Report On Performance Analysis

Loan Performance Analysis of Bangladesh Shilpa Bank

University Of Dhaka (Department of Accounting & Information Systems)

Internship Report On Loan Performance Analysis of Bangladesh Shilpa Bank

Presented To: Taslima Nasreen Assistant Professor and internship supervisor Department Of Accounting and Information Systems

Prepared By: Ahmed Nayeem Javed Roll-9031 Sec A. 9th Batch Department of Accounting and Information Systems

Presented On: June 10, 2008

Date: June 10, 2008 Taslima Nasreen Assistant Professor and Concerned Supervisor Department of Accounting & Information Systems University of Dhaka Dear Madam: It’s a matter of great pleasure for me to have the opportunity to submit a term paper titled Loan Performance Analysis of Bangladesh Shilpa Bank as a part of my internship. After the successful completion of my BBA program, I was required to complete a three month-long internship program. As scheduled by the department, I came to your supervision and joined Bangladesh Shilpa Bank to study the loan performance of this specialized commercial bank. During the period of preparation of this paper, I have tried to put my best efforts to make this paper a comprehensive one. I came to know many things

related

to

the

loan

monitoring,

loan

administration,

loan

performance and loan sanction and disbursement system which were a vital part of our main stream of study. Already I have enjoyed my internship period very much. In spite of my best efforts, several limitations caused our report to possess some shortcomings. I, therefore, would like to place this report to your judgment and suggestion. Sincerely yours,

Ahmed Nayeem Javed

Sec-A, 9th Batch Dept. of A.I.S

University of Dhaka

ACKNOWLEDGEMENT I would like to acknowledge sincerely the Assistant Professor Taslima Nasreen, Department of Accounting & Information Systems, University of Dhaka, for providing me all guidance and support that I needed. Her sincere guidance, untiring cooperation and valuable suggestions and inspirations of creating unique report make me able to overcome all the problems during my study and reach the successful completion of the internship program at Bangladesh Shilpa Bank (BSB). At the very beginning I would like to express my deepest gratitude to Almighty Allah for giving me the strength and composure to finish the task within scheduled time. In writing this report I have drawn materials from a variety of sources, which have a bearing on different facts of loan operation and performance. In preparing the report, I received active-co-operations from the GM, AGM, DGM and senior manager of BSB. I sincerely express my heart-felt gratitude from their co-operation, which help me to conduct and complete this report. I thank to MD. Mustafa Kamal, Senior Manager, Central Recovery Department, Mr.Golam Abbas , Senior Manager , MIS Department, Shahida Alam , Manager , MIS Department ,Taifur Alam , Manager , Manager , MIS Department ,Tanvir Ahmed, Senior officer , MIS Department . I also like to thank the entire departmental heads and staffs who helped me in various ways. The members of the management of BSB were very co-operative and helpful to me from top to bottom level. They helped me by supplying various data, guidelines and direction. At last I am also grateful to my department for giving me the opportunity to work outside for attaining practical knowledge. Thanks for all from core of my heart.

EXECUTIVE SUMMARY Bangladesh Shilpa Bank (BSB) is the prime concern of Development Financing Institution (DFI) of country that extends financial assistance both in local and foreign currencies for setting up new industries to boost up the industrial development of the country in conformity with industrial policy and financial reforms program of government towards market economy. Bangladesh Shilpa Bank commences its operation form Loan operation department where they scrutinize the loan proposal and appraise the proposed investment sector form various aspects, viz. organization and management, technological, marketing, economic and profitability. The bank has kept on sanctioning term loans during FY 2006-07 also.

This is long term local currency loan of taka 1006 million has been sanctioned to 39 projects and short term loan of taka 105 million to 15 projects. Of the total sanctioned long term loan, taka 928 is for 37 new projects and an additional loan of taka 78 for 2 existing projects. In the financial year 2006-07, food and allied sector got 4% concentration of its total loan outstanding amounting to a total of tk224 million. Analysis of this shows, loans of this sector are performing better year to year and demands constant concentration. Already bank has stopped sanctioning and disbursing loan to jute and allied fiber sector, now only job of the bank is to recover the amount of loan money which was given before. Cotton and woolen fiber is the prime sector among the sectors with those BSB deals. This sector is getting more concentration year to year 69% of outstanding in this sector. In the year 2006-07 the percentage of classified loan is tk818 million which is 19% of total outstanding and 81% of total outstanding is unclassified which sounds good is of TK 3504 million. In the consecutive years there is no significant change among the amount of unclassified loan, which really proves better performance of this sector better planning, monitoring and controlling of the bank in this specific sector.

Tannery and its products have an outstanding 2% loan of the total. Analysis portrays that this sector has the percentage of bad loan of 10% which is relatively low comparing with other sectors and with total outstanding. The bank has stopped sanctioning any loan to the forest and wood sector. The last disbursement was in 2004-05. In 2006-07 the total outstanding loan amount in basic metal products is TK 10 million and the total amount is classified loan and has gone under the title “bad loan”. Performance of machinery and parts is relatively satisfactory as 93% of the total outstanding is classified in this sector and it is near about 47 million in the year of 2006-07, where the unclassified section is only 7%. Performance of services sector is also performing well. This sector has got 4% concentration of total outstanding. In this sector unclassified loan is relatively high, which is 85% of the total outstanding is of 190 million and classified section is 32.6 million. In essence, BSB deals with 18 sectors, 1 or 2 sectors is going to be closed by the bank because of loan default, government policy, donor pressure etc, but the remaining sectors will run. So if we look at the chart, wee see 22% of outstanding amount is bad loan or we can say the portion under classified section and the rest amount is unclassified.

After the proper assessment, BSB provide loan to invest the proposed sector. Bangladesh Shilpa Bank also monitors and gives suggestion form site selection to final submission of report. With a great ambition, BSB was started its operation, but unfortunately it is now a loosing concern. Now a day, BSB tries to minimize their range of loan operation due to unethical practice of entrepreneur of misuse fund and money transfer to the other project. BSB also tries to find out thrust sector and actual entrepreneur those who have interested to established profitable industry.

Table of Contents Particulars

Page No.

Introduction

Chapter One

Background of the study

01

Rationale of the study

01

Objectives to the Study

01

Methodology of the Study

02

Limitations of the Report

03

Overview of BSB

Chapter Two

Historical Background

05

Institutional overview of BSB

05

Capital Structure

06

Ownership and Sources of Fund of BSB

06

Mission of BSB

06

Management

07

Function of BSB

07

Management Apparatus

08

Activities Of BSB

09

SWOT Analysis of BSB

10

Business Programmes

13

Location: Zonal & Branch Offices of BSB

15

Loan Operation Department & Project Appraisal Activities

Chapter Three

Introduction

17

Structure of Loan Operation Department

17

Functions

18

Loan Sanction Procedure

18

Processing of Loan Proposal

22

Appraisal phase

23

Project Appraisal Committee

23

Different Aspects of Project Appraisal

23

•

Management and Organization Aspect

24

•

Technical Aspect

28

•

Market Aspect

30

•

Financial Aspect

•

Socio Economic Aspect

Loan sanctions authority

31 33 37

Various functional Departments Introduction

39

Different Functional department of Bangladesh Shilpa Bank (BSB)

Chapter Four

•

Loan Operation Department

40

•

Project Implementation Department

40

•

Documentation and Machinery Procurement Department

•

Central Recovery Department

•

Project Rehabilitation Department (PRD)

•

Loan Accounting Department

•

Law Department

•

Human Resource Management Department

41 42 44 44 45 46

Findings, Recommendations and Conclusion

Chapter Five

Findings

49

Recommendations

51

Conclusion

53

Chapter – 1 Introduction 1.1 Rationale of the study:

When an academic course has practical application in real life then it creates great value. Only a lot of theoretical knowledge will be little important unless it is applicable in the practical life. So we need proper application of our knowledge to get some benefit from our theoretical knowledge to make it more effective. We engage ourselves in such field to make proper use of our knowledge in our practical life. Only when we come to know about the benefit of the theoretical knowledge, such an application is made possible through internship. My internship is on “Loan Performance Analysis of Bangladesh Shilpa Bank”. That is to know about the loan performance of BSB. As the level of industrial development increases in Bangladesh’s gives loan towards the advancement of various sectors for industrialization. It helps to manage all types of efforts from establishment to implement of its operation. There some accumulation of human capital and technological innovations will also facilitate the project implementation. When theoretical knowledge is obtained from a course study it is only the halfway of the subject matter and procedure through which acquired knowledge of subject matter, which can be fruitfully applied in our daily life. Various case studies about various default project has given more realistic idea about the loan default that hamper the specific project and also the potential benefit driven from the project.

1.2 Objective of the study:

The objective of the study is to find out the Loan Performance of BSB. The following are the objectives of the study: o To gather practical knowledge about the loan performance of a financial institution. o To highlight the credit and recovery procedures and evaluate performance. o To develop knowledge about the reasons of making loan default by the sponsors. o To get an idea about the condition loan default mechanism of BSB. o To know the contribution of BSB in the different sectors of the economy. o To suggest necessary steps for overcoming such problems of BSB.

1.3 Methodology of the study: To prepare the report, data has been collected from the primary and secondary sources. Data have been collected by oral interviewing the responsible officers. They also gave me annual report, annual budget granted through government of BSB and other documents. Different form of statistical configurations and rations has been used to make the study meaningful and realistic.

After collecting data from the interview and material, the data was first carefully scrutinized. Then the data was organized as required. In order to make the study effective and efficient, following two sources of data and information have been used widely.

Sources of Data

Secondary sources

Primary Sources Face to face conversation with the head of the departments, . respective officers and Staff of BSB. Relevant

document’s

provided

by

the

studies

as

officers

concerned. Observation of department of BSB. Discussion teacher.

with

my

supervising

Annual report of the BSB Annual Budget of the BSB. Various document of the BSB. Extensive literature search on the basis of these documents of publication. Web site of BSB. Newspaper, journal, articles etc. MIS department.

I have analyzed these reports and document in the light of analytical review. I have used some statistical tools, graphical presentation, and table to find out the different types of analytical result. Those are given the overall picture of the BSB.

1.4 Limitations of the study:

After completing the institutional experience, practical performances in the formal stage become difficult. So in performing this report my lack of proper knowledge greatly influenced in this performance. Besides above, every study has some limitations. When I conduct my study I also had some problems. Those are as follows:



Lack of sufficient knowledge.



Lack of available information and documents to support our study.



Up-to-date information was not available.



Improper combination among various departments.



Confidentiality of the bureaucrats.



Being busy, also another reason of not giving more information.



Unwillingness to give information



And two months time is not enough for a comprehensive study.

Chapter – 2 An Overview of Loan

2.1 Sanction of term Loan: The bank has kept on sanctioning term loans during FY 2006-07 also. This is long term local currency loan of taka 1006 million has been sanctioned to 39 projects and short term loan of taka 105 million to 15 projects. Of the total sanctioned long term loan, taka 928 is for 37 new projects and an additional loan of taka 78 for 2 existing projects. Table-1

Sanction of term loans (million TK) 2005-2006

2006-2007

Nature Number Local Foreign Total Number of the

of

project projects New

Currenc currency

of the

y

Local Foreign Total Currenc currenc

project

y

y

37

928

-

45

1183

-

1183

928

2

6

-

6

5

122

-

122

2

78

-

78

Loans Rehabili

-

-

-

-

-

-

-

-

tation Total

52

1311

-

1311

39

1006

-

1006

projects Existing

-

project (BMRE) Additio nal

Source: Annual report 2006-07

2.2 Loan Application Received: In FY 2006-07, the bank has received 51 new proposals with loan amount of taka 1699 million after proper scrutinies. The bank received 96 loan proposals with loan amount of taka 5272 million in FY 2005-06. 2.3 Commitment of Term Loan: During FY 2006-07, the bank has made a loan agreement of taka 714 million in local currency with the

entrepreneurs of 14 projects and committed loan in this regard were 36 and taka 765 million respectively in FY 2005-06. 2.4 Disbursement of Term loans: In FY 2006-07, the Bank has disbursed term loans of taka 534 million in local currencies to 53 projects registering an increase in terms of number of projects and amount of loan disbursement 23 and 10 per cent respectively over the previous financial year.

Table-2 Commitment and disbursement of term loans (Mil lion TK)

t/ nt

Number of Local Number of Local

Disburseme

2006-2007

2005-2006

Commitmen

projects

Foreign

Foreign

Total

projects

Currency currency Total

Currency currency

Commitment 36

765

-

765

14

714

-

714

Disbursement 43

485

-

485

53

534

-

534

Source: Annual report 2006-07

2.5 Sanctions and Disbursement of Working Capital / Commercial Loan During FY 2006-07, the bank sanctioned Working Capital loans of taka 105 million to 15 projects and disbursed TK.196million to 13 projects. The bank sanctioned TK.232 million to 9 projects and disbursed TK.32 million to 7 projects in 2005-06.The financial year under review has witnessed a fall in sanction but a rise in the disbursement of working capital.

2.5 Others investments: During FY 2006-07, the bank has invested TK. 50.36 million to purchase shares from the primary and secondary market which is higher by TK 15.55 million than those of the previous financial year. During the same financial year, the Bank has earned an amount of TK 27.16 million as capital gain, dividend and commission from share trading. In FY 2005-06, it was TK 10.53 million, showing a rise of 158 per cent 200607.

2.6 Projects implementation: The bank intensively monitors and supervises implementation of its financed projects. During FY 2006-07, 8 projects commenced trial run and commercial production and 30 projects are under different stages of implementation .Of these, 14 projects are under construction, 4 have completed loan agreement and 12 projects are awaiting documentation.

Table-3 Stages of implementation of projects Different stages of project

2005-2006

2006-2007

implementation Start of commercial

12

08

Under construction

25

14

Documentation completed

24

04

Awaiting documentation

11

12

Total:

60

30

operation Position of projects under implementation:

Source: Annual report 2006-07

2.7 Loan portfolio: In FY 2006-07, the total number of projects in the loan portfolio stands at 179 with total loan liabilities of TK 6229.60 million for keeping the written-off projects separate as per the guidelines of Bangladesh Bank. Among these existing projects, 59 are export-oriented, 79 import substitute and 41 are service industries. In FY 2006-07, loan liabilities of 20 projects are liquidated and 31 new projects have entered into the loan portfolio. In the same date of previous financial year, there were 164 projects with total loan liabilities of TK. 6260.18 million. Of these 164 projects, 58 were export-oriented, 71 import substitute and 35 were other industries. In comparison to the previous financial year, the number of projects has increased @ 9 per cent in the loan portfolio during the financial year under review. As on June, 2007 the total written-off projects and amount of loan kept in separate loan ledger by the Bank are

278 and TK 12223.16 million respectively. On the other hand as on June , 2006 the total written-off projects and amount of loan kept in separate loan ledger by bank were 283 and TK 12359.55 million respectively.

Table-4 Sector- wise position of Bank’s Loan Portfolio As on 30-06-2007

Sectors

No of

Amount of Projects

Total Loan (Million TK)

Food and Allied Products

43

224.02

Jute and Allied Products

3

535.75

Cotton, Woolen and synthetic textiles53 Paper, paper products and printing Tannery and leather products

4322.43 7

4

104.02 106.06

Non-Metallic mineral Products

2

71.36

Forest Wooden Products

-

-

Rubber and rubber products

-

-

Basic metal Products

1

10.83

Metal Products

3

14.64

Electrical Machinery and Goods

1

15.81

Machinery and Spare parts

7

47.65

Transport Equipment

7

69.16

Chemical and Pharmaceuticals

14

230.22

Petra - Chemical products

5

120.84

25

224.50

Service industries Miscellaneous

Grand Total

4

96.31

179

6229.60

Source: annual report 2006-07

2.8 Loan Recovered: Recovery of loan is a crucial index to measure the success of a lending organization. Like previous years, this year too, the Bank has strengthened its recovery drive realizing loans and dues from its borrowers and notable success has achieved. Total recovery target of loans during the FY 2006-07 is TK. 1000 million, against which actual cash recovery is TK. 1065.71 million, showing about 106.54 per cent up to the target. During the reporting year, outstanding loan of TK. 280.20 million is regularized rescheduling and replacement of bad and doubtful loan accounts. The amount regularized through cash recovery and rescheduling was TK. 1158.85 million and TK. 790.10 million respectively in FY 2005-06. In FY 2006-07, the amount of

classified loan decreased by TK. 356.00 million from TK. 2604.30 million of the previous financial year 2005-06 and has reached to TK 2248.30 million. As a result, the percentage of classified loan declines by 6 per cent from 38 per cent of the preceding year and has stood at 32 per cent in FY 2006-07.

Table-5 Recovery of loans

Category of Loans:

Amount Recovered (million TK) 2005-2006

2006-2007

(A) Long Term Loans: Long Term projects Loans

934.27

774.00

Bridge Loan

.82

.50

Staff Loan

41.62

52.40

Administered loan

118.10

35.10

Subtotal

1094.81

862.00

30.47

44.80

(B) Short Term Loans: Working capital loans Others

(Debentures/shares/loans 33.57

against FDR)

9.90

-

149.01

64.03

203.71

1158.85

1065.71

Written-off loans Sub-total: Grand Total (A+B): Source: Annual report 2006-07

Chapter – 3 Administration of Loan 3.1 Process of Loan Appraisal 1) Issue of Loan Application form. 2) Instruction &co-ordination to fill the form. 3) Receive form (BSQF) along with 1/8th of 1% project estimated cost & other necessary documents. 4) Scrutiny of loan application and other papers for evaluation of loan proposal. 5) Preparation of Appraisal Report. 6) Granting /Rejecting loan application. 7) Put-up loan appraisal is granted. 8) Loan sanctioned with memorandum. 9) Send information to PID, documentation &other department.

The function loan operation department (LOD) has been seen in a flowchart but now it is discussing elaborately one by one are as follows:

3.2 Issue of loan application form: This is given by the bank taking TK.1000 from the sponsors of the proposed project where includes various aspects of the project are as follows: 1. Proposed project; *Name of the project.

*Location of the project. *Line of the product. *Amount of the project. (a) F/C (b) L/C

2. Promoter’s applicant; (a) Particulars of the promoters. (b) Particulars of the persons relates with promoters (i.e.) father, mother, spouse, son(s), daughter(s), brother(s) 3. Corporate set up (constitution); 4. Management; 5. Proposed product; 6. Foreign collaboration, if any; 7. Project land: (a) Water. (b) Power. (c) Gas. (d) Communication facilities. 8. Building& civil works; 9. Plant machinery; 10. Erection &installation; 11. Utilities; 12. Raw materials; 13. Personnel; (a) Managerial &technical; (b) Administrative &staff; (c) Labor: *Skilled *Unskilled; (d) Cost of the project and means of finance, etc.

3.3 Instruction & co-operation to fill up the form:

The bank authority helps to the sponsors by providing necessary information required by the sponsors for filling up the form about the knowledge advice necessary by them. And then sponsors prepare feasibility report. Receive form Bangladesh Standard Questionnaire Form (BSQF):

After fulfilling this form by the sponsor’s bank authority receive with 1/8of1%project estimated cost other necessary documents complied by the sponsors.

3.4 Scrutiny of loan application and other paper evaluation of loan proposed:

The bank officials then scrutinize all the papers with the given documents that mean feasibility report given by the sponsors. If all of this are correct then bank prepare appraisal report about given information. 3.5 Preparation of appraisal report: The bank authority makes the report, which consists of three (3) types of analysis, is as follows: (a) Technical analysis (b) Financial analysis. (c) Economic analysis/market analysis.

3.6 Technical analysis: The technical engineer does this report whether the proposed project is viable or not. It gives indication about the project technically sound or not. Here engineer justify several aspects are follows: The project will be established which is suitable or not for the project whether the road, railway, riversides or airport etc that are precondition for establishing the project situates this place. He also justifies the types of machines, capacity, types, production capacity etc and gives permission for that company. 3.7 Financial analysis:

A financial analyst of the responsible officer makes financial analysis. He will examine prospect of the company about the demand of the product, marketability of the product, profitability of the product, supply and production capacity of the product to meet the market demand through various a financial analysis such as current ratio, profitability ratio, asset management ratio etc. 3.8 Economic analysis/market analysis:

This analysis is also made by an economist or market analyst that is feasibility report of the product of related company. This study comprises of whether the product will be launched that’s acceptability and other related economic matter of the product such as marketability of the product, profitability of the product, supply and production capacity of the product to meet the market demand. Chapter 04 Analysis of Loan Performance

4.1 Definition of loan performance: Financial soundness of all banks depends on the performance of its disbursed loan on various sectors. Loan performance means how the loans were scheduled to act and how they are actually acting. It is closely associated with timely and steady repayment of interest and principal of a loan. A loan is said to be well performed when its repayment is duly made. If a loan fails to be repaid duly for some consecutive period or installments, it falls under the classification criteria. Performance bank’s loan is usually measured through the percentage of classified and unclassified loan of total outstanding. If the amount of classified loan is high, overall loan performance of a bank is poor and low amount of classified loan indicates an effective and efficient loan performance.

4.2 Bangladesh Bank Guideline for loan classification: Policy on loan classification and provisioning: The process of gradually upgrading the policies on loan classification and provisioning to the international level is going on. Measures have been taken to strengthen the credit discipline and the process of classification has been simplified. The following revised policies on loan classification and provisioning has been issued amending the previous circulars in this regard: 1. Categories of Loans All loans and advances will be grouped into 4(four) categories for the purpose of classification, namely (a) Continuous Loan (b) Demand Loan (c) Fixed Term Loan and (d) Short-term Agricultural and Micro Credit. Continuous Loan: The loan Accounts in which transactions may be made within certain limit and have an expiry date for full adjustment will be treated as Continuous Loans. Examples are: CC, OD etc.

Demand Loan: The loans that become repayable on demand by the bank will be treated as Demand Loans. If any contingent or any other liabilities are turned to forced loans (i.e. without any prior approval as regular loan) those too will be treated as Demand Loans. Such as: Forced LIM, PAD, FBP, and IBP etc. Fixed Term Loan: The loans, which are repayable within a specific time period under a specific repayment schedule, will be treated as Fixed Term Loans. Short-term Agricultural Credit will include the short-term credits as listed under the Annual Credit Program issued by the Agricultural Credit Department of Bangladesh Bank. Credits in the agricultural sector repayable within less than 12 months will also be included herein. Short-term Micro-Credits will include any microcredits for less than TK.25,000/= and repayable within less than 12 months, be those termed in any names such as Non-agricultural credit, Self-reliant Credit, Weaver's Credit or Bank's individual project credit. 2. Basis for Loan Classification: (A) Objective Criteria: (1) Any Continuous Loan if not repaid/renewed within the fixed expiry date for repayment will be treated as past due/overdue from the following day of the expiry date. This loan will be classified as Sub-standard if it remains past due/overdue for 6 months or beyond but less than 9 months, as `Doubtful' if for 9 months or beyond but less than 12 months and as `Bad-Debt' if for 12months or beyond. (2) (1) Any Demand Loan if not repaid/rescheduled within the fixed expiry date for repayment will be treated as past due/overdue from the following day of the expiry date. This Loan will be classified as Sub-standard if it remains past due/overdue for 6 months or beyond but not over 9 months from the date of claim by the bank or from the date of creation of the forced loan; likewise the loan will be classified as "Doubtful' and Bad/loss if remains past due/overdue for 9 months or beyond but not over 12 months and for 12 months and beyond respectively.

(3) In case any installment (s) or part of installment (s) of a Fixed Term Loan is not repaid within the due date, the amount of unpaid installment (s) will be termed as `defaulted installment'. (3.1) In case of Fixed Term Loans, which are repayable within maximum five years of time: If the amount of `defaulted installment' is equal to or more than the amount of installment (s) due within 6 months, the entire loan will be classified as ``Substandard''. If the amount of 'defaulted installment' is equal to or more than the amount of installment (s) due within 12 months, the entire loan will be classified as ''Doubtful. If the amount of 'defaulted installment' is equal to or more than the amount of installment (s) due within 18 months, the entire loan will be classified as ''Bad -Debt.'' (3.2) In case of Fixed Term Loans, which are repayable in more than five years of time: (a) If the amount of `defaulted installment' is equal to or more than the amount of installment (s) due within 12 months, the entire loan will be classified as 'Substandard.' (b) If the amount of `defaulted installment ' is equal to or more than the amount of installment (s) due within 18 months, the entire loan will be classified as 'Doubtful'. (c) If the amount of 'defaulted installment 'is equal to or more than the amount of installment (s) due within 24 months, the entire loan will be classified as 'Bad-Debt'. Explanation: If any Fixed Term Loan is repayable at monthly installment, the amount of installment (s) due within 6 months will be equal to the amount of summation of 6 monthly installments. Similarly, if repayable at quarterly installment, the amount of installment (s) due within 6 months will be equal to the amount of summation of 2 quarterly installments. (4) The Short-term Agricultural and Micro - Credit will be considered irregular if not repaid within the due date as stipulated in the loan agreement. If the said irregular status continues, the credit will be classified as 'Substandard ' after a period of 12

months, as 'Doubtful' after a period of 36 months and as 'Bad Debt' after a period of 60 months from the stipulated due date as per loan agreement. (5) All unclassified loans other than Special Mention Account (SMA) will be treated as Standard. (6) A Continuous credit, Demand loan or a Term Loan which will remain overdue for a period of 90 days or more, will be put into the "Special Mention Account (SMA)''. This will help banks to look at accounts with potential problems in a focused manner and it will capture early warning signals for accounts showing first sign of weakness. Loans in the "Special Mention Account (SMA)" will have to be reported to the Credit Information Bureau (CIB) of Bangladesh Bank. (B). Qualitative Judgment: The concerned bank will classify on the basis of qualitative judgment and can declassify the loans if qualitative improvement does occur. But if any loan is classified by the Inspection Team of Bangladesh Bank, the same can be declassified with the approval of the Board of Directors of the bank. However, before placing such case to the Board, the CEO and concerned branch manager shall have to certify that the conditions for declassification have been fulfilled.

4.3 Sector wise loan performance analysis BSB:

4.3.1 Food and allied products: Food and allied product sector is one of the improving sectors of BSB. In the financial year 2006-07, food and allied sector got 4% concentration of its total loan outstanding amounting to a total of TK224 million.

Status of classified loan: For the year 2006-07 food and allied sector classified TK38 million as bad loans, representing 17%percent of the total outstanding where as TK185 million is still unclassified. Percentage of classified and unclassified loan is presented in the following pie chart:

Food and Allied Products '06-'07 17%

Unclassified Substandard Doubtful Bad Loan 83%

Findings of the sector: Though the percentage of classified loan is 17% but the total outstanding is still too high in 2006-07, this sector got some improvements over the last couple of years. The following chart shows the improvements

Food and Allied Products 450000 400000 350000 '000 tk

300000 250000 200000 150000 100000 50000 0

2006-07

2005-06

2005-04

Unclassified

185612

118428

66876

Substandard

0

1786

987

38411

172050

423007

Bad Loan

Total bad loan of this sector in 2004-05 was TK 423 million but it was reduced to TK 172 million in 2005-06 and got a dramatic improvement in 2006-07 with a 78%fall to TK 38 million . This sharp and continuous reduction in Bad loans indicates better loan monitoring and administration in this sector. From unclassified loans point of view, this sector also conveys some positive signal. Unclassified loans with the reduction in bad loans, goes up from 66 million in 200405 to 185 million in 2006-07. In short, loans of this sector are performing better year to year and demands constant concentration. 4.3.2 Jute and allied fiber: Jute and allied fiber is that sector with which BSB is going to close its operation. Already bank has stopped sanction and disbursement in this sector only job of the bank is to recover the amount of loan money which was given before. In 2006-07 this sector got 9%concentration and its loan outstanding amount is 535 million.

Status of classified loan: For the financial year 2006-07 this sector has classified TK 416 million as bad loan which is 78% of total outstanding where as TK 118 million is still unclassified. The view of the classified and unclassified loan is given below:

Jute and Allied Produts '06-'07 22%

Unclassified Substandard Doubtful Bad Loan

78%

Findings of the sector: This sector has 78% bad loan comparing with the total outstanding, though it is 78% and seems too high but if we analyze the previous year’s data we will get some different idea about this sector.

Jute and Allied Fibers 600000 500000

'000 tk

400000 300000 200000 100000 0

2006-07

2005-06

2005-04

Unclassified

118834

112375

7394

Substandard

0

0

0

416912

424338

530993

Bad Loan

If we start talking about bad loan or classified section we see the difference year to year. In 2004-05 the amount of bad loan was TK 530 million, in 2005-06 the amount was TK 424 million and in 2006-07 the amount is TK 412 which is comparatively low than previous years. But the decreasing speed is slow here.

If we see the diagrams here we see the amount of unclassified loan is increasing and its growth rate is good enough. It was only TK 7 million in 2004-05; in 2005-06 there was huge change, it was TK 112 million which is 16 times more than previous year. And in 2006-07 TK 118 million is also good if we apply the growth of unclassified loan point of view.

4.3.3 Cotton and Woolen Products: This is the prime sector among the sectors with those BSB deals. Sanction, disbursement and recovery all is good in this sector. This is the sector by which the country earns most of its foreign income and it is playing a vital role since couple of years. This sector is getting more concentration year to year 69% of outstanding in this sector.

Status of classified loan: In the year 2006-07 the percentage of classified loan is TK818 million which is 19% of total outstanding and 81% of total outstanding is unclassified which sounds good is of TK 3504 million.

Cotton and Woolen Products '06-'07 19%

Unclassified Substandard Doubtful Bad Loan 81%

Findings of the sector: In 2004-05 the amount of bad loan was of TK 1588 million and in the year 2005-06 that was of TK 948 million and in the year 2006-07 it is of TK 818 million. So here we see 40%fall of bad loan in the year 2005-06 comparing with 2004-05 and 13%fall

in the year 2006-07.So it indicates well performance of the bank as well as well performance of the sector.

Cotton and Woolen Products 4000000 3500000

'000 tk

3000000 2500000 2000000 1500000 1000000 500000 0

2006-07

2005-06

2005-04

Unclassified

3504207

3338733

3604658

Substandard

0

158

110021

818225

948011

1588881

Bad Loan

If we talk about substandard loan in the diagram, we see in 2004-05 it was of TK 110 million and in 2005-06 it was of TK .158 million and in 2006-07 no existence of this class. So it indicates well because a class has dropped out. In the consecutive years there is no significant change among the amount of unclassified loan, which really proves better performance of this sector better planning, monitoring and controlling of the bank.

4.3.4 Paper and Paper products:

Only 2%of total outstanding exist in this sector. This is the sector which is very important for a country, if the sector falls then the country become dependent on import which may not be good for a country.

Status of classified loan: In this sector here the percentage of bad loan is10% which is relatively low comparing with other sectors and with total outstanding. The amount of bad loan is of TK 14 million in 2006-07 where unclassified loan is 90% and it is of TK 125 million.

Paper and Paper Products '06-'07 10%

Unclassified Substandard Doubtful Bad Loan 90%

Findings of the sector: In this sector the data gives us that kind of information which can be matter of hope. Here he see, in 2004-05 bad loan was of TK 54 million, in 2005-06 the amount was TK 22 million and in 2006-07 the amount is only 14 million. So the falling rate of bad loan is 60% and 37% in two consecutive years, a positive change in unclassified section.

Paper and Paper Products 140000 120000

'000 tk

100000 80000 60000 40000 20000 0 Unclassified

2006-07

2005-06

2005-04

125424

29294

122639

0

88582

0

14599

22711

54522

Doubtful Bad Loan

Though in 2005-06 unclassified section showed negative signals and there was also a big amount of doubtful loan but the bank has crossed the session and now is in good position. In 2006-07 the unclassified loan is of TK125 million which is 76.8% more than the last year, so it proves the great performance of the bank and demands such kind of performance in all sectors. 4.3.5 Tannery and its products: This is the sector from which country can earn money by export though this sector is earning money but it is not equal to the opportunity and also the expectation. This sectors has 2% of total outstanding is of TK 14 million

Status of classified loan:

This sector’s classified loan is 14% of outstanding is of TK 91 million in the year 2006-07 is conveys a message that the amount of classified loan is almost same of the year 2005-06.And the unclassified loan is 86%.

Tannery and Its Products '06-'07 14%

Unclassified Substandard Doubtful Bad Loan

86%

Findings of the sector: When we see the same scenario year to year then it is said that, probably the same effort has given to this sector or we can say that no strategic change. In this sector in 2004-05 the amount of bad loan was 79 million, in 2005-06 it was 91 million and in 2006-07 it is 91 million also. So this sector demands some new policy to recover the bad loan amount quickly.

Tannery and its Products 100000 90000 80000 '000 tk

70000 60000 50000 40000 30000 20000 10000 0

2006-07

2005-06

2005-04

Unclassified

14540

17257

19767

Substandard

0

0

0

91523

91773

79798

Bad Loan

Comparing with bad loans or the classified sectors, it is too low, the amount of unclassified loan. And year to year the amount is falling. So from this scenario we can conclude that this sector is in danger and the bank should reform all strategy and need new plan if the bank wants to deal with this sector 4.3.6 Non-metallic mineral products: Non-metallic sector is that kind of sector which is actually helping the bank indirectly because bank doesn’t need to think about the sectors like others because it is performing very well. Status of classified loan: Total outstanding loan was 71 million in the year 2006-07 and the total amount has gone under the title unclassified loan and the classified section is 0%, really sounds good.

Non Metalic Products '06-'07 0%

Unclassified Substandard Doubtful Bad Loan

100%

Findings of the sector: The amount of unclassified loan was TK 100 million in the year 2004-05, 86 million in the year 2005-06 and in 2006-07 it is 71 million , its falling year to year so it can be seems that the sector is not performing well but it will not be right cause this sector keeping its classified sector nil, year to year. Fall of the amount of unclassified loan can be linked with other sections like sanction, disbursement etc.

Non Metalic Mineral Products 120000 100000

'000 tk

80000 60000 40000 20000 0

2006-07

2005-06

2005-04

Unclassified

71356

86008

100303

Substandard

0

0

0

Bad Loan

0

0

0

4.3.7 Forest and Wood Products: Though it is an important sector of the country but BSB is not currently dealing with this sector. Status of classified loan: There is no amount of outstanding loan in last two years and also classified and unclassified loans. Findings of the sector: In 2004-05 there was only of TK 6 million bad loans in this sector. After that we see no activities of this sector. BSB need to consider the sector again not only for its profitability but for the people who deals with this sector.

Forest and Wood Products 8000 7000

'000 tk

6000 5000 4000 3000 2000 1000 0

2006-07

2005-06

2005-04

Unclassified

0

0

0

Substandard

0

0

0

Bad Loan

0

0

6784

4.3.8 Basic metal Products: Though the outstanding amount of this sector has a little significance but it is not a matter of hope that the total outstanding amount is bad loan. Status of classified loan: In 2006-07 the total outstanding loan amount is 10 million TK and the total amount is classified loan and has gone under the title “bad loan”

Basic Metal Products '06-'07 0%

Unclassified Substandard Doubtful Bad Loan

100%

Findings of the sector: In 2006-07 the amount of bad loan is of TK 10 million and it was of TK 11 million in 2005-06. And in those years these amount were also the total outstanding amount. So it means either the sector has fallen totally or the inefficiency of loan handling of BSB. So BSB should keep watching and think how the can recover their money quickly and how the sector can be raised again.

Basic Metal Products 12000 10000

'000 tk

8000 6000 4000 2000 0

2006-07

2005-06

2005-04

Unclassified

0

0

2182

Substandard

0

0

0

10832

11188

0

Bad Loan

4.3.9 Metal products: Among the sectors with which BSB deals this is one of the small sectors. BSB is doing transaction with this sector regularly but the amount is comparatively low.

Status of classified loan: In 2006-07 the total amount of outstanding was of TK 14 million. Of that amount bad loan is 81% and unclassified loan is 19%.bank actually does not expect this type of scenario but it happed.

Metal Products '06-'07 19%

Unclassified Substandard Doubtful Bad Loan

81%

Findings of the sector: Last three years three years the bad loan has shown abnormal attitude, in 2006-07 the amount of unclassified loan was .5 million and the amount of bad loan was 30 million which was 60 times more than the unclassified loan after that year bad loan was 11 million and after that year it means an 2006-07 it was 11 million also and in the other hand unclassified loan

Metal Products 35000 30000

'000 tk

25000 20000 15000 10000 5000 0

2006-07

2005-06

2005-04

Unclassified

2801

958

500

Substandard

0

0

0

11839

11820

30212

Bad Loan

4.3.10 Electrical Machinery: This is the sector with which BSB has started dealing again with a very good performance. Status of classified loan: In the year 2006-07 the there was only outstanding amount 15 million and the whole amount is unclassified.

Electrical Machinery '06-'07 0%

Unclassified Substandard Doubtful Bad Loan

100%

Findings of the sector: In the year there 2004-05 and 2005-06 there was no amount of outstanding loan. But in the year 2006-07 here there was only 15 million outstanding and which is totally unclassified. So from these data we can say that the sector is really performing well and the bank should keep and monitor the performance level which exists now. Electrical Machinery 18000 16000 14000 '000 tk

12000 10000 8000 6000 4000 2000 0

2006-07

2005-06

2005-04

Unclassified

15807

0

0

Substandard

0

0

0

Bad Loan

0

0

0

4.3.11 Machinery and spare parts: This sector is very much necessary for a country to make production and the bank is dealing with this sector year to year Status of classified loan: 93% of the total outstanding is classified in this sector and it is near about 47 million in the year of 2006-07, where the unclassified section is only 7%.

Machinery and Spare Parts '06-'07 7%

Unclassified Substandard Doubtful Bad Loan

93%

Findings of the sector: In 2004-05 the amount of bad loan was 26 million and substandard loan was 13 million and the unclassified loan was only 12% of the total unclassified loan. In 200506 the amount of bad loan was 29 million and the doubtful amount was 14 million and the unclassified loan was 4 million which only 9% of total classified amount and in 2006-07, here we see the unclassified amount is only 7% of classified loan. So finally we see the section’s performance is not rising rather falling.

Machinery and Spare Parts 50000

'000 tk

40000 30000 20000 10000 0

2006-07

2005-06

2005-04

Unclassified

3431

4905

5492

Substandard

0

0

13272

Doubtful

0

14237

0

44214

29953

26912

Bad Loan

4.3.12 Transportation: One of the most important sectors with which BSB deals. This sector has a great utility for communication purpose. Status of classified loan: 19% of total outstanding is not bad when the amount of bad loan is falling year to year. In 2006-07 the amount of classified loan was 13 million and the unclassified loan was almost 56 million.

Transportation '06-'07 19%

Unclassified Substandard Doubtful Bad Loan 81%

Findings of the sector: In 2004-05 the total outstanding amount was bad loan , in 2005-06, the amount of bad loan was 15 million which was 26% of total outstanding and that year unclassified loan was 44 million, which was 78% of total outstanding and in2006-07 the difference between classified and unclassified loan improved and turned into the proper way.

Transport 60000 50000

'000 tk

40000 30000 20000 10000 0

2006-07

2005-06

2005-04

Unclassified

55792

44387

0

Substandard

0

0

0

13369

15911

15842

Bad Loan

4.3.13 Chemicals: Chemical sector is one of the important sectors of BSB. This sector has the outstanding amount which is 230 million and this amount is 4% of the total outstanding. Status of classified loan: We divided the total outstanding amount into two sections, classified and unclassified. In this sector in the year 2006-07 bad loan we 44% and the unclassified amount was 56%.

Chemicals '06-'07

Unclassified Substandard

44%

Doubtful 56%

Bad Loan

Findings of this sector: In this sector, here we see the contra situation of the two sections. In the year 2004-05, bad loan was 120 million and unclassified loan was 76 million, in the year 2005-06, bad loan was 111 million and unclassified loan was 125 million and finally in the year 2006-07, bad loan was 102 million and the unclassified loan is 127 million. So here we see that, the amount of bad loan is falling and unclassified section is improving.

Chemicals 140000 120000

'000 tk

100000 80000 60000 40000 20000 0

2006-07

2005-06

2005-04

Unclassified

127978

125969

76815

Substandard

0

0

0

102245

111223

120627

Bad Loan

4.3.13 Petra Chemicals: This is a sector which is really important for our country and in the current situation the sector has to do a lot for us. This sector got 2% concentration of total outstanding loan. Status of classified loan: In the year 2006-07 the total outstanding amount was 120 million of that amount 19% considered as bad loan or the classified loan and the rest amount considered unclassified.

Petro Chemicals '06-'07 19%

Unclassified Substandard Doubtful Bad Loan 81%

Findings of this sector: Again we see the contra situation between classified and unclassified section and also seeing the positive changes .2004-05, 2005-06 and 2006-07 in these years position of unclassified loan improved and bad loan also improved with a positive change.

Petro Chemicals 120000 100000

'000 tk

80000 60000 40000 20000 0

2006-07

2005-06

2005-04

Unclassified

98016

85868

92998

Substandard

0

0

0

22822

40621

40399

Bad Loan

4.3.14 Miscellaneous: When the outstanding amount of a section is 2% of total outstanding and the total amount are classified then the sector is bad can be easily said. Status of classified loan: In the year 2006-07 the total outstanding amount is 97 million and 96.5 million is bad loan, so this is the section which is in danger.

Miscelleneous '06-'07 0%

Unclassified Substandard Doubtful Bad Loan

100%

Findings of this sector: In 2004-05, the amount of bad loan was 12 million; the amount of substandard loan was 69 million and the unclassified loan was 14 million which only 19% of total outstanding was. In the year 2005-06, the classified loan was 76 and unclassified was 6 million only and the final year the situation is 96 million bad loan and unclassified loan is only 7 million, and the ratio is 14:1. So BSB need to take quick and effective initiative to bring the sector from this kind of bad situation.

Miscellenous 120000

'000 tk

100000 80000 60000 40000 20000 0

2006-07

2005-06

2004-05

Unclassified

7

6901

14375

Substandard

0

0

69193

96298

76328

12684

Bad loan

4.3.15 Service Sector: Last decade some Industries has come under the focus of BSB, service sector is one of them and performing well. This sector has got 4% concentration of total outstanding. Status of classified loan: Here unclassified loan is relatively high, which is 85% of the total outstanding is of 190 million and classified section is 32.6 million.

Service Industries '06-'07 15%

Unclassified Substandard Doubtful Bad Loan 85%

Findings of this sector: In 2004-05 classified and unclassified section was almost in competition, classified loan was 96 million and unclassified loan was 112 million. In 2005-06, we see the ratio of classified and unclassified loan is 2:1 and the most recent year the ratio is 6:1, so finally we can say the section is really performing well. Service Industries 250000

'000 tk

200000 150000 100000 50000 0

2006-07

2005-06

2005-04

Unclassified

190839

151316

112150

Substandard

671

0

24

Doubtful

0

0

46716

Bad loan

32994

77060

44810

4.3.16 Classified and unclassified loan at glance: BSB deals with 18 sectors, 1 or 2 sectors is going to close by the bank because of loan default, government policy, donor pressure etc, but the remaining sectors will run. So if we look at the chart, wee see 22% of outstanding amount is bad loan or we can say the portion under classified section and the rest amount is unclassified.

Total Loan Status

28% 0% 72%

Unclassified Substandard Doubtful Bad Loan

4.3.1 Total Findings in brief: In the year 2004-05, bad loan was 2975 million, doubtful loan was 46 million, substandard loan was 193 million and unclassified loan was 4226 million, so by ratio the situation was 1.3:1. In 2005-06, bad loan was 2033 million, doubtful loan was 102 million, substandard loan was 1.9 million and unclassified loan was 4122 million, the ratio was 2:1, and in the recent last year 2006-07, the ratio is 2.63:1, so considering

the previous situations, comparing the performance of year to year, the bank is performing good now and their loan performance is coming in control.

Total Loan Status 5000000

'000 tk

4000000 3000000 2000000 1000000 0

2006-07

2005-06

2005-04

Unclassified

4514644

4122399

4226149

Substandard

671

1944

193497

0

102819

46716

1714283

2033014

2975566

Doubtful Bad Loan

Chapter – 5 Summary & Conclusion

5.1 Recommendations There are some problems involved in the project appraisal practice of BSB. Some of them relate to BSB’s own institutional weaknesses and some of them relate to the borrowers and govt. also involved. During the internship program the following findings are obtained: 1. Sometimes improper feasibility reports are submitted by sponsors, which do not contain adequate and reliable information. 2. Lengthy procedure and long time (more than three months) involved in the appraisal of project. 3. Lack of business experience of the entrepreneurs 4. Lack of financial commitment on the part of the borrower, the result being the failure of mobilization of equity by them in future means they divert their equity in other purpose after getting the loan amount. 5. Inadequate attention is paid to analyze risk and uncertainties associated with the projects, means only sensitivity analysis is done to analyze risk. 6. Lack of co-ordination among various financial institutions in exchange of information.. 7. There is no system of accountability of the appraisal team if the approved project fails due to their improper appraisal.

8. Unstable tariff and fiscal policy, political instability of the country, resulting in poor project appraisal especially from the economic viewpoint. 9. The main aim of BSB is to stimulate industrialization throughout the country. 10. Loans are given to sponsors through preparing appraisal report. 11. Inadequate attention to social cost and benefits 12. The nature of credit shows that it mainly grants term loan. 13. Sometimes inefficient allocations of resources have created a huge amount of bad debt 14. There are some sick industries are in the BSB 15. Political interruption in sanctioning loan. 16. Lacking of co-ordination among the various departments. 17. Lacks of eagerness to devote themselves for bank because of lower benefits are given to employees. 18. Despite of BSB’s problem in financial condition, it helps in various social, cultural development of the country. 19. Sometimes BSB helps more by giving more than the expectation of the client. 20. Project rehabilitation is one of the criteria of BSB that revive the sick project. 21. Contribution to the GDP is remarkable through industrialization process. 22. Help in implementing the projects. 23. Complex judiciary systems 24. Giving advice about the projects function for their future success. 25. Contribution of BSB is highest in the industrialization of Bangladesh though there’s some problem.

5.2 Conclusion: I would like to say and believe that this report will offer a number of benefits to improve and update the loan sanction procedure for its smooth operation and will cooperate in redesigning the system and atmosphere of the department. If a small portion of sickness of the projects can reduced it would be a great benefit to the bank as well as to the whole nation. I put here some recommendations it would help in selecting appropriate, socially contributable and more employment opportunity creatable projects in true sense. If this report can improve the existing condition of sanctioning procedure, and is implemented, my little initiatives will get a breathed satisfaction because I poured effort which I could.