retail credit policy

P R E F A C E

P R E F A C E

This Retail Banking Credit Policy Manual of the Bank is prepared in line with the Prudential Guidelines for consumer financing of Bangladesh Bank on Credit Risk Management and for the guidance of the Officers/Executives in handling affairs relating to credit in a disciplined way. This policy will apply to all Branches of Prime Bank Limited in Bangladesh and replace the existing Policy guidelines that have been issued from time to time though circulars.It is very likely that this policy may have limitations, which will be rectified/removed in due course. Moreover, it will be revised and updated from time to time. As such, suggestions from Banks Executives and Officers for making further improvement are welcome.

The main purpose of this policy is to make the executives and officers of the bank conversant with the policy and strategy of the Bank regarding credit operation and enable them to discharge duties and responsibilities with confidence and constructive initiative.

The concerned Executives and Officers must keep themselves fully conversant with its contents, which are strictly Private and Confidential and must not in any way be divulged to any person not in the service of the Bank.

In addition to the instructions contained in this policy, the Branch In-charge/Manager and Officers will also be guided by circulars issued by Head Office from time to time.

This Policy is printed in loose-leaf form to facilitate the replacement of any page or section due to subsequent changes and amendments made at any stage. Such amendments on printed sheets will be supplied to the Branches as and when done and should be substituted accordingly.

PRIME BANK LIMITED

M. SHAHJAHAN BHUIYAN

HEAD OFFICE, DHAKA

MANAGING DIRECTOR

1.0 Context

Retail lending is one of the core businesses for Prime Bank Limited and has been targeted for significant further growth. This reflects the potential of retail lending to produce high levels of economic profit and perceived demographic trends toward an expanded middle class and higher income levels.

Asset quality is generally expected to be higher in personal lending than corporate lending due to a variety of factors including:

Diversification of risk

Security

Cultural values

The increasing need for individuals to have access to bank credit for the conduct of normal daily activities.

Prime Bank is a conservative lender in retail credit as part of its corporate philosophy. However, conservatism does not mean simply minimizing bad debts, but incorporates the concept of lending against acceptable risks. The Banks overriding goal is not only to increase total shareholder return but also to contribute to the socio economy by improving the life style of the limited income segment of the country and that can be best achieved optimizing profits, rather than just minimizing losses. Profit optimization will follow from:

Good-planning and control of approval process

Well designed products with appropriately focused marketing

The use of statistical techniques and decision support systems that permit risks to be managed predictably

Gathering high quality management information, this is then read and used.Taking the foregoing into account, this manual (to be referred as Retail Banking Credit Policy Manual) sets out the general policy parameters for personal lending. Retail lending in the context of this manual is lending to individuals in their own right and excludes sole proprietor and small business lending.

1.2 Credit Risk Management Policy:

Credit risk management needs to be a robust process that enables a Bank to proactively manage its loan portfolio in order to minimize losses and also to earn an acceptable level of return for stakeholders. Given the fast changing dynamic global economy and the increasing pressure of globalization, liberalization, consolidation and disinter mediation, it is essential that Prime Bank has a robust credit risk management policy and procedures that are sensitive and responsive to these changes.

To provide a board guideline for the Retail Credit Operation towards efficient management of the Retail Credit portfolio of the Bank, a clearly defined, well-planned, comprehensive and appropriate Credit Risk Management Policy is a pre-requisite.

In the above backdrop, this policy document has been prepared. And, it is hereby named as Retail Banking Credit Policy Manual.1.3 Purpose:

The sole purpose of this policy document is to set out yardsticks for and spell out standard operating procedures for management of retail credit risk of the Bank. As such, it specifically addresses the following areas:

Establishing an appropriate credit risk environment

Setting up a sound credit approval process

Maintaining an appropriate credit administration and monitoring

Process, and

Ensuring adequate controls over credit risk.

1.4 Scope:

This policy document will be applicable for issues related to retail lending operation and also to be read in conjunction with the Credit Risk Management Policy with respect to both direct and indirect credit products of traditional and Islamic banking products.

1.5 Amendment of the Policy:

This Retail Banking Credit Policy Manual will be amended, revised, refined, readjusted as and when warranted to accommodate the changes in the market condition, cyclic aspect of the economy, government policy, industry demand, central bank regulation and experience of the Bank in managing credit risk. For this purpose, the Board of Directors of the Bank will review the Retail Banking Credit Policy Manual at least annually and make necessary amendment. 1.6 Access to the Policy:

This policy document is categorized as a confidential one and will be officially distributed to all executives of the Bank and all officers working in the Corporate Banking and Credit Division (comprising of Credit Risk Management Unit, Credit Administration Unit and Recovery Unit), Retail Credit & Credit Card Division of both Branch and Head Office, Foreign Exchange Department of Branches and International Division of Head Office. Anybody other than the above will have to apply to collect this document to Credit Risk Management Unit of Credit Division, Head Office through proper channel.

1.7 Mandatory Reading of the Manual

Executives and staff officers involved the retail lending and cards business must read the sections relevant to their direct responsibilities before take over of a new job, annually thereafter or whatever shorter periods is determined by their managers.

1.8 The Risk Management Cycle

The risk management cycle for retail lending consists of six steps:

Planning products and Risk Management Controls

Acquiring Accounts

Maintaining Account and Managing Credit Quality

Collecting Delinquencies

Writing off bad debts

Evaluating performance and refining plans and control

Management oversees every step of the process, aided by MIS, which is indispensable.

2.0 New Product Approval Procedure:

A product is defined as any form of packaged lending or service offering which is designed to meet the requirement of a particular market segment without being tailored to individual needs.

This section articulates fundamental policy guidelines for Consumer Financing. Before launching, for every type of retail lending product, bank shall develop fully documented product program guidelines. These guidelines shall include objective / quantitative parameters for the eligibility of the borrowers and determining the maximum permissible limit per borrower.

These fundamental guidelines will be the key elements that would support the banks retail credit culture and they will dictate banks behavior when dealing with customers and managing lending portfolio of such loans. Any deviations from these guidelines must in all cases, will require approval from Board of Directors / appropriate competent authority.

While developing Product Program Guidelines (PPG) for any product - the following guidelines must be included in the PPG documents to ensure that the PPG is covering all the aspects of risk and return for the particular product.

PPG Guideline No. 1: Customer Segment

PPG Guideline No. 2: Purpose

PPG Guideline No. 3: Nationality

PPG Guideline No. 4: Age Limit - Minimum age (years) / Maximum age (years)

PPG Guideline No. 5: Minimum Income

PPG Guideline No. 6: Loan Size

PPG Guideline No. 7: Loan to Price Ratio

PPG Guideline No. 8: Security/ Collateral

PPG Guideline No. 9: Legal Documents

PPG Guideline No. 10: Interest Rate

PPG Guideline No. 11: Maximum Term of Loan

PPG Guideline No. 12: Repayment Method

PPG Guideline No. 13: Disbursement Mode

PPG Guideline No. 14: Disbursement pre-condition

PPG Guideline No. 15: Debt Burden Ratio (DBR %)

PPG Guideline No. 16: Verification of Personal Details and Quotation

PPG Guideline No. 17: Substantiation of Income

A basic Product Program Guideline (PPG) has been developed for eleven retail-lending products and added in the Appendix 1 for ready references. The products are:

Car Loan Doctors Loan

Household Durable Loans

Marriage Loan

Any Purpose Loan

Education Loan

Hospitalization Loan

Swapna Neer

Advance Against Salary

Travel Loan

CNG Conversion Loan

2.1 Credit Principles:

Fundamentally, credit policies and procedures can never sufficiently capture all the complexities of the product. Therefore, the following credit principles are the ultimate reference points for all concerned executives & staff-making consumer-financing decisions:

Assess the customers character for integrity and willingness to repay

Only lend when the customer has capacity and ability to repay

Only extend credit if bank can sufficiently understand and manage the risk

Use common sense and past experience in conjunction with thorough evaluation and credit analysis.

Do not base decisions solely on customers reputation, accepted practice, other lenders risk assessment or the recommendations of other officers

Be proactive in identifying, managing and communicating credit risk

Be diligent in ensuring that credit exposures and activities comply with the requirement set out in Product Program Guidelines.

3.0 Introduction

This section provides high level policies and guidance for the delivery of an effective and consistent methodology for the assessment and approval of retail credit. The primary factor determining the quality of the Banks credit portfolio is the ability of each borrower to honor, on timely basis, all credit commitments made to the Bank i.e. repayment of loan installments on time. The authorized Credit Officers/ Executives must accurately determine this prior to approval. Therefore a thorough credit risk assessment shall be conducted prior to the sanction of any credit facilities. While assessing a credit proposal more emphasis shall be given on repayment potential of loans out of funds generated from borrowers business (cash flow) instead of realization potential of underlying securities.

3.1 Principles:

Each credit assessment must:

1. Be based on the sound ethical practices, which are consistent with all banking rules and legislation; and

2. Be consistent, at a product level, with Product Program Guideline (section3.2 Applications:

The first stage of credit assessment and approval process is a customer application. The application must provide adequate information to enable the Bank to assess the credit. As a minimum, the application must request for sufficient information to verify the existence of the individual and to facilitate the collection effort, including skip tracing and security checks. The information in the application must also establish Know Your Customer (KYC). Specific information should include:

Telephone and address contact details

Employment/business details

Income details

Income & Expenditure Statement

Personal Net worth Statement

Residence details

Credit references and guarantors details

All application must be checked for complete information so that initial review of the application enables the selection of better proposal for accelerated processing and quick reflection of those that do not meet minimum criteria of the product. However, application should not be rejected purely on the basis of incomplete information, if the proposal merits consideration appropriate follow up should be initiated. A format of loan application is attached in Appendix 2.

3.3 Contact Point Verification:

Verification is a key part of application process. The level and verification details must be documented in PPG. Contact Point Verification shall be done for all applicants except for the High Net Worth individuals or the customers having good account relationship with the bank. The objective is to confirm the declared/undeclared information of the applicants. CPV includes:

Applicants Residence, Business/Office address, phone, status.

Guarantors Information Verification

Bank Statement & other Income Documents Verification

3.4 Contact Point Verification through Third party(s):

As the verification is a critical function of loan application process, it is to be managed professionally by independent third party agency(s). This will enable the selection of better accounts for accelerated processing and quick rejection of those having negative or inadequate information. Format of CPV report attached in Annexure 3.Regular examination and testing of the third party must be in place and the integrity of the verification report must be in place. The officers involved in Retail lending process must verify the data by telephone or personal visit as appropriate. The percentage of accounts verified will be determined by the risk dynamics of a product but must not less than 20% in any case.

Data must be structured to facilitate monitoring at individual agent level. Quarterly review meeting with third party agents must be held to assess the performance and to discuss forthcoming activities.

3.5 Guarantee:

One of the fundamental perquisites for securing retail lending is to obtain guarantee acceptable to the bank by way of social status and perceived creditworthiness. The following must be adhered to while obtaining guarantee for securing the loans:

1. No loans shall be allowed against the guarantee of an existing guarantor of any other loan.

2. Existing borrowers of the bank shall not be eligible to become Guarantors for any retail loans.

3. No guarantee shall be obtained from the Chairman, Managing Director and Directors of Corporate facility clients and obtaining such guarantee must be referred to the Head Office for approval.

4. All guarantors must be cross-referenced through available MIS to ascertain whether the guarantor is an existing bank customer, or if the guarantor had the past relationship with the bank. If the guarantor has a negative credit history and social status or if his financial standing does not appear to be acceptable, the guarantee should be rejected or referred to the appropriate level of authority.

3.6 De duplication check

All approved applications must be checked against Banks database to identify whether the applicant is enjoying any other loan in other account apart from the declared loans. It must also be checked that the applicant has a credit card and any payment default is made. This cross- checking is mandatory for Credit Card Retail Credit approval. In such cases the application must be rejected.

3.7 Maintenance of Negative Files

Two negative files one listing the individuals and the other listing the employers - are to be maintained to ensure that individual with bad history and dubious integrity and employers of the applicants with high delinquency rate do not get loan from the Bank.

3.8 Assessment Methods:

This section outlines the process that will be used to assess the lending requests. It is the policy of the Bank to use the method of assessment that provides the highest level of control and risk prediction for a particular group of customers. There are two major assessment methods will be used for consumer financing and the order of preference will be:

Credit Scoring Matrix

Judgmental Decision

3.8.1 Credit Scoring:

Credit scoring is a method used for predicting the creditworthiness of applications. This scoring is based on the concept that applicants will perform in a similar way to existing customers with a similar demographic profile. Key items of application information such as occupation, residence status, income details etc are assigned point values. The total of these point values i.e. final score represents the repayment probability, generally expressed as an odd or risk quote between good or bad accounts. Generally the higher the score, the more likely the applicant will not experience delinquency and, conversely, the lower the score the more likely the applicant will experience delinquency. A format of Credit Scoring Matrix is attached in Appendix 43.8.2 Judgmental Decisions:

Applications meeting the minimum cut-off score and meeting any other credit criteria should be further reviewed for judgmental decision. Judgmental approval involves the assessment of an applicants character, capacity and collateral, which are defined as:

Character- an applicants willingness to meet past obligations

Capacity- an applicants willingness to meet current and future obligation Collateral the value of the items being financed or collateral being offered.The judgmental assessment approach must be established through the development of credit criteria in line with Product program Guideline. Criteria will vary from the risk dynamics of a product but should be documented and capable of audit. The following factors must be taken into account while assessing the credit on judgmental approach:

Employment

The accuracy and stability of an applicants stated employment/self employment and income is critical to all credit decisions. Cautions should be exercised and verification must be conducted on the occupational details. ResidenceAn applicant is required to be living at his/her present address for a minimum of one year unless the applicant is an established bank customer holding an account for longer than 6 months. The applicant must provide utility bills for verification. Debt Burden

Consumer credit products traditionally have incorporated an assessment of the applicants debt burden based upon the minimum income level or maximum credit limit established for the product.The calculation should be:

Total monthly Expenses (TME)/Net Total Monthly income (NTMI)

TME = Living Expenses + Credit Card Repayments (including payments to other banks) + Loan Repayments (including payments to other banks and payment of current loan applications)

NTMI = Total monthly income (i.e. Salary/business + other monthly income e.g. house rent, dividend etc)- deductions.

3.9 Credit Approval Process:

Applications are received at Credit Assessment & Approval unit from sales team / branches. Applications are evaluated / assessed by Credit Analysts / Managers. The evaluation process is carried out based on the agreed and standard guidelines for different loans product and the documents checklist as per the product program guideline (PPG). The detailed credit and risk assessment should be conducted prior to the approving of any loans. Sales Team/Branches must complete a documentation checklist (refer Annexure 5 & Annexure 6) to ensure all documents have been properly obtained.

The sales team / branch staff responsible for loan sales as well as the customer relationship, and must be held responsible to ensure the accuracy of the loan application submitted for approval. They must be familiar with the banks Retail Credit Policy Manual & Guidelines and should conduct due diligence on new borrowers, purpose of the loans and guarantors.

The credit approval function is completely separated from the marketing / sales function. Approvals must be evidenced in writing. Approval records must be kept on file with the Credit Applications.

Credit approval should be centralized within the Credit function. Regional credit centers shall be established as appropriate; however, all large loans (as defined in the PPG) must be approved by the Head of Credit or delegated Head Office credit executives. Any credit proposal that does not comply with this policy, regardless of amount, should be referred to Head Office for Approval.To illustrate the process of marketing a loan at the front end till disbursement at the Credit Administration Department, a sample process workflow chart (Appendix 7) is attached.

4.0 Delegation of Approval Authority:

Credit approval authority to the proper body and/or executive is a precondition for ensuring smooth and transparent credit operation in the Bank. Since inception, credit approval authority has been delegated to different tiers of both the Board of Directors and the Management. Authorities who enjoy delegation of business power i.e. credit approval authority are as follows:

1. The Board of Directors

2. The Executive Committee of the Board

3. The Managing Director

4. The Deputy Managing Director

5. Retail Credit Committee.4.1 Process of delegating approval authority:

All credit approval authority will be delegated with the proper approval of the Board of Directors. Henceforth, the Board of Directors will review and amend/revise delegation of credit approval authority of different tiers of both the Board of Directors and the Management which will be treated as the maximum indicative limit. However, specific credit approval authority will be delegated in writing by the Board of Directors and the Managing Director, as the case may be, as per the indicative maximum limit to different body/executives. In this process, the Board of Directors will first delegate authority to the Executive Committee of the Board and the Managing Director. Furthermore, it will fix the maximum indicative limits for different tiers of the Management based on which the Managing Director will delegate authority in writing to the Deputy Managing Director looking after retail credit portfolio, Executives working at Retail Banking division, Head Office and Head of Branches considering knowledge, experience and credit judgment of the concerned executive. An Executive shall not be delegated credit approval authority only on the basis of his/her position. In other words an executive will not automatically get lending authority by virtue of his/her functional title/designation. And, credit approval authority delegated to an executive will not automatically be transferred to his/her replacement.

4.2 Revision of Credit Approval Authority:

The Board of Directors will review enforcement of the delegated authority by the Executive Committee of the Board and the Managing Director at least annually and revise the same as and when required. On the other hand, the Managing Director will review the enforcement of the delegated credit approval authority by the Executives at least annually and revise the same within the indicative maximum limit approved by the Board, if necessary. However, the Managing Director may cease or curtail delegated authority of any Executive at any point of time without assigning any reason. And, the Managing Director will place a report before the Board of Directors at least annually regarding enforcement performance of all executives enjoying credit approval authority.

4.3 Criteria for Approval Authority:

It is essential that executives enjoying credit approval authority have relevant training and experience to carry out their responsibilities effectively. As a minimum, approving executives should have the followings:

At least 5 years experience working in corporate/commercial banking as a relationship manager or account executive.

Training and experience in financial statement, cash flow and risk analysis.

A thorough working knowledge of Accounting

A good understanding of the local industry/marketing dynamics.

4.4 Credit Approval Authority:

Credit approval authority may be delegated to the following body/Executive:

1. The Board of Directors

2. The Executive Committee of the Board

3. Different tier of the Management

4.5 The Board of Directors:

The Board of Directors will have the authority to sanction any loan for the amount not exceeding the regulatory limit that the Bank can provide to a single customer. Besides, all proposals for waiver of interest, commission, charges etc and principal must be approved by the Board of Directors. Any proposal for reduction of rate of interest by more than one percent from minimum level of approved interest rate band must be approved by the Board.

4.6 The Executive Committee of the Board:

The Executive Committee of the Board of Directors may sanction any loan for the amount not exceeding the regulatory limit the Bank can provide to a single customer. However, it will not have the authority to approve any proposal for waiver of interest, commission; charges etc and principal must be approved by the Board of Directors. Any proposal for reduction of rate of interest by one percent or less from the minimum level of approved interest rate band may be approved by the Executive Committee of the Board. Any proposal beyond the delegated authority of the Managing Director will be placed before the Executive Committee of the Board for approval.

4.7 The Management: Different tier of the Management may be delegated credit approval authority to ensure timely disposal of the credit proposals at root level. In the Management, the following executives may be delegated credit approval authority:

1. The Managing Director

2. The Deputy Managing Director supervising Retail Banking3. Executives working at Retail Banking, Head Office4. Executives working as Head of Branches

Name of the ProductsLoan limitHead Office Retail Credit CommitteeDeputy Managing DirectorHead Office Credit Committee

Car Loan (new)

20.00 lac--Up to 10.00 lacUp to 15.00 lac

Car Loan (reconditioned)

20.00 lac--Up to 8.00 lacUp to 15.00 lac

Household durables (Other items)

5.00 LacUp to 2.00 lacUp to 3.00 lac5.00 lac

Doctors Loan (Specialist)

10.00 lacUp to 3.00 lacUp to 5.00 lac10.00 lac

Doctors Loan (General Practitioner)


Advance Against Salary


Any Purpose Loan

1.50 lacUp to 1.00 lacFull limit--

Education Loan


Travel Loan


Marriage Loan


Hospitalization Loan

3.00 lac--Up to 1.50 lac3.00 lac

CNG Conversion Loan

60 thousand for individual and 1.00 lac for corporate bodiesUp to 1.00 lac----

The Board of Directors in its 237th meeting held on November 21, 2005 approved the delegation of business power to the different tiers as follows:

5.0IntroductionAfter approval, Credit Team will send / forward the approved applications along with the security and other documents to the Credit Administration Unit for processing. The Credit Administration function is critical in ensuring that proper documentation and approvals are in place prior to the disbursement of loan facilities.

Under Credit Administration there shall be two-sub units, Documentation & Quality Control and Loan Administration Dept who will process the document and disburse the loan.

5.1Credit Documentation

Credit Documentation dept is responsible:

To ensure that all security documentation complies with the terms of approval.

To control loan disbursements only after all terms and conditions of approval have been met, and all security documentation as per the checklist of approved PPG is in place.

To maintain control over all security documentation.

To monitor borrowers compliance with agreed terms and conditions, and general monitoring of account conduct/performance.

Upon performing the above, Documentation dept will forward the Limit Insertion Instruction to the Loan Administration unit for limit and other information to input into the banks main system. A format of Limit Insertion form is attached in Appendix 8.5.2Disbursement

Loan Administration dept in head office/ regional office/ branches will disburse the loan amounts under loan facilities only when all security documentation is in place. CIB report is obtained, as appropriate, and clean. A sample documentation and disbursement checklist is attached as Appendix 9.5.3Custodial Duties:

Loan disbursements and the preparation and storage of security documents shall be centralized in the head office and regional credit centers. Security documentation is held under strict dual control in locked fireproof storage.

5.4Compliance Requirements

All required Bangladesh Bank returns must be submitted in the correct format in a timely manner.

Bangladesh Bank circulars/regulations shall be maintained centrally, and advised to all relevant departments and braches to ensure compliance.

Appointment of all third party service providers (valuers, lawyers, insurers, CPV, Recovery Agents etc.) must be approved by the Board of directors/ Executive Committee or appropriate competent level of authority. The performance of the third party services must be reviewed on an annual basis.

6.0Credit Risk

The credit risk is managed by the Credit Approval & Assessment unit, which is completely segregated from sales. The following elements contribute to the management of credit risks:

The credit risk associated with the products is managed by the following:

1. Loans will be given only after proper verification of customers static data and after proper assessment & confirmation of income related documents, which will objectively ascertain customers repayment capacity.

2. Proposals will be assessed by independent Credit Unit completely separated from sales.

3. Every loan will be secured by hypothecation over the asset financed, and customers authority taken for re-possession of the asset in case of loan loss. For Car Loan, the vehicle will be registered in banks name, which will give the bank the legal right of re-possession when required.

4. The loan approval system is parameter driven which will substantially eliminate the subjective part of the assessment procedure.

5. There will be dedicated collection force who will ensure timely monitoring of loan repayment and its follow up.

6. The Credit & Collection activities will be managed centrally and loan approval authorities will be controlled centrally where the branch managers or sales people will have no involvement

6.1Operational Risk

For consumer loans, the activities of front line sales and behind-the-scene maintenance and support are clearly segregated. Consumer Credit Administration Unit will be formed.

Credit Administration Unit will manage the following aspects of the product: a) Inputs, approvals, customer file maintenance. b) The Operation jobs like disbursal in the system including raising debit standing orders and the lodgment and maintenance of securities. Type a jobs and type b jobs will be handled by separate teams within Credit Administration Unit therefore the risk of compromise with loan / security documentation will be minimal.

It will ensure uncompromising checks, quick service delivery, and uncompromising management of credit risks.

6.2.Maintenance of Documents & SecuritiesThe applications and other documents related to Consumer loans will be held in safe custody by Loan Administration Unit. The physical securities and the security documents will be held elsewhere inside fire-proof cabinets under Credit Administrations custody. The dual-key system for security placement and retrieval will have to be implemented.

6.3Internal Audit

The Banks Internal Audit & Board Audit Cell will be responsible with performing audits of all departments. Audits should be carried out on a regular or periodically as agreed by the Management to assess various risks and possible weaknesses and to ensure compliance with regulatory guidelines, internal procedures, and Retail Lending Guidelines and Bangladesh Bank requirements.

7.0 Introduction:

This section lays down the procedures with regard to collections and remedial management retail credit to ensure the effective control and monitoring in the recovery of funds lent to customers.

7.1 Objective:

To minimize the combined collection expenses, write off costs, and reduce the overall provisions held to minimize the bad debt charge on the profit and loss account.

7.2 Monitoring

A banks loan portfolio is subject to a continuous process of monitoring. This will be achieved by regular generation of over limit and overdue reports, showing where facilities are being exceeded and where payments of interest and repayment of principle are late. 7.3 Review:

In order to ascertain the effectiveness of this procedure, the section must be reviewed every after six months by the Head of Retail Banking or appropriate level of authority. Any modifications must be approved by EC/ Board of Directors.7.4Recovery:The collection process for personal loans starts when the account holder has failed to meet one or more contractual payment (Installment). It therefore becomes the duty of the Collection Department to minimize the outstanding delinquent receivable and credit losses.

This procedure has been designed to enable the collection staff to systematically recover the dues and identify / prevent potential losses, while maintaining a high standard of service and retaining good relations with the customers. It is therefore essential and critical, that collection people are familiar with the computerized system, procedures and maintain effective liaison with other departments within the bank.

7.5Collection objectives

The collectors responsibility will commence from the time an account becomes delinquent until it is regularized by means of payment or closed with full payment amount collected.

The goal of the collection process is to obtain payments promptly while minimizing collection expense and write-off costs as well as maintaining the customers goodwill by a high standard of service. For this reason it is important that the collector should endeavor to resolve the account at the first time worked.

Collection also protects the assets of the bank. This can be achieved by identifying early signals of delinquency and thus minimizing losses.

The customers who do not respond to collection efforts - represent a financial risk to the institution. The Collectors role is to collect so that the institution can keep the loan on its books and does not have to write-off / charge off.

7.6 Identification and allocation of accountsWhen a customer fails to pay the minimum amount due or installment by the payment due date, the account is considered in arrears or delinquent. When accounts are delinquent, collection procedures are instituted to regularize the accounts without losing the customers goodwill whilst ensuring that the banks interests are protected.

7.7 Collection Steps

To identify and manage arrears, the following aging classification is adopted:

For all products other than credit cards:

Days Past Due (DPD)Collection Action

1-14Letter, Follow up & Persuasion over phone (Appendix 10)

15-291st Reminder letter & Sl. No. 1 follows

30-442nd reminder letter + Single visit

45-59

3rd reminder letter (Appendix 11)

Group visit by team member

Follow up over phone

Letters to Guarantor, Employer, Reference all above effort follows

Warning on legal action by next 15 days

60-89

Call up loan (Appendix 12)

Final Reminder & Serve legal notice

legal proceedings begin

Repossession starts

90 and above

Telephone calls/Legal proceedings continue

Collection effort continues by officer & agent

Letter to different banks/Association

As and when an account become delinquent collection system works together to achieve business objectives i.e. recovery of the past due installments. At the beginning of the month collection unit has taken the total asset portfolio from the system. Then all 30 to 149 DPD account has to be identified and allocate those accounts to the individual collectors in Call Center to collect the over dues on a set target basis. The respective collector has got one month time to recover the overdue on a target based matrix.

7.8 Risk Grading of CustomersCustomers are classified according to creditworthiness to enable focused attention on those requiring increased supervision on remedial action. Risk Grading also provides the Board and Management to obtain an overview of the quality of the credit portfolio as follows:

Loan evaluation and ongoing review

To measure the credit quality in a portfolio / business unit

Early detection of loans showing deteriorating features

Effective problem loan management

The Banks regulatory reporting and portfolio management strategies are driven by risk grade.

In principles, Risk Grading shall be assigned to all customers with facilities. The following Risk Grading will be assigned based on the degree of delinquencyDelinquency CycleRisk Grading

1. New AccountGrade 1

2. Front EndGrade 2

3. Mid RangeGrade 3

4. Hard CoreGrade 4

Front-End X Dpd (1-29 Dpd)

Front-end is the first collection bucket in which delinquent accounts are identified and at this stage, the customers are normally contacted by phone and letter, which serves as a reminder of his/her obligation to pay the overdue amount to the bank.

Any account, which is past due by one day from his payment date, will be assigned to respective collectors at the beginning of the month and given one month time to recover the dues. Telephone call should be conducted in a soft and tactful manner in consistency with the customer service level. Collector must always do an inquiry through the system to confirm if payment has been received before commencing with telephone calling to avoid causing misunderstanding with the customer.

Initial telephone contact should be directed at the office. If the customer cannot be contacted, telephone call should then be made to the residence telephone number. Upon successful contact with a customer, the collector will tactfully inquire about the reason for not paying the minimum payment due. The collector will then proceed to obtain a promise to pay for the overdue installment along with the penal interest.

If collection letter or statement returned from the customer due to change of address, it is the responsibility of the respective collectors to collect the new address and telephone number and on some extent they could use the external agency for update the same. The collectors should ask the customer to provide written instruction of address change to the customer services department and at the same time record the new address and telephone no into the banks system

Selective letters can be issued to customers who are difficult to contact through telephone.

Mid-Range 30 & 60 Dpd (30 - 89dpd)

Mid-range is the bucket in which the account is considered to be seriously delinquent thus collection efforts must be more intensive, as the account has threatened our asset. When the front-end delinquent collection effort fails to obtain installment, the account will automatically age into the 30 DPD and subsequently 60 DPD delinquent categories.

These are accounts, which flow down from Front-end. Collectors must exercise a more aggressive approach at this stage as the customer has failed to submit a payment even after Front-end efforts. Collection letters also send to the customers reminding the customers to pay the overdue within due date.

The Collector must review and analyze the reason(s) for delay in payment. Upon successful contact with the customer, the collector must secure a payment date. Constant telephone calls should be made to those customers who have given numerous broken promises.

Seeking assistance letter to the guarantor or on some extent to the employer may be an effective instrument at this stage.

Hard-Core - 90 & 120 Dpd ( 90-149 Dpd)

90+ DPD accounts are considered hard-core delinquency and collection efforts are to be more intensified than 30 DPD and 60 DPD accounts. Interest to be suspended at this stage of delinquency (90 DPD).

Extra telephone calls and letters are mandatory. Final reminder letter & Guarantee call up letter must be sent to the customers and guarantors informing the consequences and demanding the payments. Intensive visits are also conducted on accounts for immediate settlements. Requests for waiver are entertained in case of settlement at one go payment. Re-write can also be offered in some cases as an exception.

When recovery opportunities are considered good through legal notice, collectors should make recommendations for legal notices if necessary but not as mandatory.

Recovery management 150+ DPD :

The account in150+ DPD is provided monitored and tracked separately other than the above delinquent accounts. A recovery management team is dedicated for dealing those accounts till settlement. Facility call up letter must be served to the customer and demanding the total outstanding is the first initiative for this stage. Then legal notice and other legal consequence will be the next course of action for the recovery. External recovery agencies and legal agency are involved at this stage. Best possible effort and pressure will be given to the customer as well as to the guarantor for the settlement through using internal collectors as well as external recovery agencies.

7.9Productivity tracking:For productivity tracking, analysis from the collectors call sheet is required. The variables for productivity tracking are, no of calls made per day, valid contact, promise to pay, kept promise, broken promise etc needs to be analyzed.

A process should be established to share the lessons learned from the experience of credit losses in order to update the lending guidelines.

7.10Agency management:

All problems accounts must be placed into a dedicated recovery management team. The recovery portfolio has sub divided into various collectible and non-collectible pools of accounts. Depending upon the size of the account balance, internal recovery efforts may continue while rest of the portfolio that would be assigned to external agencies including legal agencies to ensure expected recovery. In order to reinforce the recovery effort a separate Call Center must be formed under Recovery and Collection unit. The center will be managed by the contractual staff with competitive incentive scheme

The Head of Retail Banking would be empowered to offer interest waivers for one-time settlement, and installment plans (not re-writes) and amnesty offers to maximize recovery collections. On every month the Recovery and collections ensure the allocation of the provided accounts to the individual collectors as well as to the external agencies depending on the prospect of recovery to maximize the collection.

8.0 Prudential Regulation 4

Banks shall observe the prudential guidelines of Bangladesh Bank given at Appendix 15 in the matter of classification of Retail Credit portfolio (irrespective of all consumer banking products) and provisioning there-against.

In addition to the time-based criteria prescribed in Appendix XXI, subjective evaluation of performing and non-performing credit portfolio shall be made for risk assessment and, where considered necessary, any account including the performing account will be classified. Such evaluation shall be carried out on the basis of credit worthiness of the borrower, its cash flow, operation of the account, adequacy of the security, inclusive of its realizable value and documentation covering the advances.

Apart from specific provisioning requirement as prescribed above, banks shall maintain a general reserve at least equivalent to 5% of unclassified consumer finance portfolio as the Bangladesh Bank BPRD circular no 17 dated December 06, 2005.

8.1 SUBMISSION OF RETURNS:

Bank shall submit the borrower-wise annual statements regarding classified loans/ advances to the Banking Inspection Department.

8.2 TIMING OF CREATING PROVISIONS:

Banks shall review, at least on a quarterly basis, the recovery of the loans / advances portfolio and shall properly document the evaluations so made. Shortfall in provisioning, if any, determined, as a result of quarterly assessment shall be provided for immediately in their books of accounts by the banks on quarterly basis.

8.3 Prudential Regulation - 5

RESCHEDULING OF LOAN

Rescheduling of loan will be governed by rules & regulations as prescribed by Bangladesh Bank from time to time.

8.4 Prudential Regulation - 6

TRANSFER FACILITIES FROM ONE CATEGORY TO ANOTHER TO AVOID CLASSIFICATION

The bank shall not transfer any loan or facility to be classified from one category of consumer finance to another to avoid classification.

8.5 Prudential Regulation - 7CREDIT INFORMATION BUREAU (CIB) CLEARANCE

While considering proposals for any exposure, banks shall give due weight age to the credit report relating to the borrower and his group obtained from a Credit Information Bureau (CIB) of Bangladesh Bank. The condition of obtaining CIB report will be governed by rules & regulations as prescribed by Bangladesh Bank from time to time. CHARGE OFF/WRITE OFF POLICYAccounts are considered charged off when they are no longer considered collectible or an asset of the Bank. An account to be charged off at 2 years past due. When recovery from the charge off accounts is received from the debtors, they are treated as recoveries.

9.0 Introduction:

Management Information System( MIS) is one of the most important elements of the credit cycle as it provides a feedback mechanism on the effect of decisions made earlier in the credit cycle and also provides input to product profitable models.Bank shall put in place an efficient computer based MIS for the purpose of consumer finance, which will to effectively cater to the needs of consumer financing portfolio and will be flexible enough to generate necessary information reports used by the management for effective monitoring the quality of the portfolio against the established operating standards and budgets. The MIS is expected to generate the following periodical reports during the three stages of credit cycle.

9.1 Approval and initial credit AssessmentInformation related to the booking and acquisition of new accounts.

9.2 Account Maintenance: Information related to the on-going performance of the portfolio of active accounts. Quarterly product wise profit and loss account duly adjusted with the provision on account of classified accounts. These profit and loss statements must be placed before the Board of Director in the immediate next Board Meeting. 9. 3 Collection & Recoveries:

Information related to the problem account which includes: Delinquency reports (for 30, 60, 90 180 & 360 days and above) on monthly basis.

Reports interrelating delinquencies with various type of customers of various attributes of the customers to enable the management to take important policy decisions and make appropriate modifications in the lending program.

Compliance is the act of complying all external laws, regulations, guidelines, markets and internal codes of conduct, policies and procedures. The Officers working in Retail banking must be fully conversant, and comply, with the laws, codes, rules & regulations covering their retail banking business; that any potential problem that arises are promptly resolved in a manner which minimizes any potential damage to the good name and reputation of Prime Bank Ltd.A Compliance Culture must be fostered by regular instruction of staff on regulatory requirements, and the establishment of, and enforcement of, related operating procedures and controls.In order to promotion of good compliance the following Key Business values must be followed for Retail Banking:

Highest personal standard of integrity;

Commitment to truth and fair dealing; Putting the Banks interest ahead of the individuals;

Openly esteemed commitment to Quality and Competence;

Commitment to complying with the spirit and letter of all laws;

9.0 The Aim of Retail Credit TrainingTo establish and maintaining competitive advantage, the Bank shall invest in training, development and education, which contribute directly to the achievement of business objectives and good lending practices.

9.1 Retail Credit Courses:The Retail Credit training program will be comprised of core courses ranging from fundamental to advanced level, supplemented by short skill courses.

Core Executive/Officers Training Courses

Fundamental of Personal Credit Consumer Credit Management

Advanced Retail Lending Management

Skill Workshop Program

Regulatory and Law Relating to Lending

Retail Lending Workshops

Managing Debt Collection

Collection and Negotiation Workshop

Sales and Service Management Workshop on Marketing & Negotiation Skill

10.0 Segregation of Duties

Adequate segregation of duties is a prerequisite of an effective system of internal control. To be adequate, segregation must ensure that the following functions are performed by persons independent of each other: Sales and Marketing Sales and Branch

Credit Assessment and Approval by Credit unit

Credit Documentation and Administrations Loans processing and disbursement unit

Credit Recovery by Recovery & Collection unit

The credit approval team will be independent from the sales and branch team who will evaluate and approve the loan. The credit administration under Retail operations team will check and ensure the documentation and disburse the loans. This will ensure the better control of the bank asset and mitigate the risk of compromise of the duties.The following chart represents the Retail Banking management structure:

Key Responsibilities:Separate job Descriptions for key positions have been provided with the Annexure.

Head of Retail Banking

Head of Assessment

MIS & Planning

Credit Administration Team

Credit Analysis Team

Head of Sales & Marketing

Head of Recovery

Sales Team

Collection Team

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