1.

1 INTRODUCTION:

Jamuna Bank Limited (JBL) is a third generation commercial bank in Bangladesh. As a part of
the banking industry it has been working since 2001. The bank was established by a group of
local entrepreneurs. Like other local commercial bank, it provides all types of support to trade,
commerce, industry and overall business in Bangladesh. The bank offers Conventional and
Islamic banking through designated branches. At present the bank has Real-Time online banking
branches network throughout the country having strong IT backbone. It has 213 ATM booths of
its own, sharing with other partner banks and consortium throughout the country.

1.2 ORIGIN OF THE REPORT:

As per the prerequisite of obtaining Masters of Business Administration (Evening) degree at

University of Dhaka, every student has to go through an internship program. As an employee of
Jamuna Bank Limited the author worked on the report on Credit risk management of that bank
under the supervision of Dr. Md. Rafiqul Islam, Professor, Dept. of Banking and Insurance. The
titled of the report is “Credit Risk Management of Jamuna Bank Limited”. This report is
complying with the prescribed instruction.

1.3 PROBLEM STATEMENT :

The main function of any commercial bank is to collect deposit from surplus unit and invest these
deposits as loan to the deficit unit. The difference between the interest from the borrower and the
depositor is the main income source of the bank is called spread.
The main concentration of any commercial bank lies in credit division. The profit mainly depends
on how efficiently bank monitor its lending money. The failure mainly occurs due to bad loans
that occur because of the inefficiency of proper credit risk management. If the bank has the
strongest CRM Division may have a positive return of that bank.
Jamuna Bank Limited is a third generation bank in Bangladesh that provides Short-term and
long-term finance for entrepreneurs as well as to general people. This report covers all areas
relating to credit risk management and furnishes some recommendation of the findings.

1.4 OBJECTIVE OF THE STUDY :

The General of the report is to find out the actual scenario of the credit risk management of
Jamuna Bank Limited. This work actually helps to gather knowledge about the rules, regulations,
procedures and practices followed by Jamuna Bank Limited regarding credit risk management.
THE SPECIFIC OBJECTIVE OF THE REPORT:

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  To analyze the pros and cons of the credit policy and practices, credit appraisal, financing
in various sectors and its recovery, loan classification method, pricing of credit facility,
security and valuation process, credit risk assessment, sectoral outlook of the bank.
 To study the control mechanism of Jamuna Bank Limited.
 To know the management structure involved with credit risk management.
 To know the assessment process of credit risk grading.
 To examine the various loan products and their compatibility in the present financial
market.
 To know the use of technology in the various segment of credit approval, disbursement
and recover to enhance the green banking campaign of Bangladesh Bank.
1.5 METHODOLOGY :
1.5.1 Sources of data:
Both primary and secondary data are used in this report. the details of Primary and secondary
data sources are as follow:
PRIMARY SOURCE:

 Face-to-face interview with the respective officer.

 Practical work exposure with Jamuna Bank Limited.
 Physical observation of the credit risk management division and interact with the
personnel of the respective division.
SECONDARY SOURCE:

 Annual Report of Jamuna Bank Limited.

 Various publication published by the credit risk management division.
 Information available in the web.
 Bangladesh Bank publications related to the issue.
 Other internal publication of JBL.

1.5.2 Scope of the study:

Risk is the chance that an investment's actual return will be different than expected. This
includes the possibility of losing some or all of the original investment. It is usually measured by
calculating the standard deviation of the historical returns or average returns of a specific
investment. A fundamental idea in finance is the relationship between risk and return. The
greater the amount of risk an investor is willing to take on the greater the potential return. The
reason for this is that investors need to be compensated for taking on additional risk.

By analyzing the total risk, some indexes have taken to analyze only the credit risk of Jamuna
Bank Limited except other risks e.g. market risk, operational risk etc. The credit risk has been

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taken into consideration for analyzing because of the fact that it is our related matter. For that
purpose firstly the deposit of the branch is analyze. Then calculation of the cost of deposit is
needed, which helps to set the lending rate. The author has analyzed determination of lending
rate, the advance deposit ratio, yearly comparison of Export & Import business, Income &
Expenditure and the profit of Jamuna Bank Limited. Thus samples of the full set of data have
been taken to analyze the total scenario of risk management of Jamuna Bank Limited. Sample of
data is taken such a way to ensure that the sample reflects over the full dataset and gives a detail
overview about the risk of credit management. For analyzing the credit risk Balance sheet,
Income Statement and Cash Flow Statement of Jamuna Bank Limited from the year 2013 to 2016
have been taken.

1.6 SIGNIFICANCE OF THE STUDY :

In Modern banking era the most significant task of a bank or a financial institution is to manage
the credit risk. Without having proper arrangement of risk management a bank cannot have
sustainability in the financial market. So risk has to be managed to cope up with the present
situation.

The present economic state of Bangladesh demands immediate development of the efficient and
strong financial institutions. Banking sector has lot of areas to improve upon. One of the
measures to improve this condition is to develop and design the effective system for Management
of Credit Risks, which requires continuous study and research thereupon.

1.7 LIMITATIONS OF THE STUDY :

Credit Risk Management is a vast area to study. Different departments such as Retail Banking
Division, Credit Administration Division are involved so that the information may not have the
accuracy, as the information will be collected only from credit risk management division. Due to
the constraints of time all information regarding credit risk management may not be obtained. So
it may apparent that the outcome may be incomplete. Therefore all information will be presented
throughout the report from the first hand experience.

1.8 LITERATURE REVIEW :

In the past two decades, the banking industry has evolved from a financial intermediation
between depositors and borrowers, to a “one-stop” Centre for a range of financial
services like insurance, investments and mutual funds. The advancement of information
and communicative technology (ICT) is given credit for the evolution of banking services,
in particular, online banking. The development in ICT has not only provided vast banking

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opportunities previously beyond reach, but also heightens the competition and risks faced by
banks in the financial system (Voon-Choong et al. 2010).

Risk is the deviation of the expected outcome. In one way, risk can be classified as
business risk and financial risk. Business risk arises from the nature of a firm’s business
which relates to factors affecting the product market. Financial risk arises from possible
losses in financial markets due to movements in financial variables(Jorion and Sarkis,
1996). It is usually associated with leverage with the risk that obligations and liabilities
cannot be met with current assets (Gleason, 2000).

Another way of decomposing risk is systematic risk and unsystematic risk. Systematic risk is
associated with the overall market or the economy and it can be mitigated in a large diversified
portfolio, whereas unsystematic risk is linked to a specific asset or firm and cannot be
diversified though its parts can be reduced through mitigation and transferring
techniques (Santomero, 1997). However, some risks cannot be eliminated or transferred and
must be absorbed by the banks. The first is due to the complexity of the risk and
difficulty in separating it from asset. The second risk is accepted by the financial institutions as
these are central to their business. These risks are accepted because the banks are specialized in
dealing with them and get rewarded accordingly. The objective of financial institutions is to
maximize profit and shareholder value-added by providing different financial services
mainly by managing risks (Khan and Ahmad, 2001).

Bangladesh Bank, the prime supervisory authority of the financial sector implemented
the new capital standard – Basel II from January 2009 in parallel with Basel I. From January 01,
2010 Basel II has been solely implemented in the banking sector. Basel II requires addressing
and managing the market risk and operational risk in addition to the existing (as per
Basel I) credit risk. Basel II capital standard is acting as a major catalyst for enrichment of
risk management practices within the bank embedding the risk culture in the bank’s operation.
In response to the new capital accord (Basel II), risk management process within the bank has
been introduced supporting the principles of more risk sensitive approach to capital
adequacy.

Most of the parties involved in bank-dealings suffer from the following limitations:
i) lack of proper identification of the determinants related to bank- dealings; ii)
failure to properly identifying risks involved in banking transaction; and iii) lack of
knowledge to manage the risks faced by banks. All these necessity call for an in-depth
investigation on risk management practices and here lies the justification of this study.

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Risks faced by banks:

Risk, in this context, may be defined as reductions in firm value due to changes in the business
environment (David H. Pyle, 1997). Typically, the major sources of value loss are identified
as:

Market risk is the change in net asset value due to changes in underlying economic factors such
as interest rates, exchange rates, and equity and commodity prices.

Credit risk is the change in net asset value due to changes the perceived ability of counter-parties
to meet their contractual obligations.

Operational risk results from costs incurred through mistakes made in carrying out transactions
such as settlement failures, failures to meet regulatory requirements, and untimely collections.

Performance risk encompasses losses resulting from the failure to properly monitor employees or
to use appropriate methods (David H. Pyle, 1997). Generally, commercial Banks face the
following risks:

Credit Risk:

Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail
to meet its obligations in accordance with agreed terms (http://www.bis.org, July 1999). It is
the potential loss arising from the failure of a borrower to meet its obligations in
accordance with agreed terms. Credit risk is one of the oldest and most vital forms of risk faced
by banks as financial intermediaries (Broll, et al, 2002). Commercial banks are most likely to
make a loss due to credit risk (Bo, et al., 2005). Generally, the greater the credit risk, the
higher the credit premiums to be charged by banks, leading to an improvement in the net
interest margin (Hanweck and Ryu, 2004).

Market Risk:

The risk of loss from adverse movement in financial market rates (interest and
exchange rate) and bond, equity or commodity prices. A bank’s market risk exposure is
determined by both the volatility of underlying risk factors and the sensitivity of the bank’s
portfolio to movements in those risk factors (Hendricks and Hirtle, 1997).

The risk of changes in income of the bank as a result of movements in market interest rates.
Interest rates risk is a major concern for banks due to the nominal nature of their assets and the
asset-liability maturity mismatch (Hasan and Sarkar, 2002).

Some researchers emphasized that higher interest rates had positive impact on banks
(Hanweck and Ryu, 2004; Hyde, 2007).

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It arises from potential change in earnings resulted from exchange rate fluctuations,
adverse exchange positioning or change in the market prices managed by the
Treasury Division.

Equity Risk:

It is the risk of loss due to adverse change in market price of equities held by the bank. Equity risk
is "the financial risk involved in holding equity in a particular investment." Equity risk often
refers to equity in companies through the purchase of stocks, and does not commonly refer to the
risk in paying into real estate or building equity in properties.

The measure of risk used in the equity markets is typically the standard deviation of a security's
price over a number of periods. The standard deviation will delineate the normal fluctuations one
can expect in that particular security above and below the mean, or average. However, since most
investors would not consider fluctuations above the average return as "risk", some economists
prefer other means of measuring it(en.wikipedia.org).

Operational Risk:

The potential financial loss as a result of a breakdown in day-to-day operational processes.

Operational risk does not mean only failures in the bank’s operations, but also the causes of the
failures, such as terrorist attacks, management failures, competitive actions and natural
disasters (King, 1998).These caused are largely uncontrollable and unpredictable. Moreover,
human or technological errors, lack of control to prevent unauthorized or inappropriate
transactions being made, fraud and faulty reporting may lead to further losses caused
by internal process, people and operating system (Medova, 2001).

Money Laundering Risk:

It arises from the practice of disguising the origins of illegally-obtained money (drug dealing,
corruption, accounting fraud and other types of fraud, and tax evasion, etc.) through banking
channel and the proceeds of crime are made to appear legitimate (Wikipedia).

Information Technology Risk:

It is related to IT, such as network failure, lack of skills, hacking, virus attack and poor
integration of system.

Liquidity Risk:

It generates from the failure or inability to meet current and future financial obligations by bank
due to shortfall of cash or cash equivalent assets. Banks are exposed to liquidity risk where the

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more liquidity is generated, the greater are the possibility and severity of losses associated
with having to dispose of illiquid assets to meet the liquidity demands of depositor
(Diamond 1999; Allen and Jagtiani, 1996). However, besides depositors, revealed that
banks that make commitments to lend are exposed to the risk of unexpected liquidity demands
from their borrowers (Gatev, 2006).

Marketing Risk:

This risk is related to the different aspects of the promotion and branding of the bank, including
image management, product promotion and advertising.

Human Resource Risk:

This type of risk is generated within the bank from failure to recruit the right people in the right
place, inappropriate means of recruitment, failure to provide feedback to theemployees on
performance, over-reliance on key personnel, inappropriate training and development etc.

TECHNIQUES OF R ISK MANAGEMENT

GAP Analysis:

It is an interest rate risk management tool based on the balance sheet which focuses on the
potential variability of net-interest income over specific time intervals. In this method a
maturity/ re-pricing schedule that distributes interest- sensitive assets, liabilities, and off-
balance sheet positions into time bands according to their maturity (if fixed rate) or
time remaining to their next re- pricing (if floating rate), is prepared. These schedules are
then used to generate indicators of interest-rate sensitivity of both earnings and economic
value to changing interest rates. After choosing the time intervals, assets and liabilities are
grouped into these time buckets according to maturity (for fixed rates) or first
possible re-pricing time (for flexible rates). The assets and liabilities that can be re-priced are
called rate sensitive assets (RSAs) and rate sensitive liabilities (RSLs) respectively.
Interest sensitive gap (DGAP) reflects the differences between the volume of rate
sensitive asset and the volume of rate sensitive liability and given by,

GAP = RSAs – RSLs

The information on GAP gives the management an idea about the effects on net-income due to
changes in the interest rate. Positive GAP indicates that an increase in future
interest rate would increase the net interest income as the change in interest income is
greater than the change in interest expenses and vice versa (Cumming and Beverly, 2001).

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Duration-GAP Analysis:

It is another measure of interest rate risk and managing net interest income derived by taking
into consideration all individual cash inflows and outflows. Duration is value and time
weighted measure of maturity of all cash flows and represents the average time needed to
recover the invested funds. Duration analysis can be viewed as the elasticity of the market
value of an instrument with respect to interest rate. Duration gap (DGAP) reflects the
differences in the timing of asset and liability cash flows and given by,

DGAP = DA - u DL

Where DA is the average duration of the assets, DL is the average duration of liabilities, and u is
the liabilities/assets ratio. When interest rate increases by comparable amounts, the
market value of assets decrease more than that of liabilities resulting in the decrease in
the market value of equities and expected net-interest income and vice versa(Cumming and
Beverly, 2001).

Value at Risk (VaR):

It is one of the newer risk management tools. The Value at Risk (VaR) indicates
how much a firm can lose or make with a certain probability in a given time horizon. VaR
summarizes financial risk inherent in portfolios into a simple number. Though VaR is used to
measure market risk in general, it incorporates many other risks like foreign currency,
commodities, and equities ( Jorion, 2001).

Risk Adjusted Rate of Return on Capital (RAROC):

It gives an economic basis to measure all the relevant risks consistently and gives managers
tools to make the efficient decisions regarding risk/return tradeoff in different
assets. As economic capital protects financial institutions against unexpected losses, it is
vital to allocate capital for various risks that these institutions face. Risk Adjusted Rate of
Return on Capital (RAROC) analysis shows how much economic capital different
products and businesses need and determines the total return on capital of a firm. Though
Risk Adjusted Rate of Return can be used to estimate the capital requirements for
market, credit and operational risks, it is used as an integrated risk management tool
(Crouhy and Robert, 2001)

Securitization:

It is a procedure studied under the systems of structured finance or credit linked

notes. Securitization of a bank’s assets and loans is a device for raising new funds
and reducing bank’s risk exposures. The bank pools a group of income-earning

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assets (like mortgages) and sells securities against these in the open market, thereby
transforming illiquid assets into tradable asset backed securities. As the returns from these
securities depend on the cash flows of the underlying assets, the burden of repayment is
transferred from the originator to these pooled assets.

Sensitivity Analysis:

It is very useful when attempting to determine the impact, the actual outcome of a particular
variable will have if it differs from what was previously assumed. By creating a given set of
scenarios, the analyst can determine how changes in one variable(s) will impact the target
variable.

Internal Rating System:

An internal rating system helps financial institutions manage and control credit risks
they face through lending and other operations by grouping and managing the
credit-worthiness of borrowers and the quality of credit transactions.

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2.1 HISTORY & BACKGROUND OF JAMUNA BANK LIMITED:

Jamuna Bank Limited (JBL) is registered under the Companies Act, 1994 of Bangladesh with its
Head Office currently at Hadi Mansion, 2, Dilkusha C/A, Dhaka-1000, Bangladesh. The
operation of this bank started June 3rd 2001. Being a 3rd generation Bank of Bangladesh, it
focuses on:

 Remaining with time

 Managing change

 Developing human capital

 Creating true customer’s value

JBL came into being as a highly capitalized third generation Bank started its operations the
authorized Capital and Paid–up Capital of Tk.2424.00 and Tk.1313.00 million
respectively. The Bank is managed and operated by a group of highly educated and
professional team. The Management of the bank focuses on understanding and
anticipating customers' needs. Since the need of customers is changing day by day with
the changes of time, the bank endeavors its best to devise strategies and introduce new
products to cope with the change. Jamuna Bank Ltd. has already achieved tremendous
progress since its beginning. The bank has already built up reputation as one of quality
service providers of the country.

JBL from the very inception set a mission to build up itself as a unique commercial bank through
difference in outlook, and providing comprehensive and innovative services to the valued
customers. And ultimate goal is attaining mutually a sustainable higher level in financial
measure.

As a new generation private commercial bank of the country, JBL provides all conventional
services to the clients. In addition it presents a good number of schemes and products in deposit
and credit forms.

2.2 C ORPORATE VISION:

To be a leading banking company and to play a significant role in the financial progress of the
country.

2.3 C ORPORATE MISSION:

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The Bank is fully committed to satisfy various needs of its customers through diverse products at

a competitive price by using proper technology and providing in time service so that a sustainable
growth, a fair return and contribution to the progress of the country can be ensured.

2.4 C ORPORATE GOVERNANCE :

The organizational structure and corporate governance of JBL reflect the determination to
establish, sustain and increase its strength for a strong base as a customer–oriented bank with a
transparent management.

2.5 OBJECTIVE OF JBL:

 To earn and maintain CAMEL Rating “Strong”.

 Establish relationship banking and improve service quality through development of Strategic
Marketing Plans.
 Keeping risk position at an acceptable range (including any off balance sheet risk).
 Maintain proper liquidity to fulfill maturing obligations and commitments.
 Maintain a healthy growth of business with desired image.
 Maintain adequate control systems and transparency in procedures.
 To ensure proper utilization of resources.

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 2.6 Organization Chart of JBL:

Chairman

Managing Director

Deputy Managing Senior Executive Vice President Deputy Managing

Director Director
Executive Vice President

Senior Vice President

Vice President

Senior Assistant Vice President

Assistant Vice President

First Assistant Vice President

Senior Executive Officer

Executive Officer

First Executive Officer

Management Trainee Officer

Officer

Probationary Officer

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3.1 DIFFERENT TYPES OF FUNDED CREDITS :

3.1.1 Cash Credit (Hypothecation) limit:

Advances allowed to the business concerns for trading intend and to the industries to meet up the
working capital requirements against hypothecation of stocks as primary security fall under this
type of lending. It is a sort of continuous credit wherein customers can transact in the account all
through within the valid period. This type of credit is renewable after its expiry.

3.1.2 Cash Credit (Pledge) limit:

It is financial accommodation to business concerns for trading intend and to industries as
working capital against pledge of stocks as initial security. It is also a continuous credit similar to
the above.

3.2 DIFFERENT TYPES OVER DRAFT FACILITIES :

JBL extended different types of Over Draft facilities to different individuals/ organizations like
SOD (General), SOD (FDR), SOD (Financial Obligation), SOD (Work Order), SOD (Pay Order),
etc. Out of those SOD (Gen.) is very much similar to C.C.(Hypo.) except Hypothecation of Stocks.
SOD (FDR) is extended against lien on FDR that may be issued either by any branch of JBL or by
other Bank(s). SOD (F.O.) is extended against lien on different types of Deposit under different
schemes. On the other hand, SOD (W.O.) is extended against Assignment of Work order(s) for
execution of concerned works. SOD (P.O.) is extended for participating in the Bids as invited by
different work giving agencies.

Overdraf

SOD (General) SOD (FDR) SOD (Financial SOD (Work SOD (Pay
Obligation) Order) Order)

Overdraf Overdraf

3.3 TERM LOAN: Overdraf

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Term loans are allowed for a specific purpose but for a definite period. Term Loan is generally
repayable by installments on monthly/ quarterly/ half–yearly basis. As per the length of the loan
repayment period Term loans are divided in three categories i.e. Short term, Medium term and
Long term. JBL provides Term Loans in different forms based on the purpose of the loan.
Term Loan

Loan House Building Finance House Building Finance House Building

(General) (Commercial) (General) Finance (Staff)

3.4 FUNDED CREDIT RELATED TO INTERNATIONAL TRADE :

JBL provides all types of Funded Credits in connection with Foreign/International Trade.
Foreign Trade related Funded Credits can be divided into two broad categories i.e. Post–Import
Funded Credits and ii. Export & Post–Export Funded Credits.

i. Post–Import Funded Credits are Loan against Trust Receipt (LTR), Loan against Imported
Merchandise (LIM), etc.

ii. Export & Post–Export Funded Credits are Packing Credit (PC), Negotiation and Purchase of
Export Bills (FDBP), Discounting Bill of Exchange (LDBP), etc.

Foreign Trade related Funded Credit

Post Import Funded Export & Post-Export

Credit Funded Credit

LTR LIM PC FDBP LDBP

3.5 AGRICULTURAL CREDIT :

JBL provides credits for Agro Industries at a concession rate of interest.

3.6 INDUSTRIAL CREDIT :

JBL offers a full pack of advisory, financial and operational services to its corporate client

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 groups compilation of trade, investment, treasury, and traditional banking activities in one box.
Corporate banking service envelopes a big array of business.

3.7 LEASE FINANCE :

Lease means a contractual relationship between the owner of the asset and its user for a specified
period against mutually agreed upon rent. The owner i.e. the Bank is called the Lessor and the
user i.e. the customer is called the Lessee. Lease finance is one of the most convenient sources of
financing of assets viz. machinery, equipment vehicle, etc.

3.8 SME CREDIT SCHEME:

At present Small & Medium Enterprise (SME) Credit is a very important product of
banking. After a long while since the independence small and medium entrepreneurs of our
country were overlooked in the banking sector as they do not have enough property to provide as
collateral security to the commercial banks. But, this group is striving entrepreneurs, who cannot
pursue their financial uplift due to financial constraint. On the other hand, the role of Small and
Medium Enterprises is very crucial in the economic development of the country. SME plays the
vital role in employment generation particularly self–employment by making significant
contribution to the GDP. With this end in view, SME Credit concept has been introduced recently
in the banking sector of our country in order to promote and to boost up the potentials of such
small and medium entrepreneurs.

SME Credit Scheme

Loan of Purchase Business Office Capital Machinery Flexible

of Professional Renovation Loan Purchase Loan Working Capital
Rights Loan

Double Loan Festival Credit Trade Finance Loan for Herbal Working
Industry Capital Loan

3.9 C REDIT PRODUCTS :

JBL offers wide range of diversified Retail Credit products, which will facilitate to improve the
standard of living of the country.

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 Retail Credit Products

Loan Under Household CNG Conversion Travel Loan

Consumer Credit Durable Loan Loan
Scheme

Study Loan
Any Purpose Loan Against Doctor Loan Marriage Loan
Lifestyle Loan Salary

3.10 D IFFERENT TYPE OF NON-FUNDED CREDIT :

Non-Funded Credit Related to International Trade:

JBL provides all types of Non–Funded Credits in connection with Foreign/ International Trade.
Foreign Trade related Funded Credits such as Issuing, Advising and Confirming of Documentary
Credits like L/C on Sight & Deferred Payment basis; Back to Back L/C; Acceptance against
Usance Bills through Acceptance for Bill Payment (ABP); Lodgment/ Collection of Documentary
Bills; Assist customers to insure all risks; Foreign Currency Dealings, etc.

Non-Funded Credit
related to Foreign Credit

L/C (Sight) L/C(Deferred Payment Basis) Back to Back L/C Acceptance Against Collection of
Usance Bill(ABP) Documentary
Bill

3.11 BANK GUARANTEE :

JBL issues Guarantees on behalf of its customer in the form of Bid–Bond; Performance
Guarantee; Advance Payment Guarantee; etc.

Bank Guarantee

Bid Bond Performance Guarantee Advance Performance

Guarantee

Guarranty Page 64
Credit operation in a Bank is of paramount importance. The extension of credit is the main
revenue source of a Bank, such as Jamuna Bank Limited. The failure of a commercial Bank is
usually associated with the problems in credit portfolio and is less often the result of shrinkage in
the value of other assets. Thus, credit portfolio not only features dominant in the assets structure
of the Bank, it is critically important to the success of the Bank also.

Credit risk is inbuilt in all spheres of lending and trading operation. Credit risk emanates from a
bank’s on and off balance sheet dealings with an individual, corporate, bank, financial institution
or a sovereign. Credit risk is a significant factor for every financial organization that can be
managed on an ongoing basis.

One of the most significant risks of a bank is exposed to is, what is generally termed as “Credit
Risk”, which is the primary risk in the banking system. Since the largest slice of income generated
by a bank and a major percentage of assets is subject to this risk, it is obvious that prudent
management of this risk is fundamental to the sustainability of a bank.

In simpler terms risk is the variability of return from its expected value. Risk is defined as the
product of a hazard (such as damage costs) and the probability that this hazard occurs. In other
words, (probability) x (hazard) = risk. The first two values must be known or at least estimated in
order to define risk. Risk assessment is the process of analyzing potential losses from a given
hazard using a combination of known information about the situation, knowledge about the
underlying process, and judgment about the information that is not known or well understood.
The process of combining a risk assessment with decisions on how to address that risk is called
risk management. Risk management is part of a larger decision process that considers the
technical and social aspects of the risk situation. Risk assessments are performed primarily for
the purpose of providing information and insight to those who make decisions about how that
risk should be managed. Judgment and values enter into risk assessment in the context of what
techniques one should use to objectively describe and evaluate risk. Judgment and values enter
into risk management in the context of what is the most effective and socially acceptable solution.
The combined risk assessment and risk management process can be described as a six step
process. The first three steps are associated with risk assessment and the last three with risk
management.

The effective management of credit risk is a critical component of a comprehensive approach to

risk management and essential to the long-term success of any banking organization. Towards

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achieving the objectives of the Bank of efficient and profitable deployment of its mobilized
resources and to facilitate administering the credit portfolio in the most efficient way, a clearly
defined, well planned, comprehensive and written down credit policy and control guidelines of
the Bank is a pre-requisite.

4.1 LOANS & ADVANCES :

This section lends the fund what the bank mobilizes through its various deposit accounts. This is
the second function of banks two generic function -deposit mobilization and credit creation. The
major part of banks income is derived from credit and since the banks credit is customer’s fund,
bank takes extreme caution in lending.

4.2 S ANCTIONING LOAN & A DVANCES :

To have a clear idea about the credit management of JBL the following points are essential.
a. Credit policy of the Bank
b. Credit Sanctioning Authority of JBL and
c. Processing and Screening of credit proposal

4.2.1 Credit Policy of the Bank:

JBL Credit Policy contains of total macro-economic development of the country as a whole
by way of providing financial support to the trade, commerce and industry. Throughout its credit
operation JBL goes to every possible corners of the society. They are financing large and medium
scale business house and industry. At the same time they also take care entrepreneur through its
operation of lease finance and some micro credit, small loan scheme etc. The bank has come
up with a scheme where women will be 91% financial support for their self employment and
development.

4.2.2 Credit Sanctioning Authority of JBL:

Delegated powers are expected to be exercise by the authorized executives sensibly keeping the
bank’s interest in mind. In exercising the power so delegated authorized executives shah also
have credit restriction, tools and regulations .as governed by Banking Company Act,
Bangladesh Bank, and other usual credit norms. However, the following guidelines are laid
down before the executives of JBL for exercising the delegated power.
 The borrower must be a man of integrity and must enjoy good reputation in the market.

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  The borrower must have the capacity and capability for utilizing credit
properly and profitably.
 The enterprise of the borrower must be viable and profitable i.e. proposal of (lie
borrower must be evaluated properly and carefully so as to ascertain its
profitability.
 The enterprise must generate sufficient fund for debt and servicing."
A customer to whom credit is to be allowed should be far as possible within the command area.
No sanctioning officer can sanction any credit to any of his near relatives and to any company
where his relatives have financial interest.

4.2.3 Processing and Screening of credit proposal:

Head Office of Jamuna Bank Limited Sends sanction letter to the respective branch. Branch
office now request Head Office to set drawing power limit and to open a loan account. If the
proposed loan met all the criteria then Head Office opens the account and set the drawing power.

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To strengthen the risk management practices of banks, Bangladesh Bank issued “Industry Best
Practices” in 2003 for ‘Managing Core Risks in Banking’ in five (5) areas. Inarguably, ‘Credit Risk
Management’ was the most important among them. Since then, the banking sector in Bangladesh
witnessed different changes and transformation which warrant the revision of the Credit Risk
Management (CRM) Guideline to address the changes, owing to the significant time lag.
Experience of prior years has shown that absence of proper management of such risk has resulted
in significant losses or even crippling losses for a number of banking institutions. It is envisaged
that as the size of the banking system’s balance sheet increases over time, the potential financial
burden will escalate proportionately. Again, as a consequence of immense competition in the
banking industry, the diversity and operational periphery of credit functions have extended
which harbor new sources and dimension of credit risk. In these years, revolutionary changes
have been incurred in the regulatory environment. In this backdrop, Bangladesh Bank (BB) has
felt the exigency to revisit the credit risk management guidelines. In continuation to that, this
revised version of the guidelines titled “Guidelines on Credit Risk Management (CRM) for Banks”
has been prepared. These guidelines are prepared on the basis of the first version of its kind, the
Bank Company Act 1991 (Amended in 2013), Credit related Circulars and Instructions of BB, Risk
Management Guidelines for Banks, and the Risk Based Capital Adequacy Framework in line with
Basel II & III. These guidelines have been outlined by aligning with the Principle 17, 18, 19, 20
and 21 of Core Principles for Effective Banking Supervision i.e. BCP, issued by the Bank for
International Settlements.

These guidelines provide broad-based policy on the core principles for identifying, measuring,
managing and controlling credit risk in banks. The guideline will be applicable for all types of
conventional and shariah-based mode of financing. These policies represent minimum standards
for credit related functions and are not a substitute for experience and good judgment. The
guideline will accommodate all instructions set out in the concerned acts and regulations of BB
from time to time.

The purpose of this document is to provide directional guidelines to the banking sector that will
improve the risk management culture, establish standards for segregation of duties and
responsibilities, and assist in the ongoing improvement of the banking sector in Bangladesh.
Banks are expected to go beyond the yardstick set out in these guidelines. In order to excel in

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 credit risk management, banks themselves will devise, nurse and ensure compliance on core
credit values to cultivate and drive behavior towards highly efficient and quality credit functions.

The core credit values should include, but not be limited to, honesty (highest standard of
professional and personal integrity), trust (faith and belief on each other in professional
behavior), sincerity (intention to convey the truth to the best of knowledge and in action),
equilibrium (balanced decision making through using open and unbiased processes of gathering
and evaluating necessaryGuidelines
information), diligence
of BB (act with
on Managing due care
Credit Riskwhich displays professional
skills in conduct of any aspect of credit process) etc. Keeping in mind the credit values, banks will
devise credit appraisal principles which should give an underlining broad guideline of credit risk
management. This is the ultimate desired outcome of these guidelines
Policy Preferred Organizational Structure & Procedural
Guidelines Responsibilities Guidelines

Lending Credit Approval Segregation of Internal

Guidelines Assessment Authority Duties Audit

Approval Credit Credit Credit

Process Administration Monitoring Recovery

5.1 POLICY GUIDELINES :

Policy Guidelines focus on basic credit risk management policies that are recommended for
adoption by all banks in Bangladesh. this guidelines provide the process and principles that are
made for the implementation of detailed lending process and risk grading system within
individual banks.

5.1.1 LENDING GUIDELINES :

The lending guidelines should provide the key basis for account officers/ the credit managers to
make their recommendations for sanction and should include the below ones:

 Business and Industry segment Focus: The credit guidelines should identify
transparently the business/ industry sectors that should constitute the big portion of the

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 bank’s credit portfolio. For each sector, a clear indication of the bank’s appetite for growth
should be indicated for example Textiles: Grow; Cement: Maintain; Construction: Shrink.
 Credit facility type: – The credit types that are allowed should be clearly focused, such as
term loan, pledge, hypothecation.
 Single Borrower/ Group Limits: Details of the Bank’s single Borrower/ Group limits
should be included as per Bangladesh Bank guidelines. Banks may wish to establish more
conservative criteria in this regard.
 Lending Caps: Bank should establish a specific industry sector exposure cap to avoid over
concentration in any one industry sector.
 Cross Border Risk: Risk associated with cross border lending. Borrowers of a particular
country may be unable or unwilling to fulfill principle and/ or interest obligations.
Distinguished from ordinary credit risk because the difficulty arises from a political event,
such as suspension of external payments :
 Synonymous with political and sovereign risk.
 Third world debt crisis. For example, export documents negotiated for countries like
Nigeria.
5.1.2 Credit Assessment & Risk Grading:
5.1.2.1 Credit Assessment:
Credit risk assessment process is conducted before allowing credit facility. The credit manager or
the officer related to the credit department should present the assessment report that must be
approved by the credit risk management division; the manager should be held responsible for the
accuracy of the full credit proposal which is submitted for approval.

All Banks should have established KYC and Money Laundering guidelines which should be
maintain all the time. Loan Applications should summaries the risk assessment result and should
include the followings:

 Loan amount and category of credit

 Intend of Credit(s) applied for.
 Credit Structure (Tenor, Covenants, Repayment Schedule, Interest) Security
Arrangements.
Along with the above mentioned areas the following should also be included:

 Projected Financial Performance: Where term facilities are being proposed, a

projection of the borrower’s future financial performance should be provided, indicating an
analysis of the sufficiency of cash flow to service debt repayments. Credit should not be
granted if projected cash flow in insufficient to repay debts.

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 Account Conduct: For existing borrowers, the historic performance in meeting repayment
obligations (trade payments, cheques, interest and principal payments, etc.) should be
assessed.
 Mitigating Factors: Mitigating factors for risks identified in the credit assessment should
be identified. Possible risks include, but are not limited to: margin sustainability and /or
volatility, high debt load (leverage/ gearing), overstocking or debtor issues; rapid growth,
acquisition or expansion; new business line/ product expansion; management changes or
succession issues; customer or supplier concentration; and lack of transparency or industry
issues.
 Security: A current valuation of collateral should be obtained and the quality and priority of
security being proposed should be assessed. Credit should not be sanctioned based solely on
security. Adequacy and the extent of the insurance coverage should be assessed.
 Name Lending: The credit division should lend the money according to the proper
guidelines not based on the reputation, goodwill or other subject matter.
5.1.3 Approval Authority:
 The division which approves credits should be clearly delegated to executives and the
board of directors. To ensure accountability the authority of approval should submit the
report to the single executive.

 Loan sanction authority should submit the report in written form to the MD or CEO or
the board of directors.
 Approval authority should be reviewed by the MD or CEO or the board of directors.
 Credit sanction function should be separated from the relationship management
function.
 The main role of the credit committee might be restricted to review only the proposals.
 Sanctions must be proven in written or electronic signature.
 All loan or credit should be authorised by the credit committee within the authority limit
to them by the managing director or CEO.
 Successfully completed and assessment test demonstrating adequate knowledge of the
following areas:
 Introduction of accrual accounting.
 Industry/ Business Risk Analysis
 Borrowing causes.
 Financial Statement Analysis.
 The Asset Conversion/ Trade Cycle.
 Cash Flow Analysis.
 Projections.
 Credit Structure and Documentation.

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  Credit Management.

5.1.4 Segregation of Duties: Banks should aim to segregate the following credit functions

 Credit Approval/ Risk Management.

 Relationship Management/ Marketing.
 Credit Administration.
The main aim of the segregation of duty is to duly done the proper duty by the proper
department. To maintain control over the authority of disbursement and achieve an objective and
fair judgment of credit proposal.

5.1.5 Internal Audit/ Control:

Conducts independent inspections annually to ensure compliance with Lending Guidelines,

operating procedures, bank policies and Bangladesh Bank directives. Reports directly to MD/
CEO or Audit Committee of the Board.

5.2 PREFERRED ORGANIZATIONAL STRUCTURE & R ESPONSIBILITIES :

The proper structure of the institution should be placed to support the selection of the policies.
The key feature is the segregation of the relationship management/ the marketing management/
Administration functions.

5.2.1 Preferred Organizational Structure:

The following chart represents the preferred organizational structure:

Board of Directors

Managing Director/CEO

Head of Credit Risk Head of Corporate/ Other Direct Reports

Management Commercial Banking

Credit Approval (Includes Relationship

Regional Credit Centers If Management/Marketing
Applicable) (RM)

Credit Administration
(May report Separately to Business Development
MD/CEO)

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 Monitoring/Recovery
(Includes Regional
Recovery Centers If
Applicable)
5.2.2 Key Responsibilities:

The key responsibilities of the above functions are as follows:

 The omission of the bank’s all divisional operation

 The omission of the asset quality of the bank.
 Forthwith all the classified loans and maintain provision of the classified loans as per BB
guidelines.
 Approve the loan facility recommended by the delegate authority by analyzing the factors.
5.3 PROCEDURAL GUIDELINES :

5.3.1 Approval Process:

The process of approval of credit must reinforce the segregation of the authority of the
relationship manager or the marketing manager from approving authority.

The recommending or approving executives should take responsibility for and be held
accountable for their recommendations or approval. Delegation of approval limits should be such
that all proposals where the facilities are up to 15% of the bank’s capital should be approved at
CRM level, facilities up to 25% of capital should be approved by CEO/MD, with proposals in
excess of 25% of capital to be approved by the Executive Committee/ Board only after
recommendation of CRM, Corporate Banking and MD/ CEO.
ZCO Advices Sanction if the

otherwise, forwards to the

Credit Application Recommended

delegated Authority,

by RM/Marketing
next level

Zonal Credit Officer (ZCO)

Head of Credit & Head of Corporate MD/CEO

Banking Advices the
decision to HOC
if within the
Decision to

delegated
Advise the

authority,
HOC

otherwise,
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forwarded to
 Managing Director

Executive Committee

Fig: The following diagram illustrates the preferred approval process

 Appeal Process:
Any declined credit proposal may be resubmitted to the next higher authority for re–assessment/
approval. However, there should no appeal process beyond the MD/ CEO.

5.3.2 Credit Administration:

The Credit Administration function is critical in ensuring that proper documentation and
approvals are in place prior to the disbursement of credit facilities. For this reason, it is essential
that the functions of Credit Administration be strictly segregated from Relationship/ Marketing
in order to avoid the possibility of controls being compromised or issues not are being
highlighted at the appropriate level.

 Disbursement:
 Security documents are prepared in accordance with the approval terms and are legally
enforceable. Standard credit facility documentation that has been reviewed by legal
counsel should be used in all cases. Exceptions should be referred to legal counsel for
advice based on authorization from an appropriate executive in CRM.
 Disbursements under credit facilities are only be made when all security documentation
is in place.
 Custodial Duties:
 Credit disbursements and the preparation and storage of security documents should be
centralized in the regional credit centers.
 Appropriate insurance coverage is maintained and renewed on a timely basis on assets
pledged as collateral.
 Security documentation is held under strict control, preferably in locked fireproof
storage.
 Compliance Requirements:
 All required Bangladesh Bank returns are submitted in the correct format in a timely
manner.
 Bangladesh Bank circulars/ regulations are maintained centrally, and advised to all
relevant departments to ensure compliance.

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  All third party service providers i.e. Surveyors, Lawyers, Insurers, CPAs, etc. are
approved and performance reviewed on an annual basis. Banks are referred to
Bangladesh Bank circular outlining approved external audit firms that are acceptable.

5.3.3 Credit Monitoring:

To reduce credit loss, monitoring system must be held at place to provide the actual scenario
prior to sanction a loan. The system should provide information to the executive in RM and CRM
division:

 Interest payment or past due principal, account excesses break down of credit agreement.
 Terms and Conditions of the credit, any breach of agreement are referred to RM and
CRM division for regular follow-up.
 Any external, internal or regulator inspection findings should be corrected timely.

 Early Alert Process:

An Early Alert account is one that has risks or potential weaknesses of material nature requiring
Supervision, monitoring or proper attention by the management

In spite of judicious credit approval system, credit may seem troubled. The symptoms of early
alert are by no means exhaustive and hence, if there are other concerns, such as a breach of credit
covenants or adverse market rumors that warrant additional caution, an Early Alert report
should be raised.

5.3.4 Credit Recovery:

The RU’s primary functions are:

 Determine Account Action Plan/ Recovery Strategy.

 Pursue all options to maximize recovery, including placing customers into receivership or
liquidation as appropriate.
 Ensure adequate and timely loan loss provisions are made based on actual and expected
losses.
 Regular review of grade 6 or worse accounts.

 NPL Account Management:

All NPLs should be allocated to a Manager within the RU, who is responsible for

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Coordinating and administering the action plan/ recovery of the account and should serve as the
primary customer contact after the account is downgraded to substandard.

 Account Transfer Procedure:

Recovery units should ensure that the following s carried out when an account is classified as Sub
Standard or worse:

 Facilities are withdrawn or repayment is demanded as appropriate. Any drawings or

advances should be restricted and only approved after carefully scrutiny and approval
from appropriate executives within CRM.
 CIB reporting is updated according Bangladesh Bank guidelines and the borrower’s Risk
Grade is changed as appropriate.
 Loan Loss Provisions (LLP) is taken based on Force Sale Value (FSV).
 Credits are only re–scheduled in conjunction with the Large Loan Re–scheduling
guidelines of Bangladesh Bank. Any re–scheduling should be based on projected future
cash flows and should be strictly monitored.
 Prompt Legal Action is taken if the borrower is uncooperative.
 Non Performing Loan (NPL) Monitoring:
On a quarterly basis, a Classified Loan Review (CLR) should be prepared by the RU Account
Manager to update the status of the Action/ Recovery Plan, review and assess the adequacy of
provisions and modify the bank’s strategy as appropriate.

 Non Provisioning and Write–off:

The guidelines established by Bangladesh Bank for CIB reporting, provisioning and write–off of
bad and doubtful debts and suspension of interest should be followed in all cases. These
requirements are the minimum, and Banks are encouraged to adopt more stringent provisioning/
write–off policies. Regardless of the length of time a credit past due, provisions should be raised
against the actual and expected losses at the time they are estimated. The approval to take
provisions, writes–offs, or release of provisions/ upgrade of an account should be restricted to
the Head of Credit or MD/ CEO based on recommendation from the Recovery Unit.

The following guidelines is to be followed in determining the actual amount of provision:

Particulars Amount
Gross Outstanding XXX
Less: (i) Cash Margin held or Fixed Deposits/SP under lien (XXX)
(ii) Interest kept in Suspense Account (XXX)

Credit Value XXX

(For which provision is to be created before considering
estimated realizable value of collateral security held)

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Less: Eligible Security (XXX)
(The Value of Eligible security id determined as half of the
estimated force sale value of the collateral security held)
Net Credit Value XXX

Credit operation in a Bank is of paramount importance. The extension of credit is the main
revenue source of a Bank, such as Jamuna Bank Limited. The failure of a commercial Bank is
usually associated with the problems in credit portfolio and is less often the result of shrinkage in
the value of other assets. Thus, credit portfolio not only features dominant in the assets structure
of the Bank, it is critically important to the success of the Bank also.

Credit risk is inbuilt in all spheres of lending and trading operation. Credit risk emanates from a
bank’s on and off balance sheet dealings with an individual, corporate, bank, financial institution
or a sovereign. Credit risk is an essential factor that should be managed on an ongoing basis.

Bank’s credit policy provides the basis of all the credit management; it establishes objective
standards and parameters to be followed by bank employees responsible for the provision and
processing of loans and management. If the credit policy is correctly formulated, carried out and
well understood at all levels of the bank, it allows management to maintain proper standards of
the bank loans to avoid unnecessary risks and correctly assess the opportunities for business
development.

6.1 LENDING GUIDELINES :

 Credit Quality:
Credit facilities shall be allowed tracking industry best practices pursuant to these policy
stipulations so that credit expansion does not deteriorate quality. Credit shall be extended to
the customers who will harmonize such standards.
 Diversification:
Concentration of credit shall be cautiously avoided to minimize risk. The portfolio shall
always be well diversified in respect to economic purpose, national interest, sector, industry,
geographical region, maturity, size etc.
 Repayment Capacity of Borrower:
Those companies/persons, who can make best use of the facility thus contribute to maximize
our profit as well as promote faster economic growth of the country, shall be selected to avail
credit facilities. To ensure achievement of this objective lending decision shall be based
mainly on the borrower’s ability to repay.
 Loan pricing:

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 Loan pricing depends on the volume of risk and type of securities proposed. Rate of interest
is the reflection of risk in the transaction. The higher the risk, the higher is its pricing. Risk
premium is added based on perceived risk on the Base/Prime rate calculated using standard
approach, taking into consideration the component of cost of fund, expected loss, cost of
allocated capital, term cost of liquidity, cost of liquid asset buffer, loan administration cost
and competitive margin to determine a base rate.

 Security:
Security accepted against credit facilities shall be properly valued and bank’s claim shall be
established and documentation perfected in accordance with the laws of the country. An
appropriate margin of security will be taken to reflect such factors as the disposal costs or
potential price movements of the underlying assets.
 Name Lending:
The Bank shall carefully avoid name lending. Credit facility shall be allowed absolutely on
business consideration after conducting due diligence. No credit facility shall be allowed
simply considering the name and fame of the key person or corporate image of the borrowing
company.

 Single Borrower Exposure Limit:

As per latest BRPD Circular no. 02 dated Jan 16, 2014 issued pursuant to the provisions of
Banking Companies Act 1991:
1. The outstanding amount of exposure, both funded and non-funded, to a single
person /counter party or a group shall not exceed 35% of the capital at any point
of time.
2. The aggregate outstanding principal amount of funded exposures shall not exceed
15% of the capital at any point of time.
3. In case of export financing, the outstanding amount of exposure, both funded and
non funded, at any point of time to a single person/counterparty or a group shall
not exceed 50% of the capital. No cap for power sector.
 Large Loan:
As per latest BRPD Circular no. 02 dated Jan 16, 2014,

 Large loan refers to any exposure to a single person/counter party or a group

which is equal to or greater than 10% of the capital.
 The banks may sanction large loans as per the following limits set against their
respective classified loans:
Rate of Net Classified Loans Large Loan Portfolio Ceiling against Bank's Total
Loans & Advances
Upto 5% 55%
More than 5% but upto 10% 52%
More than 10% but upto 15% 48%

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More than 15% but upto 20% 44%
More than 20% 40%

 Country /Cross border Exposure:

In case of Import/Export Finance, cross-border risk should be assessed with due diligence.

(a) While taking cross border exposure political and sovereign risk shall be examined and
considered.
(b) Currency Risk
(c) Expatriation
(d) Change in Laws
(e) Expropriation
(f) In this respect sanction of United Nations Organization and embargo imposed by our
Government shall be strictly complied and adhered to.
(g) Limits to be established by the Board for individual Country as well as & for aggregate
Bank Credit exposures to different countries. The country exposure limits may be utilized
up to maximum amounts for different maturities.

 Lending Caps:

Specific industry sector exposure cap has been established to avoid over concentration in any
one industry sector. Sector-wise and Industry wise allocation of credit shall be made annually
with the approval of Executive Committee/Board of Directors. This will be reviewed from
time to time if warranted to be adjusted adjust with the changed circumstances/scenario. A
report on outstanding loan portfolio of each sector will be submitted to Executive Committee
of Board of Directors/Board of Directors on quarterly basis for their information/perusal/
guidance. Credit concentration (on the basis of Borrower/ Group/Sector/Industry) will be
monitored regularly.

 Credit Rating:

Borrowers of the Bank may preferably be rated by an external credit rating agency. However
regulatory requirement in this regard shall be fully complied with.

 Minimum Capital Requirement for Bank:

As per Guideline of BASEL-II, scheduled banks in Bangladesh are required to maintain

Tk.4.00 billion or 10% of Total Risk Weighted Assets as capital, whichever is higher. It will be
followed strictly. Pursuant to regulatory requirement bank shall transit to BASEL-III and

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 maintain minimum total capital ratio (10%) and minimum total Capital plus Capital
conservation buffer ratio (2.5%).

 Discouraged Businesses for Bank’s Finance:

In view of legal aspect, business risk and banking ethics, following business are on
discouraged list for Bank’s finance:

1. Counter-parties in countries subject to UN sanctions

2. Loans to business whose equity is substantially financed by Preference Shares.
3. Land purchasing
4. Gold trading
5. Harmful drugs/narcotics manufacturing or other items against national interest.
6. Any other type that Bank may identify as discouraged from time to time.

6.2 C REDIT CATEGORIES :

Loan and advances have primarily been divided into three major sections:
a) Fixed term loan: These types of advances made by the bank on a fixed repayment
schedules. The terms of the credit are given below.

Shorter Term : prior to 12 months.

Medium term : more than twelve months ant prior to 60 months.

Longer Term : More than 60 months

b) Continuous credit: These types of advances have no fixed repayment term, but these have
fixed date of expiry that can be renewed on the basis of satisfactory performance.
C) Demand Loan: These are the loans that become repayable on demand by the bank and no
fixed instilment of repayment schedule is laid down. If any contingent of other liabilities are
turned to forced loans (i.e. without any prior approval as regular loan) those too will be treated as
Demand Loans.

Further all categories of loans are accommodated under the 7 sectors as under:

I. Agriculture:

Agriculture loans are sub sectioned and given below:

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a) Loans to primary producers: Loans which are approved to the production units engaged in
forestry, livestock or farming is called the agricultural loan.

Loans to processors or traders of agricultural products are not to be categoried as agricultural

loans.

Loans to tea gardens for production are treated as agricultural loan, but loans to tea gardens for
export should be treated under the category "Export Credit". Similarly medium and long-term
loans to tea gardens are categorized as industrial term lending.

b) Loans to input dealers/distributors: Loans which are financed to the distributors or

import dealers is called the loans to import dealers/ distributors.

Agricultural loans may include short, medium and long fixed term loans as well as continuing
credits. As such, it may fall under Loan (Gen)/Hire-Purchase/Lease Financing/Cash
Credit/Overdraft etc.

II. Term Loan for Large & Medium Scale Industry:

As per SMESPD Circular-01 dated 07.01.2016, Medium and Small Enterprise are defined. Rest
enterprises over the both categories in terms of fixed asset and number of employee are termed
as Large Enterprise. Medium Enterprise is defined as under:

Nature of Business Fixed Asset (Excluding No. of Employee

Land & Building)

Service 1 -15 crore 50-100

Trading 1 -15 crore 11-50

Manufacturing 10-30 crore 100-250

III. Term Loans to Small & Cottage Industries:

As per SMESPD Circular-01 dated 07.01.2016, Small, Micro and Cottage Enterprise are defined
as under:

Small Enterprise:

Nature of Business Fixed Asset (Excluding No. of Employee

Land & Building)
Service 5 lac -1 crore 6-10
Trading 5 lac -1 crore 10-49

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 Manufacturing 50 lac -10 crore 25-99

Micro Enterprise:

Nature of Business Fixed Asset (Excluding No. of Employee

Land & Building)
Service Less than 5 lac Less than 10
Trading Less than 5 lac Less than 5
Manufacturing 5-50 lac 10-24

Cottage:

Cottage is that enterprise which has fixed asset valued less than 5.00 lac excluding land &
building having family member maximum10.

No short term or continuing credits are to be included in this category. Medium & Long term
credits are also included under this category.

Like the Large & Medium Scale Industry it is also allowed in the form of "Loan (Gen)/Hire -
Purchase/Lease Financing".

IV. Working Capital:

Loans which are sanctioned for manufacturing unit to meet up the working capital needs
irrespective of their size.

These are generally continuous credits and categorize under the head "Cash Credit/SOD
(General)."

V. Export Credit:

"Export Cash Credit (ECC)", Packing Credit (PC), Foreign Documentary Bills Purchased (FDBP),
Local Documentary Bills Purchased (LDBP) etc. However, bills discounted/purchased against
supply of goods and services to companies/ industries which are located in the country and not
involved in export/deemed export shall not fall under export credit.

VI. Commercial Lending:

This category of advances are allowed in the form of (I) Loan against imported merchandise
(LlM), (ii) Loan against trust receipt (LTR), (iii) Payment against import documents (PAD), (iv)
Secured Overdrafts (SOD), (v) Cash Credit (CC), (vi) Loan (Gen), (vii) Time Loan etc. for
commercial purposes.

VII. Others:

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Bangladesh Bank vide BRPD Circular No. 07 dated 03.11.2004 has also given prudential
regulatory guidelines for Small Enterprise Financing. The SMEs are recognized as engines of
economic growth worldwide.

6.3TYPES OF CREDIT FACILITIES

Depending on the various nature of financing, all the Loan facility has been brought under two
major groups; Funded Credit and Non-funded Credit.

6.3.1Funded Credit Facilities:

Any type of credit facility which involves direct outflow of bank’s fund on account of borrower
refers to funded credit facility. The followings are the funded credit facilities/limits practiced in
JBL:

6.3.2 PAD:
It is an interim advance connected with import through L/C. As the L/C issuing bank is bound to
honor its commitment to pay for import bills when these are presented for payment, the issuing
bank will lodge the in-order shipping documents to their book by creating PAD as soon as they
receive it.
6.3.3 LTR:
Facility allowed for retirement of shipping documents (so that the importer can release the
goods imported through L/C) by adjustment of PAD liability, is known as LTR. The facility is
allowed on trust with the arrangement that sale proceeds of the goods will be deposited to
liquidate the loan account within the stipulated time.
6.3.4

It is a short term facility allowed to customers against export L/C and/or firm contract for
processing/packing/shipping of goods to be exported. It must be adjusted from proceeds
of the relevant exports. It falls under the category "Export Credit".

6.3.5 ECC:
This facility is allowed to a customer for processing of export of goods. It must be adjusted from
proceeds of the relevant exports.

6.3.6 IDBP:
This facility is provided to purchase documents/ bills (duly accepted by issuing Bank) submitted
by the exporter/supplier on (deemed) export/supply made to local export oriented industries or
other entities against inland L/C usually denominated in Foreign Currency. This temporary
liability is adjustable from proceeds of the Bill.

6.3.7 FDBP:
It falls under the category "Export Credit".This facility is provided to negotiate (purchase)

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Foreign Documentary bills/documents submitted by the exporter on export made against export
L/C denominated in Foreign Currency. Payment made to a customer through
purchase/negotiation of a Foreign documentary bills falls under this head. This temporary
advance is adjustable from the proceeds of the shipping/export documents.

6.3.8 SOD(Export):
This facility is allowed for making import payments including BTB L/C liability in foreign
currency against export L/C, where the exports do not materialize before the due date of import
payments.

6.3.9 Lease Finance :

This is a mode of term financing for acquisition of capital machinery and equipments (or other
assets such as consumer durables, vehicles, etc. and in some cases house building) whereby the
Bank retains ownership and the customer is given the exclusive right to use the asset for an
agreed period of time in return of rental payment.

6.3.10 Hire Purchase (HP):

Hire-Purchase is a type of installment credit under which the Hire-Purchaser agrees to take the
goods on hire at a stated rental, which is inclusive of the repayment of Principal as well as
interest for adjustment of the loan within a specified period.

6.3.11 CC (Hypo):
Advances allowed to individual/firm for trading as well as wholesale purpose or to industries to
meet up the working capital requirements against hypothecation of goods as primary security fall
under this type of lending. It is allowed under the categories (i) "Commercial Lending" when the
customer is other than an industry and (ii) "Working Capital" when the customer is an industry.

6.3.12 CC (Pledge)
Financial accommodations to individual/firms for trading as well as for whole-sale or to
industries as working capital against pledge of goods as primary security fall under this head of
advance. It is also a continuous credit and like the above allowed under the categories (i)
"Commercial Lending" and (ii) Working Capital".

6.3.13 Secured Over Draft (SOD)

This continuous credit limit is allowed for different business purposes including meeting working
capital requirement. The types of facility of SOD are given below:

 SOD (WO)
 SOD (PO/SDR)
 SOD (FDR)
 SOD (FO)

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  SOD (Special Scheme)
 SOD (Share)
6.3.14 Time Loan :
This is one time financial accommodation for short period maximum 12 months to meet some
specific purpose. The loan is adjustable within the validity and not renewable and no transaction
is allowed. It can be repaid with instalments or lumpsome basis.

6.3.15 Retail Credit:

These loans are processed through Retail Department. PPG for Retail Credit has approved by the
Board of Directors in its 121th meeting held on 15-06-2009. Products of retail credit are as
follows:

 Auto Loan
 Any Purpose Loan
 Personal loan
 Salary Loan
 Doctor’s Loan
 Education Loan
 Overseas Loan

6.4 C REDIT PRICING :

Sanctioning credit is the main function of a bank and it is the prime source of earning of a bank.
The price of loan is the interest that borrowers must pay to the bank. Lion share of Banks revenue
is generated from credit operation in form of interest from loan accounts. On the other hand,
financial market of our country is apparently very competitive due to participation of 57 (fifty
seven) banks in our small financial market. As such, pricing is very crucial for business growth of
the Bank. Jamuna Bank Limited fix/refixs price of different credit facilities from time to time
considering changes in the market condition.

6.4.1 Base of Pricing:

Credit operation of Bank is associated with the risk of default. Bank cannot avoid credit risk but it
can mitigate and minimize the risks. Higher the risks, higher the loan pricing and ancillary
income. Price of all credit facilities will be fixed based on the level of risk and type of security
offered. Therefore, loan pricing will be directly correlated with the risk grade of the customer.

Banks must price loans to cover all costs, including a certain number of basis points over the life
of the loan to account for each of the following:

 Cost of funds- The rate at which the bank is able to attract funds of equivalent tenor to
the loan in question. In banks that apply funds transfer pricing, this rate is a wholesale

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 rate, usually the swap rate (fixed or floating, depending on whether the loan is fixed or
floating) of an equivalent tenor.
 Expected loss- The number of basis points that corresponds to the expected loss on the
loan, which will be higher on loans with more credit risk and lower on loans with less
credit risk. Although banks do not make loans with the expectation of suffering any loss,
this amount is not zero for any loan, no matter how well collateralized or guaranteed.
 Cost of allocated capital- The cost of allocated capital is the amount of capital the
bank has allocated to the loan as coverage for unexpected loss, multiplied by the target
return on equity for the bank as a whole, and expressed in terms of basis points. As a
simplification, banks often use the risk-based capital requirement as a proxy for the
amount of capital that should be allocated to the loan.
 Cost of liquidity- The number of basis points that captures the cost arising from the fact
that loans of longer and longer tenor require stable funding of longer and longer tenor,
which will be costly for the bank above and beyond any interest-rate risk considerations
(which will be captured in the swap rate).
 Cost of liquid asset buffer- Banks rarely “maturity-match” a loan with a specific
source of funding of equivalent tenor. They rightly know that a mix of current accounts,
savings accounts, and fixed deposits will render a stable source of funds under most
circumstances.
 Loan administration costs- For any loan, big or small, there are staff costs involved in
origination and monitoring. Some of these costs are up-front and some are ongoing, but
they all must be expressed in terms of basis points over the life of the loan.
 Competitive margin- Finally, after all other costs have been included in the rate, the
bank will add on a certain number of basis points to earn a margin. This component is the
only one that is fully at the discretion of the bank, given its funding and expense structure.
This margin may even be negative, if the bank desires to gain a temporary competitive
advantage. However, it should not be negative on any kind of loan product for an
extended period of time.

6.4.2. Fixing of Interest Rate:

Usually, Bank will charge fixed interest rate which will be subject to changes by the Management.
In this respect, all loan contracts will contain a provision to the effect that rate of interest is
subject to changes by the Management. And, interest rate will be revised as and when a
significant fluctuation occurs in the cost of fund of the Bank due to volatility of interest rate in the
market. The Bank may charge floating interest based on market condition as well as nature of
product.
6.4.3 Interest Rate Policy of BB:

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Under the financial sector reform program, banks are free to charge/fix their deposit and lending
rates other than export credit. At present, except pre-shipment export there is no interest rate cap
lending for banks yet banks can differentiate interest rate up to 3% considering comparative risk
elements involved among borrowers in same lending category.

6.4.4 Revision of Rates:

The Management of the Bank will continuously monitor interest rate situation in the market and
discuss the same in the Asset Liability Management Committee (ALCO) meeting at least once in a
month. As per decision of the Asset Liability Management Committee (ALCO), the Management
of the Bank may approach the Board of Directors to revise rate of interest, commission, charges
etc. considering the above aspects and also taking into cognizance the advices of Bangladesh
Bank.
6.4.5 Fee and Commission:
Fee/commission based income is a leading contributor in bank’s profit. To achieve optimum
profit and to get an edge over the competitor, price setting for non funded product is very much
crucial. Considering the above aspects, Bank sets their rate of commission for different products
and can revise time to time.

6.5 CREDIT RISK ASSESSMENT:

Credit operation of Bank is associated with the risk of default. Bank cannot avoid credit risk but
can mitigate and minimize the risks. So there should be a robust process of credit risk
management, risk identification, risk assessment, risk grading, risk pricing, risk monitoring, risk
analysis and risk mitigation. The success, profitability, reputation and even existence of a Bank
depend upon the efficiency and prudence in managing and understanding credit risks.

6.5.1 KYC Concept:

The Credit Officers/RM must know their customers and conduct due diligence on new borrowers,
principals and guarantors to ensure such parties are in fact who they represent themselves to be
i.e., Know Your Customer (KYC).
The Banker- Customer relationship would be established first through opening of CD/SND/SB
accounts. Proper introduction, photographs of the account holders/signatories,
passport/National ID, Trade License, Memorandum and Articles of the Company, certificate of
incorporation, certificate of commencement of business, List of Directors, Board resolution, etc,
i.e. all the required papers as per Bank’s policy and regulatory requirements are to be obtained at
the time of opening of the account. A declaration regarding approximate transaction to be done
through the account is to be obtained at the time of opening of account. Information regarding
business pattern, nature of business, volume of business, etc. to be ascertained. Any suspicious

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transaction must be timely addressed and brought to the notice of Head Office/Bangladesh Bank
as required and also appropriate corrective measures to be taken as per the direction of Bank
Management/Bangladesh Bank from time to time.

6.5.2 Credit Risk Assessment:

Following risk areas in the credit proposal should be addressed and assessed before sending to
Head Office.

i. Borrowers Analysis:
ii. Industry Analysis:

iii. Buyer/Supplier risk analysis.

iv. Demand /Supply position.

v. Stock position.

vi. Technological feasibility.

vii. Divisional competence.

viii. Demand.

ix. Debt-Equity Ratio

x. Financial analysis (Historical)

Xi.Projected Financials.

Xii.Trade Checking.

xiii.Account conduct

xiv. Deposit with our Bank.

xv. Other Business with us.

xvi. Loan structuring:

xvii. Security:

xiii. Succession issue.

xx. Environmental factor.

xxi. Employment generation and contribution to the national economy.

xxii. Credit Rating.

xxiii. Credit Risk Grading.

6.5.3 Definition of Credit Risk Grading (CRG)

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Credit risk grading is a process that indicates the risk associated with the credit. Credit risk
grading is the basis of developing CRM system.
6.5.4 Functions of Credit Risk Grading

 Promote soundness & safety.

 Helps in decision making.
 Monitor changes and trends.
 Optimize return.

6.5.5 Number and Short Name of Grades Used in The CRG

The declared Credit Risk grading has 8 catagories with short name and numbers are
provided as follows:
Grade Name Short Name NUMBER
Superior SUP 1
Good GD 2
Acceptable ACCPT 3
Marginal/Watch list MG/WL 4
Special Mention SM 5
Sub standard SS 6
Doubtful DF 7
Bad & Loss BL 8

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6.6 C REDIT RISK GRADING PROCESS

 CRG must be finished for all exposures (irrespective of amount) other than those covered
under Consumer and Small Enterprises Financing Prudential Guidelines and also under The
Short-Term Agricultural and Micro - Credit.
 Score sheet is not applicable in case of superior grading. This will be monitored by the
prescribed guidelines of CRG.
 Relationship manager should ensure to correctly fill up the Limit Utilization Form as in
order to arrive at a realistic earning status for the borrower.
 Risk factors should be examined and weighted more carefully on the ground of up to date
data and objectives must be ensured to assign the proper grading.
 Credit risk grading is a continuous process which should be exercised by the relationship
manager.
 Proper documentation is to be maintained for all types of loans.
 The credit risk grading sheet should be prepared by credit officer and should be
submitted to the credit administration division and other related divisions.
 Any changes should be rectify by the proper authority.
6.7 EARLY WARNING SIGNALS (EWS)

EWS is standing for Early Warning Signals. it actually helps to maintain loans unclassified.

The weakness of the loan is identifying first and actions are taken according to the credit risk
management.

Management should be sensible to the issue regarding the classification of the loan that is
at the edge of classification.

6.8 CREDIT R ISK GRADING R EVIEW

Credit Risk Grading for each borrower should be assigned at the inception of lending and should
be periodically updated. Frequencies of the review of the credit risk grading are mentioned below;

Number Risk Grading Short Review frequency (at least)

1 Superior SUP Annually
2 Good GD Annually
3 Acceptable ACCPT Annually
4 Marginal/Watchlist MG/WL Half yearly
5 Special Mention SM Quarterly
6 Sub-standard SS Quarterly
7 Doubtful DF Quarterly
8 Bad & Loss BL Quarterly

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6.9 MIS ON CREDIT R ISK GRADING
Bank should have comprehensive MIS reports on credit risk grading to evaluate entire credit
portfolio of the Bank. These are as follows:

 Credit Risk Grading Report (Consolidated)

 Credit Risk Grading Report (Branch Wise)
 Credit Risk Grading Report (Branch & Risk Grade Wise)
 Credit Risk Grading Report (Grade Wise Borrower List)

MIS reports as mentioned above should be prepared and circulated at least on a quarterly
basis.

6.10 FINANCIAL SPREAD SHEET (FSS) :

A Financial Spread Sheet (FSS) has been developed which may be used while analyzing the
credit risk elements of a credit proposal from financial point of view. The FSS is well designed
and programmed software having two parts. Input and Output Sheets. The financial numbers
of borrowers need to be inputted in the Input Sheets which will then automatically generate
the Output Sheets.

6.11 INTERNAL CREDIT R ISK R ATING SYSTEM

An internal credit risk rating system (ICRRS) categorizes all credits into various classes on the
basis of underlying credit quality. Jamuna Bank Limited shall develop an internal credit risk
rating system in line with regulatory authority’s prescription for its credits in consistent with
the nature, size and complexity of the bank’s activities. All credit facilities should be assigned a
risk grade. If any deterioration in risk is observed, the risk grade assigned to a borrower and its
facilities should be immediately changed. The rating system will be approved by the board.

6.12 SECURITY AND VALUATION :

Though security/collateral is only viewed as secondary sources of loan repayment, never
primary sources, the valuation of security/collateral is of great importance to any Bank/F.I.s
where risk of nonpayment of loans is considered to be significantly mitigated by this asset. All
attempts should be made to cover loans by tangible securities as far as possible. Security
requirement will be determined on case to case basis considering customer’s business strength,
level of risk etc. However, Jamuna Bank Limited will always prefer to have security equivalent
to atleast 1.00 time of the total funded limit.

6.12.1 Eligible securities:

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As per BRPD Circular No. 05 dated 27.04.2005 and 14 dated 23.09.2012 following securities
have been identified as eligible security for determining base for provisioning for classified
loans :
i) Lien on Bank deposit - 100%
ii) Market value of gold / gold ornaments pledged to the Bank – 100%
iii) Lien on Government Bond / Sanchayapatra – 100%
iv) Guarantee given by Government of Bangladesh– 100%
v) Market value of easily marketable security/Saleable goods pledged to the Bank-
50%

vi) Market value of Registered Mortgaged Land and Building along with Registered
Power of Attorney favoring the Bank to sell the property.

vii) 50% of face value or 50% of average market value of last 6(six) months of shares/
securities traded in the stock exchange.

Besides the above following securities are also obtained on a case to case basis :

i) Hypothecation of Stock and machinery.

ii) First charge/ charge on the fixed and floating asset of limited company with the
Register of Joint Stock Company.

iii) Corporate Guarantee of another company backed by Board Resolution.

iv) Personal Guarantee under cover of forwarding letter.
v) Bank Guarantee
vi) Assignment of bill/receivables duly accepted by the employer to issue cheques in
favour of Bank.

vii) Ownership of vehicles / assets in the name of the Bank.

viii) Assignment of Surrender value of Life Insurance Policy.
ix) Pari Passu Security Sharing Agreement.
x) Post Dated Cheque under cover of Forwarding Letter.
xi) Trust Receipt.
6.12.2 Discouraged security:

i) Vacant land
ii) Third party property
iii) Agricultural low Land.
6.12.3 Concentration of Collateral:

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Concentration of collateral is nearly as dangerous as concentrations of loan. For appropriate
credit risk management, Jamuna Bank Ltd. maintains track of types of collateral. Collaterals
are categorized by the following types:

 Shares and securities

 Commodities/export documents
1. Export documents
2. Commodities
i. Export commodities
ii. Import commodities
iii. Other commodities pledged or hypothecated
 Machinery/fixed assets (excluding land, building/flat)
 Real estate
1. Residential Real estate
2. Commercial Real estate
 Financial obligations
 Guarantee of individuals (personal guarantee)
 Guarantee of institutions (corporate guarantee)
1. Guarantee of bank or NBFI
2. Other corporate guarantee
 Miscellaneous
 Unsecured loans
6.12.4 Third party guarantee:

In case of the existence of a third-party guarantee, the bank evaluates the level of coverage
being provided in relation to the credit-quality and legal capacity of the guarantor. Additional
steps are the following:

 The corporate guarantee must be supported by a Memorandum of Association (MoA)

and Articles of Association (AoA) of the company giving the corporate guarantee.
Additionally, the corporate guarantee to be approved in the board meeting of the
corporate guarantor.
 The guarantor company must be rated in any of the investment grade categories by at
least one ECAI.
 The balance sheet of the third party giving a corporate guarantee is to be analyzed.

6.13 V ALUATION OF COLLATERAL :

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Collateral is only as good as the lender’s ability to locate, identify, and legally claim the
collateral and eventually sell the collateral for enough to recover the principal, interest, plus all
liquidation costs. When collateral is taken as security, consideration must be given to the
dependability of the value, its marketability, the liquidity and the ability of the bank to control
the collateral when in the possession of the debtor and when the bank must liquidate.

6.14 V ALUATION METHODOLOGY :

JBL pursues a comprehensive valuation strategy in assessing value of the collateral offered as
security. JBL recognizes that valuation is a process which must follow a systematic approach
and the persons entrusted with the job must have required qualifications to do it. As the
security usually consists of immovable property and valuation of this property requires some
level of expertise, JBL avails third party independent valuators’ service in this regard.

As a matter of prudent approach, JBl attaches importance to following method:

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6.14.1 Determining nature of assets to be evaluated and evaluation process:

JBL determines the nature of assets before deciding on the agency to be employed for the
valuation service. In the cases of assets offered as security requires special expertise, JBL
decides on employing agencies on ad-hoc basis for specific purpose, if such valuator is not in
the list. JBL lists valuators emphasizing on expertise in valuating immovable properties,
inventory, machinery and vehicles etc. which are commonly offered and accepted as
collateral.

JBL sets minimum reporting criteria, the basis of valuation and representations and
warranties to be provided by the valuators in regard to quality, value, ownership, possession
of the assets/property valuated.

6.14.2 Identifying agencies to the job:

JBL identifies valuators of repute in the field from information available with the peer Banks,
applications received from agencies spontaneously and applications received on invitation
for enlistment based on prescribed criteria.

6.14.3 Selecting agencies:

JBL pursues a methodical approach in selecting agencies to perform the job. The process
includes, but not limited to, a thorough examination of the following:

 Date of establishment and nature of constitution of the firm

 Background of person(s) owning the firm
 Resume of key personnel conducting the valuation
 Specimen of report made by them
 Adequacy of reports in form of and substance
 Clientele and top ten clients of the firm
 Financials
 Fees
6.14.4 Setting Terms of Reference and fees for the services:

Based on reporting requirement and the representations/warranties expected of the

agents/firms, JBL sets up a written down Terms of Reference, which inter alia, include
reporting format, representation and warranties and fees for various services to be provided.

6.15 POST EVALUATION

• Evaluating reports in form and substance.

• Cross evaluation by bank officials/another agency in desirable cases.

• Delisting of Agencies.

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6.16 EVALUATING REPORTS
The quality of the report and reliability of the data and its evaluation is done by the bank on
an on-going basis with its experience and secondary basis with its experience and secondary
information available to form an opinion. Sometimes, bank would like to visit the property to
ascertain the position also. Where bank has a reason to believe that the evaluation made
tends to vary substantially from an opinion/assessment bank forms, bank may order a
revaluation by another agent/firm.

The accessibility of the report vis-a vis the firm made the valuation depends upon the post
evaluation exercise carried out by the bank in selected cases.

6.17 V ALUATION OF SECURITIES :

Jamuna Bank Limited follows a methodical process to evaluate these securities.

i) In case of imported goods, value of stock will be landed cost or current market
whole sale price whichever is lower.

ii) The value of goods will be Ex-mill/Factory Price or current market whole sale price
whichever is lower in case of locally manufactured goods.

iii) Where applicable, valuation of stock can be made based on Government’s imposed
wholesale price or current market retail price whichever is lower.

iv) In the cases not covered by the above 3 (Three) guidelines, the valuation can also be
done based on current lowest wholesale market price after appropriate verification by
the Branch.
v) In case of LIM, facility amount should not exceed invoice value net of L/C margin
unless the Bank agrees to finance duties/VAT. However, where market price of the
goods is lower than landed cost necessary arrangement should be made with the
customer to obtain additional deposit. The price at which LlM goods to be released to
customer should be approved by Head Office or it may be at market price or landed
cost whichever is higher.

Valuation of the securities/Collateral offered against the credit facilities shall be done by an
approved Surveyor of the Bank irrespective of loan amount and value of securities. In
addition to the valuation done by the Surveyor, an independent valuation should also be
done jointly by the Manager and 2nd Officer/Relationship Officer in the Bank’s approved
format as is presently done. Both the valuation certificates issued by Surveyor and Bank

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officials along with photograph from 3(three) different angles be enclosed with credit
proposal. The Branch shall arrange valuation by the enlisted surveyor of the Bank.

6.18 G UIDELINES FOR ASSESSMENT OF VALUATION OF LAND & BUILDING :

To determine the basis of valuation of land is rather a difficult and tricky proposition as there
is no uniformity in price of land. Again, value of land in the present market context is a
relative term as the seller and the buyer look at from different view point. Moreover, it differs
from a willing seller and an unwilling seller and similarly a willing buyer may have different
value than that of an unwilling buyer.

Besides, the buildings may be valued taking into consideration on the present cost of
construction materials, labour cost and workmanship etc. as well as we may take into
consideration the materials used for the construction of the building already built and the
quality of its finishing work, fixture and fittings etc. to arrive at a fair and reasonable value of
the same.

However, we may summarize the criteria for valuation of land & buildings under the
following broad heads:

1. Average buying/selling rate of land in the locality for 02(two) years i.e. last year and the
year under review (present year) shall be taken into consideration at the time of valuation of
land & buildings of an area.
2. Enquiry from the local people near by the plot in question about the selling/buying rate
of land in the area at random basis is to be done.
3. Collection of rate of sell of land from the near by sub-register office of the Government
are to be undertaken for valuation of land.
4. Consideration of valuation of the questioned land for residential/commercial/
industrial/other important purpose based are to be made.
5. Present market context basis of valuation of land is to be ensured.
6. Communication infrastructure basis of valuation of land are to be viewed.
7. Special emphasis may be given on first party property for valuation of land proposed to
be mortgaged.
8. Third Party Property be discouraged as mortgage. It may be taken as collateral with
special consideration.
9. “Future prospect for development of land & building” in question may be taken into
consideration for valuation.

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10. Future probability of acquire/acquisition by Government may be inquired and a
certificate to this effect be given & taken into consideration for valuation.
11. Enquiry about master plan of the Govt. for the area should invariably be inquired about.
12. Legal aspect basis of valuation of land may also be considered for the Bank’s interest
point.
13. Co-sharer/partnership of land may be valued with special care & caution.
14. Rural dwelling houses/tinshed/kachha houses cannot consider for valuation.
15. Vacant land or planned construction may be valued with due weightage.
16. Constructed first class building with approved plan may be valued judiciously.
17. Depreciation of first class pacca building should invariably be made as per the following
rate on total cost of const
a) Depreciation for 1-10 years old building: ½% per year

b) Depreciation for 11-20 years old building: 1% per year

c) Depreciation for 21-30 years old building: 2% per year

d) Depreciation above 30 years old building: 3% per year

18. Semi-pacca construction/building without approved plan of the competent authority of

the area shall not be considered for valuation.
19. All constructed building must have approved plan of the competent authority for
consideration of valuation.
20. All the proposed property to be taken for mortgage against loans & advances should be
classified under the following broad heads and valued accordingly to the above common &
acceptable criteria:
i) City Corporation Area
ii) Municipality area
iii) Pourasava
iv) Industrial area
v) Other area: a) Urban,
b) Rural

6.19 C RITERIA FOR ENLISTMENT OF SURVEY COMPANY FOR VALUATION OF PROPERTY :

1. 05(Five) years minimum experience as a professional valuator having sufficient

experiences in valuation of mortgaged properties against Bank’s loans and advances.

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 Proper evidence of such experiences and necessary papers in support of the same are to
be submitted.
2. Enlistment with at least 03(Three) Banks as a professional surveyor.
3. Trade license, Certificate of controller of insurance for conducting valuation under
different category is to be furnished.
4. Engagement of qualified surveyor/inspector and assessor are necessary. Particulars of
Management/Technical staff to be furnished. Chief Surveyor must have wide range of
experience in survey works. Bio-data of key management personnel to be furnished.
5. Sample report of valuation in respect of land, building and machinery to be furnished.
6. TIN, Income Tax clearance Certificate are to be furnished.
7. Attested copies of memorandum of Articles and Articles of Association of the company
are to be furnished.
8. List of customer, particularly names of commercial banks to be furnished.
9. Details of valuation of properties being done by the surveying company will have to be
submitted separately.

By publishing advertisement in the daily newspapers regarding enlistment of surveyor

companies, selection process of surveyor companies are completed on the basis of the above
noted criteria with approval of Management of the Bank.

7.1 DEPOSITS & DEPOSIT MIX :

In commercial Banks operation starts with mobilization of resources i.e. collection of

deposits and then the same are deployed as loans, advances and investment for the purpose
of maximizing wealth. Thus, deposit is the lifeblood of a bank. In keeping with this axiom
JBL attaches utmost importance to the deposit mobilization campaign and to the optimal

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deposit mix for minimum cost of fund as much as possible. The comparative position of
Deposits & Deposit Mix of the Bank for the last two years is depicted below:
Taka in Million
Type of Deposit As on As on Changes
31/12/2016 31/12/2015 +/(-)
Current A/C & Others 19,749,454,389 15,439,585,382 4309.86

Bills Payable 10,914,338,305 1,961,645,959 8952.69

Savings Deposit 12,729,966,705 10,154,755,624 2575.21

Short Term Deposit 7,523,877,711 6,537,571,060 986.31

Fixed Deposit 51,600,389,749 49,668,192,528 1932.2

Scheme Deposits 38,402,419,319 34,584,730,398 3817.69

Foreign Currency 585,507,866 497,517,148 78.00

Deposit
Total Deposits 141505.95 118843.99 22601.06
(Taka in Millions)

Under the prevailing extremely competitive market JBL has been able to instill confidence in
customers as to its commitment to the depositors and borrowing customers and thereby
could mobilize a total deposit of Tk.141505.95 million in 2016 and 118843.99 in 2015 and
thus the increase is 22601.06 which is 8.68%.

BDT in Million

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 Figure: Deposit Mix of JBL 2016

BDT in Million

Figure: Year wise deposit of JBL over last five years

7.2 C OSTS OF FUND (DEPOSIT COST & OVERHEAD COST ):

The deposit cost of Jamuna Bank Limited in 2012 was 8.05 where it was 7.99 in 2013. That
indicates positive reduction of deposit cost. In 2016 it is 6.43 which is much more indicates
that the company is efficient enough to run the business with low cost deposit.

Year 2016 2015 2014 2013 2012

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 Cost of 6.43 6.83 7.13 7.99 8.05
fund

BDT in Million

Figure: Deposit Cost 2012-2016

7.3 LOANS & ADVANCES :

In 2013 the loan & advances was 67669.38. In this year the political situation was not good
although JBL continues its growth over the years. In 2016 the disbursement of loans and
advances is at the peak point that is 11799.61 million. So far the bank is efficient enough to
continue its loan disbursement to generate profit.

Year 2016 2015 2014 2013 2012

Loans & 117099.61 87252.28 77899.79 67669.38 54887.03

Advances

BDT in Million

Figure: Loans & Advances of JBL

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7.4 C LASSIFIED LOANS & ADVANCES :
Over the last couple of years the Ratio of Classified Loans & Advances out of Total Loans &
Advances has been increased alarmingly with respect to than that of the previous years. This
is due to tremendous growth of loan portfolio within a short span of time. However,
percentage of non-performing loan has decreased significantly as a result of efficient credit
risk management.

Year 2016 2015 2014 2013 2012

Total Loan 117099.61 87252.28 77899.79 67669.38 54887.03

NPL 4742.53 5837.17 4424.70 5136.10 5340.50

Percentage 4.05 6.69 5.68 7.59 9.73

of NPL

Figure: Percentage of Non-Performing Loan of JBL

7.5 INVESTMENT :
It is clearly understood that the investment in government treasury bond is reduced in 2016
compared to that of previous years. The highest investment is recocred in 2014 which is
39963.54 million taka. The other investment of the bank has been slightly reduced that is
2.92 million taka. The company is hoping that the investment will rise with the passage of
time as the deposit mix is rising.

Year 2016 2015 2014 2013 2012

Total 30113.97 34722.81 39963.54 31392.2 39118.93

Investment

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 BDT in Million

Figure: Year wise investment of JBL last five years

BDT in Million

Figure: Investment mix of JBL in 2016

7.6 Y EAR WISE COMPARATIVE POSITION OF DEPOSIT, LOAN & ADVANCE AND INVESTMENT DURING LAST
FIVE YEARS :

Year 2016 2015 2014 2013 2012

Total 117099.61 87252.28 77899.79 67669.38 54887.03
Deposit
Total Loans 141505 118849 97485 79623 70508
& Advances
Total 30113.97 34722.81 39963.54 31392.2 39118.93
Investment

BDT in Million

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 Figure: Year wise comparison of deposit, Loan & Adv. and Investment

Deposit and Loan & Advances have increased over the years. The growth of deposit in 2016 is
16 percent. Beside deposit, Loan & Advances also increased over the five years. in 2016 the
Loan & Advances is at peak which is 117099 million BDT. The growth of Loan & Advances in
2016 is 25.49 percent. But Investment in last five years has been fluctuating. In 2014 the
investment was highest but it has recently reduces to 30113.97 million which is 9849.57
million less than the peak point in 2014. So it is Obvious that with the growth of deposit mix
the bank should increase its investment and loan & advances as well. If the deposited money
is kept idle then the income from investment and loan & advances will fall down. So an
efficient bank should utilize its deposited money in the investment and loan & advances to
generate profit.

7.7 Import Business:

Year 2016 2015 2014 2013 2012

Total 75380.23 70296.4 59909.8 52751.3 57705.2

Import

BDT in Million

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 Figure: Import Business og JBL

Import business over the years increases except in 2013. It is mentionable that in the past
three years the growth rate is increasing. The growth rate in 2016 is 6.75 percent.

7.8 EXPORT BUSINESS:

Year 2016 2015 2014 2013 2012

Total 80780.56 67080.8 64988.6 64250.5 68844.1

Investment

BDT in Million

Figure: Export Business of JBL

The total export of Jamuna Bank Limited has been increased over the five years but in 2016 it
is at peak. The growth rate in 2016 is 16.96 percent which was 3.12 percent in 2015. This
indicates a huge rise in export business.

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7.9 PROFIT:

Year 2016 2015 2014 2013 2012

Profit Before Tax 1876.36 1642.45 1347.12 1135.19 1042.05

Profit After Tax 2974.91 2186.79 1847.38 2284.89 2080.52

BDT in Million

Figure: Operating Profit, Profit before Tax & Profit After Tax

The Total operating profit, profit before tax and profit after tax are at the peak in 2016. The
graph shows that the profit growth rate is constant over the years.

7.10 R ATIO ANALYSIS :

Ratio Analysis is one of the methods to analyze finacial strength of a company. Some of the
ratios have been drawn to show the financial condition of Jamuna Bank Limited.

7.10.1 Return on Asset:

Year 2016 2015 2014 2013 2012

Net Profit 2974.91 2186.79 1847.38 2284.89 2080.52
After Tax
Total Asset 2680.99 1885.16 1742.81 2077.17 1962.75
ROA 1.11 1.16 1.06 1.01 1.06

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 Equation: Return on Asset =

7.10.2 Return on Equity:

Year 2016 2015 2014 2013 2012

Net Profit After Tax 2974.91 2186.79 1847.38 2284.89 2080.52

Total Shareholder’s 250.41 176.49 135.04 173.09 155.84

Equity
ROE 11.88 12.39 13.68 13.2 13.35

Equation=

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7.10.3 Earning Per Share:
Year 2016 2015 2014 2013 2012
Net Income 2974.91 2186.79 1847.38 2284.89 2080.52

Average Outstanding 972.19 819.02 843.55 903.11 896.77

Common Share
Earning Per Share 3.06 2.67 2.19 2.53 2.32

Equation=

7.10.4 Credit-Deposit Ratio:

Year 2016 2015 2014 2013 2012

Loans 117099.61 87252.28 77899.79 67669.38 54887.03
Deposits 141505 118849 97485 79623 70508
ROA 83.59 73.41 67.95 69.41 68.93

Equation=

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8.1 FINDINGS & R ECOMMENDATION :

Objective 1:
To analyze the pros and cons of the credit policy and practices, credit appraisal, financing in
various sectors and its recovery, loan classification method, pricing of credit facility, security
and valuation process, credit risk assessment, sectoral outlook of the bank.

Findings:
The overall credit management of the bank is not fully following the policy of Bangladesh
Bank. Loan recovery is not conducted in regular basis. As the security and valuation process
is not followed according to the BB policy, the Non-Performing Loan (NPL) is raising. The
Credit risk assessment process is complex in Jamuna Bank Limited.

Recommendation:
The Bank should follow the credit policy of Bangladesh Bank. The bank should conduct the
physical visit to the default customer so that the bad loan can be recovered and thus the
provision which is kept for NPL can be reduced. For this the profit will be maximized. Credit
assessment process should be made easy and the bank should maintain standard of the ideal
loan policy.

Objective 2:
To study the control mechanism of Jamuna Bank Limited.

Findings:
Credit control mechanism of Jamuna Bank Limited is not fully consisted with the BB Policy.
Recommendation:

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Jamuna Bank Limited should follow the credit control mechanism of Bangladesh Bank and
the mechanism of itself.

Objective 3:
To know the management structure involved with credit risk management.

Findings:
Jamuna Bank Limited has an experienced employee team. But in credit division the
management has not been capable of set up efficient team. So that the time required for
sanctioning loan or make proposal needs time. Sometime it really hassle to deal head office
to sanction loan.

Recommendation:
Jamuna Bank Limited should provide their credit services promptly. Head Office should deal
with branches with shortest possible time. Documentation can be made precise so that
branch can make proposal easily. Head Office may employ efficient worker in their respective
chair.

Objective 4:
To know the assessment process of credit risk grading.

Findings:

The Credit Risk Grading process involves MIS, Grading review, Early Warning Signal, FSS,
ICRRS, and Risk Appetite Statement etc. In practice the MIS report should submit to the
Credit Division quarterly. But it is seen that credit risk grading report is not submitted in due
time.

Recommendation:

Bank should prepare its document in due time and submit these document to respective
division in due time. MIS Report is important in credit risk grading so it should be prepared
before due date and submitted to the respective division.

Objective 5:
To examine the various loan products and their compatibility in the present financial market.

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Findings:

Some credit products are not compatible with present financial market. The product may not
be designed considering the present interest rate and in some cases the hidden charge and
charged document charge are high comparing to the product of other bank. This bank does
not have any plan to enter into the Credit Card Market. It is well versed that tomorrow's
payment will be consisted of only plastic money (Credit Card). A large part of business
transaction will be done by credit card III near future.

Recommendation:

Bank should make credit product compatible with the other bank’s product. The interest rate
is prerequisite factor for making any product, so it should be considered. And the service
charge may reduce to the optimum level. Jamuna Bank should circulate credit card like other
bank. It could reduce the time consumption and it could generate loan and profit.

8.2 C ONCLUSION :

Jamuna bank has paved the way to go long with its vision. Today this organization is more
strong and structured compared to other banking institution. New innovation in banking
products, in house practice and standard mode of communication with the customer make
this bank unique.
The quality of the services and the experience of the employee flourish the opportunity to
growth more and more. It has country wide branches and ATMs which facilitate the
customer to bank anywhere in the country. It has the best IT based services. The prompt and
best quality services help the bank to make more profit.
This report tries to figure out most of the indicators of problems and strengths of Jamuna
Bank Limited as a valid pretender in the competitive banking sector of Bangladesh. A severe
cut throat competition is going on currently in this sector and that’s why Jamuna Bank
Limited has to work out with different dimensions like – product diversification, market
forecasting, proactive activities undertaken by Jamuna Bank Limited and some suggestion to
get rid of the predicaments that exist.

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