Table of Contents

CHAPTER NO 1 ........................................................................................................................................ 2
INTRODUCTION...................................................................................................................................... 2
HISTORY OF NATIONAL BANK OF PAKISTAN .............................................................................. 2
BRANCH NETWORK .............................................................................................................................. 3
VISION ....................................................................................................................................................... 4
MISSION .................................................................................................................................................... 4
CORE VALUES .......................................................................................................................................... 4
GOALS ........................................................................................................................................................ 4
CHAPTER NO 2 ........................................................................................................................................ 5
CREDIT DEPARTMENT......................................................................................................................... 5
Forms of Loans ................................................................................................................................................... 5

CREDIT ADMINISTRATION ................................................................................................................. 7

CREDIT RISK ASSESSMENT ................................................................................................................ 7
Business risks ..................................................................................................................................................... 7
Collateral risks ................................................................................................................................................... 7
Management Risks ............................................................................................................................................ 9
Business risks ..................................................................................................................................................... 9
Market Specific Risks:...................................................................................................................................... 9

CREDIT RISK RATING ......................................................................................................................... 10

RECOVERY .............................................................................................................................................. 12
REMEDIAL ACTION / STRATEGY .................................................................................................... 13
Grace Period ................................................................................................................................................................... 13
Rescheduling.................................................................................................................................................................. 14
Restructuring ................................................................................................................................................................. 14

CHAPTER NO 1

INTRODUCTION
National Bank of Pakistan is one of the biggest commercial bank operating in Pakistan. It has
redefined its role and has moved from a public sector organization into a modern commercial
bank. The Bank's services are available to individuals, corporate entities and government. While
it continues to act as trustee of public funds and as the agent to the State Bank of Pakistan (in
places where SBP does not have presence). It has diversified its business portfolio and is today a
major lead player in the debt equity market, corporate investment banking, retail and consumer
banking, agricultural financing, treasury services and is showing growing interest in promoting
and developing the country's small and medium enterprises and at the same time fulfilling its
social responsibilities, as a corporate citizen.
In today's competitive business environment, needed to redefine its role and shed the public
sector bank image,

for a modern commercial bank.

It

is

now listed on the

Karachi/Islamabad/Lahore Stock Exchanges.

HISTORY OF NATIONAL BANK OF PAKISTAN

The normal procedure of establishing a banking company under the Companies Law was set
aside and the Bank was established through the promulgation of an Ordinance due to the crisis
situation that had developed with regard to financing of jute Trade. The Bank commenced its
operations from November 20, 1949 at six important jute centers in the then East Pakistan and
directed its resources in financing of jute crop. The Banks Karachi and Lahore offices were
subsequently opened in December 1949.
State bank of Pakistan after its formation demanded from the Indian Reserve Bank the assets
against the Indian currency retired from Pakistan territory. Government of India refused to hand
over the assets worth about five hundred million rupees. The dispute is still unsettled and these

assets are still not delivered to Pakistan. Until June 1950, the Bank was engaged exclusively on
jute operation. Thereafter, it was felt that it could expand its business to include other
commodities as well. Bank took a big stride in 1952, when it replaced the Imperial Bank of
India, as an agent of State Bank of Pakistan.
With the passage of time its functioning diversified as they take over the function of different
institution with the passage of time like in past they took over the function of Imperial bank of
India and now of NDFC (national development Finance Corporation).
It is working as the agent of the state bank of Pakistan and performs its functions wherever state
bank of Pakistan is not present.
The government floated its 10 % of the shares in the open market in past and the ratio became
60: 40 and in future they trying to make it 55: 45.
In 1999 national bank celebrated its golden jubilee during the last fifty years bank has made
substantial strides in the financial services industry in Pakistan.
In 1999 its market share was around 22% and it remains the largest financial institution in
Pakistan.

BRANCH NETWORK
With the geographical development of its branches, the Bank has been able to extend its services
to a much larger number of Pakistanis all over the country. Today it has more than 8.5 million
accounts. Bank maintains its presence in all the major financial centers of the world through its
15 overseas branches and 5 representative offices. Of these, three representative offices have
recently been set up at Tashkent (Uzbekistan), Baku (Azerbaijan) and Almaty (Kazakhstan) to
take advantage of the emerging opportunities in CIS countries. Banks role globally is well
assisted by its network of correspondent banks located strategically in Asia, America, Europe
and Africa. It has an extensive domestic branch network of over 1200 branches located all over
Pakistan. The Bank also has a presence in 24 international locations including the USA, United
Kingdom, Europe and the Far East.

VISION
The vision statement of is:
To

be

recognized

as

leader

and

brand

synonymous

with

trust,

highest standards of service quality, international best practices and social responsibility.

MISSION
We will aspire to the values that make truly the Nations Bank, by:

Institutionalizing a merit and performance culture

Creating a distinctive brand identity by providing the highest standards of services

Adopting the best international management practices

Maximizing stake holders value

Discharging our responsibility as a good corporate citizen of Pakistan and in countries

where we operate

CORE VALUES
The core values of are:

Highest standards of Integrity

Institutionalizing team work and performance culture

Excellence in service

Advancement of skills for tomorrows challenges

Awareness of social and community responsibility

Value creation for all stakeholders.

GOALS
To enhance profitability and maximization of share through increasing leverage of existing
customer base and diversified range of products.

CHAPTER NO 2
CREDIT DEPARTMENT
Credit department is one of the most sensitive and important departments of the bank. The major
portion of the profit is earned through this department. The job of this department is to make
proposals about the loans. The Credit Management Division of Head Office directly controls all
the advances. As we known bank is a profit seeking institution. It attracts surplus balances from
the customers at low rate of interest and makes advances at a higher rate of interest to the
individuals and business firms. Credit extensions are the most important activity of all financial
institutions, because it is the main source of earning. However, at the same time, it is a very risky
task and the risk cannot be completely eliminated but could be minimized largely with certain
techniques.

Forms of Loans
In addition to purchase and discounting of bills, bankers in Pakistan generally lend in the form of
cash finance, overdrafts and loans. Provides advances to different people indifferent ways as the
case demand

a) Cash Finance
This is a very common form of borrowing by commercial and industrial concerns and is made
available either against pledge or hypothecation of goods, produce or merchandise. In cash
finance a borrower is allowed to borrow money from the banker up to a certain limit, either at
once or as and when required. The borrower prefers this form of lending due to the facility of
paying markup/services charges only on the amount he actually utilizes. If the borrower does not
utilize the full limit, the banker has to lose return on the un-utilized amount. In order to offset
this

loss,

the

banker

may

provide

for

in the cash finance agreement, according to which the borrower has to pay

suitable

clause

markup/service

charges on at least on self or one quarter of the amount of cash finance limit allowed to him even
when he does not utilize that amount.

b) Overdraft/Running Finance
This is the most common form of bank lending. When a borrower requires temporary
accommodation his banker allows withdrawals on his account in excess of the balance,
which the borrowing customer has in credit, and an overdraft thus occurs. This
accommodation is generally allowed against collateral securities. When it is against collateral
securities it is called Secured Overdraft and when the borrowing customer cannot offer any
collateral security except his personal security, the accommodation is called a Clean Overdraft.
The borrowing customer is in an advantageous position in an overdraft, because he has to pay
service charges only on the balance outstanding against him. The main difference between a cash
finance and overdraft lies in the fact that cash finance is a bank finance used for long term by
commercial and industrial concern on regular basis, while an overdraft is a temporary
accommodation occasionally resorted to.

c) Demand Financing/Loans
When a customer borrows from a banker a fixed amount repayable either in periodic installments
or in lump sum at a fixed future time, it is called a loan. When bankers allow loans to their
customers against collateral securities they are called secured loans and when no collateral
security is taken they are called clean loans. The amount of loan is placed at the borrowers
disposal in lump sum for the period agreed upon, and the borrowing customer has to pay interest
on the entire amount. Thus the borrower gets a fixed amount of money for his use, while the
banker feels satisfied intending money in fixed amounts for definite short periods against a
satisfactory security.

CREDIT ADMINISTRATION
Credit administration performs the following functions:
1. Credit risk assessment
2. Credit risk rating

CREDIT RISK ASSESSMENT

Extending finance to a borrower amounts to exposing the Bank to risks inherent in the
borrowers business. These risks can be broadly categorized in to following:
Management risk
1. Character
2. Competency
Business risks
1. Industry driven risks
2. Market Specific Risks
Collateral risks
The forms of security against which the Bank is, and is not, authorized to lend money are
described in sections 25 and 26 respectively of the National Bank of Pakistan Ordinance, while
the Banks bye-laws lay down the limitations for secured and unsecured financing. The section
25 & 26 are reproduced below for guidance:Section 25: (Authorized Securities)
The advancing and lending of money, against the following securities is admissible: a) Stocks, fund and securities in which a trustees in authorized to invest trust money by any
law for the time being in force in Pakistan and shares of the State Bank of Pakistan.
b) Debentures or other securities for money issued under the authority of any law for the
time being in force in Pakistan by, or on behalf of, a port trust authority or a district board

or a municipal board or committee or, with the sanction of the Federal Government,
debentures or other securities for money issued under the authority of the Government of
an Acceding State. Detailed criteria is laid down at Section 10.8.4 under TFC
c) Goods which, or the documents of title to which, are deposited with, or assigned to, the
bank as security for such advances, loans or credits;
d) Subject to such directions as may be issued by Central Board, debentures of companies
with limited liability;
e) Shares of companies with limited liability, in accordance with such directions in this
regard as may be issued from time to time by the State Bank of Pakistan as mentioned at
Section 8.3
f) Goods which are hypothecated to the Bank as security for such advances, loans or
credits;
g) Accepted bills of exchange and promissory notes endorsed by the payees and joint and
several promissory notes of two or more persons or firms unconnected with each other in
general partnership;
h) Immovable property or documents of title relating thereto, subject to such directions as
may be issued by the Central Board;
Subject to such directions as may be issued by the Central Board, tea crops; PROVIDED THAT
any advances or loans, which are guaranteed by the Federal Government or any Provincial
government in Pakistan, may be made without any specific security.
Section 26: (unauthorized securities)
a) The Bank shall not make any advance or loan upon the security of its shares
b) The bank shall not discount or buy or advance or lend to any individual or partnership
firm an amount exceeding in the whole at any one time such sum as may be prescribed
c) The bank shall not discount or buy or advance or lend or open cash-credits on the security
of any negotiable instrument of any individual or partnership firm, payable in the town or
at the place where it is presented for discount, which does not carry on it the several
responsibilities of at least two persons or firms unconnected with each other in general
partnership

Management Risks
1. Is the management academically qualified enough to identify and handle problems?
2. Attitude of the management i.e. conservative, aggressive or speculative
3. Previous experience of the management in the same business
4. HRM analysis of the firm. Sometimes, due to one man show, the most performing
individual may leave the organization which may adversely affect the repayment capacity
of the borrower
5. Are directors resident, a non-resident director may easily walk away commitment
Management Relationship with the Bank:
1. Their track record in different lines of business
2. Any default history? With our bank or with any other Bank/financial institution
3. Length of relationship with the bank
4. Any change in the key management or dispute
5. Product acceptability or demand in the market
6. The experience of other banks with the client/sister concerns

Business risks
Industry driven risks
1. Concentration of sales on any one industry enhances the risk
2. Product life cycle: the shorter it is, higher is the risk. Moreover stage of product life cycle
is also very critical as at maturity stage is very riskier
3. Existing and anticipate Government polices/restrictions may increase or reduce risks in a
given sector
Market Specific Risks:
1. Cut throat competition can result in reduction of existing high profit margins
2. Entrance of any big multinational or national player may change the whole scenario
3. Concentration of sales on a single geographical area
4. Single buyer focused sales
5. Reputation of buyers

CREDIT RISK RATING

Once, the bank has identified all the risk in the credit portfolio of the customer then according to
that it will assign risk rating to the customer. The Risk Rating System is a tool, which provides a
uniform framework and common language for assessing and monitoring risk in a credit portfolio.
It allows senior management to evaluate and track the risk of NBPs relationships and credit
portfolio on a continuing basis. Risk ratings should operate simultaneously with the credit
approval process. Risk ratings should be assigned first by the Relationship Manager and
subsequently reviewed by all the persons involved in the approval process. The risk ratings are to
be recorded in the appropriate places in the Credit Request package.
The Credit Risk Rating (CRR) is intended to reflect the overall risk profile of the borrower or
guarantor. Risk Ratings are assigned according to the perception of risk on a numerical scale,
determined through examining the following guidelines as presented in the grid below.
a) Country Factors
b) Industry / Company Stability / Regulatory Environment
c) Competitive Position
d) Operating Performance
e) Cash Flow Strength
f) Balance Sheet Strength
g) Management and controls
h) Debt Ratings / Credit Ratings (if available)
i) Collateral Quality and Control
j) Adherence to credit terms and documentation
k) Company and Owner relations
Country Factors are evaluated by the following factors, which are prevalent in the country
/economy:

Political Stability

Economic Structure (per capita income; private sector development; strength of private
sector; pace of economic development)

Macro-Economic Stability (fiscal and monetary policy; inflation and current account
deficit)

Debt Burden (extent of foreign debt; quantum of FX reserves)

All borrowing customers must be credit risk rated. A customers credit risk rating must
be re-assessed immediately if any deterioration in credit worthiness becomes evident.

The Relationship Manager or Branch Manager is primarily responsible for the grading of a
customer relationship. Accounts must be recommended for downgrade by the concerned
Relationship Manager or branch manager, which must be reviewed and approved by Risk
Management. A decision to downgrade a customer must be documented in a downgrading memo
(format given in chapter on Criticized Assets), which must propose a course of action to improve
or remedy the situation.
Different credit risk ratings may be applied to individual customers within a group. In such
cases, group to be rated according to the rating of the majority accounts within the group.

Risk rating benchmarks

Risk Profile Range

Risk Rating

(%)
91-100

81-90

71-80

61-70

51-60

45-50

41-44

35-40

25-34

upto 25

10

RECOVERY
1st Notice

1st notice must be served within 7 day of first default of installment of Principal or
Markup.

Demanding payment within 15 days of the service of notice.

2nd Notice
If the default continues second notice should be served within 7 days of the expiry of first notice
or 22 days of the first default, as referred above (whichever is later) allowing another 15 days
time to pay the arrears.

3rd Notice:

Issue after within 7 days of the expiry of second notice or 44 days of the first default.

Allowing 15 days time to fully pay the arrears.

The maximum time period allowed up to expiry of the third notice is 59 days.

After this bank has right to adjust loan at any time by auction or sale of pledged security
and collateral.

Settlement of Problem Account:Follow-up status of problem accounts / Watch list accounts identified as mentioned above.

Approval for filing of suits for recovery of finance below Rs.30 (M) jointly with RBC.

Pursue the under litigation/stuck-up accounts having principal outstanding up to Rs.30

(M), which are not dealt by SAMG.

Approval for filing of suits for recovery of finance above Rs.30 (M) accounts, which are
not in loss category jointly with RBC.

Seeking approval for settlement/restructuring/rescheduling of cases in terms of

Instruction Circular No.119/2005 dated 14.10.2005

Checking/Analysis of various returns and its subsequent submission to CMG, Head

Office

Submission of borrower wise CIB data to CMG/HO.

Submission of Data relating to portfolio management to Head Office

REMEDIAL ACTION / STRATEGY

Following remedial actions are taken

Bank can put Debit lock

Grace period (Rescheduling)

Debit lock
Bank can put a debit lock on customers account preventing him from further withdrawing of
funds. This is a preventive action on part of bank.
Grace Period
If a banker sees that by giving customer some period as a grace period then he can again stand on
his feet and would be able to continue his business then bank grant him a breathing space.
During that period bank allows customer not to pay installments and interest payment and invest
that money again in the business.
The RM is also required to exercise due diligence in the following sequence:

Assess the collateral by arranging its fresh forced sale valuation by a banks approved
value to determine the residual value.

Arrange review of the credit if necessary, to determine accuracy and enforceability of the
securities.

Monitor further facility utilizations in the accounts and consider blockage of the
unutilized lines depending upon the situation.

Obtain fresh credit checking and CIB report in order to verify the position of customers
outstanding over dues with other banks.

Analyze the latest financial position of the borrower vis--vis his overall liabilities in
order to determine his capacity to settle the obligations

Rescheduling
A loan is considered as rescheduled when original terms of principal repayment are extended,
because of project delays etc.

Restructuring
A restructured loan is one, the terms and conditions of which have been modified, principally
because of deterioration in the borrowers financial condition to provide for a reduction in markup rate or principal or capitalization of mark-up accrued. However, capitalized mark-up is
separated and treated as a markup free liability (unserviceable portion of outstanding dues).
While considering restructuring proposals, the situations may warrant allowing certain
concessions depending upon the particular situations involved.