A Study on Estern Bank Limited

Prepared for
Mr. Neaz Ahmed Associate Professor

Prepared by
Nafis Raihan BBA 9th Batch Roll # 37

Institute of Business Administration

University of Dhaka

18 June 2005

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Letter of Transmittal
October 24, 2009

Chairperson Internship & Placement Program Institute of Business Administration University of Dhaka

Subject: Submission of Internship Report

Dear Sir As per requirement of the degree completion, I here by submit my internship report titled Marketing analysis on Brokerage House of Anwar Securities Limited after completing my internship successfully in Anwar Securities Limited , Dhaka. As instructed I am submitting the report. Please wish me luck in my endeavor to success after four years course in Institute of BRAC University.

Thank you,

Md. Imran Hossain BBA ID # 04304042

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ACKNOWLEDGEMENT

THE SUCCESSFUL COMPLETION OF THIS REPORT MIGHT NEVER BE POSSIBLE IN TIME WITHOUT THE HELP SOME PERSON WHOSE INSPIRATION AND SUGGESTION MADE IT HAPPEN. FIRST OF ALL I WANT TO THANK MY FACULTY ADVISOR MR. NEAZ AHMED FOR HELPING ME OUT WITH DIRECTIONS TIME TO TIME WHEN I NEEDED IT MOST. I ALSO WANT TO THANK THE INTERNSHIP AND PLACEMENT OFFICE FOR GIVING ME THE CHANCE TO DO MY INTERNSHIP IN EBL WHERE I LEARNED; EVEN WORKING UNDER PRESSURE CAN BE FUN.

I ALSO WANT TO THANK MR. MD. ABDUL WADUD, SAVP & HEAD OF CORPORATE RELATIONSHIP MANAGEMENT UNIT 3, UNDER WHOM I DID MY INTERNSHIP. I ALSO WANT TO THANK MR. SYED FAKHRE FAISAL (SRM & AVP UNIT - 3), MR. WAHID-BIN AHMED (RM & SPO, UNIT-3), MR. ANISUR ROUF (ARM & PO, UNIT3), MR. SHOEB (MTO, UNIT-3), MR. TARIQ (RM, UNIT-4), MR. SADIQ (MTO, UNIT-4), MR. HUMAYUN (RM, UNIT-5), MR. RIYADH (RM, UNIT-5), MR. IRFAN (MTO, UNIT-5) AND ALL OTHERS WHO TIME TO TIME HELPED ME TO DO MY WORK.

WITHOUT THE HELP AND SUPPORT OF THESE PEOPLE THIS REPORT MIGHT NEVER SEE THIS COMPLETION.
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EXECUTIVE SUMMERY

THIS REPORT WAS ORIGINATED IN RESULT OF MY INTERNSHIP, WHICH I DID, AS MUST REQUIREMENT OF BBA PROGRAM. THIS REPORT WAS DONE BASED ON MY LEARNING OF 10 WEEKS INTERNSHIP IN CORPORATE BANKING DIVISION IN EASTERN BANK LIMITED. THE OBJECTIVE OF THIS REPORT WAS TO GAIN KNOWLEDGE ABOUT EBL AND ITS CORPORATE BANKING DIVISION AND THUS ANALYZING THE DIVISION, FINDING POSSIBLE PROBLEMS IN THE DIVISION AND SUGGESTING POSSIBLE SOLUTION BASED ON THE KNOWLEDGE I GATHERED IN THE BBA COURSES. TO DO THIS I WORKED IN CORPORATE BANKING RELATIONSHIP MANAGEMENT UNIT3 IN DHAKA AREA AND USED OBSERVATION TECHNIQUE WITH INFORMAL UNSTRUCTURED INTERVIEWS FROM TIME TO TIME. BIGGEST PROBLEM I FACED TO DO THIS REPORT WAS THE EMPLOYEES WERE RELUCTANT TO GIVE INFORMATION IN FEAR OF LEAKING CLIENT DATA.

EASTERN BANK LIMITED (EBL) IS THE SUCCESSOR OF BANK OF CREDIT AND COMMERCE INTERNATIONAL (OVERSEAS) LIMITED. IN 191 WHEN THE BANK COLLAPSED INTERNATIONALLY THE OPERATION OF THIS BANK WAS TAKEN OVER BY EBL WITH ALL ITS ASSETS AND LIABILITIES. SINCE THEN IT IS SUCCESSFULLY OPERATING ITS OPERATION. NOW IT HAS 22 BRANCHES ALL OVER BANGLADESH AND CONCENTRATING ON CORPORATE, CONSUMER AND TREASURY BANKING.

THE CORPORATE BANKING DIVISION IS MAINLY DIVIDED INTO TWO AREA DHAKA AND CHITTANGONG. DHAKA HAS FOUR UNITS WHERE CHITTAGONG HAS ONLY ONE UNIT. THEIR JOB IS TO DO BUSINESS WITH THE BIGGER CORPORATE HOUSES WITH WHOM THEIR BUSINESS CREDIT AMOUNT EXCEEDS BDT 5 (FIVE) CRORE. THE TREASURY DIVISION DEALS WITH FUND MANAGEMENT I.E. MONEY MARKET DEALING AND LC PAYMENTS. THEY ARE ALSO RESPONSIBLE FOR MAINTAINING THE STATUTORY REQUIREMENTS WITH BANGLADESH BANK. CONSUMER BANKING DIVISION DEALS WITH THE FINANCIAL NEEDS OF INDIVIDUAL CUSTOMERS. THE

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TWENTY-TWO BRANCHES OF EBL, WHICH ARE NOW TERMED AS THE SALES & SERVICE CENTERS PRINCIPALLY FOCUS ON RETAIL BANKING BASED ON RELATIONSHIP WITH INDIVIDUAL CUSTOMERS.

AMONG THE OTHER DIVISIONS THEM MAJOR DIVISIONS ARE CREDIT RISK MANAGEMENT WHO ANALYZE THE RISK INVOLVED IN CREDIT BUSINESS. CREDIT ADMINISTRATION DIVISION WHICH LOOKS AFTER THE PROPER DISBURSEMENT OF CREDITS. BRAND MANAGEMENT DIVISION LOOKS AFTER THE IMAGE OF EBL. FINANCE DIVISION LOOKS AT THE CORE FINANCIAL ACTIVITIES OF EBL. HUMAN RESOURCE DIVISION IS ENGAGE TO ENRICH THEIR HUMAN RESOURCES FOR WHICH THEY DEVELOPED THEIR OWN SLOGAN EMPLOYEE OF CHOICE. SPECIAL ASSET MANAGEMENT DEALS WITH THE CLASSIFIED ACCOUNTS. THE OPERATIONS DIVISION CONSISTS OF SERVICE DELIVERY, TRADE SERVICE, TREASURY SUPPORT DIVISION AND IT DIVISION. THESE SUBDIVISIONS PROVIDE SUPPORT TO THE FRONT OFFICE FUNCTIONALITIES. THE INFORMATION TECHNOLOGY DIVISION DEALS WITH IDENTIFYING THE NEED AND DEVELOPING SOFTWARE FOR THE BANKS OPERATION, ITS MAINTENANCE AND PURCHASE OF NEW SOFTWARE RIGHTS, MAINTAINING THE COMPUTERS AND UPGRADE THEM WHENEVER REQUIRED AND TRAINING THE STAFF FOR OPERATION OF COMPUTERS AND PREPARING TRAINING MATERIALS. THE INTERNATIONAL DIVISION IS RESPONSIBLE FOR HELPING IN IMPORT AND EXPORT BUSINESSES ON ACCOUNT OF THE CUSTOMERS OF THE BANK.

THE CORPORATE CULTURE OF EBL IS A EASY GOING ONE. HUMAN RELATIONSHIP AND SIMPLICITY IS OF GREAT VALUE TO THEM. THAT IS WHY THEY DEVELOPED A SLOGAN SIMPLE MATH, THE PHILOSOPHY OF EASY BANKING. WHILE CELEBRATING THE 10TH ANNIVERSARY IN 2002, EBLS LOGO WAS CHANGED TO REFLECT THE RESTRUCTURING AND THE TRANSFORMATIONS IT IS GOING THROUGH; THE COLORS OF THE NEW LOGO SIGNIFY THE VIBRANT GREEN OF MOTHER EARTH, A BLUE SKY FULL OF POSSIBILITIES AND A YELLOW RISING SUN OF HOPE.

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EBL is in the business of providing banking service and is changing its approaches to become more and more customer focused. At present EBL offers a variety of services/products for the retail customers as well as for corporate clients. Currently they are providing four types of services: Savings and Current Accounts, Fund Transfer, Securities and Commercial Lending. Although EBL is a banking business they do not promote them aggressively like the other banks. They rather believe in focused customer group and target them as their employees. But as now they are planning to go for large-scale consumer banking, they will need to build strong brand image through promotions in near future. The strengths of EBL are its functional operation focused business matrix structure, centralized decision-making process and superior IT platform. But the unimpressive branch layout and inadequate marketing approach is their weakness. Still EBL can exploit their opportunity of being the early mover of Internet banking which they introduced for the first time in Bangladesh. They can implement some innovative products too and draw clients. The greatest threat that EBL posses are from the failure of identifying opportunities that they have proven to be not so keep of. Again another threat might be the technological obsolesce of the high cost IT platform that they implemented. The corporate division of EBL generates about 70% of the Banks revenue and the main focus of EBLs business. Corporate divisions main functions are targeting corporate clients and building business relationship with them, evaluating financial strength of the clients, designing customized service for the clients and making possible recommendations for further financial expansion. The relationship units are the main units in corporate banking, which consist one RM, one or two ARM and a unit head who reports directly to Head of Corporate Banking. The two other subdivision of Structured Finance and Project Finance Division who deals with Syndication process and Project Appraisals mainly. The other non-corporate division and subdivision on which corporate activity are dependent are Cridit Risk Management, Credit Administration, IT Division, International Division, Marketing Division, R&D Division and Consumer Banking Division.

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EBL always follow participative leadership. So the corporate division employees are always welcome to take initiative and do things if it aligns with the betterment of the organization. Corporate Division employees enjoy a good deal of autonomy about decision-making. Their job is supported with state of the art banking software Flexcube through this they can track their clients transactions online. As all 22 of the branches are connected with this software it makes monitoring and controlling job easier. EBL believes in their clients satisfaction. They are ready to lengths in order to maintain their clients satisfaction provided it is not risky and not unlawful. They are not that much in advertising them selves, as they believe in peoples network. But their plan to go aggressive consumer banking might need for aggressive public advertising. EBLs Corporate Banking has a unique culture. They believe in peoples network and respect leadership and fellowship at the same time. The employees are very closely bonded and possess a we feeling. Most of the employee has high satisfaction in their job and are high performer. In EBL both upward and downward communication is in use. The targets, policies and procedures are communicated downward. The feedbacks and suggestion or proposals of some thing new are communicated upward. The percentile of data loses in upward communication is very low and this kind of communication is very much appreciated. When the bank communicates to external sources they rely on lateral communication mainly. Letters and Faxes are the most common media in these cases. Use of Phones and E-mails are not uncommon. The internal communication in EBL is of Grapevine structure. Most of the communications are done on point-to-point basis via e-mail and phones. In EBL e-mail gets the same importance as of a written document and printout of e-mails are documented. In case of RM and ARM wheel structure of communication is very common. As they have the sole responsibility for their clients, they move from divisions to division to get their work done faster and surely, so that they can provide services to their clients in no times. In EBL both formal and informal groups can be seen. As the organogram generates formal group, the informal group are generated from work dependency and personal relationship. The employees feel motivated as their effort are properly recognized and rewarded. The working environment is very friendly and comfortable. Peoples are very

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helpful. The employees also get to exercise decision-making. In EBL both short-term and long-term goals are well communicated to the employees this helps the employees to visualize their roles contribution to the big picture. It is also a big motivational drive for them. The employees of EBL are ready to perform, as they are happy with the reward and remuneration they get. But since the salary structure is not changed for the last few years, it is loosing its competitiveness and should be upgraded soon specially the insurances. Most of the employees know each other and feels home like in EBL as many have them have very close interpersonal term with each other. The job security is high in EBL. Thus the employees of EBL are extremely happy about their organization and corporate banking division is no exception. The Corporate Banking Division of EBL has its own strengths and weakness. EBL corporate divisions strength is its structures within which they can set strategies for growth, asset quality, arrange low cost funding; maximize customer earnings and flatter structure. Centralization of decision-making is another strength as it ensures faster decision making and service deliver. IN THE NEW STRUCTURE EACH FUNCTIONAL DIVISION IS FLAT WITHIN THE DIVISION AND DELEGATION OF AUTHORITY IS ALSO CENTRALIZED. IT HAS A SIGNIFICANT EFFECT OVER THE CORPORATE DIVISION EMPLOYEES BECAUSE MID AND LOW-LEVEL PERSONNEL ARE BECOMING FRUSTRATED AS THEY ARE LOOSING THEIR DECISION MAKING POWER. IN THIS SITUATION IF EBL FAILS TO KEEP THE EMPLOYEES MOTIVATED THEN THEIR SERVICE MIGHT SERIOUSLY BE HAMPERED AND THERE WILL BE A RISK OF HIGH TURNOVER AMONG EMPLOYEES.

The economy of Bangladesh is booming. The recent increase in GDP is an indication of that. Thus more and more corporates are emerging in the scene that can very well be prospective corporate clients for EBL. If EBL can identify prospective future corporate clients and can focus on doing business with them, it my proof profitable for them in future. Recent growth in Small and Medium Enterprise financing indicates that there are going to be some strong but new corporate houses emerging in the markets.

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With the changes in business environment, the ways of doing business is changing. The competing banks are aggressively developing new products, which will facilitate the purposes of the corporate houses. But EBLs R&D division is weak and not producing much to attract corporate clients. If EBL dont develop new products to provide more facilities to corporate houses or if they dont offer custom made products to their clients, they may well be bitten by competitor banks and may loose clients to other banks. This may seriously hamper the profitability of EBL. Though EBLs corporate banking division is doing well in the market, it is not free from problems. The main problems of corporate banking are too many corporate clients per unit, multidimensional corporate clients per unit, slow paced output of the other divisions, in appropriately trained employees of IT division, no definite process of executing jobs and lack of internal growth. Despite these problems EBLs corporate divisions are still the strongest division in EBL and an asset for the bank.

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TABLE OF CONTENTS PART A: INTRODUCTION

1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 PROLEGOMENON ORIGIN OF THE REPORT OBJECTIVES OF THE STUDY METHODOLOGY SOURCES OF DATA SCOPE L IMITATION ORGANIZATION OF THE REPORT 1 2 3 3 3 3 4

PART B: ORGANIZATION
2.1 H ISTORICAL P ROFILE OF EBL 2.2 C URRENT P ROFILE OF EBL 2.2.1. C ORPORATE B ANKING D IVISION 2.2.2. T REASURY D IVISION 2.2.3. C ONSUMER B ANKING D IVISION 2.2.4. C REDIT R ISK M ANAGEMENT D IVISION 2.2.5 B RAND M ANAGEMENT D IVISION 2.2.6 F INANCE D IVISION 2.2.7. H UMAN R ESOURCES D EPARTMENT 2.2.8 S PECIAL A SSET M ANAGEMENT D IVISION 2.2.9 O PERATIONS 2.2.10 A UDIT AND C OMPLIANCE D IVISION 2.2.11 C REDIT A DMINISTRATION D IVISION 2.2.12 I NFORMATION T ECHNOLOGY D IVISION 2.2.13 I NTERNATIONAL D IVISION 2.3. C ORPORATE C ULTURE OF EBL 2.3.1. V ISION OF EBL 2.3.2. M ISSION S TATEMENT OF EBL 2.3.3. EASTERN B ANK S V ALUES 2.3.4 M ANAGEMENT AND O RGANIZATIONAL S TRUCTURE 2.4 M ARKETING P ROGRAM OF EBL 2.4.1 P RODUCT P ROFILE OF EBL 2.4.1.1 S AVINGS & C URRENT A CCOUNTS 2.4.1.2 F UND T RANSFER 2.4.1.3. SECURITIES 2.4.1.4. C OMMERCIAL L ENDING 2.4.2 P ROMOTION 2.4.3. D ISTRIBUTION 2.5. F INANCIAL P ROFILE OF EBL 2.5.1. I NVESTMENTS 2.5.2 E QUITY P ROFILE 2.5.3. A SSETS OF EBL 2.6 G ROWTH AND D EVELOPMENT P ROFILE OF EBL 2.6.1. G ROWTH IN S ALES V OLUME 2.6.2. G ROWTH IN A SSETS 2.7. SWOT
OF

5 5 6 6 6 7 7 7 8 9 10 10 10 10 11 11 11 11 11
OF

EBL

12 12 12 12 13 13 13 14 14 15 15 15 15 16 16 18 19

E ASTERN B ANK L TD
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2.7.1. S TRENGTHS OF THE ORGANIZATION 2.7.2. W EAKNESSES OF THE O RGANIZATION 2.7.3 O PPORTUNITIES FOR EBL 2.7.4 T HREATS

19 19 20 21

PART C: PROJECT 3.1 I NTRODUCTION 3.1.2 P RINCIPLES O F L ENDING

3.2 CORPORATE DIVISION 3.2.1 G ENERAL I NFORMATION 3.2.2 T HE PAPERS C ORPORATE PREPARES 3.2.3 C REDIT P RODUCTS 3.2.4 M ODES OF CHARGING SECURITY 3.2.5 L OAN P ROCESSING C OST 3.2.6 L OAN P ROCESSING T IME 3.2.7 B OOKS M AINTAINED 3.3 CREDIT RISK MANAGEMENT DIVISION 3.3.1 GENERAL INFORMATION 3.3.2 CONSIDERATIONS OF CRMD 3.3.3 O BLIGOR R ISK RATING IN EBL 3.3.4 C LASS OF R ISK 3.3.5 P OLICY E XCEPTION 3.3.6 R ATIO A NALYSIS 3.3.7 B OOKS M AINTAINED 3.4 CREDIT ADMINISTRATION DEPARTMENT 3.4.1 G ENERAL I NFORMATION 3.4.2 L OAN D ISBURSEMENT 3.4.3 L OAN S UPERVISION 3.4.4 M ONITORING 3.4.5 L OAN ADJUSTMENT 3.4.6 R ECOVERY 3.4.7 S OME OTHER C ASES 3.4.8 C HARGE D OCUMENTS

22 22
24 24 24 27 29 31 31 32 33 33 33 35 39 40 41 43 44 44 44 45 45 45 45 46 46

PART: D CONCLUSION & RECOMMENDATIONS APPENDIX

52 54

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PART A: INTRODUCTION
1.1

PROLEGOMENON

Linguistics and etymology showed that both French word banque and Italian word banca were used 2,000 years ago to mean a bench or money changing table. Those first bankers were moneychangers situated at a table aiding travelers who came to town by exchanging foreign coins for local money or discounting commercial notes for a fee in order to supply merchants with working capital. Afterwards came the idea of attracting deposits and securing temporary loans for earning interest. And by offering these services banks has survived two thousand years! In the mean time other competitors have arrived in the arena of lending business--- governmental agencies, credit unions, cooperatives, insurance agencies, financing companies etc. But banks are still in the scenario. Theorists ask that what essential services banks provide that other businesses and individuals cannot provide themselves. Financial economists explain this by pointing to imperfections in the financial system. For example, all loans and securities are not perfectly divisible into small denominations that everyone can afford, while perfect market requires equal power of the participants. Banks provide a valuable service in dividing up such instruments into smaller securities in the form of deposits that are readily affordable for small savers. Another contribution banks make is their willingness to accept risky loans from borrowers, while issuing low-risk securities to their depositors. Banks also satisfy the strong need of many customers for liquidity. Financial instruments are liquid if they can be sold quickly in a ready market with little risk of loss to the seller. Banks play this unique role by offering high liquidity in the deposits they sell and in the loans they provide. Still another reason banks have existed in their superior ability to evaluate information. Some borrowers and lenders know more than others, so they can choose exceptionally profitable investments and avoid poorest ones. These informational asymmetries reduce the efficiency of markets, but provide an important role for banks that have the expertise and experience to evaluate financial instruments and to choose those with the most desirable risk-return features. Modern banks play an important part in promoting economic development of a country. They collect savings of mass people scattered through out the country and provide necessary funds for executing various programs underway in the process of economic development. Economic history shows that development has started everywhere with the banking system and its contribution towards financial development of a country is highest in the initial stage. Schumpeter (1933) regarded the banking system as one of the two

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main agents (other being entrepreneurship) in the whole process of development. Alexander Gerschenkron (1962) in his popularly known Gerschenkrons Hypothesis explained the banking system as the key role player at certain stage of the industrialization process. Leaving aside the generalizations made above, the case studies of some particular developed countries also show the useful roles played by the banks in economic development process of those countries. Prior and after World War II, Japan experienced very high rates of both industrial production and per capita income. Takeuchi (1970) credited Japanese banking system with making vital contributions to that growth.

So banks are still there and they are worth serious study.

1.2

ORIGIN OF THE REPORT

After completion of 8 semesters in IBA to complete BBA Program, 10 weeks organizational attachment is a must and I was placed in the Head Office at Corporate Banking Division of Eastern Bank Limited (EBL). Only theoretical knowledge without any practical experience makes a person sterile. On the other hand a person having practical experience but no theoretical exposure keeps him blind. The internship program is designed to overcome such sterile position. This program gives the chance to fulfill the theoretical knowledge that is acquired from class lectures, books, journals etc. in the practical settings. Here, I got an opportunity to realize the relevance and usefulness of the classroom learning as I was placed in the Easten Bank Limited for 10 weeks starting from March 01, 2005 to May 07, 2005.

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1.3

OBJECTIVES OF THE STUDY

Objectives of the study are summarized in the following manner a. To analyze the performance of the Eastern Bank as a whole.
b. To examine the Corporate Banking procedures practically. c.

To acquire in-depth knowledge, over EBLs Corporate divisions work flow and their inter division dependencies.

d. To provide possible solutions of problems that exists in the current organizational setup.

1.4

METHODOLOGY

This report has been prepared on the basis of experience gathered during the period of internship form March 01 to May 07 in the Head Office of Eastern Bank Limited at Corporate Banking Division. The observational technique will be used widely and primarily to conduct the research. The work procedure of the corporate sub-divisions will be observed closely to gain an idea over their work procedure.

1.5

SOURCES OF DATA
a. Personal experience gained by visiting different desks & departments. b. Study of the old files. c. Different Instructions Manuals published by Eastern Bank. d. Personal investigation with bankers.
e.

Sources of information for writing this report are:

The documents I have assisted to prepare e.g. Proposals, Sanction Letters, Application for Limits etc. Annual Reports published by EBL

f.

1.6

SCOPE

This report is done only on the corporate banking division of EBL. Again among EBL only the area -1 (Dhaka region) is considered. Area -1 has 5 (five) units, four of which is situated in Dilkusha C/A and one in Gulshan. This report focuses only on the four units of Dilkusha C/A due to access in data, convenience and time constraints.

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1.7

Limitation

The major limitation of this report is that no previous study is done beforehand on EBLs corporate division. So no secondary study material was available. The study is heavily relied on observational method, which has its own disadvantages, and not a very effective method. The corporate division is not very well structured and has anomalies in practices among the sub-units. Employees of corporate divisions were reluctant to give information, as they are afraid that their clients information might get licked outside. The non-corporate division employees were even more reluctant to disburse information. More over the time span to do the research was very short.

1.8

ORGANIZATION OF THE REPORT

This report is broadly organized into three broad parts. The first part is on the introductory part. The second part is on the overview of the organization itself. The third part concentrates on the research project. Finally fourth and final part contains the recommendations and the conclusion

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PART B: ORGANIZATION
2.1 H ISTORICAL P ROFILE
OF

EBL

Eastern Bank Limited was incorporated as a public limited company and a scheduled bank on 16 August 1992 to commence business. EBL is the successor of BCCI. In 1991 when BCCI collapsed internationally, the operation of this bank closed down in Bangladesh. After discussions with BCCI employees and taking into consideration the depositors and customers interests, Bangladesh Bank gave permission to form a bank named Eastern Bank Limited by taking all assets and liabilities of erstwhile BCCI (Overseas). It was established under the Bank of Credit and Commerce International (Overseas) Limited (Reconstruction) Scheme formulated by Bangladesh Bank. EBL started business with four branches-Principal Branch, Motijheel Branch, Agrabad Branch and Khulna Branch and had authorized capital of TK.1000 million with 10 million shares of TK. 100 each and of paid up capital of TK.310 million. The paid up capital increased to TK. 600 million in 1994. The first Board of Directors constituted of 7 directors of Bangladesh Government. Mr. Nurul Hossain Khan was the chairman and Mr. Ghiyasuddin Ahmed was Managing Director. In 1993, EBL started its expansion of branches. The bank got its Authorized Dealership License from Bangladesh Bank on 7th July 1993. Six new branches opened in 1994 and three in 1995. the very next year they inaugurated two more branches. Their number of branches reached to twenty-one (21) as they open five more branches in 1997. Since then they only opened one more branch that was in 2001. Still now they are operating with 22 branches.

2.2 C URRENT P ROFILE

OF

EBL

At present, the bank has 22 branches throughout the country with 500 employees. The existing Board of Directors has 12 members. Mr. M. Ghaziul Haque is the Chairman of Board and Mr. K Mahmood Sattar is the Managing Director. EBL is currently going through a restructuring stage where the traditional Branch Banking System is gradually discarded and being replaced by a Centralized System. Till 2000, EBL operated in a Geographical Matrix where the business of the bank was concentrated in the twenty- two branches. In 2001, the management of EBL changed it

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business philosophy into Business Matrix. The main three businesses that the bank is now concentrating on are: Corporate Consumer Treasury

2.2.1. C ORPORATE B ANKING D IVISION

Corporate Banking Division of EBL caters to the needs of corporate clients. The entire corporate division is divided into three broad areas: Area-1 that comprises of Dhaka, Area-2 that comprises Chittagong and Area-3 that comprises of Outstation Branches i.e. the branches in areas other than Dhaka and Chittagong. There are five units in Area-1, while Area-2 has three units. Also there are Small Business Unit (SBU) in Dhaka and Agrabad (Chittagong). All the units are operated from the Corporate Banking Division at Head Office. In general this divisions functions are: Targeting corporate clients and building business relationship with them Evaluating financial strength of the clients Designing customized service for the clients Making possible recommendations for further financial expansion

2.2.2. T REASURY D IVISION

The Treasury Division of EBL deals with fund management i.e. money market dealing and LC Payments. They are also responsible for maintaining the statutory requirements with Bangladesh Bank.

2.2.3. C ONSUMER B ANKING D IVISION

Consumer Banking Division deals with the financial needs of individual customers. The twenty-two branches of EBL, which are now termed as the Sales & Service Centers principally focus on retail banking based on relationship with individual customers. This divisions principal functions are:

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New Product Development Brand Management Maintenance of CASA and HP Accounts Providing Consumer Loan Providing Locker Services Beside these 3 business units several ancillary units are present which support the business units in day-to-day activities. They are:

2.2.4. C REDIT R ISK M ANAGEMENT D IVISION

This division is responsible for evaluating the credit worthiness and debt payment capability of present loan customers and loan applicants. The department also monitors the risk worthiness regularly. The branches send all proposals from the prospective borrowers to the corporate division, which in turn analyze the financial statements and prepare credit memorandum, application for limit, account profitability and other necessary papers and send them to the Credit Risk Management division for approval. The department keeps track of credit portfolio by obtaining regular information from the branches. It sets price for credits and ensures its implementation at the branches. This department also monitors the various loan accounts of the branches and prepares various statements for Bangladesh Bank.

2.2.5 B RAND M ANAGEMENT D IVISION

The Brand Management division is a secondary unit of consumer division and is responsible for all activities related to managing the organizations brand and building brand equity. It designs the logo, greeting cards and official stationary and prepares promotional plan and budget.

2.2.6 F INANCE D IVISION

Finance division of the bank is responsible for:

Budgeting and Cost Monitoring Planning and monitoring the banks liquidity Corporate Tax management Monthly-accrued interest calculation of all interest bearing accounts

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Amortization of all fixed and other assets, Central bank & other statutory reporting, Management reporting (MIS), Preparation of various financial statements Weekly deposit and advance analysis of the bank, Cost of fund analysis, Maintenance of accounts, Preparation of annual report of the bank, Maintenance of provident fund accounts, Maintenance of income and expenditure posting,

2.2.7. H UMAN R ESOURCES D EPARTMENT

At present around 500 people are employed in EBL. All aspects of the employees are looked after by the Human Resources Department. HR Department is responsible for recruitment and development of staff members. The Mission Statement of HR Division is:

Employee of Choice We will inculcate a high performance culture where we will work with fun and pride.
HR Department carries out the following functions:

To identify the need and recruiting new human resources. To take care of all formalities regarding appointment and joining of the successful candidates. Training, Remuneration, Compensation, Promotion, Demotion, Termination, Retirement and Transfer of human resources. In 2004 16 in-house training programs were designed and executed. Also EBL employees participate in different external courses offered by BIBM, Bangladesh Bank Training Academy, Chambers, Export Promotion Bureau etc. HR department introduced a voluntary separation scheme to address the overstaffed scenario in 2001. The intended employees were offered severance packages and end service benefits. To maintain personal files of all employees of the bank.

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CHAIRMAN (1) BOARD OF DIRECTORS (11) MANAGING DIRECTOR & CHIEF EXECUTIVE OFFICER (1) EXECUTIVE VICE PRESIDENT (3) SENIOR VICE PRESIDENT (16) VICE PRESIDENT (15) SENIOR ASSISTANT VICE (11) FIRST ASSISTANT VICE (23) PRESIDENT ASSISTANT VICE PRESIDENT (57) SENIOR PRINCIPAL OFFICER (63) PRINCIPAL OFFICER (74) SENIOR OFFICER (72) OFFICER (35) SUPERVISORY OFFICER (38) JUNIOR OFFICER (35)

F IGURE1: EBL O RGANOGRAM

2.2.8 S PECIAL A SSET M ANAGEMENT D IVISION

Special Asset Management Division (SAMD) is responsible for management of all accounts, which are classified in the banks loan portfolio. The classifications are Substandard, Doubtful and Bad & Loss. SAMDs responsibility covers the areas of monitoring and controlling the classified accounts, actively following up with the borrowers for recovery, negotiating and restructuring/ rescheduling debts wherever feasible.

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2.2.9 O PERATIONS
The Operations division consists of Service Delivery, Trade Service, Treasury Support division and IT division. These subdivisions provide support to the front office functionalities.

2.2.10 A UDIT

AND

C OMPLIANCE D IVISION

This division provides legal assistance to the branches and formulates strategy for classified loans and ensures observance of rules and policies by all stakeholders of the bank through routine and surprise inspection and audit.

2.2.11 C REDIT A DMINISTRATION D IVISION

Credit Administration Division deals with Credit Administration, Loan Monitoring and Documentation. Credit Administration entails post-approval functions of the division, which are monitoring credit expiry, dues, excess over limit, document deficiency and reporting the deficiencies. Loan monitoring part entails follow-up on approval terms, proper disbursement, monitor interest payments, monitor principal repayment and maintaining balance with general ledger. Documentation function entails ensuring that proper loan documents are present, filing with the Registered Joint Stock Corporation (RJSC) and executing registered mortgage deed.

2.2.12 I NFORMATION T ECHNOLOGY D IVISION

The Information Technology Division deals with identifying the need and developing software for the banks operation, its maintenance and purchase of new software rights, maintaining the computers and upgrade them whenever required and training the staff for operation of computers and preparing training materials. Presently the IT Division is carrying out batches of training program to introduce the integrated banking software called Flex Cube. A team from iflex Solutions India is assisting EBL with this software.

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2.2.13 I NTERNATIONAL D IVISION

The International Division is responsible for helping in import and export businesses on account of the customers of the bank. It also deals with all the correspondents of foreign banks, which have account with the bank.

2.3. C ORPORATE C ULTURE 2.3.1. V ISION OF EBL

OF

EBL

The management of EBL as a part of the restructuring program rephrased the banks vision in 2001. Before that the bank did not have any structured vision and mission statement. Now EBLs vision is:

To become the bank of choice by transforming the way we do business and developing a truly unique financial institution that delivers superior growth and financial performance and be the most recognizable brand in the financial services in Bangladesh.
2.3.2. M ISSION S TATEMENT
The Mission of EBL states: We will deliver service excellence to all our customers, both internal and external. We will constantly challenge our systems, procedures and training to maintain a cohesive and professional team to order to achieve service excellence. We will create an enabling environment and embrace a team-based culture where people will excel. We will ensure to maximize shareholders value.

OF

EBL

2.3.3. EASTERN B ANK S V ALUES

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EBLs Value Statement does not claim to be No. 1 in banking or The most Superior in banking. Rather it simply maintains Simple Math, the Philosophy of Easy Banking. While celebrating the 10th anniversary in 2002, EBLs logo was changed to reflect the restructuring and the transformations it is going through; the colors of the new logo signify the vibrant green of mother earth, a blue sky full of possibilities and a yellow rising sun of hope.

2.3.4 M ANAGEMENT

AND

O RGANIZATIONAL S TRUCTURE

OF

EBL

The Board of Directors establishes the objectives and policies of the bank. It has the authority to declare dividend, to approve the balance sheet, etc. The Chairman informs the board of directors on the progress of the bank and implements the policies established. The board is not directly concerned with the day-to-day operation of bank rather it has delegated authority to its management committee. There are three committees of the board for different purposes, which are: 1. Executive Committee comprising of seven members of the board 2. Committee of the board for Administrative Matters 3. Committee to examine Bad Loan Cases

2.4 M ARKETING P ROGRAM 2.4.1 P RODUCT P ROFILE

OF

EBL EBL

OF

EBL is in the business of providing banking service and is changing its approaches to become more and more customer focused. At present EBL offers a variety of services/products for the retail customers as well as for corporate clients. There are four categories of services in EBL:

Savings and Current Accounts Fund Transfer Securities Commercial Lending.

2.4.1.1 S AVINGS & C URRENT A CCOUNTS

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Savings Accounts High Performance Account (HPA) Short Term Deposits (STD) Fixed Deposits (FDR) Current Deposits for Individual Current Deposits for Partnership Current Deposits for Joint Account Current Deposits for Limited Companies

2.4.1.2. F UND T RANSFER

Fund transfer includes the following services: Demand Draft (not available under new system) Mail Transfer (not available under the new system) Telegraphic Transfer (not available under the new system) Payment Order Sale of Travelers Cheque

2.4.1.3. SECURITIES
It includes the following services: Sale of Bangladesh Sanchaya Patra, Pratirakkhya Sanchaya patra, ICB certificates, etc Encashment of different Sanchaya Patra, ICB certificates, etc.

2.4.1.4. C OMMERCIAL L ENDING

Fast Loan Fast Cash Payment against Documents (PAD) Cash Credit (CC/HYPO) Acceptance against (ULC) Own Acceptance Purchase (OAP) Local Bill Purchased-Documentary (LBPD) Foreign Bill Purchased-Documentary (FBPD) Loans against Foreign Bill-Documentary (LAFBD) Sight Letter of Credit (SLC) Usance Letter of Credit (ULC) Letter of Guarantee (LG) Packing Credit against Export L/C & Export Order (PC), etc

- 24 -

The Product Development team of consumer banking division is currently working on designing credit products like EBL Monthly Income Plan (MIP), Savings Insurance Schemes, Monthly Deposit plan, Retail loans, Unsecured Consumer loans, Loans for Professionals, Car Loans. Several of these will be introduced during the 11th anniversary of EBL in August. Also new services like Automated Teller Machine (ATM), Telephone Banking, Online Banking, Credit Card Facility, Sweep in-out Facility etc will be introduced by the end of July 2003.

2.4.2 P ROMOTION
Although EBL is in the banking business for quite sometime its brand image has not grown strong and in order to succeed in the competitive bank environment it needs enrich its brand equity. So far EBL has shunned any sort of promotional tools except for a few inconspicuous billboard advertisements, signboards and newspaper recruitment ads. However a new department called Brand Management has been set up in 2001 to give a new and enhanced brand identity to EBL. This department supervises the planning of advertisement campaigns for EBLs products and analyzing customer feedbacks. With the aid of a advertising agency the logo and stationary of EBL has been changed and eye-catching brochures, calendars and posters have been prepared which are displayed at the sales & service centers.

2.4.3.

D ISTRIBUTION

EBLs 22 branches are now termed as Sales & Centers, which will all be connected through the network by mid July 2003. After that the customer can make transactions from any branch they desire.

- 25 -

Chart1: Growth of Distribution Outlets

25 20 15 10 5 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 14 16 21 21 21 21 22 22 22

Chart 1: Distribution Outlets

2.5. F INANCIAL P ROFILE 2.5.1. I NVESTMENTS

OF

EBL

The quantum of investment of bank stood at taka 3611 million in 2003 from taka 2268 million of 2002, thus registering an increase of 60%.

2.5.2 E QUITY P ROFILE

At the end of the year 2003, the total shareholders equity of the bank was TK 2,321 million where as in 2000 it was only 1,700 million. In four years time the equity increased by 621 million. Changes in shareholders equity are given below:

2000

2001

2002

2003

Paid up Capital 600 720 720 828 Reserve fund & 2,260 2,322 2,448 2,560 other reserves Retained earnings 297 223 252 49 Less: Pre takeover (1,457) (1,348) (1,309) (1,298) losses Total Equity 1,700 1,917 2,111 2,321 Table 1: Change in Shareholders Equity (Tk in Millions)

2.5.3 ASSETS

OF

EBL

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The Banks total asset was Tk. 18284 million on December 31,2001 as against Tk. 16880 million on December 31, 2000. The composition of its assets in 2001 is given below:

2003 Cash 1,070 Placement with Other banks 1,546 Investments 3,611 Loans & Advances 11,288 Fixed & Other Assets 945 Total 18,460 Table 2: Composition of EBLs Assets in 2001

2002 1,082 3,244 2,268 10,891 475 17,960

2.6 G ROWTH

AND

D EVELOPMENT P ROFILE S ALES V OLUME

OF

EBL

2.6.1. G ROWTH

IN

Growth in sales volume comprises of growth in deposits, growth in loans and advances and growth in export and import business.

G ROWTH

IN

D EPOSITS:

Deposits increased by 7.29% from Tk 12375 million in 2000 to Tk 13277 million in 2001 and in 2002 only by 3.8% to Tk. 13662 million. But in 2003 the deposit decreased to Tk. 11952 million mainly because of reduction of some high interest deposit. The bank has focused on reducing cost of funds by increasing transactional deposits and other lowcost deposit. Rates of interest were revised periodically as par market condition.

- 27 -

Yearwise Growth in Deposits

14000 12000
13277 12375

10000
8879

13662

11231

11952

8000 6000 4000 2000 0

1997

9568

1998

1999

2000

2001

2002

2003

Chart 2: Growth in Deposits

L OANS & A DVANCES:

The total loans and advances of the bank were Tk. 10891 million showing an increase of 9.5% only over the year 2002 as against in the year 2001 when the increase was of 22%. The total classified loans of the bank stood at Tk. 1466 million in December 2002 as against Tk. 1146 million at the end of December 2001. Then it increased even further in 2003 and became Tk. 11288 million at the end of year. Loans increased due to procedural streamlining and establishing transparencies to the credit management system.

Yearwise Growth in Loans & Advances

12000 10000 8000 6000 4000 2000 0

Tk in M illion

11288

10891

9946

7902

8141

1997

5258

1998

Chart 3: Growth in Loans

5744

1999

2000 Year

2001

2002

2003

- 28 -

I MPORT & E XPORT B USINESS:

The banks total foreign exchange business was of Tk. 17272 million, which included Import, Export, and Remittance of Tk. 11415 million, Tk. 5432 million and Tk. 425 million respectively in 2001. which increased to Tk. 20143 million including import, export and remittance amount of Tk. 18256 million, Tk. 3533 million and Tk. 354 million respectively. Major items of export were readymade garments, shrimps, tea, jute goods, leather goods and non-traditional items. Major import items were consumer goods and old vessels for scrapping, industrial raw materials, fabrics and accessories of garment industries etc.

Chart 4: Yearwise Growth in Import, Export & Remittance

20000
9965

16256

12642

12533

11818

11415

15000
7015 3426
Tk in Million

7281

5729

10000 5000 0

4822
156

5402

4358

3533

237

425

275

113

354

1997

1998
Export

1999
Import

2000
Year

2001

2002

2003

Remittances

2.6.2. G ROWTH

IN

A SSETS

EBLs assets have grown steadily over the years. In the year 2003 it stood at Tk. 18715 million as against Tk. 18445, showing a minor increase of 1.46%.

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Chart 5: Growth of Assets

20,000 15,000 10,000 5,000 -

14,394 10,186 10,973

16,880

18,284 18,445

18,716

1997

1998

1999

2000

2001

2002

2003

2.7. SWOT

OF

E ASTERN B ANK L TD.

Studying the internal and external environment of EBL the following strengths, weaknesses, opportunities and threats could be identified:

2.7.1. S TRENGTHS

OF THE ORGANIZATION

Changed Organizational Structure: Up until 2000 EBL carried out its operation like every other local bank. All of its braches acted as single banks and did everything from marketing to loan processing to relationship maintaining. In 2001 EBL changed its traditional way of doing business. Rather than operating as a geographical matrix, EBL started operating as a business matrix. The functional areas were separated and redefined as Business Units. This has allowed management to operate more efficiently. Centralized Processes: The new organizational structure has resulted in centralized operations. Before all the branches were empowered to do almost everything within limits. They were responsible for marketing, loan processing, account activity monitoring and other transactions. Their accountability did not go much beyond sending statements to the head office annually. Under the current system management has more control on

- 30 -

the overall bank and its day-to-day operations. For example, loan default at branches would be lower if the Corporate Division and the Risk Management Division, at Head Office, scrutinize the loan proposals along with the branch managers. Superior IT Platform: From 15 March 2003 EBL has started using Flex cube - a banking software, which caters to all the needs of retail, corporate, treasury and investment banking. Flex cube enables EBL to remain associated between all its branches and business units.

2.7.2. W EAKNESSES

OF THE

O RGANIZATION

Inadequate Marketing Approach: Currently EBLs marketing programs include pointof-sale advertisements consisting of brochures and placards. Few inconspicuous billboards are placed at different locations. Occasionally press releases are given to highlight various features and changes. Lack of proper advertising campaign has resulted to poor brand familiarity. Unimpressive Physical Layout: The physical layouts of several of the EBL branches are quite unappealing. Some are located at inconspicuous locations with dull premises. The interiors of Principal and Head Office are drab and not cleaned properly or regularly. Sometimes the air conditioning does not work. These features of the Bank may create a wrong impression in the customers minds, specially the ones who come in for the first time.

2.7.3 O PPORTUNITIES

FOR

EBL

Online Banking: On March 15, 2003 EBL went Online. All its Dhaka and Chittagong branches are already connected through the web and transactions in accounts can be made from any one of the branches online. By the middle of July all the 22 branches would go online and thus customers all over Bangladesh will get access to all EBL products anytime from any branches. Also each and every customer will be given an ID and a password, so that they can login to the website of EBL and carry out transactions on their own. EBL is the first local bank, which has gone online and gives its customers

- 31 -

the satisfaction of anytime and any branch banking. In the fast paced life of today, people will appreciate this unique convenience and bank with EBL. New Products and Services: By the end of July 2003, EBL launched new consumer products like EBL Monthly Income Plan (MIP) and Savings Insurance Schemes. Also Automated Teller Machine (ATM), Telephone Banking, Credit Card Facility, Sweep in-out Facility etc was introduced. Although most of these are already available in other banks and EBL is quite late in introducing them, its current customer base will welcome the new features. In order to promote the new facilities EBL has decided to take up an extensive promotional program, which will include direct marketing and advertising. Already the first phase of selection and recruiting marketing executives and sales people has finished. If these services are properly communicated to their potential customers, it can be a good business growth opportunity for EBL.

2.7.4 T HREATS
Lost Opportunities: Till date EBL offers very few consumer products e.g. car loans, house building loans, festival loans and other facilities like credit card, ATM, telephone banking etc. All the multinational and several of the local banks of Bangladesh already provide these and thus already have created a huge loyal customer base. When EBL starts offering these features it would be difficult to attract new customers and lure away the ones who do business with other banks as they have well established brand equity. Most of the established banks have extensive marketing practices and emphasize on aggressive direct marketing, which EBL has not started yet. Other opportunities have also been lost e.g. several of the banks both multinational and local participated in the Automobile Shows to offer Car Loan schemes. EBL do not take part in these shows, though it has such offering. Although the bank has given out a press release about Internet banking, not much promotion was done as the management is waiting for all of the branches to go online. After that an extensive promotional program will be launched. However while waiting for the right moment, few other banks, which do not provide

- 32 -

proper online banking, have already started massive promotion. This publicity may dilute the uniqueness of EBLs features. Technological Obsolescence: EBL has recently started using a very modern and sophisticated IT Platform. The bank plans to change its entire business philosophy based on the uniqueness of this platform and ancillary infrastructure. However like every other novelty this system has the risk of being obsolete as technological changes are coming very quickly and continuously.

PART C: PROJECT
3.1 I NTRODUCTION
The principle reason banks are chartered is to make LOANS to their customers. Banks are expected to support their local communities with an adequate supply of credit for all legitimate business and consumer activities and to price that credit reasonably in line with competitively determined interest rates. Indeed making loans is the principal economic function of bankshow well a bank performs its lending function has a great deal to do with the economic health of its region, because bank loans support the growth of new businesses and jobs within the banks trade territory. Moreover, bank loans often seem to convey positive information to the marketplace about a borrowers credit quality, enabling a borrower to obtain more and cheaper funds from other sources.

- 33 -

EBL extends its Credit facilities only to the qualified borrowers whose use of proceeds is clearly and legitimately established. The Credit must have a clearly defined source of repayment. All borrowers must meet credit standards of EBL and Bangladesh Bank. Creditworthiness is established by review of financials, track record, ownership and industry condition.

3.1.2 P RINCIPLES O F L ENDING

Principles Safety EBL Considers

EBL considers it in two ways 1) the Security offered 2) Repaying Capacity and willingness of the debtor. 1) Easiness in evaluation 2) Ready Market 3) Marketability Security 4) Value free from fluctuation 5) Free from encumbrances. 1) What the client will do with the money Purpose 2) How much money he really needs to do it Sources of Repayment 1) Sales 2) Profit 3) Other financial information (Discussed Later) EBL has to keep sufficient liquid to meet the demand of depositors Liquidity any time. So it tries to give credit against highly marketable security. The main source of profit comes from the difference between the interest received on loans and advances and the interest paid on deposit. EBL gives due importance to the profitability of Credit given

Profitability

EBL also makes it sure that the Obligor is a man of Character, he has adequate Capital, and he is Competent enough to carry on his business. To deal with credit EBL has four departments: Consumer Banking Division: This division gives loan to the individuals. In Principal

a)

branch there is three desks to deal with the job.

b) Corporate Division: Every branch has one department dealing with the credit given

to corporate bodies. It is the recommender of loan. In principal branch there are 5 unit each headed by Relationship Managers. They guide the Assistant Relationship Managers to deal with the corporate bodies.
c) Credit Risk Management: it is situated in head office. All credit proposals come here

and it decides whether the credit line will be given. It also considers whether additional terms and conditions are needed, whether the credit line should be changed. It plays the

- 34 -

role of Decider. It has a Credit Committee which sits for meeting everyday and decides which proposals are creditworthy. This committee consists of Managing Director and Executive Vice President. Head of corporate and officers of Credit Risk Management Dept. presents scrutinized proposals before them. After detail discussion, decision is taken. If any proposal goes beyond 1.50 crore cumulatively or 1.00 crore in cash only, it goes to Board of Directors.
d) Credit Administration Department: It monitors the credit disbursed already, or gives

direction to accounts dept. to disburse new credit line. It also keeps the charge documents. For all the branches of Dhaka, there is one Credit Administration department
Credit Risk Management.

situated in Head office. For all the branches of Chittagong, there is

one Credit Administration department situated in Agrabad branch. Other branches of the country have their own Credit Administration Departments.

3.2 CORPORATE DIVISION

3.2.1 G ENERAL I NFORMATION
Corporate Division is responsible for giving loans to corporate bodies --- traders, companies, business establishments. Borrower comes to the department and asks the officers for loans. He is then provided with loan application format. The borrower fills in the application and process of approval starts. Papers circulate in the following manner
Corporate Banking Credit Administration

Sanction Letter prepared by Credit Risk Management Dept. is sent to Credit Administration Department, Credit Administration department provides a copy of the letter to Corporate Banking Division.
- 35 -

Credit Administration

Corporate Banking

Borrower first comes to Corporate Division of any branch and fills a loan application specific for corporate borrowers. The client provides own information (Trade license, Balance sheet, etc.) and Corporate Division starts preparing documents.

3.2.2 T HE

PAPERS

C ORPORATE

PREPARES

Documents

Contents 1. 1. Name of the account, Branch, Account first opened 2. Proposal, amount and purpose

1. Credit Memorandum (CM)

3. Credit structure 4.Repayment source, Financial discussion 5.Relationship with the customer 6. Financial analysis 7.Threats and mitigation factors,etc 1. Name of the Account, Name of the Proprietors or Directors of Company, Branch 2. Purpose of the Proposal

2. Application For Limit (AFL)

3. Existing Facilities, Outstanding amount, Expiry Date, Proposed Facilities, Proposed Tenor, Interest Rate, Total, Class Exposure 4. Particulars of Every Facility: For Example, a SODs Existing limit, Outstanding Amount, Purpose of the SOD, Security offered for that Particular SOD, Interest Rate, Repayment Source (e.g. Daily Sales Proceeds) 5. Declaration: That All Procedures in respect of opening account have been complied with, Existing Securities with their valuation have been checked, etc.

3. Account Profitability

1. Obligors Name, Branch 2. Account Performance (Usually of 12 Months), Nature of Account,

- 36 -

Sum of Total amount drawn Called Debit Summation, Sum of total amount deposited called Credit summation, Average utilization of the credit limit, Interest Income, Commission Income, Other revenue, Total earning of the bank from the account 3. Comment by Corporate Division, if any 1. Sales in a Specific Period 4. Portfolio Review 2. Net Profit 3. Net profit/ Sales (%) 4. Receivables 5. Other Financial Information, if needed Officers personally visit to the business establishment and prepare this call report. Usually SRM discusses with the proprietor to gather information about business condition, future plans, new needs etc. On this basis an action plan is taken and mentioned in the report that whether the credit line should be renewed or expanded, what should be done to attract the new client etc. Here the proprietor or the company management itself fills in the Bank-supplied format to declare the stock they are holding on a specific date. Important things are 1. Description of the stock: Quantity, Value per unit, Total Value 6. Stock Report 2. Details of Raw Materials, Finished Goods, Work in Progress ,Book Debts 3. Pari-Passue (Charge of other Banks on the same Stock) 4. Sales of current and provious month 5. Declarations: Stocks for which payments received but not yet delivered are not included, book entries are correct and authentic, etc. 7. Stock Inspection Report An officer of the bank usually a SRM goes to the establishment and inspects the stock that whether it really conforms to Stock Report.

5. Call Report

8. Net Worth Statement Report

Personal net-worth of the Proprietor, partners or the Directors 1. Liabilities (Payable to banks, other creditors, unpaid taxes etc.)

- 37 -

2. Assets (Cash in hands, Real Estates, Investments, etc.)

Obtained from Credit Information Bureau of Bangladesh Bank 9. CIB Report 1. Name of the Banks client has taken loan from 2. Date of sanction of those loans 3. Whether the borrower has any classified loan 10. Appraisers Report For example, a report from Jorip O Paridarshan Company assesses the value of the land client offered for mortgage, on behalf of EBL.

3.2.3 C REDIT P RODUCTS

Product
CC
(PLEDGE

ELABORATION Cash Credit Against Pledge of Inventory and Hypothecation of Inventor. Cash Credit Against Hypothecation Inventory and Book Debts. Local Bill Purchase Documentary.

NATURE *Interest is charge only on the amount drawn for a period. *To Finance Inventory. *Working Capital *General Purposes. *Interest is charge only on the amount drawn for a period. *To Finance Inventory. *Working Capital *General Purposes. *Say, a supplier sells some goods to a buyer. Buyer has not paid yet but a bank has given guarantee that he would. The seller then can come to EBL with sales documents and seeks loan against them. Buyers bank must accept the bill. EBL discounts the bill, gives the seller cash and after the tenor is over will claim the money from the buyers

RISK FACTOR Recourse on Pledge Inventory. High Monitory Risk. Ever Green Recourse on Sales Proceeds

TENOR/ VALIDITY 12 Months.

CC
(HYPO)

12 Month. 45/180 Days.

LBPD

Recourses on Banks thru Acceptance. Residual on Client.

- 38 -

LAFBD

Loan Against Foreign Bill Documentary.

bank. *The transaction is between a foreign and a local party *To Purchase/Discount Export Doc, Against Export Contract Sight/ Usance. *Here EBL does not discount the bill, instead it pays at a lower foreign exchange rate than markets on clients consent. *Only provided to highly valued customer *Bank Accepts clients liability to another party, usually an exporter *When client fails to make a payment and the liability comes to bank, bank is forced to make a loan. It is a forces loan. *To Refinance Banks Acceptance. *Advance Against Sight L/C *Bank has to pay even the importer doesnt. So it is forced loan *For Importation. *Instant Payment on received goods *For importation. *Deferred payment *For Contractual Obligation.

Recourse on Export Doc. Payment risk Residual on Client.

45/180 Days.

LAFB (Clean) ACCEP TAN CE

Loan against Foreign Bill Acceptance Against ULC.

Clean Fiannce Performance Risk Recourses on Sales .

*120 days 12 Months.

OAP

Own Acceptance Purchase.

No Recourse Clean Finance. Ever Green. Recourse on Title to Import Document. Recourse on Title to Import Document. Recourse on Sales. Performance Risk. Ever Green. Performance Risk. Lien on Export L/C. No Credit Risk. High Credit Risk Recourse on Sales Ever green Recourse on Sales.

12 Months. 21Days per Bangladesh Bank. 12 Months. 12 Months Specifi Period. Open Ended. 180 Days. 12 Months. 12 months

PAD

Payment Against Document.

SLC ULC

Sight Letter of Credit. Usance Letter of Credit. Letter of Guarantee.

LG

PC

Packing Credit Against Export L/C& Export Order. Secured Overdraft.

*is given rarely. *To Finance Export L/C. *Preshipment Finance. *100% Cash Covered. *General Purposes.

SOD

OD

Overdraft Against Other Collateral Import Loan Against Hypothecation Inventory and Book Debts

*General purposes

Import Loan (Hypo)

*To Finance Import L/C or Against Contract.

180 Day.

- 39 -

Import Loan (Pledge)

Import Ioan Against Imported Merchandise Pledged and Hypothecation of Book Debts. Demand Loan Against Hypothecation of Inventory and Book Debts. Demand Loan Against Pledge Inventory Procedure Locally and Hypothecation of Book Debts.

* To Finance Import L/C Merchandise under Pledged.

Recourse on Pledge Inventory. High Monitory Risk.

180 Days.

Demand Loan (Hypo)

*Bank can demand it any time but usually not practiced. *To Finance Inventory Procedure Locally. *To Finance Duty/Tax. *To Finance Inventory Procedure locally under Pledge.

Recourse on Sales.

180 Days.

Demand Loan (Pledge)

Recourse on Pledge Inventory. High Monitory Risk. Recourse on Sales Collateralize by Fixed /other Assets. Clean Finance Performance Risk.

180 Days.

Time Loan

Time Loan Against Other Security

*To Finance Fixed / other Asset.

12 Months.

Time Loan

Time Loan Against Foreign Bill-Clean

*To Finance Export Contract

120 Days Over 12 Months. Max 7 Years.

Term Loan

Term Loan Against Fixed assets.

*To Finance Fixed Assets.

Recourse on Fixed Assets High Risk. Recourse on Banks. Residual on Client. Recourse on Banks. Residual on Client.

BCP (Foreign

Bankers Cheque Purchase (Foreign)

*To Purchase /Discount Foreign Currency. Drafts/Payment Order. *Upfront Interest to be Realized.

30 Days.

BCP (Local)

Bankers Cheque Purchase (Local).

*To Purchase /Discount Bank Draft /Pay Order. *Upfront Interest to be Realized.

30 Days.

Fwd FX

Forward Purchase of Foreign Exchange

*Say, an importer will import goods and he has prepared documents. But suddenly Foreign exchange rate goes high. To avoid such risk bank purchases foreign currency on behalf of client in advance.

Performance Risk.

180 Days.

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EOL

Excess Over Limit

Say, a valued customer is availing some credit facility. He has outstanding almost touching the limit. He needs to draw an amount which exceeds the limit, but he does not have enough time to have a new credit facility. In this case EOL is given.

Whether there is Sufficient collateral.

Negotiation

3.2.4 M ODES
LIEN 1. Right to retain possession but not ownership.

OF CHARGING

S ECURITY
HYPOTHECATION 1. Mortgage of movables by an agreement. Neither possession nor ownership is transferred. 2. Hypothecation is used in case of advance against movable goods by an agreement only. 3. Delivery of possession of goods not necessary. MORTGAGE 1. Transfer of interest in immovable property to secure the repayment of money advanced. Ownership remains with the mortgagor. 2.Mortgage is used in case of advance against security of immovable property. 3. Delivery of title deeds necessary.

PLEDGE
1. Bailment of goods as security for payment of a debt or performance of a promise. Title & ownership are retained.

2. Lien is used in case of advances against FDR. Bank deposits & other financial obligations as security. 3. Delivery of possession of financial obligations in the ordinary course is necessary. 4. Letter of lien is used for creation of charge but even in the absence of letter of lien, Bank has general lien on its own financial obligations to the Bank.

2. Pledge is used in case of advance against movable goods kept in Banks possession as security. 3. Delivery of possession of goods or title deeds are necessary, even if symbolic. 4. Letter of pledge is necessary.

4. Letter of hypothecation is necessary.

4. Memorandum of deposit of title deeds or Registration of mortgage deed is necessary.

- 41 -

5. Lien is two typesGeneral lien and particular lien. Banks lien is general lien over its own financial obligation to clients.

5. Pledge is one type i.e. pledge in closed godown with Banks possession..

5.Hypothecation is only one type

5.Mortgage is various types, but in case of mortgage to Bank only two types are usedEquitable & registered mortgage

6. Property under lien cannot be realized/sold and proceeds thereof cannot be appropriated without notice to the owner & sometimes without courts order.

6. Pledge goods may be sold out and proceeds thereof may be appropriated towards adjustment of liability in case of failure of the borrower to repay or fulfill the terms and conditions.

6. Hypothecated goods cannot be sold out /disposed off without notice & courts order. However, if a special power of attorney is taken in that case can be disposed off without going to the court.

6. In case of Equitable mortgage, Court Order is necessary & in case of registered mortgage courts order is not necessary for sale/disposal of the mortgaged property for adjustment of advance.

Guarantee
Guarantee has three parties. Say, A will give guarantee to C that if B does not repay the loan taken from C or does not perform any act promised; A will repay the loan or compensate for B failure.

Indemnity
Indemnity has two parties. A will indemnify that if B faces any loss or damage from the act of A or any third party, A will save B from the consequences.

Different type of Charge: Negative Lien

- 42 -

Also named as Non-Possessory Lien. In the case of a negative lien, the securities are not in the possession of the creditor. But, the debtor gives an undertaking that he will not create any charge on those securities in question without the prior written permission of the creditor. Such a letter of undertaking must be duly stamped. Thus in case of a negative lien, the possession of the security is with the debtor himself. Who promises not to create any charge over them until the loan is repaid. EBL usually charge this mode when borrower is reluctant to give mortgage or hypothecation. EBL charges it as that the borrower can not give the property to anyone else for security purpose without prior permission of EBL.

3.2.5 L OAN P ROCESSING C OST

Application fees: No fee. Documentation fee: Actual basis. Appraisal fee: 0.5% - 1% of the total loan sanctioned. Legal fee: Examination and technical assistance fee (in case of project). Interest Rate: It depends on bank-customer relationship. It ranges from 10% to 15%.

3.2.6 L OAN P ROCESSING T IME

It varies with the nature of loan. Trade finance needs 1-2 weeks. Loan Proposals required BOD approval takes 3 weeks.- IF a third party issue the financial instrument than it may take more time. In case of a big amount of short term finance, if requires BOD approval and so, it may take even a month to sanction.

3.2.7 B OOKS M AINTAINED:

Corporate keeps a unique file for every client and puts all the documents in it. This file has five parts and each contains different contents:

Part 1

Name Approvals

Contents CM/BM, Date wise record of Head Office Approval, Minutes of Executive Committee, AFL, EOL/Rush Transaction Letters among Branches, Head office, other institutions

Correspondence

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Reports

Call reports, Stock Inspection Reports, Valuation Report, Credit/CIB Report, Irregular Transaction/Overdue Report, Loan Documentation Report Spread Sheet, Balance Sheet, Cash Flow, Income Statement, Annual Report, Account profitability, Net worth Statement, Portfolio Review RJSC searches, Accepted Sanction letters by Borrowers, Photo copies of Legal security, charge documents, Copy of Legal Opinion Copy of License, Copy of Import Registration Certificate.

Financial

Legal

Officers of Corporate Division receive the application of loan; other documents supplied by client and check them closely. They consider whether the applicant is loan-worthy; if yes, how much credit he should be sanctioned. Corporate then prepares all documents stated earlier, forwards them to Credit Risk Management Division. If that division approves the proposal, sanction letter is sent to Credit Administration Department. Corporate then prepares Charge Documents (Discussed later) gets them signed form the borrower. If any existing facility needs to be renewed, proposal comes to Corporate Division again.

3.3 CREDIT RISK MANAGEMENT DIVISION

3.3.1 GENERAL INFORMATION
This department is the most sensitive one in the banking operation. In EBL CRMD is the final authority to decide whether a borrower should be given loan. If it gives loans and advances without discretion, it is likely that a large portion would become unrealizable and bank would face serious consequences. On the other hand if this section is unnecessarily fuzzy about loan sanction, bank would not be able to cover its own expenditure, since interest income is the main source of

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income. So CRMD has to look after every side of an issuesecurity, profitability, image. Credit Risk Management properly assesses credit product risk and structure the credit facility based on customers business needs with effective control on cash flow and collateral. This division scrutinizes all the documents sent by Corporate Division and look for flaw in them. They are the gatekeeper here. CRMD can call in the corporate officers for any discrepancy in the document and can ask for the correction. If the concerned officers of this department are satisfied, only then the proposal goes to Head Office Credit Committee for final approval. Credit Committee has total power to reject any proposal. Facilities cannot be activated until they are properly approved by the Committee. Corporate recommends, Credit Risk Management Division scrutinizes and Credit committee approves. So CRMD is playing the Check and Balance role.

3.3.2 CONSIDERATIONS OF CRMD A) O BLIGOR

OF THE APPLICATION

Obligor has to be creditworthy and competent enough to run the proposed industry. Preference given for educated / knowledgeable sponsors, who know about their business concern, have technical know-how and expertise in the line of proposed industry.

Who have own land and building for running the project Have experience in working abroad Having innovative ideas Who have good dealings with the bankers /outside parties and has social contacts and standings.
Have an A/C with EBL

B) V IABILITY O F B USINESS O R P ROJECT (N EW M ANUFACTURING)

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The project should be viable from organizational, technical, commercial, financial and economic points of view. a. Technical viability It implies the assessment of various requirement of actual production process. It involves a critical study of following factors: Location and site of the project:

Selection of the optimum location, therefore, revolves around the joint consideration and evaluation of the following factorsRaw materials supplies Transportation facilities Power and fuel supply Water manpower Natural and climate factor

Size of the plant / project Technology, plant & equipment- the study should consider some important technological factors with regard to plant and equipment, viz.:

Adequacy and suitability of the plant & equipment s and their specification Plant layout Balancing of different sections of the plant Reputation of the machinery supplies, etc. Building and layout- the operative efficiency of industrial project also depends on the layout.

b. Commercial viability This study indicates evaluation of a projects feasibility in terms of market. The market analysis contains:

Analysis of past and present demand Analysis of past and present supply Estimate future demand of the project Estimates projects share in the market, etc. Marketing channel for the product should be accessible to the entrepreneur.

C. Financial viability

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Analysis of financial viability is an essential part of project appraisal. The financial analysis focuses the following for judging this viability: D. Economic viability The project should ensure benefit to the national economy and create sufficient opportunity.

Generation of employment Improvement of quality of life and well-being Environmental issues Opportunity cost

E. Management and organizational viability: It is very important for the success of a project. Because, if the management is incompetent a good project fail. So it is necessary to evaluate the following things overall background of the promoter, their academic qualification, Business and industrial experience, their past performance.

C) S ECURITY O FFERED D) R EPAYMENT S OURCES

After these considerations, CRMD decides whether the proposal will go to Credit Committee.

3.3.3 O BLIGOR R ISK R ATING I N EBL

To assess the risk quickly and objectively, EBL has divided the customers in 7 groups. As a result whenever they come for new or renewal facility, CRMD easily identifies who is risky and who is not.

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Rating GOOD

Short GD

No
1

CRITERIA Growing Industry (Growth 15%+) Among top 20 in the Industry Strong management with succession Steady growth in financial performance Satisfactory payment record/account turnover Liquidity 3X and above Leverage 0.5X and below Timely submission of financial information Strong Parent/Sister Office Guarantee Good collateral OR 100% cash covered Growing Industry (Growth 10%+) Acceptable player in the market Good management with succession Acceptable growth in financial performance Satisfactory payment record/account turnover Liquidity 1.5X and above Leverage 1.5X and below Timely submission of financial information Acceptable Parent/Sister Office Guarantee Acceptable collateral Past due over 60 days Loosing market share Thin management with no succession Unreliable sales/operating profit. - 48 Unsatisfactory payment record/account turnover

STRATEGY
Retain and grow with client Sell multi products

ACCEPTABL E

ACCEP

Retain and grow with client Sell multi products

MARGINAL/ WATCHLIS T

MG/WL

No increase in credit limit Close monitoring thru clear action plan Ensure 100% completion of loan doc. Semi-annual review Follow up for settlement of past dues

3.3.4 C LASS

OF

R ISK

All credit risks are properly defined in different classes as per EBLs policy guidelines on classes of risk. A clear definition of Class of Risk is provided in

1. 100% Cash Covered by having the funds available in EBLs cash margin account 2. 100%EBL FDR fully liened & pledged in favor of the bank. 3. 100% in the form of Govt. Sanchya Patra fully liened & pledged in Class A favor of bank 4. 110% cash covered if credit facilities are in different currency than that of collateral.

Credit facilities extended to clients which are secured by 1. Hypothecation of business assets like inventory, book debts & assets. Plant & Machineries. 2. Mortgage of fixed assets like Factory Land & Builiding and other Class B real assets 3. Partial cash covered or other collateral. 4. Guarantee from acceptable Financial Institution or Lien on fixed deposits issued by them 5. Personal or corporate Guarantee. 6. Government Guarantee through Ministry of Finance. Class C Credits facilities extended to cover or to hadge foreign currency risk against Letters of Credit are called exchange fluctuation risk. The product which EBL sells to its customers is called Contract (FWD FX)

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and can be further explained as follows: 1. 2. 3. 4. Exchange Fluctuation Risk Forward Contract against Letters of Credit Hedge FX risk of EBL/Other Bank Letters of Credit Risk for Maximum 180/360 days.

This class risk is concerned only with risk taken on a banking financial institution and can be further explained as follows: 1. Risk on banking financial institutions (FI) including Bangladesh Bank 2. Call/STD/Time placement with banking financial institutios 3. Term Exposure on banking Financial institutions Class D 4. Financing against banking Financial institutions acceptance 5. Negotiation of Export documents against valid export L/Cs 6. Purchase of Pay Order/Demand Draft drawn by a banking financial institutions 7. Nostro Account with other banking Financial Institutions 8. Purchase of Treasury Bills from Bangladesh Bank.

3.3.5 P OLICY E XCEPTION

The cases mentioned under need Board of Directors approval

Sl. No. 1 2 3 4 5 6 7

Policy Exception Required Board Approval Name Lending, Inadequate Financial Information NO primary source of repayment identified Term loan tenor over 7 years, real estate financing Grace period principal amortization exceeds 24 months Term loan larger or exceeding loanable fund than Boards policy limits EBL not pari-passu with other lenders (Inferior Security) Loan proceeds for military purposes

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8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Lending for fire arms, explosives or alcoholic plant Start up/Venture capital loan, no applicable collateral Equity finance, underwriting of shares or debentures Primary repayment, proceeds from insurance Exposure to non-profit obligor (which declares itself non-profit org.) Exposure to political org. Exposure to clubs, societies or charitable org. Specialized industry knowledge required. Evergreen credit/open ended exposure (Exposure having no fixed expiry) Loan to directors or auditors Insufficient KYC/credit history on borrower NO clearly defined use of loan proceeds Bangladesh bank circular or guidelines requiring Board approval Violate spirit and law of country Bail out loan Integrity of client in question New relationship with watch list rating

3.3.6 R ATIO A NALYSIS:

It is actually done in Corporate Division, CRMD recalculate them. Name Growth Ratio All Expressed in % Sales Growth Net Sales Growth, Composite

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Net income Growth Total Asset Growth Total Liabilities Growth Net worth Growth Profitability Ratios Gross Margin, composite Deprecation, Amortization Operating Profit Margin Return on Assets Interest Expense Return on Equity Coverage Ratios Interest coverage Debt Ser. Coverage Activity Ratios Receivables in days Payable in days Inventory in days Liquidity Ratios Working capital Quick Ratio Current Ratio Leverage Ratio Total Liability/Net Worth Affiliate Exposure/Ner Worth Total liabilities/Net Worth-Affiliates Formulas For Calculation Current Ratio Quick Ratio Leverage Current Assets/Current Liabilities (Current Assets-Inventory)/Current Liabilities Total Liability/Equity

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Debt to Assets Inventory in days Total Turnover

Total liability/Total Assets (365*inventory)/cost of good sold

Assets Net Sales/Total Assets

Gross Profit Sales Gross Profit*100 /Net Sales Net profit sales to Net profit *100/Net sales Net profit*100/Equity (Net profit + Depreciation + Interest Paid)/(Interest paid + 12 months principle payments)

Return on Equity Dev service Coverage ratio

3.3.7 B OOKS M AINTAINED:

Books Client wise File Contents Mentioned in Previous chapter. Here is kept the files of that client who has continuous relationship with EBL. The documents of those clients who do not have a regular credit line with EBL. They are having single transaction. every Sanction Reference number, Date of Sanction, Name of client, facility availed, Expiry date

One-time Transaction File

Sanction branch)

Register

(for

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3.4 CREDIT ADMINISTRATION DEPARTMENT

3.4.1 G ENERAL I NFORMATION
Credit Administration Department is established only a year ago. Loan monitoring and keeping charge documents are its primary responsibility. Credit Administration keeps a historical record of all disbursements by reference number for each loan, l/c guarantee etc. Operating records are agreed periodically to accounting records. Credit Admin prints out the credit position of each borrower every day and sends them to respective officers. This print out carries names of the borrower, date of sanction, type of loan, accrued interest till date and amount repaid. Risk concentration by industry or borrower is monitored on 6 month-basis. Credit approvals take account of a credits impact on risk concentrations which is pointed out in individual credit presentations. Credit Admin reports to Head Office Credit Division the largest sector by limits and outstanding representing on a quarterly basis. Facilities in process, renewal or amended CMs are tracked by way of a unique control number issued by Credit Admin. It enters all credit facility amounts into MIS database, which are able to detect computation errors. Accounting and system controls ensure that

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outstandings are posted to the correct account and properly summarized for management decision making.

3.4.2 L OAN D ISBURSEMENT

Loan disbursement is not allowed until Credit Admin gives green signal. This department receives sanction letter from CRMD, keep the original with them and sends a copy to the Corporate Division. Then Corporate Division stars preparing Sanction Letter. When sanction letter provided to the borrower and all terms and conditions agreed by the borrower, necessary charge documents are taken from the borrower. Later on a particular account is created for the borrower as SOD, CC, LAOS, LIM etc as the case may be. These are all new accounts in the name of the borrower, given cheque books to them for drawing money. Charge documents are kept in Credit Admins safety box.

3.4.3 L OAN S UPERVISION

Credit officer of EBL supervises their borrower activities in two methods 1. On site supervision: Credit officer visits the site that is factory building, office etc. (whether production procedure is going on as per agreement) It is done by the officers of Corporate Division. 2. Off site supervision: Supervising activities of the borrower from the office desk. It is done by Credit Admin.

3.4.4 M ONITORING
Monitoring loan basically means that whether the loan is used exactly to that purpose for which it was sought. If borrower uses it for other purpose he may be called in by the officer of Corporate Division and asked to show cause. Also credit officer monitors the accounts of the borrowerday-to-day transaction pattern, daily balance of the account etc.

3.4.5 L OAN

ADJUSTMENT

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Borrower has to adjust his account as per terms and conditions of sanction letters. He must pay the required amount with interest within schedule on or before the expiry date of the loan. Reminder is given to the borrower, Credit Admin supplies necessary information and help Corporate Division to issue a reminder letter. Getting the letter the borrower may adjust the loan with interest. Or he may ask for renewal of the loan or negotiate for rescheduling the portfolio. So he has to request the Corporate Division. Corporate Division prepares a renewal CM and the circular flow stars again through CRMD and credit Admin. In this case adjustment is deferred for the time being.

3.4.6 R ECOVERY
Sometimes borrower can not repay the loan, for failure in business, for personal dishonesty or for other reasons. Credit Admin transfer these cases to Special Assets Department. After making all sorts of efforts and while the borrower is poised to become a defaulter, the file of the borrower is forwarded to legal action. Question arises that when the file is forwarded for recovery. However the timing comes after all the following procedures are made. 1. 2. 3. 4. Request or persuasion by letter, phone or orally Final notice is given to the borrower File forwarded to attorney for serving legal notice. Legal Suit

The borrower can be sued for three purposes 1. Money suit- Claim for money 2. Title Suit- Claim for the title of the property kept as security 3. Petition for winding up of an active company. Approve of EVP and MD is essential for legal action against Borrowers and the foreclosure and sale of collateral. This is then reported to EBLs Board of directors on post-fact basis.

3.4.7 S OME

OTHER

C ASES

Defaults are cured by repayment or when extended through proper approvals including credit review and fresh legal documentation.

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Rollovers require the same transaction approvals as initial drawdowns. Rollovers are exceptional and clearly identified as part of a clients banking needs for specific approval by the Competent Authorities. Rescheduled debt without established satisfactory repayment history is a classified asset. Credit Admin reports all past dues to Head Office Credit Committe. Potentially uncollectible or delinquent credit facilities are clearly identified and not suppressed through rollovers, renewals or extensions.

3.4.8 C HARGE D OCUMENTS

When Credit Admin receives CRMDs approval to disburse a loan, Credit Admin sends a copy of the letter to Corporate Division and demands Sanction letter signed by the borrower and necessary charge documents. What documents are needed for which loan are given in the chart in the next page.

Cases

Documents Required & Kept Letter of Borrower requesting for new facility/renewal Letter of authority in case of partnership Resolution of Board in case of company Certificate from RJSC regarding legal entity(whether group etc.) Facility Advice letter: Accepted unconditionally by borrower

General Documents

Demand Promissory note Letter of continuity Deed of Partnership, if partnership Memorandum and Articles of Association, if company Letter of Arrangement Letter of Disbursement Revival Letter

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Lien on Account

Resolution to lien account proceeds Letter of lien and set-off Resolution to deposit FDR/SC/Bonds endorsed by holder

Pledges of deposits/Savings certificates

Letter of Guarantee by depositor(if deposit stands in the name of 3rd party) Letter of lien and Set off Letter of Authority for encashment of SC/FDR. Resolution to deposit Share certificates

Pledge of Shares

Memorandum of Deposit of shares Irrevocable letter of authority for collection of dividends, bonus etc Notice of pledge by shareholder to the relative companies. Letter of pledge Letter of disclaimer

Pledge of inventory

RJSC Search Certificate RJSC form 18 & 19 properly filled in by client & receipt Insurance policy with EBL as joinetly insured Resolution of Hypothecation inventory Letter of Hyothecation

Hypothecation of Inventory

RJSC Search certificate RJSC form 18 & 19 properly filled in by client & receipt Certificate of registration from RJSC Insured policy with EBL jointly insured

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Resolution to Hypothecate Book Debts Hypothecation Agreement Hypothecation of receivables/Book Debts RJSC search certificate RJSC form 18 & 19 properly filled in by client & receipt Certificate of registration from RJSC Modification of Letter of Hypothecation of Receivables Resolution to Hypothecate Machinery and equipment. Hypothecation Agreement RJSC search certificate Hypothecation of Machinery and equipment RJSC form 18 & 19 properly filled in by client & receipt Certificate of registration from RJSC Modification of Letter of Hypothecation

Resolution to assign receivables Deed of Assignment of receivables Notification and acknowledgement of assignment of receivables from the debtor RJSC search certificate RJSC form 18 & 19 properly filled in by client & receipt Certificate of registration from RJSC

Assignment on receivables

Mortgage

Letter of nomination of third party mortgagor from borrower with attested specimen signature of mortgagor Resolution to mortgagor and guarantee

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Copy of valid ID Personal guarantee from third party mortgagor. Original title deeds of mortgagors C.S., S.A. and R.S. Parchas Mutation Parchas in mortgagors name, certified by Assistant Commissioner of Land Duplicate carbon copy for mutation case Letter of No Objection of mortgagor to mortgage Land Development Tax Receipt of the immediately preceding Bengali year Municipal holding tax receipt Building plan with letter of approval Valuation Report RJSC search report Memorandum of deposit of title deed with approval of legal counsel Power of Attorney Income Tax Clearance Certificate Non Encumbrance Certificate from Land Registrar

List of Directors with specimen signature Resolution of Guarantee Guarantee Net worth Statement Letter of guarantee Letter of counter indemnity Term Loan Agreement Term loan agreement between EBL & Borrower Draft Term Loan Agreement approved by CRMD and legal

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counsel

Accepted Mandate Letter Accepted Term Letter Information Memorandum Syndication (more than one bank are giving loan) Participation Letters Facilities Agreement Power of Attorney of participants Accepted Fee Letter Legal counsels opinion Consent of the Head of CRMD

Legal counsel periodically reviews documentation in standard form or a signed letter. Banks legal counsel ensures that the Banks security interests are perfected. The account manager and credit Admin check documents for completeness and execution by authorized client signatory. Instances for incomplete documentation can receive a temporary waiver if EVP & Head office credit division & MD permit. Credit Admin keeps all these documents and on adjustment of loan returns to the borrower.

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PART D: CONCLUSION & RECOMMENDATIONS

Eastern Bank Limited is a very established in the market. But compare to the other players in the industry, it has very high classification rate which is quite unacceptable and the efficiency of corporate division is related with this issue. EBL can come out from the present position if they follow the following recommendations properly

The Bank should send the Relationship Managers and CRM employees to various training programs on Loan Application Evaluation Techniques on a regular basis so that the RMs can properly evaluate all the loan applications in a structured and scientific way and select only those applications which has a sound credit worthiness and repayment capability.

The RMs should be encouraged to build up their knowledge base about various industries, the opportunities and risks in the sectors, the well performers and the upcoming companies, industry standards etc. For example, RMs can be given incentives to attend various seminars, workshops, or training programs in these areas.

CRM must be strict to see that all the procedures Loan Evaluation and Monitoring are followed before giving any new loans. It was observed that not all the steps

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of the present guideline are followed strictly by the RMs. For example, the RMs did not go on regular quarterly calls to the clients and also sometimes did not verify all the information provided by the clients. This gives rise to chances that the clients actual position may not be understood on time and increases the risk of classification. So steps must be taken to ensure strict adherence to the loan evaluation and monitoring policy. The RMs should keep their eyes open about the position of the industries of their respective clients. As soon as any new risk occurs in the industry or the industry shows signs of deterioration, they should analyze its impact on their respective clients and act accordingly. As soon as the client fails to make timely repayment, pressure should be created on him to make the payment urgently and no further credit should be allowed to him unless he pays back the previous dues (except for cases where new loans are needed to ensure past loans recovery). Also no unnecessary restructuring of repayment schedule should be allowed. Credit Rating must be given proper emphasis. of the client being classified eventually. . Special Asset Management Department should immediately launch legal procedures against those accounts where negotiation has failed and there is no chance of repayment. They should try to recover as much of the loan as possible by disposing of the securities held against these loans. Whenever a credit rating is

lowered, the RMs must look into the account to see whether there is any chance

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Bibliography:
Commercial Bank Management, Peter S. Rose, Third Edition, Irwin. Money And Capital Market, Peter S. Rose, Eighth Edition,

McGrawhill-Irwin. Business Communications, Eighth Edition, William C. Baty, PWSKENT Publishing Company. Annual Report 2000-2001 Bangladesh Bank. Annual Report 1999-2000, 2000-2001, 2001-2002, 2002-2003 Eastern Bank Limited.

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APPENDIX
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- 66 -

CURRENT ORGANOGRAM BASED ON FUNCTIONALITY

CHAIRMAN BOARD OF DIRECTORS

MANAGING DIRECTOR

BRAND MGMT

HRD

FIN &ACC

CREDIT RISK MGMT

AUDIT & COMPL .

CORPORATE BANKING

SPECIAL ASSET MGMT

OPERN

CONSUMER BANKING

CENTRAL SUPPORT DEPT

CREDIT ADMIN

AREA HEAD (DHAKA)

AREA HEAD (CHTG)

TRADE SERVICE

INTL DIVISION

TREASURY

INFORM.TE CH.

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Table 1: Broad Performance Indicators of EBL from 2000-2003. (FIGURES IN MILLION TAKA) Particulars Reserve Deposit Loans And Advances Export Import Guarantee Business Operating Income Operating Expense Operating Profit(Loss) Net Profit(Loss) before tax Total Assets (Excluding Contingent) Return On Equity % Return On Asset % Book value per share (TK) Earning per share(TK) Dividend per share Classified loans as a % of total loans Capital Adequacy ratio % Net interest margin % 2000 2260 12375 8141 7281 12533 1789 1916 1242 674 475 16880 15.38 1.57 266.07 40.91 30.00 8.21 24.17 3.44 2001 2322 13277 9946 5402 11415 1054 2022 1319 703 553 18284 16.93 1.84 265.02 44.86 30.00 11.52 22.49 3.46 2002 2448 13662 10891 4,358 12,642 1,183 1,986 1,255 731 631 18,445 17.44 2.04 295.29 51.48 35.00 13.46 22.32 3.44 2003 2,560 11,952 11,288 3,533 16,256 354 1,985 1,226 759 638 18,716 15.33 1.95 281.87 43.21 20.00 13.61 18.27 2.43

Source: Annual Report, 2003

Table 2: Comparison of lending rates of different banks EBL LOANS & ADVANCES SCB HSBC PRIME SOUTH EAST

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AGRICULTURE LARGE & MED INDUS. WORKING CAPITAL EXPORT OTHER COMMERCIAL LENDING SMALL INDUSTRIES OTHERS

11-16% 12.5-16.65% 10-15.5% 7% 13-16% 14-16% 12-14%

9-11.5% 10-15.5% 8-15% 7-9% 9-17.5% 9-14% 7-20%

12.5-14% 9.5-16.5% 8-16.5% 7-10% 8-15.5% 10-13% 9-19%

11% 15% 15% 7% 16% 15% 13-16%

9-13% 13-15% 12-15% 7% 13-15% 11.5-13% 13-15%

*Source: Bangladesh Bank Annual Report 2001-2002

Table 3: Sector wise % distribution of EBL's total loans

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Sector Name Textile Steel Products Cement Ship Breaking Pharmaceutical Chemical, Plastic & Plastic Products Foods & Beverage Edible Oil Power, Gas & Oil Leather Jute Poultry & Hatchery Electronic Goods Brick & Ceramics Soap & Detergents Paper, Printing & Packaging RMG Shrimp Export Media Information Technology Telecommunication Shipping, Airline & Transport Commodity Import Construction Trading Service Clinic, Hospital & NGOs Educational Institution Financial Institution Individual Others Total

% Share of Total Loans and Advances 11.47% 4.57% 1.09% 7.65% 1.48% 2.45% 6.33% 6.11% 4.63% 0.69% 0.31% 1.53% 3.16% 0.08% 0.11% 2.43% 9.13% 0.12% 0.29% 0.02% 5.27% 0.66% 9.38% 6.51% 5.83% 1.13% 0.05% 0.14% 4.44% 0.17% 2.77% 100.00%

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Source: Statement of Loan as on December 1st, 2004

A NEW APPROACH IN CREDIT RISK MANAGEMENT IN EASTERN BANK LTD.

1.0 INTRODUCTION

Risk is inherent in all aspects of a commercial operation; however for Banks and financial institutions, credit risk is an essential factor that needs to be managed. Credit risk is the possibility that a borrower or counter party will fail to meet its obligations in accordance with agreed terms. Credit risk, therefore, arises from the banks dealings with or lending to corporate, individuals, and other banks or financial institutions. Credit risk management is of utmost importance to Banks, and as such, policies and procedures should be endorsed and strictly enforced by the top level management and the board of any Bank. According to the guideline prescribed by Bangladesh Bank, Eastern Bank Ltd. (EBL) restructured its credit approval and monitoring procedures in the year 2002. This improved the risk management culture and established minimum standards for segregation of duties and responsibilities resulting better control on the overall loan approval and monitoring process. This study was conducted to find out the real effects on classified loans of the new approach in credit risk management.

1.1 Origin of the Report

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After completion of two years (4 semesters) MBA Program of Institute of Business Administration, University of Dhaka; 3 months organizational attachment is a must. I completed this internship period in Eastern Bank Limited (EBL), one of the largest and reputed Private Commercial Banks in Bangladesh. I worked in the credit administration department in the Head Office. The primary activities carried out by this department include collecting necessary documents for the loans approval, monitoring the loan after disbursement and ensuring its repayment, and finally initiating classification, in case of non-recovery. While working in this department, I found that EBL was doing well in reducing their classified loan. By the end of the year 2002 and 2003 they had a staggering classification rate of 13.46% and 13.61% in the total portfolio of loans and advances. But at the end of September 2004 the classification percentage came down to 8.22% with classified loans and advances totaling Taka 109 crore, which is almost half of the previous two years. So, I felt an urge to explore the reasons behind such magical improvement. I thought, the new approach in credit risk management might be one of many reasons that had made this possible. My Internship advisor and respected teacher Associate Professor Dr. Jawadur Rahim Zahid and supervisor in the organization Mr. Monzur-Ul-Mowla, First Assistant Vice President and Assistant Manager, Credit Administration of Eastern Bank Limited kindly approved my proposal and the project originated.

1.2 Objectives
To find out the effects of new approach in credit risk management on credit related processes. To highlight the impact of the new approach in credit risk management on classified loans and advances.

1.3 Methodology
The first step of this report work was concerned with problem identification and deciding on the topic. This was achieved through consultation with the faculty advisor and the supervisor in EBL. Next the particular objectives of the project were set.
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Based on these objectives, the necessary data for completion of the project were identified. Next, those internal sources were identified who would be able to provide the necessary information. After this, the data collection process began. Both primary and secondary sources of information were used for the purpose of this report. The primary sources of information were the concerned officials of EBL. Data were collected from them through face-to-face interview. The sources of secondary information were different publications, board memos and other reports of EBL. To compare EBLs position with other banks, data from Bangladesh Banks publications were used. After data collection was complete, the data was analyzed in a descriptive way to find out their implications. Based on these findings, the final report was completed.

1.4 Scope
The report only covers the impact of the new approach in credit risk management on classified loans and advances and also the overall effect on credit approval and monitoring process. The new approach is based on the guideline provided by Bangladesh Bank. This is a descriptive study only. No attempt was made to find out a direct relationship between these two variables (new approach and effect on classified loans and advances). No recommendation has been provided in this report.

1.5 Limitations
Because of organizational restriction, no name and details of the status of a classified account could be revealed. As a result, specific reasons behind a particular clients classification could not be revealed. This hampered the fulfillment of the objectives of the report. The financial statements of EBL for 2005 have not been published yet. As a result, some of the data necessary for financial analysis in the organizational part could not be availed.

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1.6 Organization of the report

This report is organized into two broad parts. The first part is an overview of the organization itself. The second part concentrates on the research project. The organization part includes History of Eastern Bank Ltd., its profile, structure, operations, management bodies, products, financial status etc. The next part focuses on the project topic. Guideline of Bangladesh Bank for managing credit risk properly is presented first. Then in the following chapters restructuring process, reason for restructuring and effects of restructuring is described. Finally, a conclusion based on the project findings is drawn.

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2.0 PROFILE OF EASTERN BANK LTD.

This part takes a glimpse at Eastern Bank Ltd. from different perspectives. History of the bank, current status of the bank, its products, organizational structure and many other things are discussed for the better understanding of the organization.

2.1 History
Eastern Bank Limited was incorporated as a public limited company and a scheduled bank on 16 August 1992 to commence business. EBL is the successor of BCCI. In 1991 when BCCI collapsed internationally, the operation of this bank closed down in Bangladesh. After discussions with BCCI employees and taking into consideration the depositors and customers interests, Bangladesh Bank gave permission to form a bank named Eastern Bank Limited by taking all assets and liabilities of erstwhile BCCI (Overseas). It was established under the Bank Of Credit And Commerce International (Overseas) Limited (Reconstruction) Scheme formulated by Bangladesh Bank. EBL started business with four branches-Principal Branch, Motijheel Branch, Agrabad Branch and Khulna Branch and had authorized capital of TK.1000 million with 10 million shares of TK. 100 each and of paid up capital of TK.310 million. The paid up capital increased to TK. 600 million in 1994. The first Board of Directors constituted of 7 directors of Bangladesh Government. Mr. Nurul Hossain Khan was the chairman and Mr. Ghiyasuddin Ahmed was Managing Director. In 1993, EBL started its expansion of branches. The bank got its Authorized Dealership License from Bangladesh Bank on 7th July 1993. Six new branches opened in 1994 and three in 1995.

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2.2 Current profile of EBL

At present, the bank has 22 branches throughout the country with 500 employees. The existing Board of Directors has 12 members. Mr. M. Ghaziul Haque is the Chairman of Board and Mr. K Mahmood Sattar is the Managing Director. EBL has gone through a restructuring stage where the traditional Branch Banking System is gradually discarded and being replaced by a Centralized System. Till 2000, EBL operated in a Geographical Matrix where the business of the bank was concentrated in the twenty- two branches. In 2001, the management of EBL changed it business philosophy into Business Matrix. The main three businesses that the bank is now concentrating on are: Corporate Consumer Treasury

2.2.1. Corporate Banking Division

Corporate Banking Division of EBL caters to the needs of corporate clients. The entire corporate division is divided into three broad areas: Area-1 that comprises of Dhaka, Area-2 that comprises Chittagong and Area-3 that comprises of Outstation Branches i.e. the branches in areas other than Dhaka and Chittagong. There are five units in Area-1, while Area-2 has three units. Also there are Small Business Unit (SBU) in Dhaka and Agrabad (Chittagong). All the units are operated from the Corporate Banking Division at Head Office. In general this divisions functions are: Targeting corporate clients and building business relationship with them Evaluating financial strength of the clients Designing customized service for the clients Making possible recommendations for further financial expansion

2.2.2 Treasury Division

The Treasury Division of EBL deals with fund management i.e. money market dealing and LC Payments. They are also responsible for maintaining the statutory requirements with Bangladesh Bank.

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2.2.3 Consumer Banking Division

Consumer Banking Division deals with the financial needs of individual customers. The twenty-two branches of EBL, which are now termed as the Sales & Service Centers principally focus on retail banking based on relationship with individual customers. This divisions principal functions are: New Product Development Brand Management Maintenance of CASA and HP Accounts Providing Consumer Loan Providing Locker Services

2.3 Other divisions

Beside these 3 business units several ancillary units are present which support the business units in day-to-day activities. These are Credit Risk Management Division, Brand Management Division, Finance Division, Human Resources Department, Special Asset Management Division, Operations, Audit and Compliance Division, Credit Administration Division, Information Technology Division and International Division.

2.3.1 Credit Risk Management

This division is responsible for evaluating the credit worthiness and debt payment capability of present loan customers and loan applicants. The department also monitors the risk worthiness regularly. The branches send all proposals from the prospective borrowers to the corporate division, which in turn analyze the financial statements and prepare credit memorandum, application for limit, account profitability and other necessary papers and send them to the Credit Risk Management division for approval. The department keeps track of credit portfolio by obtaining regular information from the branches. It sets price for credits and ensures its implementation at the branches. This department also monitors the various loan accounts of the branches and prepares various statements for Bangladesh Bank.

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2.3.2 Brand Management

The Brand Management division is a secondary unit of consumer division and is responsible for all activities related to managing the organizations brand and building brand equity. It designs the logo, greeting cards and official stationary and prepares promotional plan and budget.

2.3.3 Finance
Finance division of the bank is responsible for: Budgeting and Cost Monitoring Planning and Monitoring the banks liquidity Corporate Tax management Monthly accrued interest calculation of all interest bearing accounts Amortization of all fixed and other assets, Central bank & other statutory reporting, Management reporting (MIS), Preparation of various financial statements Weekly deposit and advance analysis of the bank, Cost of fund analysis, Maintenance of accounts, Preparation of annual report of the bank, Maintenance of provident fund accounts, Maintenance of income and expenditure posting.

2.3.4 Human Resources

At present around 500 people are employed in EBL. All aspects of the employees are looked after by the Human Resources Department. HR Department is responsible for recruitment and development of staff members. HR Department carries out the following functions: Identifying the need and recruiting new human resources. Taking care of all formalities regarding appointment and joining of the successful candidates.

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 Training, Remuneration, Compensation, Promotion, Demotion, Termination, Retirement and Transfer of human resources. Maintain personal files of all employees of the bank. In 2001 16 in-house training programs were designed and executed. Also EBL

employees participate in different external courses offered by BIBM, Bangladesh Bank Training Academy, Chambers, Export Promotion Bureau etc. HR department introduced a voluntary separation scheme to address the overstaffed scenario in 2001. The intended employees were offered severance packages and end service benefits.

2.3.5 Special Asset Management

Special Asset Management Division (SAMD) is responsible for management of all accounts, which are classified in the banks loan portfolio. The classifications are Substandard, Doubtful and Bad & Loss. SAMDs responsibility covers the areas of monitoring and controlling the classified accounts, actively following up with the borrowers for recovery, negotiating and restructuring/ rescheduling debts wherever feasible.

2.3.6 Operations
The Operations division consists of Service Delivery, Trade Service, Treasury Support division and IT division. These subdivisions provide support to the front office functionalities.

2.3.7 Audit and Compliance

This division provides legal assistance to the branches and formulates strategy for classified loans and ensures observance of rules and policies by all stakeholders of the bank through routine and surprise inspection and audit.

2.3.8 Credit Administration

Credit Administration Division deals with Credit Administration, Loan Monitoring and Documentation.

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Credit Administration entails post-approval functions of the division, which are monitoring credit expiry, dues, excess over limit, document deficiency and reporting the deficiencies. Loan monitoring part entails follow-up on approval terms, proper disbursement, monitor interest payments, monitor principal repayment and maintaining balance with general ledger. Documentation function entails ensuring that proper loan documents are present, filing with the Registered Joint Stock Corporation (RJSC) and executing registered mortgage deed.

2.3.9 Information Technology

The Information Technology Division deals with identifying the need and developing software for the banks operation, its maintenance and purchase of new software rights, maintaining the computers and upgrade them whenever required and training the staff for operation of computers and preparing training materials. Presently the IT Division is carrying out batches of training program to introduce the integrated banking software called Flex Cube. A team from iflex Solutions India is assisting EBL with this software.

2.3.10 International Division

The International Division is responsible for helping in import and export businesses on account of the customers of the bank. It also deals with all the correspondents of foreign banks, which have account with the bank.

2.4 Vision and Mission statements of EBL

The management of EBL as a part of the restructuring program rephrased the banks vision in 2001. Before that the bank did not have any structured vision and mission statement. Now EBLs vision is: TO
A

BECOME THE BANK OF CHOICE BY TRANSFORMING THE WAY WE DO BUSINESS AND DEVELOPING TRULY UNIQUE AND FINANCIAL BE THE INSTITUTION MOST THAT DELIVERS BRAND SUPERIOR IN THE GROWTH AND FINANCIAL IN

PERFORMANCE

RECOGNIZABLE

FINANCIAL

SERVICES

BANGLADESH.

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The mission of EBL states We will deliver service excellence to all our customers, both internal and external. We will constantly challenge our systems, procedures and training to maintain a cohesive and professional team to order to achieve service excellence. We will create an enabling environment and embrace a team based culture where people will excel. We will ensure to maximize shareholders value.

EBLs Value Statement does not claim to be No. 1 in banking or The most Superior in banking. Rather it simply maintains Simple Math, the Philosophy of Easy Banking. While celebrating the 10th anniversary in 2002, EBLs logo was changed to reflect the restructuring and the transformations it is going through; the colors of the new logo signify the vibrant green of mother earth, a blue sky full of possibilities and a yellow rising sun of hope.

2.5 Management and Organizational Structure

The Board of Directors establishes the objectives and policies of the bank. It has the authority to declare dividend, to approve the balance sheet, etc. The Chairman informs the board of directors on the progress of the bank and implements the policies established. The board is not directly concerned with the day-to-day operation of bank rather it has delegated authority to its management committee. There are three committees of the board for different purposes, which are: Executive Committee comprising of seven members of the board Committee of the board for Administrative Matters Committee to examine Bad Loan Cases

2.6 Organization chart

Following is the present organization chart of EBL:

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CHAIRMAN BOARD OF DIRECTORS MANAGING DIRECTOR & CHIEF EXECUTIVE OFFICER EXECUTIVE VICE PRESIDENT SENIOR VICE PRESIDENT VICE PRESIDENT SENIOR ASSISTANT VICE PRESIDENT PRESIDENT FIRST ASSISTANT VICE PRESIDENT ASSISTANT VICE PRESIDENT SENIOR PRINCIPAL OFFICER PRINCIPAL OFFICER SENIOR OFFICER OFFICER SUPERVISORY OFFICER JUNIOR OFFICER

Figure1: EBL Organogram

2.7 Marketing aspects

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EBL has a highly skilled marketing team which contributes to the growth of the organization continuously by developing new, innovative products, properly campaigning for the products and maintaining a healthy customer relationship.

2.7.1 Product Profile of EBL

EBL is in the business of providing banking service and is changing its approaches to become more and more customer focused. At present EBL offers a variety of services/products1 for the retail customers as well as for corporate clients. There are four categories of services in EBL: Savings and Current Accounts Fund Transfer Securities Commercial Lending

2.7.1.1 Savings & Current Accounts

Different savings accounts are: High Performance Account (HPA), Short Term Deposits (STD), Fixed Deposits (FDR), Current Deposits for Individual, Current Deposits for Partnership, Current Deposits for Joint Account, Current Deposits for Limited Companies

2.7.1.2 Fund Transfer

Fund transfer includes the following services: Demand Draft (not available under new system) Mail Transfer (not available under the new system) Telegraphic Transfer (not available under the new system) Payment Order Sale of Travelers Cheque

2.7.1.3 Securities
It includes the following services: Sale of Bangladesh Sanchaya Patra, Pratirakkhya Sanchaya patra, ICB certificates, etc.
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Encashment of different Sanchaya Patra, ICB certificates, etc.

2.7.1.4 Commercial Lending

Commercial lending comes in various forms and names. These are Fast Loan, Fast Cash, Payment against Documents (PAD), Cash Credit (CC/HYPO), Acceptance against (ULC), Own Acceptance Purchase (OAP), Local Bill Purchased-Documentary (LBPD), Foreign Bill Purchased-Documentary (FBPD), Loans against Foreign Bill-Documentary (LAFBD), Sight Letter of Credit (SLC), Usance Letter of Credit (ULC), Letter of Guarantee (LG), Packing Credit against Export L/C & Export Order (PC), etc. The Product Development team of consumer banking division is currently working on designing credit products like EBL Monthly Income Plan (MIP), Savings Insurance Schemes, Monthly Deposit plan, Retail loans, Unsecured Consumer loans, Loans for Professionals. New services like Automated Teller Machine (ATM), Telephone Banking, Online Banking, Credit Card Facility, Sweep in-out Facility etc was introduced in July 2003.

2.7.2 Promotion
Although EBL is in the banking business for quite sometime its brand image has not grown strong and in order to succeed in the competitive bank environment it needs enrich its brand equity. So far EBL has shunned any sort of promotional tools except for a few inconspicuous billboard advertisements, signboards and newspaper recruitment ads. However a new department called Brand Management has been set up in 2001 to give a new and enhanced brand identity to EBL. This department supervises the planning of advertisement campaigns for EBLs products and analyzing customer feedbacks. With the aid of a advertising agency the logo and stationary of EBL has been changed and eye-catching brochures, calendars and posters have been prepared which are displayed at the sales & service centers.

2.7.3 Distribution
EBLs 22 branches are now termed as Sales & Centers, which are all connected through the network from mid July 2003. After that the customer can make transactions from any branch they desire.

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Chart1: Growth of Distribution Outlets 25 20 15 10 14 16 21 21 21 21 22

2.8

5 0 1995 1996 1997 1998 1999 2000 2001

Financial Profile of EBL

2.8.1 Investment Function
The investment portfolio of EBL was as follows in 2002 and 2003. (Note: 2004 data could not be availed from the respective dept.)

Table 1: Instrument wise breakup of EBLs Investments

2002 % of total 2003 % of total investment in 2003 1,550,000,000 720,000,000 1,060,000,000 1,354,100 50,000,000 4,000,000 100,000,000 125,000,000 856,600 3,611,210,7 00 0.00% 42.92% 19.93% 29.35% .03% 1.38% 0.11% 2.76% 3.46% 0.02% 100.00% investment in 2000 28 Days T-Bills 364 Days T-Bills 2 Years T-Bills 5 Years T-Bills Prize Bond Preference Shares of United Cement Ind. Ltd. Shares of Central 400,000,000 100,000,000 590,000,000 880,000,000 1,259,00 50,000,000 1,200,000 110,000,000 135,000,000 856,600 2,268,315,6 00 Source: Annual Report, 2003 17.63% 4.40% 26.01% 38.79% 0.005% 2.2% 0.052% 4.84% 5.95% .037% 100.00%

depository Bangladesh Ltd 15 Years ICB Debentures 20 Years HBFC Debentures 8,566 ICB Shares (TK 100 Each) Total

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From the above data it is seen that EBL prefers to invest in medium-term treasury bills (1 year and 2 year maturity). 0 In both 2002 and 2003, 75-80% of its investment was made in 1 year and 2 year T-bills. They adopt this policy primarily as a source of liquidity rather than a source of income. The rest 20-25% of investments were made in long-term debentures and shares of some company. It means that EBL is getting higher returns from these high yielding longterm investments but the trade off is that a large quantity of EBL's money is stuck in those investments for a pretty long time and EBL can't use that money in case of sudden high returning investments.

2.8.2 Broad performance indicators (EBL at a glance)

Eastern Bank has performed well in last few years where there has been significant growth in different segments of the Bank. Here growth for some of the different business of EBL is shown.

Table 2: Broad Performance Indicators of EBL from 2000-2003 (FIGURES IN MILLION TAKA).
Particulars Reserve Deposit Loans And Advances Export Import Guarantee Business Operating Income Operating Expense Operating Profit(Loss) Net Profit(Loss) before tax Total Assets (Excluding Contingent) Return On Equity % Return On Asset % Book value per share (TK) Earning per share(TK) Dividend per share Classified loans as a % of total loans Capital Adequacy ratio % 2000 2260 12375 8141 7281 12533 1789 1916 1242 674 475 16880 15.38 1.57 266.07 40.91 30.00 8.21 24.17 2001 2322 13277 9946 5402 11415 1054 2022 1319 703 553 18284 16.93 1.84 265.02 44.86 30.00 11.52 22.49 2002 2448 13662 10891 4,358 12,642 1,183 1,986 1,255 731 631 18,445 17.44 2.04 295.29 51.48 35.00 13.46 22.32 2003 2,560 11,952 11,288 3,533 16,256 354 1,985 1,226 759 638 18,716 15.33 1.95 281.87 43.21 20.00 13.61 18.27

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Net interest margin % Source: Annual Report, 2003

3.44

3.46

3.44

2.43

2.9 Growth and Development Profile of EBL

2.9.1 Growth in Sales Volume
Growth in sales volume comprises of growth in deposits, growth in loans and advances and growth in export and import business.

Growth in Deposits:
Deposits increased by 7.29% from Tk 12375 million in 2000 to Tk 13277 million in 2001 and in 2002 only by 3.8% to Tk. 13662 million. The bank has focused on reducing cost of funds by increasing transactional deposits and other low-cost deposit. Rates of interest were revised periodically as par market condition.

Chart 2: Year wise growth in Deposits Yearwise Growth in Deposits

14000 12000
12375 13277

10000
8879

13662

11231

8000 6000 4000 2000 0

1997

9568

1998

1999

2000

2001

2002

Loans & Advances:

The total loans and advances of the bank were Tk. 10891 million showing an increase of 9.5% only over the year 2002 as against in the year 2001 when the increase was of 22%. The total classified loans of the bank stood at Tk. 1466 million in December 2002 as against Tk. 1146 million at the end of December 2001. Loans increased due to procedural streamlining and establishing transparencies to the credit management system.

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Yearwise wise growth in Loans Advances Chart 3: Year Growth in Loans &and Advances

12000

Tk in Million

10000 8000 10891 6000 7902 8141 4000 2000 0 5258 1997 5744 1998 9946

1999

2000

2001

2002

Year

Import & Export Business:

The banks total foreign exchange business was of Tk. 17272 million, which included Import, Export, and Remittance of Tk. 11415 million, Tk. 5432 million and Tk. 425 million respectively in 2001. Major items of export were readymade garments, shrimps, tea, jute goods, leather goods and non-traditional items. Major import items were consumer goods and old vessels for scrapping, industrial raw materials, fabrics and accessories of garment industries etc.

Chart 4: Yearwise Growth in Import, Export & Remittance

14000 12000 10000 8000 6000 4000 2000 0

12533

11818

Tk in Million

11415

9965

1997

7015 3426

5402

7281

1998

Export

4822

5729
Year

156

237

275

425

1999

2000

2001

Import

Remittances

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2.9.2 Growth in Assets

EBLs assets have grown steadily over the years. In the year 2002 it stood at Tk. 17648 million as against Tk. 18284, showing a decrease of 6.4%.
Growth o f Asse of Chart 5: Growth ts Assets
20,000

16,880 14,394 10,186 10,973

18,284 17,648

15,000 10,000 5,000 -

1997

1998

1999

2000

2001

2002

2.10 Portfolio
Table 3: Sector wise investment summary
Sector-wise summary Nature of Business Tea Agro-based Machinery Automobiles Automobiles & Spare Parts Brick manufacturing & Ceramic Carrying Cement Chemical, Plastic& Plastic Products Civil Clearing and Forwarding Clinic, Hospital & NGO's Cloth Commodity Import Computer & Electronics Consultancy Limit (Taka.In lac) 373 2517 13 5371 211 1056 5000 9019 11626 109 77 456 22395 1144 122 % of total limit 0.16 1.1 0.01 2.35 0.019 0.46 2.18 3.94 5.08 0.05 0.03 0.2 9.78 0.5 0.05

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Cotton, yarn & Dyes Crockeries Edible Oil Educational Institution Electronic Goods Fertilizer & Medicine Financial Institution Foods & Beverage Garment/ Accessories Individual Information Technology Jute Leather Media Others Paper & Stationary Pharmaceutical Poultry & Hatchery Power, Gas & Oil Printing & Packaging Real State RMG Road & Bridge Rod, Cement & Sheet Sanitary & Hardware Ship Breaking Shipping, Airline & Transport Shrimp- Export Shrimp, Fish & Fishfry Soap & Detergent Steel Products Tea Telecommunication Textile Travel Agency Grand Total

278 22 5651 200 6834 610 10400 8632 2168 630 365 1059 1153 1020 11932 1184 1306 4024 12064 2850 1071 17095 4471 1716 583 24138 1500 536 593 275 14630 135 2816 27101 345 228876

0.12 0.01 2.47 0.09 2.99 0.27 4.54 3.77 0.95 0.28 0.16 0.46 0.5 0.45 5.21 0.52 0.57 1.76 5.27 1.25 0.47 7.47 1.95 0.75 0.25 10.55 0.66 0.23 0.26 0.12 6.39 0.06 1.23 11.84 0.15 100

Table 3: Business Portfolio of Eastern Bank Limited.

Source: Head Office, Credit Risk Management. By analyzing the above table it is clear that EBL has a much diversified investment in its portfolio. The largest three sectors are Textile, Ship breaking and Commodity import. In the Textile sector EBL has invested 11.84% of its total portfolio. In the Ship breaking sector the proportion is 10.55% and in the Commodity import the proportion is 9.78%. The other major sectors are RMG, Steel products, Power, Gas and Oil and lastly Civil. The percentages of the investments are 7.47%, 6.39%, 5.27%, and 5.08%

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respectively. By analyzing the overall scenario we can say that EBL is giving preference the RMG and Textile sectors, which is combined 19.31% of the total investment. And it includes the commodity import section, because EBL is providing a lot of facilities for importing raw material and machinery to the textile sector and also the RMG sector. And another good thing is EBL invested above 5% in both the Civil and Power, gas and oil sector, which shows that EBL has the intention of investing for public welfare.

3.0 GUIDELINES OF BANGLADESH BANK

Credit risk management needs to be a robust process that enables banks to proactively manage loan portfolios in order to minimize losses and earn an acceptable level of return for shareholders. Central to this is a comprehensive IT system, which should have the ability to capture all key customer data, risk management and transaction information including trade & Forex. Given the fast changing, dynamic global economy and the increasing pressure of globalization, liberalization, consolidation and disintermediation, it is essential that banks have robust credit risk management policies and procedures that are sensitive and responsive to these changes. The guidelines have been organized into the following sections: Policy Guidelines Lending Guidelines
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Credit Assessment & Risk Grading Approval Authority Segregation of Duties Internal Audit Preferred Organizational Structure & Responsibilities Procedural Guidelines Approval Process Credit Administration Credit Monitoring Credit Recovery

These guidelines were prepared and endorsed by senior credit executives from private sector, foreign and nationalized commercial banks operating in Bangladesh. They are intended for use in the corporate/commercial banking businesses.

3.1 Policy Guidelines

This section details fundamental credit risk management policies recommended for adoption by all banks in Bangladesh. that are

The guidelines contained

herein outline general principles that are designed to govern the implementation of more detailed lending procedures and risk grading systems within individual banks.

3.2 Lending Guidelines

All banks should have established Credit Policies (Lending Guidelines) that clearly outline the senior managements view of business development priorities and the terms and conditions that should be adhered to in order for loans to be approved. The Lending Guidelines should be updated at least annually to reflect changes in the economic outlook and the evolution of the banks loan portfolio, and be distributed to

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all lending/marketing officers. The Lending Guidelines should be approved by the Managing Director/CEO & Board of Directors of the bank based on the endorsement of the banks Head of Credit Risk Management and the Head of Corporate/Commercial Banking. Any departure or deviation from the Lending Guidelines should be explicitly identified in credit applications and a justification for approval provided. Approval of loans that do not comply with Lending Guidelines should be restricted to the banks Head of Credit or Managing Director/CEO & Board of Directors. The Lending Guidelines should provide the key foundations for account

officers/relationship managers (RM) to formulate their recommendations for approval, and should include the following: Industry and Business Segment Focus, Types of Loan Facilities, Single Borrower/Group Limits/Syndication, Lending Caps, Discouraged Business Types, Loan Facility Parameters, Cross Border Risk, Third world debt crisis.

3.3 Credit Assessment & Risk Grading

3.3.1 Credit Assessment
A thorough credit and risk assessment should be conducted prior to the granting of loans, and at least annually thereafter for all facilities. The results of this assessment should be presented in a Credit Application that originates from the relationship manager/account officer (RM), and is approved by Credit Risk Management (CRM). The RM should be the owner of the customer relationship, and must be held responsible to ensure the accuracy of the entire credit application submitted for approval. RMs must be familiar with the banks Lending Guidelines and should conduct due diligence on new borrowers, principals, and guarantors. It is essential that RMs know their customers and conduct due diligence on new borrowers, principals, and guarantors to ensure such parties are in fact who they

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represent themselves to be. All banks should have established Know Your Customer (KYC) and Money Laundering guidelines which should be adhered to at all times. Credit Applications should summaries the results of the RMs risk assessment and include, as a minimum, the following details: Amount and type of loan(s) proposed. Purpose of loans. Loan Structure (Tenor, Covenants, Repayment Schedule, Interest). Security Arrangements.

In addition, the following risk areas should be addressed: Borrower Analysis: The majority shareholders, management team and group or affiliate companies should be assessed. addressed, and risks mitigated. Industry Analysis: The key risk factors of the borrowers industry should be assessed. Any issues regarding the borrowers position in the industry, overall industry concerns or competitive forces should be addressed and the strengths and weaknesses of the borrower relative to its competition should be identified. Supplier/Buyer Analysis: Any customer or supplier concentration should be addressed, as these could have a significant impact on the future viability of the borrower. Historical Financial Analysis: An analysis of a minimum of 3 years historical financial statements of the borrower should be presented. Where reliance is placed on a The corporate guarantor, guarantor financial statements should also be analyzed. strength of the borrowers balance sheet. profitability must be analyzed. Projected Financial Performance: Where term facilities (tenor > 1 year) are being proposed, a projection of the borrowers future financial performance should be provided, indicating an analysis of the sufficiency of cash flow to service debt Any issues regarding lack of management depth, complicated ownership structures or inter-group transactions should be

analysis should address the quality and sustainability of earnings, cash flow and the Specifically, cash flow, leverage and

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repayments. repay debts.

Loans should not be granted if projected cash flow is insufficient to

Account Conduct: For existing borrowers, the historic performance in meeting repayment obligations (trade payments, cheques, interest and principal payments, etc) should be assessed. Adherence to Lending Guidelines: Credit Applications should clearly state whether or not the proposed application is in compliance with the banks Lending Guidelines. The Banks Head of Credit or Managing Director/CEO should approve Credit Applications that do not adhere to the banks Lending Guidelines. 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 concentrations; and lack of transparency or industry issues. Loan Structure: The amounts and tenors of financing proposed should be justified based on the projected repayment ability and loan purpose. adversely impact the borrowers repayment ability. Security: A current valuation of collateral should be obtained and the quality and priority of security being proposed should be assessed. Loans should not be granted based solely on security. Adequacy and the extent of the insurance coverage should be assessed. Name Lending: Credit proposals should not be unduly influenced by an over reliance on the sponsoring principals reputation, reported independent means, or their perceived willingness to inject funds into various business enterprises in case of need. These situations should be discouraged and treated with great caution. Rather, credit proposals and the granting of loans should be based on sound fundamentals, supported by a thorough financial and risk analysis. Excessive tenor or amount relative to business needs increases the risk of fund diversion and may

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3.3.2 Risk Grading

According to this guideline, all Banks should adopt a credit risk grading system. The system should define the risk profile of borrowers to ensure that account management, structure and pricing are commensurate with the risk involved. Risk grading is a key measurement of a Banks asset quality, and as such, it is essential that grading is a robust process. All facilities should be assigned a risk grade. Where deterioration in risk is noted, the Risk Grade assigned to a borrower and its facilities should be immediately changed. Borrower Risk Grades should be clearly stated on Credit Applications. The following Risk Grade Matrix is provided as an example. The more conservative risk grade (higher) should be applied if there is a difference between the personal judgment and the Risk Grade Scorecard results. It is recognized that the banks may have more or less Risk Grades; however, monitoring standards and account management must be appropriate given the assigned Risk Grade [Appendix I]. At least top twenty five clients/obligors of the Bank may preferably be rated by an outside credit rating agency. The Early Alert Report should be completed in a timely manner by the RM and forwarded to CRM for approval to affect any downgrade. After approval, the report should be forwarded to Credit Administration, who is responsible to ensure the correct facility/borrower Risk Grades are updated on the system. not be postponed until the annual review process. The downgrading of an account should be done immediately when adverse information is noted, and should

3.4 Approval Authority

The authority to sanction/approve loans must be clearly delegated to senior credit executives by the Managing Director/CEO & Board based on the executives knowledge and experience. Approval authority should be delegated to individual executives and not to committees to ensure accountability in the approval process. The following guidelines should apply in the approval/sanctioning of loans:

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Credit approval authority must be delegated in writing from the MD/CEO & Board (as appropriate), acknowledged by recipients, and records of all delegation retained in CRM. Delegated approval authorities must be reviewed annually by MD/CEO/Board. The credit approval function should be separate from the marketing/relationship management (RM) function. The role of Credit Committee may be restricted to only review of proposals i.e. recommendations or review of banks loan portfolios. Approvals must be evidenced in writing, or by electronic signature. Approval records must be kept on file with the Credit Applications. All credit risks must be authorized by executives within the authority limit delegated to them by the MD/CEO. The pooling or combining of authority limits should not be permitted. Credit approval should be centralized within the CRM function. Regional credit centers may be established, however, all large loans must be approved by the Head of Credit and Risk Management or Managing Director/CEO/Board or delegated Head Office credit executive. The aggregate exposure to any borrower or borrowing group must be used to determine the approval authority required. Any credit proposal that does not comply with Lending Guidelines, regardless of amount, should be referred to Head Office for Approval. MD/Head of Credit Risk Management must approve and monitor any cross-border exposure risk. Any breaches of lending authority should be reported to MD/CEO, Head of Internal Control, and Head of CRM.

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It is essential that executives charged with approving loans have relevant training and experience to carry out their responsibilities effectively. A monthly summary of all new facilities approved, renewed, enhanced, and a list of proposals declined stating reasons thereof should be reported by CRM to the CEO/MD.

3.5 Segregation of Duties

Banks should aim to segregate the following lending functions: Credit Approval/Risk Management Relationship Management/Marketing Credit Administration

The purpose of the segregation is to improve the knowledge levels and expertise in each department, to impose controls over the disbursement of authorized loan facilities and obtain an objective and independent judgment of credit proposals.

3.6 Internal Audit

Banks should have a segregated internal audit/control department charged with conducting audits of all departments. Audits should be carried out annually, and should ensure compliance with regulatory guidelines, internal procedures, and Lending Guidelines and Bangladesh Bank requirements.

3.7 Preferred Organizational Structure & Responsibilities

The appropriate organizational structure must be in place to support the adoption of the policies detailed in Section 1 of these guidelines. Management/Administration functions. Credit approval should be centralized within the CRM function. Regional credit centers may be established, however, all applications must be approved by the Head of Credit The key feature is the segregation of the Marketing/Relationship Management function from Approval/Risk

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and Risk Management or Managing Director/CEO/Board or delegated Head Office credit executive.

3.7.1 Preferred Organizational Structure

The following chart represents the preferred management structure:

M H e a d o f C ( C R r e
( M

a g in

ir e c t o r

r e d it M ) it A d m

is k

HM e a a n d a go ef mC oe rn p t o r a tO e t h e r D i r e c t R e p / C o m m e r c i a l B a n k ( Ii nn gt e r n a l A u d i t , e M ( R e a n a g e M ) m e n t /

in

a y r e p o r t s e p a r a t e l yM t o M D / C E O )

i s t rR a e t i l oa nt i o n s h i p a r k e t in g v a lB u s in e s s D

r e d

it

p r o

v e lo p m

n t

( in c lu d e s r e g io n a l c r e d i t c e n t r e s if a p p lic a b le )

M o n it o r in g / R e c o v e r y (i n c l u d e s r e g i o n a l r e c o v e r y c e n t r e s i f )a p p l i c a b l e

Figure 2: Preferred management structure 3.7.2 Key Responsibilities

The key responsibilities of the above functions are as follows.

3.7.2.1 Credit Risk Management (CRM)

Oversight of the banks credit policies, procedures and controls relating to all credit risks arising from corporate/commercial/institutional banking, personal banking, & treasury operations. Oversight of the banks asset quality. Directly manage all Substandard, Doubtful & Bad and Loss accounts to maximize recovery and ensure that appropriate and timely loan loss provisions have been made.

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To approve (or decline), within delegated authority, Credit Applications recommended by RM. Where aggregate borrower exposure is in excess of approval limits, to provide recommendation to MD/CEO for approval. To provide advice/assistance regarding all credit matters to line management/RMs. To ensure that lending executives have adequate experience and/or training in order to carry out job duties effectively.

3.7.2.2 Credit Administration

To ensure that all security documentation complies with the terms of approval and is enforceable. To monitor insurance coverage to ensure appropriate coverage is in place over assets pledged as collateral, and is properly assigned to the bank. To control loan disbursements only after all terms and conditions of approval have been met, and all security documentation is in place. To maintain control over all security documentation. To monitor borrowers compliance with covenants and agreed terms and conditions, and general monitoring of account conduct/performance.

3.7.2.3 Relationship Management/Marketing (RM)

To act as the primary bank contact with borrowers. To maintain thorough knowledge of borrowers business and industry through regular contact, factory/warehouse inspections, etc. RMs should proactively monitor the financial performance and account conduct of borrowers. To be responsible for the timely and accurate submission of Credit Applications for new proposals and annual reviews, taking into account the credit assessment requirements outlined in Section 1.2.1 of these guidelines.

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To highlight any deterioration in borrowers financial standing and amend the borrowers Risk Grade in a timely manner. Changes in Risk Grades should be advised to and approved by CRM. To seek assistance/advice at the earliest from CRM regarding the structuring of facilities, potential deterioration in accounts or for any credit related issues.

3.7.2.4 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.

3.8 Procedural Guidelines

3.8.1 Approval Process
The approval process must reinforce the segregation of Relationship

Management/Marketing from the approving authority. The responsibility for preparing the Credit Application should rest with the RM within the corporate/commercial banking department. Credit Applications should be recommended for approval by the RM team and forwarded to the approval team within CRM and approved by individual executives. Banks may wish to establish various thresholds, above which, the recommendation of the Head of Corporate/Commercial Banking is required prior to onward recommendation to CRM for approval. In addition, banks may wish to establish regional credit centers within the approval team to handle routine approvals. Executives in head office CRM should approve all large loans. 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 banks capital should be approved at the 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 EC/Board only after recommendation of CRM, Corporate Banking and MD/CEO.

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The following diagram illustrates the preferred approval process:

Credit Application Recommended By RM / Marketing

2 Zonal Credit Officer (ZCO)

Head of Credit (HOC) & Head of Corporate Banking (HOCB) 5 6

Managing Director

7
Executive Committee/Board

Figure 3: Credit approval process 3.8.2 Credit Administration

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

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3.8.3 Disbursement
Security documents are prepared in accordance with approval terms and are legally enforceable. Standard loan 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 loan facilities are only be made when all security documentation is in place. CIB report should reflect/include the name of all the lenders with facility, limit & outstanding. All formalities regarding large loans & loans to Directors should be guided by Bangladesh Bank circulars & related section of Banking Companies Act. All Credit Approval terms have been met. disbursements. A sample documentation and disbursement checklist is attached as Appendix 3.2.1, which banks may wish to use to control

3.8.4 Custodial Duties

Loan 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.

3.8.5 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 (valuers, 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.

3.8.6 Credit Monitoring

To minimize credit losses, monitoring procedures and systems should be in place that provides an early indication of the deteriorating financial health of a borrower. At a minimum, systems should be in place to report the following exceptions to relevant executives in CRM and RM team: Past due principal or interest payments, past due trade bills, account excesses, and breach of loan covenants; Loan terms and conditions are monitored, financial statements are received on a regular basis, and any covenant breaches or exceptions are referred to CRM and the RM team for timely follow-up. Timely corrective action is taken to address findings of any internal, external or regulator inspection/audit. All borrower relationships/loan facilities are reviewed and approved through the submission of a Credit Application at least annually. Computer systems must be able to produce the above information for central/head office as well as local review. Where automated systems are not available, a manual process should have the capability to produce accurate exception reports. Exceptions should be followed up on and corrective action taken in a timely manner before the account deteriorates further. Despite a prudent credit approval process, loans may still become troubled. Therefore, it is essential that early identification and prompt reporting of deteriorating credit signs be done to ensure swift action to protect the Banks interest.

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Moreover, regular contact with customers will enhance the likelihood of developing strategies mutually acceptable to both the customer and the Bank. Representation from the Bank in such discussions should include the local legal adviser when appropriate. An account may be reclassified as a Regular Account from Early Alert Account status when the symptom, or symptoms, causing the Early Alert classification have been regularized or no longer exist. The concurrence of the CRM approval authority is required for conversion from Early Alert Account status to Regular Account status.

3.8.7 Credit Recovery

The Recovery Unit (RU) of CRM should directly manage accounts with sustained deterioration (a Risk Rating of Sub Standard (6) or worse). Banks may wish to transfer EXIT accounts graded 4-5 to the RU for efficient exit based on recommendation of CRM and Corporate Banking. Whenever an account is handed over from Relationship Management to RU, a Handover/Downgrade Checklist should be completed. The RUs 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.

Recovery Units should ensure that the following is 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 careful scrutiny and approval from appropriate executives within CRM.

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CIB reporting is updated according to Bangladesh Bank guidelines and the borrowers Risk Grade is changed as appropriate. Loan loss provisions are taken based on Force Sale Value (FSV). Loans are only rescheduled in conjunction with the Large Loan Rescheduling guidelines of Bangladesh Bank. Any rescheduling should be based on projected future cash flows, and should be strictly monitored. Prompt legal action is taken if the borrower is uncooperative. 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.

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4.0 RESTRUCTURING ACCORDING TO THE GUIDELINES

Eastern Bank Limited has been restructured in the year 2002. It has changed the way it used to do its operation. Some new divisions have been introduced. The major restructuring part is the centralization of the overall operation. Now the branches will act as the sales and service center and all the decisions are made by the Head office. The reason behind this centralization and restructuring is to optimize EBL profit and also reduce the amount of bad or classified loans. Two new divisions named Corporate Banking and Credit administration have been introduced. Both the divisions are responsible for providing the facilities to the corporate clients and also monitor their daily transactions. And all the decisions about providing facilities to the clients are made by the Credit Risk Management Division. Operation of Trade services also changed, now all the import/export businesses are operated from the head office. Corporate Banking was introduced for maintaining good relationship with the Corporate Clients through the Relationship Managers and also for better marketing of the Banks Products in the Market. Credit Administration was introduced to look after all the transaction made by the corporate clients and their current outstanding.

4.1 Reasons behind the Restructuring and Centralization

Before the restructuring, all credit related matters were handled in branch level, which led to lower transparency and possibility of misjudging the clients capacity to

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repay. Main objective of this new approach is to increase the centralized control over credit approval and monitoring procedures. Other objectives are: Reducing the amount of Bad-Assets and increasing the amount of Good-Assets. Minimizing the mistakes and wrong decisions taken at the branch level. Increasing amount of deposits. Reducing the amount of bad loan through proper selection of the corporate clients. Reviewing and scrutinizing the loan repayment process more accurately. Optimizing the Profit of the Bank.

4.2 Major changes occurred after restructuring

4.2.1 Structural Change
Previously Eastern Bank followed a relatively tall structure. With only 698 employees, EBL had 12 hierarchical levels. This tall structure caused too much bureaucratic cost for EBL. The sources of this bureaucratic cost were too many middle level managers, information distortion, motivational and coordination problems among the employees. Previously the operation of the banks were quite decentralized, the managers of each branch had been given wide discretion to make decisions regarding the branch operations. But now the new management decided to centralize all operations. The branches of the bank are now termed as the Sales & Services Center which is solely concentrated on building consumer-banking relationship with its customers. Each branch will take the related papers and documents from the clients and send that to the head office for processing. The head office will made the decisions and the branch will let the clients know about the advisements. According to the new organogram, the organization has become flat across the department but it still remains tall within the department. As some different hierarchies have been created, the organization has avoided becoming too tall. The board of directors being at the highest level of organizational structure plays an important role on the policy formulation. The board of directors is not directly concerned with the day-to-day operation of bank, at least in written. It has delegated

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to its authority to its management committee. The board establishes the objectives and policies of the bank. The board has the authority to declare dividend, to approve the Balance Sheet, etc. Chairman keeps board of directors informed, on the progress of the bank and implements the policies established. Among the 15 members of the board, 7 are internal to the organizations and 8 are external to organization appointed by different regulatory bodies. There are three (3) committee of the board for different purposes: Executive committee comprises 7 members of the board Committee of the board for Administrative matter Committee to examine Bad Loan Cases

The Managing Director is the head of the operational area of the bank and its chief executive. The Managing Director was appointed by the board of directors with prior permission of Bangladesh Bank. All policy formulation and subsequent executions are done in the Head Office An Executive Vice President heads the Asset Management Division, Corporate Banking Division, Credit Risk and Credit Administration Division and a Senior Vice President heads the IT Division, Consumer Banking Division and also the Brand Management Division. The whole corporate division is divided into two broad areas, Area1 (headed by a SVP) that comprises Dhaka and Outstation Branches and Area2 (headed by a SVP) comprising Chittagong branches. A Senior Vice President heads each area. There are six units in these two areas headed by a VP or AVP. Some senior relationship managers helped them to carry out the job. A Senior Vice Presidents heads the Human Resource Department.

4.2.2 Strategic Change

Strategic change is the movement of a company away from its present state toward some desired future state to increase its competitive advantage.

4.2.2.1 Determining the Need for Change

As the ROE of EBL was falling, the Board of Directors recognizes that there is a gap between desired company performance and actual performance. The competition in

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the banking industry has increased over the period and EBL was way behind to introduce new products for the customers. Moreover the loan recovery performance of the banks was not satisfactory and the management had to write off a significant portion of the bad debts. So the Board of directors realizes that EBL needs for a strategic change. In order to initiate the change process, the Board of Directors replaced the Managing Director Mr. M. Khairul Alam with K. Mahmood Sattar who was the Head of corporate of the ANZ Gridlays Bank (Bangladesh). In Eastern Bank Limited, two major strategic changes occurred reengineering and restructuring.

4.2.2.2 Reengineering
EBL has changed some of its business processes. Previously each branch manager used to take all the decisions regarding their branch operation by him or her. There are 22 branches of Eastern Bank Limited operating countrywide. But now all these branches are termed as the Sales & Services Centers and they are now totally focusing on retail banking based on individual customers. Respective branches took all the necessary papers from clients and send all advance proposals to the Head office for approval. The head office will process the documents and let the customer know the decisions through the respective branch. Each branch is now involved with general banking (deposit, withdrawal). EBL concentrates on Corporate Banking that deals with business houses including sole proprietorship concerns, Consumer Banking that deals with all individuals, professionals, housewives, doctors, engineers, etc. and high net worth individual, treasury Department dealing in call/placement. Money market (local and foreign) operations, sell treasury products, maintain liquidity including CRR & SLR and responsible for presenting credit line proposals for Banking Financial Institution. EBLs information Technology (IT) Department have been providing uninterrupted high quality computerized banking services to meet the needs of its clientele which aims at building, operating and maintaining the technology base of the bank to enable errorfree production of information that ensures ongoing efficiency and profitability of operations. The management of the bank is on the threshold of shifting on the new IT paradigm as a world class banking software has been selected which will provide Online banking, Internet banking. Automated Teller Machine (ATM's), Point of Sale (POS), Credit Card facility etc to its customer to meet the challenge of the 21st Century. Steps have been taken to select the compatible Computer hardware,
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Environmental software, Communication link, Local Area Network (LAN) and Wide Area Network (WAN) equipments to implement the banking software successfully. Moreover, Eastern Bank Limited has changed its vision and mission to face the challenges of the external situation.

4.2.2.3 Restructuring
The top management realized a need for rightsizing the number of employees of the Bank. After rightsizing the management decided to change the structure of the Bank, and they changed the structure from the geographical matrix to the business matrix. The next step was to place right people in the right place and define their job description. Before the change the responsibility of the employees were not specific, all of them were used o do everything. With this job description the responsibility was also delegated towards the employees. They have also got job title, so there are two hierarchies there in the Bank now: corporate hierarchy and the job hierarchy. The main structural change that needs to be noticed is that the structure among the departments is decentralized whereas the structure within the departments is centralized. As a result, the organogram of the Bank has become more flat than before.

4.2.3 Operational Changes

An operation is all about processes, which are considered to be activities performed by several people to accomplish transactions. Operation is important for bank because it is the nerve center of the business without which nothing can materialize. It is like the production unit of the manufacturing concern ad it touches every other function: Consumer Corporate Treasury Support

Operations deal with every transaction and are involved in every affair, which includes: Starting an account relationship Settlement of account,

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Foreign trade dealing, Resolving disputes and claims, Shortened of lead-time in every transaction, Reconciliation of suspense accounts. Reforms recommended by the new management are, Capacity planning Change in organization structure Renationalize human resources Centralize processes

4.2.3.1 Why Centralization of Operations

To allow front offices to become more customers focused and sales oriented. To contain cost of transactions at branch level. To optimize the utilization of their resources and premises. To bring in control in their activities. To eliminate lapses on account of security documentations of risk assets. To provide efficient customer services.

4.2.3.2 Benefits of Centralization

Consolidate skill sets Effective internal control Containment of costs Enhances business flexibility at branch level Data consolidation Economies of scale.

4.2.4 Introduction of Corporate Banking

Eastern Bank has launched Corporate-banking division on the 10th January of 2002. Corporate is responsible for providing all the facilities to the corporate clients. Previously the procedure was different. Branches were responsible for providing all the cash and non-cash facilities to the clients. But now the scenario is changed. The whole corporate division is divided into two broad areas, Area1 that comprises Dhaka and Outstation Branches and Area2 comprising Chittagong branches. Area 1 consists of six
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units. Four of them are located in the principal branch and one is in the Gulshan branch. Six units in area1 are looking after assets and one unit is responsible for liabilities, while area2 has three asset units and one liabilities unit. Every unit has a unit head, who is in charge of that unit and responsible for all the business activities of that unit. Generally one RM and one ARM work under the unit head. All Unit heads work under the head of Corporate, and they report directly to him. The management hierarchy of the Corporate Banking is given below: Head of Corporate Unit Heads Relationship Managers Asst. Relationship Managers

Figure 4: Management Hierarchy of Corporate Banking

The broad functions of this division are as follows: Targeting corporate clients and building business relationship with them. Designing customized service for the clients. Evaluating financial strength of the clients. Making possible recommendations for further financial expansion

4.2.5 Call programs for prospective clients

Target Clients: Established with Three years track records or diversification/expansion of business houses with five years success track record, strong financials, good net worth and established market reputation. Call Objectives: Obtain project details, financials, year to date results, current banking arrangements, independent market opinion of sponsors & company, group business information future requirements, CIB position, opinion on credit worthiness of sponsors, security/rates/facility levels of existing bankers, ascertain how EBL value offer fits in with customer requirement, try to understand customer need in terms of value offer.

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4.3 Credit Approval and Monitoring Process

4.3.1 Selection of the Borrower
In lending, the most important step is the selection of the borrower. Due to the asymmetric information and moral hazard, banks have to suffer a lot due to the classified loans and advances, which weakens the financial soundness of the bank. If the selection of borrower is correct, that is, the borrower is of good character, capital and capacity or of reliability, resourceful and responsible; the bank can easily get the return from the lending. Consequently, monitoring is made much easier for the banker. From this point of view, EBL follows the following procedures,

4.3.2 Studying Past Track Record

After getting an application for a loan, an EBL Official studies the past track record of the applicant. Generally the study includes, Account balances and the past transactions. Credit report from other banks. Information of the Industry by studying market feasibility. Financial statements (balance sheet, cash flow statement, and income statement). If the borrower is a sole- proprietor, then the single entry accounting treatment is converted to double entry system. Report from Credit Information Bureau of Bangladesh Bank if the amount is more than TK.10 lac.

4.3.3 Borrower analysis

Borrower analysis is done from the angle of 3-C (character, capital, capacity) or 3-R (reliability, resourcefulness, responsibility). It follows that the bank forms a rational judgment about the integrity of the borrower, which should be undoubted. The human skill, conceptual skill, operational skill is qualitatively analyzed.

4.3.4 Business analysis

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Business analysis is done from two angles-terms and conditions and collateral securities.

4.3.5 Credit Approval Procedure

After receiving the application from the client, EBL official prepares a Credit Line Proposal (CLP) and forwards the same to the Head Office to place before Head Office Credit Committee (HOCC) for approval. It includes, Request for credit limit of customer. Project profile/ profile of business. Copy of trade license duly attested. Copy of TIN certificate. Certificate copy of Memorandum & Articles of Association, certificate of incorporation, certificate of commencement of business, Resolution of the Board, Partnership Deed. (Where applicable)

3 years Balance sheet and profit & loss account. Personal net worth statement of the owner/ directors/ partners etc. Valuation certificate of the collateral security in Banks form with photograph of the security. CIB Inquiry form duly filled in(for proposal of above 10lac) Credit report from another banks. Stock report duly verified (where applicable) Indent/ Proforma invoice/ Quotation. Price verification report. Statement of accounts Declaration of the name of the sister concern and their liability. In case of L/C detailed performance of L/C during last year.

Therefore, the steps in lending can be sum up as follows, -

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Entertainment of application for loan proposal. Preliminary screening of credit proposal. Feasibility study & Appraisal of loan proposal or Credit investigation. Sanction of loans or advances. Documentation. Disbursement of loans or advances. Supervision and follow up of loans and advances.

4.3.6 Risk Analysis of Corporate and Consumer Banking

It is observed that the bank is not evaluating the credit risk of its clients Central Bank requires a lending risk to be analyzed with proper rating. Risk rating helps the bank to properly identify the credit strength of its clients and this also helps in focusing on appropriate action plan to be taken for both the good and classified borrowers. This also strengthens of credit discipline in EB. In order to achieve the objectives; riskrating guideline has been introduced which is term as Obligor Risk Rating (ORR) [Appendix II]. Risk rating of client is a continuous process. Therefore, Branch should rates its clients while presenting CLP [New or Renewal] and on a half-yearly basis i,e. 6 months from the date of payment of a credit proposal. During half yearly review this exercise should be done in portfolio review format. Any upgrade or downgrade of risk rating should also be presented through credit portfolio Review format.

4.3.7 Monitoring Process of Corporate Banking

Corporate banking is an integrated specialized area of the bank, which addresses customers' business requirement. Business houses including sole proprietorship concern are considered to be the corporate customers. Corporate Department means a separate line of business. The roles of relationship managers or account managers are to retain and grow share of existing customer base and booking new customer (quality credit) to sustain and increase corporate banking and Eastern Bank Limited profitability through superior customer service. Developing

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and executing customer strategies that identify and maximize the banks earning opportunities, effectively assessing and managing credit risk and costs, managing career development of staff, developing referrals and liaising with Head Office and credit to develop new customers, identify potential process/ service enhancements and escalate to the appropriate person. Account Manager is basically dealing officer, responsible for managing clientele relationship. Alternate Account Manager will take care of client relationship during account manager absence.

4.3.8 Monitoring Process in Consumer Banking

Consumers are all individuals, professionals, housewives, doctors, and engineers, etc and high net worth individuals. Consumer banking is considered to the front officers of the bank, which interfaces with the customers. Monitoring of consumer banking is one by "Sales and Service center." They keep record of all the documents. If there is any exception, they monitor it and send it to the clients and request it to adjust it. Head Office credit risk management finally monitors all branches consumer banking by using Management Information System (MIS). Eastern Bank Limited give maximum emphasis on Consumer Banking.

4.3.9 Monitoring Process in Credit Administration Department

Credit Administration Department will be responsible for monitoring of limits and outstanding as per credit approvals. Ensure proper loan documentation before disbursement. Also ensure that all credit approval conditions are adhered to and to highlight exceptions and obtain approvals for any exceptions.

Steps of Credit Payment and Monitoring Process:

There are some steps in credit payment and monitoring process. For proper credit payments and monitoring these steps are very much important. If these are not

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properly maintained then very clients face much problem. So, these steps are very much important. These steps are given below: Step-1: The credit payments and monitoring process starting from review of credit payment. Step-2: Then obligor risk rating. Step-3: Payment of credit limits. Step-4: Disbursement of facilities. Step-5: Portfolio review and monitoring of credit risk with proper documentation and reporting. The processes clearly reflect a strong check and balance ensuring superior credit discipline. These processes will eventually be incorporated and highlighted in the EBL's credit policy manual (under process). The Credit Payments and Monitoring Process will also have the following merits: Expedite credit payment process better credit analysis of customer business. Banks vision to provide service excellence. Ensure superior asset quality with growth in sustainable profit. Maintain appropriate check and balance in business transition with strong MIS database. Good opportunity for employee development thru clear guideline. This will expedite in developing credit policy manual for the bank.

4.3.10 Follow-up and Supervision of Credit

Credit monitoring implies that the checking of the pattern of use of the disbursed fund to ensure whether it is used for the right purpose or not. It includes a reporting system and communication arrangement between the borrower and the lending institution and within department, appraisal, disbursement, recoveries, follow-up etc. EBL Officer checks on the following points, 1. The borrowers behavior of turnover

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2. The information regarding the profitability, liquidity, cash flow situation and trend in sales in maintaining various ratios. The review and classification of credit facilities starts at Credit Department of the Branch with the Branch Manager and finally ends with Head office credit division.

4.4 Comparative Scenario

Previously (before 2001) there was no standard loan evaluation, approval and disbursement process and no strict loan monitoring policy. As a result, there were lots of irregularities in loan disbursement and recovery of EBL. This is one of the main reasons why EBL incurred so much classified loans and advances. Previously, there was no centralized Corporate Banking Department and therefore the branch manager and the branch credit officer maintained the relationship with the client at the branch level. In this decentralized structure, head office management had poor control over the loan disbursement and monitoring process. They only got involved during the time of loan approval and yearly renewal. On the other hand, the branch employees had significant control over the operations of the credits. Sometimes they used their discretions over head office approval in disbursing loans and collecting repayment. For example, once a client in Chittagong was allowed to draw loans up to TK 28 crore against an approved limit of only TK 5 crore as the branch manager was sure that the client would be able to pay back the extra amount very quickly. However, the client could not pay back the loan completely which resulted in a large classified amount. Also, previously the loan applicants background was not checked on a strict basis. Sometimes the credit officers failed to corroborate the information and documents provided by the client through face-to-face contact, factory/office visit, financial data checking etc. As a result, there have been instances where client took loans through fake documents and never paid back the money. In some instances, the credit officials also failed to monitor the loans properly. Since there was no requirement of reports like Account Profitability, Portfolio Review statements etc., there was no strict monitoring of the clients stocks,

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earnings, etc. on a regular and timely basis. As a result, the concerned credit officials failed to detect deterioration in the clients financial position on time. Some Credit Administration Department officials also failed to perform their duties properly. It is their responsibility to ensure that all loan documents are authentic, in proper order, and up-to-date. However, there have been instances where credit administration failed to ensure that valid insurance is held, charges are created on the borrowers asset properly, land assets have been mortgaged properly etc. Because of these deficiencies in loan documentation, EBL failed to recover some classified loans by taking over and selling off the securities held against them. Also there was a general tendency among the bank officials not to recognize classified loans on time. It was considered that if an account became classified, it represented a failure on the part of the concerned bank officials. As a result, when the performances of an account began to deteriorate, in stead of putting in an exit plan, the officials went for restructuring the repayment schedule. This resulted in more accrued interest on the account and a higher amount of classification than the one which would have occurred if the account had been classified in the initial phase. After the new management took over, they have put in place lots of standard policies and procedures for the purpose of proper evaluation and monitoring of a loan. This is how the loan approval and monitoring process is structured now.

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5.0 BENEFITS OF RESTRUCTURING

5.1 Loan Classification

Loan classification is a process by which the risk or loss potential associated with the loan accounts of a bank on a particular date is identified and quantified to measure accurately the level of reserves to be maintained by the bank to provide for the probable loss on account those risky loan. All types of loans of a bank are fall into following four scales: Unclassified: Repayment is regular. Substandard: Repayment is stopped or irregular but has reasonable prospect of improvement. Doubtful debt: Unlikely to be repaid but special collection efforts may result in partial recovery. Bad/ Loss: Very little chance of recovery.

5.1.1 Classification procedure

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The classification procedure is done as per the Central Banks instructions in B C D circular No.34 of 1989, B C D circular NO. 20 of 1994. The loans are classified on the basis of following criteria. Classification criteria: Overdue (OV) Required payment (RP) Limit Overdrawn (LD) Legal action (LA) Qualitative judgment (QJ)

5.1.2 Legal Framework for Loan Recovery

After being classified, if the borrower is disable to adjust the loan then the bank can take the following legal actions by filing suit, Filing certificate cases under Public Demand Recovery Act-1913. Filing money suit cases under Artha Rin Adalat-1990. Filing Bankruptcy cases under Bankruptcy Act-1997. Filing cases under Negotiable Instrument Act-1881 section 138 to 141 for insufficient fund. (In case of term loan).

5.1.3 Reducing the Amount of Bad Asset and also Increase the amount of Good Asset
EBL had a huge loss in the year 2001, Top Management decided to centralize the whole operation. And they also decided to introduce two new divisions named Corporate Banking and Credit Risk Management. The task of the relationship managers of the corporate banking is to do the marketing for the Bank. They also facilitate the existing clients in their daily transaction. Previously corporate clients can apply and take the loan from their respective Branches and the loan is granted by the Branch manager. But now RMs does the marketing for the bank and deal with the clients. After the loan is granted, credit risk management look after the clients documents and also the repayments.

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The major problem behind the decrease in the profitability was the amount of bad assets (Loans and Advances). So, Corporate Relationship Managers have got specific instruction about the selection of the clients and to make them repay the interest and also the principal amount. When EBL is giving loans to a new, small or not very well reputed organization, it usually charges high interest rate to the clients. But when it is giving loan to a wellreputed or financially strong organization, charges lower interest rate. So, when it is providing loans to the less reputed organization its income is going down. But ht e problem is financially weak organizations usually fails to repay the loans in the due time. And there is also a probability of default. When any organization fails to pay the quarterly or annual repayment EBL is conceding a loss. But the fact is EBL had to face loss in two different ways if any organization fails to repay its loan. Bank is not receiving the money given to the client as loan and also the interest. And the Bank has to make provision for this loss from its annual profit. So, in both ways it is hampering the Banks profitability. EBLs main concern is to reduce the amount of the bad loans and increase the amount of the good asset. So, EBL is targeting the big and financially strong organizations for doing business with them. By introducing the Corporate Banking and Credit Administration EBL is trying to look for the new clients and monitor its existing clients regularly. By the end of the year 2002 and 2003 they had a staggering classification rate of 13.46% and 13.61% in the total portfolio of loans and advances. But at the end of September 2004 the classification percentage came down to 8.22% with classified loans and advances totaling Taka 109 crore, which is almost half of the previous two years. So, benefits of restructuring were recognized within a short period of its implementation.

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% of Classified Loan 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 1997

1998

1999

2000

2001

2002

2003

2004

Years

Figure 5: Growth trend of % of Classified Loans

5.2 Portfolio analysis of EBLs classified loans and advances Sector wise Portfolio Analysis:
EBLs total loans and advances and classified loans and advances are scattered over 31 different sectors. If we calculate the amount of outstanding corporate loans and classified loans in these sectors, we get the following portfolios of Total Loans and Advances and Classified Loans and Advances.

Table 4: Sector wise % distribution of total loans & classified loans (March 03)
Sector Name Textile Steel Products Cement Ship Breaking Pharmaceutical Chemical, Plastic & Plastic Products Foods & Beverage Edible Oil Power, Gas & Oil Leather % Share of Total Loans and Advances 11.47% 4.57% 1.09% 7.65% 1.48% 2.45% 6.33% 6.11% 4.63% 0.69% % Share of Classified Loans and Advances 3.25% 5.83% 0.00% 13.25% 0.00% 2.64% 0.43% 13.89% 0.00% 6.39%

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Sector Name Jute Poultry & Hatchery Electronic Goods Brick & Ceramics Soap & Detergents Paper, Printing & Packaging RMG Shrimp Export Media Information Technology Telecommunication Shipping, Airline & Transport Commodity Import Construction Trading Service Clinic, Hospital & NGOs Educational Institution Financial Institution Individual Others Total

% Share of Total Loans and Advances 0.31% 1.53% 3.16% 0.08% 0.11% 2.43% 9.13% 0.12% 0.29% 0.02% 5.27% 0.66% 9.38% 6.51% 5.83% 1.13% 0.05% 0.14% 4.44% 0.17% 2.77% 100.00%

% Share of Classified Loans and Advances 0.67% 0.10% 0.43% 0.17% 0.00% 0.84% 8.98% 0.00% 0.00% 0.00% 0.00% 1.85% 9.31% 6.07% 12.46% 1.74% 0.38% 0.00% 0.00% 0.24% 11.09% 100.00%

In the table, the bold-faced sectors represent the sectors which constitutes relatively higher % of classified loans and advances than of total loans and advances. These sectors include steel products, ship breaking, chemical & plastic products, edible oil, leather, jute, brick & ceramics, shipping & transport, trading, service, hospitals & NGOs and others. The relatively higher exposure of these sectors to Classified Loans and Advances implies that these sectors are inherently more risky for investment. The following graphs show the portfolio distributions of total loans and advances and classified loans and advances.

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Sectorwise % share of classified loans and advances

Trading, 12.46% Construction, 6.07% Commodity Import, 9.31% Shipping & Transport, 1.85% Others, 11.09% RMG, 8.98% Printing & Packaging, 0.84% Brick & Ceramics, 0.17% Electronic Goods, 0.43% Poultry & Hatchery, 0.10% Jute, 0.67% Leather, 6.39% Edible Oil, 13.89% Ship Breaking, 13.25% Chemical & Plastic, 2.64% Foods & Beverage, 0.43% Textile, 3.25% Service, 1.74% Clinic, Hospital & NGOs, 0.38% Individual, 0.24%

Steel Products, 5.83%

Figure 6: Sector wise % share of classified loans and advances (March 03)

Sector wise % share of total loans and advances

Commodity Import, 9.38% Telecommunication, 5.27% RMG, 9.13% Printing & Packaging, 2.43% Electronic Goods, 3.16% Poultry & Hatchery, 1.53% Power, Gas & Oil, 4.63% Edible Oil, 6.11% Foods & Beverage, 6.33% Chemical & Plastic, 2.45% Pharmaceutical, 1.48%

Construction, 6.51% Trading, 5.83% Service, 1.13% Financial Institution, 4.44% Others, 5.41%

Textile, 11.47%

Steel Products, 4.57% Cement, 1.09% Ship Breaking, 7.65%

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Figure 7: Sector wise % share of total loans and advances (March 03)
If we calculate the respective amount of classified loans and advances in each of these sectors as % of loans and advances in that sector, we get the following table:

Table 5: Sector wise % of classified loans and advances to total loans and advances (March 03)
Total loans Sector Name and advances (in 000 TK) 1,224,842 488,015 116,397 816,917 158,044 261,627 675,959 652,466 494,422 73,683 33,104 163,383 337,445 8,543 11,747 259,491 974,961 12,814 30,968 2,136 562,765 70,479 1,001,658 695,180 622,566 120,669 5,339 14,950 474,132 18,154 295,799 10,678,655 Classified loans and advances (in 000 TK) 53,564 96,047 0 218,382 0 43,479 7,089 228,931 0 105,283 11,070 1,683 7,035 2,859 0 13,913 148,095 0 0 0 0 30,477 153,480 100,096 205,370 28,629 6,224 0 0 3,983 182,751 1,648,440 % of loans and advances Classified 4.37% 19.68% 0.00% 26.73% 0.00% 16.62% 1.05% 35.09% 0.00% 142.89% 33.44% 1.03% 2.08% 33.47% 0.00% 5.36% 15.19% 0.00% 0.00% 0.00% 0.00% 43.24% 15.32% 14.40% 32.99% 23.73% 116.57% 0.00% 0.00% 21.94% 61.78% 15.44%

Textile Steel Products Cement Ship Breaking Pharmaceutical Chemical & Plastic Foods & Beverage Edible Oil Power, Gas & Oil Leather Jute Poultry & Hatchery Electronic Goods Brick & Ceramics Soap & Detergents Printing & Packaging RMG Shrimp Export Media Information Technology Telecommunication Shipping & Transport Commodity Import Construction Trading Service Clinic, Hospital & NGOs Educational Institution Financial Institution Individual Others Total

Here we see that the mean classification rate was 15.44% for the total portfolio. The sectors which had higher classification rate than the mean rate are steel products, ship

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breaking, chemical & plastic products, edible oil, leather, jute, brick & ceramics, shipping & transport, trading, service, hospitals & NGOs, individual and others, again implying higher risk in these sectors for the bank. The risky sectors identified through this calculation matches very well with those identified in the previous analysis. The sector that are found to have very high classification rate (above 30%) are edible oil, leather, jute, brick & ceramic, shipping, trading, hospitals, and others. The 142.89% and 116.57% classification rate in leather and hospital sector is due to the fact that almost all the disbursed loans and advances in these two sectors became classified. Classified loans in these two sectors became higher than the disbursed amount because of the interest accrued on the disbursed loans before classification. Sector wise analysis of number of accounts: In terms of number of classified accounts, if we calculate the respective number of classified clients in each of these sectors as % of total clients in that sector, we get the following table:

Table 6: Sector wise % of classified clients to total clients in the sector (March 2003)
Sector Name Number of Clients Textile Steel Products Cement Ship Breaking Pharmaceutical Chemical & Plastic Foods & Beverage Edible Oil Power, Gas & Oil Leather Jute Poultry & Hatchery Electronic Goods Brick & Ceramics Soap & Detergents Printing & Packaging RMG Shrimp - Export Media Information Technology Telecommunication 23 15 3 11 7 13 23 5 13 4 14 11 12 7 1 16 42 1 3 2 2 Number of Classified Clients 4 4 0 3 0 6 5 2 0 1 5 1 2 2 0 2 14 0 0 0 0 17.39% 26.67% 0.00% 27.27% 0.00% 46.15% 21.74% 40.00% 0.00% 25.00% 35.71% 9.09% 16.67% 28.57% 0.00% 12.50% 33.33% 0.00% 0.00% 0.00% 0.00% % of Client Classified

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Sector Name

Number of Clients

Number of Classified Clients 7 5 7 54 4 1 0 0 9 42 180

% of Client Classified 38.89% 22.73% 9.21% 34.62% 16.67% 100.00% 0.00% 0.00% 21.43% 28.77% 24.93%

Shipping & Transport Commodity Import Construction Trading Service Clinic, Hospital & NGOs Educational Institution Financial Institution Individual Others Total

18 22 76 156 24 1 3 6 42 146 722

Here, we see that out of total clients of 722, 180 were classified as on March 31, 2003. This means that 24.93% of all loans and advances clients of EBL were classified. The sectors, which had higher classification rate than this among its clients, are again found to be steel products, ship breaking, chemical & plastic products, edible oil, leather, jute, brick & ceramics, RMG, shipping & transport, trading, service, hospitals & NGOs, and others. So we see that in all the 3 types of analysis, we continuously find the following 12 sectors to have higher than usual classification level: Steel products Ship breaking Chemical & plastic products Edible oil Leather Jute Brick & ceramics Shipping & transport Trading Service Clinics & NGOs Other

We can therefore assume the above 12 sectors to be risky for investment for EBL.

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Table 18: Table of Comparison Shifted Emphasis of Loan Exposure (as on September 2004)
Sector Name Textile Steel Products Cement Ship Breaking Pharmaceutical Chemical, Plastic & Plastic Products Foods & Beverage Edible Oil Power, Gas & Oil Leather Jute Poultry & Hatchery Electronic Goods Brick & Ceramics Soap & Detergents Paper, Printing & Packaging RMG Shrimp Export Media Information Technology Telecommunication Shipping, Airline & Transport Commodity Import Construction Trading Service Clinic, Hospital & NGOs Educational Institution Financial Institution Individual Others Total September 2004 13% 6 15 2 4 8 3 3 10 10 8 2 5 11 100% March 2003 11.47% 4.57 1.09 7.65 1.48 2.45 6.33 6.11 4.63 0.69 0.31 1.53 3.16 0.08 0.11 2.43 9.13 0.12 0.29 0.02 5.27 0.66 9.38 6.51 5.83 1.13 0.05 0.14 4.44 0.17 2.77 100

Here we see, Eastern Bank Limited management could understand their flaws. We saw this in the previous three tables. But, in this above table of comparison we find out the fact that EBL has become very much choosy about borrowers. This is made possible because of 1. An efficient management policy 2. Highly Professional bunch of credit analysts 3. Appropriate market and segment analysis 4. Efficient Relationship Mangers and above all 5. Cooperation of the clients of the Bank

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Another noticeable matter is that, there are two important external factors have helped in achieving such position. The two reasons are as follows:
1.

Bangladesh Banks active supervision through CIB report (Credit Information Bureau) Cooperation of the other Banks and Financial Institutions in

2.

disclosing client information. All the above factors have made the EBL existing and potential clients to comply with the rules and regulations as desired by the Bank. Such compliance and disclosure of information meticulously; help a Bank Official to go through a detailed analysis of the credit risk. In this way, 1. With good choice of Clients and 2. External cooperation Eastern Bank Limited has achieved such an enviable position. Branch wise Portfolio Analysis: If we divide the total outstanding and classified outstanding figures according to their respective branches, we get the following table:

Table 8: Branch wise distribution of classified loans and total loans (March 2003)
Classified outstanding Branch Classified Outstanding 262,295 10,738 49,845 0 2,873 92,187 161,560 10,742 492,253 64 17,145 17,465 of Branch as % of Total Classified Outstanding 15.91% 0.65% 3.02% 0.00% 0.17% 5.59% 9.80% 0.65% 29.86% 0.00% 1.04% 1.06% Total Branch Advances 3,428,961 98,184 76,525 20,587 48,547 111,122 601,868 75,673 642,246 225,011 162,948 47,085 CL O/S as % of Branch Advances 7.65% 10.94% 65.14% 0.00% 5.92% 82.96% 26.84% 14.20% 76.65% 0.03% 10.52% 37.09%

Agrabad Bogra Chawkmughultuly Chouhatta Dhanmondi English Road Gulshan Jessore Jubilee Road Khatunganj Khulna Laldighirpaar

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Mirpur Motijheel Moulvibazar O R Nizam Road Principal Rajshahi Shantinagar Sonargaon Road Station Road Uttara Total

0 39,688 29,538 1,723 420,120 7,247 0 18,883 11,136 2,938 1,648,440

0.00% 2.41% 1.79% 0.10% 25.49% 0.44% 0.00% 1.15% 0.68% 0.18% 100.00%

28,147 213,047 84,306 144,347 4,124,086 29,645 11,211 361,040 132,059 12,010 10,678,655

0.00% 18.63% 35.04% 1.19% 10.19% 24.45% 0.00% 5.23% 8.43% 24.46% 15.44%

Here, we see that most of the classified loans and advances are concentrated in 4 branches Agrabad (15.91%), Jubilee Road (29.86%), Gulshan (9.80%) and Principal Branch (25.49%). Therefore, we may tend to assume that the performances of these branches in loan evaluation, monitoring and recovery are not very effective. But that is not necessarily true. The high share of classified loans in these branches is mainly due to the fact that these 4 branches carry out most of the lending activities of EBL. A better indicator of the performance of these branches will be the amount of branch classified outstanding as % of branch loans and advances. The last column gives us that figure. Here we see that the performances of Chawkmughultuly, English Road, Gulshan, Jubilee Road, laldighirpar, Moulvibazar, Rajshahi, and Uttara branches are quite unsatisfactory as they have at least 25% of their total outstandings as classified, which is way above the average classification rate of 15.44%. Especially, the performance of Chawkmughultuly, English Road and Jubilee Road branches are completely unacceptable as they have 65 85% classification rate. There were serious deficiencies in the performances of these branches employees in terms of loan approval, monitoring and recovery.

Table 9: Branch wise Classification Rate as on September 2004

Classified outstanding Classified Branch Agrabad Bogra Chawkmughultuly Chouhatta Dhanmondi English Road Gulshan of Branch as % of Total Total Branch Advances 1,263,138,012 76,832,285 60,578,497 24,110,850 42,761,976 80,492,888 806,912,068 Outstanding Classified Outstanding 169,618,638 18.30% 27,470,431 2.96% 39,008,260 4.21% 808222 0.09% 6,207,402 0.67% 73,450,270 7.92% 129,393,003 13.96% CL O/S as % of Branch Advances 13.43% 35.75% 64.39% 3.35% 14.52% 91.25% 16.04%

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Jessore Jubilee Road Khatunganj Khulna Laldighirpaar Mirpur Motijheel Moulvibazar O R Nizam Road Principal Rajshahi Shantinagar Sonargaon Road Station Road Uttara Total

14,224,101 75,622,460 1836222 14,322,297 0 0 0 28,058,270 13,322,652 312,985,664 1,592,576 0 13,322,652 5,759,227 0 927,002,347

1.53% 8.16% 0.20% 1.55% 0.00% 0.00% 0.00% 3.03% 1.44% 33.76% 0.17% 0.00% 1.44% 0.62% 0.00% 100.00%

37,332,374 231,414,367 297,509,630 152,446,850 41,438,679 38,866,301 107,880,307 69,694,470 213,894,635 2,517,954,456 19,524,085 24,523,452 260,368,475 92,675,962 54,122,333 6,514,472,952

38.10% 32.68% 0.62% 9.39% 0.00% 0.00% 0.00% 40.26% 6.23% 12.43% 8.16% 0.00% 5.12% 6.21% 0.00% 14.23%

In this above table of September 2004, which is procured from the Credit Administration Department, I found that several in branches classification rate has grown up a bit. But in most cases in most of the branches, classification rate is lower. Notable that, from the previous year, Eastern Bank Limited has followed a strict strategy to classify any account. EBL Credit Department has set various rigorous programs and guidelines because of which a seemingly good-shaped client is also downgraded to classification. Even after all such restriction and strict policies the Branch wise classification is here found to be lowered in an average, significantly.

5.3 Manpower
After the restructuring of the bank and its processes, manpower requirement in various areas has been decreased significantly. Before change, there were one credit officer in each branch (total of 22) to handle the credit risk. But after the restructuring, necessity of these officers ends. Now, only 12 persons are handling all the portfolios sitting in the head office. The whole process is thus centralized. According to the last snapshot taken from the bank, it was found that only 12 person are managing the credit risk of Tk. 1500 crore loans and advances.

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6.0 CONCLUSION

EBL is the first local Private Bank in Bangladesh, which has implanted the strategy of Centralization. The ultimate goal of following this strategy is to maximizing the profit and also reduces the amount of bad debts. All the major decisions about providing the facilities to the clients will be taken by the head office. Only head office has the authority of providing the funded and non-funded facilities to the corporate clients. Corporate Banking division is liable to do the marketing of the corporate clients and Credit Administration division is responsible for the monitoring and scrutinizing of the daily transactions of the corporate clients. Head Office credit will decide whether any facility will be provided to the existing clients and also to the new clients. Trade Services division will control all the import/export business of Eastern Bank Limited. Now EBL is concentrating on increasing the portion of good assets so that it can reduce its losses. This decision had an immediate impact on the Banks profitability, because as the portion of good asset is rising EBL is earning less interest income. To solve this problem EBL is trying to increase the volume of good assets and also increase the volume of the business by providing funded and non-funded facilities to the strong companies and group of companies in the market. Very soon EBL is going to introduce credit card and debit card facilities to its clients, which will be a major feature of the year 2003. EBL already signed a contract with the Banking software giant IFLEX which is a sister concern of the CITI Group. IFLEX will provide all the necessary banking software to the EBL and all the branches will be connected by the networking facility. So, it can be said that with its new and improved features and unique Banking system EBL is going to increase its competitiveness in the industry and satisfy its customers more than before.

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APPENDIX I
Risk Rating Superior Low Risk

Risk Grading by Bangladesh Bank

Grade 1 Definition secured by

Facilities

are

fully

cash

deposits,

government bonds or a counter guarantee from a top tier international bank. All security documentation Good Satisfactory Risk 2 should be in place. The repayment capacity of the borrower is strong. The borrower should have excellent liquidity and low leverage. The company should demonstrate consistently strong earnings and cash flow and have an unblemished track record. All security documentation should be in place. Aggregate Score of 95 or greater Acceptable Fair Risk 3 based on the Risk Grade Scorecard. Adequate financial condition though may not be able to sustain any major or continued setbacks. These borrowers are not as strong as Grade 2 borrowers, but should still demonstrate consistent earnings, cash flow and have a good track record. A borrower should not be graded better than 3 if realistic audited financial statements are not received. These assets would normally be secured by acceptable collateral (1st charge over stocks / debtors / equipment / property). Borrowers should have adequate liquidity, cash flow and earnings. Marginal - Watch list 4 An Aggregate Score of 75-94 based on the Risk Grade Scorecard. Grade 4 assets warrant greater attention due to conditions affecting the borrower, the industry or the economic environment. These borrowers have an above average risk due to strained liquidity, higher than normal leverage, thin cash flow and/or inconsistent earnings. Facilities should be downgraded to 4 if the borrower incurs a loss, loan payments routinely fall past due, account conduct is poor, or other untoward factors

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are present. An Aggregate Score of 65-74 based on the Special Mention 5 Risk Grade Scorecard. Grade 5 assets have potential weaknesses that deserve managements close attention. If left uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the borrower. Facilities should be downgraded to 5 if sustained deterioration in financial condition is noted (consecutive losses, negative net worth, excessive leverage), if loan payments remain past due for 30-60 days, or if a significant petition or claim is lodged against the borrower. Full repayment of facilities is still expected and interest can still be taken into profits. An Aggregate Score of 55-64 based on the Risk Grade Substandard 6 Scorecard. Financial condition is weak and capacity or inclination to repay is in doubt. These weaknesses jeopardize the full settlement of loans. Loans should be downgraded to 6 if loan payments remain past due for 60-90 days, if the customer intends to create a lender group for debt restructuring purposes, the operation has ceased trading or any indication suggesting the winding up or closure of the borrower is discovered. Not yet considered non-performing as the correction of the deficiencies may result in an improved condition, and interest can still be taken into profits. An Aggregate Score of 45-54 based on the Risk Grade Scorecard. Doubtful and Bad (non-performing) 7 Full repayment of principal and interest is unlikely and the possibility of loss is extremely high. However, due to specifically identifiable pending factors, such as litigation, liquidation procedures or capital injection, the asset is not yet classified as Loss. Assets should be downgraded to 7 if loan payments remain past due in excess of 90 days, and interest income should be taken into suspense (non-accrual). Loan loss provisions must

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be raised against the estimated unrealizable amount of all facilities. The adequacy of provisions must be reviewed at least quarterly on all non-performing loans, and the bank should pursue legal options to enforce security to obtain repayment or negotiate an appropriate loan rescheduling. In all cases, the An

requirements of Bangladesh Bank in CIB reporting, loan rescheduling and provisioning must be followed. Aggregate Score of 35-44 based on the Risk Grade Loss (non-performing) 8 Scorecard Assets graded 8 are long outstanding with no progress in obtaining repayment (in excess of 180 days past due) or in the late stages of wind up/liquidation. The prospect of recovery is poor and legal options have been pursued. The proceeds expected from the liquidation or realization of security may be awaited. The continuance of the loan as a bankable asset is not warranted, and the anticipated loss should have been provided for. This classification reflects that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future. Bangladesh Bank guidelines for timely write off of bad loans must be adhered to. An Aggregate Score of 35 or less based on the Risk Grade Scorecard

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APPENDIX II

Obligor Risk Rating (ORR)

RATING GOOD

Short GD

No 1

CRITERIA Growing Industry (Growth 15%+) Among top 20 in the Industry Strong management with succession Steady growth in financial performance Satisfactory payment record/account turnover Liquidity 3X and above Leverage 0.5X and below Timely submission of financial information Strong Parent/Sister Office Guarantee Good collateral OR 100% cash covered Growing Industry (Growth 10%+) Acceptable player in the market Good management with succession Acceptable performance Satisfactory payment record/account turnover Liquidity 1.5X and above Leverage 1.5X and below Timely submission of financial Office information Acceptable Guarantee Parent/Sister growth in financial

STRATEGY Retain and grow with client Sell multi products

ACCEPTABLE

ACCEP

Retain and grow with client Sell multi products

MARGI-NAL/ WATCHLIST

MG/WL

Acceptable collateral Problem in Industry Loosing market share Thin management with no succession Unreliable sales/operating profit. Unsatisfactory payment

No increase in credit limit Close monitoring thru clear action plan Ensure 100%

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record/account turnover Liquidity below 1X High Leverage Perpetual delay in submission of financial information Incomplete Loan Documentation Drop in collateral value or collateral shortfall SPECIAL MENTION SM 4 Past due over 60 days Problem in Industry Loosing market share Severe management problem Company operating at losses with sales going down. Unsatisfactory record/account turnover Liquidity below 1X / insufficient cash flow High Leverage Financial Information not available Incomplete Loan Documentation Drop in collateral value or collateral shortfall Diversion of fund Past due over 90 days SUB STANDARD SS 5 All criteria of Special Mention Past due over 180 days payment

completion doc.

of

loan

Semi-annual review Follow settlement dues up of for past

Possible exit/reduction of credit limit Close monitoring thru clear action plan Ensure completion doc. Quarterly review Follow settlement dues up of for past of 100% loan

Credit

limit

for

adjustment purpose Clear exit plan to be in place Quarterly review Follow settlement dues up of for past

DOUBTFUL

DF

All criteria of Substandard Client out of business Past due over 270 days

Credit

limit

for

adjustment purpose Quarterly review Follow settlement up of for past

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dues Legal action BAD & LOSS BL 7 All criteria of Doubtful Past due over 360 days Credit limit for

adjustment purpose Quarterly review Follow settlement dues Legal action up of for past

NOTE: No 1 to 4 usually noted by Bank itself. No 5 to 7 under the guideline given by Bangladesh Bank.

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