Chapter-05

Loan Disbursement and Recovery Procedures of BKB

Bangladesh krishi bank performs all types of banking activities various section and achieve and
full fill its objective (especially Agriculture and SME sector development) economic
development as well as to strengthen its position.
Disbursement:
The act of paying out or disbursing money. Disbursements can include money paid out to run a
business, spending cash , dividend payments ,and/or the amount that a lower might have to pay
out a person s behalf in connection with a transaction.
Recovery:
The term recovery refers to collection of amount due. Normally recovery depends on the purpose
time and condition, business running process etc. loan amount will be recovered on instalment
basis. The manager can fix instalment period on the basis of nature of their business.

BKBs Credit Disbursement Program

Short term loan: Bangladesh Krishi Bank provides such loan to all sorts of people, especially
the poor and marginal farmer as well as low income people for the very short term basis. The
duration of this loans are 1 to 18 months. Such loans are Crop loan, Continuous loan, Fishery
loan.
Medium term Loan: BKB provides such loan for the period of 18 months to 5 years.
Long term Loan: This loan is provided for the period of 5 to 10 years.

Short term Agricultural loan:

Loans having maturity less than one year falls under this category. The loan items under this
category are:

General short term loan.

Special lending activities of 100 crore Taka.
Loan in the disastrous region.
Lending activities with Bangladesh Mission.
Midterm Agricultural loan: This loan facility is extended for loans having maturity more than
one year but less than three years. The loan under this category is:

Mid-term general loan activities.

Mid term Loan in the disastrous region.
I.D.B.I loan 1&2.
A.D.B loan 1&2.
USAID IRI cultivation program.
Ret culture.

Long term Agricultural loan: Tenure of long term loans is more than three years. The loans
under this type are:

A.D.B loan 1&2.

USAID IRI cultivation program.
Japan assistance.
Improvement of tea sector.
Ret culture.

Process of Agricultural Credit

Institutional agricultural credit is provided to the Farmers who have agricultural land. A landless
or marginal farmer may also have agricultural credit but that required a grantor who has
agricultural land or socially bona fide person.

Application: refers to the initial point of entry for getting agricultural credit. Application
or prescribed form has filled by applicant.
Processing: refers to the work of the Bank official for assessing and verifying the
application content and recommended for sanction of fixed amount of agricultural loan
(norms set by Bangladesh Bank).
Sanction and disbursement: refers to the giving funds to the farmers for agricultural
production.
Re payment of the loan: After harvesting and selling of crops or food grains farmers have
to return loan amount with interest (at present 10%, simple rate).

Now a days revolving credit of agricultural credit is introduced by the Bangladesh bank on
selected area as experimental basis in some areas in Bangladesh. It is getting popularity in the
country.

Pre requisite condition before and after sanction a Loan:

There are several types of loans and advances in the banking operation and each has separate
pre-requisite condition. Here mention some general pre requisite condition for all loans and
advances:
 Receive all documents very carefully.
Closely monitor loans holders repayment ability.
Analyze line holders business, goodwill, character, etc.
Strictly assigning security and mortgage assets.
Ensure that have to follow rules and regulations of Bangladesh Bank and head office
about loans and advances.
Make survey report by the authorized surveyor against loans mortgage and security.
Before issues second disbursement ensures that first disbursement money is utilize
properly.
Duly visit project/ plant/ business or other properties.

Review, supervision and control of loan and advances:

Review, supervision and control of advances are necessary in order to ensure safety and
advances and keep the same regular. Bank do not lend its own money, bank lend the depositors
money. So, safety of advances is very important. Supervision and control advances are exercised
in different levels (Branch/ region /area /head office) from the time of disbursement to the time
of Final recovery/ adjustment.

Documents for Loans and Advances:

All kinds of papers necessary for opening an A/C.

Charge documents.
Promissory note.
Letter of guarantee
Declaration
Letter of continuity.

Application & agreement for confirmed irrevocable without Recourse to drawers Letter of
Credit.

Management
Loan management is the process for controlling and collecting payments from your customers. A
good loan management system will help you reduce the amount of capital tide up with debtors
(people who owe you money) and minimize your exposure to bad debts.
Good loan management is vital to cash flow. It is possible to be profitable on paper and but lack
the cash to continue operating in business.

Loan Management Policy:

Loan management policies help the loan department operate more efficiently. Loan management
policies are rural & guidelines established by top management that govern the companys loan
department and its performance in the extension of loan privileges.
Types of Loan Management:
Loan management policies allow the loan department to operate more efficiently. Ambiguity is
reduced over how to proceed when policies are clearly-defined. Loan management policies can
offer specifies rules in regard to the loan amounts, type of customers, debt-to-income ratio,
collateral requirement, payment terms and interest rates.

Types:
There are several types of loan management policies. They are based on the industry, lending
activities and top managements business style or approach to lending. Automotive, academic,
home, retail, wholesale and credit card lending all may have different loan management policies.
A tight loan management policy to conservative and restrictive guidelines for the extension of
credit. A loose policy allows for more flexibility and may focus more on simply making sure
debt is repaid instead of credit analysis and review.

Procedures:
Loan procedures are the specific ways in which top management requires the loan department to
achieve loan management policies. They can include instructions on what data is to be used for
the loan investigation and analysis process and other procedures. Loan procedures can also
provide information for the loan approval process, account suspension and instances requiring
management notification.

Cash Flow:
A major influence on loan management policies is cash flow. Cash flow requirements describe
the amount of money a business needs to meet its financial obligations or pay its bills. A loose
loan policy in which little customer loan investigation is performed can lead to higher default
rates and slower repayment of debt. This can have a significant impact on a companys cash
flow. Companies with small cash reserves or other sources of capital may be inclined to adopt
tighter loan management policies.
Communication:
Part of a good loan management policy should stress communication with other departments.
Communication with the sales department can reduce conflict sometimes occurs when a sale is
declined or affected because the loan department determines there is high level of risk involved
in doing business with a particular customer. Communication with the collections department
can provide warning signs of loan or credit default.

Guidelines:
The purpose of this document is to provide directional guidelines that will improve the risk
management culture, establish minimum standards for segregation of duties and responsibilities,
and assist in the ongoing improvement of BKB. The guidelines have been organized into the
followings:
Policy guidelines:

Lending Guidelines.
Credit Assessment & Risk Grading.
Approval Authority.
Segregation of Duties.
Internal Audit.

Management structure & responsibility

Procedural guidelines:

Approval Process.
Credit Administration.
Credit Monitoring.
Credit Recovery.

Lending guidelines:

The lending guidelines include the following:

Industry and business segment focus.

Types of loan facilities.
Single borrowers/group limits/syndication.
 Lending caps.

Loan assessment & risk grading:

Loan applications should summarize the result of the risk assessment & include, as a minimum,
the following details:

Environment or social risk inputs.

Amount and type of loan (s) proposed.
Purpose of loans.
Loan structure (Tenor, Covenants, Repayment schedule, Interest).
Security arrangements.
Any other risks or issue.
Risk triggers & action plan-condition prudent, etc.

Approval Authority:
Loan approval authority has been delegated to Branch Manager, loan Committee by the
MD/Board.
Delegated approval authorities shall be reviewed annually by MD/Board.
Approvals must be evidenced in writing. Approval records must be kept on file with the
loan application.
The aggregate exposure to any borrower or borrowing group must be used to determine
the approval authority required.
Any loan proposal that does not comply with lending guidelines, regardless of amount,
should be referred to Head Office for Approval.

Segregation of Duties:

Bank will aim at segregating the following lending function:

Loan approval/Risk management.

Relationship management/marketing.
Loan administration

Loan Recovery Procedure

With the objective of reducing classified loans and preventing further classification a number of
strategies and techniques have adopted by the bank. These include:

Reduction of classified loans in each branch to an acceptable level and for this purpose,
in each accounting year classified loan of the previous year to be reduced by 5 percent.

Identification of loan accounts as would be classified (which will become classified after
 30 June, each year if they are not recovered on or before 30 June) and all out efforts to be
under taken to recover them.

Preparation of the list of the would-be-classified (WCL) and classified loan accounts to
be completed at the beginning of the year.

Taking various steps at the beginning of the year to achieve recovery targets of classified
and WCL loans. Such steps include arrangement of Shuvo halkhata, Modhu Mela,
Nobanno Mela, Maha Camp etc.

It is the duty of the bank to recover the landed fund within the stipulated time and if the borrower
fails to repay the money within the said period bank will declare him/her as a defaulter and
recover the fund by selling the securities given by the borrower or by freezing his her account or
make a suit against him or her.

Strategies for recovery: Recovery of loan can be made in the following 3 method:

Persuasive
If the borrower didnt paid the due amount of loan in time then the first step of bank is private
communication with him.it create a mental pressure on borrower to repay the loan amount. In
this case bank can provide some advice to the borrower for repaying the loan.

Voluntarily

Building task force

Arranging seminar
Loan rescheduling policy
Waiver of interest rate

Legal recovery

Reminder to the bank

Creating social pressure for the payment of loan and advance
Providing legal notice
Execution of legal rules by the help of court

Others

Visit borrower office

Remind indirect by phone call
 Invite to borrower for cup

Loan facilities, principals, procedures and lending guidelines should provide a clear and
consistent point of reference for all employees and prevent misunderstanding, confusion or
omission by personal dealing with loan issues. Additionally, loan policies help prevent deviation
from the overall lending principles and loan culture.

Loan-Pricing Method
In pricing a business loan, Bank management must consider the cost of raising loan able funds
and the operating costs of running the Bank. This means that Banks must know what their costs
are in order to consistently make profitable, correctly priced loans of any type. There is no
substitute for a well-designed management information system when it comes to pricing loans.
The BKB is generally used the simplest loan-pricing model which assumes that the rate of
interest charged on any loan includes four components: (1) the cost to the Bank of raising
adequate funds to lend, (2) the Banks non-funding operating costs (including wages and salaries
of loan personnel and the cost of materials and physical facilities used in granting and
administering a loan), (3) necessary compensation paid to the Bank for the degree of default risk
inherent in a loan request, (4) Banks desired profit margin.
These sector-wise interest rates have been introduced by the Head Office of the BKB. They use
cost-plus pricing method in case of pricing the loans. The fourteen branches of the Trust Bank
Limited have maintained these rates strictly except in case of some quality and credit-worthy
lenders. After judging the lenders credit-worthiness, the BKB gives some beneficiary to this
kind of lenders. They can enjoy a decreasing interest rate, which maintained by the BKB
branches internally. Other wise, the scheduled rates are maintained by all the BKB branches. In
case of Micro Credit, as the loan amount is not so large thats why the scheduled rate is
maintained by the Bank. Actually, the Lending rate is based on the prescription, which is given
by Bangladesh Bank.
The recovery performance of the bank was not so good during the period 1999-2002. The credit
administration and monitoring of this bank was inexperienced. This bank is monitoring and all
the loans are sanction by the high authority whose are high officials of Bangladesh Army. This
Bank has a common thinking that the people who taking loan from this bank always think that
this is an army bank so if I failed to pay then it will be a very big problem for me. But this
thinking did not work properly. Thats why the management has to think about a well-designed
recovery policy.