Prepared for

Dr. Md. Main Uddin

Associate Professor,
Dept. of Banking and Insurance
University of Dhaka

Prepared by
Gazi Mizanur Rahman (ID: 51427004)
Md. Arefin Haque (ID: 51428009)
Abid Zahangir (ID: 51428018)
M. Mahfuzur Rahman (ID: 51221074)

Course: Risk Management in Banking

Acknowledgement
The case study on Successful loan customer and Default loan customer" has been prepared to
fulfill the requirements of the Course-Risk Management in Banking. We consider ourselves
privileged as the instructor assigned us this job which eventually acquainted us with practical
dealing of a loan.
At the very inception our gratitude goes to Allah for special blessing in accomplishing the case
study. Then, we would like to thank our instructor for giving us the opportunity to prepare this
case study. He also provided me some important advices and guidance for preparing this report.
Without his assistance, this report would not be a comprehensive one.

Executive Summary
Nonperforming loans is usual incident for banking industry in Bangladesh. A Non-performing
loan is a loan that is in default or close to being in default. Many loans become non-performing
after being in default for 90 days, but this can depend on the contract terms. NPLs started at the
early stage of liberation. During 1980s and 1990s, Privatization and liberalization of banking
sector could not control NPLs. Rate of NPLs was 41.1% in 1999. Now it is 11.90%.The amount
of NPLs increased to taka 73.3 billion in 2012 from taka 47.3 billion in 2003. Reasons behind the
NPLs in Bangladesh numerous.
Here we analyzed two real cases. We took these cases from Foreign Exchange Corporate Branch,
Sonali Bank Ltd, Motijheel, Dhaka. We faked some data (such as borrowers' name, firms' name,
addresses ) for the sake of confidentiality. Business of default borrower is frozen fish and food
stuffs exporting. The bank extended a pre shipment cash credit (PSC) for export to the borrower.
The loan has given for financing purchase, processing, manufacturing or packing of goods prior
to shipment.
But the borrower failed to repay the loan. There are many reasons behind this failure.
Entrepreneurs related problems make the top of the list. The loan customer had lack of
experience, lack of business and institutional training. Second reason is business related. Not
taking credit report about foreign buyer, miss-utilization of loan amount, failing of importer to
make payment in time, poor quality of product, poor management and misuse of profit are main
reasons here. Strong competition is another business related cause. Another reason is that the
borrower faced a strong competition from its counterparts.
The successful borrower carefully handle all the aspects for which loan may become default.

Introduction:
Developing country like Bangladesh with a yet to develop capital market, mainly depends on the
intermediary role of commercial banks for mobilizing internal saving and providing capital to the
investor. Thus, it matters greatly how well our financial sector is functioning. From the point of
view of performance of our financial sector for last few decades, we see that our banking
industry is heavily burdened with a high rate of non-performing loans (NPLs). It is obvious that
NPLs reduce banks profitability, as banks cannot appropriate interest income from their
classified loans. NPLs reduce loan able funds by stopping recycling. Banks need to set aside a
portion of their income as a provision for loan loss to make up bad debt.
In our case, we observe negligence from both side of bank and loan customer. There are some
measures extracted by us required to take by loan customer to avoid failure.

Definition of Default Loan(Non performing loan):

A sum of borrowed money upon which the debtor has not made his or her scheduled payments
for at least 90 days. A nonperforming loan is either in default or close to being in default.
According to IMF, definition of NPLs is
A loan is nonperforming when payments of interest and principal are past due by 90 days or
more, or at least 90 days of interest payments have been capitalized, refinanced or delayed by
agreement, or payments are less than 90 days overdue, but there are other good reasons to
doubt that payments will be made in full (Wikipedia, definition of NPLs).

Credit Risk Grading (CRG) and Provisioning:

Number
1
2
3
4
5
6
7
8

Grading
Superior
Good
Acceptable
Marginal / Watchlist
Special Mention
Sub standard
Doubtful
Bad & Loss

Status

Provision

Unclassified

1-5 %

Classified

5%
20 %
50 %
100 %

Table: Credit Risk Grading (CRG) and Provisioning (According to Bangladesh Bank)

Case - 1
M/S X Food Processing Ind. Ltd
(Not Genuine name)

Information about Default Borrower

Name of the Borrower
Name of Proprietor
Address (Fake):
Types of Business:
Types of Loan:
Mode of Loan
Date of Sanction:
Sanctioned Limit
Disbursement Amount
Rate of Interest
Interest (From 30.04.10 to
31.12.12)
Total Liability
Total deposit
Net Liability
Status
Collateral
Value of Collateral
Deficit
Present condition of
Business
Borrowers Status

M/S. X (fake name) Food Processing

Ind. Ltd
Mr. K. Ahmed, (M.D)
Mrs. S. Razia.( Chairman)
Office: R-A,H-B, New D.O.H.S,
Mohakhali, Dhaka.
Factory: Nasirabad, Chittagong.
100% Export oriented frozen fish &
food stuffs
Pre- shipment cash credit (PSC) for
export
Continuous disbursement &
continuous repayment installments.
30-04-2010
7500000/6500000/- miscellaneous date
7% regular but 15% overdue
Tk. 4321750
Tk. 10821750
Tk. 3500000
Tk. 7321750
Bad-loss
Agricultural Land : 05 Bigha,
Chauddagram, Comilla.
Tk. 6000000
Tk. 1321750
Dissolved
Default

Reasons behind default:

There are many reasons behind the borrower being default. We mainly categorized
them into two:
A. From the borrower's end
B. From Banker's End
A. From the borrower's end:
Lack of business experience:
The borrower came across for loan without prior business experience. Besides his/her own
experience they looked for bank finance. Normally banks do not finance in the projects where
the key personnel do not have enough background in that particular business. Here there might
have third party influence.

Not taking credit report about importer:

The importer did not have any prior business experience with Bangladeshi exporters. In such
exporter usually seeks credit report of importer from his bank. But the loan customer failed to do
so. Consequence is the importer failed to pay his due in time.

Miss-utilization of loan amount:

The loan customer did not use the sum solely for the purpose he has taken the loan for. he used it
on something else.

Failing of Importer to make payment in time:

As the borrower was unaware of creditworthiness of the importer, eventually importer failed to
make the payment.

Poor quality of product:

The importer did not place any further order of product after first one due to the poor quality of
product. Standard process of frozen food did not comply with that of the exporter. The buyer got
some rotten food items. This thing resulted in no further order.

Unskilled Management:
There was a communication gap between top official and workers. We have already seen that the
corporate office of the business in Dhaka and its factory is in Chittagong. Though distance does
not matter in proper communication but here it affected the business operation due to improper
communication procedure. That gap led to poor quality product.

Communication gap between exporter and importer:

A communication gap between exporter and importer also was there, which results delay
payment.

Lack of own capital:

The borrower without his own equity sought the bank financing. Indeed he showed his portion of
capital in the papers but he financed all transactions by bank's fund. So that made the business
more risky as the owner was not as careful as he would be if his own capital would have
remained there.

Misuse of profit:
The customer used the proceed of profit outside of business for his personal purpose instead of
repaying the loan.

Failing of borrower to repay the loan installments in time:

The borrower failed to repay the installments. As a result, the loan become overdue and interest
rate increased to 15% and liability increased eventually.

B. From Banker's End:

Lack of proper Investigation before sanction:
Bank did not follow all procedures of loan investigation properly. It did not check market report
about the customer and his experience, profitability of the business, potential risks associated
with the industry.

Lack of proper loan analysis:

Bank failed to analyze the loan according to standardized process.

Failing to make CRG:

The bank did not categorize the loan according to Credit Risk Grading (CRG) formulated by
Bangladesh bank. So the bank failed to assess the risk associated with the customer and did not
monitor the loan.

Poor Quality collateral:

The collateral was not enough to recover the loan amount. Legal papers of collateral was not
clear. There is a legal problem regarding to ownership of the land. That's why bank could not
take the possession of the land.

Other Reasons
Bank did not collect importers credit report. There was lack of proper follow up and supervision.

Recommendation:
1. There should not be any compromise with due diligence in the sanctioning process. "Banks
should take high collateral. The security or collateral provided must be valued by proper agency
or put up on a regular mark to market valuation process.
2. Banks should take some step to collect the default loan. At the end bank should go to Artha
Rin Adalat.
3. Identification of highly risk sensitive borrowers in the credit portfolio. Banks should take
information about the clients before giving loans. Banks could go Bangladesh Bank to collect the
information and verify the financial statement carefully from reliable sources to identify the risky
borrowers.
4. Identification of geographical area-wise risk sensitivity. Banks should identify the clients
according area wise thats mean in Bangladesh, there is some places where growth rate is low or
rate of repay rate is low.
5. Targeting high value end NPL accounts (having exposure of Tk. 5.00 crore and above)
6. Prompt action on credit reports
7. Capacity building of officers and executives in the recovery department. Banks should give
proper training to employee. So they can handle loans properly. If there is short of experience
employee, bank should recruit experience employee for recovery department.
8. A robust risk management culture, with a well articulated risk management policy can help
the institutions to avoid such loan default.

Information about successful Borrower

Name of the Borrower
Name of proprietor
Address:

Types of Business:
Types of Loan:
Mode of loan
Date of sanction:
Sanction limit
Disbursement amount
Rate of interest
Interest
Total Liability
Total deposit
Net Liability
Status
Collateral Security
Valuation of Collateral
Deficit
Present condition
Borrowers status

M/S Monsur General Trading

Mohammad Monsur, (M.D)
Mrs. Sharmin Monsur.( Chairman)
Office: 65, Motijheel, Sharif Mansion,
Dhaka.
Processing warehouse : Shambazar
,Dhaka.
100% export oriented fresh fruits &
vegetables.
Pre- shipment cash credit (PSC) for
export
Continuous disbursement &
continuous repayment installments.
20.09.2003
30000000/27500000/- miscellaneous date
7% regular but 15% overdue
Time to time regular rate
25537500/Regular Installment
25537500/Regular
Agricultural Land : 07 Acre,
Narsingdi ,& six store building at
Dhanmondi, Dhaka.
80000000/Nil
Business is operational and
expanding.
Regular.

Case - 2
Strengths of the successful borrower:
Prior business experience
Good Management

Better quality product

Proper monitoring of business
Good profitability
Proper communication with importer.

Conclusion:
Our banking sector is characterized by low profitability and inadequate capital base because
there are lots of banks in Bangladesh. Banks revenue comes from spread (Lending rate
borrowing rate).But there is huge competition among banks. So the profit is minimum.The crux
of the problem lies in the accumulation of high percentage of non-performing loans over a long
period of time. The problem is most severe for NCBs and DFIs. However, starting from a very
high rate of 41.1% in 1999 it came down gradually to 11.90% in 2013 according to latest
published data. Still, it is very high by any standard. Unless it can be lowered substantially we
will lose competitive edge in the wave of globalization of the banking service that is taking place
throughout the world. We have had a two-decade long experience in dealing with the NPLs
problem and much is known about the causes and remedies of the problem. It needs to be
mentioned that management of NPLs must be multi-pronged, with different strategies pursued at
the different stages through which a credit facility passes. Measures should be in place for both
prevention and resolution. With regard to preventive measures, emphasis needs to be placed on
credit screening, loan surveillance and loan review functionaries both at individual bank levels
and in the central bank of the country. Resolution measures must be accompanied by legal
measures, i.e. improving the efficiency of the legal and the judicial system and developing other
out of the court settlement measures like compromise settlement schemes, incentive packaging,
formation of asset management companies, factoring, and asset securitization and so on.
Unfortunately, Bangladesh is found to be very weak from the above point of view, and strictly
speaking, it has mainly concentrated on a few legal measures that have also been found to be
ineffective. Therefore, this study has highlighted some challenges, shown below, for improving
the debt recovery environment and solving the NPL problems of the country as well.