Letter of TransmittalJuly 13, 2013.M. Shahjahan MinaProfessor Department of FinanceUniversity of Dhaka.Subject: Submission of report on Working Capital Financing by Pubali Bank Limited

Dear Sir,We take the pleasure to inform you that, we are going to submit the report that you had assigned us as a partial requirement for the course Working capital Management (F-405)The report is prepared on Working Capital Financing by Pubali Bank LimitedWe sincerely hope that, you will enjoy going through this report, as we have felt great pleasure to prepare it. If any other information is required for further clarification, we will be pleased to provide you with that. We are thanking you heartily. We tried our best to make this report the best one. We think this report can serve us all as a means of tool for solving business decision problems.Finally, we would like to thank you for providing us the opportunity to work in such an interesting and enthusiastic report as we have enjoyed as well as learned a lot in preparing this report.Sincerely,_______________A. S. M. KamranBBA 16th batchDepartment of Finance University of Dhaka

Acknowledgement

For the completion of this study we cant deserve all praise. There were a lot of people who helped us by providing valuable information, advice and guidance for the completion of this report in the scheduled time.Course report is an essential part of BBA program as one can gather practical knowledge within the short period of time by observing and doing the works of chosen organizations. In this regard our report has been arranged at Pubali Bank Limited. At first we like to pay our thanks to almighty Allah, for helping us to do all the works with perfection.We would like to pay our gratitude to our supervising course teacher M. Shahjahan Mina, who instruct us in the right way and give us proper guidelines for preparing this report.At last we must mention the wonderful working environment and group commitment of this organization that has enabled a lot deal to do and observe the process during our time.This report is prepared by us to meet only for our academic purpose and not for any other reason. It might not be used for the benefit of any other purpose.

Table of ContentsTopicsPage No.

Executive Summary4

Introduction

Origin of the report5

Methodology of the Study5

Key parts of the report5

Objective of the report6

Scope 6

Limitations6

Working Capital Financing in Bangladesh

Need for Working Capital7-8

Pubali Bank Limited [History, Capital structure and Services]9-10

Types of Loans Provided by the Bank11-13

Assessment of Creditworthiness14

Application of Credit Risk Management Techniques by PBL14-15

Computation of Credit Risk Grading 15-19

Arrangements of Loans19-20

Duration and Rate of Interest of Working Capital20

Documents Required for the Loans21

Repayment Arrangement21

Management of loan after lending22

Problems Faced by PBL22-23

Recommendations and Conclusion

Recommendations23

Conclusions24

Executive SummaryThe main objective of the project was to study various types of working capital finance provided by banks and to know details the procedure of assessment of working capital finance extended by banks. Wheels of business cannot move without money. Availability of money is being limited and wants being unlimited. So procurement of fund is one of the important functions in commercial & non-commercial enterprises and utilizes it for maximization of business profits. Working capital requirement is the short-term requirement. Working capital is the investment needed for carrying out day-to-day operations of the business smoothly. Bank is one of the important sources of working capital requirement. Bank gives various facilities to the borrowers. Pubali Bank Limited provides various types of working capital loan. These loans include overdraft facility, cash credit (hypo), cash credit (pledge), demand loan, time loan, import loan, EDF loan, packing credit etc. In Pubali Bank Limited, loan is arranged upon request of the client and after assessment of credit worthiness of the client as per the specified guideline in the credit policy. Maximum limit of line of credit is determined by various factors such as cash flow generation capacity of the client, revenue pattern of the client and expected revenue in future, existing working capital limit with other banks, capacity and integrity of the management of the firm and so on. The duration of the loans normally vary from 30 days to 1 year. But most usual time durations are 30 days, 45 days, 60 days, 120 days, 180 days and 1 year. In case of non-repayment or default bank often reschedule the loan by extending the tenor of the loan. It tries to figure out the reason of non-repayment and if possible it extends its tenor. As an ultimate weapon, bank goes to court for realization of its dues.

IntroductionOrigin of the reportThis report is generated under the academic supervision of our course teacher Shahajahan Mina, Department of Finance, University of Dhaka. This report is prepared as the requirement of Business Finance course. The topic is Working Capital Financing by Pubali Bank Limited.MethodologyThe methodology of the report is inductive. The report is based on both primary and secondary information.Primary Information: The primary data have been collected from the employees Pubali Bank Limited through the structured questionnaire.Secondary Information: The secondary sources of data are different reference books, company website, speeches of managers etc.Key Parts of the reportThe main view of the report is to identify the impact of macro-environment forces on the pharmaceutical industry to launch a new product. We focused on Bangladesh pharmaceutical industry as we conduct our study based on two leading pharmaceutical company of Bangladesh.

Objectives of the reportBroad Objectives: The main objective of the project was to study various types of working capital finance provided by banks. To know details the procedure of assessment of working capital finance extended by banks.Specific Objectives: To know the various types of working capital finance provided by banks. To analyze in detail the procedure of assessment of working capital finance extended by bank. To apply these procedure at a practical level.

ScopeIn this report, at first we cover the preliminary concept of macro-environmental factors. Then we go for the effects of these factors on launching a new product of a pharmaceuticals company.LimitationsThere were certain limitations of the problem we face both in report preparing analyzing.0. Unavoidable conditions: Some of the unavoidable conditions also had a deterring effect on preparing the report.0. Restrictions that we faced: Lack of information, lack of technology etc. are the restrictions within the problem. 0. Absence of some information regarding data compilation: While making the survey for data collection, we have faced problems. Some of the information was really essential was hard to collect.

Working Capital Financing in BangladeshWorking capital is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth.

A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.

NEED FOR WORKING CAPITAL

The need of gross working capital or current assets cannot be overemphasized. The object of any business is to earn profits. The main factor affecting the profits is the magnitude of sales of the business. But the sales cannot be converted into cash immediately. There is a time lag between the sale of goods and realization of cash. There is a need of working capital in the form of current assets to fill up this time lag. Technically, this is called as operating cycle or working capital cycle, which is the heart of need for working capital. This working capital cycle can be described in the following words.If the company has a certain amount of cash, it will be required for purchasing the raw material though some raw material may be available on credit basis. Then the company has to spend some amount for labor and factory overheads to convert the raw material in work in progress, and ultimately finished goods. These finished goods when sold on credit basis get converted in the form of sundry debtors. Sundry debtors are converted in cash only after the expiry of credit period. Thus, there is a cycle in which the originally available cash is converted in the form of cash again but only after following the stages of raw material, work in progress, finished goods and sundry debtors. Thus, there is a time gap for the original cash to get converted in form of cash again. Working Capital needs of company arise to cover the requirement of funds during this time gap, and the quantum of working capital needs varies as per the length of this time gap.Thus, some amount of funds is blocked in raw materials, work in progress, finished goods, sundry debtors and day-to-day requirements. However some part of these current assets may be financed by the current liabilities also. E.g. some raw material may be available on credit basis, all the expenses need not be paid immediately, workers are also to be paid periodically etc. But still the amounts required to be invested in these current assets is always higher than the funds available from current liabilities. This is precise reason why the needs for working capital arise. From the Financial management point of view, the nature of fixed assets and current assets differ from each other.

1. The fixed assets are required to be retained in the business over a period of time and they yield the returns over their life, whereas the current assets lose their identity over a short period of time, say one year.2. In the case of current assets, it is always necessary to strike a proper balance between the liquidity and profitability principles, which is not the case with fixed assets. E.g. If the size of current assets is large, it is always beneficial from the liquidity point of view as it ensures smooth and fluent business operations. Sufficient raw material is always available to cater to the production needs, sufficient finished goods are available to cater to any kind of demand of customers, liberal credit period can be offered to the customers to improve the sales and sufficient cash is available to pay off the creditors and so on.

In other words, it can be said that the aim of working capital management is to have minimum investment in working capital without affecting the regular and smooth flow of operations. The level of current assets to be maintained should be sufficient enough to cover its current liabilities with a reasonable margin of safety. Moreover, the various sources available for financing working capital requirements should be properly managed to ensure that they are obtained and utilized in the best possible manner.

HistoryThe Bank was initially emerged in the Banking scenario of the then East Pakistan as Pubali Mercantile Bank Limited at the initiative of some Bangladeshi entrepreneurs in the year 1959 under Bank Companies Act 1913 for providing credit to the Bangladeshi entrepreneurs who had limited access to the credit in those days from other financial institutions. After independence of Bangladesh in 1972 this Bank was nationalized as per policy of the Government and renamed as Pubali Bank. Subsequently due to changed circumstances this Bank was denationalized in the year 1983 as a private bank and renamed as Pubali Bank Limited. Since inception this Bank has been playing a vital role in socio-economic, industrial and agricultural development as well as in the overall economic development of the country through savings mobilization and investment of funds.At Present, Pubali Bank is the largest private commercial bank having 419 branches and it has the largest real time centralized online banking network.Capital structure of the Bank:The authorized capital of the Pubali Bank Limited is Taka 10000000000 divided into 100000000 ordinary shares of TK. 10 each which was increased from Taka 5000000000 divided into 5000000 ordinary shares of Tk 100 each & the face value of each share has also been changed to taka 10 each from taka 100 under special resolution passed in the extra ordinary general meeting held on 6 May 2010 & 15 July 2010 respectively. Deposit ServicesSavings Bank AccountFixed Deposit AccountShort Term Deposit AccountCurrent Account Pension Account Foreign Currency AccountLoans & Lease Services

Micro Credit Small and Medium Enterprise FinancingIndustrial Loans Working Capital FinancingExport Credit Import Credit Bills Purchase Letter of CreditLetter of GuaranteeLease Financing Transport FinancingConsumers Loan SchemeHouse Building Loans

Remittance Services

Remittance of Fund from abroad by Bangladeshi NationalsForeign RemittanceInternal Remittance

Miscellaneous ServicesElectric BillGas BillPhone BillCheque ClearingInstrument CollectionLocker Services

Types of Loans Provided by the BankPubali Bank Limited provides various types of working capital loan. These loans include overdraft facility, cash credit (hypo), cash credit (pledge), demand loan, time loan, import loan, EDF loan, packing credit etc.1. Bank Overdraft FacilityA good credit score, the interest rate and the maximum line of credit that you can get depends on your companys relationship with the lender. One advantage that this type of credit facility has over other types of working capital loans is that the borrower only pays for the interest applicable to the amount that has been overdrawn. The rates are typically set between 1 and 2 percent above the prime rate of the bank.2. Cash Credit (Hypothecation)Under this arrangement a credit is sanctioned against hypothecation of collateral. The letter of hypothecation creates a charge against the goods in favor of the Bank but neither the ownership nor its possession is passed on to it; only a right or interest in the goods is created in favor of the Bank and the borrower binds himself to give possession of the goods to the bank when called upon to do so. When the possession is handed over, the charge is converted into pledge. This type of facility is generally given to the reputed borrowers

3. Cash Credit (Pledge)Under this arrangement a cash credit is sanctioned against pledge of collateral. By signing the letter of pledge, the borrower surrenders the physical possession of the goods under the Banks effective control as security for payment of Bank dues. The ownership of the goods, however, remains with the borrower. The pledge creates an implied lien in favor of the Bank on the underlying merchandise. In the event of failure of the borrower to honor his commitment the Bank can sell the goods for recovery of the advance. No collateral security is normally asked for grant of such credit.

4. Letter of CreditLetters of credit are often used to finance purchases in a foreign transaction. Letters of credit are the guarantee of payment by the buyers bank (not the buyer) to pay provided the terms of the letter of credit are strictly met. Letters of credit can provide extended payment terms and still provide a guarantee of payment by the buyers bank, by accepting to pay the draft at maturity. This action is the source of a bankers acceptance, which draws its name from the accepted draft. A banker's acceptance is a method of financing that banks can use to provide customers with short-term (six months or shorter) financing for trade transactions. A banker's acceptance is a time draft drawn on and accepted by a bank. The bank indicates its commitment to pay the stated amount of the draft on a specified future date by signing the draft on its face and thereby accepting it. The draft may then be sold to an investor for a money-market rate of return based on the credit risk of the bank. Acceptances may be less expensive than more traditional trade financing methods.

5. Demand LoanDemand loans are loan agreements that provide the bank with the ability to demand full payment of the remaining balance of the loan at any point in time after the loan is executed. Unlike an installment loan, the demand loan format does not include a specific maturity date and may not include a specific schedule for making payments to retire the debt. Sometimes referred to as a call loan, a demand loan is usually employed when the bank and borrower have a long standing and positive business relationship, and the lender has confidence that the borrower will pay off the loan within a reasonable period of time.

6. Time LoanTime is a form of short-term asset based business loan payable usually in one installment on the maturity date. Time loan that is payable in full at a specified maturity date, e.g., 30, 60, 90, or 120 days.

7. Packing CreditPacking credit is any loan or advance granted or any other credit provided by a bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment, on the basis of letter of credit opened in his favor or in favor of some other person, by an overseas buyer or a confirmed and irrevocable order for the export of goods from the producing country or any other evidence of an order for export from that country having been placed on the exporter or some other person, unless lodgment of export orders or letter of credit with the bank has been waived.

Assessment of Creditworthiness

The first thing PBL do before giving a loan to any firm is assessing whether the firm is eligible to take a loan or not. In this process it first assesses the creditworthiness. Assessment of creditworthiness is done based on guidelines in the credit policy. It estimates the five Cs for this purpose which are- 1. Character, 2. Capacity, 3. Capital, 4. Collateral, 5. Condition.Bank tries to identify the cash flow to the firm and on the basis of the nature of cash flow and operating cycle it attempts to identify the various types of risks associated with the proposed lending. Analysis of risk includes but not limited to analysis of the following risks:1. BUSINESS RISK1. MANAGEMENT RISK1. FINANCIAL RISK1. FACILITY STRUCTURE RISK1. SECURITY RISK1. ACCOUNT PERFORMANCE RISK

Application of Credit Risk Management Techniques by PBL

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

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

Use of Credit Risk GradingThe Credit Risk Grading matrix allows application of uniform standards to credits to ensure a common standardized approach to assess the quality of an individual obligator and the credit portfolio as a whole.As evident, the CRG outputs would be relevant for credit selection, wherein either a borrower or a particular exposure/facility is rated. The other decisions would be related to pricing (credit spread)and specific features of the credit facility.Risk grading would also be relevant for surveillance and monitoring, internal MIS and assessing the aggregate risk profile. It is also relevant for portfolio level analysis.

Computation of Credit Risk Grading The following step-wise activities outline the detail process for arriving at credit risk grading.

Step I Identify all the Principal Risk Components

Step II Allocate Weights to Principal Risk Components

Principal Risk Components WeightStep III Establish the Key Parameters

Step IV Assign weights to each of the Key Parameters

Step V Input data to arrive at the score on the key parameters

Step VI Arrive at the Credit Risk Grading based on total score obtained

In Case of Lending to Commercial Clients

Bangladesh Bank vide its BRPD Circular No.18 dated December 11, 2005 advised all Banks to implement Credit Risk Grading for their borrowing clients as per Credit Risk GradingManual. According to the Manual Pubali Bank Limited

Exhibit: Principal Risk Components & allocation of weights to key parameters (commercial clients)

Exhibit: Credit Risk Grading based on total score obtained (commercial clients)

In case of lending to a Banking Company or a Non-Banking Financial Institution

The Credit Risk Grading system earlier was applicable only in case of lending to commercial clients. Since the nature of business as well as leverage level of Banks and Non Banking Financial Institutions is different from that of other borrowing clients, the need for a separate Credit Risk Grading system has been felt. Keeping this in mind and with a view to properly risk rate a Bank in order to set up counterparty limits for providing credit products extended by one bank to another Bank new Credit Risk Grading Manual for the Bank has been produced.

Exhibit: Principal Risk Components &allocation of weights to key parameters (Banks & NBFIs)

Exhibit: Credit Risk Grading based on total score obtained (Banks and NBFIs)

Arrangement of LoansDifferent banks have different strategies of arranging loans. In Pubali Bank Limited, loan is arranged upon request of the client and after assessment of credit worthiness of the client as per the specified guideline in the credit policy. Maximum limit of line of credit is determined by various factors. Those are:1. Cash flow generation capacity of the client: In case of arranging loan the most important factor that PBL considers, is the cash flow of the client. If the firm is highly capable of generating cash in a short period, then PBL provide higher loan. 2. Revenue pattern of the client and expected revenue in future: PBL estimates the operating cycle of its prospective borrower to see the cash flow pattern of its clients. If the revenue of the relevant firm is consistent over the years, it is assumed that firm will be able to repay the loan.3. Existing working capital limit with other banks: It also sees the existing working capital limit with other banks. If it is reasonable that the applicant has the capacity to borrow further loan and can repay it properly it goes for funding.4. Capacity and integrity of the management of the firm: PBL will provide loans to those clients where managers show their excellence in operating the business and play an important role for the value maximization.The bank considers some other factors for further security of the loan provided to the client:1. SWOT analysis of the client with special emphasis on future growth and sustainability of the firm.1. Debt servicing capacity of the client.1. Value and quality of collateral and guarantee, if available.1. Group strength of the borrower. Duration and Rate of Interest of Working CapitalThe duration of short term loan is not more than one year, as we all know. But the duration varies from client to client and from business to business. The duration normally varies from 30 days to 1 year. But most usual time durations are 30 days, 45 days, 60 days, 120 days, 180 days and 1 year. Duration varies from client to client. PBL sees the operating cycle to set duration for any of its clients. It tries to set duration so that the client can pay his debt when fund has at his hand. The duration also varies according to the type of business. If it is a manufacturing company (especially garments manufacturing company) then duration may be set at 120 days to 180 days.The interest rate of Pubali Bank Limited is on an average 16% for short term loans. But it also varies for businesses and relationship of clients. For manufacturing companies the interest rate is around 15.5%. For foreign and multinational clients it varies from 14%- 15%. For SME sector the rate is around 18%

Documents required for the loan Various kinds of documents are required for the safety of the loan given to the borrower. These documents are-1. Trade license1. VAT registration certificate1. Tax clearance certificate1. TIN certificate.1. MOA & AOA1. Form X & Form XII1. Audited financials for last three years1. Projected financials for next three years1. Bio data of Directors and Top management.1. IRC & ERC1. DOE Clearance1. Request letter & Board resolution.Repayment Arrangement Cash from the clients business is the main source of repayment. Most of the working capital loan such as overdraft and cash credit is repaid on continuous basis. That is, as and when business receives fund from customers, they deposit it in their OD/CC account that brings the outstanding loan balance down. On the other hand, they utilize OD/CC when they need to make any payment to suppliers or other parties. In case of demand loan, import loan and time loan, most common repayment procedure is bullet payment. However, installment basis repayment is also possible for such loan. For export client, EDF loan & packing credit are repaid from their incoming export proceed on FIFO basis. Whether the loan will be repaid by bullet payment or in installment basis depends upon what type of borrower the client is and the judgment of the bank on the client.

Management of loan after lendingSales, stock, receivable, cash flow and account performance of the client are monitored & reviewed on a regular basis. If any risk arises, early alert is raised and necessary steps are taken so that the loan does not become a bad one. Special emphasis is given on the fact that fund is not diverted into other activities.

In Case of Non Repayment In case of non repayment or default bank often reschedule the loan by extending the tenor of the loan. It tries to figure out the reason of non repayment and if possible it extends its tenor. If the borrower fails to repay after that, bank resorts to collateral and guarantee. As an ultimate weapon, bank goes to court for realization of its dues. However, due to lengthy legal process of our country, this is the least preferred option.

Problems facing by PBL:Though PBL is very much conscious in case of choosing its clients for financing short term capital, it also faces some problems in case of these types of activities. 1. As PBL prefers mostly loan against collateral, loan against accounts receivable is not done in most of the cases. For manufacturing companies bank does not any loan against accounts receivable. But this sort of loan is given at a limited basis to SME firms. But at a very limited basis. 2. The main problem facing by PBL is fund diversion. After getting loan if clients do not divert it to other channel it may get riskier for them to repay the loan. This type of problem can happen in case of group of companies. 3. Another problem that the bank faces is cash flow of clients. Business may not go smooth always. In bad times of the clients it may be difficult for the clients to repay the loan within the time limit. 4. It does not offer any bankers acceptance other than L/C. it is not only the limitation of PBL, rather no lending institutions offer bankers acceptance.5. Commercial papers are not applicable in Bangladesh. 6. Loan processing is a lengthy and time consuming process. There is also problem in selecting borrower. PBL most of the time wants to deal with previously evaluated parties. In case of new borrower it requires and evaluates too many factors very cautiously. It makes the loan processing lengthy. Recommendations1. Pubali Bank Limited should try to reduce its loan processing time and be prompt in providing loan to borrowers.2. It can try to increase to provide loan against accounts receivables. There are many companies (especially service companies) now-a-days which have a very good prospect. But due to lack of collateral many of them cannot get loan from banks. They can be provided loan against accounts receivable.3. It can increase their monitoring so that borrowers cannot use their borrowed money for other purposes except for the reason they took the loan.4. It can also keep closer look so that funds could not be diverted.

Conclusion

Working capital is a financial metric which represents operating liquidity available to a business, organization or other entity, including governmental entity. Working capital measures how much in liquid assets a company has available to build its business. Bank gives various facilities to the borrowers for financing working capital for operating their day-to-day businesses. Pubali Bank Limited generates almost 70% of its revenue by lending short term loans to the manufacturing companies. It also lends to other service companies, trading firms and also to SME firms. Pubali Bank Limited provides various types of working capital loan. These loans include overdraft facility, cash credit (hypo), cash credit (pledge), demand loan, time loan, import loan, EDF loan, packing credit etc. Though PBL is very much conscious in case of choosing its clients for financing short term capital, it also faces some problems. Despite this fact, we can hope that the bank will be able to overcome those problems and make a good portfolio for financing to different sectors.

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