An Overview of Credit Performance of Prime Bank Limited

31 October 2011

iAn Overview of Credit Performance of Prime Bank Limited

Submitted ToProfessor Dr A. A. Mahboob Uddin ChowdhuryChairman & ProfessorDepartment of FinanceFaculty of Business StudiesUniversity of Dhaka.

Submitted ByMd. Asaduzzaman KhanRoll: 13-010BBA, 13th BatchDepartment of FinanceUniversity of Dhaka.

31 October 2011Supervisors Certificate

This is to certify that the internship report on An Overview of Credit Performance of Prime Bank Limited in the bona-fide record is done by Md. Asaduzzaman Khan, ID.No:13-010 as a partial fulfillment of the requirement of BBA Degree from the Department of finance, University of Dhaka.

The report has been prepared under my guidance and is a record of the bona-fide work carried out successfully.

SupervisorProfessor Dr A. A. Mahboob Uddin ChowdhuryChairmanDepartment of FinanceFaculty of Business StudiesUniversity of Dhaka.

Declaration

I do hereby solemnly declare that the work presented in this study report has been carried out by me and has not been previously submitted to any other University/College/Organization before.

I further undertake if indemnify the university against any loss or damage arising from breach of the forgoing obligation.

Md. Asaduzzaman KhanRoll: 13-010BBA, 13th BatchDepartment of FinanceUniversity of Dhaka.

LETTER OF TRANSMITTAL

31 October 2011Professor Dr A. A. Mahboob Uddin ChowdhuryChairmanDepartment of FinanceFaculty of Business StudiesUniversity of Dhaka.Subject: Submission of Internship Report on An Overview of Credit Performance of Prime Bank Limited Dear Sir,I am glad to inform you that here is the report you assigned me to prepare for the completion of our internship course after completion BBA theoretical program. In my report, I have tried my best to show the Theoretical, Empirical and performance analysis of Prime bank limited. I have tried to match my theoretical knowledge with the practical field. I hope that my report will be able to represent a transparent scenario of An Overview of Credit Performance of Prime Bank Limited. I also confess that my report has some limitations because I am still student and I am in a process of developing my skills. So I hope that you will be kind enough to consider the limitations of this report.Thank you for giving me such an opportunity for working on the topic. I will be honored if you provide me any additional information, if necessary.

Sincerely yours

Md. Asaduzzaman KhanRoll no: 13-010BBA 13th BatchDepartment of FinanceUniversity of Dhaka.ORIGIN OF THE REPOTR

This report is prepared for internee under the internship program arranged by Department of Finance, Faculty of Business Studies, University of Dhaka. After the completion of theoretical course Department of Finance arranges internship of every student for three months in attachment with different business organization.

Each and every student has to prepare an internship report assigned by the supervisor. I have the opportunity to complete my internship in Prime Bank Limited. Then my supervisor, Professor Dr A. A. Mahboob Uddin Chowdhury, assigned me with the internship report on An An Overview of Credit Performance of Prime Bank Limited.

Our honorable supervisor helped me time to time by showing me the direction and giving his suggestion. So I would like give him my humble gratitude. I am also grateful to the authority of Prime Bank HR department for providing me the required information. Without the co-operative support from them preparing this report would not be possible.

ACKNOWLEDGEMENT

At first I want to admit that, I would not be able to prepare this report without the help of some persons. So I am indebted to a number of people for their help, advice and suggestion that made me able to complete this report.

This report has been assigned by Professor Dr A. A. Mahboob Uddin Chowdhury. So at the beginning of my report I would like thank him from the bottom of my heart for giving me such an interesting topic and also for his valuable advice. He has helped time to time by showing me the direction and giving his suggestion. I am most grateful to him for his close guidance.. Then I would like thank each and every member of this organization for providing me such a warm working environment.

I have prepared this report with the help of some text book, articles, web sites a list of then is given in the bibliography section. Finally would like to thank each and every person who contributed to prepare this report by their valuable idea, advice, suggestion, guidance and help.

TABLE OF CONTENTPARTICULARSPAGE

Chapter 1: Introduction

1.1 Introduction

1.2 Scope & Objectives of the Study

1.3 Methodology & Limitation

Chapter 2: Theoretical Development

2.1 Liquidity Management

2.2 Credit Management

2.3 ALM

Chapter 3: Administration of Credit by Prime bank Limited

Chapter 4: Empirical Analysis Performance Analysis

Chapter 5: Summary and Conclusion

Bibliography

Executive SummaryBank as a financial institution deals with financial instruments. Its primary function is to bridge between surplus units and the deficit units of the country by collecting deposits from one and lending another with a view to making profit. But lending is not as easy as it sounds. Lending involves high degree of risk of non-repayment of interest or principal or both. Hence this risk may jeopardize banks overall profitability as well assets. It is highly pronounced that a bad loan can eat up profits of good loans. So lending itself is very risky but mandatory function for a bank. To safeguard from lending risk bank must adhere to some principles like safety, profitability, security, sources of repayment, diversity, national interest. To encompass these principles, an integrated sound lending policy is must. A sound lending policy is nothing but a prescription while intending to lend. Lending policy focuses mainly three stages of lending process: Pre-Sanction stage, Sanctioning stage and Post-Sanction stage. At Pre-Sanction stage, potential borrowers from targeted business segments are offered different financial products according to their need and purpose as per the policy of bank. And would be borrowers are evaluated qualitatively and quantitatively to assess their capacity and willingness of repayment of loan with interest in due time. Credit risk grading is done with due diligence based on supporting documents. In addition to that a policy of keeping security is included in the pre-sanction stage of lending policy to mitigate risk associated with a particular borrower. These reports are sent for further scrutiny and approval to the higher authority of bank. If these authorities find all things accordingly and non-conflicting with bank policy as well as Bangladesh Bank regulation or any other regulations in force for time being, they fix up the price of the loan considering the associated risk and value of security and finally approve the loan and disburse the fund in the Sanction stage. In the Post-sanctioning stage, bank officials follow up and keep records the borrowers activities by monitoring and administrating the loan. To manage credit risk, risk grading is done continuously to assess the borrowers present financial position and financial soundness. As per risk grading, non-performing loan is identified and reported separately from performing loan in the books of accounts with appropriate provisioning.

Chapter 1

Introduction At first, we know the Bank is a financial institution. Every country has a central bank; it is guardian of the financial system. Monetary policy is formulated & implemented by the Central bank; it is concerned with supply of money that is controlling the money supply. All private banks are called commercial bank. A bank have some financial assets such as fixed deposit, Bond, Savings account, pay order and different types of loans, it is contributing toward the development of any economy and is treated as an important Service industry in the modern world. Bank plays a vital role in the economy by providing means of payment and in mobilizing resources. Bank is the most important financial institution in the economy. The economic development of a country depends on the development of banking sector. Todays modern banks are not only providing traditional banking but also expanding the many financial services. In todays world the life of the people directly or indirectly are within the arena of banking whether conventional or Islamic banking. Although Islamic banking is not a newer concept in Bangladesh as it has started its operation since 1983. Islamic Banking is also getting popular in the country.Prime Bank Limited is a second-generation private commercial bank established in Bangladesh in the year 1995 under the Companies Act, 1994. Since inception, it is committed to provide high quality financial services to the countrymen with a view to accelerate economic development of the nation. As such, it has been working for stimulating trade and commerce, accelerating the pace of industrialization, boosting up export, creating employment opportunity, alleviating poverty, raising standard of living of the people etc and thereby contributing to the sustainable development of the country. At present, the bank has a network of 111 (one hundred and eleven) branches stationed in both rural and urban areas of the country and this are further extended every year by 4/5 new branches. Since inception, the Bank has been making significant profit every year and positioning itself as second highest profit-making bank in the country for last five consecutive years. This has been possible due to significant credit growth of the bank. On an average, credit portfolio of the bank has been growing @ 40% every year. However, asset quality of the Bank was never compromised for this high growth. It has been well maintained which is reflected in its classification rate that never exceeded 2% in its 10 (Ten) years of life. As the lion share of the total revenue comes from credit operation and the existence of the Bank depends on quality of asset portfolio, efficient management of credit risk is of paramount importance.A banker should employ his funds in such a way that they will bring him adequate return because like all other commercial institutions banks are run for profit. But its policy must comply with current growth of loan portfolio and market position.

Scope & Objective To analyze the Theoretical Development of Liquidity, Credit, ALM To overview of Administration of Credit by Prime Bank limited To analyze the Performance Analysis/Empirical Analysis of Prime Bank Ltd. To summarize the report & Conclusion of the report. To get an overall idea about the performance of Prime Bank Limited. To fulfill the requirement of the internship program under BBA program. The study would focus on the following areas of Prime Bank Limited: Credit performance of Prime Bank Limited. Organization structures and responsibilities of management. Financial statement of Prime Bank LimitedMethodology & limitationMethodology:The study will require a systematic procedure from selection of the topic to final report preparation. To perform the study, data sources will be identified and collected as clearly as possible. They will be classified, analyzed, interpreted and presented in a systematic manner and key points are to be found out. Which given as following Primary Sources Face to face conversation with the employees Informal conversation with the client Study relevant file provided by the officersSecondary Sources Banks Annual Repot PBL employ activity policy Different circulars, manuals and files of the bank PBL Database Different books and periodicals related to the Banking sector Online journalsLimitation: The study requires high costs, time and temperament that I failed to give in many cases Inexperience in preparing internship report may put some limitations but I try my best to overcome these limitations Relevant up-to-date information is/has not found when required The PBL bank authority is not frequent to exposure of their confidential data.

Chapter 2Theoretical DevelopmentLiquidity, Credit, ALM

Liquidity Management:The concept of liquidity is well known in business namely, the ability to sell asset on short notice with minimal loss in value. However bank liquidity management is a much more complex concept then liquidity per, se. in general liquidity management consists of two interrelated parts. First, management must estimate fund needs, which is based on deposit inflows and outflows and varying level of loan commitments. Deposit flows are affected by financial instruments as well as the competitive rates posted by bank in their respective geographic markets.The second part of liquidity management involves meeting liquidity needs. Two type of liquidity are available to meet potential liquidity requirements asset management and liability management.Asset management refers to meeting liquidity needs by using near-cash asset, including net funds sold to other bank and money market securities. Also asset-backed securities derived from securities loans is a growing source of asset liquidity in the banking industry.Liability management refers to meeting liquidity needs by using outsources of discretionary funds. However in order to access these sources of liquidity , a bank must maintain sound financial condition. In general, smaller banks trend to emphasize asset management in meeting liquidity needs, in contrast to large bank with an emphasis on liability management.Estimating Liquidity NeedsThe first step in any analysis of bank liquidity is the estimation of liquidity need. These needs primarily arise from deposit needs and withdrawal. To estimate the need bank should focus on the demand of liquid asset and the supply of deposits. In generally loan growth does not exceed the deposit but difference can arise temporarily specially in the urban areas where there is huge opportunity of trade and commerce. A recent trend in liquidity management is the ability to meet cash needs arising from securities activities which in many cases are off balance sheet exposure for hedging or market making purposes. It is prudent to adjust the estimated liquidity needs to some extent to avoid a liquidity squeeze in the form of a cash shortage that could result in the lost opportunity of lending, reduced depositors confidence. There are two common methods that commercial banks use in these days to estimate the required fund for liquidity. They are - Sources and Uses of Funds Method Structure-Of-Deposit methodSources and Uses of Fund methodOne method of estimating future liquidity is the sources and uses of fund method. Under this method management evaluates the potential changes in the individual asset and liability accounts. That is loan amount may be divided into several sectors that is commercial, individual, industrial etc. Management estimates demand of those loans from past data of the loan portfolio. Deposit levels are influenced by the economic and competitive market condition. As interest rates rises depositors try to move funds to get the maximum return therefore the management also experiences the increasing completion for deposit funds especially from non bank financial institutions. During low interest rates depositors try to invest in bonds and stocks causes increase demand in the bank. At the same time change in monetary policy as well as change in the international financial market. In our country we also experience increase in the loan demand at harvesting period for agricultural loan. In this method decrease in the loan and increase in the fund is the sources of fund and both increase in the loan and fund deposits are the uses of the fund method. Subtracting loan changes from the deposit is the liquidity needs for the bank. In this method there are both discretionary and nondiscretionary items based on the ability of the management to control the flow of funds. Deposit withdrawals are nondiscretionary items as bank cannot control the amount of withdrawal as loans are discretionary as bank management can control the amount of loan disbursement.Structure-Of-Deposit MethodAnother way to measure the liquidity needs is the structure-of-deposit method. The idea of this approach is to list the different types of deposits that the bank is using to acquire then assign a probability of withdrawal to each type of deposit within a specific time period. High risk liquidity requires extensive liquidity to support them where as low risk deposit requires low liquidity to support them. Generally a strong and positive relationship exists between the bank and these depositors. If other competing banks increase interest rates, then these funds can rapidly be withdrawn and thereby cause liq1uidity demand on the bank.The major strength of this method is that it directs the management attention to the probable cause of management pressure. On the other hand its drawback is the ignoring other liquidity demands stemming from the loan. The evaluation of the probability of withdrawal must be estimated on a case by case basis. Stability characteristics of each source of fund management are necessary due to avoid the large difference.Credit Risk Management:The Credit Risk Management Department shall perform interlaid the following duties:(a) Assess risks inherent in the credit proposal sent by Corporate Division and also evaluate proposed facility pricing based on risks, security, structuring and terms and conditions to suit the business condition and to protect Banks interest.(b) Compliance to the existing rules and regulations of the Bank and all regulatory authorities and laws of the country and to advise the Corporate Division for rectification, if required.(c) Advise the Corporate Division about changes, if required, in the structure and terms and conditions of the proposed facility. (d) Process credit proposal for approval of the competent authority.(e) Issues sanction advice for credit facilities or decline. (f) Maintain Limit Sanction Register.(g) Review the performance of the customer on Off-site Basis and prescribe appropriate remedial measures, if required until the loan account becomes a Special Mention one. (h) Review/revise risk grading of the customer from time to time based on the Early Alert Report and Downgrade Proposal submitted by Corporate Division.(i) Handover loan to the Recovery Department as and when it is degraded to Special Mention or below.Major Functions of CRM:(a) To update Banks Credit Policy/Lending Guideline, procedures and control mechanisms related with all credit risks arising from corporate/commercial banking and retail banking etc.(b) To approve/decline credit proposal received from Corporate Division (presently from Branches) within delegated authority and to recommend to the higher authority if it is beyond delegation.(c) To provide advice/assistance regarding all credit matters to Corporate Division/Branches.(d) Periodical review of different types of credits, maintain effective follow-up and supervision and take all possible measures in time to save from classification.Duties and Responsibilities of CRM:(a) Examine/review credit proposals (new/renewal) sent by corporate division/branches to:(b) Revise and ratify borrowers risk grade developed by Corporate Division/branches.(c) Review delegated credit approval authorities on an annual basis(d) Review approval procedures of Retail Credit from time to time(e) Review and update banks credit manual and credit operating procedures on an annual basis.(f) Conduct industry analysis and detect risk involved with each industry.(g) Formulate strategy to minimize risk of lending to specific industry.(h) Guide and educate officers of all Departments of Credit Division and Corporate Division/branches.

Computation of CRG:The following step-wise activities outline the detail process for arriving at credit risk grading.Step I: Identify all the Principal Risk ComponentsStep II:Allocate weight ages to Principal Risk ComponentsStep III:Establish the Key Parameters Step IV:Assign weight ages 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.Credit risk components and key parameters

Figure: Credit Risk Components

Each of the above mentioned key risk areas require be evaluating and aggregating to arrive at an overall risk grading measure. Evaluation of Financial Risk: Risk that counterparties will fail to meet obligation due to financial distress. This typically entails analysis of financials i.e. analysis of leverage, liquidity, profitability & interest coverage ratios. This capitalizes on the risk of high leverage, poor liquidity, low profitability & insufficient cash flow. Evaluation of Business/Industry Risk: Risk that adverse industry situation or unfavorable business condition will impact borrowers capacity to meet obligation. The evaluation of this category of risk looks at parameters such as business outlook, size of business, industry growth, market competition & barriers to entry/exit. To conclude, this capitalizes on the risk of failure due to low market share & poor industry growth. Evaluation of Management Risk: Risk that counterparties may default as a result of poor managerial ability including experience of the management, its succession plan and team work. Evaluation of Security Risk: Risk that the bank might be exposed due to poor quality or strength of the security in case of default. This may entail strength of security & collateral, location of collateral and support. Evaluation of Relationship Risk: These risk areas cover evaluation of limits utilization, account performance, conditions/covenants compliance by the borrower and deposit relationship.

Asset / Liability Management:Bankers make decisions everyday about buying and selling securities, about whether to make particular loans, and about how to fund their investment and landing activities. These decision are based on (1) Their outlook for interest rate-the direction of change in interest rates in the future.Two other factors: that they must take into account include.(2) The composition of their asset and liabilities.(3) The degree of risk that they are willing to take.Collectively these decisions affect the banks net interest income and balance sheet values. The process of making such decision about the composition of asset and liabilities and risk assessment is knows as asset liability management (ALM).The decisions are usually made by the asset/liability management committee (ALCO) that is responsible for the overall financial direction of the banks. The ALCOs goal is to manage the source and use of funds on the balance sheet and off balance sheet activities with respect to interest rate risk and liquidity. ALM is generally viewed as short run in nature, focusing on the day-to-day and week-to-week balance sheet management necessary to achieve near-term financial goals. The traditional purpose of ALM has been to control the size of the banks net interest income. This goal is associated with dollar gap. ALM also considers the affects of the changes on the value of balance sheet item.Roles of Asset / Liability ManagementAsset Liability Management is not the only responsibility of management, but rather a team effort between the board and management. That said, it is important to separate the responsibilities of each. The board has a responsibility to shareholders and regulators to establish policy and monitor the decisions of management. Roles of Asset Liability Management (ALM)1. To manage liquidity and interest rate risk of the bank.2. To understand the market position and competition etc.3. To assume overall responsibilities of Money Market activities.4. To provide inputs to the Treasurer regarding market views and update the balance sheet movement.5. To comply with the regulations of Bangladesh Bank in respect of statutory obligations as well as thorough understanding of the risk elements involved within the business.

Chapter-3Administration of Credit by Prime Bank limited

Credit Administration process:

Branch Limit Creation Process of CAD

CRMCorporate Proposal

Bangladesh Bank Policy

Board of DirectorsEC BoardHOCRC/MDCorporate Our Bank Policy

HOCRC/MD

Corporate Office Note

CRM

Branch For Sanction

Sanction Check List

CAD Memo Place Approach Limit Creation

Credit Administration DepartmentObjectives:a) To separate documentation and disbursement activity from credit approval process. b) To ensure discipline in Credit Management.Duties and Responsibilities: Documentation: To ensure that security documents are prepared in accordance with approval terms and are legally enforceable. Disbursement: To allow disbursements under loan facilities only after completion of all documentation formalities. The branches shall send a copy of Certificate of Documentation (Check list) to Credit Administration Department, Head Office seeking approval for disbursement. In respect of business credit facilities allowed by the Head of branch under the business power delegated to him, Certificate of documentation (check list) along with a copy of sanction advice to be also sent to the Credit Administration Department for disbursement authority. They shall send it by fax followed by mail. The Credit Administration Department shall promptly response for advising about disbursement preferably on the same day. If disbursement authority is given to the Branch with some exception i.e. incomplete documentation with the undertaking of the Head of Branch to get it completed within a given time frame having approval from the competent authority, the Credit Administration Department shall continuously follow-up with the concerned Branch to ensure completion of the documentation within the given time frame. In the cases of Large Loan the representative of Credit Administration Department may visit the Branch to verify the status of documentation. Custodial Duty: To ensure safekeeping of all security documents. Presently, the document files shall be preserved by the branches under joint custody. Credit Administration, HO shall supervise, control and monitor the custodial matter. CIB Related Function: To collect CIB report of the borrower as and when asked by the Corporate Division/branches. They shall submit CIB statement to Bangladesh Bank and perform all CIB related activities. Compliance: To prepare and submit all required Bangladesh Bank returns in the correct format in a timely manner. To ensure that all Bangladesh Bank circulars/regulations are maintained centrally, and advised to all relevant departments to ensure compliance. Enlistment: To enlist and manage all third party service providers (Surveyors/values, lawyers, insurers, CPAs etc.) and review their performance on an annual basis. Others: To prepare all monthly statements as required by the Management.

Accountabilities of CAD:1. Ensure loan documentation and securities are duly completed and in place prior to disbursement of loans.2. Ensure accurate and timely submissions of returns of both the Central Bank and the Bank's Head Office.3. Act on exception reports and ensure timely receipt of loans installments.4. Ensure the adequate insurance is in place on all pledged assets, all approval conditions have been met, and any exceptions are appropriately approved prior to disbursement of loans.5. Ensure that department operations, including the preparation of loan documentation, recording of charges, and reporting of exceptions are done in a timely and efficient manner.6. Ensure compliance with internal policies and procedures and external regulatory requirements, and that all internal and external audit documentation are implemented.

Credit Administration Flowchart

Functions ofCredit Administration DepartmentCustodianDisbursementMonitoringComplianceObtaining Security Documentation as per approvalApproval from CRMConditions & Covenant Branch MonitoringReturns to BB, CIB Reporting, default list circulationSafely Storing Loans/Security Documents (fire proof)Completion of Security DocumentationMonitoring of Past Due, Limit, Expiry & Documents DeficiencyMaintain BB Circulars & ensure compliance by all Depts.Periodic review of documentation*Ensure adherence to approve terms & other requirements before disbursement.Audit, Internal/BB Inspection ComplianceEnsure all values, lawyers, insurers are approved, enlisted & their performance are reviewed periodicallyEnsure Collateral is Insured & Property Valued.Limit Creation & Complying Disbursement Check ListDisbursement

* Periodically means:Risk GradeReview Frequency

> 6Quarterly

4 - 5Semi-Annually

1 - 3Annually

Recovery Department Major Functions:i) Recovery of Non performing and under performing loan from risk grade special mention account to below. With this end in view take all necessary measures inter-alia meeting with the customers, negotiate for restructuring, rescheduling settlement by way of extension of time, waiver of partial interest, serving legal notice, foreclosure and sale of mortgaged / hypothecated / pledged property filing suit in time, follow up suits, publishing sale notice in the News Paper, best effort to be made to keep classified loan within the minimum possible level.ii) To ensure that adequate provision against classified and unclassified loan is maintained as per Bangladesh Banks guidelines.iii) All work related to loan classification in line with Bangladesh Banks guidelines.iv) The recovery Department shall review documentation of non performing and under performing loans, meet the customers and prepare classified loan review report within 15 days of transfer and be approved by the Head of Credit.v) Classified loan review should be prepared by Recovery Department on quarterly basis to update the status of the action/recovery plan and modify Banks strategy.vi) Where required proper legal action be taken in time.vii) Court cases are regularly followed up and necessary steps are taken for early resolution.viii) Recovery Department shall determine the Forced Sale Value (FSV) for accounts grade 6 and worse. Organizational Structure of Prime bank LimitedSmooth and transparent credit operation requires segregation of duties so that relevant activities e.g. credit marketing, approval, documentation, disbursement etc become independent of each other. It is important that these activities are not pooled within one or two Departments/divisions in the organization. Rather, it is preferable that all the above activities rest with separate Departments/Divisions. As such, these require some independent departmental set-up both at Branch and Head Office level within the Bank. 1. Organizational Set-up at Head Office: MD

Corporate DivisionCredit Division

General Credit Dept.SME Dept.Export Dept.Leasing Dept.Syndication Dept.CRM Dept.Credit Administration Dept.Recovery Dept.

Figure: Organizational Set-up at Head Office2. Organizational Set-up at Branch:

Head of Branch

Corporate Banking UnitCredit Risk Management Unit Credit Administration UnitCredit Recovery Unit

Figure: Organizational Set-up at Branch

At the minimum, one officer shall be placed in the Credit Administration Unit immediately in each branch who shall work independent of the Branch Management and under administrative and working control of Credit Administrative Department, Head Office.3. Segregation of Duties:From now onward, credit related activities of the Bank are segregated/separated and to be done by separate Departments/set of people. These are as follows:

i. Credit marketing/Relationship (Corporate Banking Division);ii. Credit Approval/Credit Risk Management (CRM);iii. Credit Administration (Documentation & Disbursement);iv. Credit Recovery.

The purpose of the segregation is to improve the knowledge level and expertise in each department, to impose control over the disbursement of sanctioned loan facilities to avoid conflict of interest, compromise and to ensure quality of assets through transparent process.4. Corporate Banking Division Functions:

a) To solicit customers and maintain effective relationship with them.b) To collect sufficient credit information and process the same to conduct due diligence (Credit Analysis).c) To prepare well-dressed credit proposal and recommend the same to the Credit Risk Management Department of the Credit Division.

4.1. Duties and Responsibilities:

Broadly the responsibilities of the division are, but not limited to, the following:a) To set short, medium and long term business goals and forward the same to the Credit Risk Management (CRM) Department of Credit Division for its ratification.b) To formulate plans and strategies to achieve specific business goals.c) To identify target customers, initiate/establish new customer relationships and renew/strengthen existing ones.d) To study market and competitive position and customize business plans & strategies with changing environment on an on-going basis.e) To carry out credit analysis with due diligence, assess credit requirement of the customer, structure credit facilities, identify potential credit risks and mitigating factors thereto.f) To appraise and recommend proposals for participation in loan syndications arranged by other banks. g) To prepare well-dressed credit memo, addressing credit worthiness of borrower.h) To structure loan terms/agreement to reasonably ensure borrowers capacity to repay loans as well as protection of interest of the bank and thereby interest of the depositors.i) To ensure compliance of banks own policies and regulatory requirements;j) To coordinate with Credit Administration Department for accomplishment of proper documentation and disbursement.k) To coordinate with Recovery Department of Credit Division to facilitate effective monitoring of existing loans.l) To collect latest credit information and revised risk grade of the borrower and place the same before the CRM Department for ratification. m) To minimize credit losses through risk assessment and timely identification of deteriorating credit risk of the customers. n) To develop new products and formulate means of mobilizing and allocating short, medium and long term resources.o) To ensure customer satisfaction in all respects.

The Head of Branches shall act as Relationship Manager for his Branch for doing the function of Corporate Banking Division. Officers of Credit Marketing Team of the Branch shall work as members of corporate banking functions. They shall do marketing of Banks credit products, explore new business opportunities, negotiate terms and conditions, process credit proposals, maintain effective relationship with customers and submit proposals to CRM, Head Office for approval of business credit facilities beyond their delegated business power.

Chapter- 4Empirical Analysis /Performance Analysis

Empirical analysis: Financial analysis Ration analysisFinancial analysis:The analysis of financial statement is the traditional way that bank evaluate business loan for the following reasons. The first reasons in determine the financial condition and credit worthless of potential and existing customers: Making loans results in credit risk to the bank. Credit risk means that the customers to whom credit has been extended may default on their payment for the goods and services they received resulting in a loss to the bank. The second reason for using financial analysis is to monitor the financial behavior of customer after credit has been extended. This is necessary to detect activities that could impair their ability to pay their loans and accounts payable or their ability firm in distress might liquidate inventory at unprofitable price in order to increase their cash flow in the short run. An increase in sales at unprofitable price can only result in bankruptcy over time.Ratio analysisProfitability ratioProfitability is the ultimate test of the effectiveness of management profitability can measure in terms of returns on asset, net asset, equity, and sales. All of the measures presented here indicate that Prime Bank profitability declined.Return on asset (ROA):The return on asset in the most comprehensive measure of profitability, measure the productivity for shareholders, bondholders, and other creditor, ROA is calculated dividing net income (NI) by total asset.ROA= Return on Asset

year20062007200820092010

Profit after tax10521401123227843,003

Total assets6089979588110437124806152,797

ROA2%2%1%2%2%

InterpretationROA of Prime Bank Ltd. is showing a Random trend which implies that in 2008 ROA is decrease but all the time in 2006 to 2010 ROA are same. The less income is generated by a given level of assets in 2008. Companys asset is not efficient in 2008 generating return.

Return on Equity:Return on equity (ROA) mean the rate of return on the stockholders invest must in the corporation, which include their paid-in capital as well as retained earnings. ROE is calculated by dividing net income by total stockholders equity.ROE= ROE of prime Bank Return on Equity

year20062007200820092010

Profit after tax10521401123227843,003

Total Shareholder's equity3860527366971174516,769

ROE27%27%18%24%18%

InterpretationPrime Bank Ltd. Generated 27% profit out of the total equity capital invested by the shareholders in 2006 & 2007 .ROE decrease in 2008but increase 2009 slightly. This decrease in ROE reveals that Prime Bank generated less return in 2011with the money shareholders have invested.Earnings per shareEarnings per share (EPS) is the statistic that is often quoted when profitability is discussed the reason for its popularity is that it is relatively easy to understand and easy to relate to stock price. Earnings per share are derived by dividing income available for common stock by the number of shares outstanding.Earnings per share= Earnings per share

year20062007200820092010

Earnings per share (Taka)60.1161.5743.3278.3356.9

InterpretationPrime Bank Ltd. EPS are lowest in 2008 and height value in 2009 but in 2010 Earnings per share was decreasing.

Liquidity RatiosCurrent ratio:Current ratio is a board measure of liquidity derived by liabilities. It is considered a board measure because it includes all current asset and current liabilities. Current ratio= Prime Bank Current ratio 2006 to 2010Current ratio

year20062007200820092010

Current ratio0.880.970.880.961.09

InterpretationWe know that the standard current ratio is 2:1 but the actual current ratio of Prime Bank for the fiscal year 2010 is 1.09:1 which indicates that Prime Bank has 1.09 taka current assets to meet every taka current liabilities. On the other hand for the fiscal year 2009 the ratio is .96:1 and for the fiscal year 2008 the ratio was .88:1. We see the current ratio has decreased from the previous two years, and so has the liquidity position of the company.Financial leverage Debit ratio:The debit ratio indicates the proportion of a firms total asset that is financial with borrowed funds. It is calculated by dividing total liabilities by total assets.Debit ratio= Debit ratio of prime bank in 2006 to 2010Debt Ratio

year20062007200820092010

Long-term liabilities1687715267310443820947,918

Loans and advances45010576837515689252111,167

Total assets6089979588110437124806152,797

Debt Ratio102%92%96%102%104%

InterpretationThe Debt-to-asset ratio of Prime Bank Ltd in 2010 was very high compared to other following four years. This higher debt-asset ratio means higher financial risk and thus weaker solvency. But Prime Bank Ltd reduced this ratio in the following four years and thus better financial condition and lower financial risk

Equity Debt ratioEquity Debt ratio = Equity Debt ratio

year20062007200820092010

Equity Debt ratio7.00%7.10%6.45%10.39%12.33%

InterpretationThe equity -to- debt ratio for Prime Bank was just .07 which implies lower financial risk. But the ratio increased and reached to 0.1233 in 2010 which indicates that Prime Bank is going to face lower financial risk and thus indicates strong solvency.

Times interest earnedBy reducing the amount of debt outstanding, Prime Bank was better able to cover its outstanding debts, thereby reducing its financial risk. Debt coverage is measured by times interest earned, which is computed by dividing earnings before interest and taxes by interest expense-Times interest earned=

Times Interest earned

year20062007200820092010

EBIT5199717090961083112,023

Interest expenses36985267712684267,790

Times Interest earned1.4061.3611.2761.2851.543

Credit deposit ratioCredit deposit ratio

year20062007200820092010

Credit deposit ratio82.25%81.81%85.38%83.45%89.28%

InterpretationThe Credit deposit ratio for Prime Bank in 2006 was 82.25% but in next four year it was increase randomly. And finally in 2010 it was 89.28%. We saw that it is increasing trend. So companies deposits against loan are higher in recent years.

Cost income ratioCost income ratio

year20062007200820092010

Cost income ratio34.07%32.37%33.42%35.47%37.22%

InterpretationCost income ratios indicate that total income against total cost. Prime Bank cost income ratios are increasing in recent year. In 2010 cost income ratio is 37.22%.

Performance at a GlanceKey Financial Data & Key Ratios

Particulars20062007200820092010

Interest income 5199717090961083112,023

Interest expenses36985267712684267,790

Net interest income15001903197024054,234

Non-interest income17322913380857905,447

Non-interest Expenses11011559193129073,603

Net Non-interest income6311354187728831,844

Profit before provision and tax21313257384752896,078

Provision for loans and assets3909101384700540

Profit after provision before tax17412347246345895,538

Tax including deferred tax689946123218052,535

Profit after tax10521401123227843,003

Balance Sheet

Authorized Capital 40004000100001000010,000

Paid-up Capital 17502275284435555,776

Total Shareholder's equity3860527366971174516,769

Deposits547247051288021106956124,519

Long-term liabilities1687715267 310443820947,918

Loans and advances45010576837515689252111,167

Investments784412698231031993420,484

Property, Plant and Equipment412660137515731,692

Earning Assets5545872798100261109905132,688

Net current assets52861338996234357,349

Total assets6089979588110437124806152,797

Current ratio0.880.970.880.961.09

Equity Debt ratio7.00%7.10%6.45%10.39%12.33

Other Business

Import52639706179142496452147,704

Export41801513166855076097106,943

Remittance1505015905226692644728,433

Guarantee Business53867033100101367329,000

Capital Measures

Total risk weighted assets44324554857225382710183,747

Core capital (Tier-I) 386052616265905715,793

Supplementary capital (Tier-II)5491122159431125,692

Total Capital4409638378591216821,485

Tier-I capital ratio8.71%9.50%8.67%10.95%8.60

Tier-II capital ratio1.24%2.00%2.21%3.76%3.09

Total capital ratio9.95%11.50%10.88%14.71%11.69

Credit Quality

Nonperforming loans (NPLs)367777132311491,368

NPLs to total loans and advances(%)0.82%1.35%1.76%1.29%1.23

Provision for unclassified loans545895104013031,463

Provision for classified loans309478734631642

Share Information

Market price per share (Taka)529924540653945

No. of shares outstanding(Million) 17.5022.7528.4435.5557.76

No. of shareholders (actual)5262736891801033919,748

Earnings per share (Taka)60.1161.5743.3278.3356.90

Dividend30%35%25%40%40%

Cash0.00%10.00%0.00%10%5%

Bonus30%25%25%30%35%

Effective dividend ratio33.33%40.00%27.78%44.44%49.52

Market capitalization 925321021153492321254,572

Net asset value per share (Taka)221232235330290

Price earnings ratio (times)8.8015.0112.468.3416.60

Key Financial Ratios

Operating Performance Ratio

Net interest margin on average earning assets3.23%2.97%2.28%2.31%3.49

Net non-interest margin on average earning assets1.36%2.11%2.17%2.72%1.52

Earning base in assets (average)90.71%91.29%91.07%89.34%87.39

Cost income raito34.07%32.37%33.42%35.47%37.22

Credit deposit raito82.25%81.81%85.38%83.45%89.28

Cost of funds on average deposits8.15%8.41%8.55%8.41%6.39

Yield on average advance13.52%13.96%13.69%13.18%11.92

Return on average assets2.05%1.99%1.30%2.37%2.16

Return on average equity31.55%30.68%20.58%30.19%21.06

Other information

No of Branches5061708494

No of SME---514

No of employees11721400155118442,139

No of foreign correspondents517553518602621

Average earning assets464486412886530105083121,296

Average total assets512037024495013117622138,802

Average depostis 45373626187926697488115,737

Average advance 38463513476642082204100,210

Average equity 333445665985922114,257

Chapter- 5Summery & Conclusion

Summery and conclusionCredit is the main source of income of a bank. Credit exposes banks to credit risk which must be managed prudently. Recent global financial crisis has shown the dire effect of reckless lending. Following the global financial meltdown regulatory bodies all over the world have become conscious about implementing stricter credit risk management policies. During this crisis Bangladeshi banks have enjoyed relative safety as they were following Bangladesh banks credit risk management guidelines. Still, many experts demand to close any loopholes that may be present in this policy. Prime Bank Limited has been following Bangladesh Banks credit risk management guideline. Being a fast growing bank PBLs loan portfolio is increasing rapidly. With its superior service and quick decision making ability, PBL has established itself as a prominent lending institution. In year 2009, PBLs loan portfolio increased by 53.48% to Tk. 3288.77 crore. Therefore, necessity for credit risk management is higher than ever for PBL.PBL has managed to decrease the ratio of non-performing loan to total loan portfolio. In the year 2009, non-performing loan has decreased by 22.54% to Tk. 71.09 crore. This is the effect of active credit risk management. It has been possible due to better credit risk assessment, grading, and constant monitoring.

Recently the bank has been able to develop a coordinated system of Analyzing, Processing, Sanctioning, Controlling and Monitoring the Credits backed by fully automated system, which facilitates management of credit risk in an efficient manner. The quality of assets of the Bank improved gradually as a result of effective management of credit risks in recent time which would help to recoup the downturn and to boost up PBLs overall financial conditions.

For efficient Management of Credit Risks the Bank emphasizes on building cordial rapport and relationship with the customers to ensure that neither the business nor the business relationship between the Banker and the Customer is hampered in any manner whatsoever.Rather it gives an impetus to enhance the same and improves the standard of Customers service of the Bank. Constant monitoring and supervision of the credit plays a vital role for keeping the credit portfolios out of risk. Bank exerts constant efforts on keeping the existing credits up to the mark through regular follow-up and visiting to the customer that can help the Bank to identify any possibility of default much earlier. Early treatment by taking preventive/ remedial measures might save the accounts from being classified.

The banking industry is extremely competitive and constantly changing. Rival banks are introducing new products and services and taking new measures to manage credit risk.Therefore it becomes mandatory for each market player to know what others are doing. This requires R&D activities and proactive action to meet challenges.There is no alternative of providing adequate training to the employees. More credit analysts may be recruited to reduce pressure on existing employees. Workshops may be arranged for employees working in credit department to keep them up-to-date. This will also increase their efficiency.Credit risk management is an ever evolving subject. Banks must be flexible enough to incorporate any new practice in its credit risk management policy.

Bibliography

1. Commercial Banking (The Management of Risk), 3rd Edition by GUP & KOLARI2. Bangladesh Bank, Managing Core Risk in Banking: Credit Risk Management, Dhaka, 2005.3. Prime Bank Limited, Credit Risk Management Policy 2005.4. Annual Report of Prime Bank Limited 2006 to 2010.5. http:// www.bangladeshbank.org6. http://www.primebank.com.bd