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Transcript of Performance Appraisa & credit term of Eastern Bank Ltd
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Thesis Paper on Credit Terms andPerformance Appraisal of Eastern Bank
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1
CHAPTER- 01
INTRODUCTION
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1.1 INTRODUCTION
After completion of 36 credits in the regular MA Program of the !acult" of usiness
#tudies$ A#A %ni&ersit" angladesh$ ' prepared m" Thesis paper on Credit Ris(
Management and Performance Appraisal of Eastern an( )td* prepared on the Credit Ris(
Management +CRM, department of the an(* 'n the report it has gone through the standard
operating procedures carried out " the an( and understood them .ell* Pro/ect paper has
tried to understand the regulator" compliance issues proposed " angladesh an( +,
regarding credit management practices*
1.2 OBJECTIVE OF THE REPORT
To pro&ide a thorough understanding of the Credit Ris( Management Practice follo.ed "
CRM and Performance of Eastern an( )imited last fi&e "ears for performance e&aluation*
The report attempts to sho. .hether the .hether the Credit Ris( Management Practice
follo.ed " Eastern an( is in compliance .ith angladesh an( guidelines* #ome core
issues li(e Classification procedures and on-performing )oan handling procedures .ill alsoe discussed thoroughl"* Credit Ris( grading procedure proposed " angladesh an( has
also een intended to e scrutinied in the report .ith the e2isting ris( rating s"stem follo.ed
" Eastern an( )imited*
1.3 SCOPE OF THE STUDY
The scope of the stud" is limited to CRM* There .as no intention .hatsoe&er$ to focus on
ho. the loan and ad&ances .ere mar(eted to the customers$ ho. the relationships .ere uilt
and ho. each customers .ere follo.ed up or handled " the Relationship Managers* Purpose
of the report .ould e to focus on ho. the credit management practice is eing carried out "
the respecti&e department li(e .hat is modus operandi$ .hat is the e&aluation techniues
follo.ed " the officers during e&aluating a loan proposal and so on so forth* Also the report
.on4t co&er &arious legal issues regarding disursement and reco&er" procedures of a loan*
And finall" entire ris( management issues in the report .ill re&ol&e around #ME loan
proposals onl"*
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1.4 SOURCES OF DATA & METHODOLOGY
Primary Sources of Data: 5irect con&ersation .ith the emplo"ees of Eastern an( )imited*
Secondary Sources Of Data: Annual Reports of the an($ different reports$ operational
manual for the emplo"ees$ angladesh an( Circulars$ an( 5ataase and &arious other
pulications and .esites* !or the anal"sis part$ data ha&e een collected from the loan
proposals and other documentation pac(ages of the an(* 'nter&ie. method to the E)
fficials has een used for getting information* A case stud" has een used to present the
Credit Ris( Assessment process of Eastern an( )imited*
1.5 LIMITATIONS
The follo.ing limitations are apparent in the report- Time is the first limitation as the
duration of the program .as of 17 .ee(s onl"* Another limitation of this report is an(4s
polic" of not disclosing some data and information for o&ious reason$ .hich could ha&e
een &er" much useful*
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4
CHAPTER- 07
OVERVIEW OF EASTERN AN! "TD
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#$% FOR&ATION
'n pursuance of the 8an( of Credit and Commerce 'nternational +&erseas, )imited in
angladesh +Reconstruction, #cheme$ 1997:$ framed " the angladesh an( and appro&ed
" the ;o&ernment of angladesh$ the Eastern an( )imited .as formed as a pulic limited
compan" incorporated in angladesh .ith primar" o/ecti&e to carr" on all (inds of an(ing
usiness in and outside the countr"* Eastern an( )imited had also ta(en o&er the usiness$
assets and liailities of erst.hile an( of Credit and Commerce 'nternational +&erseas,
)imited ranches in angladesh .ith effect from 16th August$ 1997*
#$# VISION OF E"
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large loan portfolios .ith the o/ecti&e to ensure etter operation and control of all functions
of the an(*
5espite such situation the "ear .as a remar(ale one for Eastern an( )imited +E), .hen
the an( finall" completed the introduction of a state-of-the art 'T technolog" platform of
!le2cue$ a .orld class an(ing soft.are* All of an(4s 77 ranches .ere connected to this
'T platform gi&ing an en&iale opportunit" to all the E) customers to otain the most
co&eted ser&ices that no other an( could offer them "et*
Customers of ne. centur" are self-moti&ated$ &igilant and informed aout the mar(et
conditions$ further more de&elopment of information technolog" and telecommunication
s"stems created an en&ironment .here" customers demand con&enience$ reasonal" priced
etter ualit" financial products and personalied ser&ices* Customer demand together .ith
technological ad&ancement created ne. challenges and opportunities in the an(ing sector in
angladesh* Adapting realistic and timel" usiness policies$ in&estments in 'T are no.
pre/udice to sta" at the edge of this asserti&e and competiti&e an(ing usiness of the countr"*
'n&ention of ne. financial products and ser&ices and introduction of ne. deli&er" methods
are the (e" concern of sta"ing close to customers*To cope .ith the status uo$ Eastern an( )imited .elcomed these de&elopments and
restructured the an( to meet the challenges in future* The ranches of the an( are no.
termed as the 8#ales ? #er&ices Center: .hich are solel" concentrated pro&iding ser&ice to
the corporate and consumer clients and maintain relationship .ith them* The strategic
changes that initiated ac( in 7007 to face this changing circumstance ha&e een completed
in 700>* As a result$ this ne. usiness structure supported .ith the roust an(ing solution
.ill allo. the an( to focus on customers4 needs and pro&ide the est ser&ices and products
to customer4s doorstep at an attracti&e price*
@eeping in mind such changed circumstances the an( concentrated not onl" on .holesale
an(ing ut also on other alternati&es* !or e2ample$ introducing ne. products di&ersif"ing
an(4s acti&ities in consumer and retail an(ing simultaneousl" securing lo. cost deposits
to sustain profitailit"$ increase shareholders4 .ealth rationaliing the e2penses and
optimiing fruitful use of the funds* The cost to operating income ratio of the an( in 700>
.as at the lo.est rac(et compared .ith other an(s*
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CHAPTER- 03
CREDIT SECTION PRODCEDURE OF
E"
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3.1 Int!"#$t%!n
Credit Ris( Management is one of the most crucial components of the d"namics of an(
management as credit lending is the principal acti&it" for the commercial an(s* 'n this
segment of the report Credit Ris( management practice of Eastern an( )imited .ill e
thoroughl" discussed and then it .ill e compared and contrasted .ith Prudential ;uidelines
of angladesh an(* Then t.o of the (e" credit management practicesB Handling of on-
performing loans and procedures for loan classification .ill e discussed simultaneousl"*
3.2 CREDIT RIS
Ris( is inherent in all aspects of a commercial operation ho.e&er for an(s and financial
institutions$ credit ris( is an essential factor that needs to e managed* Credit ris( is the
possiilit" that a orro.er or counter part" .ill fail to meet its oligations in accordance .ith
agreed terms* Credit ris($ therefore$ arises from the an(4s dealings .ith or lending to
corporate$ indi&iduals and other an(s or financial institutions*
Eastern an( )imited has categoried its credit ris(s into four road categories for its ris(
management purpose* Each class of ris( has their uniue management techniue* !ollo.ing
are the four road categories of ris(s defined internall" " the an(B
Class- A
Class- Class- C
Class- 5
'$#$% C"ASS - A:
Credit facilities e2tended to clients .hich are secured "B
100 cash co&ered " ha&ing the funds a&ailale in E)4s cash margin account
100 E) !i2ed 5eposits full" lined ? pledged in fa&or of the an(
100 in the form of ;o&t* #anch"a Patra full" lined ? pledged in fa&or of the an(*
!
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110 cash co&ered if credit facilities are in different currenc" than that of collateral*
'$#$# C"ASS - :
Credit facilities e2tended to clients .hich are secured "B
H"pothecation of usiness assets li(e 'n&entor"$ oo( dets ? assets$ Plant ?
Machiner"
Mortgage of fi2ed assets li(e !actor" )and ? uilding and other real assets
Partiall" cash co&ered or other collateral
;uarantee from acceptale !inancial 'nstitution or )ien on fi2ed deposits issued "
them
Personal or Corporate ;uarantees
;o&ernment ;uarantee through Ministr" of !inance
'$#$' C"ASS - C:
Credit facilities e2tended to co&er or to hedge foreign currenc" ris( against )etters of Credit
are called e2change fluctuation ris(* The product$ .hich E) sells to its customers$ is called
!or.ard Contract +!=5 !D, and can e further e2plained as follo.sB
E2change !luctuation Ris(
!or.ard Contract against )etters of Credit
Hedge !D ris( of E)ther an( )etters of Credit
Ris( for Ma2* 1F0360 da"s
'$#$( C"ASS - D:
This class of ris( is concerned onl" .ith ris(s ta(en on a an(ing financial institution and can
e further e2plained as follo.sB
Ris( on an(ing financial institutions +!', including angladesh an(
Call#T5Time placement .ith an(ing financial institutions
Term E2posure on an(ing !inancial 'nstitutions
!inancing against an(ing !inancial 'nstitution4s acceptances
egotiation of E2port documents against &alid e2port lcees
Purchase of Pa" rder5emand 5raft dra.n " a an(ing financial institutions
ostro Account .ith other an(ing !inancial 'nstitutions
"
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Purchase of Treasur" ills from angladesh an(
'$' CREDIT RIS! &ANA)E&ENT PRACTICE
Credit lending is the principal acti&it" for a commercial an(* 'n this competiti&e usiness
mar(et it has ecome &er" crucial for a an( to ma(e prudential decisions .hile disursing
an" loan e it in corporate sector$ in #ME sector or e it consumer financing* =hile a an(
cannot ma(e a loan decision .himsicall" it also has to measure the cost and price against
disursement of a loan* Thus credit ris( management needs to e a roust process that should
enale an(s to proacti&el" manage loan portfolio in order to minimie losses and earn an
acceptale le&el of return for shareholders* 'n this ac(ground it is &er" essential that a an(
maintains a credit Ris( Management department and that is the case for Eastern an(
)imited$ .hich has a full-fledged Credit Ris( Management +CRM, unit e2clusi&el" to focus
on the Corporate and #ME loans of the o&erall portfolio*
'$( CREDIT RIS! &ANA)E&ENT DEPART&ENT
The credit ris( management department is placed suital" in the organiational d"namics so
that ma2imum output can e generated from it* All corporate and #ME proposals of the an(
are appro&ed through this particular department of the an(* The acti&ities of the department
includeB
&ersight of the an(4s credit policies$ procedures and controls relating to all credit
ris(s arising from corporatecommercialinstitutional an(ing$ personal an(ing$ ?treasur" operations*
&ersight of the an(4s asset ualit"*
5irectl" manage all #ustandard$ 5outful ? ad and )oss accounts to ma2imie
reco&er" and ensure that appropriate and timel" loan loss pro&isions ha&e een made*
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time* A .ee(l" report from the dataase is pro&ided to the Head of CRM and also a monthl"
report on #ME proposals is placed to the Head of #ME from it* After gi&ing entr" into the
dataase$ proposals are placed to respecti&e credit officers*
The credit officers then start to re&ie. the loan proposal* The asic intention is to measure the
e2act financial need of the customer and disurse the amount accordingl" and to minimie
the ris( e2posure of the an( in the process* 'n terms of regularit" the proposals ma" e
roadl" classified as one time and regular* ne time proposals include )P5$ !P5$ )C$ and
an( ;uarantee and so on* The regular proposals refers to appro&al for fresh credit li(e Cash
Credit$ 5emand )oan$ Time loan Pa" order$ Time loan .or( order$ restructuring of e2isting
facilities etc* n an a&erage follo.ing is the time needed " each of the officers to re&ie.
these t.o road t"pes of proposalsB
Proposal T"pe Reuired Re&ie. Time +5a"s,
ne time 7
Regular 9
oteB The data ha&e een collected from the pre&ious 3 months re&ie. performance as is
recorded in the
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'$2 ANA"/SIS OF A RENEWA" PROPOSA" 3A CASE STUD/4
Rene.al is a (ind of proposal in .hich the e2isting relationship is rene.ed for a further
period of time* The pre&ious relationship .as appro&ed for a certain period of time for
e2ample$ for one "ear* After the stipulated time period if the client .ants to continue .ith the
relation$ he or she contacts the RM of the concerned ranch* The RM then as per standard
format prepares the rene.al proposal* 't is to e mentioned here that .hen the pre&ious limit
is to e increased for the current "ear then it is called
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usiness d"namics as elaoratel" as efore$ .hen he sanctioned the proposed limit for the
first time* Regarding the e&aluation of account performance the officer tries to identif"
.hether the account statements reflect the operational performance of the client* There are
some ratios to consider in this case* These areB
3.8.1 Deposit Ratio
5eposit ratio is defined as Credit #ummation to #ales* The credit summation figure is readil"
a&ailale in the account profitailit" part of the CM pac(age* This can also e &erified from
the account statement of the client* The purpose of this ratio is to measure ho. much amount
.as deposited in the account out of the entire sales proceeds during the stated period* 't is
e2pected that the client regularl" deposit his mone" into the account*
3.8.2 Average Utilization Ratio
A&erage utiliation ratio captures .hether the client is utiliing the sanctioned limit properl"*
'f the utiliation ratio is good then it is e&ident that he is doing so and &ice &ersa* A&erage
utiliation is arri&ed " di&iding the interest income for the "ear .ith respecti&e interest rate*
This amount is then di&ided " the total limit*
Apart from these ratios account statement of the client is strictl" scrutinied to find if there
are an" irregularities* The account statement should reflect the operations of the usiness for
the client* The monthl" credit summation should coincide .ith the a&erage monthl" sales
figures* Also the officers chec( the source of the deit and credit transaction and their
regularities* Also an" .indo. dressing in the account performance are tried to e figured out*
The call report of the CM pac(age states the current usiness position of the client and his
usiness needs in detail* 't is prepared " the RM disclosing his e2perience during his &isit to
the clients4 premises* The portfolio re&ie. asicall" pro&ides a periodical statement of the
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financial health of the usiness* Also some ueries regarding the operations of the usiness is
reported in this part of the proposal*
#toc( inspection report is another important section of the proposal$ .hich is to e strictl"
monitored in case of a rene.al proposal* The report mentions the date of stoc( inspection$ the
rea(up of stoc(s and oo( det as on that date$ total &alue of securit"$ and amount of e2cess
securit" and so on*
3.8.3 Calculation of excess security:
!unding utstanding as on stoc( inspection dateB DDD
#ecurit" Ialue on same dateB DDD
5ra.ing po.erB +#ecurit" &alue, D 5ra.ing po.er +G0,
E2cess #ecurit" J !unding outstanding K 5ra.ing po.er*
!inall" ased on the data from the CM pac(age the officers calculate the .or(ing capital
reuirement of the usiness and chec( .hether it supports the proposed limit*
n an a&erage these are the things that are eing anal"ed for appro&ing a rene.al proposal
of a client* These parts are addressed at its &er" asic if not an"thing more for the stated
purpose* Ho.e&er$ the anal"sis ma" not follo. the same chronological order as is mentioned
ao&e* !ollo.ing is the chec(list that is pursued during the e&aluation process +figure
represents the e2cel model used to do the tas(s,B
=hether the proposal is placed .ithin e2pir" date +'f not$ collect a time e2tension proposal,
The e2isting proposal has a stipulated time period for .hich it .as sanctioned pre&iousl"*
After that date the limit .ill ecome past due if not settled full"* This .ould e detrimental
for the client$ as it .ill e reported in the C' report of angladesh an(* #o it is &er" much
necessar" that the rene.al proposal e sumitted .ell .ithin the e2isting e2pir" date*
Ho.e&er$ if there are an" issues li(e mortgage modification or so on$ a time e2tension
proposal ma" e appro&ed for the client to a&oid the emarrassment* 'nsurance co&erage +do
.e ha&e rene.ed insurance polic"L
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The an( needs to ha&e adeuate insurance co&erage on its securit" against fire$ flood and
other ris(s* The specific amount of insurance is 110 of the securit" &alue* 't is to e
chec(ed during e&aluation .hether the insurance co&erage has een rene.ed .ith the
compan"*
'nterest rate +=hether J1> or N
The minimum interest rate is re&ised from time to time* !or e2ample current sla for interest
rate in E) is 1 for the regular #ME clients* #o the officer must ma(e sure .hether stated
interest rate is as per regulation of the an(* Also the reduction of interest rate reuires
appro&al from higher authorit" so it is also to e chec(ed .hether interest rate is eing
reduced or not*
Chec( the correspondenceB - The address of the customer is usuall" mentioned ut the officer
needs to chec( .hether there is an" change in it or nonetheless it is mentioned or not*
5eclaration from Credit AdminB - Another important component of chec(list is to loo( for
an" declaration from Credit Administration 5epartment* The declaration regarding
documentation and other procedures needs to e in place efore sanction of the limit* #o the
officer chec(s .hether all the declarations are in place or not* The declaration of the Credit
Administration regarding the proposals is as follo.ingB
C' report otainedB - Another important thing is to chec( is .hether C' report has een
otained or not* This is &er" important ecause from this report status of client4s all loans can
e identified* 't is a standard practice that current C' report +not older than 6 months, should
accompan" a loan proposal*
Account #tatement .ith other an(sB - 'f the client has other loan relationships then the
account statements of other an(s needs to e otained*
3.8.4 Conclusion
After all the anal"sis if the credit officer is satisfied .ith the /ustification of limit he prepareshis recommendation* The recommendations are then sumitted to his immediate super&isor
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for his appro&al* !inall" all the documents are sumitted to HCRM for his appro&al* After
getting the appro&al from HCRM the officer then prepares a sanction letter as per standard
format of the an(* ne cop" of the sanction letter is sent to the Credit Administration
department +this department is responsile for loading the limit into the s"stem so that the
clients gets his loan, and another cop" +original documents, is then stored in the Credit !ile
of the client* This is ho. the credit officer carries out a t"pical rene.al anal"sis*
1
CHAPTER- 0>
NON5PERFOR&IN) "OAN
C"ASSIFICATION CRITERION
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4.1 Int!"#$t%!n
P) +on-performing )oans, include those loans$ .hich are sho.ing signs of .ea(ness in
the credit ualit" of the loans* =hen the ualit" of a loan deteriorates$ the first signal comes
as irregularit" in client4s loan repa"ment* ften a loan account starts ha&ing past dues*
'nternational est practices reuire that a loan e classified as non-performing if its principal
andor interest are three months or more in arrears* an(s in angladesh are allo.ed to
classif" non-performing loans ased on a time frame of three months* Earl" recognition of
non-performing loans stimulates collection efforts and helps reduce the possiilit" of loss of
such assets*
4.2 NON'PERFORMING LOAN( ELABORATION
)oans ma" e termed as on-Performing oth from the o/ecti&e and su/ecti&e /udgment*
/ecti&e criteria for loan classification are grossl" set " angladesh an(* #u/ecti&e
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/udgment " the an( officials are guided " the 'nstruction Circulars from the top
management*
The follo.ing o/ecti&e criteria .ere prescried " angladesh an( for loan classification
&ide RP5 Circular o* 16$ dated 06 5ecemer$ 199F .ith suseuent amendments &ide
RP5 Circular o* 9 of 7001$ RP5 Circular o*07 dated 1 !eruar"$ 700 and RP5
Circular o* 09 dated 70 August$ 700*
T"pe of )oan &erdue period Classification
Continuous )oan O 90 da"s #M
O 1F0 da"s ##
O 7G0 da"s 5!
O 1 "ear )
5emand )oan O 90 da"s #M
O 1F0 da"s ##
O 7G0 da"s 5!
O 1 "ear )
!i2ed Term )oan +Q ears, O 90 da"s SEui&alent 'nstallments #M
O 1F0 da"s SEui&alent 'nstallments ##
O 7G0 da"s SEui&alent 'nstallments 5!
O 1 "ear SEui&alent 'nstallments )
#M J #pecial Mention$ ## J #u #tandard$ 5! J 5outful$ ) J ad ? )oss
esides the o/ecti&e criteria$ E) uses the follo.ing su/ecti&e criteria to classif" loans* 't
can e noted here that$ loans are classified primaril" " o/ecti&e criteria* Ho.e&er$ officials
are encouraged to follo. the su/ecti&e criteria side-"-side the o/ecti&e criteria* rief
descriptions of the four classification categories are pro&ided in the follo.ing tale*
#pecial Mention +#M, #pecial Mention assets ha&e potential .ea(nesses that deser&e
management4s close attention* 'f left uncorrected$ these .ea(nesses ma" result in a
deterioration of the repa"ment prospects of the orro.er* !acilities should e do.ngraded to#M if sustained deterioration in financial condition is noted +consecuti&e losses$ negati&e net
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.orth$ e2cessi&e le&erage,$ or if a significant petition or claim is lodged against the orro.er*
!ull repa"ment of facilities is still e2pected* #ustandard +##, !inancial condition is .ea(
and capacit" or inclination to repa" is in dout* These .ea(nesses /eopardie the full
settlement of loans* )oans should e do.ngraded to ## if the customer intends to create a
lender group for det restructuring purposes$ the operation has ceased trading or an"
indication suggesting the .inding up or closure of the orro.er is disco&ered* The correction
of the deficiencies ma" result in an impro&ed condition* 5outful +5!, !ull repa"ment of
principal and interest is unli(el" and the possiilit" of loss is e2tremel" high* Ho.e&er$ due
to specificall" identifiale pending factors$ such as litigation$ liuidation procedures or
capital in/ection$ the asset is not "et classified as )* Assets should e do.ngraded to 5! if
the client is non-cooperati&e after recurrent reuests for regulariing*
Pa"ment The an( should pursue legal options to enforce securit" to otain repa"ment or
negotiate an appropriate loan rescheduling* 'n all cases$ the reuirements of angladesh an(
in C' reporting$ loan rescheduling and pro&isioning must e follo.ed*
ad ? )oss +),* Assets graded ) are long outstanding .ith no progress in otaining
repa"ment or in the late stages of .ind up liuidation* The prospect of reco&er" is poor and
legal options ha&e een pursued* The proceeds e2pected from the liuidation or realiation of
securit" ma" e a.aited* The continuance of the loan as a an(ale asset is not .arranted$
and the anticipated loss should ha&e een pro&ided for* This classification reflects that it is
not practical or desirale to defer .riting off this asicall" .orthless asset e&en though partial
reco&er" ma" e affected in the future* angladesh an( guidelines for timel" .rite off of
ad loans must e adhered to*
A rief description of the acti&ities of different departments other than CRM for etter
understanding of the P) management function is presented elo.* esides these
departments$ Relationship Managers of Corporate an(ing %nits and #ME units +#mall ?
Medium Enterprises, also pla" an acti&e role in the P) management*
4.3 CREDIT ADMINISTRATION DEPARTMENT )CAD*
Acti&ities of Credit Administration 5epartment include the follo.ing at its &er" asicB
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A* 5ocumentation of loans*
* 5isursement of loans*
C* Credit Monitoring*
5* Earl" Alert process*
E* reporting to angladesh an(
4.4 SPECIAL ASSET MANAGEMENT DEPARTMENT )SAMD*
#pecial Asset Management 5epartment is responsile for all accounts classified in the an(4s
loan portfolio* The three t"pes of classification maintained " the department are gi&en
elo.B
i* #ustandard*
ii* 5outful and*
iii* ad ? )oss*
#AM54s responsiilit" sectorsB
+A,Monitoring and controlling the classified accounts through monthl" reporting and
uarterl" re&ie.update*
+, Acti&el" follo. up .ith the orro.ers for reco&er"*
+C, egotiating and restructuringrescheduling dets .here&er feasile$ on its o.n and or
in association .ith the concerned Relationship Manager %nit HeadArea Head)ine
of usiness and Head ffice Credit Ris( Management*
+5,Re&ie. for reschedulerestructure.ai&er.rite-off is presented " #AM5 .ith$ if
deemed necessar"$ inputs from the related unit or ranchline of usiness* Proposal is
placed as per the format .ith all rele&ant supportdocuments information to facilitate
the process for appro&al from the appropriate authorit" dul" recommended " Head ofCredit Ris( Management and Managing 5irector ? CE*
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+E, Ad&ise client the reschedule restructure .ai&er letter after proper appro&al from the
E) oard*
+!, Head ffice Credit Ris( Management releases the appro&ed restructure
reschedule.ai&e.rite-off proposal to Credit Administration 5epartment .ho are
responsile for communicating the decision /ointl" .ith Head of #AM5 to client as
.ell as initiating action on the oo(s of account of the unit or the ranch
+;,!ollo. up responsiilit" on such .ai&erreschedule .rite off loans is assigned to
#AM5*
#AM5 also prepares a Consolidated Report of all ad loans .ritten off on a uarterl"
asis and sumit the report to the Head of Credit Ris( management and Managing
5irector ? CE*
4.5 DETECTION PROCESS OF NPL
!irst and foremost reuirement for an" and all Relationship Managers #ales ? #er&ice
Managers and Credit Managers is to identif" a prolem credit in its earliest stages "
recogniing the signs of deterioration* #uch signs include$ ut not limited to$ the follo.ingB
a, on-pa"ment of interest or principal or oth on due dates or past dues e"ond a
reasonale period or recurring past dues*
, 'n case of &erdrafts$ +or Cash Credits or similar facilit",$ no mo&ement in the
account e"ond a reasonale period*
c, 5eterioration in financial condition of the client$ as gathered from client4s latest
financial statements*
d, A shortfall in collateral co&erage$ particularl" if the collateral .as a (e" factor in the
decision-ma(ing or the loan .as predicated on the sole factor of collateral +i*e*$ full"
secured transactions,*
e, 5eath or .ithdra.al of (e" o.ner+s, or management personnel*
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f, Compan" filing for an(ruptc" or &oluntar" dissolution*
g, Ad&erse mar(et report aout the compan" itself or its principal o.ners*
4.+ STEPS TO FOLLO, FOR CLASSIFICATION
#teps to follo. in such situations areB
+A,CA5 rechec(s the account$ for all outstanding$ including an" outstanding in allied or
sister compan" or in o.ner4s or partners4 or directors personal name+s,*
+, CA5 thoroughl" re&ie.s loan documentation to confirm that 8the an( has .hat the
an( needs:$ documents are in proper form$ properl" e2ecuted and current +i*e* not
time arred,* A re&ie. of the documentation ser&es as a good reminder of the an(4s
legal rights against the detor$ principal o.nerguarantors etc*
+C, CA5 otains current figures to re&ie. these on strict liuidation asis$ to ta(e a close
loo( at the assets and liailities to determine .ho has the preferential right or prior
lien to .hat assets* !or )imited )iailit" companies$ a title search at the RU#C office
.here all charges are filed is carried out*
+5,'f ;uarantors are in&ol&ed$ CA5 loo(s closel" at the net .orth statement and ta(e
steps to protect E)4s interests4 &is-V-&is other creditors* 'n other .ords$ if possile$
perfect liens on ;uarantor4s assets or gi&e demand notice to guarantor*
+E, Concurrentl" .ith the assessment of situation$ once the account is classified
sustandard$ credit lines are froen .ith notice to all concerned$ on a 8damage
control: concept*
+!, A report in the prescried form as per standard format is sumitted to classif" the
account* A concurrent initial Action Plan to upgrade or reco&er the outstanding is also
sumitted in the Portfolio Re&ie. !ormat for appro&al*
+;,A full assessment of the prolem situation surrounding the account leads the re&ie.er
to decide options a&ailale to the an(B &i* =or( out$ .ith no rescheduling
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=or( out$ .ith rescheduling$ under proper rescheduling agreement and if needed .ith
fresh documentation and renegotiated collateral securit"* )egal action$ .hich if
situation so .arrant$ is ta(en immediatel" +.ith prior appro&al from appropriate
appro&ing authorit", .hen the need is recognied to pre empt" an" dissipation or
transfer of the assets of the orro.er or the guarantor*
4.- CLASSIFICATION PROCESS
!or the purpose of determining the 8Classified: status of an account$ follo.ing guidelines are
oser&ed
'* The process of Classification of an account starts .ith strict application of the ris(
rating assessment that is compulsor" for each orro.ing relationship* Account
deemed to e classified are su/ect to Portfolio Re&ie. !orm sumission or a direct
classification " Head ffice Credit Ris( ManagementB #pecial Mention #ustandard
5outful ad ? )oss*
''* Ho.e&er$ unpaid 'nterest or Principal or E2pired )imit for a period of 90 da"s ormore or recurring past dues +of Principal, remain the most significant Rules of Thum
triggering the classification*
4. DO,N GRADING/UPGRADING CLASSIFIED ACCOUNTS
The follo.ings are the procedures for upgrading or do.ngrading the classified accountsB
+A, Primar" responsiilit" lies .ith the concerned Relationship Manager to initiate the
classification " sumitting the Portfolio Re&ie. !orm in a timel" manner*
+, This responsiilit" first mo&es laterall" to Relationship Managers and escalates
up.ards to %nit Head#ales ? #er&ice Manager$ if an"one ha&ing responsiilit" for
the account in the la"ers fail to identif" and report a classified name*
+C, 'f and .hen a Portfolio Re&ie. !orm is sumitted$ the concerned Relationship
Manager%nit HeadArea Head$ Head of )ine of usiness$ re&ie.s it promptl"* The
latter finall" recommends the categor" or se&erit" of classification along .ith Action
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Plan to upgradereco&er outstanding* Head of Credit Ris( Management and
Managing 5irector ? CE re&ie.s and agrees to the classification and the related
Action Plan for reco&er"upgrade* Head ffice Credit Ris( Management is
responsile to release and distriute copies of appro&ed Portfolio Re&ie. !orm toB
Area Head$ Corporate an(ing Head of )ine of usiness*
Concerned %nit Head #ales ? #er&ice Manager*
Head of #pecial Asset Management 5epartment*
+5, Head ffice Credit Ris( Management ma" also independentl" classif" an account in
the normal course of inspection of a ranch or unit4s loan portfolio* 'n such e&ent$
the Portfolio Re&ie. !orm .ill then e filled in " Head ffice Credit Ris(
Management and .ill e referred to the respecti&e Relationship Manager %nit Head
Area Corporate Head Head of )ine of usiness andor Head of #pecial Asset
Management 5epartment for information* Action Plan for reco&er"upgrade .illthen e presented " Head of #pecial Asset Management 5epartment in consultation
.ith RM %nit Head Area Head Head of )ine of usiness to the Head of Credit
Ris( Management ? Managing 5irector ? CE for appro&al*
+E, #uch classification ma" e superseded " a more se&ere classification i*e* do.n
grading$ " the regulator" od" +angladesh an(,*
+!, =here&er reuired an independent assessment of the classified credit ma" e
conducted " Head ffice Credit Ris( Management or " internal auditor
documenting as to .h" the credit deteriorated and .hat .ere the lapses*
+;, nl" the Head of Credit Ris( Management ? Managing 5irector ? CE is
empo.ered to upgrade a classified account ut the recommendation has to originate
from the Head of #pecial Asset Management 5epartment* Continuation of usiness
strateg" +if an", for the upgraded account .ill reuire the consent of Area Head K
Corporate an(ing Head of )ine of usiness .ith proper /ustification*
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+H, %pgrading of a classified account has to e .ell /ustified diligentl" and o/ecti&el"
" all recommending officers* Essentiall"$ complete remo&al of the reason+s, for
classification should e the asis of an" upgrading*
+', Classified Accounts are passed on to #pecial Asset Management 5epartment in the
follo.ing mannerB
An" and all accounts$ .hich ha&e een do.ngraded to #u #tandard status*
An" and all accounts$ .hich ha&e een do.ngraded to 5outful or ad ?
)oss status*
=ithin G da"s of an account eing do.ngraded to sustandard +##-,$ a Reuest
for Action and a Hando&er5o.ngrade Chec(list are completed " the RM and
for.arded to #AM5 for ac(no.ledgment* The account is assigned to an account
manager .ithin the #AM5 .ho .ill then in consultation .ith concerned
Relationship Managers%nit HeadArea Head Head of )ine of usiness prepare
Action Plan for reco&er" or upgrade and get it appro&ed " Head of Credit Ris(
Management and Managing 5irector ? CE*
fficer in #pecial Asset Management 5epartment get the credit files transferred
to their 5epartment from Corporate an(ing)ine of usiness and under their
custod" for account eing classified #ustandard$ 5outful and ad ? )oss$ and
.ill monitor all upgradedo.ngrade*
fficer in #pecial Asset Management 5epartment must sign on the )oan
5ocumentation Chec(list to ensure re&ie. of loan documentation at hisher end*
fficer in #pecial Asset Management 5epartment must re&ie. the #toc( Report
and #toc( 'nspection Report of classified accounts to arri&e at an effecti&e action
plan for reco&er"upgrade* #pecimen of #toc( Report and #toc( 'nspection
Report attached*
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#pecial Asset Management team in the standard .ai&er format processes
proposal for restructurereschedule.ai&er for the classified accounts* The
proposal should accompan" copies of pre&ious appro&als$ recent accepted
#anction )etter " client$ )a."er4s opinion and updated status on )oan
5ocumentation*
+U, Head of #pecial Asset Management in H** interfaces .ith Head ffice Credit Ris(
Management ? Managing 5irector ? CE on all up gradingreco&er" efforts in the conte2t
of Reco&er"$ )oan )oss Pro&ision and RestructureReschedule=ai&ers=rite-offs*
4.0 REPORTING OF CLASSIFIED ACCOUNTS
The reporting procedure for classified accounts has een outlined elo.B
1* Accounts$ .hich are$ once classified ut not up-graded or reco&ered are to e
separatel" reported on a monthl" asis to Head ffice Credit Ris( Management and
Managing 5irector ? CE* Complete accurac" is to e ensured .hile reporting these
names* #uch reports originate from Credit Administration 5epartment*
7* Head of #pecial Asset Management 5epartment sumits monthl" results on reco&er"
status on all e2isting and ne.l" Classified Accounts to Head ffice Credit Ris(
Management and Managing 5irector ? CE*
3* Head of #pecial Asset Management 5epartment sumits uarterl" report on Classified
Accounts to Head ffice Credit Ris( Management and Managing 5irector ? CE*
4.1 NON' EARNING LOANS
!ollo.ing guidelines are strictl" oser&ed for treatment of unpaiduncollected interest in
classified accountsB
A, 'f interest is o&erdue " more than 90 da"s the outstanding must e classified #pecial
Mention on-Earning or e&en lo.er +such as #u-standard,$ if not alread" so
classified*
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, 'f an" loan is classified as #pecial Mention#ustandard5outful$ interest is charged
on this loan$ ut this cannot e treated as income* All such interest is credited to
'nterest #uspense +Credits, AWC* or an" other account speciall" designated for this
purpose " angladesh an(*
C, 'f a loan is classified as ad ? )oss$ charging of interest thereafter is suspended from
the date of ad ? )oss classification* A contingentmemo entr" is ta(en up for the
interest eing suspended .hich is re&ersedrought ac( as actual liailit" at the time
of suit eing filed for reco&er" or if restructure.ai&ersettlement ta(es place* Head of
#pecial Asset Management 5epartment ensures that these contingentmemo items are
monitored and reported on a uarterl" asis to Head of Credit Ris( Management and
Managing 5irector ? CE*
5, A properl" conducted o&erdraft facilit" can e considered earning as long$ as
outstanding .ith interest deited to the account remain .ithin appro&ed and &alid
limit* ut$ it is not permissile to increase o&erdraft limits to asor interest charges
unless specificall" appro&ed " Head of )ine of usinessArea Head Corporate#ales
? #er&ice Managers pro&ided such interest is settled " cash deposit into the account
.ithin 60 da"s of such deits*
E, #ometimes$ #ustandard loans ma" e restructured or rescheduled$ .ith the
stipulation that as part of the rescheduling$ accrued unpaid interest e capitalied*
nl" in these situations$ e2ceptions to the foregoing rule ma" e allo.ed ut strictl"
on the follo.ing conditionsB
The restructuring or rescheduling is appro&ed " the appropriate appro&ing
authorities on the asis of a 8=or(-out: credit proposal*
The interest to e capitalied .ith principal is reser&ed from interest suspense
accounts onl" after full completion of documentation related to rescheduling
and compliance of all conditions precedent related to rescheduling*
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!, Classified accounts for .hich restructurerescheduled appro&ed ma" e
upgradeddeclassified to Marginal=atchlist-3 i*e* placed under earning status
pro&ided the follo.ing t.o criteria are met*
orro.er displa"s sustained repa"ment performance in accordance .ith the
repa"ment plan*
All principal and interest amounts contractuall" due are assured of repa"ment
.ithin a reasonale period*
Ho.e&er$ return of such accounts to earning status on this prete2t must ha&e Head
ffice Credit Ris( Management4s pre fact concurrence*
;, Earlier$ accounts .hich ha&e een classified " angladesh an( auditors during
their course of inspection .ould reuire pre-fact appro&al from angladesh an( for
declassificationupgrade as per their reuirement* ut in a recent amendment from
states that the oard of directors of the an( can de-classif" an account* 'n this case$
ho.e&er$ this phenomenon has to e reported to *
4.11 APPLICATION OF PAYMENTS INTO CLASSIFIED LOANS
'f a classified loan or part of an" classified loan is collected than accrued interest and
suspended interest should e settled first an" residual .ill e applied for settlement of
Principal )oan*
4.12 REVIE, OF CLASSIFIED ACCOUNTS
Classified Accounts +li(e #ustandard$ 5outful and ad ? )oss, are re&ie.ed on a uarterl"
asis in the manner and as stipulated in the ligor Ris( Rating +RR, guidelines of the
an(*
'f Relationship Manager feels that due to irregularities or o&er dues$ etc*$ regular lines should
not e rene.ed ut e2isting outstanding should e placed on liuidation asis +i*e* ad/ustment
purpose,$ a rene.al .or( out CM co&eringX
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1* The outstanding$ .ith specific maturities$
7* Anticipated date of liuidation +or e2pir" of the facilities, and
3* Action plan to either upgrade or complete reco&er"
Must e sumitted in the normal manner ? account should e rated #pecial Mention K >*
'f up-to-date financials are not a&ailale$ Relationship Manager should sumit rene.als ased
on latest a&ailale ones* More than perfunctor" tradean( chec(ing must accompan" the
CM*
4.13 CREATION OF LOAN LOSS PROVISION
As part of pragmatic and conser&ati&e approach to sustain the ualit" of the an(4s loan
portfolio and hence$ the earning stream$ )oan )oss Pro&ision e2ercise is eing made
mandator" for all )ine of usiness and Head of #pecial Asset Management of the an(*
#uch e2ercise is dictated "B
;enerall" accepted an(ing practice*
Conser&ati&e approach to assess the ualit" of Ris( Assets .here" the most accurate
health of the )oan Portfolio is reflected on the oo(s of the an( and*
To e guided " angladesh an( instructionsguidelines on pro&isioning*
!ollo.ing guidelines are oser&edB
1* The prudential Pro&ision Practice dictates that rather than .ait until the close of the
fiscal "ear pro&ision e2ercise .ould e an ongoing one$ .ith the needed pro&ision
created$ .hen an account is classified and continues to remain classified* The
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pro&ision e2ercise is to e carried out " each uarter end$ ased on reports on
Classified Accounts related to pre&ious uarter*
7* angladesh an( instructionsguidelines are follo.ed for the purpose of )oan )oss
Pro&ision e2ercise*
3* %nless other.ise enhanced " angladesh an( regulator" od"$ )oan )oss
pro&ision polic" as per the matri2 gi&en elo. is adopted and follo.ed " the line of
usiness and #pecial Asset Management 5epartment of the an(*
ligor Ris(
Rating Past 5ue #
E2pired Credit
+CR'TER'A, Classification #tatus Pro&ision to e held against et )oan Ialue
G 90 da"s$ 1F0 da"s$ 7G0 da"s$ 360 da"s #pecial Mention$ #ustandard$ 5outful
ad ? )oss
70
0
100
!ollo.ing formula is applied in determining the reuired amount of pro&isionB
;ross utstanding DDD
)essB +i, Cash margin held or !i2ed
5eposits#P under lien* + DDD ,
+ii, 'nterest in #uspense Account + DDD ,
)oan IalueB +!or .hich pro&ision is to e created efore considering
estimated realiale &alue of other securit"collateral held, DDD
)essB Estimated sal&age &alue of securit"collateral held + DDD ,$ et )oan Ialue
DDD
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!or the purpose of pro&ision against classified loans$ 8Eligile #ecurities: mean the
follo.ingB
100 of deposit under deposit against the loan
100 of the mar(et &alue of gold or gold ornaments pledged .ith the an(
100 of the &alue of ;o&t* ond#ancha"apatra under lien
0 of the mar(et &alue of easil" mar(etale commodit" (ept under the control of the
an(
0 of the mar(et &alue of land and uilding mortgaged .ith the an(
0 of the a&erage mar(et &alue for last 06 months or 0 of the face &alue
.hiche&er is less$ of the shares traded in stoc( e2change* The amount of reuired
pro&ision ma"$ in some circumstances$ e reduced " an estimated realiale forced
sale &alue of +i*e* #al&age Ialue, of an" tangile collateral held +&iB mortgage of
propert"$ pledged goods or h"pothecated goods repossessed " the an($ pledged
readil" mar(etale securities etc,* Hence$ in these situations$ it .ill e ad&isale to
e&aluate such collateral$ estimate the most realistic sale &alue under duress and net off
the &alue against the outstanding efore determining the et )oan &alue for pro&ision
purposes* Conser&ati&e approach is ta(en to arri&e at pro&ision reuirement and
angladesh an( guideline to e properl" follo.ed$ Pro&idedB
+A,The classification criteria are strictl" and o/ecti&el" applied and
+, Classified accounts are monitored in the manner as stipulated in this .rite-up a
concerted focused attention on the classified loans is e2pected* 'f an account is thus
re&ie.ed and rated sa" #u-standard and 70 pro&ision is made there against$ in
suseuent assessments if the account sho.s further signs of deterioration$
do.ngrading to 85outful: is .arranted* This should then prompt$ as per the matri2$
a 0 pro&ision of the et )oan Ialue*Therefore$ the process of4 classification
should trigger the Prudential )oan )oss Pro&ision e2ercise*
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+C, The action is not completel" a 8lind faith: one$ since uniue circumstances and
reco&er" prospects ma" still lead the assessor to pro&ide for less than the prudential
le&el* Uudgmental e&aluation should accordingl" pla" the desired role and final
decision for the e2tent of loss pro&ision .ill rest .ith the Head of Credit Ris(
Management and Managing 5irector ? CE*
+5,Ho.e&er$ onl" the Managing 5irector ? CE can appro&e the )oan )oss Pro&ision$
.hether specific +against each classified account, or general reser&es on the strength
of recommendation from #pecial Assets Management and Head of Credit Ris(
Management*
4.14 PROBABLE LOSS
nl" for the purpose of Prudential Pro&ision E2ercise 8Proale )oss: categor" of rating is
to e determined* 'n general$ accounts .hich are alread" classified 85outful: ut ha&e not
een do.ngraded to
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Readil" saleale prospects at mar(et &alue +Higher of realiale &alue .ill mean
lo.er* ris( and &ice &ersa, 0 to >0
oteB An account scoring more than 0 ma" ualif" to e high as a 8Proale )oss: and
.ould despite eing classified 85outful ma" deser&e a higher pro&ision on a et )oan &alue
asis*
4.15 RECOVERY PROBABILITY CATEGORIES TO BE ASSIGNED TO ALL
CLASSIFIED LOANS
A, )oans determined to ha&e high proailit" of reco&er" .ithin 6 months reco&er"
efforts to continue on an ongoing asis*
, )oans determined to ha&e moderate proailit" of reco&er" .ithin 1 "ear re&ie.
reco&er" efforts on a 3 monthl" asis*
C, )oans determined to ha&e lo. and remote proailit" of reco&er" re&ie. case on a 6
monthl" asis*
5, )oans determined to ha&e &irtuall" no chance of reco&er"B charge off the oo(s*
Ho.e&er in this situation proper appro&al from the appropriate appro&ing authorities
should e otained and also shall e guided " angladesh an( circularsinstructions
+if an", and su/ect to complete anal"sis ofB
an(ing practice$
)egal and ta2 implication and
#tatus of each indi&idual credit*
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35
CHAPTER- 0
CR& PO"ICIES RECO&&ENDED
/ AN)"ADES* AN!
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5.1 INTRODUCTION
This section details fundamental credit ris( management policies that are recommended for
adoption " all an(s in angladesh " angladesh an( and E)4s compliance status .ith
these guidelines* The guidelines outline general principles that are designed to go&ern the
implementation of more detailed lending procedures .ithin indi&idual an(s* E)4s practice
regarding general credit ris( management has een e2plained in the follo.ing section .ith
their congruence .ith the regulator" guidelines*
5.2 LENDING GUIDELINES
The an( has its estalished Credit Policies +8)ending ;uidelines:, that clearl" outline the
senior management4s &ie. of usiness de&elopment priorities and the terms and conditions
that should e adhered to in order for loans to e appro&ed* The )ending ;uidelines is
updated at least annuall" to reflect changes in the economic outloo( and the e&olution of the
an(4s loan portfolio$ and is distriuted to all lendingmar(eting officers* The )ending
;uidelines is appro&ed " the Managing 5irectorCE ? oard of 5irectors of the an(
ased on the endorsement of the an(4s Head of Credit Ris( Management and the Head of
CorporateCommercial an(ing*
An" departure or de&iation from the )ending ;uidelines is e2plicitl" identified in credit
applications and a /ustification for appro&al is pro&ided* The )ending ;uidelines pro&ides the
(e" foundations for Relationship Managers +RM, to formulate their recommendations for
appro&al$ and includes the follo.ingB
5.3 INDUSTRY AND BUSINESS SEGMENT FOCUS
The )ending ;uidelines clearl" identif" the usinessindustr" sectors that should constitute
the ma/orit" of the an(4s loan portfolio* This .ill pro&ide necessar" direction to the an(4s
mar(eting staff*
5.4 TYPES OF LOAN FACILITIES
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The t"pe of loans that are permitted is clearl" indicated and defined$ such as =or(ing Capital$
Trade !inance$ Term )oan$ etc* A full list of E) credit products for #ME and consumer
clients has een attached in the appendi2*
5.5 SINGLE BORRO,ER/GROUP LIMITS
'n case of single orro.er e2posure limit the an( strictl" follo.s angladesh an(
guidelines* The regulation regarding the stated purpose communicated &ides RP5 circular
no dated April 09$ 700 is pro&ided elo.B
8As a result of increase in capital of almost all the an(s$ no. it has een decided to reduce
the single orro.er e2posure limit from 0 to 3$ thusB
The total outstanding financing facilities " a an( to an" single person or enterprise or
organiation of a group shall not at an" point of time e2ceed 3 of the an(4s total capital
su/ect to the condition that the ma2imum outstanding against fund ased financing facilities
+funded facilities, do not e2ceed 1 of the total capital*
on funded credit facilities e*g* letter of credit$ guarantee etc* can e pro&ided to a single
large orro.er* ut under no circumstances$ the total amount of the funded and non-funded
credit facilities shall e2ceed 3 of a an(4s total capital*
Ho.e&er$ in case of e2port sector single orro.er e2posure limit shall remain unchanged at
0 of the an(4s total capital* ut funded facilities in case of e2port credit shall also not
e2ceed 1 of the total capital*:
5.+ DISCOURAGED BUSINESS TYPESThe guideline ad&ices that an(s should outline industries or lending acti&ities that are
discouraged* As a minimum$ the follo.ing should e discouragedB
Militar" Euipment=eapons !inance*
Highl" )e&eraged Transactions*
!inance of #peculati&e 'n&estments*
)ogging$ Mineral E2tractionMining$ or other acti&it" that is ethicall" or
en&ironmentall" sensiti&e*
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)ending to companies listed on C' lac( list or (no.n defaulters
Eastern an( limited follo.s the guideline and also in addition the" ha&e a list of the
discouraged usiness of their o.n .hich cannot e printed for the sa(e of confidentialit"*
5.- LOAN FACILITY PARAMETERS
!acilit" parameters +e*g*$ ma2imum sie$ ma2imum tenor$ and co&enant and securit"
reuirements, are clearl" stated* As a minimum$ the follo.ing parameters +mentioned in the
guideline, are adoptedB
an( does not grant facilities .here the an(4s securit" position is inferior to that of
an" other financial institution*
Assets pledged as securit" is al.a"s properl" insured* 'n fact$ E) ensures 110
insurance on the h"pothecated securit" for a particular facilit"* The an( also has its
o.n list of insurance companies from .hich the client can ta(e insurance*
Ialuations of propert" ta(en as securit" is performed prior to loans eing granted*
Also recognied 3rd part" professional &aluation firm is appointed to conduct the
&aluations*
.$2 CREDIT ASSESS&ENT
A thorough credit and ris( assessment is conducted prior to the granting of loans$ and at least
annuall" thereafter for all facilities* The results of this assessment are presented in a Credit
Application that originates from the relationship manageraccount officer +8RM:,$ and is
appro&ed " Credit Ris( Management +CRM,* The RM is the o.ner of the customer
relationship$ and is held responsile to ensure the accurac" of the entire credit application
sumitted for appro&al* RMs are familiar .ith the an(4s )ending ;uidelines and should
conduct due diligence on ne. orro.ers$ principals$ and guarantors*
't is essential that RMs (no. their customers and conduct due diligence on ne. orro.ers$
principals$ and guarantors to ensure such parties are in fact .ho the" represent themsel&es to
e* The an( has its estalished @no. our Customer +@C, and Mone" )aundering
guidelines .hich are adhered to at all times*
Credit Applications summarie the results of the RMs ris( assessment and include$ as a
minimum$ the follo.ing detailsB
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Amount and t"pe of loan+s, proposed*
Purpose of loans*
)oan #tructure +Tenor$ Co&enants$ Repa"ment #chedule$ 'nterest, #ecurit"
Arrangements*
.8.1 !orro"er Analysis- The ma/orit" shareholders$ management team and group or affiliate
companies is assessed* An" issues regarding lac( of management depth$ complicated
o.nership structures or inter-group transactions are addressed$ and ris(s mitigated*
.8.2 #n$ustry Analysis- The (e" ris( factors of the orro.er4s industr" are assessed " the
RM* An" issues regarding the orro.er4s position in the industr"$ o&erall industr" concerns
or competiti&e forces is addressed and the strengths and .ea(nesses of the orro.er relati&e
to its competition should e identified*
.8.3 %upplier&!uyer Analysis- An" customer or supplier concentration is reported in the
credit application$ as these could ha&e a significant impact on the future &iailit" of the
orro.er*
.8.4 'istorical (inancial Analysis- An anal"sis of a minimum of 3 "ears historical financial
statements of the orro.er is presented in an(4s specified format* The anal"sis should
address the ualit" and sustainailit" of earnings$ cash flo. and the strength of the
orro.er4s alance sheet* #pecificall"$ cash flo.$ le&erage and profitailit" must e anal"ed*
.8. A$)erence to *en$ing +ui$elines- Credit Applications should clearl" state .hether or
not the proposed application is in compliance .ith the an(4s )ending ;uidelines*
.8., -itigating (actorsMitigating factors for ris(s identified in the credit assessment is
identified and reported in the application*
.8./ *oan %tructureThe RM ma(es sure that the amounts and tenors of proposed financing
are /ustified ased on the pro/ected repa"ment ailit" and loan purpose* E2cessi&e tenor or
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amount relati&e to usiness needs increases the ris( of fund di&ersion and ma" ad&ersel"
impact the orro.er4s repa"ment ailit"*
.8.8 %ecurityA current &aluation of collateral is otained and the ualit" and priorit" of
securit" eing proposed is assessed* )oans are not granted ased solel" on securit"* Adeuac"
and the e2tent of the insurance co&erage are also ta(en into consideration*
.8.0 ae *en$ing 'n this case an( also follo.s the prudential guidelines .hich sa"s
8Credit proposals should not e undul" influenced " an o&er reliance on the sponsoring
principal4s reputation$ reported independent means$ or their percei&ed .illingness to in/ect
funds into &arious usiness enterprises in case of need* These situations should e
discouraged and treated .ith great caution* Rather$ credit proposals and the granting of loans
should e ased on sound fundamentals$ supported " a thorough financial and ris( anal"sis:*
5.0 APPROVAL AUTHORITY
The prudential guidelines regarding appro&al authorit" " is stated elo.B
8The authorit" to sanctionappro&e loans must e clearl" delegated to senior credit e2ecuti&es
" the Managing 5irectorCE ? oard ased on the e2ecuti&e4s (no.ledge and e2perience*
Appro&al authorit" should e delegated to indi&idual e2ecuti&es and not to committees to
ensure accountailit" in the appro&al process* The follo.ing guidelines should appl" in the
appro&alsanctioning of loansB
Credit appro&al authorit" must e delegated in .riting from the M5CE ? oard +as
appropriate,$ ac(no.ledged " recipients$ and records of all delegation retained in CRM*
5elegated appro&al authorities must e re&ie.ed annuall" " M5CEoard*The credit appro&al function should e separate from the mar(etingrelationship management
+RM, function* The role of Credit Committee ma" e restricted to onl" re&ie. of proposals
i*e* recommendations or re&ie. of an(4s loan portfolios* Appro&als must e e&idenced in
.riting$ or " electronic signature* Appro&al records must e (ept on file .ith the Credit
Applications* All credit ris(s must e authoried " e2ecuti&es .ithin the authorit" limit
delegated to them " the M5CE* The 8pooling: or comining of authorit" limits should
not e permitted* Credit appro&al should e centralied .ithin the CRM function* Regional
credit centers ma" e estalished$ ho.e&er$ all large loans must e appro&ed " the Head of
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Credit and Ris( Management or Managing 5irectorCEoard or delegated Head ffice
credit e2ecuti&e* The aggregate e2posure to an" orro.er or orro.ing group must e used to
determine the appro&al authorit" reuired* An" credit proposal that does not compl" .ith
)ending ;uidelines$ regardless of amount$ should e referred to Head ffice for Appro&al
M5Head of Credit Ris( Management must appro&e and monitor an" cross-order e2posure
ris(* An" reaches of lending authorit" should e reported to M5CE$ Head of 'nternal
Control$ and Head of CRM*
A monthl" summar" of all ne. facilities appro&ed$ rene.ed$ enhanced$ and a list of proposals
declined stating reasons thereof should e reported " CRM to the CEM5:*
The an( tries to follo. the ao&e guidelines as perfectl" as possile* The e2isting appro&al
authorit" for appro&ing credit proposals is summaried elo.B
T"pe of Credit Amount Tenor Appro&ing Authorit"*
!unded on-funded %p to T@ 1*00 Crore 17 month Head of CRM*
!unded on-funded %p to T@ 1*0 Crore 17 month Head of CRM ? Head of
Corporate an(ing +/ointl",*
!unded on-funded %p to T@ 3*00 Crore 17 month 5M5 +singl",*
!unded on-funded %p to T@ *00 Crore 60 month 5M5 ? M5 +/ointl", Cash
against #ecurit"*
+Class A- E) !5Rs, %p to T@ 7*00 Crore 60 month 5M5 ? M5 +an" one, Cash
against #ecurit"*
+Class - !5Rsother an(, %p to T@ 10*00 Crore 60 month 5M5 ? M5 +an" one,
Consumer an(ing All products +E2ceptions, 60 month 5M5 ? M5 +an" one,
5.1 SEGREGATION OF DUTIES
E) segregates the follo.ing lending functionsB
Credit Appro&alRis( Management*
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Relationship ManagementMar(eting*
Credit Administration
The purpose of the segregation is to impro&e the (no.ledge le&els and e2pertise in each
department$ to impose controls o&er the disursement of authoried loan facilities and otain
an o/ecti&e and independent /udgment of credit proposals*
5.11 PREFERRED ORGANISATIONAL STRUCTURE &
RESPONSIBILITIES
The guideline proposes that appropriate organiational structure must e in place to
support the adoption of the policies of the guidelines* The (e" feature is the
segregation*
Mar(etingRelationship Management functions from Appro&alRis(*
ManagementAdministration functions* 't also proposes credit appro&al should e
centralied .ithin the CRM function* Regional credit centers ma" e estalished$
ho.e&er$ all applications must e appro&ed " the Head of Credit and Ris(
Management or Managing 5irectorCEoard or delegated Head ffice credit
e2ecuti&e*
The organiational structure of E) +credit related, is compared elo. .ith that of the
guideline* E) ensures that all credit appro&als are centralied .ithin the CRM function*
There are three regional corporate ases t.o in 5ha(a and the other one in chittagong$
ho.e&er$ all applications are sumitted to CRM of 5ha(a Head office and appro&ed " the
oard$ M55M5 or HCRM as appropriate* !or the #ME sector$ all proposals come to
5ha(a #ME center and then appro&ed through CRM* The follo.ing chart represents the
preferred management structure in the guideline* The credit related structure of E) is as
follo.sB
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.11.1 ey Responsiilities: @e" responsiilities of concerned parties as mentioned in the
prudential guidelines are discussed elo.B
Cre$it Ris5 -anageent 6CR-7&ersight of the an(4s credit policies$ procedures
and controls relating to all credit ris(s arising from corporatecommercialinstitutional
an(ing$ personal an(ing$ ? treasur" operations*
versig)t of t)e an59s asset uality5irectl" manage all #ustandard$ 5outful ?
ad and )oss accounts to ma2imie reco&er" and ensure that appropriate and timel"
loan loss pro&isions ha&e een made* To appro&e +or decline,$ .ithin delegated
authorit"$ Credit Applications recommended " RM* To pro&ide ad&iceassistance
regarding all credit matters to line managementRMs* To ensure that lending
e2ecuti&es ha&e adeuate e2perience andor training in order to carr" out /o duties
effecti&el"*
Cre$it A$inistrationTo ensure that all securit" documentation complies .ith the
terms of appro&al and is enforceale* To monitor insurance co&erage to ensure
appropriate co&erage is in place o&er assets pledged as collateral$ and is properl"
assigned to the an(* To control loan disursements onl" after all terms and
conditions of appro&al ha&e een met$ and all securit" documentation is in place* To
maintain control o&er all securit" documentation* To monitor orro.er4s compliance
.ith co&enants and agreed terms and conditions$ and general monitoring of account
conductperformance*
Relations)ip -anageent&-ar5eting 6R-7 To act as the primar" an( contact .ithorro.ers* To maintain thorough (no.ledge of orro.er4s usiness and industr"
through regular contact$ factor".arehouse inspections$ etc* RMs should proacti&el"
monitor the financial performance and account conduct of orro.ers*
To e responsile for the timel" and accurate sumission of Credit Applications for ne.
proposals and annual re&ie.s$ To highlight an" deterioration in orro.er4s financial standing
and amend the orro.er4s Ris( ;rade in a timel" manner* Changes in Ris( ;rades should e
ad&ised to and appro&ed " CRM*
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5.12 APPROVAL PROCESS
The appro&al process segregates the .or( of Relationship ManagementMar(eting from the
appro&ing authorit"* The responsiilit" for preparing the Credit Application rests .ith the RM
.ithin the corporate#ME an(ing department* Credit Applications are recommended for
appro&al " the RM team and for.arded to the appro&al team .ithin CRM and appro&ed "
indi&idual e2ecuti&es*
The recommending or appro&ing e2ecuti&es ta(e responsiilit" for and are held accountale
for their recommendations or appro&al*
.12.1 Approving %-; proposals
The RM first sends the credit application to the #ME center in Head office 5ha(a* The #ME
center then chec(s the documents and ma(e sure the" are .ell .ithin the lending guidelines
of the an(* The" also pro&ide additional condition for sanction as appropriate* After
re&ie.ing the" send the proposal to the CRM department* The respecti&e credit officers
re&ie. the proposal and get the appro&al from the appro&ing authorit"*
5.13 CREDIT MONITORING
To minimie credit losses$ monitoring procedures and s"stems are in place that pro&ides an
earl" indication of the deteriorating financial health of a orro.er* At a minimum$ s"stems
are in place to report the follo.ing e2ceptions to rele&ant e2ecuti&es in CRM and RM teamB
Past due principal or interest pa"ments$ past due trade ills$ account e2cesses$ and
reach of loan co&enants*
)oan terms and conditions are monitored$ financial statements are recei&ed on a
regular asis$ and an" co&enant reaches or e2ceptions are referred to CRM and the
RM team for timel" follo.-up*
Timel" correcti&e action is ta(en to address findings of an" internal$ e2ternal or
regulator inspectionaudit*
All orro.er relationshipsloan facilities are re&ie.ed and appro&ed through the
sumission of a Credit Application at least annuall"*
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E) has an e2cellent 'T ac(one$ .hich produces the ao&e information for
centralhead office as .ell as local re&ie.*
5.14 CONCLUSION
Compliance .ith the guidelines of circulars or directions is a must for all the scheduled
an(s in the countr"* E) is no e2ception is this case* All the circulars related to credit are
properl" filed in the department* 't is made sure from the top management that each and
e&er" credit officer understands all the circulars and directions and e2ercise due diligence
during operation regarding the stated issue* The follo.ing section discusses a similar topic$
.hich necessaril" reuires an(4s strong compliance regarding it*
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46
CHAPTER- 06
PERFOR&ANCE EVA"UATION
OF EASTERN AN! "TD
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+.1 Stt%$ %!%t6 !7 EBL
!urther impro&ement of asset ualit"*
!urther change in deposit mi2 to increase pie of lo. cost deposits*
To ecome cost efficient organiation*
Moderate gro.th in con&entional products*
Pursue inorganic gro.th through merger and acuisition*
'ncrease off-alance sheet usiness through product inno&ation*
Careful presentation in the capital mar(et*
'ncrease intrinsic &alue of the compan" " strengthening internal controls through
installation of clearl" laid do.n policies$ procedures and processes*
5i&ersit" corporate usiness to ta(e ad&antage of PPP* 'ncreased and focused Corporate #ocial Responsiilit" +C#R,*
'ncrease shareholders4 &alue*
#trengthen ris( management*
'mpro&e ualit" of human capital " strengthening their competencies*
Create .orld class 'T infrastructure to deli&er superior ser&ice to our customers*
+.2 Bn8 P!7%t9%:%t6
)i(e all usinesses$ an(s profit " earning more mone" than .hat the" pa" in e2penses* Thema/or portion of a an(Ys profit comes from the fees that it charges for its ser&ices and the
interest that it earns on its assets* 'ts ma/or e2pense is the interest paid on its liailities*
The ma/or assets of a an( are its loans to indi&iduals$ usinesses$ and other organiations
and the securities that it holds$ .hile its ma/or liailities are its deposits and the mone" that it
orro.s$ either from other an(s or " selling commercial paper in the mone" mar(et*
To anal"e performance of Eastern an( )imited +E), " calculating different financial
ratios$ .e use follo.ing ratios-
1* RE +Return on Euit",
7* RA +Return on Asset,
3* Profit Margin
>* Asset %tiliation
* et 'nterest Margin
6* Pro&ision for )oss Ratio
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G* )oan Ratio
F* Temporar" 'n&estment Ratio
9* EP# +Earning Per #hare,
10* 5P# +5i&idend Per #hare,
11* PE +Price Earning, Ratio
+.3 P7!;n$ E
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for "oan
"osses
Tota9
"oans +
"eases
1G$GG$9F$66 7$9G3$9F1$7F0 30$F9$G06$79> 39$>7G$3F3$F91 >6$179$77$0F3
Net "oan 1G$1G>$7F$36 7$0>6$619$796 30$19>$1G1$>36 3F$637$0F3$300 >$7GG$71$1F
Treasury
i99
>$60$000$000 3$6F0$000$000 1$1G0$000$000 - -
In=estment
? % year
- 7$967$G3>$GG3 1$79F$1F0$16F >>0$0G9$70 7GF$30$6G
Due from
Ot@er
an7
G>$7F$>0 97G$301$G79 1$>0$31$9FG 3$>06$373$97 6$GGG$716$3
No$ of
S@ares
Issue
F$7F0$000 F$7F0$000 10$30$000 13$F69$000 7>$96>$700
Pro;osed
Di=idend
331$700$000 3G7$600$000 31$900$000 - -
&ar7et
;rice of ;er
S@are
1777*G G97*0 10G0*G F9*30 6>>*7
o.$
R; 6Return on ;uity7:
REJ +et 'ncome Z Total Euit", [ 100
/ear #662 #668 #6%6 #6%% #6%#
Net
Income
>6$1$07F 13$733$6F0 >1F$6>F$10 G9F$33$19G 1$>F$991$937
Tota9
Euity
3$0G1$336$910 3$31>$G73$16> 3$G10$917$939 >$G33$3F$666 F$>3>$1F1$F0>
4"
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ROE 1G*G9 1*>F 11*7F 16*FG 1G*3
" this ratio .e see that in 7009 ? 7010 E)4s RE is relati&el" lo.er than others* ut in
7011 its increasing ? also continuous increasing is going on* Therefore$ in&estors .ill attract
more effecti&el" to in&est*
RA 6Return on Asset7:
RAJ +et 'ncome Z Total Asset, [ 100
/ear #662 #668 #6%6 #6%% #6%#
Net
Incom
e
>6$1$07F 13$733$6F0 >1F$6>F$10 G9F$33$19G 1$>F$991$937
Tota9
Asset
7G$399$9>$>6
9
3$93>$F33$11
0
>7$0G$07$0
>
>$31$G9$9F
3
6F$330$333$10
3
ROA 1*99 1*>3 0*99 1*>G 7*1>
Managing asset or handling asset is the most important part of an organiation* Here$ .e see
that Eastern an( )td* Managing their asset in a&erage at 1** And also in 7017$ RA is
much etter than others*
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Profit
&ar*3> 7>*37 1>*F> 71*G 31*60
E)4s profit margin ratio in 700F is 3>*3> ut it decreases in 7006$ 7009$ 7010$ 7011 and
it4s o&ercome in 7017* #o$ E) is doing .ell in 7017
Asset Utilization:
Asset %tiliationJJ +perating Re&enue Z Total Asset,
/ear #662 #668 #6%6 #6%% #6%#
Tota9
Asset
7G$399$9>$>6
9
3$93>$F33$11
0
>7$0G$07$0
>
>$31$G9$9F
3
6F$330$333$10
3
O;eratin
< re=enue
1$91$610$77 7$110$G>G$379 7$F70$66G$70 3$G01$637$F79 >$61G$633$13F
Asset
Uti9iatio
n
0*0F 0*09 0*066 0*06F 0*06G
E)4s asset utiliation capailit" is increasing 0*0F to 0*06G* That4s a &er" good sign to an"
financial organiation*
et #nterest -argin:et 'nterest MarginJ +Total 'nterest 'ncome K Total 'nterest E2pense, Z A&erage Earning
Asset
/ear #662 #668 #6%6 #6%% #6%#
Tota9 Interest
Income
7$0G$>17$77 7$F79$337$63
7
3$F0F$903$03
6
$77>$>13$1>
6$1F6$163$1
90
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Tota9 Interest
E>;ense
1$36$>$6>7 7$160$0GF$1>
7
7$>9F$06F$11
G
3$6G$3F0$G
1
>$037$G11$6
17
A=era>
9*1G$G6F$076$F
G9
71$067$0>F$9
>
76$967$$F
79
33$97>$>1G$
>07
Net Interest
&ar
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7$G>7 773$369$7F F>$39>$00F >7$6F6$0G3 767$11$377
Tota9 9oans
+"eases
1G$GG$9F
$66
7$9G3$9F1$7
F0
30$F9$G06$7
9>
39$>7G$3F3$F9
1
>6$179$77$0F
3
Pro=ision for
"oss Ratio
0* 0*F6 1*F9 1*1 0*G
Pro&ision for loan losses is doing etter .hen it4s decreasing* Here .e see that in 7009$ 7010$
7011 this rate is increase ? in 7017 its rate ecome lo.er* #o$ E) is standing in a lo. ris(
position*
*oan Ratio:
)oan RatioJ J +et )oan Z Total Asset, [ 100
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/ear #662 #668 #6%6 #6%% #6%#
Net
9oan
1G$1G>$7F$
36
7$0>6$619$79
6
30$19>$1G1$>3
6
3F$637$0F3$30
0
>$7GG$71$1F
Tota9
Asset
7G$399$9>$>
69
3$93>$F33$11
0
>7$0G$07$0
>
>$31$G9$9F
3
6F$330$333$103
"oan
Ratio
67*69 69*G G1*03 G1*0F 66*76
E) use their asset against loan &er" .ell li(e more than 0* #o$ it is the good sign to E)*ut in 7017 it decreases* #o$ E) must ha&e to concentrate on this ? sol&e the prolem*
=eporary #nvestent Ratio:
Temporar"
'n&estment RatioJ +Treasur" ill \ 'n&estment Q 1"ear \ 5ue from other an(, Z Total Asset
/ear #66. #660 #661 #662 #668Treasury Bi99 >$60$000$00
0
3$6F0$000$000 1$1G0$000$00
0
- -
In=estment ?
%year
- 7$967$G3>$GG3 1$79F$1F0$16
F
>>0$0G9$70 7GF$30$6G
Due from
ot@er an7
G>$7F$>0 97G$301$G79 1$>0$31$9F
G
3$>06$373$9
7
6$GGG$716$
3
Tota9 Asset 7G$399$9>$>
69
3$93>$F33$110 >7$0G$07$
0>
>$31$G9$
9F3
6F$330$333$
103
Tem;orary
In=estment
Ratio
0*19 0*71 0*09> 0*0G1 0*1
Temporar" in&est ratio of E) in 7009 is running lo.* E) must ha&e to (eep concentrate on
it*
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;1F$6>F$10 G9F$33$19G 1$>F$991$937
No$ of
S@ares
Issue
F$7F0$000 F$7F0$000 10$30$000 13$F69$000 7>$96>$700
EPS 66 61*9F >0*0 G*6 F*>>
EP# of E) 700F ? 7009 is good ut in 7010 it is too much lo.er* 'n 7011 E) ma(e o&er
the prolem for EP# is increasing ? also (eep it in 7017*
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*7
Annua9
Earnin0*0 G*6 F*>>
PE 3Price
Earnin> 10*7> 11*07
EP# of E) 700F$ 7010 is good ut in 7009$ 7011$ 7017 it is too much lo.er* #omeho.
e2ternal factors are not .or( properl" for that PE ratio decreasing*
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5
CHAPTER- 0G
FINDIN)S +
RECO&&ENDATIONS
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-.1 M=! F%n"%n>
) has started to di&ersif" its usiness into different areas of the countr"* The gro.th of
the E) has so far een &er" stead" and &er" high*
E) is maintaining stead" profitailit"*
E) is maintaining good credit polic"*
E) has good in&estment structure ut in some sector it does not perform &er" .ell*
E)4s liuidit" performance is satisfactor"*
Eastern an( )imited follo.s the guideline regarding discouraged lending acti&ities
and also in addition the" ha&e a list of the discouraged usiness of their o.n*
E)4s credit appraisal process is pleasing ut some correcti&e measure has to e ta(en*
The an( tries to adhere to the prudential guidelines regarding appro&