Internship Report On Evaluating the Credit and risk Management System Of Eastern Bank Limited

Eastern Bank Limited is a commercial bank with 49 online branches across major cities in Bangladesh and 973 full time employees on year end 2010. It was established under Bank Company Act, 1991 and was incorporated as a Public Limited Company under Companies Act, 1994 on August 8, 1992. The Bank started commercial banking operations from August 16, 1992.
Eastern Bank Limited offers both funded and non-funded facilities to its customers. Funded credit facility involves direct cash of the bank and non-funded facility does not involve direct cash. Eastern Bank Limited follows some specific principles for its credit activities, which involve Know Your Customer (KYC), safety, liquidity, profitability, purpose and spread. Eastern Bank Limited being the leading private sector commercial bank in the country has a diversified credit portfolio, which has enhanced its asset quality. Eastern Bank Limited has outperformed its peer competitor banks in terms of profitability, asset quality, and fund management and practically in every area of banking operation.

The lending procedure followed by Eastern Bank Limited consists of a set of sequential activities, wherein both bank officials and potential borrowers play significant role. The lending process formally starts with a loan application from a client who must have an account with the Bank. The branch manager first interviews the borrower and makes a preliminary assessment. Then the customer provides relevant financial information to the bank for credit analysis. For corporate customer, financial statements for the last three years have to be supplied to the bank officials. For new company, projected financial statements are used for financial appraisal. Meanwhile the bank sends inquiry to the Credit Information Bureau of Bangladesh Bank in prescribed format to know whether the borrower has classified loans with other banks.

If the CIB report obtained from Bangladesh Bank signifies that the customer is a good borrower, the bank starts processing of the loan proposal. At this stage the bank conducts credit analysis. The bank uses financial spread sheet analysis which consists of the analysis of balance sheet, profit & loss account, cash flow statement. The outcomes of the financial spread sheet analysis are various ratio analyses. The credit analysis is undertaken for the quantitative measurement of the risk associated with a loan. If the loan amount exceeds taka one crore, the bank conducts Lending Risk Analysis (LRA), a practice introduced under FSRP (Financial Sector Reform Project) by IMF, WB etc. Lending Risk Analysis primarily identifies two components of the lending risk- business risk and security risk. The lending risk analysis classifies the lending risk as Good Risk, Acceptable Risk, Marginal Risk and Poor Risk.

After credit analysis if the borrower is found sound for lending, the bank proceeds to prepare the credit proposal. If the credit line is within the discretionary power of the branch manager then the credit line is approved and otherwise it is sent to the corporate office. Corporate office credit committee reviews the credit proposal and if finds everything in order, sends it to the managing director who approves the credit line. In case of the loan amount being more than one crore, Board approves credit.

After board approval the sanction advice is sent to the borrower who returns the duplicate copy duly signed meaning that he/she accepts the terms and conditions of the bank’s credit policy. Once the credit is disbursed, monitoring starts formally. Monitoring of a loan is very essential because of high default rate in Bangladesh.

The total duration of time required to complete the lending process varies with the nature of credit, collection of information, nature of information, analysis of information, preparation of the proposal, corporate office scrutiny, board approval, preparation of sanction advice, creation and collection of charge documents and actual disbursement of loan.
Classified loan as a percentage of total loans of Eastern Bank Ltd as on 31.12.2010 was 1.99% which is very good. Eastern Bank Limited has strengthened its credit portfolio management through diversification of its investment among the different industries. For every economic sector the Board has imposed a ceiling to avoid concentration of credit to a single industry and hence to reduce the risk of the overall credit.

Lending is the main income generating activity for all banks and involves both risk and profit. But a sound lending process supported by quantitative analysis, qualitative judgment and a separate credit-monitoring cell can reduce the risk to a certain extent. So far Eastern Bank Limited could maintain a very good loan portfolio and its lending process is reasonably sound.

Risk is inherent in all aspects of a commercial operation; however for Banks and financial institutions, credit risk is an essential factor that needs to be managed. Credit risk is the possibility that a borrower or a country party will fail to meet its obligations in accordance with agreed terms. Credit risk, is therefore, arises from the bank’s dealings with or lending to corporate, individuals, and other banks or financial institutions.

Credit management needs to be a robust process that enables banks to proactively manage loan portfolio in order to minimize losses and earn an acceptable level of return for shareholders. Central to this a comprehensive IT system, which should have the ability to capture all key customer data, risk management and transaction information including trade, Forex. Given the fast changing, dynamic global economy and the increasing pressure of globalization, liberalization, consolidation and disintermediation, it is essential that banks have robust credit management policies and procedures that are sensitive and responsive of these changes.

The purpose of this document is to provide directional guidelines to the banking sector that will improve the credit management culture, establish minimum standards for segregation of duties and responsibilities, and assist in the ongoing improvement of the banking sector in Bangladesh.

Eastern Bank Limited (EBL) is one of the modern, fully online and technologically superior private commercial Banks in Bangladesh. Eastern Bank markets a wide range of depository, loan & card products. These products include different types of Savings & Current Accounts, Personal Loans, Auto Loan, Debit Card, Pre-paid Cards, Internet Banking, Treasury, Syndication, Corporate Banking and SME Banking services through a network of 49 branches & centers countrywide. Eastern Bank has its presence in major cities/towns of the country including Dhaka, Chittagong, Sylhet, Khulna and Rajshahi. Tracing its origin back to 1992, EBL is serving the individual and corporate clientele alike with remarkable success offering innovative banking services since then.

Background of the Report:

The business world is getting dynamic and competitive. It is hard for an organization to run & even survive in a fast paced, growing and uncertain world if it cannot keep tracks with the go of business dynamism. Business plays and links important roles in developing the economy of a country. So, as a business graduate, I think I need to be attached with any organization to get a handy & versatile experience about the business world before starting our career. Internship is the arrangement, which makes a bridge between our academic knowledge and practical world to have an acquaintance with the real business world as well as to gear me up to lead the future competitive business.

The report is a requirement of the internship program for my MBA program. My internship instructor Mr. Md. Ariful Islam, Lecturer, Department of Banking, University of Dhaka, has duly approved the topic of my report. During my internship, I was concentrated on different functions regarding the credit administrative division, corporate & investment banking division, consumer banking division which inspired me to choose this topic. The report thus was titled as “Evaluating the Credit Management System of Eastern Bank Limited”.