the cost of fund. The higher the cost, the higher the interest rate and vice
versa.
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Unclassified Loans:
Type
Amount in Tk.
Year
2010
2009
Standard
10,460,432,000
9,355,471,819
Special
Mention
Account 38,292,000
52,405,000
(SMA)
Classified Loans:
Type
Year
Sub-standard
Doubtful
Bad / Loss
Amount in Tk.
2009
8,319,000
5,839,000
8,803,000
2010
36,295,000
4,394,000
15,615,000
Base
Provision
10,460,432,0
* Various
(2010)
170,260,050
00
34,839,000
30,735,000
3,722,000
12,313,000
5
20
50
100
1,741,950
6,147,000
1,861,00
12,313,00
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* General is kept @ 1% on general loans and advances and 2% on small enterprise financing and
5% on consumer financing.
So we find that Prime Bank Ltd. complies with the provision of loan classification (Unclassified
or Standard, Sub-standard, Doubtful & Bad or Loss) as Bangladesh Bank directs.
Here in the above table we find an additional classification named Special Mention Account
(SMA) which fulfils another provision from Bangladesh Bank. According to this provision Prime
Bank Ltd. has kept the amount of provision @ 5%.
We also find that the bank complies with the provision @ 2% on small enterprise financing.
From the interest rates of the bank as stated earlier, we find that the highest difference among the
interest rates in the same sector is 2% which is less than 3%. This fulfils the provision that the
variation of interest rates in the same sector will not exceed 3%.
To comply with the provision of quarterly basis revision of loan classification Prime Bank Ltd
revises the classification of loans and related necessary provision quarterly and submits a report
to the Bangladesh Bank.
Besides, Prime Bank Ltd. complies with the provision of submitting the statement of loans
extended to the directors of the financial institutions on quarterly basis within next 15 days of the
following month of the quarter.
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Chapter: 5
Conclusion
Conclusion&&Recommendations
Recommendations
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Recommendations :
From the findings of the report we can expose the following recommendations for the betterment
and further success of the credit division of Prime Bank Ltd.:
The down payment paid by CCS customers is very high with PBL. Besides, others bank
such as- Dhaka Bank Limited, AB bank Limited, And Eastern Bank Limited are not
taking any down payment. So I think PBL should not take any down payment or reduce
the down payment percentage to make its CCS more competitive.
Interest rate and payback period are very important criteria for any kind of loan but
most of the clients are not satisfied to PBL Consumer Credit interest rate and loan
payment period. They want lower interest rate and more payment period and reduce
interest rate. Therefore I suggest for increasing payment period. It will make the
installment more attractive and convenient for customers to pay. At the same time it
will help reduce outstanding for the bank.
All the lending and savings packages offered to the Premium customers are same as
offered to the general customers, excepting the waiver of service charges for premium
ones. Prime Bank Limited should try to introduce more attractive lending and savings
scheme to its Premium customers to create more business for the Bank. The Bank can
pay more attention to this segment of customers, as it is the most solvent group from
which income can be generated if the package is designed properly.
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Premium Customer should be offered occasional gifts and discounts, which can make
the premium service more attractive and keep consumer delighted. The interest rates on
several loan and deposit schemes should be differentiated for the premium customers.
Conclusion :
Prime Bank Limited is a potential and promising bank in the banking sector of Bangladesh.
Credit Management policies and techniques used in the bank at present is comparable to
international standards. The officials follow the policy very strictly. They are very much sincere
and conservative in sanctioning loan. The proposal is thoroughly scrutinized by the loan
sanctioning authority. The total function of the credit division is monitored periodically. From
overall findings it is transparent that the credit division of Prime Bank Ltd is one of the most
efficient and well operated divisions.
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References :
Chowdhury, L.R., A Textbook on Bankers Advances; 2nd Edition; Paradise Printer; 2002
Fraser, and Donald R., Commercial Banking; 5th Edition; West Publishing Company;
2002
Macdonald, S. S., Bank Management; 4th Edition; The Dryden Press; 2000.
Qureshi, A A., Higher Management in Banks; 1st edition; The Pioneer Printing Press Ltd;
1997.
Bangladesh Bank, Bank Regulatory and Policy Department, Circular No: 09; May 14,
2001
www.prime-bank.com
Internet.
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Acronyms :
PBL
SOD
Secured Overdraft.
PAD
LIM
LTR
SME
CCS
CIB
IBP
FBP
FDBP
LRA
SWIFT
NFCDA
NITA
BRPD
ATM
T24
Tamenos 24
L/C
Letter of Credit
L/G
Letter of Guarantee
CEO
ICB
EVP
Executive Vice-President
GDP
TIN
SMA
NCB
PCB
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