The establishment of the Credit Information Bureau (CIB) at Bangladesh Bank is a major change for Bangladesh bank. Let’s know detail about the credit information bureau (CIB).
The credit information which has so far been collected by Bangladesh Bank from scheduled banks and other financial institutions is not broad-based and systematized to be used by Bangladesh Bank, scheduled banks, financial institutions, the Government of Bangladesh, and other agencies for credit policy and other purposes.
Under the situation, it has become imperative to equip the banks with requisite credit information for processing the loan applications of the borrowers.
With this end in view, the creation of the Credit Information Bureau was urgently felt and the proposal was put forward by various organizations.
The proposal finally comes into reality when the Board of Directors of Bangladesh Bank in its meeting held on August 18, 1992, approved the creation of a full-fledged credit Information Bureau in Bangladesh Bank with a view to strengthening credit discipline and streaming all sorts of data.
The Credit Information Bureau (CIB) of Bangladesh Bank has undertaken the task of collecting, collating, and storing detailed credit information from scheduled banks and other financial institutions in its proper perspective so that these can be exchanged among the scheduled banks, financial institutions, and Bangladesh Bank for quick processing of new loan proposals and re-scheduling of existing loans.
The CIB has also been supplying credit information to the Government and other national and international organizations that are engaged in the formulating of monetary, economic, and credit policy.
As a matter of policy, all the scheduled banks are required to submit data on a quarterly basis and other financial institutions on a half-yearly basis on each borrower having an outstanding credit facility of Tk. 1 lac and above to Bangladesh Bank on a specially designed form (CIB 01). In addition, Bangladesh bank also collects information from the scheduled banks in respect of big selected borrowers having outstanding Tk. 1 crore and above on a monthly basis.
The object of a compilation of complete credit information about the borrower at Bangladesh Bangladesh Bank is to standardize information flow on loans/credits and to increase the speed and accuracy with which the credit information is made available to banker assassin credit risk and, thereby, assist them for effective support for lending operations.
This will also create MIS (Management Information system) on credit information, viz., recovery, disbursement, classifications, etc., for use by the Government, Bangladeshi Banks, and other nationals and international financial institutions.
Since the inception of CIB in Bangladesh Bank, various credit information (pertaining to banks and financial institutions) are being collected, processed, and distributed to the commercial banks, financial institutions, government offices, and the Security Exchange Commission. The information so far collected by CIB are
- Debtor’s/Borrower’s Information (segment-1)
- Owner’s Information (Segment-2)
- Group / Affiliations Information (Segment-3)
- Credit / Exposure Matrix or Financial Information (Segment-4)
- Third-Party Guarantors information (Segment-5)
The information under the above segments has been structured and necessary software has been developed for providing credit information to the banks and financial institutions for loan procession and MIS purposes.
CIB is also collecting data relating to the CRR (Credit Risk Rating), Financial Scores, viz., Y-Score, and Z-Score from the scheduled banks. This information will ultimately be retrieved from the scheduled banks in order to provide more helpful tools for them to decide issues regarding the sanction of loans more promptly and smoothly.
Those scheduled banks who make LRA (Lending Risk Analysis) will directly supply information or CRR from the overdue risk score matrix. Information on the financial scores, such as Y-Score and Z-Score may be supplied from the spreadsheet. The detailed calculations of the Y-score have been given on “Lending Risk Analysis” in Chapter 31.
For those banks who do not process to supply information CIB-01 form and other related segments, a handbook of guidelines issued by CIB, Bangladesh Bank, may be consulted).
Credit Information Bureau (CIB) at Bangladesh Bank
After the establishment of the Credit Information Bureau (CIB) at Bangladesh Bank, the collection of information about the borrower has become easier. Bankers, of course, have their own ways to collect information about the prospective borrower from the following sources to assess their judgment before a proposal for any credit facility is taken into consideration.
When an advance proposal has to be processed, a banker first studied the loan application made by the borrower. A Loan application usually contains information pertaining to the name of the concern, constitution, nature and place of business, year of establishment, borrower’s experience in the line, particulars of assets and liabilities, the purpose of advance, the amount required, a period of advance applied for, nature of security offered, sources of repayment, names of present bankers with details of borrowing and other facilities.
Some banks obtain this information from borrowers in a specially designed form-“declaration of the borrower”, a specimen of which is given hereinafter.
Reports can be obtained from various markets, particularly, from businessmen carrying on the same trade as the borrower does, some of whom may be his friends, others his rivals or enemies. Some may give exaggerated figures of his means while others may try to run him down. All such reports are sometimes contradictory to each other.
It is for the lending banker to analyze these reports and form of balanced opinion about the integrity, capacity, and financial position of the borrower.
Study of account
If the borrower is a customer of the bank, a study of the borrower’s account and his past dealings will throw light on his financial position, character, and capacity to do business. If he is already having a current account with the bank with good turnover, that will give an impression about the volume of business of the borrower.
It should be enquired that the borrower’s cheques were never returned in the past due to insufficient balance as a rule rather than as an exception. An honest and straightforward businessman cares more for his reputation and is very particular in meeting his commitments. The return of cheques due to insufficient balance in the account is the first danger signal to a bank.
It should put the bank into a searching inquiry. If some of the parties to whom cheques are issued are known to the bank, further independent inquiry would be possible. If he is having accounts with other banks, he may be requested to show the relative passbook and/or statement of accounts so that all accounts can be studied side by side. A confidential opinion about the customer forms from his previous bankers should be obtained.
The source of repayment of the loan is as much important as the selection of the right type of borrower because it is out of this found form which the borrower expects to repay the bank loan. The specified repayment schedule must be critically examined.
Financial statements etc.
Financial statements are indicators of two significant factors: i. profitability and ii. Financial soundness.
The borrower should be requested to supply the latest statement in regard to his assets and liabilities. It is always preferable to have audited statements for the last three years. In the case of limited companies, the audited Balance Sheet and Profit and loss account for the last three years must be obtained.
A study of the Balance Sheet and Profit and Loss account is one of the most effective methods of assessing the financial position of a borrower.
The balance sheet is a financial statement expressing in its assets side what the company owns in the form of cash, sundry debtors, investment, stocks, machinery, land, and building, etc. and in the liabilities side what the company owes in the form of paid-up capital, reserves, bank borrowing, other trading borrowings, deposits, credit balance of profit and loss account, etc. of a concern on a particular date.
In other words, the balance sheet not only states the assets owned by the concern but also the form of the source in which the funds are available on that date to hold those assets.
The Profit and Loss account shows the financial result of the working of an enterprise over a period of time. Both these statements should be carefully scrutinized and analyzed and important items on assets and liabilities should be critically examined.
Such a study will prominently bring out some important facts pertaining to the borrower’s financial position which will enable the banker to arrive at a significant conclusion. The net worth of a borrower can be fairly estimated from the study of the financial statements.
Besides, discreet inquiries should be made to ascertain the liabilities in the nature of arrears of income tax, payment of installments for land purchased or taken on rent or lease, dues of previous bankers, personal guarantees are given, etc. These are usually undisclosed liabilities and sometimes drain away from the working capital of the business abruptly which affects the business adversely.
Other sources of information about the borrower include press reports regarding purchase and sale of the property, suctions and decrees, Registration, revenue, and municipal records can also be referred to with the advantage to verify the properties owned by the borrower and charges thereon if any.
If the borrower happens to be a limited company, a search of ht records of the Registrar of Joint Stock Companies should be made form finding out if there are any prior charges or mortgages on the company’s assets.
After having collected all the information from outside sources, it is advisable to arrange for a personal interview with the borrower. a personal interview is one of the most important duties of a banker and this responsibility should not be delegated to an inexperienced officer. The interview should be conducted in a free and pleasant atmosphere.
The banker should extend to the customer courtesy and warm reception to put him in a prepared and informal frame of mind. The questions must be suggestive and helpful to put him at ease so that he gives all information required by the bank.
The banker should be able to know from the interview the customer’s specific requirements, the prospects of his employing the funds prudently, his capacity to repay, and the suitability of the security offered if any.
The banker should be a clean listener, deeply interested in understanding the customer’s viewpoint, and with that purpose ask a number of questions. The customer should be encouraged to tell his own story in his own way and place his requirement before the bank. It is not necessary for the banker to make any commitments in a case that requires further analysis.
The main points that will be covered in an interview with the borrower are his business, his capital with reference to working capital, his experience in life, working result, amount of advance and period, the purpose of the advance, source of repayment, terms of repayment, security offered, and types of charge available.
Bankers should try to analyze and judge for themselves the correctness or otherwise of the various statements made by the customer and form a balanced opinion regarding the acceptability or otherwise of the proposal. Where necessary enquires may be made to verify the information given by the customer and obtain further reports on the party from different sources.
The first interview is, however, the most important because the first impressions are likely to be more or less permanent. Even then, the bank may arrange subsequent interviews or meetings with old borrowers.
The object of the later interviews re-assess the creditworthiness of form a fresh opinion regarding the suitability or otherwise of continuing the advances already granted.
Preparation of credit report
In the case of fully secured advances against fixed deposit receipts, government securities, approved shares and debentures, life insurance policies, savings certificates, etc., it may not be necessary to prepare detailed credit reports.
Brief particulars should, however, be maintained on a credit card/binder recording the borrower’s means, standing, and business reputation. In other cases, detailed credit reports need to be prepared and kept on record.
The main idea behind credit investigation is to assess the net worth of the borrower from his assets and liabilities. Normally the Manger should try to ascertain maximum information at the first interview with the borrower and then make an independent inquiry from banks and outside agencies.
The guiding principle for a Manger while collecting and recording information should be to remain uninfluenced by extraneous considerations and, secondly, he should study market bulletins, gazette notifications, and leading and local dailies to keep himself abreast of the latest situation.
The credit information to be obtained will differ according to the type of customer. The various columns in the compilation of the customer.
The various columns in the compilation of credit reports for sole proprietorship or partnership and limited companies along with a specimen of the credit report to be kept on the bank’s record are given hereinafter.
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