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UBL Credit Analysis by Regents & Stalwarts... GCUF
A Research coonducted on UBL credit policies BY GCUF students.."The Regents & Stallwart's"
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DEDICATION Words are looking to express obligations to our affectionate parents and teachers for
their love, good, wishes, inspirations, motivation, has enabled us to reach this stage.
We remember their unceasing prayers without which the present destination would
“Conclusion and Recommendation” .............................................................................................. 52
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ACKNOWLEDGEMENT All praise to Almighty Allah, the most Gracious and compassionate. Who created the
universe and bestowed mankind with the knowledge and blessings of Allah be upon the
Holy Prophet Muhammad (S.A.W.) who guided mankind with the Holy Quran and
Sunnah, the everlasting source of guidance and knowledge for humanity.
It is an utmost pleasure to be able to express to heartiest gratitude and deep sense of
devotion to our reverend and worthy supervisor respected SIR Syed Ahmed Gillani; who guide us to achieve this goal. We also like to thank Engr. Saqib Hassan Minhas
(Regional Head of Credit Admin Deptt), Mohammad Shahzaib (processing manager),
Asad Rasool (Credit Admin Officer) of UBL who gave us their precious time and
provide us data and information.
Place: Faisalabad
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Signatures of Participants of Project
Group Leader
Farman Ali 454
Group Members
Javaria Iqbal (302)
Muhammad Usman Virk (327)
Mian Mubeen Ahmed (339)
M.Taimoor Saeed (343)
M.Rashid Latief (344)
M.Shahid Rasheed (351)
Rehana Hayat (354)
Shymmal Khan (362)
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Executive Summary
UBL is the second largest bank of Pakistan with assets over Rs. 550 billion and a solid track record of 46 years in addition to the convenience of over 1400 branches serving its customers throughout the country and also at several overseas locations.
In our project we first give an overview of credit analysis and investment policy and why credit analysis is important for evaluating the borrower .It highlights the factors that are important for credit analysis. The first chapter also provides an overview of the functions of investment banking.
In chapter 2 a brief banking history is first provided And then banking in Pakistan. An overview of UBL is provided with Introduction of its departments and subsidiaries. By elaborating UBL role in economy our project specify how UBL help in the economic growth of the country. UBL has taken leading start in the introduction of computers in (1966- 1968) in important cities. By introducing UBL online system, money gram facility, and hajj services UBL is maintaining its leadership in the industry. Credit extension is the principal function of a bank, through which pace of activity is accelerated in the various sectors of economy.
Chapter 3 majorly comprises financial analysis of an important client of UBL Name Nimra textiles. In which we Use different ratios to analyze the financial condition of Nimra textiles.
Chapter 4 majorly comprises the credit policy and implications of UBL.A brief summary of procedures followed by UBL in financing is shown in this area. An attempt has been made by us to elaborate the security requirements for loan disbursement by UBL.
Credit principles and other requirements are mentioned under chapter number four. The 5 c’s of credit are also covered under this chapter. An attempt has been made to cover the stated prudential requirements of state bank of Pakistan for loan disbursement.
Chapter 6 provides insight into difference between the practical and theoretical approach of UBL credit policies. It also provides an insight into loan covering process followed by UBL.
At the end of this project,on the basis of our observations suggestions are recommended as per learning from analysis.This project also will provide a better and brief learning about United Bank Limited.
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CHAPTER NO.1 INTRODUCTION TO SUBJECT
“CREDIT ANALYSIS AND INVESTMENT BANKING”
1.1 Overview of Credit Analysis and Investment Banking:-
The process of credit analysis may be explained as a procedure, which is carried out in
order to find out the capacity of an issuer to provide some credit to the debtor. This
process is applicable to individual borrowers as well as the issuers of securities.
Introduction Credit analysis focuses at determining credit risk for various financial and nonfinancial
instruments as well as projects. Credit risk analysis can be separated into two steps.
The first part consists of analyzing the credit risk of a particular asset. The second part
analyses the risk of the whole portfolio which comprises the individual credit sensitive
entities. And it is true that the measurement and management of Credit risk has become
a key risk-management issue for both financial and non-financial institutions. With the
improved liquidity in credit derivative market and advances in modeling, the accurate
measurement and management of credit risk to achieve the desired exposure is not as
difficult as before.
Definition
• The process of evaluating an applicant's loan request or a corporation's debt
issue in order to determine the likelihood that the borrower will live up to his/her
obligations.
• Credit analysis is the method by which one calculates the credit worthiness of a
business or organization. The audited financial statements of a large company
might be analyzed when it issues or has issued bond or a bank may analyze the
Five force analysis helps the marketer to contrast a competitive environment.It has similarities with other tools for environmental audit,Such as PEST analysis,but tends to focus on the single,stand alone,business or SBU (Strategic Business Unit) rather than a single product or range of products.For example,DELL would analyse the market for business computers i.e one of its SBUs.
Five forces analysis looks at five key areas namely the threat of entry, the power of
buyers, the power of suppliers, the threat of substitutes, and competitive rivalry.
5.4.1 The threat of entry.
• Economies of scale e.g. the benefits associated with bulk purchasing.
• The high or low costs of entry e.g. how much will it cost for the latest technology?
• Ease of access to distribution channels e.g. Do our competitors have the
distribution channels sewn up?
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• Cost advantages not related to the size of the company e.g. personal contacts or
knowledge that larger companies do not own or learning curve effects.
• Will competitors retaliate?
• Government action e.g. will new laws be introduced that will weaken our
competitive position?
• How important is differentiation? e.g. The Champagne brand cannot be copied.
This desensitizes the influence of the environment.
• This is high where there a few, large players in a market e.g. the large grocery
chains.
• If there are a large number of undifferentiated, small suppliers e.g. small farming
businesses supplying the large grocery chains.
• The cost of switching between suppliers is low e.g. from one fleet supplier of
trucks to another.
5.4.2 The power of suppliers.
The power of suppliers tends to be a reversal of the power of buyers.
• Where the switching costs are high e.g. Switching from one software supplier to
another.
• Power is high where the brand is powerful e.g. Cadillac, Pizza Hut, Microsoft.
• There is a possibility of the supplier integrating forward e.g. Brewers buying bars.
• Customers are fragmented (not in clusters) so that they have little bargaining
power e.g. Gas/Petrol stations in remote places.
5.4.3 The threat of substitutes
• Where there is product-for-product substitution e.g. email for fax Where there is
substitution of need e.g. better toothpaste reduces the need for dentists.
• Where there is generic substitution (competing for the currency in your pocket)
e.g. Video suppliers compete with travel companies.
• We could always do without e.g. cigarettes.
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5.4.4 Competitive Rivalry
• This is most likely to be high where entry is likely; there is the threat of substitute
products, and suppliers and buyers in the market attempt to control. This is why it
is always seen in the center of the diagram.
5.5 Macro-economic risk areas In considering a structured approach to credit, the process requires a categorization of
each risk element. It should be noted that there exists considerable overlap and
interrelationship between these elements. The aspects considered in this section have
substantial interconnections and interrelationships with each having an effect upon
another
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5.6 Micro-economic risk areas:
One of the most fundamental non-financial aspects crucial for the long term success of
a business is its strategy and plans. Corporate strategy is developed by management
and will reflect their judgment using their skills, expertise, experience and
entrepreneurial flair. At the strategic level they will establish the fundamentals of the
business and the basic direction for the future. At the business plan level they will
address the practical implementation of the strategic decisions.
5.7 Rules followed by the bank for Credit Risk Management: 5.7.1 PRs. For SMES
Regulation R-1 Sources and capacity of repayment and cash flow backed lending.
Regulation R-2 Personal guarantees.
Regulation R-3 Limit on clean facilities.
Regulation R-4 Securities.
Regulation R-5 Margin requirements.
Regulation R-6 Per party exposure limit.
Regulation R-7 Aggregate exposure of a bank/DFI on SME sector.
Regulation R-8 Minimum conditions for taking exposure.
Regulation R-9 Proper utilization of loan.
Regulation R-10 Restriction on facilities to related parties.
Regulation R-11 Classification and provisioning for assets.
5.7.2 PRs for Corporate Commercial
RISK MANAGEMENT (R)
Regulation R-1 Limit on exposure to a single person.
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Regulation R-2 Limit on exposure against contingent liabilities.
Regulation R-3 Minimum conditions for taking exposure.
Regulation R-4 Limit on exposure against unsecured financing facilities.
Regulation R-5 Linkage between financial indicators of the borrower and total exposure
from financial institutions.
Regulation R-6 Exposure against shares/TFCs and acquisition of shares.
Regulation R-7 Guarantees
Regulation R-8 Classification and provisioning for assets.
Regulation R-9 Assuming obligations on behalf of NBFCs.
Regulation R-10 Facilities to private limited company.
Regulation R-11 Payment of dividend.
Regulation R-12 Monitoring.
Regulation R-13 Margin requirements.
5.7.3 PRs for Consumer Loaning
Regulation R-1 Facilities to related persons & utilization of clean loans for Initial Public
Offerings (IPOs)
Regulation R-2 Limit on exposure against total consumer financing.
Regulation R-3 Total financing facilities to be commensurate with the income.
Regulation R-4 General reserve against consumer finance.
Regulation R-5 Bar on transfer of facilities from one category to another to avoid
classification.
Regulation R-6 Margin requirements.
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5.7.4 PRs for Credit Cards
Regulation O-1 Receipt of credit cards.
Regulation O-2 Statement of accounts.
Regulation O-3 Unauthorized/wrong transactions.
Regulation O-4 Partial payment by cardholder.
Regulation O-5 Due date for payment.
Regulation R-7 Maximum card limit.
Regulation R-8 Classification and provisioning.
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CHAPTER NO.6
Differences and Similarities in theoretical and practical approach We visited United Bank Limited (UBL) and conducted meeting with CAD Manager and
other concerned persons and found following that UBL follow most of the credit principal
that we have studied during our course. The difference and similarities are as under
(1) The Prudential regulations (PRs) of state bank of Pakistan are strictly
followed and in case of any violation of these regulation SBP impose the
penalties or issue different warning to banks
(2) The documents needed for advancing loan must be duly approved by
concerned authorities.
(3) The character of the borrower is evaluated by different out sourcing firm
and Electronic Credit Information Bureau (ECIB) report.
(4) The usual principal of lending like 5 C,S of credit, financial analysis of the
borrower is done by the bank RM department of UBL
(5) The SWOT analysis of the borrower is done by the borrower himself and
some outsource agencies employed by the bank also conduct SWOT
analysis for the banks.UBL has contract with the risk consulting firm ICIL.
This firm provides UBL all the information about the character, SWOT
analysis etc. of the borrower. The bank gives due weight age to this
analysis report.
(6) The pest analysis is also taken into consideration when it is applicable.
(7) The loan collection procedure as we have studied is followed almost in the
same order i.e.
• Recovery letter
• Telephone call
• Personal visit
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• The collection agencies (in case of car financing only)
• Legal action
UBL try to solve the problems up to first three steps because last two steps involve legal
actions which prolong to some period and also hurt the reputation of the banks.
(8) For rescheduling of loan 90 days as grace period allowed to borrower.
(9) For restructuring bank decrease the mark up rate and also increase the
installment period.
(10) When we ask about the borrower risk assessment the manager
have not enough knowledge about Michael porters risk assessment model
and Porter five competitive forces. They use traditional method to assess
the borrower risk.
(11) The financial statements are accepted as it is provided by the
borrower. The only thing important is the statements should be audited by
some approved charted accountant firms. Because audited financial
statement of the borrower is only requirement by SBP. The bank loan
processing officers has no concern with window dressing or any other fake
information showed in the financial statement.
(12) As for securities against loan is concern the security is critical
analyze it should have sufficient market value, liquidity, and not perishable
in nature.
(13) The security against the loan is valued according to the Forced
Sale Value (FSV). the Forced Sale Value(FSV) of the securities depend
on the type of security and its value. the UBL usually value security on
following ways
• Land =15%
• Building =20%
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• Machinery=25%
(14) The industry condition of the borrower also given due
consideration.
(15) The economic condition of the country has also impact on credit
policies of banks; unfavorable economic condition leads to strict credit
policy and vice versa.
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CHAPTER NO.7
“Conclusion and Recommendation” 7.1 Conclusion The study is mainly focused on the credit policies and the tools used for credit risk
analysis. Present study is done on one of the leading bank of Pakistan UBL. We
critically examined and analyze documents procedures, rules and regulations regarding
financing decision of banks. We elaborate different tools and techniques used by UBL
management and to assess borrower risk. We also elaborate different aspect of UBL
credit policy. UBL human resources are highly qualified and have update knowledge
about present developments in the areas of credit risk analysis. Still there are some
minute difference in practical approaches and techniques used by the bank for risk
assessment. The reason is behind these differences are traditional method of risk
assessment, unqualified borrower, and unavailability of sufficient documents and less
use of credit rated agencies.
The present study also enables us to get familiar with financing decision process and
evaluation of borrower risk.
7.2 Recommendations
Although UBL have wonderful credit policies but still there is room for a lot of
improvement and innovations.
Following are some of the suggestions and recommendations that I want to make:
Ø A regular contact with the customers should be maintained in personally.
Because there is an era of retaining the customers. So I recommend that there
should be CRM to get feedback from customers.
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Ø A proper timeline in cas disbursement should be defined which is usually
comprised due to lengthy processing and documentation requirements.
Ø Relationship managers should be fully trained and need to be fully equipped with
requisite knowledge and skills.
Ø A proper infrastructure should be defined for carrying out computerized financial
analysis of borrower’s business.
Ø Heavy collaterals requirements should be avoided to serve large pool of
borrowers. Heavy collaterals requirements restrict credit business of the bank.
Ø The credit proposal and other documents at times should be properly and
sufficiently prepared before taking approval.
Ø Filing and record maintenance of credit related documents should be done
efficiently.
Ø There is no facility for students to get mark free loan in this bank. So, this bank
should provide free of mark up or easy terms and conditions loan to students and
deserving persons on merit. I hope this scheme will be successful in producing