This Report covers the details of Bangladesh Krishi Bank’s practices about analysis of

loan disbursement & recovery status. The report consists of the writer’s observation

and on the job experiences during the internship period in the credit department of

Siddirgonj Branch, Narayangonj, Bangladesh Krishi Bank. The report mainly

emphasizes the sequential activities involved in credit approval process, analytical

techniques used by BKB for credit analysis as an integral part of the credit approval

process. The report also focuses on the loan recovery by BKB both in pre-sanction

and post-sanction period of a credit. Finally the report incorporates an evaluation of

the different aspects of the lending process and risk management techniques and

makes some recommendations.

Loan is the primary financial activities in the banking system. The report provides a

detailed discussion about how Bangladesh Krishi Bank manages its loan activities. In

doing so, the standard operating procedures of the bank have been delineated in

details. The report also discusses banks procedures for managing its non-performing

loans. Loan classification procedures have also been discussed in the report. The bank

is recognized as one of pioneers in maintaining compliance with the Bangladesh bank

directives. The report provides a detailed discussion of some the crucial issues of

credit risk management and tries to focus on the practice of Bangladesh Krishi Bank

Limited in this regard under the regulatory framework prevailing in the country. The

findings and their implementations are delineated adequately for the reader to enable

them to get the gist of the core idea behind the study.

BKB follows some specific principals for its loan activities, which involve Know

Your Customer (KYC), safety, liquidity, profitability, purpose and spread.

The lending procedure followed by BKB consists of a set of sequential activities. In

these sequential activities, both bank officials and potential borrowers play significant

role.

Loan analysis if the borrower is found sound for lending, the bank proceeds to prepare

the credit proposal. The credit proposal consists mainly of a brief description of the

borrower, purpose of the loan, collateral, and expiry of the credit line, amount, interest

rate and the result of the credit analysis. The credit proposal is prepared to facilitate

the approval of that particular loan either by Corporate Office credit committee or by

the Board of Directors.

www.AssignmentPoint.com

BKB does not have any fixed time duration to complete lending process for a

particular loan proposal. The total duration of the time required to complete the

lending process varies with the nature of credit, collection of information, nature of

information, analysis of information, preparation of the proposal, corporate office

scrutiny, board approval, preparation of sanction advice, creation and collection of

charges documents and actual disbursement of loan.

BKB must try to reduce the time required by a particular lending process to be

completed. The Higher the duration, the higher the loan processing cost.

Number of banks operating in the market is more but number of potential and good

borrower is less. The bank must find unexpected but profitable sector for financing.

Along side, to expedite the lending process right borrower has to be selected with

strict adherence to KYC, relevant information has to be collected quickly, analysis

must be done precisely and faster, credit proposal has to be prepared in a way that will

represent a transparent picture of the borrower’s financial strength and business

potential and finally to reduce the time involved in the lending process.

Lending is the main income generating activity for all banks including Bangladesh

Krishi Bank. Lending involves both risk and profit. But a sound lending process

supported by quantitative analysis, qualitative judgment and a separate credit

monitoring cell can reduce the risk to a certain extent.

2

Acronyms

Acronyms Elaborations

BKB : Bangladesh Krishi Bank

KYC : Know Your Customer

SLR : Statutory Liquidity Reserve

GDP : Gross Domestic Product

SWOT : Strengths, Weaknesses, Opportunities and Threats.

ATM : Automated Taller Machine.

SME : Small & Medium Enterprise.

SND : Short Notice Deposit

BB : Bangladesh Bank

FDR : Fixed Deposit Receipt

LC : Letter of Credit

3

TABLE OF CONTENTS

No. of contents Name of contents Page noStudent Declaration 4

Official Certification 5

Acknowledgment 6

Executive Summary 7-8

Acronyms 9

Chapter : 1 Introduction 13

Introduction 14

Origin of the report 14-15

Objectives of the report 15-16

Methodology 17-18

Limitations 18

Scope of the study 18

Time schedule 19

Chapter : 2 Organizational

Profile

20

Introduction &

Background of BKB

21

Principle activities 21-22

BKB at a glance 22

Objectives of BKB 22-23

Features of BKB 23

Performance of BKB 24-28

Auditors of the bank 28

Corporate governance &

regulatory compliance

28

Branch information 28-29

SWOT analysis 29-32

4

Chapter : 3 Literature Review 33

Loan management 34

Loan management policy 34

Types of loan

management

34-35

Guidelines 36

Loan assessment & risk

grading

37

Approval authority 37

Segregation of duties 37

Chapter : 4 Analysis & Findings 38

Introduction 39

Types of credit facility by

BKB

39-48

Loan disbursement by

BKB

49-52

Corporate financing 52

Credit program 52

Deposit scheme 53

Poverty alleviation 53-54

An overview of credit

policies & activities of

BKB

54

Credit policy of BKB 54-55

Disbursement year by

year

55

Loan lending planning of

BKB

55-56

Principles of lending 56-57

Strategies of lending

procedure

57-58

5

Classification of loans &

provisioning

58-59

Evaluation of the BKB’s

loan products, principals

& strategies

60-62

Recovery status of BKB 62-69

Recovery data 69-70

Chapter : 5 Conclusions &

Recommendations

71

Recommendations 72

Conclusion 72-73

References 74

6

CHAPTER – 1

INTRODUCTION

7

1.01. INTRODUCTION:

Bank is committed to provide high quality financial services/products to contribute to

the growth of the country through stimulating trade and commerce, accelerating the

pace of industrialization, boosting up export, creating employment opportunity for the

youth, poverty alleviation, raising standard of living of limited income group and

overall sustainable socio-economic development of the country. In achieving the

aforesaid objectives of the Bank, Credit Operation of the Bank is of paramount

importance as the greatest share of total revenue of the Bank is generated from it,

maximum risk is centered in it and even the very existence of Bank depends on

prudent management of its credit portfolio. The failure of a Bank is usually associated

with the problem in credit portfolio and it’s less often the result of shrinkage in the

value of other assets. As such, credit portfolio not only features dominant in the assets

structure of the Bank, it is crucially importance to the success of the Bank also.

The major occupation of the people of Bangladesh is "Krishi". Krishi is a Bengali

word which means "Agriculture". About 73% of the population depends directly or

indirectly on agriculture which contributes a significant portion to GDP. 

Bangladesh Krishi Bank (BKB) has been established under the Bangladesh Krishi

Bank order 1973 (President's Order No 27 of 1973). BKB is Banking Company under

the Banking Company Act-1991. Its Head Office is located at Krishi Bank Bhaban,

83-85 Motijheel Commercial Area, Dhaka-1000, and Bangladesh. Krishi bank has

started commercial functioning since 1977 to generate more loan able fund from the

idle rural and urban savings and invest them for the betterment of our economy.

1.02. ORIGIN OF THE REPORT:After completion of 11 semesters in the BBA Program at department of Business

Administration, in Bangladesh Islami University, a student is required to undertake an

internship program. For this purpose each of them is attached with an institution.

8

The basic purpose of this attachment is to expose the students to real situation and

acquaint them with practice of modern business world. This exposure is helpful to

know how things move and to find the gap as well as similarly between

theoretical knowledge and practical operation.

The internship is designed to bridge the gulf between the theoretical knowledge and

real life experience as a part of Bachelor of Business Administration (BBA)

program. It is designed to have a practical experience while passing through the

theoretical understanding. The main objective of doing an internship report is to have

a practical experience of the real life aspects of the management that we have studied

in the academic course.

To prepare a report, I have selected and got opportunity to work as an intern in

Bangladesh Krishi Bank, Siddirgonj Branch. I have prepared my internship report on

“Loan Disbursement & Recovery Status of Bangladesh Krishi Bank.” The topic

is assigned by Sultan Ahmed, Associate professor, Bangladesh Islami University.

In the report I have tried my level best to make the reader understandable about the

general banking procedures followed by Bangladesh Krishi Bank. As my report is

mainly focused on Credit policy of Bangladesh Krishi Bank. So in my report it has

gone through the standard operating procedures carried out by the bank and

understood them well. Project paper has tried to understand the regulatory compliance

issues proposed by Bangladesh Bank (BB) regarding credit management practices.

1.03. OBJECTIVES OF THE REPORT: To provide a thorough understanding of the Credit Risk Management Practice

followed by Shiddirgonj Branch of BANGLADESH KRISHI BANK for credits. The

report attempts to show whether the Credit Risk Management Practice followed by

BKB is in compliance with Bangladesh Bank guidelines. Some core issues like

Classification procedures and Non-performing Loan handling procedures will also be

discussed thoroughly. Credit Risk grading procedure proposed by Bangladesh Bank

has also been intended to be scrutinized in the report with the existing risk rating

system followed by BANGLADESH KRISHI BANK.

9

So I can categorize my study objectives in two types. They are-

1. Broad objectives.

2. Specific objectives.

These are objectives of the study are described as follows:

1. Broad Objective:

The broad objective of the report is to have an overview on

Loan Disbursement & Recovery Status by BKB.

2. Specific Objectives:

To develop knowledge about Loan Disbursement & Recovery

in BKB.

To identify the strengths and weaknesses of the loan approval

and monitoring process in BKB.

To make recommendations regarding the Bank’s loan activities.

To understand the loan disbursement and recovery the bank

follows in the competitive market.

To provide brief description about different operations areas of

Bangladesh Krishi Bank Limited.

Prudential Guidelines on Loan Disbursement & Recovery

issued by Bangladesh Bank.

10

1.04. METHODOLOGY: SOURCES OF DATATo complete my internship report I have used information collected from two

sources .They are-

1. Primary sources.

2. Secondary sources.

1. Primary sources: Primary sources of the information are the information

Collected by the practical office desk work, direct conversations with the employees

of the bank, direct observations of the functions, relevant document studies provided

by the concerned officers.

2. Secondary sources: Majority of the information were collected from the

secondary sources, which include books, publications, reading materials and various

circulars and reporters, published by Bangladesh Krishi Bank. I have also collected

information from various websites. For the analysis part I have collected data from the

loan proposal and from other documents.

DATA ANALYSIS This is a descriptive report mainly aiming to depict the loan approval process and

monitoring techniques of BKB. The data gathered from both primary and secondary

sources were arranged orderly to get a clear picture of the BKB’s loan management

regarding lending process and monitoring. The study includes both qualitative and

11

quantitative analysis of loan approval process and monitoring tools. Based on the

observational information I have also tried to evaluate and analyze the problems

involved in various phases of the loan disbursement & recovery status.

Presentation of Results and Recommendations

After the data analysis, recommendations are made based on the critical evaluation of

the different phases of process and techniques involved in loan approval and

monitoring.

1.05. LIMITATIONS: There are some limitations of the study. These limitations are mentioned below:

Bank is a sophisticate business sector. So bank do not interested to

provide me confidential data.

Time is one of the important limitations of this report.

Sometimes collection of primary data is not easy enough or time

consuming.

Another limitation of this report is Bank’s policy of not disclosing

some data and information for obvious reason, which could have

been very much useful.

Sometimes employees were very busy to give their valuable time.

Lack of experience of making internship report is one of the

limitations of my study.

Sufficient records & publications as well as up to date information

are not readily available.

1.06. SCOPE OF THE STUDY:The scope of the organizational part covers the organizational structure, background

& objectives, functional experimentation & business performance of “Bangladesh

12

Krishi Bank (BKB)” as whole and the main part covers operational scenario of

“Bangladesh Krishi Bank”. It focuses on loans and recovery status of Bangladesh

Krishi Bank.

1.07. TIME SCHEDULE:For completing the report the time schedule was as follows:

Serial No. PARTICULARS DURATION

01 Data collection

analyzing &

consultation with

the supervisor

35 Days

02 Data observation 30 Days

03 Data input to

computer, setting

processing, &

preparing the report

5 Days

04 Make out as a book

& shown to the

supervisor for

correcting then

submitted to him

finally

15 Days

TOTAL 90 Days

13

CHAPTER-02

ORGANIZATIONAL PROFILE

14

2.01. INTRODUCTION AND BACKGROUND OF BKB:Bangladesh Krishi Bank is 100% govt. owned specialized bank in Bangladesh.

KRISHI means agriculture in Bangladesh. Since its inception Bangladesh Krishi Bank

(BKB) is financing in the agricultural sector remarkably. BKB also performs

commercial banking. People work abroad can easily send home through our “TAKA

DRAWING” arrangement. The major occupation of Bangladeshi people is KRISHI

which means agriculture. About 85% of our people depend on the agriculture which

contributes a significant portion to our GDP. And BKB is working to improve

agricultural sector of the Bangladesh.

Bangladesh Krishi Bank has been established as a full Government owned bank under

Presidential Order 27 of 1973. BKB is a Financing company under Banking Company

Act-1991. Now it has 948 branches all over Bangladesh. Objectives of BKB is to

provide credit facilities to the farmer for the development of agriculture and

entrepreneurs engaged in development of agro-based as well as Cottage industries.

The bank is guided in accordance with the policies and principles of the Government

of the Peoples Republic of Bangladesh. In providing loan bank always give priority to

the poor farmers and SME loans for the small entrepreneurs. It is somewhat different

in some respects of risks because the loan risk is higher in this bank. And it also takes

an essential part in the national development process.

2.02. PRINCIPLE ACTIVITIES:The bank provides all kinds of commercial banking services to its customers through

its branches in Bangladesh. Generally it provides loan to individuals and corporate

bodies related to:

Production of Crops.

Purchase of Irrigation Machinery and Equipment

Development of Horticulture

Pisciculture and finally

Animal Husbandry.

The bank gives emphasis to establish small agro-based cottage industries at both

urban and rural areas by way providing technical and financial supports. The Bank,

15

within its constitutions put priority as far as possible and extend loan to small and

marginal farmers. The bank as such is discharging its duty to the society side by side

its responsibility as a financial institution.

2.03. BKB AT A GLANCE: Name : Bangladesh Krishi Bank (BKB).

Status : Specialized Bank

Established : 1973 (President’s order 27 of 1973)

Starts of Commercial Banking : 1977

Authorized Capital : 15000000000

Paid up Capital : 9000000000

Reserve : 2059927847

No. of Branches : 952

No. of Employees : 10272

EMAIL : bkb@citechco.net

WEBSITE : www.krishibank.org.bd

CHAIRMAN : Khandakar Ibrahim Khaled

Although manpower needed in BKB is 13680 but there is lack of manpower more

than three thousand.

2.04. OBJECTIVES OF BKB: Bangladesh is mainly an agricultural country. The infrastructures of the country are

mainly based on agriculture. More than 60% of our labor force is related with

agriculture or agriculture based industries. As its name suggest, Bangladesh Krishi

Bank is mainly established for the development of the agricultural sector. If it can be

possible to make the agricultural sector of a country as one of the profitable sector

than it would also be possible to reduce the poverty level of Bangladesh. So the main

objective of BKB is to make the agricultural sector as one of the profitable sector of

the country. And to increase the standard of the living of the people. Agriculture is

one of the most uncertain and risky sector to finance. But BKB is financing in the

agricultural sector. The main objectives of BKB are as follows:

16

Development of the agricultural sector and the agricultural

based activities of the country.

Help to make the agro-based product marketable.

To strengthen the rural economy.

To ensure proper economical development of Agro-based

industries and small entrepreneurs by providing loans.

To select the new sectors of agro-based products and take

initiatives to develop the sector by providing loans and

marketing support.

BKB provides financial support to the entrepreneurs of the

products which have enough probability to export.

Financing the marginal farmers is one of the important

objectives of BKB.

These are the prime objectives of Bangladesh Krishi Bank. Besides BKB also

provides financial help to the poor farmers after every calamity to cope up with the

situation.

2.05. FEATURES OF BKB: ► BKB has an authorized capital of tk. 15000 Million only and paid up capital

tk. 9000 Million only which is fully paid by the government.

► Bank has started commercial functioning since 1977.

► The bank operates its function through 952 branches (Rajshahi Division) of

which 822 (86%) rural and 130 (14%) are Urban.

► It has 14 Foreign exchange (Authorized Dealer) branches.

► In the field level the bank has 8 divisional and 51 regional offices for close

supervision of the branch activities.

► For smooth working bank has also 56 field level audit offices at divisional

and regional levels.

17

► Among the 952 branches 212 branches have already been computerized.

2.06. PERFORMANCE OF BKB:As on 30th June, 2011 total assets (including contingencies) went up to Taka 140815

million from Taka 117823 million of 2010. During the same period operating profit

has increased to Taka 3304 million from Taka 1787 million of 2010.

2.06.01. TREND OF BRANCH EXPANSION:

YearUrban Branches

Rural Branches

2006-2007 128 803

2007-2008 129 810

2008-2009 129 811

2009-2010 130 817

2010-2011 130 822

18

2.06.02. DEPOSITS:Deposit is the largest source of bank funds. It is assumed that a medium size bank

collects 85%-90% of its bank fund through deposits. To strengthen the base of the

bank’s fund BKB emphasizes of collecting deposits. There are mainly four types of

deposits. They are given below:

1. Fixed deposits.

2. Savings deposits.

3. Current deposits.

4. Short Notice Deposit (SND)

The year wise deposit mixes are given below:

(Figures are in Core TK)

TYPES OF DEPOSITS 30-06-2009 30-06-2010 30-06-2011

FIXED DEPOSITS 2789.23 3638.74 4553.11

SAVINGS DEPOSITS 2351.67 2421.85 2724.04

CURRENT DEPOSITS 493.27 549.34 603.62

SND & OTHERS 1227.60 1341.77 1517.57

TOTAL 6861.77 7951.70 9398.34

The graphical presentations of the deposits of BKB for the three years are given

below:

Deposit mix is the combination of various types of deposits of Bangladesh Krishi

Bank. These deposits are consists of Fixed, Savings, Current deposits and others type

of deposits. For the year 2011 the DEPOSIT MIX of BKB, Fixed are 48% of the total,

19

Savings are 29%, Current deposits are 7% and others are 16% of the total deposit.

This can be graphically shown as follows

2.06.03. PROFIT AND OPERATING RESULT:The Bank earned as operating profit Tk. 3304,001,494tk during 2011.And the amount

of provisions for the year is 125,215,275tk Provision for income tax .Provision for tax

was nil for the year. There was no profit no loss situation and in the previous year net

loss was (1,966,375,453). So the performance of the bank is better than the previous

year.

2.06.04. LOAN AND ADVANCES:Bangladesh Krishi Bank is following the “PONCHO BARSHIKI NITIMALA” of the

government from the year 2007-08.And working for the establishment of these

planning. BKB has provided 4003.20 cores Taka as loan and advance in the year

2011. And in the year 2010 it was 3441.56 cores. Which are approximately 561.64

cores more than the previous year. The lion portions of the loans provided by BKB

are provided to the agricultural sector and in the agro-based industry. And which is

also an indicator of banks dedication towards the development of the agricultural

sector of the country.

2.06.05. INVESTMENTBKB also does the work of investments. Investment is one of the major sources of the

uses of fund. BKB mainly invests on various Bonds, Debentures and shares. In the

year 2011 the total amount invested by BKB was 1,511,989,500 Taka. Of which

20

Share was 34,439,000 Taka and Bond was 1,477,550,500 and in the previous year it

was about 1,491,694,500 taka.

2.06.06. EXPORT BUSINESSThe total quantum of Export business handled by the Bank in 2011 stood at

Tk.1346.70 core Taka as compared to the volume of Tk.1084.45 in 2010 registering

an increase of 262.25 cores Taka.

2.06.07. IMPORT BUSINESSImport business handled by the Bank during the year 2011 amounted to Tk. 2297.94

core Taka as against Tk.1813.00 core Taka of the preceding year registering an

increase of 484.94 cores Taka.

2.06.08. REMITTANCEThere are two types of remittances, one is the inward remittance and another one is

the outward remittances. In the year 2010 total inward remittances were 687.78 cores

but in the year 2011 it is 951.27 cores. Which were 263.49 cores higher than the

previous year. And the outward remittance was 9.46 in 2010 and in 2011 it is 17.21.

We can see the foreign trade business of BKB graphically as follows:

21

2.06.09. MODERNIZATION OF THE BRANCHESTo ensure quality of services to the customers BKB is computerizing its branches. At

present regional office, Head office and other Divisional Branches are computerized.

In 2010-11 fiscal years there 162 branches have been computerized. And to ensure

quality and quick service there has been opened one stop services in this branches.

Providing online Banking service is under processing in some important branches.

2.07. AUDITORS OF THE BANK The Audit Firms M/s. Zoha Zaman Kabir Rashid & Co and Kazi Zahir & co. jointly

has done audit and Inspection of the Books of Accounts of the Bank for the

accounting year ended 30th June 2011 jointly.

2.08. CORPORATE GOVERNANCE & REGULATORY COMPLIANCEEastern Bank Limited practiced the principles of good corporate governance over the

years that covered compliance of regulatory requirements, responsive to various

stakeholders. Spirit of corporate governance also included practicing of the corporate

culture within the organization and shared this by the employees.

Eastern Bank Limited complied with all the regulatory guidelines prescribed by the

Banking Companies Act, Bangladesh Bank, National Board of Revenue and

Securities & Exchange Commission, International Accounting Standards, etc.

22

2.09. BRANCH INFORMATION:I got chance to work as an internee in the Shiddirgonj Branch of Bangladesh Krishi

Bank. The bank is located at Chittagong Highway Road, Shiddirgonj, and

Narayangonj. There I obtained practical knowledge of working at various

departments.

(Amounts are in Taka)

Branch Name Bangladesh Krishi Bank,

Shiddirgonj branch.

Location Shiddirgonj, Narayangonj.

Number of Office Staffs 17 ( 1 A.G.M, 1 S.P.O, 4 P.O, 3 S.O,

3 Officer, 1 supervisor, 2 cashier, 2

GO)

Name of the Branch Manager Md. Mobarak Hossain.

Total Loan Disbursement 816,45,000

Loan Recovery 7,63,88,000

Total Deposits 45,27,16,000

Total Expenses 3,07,41,000

Total Revenue 5,24,12,000

Total Profit 2,16,71,000

Total Assets 2,38,39,59,000

2.10. SWOT ANALYSIS SWOT analysis is the detailed study of an organization’s exposure and potential in

perspective of its strength, weakness, opportunity and threat. This facilitates the

organization to make their existing line of performance and also foresee the future to

improve their performance in comparison to their competitors. As though this tool, an

organization can also study its current position, it can also be considered as an

23

important tool for making changes in the strategic management of the organization.

Strengths: Bangladesh Krishi Bank has already established a favorable reputation

amongst the people in the banking industry of the country. It is one of the

leading specialized banks in Bangladesh.

Bangladesh Krishi Bank has provided its banking service with a top leadership

and management position.

Bangladesh Krishi Bank has gained enough confidence of the poorer section

of the country. They feel quite comfortable to make any transaction with the

bank as it is fully Government owned specialized bank.

Bangladesh Krishi BANK has an interactive corporate culture. The working

environment is very friendly, interactive and informal. And, there are no

hidden barriers or boundaries while communicate between the superior and the

employees. This corporate culture provides as a great motivation factor among

the employees.

Bangladesh Krishi Bank has 952 branches across the whole country. This is

considered as one of the strengths of BKB.

Bangladesh Krishi Bank has some definite objectives. So it can conduct its

activities towards its objectives.

BKB is fully a government company. BKB is financially strong as result

customers feel comfortable in dealing with the company.

BKB’s lending rate is lower than any other private commercial banks.

Weaknesses:

Bangladesh Krishi Bank has less manpower than needed. BKB has 10272

employees. But manpower needed 13680.

24

The bank failed to provide a strong quality-recruitment policy in the lower and

some mid level position. As a result the services of the bank seem to be Deus

in the present days.

The poor service quality has become a major problem for the bank. The

quality of the service at BKB is lower than the other private commercial

banks.

Profit making is not the prime objective of BKB. So in some sector of BKB

there is no or slow growth.

In terms of promotional sector, BKB has to more emphasize on that. They

have to follow aggressive marketing campaign.

The bank is not fully computerized so the banking procedure is time

consuming.

BKB can not provide enough customer satisfaction.

As previously mentioned, the world is advancing e-technology very rapidly. Though

Bank Asia has taken effort to join the stream of information technology, it is not

possible to complete the mission due to poor technology and infrastructure of our

country.

Opportunities: In order to reduce the business risk, BKB has to expand their business

portfolio. The management can consider options of starting merchant banking or

diversify into leasing and insurance sector.

BKB can improve the quality of service by introducing automation and online

banking.

Opportunity in retail banking lies in the fact that the country’s increased

population is gradually learning to adopt consumer finance. The bulk of our

population is lower class and middle class. Different types of retail lending

products have great appeal to this class. So a wide variety of retail lending

products has a very large and easily pregnable market.

25

A large number of private banks coming into the market in the recent time. In

this competitive environment BKB must expand its product line to enhance its

sustainable competitive advantage. In that product line, they can introduce the

ATM to compete with the local and the foreign bank. They can introduce

credit card and debit card system for their potential customer.

BKB can use the customer confidence and expand its activities towards the

development of the country by providing quality services and customer

satisfaction.

BKB have to identify the emerging agricultural sector and finance the sector

to make the sector more profitable.

If BKB can be able to establish agricultural sector as one of the profitable

sector than people will get interest more in agricultural sector and agro based

industries. Thus the rural poverty can be eradicated.

Threats:

BKB performs commercial banking activities. So all sustaining multinational

banks and upcoming foreign and private banks pose significant threats to BKB

Limited. If that happens the intensity of competition will rise further and

banks will have to develop strategies to compete against these local and

foreign banks.

If BKB can not provide sufficient help and support to the poorer section and

the marginal farmers than the development of agricultural will not be possible.

BKB is financing in the development of agricultural sector of the country. And

we all know that Agricultural sector is one of the most uncertain and risky

sector to invest. These uncertainties are considered as one of the major threats

for BKB.

26

CHAPTER 3

LITERATURE REVIEW

27

3.01. LOAN MANAGEMENT:

Loan management is the process for controlling and collecting payments from your

customers. A good loan management system will help you reduce the amount of

capital tide up with debtors (people who owe you money) and minimize your

exposure to bad debts.

Good loan management is vital to cash flow. It is possible to be profitable on paper

and but lack the cash to continue operating in business.

3.02. LOAN MANAGEMENT POLICY:

Loan management policies help the loan department operate more efficiently. Loan

management policies are rural & guidelines established by top management that

govern the company’s loan department and its performance in the extension of loan

privileges. Loan procedures are employed to achieve the goals of loan management

policies.

3.03. TYPES OF LOAN MANAGEMENT:

Significance:Loan management policies allow the loan department to operate more efficiently.

Ambiguity is reduced over how to proceed when policies are clearly-defined. Loan

management policies can offer specifies rules in regard to the loan amounts, type of

customers, debt-to-income ratio, collateral requirement, payment terms and interest

rates.

Types:There are several types of loan management policies. They are based on the industry,

lending activities and top management’s business style or approach to lending.

28

Automotive, academic, home, retail, wholesale and credit card lending all may have

different loan management policies. A tight loan management policy to conservative

and restrictive guidelines for the extension of credit. A loose policy allows for more

flexibility and may focus more on simply making sure debt is repaid instead of credit

analysis and review.

Procedures:Loan procedures are the specific ways in which top management requires the loan

department to achieve loan management policies. They can include instructions on

what data is to be used for the loan investigation and analysis process and other

procedures. Loan procedures can also provide information for the loan approval

process, account suspension and instances requiring management notification.

Cash Flow:A major influence on loan management policies is cash flow. Cash flow requirements

describe the amount of money a business needs to meet its financial obligations or pay

its bills. A loose loan policy in which little customer loan investigation is performed

can lead to higher default rates and slower repayment of debt. This can have a

significant impact on a company’s cash flow. Companies with small cash reserves or

other sources of capital may be inclined to adopt tighter loan management policies.

Communication: Part of a good loan management policy should stress communication with other

departments. Communication with the sales department can reduce conflict

sometimes occurs when a sale is declined or affected because the loan department

determines there is high level of risk involved in doing business with a particular

customer. Communication with the collections department can provide warning signs

of loan or credit default.

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3.04. Guidelines: The purpose of this document is to provide directional guidelines that will improve

the risk management culture, establish minimum standards for segregation of duties

and responsibilities, and assist in the ongoing improvement of BKB.

The guidelines have been organized into the followings:

Policy guidelines:oLending Guidelines.

oCredit Assessment & Risk Grading.

oApproval Authority.

oSegregation of Duties.

o Internal Audit.

Management structure & responsibility.

Procedural guidelines:oApproval Process.

oCredit Administration.

oCredit Monitoring.

oCredit Recovery.

Lending guidelines:The lending guidelines include the following:

o Industry and business segment focus.

oTypes of loan facilities.

oSingle borrowers/group limits/syndication.

oLending caps.

3.05. Loan assessment & risk grading:

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Loan applications should summarize the result of the risk assessment & include, as a

minimum, the following details:

oEnvironment or social risk inputs.

oAmount and type of loan (s) proposed.

oPurpose of loans.

oLoan structure (Tenor, Covenants, Repayment schedule, Interest).

oSecurity arrangements.

oAny other risks or issue.

oRisk triggers & action plan-condition prudent, etc.

3.06: Approval Authority: Loan approval authority has been delegated to Branch Manager, loan Committee

by the MD/Board.

Delegated approval authorities shall be reviewed annually by MD/Board.

Approvals must be evidenced in writing. Approval records must be kept on file

with the loan application.

The aggregate exposure to any borrower or borrowing group must be used to

determine the approval authority required.

Any loan proposal that does not comply with lending guidelines, regardless of

amount, should be referred to Head Office for Approval.

3.07. Segregation of Duties:Bank will aim at segregating the following lending function:

Loan approval/Risk management.

Relationship management/marketing.

Loan administration.

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CHAPTER 4ANALYSIS AND FINDINGS

32

4.01. Introduction

Loan facilities, principals, procedures and lending guidelines should provide a clear

and consistent point of reference for all employees and prevent misunderstanding,

confusion or omission by personal dealing with loan issues. Additionally, loan

policies help prevent deviation from the overall lending principles and loan culture.

Loan procedures support the delivery of loan products, help to avoid undue process

and serve as an efficient mechanism in granting of facilities and the administration of

the risk asset portfolio.

4.02. Types of Credit Facility by BKB The total loan disbursement of BKB can be classified into three major groups these

are:

1. Short term loan

2. Medium term loan and

3. Long term loan

BKB offers both funded and non-funded loan facilities. Among all the funded and non

funded facilities BKB does not provide all but those, which are commensurate with

the Bank’s policy and strategy. The various funded and non funded loan facilities that

BKB provides to its borrowers are:

Funded Facilities:The funded loan facilities are those, which involve direct cash. In other words any

type of loan facility, which involves direct outflow of Bank’s fund on account of

borrower is termed as, funded loan facility. The following funded loan facilities are

provided by BKB.

Bangladesh Krishi Bank provides different kinds funded loan especially in

Agriculture sector of our country. These loans have low interest rate which facilitates

our people who involve in agriculture. In this section of report we will discuss about

the different types of loan that BKB offer.

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BKB finances the following seven sectors, which are given below:

1. Crop

2. Fisheries

3. Live Stock

4. Agro-equipment and farm machineries

5. Agro processing industries

6. Continuous Loan  

7. Poverty Alleviation and Micro Credit Programs

8. Special Recovery Activities/ program

9. SME

10. Others

CROP:

Crop is one of the important sectors of Bangladesh agriculture. In this sector the

total number of manpower involved are more than 57% of the total. And in the

national GDP the portion of the CROP sector is approximately 11.7%. So 60% of

the total allocation of loan of Bangladesh Krishi Bank is reserved for crop alone.

This program attends all the seasonal crops and the target people are land owners,

share cultivators, and marginal farmers. Rate of interest is very much within the

reach of these people around 8%. The important sectors of Crop sector are:

1. Loans in the food crops. (Rice, Jute, Wheat

etc.)

2. Cash crops.

3. Horticulture.

4. Loan for gardening and nursery.

5. Tea state.

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6. Small Holding Tea State in Chittagong Hill

Tracts.

7. Loan in the emerging sectors of agriculture.

FISHERIES:

In development of Bangladesh’s economy it is one of the important sectors. This

sector can create the employment of people, meets the local demand for fish and also

can earn foreign currency through exports of fish. BKB disburses loan for fish culture

and fish hatcheries. Cultivation of sweet water fish and Shrimp gets loan. Hatcheries

for fish and Shrimps are considered for BKB’s loan. The loan disbursed in this year in

this sector is 296.47 cores.

LIVE STOCK:

In our country Livestock sector has enough importance for the development of our

economy. In our country this sector can meet the local demand for meat, milk, skin,

bones etc. And this sector can earn foreign currency also. To reduce the dependence

of import and increase the export of child food, meat and skin. BKB provides loan in

this sector. Aim of the project is to create self employment. BKB provides loan for:

1. Buying cows.

2. Beef fattening.

3. Dairy farm.

4. In Poultry farming.

5. In goat farming.

CULTIVATION & IRRIGATION:

Bangladesh Krishi Bank presents loan for mechanizing cultivation and irrigation.

People are interested now to switch over from traditional machinery system to modern

one. So this a timely approaches to provide loan in this sector. BKB also patronize

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manufacture and marketing of farm equipment. Besides the bank offers credit for

poultry and dairy firms and for export oriented food and fish processing plants.

POVERTY ALLEVATION PROGRAM:

BKB is working to ensure the development of the rural and poor people. BKB is

providing loan in this sector to make the proper use of the rural manpower towards

the development of the country. BKB is providing loan in the13 sector under this

program. They are:

1. Loan to the landless and marginal farmers.

2. Joint lending for poverty eradication.

3. Self are sustaining lending.

4. Improvement of the labor force.

5. South Asian Poverty Eradication Program.

6. United Nation’s farmer’s development program.

7. BKB-NGO micro credit program.

8. Cow farming for the women.

9. Autistic development program.

10. SME development for Manipuri.

11. Development program for Rakhains.

12. Special loan for Manipuri people in Shylet.

13. Working facility for the rural women.

SME LOAN:SME plays a vital role in our economy. SME is one the major source of self

employment. To make skilled entrepreneur BKB finance in this sector. To establish

the Brain Resource as an important alternative to Venture capital SME loan is

provided. BKB logically imposes sufficient emphasis on it. Major Fields for banks

interest are-

1. Electrical and electronics.

2. Software.

36

3. Light engineering.

4. Agro-based all fields.

5. Leather and leather goods.

6. Garments.

7. Plastic and synthetics.

8. Health care.

9. Education.

10. Pharmaceuticals.

11. Faison goods.

The credit range in this sector is taka 2.0 lac to taka 500.00 lac. The interest rate is

quite logical and viable.

Corporate Finance and Other Project Loans

Project loan normally has fixed maturity and it relates to term investment. As such it

requires appraisals of those proposals to have a rational decision. Appraisal may be

termed as assessment of viability over a period of time.

These loans are usually made for:

Setting up of industries and to meet working capital

Balancing, Modernization, Replacement and Expansion (BMRE) of

existing industries.

OTHERS TYPES OF LOANS BY BKB:

Over Draft

Over draft facility is also a continuous loan arrangement on a customer’s current

account permitting him/her to overdraw up to a certain approved limit for an agreed

period. Here the withdrawal of deposits can be made any number of times at the

convenience of the borrower, provided that the total overdrawn amount does not

exceed the agreed limit. Customer can return any amount at any time within the pre-

fixed time of the facility. Turn over of an Over Draft facility is the most important

phenomenon on which renewal of the facility depends. Over Draft facility is given to

37

the businessmen for financing working capital requirement and high net worth

individual to overcome temporary liquidity crisis.

Secured Over Draft

This is a type of over draft facility given to the borrowers keeping sufficient collateral

from the customer in the most liquid form. This facility provides specific right to a

client to overdraw within a pre fixed limit for a certain period of time. Secured over

Draft is normally granted against the security of tangible asset such as lien of Fixed

Deposit Receipt (FDR), Bonds, Sanchaya Patra but currently Secured Over Draft is

given only against Fixed Deposit Receipt because Bangladesh Bank has recently

prohibited Secured Over Draft against Bonds and Sanchaya Patra. Interest charged on

the Secured over Draft is calculated on the basis of the security lined.

Term LoanTerms loans are given to finance the acquisition of capital assets. Loan agreements

often contain restrictive covenant and loan is repayable in accordance to amortization

schedule. Collateral is must for term loan. Under term loan there are three categories:

Short term Agricultural loan- loans having maturity less than one year falls

under this category. The loan items under this category are:

1. General short term loan.

2. Special lending activities of 100 core Taka.

3. Loan in the disastrous region.

4. Lending activities with Bangladesh Mission.

5. Lending activities for the process and marketing of

agricultural products.

Midterm Agricultural loan- this loan facility is extended for loans having

maturity more than one year but less than three years. The loan under this

category are:

1. Mid-term general loan activities.

2. Mid term Loan in the disastrous region.

3. I.D.B.I loan 1&2.

38

4. A.D.B loan 1&2.

5. USAID IRI cultivation program.

6. Ret culture.

Long term Agricultural loan- tenure of long term loans is more than three

years. The loans under this types are:

1. A.D.B loan 1&2.

2. USAID IRI cultivation program.

3. Japan assistance.

4. Improvement of tea sector.

5. Ret culture.

Syndicate Loan

A Bank can lend up to 15% of its paid up capital without any approval by Bangladesh

Bank. If the loan amount exceeds 50% of the paid up capital then Bank goes for

Syndicate loan. Lead Bank makes the arrangement and Head Office makes the facility

agreement by the Bank’s lawyer. All terms and conditions such as security sharing,

mode of creating charges, mode of repayment, covenants of the loan are written on

the facility agreement.

Cash Credit

BKB also offers personal cash credit facility to its customers for buying household

appliances, agricultural machineries, for business. Securities are kept for such type of

credit facility but a guarantee from third party is required who ought to be a

prominent person or government service holder. Anyone with continuous employment

for a reasonable length of time in an organization is entitled to enjoy this facility. A

quotation needs to be submitted on the office pad from where the goods will be

purchased. Limit of personal credit ranges varies with the financial strength of the

mortgage. And interest rate is 15.00%, which is subject to change.

39

The objective of this loan is to provide cash credit durables to the fixed income group

(Service holders) and other eligible borrowers under the scheme for following

business area.

Items of Investment under Cash Credit:

1. Refrigerator / Deep Freeze

2. Television / VCR / VCP / Dish Antenna

3. Buying cows.

4. Beef fattening.

5. Dairy farm.

6. In Poultry farming.

7. In goat farming.

8. Music Center

9. Motor Car / Motor Cycle

10. Air –Cooler / Air – Conditioner

11. Personal computer

12. Washing Machine

13. Household Furniture & Fixtures

14. Sewing Machine

15. Kitchen appliances like Oven, Toaster, Pressure Cooker, Blender

etc.

16. Any other item not specified above but considered essential.

Non funded facilities: Non funded facilities are also known, as contingent facilities are those where bank’s

fund is not required directly. A non-funded facility can be turned to a funded facility

as per situation creates. Bank receives commission rather than interest income by

providing non-funded facilities. Following non-funded facilities are provided by

BKB:

Letter of Credit (L/C)

40

A letter of credit can be defined as a Credit Contract whereby the buyer’s bank is

committed (on behalf of the buyer) to place an agreed amount of money at the seller’s

disposal under some agreed upon conditions. Since the agreed upon conditions

include, amongst other things, the presentation of some specified documents, the letter

of credit is called Documentary Letter of Credit. The Uniform Customs & Practices

for Documentary Credit (UCPDC) published by International Chamber of Commerce

(ICC, 1993) Revision, Publication No. 500 defines Documentary Credit.

Any arrangement however named or described, whereby a bank (the “issuing bank”),

acting at the request and on the instructions of a customer (the “applicant”) or on its

own behalf,

1) Is to make a payment or to the order of third party (the Beneficiary), or is to

accept and pay bills of exchange (Drafts) drawn by the Beneficiary, or

2) Authorized another bank to effect such payment, or to accept and pay such

bills of exchange (Drafts),

3) Authorizes another bank to negotiate, against stipulated document (s),

provided that the terms and conditions are complied with.

BKB provides only irrevocable letter of credit (L/C) facility.

41

FIGURE: TYPES OF CREDIT OF BKB

Classification of Credit

Short term Medium term Long term

Crops loan

Fisheries loan (digging ponds, lake)

Live stock loan

Socio economic activities

Irrigation and farm machinery loan Example: Tractor

Agro based IndustriesWorking capital Loan

White fish loan

Fish & shrimp hatchery

Shrimp culture (Marine, sweet water culture

Poultry firm

Dairy firm

Food processing

Exportable items

Import substitute

42

4.03. LOAN DISBURSEMENT BY BKB:

The amount of money disbursed by BKB in the year 2010-11 is given below:

(Figures in core TK)Serial No. SECTORS OF LOAN

DISBURSEMENT2009-10 2010-11 2011-12

1 CROP 1431.38 1488.40 1778. 22

2 Fisheries 282.85 296.47 494. 39

3 Live Stock 226.30 229.83 337.004 Agro-equipment and

farm machineries

28.74 28.93 39.87

5 Agro-processing

industries

181.85 179.64 187.77

6 Continuous Loan   948.83 1462.34 1636.27

7 Poverty Alleviation

and Micro Credit

Programs

53.43 47.82 86.03

8 SME. - 76.00 131.339 Others 288.48 193.73 331.25

TOTAL 3441.56 4003.20 5222.13

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Loan disbursement trend in BKB for the last three years are given below:

Sector wise loan disbursement in 2011-12

Bangladesh Krishi Bank has been engaged in foreign exchange business since 1980. It

deals with all kinds of export, import, remittance and other sorts of foreign exchange

business.BKB has got 200 major correspondent banks globally and maintain

sufficient number of Nostro Accounts in various foreign currencies with different

44

leading banks in the important business centre of the world. BKB has taken massive

foreign exchange programmers to increase business. Import of capital machinery and

raw materials for agro processing industries and export of agricultural products,

foreign remittance and all sorts of foreign exchange transactions and services

provided by BKB. Products and services in case of international banking are given

below:

Letter of Credit. (LC)

Bill purchase/ Discount.

Export Credit. (Pre shipment and Post shipment).

Remittance (Inward/ Outward)

Collection, purchase and sale of foreign currencies and

Travelers cheque.

Maintenance of student education file.\

Guarantees in foreign currencies.

Foreign Currency accounts.

NFCD (Non-resident Foreign Currency Deposit) A/c.

RFCD (Resident Foreign Currency Deposit) A/c.

Forward Contracts.

Correspondent Banking Relations.

Taka Drawing Arrangement.

Dealing room.

S.W.I.F.T (Society for Worldwide Inter bank Financial

Telecommunication.)

PRODUCTS AND SERVICES OF BKB:

Although the central attention of BKB is agriculture. It doesn’t abandon other fields

of the economy at all. All the businesses of the bank may be defined as follows:

Corporate Financing.

Credit Program.

Deposit scheme

International Banking.

Loan services of BKB.

Poverty Alleviation.

Micro-credit program.

45

4.04. CORPORATE FINANCING

The Bank has started financing to renowned corporate bodies of the country for the

last 2/3 years. This has opened a new arena of utilizing Agri-product marketing

channel of the companies in easy terms and at a lower interest rate. Such companies

are:

1. PRAN GROUP (Agriculture Marketing Company Ltd.)

2. SQUARE GROUP (Square Consumer Products Ltd.)

3. PARTEX GROUP (Partex Furniture Ltd.)

4. SUPREME SEEDS

5. PADMA GROUP

6. P.H.P GROUP

7. T.K. GROUP

8. ISPAHANI GROUP

9. SA GROUP

10. K.D.S GROUP

11. CITY GROUP

12. S. ALAM GROUP

13. MEGHNA GROUP

14. National Pharmaceutical Co. ltd. (NPCL)

4.05. CREDIT PROGRAM:Credit program may be called the prime function of the bank. This program includes

the loans provided for crops, fisheries, livestock, farm and irrigation, agro based

industries project, SME, Micro credit. More about credit program will be discussed in

the credit section of the project part.

4.06. DEPOSIT SCHEME:As a commercial bank BKB offers some well designed deposit scheme for the

customer. These are Special Notice Deposit (SND), Fixed Deposit, Time deposit,

46

Savings scheme, Educational Savings, etc. Under time deposits there are sub head like

DPS,SPS, Teachers Savings, Hajj Deposit and Krishan-Krishani,

Types of deposits and interest rate related with particular deposits are given below:

Name of the Account Period Rate of InterestSavings Bank Account ---- 5.00%

Short Term Deposit (STD)

Account

----3.50%

Current Deposit Account ---- 0.00%

FIXED DEPOSITS

FDR 13 months and above but less

then 6 months 7.00%

FDR 26 months and above but less

then 1 year7.50%

FDR 31 year and above but less

then 2 years7.75%

FDR 42 years and above

(Maximum 4 years) 8.00%

4.07. POVERTY ALLEVIATION: Bangladesh Krishi Bank has taken up poverty alleviation as one of the fundamental

jobs. It extends Micro Credit services for the people below the poverty level. Some of

these services arranged by BKB alone and some are joint efforts. Local and

international agencies collaborate in some cases. The international organization like

United Nations, Asian Development Bank, SAARC are working with BKB in some

projects.

It is now possible to say that BKB is performing its duties efficiently in developing

the agricultural sector of the country. And at the same time helping the down trodden

millions to come up above the poverty level through sustainable growth.

47

4.08. AN OVERVIEW OF CREDIT POLICIES AND ACTIVITIES OF BKBAgriculture is the most important and profitable sector in Bangladesh. All of our

economic activities have been developed based on agriculture. In this case

Bangladesh Krishi bank is the leading financial institution for financing in agriculture.

Bangladesh Krishi Bank strictly adheres to the regulatory policies, rules etc as regard

to credit

Management and is in compliance with regulatory requirements as stipulated by

Bangladesh Bank from time to time.

4.09. CREDIT POLICY OF BKB:Bangladesh Krishi bank in fiscal year 2011-2012 decided to prepare a five years

plan to disburse loan in different sector. The key point of their planning is given

below:

► To develop and expansion of agriculture the bank will provide loan to all agro-

based sector which involve in Agriculture.

► To facilitate, modernized, profitable of and to improve the life style of rural

people BKB will pay special attention to the 7 sector such as: Crops, Fisheries, Live

stock, Agro-equipment and firm machineries, Agro based industries, Continuous loan,

Poverty alleviation and Micro-credit program.

► To identify different sector which increase the price of agro product and

distribution BKB work for those sector and give loan to improve the situation.

► To face the growing amount of loan demand in every year BKB will increase the

amount of loan disburse in the agricultural sector. To reduce the use of traditional

systems in agriculture.

►Using advanced scientific technologies.

►Exporting agricultural food products.

►To change the current cropping pattern and increase the cropping intensity.

48

4.10. DISBURSEMENT YEAR BY YEAR

Source of Agriculture

Year Loan Disbursement(Amount

in Core Taka)

Changes in Core Taka

2005-06 2668.67

2006-07 2964.14 295.47

2007-08 3279.64 315.50

2009-10 3441.56 161.92

2010-2011 4003.20 561.64

2011-2012 5222.13 1218.93

4.11. LOAN LENDING PLANING OF BKB:Bangladesh Krishi Bank declares theirs loan disbursement goal for the upcoming

fiscal year in the last week of the month June. For the 2012-13 fiscal years the 6000

core Taka will be disbursed. Special features of lending procedure for the year 2012-

13 are-

To reduce the use of traditional systems in agriculture.

Using advanced scientific technologies.

Exporting agricultural food products.

To change the current cropping pattern and increase the

cropping intensity.

Loan disbursement target of BKB for the year 2012-13 is given below:

Serial No. SECTORS OF LOAN

DISBURSEMENT

2012-13

(Core Tk)

1 CROP 2600.00

49

2 Fisheries 500.00

3 Live Stock 470.00

4 Agro-equipment and farm machineries 80

5 Agro-processing industries 400

6 Continuous Loan   1000

7 Poverty Alleviation and Micro Credit

Programs

100

8 SME. 500

9 Others 850

TOTAL 6000

4.12. PRINCIPLES OF LENDING:Banks are profit oriented organization for which a bank invests its funds in many

ways to earn income. At the same time bank runs the risk of default in repayment. As

such the banks are required to follow certain basic principles of lending. The lending

principles of BKB govern its extension of credit facilities. These principles are strictly

followed to shape and define the acceptable risk profile of Bank Asia. These

principles are:

Know Your Customer: Know Your Customer (KYC) is the most important

guiding principle of BKB for extending credit facilities to its prospective

borrowers. Complying with this principle helps the bank to avoid money

laundering crime and adverse selection of borrowers.

Safety: Safety depends first upon (i) the security and its value offered by the

borrower and (ii) the repaying capacity and willingness of the borrower to

repay the loan with interest.

Liquidity: It refers to the ability of an asset to be converted into cash without

loss and within a short time to meet depositor’s demand for cash.

Profitability: BKB must employ its fund in such a way that they will bring

adequate return for the bank, which should be more than cost of the funds.

50

Purpose: The purpose for which BKB will provide loan should be productive

so that the money not only safe but also provides a definite source of

repayment.

Spread: It refers to the diversification of advance. BKB always provide loans

at a lower rate than the other commercial banks. Though profit is not the main

aim of lending of BKB but So far BKB could maintain considerable margin

on its disbursed loan. Recently Bangladesh Bank has imposed restriction on

lending rate and to comply with Bangladesh Bank policy guidelines, BKB

always follows lending guidelines of Bangladesh Bank.

4.13. STRATEGIES OF LENDING PROCEDURE:A loan policy gives loan officers, relationship managers and the Bank’s management

specific guidelines in making individual loan decisions and in shaping the Bank’s

overall loan portfolio. One of most important ways a Bank can make sure its loans

meet regulatory standard and are profitable is to establish a written loan policy.

BKB also has a good loan policy and the most important elements of the policy are

stated below:

A goal statement for the Bank’s loan portfolio (in terms of types, maturities,

sizes, and quality of loans).

Specification of the lending authority given to each loan officer and loan

committee (measuring the maximum amount and types of loan that each

person and committee can approve).

Lines of responsibility in making assignments and reporting information

within the loan department.

Operating procedures for soliciting, reviewing, evaluating, and making

decisions on customer loan applications.

51

The required documentation that is to accompany each loan application and

what must be kept in the Bank’s credit files (required financial statements,

security agreements etc).

Lines of authority within the bank regarding who is responsible for

maintaining and reviewing the Bank’s credit files.

Guidelines for taking, evaluating and perfecting loan collateral.

A presentation of policies and procedures for setting loan interest rates and

fees and the terms for repayment of loans.

A statement of quality standards applicable to all loans.

A statement of the preferred upper limit for total loans outstanding (i.e. the

maximum ratio to total loans to total assets allowed).

A description of the Bank’s principal trade area, from which most loans

should come.

A discussion of the preferred procedures for detecting, analyzing and working

out problem loan situations.

A written loan policy statement carries a number of advantages for the bank adopting

it. It communicates to employees working in the loan department what procedures

they must follow and what their responsibilities are. It helps the Bank moves forward

a loan portfolio that can successfully blend multiple objectives such as promoting the

bank’s profitability, controlling its exposure and satisfying regulatory requirements.

4.14. CLASSIFICATION OF LOANS AND PROVISIONING Loan classification is a process by which the risk or loss potential associated with the

loan accounts of the Bank on a particular date is identified and quantified. It is done to

determine the level of reserves to be maintained by the Bank for the probable loss on

that risky loan account.

52

Figure 4.2 Classifications of Loans

4.14.1. Unclassified Loans An unclassified loan or commitment is one that is set by Bangladesh Bank or the

Head Office of the Bank. Unclassified loans are those loans in which repayment is

regular.

4.14.2. Classified Loans A classified loan or commitment is one that is classified as substandard, Doubtful or Loss as per policy of loan classification set by Bangladesh Bank or Head Office of the bank.

Loan Classification means to categorize the debt information in a systematic manner. But in true sense it is defined in terms of degree of risk associated with these loans. The objectives/importance of loan classification is: To find out Net Worth of a bank;

To assess financial soundness of a bank;

To calculate the required provision and the amount of interest suspense;

Strengthen credit discipline;

To improve loan recovery position and

To put the bank on sound footing in order to develop sound banking practice in

Bangladesh.

Position of classified loans and advances and other assets should be placed before the

Board of directors of the bank.

Loan

Classified

Unclassified

53

4.15. EVALUATION OF THE BKB’S LOAN PRODUCTS, PRINCIPALS AND STRATEGIES

4.15.1. LOAN PRODUCTS EVALUATIONBangladesh Krishi Bank was established due to work for the development of the

agricultural sector of the country. It was established in 1973 but started its commercial

banking activities in the year 1976. Now is the period of innovations. There are 52

commercial banks operating in the country excluding other non banking financial

institutions. In this competitive banking arena a bank must come up with new and

easily accessible customer focused loan products. BKB offers a limited number of

loan products to its customers. As BKB’s targeted customer is the poor and minor

people. BKB also helps in the foreign business for the businessman. And for helping

the international business of agricultural products and development of agro-based

industries.

The loan mix of the bank is very conventional. It has been observed that the existing

loan products are insufficient to meet up the existing borrower’s need. The bank has

no loan products for the religious Muslim borrowers. It has caused the bank to lose a

large segment of the potential borrowers. The bank has yet to establish credit card

facility which could pull a large number of borrowers because due to safety need,

increasing number of people are being interested in having this facility. BKB is still

lagging behind the other commercial banks in terms of product diversity in credit.

But BKB has promised to incorporate new loan products in its loan mix portfolio. The

bank is trying to computerize all its branches. BKB is planning to start online banking

for providing good services to its customers.

4.15.2. EVALUATION OF LENDING PRINCIPLESBank Asia follows well constructed lending principles starting with KYC or Know

Your Customer and ending with Spread. KYC is getting increasing emphasis in the

banking arena because loan default rate is high in our country. Proper compliance

with KYC can help the banks to avoid bad loans. The BKB still maintains adequate

54

safety in its loan portfolio, which is reflected in its low default rate. The bank was

able to establish confidence in the minds’ of the customers regarding maintaining

adequate liquidity to meet up the borrowers’ requirement.

At the same time the bank was able to remain profitable in terms of interest income

maintaining a higher spread. So far BKB was able to perform well in its loan portfolio

but the scenario is changing very rapidly. Lending rate is lower than any other banks

of Bangladesh. The bank has to adopt necessary strategy to maintain its profitability

from the loan portfolio. And also BKB should follow their existing lending principle

towards the development of the agriculture of our country.

4.15.3. STRATEGY EVALUATIONStrategy provides guidelines to BKB to device a smooth lending procedure. As

mentioned earlier, BKB does not have a very diverse loan products but it provides

short term, mid term and long term loans. Size of the credit varies from fifty thousand

taka for personal credit to several cores for syndicated loans. BKB has a preference

for rural farmers, minor people development of the women.

BKB also finances SME (Small and Medium Enterprise), provides personal credit,

export and import finance. BKB finances in the corporate sector mainly agricultural

based industries. But BKB is in constant search of profitable business sector for

extending credit line. Bank has also taken safe guard against predicted alteration in

the world trade policy. As MFA (Multi Fiber Agreement) was phased out from

December 2004, many of the country’s garments factories were under the threat of lay

off. The experts of the bank are anticipating that the situation after last year were

seriously jeopardize the banking sector because most of the banks have heavily

financed in the export oriented RMG (Ready Made Garments) sector.

BKB’s main motto is to ensure the proper development of agriculture by

modernizing, marketing and improving the standard of living of the rural and urban

people. That’s why BKB is not confining their lending activities in limited sectors.

Rather providing loan to ten sectors. BKB has ensured the quality of loan by proper

mortgage loan in different sector.

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Agriculture is the most uncertain sector to finance but BKB is financing successfully

in this sector. Agro-based industry’s improvement is dependent to the loan provided

by BKB.

Recovery Status of BKB

The perspective of the Basel 2 implementation has encouraged bank to conduct a

number of studies on the impact that new rules will have on credit management,

according to the specific characteristics of the lender. With regard to BKB, studies

tend to highlight the opportunities related to the use of complex credit management

tools for internal management purposes, as well as the limitations related to the

assessment of the value of the relationship between customer and bank.

Available studies on credit management for BKB focus on the characteristics of this

type of bank, such as size, type of customer base and field of activity, showing how

its specificity can affect the riskiness of its loan portfolio. In detail, the evidence

provided attempts to prove the greater capacity of this bank to select and monitor their

borrowers, compared to the banking system as a whole.

This paper focuses on the phase subsequent to borrower default, with the aim of

assessing whether the special nature of these banks is also reflected in the

effectiveness of the loan recovery process. Therefore, the analysis is aimed at

assessing the significance of the characteristics of the BKB, with respect to another

driver of the expected credit loss, with a view to highlighting if the differences

proposed in the relevant literature--in terms of the probability of insolvency--are

consistent with the differences reported in terms of the effectiveness of the recovery

process, or if the two risk factors offset each other.

Internal controls of loan recovery:An area that plays a crucial role in the control of loan recovery is its system of

internal controls. Effective internal controls enhance the safeguards against system

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malfunctions, errors in judgment and fraud. Without proper controls in place,

management will not be able to identify and track its exposure to risk. Controls are

also essential to enable management to ensure that operating units are acting within

the parameters established by the board of directors and senior management.

Seven aspects of internal controls deserve special attention:

1. Information Systems. It is crucial that effective controls are in place to

ensure the integrity, security, and privacy of information contained on the

credit union's computer systems. In addition, the loan recovery should have a

tested contingency plan in place for the possible failure of its computer

systems.

2. Segregation of Duties. The loan recovery should have adequate segregation

of duties and professional resources in every area of operation. Segregation of

duties may be limited by the number of employees in smaller loan recovery.

3. Audit Program. The effectiveness of the loan recovery’s audit program in

determining compliance with policy should be reviewed. An effective audit

function and process should be independent, reporting to the Supervisory

Committee without conflict or interference with management. An annual audit

plan is necessary to ensure that all risk areas are examined, and that those

areas of greatest risk receive priority. Reports should be issued to management

for comment and action and forwarded to the board of directors with

management's response. Follow-up of any unresolved issues is essential, e.g.,

examination exceptions, and should be covered in subsequent reports. In

addition, a verification of members' accounts needs to be performed at least

once every two years.

4. Record Keeping. The books of every loan recovery should be kept in

accordance with well-established accounting principles. In each instance, a

loan recovery records and accounts should reflect its actual financial condition

and accurate results of operations. Records should be current and provide an

audit trail. The audit trail should include sufficient documentation to follow a

transaction from its inception through to its completion. Subsidiary records

should be kept in balance with general ledger control figures.

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5. Protection of Physical Assets. A principal method of safeguarding assets is to

limit access by authorized personnel. Protection of assets can be accomplished

by developing operating policies and procedures for cash control, joint

custody (dual control), teller operations, and physical security of the computer.

6. Education of Staff. Loan recovery staff should be thoroughly trained in

specific daily operations. A training program tailored to meet management

needs should be in place and cross-training programs for office staff should be

present. Risk is controlled when the loan recovery is able to maintain

continuity of operations and service to members.

7. Succession Planning. The ongoing success of any loan recovery will be

greatly impacted by the ability to fill key management positions in the event of

resignation or retirement. The existence of a detailed succession plan that

provides trained management personnel to step in at a moment's notice is

essential to the long-term stability of a loan recovery. A succession plan

should address the Chief Executive Officer (or equivalent) and other senior

management positions (manager, assistant manager, etc.).

LOAN-PRICING METHOD: In pricing a business loan, Bank management must consider the cost of raising loan

able funds and the operating costs of running the Bank. This means that Banks must

know what their costs are in order to consistently make profitable, correctly priced

loans of any type. There is no substitute for a well-designed management information

system when it comes to pricing loans.

The BKB is generally used the simplest loan-pricing model which assumes that the

rate of interest charged on any loan includes four components: (1) the cost to the Bank

of raising adequate funds to lend, (2) the Bank’s non-funding operating costs

(including wages and salaries of loan personnel and the cost of materials and physical

facilities used in granting and administering a loan), (3) necessary compensation paid

to the Bank for the degree of default risk inherent in a loan request, (4) Bank’s desired

profit margin.

Interest rate of BKB for Lending

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Loan Interest

SECURED OVER DRAFT (SOD) 13.5%

SECURED OVER DRAFT 16%

TEMPORARY OVERDRAFT 16%

CASH CREDIT 16%

CASH CREDIT 16%

OVER DRAFT 16%

OVER DRAFT (WORKING CAPITAL) 16%

OVER DRAFT A/C (ATM CARD) 16%

MARRIAGE LOAN SCHEME 12%

LOANS AGT.TRUST RECEIPT(LTR) 16%

HOUSE BUILDING LOAN (HBL) AGAINST COMMUTATION BENEFIT 11%

HOUSE BUILDING LOAN(HBL) RESIDENTIAL 11%

HOUSE BUILDING LOAN(HBL) COMMERCIAL 16%

HOUSE BUILDING LOAN(HBL) MORTGAGE 11%

CONSUMER DURABLE SCHEME 17%

PACKING CREDITS(PC) 13%

LOAN OTHER 16%

GENERAL LOAN(SATTLEMENT A/C) 16%

CONSUMER DURABLE SCHEME (CDS) 17%

MICRO CREDIT(RECONST & REPAIRING OF DWELLINGG HOUSE) 12%

LOAN AGT.CASH COLLATERAL 13.50%

TRUST MONEY MAKING SCHEME(TMMS) LOAN 13%

TERM LOAN(GENERAL) 16%

TERM LOAN(COMMERCIAL) 16%

TERM LOAN(INDUSTRIAL) 16%

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TIME LOAN 16%

SMALL LOAN 16%

LOAN AGT.IMPORTED MERCHANDISH(LIM) 16%

EXPORT CASH CREDIT 16%

CAR LOAN(OTHERS) 16%

CREDIT CARD OUTSTANDING(LOCAL) 16%

CAR LOAN(NEW) 16%

CAR LOAN(RECOND) 16%

CAR LOAN(MINIBUS,TRUCK) 16%

HOUSEHOLD DURABLE LOAN 16%

DOCTORS’ LOAN 16%

ADVANCE AGAINST SALARY 16%

ANY PURPOSE LOAN(OTHERS) 17%

HOSPITALIZATION LOAN 16%

EDUCATION LOAN 16%

TRAVEL LOAN 17%

CNG CONVERSION LOAN 17%

APON NIBASH LOAN 16%

PAYMENT AGAINST DOCUMENT 15%

FOREIGN DOCUMENTARY BILL PURCHASED(FDBP) 1%

LOCAL DOCUMENTARY BILL PURCHASED(LDBP) 15%

INLAND BILLS PURCHASED(IBP) 16%

These sector-wise interest rates have been introduced by the Head Office of the BKB.

They use cost-plus pricing method in case of pricing the loans. The fourteen branches

of the Trust Bank Limited have maintained these rates strictly except in case of some

quality and credit-worthy lenders. After judging the lenders’ credit-worthiness, the

BKB gives some beneficiary to this kind of lenders. They can enjoy a decreasing

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interest rate, which maintained by the BKB branches internally. Other wise, the

scheduled rates are maintained by all the BKB branches. In case of Micro Credit, as

the loan amount is not so large that’s why the scheduled rate is maintained by the

Bank. Actually, the Lending rate is based on the prescription, which is given by

Bangladesh Bank.

The recovery performance of the bank was not so good during the period 1999-2002.

The credit administration and monitoring of this bank was inexperienced. This bank is

monitoring and all the loans are sanction by the high authority whose are high

officials of Bangladesh Army. This Bank has a common thinking that the people who

taking loan from this bank always think that this is an army bank so if I failed to pay

then it will be a very big problem for me. But this thinking did not work properly.

That’s why the management has to think about a well-designed Recovery Policy.

BKB’S Recovery Probability Categories to Be Assigned to All Classified Loans

Category

Loans determined to have high probability of recovery within 6 months; recovery

efforts to continue on an on-going basis.

Loans determined to have moderate probability of recovery within 1 year; review

recovery efforts on a 3 months basis.

Loans determined to have low and remote probability of recovery; review case on a 6

months basis.

Loans determined to have virtually no chance of recovery: charge-off the books.

However in this situation proper approval from the appropriate approving authorities

should be obtained and also shall be guided by Bangladesh Bank instructions and

subject to complete analysis of:

Banking practice.

Legal and tax implication and

Status of each individual credit.

Notes for assessment of category

Estimate the cost of continued collection efforts against any money, which can be

reasonably expected to be recovered. Include in the cost (1) employee man-hour, (2)

legal expenses, (3) charge of any external collection agency if used.

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Why Recovery takes so much time

Only because of existing rules and regulation recovery is a time consuming

procedure. I think an example will make this thing clear. Let, Mr. X took loan from Y

bank by giving a land as registered mortgage and become bad. Now bank cannot sell

the land without the permission of court though the land was as registered mortgage to

bank. So bank has to sue against Mr. X and court send notice to Mr. X. But Mr. X can

delay his coming by saying he is sick and asking for more time. Court gives new date

to settle the matter. Then on new date a person came to the court saying that he is the

brother of the client and the land is their father’s property. And most importantly,

client didn’t notify him before give the land to the bank. So court asks him to prove

his claim. Finally, if court gives injunction in favor of bank, they face problem to sell

the land. Because client put mussel-men protect the land from bank. Moreover people

are not interested buy land on occasion from court. Finally the interesting thing is

most of the time the same client but the land in another name.

Criteria of loan:

Type of loan Schedule of time up Criteria

1) Current loan & Long

term loan

Less than 2 months US (Standard)

2 months but less than 3

months

SMA

Up 3 months but less than

6 months

SS

Up 6 months but less than

9 months

DF

9 months or up BL

2) Short term loan &

micro credit

Still of 12 months US

Up 12 months & still of SS

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36 months

Up 36 months & still of

60 months

DF

Up 60 months BL

Source of BKB

Recovery Data (for 2012):Recovery of Classified Loan

Target Recovery of

current week

Recovery of

current year

Recovery of

percentage

Recovery of

2011

141.00 0 121.74 86% 135.37

Target Recovery of

current week

Recovery of

current year

Recovery of

percentage

Recovery of

2011

375.00 27.00 410.00 109% 385.45

Recovery of Unclassified Loan

Bad Loan (for 2012)

Title of loan Target Recovery of

current year

Bad loan

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Classified loan 141.00 121.74 19.26

Unclassified loan 375.00 410.00 35

Source of annual report of BKB 2012.

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CHAPTER – 5

CONCLUSIONS AND RECOMMENDATIONS

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5.1. Recommendations: Based on the evaluation of different aspects of the loan process of Bangladesh Krishi

Bank, the following recommendations have been made:

To combat the problem of mobilizing deposit in the form of loan, Bangladesh

Krishi Bank should focus on intensive marketing effort.

Entrepreneurship lending should be given due emphasis.

As borrower selection is the key to successful lending, BKB should focus on

the selection of true borrower.

Care should also be taken so that good borrowers are not discarded due to

strict adherence to the lending policy.

Monitoring of a loan should be conducted at regular interval to enhance the

borrower is properly maintaining the mortgage property and utilizing the

borrowing money.

In case of mortgage, care must be taken to accept collateral on second charge.

In case of assignment the bank must ensure that the assignment debtor has

given undertaking.

Reporting of all loans should be periodically made to Bangladesh Bank.

Loan monitoring is a continuous task and requires expert manpower.

5.2. CONCLUTION:

Most of the Banks in Bangladesh are offering a wide array of financial services

including new types of loans and advances and some whole new services are being

launched every year. BKB, a bank of difference, also has discovered new avenues to

reach its goals. For the brand name, it is gone to people’s heart through updating

various services. Bank BKB should diversify its credit portfolio BKB so that in near

future when competition among Banks will serve, it can stand with its own identity.

The Credit Risk Management method that may seem fit today may not work

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tomorrow. So all the Financial Institutions must find their own method in order to

sustain in the changing world. Central focus in this regard would be to have a

comprehensive Information Technology system, sufficient expertise and above all

very relaxed management to adopt new idea to update Credit Risk Management

method. Now BKB is continuing business operation successfully in Bangladesh

through developing an image and goodwill among its clientele by offering its

excellent services. The success has been resulted from the dedication, commitment

and dynamic leadership of its management. During the short span of time of its

operation, BKB has successfully grabbed a position as a highly progressive and

dynamic financial institution in the country. By proliferation of new advance services,

expanding use of automated equipment and electronic transfer of financial inform

BKB action, will be the country’s first largest institution in the near future.

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