Meaning of Banking :

A bank is a financial institution, which works for profit. Banking means the business of this institution. It may be defined as accepting of money on deposit for the purpose of lending or investment and dealing in various agency and general utility services. One keeps his money as deposit in a bank because he has confidence in the latter. The bank grants loans out of the money deposited to those in whom it has confidence. So banking is nothing but dealing in credit, which means confidence.

Origin and Development of Banking :

Origin of the word "Bank" Opinion differs in regard to the origin of the word "Bank". According to some authorities, the word "Bank" is derived from the words "Banco", "Bancus", "Banque" or "Banc". All of these words mean a bench upon which the mediaeval European bankers used to sit with their coins to transact banking business.

Early History of the Origin of Banking :

Banking is not anything new. It has a very old history, which dates from the days of Greece and Rome. The present day banking has passed through different stages of development. The ancient bankers performed many functions known to modern bankers. But persons who were not habitually bankers conducted banking business in ancient society in unorganized way. They carried on banking business as subsidiary to their main business. Gradually, banking functions were taken up by a separate class of people know as 'bankers'. Now banking has got an organized existence. Money also links the history of origin of banking. When money was introduced in place of barter, people faced a new problem-"where to save surplus money in safe position?" Then money came to help trade commerce. But borrowing and lending for trade and commerce could not be carried on without banking. Hence money created a logical necessity of banks. The role of banking would be meaningless without money and the role of money would be insignificant without banking. However, the birth of present day banking is not sudden. It has come to its present stage through a process of development. The modern banking has its origin in three ancestors, such as, The Goldsmiths, The Merchants and The Moneylenders.

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Importance of Modern Banks Modern banks perform many services in relations to economic development, trade and commerce, private dealings, etc. A good banking system is indispensable in a country for various types of services. The following services indicate the importance of a bank in modern societies:

Promotion and Mobilization of Savings

The bank keeps people's surplus money in safe custody. Sometimes, it allows interest at different rates on people's deposits. This system encourages the habits of thrift and savings among the people. The bank collects the scattered savings in this way, pools them together and thus makes funds available for different purposes.

Supply of Finance The bank accepts deposits for advancing loans. Loans are given to private people, industrialists, traders and merchants against approved securities. The bank provides funds for financing plans of economic development. Commercial banks generally grant short-term loans. The loans by specialized banks are usually made available for longer periods. Thus, banks borrow money by way of deposits from the public and supply the same to important institutions for investment and other purpose.

The modern economy is characterized by large-scale production. But individual producers are unable to provide big funds for production on large scale. The particular importance of banks lies in financing production on such scale.

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Principle functions of which are:

1. To receive demand deposits and pay customers cheques drawn against them, 2. To receive time deposits and pay interest there on, 3. To discount notes, make loans and invest in govt. or other securities, 4. To collect cheques, drafts and notes etc. 5. To issue drafts and cashier's cheques, 6. To certify depositors cheques and 7. When authorized by a chartering govt. it may act in a fiduciary capacity. So, A bank is an office or institution for the keeping lending and exchanging etc. of money.
BANKING ORGANIZATION

BANKING

FUNCTIONS

Definitions of Banks provided by Encyclopedias.

1) "Establishment for custody of money, which it pays out on customers order" - The New Oxford Encyclopedic Dictionary.

2) "An establishment receiving money for the purpose of being lent out on interest or returned by exchange or disposed of the profit of to be drawn out again as the owner require it" --- The New Caxton Encyclopedia " Banker includes a body of person, whether incorporated or not, who carry on the business of banking." --- English Bills of Exchange Act-1882 2) "Banker includes person, or a corporation, or a company acting as banker." --- Negotiable Instrument Act, 1881

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Definitions of Bank Accepted by Banking Institutions

" A bank performs an essentially distributive task, service or acts as an intermediary between borrowers & lender sense, however, a bank can be considered the heart of a complex financial structure." --- American Institute of Banking.

Definitions of Bank Given by Authors

" Banks are the institutions whose debts are commonly accepted in settlement of the other peoples debt." --- Sayers " A bank is an economic institution whose main aim is to earn profit through exchange of money & credit instruments. --- John Harry. " A bank is an institution the principal function of which is to collect the unutilized money of the people & to lend it to others." --- R. P. Kent.

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DEVELOPMENT OF BANKING SECTOR IN BANGLADESH:

Bank system was practiced in the Indian subcontinent from the ancient period. In Indian subcontinent merchant's goldsmith's moneylenders Ire the primary bankers. During, the early period of nineteenth century in 1806 "Bank Of Bengal" and in 1840" Bank Of Bombay" and in 1840 "Bank Of Madras was established. These banks Ire called as Presidency Bank. Then in 1920 these three banks merged to "Imperial Bank Of India". In 1971 Bangladesh become independent. After liberation "Bangladesh Bank" was automated with the assets and liabilities of former "State Bank Of Pakistan". It is the central bank of Bangladesh. During Pakistan period in my there Ire 1090 branches of 12 commercial banks. Three foreign banks Ire also active with 14 branch offices. Before Pakistan control liberation 80% of banking activities of my country, consequently Bangladesh traders and industrialists didn't get notable help from. The commercial banks. After liberation to reform the destroyed economy, on 26th March 1972, the banking sector of Bangladesh was nationalized. After nationalization Government of Bangladesh changed all the banks to six banks, which are Sonali Bank, Janata. Bank, Agrani Bank, Pubali Bank and Uttara Bank. But the last two banks have been hand over to private sector. fruitful. Then in 1983 several private banks are active in my country and playing their role in the development of trade and commerce of Bangladesh as Ill as in the development of economy.

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Growth of Private Sector Banks in Bangladesh

Bank and financial institutions play an important role in financial intermediation and thereby contribute to the overall growth in the economy. At present, the financial system in Bangladesh consists of the central bank , nationalized commercial/specialized banks, private banks, foreign banks and other non-bank financial institutions. The main focus of this writing would be a review in a general fashion on the gradual evaluation of private sector banks in Bangladesh and evaluate their comparative position vis-a-vis other types of banks and their future roles in years to come.

Before independence of Bangladesh on 16 December 1971 all the commercial banks operating here excepting National Bank of Pakistan ( Now Sonali Bank) and Eastern Mercantile Bank ( Now Pubali Bank Limited) were privately owned. After independence, all the banks operating in Bangladesh ( except

foreign banks) were nationalized and restructured into six banks. later on Uttara Bank and Pubali Bank whose majority shares were held by the Bangladesh is were transferred to the private sector in September 1983 & 1984 respectively. In the banking system, Bangladesh Bank with the approval of the Government issued licenses for opening new banks since early 80s. At present there are 30 private banks operating in Bangladesh. These private Banks are popularly known to the public as First Generation Banks ( 09 banks opened during 1982-87) ,Second Generation Banks ( 08 banks opened during 19921996) and Third Generation Banks ( 12 Banks opened during 1999-2001). For our purpose, we will treat all banks together to represent the private sector banks.

Deposits of the private banks increased significantly during the period under study ( 19852003) but growth rate came down in recent years as compared to earlier years. Deposits increased by 207 percent during 1985-90 and further by 112 percent during 1990-95. The growth rate showed down to 101 percent and 75 percent during 1995-2000 and 2000-03 and 65 Percent during 2003-2006 respectively. But in terms of market share of the private banks to Loan and Advance of NCC Bank Limited, Agrabad Branch, Chittagong Page 6 of 46

total deposits of the banking system, it showed an increasing trend over the years. The market share in deposits of the private banks increased significantly from 17.58 percent in June 1985 to 24.78 percent in June 1990 and again to 27.46 and 30.30 percent in June 1995 and 2000 respectively. At the end of December 2003,it stood at 37.59 percent. In 2006 it was 42.45 percent.

Now, a question may arise where from these deposits came in to the private banks. One can easily respond to this question by saying that substitution of deposits took place mostly from nationalized commercial Banks (NCBs) to the private banks as is evident from the declining share of deposits of the NCBs. The shares of NCBs in total deposits of the banking system, which was 71 percent in June 1985 and gradually declined to 63 percent in June 1990 and further to 56 percent in June 2000. By the end of December 2003 & 2006 it came down to 49 & 45 percent respectively. This decline in deposits, may be attributed among others to the following factors:

Relatively better customer services provided by the private banks Higher interest rate on deposits offered by these banks. The weighted average rate of interest on deposits of the NCBs and the foreign banks was 6.31 percent and 4.39 percent at the end of 2003. Whereas it was 7.20 for the private sector banks The relatively aggressive branch expansion program by the private banks. The total number of private bank branches was only 932 (13 percent of total branches) in June 1985, which increased to 1016 (18 percent of total branches in June 1995 and further to 1231 ( 20 percent) in June 2000. It again increased to 1416 (23 percent of total branches) in 2003 and 1975 (27 percent of the total branches) in December 2006.

The shares of deposit, advances and branches of the private banks in the total banking system are shown below: In % of the total banking system Sources:

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Statistics department, Bangladesh Bank:

Deposits Advances Urban Rural Total Branches Urban Rural Total Classifie d loans 16.19 22.79 24.94 27.60 34.92 36.58 1.39 1.99 2.52 2.70 2.67 2.85 17.58 11.34 24.78 19.17 27.46 24.43 30.30 28.55 37.59 37.73 39.43 45.76 0.96 0.96 0.57 0.61 0.80 1.21 12.30 7.66 20.41 9.84 25.00 11.99 29.16 15.08 38.53 16.86 46.97 18.96 5.08 4.09 5.49 5.25 5.88 6.42 12.74 NA 14.93 24.41 17.48 39.43 20.33 22.01 22.74 17.44 25.38 25.86

Year
(End June) 1985 1990 1995 2000 2003 2006

Urban Rural Total

If we look at the composition of deposits and branches of the private banks we see that most of their deposits and branches are concentrated in urban areas. Urban deposits of the private banks, which stood at 16 percent of total deposits in June 1985, increased to 25 percent. In June 1995 and further to 35 percent in June 2003. Again urban branches of the private banks which was only 8 percent of total branches in June 1985 sharply increased to 12

percent in June 1995 and again to 15 percent and 17 percent in June 2000 and in June 2003 respectively. On the other hand, the share of rural branches remained at around 5 percent throughout the period since 1985.

The general perceptions are that the private banks are a vehicle to this process. The share of rural advances of the private sector banks was always lower than that of rural deposits of these banks throughout the period. For example, rural advances were lower at 0.96 percent as against 1.39 percent of rural deposits in June 1985. The share of rural advances of these banks declined sharply to 0.57 percent of total deposits in June 1995 whereas rural deposits were 2.52 percent. The same phenomena also continued during the subsequent years. This situation suggests that we have enough resources in the rural areas, but limited opportunities to use those resources there.

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It was as high as 39.43 percent of private banks advances in December 1995 which gradually declined to 22.01 percent in December 2000 and further to 17.44 percent in June 2003. This has been due to the improved management in the private banks as well as effective supervision and prudential guidelines given by the central bank. Still the private sector banks in Bangladesh are to go a long way and they need strong consolidation of their operations in all respects rather than expansion.

BANKING STRUCTURE IN BANGLADESH

BANK

Classification on the basis of ownership

Classification on the basis of function

Classification on the basis of organization

Classification on the basis of scheduling

1. State ownership bank 2. Private ownership bank 3. Govt. and private joint ownership bank 4. Autonomous bank

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Central bank Commercial bank Co-Operative bank Agricultural bank Industrial bank Exchange bank Investment bank Merchant bank Saving bank Import and Export bank Consumer bank Transportation bank Small and Cottage Industries bank Mortgage bank Mixed bank Grameen bank Indigenous bank Regional bank Community development bank International bank

1. Unit bank/banking 2. Branch bank/ banking 3. Chain bank/ banking 4. Group bank/banking 5. Mixed bank/ banking

1. Scheduled bank 2. Non scheduled bank

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Chapter-2

Company Profile

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Profile of NCCBL
Mission of NCCBL:
Anticipating business solutions required by all customers everywhere and innovatively supplying them beyond expectation. Setting industry benchmarks of world class standard in delivering customer value through our comprehensive product range, customer service and all our activities. Building an exciting team-based working environment that will attract, develop and retain employees of exceptional ability who help celebrate the success of our business, of our customers and of national development Maintaining the highest ethical standards and a community responsibility worthy of a leading corporate citizen Continuously improving productivity and profitability, and thereby enhancing shareholder value

Vision of NCCBL:

To be in thee forefront of national development by providing all the customers inspirational strength, dependable support and the most comprehensive range of business solutions, through our team of professionals who work passionately to be outstanding in everything we do.

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Objectives & Goal of NCCBL

To share a significant portion of the banking sector by utilizing available manpower and state of the art technology for maximizing the shareholders wealth. To maximize shareholders wealth. To earn satisfactory rate of return on investment by providing wide range of banking services.

General Overview of NCCBL

In Bangladesh there are three types of banking service are available. Commercial bank is one of them. Commercial banks are organized on a joint stock company or private company or limited company system. Primarily for the purpose of earning of profit. They can be either of the branches banking types, as we see in most of the countries, with a large network of branches, or the unit banking type, as we see in the United States, Where a banks operation are confined to a single office or to a few branches with in a strictly limited area. Although the commercial banks attract deposit of all kinds- current, savings and fixed their resources are chiefly drawn from current deposits, which are repayable on demand. So they attach much importance to the liquidity of their investments and as such they specialize in satisfying the short-term credit needs of business other than the long-term.

The two essential functions of commercial banks may best be summarized as the borrowing and lending of money. Commercial Bank borrows the money as current deposit, saving and fixed deposit, i.e. they mobilizes the saving of the society. Then they provide this money to those who are in need of it by granting overdrafts of fixed loans or by discounting bills of exchange or promissory notes. Loan and Advance of NCC Bank Limited, Agrabad Branch, Chittagong Page 12 of 46

2.3 Background of NCCBL

National Credit and Commerce Batik Limited hereinafter called NCCBL started its banking operation as a scheduled bank under private sector on 17 th May 1993 under the ambit of Bank Company Act, However, it traces its origin to National Credit Limited (NCL), which was incorporated on 25th November 1985 as a public limited company in order to operate as a finance company. The NCL faced severe setback in 1992 in respect of business and came on the verge of collapse. However, with the initiative of sponsors and the management, the NCL was converted to a full-fledged private commercial bank with the permission of Bangladesh Bank in 1993. Over the years, the bank has been expanding its service coverage through introduction of new branches at different strategically important areas of the Country. It is sponsored by a number of entrepreneurs representing various business groups with exposure in Garments, Textile, Steel & Engineering, Financial, Insurance, Electronics, and Cement and Construction Sectors. Mr Tofazzal Hossain is the present Chairman of the bank. The bank went for IPO on December 1999 and raised Tk. 195.00 million from the offer. The NCCBL got enlisted with Chittagong Stock Exchange on May 16th 2000 and with Dhaka Stock Exchange on May 28th 2000. The bank increased its authorized capital to Tk. 2,500.00 million from Tk. 750.00 million on March 27, 2005. It provides a wide range of commercial banking services. The bank has 53 branches, with staff strength of 1230 as on 31 st December 2007

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Management Hierarchy of NCCBL:

Managing Director (MD)

Deputy Managing Director (DMD) Additional Managing Director (AMD)

Executive Vice President (EVP)

Senior Vice President (SVP)

Vice President (VP)

Senior Assistant Vice President (SAVP)

Assistant Vice President (AVP)

Senior Principal Officer (SPO)

Principal Officer (PO)

Senior Officer (SO)

Officer (O)

Probationary Officer (PO)

Junior Officer (JO) Loan and Advance of NCC Bank Limited, Agrabad Branch, Chittagong Assistant Officer (AO) Page 14 of 46

Corporate Information
Date of Incorporation Banking Operation Date : 25th November 1985 : 17th May 1993

Brief View of NCCBL: Taka in million

Particulars Authorized capital Paid up Capital Deposit Advance Advance-Deposit ratio % Import Export Gross Profit Net Profit Earning per Share (EPS) Return on asset (ROA) Return on equity (ROE) Capital adequacy ratio % Classified loan % Number of Branches Number of Employees NCC Bank Posted Satisfactory Growth Increase in In 2008 In 2007 Tk. 2500.00 2500.00 1757.62 46904.66 46332.69 98.78% 3,8796.88 12522.04 2363.49 60.17 50.20 1.23 21.63 10.61 4.14 57 1400 1352.01 34901.77 32687.75 93.66% 28779.21 9577.92 1780.25 67.71 38.53 1.59 20.23 10.61 4.17 53 1230 -0.03 4 1,0017.67 2944.12 583.24 -7.00 11.67 -0.36 1.40 -0.71% 405.61 12002.89 13644.94 34.80% 30.73% 32.77% -10.33% 30.28% -22.64% 6.92% Growth 10% 68.63% 38.01% 41.74%

170 -

The Paid up Capital of NCCBL was TK 1757.62 million in 2008 against TK 1352.01 million of 2007 the paid up capital of the bank increased by TK 405.61 million, registering 68.63% growth comparing to the same of previous year. The bank management has been able to collect deposit of TK 46904.66 million in 2008 against TK 34901.77 million of 2007. Deposit of the bank increased by TK 12002.89 million, registering 38.01% growth comparing to the deposit of 2007. Of the deposit, NCCBL had made loans and advances of TK 46332.69 million in 2008 against TK 32687.75 million of 2007. The loans and advance of the bank have Loan and Advance of NCC Bank Limited, Agrabad Branch, Chittagong Page 15 of 46

increased by TK 13644.94 million, registering 41.74% growth. As a result, the credit-deposit ratio of NCCBL stood at higher than the stipulated fixed 82% of total liquidity but within a short period of account closing for 2008 on 31 December, NCCBL has been able to keep down the ratio by gearing up its deposit collection drive, managing Director & CEO of the bank Nurul Amin told The industry. The import business handling by NCCBL in 2008 was TK 38796.88 million against TK 28779.21 million of 2007. Import business handling increased by TK 10017.67 million, registering 34.80% growth comparing to the same of previous year. The export business handling by the bank in 2008 was TK 12522.04 million against TK 9577.92 million of 2007, registering 30.73% growth comparing to the same of 2007. Export business handling of the bank has increased by TK 2944.12 million in 2008. The gross profit of the bank has stood at TK 2363.49 million in 2008 against TK 1780.25 million of 2007, registering 32.775% growths. The gross profit of NCCBL increased by TK 583.24 million within the year 2008, comparing to the profit of 2007. Earning per share (EPS) of NCCBL in 2008 was TK50.20 against TK 38.53 of 2007. EPS increased by TK 11.67, registering 30.28% growth. Return on asset (ROA) of the bank in 2008 was 1.23% against 1.59% of 2007. The efficient management of the bank headed by its Managing Director & CEO Nurul Amin has been able to reduce the non-performing loans by 0.71%, even in the global economic meltdown wave.

Oparational profit(2004-2008)
2500 2000 1500 2363.49 1780.25 1267.57 1018.34

Profit

1000 720.49 500 0 2004 2005 2006 2007 2008 Year

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Major Functions of NCCBL:

NCCBL is a service oriented Financial Institution. The main objective of NCCBL is to satisfy the customer by serving various facilities they as possible. The bank offers different types of quality services to its clients NCCBL performs the following functions, which are given below:

1. Deposit services: The NCC Bank offers for its clients various deposit services. These services are as follows:
Current Deposit (CD) Saving Deposit (SD) Fixed Deposit Receipt (FDR) Short Term Deposit (STD) Special Deposit Scheme. Special Saving Scheme. Premium Term Deposit. Instrument Earning Deposit.

2. Credit Services:
Banking business essentially involves lending. Infect deposits are accepted for lending or investment. It interests rate ranges from 12% to 16% NCCBL provides loans and advances in the following sectors:

Staff Loan (House Building) Staff Loan Car Loan and Advance of NCC Bank Limited, Agrabad Branch, Chittagong Page 17 of 46

 Security Over Draft (SOD) Against FDR SOD Export SOD General Loan against Trust Receipt (LTR) Packing Credit Lease Finance Hire Purchase Payment Against Document (PAD) Cash Credit Hypothecation Foreign Dollar Bill Purchase (FDBP) (DOCS) FDBP (Clean) Export Development Fund (EDF) House Building (Res.) Personal Loan Small Business Loan

3. Customers Services: NCCBL is always busy in serving to the customer in the best way. One of their greatest assets is the trust of its customers. NCCBL has the following arrangement of remittance with in the country. Information providing by the Bank in every desk. Account Opening Online Banking Facilities Pay-Order issue Telephone Transfer (TT) Demand Draft (DD) issue Account Transfer Facilities Solvency Certificate Issuing Locker Service
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 Letter of Credit (L/C) Credit Card Issue (with different limits for different types of customer). Traveler Cheque Issue Money Gram Service

Besides these, it also offers some specialized services to its customers. NCCBL has launched following saving schemes: NCC Bank special Saving Scheme (SSS). Special fixed deposit scheme (FDR). Consumer Financing (Small Loan). Lease Financing Islamic Banking Scheme Non-Resident Foreign Currency Deposit Scheme.

NCCBL, Agrabad Branch, Ctg.-My Place of Posting

Establishment:
National Credit & Commerce Bank Limited (NCCBL) is one of the fastest growing banks among all the private Commercial Banks in Bangladesh. The institution started its function back n 18th November 1985 as an Investment Company in the name & style of National Credit Ltd. (NCL). As a branch of National Credit Ltd Agrabad Branch, Ctg. started its function in 1987 as an investment company. As a branch and Commerce Bank Limited emerged full flagged Commercial Bank on 17 th May, 1993, after obtaining license from Bangladesh Bank. From that time, a branch of National Credit Ltd Agrabad Branch, Ctg. carries out their banking activities. At that time their deposit was Tk. 4 core and at present time the deposit position on branch is Tk. 259.29 core. Loan and Advance of NCC Bank Limited, Agrabad Branch, Chittagong Page 19 of 46

Present position of the branch

Figure in crore

Particulars 2007 Deposit Advance Profit Letter of Credit (L/C) Export 205.00 350.00 7.51 120.28 50.42

Year 2008 259.29 544.15 10.21 158.25 57.22

Operational profit (2002-2006)

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The bank gains remarkable progress in case of operational profit. It is a great achievement of the bank as profit is the ultimate target of any bank or any financial institution. The growth in 2006 is 15.28% higher than that of 2005.

In this connection we can conclude that the bank is performing extremely well in case of maintaining the increasing trend of operating profit.

SWOT Analysis

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SWOT stands for Strength, Weakness, Opportunity and Threat. The SWOT of NCCBL have been shown below:

Internal factors

Strength
Existence of strict and standard credit management. Harmonious lender (bank)- borrower (Client) relationship. Experienced manpower in advance/loan department. Decreasing trend of classified loan. Existence of some new & attractive credit scheme.

Weaknesses
Lack of trained and highly educated officers. Lack of modern equipment. Lack of proper office space. Lack of young, energetic and talented officers. Absence of computerized system. Absence of Islamic Banking System. Lack of proper advertisement of the products and services of advance.

External factors
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Opportunities:

Can introduce more new and attractive credit scheme. Can set a competitive interest rate. Can recruit young, energetic and talented officers. Can take initiative for introducing Islamic Banking system.

Threats:
Govt. policies are not in favor of the private banks. Competitors done the credit services to customers more effectively. Competitors offer low interest rate on loan. Entrance of highly equipped and modern banks. Intense competition in the credit market. Competitors have young and energetic work force. Govt. has imposed high rate of taxes and VAT on interest received on advance. Remarkable progress on Islamic Banks.

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7% 16%

1%

5% 14%

22% 35%

Current Deposits Fixed Deposits Deposits Schemes Other Deposits

Savings Bank Deposits Short Term Deposits Bills Payable

Advance is the most important parts of the bank. Actually, the main business of the bank is to settle loans and advance or credit. Bank accepts deposits from individuals and makes loans. Although all lending involve risks yet a bank has to go with it for earning profit and economic enlistment as well. Better control on the risk of credit system represents the well reputation of bank. A Bank has no sense without credit. It is treated as the investment of a bank. In this connection. NCCBL has also no exception.

3.1: Concept of loan and advance

3.1.1: General concept: Generally, Loan and advance refers to Money lent on condition that it is repaid, either in installments or all at once, on agreed dates and usually that the borrower pays the lender an agreed rate of interest. Loan and Advance of NCC Bank Limited, Agrabad Branch, Chittagong Page 24 of 46

Bank loan or bank advance is a from of finance. It indicates- a specified sum of money lent by a bank to customer, usually for a specified rate of ordinary interest (calculated by taking 360 day as a year). Handling load and advance is he major function of bank.

3.1.2: Difference between loan and advance :

Loan: It refers to loan term credit ie money lent by a bank for more than one year (e.g.5 or 10 or 15 year etc) Such as Loan general, House building loan, Project loan etc. Advance: it refers to short-term credit i.e. Money lent by a bank for less than one year Such as Cash credit, overdraft, discount etc.

In comprehensive sense, loan is considered as a part of advance despite of the above difference. NCC bank also classified loans and advances according to this comprehensive sense.

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3.2 Different Advances offered by NCCBL

Advances

Loans

Overdrafts

Cash credits

Discounts

Loan General House Building Loan Loan against Imported Merchandise

SOD (FO) SOD (G)

Pledge Hypothecation

Inland Bills Purchased Foreign Bills Purchased FDBP & Discounted Payment against document

LDBP Loan Against Trust Receipt Loan Against Packing Credit Transport Loan Project loan Demand Loan Consumer Finance Lease finance Small Business Loan House renovation loan Personal Loan Festival small business loan Festival personal loan Housing loan

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3.3: Details of some major advances

3.3.1: Loans Under the loan system, credit is given for a definite purpose and for a predetermined period. Normally, these loans are repayable in installments. Some major loans of the bank are describes as under:

a) Loan General

When an advance is made in lump sum repayable either in fixed monthly installments and no subsequent debit is ordinarily allowed expect by way of interest, incidental charges etc called general loan. it is usually for a single purpose where the entire amount may be required at a time or in a number of installments within a short period of time. Generally, when the advance cant be classified into any category, it is considered as Loan General.

b) House Building loan

In order to solve financial incompatibility to make a house, the bank offer this loan to middle class people. Period of loan is maximum 5 years. Limit of the amount of the loan depends on the customer banker relationship.

c) Loan against imported merchandise (LIM)

LIM is a temporary loan and allowed against imported goods. LIM may be created at the request of the importer while he is not in a position to take delivery of import bills by making payment of entire bank dues. The importer has to keep the goods in banks custody for getting this loan.

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d) Loan against trust receipt (LTR)

LTR is also a temporary loan and allowed to the customer against their application on the basis of only trust, which is generally built on good customer- banker relationship. After sanction of LTR, import bills are handled over to the importer who will clear the goods from the custom authorities by making payment duty, VAT and other charges.

e) Consumer Finance scheme

The Scheme aims at improving the standard of living of the fixed income group. Under the scheme the clients may secure loan facilities at easy installments to procure household amenities. It meets household needs of service holders: Furniture/ TV/ Refrigeration & others household durables. Its Credit Ceiling is Up to tk. 1.00 lac and term is 2 years.

f) Lease Finance scheme

An entrepreneur, under this scheme, may avail of the lease facilities to procure industrial machinery (without having to purchase it by down payment) with easy repayment schedule. The clients also get special rebate in their income- tax payment under the scheme. Items leased out to the new/ existing industries to procure machines for the industries.

g) Small business loan

This loan is introduced for smooth running/ expansion of business of small entrepreneurs who are honest, sincere & promising. This type of loan diversifies banks lending with the requirement of the time. Its Credit Ceiling is Up to tk. 5.00 Lac and term is 2-5 years.

h) House renovation loan

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The purpose of the loan is to help genuine house or flat owners (not developers) to undertake repairing or renovation works for better living or increased rental income. Credit ceiling of the loan is Up to tk. 5.00 Lac and Term is 5 year.

i) Personal loan

The loan serves the purpose of meeting emergency financial expenses of service holders such as Medical treatment, Marriage, Maternity, Admission of Children, Purchase of banks, Exam fees etc. Credit Ceiling of the loan is Up to tk. 1.00 Lac and Term is at least 6 month but not more than 3 years.

3.3.2 Overdrafts

When a current account holder is permitted by the banker to draw more than what stands to his credit, such an advance is called an overdraft. it is an automatic coverage by the bank of all checks presented against the firms account, regardless of the account balance. Interest is calculated and charged only on the debit balances on daily product basis. Generally two type of overdraft is exercised in the bank-

SOD (FO): It is allowed against financial obligation for promotion of economic and business activities. SOD (GE): It is allowed to the traders for business promotion and economic activities.

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3.3.3 Cash Credit Cash Credit is a continuous type of short-term advance. Under this system, the banker specifies a limit, called the cash credit limit, for each customer, up to which the customer is permitted to borrow against the security of tangible assets or guarantees. Two types of cash credit are exercised in NCCBL

a) Cash Credit (Hypothecation) :

Hypothecation is a charge on company for a debt, but neither ownership nor possession passes to the creditors. In hypothecation, both ownership and possession remain under debtor. This type of credit is allowed to the traders and industrial borrowers for promoting trade and commerce and industries. This type of advance depends mainly upon the trustworthy of the party.

b) Cash Credit (Pledge) :

In this case, possession of goods passes to the creditor or bank. It is allowed for promoting trade, commerce and industries of the country against pledge of stock in trade under Banks control.

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3.3.4 Discounts

Apart from the usual loans and advances, purchase and discounting of bills of exchange is another way of employing bank funds. Such bill of exchange arises out of commercial transactions both in 0inland trade and foreign trade. Although it has various types, PAD is a major one that is discussed as under:

a) PAD (Payment Against Document):

PAD is the most common credit for foreign exchange business of the bank. On the receipt of import bills against the L/C from the Negotiating Bank, the issuing bank scrutinizes the documents with terms & conditions of the L/C and if it is found completely in order, PAD loan is created in the name of the importer in order to reconcile the entries so debited by the Reimbursing Bank. The maximum period of repayment of this loan is one month.

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3.4 Advance procedure followed by NCCBL

Procedure is an important factor for the success in any field. If an institution follows proper and standard procedure for their operation, there will be a great chance of success. Better performance is possible only when better guideline and procedure are followed. For this reason, I would like to highlight the procedure of loans and advance department of NCCBL before evaluating its performance in that area.

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3.4.1 Security for loans and advances Security can be treated as an insurance against emergency. Because it serves as the safety valve for an unforeseen emergency. Simply it means things deposited as a guarantee of an undertaking or loan to be forfeited in case of default. In order to sanction credit, the bank has to keep security from the borrower for the assurance of the recovery of loans and advances.

3.4.1.1 Types of securities

Security offered against loan may be various. The securities may vary from gold and silver to goods of various types, immovable properties, life insurance policies, stock exchange securities, promissory notes etc. a prudent banker always tries to take tangible assets as securities to safeguard his interests. Generally, security has two types

a) Primary security: This is the main cover for an advance. The borrower himself deposits this. b) Collateral security: This is the additional or subsidiary or secondary security. This is resorted to after exhausting all possibilities of recovery.

3.4.1.2 Methods of creating charges on security Loan and Advance of NCC Bank Limited, Agrabad Branch, Chittagong Page 33 of 46

The bank can create charges on the borrowers security by the following methods:

Pledge

Hypothecation

Mortgage

Lien

Assignment

Set-off

a)

Pledge: It is the Bailment of goods as security for payment for a debt or performance of a promise. The possession of security is passed to the bank.

b)

Hypothecation: It is the charge against property for a amount of debt where neither ownership nor actual possession is passed to the bank. But constructive possession remains with the bank as per deed of hypothecation. Mortgage: When a customer offers immovable property like land and building as security for a loan, charge thereon is created by means of mortgage. It is the transfer of an interest in specific immovable property for the purpose of securing. There are mainly two types of mortgages: - Equitable mortgages - Legal mortgages

c)

d)

Lien: It implies right of the creditor/ bank in possession of goods or securities belonging to a debtor to retain them until a debt due from the latter are paid.

e)

Assignment: It means a transfer by one person of a right, property or debt (existing or future) to another person. Some examples are-Contract money due from the government and semi government body Supply bills Book debt Life insurance policy, etc.

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f)

Set-off: It means the total or partial merging of a claim of one person against another in a counter claim by the letter against the former. It is a right, which accrues to the banker as result of the banker customer relationship.

3.4.2 Process of loan sanction followed by NCCBL

Process of sanction

Step-1: Loan interviewing/ Selection of borrower Step-2: Loan application submitted by borrower Step-3: Collecting & correlating the information about the borrower Step-4: Preparation of credit report Step-5: Mangers decision about the suitability of proposed loan/ advance Step-6: Assessment Step-7: Recommendations Step-8: Sanction Step-9: Sanction advice & other terms & conditions Step-10: Repayment & Repayment schedules Step-11: Interest rate, etc. 3.4.3 Documentation

Documents are the physical embodiment of the existence of loans & advances Documentation is the execution of documents in right form &lawful manner. Documentation forms a permanent record of the right responsibilities and obligations of the executants that the borrower and guarantors towards the lender(bank).

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Steps of Documentation preparation of deed-Banks printed forms set as per term and condition and nature of advances legal opinion- As per latest circular form the panel advocate of bank . Executants and Execution- signature capacity- Style stamp Witnessing- Signature capacity Style. Stamping of Documents as per Stamp Act 1999, Amendment 1998 Stamp Schedule. Registration as per Registration Act -1920 Safe Keeping / Preservation

Common charge documents for all types of advances: Demand promissory note duly signed with revenue stamp Letter of arrangement Letter of acceptance Additional charge documents required for the following types of advances:

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Documents for the advances Loan general Letter of disbursement Letter of authority Overdraft Letter of continuity Letter of installment Cash credit (Hypo) Letter of hypothecation Insurance cover note Letter of guarantee Stock report signed by the borrower Letter of continuity Letter of installment

Letter of third party guarantee Cash credit (Pledge) Letter of pledge Insurance cover note Letter of guarantee Letter of disclaimer Stock report signed by the borrower Letter of continuity Letter of third party guarantee

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3.4.4 Disbursement

Finally, the bank for which the following tasks should be followed does disbursement of advances. These are Equity/ Margin should ensure Term of stanchion should ensure Charging of securities End use verification Strictly following the disbursement schedule Others i,e proper monitoring, supervision etc.

3.4.5 Supervision, Monitoring & Follow up

Supervision, monitoring and follow up indicate the caring for the loan both at the pre-sanction and post- sanction stages in order to ensure the safety of the money lent. It is substitute of collateral. Supervision starts right after the selection of the borrower. Monitoring starts when the project enters implementation phase. And follow-up starts just after disbursement of loan.

Supervision, monitoring and follow up of loans and advances helps the bank to prevent loan classification, return flow of funds, compliance of terms and conditions, problem solving, feedback and take timely corrective action.

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3.4.6 Loan pricing mechanism Loan pricing is a crucial factor of advance; the price of loan is the interest rate the borrower must pay to the bank, in addition to the amount borrowed (principal). The bank earns profit through this loan price or interest rate, which is usually higher than deposit rate. The difference between loan price and interest rate on deposit represents the profit/ spread for the bank. The higher loan prices the higher the profit. But it must be charged under the boundaries fixed by the Central bank.

Calculation of loan pricing:

Price of loan= True cost of the loan or Base rate + Profit or Risk premium

There components of true cost/ Base rate

I. II. III.

Interest expense (Interest on deposits+ Interest on borrowing from central bank. Administrative cost (Deposit and loan administrative cost.) Cost of capital (Investors expected rate of return)

Risk premium: It represents the probability that a new loan to a borrower in that particular category will not paid and will be written- off or lost.

Mathematically, risk premium = Historical loss rate for a particular type of loan.

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3.4.7 Bank Guarantee

Bank guarantee is a part of advance. It is a common banking service rendered by a commercial bank. It may be defined as an irrevocable obligation by a bank to pay a sum of money due to non- performance of contractual obligation by a third party.

As per the contract Act- 1872 A contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the Surety; the person in respect of whose default the Guarantee is give is called the Principal Debtor; and the person to whom the guarantee is given is called the Creditor.

There are four party involving bank guarantees: Parties to a bank Guarantee The Beneficiary (Creditor) The Principal (Applicant) The Guarantor (The Issuing Bank) The Instructing Party (principals bank who gives counter guarantee)

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3.4.8 Principle of sound lending taken by NCCBL Risk involvement with advance may be kept at minimum if sound lending principles are followed.

Sound lending principle Safety Purpose Liquidity Security Profitability Spread/ Diversification National interest/ Social benefit

A)

Safety : To ensure the safety of lending NCCBL follows the following factors: Factors needed For Safety

Five Cs Character Capacity Capital Condition Collateral security

Five Ps Person Purpose Product Place Profit

Five Ms Man Management Money Materials Market

Five Rs Reliability Responsibility Resources Respectability Returns

B)

Purpose : The purpose of lending is a crucial point to know for the Bank. It helps the Banker to know the course of action of the borrower as regards landing. So, the banker can have the idea whether the loan will be in productive purpose or not.

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C)

Liquidity: It means the availability of fund on short notice. The bank has to know whether the bank can get back the loan amount in liquid from or not. Because majority of bank liabilities are payable on demand or after short notice. So, the loan must have fair chance of repayment according to repayment schedule.

D)

Security : The security accepted by the bank from borrowers in order to cover loss if borrowers become defaulted. It must be adequate, readily marketable, easy to handle and free from any encumbrances.

E)

Profitability: Banking is essentially a business, which aims at earning a good profit. The bank will definitely invest its money if there is a strong possibility of fair return or profit.

F)

Spread/ Diversification : In this connection, the principle Do not pull all eggs in the same basket is followed. The advances should be as much broad based as possible and must be in conformity with the deposit structure in order to minimize the risk of lending. National interest: A bank should keep in mind the national development plan to play a significant role in the economic development of a country.

G)

Beside the above principle, NCCBL follows two most important modern concept of good lending: Modern concept of good lending consists of the feasibility study of six aspects. These are

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Modern concept of principle of good lending

Managerial feasibility Organizational feasibility Technical side Marketing side Financial aspect Economic aspect

Other new techniques for assessing soundness of a new loan proposal: Financial spread sheet analysis (FSSA) Credit Risk Grading

Credit Risk Grading:

Credit risk: Credit Risk is the possibility that a borrower or Counterparty will fail to meet obligations Loan and Advance of NCC Bank Limited, Agrabad Branch, Chittagong Page 43 of 46

 Credit risk arises form the bank s dealings with or lending to the corporate, individual and other bank or financial institutions To minimize losses banks should have comprehensive credit risk management policies and procedures

Definition of CRG Based on Pre-specified scale reflecting the credit risk for an exposure Number/ Alphabet/ Symbol as Summary indicator of risk

Major credit risk :

Financial Risk Leverage Liquidity Profitability Coverage

Business/ Industry risk Size of Business Age of Business Business out look Industry Growth Market Competition Barrier to Business

Credit Risk Management risk

Experience Succession Team work

Security Risk Security coverage Collateral coverage support

Relationship Risk Account Conduct Utilization of limit competition of coverage /conduct personal deposits

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Assigning weight to key parameters FR Lev Liq Prof Cov B/IR SB AB BO IG MC EB 50% 15% 15% 15% 5% 18% 5% 3% 3% 3% 2% 2%

Arrive at CRG based on total Score

Number 1 2 3 4 5 6 7 8

R/G Short Name SUP GD ACCPT MG/WL SM SS DF BL

Score 100%(Cash covered Govt./int .Bank Guarantee 85+ 75-84 65-74 55-64 45-54 35-44 <35

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