meaning of banking- a case study on ncc bl

Loan and Advance of NCC Bank Limited, Agrabad Branch, Chittagong

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A bank is a financial institution, which works for profit. Banking means the business of this institution.

It may be defined as accepting of money on deposit for the purpose of lending or investment and dealing

in various agency and general utility services. One keeps his money as deposit in a bank because he has

confidence in the latter. The bank grants loans out of the money deposited to those in whom it has

confidence. So banking is nothing but dealing in credit, which means confidence.

Origin of the word "Bank" Opinion differs in regard to the origin of the word "Bank".

According to some authorities, the word "Bank" is derived from the words "Banco",

"Bancus", "Banque" or "Banc". All of these words mean a bench upon which the mediaeval

European bankers used to sit with their coins to transact banking business.

Early History of the Origin of Banking :

Banking is not anything new. It has a very old history, which dates from the days of Greece and

Rome. The present day banking has passed through different stages of development. The ancient

bankers performed many functions known to modern bankers. But persons who were not habitually

bankers conducted banking business in ancient society in unorganized way. They carried on banking

business as subsidiary to their main business. Gradually, banking functions were taken up by a separate

class of people know as 'bankers'. Now banking has got an organized existence. Money also links the

history of origin of banking. When money was introduced in place of barter, people faced a new

problem-"where to save surplus money in safe position?" Then money came to help trade commerce.

But borrowing and lending for trade and commerce could not be carried on without banking. Hence

money created a logical necessity of banks. The role of banking would be meaningless without money

and the role of money would be insignificant without banking. However, the birth of present day

banking is not sudden. It has come to its present stage through a process of development.

The modern banking has its origin in three ancestors, such as,

— The Goldsmiths,

— The Merchants and

— The Moneylenders.

Meaning of Banking

:

Origin and Development of Banking :


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Importance of Modern Banks

Modern banks perform many services in relations to economic development, trade and

commerce, private dealings, etc. A good banking system is indispensable in a country for

various types of services. The following services indicate the importance of a bank in modern

societies:

Promotion and Mobilization of Savings

The bank keeps people's surplus money in safe custody. Sometimes, it allows interest at

different rates on people's deposits. This system encourages the habits of thrift and savings

among the people. The bank collects the scattered savings in this way, pools them together and

thus makes funds available for different purposes.

Supply of Finance

The bank accepts deposits for advancing loans. Loans are given to private people, industrialists,

traders and merchants against approved securities. The bank provides funds for financing plans

of economic development. Commercial banks generally grant short-term loans. The loans by

specialized banks are usually made available for longer periods. Thus, banks borrow money by

way of deposits from the public and supply the same to important institutions for investment

and other purpose.

The modern economy is characterized by large-scale production. But individual producers are

unable to provide big funds for production on large scale. The particular importance of banks

lies in financing production on such scale.


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Principle functions of which are:

1. To receive demand deposits and pay customers cheques drawn against them,

2. To receive time deposits and pay interest there on,

3. To discount notes, make loans and invest in govt. or other securities,

4. To collect cheques, drafts and notes etc.

5. To issue drafts and cashier's cheques,

6. To certify depositors cheques and

7. When authorized by a chartering govt. it may act in a fiduciary capacity. So, A

bank is an office or institution for the keeping lending and exchanging etc. of money.

Definitions of Banks provided by Encyclopedias.

1) "Establishment for custody of money, which it pays out on customers order"

-– The New Oxford Encyclopedic Dictionary.

2) "An establishment receiving money for the purpose of being lent out on interest or returned

by exchange or disposed of the profit of to be drawn out again as the owner require it"

--- The New Caxton Encyclopedia

" Banker includes a body of person, whether incorporated or not, who carry on the business of

banking."

--- English Bills of Exchange Act-1882

2) "Banker includes person, or a corporation, or a company acting as banker."

--- Negotiable Instrument Act, 1881

BANKING ORGANIZATION

FUNCTIONS BANKING


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Definitions of Bank Accepted by Banking Institutions

" A bank performs an essentially distributive task, service or acts as an intermediary between

borrowers & lender sense, however, a bank can be considered the heart of a complex financial

structure."

--- American Institute of Banking.

Definitions of Bank Given by Authors

" Banks are the institutions whose debts are commonly accepted in settlement of the other

peoples debt."

--- Sayers

" A bank is an economic institution whose main aim is to earn profit through exchange of

money & credit instruments.

--- John Harry.

" A bank is an institution the principal function of which is to collect the unutilized money of

the people & to lend it to others."

--- R. P. Kent.


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DEVELOPMENT OF BANKING SECTOR IN BANGLADESH:

Bank system was practiced in the Indian subcontinent from

the ancient period. In Indian subcontinent merchant's goldsmith's moneylenders Ire the primary

bankers. During, the early period of nineteenth century in 1806 "Bank Of Bengal" and in 1840"

Bank Of Bombay" and in 1840 "Bank Of Madras was established. These banks Ire called as

Presidency Bank.

Then in 1920 these three banks merged to "Imperial Bank Of India". In 1971 Bangladesh

become independent. After liberation "Bangladesh Bank" was automated with the assets and

liabilities of former "State Bank Of Pakistan". It is the central bank of Bangladesh. During

Pakistan period in my there Ire 1090 branches of 12 commercial banks. Three foreign banks Ire

also active with 14 branch offices. Before Pakistan control liberation 80% of banking activities

of my country, consequently Bangladesh traders and industrialists didn't get notable help from.

The commercial banks. After liberation to reform the destroyed economy, on 26th March 1972,

the banking sector of Bangladesh was nationalized. After nationalization Government of

Bangladesh changed all the banks to six banks, which are Sonali Bank, Janata. Bank, Agrani

Bank, Pubali Bank and Uttara Bank. But the last two banks have been hand over to private

sector. fruitful. Then in 1983 several private banks are active in my country and playing their

role in the development of trade and commerce of Bangladesh as Ill as in the development of

economy.


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Growth of Private Sector Banks in Bangladesh

Bank and financial institutions play an important role in financial intermediation and thereby

contribute to the overall growth in the economy. At present, the financial system in Bangladesh

consists of the central bank , nationalized commercial/specialized banks, private banks, foreign

banks and other non-bank financial institutions. The main focus of this writing would be a

review in a general fashion on the gradual evaluation of private sector banks in Bangladesh

and evaluate their comparative position vis-a-vis other types of banks and their future roles in

years to come.

Before independence of Bangladesh on 16 December 1971 all the commercial banks operating

here excepting National Bank of Pakistan ( Now Sonali Bank) and Eastern Mercantile Bank (

Now Pubali Bank Limited) were privately owned. After independence, all the banks operating

in Bangladesh ( except

foreign banks) were nationalized and restructured into six banks. later on Uttara Bank and

Pubali Bank whose majority shares were held by the Bangladesh is were transferred to the

private sector in September 1983 & 1984 respectively.

In the banking system, Bangladesh Bank with the approval of the Government issued licenses

for opening new banks since early 80s. At present there are 30 private banks operating in

Bangladesh. These private Banks are popularly known to the public as First Generation Banks

( 09 banks opened during 1982-87) ,Second Generation Banks ( 08 banks opened during 1992-

1996) and Third Generation Banks ( 12 Banks opened during 1999-2001). For our purpose, we

will treat all banks together to represent the private sector banks.

Deposits of the private banks increased significantly during the period under study ( 1985-

2003) but growth rate came down in recent years as compared to earlier years. Deposits

increased by 207 percent during 1985-90 and further by 112 percent during 1990-95. The

growth rate showed down to 101 percent and 75 percent during 1995-2000 and 2000-03 and 65

Percent during 2003-2006 respectively. But in terms of market share of the private banks to


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total deposits of the banking system, it showed an increasing trend over the years. The market

share in deposits of the private banks increased significantly from 17.58 percent in June 1985 to

24.78 percent in June 1990 and again to 27.46 and 30.30 percent in June 1995 and 2000

respectively. At the end of December 2003,it stood at 37.59 percent. In 2006 it was 42.45

percent.

Now, a question may arise where from these deposits came in to the private banks. One can

easily respond to this question by saying that substitution of deposits took place mostly from

nationalized commercial Banks (NCB‘s) to the private banks as is evident from the declining

share of deposits of the

NCB‘s. The shares of NCB‘s in total deposits of the banking system, which was 71 percent in

June 1985 and gradually declined to 63 percent in June 1990 and further to 56 percent in June

2000. By the end of December 2003 & 2006 it came down to 49 & 45 percent respectively.

This decline in deposits, may be attributed among others to the following factors:

Relatively better customer services provided by the private banks

Higher interest rate on deposits offered by these banks. The weighted average rate of interest on

deposits of the NCB‘s and the foreign banks was 6.31 percent and 4.39 percent at the end of

2003. Whereas it was 7.20 for the private sector banks

The relatively aggressive branch expansion program by the private banks. The total number of

private bank branches was only 932 (13 percent of total branches) in June 1985, which

increased to 1016 (18 percent of total branches in June 1995 and further to 1231 ( 20 percent)

in June 2000. It again increased to 1416 (23 percent of total branches) in 2003 and 1975 (27

percent of the total branches) in December 2006.

The shares of deposit, advances and branches of the private banks in the total banking system

are shown below:

In % of the total banking system Sources:


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Statistics department, Bangladesh Bank:

If we look at the composition of deposits and branches of the private banks we see that most of

their deposits and branches are concentrated in urban areas. Urban deposits of the private

banks, which stood at 16 percent of total deposits in June 1985, increased to 25 percent. In June

1995 and further to 35 percent in June 2003. Again urban branches of the private banks which

was only 8 percent of total branches in June 1985 sharply increased to 12

percent in June 1995 and again to 15 percent and 17 percent in June 2000 and in June 2003

respectively. On the other hand, the share of rural branches remained at around 5 percent

throughout the period since 1985.

The general perceptions are that the private banks are a vehicle to this process. The share of

rural advances of the private sector banks was always lower than that of rural deposits of these

banks throughout the period. For example, rural advances were lower at 0.96 percent as against

1.39 percent of rural deposits in June 1985. The share of rural advances of these banks declined

sharply to 0.57 percent of total deposits in June 1995 whereas rural deposits were 2.52 percent.

The same phenomena also continued during the subsequent years. This situation suggests that

we have enough resources in the rural areas, but limited opportunities to use those resources

there.

Year

(End

June)

Deposits Advances Branches

Classifie

d loans

Urban Rural Total Urban Rural Total Urban Rural Total

1985 16.19 1.39 17.58 11.34 0.96 12.30 7.66 5.08 12.74 NA

1990 22.79 1.99 24.78 19.17 0.96 20.41 9.84 4.09 14.93 24.41

1995 24.94 2.52 27.46 24.43 0.57 25.00 11.99 5.49 17.48 39.43

2000 27.60 2.70 30.30 28.55 0.61 29.16 15.08 5.25 20.33 22.01

2003 34.92 2.67 37.59 37.73 0.80 38.53 16.86 5.88 22.74 17.44

2006 36.58 2.85 39.43 45.76 1.21 46.97 18.96 6.42 25.38 25.86


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It was as high as 39.43 percent of private bank‘s advances in December 1995 which gradually

declined to 22.01 percent in December 2000 and further to 17.44 percent in June 2003. This has

been due to the improved management in the private banks as well as effective supervision and

prudential guidelines given by the central bank. Still the private sector banks in Bangladesh are

to go a long way and they need strong consolidation of their operations in all respects rather

than expansion.

BANKING STRUCTURE IN BANGLADESH

Classification on the

basis of ownership


basis of function


basis of organization


basis of scheduling

BANK

1. State ownership

bank

2. Private ownership

bank

3. Govt. and private joint ownership

bank

4. Autonomous bank

1. Central bank

2. Commercial bank

3. Co-Operative bank

4. Agricultural bank

5. Industrial bank 6. Exchange bank

7. Investment bank

8. Merchant bank

9. Saving bank

10. Import and Export bank

11. Consumer bank

12. Transportation bank

13. Small and Cottage Industries

bank

14. Mortgage bank

15. Mixed bank 16. Grameen bank

17. Indigenous bank

18. Regional bank

19. Community development bank

20. International bank

1. Unit bank/banking 2. Branch bank/

banking 3. Chain bank/ banking 4. Group bank/banking 5. Mixed bank/ banking

1. Scheduled bank

2. Non scheduled bank


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Chapter-2

Company Profile


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Profile of NCCBL

Mission of NCCBL:

Anticipating business solutions required by all customers everywhere and innovatively

supplying them beyond expectation.

Setting industry benchmarks of world class standard in delivering customer value

through our comprehensive product range, customer service and all our activities.

Building an exciting team-based working environment that will attract, develop and

retain employees of exceptional ability who help celebrate the success of our business,

of our customers and of national development

Maintaining the highest ethical standards and a community responsibility worthy of a

leading corporate citizen

Continuously improving productivity and profitability, and thereby enhancing

shareholder value

Vision of NCCBL:

To be in thee forefront of national development by providing all the customers inspirational

strength, dependable support and the most comprehensive range of business solutions, through

our team of professionals who work passionately to be outstanding in everything we do.


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Objectives & Goal of NCCBL

To share a significant portion of the banking sector by utilizing available manpower and

state of the art technology for maximizing the shareholders wealth.

To maximize shareholders wealth.

To earn satisfactory rate of return on investment by providing wide range of banking

services.

General Overview of NCCBL

In Bangladesh there are three types of banking service are available. Commercial bank is

one of them. Commercial banks are organized on a joint stock company or private company or

limited company system. Primarily for the purpose of earning of profit. They can be either of

the branches banking types, as we see in most of the countries, with a large network of

branches, or the unit banking type, as we see in the United States, Where a bank‘s operation are

confined to a single office or to a few branches with in a strictly limited area. Although the

commercial banks attract deposit of all kinds- current, savings and fixed their resources are

chiefly drawn from current deposits, which are repayable on demand. So they attach much

importance to the liquidity of their investments and as such they specialize in satisfying the

short-term credit needs of business other than the long-term.

The two essential functions of commercial banks may best be summarized as the borrowing

and lending of money. Commercial Bank borrows the money as current deposit, saving and

fixed deposit, i.e. they mobilizes the saving of the society. Then they provide this money to

those who are in need of it by granting overdrafts of fixed loans or by discounting bills of

exchange or promissory notes.


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2.3 Background of NCCBL

National Credit and Commerce Batik Limited hereinafter called NCCBL started its banking

operation as a scheduled bank under private sector on 17th May 1993 under the ambit of Bank

Company Act, However, it traces its origin to National Credit Limited (NCL), which was

incorporated on 25th November 1985 as a public limited company in order to operate as a

finance company. The NCL faced severe setback in 1992 in respect of business and came on

the verge of collapse. However, with the initiative of sponsors and the management, the NCL

was converted to a full-fledged private commercial bank with the permission of Bangladesh

Bank in 1993. Over the years, the bank has been expanding its service coverage through

introduction of new branches at different strategically important areas of the Country. It is

sponsored by a number of entrepreneurs representing various business groups with exposure in

Garments, Textile, Steel & Engineering, Financial, Insurance, Electronics, and Cement and

Construction Sectors. Mr Tofazzal Hossain is the present Chairman of the bank. The bank

went for IPO on December 1999 and raised Tk. 195.00 million from the offer. The NCCBL got

enlisted with Chittagong Stock Exchange on May 16th 2000 and with Dhaka Stock Exchange

on May 28th 2000. The bank increased its authorized capital to Tk. 2,500.00 million from Tk.

750.00 million on March 27, 2005. It provides a wide range of commercial banking services.

The bank has 53 branches, with staff strength of 1230 as on 31st December 2007


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Management Hierarchy of NCCBL:

Assistant Vice President (AVP)

Senior Principal Officer (SPO)

Principal Officer (PO)

Senior Officer (SO)

Officer (O)

Probationary Officer (PO)

Junior Officer (JO)

Deputy Managing Director (DMD)

Executive Vice President (EVP)

Senior Vice President (SVP)

Vice President (VP)

Senior Assistant Vice President (SAVP)

Managing Director (MD)

Assistant Officer (AO)

Additional Managing Director (AMD)


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Corporate Information

Date of Incorporation : 25th November 1985

Banking Operation Date : 17th May 1993

Brief View of NCCBL:

Taka in million NCC Bank Posted Satisfactory Growth

Particulars In 2008 In 2007 Increase in Tk. Growth 10%

Authorized capital 2500.00 2500.00 - -

Paid up Capital 1757.62 1352.01 405.61 68.63%

Deposit 46904.66 34901.77 12002.89 38.01%

Advance 46332.69 32687.75 13644.94 41.74%

Advance-Deposit ratio % 98.78% 93.66% - -

Import 3,8796.88 28779.21 1,0017.67 34.80%

Export 12522.04 9577.92 2944.12 30.73%

Gross Profit 2363.49 1780.25 583.24 32.77%

Net Profit 60.17 67.71 -7.00 -10.33%

Earning per Share (EPS) 50.20 38.53 11.67 30.28%

Return on asset (ROA) 1.23 1.59 -0.36 -22.64%

Return on equity (ROE) 21.63 20.23 1.40 6.92%

Capital adequacy ratio % 10.61 10.61 - -

Classified loan % 4.14 4.17 -0.03 -0.71%

Number of Branches 57 53 4 -

Number of Employees 1400 1230 170 -

The Paid up Capital of NCCBL was TK 1757.62 million in 2008 against TK 1352.01

million of 2007 the paid up capital of the bank increased by TK 405.61 million, registering

68.63% growth comparing to the same of previous year. The bank management has been able

to collect deposit of TK 46904.66 million in 2008 against TK 34901.77 million of 2007.

Deposit of the bank increased by TK 12002.89 million, registering 38.01% growth comparing

to the deposit of 2007. Of the deposit, NCCBL had made loans and advances of TK 46332.69

million in 2008 against TK 32687.75 million of 2007. The loans and advance of the bank have


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increased by TK 13644.94 million, registering 41.74% growth. As a result, the credit-deposit

ratio of NCCBL stood at higher than the stipulated fixed 82% of total liquidity but within a

short period of account closing for 2008 on 31 December, NCCBL has been able to keep down

the ratio by gearing up its deposit collection drive, managing Director & CEO of the bank

Nurul Amin told The industry.

The import business handling by NCCBL in 2008 was TK 38796.88 million against TK

28779.21 million of 2007. Import business handling increased by TK 10017.67 million,

registering 34.80% growth comparing to the same of previous year. The export business

handling by the bank in 2008 was TK 12522.04 million against TK 9577.92 million of 2007,

registering 30.73% growth comparing to the same of 2007. Export business handling of the

bank has increased by TK 2944.12 million in 2008. The gross profit of the bank has stood at

TK 2363.49 million in 2008 against TK 1780.25 million of 2007, registering 32.775% growths.

The gross profit of NCCBL increased by TK 583.24 million within the year 2008, comparing

to the profit of 2007. Earning per share (EPS) of NCCBL in 2008 was TK50.20 against TK

38.53 of 2007. EPS increased by TK 11.67, registering 30.28% growth. Return on asset (ROA)

of the bank in 2008 was 1.23% against 1.59% of 2007.

The efficient management of the bank headed by its Managing Director & CEO Nurul

Amin has been able to reduce the non-performing loans by 0.71%, even in the global economic

meltdown wave.

Oparational profit(2004-2008)

720.49

1018.34

1267.57

1780.25

2363.49

0

500

1000

1500

2000

2500

2004 2005 2006 2007 2008

Year

Profit


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Major Functions of NCCBL:

NCCBL is a service oriented Financial Institution. The main objective of NCCBL is to satisfy

the customer by serving various facilities they as possible. The bank offers different types of

quality services to its clients NCCBL performs the following functions, which are given below:

1. Deposit services:

The NCC Bank offers for its clients various deposit services. These services are as

follows:

Current Deposit (CD)

Saving Deposit (SD)

Fixed Deposit Receipt (FDR)

Short Term Deposit (STD)

Special Deposit Scheme.

Special Saving Scheme.

Premium Term Deposit.

Instrument Earning Deposit.

2. Credit Services:

Banking business essentially involves lending. Infect deposits are accepted for lending or

investment. It interests rate ranges from 12% to 16% NCCBL provides loans and advances in

the following sectors:

Staff Loan (House Building)

Staff Loan Car


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Security Over Draft (SOD) Against FDR

SOD Export

SOD General

Loan against Trust Receipt (LTR)

Packing Credit

Lease Finance

Hire Purchase

Payment Against Document (PAD)

Cash Credit Hypothecation

Foreign Dollar Bill Purchase (FDBP) (DOCS)

FDBP (Clean)

Export Development Fund (EDF)

House Building (Res.)

Personal Loan

Small Business Loan

3. Customers Services:

NCCBL is always busy in serving to the customer in the best way. One of their

greatest assets is the trust of its customers. NCCBL has the following arrangement of

remittance with in the country.

Information providing by the Bank in every desk.

Account Opening

Online Banking Facilities

Pay-Order issue

Telephone Transfer (TT)

Demand Draft (DD) issue

Account Transfer Facilities

Solvency Certificate Issuing

Locker Service


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Letter of Credit (L/C)

Credit Card Issue (with different limits for different types of customer).

Traveler Cheque Issue

Money Gram Service

Besides these, it also offers some specialized services to its customers. NCCBL has

launched following saving schemes:

NCC Bank special Saving Scheme (SSS).

Special fixed deposit scheme (FDR).

Consumer Financing (Small Loan).

Lease Financing

Islamic Banking Scheme

Non-Resident Foreign Currency Deposit Scheme.

NCCBL, Agrabad Branch, Ctg.-My Place of Posting

Establishment:

National Credit & Commerce Bank Limited (NCCBL) is one of the fastest growing banks

among all the private Commercial Banks in Bangladesh. The institution started its function

back n 18th

November 1985 as an Investment Company in the name & style of National Credit

Ltd. (NCL). As a branch of National Credit Ltd Agrabad Branch, Ctg. started its function in

1987 as an investment company.

As a branch and Commerce Bank Limited emerged full flagged Commercial Bank on 17th

May,

1993, after obtaining license from Bangladesh Bank. From that time, a branch of National

Credit Ltd Agrabad Branch, Ctg. carries out their banking activities. At that time their deposit

was Tk. 4 core and at present time the deposit position on branch is Tk. 259.29 core.


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Present position of the branch

Figure in crore

Particulars Year

2007 2008

Deposit 205.00 259.29

Advance 350.00 544.15

Profit 7.51 10.21

Letter of Credit (L/C) 120.28 158.25

Export 50.42 57.22

Operational profit (2002-2006)


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The bank gains remarkable progress in case of operational profit. It is a great achievement of

the bank as profit is the ultimate target of any bank or any financial institution. The growth in

2006 is 15.28% higher than that of 2005.

In this connection we can conclude that the bank is performing extremely well in case of

maintaining the increasing trend of operating profit.

SWOT Analysis


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SWOT stands for Strength, Weakness, Opportunity and Threat. The SWOT of NCCBL have

been shown below:

Internal factors

Strength

Existence of strict and standard credit management.

Harmonious lender (bank)- borrower (Client) relationship.

Experienced manpower in advance/loan department.

Decreasing trend of classified loan.

Existence of some new & attractive credit scheme.

Weaknesses

Lack of trained and highly educated officers.

Lack of modern equipment.

Lack of proper office space.

Lack of young, energetic and talented officers.

Absence of computerized system.

Absence of Islamic Banking System.

Lack of proper advertisement of the products and services of advance.

External factors


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Opportunities:

Can introduce more new and attractive credit scheme.

Can set a competitive interest rate.

Can recruit young, energetic and talented officers.

Can take initiative for introducing Islamic Banking system.

Threats:

Govt. policies are not in favor of the private banks.

Competitors done the credit services to customers more effectively.

Competitors offer low interest rate on loan.

Entrance of highly equipped and modern banks.

Intense competition in the credit market.

Competitors have young and energetic work force.

Govt. has imposed high rate of taxes and VAT on interest received on advance.

Remarkable progress on Islamic Banks.


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14%

22%

35%

16%

7% 1% 5%

Current Deposits Savings Bank DepositsFixed Deposits Short Term DepositsDeposits Schemes Bills PayableOther Deposits

Advance is the most important parts of the bank. Actually, the main business of the bank is to

settle loans and advance or credit. Bank accepts deposits from individuals and makes loans.

Although all lending involve risks yet a bank has to go with it for earning profit and economic

enlistment as well. Better control on the risk of credit system represents the well reputation of

bank. A Bank has no sense without credit. It is treated as the investment of a bank. In this

connection. NCCBL has also no exception.

3.1: Concept of loan and advance

3.1.1: General concept:

Generally, Loan and advance refers to ―Money lent on condition that it is repaid, either in

installments or all at once, on agreed dates and usually that the borrower pays the lender an

agreed rate of interest.‖


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Bank loan or bank advance is a from of finance. It indicates- a specified sum of money lent by

a bank to customer, usually for a specified rate of ordinary interest (calculated by taking 360

day as a year). Handling ‗load and advance‘ is he major function of bank.

3.1.2: Difference between loan and advance :

Loan: It refers to loan term credit ie money lent by a bank for more than one year (e.g.5 or 10

or 15 year etc)

Such as – Loan general, House building loan, Project loan etc.

Advance: it refers to short-term credit i.e. ‗Money lent by a bank for less than one year‘

Such as – Cash credit, overdraft, discount etc.

In comprehensive sense, loan is considered as a part of advance despite of the above difference.

NCC bank also classified loans and advances according to this comprehensive sense.


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3.2 Different Advances offered by NCCBL

Advances

Loans Overdrafts Cash credits Discounts

Loan General SOD (FO) Pledge Inland Bills Purchased

House Building SOD (G) Hypothecation Foreign Bills Purchased

Loan FDBP & Discounted

Loan against

Imported Merchandise

Payment against document

LDBP

Loan Against

Trust Receipt

Loan Against

Packing Credit

Transport Loan

Project loan

Demand Loan

Consumer Finance

Lease finance

Small Business Loan

House renovation loan

Personal Loan

Festival small business loan

Festival personal loan

Housing loan


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3.3: Details of some major advances

3.3.1: Loans

Under the loan system, credit is given for a definite purpose and for a predetermined period.

Normally, these loans are repayable in installments. Some major loans of the bank are describes

as under:

a) Loan General

When an advance is made in lump sum repayable either in fixed monthly installments and no

subsequent debit is ordinarily allowed expect by way of interest, incidental charges etc called

general loan. it is usually for a single purpose where the entire amount may be required at a

time or in a number of installments within a short period of time. Generally, when the advance

can‘t be classified into any category, it is considered as ‗Loan General‘.

b) House Building loan

In order to solve financial incompatibility to make a house, the bank offer this loan to middle

class people. Period of loan is maximum 5 years. Limit of the amount of the loan depends on

the customer banker relationship.

c) Loan against imported merchandise (LIM)

LIM is a temporary loan and allowed against imported goods. LIM may be created at the

request of the importer while he is not in a position to take delivery of import bills by making

payment of entire bank dues. The importer has to keep the goods in bank‘s custody for getting

this loan.


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d) Loan against trust receipt (LTR)

LTR is also a temporary loan and allowed to the customer against their application on the basis

of only trust, which is generally built on good customer- banker relationship. After sanction of

LTR, import bills are handled over to the importer who will clear the goods from the custom

authorities by making payment duty, VAT and other charges.

e) Consumer Finance scheme

The Scheme aims at improving the standard of living of the fixed income group. Under the

scheme the clients may secure loan facilities at easy installments to procure household

amenities. It meets household needs of service holders: Furniture/ TV/ Refrigeration & others

household durables. Its Credit Ceiling is Up to tk. 1.00 lac and term is 2 years.

f) Lease Finance scheme

An entrepreneur, under this scheme, may avail of the lease facilities to procure industrial

machinery (without having to purchase it by down payment) with easy repayment schedule.

The clients also get special rebate in their income- tax payment under the scheme. Items leased

out to the new/ existing industries to procure machines for the industries.

g) Small business loan

This loan is introduced for smooth running/ expansion of business of small entrepreneurs who

are honest, sincere & promising. This type of loan diversifies bank‘s lending with the

requirement of the time. Its ‗Credit Ceiling‘ is Up to tk. 5.00 Lac and ‗term‘ is 2-5 years.

h) House renovation loan


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The purpose of the loan is to help genuine house or flat owners (not developers) to undertake

repairing or renovation works for better living or increased rental income. ‗Credit ceiling‘ of

the loan is Up to tk. 5.00 Lac and ‗Term‘ is 5 year.

i) Personal loan

The loan serves the purpose of meeting emergency financial expenses of service holders such

as Medical treatment, Marriage, Maternity, Admission of Children, Purchase of banks, Exam

fees etc. Credit Ceiling of the loan is Up to tk. 1.00 Lac and Term is at least 6 month but not

more than 3 years.

3.3.2 Overdrafts

When a current account holder is permitted by the banker to draw more than what stands to his

credit, such an advance is called an overdraft. ‗ it is an automatic coverage by the bank of all

checks presented against the firm‘s account, regardless of the account balance‘. Interest is

calculated and charged only on the debit balances on daily product basis.

Generally two type of overdraft is exercised in the bank-

SOD (FO): It is allowed against financial obligation for promotion of economic and business

activities.

SOD (GE): It is allowed to the traders for business promotion and economic activities.


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3.3.3 Cash Credit

Cash Credit is a continuous type of short-term advance. ‗Under this system, the banker

specifies a limit, called the cash credit limit, for each customer, up to which the customer is

permitted to borrow against the security of tangible assets or guarantees.‘ Two types of cash

credit are exercised in NCCBL—

a) Cash Credit (Hypothecation) :

Hypothecation is a charge on company for a debt, but neither ownership nor possession passes

to the creditors. In hypothecation, both ownership and possession remain under debtor. This

type of credit is allowed to the traders and industrial borrowers for promoting trade and

commerce and industries. This type of advance depends mainly upon the trustworthy of the

party.

b) Cash Credit (Pledge) :

In this case, possession of goods passes to the creditor or bank. It is allowed for promoting

trade, commerce and industries of the country against pledge of stock in trade under Bank‘s

control.


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3.3.4 Discounts

Apart from the usual loans and advances, purchase and discounting of bills of exchange is

another way of employing bank funds. Such bill of exchange arises out of commercial

transactions both in 0inland trade and foreign trade. Although it has various types, PAD is a

major one that is discussed as under:

a) PAD (Payment Against Document):

PAD is the most common credit for foreign exchange business of the bank. On the receipt of

import bills against the L/C from the Negotiating Bank, the issuing bank scrutinizes the

documents with terms & conditions of the L/C and if it is found completely in order, PAD loan

is created in the name of the importer in order to reconcile the entries so debited by the

Reimbursing Bank. The maximum period of repayment of this loan is one month.


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3.4 Advance procedure followed by NCCBL

Procedure is an important factor for the success in any field. If an institution follows proper and

standard procedure for their operation, there will be a great chance of success. Better

performance is possible only when better guideline and procedure are followed.

For this reason, I would like to highlight the procedure of loans and advance department of

NCCBL before evaluating its performance in that area.


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3.4.1 Security for loans and advances

Security can be treated as ‗an insurance against emergency‘. Because it serves as the safety

valve for an unforeseen emergency. Simply it means things deposited as a guarantee of an

undertaking or loan to be forfeited in case of default. In order to sanction credit, the bank has to

keep security from the borrower for the assurance of the recovery of loans and advances.

3.4.1.1 Types of securities

Security offered against loan may be various. The securities may vary from gold and silver to

goods of various types, immovable properties, life insurance policies, stock exchange

securities, promissory notes etc. a prudent banker always tries to take tangible assets as

securities to safeguard his interests.

Generally, security has two types—

a) Primary security: This is the main cover for an advance. The borrower himself deposits this.

b) Collateral security: This is the additional or subsidiary or secondary security. This is resorted

to after exhausting all possibilities of recovery.

3.4.1.2 Methods of creating charges on security


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The bank can create charges on the borrower‘s security by the following methods:

Pledge Hypothecation Mortgage Lien Assignment Set-off

a) Pledge: It is the ‗Bailment of goods as security for payment for a debt or performance of a

promise‘. The possession of security is passed to the bank.

b) Hypothecation: It is the charge against property for a amount of debt where neither

ownership nor actual possession is passed to the bank. But constructive possession

remains with the bank as per deed of hypothecation.

c) Mortgage: ‗When a customer offers immovable property like land and building as

security for a loan, charge thereon is created by means of mortgage‘. It is the transfer of

an interest in specific immovable property for the purpose of securing. There are mainly

two types of mortgages:

- Equitable mortgages

- Legal mortgages

d) Lien: It implies right of the creditor/ bank in possession of goods or securities belonging

to a debtor to retain them until a debt due from the latter are paid.

e) Assignment: It means a transfer by one person of a right, property or debt (existing or

future) to another person. Some examples are--

Contract money due from the government and semi government body

Supply bills

Book debt

Life insurance policy, etc.


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f) Set-off: It means the total or partial merging of a claim of one person against another in a

counter claim by the letter against the former. It is a right, which accrues to the banker as

result of the banker customer relationship.

3.4.2 Process of loan sanction followed by NCCBL

Process of sanction

Step-1: Loan interviewing/ Selection of borrower

Step-2: Loan application submitted by borrower

Step-3: Collecting & correlating the information about the borrower

Step-4: Preparation of credit report

Step-5: Manger‘s decision about the suitability of proposed loan/ advance

Step-6: Assessment

Step-7: Recommendations

Step-8: Sanction

Step-9: Sanction advice & other terms & conditions

Step-10: Repayment & Repayment schedules

Step-11: Interest rate, etc.

3.4.3 Documentation

Documents are the physical embodiment of the existence of loans & advances Documentation

is the execution of documents in right form &lawful manner. Documentation forms a

permanent record of the right responsibilities and obligations of the executants that the

borrower and guarantors towards the lender(bank).


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Steps of Documentation

preparation of deed-Banks printed forms set as per term and condition and nature of

advances

legal opinion- As per latest circular form the panel advocate of bank .

Executants and Execution- signature capacity- Style stamp

Witnessing- Signature capacity –Style.

Stamping of Documents as per Stamp Act 1999, Amendment 1998 Stamp Schedule.

Registration as per Registration Act -1920

Safe Keeping / Preservation

Common charge documents for all types of advances:

Demand promissory note duly signed with revenue stamp

Letter of arrangement

Letter of acceptance

Additional charge documents required for the following types of advances:


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Documents for the advances

Loan general

Letter of disbursement Letter of installment

Letter of authority

Overdraft

Letter of continuity Letter of installment

Cash credit (Hypo)

Letter of hypothecation Stock report signed by the borrower

Insurance cover note Letter of continuity

Letter of guarantee

Letter of third party guarantee

Cash credit (Pledge)

Letter of pledge Stock report signed by the borrower

Insurance cover note Letter of continuity

Letter of guarantee Letter of third party guarantee

Letter of disclaimer


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3.4.4 Disbursement

Finally, the bank for which the following tasks should be followed does disbursement of

advances. These are—

Equity/ Margin should ensure

Term of stanchion should ensure

Charging of securities

End use verification

Strictly following the disbursement schedule

Others i,e proper monitoring, supervision etc.

3.4.5 Supervision, Monitoring & Follow up

Supervision, monitoring and follow up indicate the caring for the loan both at the pre-sanction

and post- sanction stages in order to ensure the safety of the money lent. It is substitute of

collateral.

‗Supervision‘ starts right after the selection of the borrower. ‗Monitoring‘ starts when the

project enters implementation phase. And ‗follow-up‘ starts just after disbursement of loan.

Supervision, monitoring and follow up of loans and advances helps the bank to prevent loan

classification, return flow of funds, compliance of terms and conditions, problem solving,

feedback and take timely corrective action.


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3.4.6 Loan pricing mechanism

Loan pricing is a crucial factor of advance; the price of loan is the ‗interest rate the borrower

must pay to the bank, in addition to the amount borrowed (principal)‘. The bank earns profit

through this loan price or interest rate, which is usually higher than deposit rate. The difference

between loan price and interest rate on deposit represents the profit/ spread for the bank. The

higher loan prices the higher the profit. But it must be charged under the boundaries fixed by

the Central bank.

Calculation of loan pricing:

Price of loan= True cost of the loan or Base rate + Profit or Risk premium

There components of true cost/ Base rate

I. Interest expense (Interest on deposits+ Interest on borrowing from central bank.

II. Administrative cost (Deposit and loan administrative cost.)

III. Cost of capital (Investors expected rate of return)‖

Risk premium: It represents the probability that a new loan to a borrower in that particular

category will not paid and will be written- off or lost.

Mathematically, risk premium = Historical loss rate for a particular type of loan.


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3.4.7 Bank Guarantee

Bank guarantee is a part of advance. It is a common banking service rendered by a commercial

bank. It may be defined as an irrevocable obligation by a bank to pay a sum of money due to

non- performance of contractual obligation by a third party.

As per the contract Act- 1872 – A contract of guarantee is a contract to perform the promise, or

discharge the liability, of a third person in case of his default. The person who gives the

guarantee is called the ‗Surety‘; the person in respect of whose default the Guarantee is give is

called the ‗Principal Debtor‘; and the person to whom the guarantee is given is called the

‗Creditor‘.

There are four party involving bank guarantees:

Parties to a bank Guarantee

The Beneficiary (Creditor)

The Principal (Applicant)

The Guarantor (The Issuing Bank)

The Instructing Party (principal‘s bank who gives counter guarantee)


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3.4.8 Principle of sound lending taken by NCCBL

Risk involvement with advance may be kept at minimum if sound lending principles are

followed.

A) Safety : To ensure the safety of lending NCCBL follows the following factors:

Factors needed

For Safety

Five Cs Five Ps Five Ms Five Rs

Character Person Man Reliability

Capacity Purpose Management Responsibility

Capital Product Money Resources

Condition Place Materials Respectability

Collateral security Profit Market Returns

B) Purpose : The purpose of lending is a crucial point to know for the Bank. It helps the

Banker to know the course of action of the borrower as regards landing. So, the banker

can have the idea whether the loan will be in productive purpose or not.

Sound lending principle

Safety

Purpose

Liquidity

Security

Profitability

Spread/ Diversification

National interest/ Social benefit


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C) Liquidity: It means the availability of fund on short notice. The bank has to know

whether the bank can get back the loan amount in liquid from or not. Because majority

of bank liabilities are payable on demand or after short notice. So, the loan must have

fair chance of repayment according to repayment schedule.

D) Security : The security accepted by the bank from borrowers in order to cover loss if

borrowers become defaulted. It must be adequate, readily marketable, easy to handle

and free from any encumbrances.

E) Profitability: Banking is essentially a business, which aims at earning a good profit. The

bank will definitely invest its money if there is a strong possibility of fair return or

profit.

F) Spread/ Diversification : In this connection, the principle – ‗Do not pull all eggs in the

same basket‘ is followed. The advances should be as much broad based as possible and

must be in conformity with the deposit structure in order to minimize the risk of

lending.

G) National interest: A bank should keep in mind the national development plan to play a

significant role in the economic development of a country.

Beside the above principle, NCCBL follows two most important modern concept of good

lending:

Modern concept of good lending consists of the feasibility study of six aspects. These are –


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Modern concept of principle of good lending

Managerial feasibility

Organizational feasibility

Technical side

Marketing side

Financial aspect

Economic aspect

Other new techniques for assessing soundness of a new loan proposal:

Financial spread sheet analysis (FSSA) Credit Risk Grading

Credit Risk Grading:

Credit risk:

Credit Risk is the possibility that a borrower or Counterparty will fail to meet

obligations


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Credit risk arises form the bank s dealings with or lending to the corporate, individual

and other bank or financial institutions

To minimize losses banks should have comprehensive credit risk management policies

and procedures

Definition of CRG

Based on Pre-specified scale reflecting the credit risk for an exposure

Number/ Alphabet/ Symbol as Summary indicator of risk

Major credit risk :

Credit

Risk

Financial

Risk

Business/

Industry risk

Management risk Security

Risk

Relationship

Risk

Leverage Size of

Business

Experience

Security

coverage

Account Conduct

Liquidity Age of

Business

Succession Collateral

coverage

Utilization of limit

Profitability Business out

look

Team work support competition of

coverage /conduct

Coverage Industry

Growth

personal deposits

Market

Competition

Barrier to

Business


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Assigning weight to key parameters

FR 50%

Lev 15%

Liq 15%

Prof 15%

Cov 5%

B/IR 18%

SB 5%

AB 3%

BO 3%

IG 3%

MC 2%

EB 2%

Arrive at CRG based on total Score

Number R/G Short Name Score

1 SUP 100%(Cash covered

Govt./int .Bank Guarantee

2 GD 85+

3 ACCPT 75-84

4 MG/WL 65-74

5 SM 55-64

6 SS 45-54

7 DF 35-44

8 BL <35


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