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Credit facilities of Prime Bank Limited

One of the two primary functions of a commercial bank is to extend credit to the deficit economic unit that comprises borrowers of all types. Bank credit is a catalyst of economic development. Without adequate finance, there can be no growth in the economy. Bank lending is important for the economy in the sense that it can simultaneously finance all of the sub-sectors of financial arena, which comprises agricultural, commercial and industrial activities of a nation. Therefore, a bank is supposed to distribute its loanable fund among economic agent-in-deficit in a manner that it will generate sufficient income for it and at the same time benefit the borrower to overcome his/her deficit.

What is Credit? The word “CREDIT” is derived from the Latin word “credo” meaning ‘I believe’. In general, credit means granting of a period of time by a creditor to a debtor at the expiration of which the latter must pay the debt. From a banker’s point of view, credit is the confidence of the lender on the ability and willingness of the borrower to repay the debts at a future date. Moreover, it can be defined broadly or narrowly. Broadly speaking, credit is the finance made available by one party (lender, seller, shareholder/owner) to another (borrower, buyer, corporate or non-corporate firm). The former may be a pure lender (a financial institution or a private moneylender), a seller supplying goods against the buyer’s promise of future payment, or a shareholder/ owner of a corporate/non-corporate making funds available to the firm viewed as a separate entity. More specifically, the term credit is used narrowly for only debt finance. To define in this way, credit is simply the opposite of debt. It is a stock-flow variable and should be carefully distinguished from money.

Kinds of credit Credit is not one homogeneous good or asset. It is various kinds. To understand the nature, scope and complexity of credit and its problems, we look at the several kinds of credit. But there is no unique way to classify credit. It can be and need to be classified in more than one way, each one specializing in only one aspect or dimension of credit. Thus we classify credit from five different angles:


Source,

Term,

End-use,

Cost.

Users,

Source of credit Nowadays credit is provided by a wide variety of sources. These sources may be conveniently classified in the following figure:

Source of Credit

Institutional

Banks

Non-institutional

Non-banks (e.g. LIC)

Moneylenders & Indigenous Bankers

Open market

Sellers (Trade Credit)

Other Banks

B.B.

Commercial

Co-operatives

Credit facilities of Prime Bank Limited : Prime Bank Motijheel Branch provides two types of Credit to its customers. These are : •

Direct Credit Facility

Indirect Credit Facility

Direct Credit Facility: Direct Credit Facility pertains to Bank’s direct fund involvement. It is popularly known as funded Credit facility.


Indirect Credit Facility: Indirect Credit Facility does not associate Bank’s monitory involvement. It is widely known as non-funded Credit facility. Both direct and indirect credit of Prime Bank is presented in the following chart.

Different Credits offered by PBL

Direct Credit Facility

Cash Credit (CC)

Over Draft (OD)

SOD

Indirect Credit Facility

TOD

CCS

CC Pledge

Loan General

Term Loan

Letter of Credit (L/C)

Letter of Guarantee

CC Hypothecation

Hire Purchase

Staff Loan House Building

Staff Car Loan

Lease Finance

House Building Loan (Com)

Lending Principles of Prime Bank Limited: Bank is the custodian of public money and as such it must be judicious, careful and selective while lending out its loanable fund to ensure timely recovery. The deciding factors for recovery of loans are selection of right type of borrowers, end-use of credits and effective follow-up and proper supervision and considering these factors, Prime Bank Limited has set its lending principles that are as follows: a)

Judicious selection of Customers

f)

Adequate return (Profitability)

b)

Purpose

g)

Supervision

c)

Safety

h)

National/Social interest

d)

Security

i)

Credit guidelines of Bangladesh Bank

e)

Liquidity


Judicious Selection of Customer Prime Bank Limited believes that the credit facility extended after judicious evaluation of creditworthiness of the customer can never result in any mishap to the bank. So, bank considers this as its most important lending principle. And while lending, this is strictly followed .

Purpose: The bank should not lend money for any purpose for which a borrower wants. So Prime Bank Limited studies the purpose for which the loan is required and also the resources from which the borrower is expected to make repayment. Loans may be required for various purposes such as trading, agricultural, transport, self-employment purpose and the like. The purpose of the loan should be productive. It helps the bank to determine its course of action as regards to lending. Funds borrowed, obviously for

a productive purpose may be spent on unproductive or speculation

purpose. Bank, therefore, take follow-up measures to ensure the end use of fund exactly for the same purpose for which it is borrowed.

Safety: The very survival of a bank depends on loans and advances. The ideal position of loans and advances refers to the situation that all the loans and advances stand fully secured. Thus Prime Bank Limited considers safety of the advances important among the principles of lending. Now the question is how to ensure safety to lending? To ensure the safety of lending bank judges the following most essential elements of the borrower : Four CsM= Man

C=Capital/Credit

P= Purpose

Five Cs M= Management

worthiness

R= Respectability

Five Ms

R= Reliability

P= Product (s)

Five Rs M= Materials

C= Condition

R= Returns

C= Character / conduct M=

R= Responsibility

P= Place

P= Person

P= Profit

M= Money

Market C= Capacity / capability

R= Resources

Liquidity: The banker while making advances must see that the money lent is not going to be locked up for a long time. Because, liability of the bank is payable either on demand or after short notice. So the banker should be sure that loan would be liquid. Thus liquidity of money lent is another important


principle of lending. Liquidity means availability or readiness of bank funds on short notice. The liquidity of advance means its repayment on demand on due date or after a short notice. The loan must have fair chances of repayment according to repayment schedule. Otherwise, the liquidity position of a bank may be threatened. Liquidity also means conversion of assets into cash without loss.

Security: The security offered by a borrower for an advance is insurance to the banker. It serves as the safety value for an unforeseen emergency. So another principle of sound lending is the security against

lending. Security offered against loan may be of various types. The securities may vary from gold and silver to goods of various types and also movable and immovable properties. Profitability: PBL obtain funds from shareholders and if dividend is to be paid on such shares it can only be paid by earning profits. Even in the case of public sector banks although they work on service motive they also have to justify their existence by earning profits. This is not possible unless funds are employed profitably. In other words banking is essentially a business, which aims at earning a good profit.

Spread / Dispersal /Diversification: The advances should be as much broad based as possible and must be in conformity with the deposit structure. The advances should not be in one particular direction / industry / activity or one or few borrowers because any adversity faced by that particular industry will have serious adverse affect on the bank. Again, advances should not be given in one area alone. There should be spread of advances against different securities, industries / activities, borrowers, areas etc. which will enable the banker to spread the risks and considerably look into the safety of advances. Here the principle is “Do not put all the eggs in the same basket�.

National interest / social benefit: Bank has a significant role in the economic development process of a country. They should keep in mind the national developmental plan / programs while going for lending but maintaining safety, liquidity and profitability.

Credit guidelines of Bangladesh Bank:


As Bangladesh Bank is the competent authority to monitor Loans and Advances of all Commercial Banks, while lending its fund, PBL strictly follows all the guide line provided by Bangladesh Bank.

Modern Concept of Lending Principles Modern concept of lending presupposes a well-developed loan proposal / loan case / project. It will cover as many as six pertinent factors like Managerial, Organizational, Technical, Marketing, Financial and Economic / Socio economic factor etc. These are technically known as feasibility or viability study of a loan proposal. By studying all these six factors if a banker is satisfied about the viability of a loan proposal, then he / she can finance it i.e., go for lending otherwise not.

Techniques of Project Appraisal: “Project appraisal” means pre-investment analysis of an investment project with a view to determine its commercial and socio-economic feasibility. It is an essential tool for judicious investment decision and project selection. It is the prime steps in the process of decisionmaking in respect of sanctioning any loan by financial institutions. The under mentioned appraisals should be conducted while evaluating an investment proposal: •

Management appraisal.

Market appraisal

Technical appraisal

Financial appraisal •

Economic appraisal

Management appraisal A good project may fail if the management is incompetent. It is necessary to evaluate the following managerial aspects: •

Overall background of the

promoters. •

Academic qualifications.

Business and industrial experience.

Past performance & market reputation.

Market appraisal Market appraisal is concerned primarily with two questions: •

Consumption trends in the past

and the present consumption •

Production possibilities and constraints

level

Imports and exports

Past and present supply position

Structure of competition

Cost structure


Elasticity of demand

Consumer behavior, intentions,

Distribution channel and marketing policies in use.

motivations, attitudes, preferences and requirements

Technical appraisal The importance of technical appraisal in project evaluation is beyond any question. Technical appraisal of a project broadly involves a critical study of the following: •

Location and Site

Nature and climate.

Raw material supplies

Size (Plant capacity): The size of

Transportation facilities

the plant or scale of operation is

Power and fuel supply

an important factor that

Water

determines the economic and

Manpower

financial viability of a project.

Financial appraisal Financial appraisal seeks to ascertain whether the proposed project will be financially viable in the sense of being able to meet the burden of servicing debt and whether the proposed project will satisfy the return expectations of those who provide capital. The aspects looked into while conducting financial appraisal are: Investment outlay and cost of the

Projected profitability

project

Break-even point

Means of financing

Cash flows of the project

Cost of capital

Level of risk

The following different techniques are applied to assess the financial viability of a project: •

Capital Budgeting:

Payback Period

Payback Period

Total Investment

Annual Cash Inflow

The payback period provides an indication of a project’s risk and liquidity. The shorter the payback period the better the project is judged to be.

Net Present Value (NPV)

Internal Rate of Return (IRR)

Profitability Index

Economic appraisal Economic appraisal, also referred to as social cost benefit analysis, is concerned with judging a project from the larger social point of view.


Opportunity Cost: The opportunity cost is the cost of the best alternative forgone due to a particular course of action. Shadow Prices: The prices of inputs and outputs of the project should be suitably corrected to reflect the real cost, if the market prices are characterized by distortions of any time. The outputs and inputs of a project are classified into (i) traded goods and services, (ii) nontraded goods and services, and (iii) labor.

Procedure for Giving Advance: The potential borrower will submit application to PBL for loan by filling up of a specific Application form. •

The Application form (Request for Credit Limit) contains following particulars:

Name of the Borrower------

A/C No.-------

Business address (with telephone no.) [Residential address and Permanent address]

Introducer's name, A/C no. & address-----

Date of establishment/ incorporation-----

Trade license number, date and expiry date (Photocopy of trade license enclosed)---

GIR/ TR no. & amount of income tax paid last year----

Constitution/ Status (Mention whether sole proprietorship/ partnership/ Public Ltd. company/ Private Ltd. company)-----

Particulars of Individual/ Proprietor/ Partners/ Directors (Name & Designation, Father's/ Husband's name, present & permanent address with Telephone no., % of shares held)----

Experience and background of Individual/ Proprietors/ Partners/ Directors----

Full particulars of assets in the personal name of Individual/ Proprietor/ Partners/ Directors with valuation-----

Names of Subsidiaries/ Affiliates, percentage of share holding and nature of business----

Nature and details of business/ products (for which credit facility is applied for), Markets (Present market price per unit, Factory price), Estimated sales for next one year------

Credit facilities required (type, amount, period, purpose and mode of adjustment)----


Details of securities offered with estimated value (Primary security, Collateral security, market value of the security)-------

Details of liabilities in the name of the client or in the name of any other partners/ Directors or Subsidiaries/ Affiliates with PBL and other banks, if any (Name of the Bank, A/C no., Nature of advance, amount, security and validity of limit)-----

Balance Sheet/ Income Statement or Statement of Accounts of the following years attached (Preferably last 3 years)----

Other relevant information------

Proposed debt/ equity ratio----

Signature of the Applicant----

After receiving the loan application form, PBL sends a letter to Bangladesh Bank for obtaining a report from there. This report is called CIB (Credit Information Bureau) report. This report is essential if the loan amount exceeds Tk.50 Lac. But PBL usually collects this report if the loan amount exceeds Tk.10 Lac. The purpose of this report is to being informed that whether the borrower has taken loan from any other bank; if 'yes', then whether these loans are classified or not.

After receiving CIB report if the Bank thinks that the prospective borrower will be a good borrower, then the bank will scrutinize the documents. In this stage, the Bank will look whether the documents are properly filled up and signed. Then comes processing stage. In this stage, the Bank will prepare a Credit Proposal .

The Initial Loan Interview The initial interview is generally held at the officer’s bank or, on occasion, at the client’s business. The objective of an initial loan interview is to ascertain whether the loan request warrants further consideration (and the additional time and expense) that is entailed in a credit investigation, followup interviews and financial statement analysis. The beginning of a loan interview sets the tone for all that follows. The credit officer of PBL should establish a relaxed but businesslike atmosphere. The credit officer should greet the client with a warm handshake, introduce himself or herself by name and ask the client fell ill-at-ease, which can hinder communication during the interview. A small amount of light conversation before the interview can be helpful. There is, however, a distinction between being friendly and being unprofessional. Referring to a client using a flip term such as buddy may perhaps be well intentioned, but it is certainly unprofessional.


Questions Pertaining to Specific Areas: Questions

for

the

client

and

the

How did you arrive at the amount of the loan

company:

request?

What is the client’s name?

Has the client accurately projected financing

Is the company a corporation, S corporation,

needs?

proprietorship, or partnership?

What terms are you requesting?

Where is the company located?

Are the terms reasonable based on the nature

How long have you been in business?

of the loan-for example, within the useful and

How long has this company been in

depreciable life of the asset being financed?

operation?

How did you decide which terms were best

What are your company’s products or

for you?

services?

Are the terms based on the client’s ability to

Who are the principal owners and how many

pay or on good financial planning?

shares do each own?

How will you use the proceeds of the loan?

Is management separate from ownership? If

Is the purpose of the loan compatible with

so, who are the

bank policy?

Principal Managers?

Questions regarding the client’s ability

What is the experience of management?

to repay the loan:

How many employees are there?

How will you repay the loan?

Are the workers unionized?

How much cash is the company generating

What is your company’s position in the

from the operating cycle?

industry?

Can the client provide a specific source of

Is the company profitable?

repayment based on reasonable assumptions?

Is the company well capitalized?

What is your secondary source of repayment

Will personal assets be pledged as security for

if the primary source fails?

the loan?

Are there guarantors?

Who are the major suppliers and customers

If there are guarantors, what is their relation

and what are there addresses?

to the client?

What are the normal terms of trade?

What is the financial strength of the

Are any contracts or franchises involved?

guarantors?

Are any items currently in dispute or

Questions regarding collateral:

litigation?

What collateral do you intend to pledge?

Questions regarding the loan request:

Who owns the collateral?

How much money do you want?

Where is the collateral located?

How much does the client need?

How liquid is the collateral?


Is the collateral controllable and resoluble?

Have you approached other banks with the

Are any special permits required to take title

loan request?

to or to sell the collateral?

How does this loan fit into the company’s

Questions regarding the client are

total banking and lending picture?

banking relationships:

Why is the client coming to this bank?

What banks do you currently use?

Do you have loans outstanding with other creditors? What is the nature and extent of these loans?

After these and other questions have been answered, the credit officer decides whether to continue with the loan request, reject it, or direct the client to other potential sources of financing.

Credit Investigation: If, after the initial interview, the commercial credit officer decides that the loan request meets basic bank lending criteria, the next step is to conduct a more in-depth investigation, relying upon the documents obtained from the client and from in-bank and outside sources. One of the important functions of a PBL is to channelise funds for meeting the credit needs of genuine borrowers engaged in economic activities of the country. study the integrity and reliability of the borrower. Credit investigation is an essential part of every lending decision for the simple reason that companies have grown more complex in structure and diversified in their operations. It is the rare credit officer who can consistently make accurate appraisals of creditworthiness and risk based on an interview alone.

Purpose of Credit Investigation Credit investigations vary among banks. In smaller banks, credit officer s investigates their own loans. The contribution from bank staff is limited to clerical assistance, such as typing credit inquires, maintaining credit files, or spreading financial statements for review and analysis by the credit officer. In many larger banks, the division of responsibility is more specialized, with the credit investigation and loan analysis function separated from the lending function.

Interview Once the major questions have been identified, the credit officer should decide whether each question warrants the time and expense necessary to arrive at an answer. Many banks have standardized forms that list types of information that should be acquired during loan interviewing and credit investigation. Of course, the amount, nature and detail of the information varies


depending on the circumstances of the loan request and it is usually left to the credit officer to determine the extent of the information-gathering process. Proforma for obtaining information for compilation of credit report of Sole Proprietor or partnership concern:

(Proforma – 1) • • • • • • • •

Name .Address Date of compilation . Nature of the firm Nature of business Investment in the business: Allied of subsidiary, Brief history regarding

• • • • •

Sales Annual income Market reputation Means Bank account and it to the bank. Whether they enjoy credit facilities, if so, state the experience regarding the operation of the account. Names of other bankers,:

Preparation and signing of credit report: Branch Managers will have a very fair idea of the assets, means and the credit position of their borrower constituents. They may depute Credit Investigator to collect credit information but branch managers should make independent inquiries to establish veracity of credit checking made by their branches. Credit report should be signed jointly by the Manager and the Credit Investigator. Revision of credit report: Every credit report should be revised intelligently and properly at least once in six months. It is, of course, understood that if at any time an adverse report or damaging information is received on a constituent or a major change is noticed in regard to the assets and means of a party, immediate steps should be taken to review and revise the credit lines make available to him. It is also necessary that whenever a new credit proposal or renewal of an existing credit line is recommended, the report on the party concerned is checked up and revised. Proforma for obtaining information for compilation of

Credit report of Limited Company (Proforma –II) • • • • • •

Name of the Company with Complete address Date of compilation of the report Nature of the Company Authorized capital,

• • • • • • •

Name of directors Nature of business Nature of allied concerns, Subsidiary concerns, if any Obtain a copy of the Verification of prior charges: Bank account and own


• • •

Experience Other bankers, if any Market reputation

• •

Preparation and signing Revision of Credit report

• • • •

Types of business Capital structure Particulars of previous transaction Existing vis-à-vis proposed credit limits Movement of the accounts Liabilities of sister concerns

Credit Line Proposal: •

• •

In this step of the term loan the branch sends a credit line proposal to the head office for approval of the term loan. The credit line proposal contains the following particulars: Fresh/Renewal/Revision of the term loan Borrowers name

• •

Process of handling loans: Getting loan Getting loan proposal proposal from the from the Client Client

Evaluating Evaluating project project andproposal proposal and

Collecting Collecting information information

About About Client Client

Legal Legal assessment assessment

About About project project

Evaluating Evaluating by by agent agent

EvaluatingCollateral Collateral Evaluating Branch Branch level level evaluation evaluation

SupervisSupervisionofofthe the ion loan loan

Disbursing Disbursing loan loan

Sanctioningand and Sanctioning Documentation Documentation Ofloan loan Of

Head Head office office Level Level

Recoveryofof Recovery theloan loan the

Usual Usual recovery recovery

Legal Legal recovery recovery

Decision Decision

Branch Branch level level


Security: Security is a Cover against loans and advances. It ensures recovery of loans and advances. Though now-a-days greater emphasis is put on the purpose of the loan rather than securities, nevertheless the securities play an extremely important role to take a decision .

Types of Security The types of securities offered vary from place to place. In metropolitan cities, it may be Govt. bonds / share / assignment of Book debt / Bills receivable etc. whereas, in the industrial area raw materials & finished goods etc. may be offered as securities. Again agricultural produce is the principal securities in the agricultural centers. Further, a bank also accepts moveable & immovable properties, life insurance policy etc. as securities.

Securities can be classified into primary security & collateral security:Primary security means the security offered by the borrower himself as cover for the loan. It refers to the asset , which has been bought with the help of the bank. Such as when a machinery or some goods have been bought with the help of the bank the machinery and goods constitute the primary security. Collateral security: All other additional security other than the primary securities such as land / Building etc. are considered as collateral securities which may be offered / deposited by the borrower or , by any other third party.

Good collateral security must have the following characteristics: o

Tangible

o

Durability (not perishable)

o

Transferable / negotiable

o

Ascertain ability of market

o

Easily marketable

o

Price stability

value o

Genuineness of title (free from encumbrance)


Valuation of Security Valuation of security is very important for the lending banker. Therefore valuation of security must be done with careful verification of sources, in respect of nature of procurement, quality , quantity and considering possible risks.

Margin: Margin is a cushion against any possible shortage. It is a portion of borrower’s contribution. The fixation of margin depends on the nature and type of security and the financial stability of the customer and also keeping in view the restrictions imposed by the Bangladesh Bank / Head Office from time to time. In case of goods and produce , reasonable margin should be retained for covering any shortage due to shrinkage, fluctuation of rate, fall in prices and charging of bank interest. In case of advance allowed against merchandise imported through bank, the amount of margin fixed should be deducted from the landed cost of the goods. For allowing advances against goods in trade locally purchased the amount of margin fixed should be deducted from the invoice value or exfactory prices, as the case may be.

Modes of Creation of Charges on Securities 'Charge' in a transaction for value means that the creditor(Bank) shall have the right to take the property on which charge is created, available to him as security for payment of a debt, by an order of court of law. A charge may be classified as :

i) Fixed Charge A charge is said to be fixed if it is made specifically to cover definite and ascertained assets of a permanent nature e.g.; charge on land and building or heavy machinery. It precludes the company from dealing with the property charged without the consent of the charge holder .

ii) Floating Charge: It is a charge on the property which is constantly changing, e.g; stock. The company can deal with such property in normal course of its business until it becomes fixed on the happening of an event. Thus it is a charge on the assets of the company in general.


Mortgage Mortgage has been defined in section 58 of Transfer of Property Act 1882. It is the transfer of interest on the property by way of charging immovable property for the security of loan amount. Therefore, for the purpose of securing loan amount when an immovable property is charged for transfer interest on the property is known as mortgage .

Classification of mortgage: On the basis of transfer of title in the mortgaged property mortgage can be classified as

i)

Simple/Registered Mortgage and ii) Equitable Mortgage .

i) Simple / Registered Mortgage: In a legal mortgage the legal title to the property is transferred in favor of the mortgagee (Bank) by mortgage deed duly vetted by legal adviser / retainer. The deed is registered in the Registrar / Sub-Registrar’s office. This method is expensive as it involves registration charge & stamp duty. After adjustment of the loan the title of the property is to be redeemed .

ii) Equitable mortgage: An equitable mortgage is affected by mere delivery of documents of title of property to the mortgagee (Bank).It does not require registration.

Lien Lien is the right to retain the asset of the borrower until the debt is paid. Lien differs from other forms of charges in respect that it does not arise out of an implied or express agreement. The right of lien arises in law out of business dealings between the parties .

The conditions for right of exercise of lien are :(a) Creditors possession of goods /securities in the ordinary course of business (b) the debtor has a lawful debt due to discharge to creditor (c) there must not be any contract to the contrary.

Types of lien Particular Lien: A particular lien arises, where goods can be retained by the creditor in respect of a particular debt only. For example a tailor has a particular lien for his charges on the shirt made for his customer.

General Lien:


Under section 171 of the Contract Act, 1872, bankers, factors (mercantile agents), Wharfingers (port authority), attorneys of High Court and policy brokers can in the absence of contract to the contrary, exercise lien and retain security for a general balance of account any goods bailed to them. So general lien confers a right to retain goods and securities not only in respect of a particular debt but in respect of the general balance due by owner of the goods and securities.

Pledge Pledge is the bailment of goods as security for payment of a debt or performance of a promise. Bailment is "the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, to returned or otherwise disposed of according to the direction of the person delivering them." The person delivering the goods is called the 'bailor' and the person to whom the goods are delivered is called the bailee.

Pledge has got the following properties: The ownership of the goods remains with the pledgor. Delivery is necessary in order to complete a pledge. This delivery may be symbolic, as for instance when the key of a warehouse in which the goods are kept or documents of the title relating to the goods are delivered. Possession of the goods may be changed by agreement without any physical change in their position.Right to sell-If the pledgor makes a default in the payment of the debt by the stipulated time , pledgee may either file a suit for the debt and retain the property pledged as security or he may, after reasonable notice, sell the property. If there is deficit the pledgor is bound to make it good to the pledgee and if there is a surplus the pledgee must account for the same to the pledgor .

Hypothecation Hypothecation is a mode of creating an equitable charge against a property for payment of a debt which continues to be in the possession of the debtor. It is different from pledge because the asset under pledge remains in the possession of the lender. However the hypothecation deed usually provides that the banker will have the power to take the goods hypothecated in its possession if the need arises. Hypothecation is particularly useful in those cases where it is almost impossible or impracticable to give possession of the goods to the lender. For example where money is to be borrowed on the basis of goods lying in a retail showroom or on the security of motor vehicle which is to be used by the client for the purpose of his business or stock or raw materials etc., it will not be at all advisable to


pledge them to the banker because it may be difficult to run the business without these assets. In such a case hypothecation is the only choice.

Precautions to be taken by a banker while loan or advance is allowed against hypothecation of goods: Granting of loans on the basis of hypothecation of goods/assets is quite risky. This is because the borrower may fail to give possession of hypothecated goods/assets when demanded by the bank or he may sell the asset without paying the money to the bank. In order to safeguard itself against all such risks, a banker should take the following steps :

Assignment An assignment means a transfer by one person of a right, property or debt (existing or future) to another person. The person who assigns the right, property or debt is called the assignor. The person to whom the rights etc are assigned is called the assignee. In banking, the usual subject of assignment is "actionable claims". Actionable claim means a claim to any debt other than a debt secured by mortgage of immovable property or hypothecation or pledge of moveable property or to any beneficial interest in moveable property not in the possession either actual or constructive of the claimant which the civil court recognized as affording grounds for relief, whether such debt, or beneficial interest be existent accruing, conditional or contingent. In other words, an actionable claim is an unsecured claim to money which is actionable i.e; for recovery of which an action may be brought in court.

Documentation against Bank Credit : Documentation is one of the major aspects of credit functions of a Commercial Bank. The principal income generating activity of a Bank in Bangladesh is providing credit services to customers preferably on a secured basis. The charge on securities against credit facilities is created through execution of relevant documentation formalities and as such the Bank can largely at a future date fall back the securities held for recovery of the dues besides documents are the physical embodiment of liability. In is to be ensured that documents should be prepared and executed according to the law of the land and should not confront with the rules and practice of Banking. Consequently documents should be drafted and executed under the supervision of Professional lawyer / legal retainer.

Document


Document is the written statement of facts or evidence in regard to a particular transaction, which on placement may bind the parties answerable and liable to the court of law. From the above discussion the following characteristics of documents are found: •

It should be written statement of facts.

The fact should cover legal aspects.

It must be an evidence of certain transactions.

It should be signed by the persons having authority and legal power.

Importance of Documentation: Documentation formalities against loans and advances should be properly completed prior to extension of the facility to safeguard the Bank's interest. Complete and correct documentation enables the Banker to take legal recourse against the borrower in case of non-realization of dues.

Purpose of Documentation: Documentation is necessary for acknowledgement of debt by the borrower and for charging of securities to the Bank against loans and advances.

Types of Documents Documents related to securing loans and advances are classified into the following 2 (Two) categories: Charge documents are preformatted and printed required to create charge on securities against loans and advances and the documents are provided by the Bank to the client for execution .

Legal documents are legal papers provided by the client certifying the legal status of the borrower, borrowing power, title to goods and property; legal deeds and power of attorney related to creation of charge on securities.

Basic Charge Documents Documents common to all sorts of loans and advances are specified below . Demand Promissory Note: D.P. Note is an unconditional written promise made by the borrower to the Bank to repay the amount of loans / advances at a fixed or determinable future date along with interest at a stated rate. Letter of arrangement: The borrower acknowledges the Bank's right to cancel the facility allowed at any time without assigning any reason and with or without prior notice.


Letter of continuity: The borrower undertakes to remain liable on the D.P. Note and other loan documentation even if the liabilities are fully or partially adjusted during the tenure of the credit facility and even through the account may show credit balance from time to time. Letter of revival: The document refers to the law of limitation whereby documents become time barred after 3 years from the date of execution. The period of limitation within which a sent for recovery of the overdue loans / advances to be filed the ordinary period of 3 (Three) years from the date on which the facility was extended. The limitation period for mortgage is 12 years beginning on the date of the mortgage deed the borrower through "Letter of revival" confirms having precluded enforcement of limitation law, and also confirms to remain liable on Promissory Note and other documents executed notwithstanding the law.

Other Charge Documents • • • • •

Letter of Hypothecation with Supplementary Agreement. Letter of pledge with Supplementary Agreement. Letter of Guarantee. Letter of Trust Receipt. Letter of Lien.

• • • •

Letter of disclaimer. General letter of Counter Guarantee. Letter of indemnity. Credit Sanction advice accepted by the borrower.

Legal Documents • • •

Memorandum and Articles of Association (Limited Company). Registered partnership deed (Partnership firm). Trade License.

Board resolution covering corporate borrowing power and execution of security documents (Limited Company). Resolution of the partners for availing of credit facility and for execution of security documents.

Steps of Documentation • • •

Obtaining of the instruments / documents. Stamping. Execution.

• • •

Obtaining Documents The documents to be obtained depend upon 3 (Three) factors :

Witnessing. Registration. Preservation.


Legal status of the borrower

Type of facility

Nature of security

Stamping of Documents: According to the provisions of stamp Act 1899, all documents chargeable with duty shall have to be stamped adequately and, properly before or at the time of execution. An unstamped and insufficiently stamped document cannot be admitted in evidence or cannot form the basis of a legal suit. Types of stamps are:

• •

• •

Judicial Non Judicial

Adhesive Embossed

Execution of Documents: Documents must be executed (signed) by the person(s) concerned competent to do so either in official capacity or in personal capacity as the case may be. In other words, execution of documents must be done by the borrower authorized representative.

Witnessing: The following documents are required to be mandatorily attested by at least 2 (Two) witnesses. •

Mortgage deed

Assignment of life insurance policy

Sale deed

Will.

Gift deed

Registration of Documents: Registration is not applicable for all the documents. In the following few cases registration of documents is necessary to give legal effect to the instruments. The assignment of an insurance policy to be registered with the respective insurance company. The mortgage deed vetted by the legal retainer to be registered with the office of the Sub - Registrar. Fixed and floating charges on the assets of a limited company to be registered with the Registrar of Joint Stock Company.

Preservation of Documents:


Upon completion of all the documentation formalities "documentation checklist" to be prepared consisting of the list of documents. The checklist should be examined and signed by an authorized officer. Documents should be kept in safe custody preferably in the Vault. Separate files to be maintained for each customer. Documents movement Register should be maintained under the supervision and signature of an authorized officer. In case of loan: •

Letter of Disbursement.

Letter of Authority (if required)

Insurance Policy (if required).

Letter of Hypothecation (when goods

Any other document as stated in Sanction Advice.

are hypothecated as security) In case of overdraft: •

Letter of Continuity.

Letter of Authority (if required)

Insurance Policy (if required).

Letter of Hypothecation (when goods

Any other document as stated in Sanction Advice.

are hypothecated as security) In case of cash credit: •

Letter of Continuity

Letter of Authority (if required)

Letter of Pledge/Hypothecation.

Insurance

Policy

under

renewed warehouse. •

Any other document as stated in Sanction Advice.

Bank’s

Mortgage clause.

Letter of disbursement incase of

Advance

against

lien

of

FDR/Insurance Policy etc: Transport Loan: •

Letter of Hypothecation of vehicles

(in separate form) •

Photocopy of blue book

Photocopy of route permit

Insurance

policy

under

Bank’s

mortgage clause •

Any

other

documents

stated

in

Sanction Advice

Legal Mortgage: •

Mortgage deed (certified copy)

Registration receipt in original

Chain of documents for title (original if available)


C.S, S.A and R.S parcha

Legal opinion

Up to date Rent Receipt

Valuation Certificate

Non-encumbrance certificate

Location plan etc. /Site plan etc

Power of Attorney (if asked for)

Credit Disbursement: Having completely and accurately prepare the necessary loan documents, the loan officer ready to disburse the loan to the borrower’s loan account. After disbursement, the loan needs to be monitored to ensure whether the terms and conditions of the loan fulfilled by both bank and client or not.

Types of advances made by Prime Bank Limited: As a first growing commercial bank in Bangladesh, Prime Bank Limited has devised an excellent advance mix which has settled it in the highest echelon of prosperity within a very short time. Since its inception in 1995, it is dominating the banking sector of Bangladesh through diversified advance products. Prime Bank’s advance mix comprises: •

Unsecured Advance and

Secured Advance.

Unsecured Advances Sometimes bank makes advances to its valued customers taking no security. In this case bank only holds different charge documents duly signed and stamped by the customer. In the pure banking term, this type of credit is defined as unsecured or clean advance. So we can term the Unsecured or Clean Advance as the credit facility extended to a customer without obtaining any security subject to restrictions imposed from time to time by Bangladesh Bank or any other competent authority. Prime Bank Limited grants two types of Unsecured Advances to its customers that are: 1) Clean Overdrafts and

2) Clean Loans.

A customer is not ordinarily permitted to overdraw his account without security. However, Prime Bank, Motijheel Branch provides an unsecured advance facility in exceptional circumstances, only for a short period, with definite repayment arrangement, subject to restrictions imposed by Bangladesh Bank or any other competent authority, with prior approval of Head Office, to a customer on the basis of his/her personal credit worthiness,


standing and reliability. It is not granted unless the Sanctioning Authority, “The Credit Committee” of Head Office has full confidence in the ability and reputation of the customer to repay it, on demand, or at its maturity if it is a loan. Definite arrangements for repayment, whether by installments or otherwise, is, as a rule, made.

Secured Advances While making advances, bank needs to make itself sure that it will not be classified and will not ultimately result in a loss for the bank. Though not desired, if it happens banker will have no way to recover the fund. To be secured in such a situation, bank takes some security against advance and advances so secured are said to be “Secured Advance”. In the language of banking, “Secured Advance” is the credit facility that is extended to the customer taking some security subject to the restrictions imposed from time to time by Bangladesh or any other competent authority. Prime Bank, Motijheel Branch extends the following type of secured advances may be allowed against tangible securities subject to margin restrictions: a)

Loan (General)

j)

SOD (Others)

b)

House Building Loan

k)

PAD

c)

Other Loans to Staff

l)

LIM

d)

Cash Credit (Hypothecation)

m)

LTR

e)

Cash Credit (Pledge)

n)

IBP

f)

Hire-Purchase

o)

Packing Credit

g)

Lease Financing

p)

FDBP (Foreign)

h)

Consumers’ Credit

q)

FDBP (Local)

i)

SOD (Export)

r)

FBP

These advances are allowed against the following securities: a)

Advance

against

Term

Deposit

d) Advance against Shares (Loans and

Receipts (FDR and MTDR)

Overdrafts)

b) Advances against different types Sanchaya Patrayas. c)

Advance Policies.

against

e)

Advances

(Loans

&

Overdrafts)

against Personal Guarantees. Life

Insurance


f)

Advances (Loans, Overdrafts & Cash

j)

Credits)

k) Advances

against

Pledge

of

goods/stocks. g) Advances

&

Cash

Credits) against Hypothecation of Goods/Stocks. Hypothecation

Import

Bills

l)

Loans against Imported Merchandise (LIM)

m) Loans against Trust Receipts (LTR) (Loans) of

Cars,

against

n) Packing Credit (P.C)

Buses,

o) Foreign

Trucks, Scooters & Water Crafts, and Capital Machinery etc. i)

against

(PADs)

(Overdrafts

h) Advances

Inland Bills Purchase (IBP / FDBP)

Bill

Purchase

(Clean

/

Documentary) p) Advances to Foreign Nationals.

Advances for Execution of Work orders.

Interest Rates Charged by PBL: Types of advances Secured Overdraft (SOD)

Interest Rate 11.25%-16%

Loan (General)

12%-16%

House Building Loan (General) Transport Loan

12.75%-16%

Demand Loan Industrial Credit

7%-14.5% 12.5%-16%

Cash Credit (Hypothecation)

11%-16%

Past Due Bills Loan against Trust Receipt (LTR)

15% 11%-15%

15%

Features Continuous advance facility given for one year but can be renewed after the expiry of the time. Given against I.C.B. unit, FDR, Sanchaypatras and Work Orders. Given against Personal guarantee, Hypothecation of goods and land and building. Given against Personal guarantee, land and building. Given against personal guarantee and hypothecation of vehicles. Given against personal guarantee and cash collateral securities. Given against land and building along with machinery, personal guarantee of Directors and hypothecation of raw materials. The bank sanctions a short-term arrangement by which a customer is allowed to borrow money up to a certain limit for a certain time. Given against Registered mortgage of land and building, hypothecation of goods and personal guarantee of Directors. Given against Bills Receivables. Advance allowed for retirement of shipping documents and release of goods imported through L/C. The goods are handed over to the importer under trust with the arrangement that sale proceeds should be deposited to liquidate the advances within a given period. Given against Bills Receivables, hypothecation of imported goods, Trust Receipt, personal guarantee, registered mortgage of land and building.


Types of Advances Agriculture Large and Medium Term Working Capital Export Commercial Lending Cottage Industry Others

Interest Rates 10% 12%-15% 11%-15% 10%-12% 11%-16% 11% 13%-16%

Source: Credit Department of Mj.Braanch

Advances against Sanchaya Patraya: Prime Bank extends advance against two types of Sanchaya Patrayas which are Pratirakhya Sanchaya Patraya and Bangladesh Sanchaya Patraya. Before giving advance against ‘Pratirakhya Sanchaya Patraya’ and ‘Bangladesh Sanchaya Patraya’, the authorized officer becomes satisfied about the followings: 1.

The Sanchaya Patraya has been issued in the name of the borrower himself.

2.

The Sanchaya Patraya is signed by the holder on the back thereof, in accordance with his/her signature appearing on the ‘Identity Slip’ (in case of joint holders, Sanchaya Patraya is duly signed by all the holders as per instructions contained for encashment).

3.

The Sanchaya Patraya does not stand in the name of minors.

4.

The ‘Identity Slip’ containing the specimen signature of the holder, is duly authenticated by the issuing authority under his/her signature and the stamp/seal of the Issuing Office.

5.

No Objection Certificate is obtained from the issuing authority in respect of pledge of the certificates as security against loan with confirmation that lien has been marked in their records favoring the Prime Bank Motijheel Branch. Bank official himself/herself and definitely not the borrower(s) will collect these certificate and letter.

6.

Sanchaya Patraya(s must be pledged to the Bank.

Procedures for pledge of Sanchaya Patraya(s) to bank: If the prospective borrower already possesses the Sanchaya Patraya: 1.

The borrower will provide a written authority addressing Sanchaya Patraya issuing office to pledge the Sanchaya Patraya with the Bank as security against borrowings.

2.

A written confirmation will be obtained from the certificate issuing authority that lien has been marked in favor of the Bank. The Branch Manager will independently verify this.


Charge Documents: While giving loan against Sanchaya Patrayas bank obtain following charge documents which are supposed to be duly stamped prior to disbursement: •

Demand Promissory Note.

Letter of Arrangement a) For Loans

:

Letter of Disbursement

b) For Overdrafts & Cash Credits

:

Letter of Continuity

Bangladesh Sanchaya Patra / Pratirakhaya Sanchaya Patra duly discharged.

Letter of Lien

Additional Documents: •

Letter of Partnership along with Registered Partnership Deed in case of Partnership Accounts.

Resolution of the Board of Directors along with Memorandum & Articles of Association in case of Accounts of Limited Companies. In case of Corporation, resolution of the Board along with Charter.

Personal Guarantee of all the Partners in case of Partnership Accounts and of all the Directors in case of Limited Companies.

An under taking from the Directors of the Public Limited Company to obtain prior clearance from the Bank before declaring any interim/final dividend and change of Directors.

Letter of Authority for encashment of Certificate on prescribed form.

“Identity Slip” issued by the office of issue.

Advances against Life Insurance Policies Precautions in accepting life policy The authorized bank official will take the following precautions while accepting a Life Policy as security for advance:


(a)

The prospective borrower is a known and respectable client of the bank.

(b)

The Insurance Policy is an endowment policy.

(c)

The borrower has an insurable interest in the life of the insured, if the policy does not stand in his/her own name.

(d)

That the policy is properly stamped.

(e)

The policy does not bear any restriction of qualifying conditions likely to affect its value as a security.

(f)

The advance is restricted to 90 percent of the surrender value to cover interest and other charges.

(g)

The

surrender

value

of

the

policy

is

ascertained

from

the

Insurance

Company/Corporation (policies for less than three years have no surrender value). (h)

The Authorized official of the bank will obtain confirmation from Insurance Company that premiums are paid up-to-date and the policy is in force. The last premium receipt or other evidence of the payments is obtained along with the standing instructions from the borrower to pay further premium to the debit of his account. In that case the Bank has to ensure that the customer in the account to pay premiums as and when they fall due always make adequate provision.

(i)

The Company/Corporation has admitted the age of the assured either on the Policy or by a separate certificate. In case that the age of the assured is not admitted by the company/corporation, a birth certificate is to be obtained from the assured and forwarded to the company as evidence of the assured’s age.

(j)

Bank will take a legal assignment by deed duly stamped at the customer’s expenses and will obtain the policy at the same time. The assured assigns the policy to the Bank and the assignment is sent to the Insurance Company/Corporation at its principal place of business in Bangladesh for registration and return.

(k)

An undertaking is obtained from the assured that he shall keep on paying the premium punctually, and produces the receipts to the Bank, and shall not do anything, which might cause the policy to be void.

(l)

After the loan is repaid the Bank reassigns the policy back to the borrower.

Advances on surrender value (a)

After having satisfied on these points, advance will be given to the borrower after obtaining approval from Sanctioning Authority and on obtaining a letter from the Insurance


Company for allowing the advance against the surrender value of the life insurance policy as declared by them. Under no circumstances, advances will be allowed in excess of the surrender value of the insurance policy. (b)

In the event of death of the assured during the tenure of the loan the Bank will tender proof of death of the insured to the satisfaction of the Insurance Company and claim the sum assured as the assignee.

Charge Documents While giving loan against Sanchaya Patrayas bank obtain following charge documents which are supposed to be duly stamped prior to disbursement: 1.

Demand Promissory Note

2.

Letter of Arrangement

3.

a) For Loans

:

Letter of Disbursement

b) For Overdrafts and Cash Credits

:

Letter of Continuity

Insurance Policy in original duly assigned in favor of the Bank. 4.

Stamped letter of Lien.

5.

Standing instruction from the Borrower for payment of premium to the debit of his account.

6.

An undertaking duly signed by the policyholder giving consent to surrender the policy.

7.

Letter of undertaking from the assured.

8.

Acknowledgement from the insurance Company/Corporation that the assignment has been registered with them.

Advance against Term Deposit Receipts (FDR And MBDR) Scrutiny of Deposit Receipts 1.

Scrutinize the Fixed/Short Term Deposit Receipts with regard to the following points subject to credit restriction imposed from time to time :

a)

The fixed deposit receipt is genuine.

b)

The authorized signatures on the FDRs are verified with the signatures of the officially recorded in the specimen signature book and tallied.

c)

The Fixed/Term Deposit Receipt is not in the name of a minor.


d)

It is duly discharged by the depositor on revenue stamp of adequate value and the signature is verified by pencil

e)

If the receipt is issued in joint names, it shall be discharged by all the depositors named in the receipt on revenue stamp of adequate value and their signatures are verified by pencil.

f)

If the Deposit Receipt is offered as a security for allowing advance to a third party, a letter of lien shall be obtained from the depositors, on the appropriate form.

g)

If the same Branch has issued the Deposit Receipt, lien against that specific Deposit Receipt is marked in the Fixed Deposit/Term Deposit A/C. of the Branch.

h)

As far as possible advances against fixed/short terms deposit receipt of other Branches should be avoided. However, where such advances are made, the Branch where the advance is being allowed shall obtain under joint signatures of 2(two) officers of the issuing Branch, a confirmation that their lien has been duly registered with them. At the issuing Branch the lien noted in the Fixed/Term Deposit A/C. should form a part of the other outstanding instructions in respect of the deposit noted therein. The Branch where the advance is to be allowed shall directly obtain the verification of the discharge of the holder of the deposit receipt and also of the signature on the letter of lien from the issuing Branch. The borrower shall not be allowed, under any circumstances to have such verification done on his own.

i)

No advance be allowed against FDR issued by other Bank without prior approval of Head Office.

j)

The discharged receipt, the letter of lien duly verified by the issuing Branch and the letter confirming registration of the lien on the deposit receipt shall be kept along with other documents for the relative advance, duly entered in the Safe-in-Safe-out Register.

k)

Lien on the partial amounts on Fixed/Term Deposits shall not be accepted.

l)

The lien of the Bank has to be marked in red ink on the Deposit Receipt against which advance has been allowed. On adjustment of the advance, lien shall be released under signature of 2(two) authorized officers on the back of the Deposit Receipt.

m)

An undertaking from the borrower/third party (if the deposit is in the name of a third party) for encashment of the FDR / Term deposit and appropriation of the proceeds thereof without reference to them be obtained.

n)

An undertaking from the borrower/Third party (if the deposit is in the name of a third party) for renewal of the fixed and Term Deposit without reference to them be obtained.

o)

Margin to be obtained as per Head Office Instruction Circular issued from time to time.

p)

A letter in the following Proforma shall be obtained from the borrower/third party (whichever is applicable) in respect of automatic renewal of FDRs.


Charge documents After full satisfaction on the above mentioned points, bank obtains the following charge documents duly stamped and allow the advance: a)

Demand Promissory Note.

b)

Fixed/Term Deposit Receipt duly discharged

c)

Letter of Lien or Letter of Lien (in case of advance to a third party) Letter of Arrangement. Letter of Partnership along with Registered Partnership Deed in case of Partnership Account.

d)

Certified copy of Memorandum & Articles of Association and resolution of Board of Directors in case of Accounts of Limited Company and in case of Corporations, resolution of the Board along with Charter.

e)

Letter of Revival. Additional documents:

a)

For Loans: Letter of Disbursement.

b)

For Overdrafts: Letter of Continuity (on special adhesive stamp)

c)

An undertaking from the Directors of the Limited company to obtain prior clearance from the Bank before declaring any interim/final dividend.

Advances against Shares (Loans & Overdrafts): Precautions to be taken: Advance against Share is given against shares of various companies quoted on the Stock Exchange maintaining appropriate margin. This advance is also subject to credit restrictions imposed by Head Office from time to time. Before giving advance, bank obtains the physical delivery of the Shares and their Transfer Deed forms (Blank) and thoroughly scrutinizes them with regard to the following: a)

The share scripts are original and bear the seal of the Company.

b)

Generally Bank does not make any advance against large block of shares of one single company, especially if the borrower has any controlling interest in the company.

c)

Bank grants no advance against shares kept with it as safe custody article.


d)

The shares are fully paid up. Bank does not allow advance against partly paid up shares unless approved by the Head Office.

e)

The shares tendered as security for advance are registered in the name of the borrower.. Share certificates are not mutilated or damaged. No rubber stamp of the Bank is put on the share certificates or Blank Transfer Deed.

f)

The Transfer Deeds are undated.

g)

Advance against “Letter of Allotment” is not, ordinarily entertained. The shares are accompanied with blank Transfer Deed duly signed by the person in whose name those shares stand and witnessed by somebody whose witness is acceptable to the Bank and easily traceable. The customer is required to sign a Memorandum of deposit when the shares are deposited.

h)

The Company concerned under its stamp/seal verifies the transferor’s signature on the Blank Transfer Deed. Mandates addressed to the company whose shares are accepted, as security is taken for realization of dividend on the shares, which are pledged and forwarded to the company.

i)

The Transfer Deeds, as far as possible, are in marketable lots, determined by the Stock Exchange.

i)

A fresh set of Transfer Deed signed by the borrower, and duly witnessed as above is obtained and retained with the Branch, for all such shares which are to be sent to various companies for registration in his name, before the closure of their books, if so requested by him. Preferably two sets, the signatures of the borrowers are obtained – one dated and another undated. If the signatures of the borrower are dated, complications arise if Bank has to sell them after some time. If the signatures are undated and the borrower dies, the company refuses to register the Transfer. Hence, two sets are obtained to meet either situation.

j)

These shares are lodged with the companies concerned for registration with their original Transfer Deeds, duly completed in all respect, under a covering letter from the Branch, requesting them to return the shares to the Branch, as the Bank has its lien on them. The Transfer Deeds attached with the shares are completed and signed by the borrower as transferee, before these are dispatched to the Companies.

k)

A receipt is obtained from the companies and retained with Branch, duly discharged by the shareholder, for exchange with the share certificates, when ready for delivery.


l)

The borrower’s signatures on the fresh set of Blank Transfer Deeds are verified by the Companies concerned and retained with Branch along with their respective share certificate when received back from them after registration.

m)

The Branch obtains a Letter of Lien from the borrower/holder in respect of all such shares which stand in his name, or which have been sent to the various companies for registration, in his name.

n)

Shares standing in the name of third parties are not, as a rule, be taken as security unless accompanied by proper letter from such third party agreeing to the shares being pledged to the Bank and giving up his/her own right in favor of the borrower with blank Transfer Deed.

o)

Where advance has been allowed to the borrower at the specific request of a third party against shares owned by them, the letter of lien is obtained from third party and not from the borrower.

p)

The Branch shall not generally resort to transferring the shares registered in the name of the borrower or any third party, in its own name.

q)

In the event of transferring the shares in the name of the Bank with the approval of the Head Office, Motijheel Branch takes special notice of any declaration of Dividend, Bonus Shares or any offer of Right Shares made by the companies concerned. It also ensures that all such Dividends and Bonus Shares are duly received by them.

I.

The dividend is credited to the account of the borrowers and the bonus shares are kept along with other shares of the borrowers.

II.

The case of an offer of Right Shares, Branches sends intimation to the borrowers concerned enquiring from them if they were interested to acquire them for the value mentioned on the Letter of Rights, which should immediately be deposited by them with the Bank.

III.

If the borrowers do not deposit the money from their own resources or make any alternate arrangement in that behalf, the Letter of Rights may be renounced with the permission of the Head Office and sold, and the sale proceeds are credited to the borrower’s account under intimation to him/her.


Calculation of Drawing Power: If the Branch Manager is satisfied with the security offered, he will calculate the drawing power of the borrower on the basis of paid-up value & market value whichever is lower keeping prescribed margin and also complying with all other instructions in this respect.

Restriction: According to the provision of Section-26 of Banking Companies Act. 1991, “no Banking company shall hold shares of any company whether as pledgee, mortgagee or absolute owner, of an amount exceeding 30% of its own paid up share capital of the company of 30% of its own share capital and reserves, whichever is less. Motijheel Branch while entertaining any application does not make any advance against shares without getting a clearance from the Head Office, where a record is maintained of the total holding of different shares of the Company held by the Bank as pledgee.

Charge Documents: While giving advance against shares Prime Bank, Motijheel Branch obtains the following charge documents duly stamped prior to disbursement: 1. Demand Promissory Note 2. Letter of Arrangement 3. a) For Loans

:

b) For Overdrafts & Cash Credits

Letter of Disbursement :

Letter of Continuity

4. Letter of Lien. 5. Letter of ownership. 6. Blank Transfer Deed duly verified by the Company. 7. Letter of guarantee, if the shares stand in the name of the persons other than the borrower. 8. Memorandum of deposit of shares. 9. Irrevocable letter of Mandate for collection of dividend, bonus shares etc. addressed to the concerned company by the shareholder. 10. Notice of pledge by the shareholder to the company. 11. Letter of Revival.


Additional Documents 1. Letter of Partnership along with Registered Partnership Deed in case of Partnership Accounts. 2. Resolution of the Board of Directors along with Memorandum & Articles of Association in case of accounts of Limited Companies. In case of Corporation, resolution of the Board along with Charter. 3. Personal Guarantee of all Partners in case of Partnership Accounts and all the Directors in case of Limited Companies. An undertaking from the Directors of the Public Limited Company to obtain prior clearance from the Bank before declaring any interim/final dividend.

Review a)

Branch Manager shall conduct a constant review of Advances against shares and exercise vigilance over:

b)

i)

Market rates of shares pledged.

ii)

Their marketability

iii)

Dividend/Bonus shares declared from time to time

Review is not being required in case of Advances allowed to recognized share brokers against the pledge of shares.

c)

Suitable steps to safeguard the Bank’s interest are necessary after review and the borrower is required to: I)

repay certain amounts

ii)

Deposit more shares as security

iii)

Pass on the dividends/bonus shares to the Bank

Undertaking In case of good parties or satisfactorily operated accounts, an undertaking is obtained from the borrower where there is sufficient security that the benefit as and when received by them shall be passed on to the Bank for credit of/or as security against the advances. This undertaking is followed up to ensure that the benefits are deposited within reasonable time.


Advances for Execution of Work Orders: Precautions to be taken Banks extend credit facilities for execution of work orders & supply orders. While allowing credit facility to a client to perform a work order / supply order, the following points should be noted carefully to judge the merit of the case: I. The work orders/ supply order of Government Department, Corporation, Semi-Government, Autonomous Bodies and reputed Multinational/Public Limited Companies can be considered. II. The customer’s management capability, equity strength, security, nature of the work i.e. feasibility study should be judiciously made to arrive at a logical decision. List of machinery & equipment and technical personnel to be obtained. III. Past experience and list of works since completed are evaluated to assess his capacity. Certificates from the work giving authority be enclosed. IV. Position of the existing works in hand and his capability to execute the existing and proposed works. V. If there is a provision for running bills for the work an appropriate percentage should be deducted from each bill to ensure complete adjustment of the liability within the payment period of the final bill. VI. Original work order/ supply order is retained by the Branch and confirmation from the Department/Organization concerned as regards genuineness of the work order / supply order is obtained. VII.

Bills receivable are assigned to the Bank prior to disbursement. An irrevocable power of attorney is executed by the borrower favoring the Bank authorizing the Bank to receive bills/cheques etc. in payment against the work order/ supply order from the work awarding authority on his behalf. The power of attorney is submitted to the work giving department for acceptance and written firm consent letter to issue all cheques favoring Prime Bank Ltd., A/C. the contractor in payment of bills against the work order / supply order is obtained.

VIII.

Genuineness of the Acceptance letter is ascertained.

IX. Disbursement is made only after completion of documentation formalities and fulfillment of necessary arrangement by the client to undertake the works, as satisfied by the Bank. X. Progress of works/ supply is monitored and bills receivable are ascertained from time to time.


Charge Documents While granting loan against Work Order/Supply Order, Prime Bank, Motijheel Branch obtains the following charge documents which are duly stamped prior to the disbursement: 1. Demand Promissory Note.

Letter of consent/acceptance from the work

2. Letter of Arrangement. 3. Letter of Continuity

order/supply order issuing department Letter of Revival.

4. Irrevocable Power of Attorney

Additional Documents 1. Letter of Partnership along with Registered Partnership Deed in case of Partnership Accounts. 2. Resolution of the Board of Directors along with Memorandum & Articles of Association in case of Accounts of Limited Companies. In case of Corporation, resolution of the Board along with Charter. 3. Personal guarantee of all the Partners in case of Partnership Accounts and of all the Directors in case of Limited Companies. 4. An undertaking from the Directors of the Public Limited Company to obtain prior clearance from the Bank before declaring any interim/final dividend. 5. Letter of Guarantee signed by the depositors of title deeds to secure the advance to third parties. 6. Notarized/Registered Irrevocable Power of Attorney to collect bills directly from the concerned authority to be vetted by Bank’s Legal Adviser. 7. In case of Limited Companies get the first charge on the fixed and floating assets of the companies favoring Bank registered with the Registrar of Joint Stock Companies as per companies act within 21 days of the execution of charge documents & obtain “Certificate of Registration of Mortgage”. 8. Withdraw the Bank’s charge after the advance is adjusted and limit cancelled by obtaining a certificate from the Registrar to the effect that Bank’s charge has been satisfied.


Cash Credits Against Hypothecation of Goods/Stocks: Cash Credit (Hypo) is sanctioned to a client against primary security of hypothecation of raw materials and/or finished products. Under this arrangement, the borrower, by signing a letter of hypothecation duly stamped, creates a charge against the goods for an amount of debt but neither the ownership nor the possession of the same is passed on to the Bank. Only a right or interest on the goods is created in favor of the Bank, but the borrower binds him to give possession of the goods to the Bank when called upon to do so. Hence, in order to secure the advance, Bank normally insists on the borrowers to provide suitable collateral security. While allowing credit facility against hypothecation of goods/stocks the following points are considered a)

The facility is allowed only to the trustworthy having undoubted standing and credit worthiness. b)

The goods are readily sellable and have constant and effective demand in the

market. c)

Bank allows cash Credit (Hypothecation) only for working capital and not for capital investment. d)

The goods are not subject to rapid deterioration due to storage for short or long

duration.

h)

e)

The borrower has an absolute title to the goods.

f)

The goods are not encumbered and/or hypothecated to any other Bank.

g)

The prices of the goods are steady.

In case agricultural crops, the crops should be of current season and the advance is adjustable before the crops of next season comes in the market. A declaration is obtained from the borrower that he shall not charge the goods hypothecated to another person/Bank without prior consent of the Bank. Careful valuation of the goods and its quantity has to be made. i)

The selling price of goods is ascertained from the market.

k)

The goods are insured covering all risks under Bank mortgage clause. An

authority letter for obtaining Insurance Policy


l)

Stock report duly signed by the borrower is obtained in Bank’s printed proforma at least once in a month but while releasing funds, upto date position of the stocks should be obtained. In the event of default, the Bank would be free to stop further drawings.

m)

Stocks/goods are inspected regularly by the bank’s authorized representative. Proper supervision is made as to whether the sale proceeds of the stocks are deposited to the CC (Hypothecation) account.

n)

A nameplate indicating that the goods are pledged is displayed at a conspicuous place both inside and outside the godown/place where the goods are lying.

o)

Fixation of margin, valuation of commodity and drawing power of a borrower are to be done carefully in the manner as advised under advances against pledge of goods/stocks.

Charge Documents Bank obtains the following charge documents duly stamped prior to disbursement: 1. Demand Promissory Note 2.

Letter of Arrangement

3.

Letter of Continuity

4.

Letter of hypothecation of goods

5.

Letter of Revival

Additional Documents 1.

Letter of Partnership along with Registered Partnership deed in case of Partnership Accounts.

2.

Resolution of Board of Directors along with Memorandum & Articles of Association in case of Accounts of Limited Companies. In case of Corporation, Resolution of the Board along with Charter.

3. Personal guarantee of all the Partners in case of Partnership Accounts and of all the Directors in case of Limited Companies. 4.

An undertaking from the Directors of the Public Limited Company to obtain prior clearance from the Bank before declaring any interim/final dividend.

5.

In case of Limited Companies where the credit facilities are allowed against Hypothecation of goods/stocks, the following procedures are adopted for getting the first charge on the fixed and floating assets of the companies favoring Bank registered with the Registrar of Joint Stock Companies as per Companies Act: a) Bank has to submit Form XVIII duly filled-in and signed by borrower Letter of Hypothecation.

along with


b) This must be submitted within 21 days of the execution of the Letter of Hypothecation and 6.

Charge Documents.

The Registrar on receiving the above documents will issue “Certificate of

Registration of

Mortgage”. 7.

a) Bank’s charge is withdrawn after the advance is adjusted and limit is cancelled. b)

Bank will submit Form along with the prescribed fee before the Registrar, who will issue certificate to the effect that Bank’s charge has been satisfied.

Consumer Credit Scheme A consumer is the ultimate user of a good. Thus “Consumer Credit” is the credit, which directly comes into the use of a consumer.

The board of Governor of the Federal Reserve System defines “Consumer Credit” as the short and intermediate term debt owed by individuals to financial institutions, retailers and other distributors, for financing for purchase of goods and services, but not including real estate mortgages and insurance policy loans. For many years bank viewed consumer loans with skepticism. Commercial loans were available in large volume, net yields were high, and loans were highly visible investments. Consumer loans, in contrast, involves small amount of money, a large staff to handle account, and there is less prestige associated with lending to individuals. Today many banks target individuals as the primary source of growth in attracting new business. This reflects the attraction of consumer deposits as well as consumer loans. From lender’s perspective, the analysis of consumer loans differs from that of other loans. First, the quality of financial is lower. Personal financial statements are typically unaudited so that it is to hide other loans. It is similarly easy to inflate asset values. Second, the primary source of repayment is current income, primarily from wages, salaries dividends and interests. These may be highly volatile depending on the nature of individual’s work, experience and history. The net effect is that character is more difficult to assess but extremely important.


Practically consumer credit is a facility designed to help consumer to purchase goods or services for their personal use on the assumption that the consumer has a stable source of income over the next few years. It enables the consumers to have access to the desired goods and services based on future purchasing power, without the credit facility the consumer and the family might not be able to immediately enjoy those comforts which requires major expenditure, e.g. a car, a color TV, a refrigerator, a music system, a washing machine, a trip to sea-resort, treatment etc. It helps the consumer to enjoy the life.

Consumer Credit Scheme of Prime Bank Limited Bangladesh is one of the poorest countries of the world. Per capita income of our country is very low. So the majority of our people is forced to live a substandard life. The middle classes and disciplined professionals cannot effort to buy essential utility products that requires a substantial amount at a time. As such they cannot raise their living standard to an expected level, Prime Bank Limited has introduced the “Consumer Credit Scheme” to serve the limited income group and improve their quality of life for achieving the objective of the bank. “Consumer Credit Scheme” is very popular in most of the developed and developing countries of the world. This is designated to finance fixed income group people for buying essential commodities to be repaid by monthly installment over a period in accordance with a contractual agreement. “Consumer Credit Scheme” is gradually becoming very popular in our country. A good number of financial institutions in our country are successfully operating similar programs.

Objective of “Consumer Credit Scheme”: The objective of Consumer Credit Scheme of Prime Bank Ltd. is as follows1. To bring the credit facility to wide range of customers. 2. To provide financial assistance to the limited income group people towards buying utility products. 3.

To help the professionals to raise their living standard.

4. To participate in the socio-economic development of the country.


Goods and services under the scheme Under “Consumer Credit Scheme” Prime Bank Ltd. grants pecuniary help for the following goods and services. •

Private car and station wagon both new and reconditioned.

Sewing machine

Kitchen

goods

such

oven,

toaster,

as

–oven,

Refrigerator and deep fridge

microwave

Television, VCR, VCP.

pressure cooker, cooking range etc.

Two-in-one, Three-in-one.

Air cooler, Air conditioner, Room-

blender,

Cookeries, cartularies, dinner set, tea set,

heater, Water purifier, Water cooler and

Photocopier.

Water pump.

Telephone, fax, cordless telephone,

Personal

computer,

pager, telephone answering machine.

typewriter,

camera, movie camera.

Ceiling fan, pedestal fan. Generator.

Washing machine, electric iron.

Furniture such as Dressing table,

Elmira, Sofa set, Wardrobe, Showcase

Other goods that are not mentioned above but are considered essential.

etc.

The qualification of the customer The employee of the organization mentioned below who are of the rank of officer and are permanent in their job and are of age between 20 and 50 can apply for loan under “Consumer Credit Scheme”. 1.

Any government organization.

5.

University, College, and School.

2.

Semi and non-government

6.

Doctor, Engineer, Lawyer, Architect,

organization. 3.

Bank, insurance company and other

Chartered Accountant, Reporter etc. 7.

financial organization. 4.

Armed forces, BDR, Police and Ansar.

Executive

of

established

non-

government organization. 8.

Self-investing businessmen.

and

self-employed


Amount of loan and Repayment Period The following table shows the loan limit, repayment period, and minimum contribution of the consumer himself for the goods they want to buy. Goods and services

Reconditioned car, Reconditioned station wagon Photocopier

Contribution of the Repayment consumer himself period 10lac(Buying price 40% 3 years of the goods) 7.5 lac (Buying 40% 3years price of the goods) 1 lac 40% 1year

Other goods

1 lac

New car, new station wagon

Loan limit

20%

2years

Source: “Consumer Credit Scheme� Brochure.

Loan Repayment Procedure The consumer has to pay the loan with the interest by fixed monthly installments. The monthly installments will be started from the next month of the buying month. Every monthly installment has to be paid on the first week of each month. The customer will make advance cheque of amount equal to monthly installment. The number of cheque will be equal to the number of month to be installed. Then each month bank places these cheques for collection of monthly installment.

Documentation The applicant will make signature in the required charge documents; by the charge document bank charges his right upon client after giving the credit facility. The charge documents include the following: 1.

Letter of disbursement.

7.

General letter of Hypothecation.

2.

Letter of agreement/arrangement.

8.

Letter of undertaking.

3.

Letter of authority.

9.

Loan agreement under Consumer

4.

Demand Promissory Note.

5.

Letter of installment

6.

Supplementary agreement.

Credit Scheme. 10.

Letter of Guarantee.

Besides charge documents the applicant will present a written promise to the bank promising that he will repay the monthly installment regularly.

Stamp Charge: Stamp charge for documentation is shown in the following table.


Table: Stamp Charge of CCS. Sl. No. 1. 2. 3. 4. 5. 6. 7. 8. 9.

Documents D. P. Note Letter of Authority Letter of Hypothecation Letter of Guarantee Letter of Agreement Supplementary Agreement Letter Undertaking Bank Commission Total Source: CCS cell, Head Office, PBL.

Name of the Stamp Revenue Stamp Not Required Adhesive Stamp Adhesive Stamp Adhesive Stamp Not Required Not Required

Value (Tk.) 20 ____ 150 150 150 ____ ____ 50 520

Table: Business Position of CCS as on ____ Motijheel Branch Bank’s Total

Cumulative No of Cases disbursed 5103

Cumulative amount disbursed 236473

Outstanding

Overdue

Recovery Rate

54963

Amount Recovered 72283

14444

83.35%

17245

956797

342940

531601

27334

95.11%

Small and Medium Enterprise (SME) Credit Scheme Introduction Small and Medium Entrepreneurs have innovative ideas, spirit and potentiality to do something productive for this country. But such type of beneficial enterprises can not go a long way for want of financial support due to complicated loan processing and collateral requirements of the banks. Prime Bank Limited is committed to play a positive role in the overall socioeconomic development of the country. In view of the above, it has introduced a simplified credit scheme titled “Small and Medium Enterprise (SME) Credit Scheme”.

Eligibility Criteria •

The entrepreneur should be skilled in managing his/her business and has experience of successfully managing the business for at least 2(two) years.


The enterprise must be 100% privately owned, controlled and operated by the entrepreneur.

The entrepreneur must be a Bangladeshi national.

Loan Ceiling •

For small enterprise: Maximum TK.250000/=

For medium enterprise: Maximum TK.7500000/=

Purpose •

Working capital.

Capital machinery.

Mode of finance •

Cash Credit (Hypo/Pledge)

Hire purchase/ Lease finance

Term Loan

Period of Loan •

In case of continuous loan: 1(one) year.

In case of term loan: Maximum 5(five) years.

Interest Interest rate is presently 15% per annum with quarterly rest.

Other charges •

The customer shall pay supervision and monitoring charges @0.75% quarterly on outstanding loan amount.

The customer shall pay loan processing fee @ 0.50% of loan amount before disbursement of loan.

Securities Tangible securities in the form of mortgage may not be available in all the cases. So, mortgage will not be mandatory. Security will be stipulated on case to case basis based on the merit of each case as under (one or several of the following): •

Registered mortgage of land and building.

Mortgage/Assignment of possession right.

Assignment of security money, advance rent (if any).

Assignment of trade receivables not older than 90 days.


Hypothecation of machineries, equipments, vehicles, stock-in-trade, raw materials, work-in-process and finished goods of the enterprise both existing and future.

Personal guarantee of persons accepted to the bank.

Post dated cheques.

Lien on deposits/saving certificates/financial obligations.

Any other securities deemed to be suitable to the bank such as Insurance Guarantee, Corporate guarantee, Assignment of Contract, Security Money etc. Table: Business Position of SME as on 30.11.2001 1. Total no. of Client 2. Total Amount Disbursed 3. Total Outstanding 4. Classification Standard 5. Recovery Rate Source: SME Cell, Head Office, PBL.

42 Tk.524.89 lac Tk.454.48 lac 100% Unclassified. 100%

Issuing Of Bank Guarantee: Bank Guarantee is a profitable product of a bank.

Sometimes customers need bank

guarantee for their business purposes. Guarantee is of three types – Bid bond: This guarantee is given to the business people. This guarantee is given for the purpose of participating in the tender. Performance guarantee: This guarantee is in favor of the client for assuring that the client will perform some specific works. Advance payment security: By this guarantee, PBL gives assurance of payment in case of advance payment. It helps in deposit mobilization. The procedure of each guarantee is same. For issuing bank guarantee, customers have to apply to PBL in their own pad. Then bank issued guarantee on judicial stamp. But the conditions for issuing bank guarantee are that --Customers must maintain a current account. Customers must keep certain percentage of guaranteed money as margin. Bank charges .50% on the guaranteed money per quarter.


Bank’s profit for issuing bank guarantee is .50% commission per quarter. Furthermore, customer has to maintain certain.

Accounting Treatment Regarding Bank Guarantee: While issuing guarantee, bank performs the following function: Customer’s Liability Dr. Banker’s Liability Cr. Banker’s liability becomes credit because the guarantee becomes the liability of the bank. If the bank pays the guaranteed amount to the beneficiary, then PBL reverses the entry and collects money from the customer and issue the bank draft. But sometimes, while the guarantee remains unused, customer gives another written in his own pad. Then again bank reverses the previous entry. PBL also issue revolving bank guarantee.

Credit Monitoring, Follow-Up and Supervision: Credit monitoring implies that the checking of the pattern of use of the disbursed fund to ensure whether it is used for the right purpose or not. It includes a reporting system and communication arrangement between the borrower and the lending institution and within department, appraisal, disbursement, recoveries, follow-up etc. PBL Officer checks on the following points, a)

The borrower’s behavior of turnover

b)

The information regarding the profitability, liquidity, cash flow situation and trend in sales in maintaining various ratios. The review and classification of credit facilities starts at Credit Department of the Branch with the Branch Manager and finally with Credit Division- Head Office.

Loan Classification: When a borrower fails to repay his loan and continuously stops repaying for a certain period the bank terms that loan as classified loan and takes other necessary measures.


Loan classification is a process by which the risk or loss potential associated with the loan accounts of a Bank on a particular date is identified and quantified to measure accurately the level of reserves to be maintained by the Bank to provide for the probable loss on account those risky loan. All types of loans and advances of a Bank fall into following four categories: Unclassified: Repayment is regular. Substandard: Repayment is irregular but has reasonable prospect of improvement. Doubtful Debt: Unlikely to be repaid but special collection efforts may result in partial recovery. Bad/Loss: Very little chance of recovery.

Classification Procedure: The loan classification procedure for all types of loan is governed by the guidelines contained in BCD Circular no 34 issued by Bangladesh Bank, in 1989 and subsequently revised partially through BRPD Circular no 16, issued in 1999. After that there was another BRPD Circular (No. 16 dated May 14, 2001) circulated that brings some changes in case of continuous & demand loans According to the latest circular the loans are classified on the basis of the following irregularities in payment: Table: Length Of Overdue Status

UC

Continuous

Term Loan & Demand Short term agri Upto 5 years & micro credit Loans Upto

More than 5 years

Upto 5 month

Upto 11 months

5 Upto 11 months

(Unclassified) SS

Upto 6 to 9

months Upto 12 to 35 Upto 6 to 11 Upto 12 to 17 months

(Sub-standard) DF

Month Upto 9 to12

months months Upto 36 to 59 Upto 12 to Upto 18 to 23 months

(Doubtful) B/L

Month 12 months &

months Upto 60

(Bad & Loss)

above

above

17 months and 18 months 24 months and above and above


Provision If any borrower fails to pay his loan, the account is classified as Standard, Doubtful, and Bad/Loss depending on the period of non – payment. At that time Bank required provision and then a proportion of net profit transfers to the provision. As per BRPD circular no 16, 1998 of Bangladesh Bank the length overdue and reserve for provision for classified loans are given below:

Types of Classification Unclassified

Rate of provision 1%

Substandard

20%

Doubtful

50%

Bad loss

100%

Following measures are available for non-repayment of loan• To issue notice for adjustment

• To issue legal notice for selling the

• To issue legal notice for filing suite.

hypothecated goods (in case of transport

• To encash securities(in case of demand

loan, cash credit-hypo).

loan)

• To issue suite for foreclosure. • Finally to sue in money loan court or insolvency court which is suitable.

Lending Risk Analysis (LRA): The modern concept of lending has shifted from the security-oriented approach to business viability one. The emphasis is given on the likelihood of repayment, business viability, management competence and management integrity of the proposed debtor. As the prevailing legal system of the country often favors the borrower by making it difficult for the Bank to foreclose on collateral, the ultimate security of the Bank is the commercial success of the borrower. Adequate emphasis of business risk is as such more important as analysis of security risk. The FSRP has designed the LRA package, which provides a systematic procedure for analyzing and quantifying the potential credit risk. Bangladesh Bank has directed the


commercial Banks to use LRA for evaluating credit proposals amounting Tk 1.00 crore and above. Experienced people of the credit department of PBL do this sort of analysis. It is a ranking whose total score are 140. Among this score 120 for total business risk and 20 for total security risk. It is a four-scale rating. In case of business risk, if the point falls between 13 to 19 then poor risk; if the score falls between 20 to 26 then acceptable risk; if the score falls between 27 to 34 then marginal risk and if the score is over 34 then good risk. In case of security risk, if the score falls between –20 to –15 then poor risk; if the score falls between –14 to 0 then acceptable risk; if the score falls between 0 to 10 then marginal risk and if the score is over 10 then good risk. In LRA, the following aspects are analyzed— •

Supplies Risk,

Level of managerial teamwork,

Sales Risk,

Management Competent Risk,

Performance Risk,

Security Control Risk, and

Resilience Risk,

Security Cover Risk.

Management ability,

Organogram of Credit Department, Motijheel Branch:

M d .S h a h id u r R a h m a n K h a n AVP In c h a rg e C re d it D e p a rtm e n t

E x e c u tiv e O ffic e r

E x e c u tiv e O ffic e r

S e n io r O ffic e r

S e n io r O ffic e r

J u n io r O ffic e r

J u n io r O ffic e r

J u n io r O ffic e r

J u n io r O ffic e r


Findings and Recommendation Major Findings of the Study •

With a view to improving the quality and soundness of loan portfolio, credit risk management methods were updated. The bank is now applying a new system of credit assessment and lending procedures by stricter separation of responsibilities between risk assessment and lending decisions.

The employees of the Bank are young, energetic, cooperative and friendly. Their dealings with the client are cooperative and friendly which creates attractive perception about the bank and interest to do business with the bank.

Prime Bank also gives preferences to local customer through its marketing efforts.

Prime Bank started operation in Bangladesh in 1999. By following prudent corporate marketing and risk management policy, Prime Bank recognized as one of the leading local bank in the country. It has well-established corporate lending and credit risk management process which involves analyzing customers’ need prudently and carefully, analyzing local culture and economy, periodic analysis of industry, offering products in line with customer’s needs and maintaining good asset portfolio. KYC, “Know Your Customer”, is a very important term that is gaining importance day

by day. In lien with this principle, Prime Bank carries out a details analysis before entering onto a relationship. Understanding business type is therefore very important as it assist the bank to structure credit facilities in line with customer’s need. For example, Loan tenor and type for a manufacturing concern should be different from that of the retailers. Prime Bank has a full service capability for corporate operation. This bank is proud to

provide high satisfaction to the customers in the market. Through analyzing the local market and industry, it offering full range of corporate products such as working capital loan, long term loan, project loan, import & export loan, treasury etc. in line with local needs. •

Prime Bank’s credit evaluation process for corporate customers involves an assessment

of the customer’s business operations and strength in order to identify and understand the current and potential operating and financial risks. Before approving any credit proposal, the bank carry out a very detailed financial analysis as it helps to identify and quantify the customer’s financial risks and prompt questions about possible operating risk.


A doctor whose patient complaint of a severe headache does not prescribe paracetamol on the theory that all headaches are the same. A doctor determines the cause of the headache and treats the ailment found. In lending, banker plays the role of doctor when the customer complains of a “cash ache”. Prime Bank has a well-defined products structuring policy. According the needs and on the basis of business cash cycle, the bank structure and offer the products to the customer. In report, we have seen number of reasons for borrowing such as borrowing caused by sales growth(both short and long term), borrowing caused by slowdown in the operating cycle, borrowing caused by purchase/replacement of fixed assets.

The most common finance that the bank grants is for the short term working capital of a business. This finance is usually provided by way of overdraft. However, it is always difficult to identify precisely how funds are being used from an overdraft because the customer can easily divert them to take advantage of other opportunities which the original facility was not designed to meet.

Understanding industry is indeed a very crucial aspect of corporate lending. This bank can identify potential area of lending through analyzing various industries. Apart from identifying prospective sector, industry analysis also assist a bank in detecting opportunity and risk associated with specific borrower its corporate banking department carry out industry analysis on a regular basis and set strategy accordingly.

Economic conditions, political stability, government policy, demographic statistics, social aspect, regulatory framework, ethnic mixes are the major issues that mainly evaluated by Prime Bank. In line with changes of these environmental issues, the bank changes its lending policy.

Identification

Some

Problems

regarding

Credit

Risk

Management Proper Credit Management is the most important function of any Bank. But the credit management activities suffer from some kinds of problems that are learnt from discussion with officers, clients and also problems identified from the job observations. The problems are as follows: Lack of Deposit for Credit Extensions Discussion with officers of the Head Office revealed that if the bank collects more deposit, it would be able to advance credit to more viable projects.


Mentally of not to repay the loan A culture has been developed among the common people that bank loans need not to be repaid. Defective Legal System Existing bad legal system is another greatest blow and curse to the credit management system and alarming factor recovering loan from defaulter. In reality it is very difficult, lengthy and expensive to have a verdict in favor of the bank. Delay in Loan Sanction Lengthy process of loan sanction or delay is a common problem of credit management. Higher Rate of Interest for Credit Clients generally complain that rate of interest for various type of credit are quite high. In many cases productivity from loaned investment is inadequate that borrower become incapable in repaying loan. Changes in Policies Due to changes in the export, import, foreign exchange policy as well as monetary and fiscal long term financing suffer a lot. Irregularity in Providing Loan Usually Banks are responsible to provide loan to those who are eligible for the loan. But in reality, small investors do not get the loan easily. They have to fulfill more terms and conditions than those who have greater influence in the business community. RECOMMENDATIONS Based on the evaluation of different aspects of the credit process of Prime Bank, the following recommendations have been made: •

In the face of competitive and borrower dominated credit scenario Prime Bank must come up with innovative loan products to meet up the demand of time. In this connection Prime Bank can focus on some more loan products like: •

Leasing

Education loan

Apartment loan

Credit card

Marriage loan


To combat the problem of mobilizing deposit in the form of credit, Prime Bank should focus on intensive marketing effort.

Entrepreneurship lending should be given due emphasis.

As borrower selection is the key to successful lending, Prime Bank should focus on the selection of true borrower. But at the same time it must be taken into account that right borrower selection does not mean that Prime Bank has to adopt conservative lending policy but rather it means that compliance with the KYC or Know Your Customer to ascertain the true purpose of the loan.

Care should also be taken so that good borrowers are not discarded due to strict adherence to the lending policy.

At the branch level credit department must be adequately capable of collecting the correct and relevant information and analyzing the financial statements quickly and precisely.

Credit officer must be skilled enough to understand the manipulated and distorted financial statements.

Credit committees at all levels must work in co-ordination with each other for quick approval of loans and to reduce the loan processing cost.

To expedite the lending process, board credit committee meeting should be held twice a month instead of once a month.

Monitoring of a loan should be conducted at regular interval to enhance the borrower is properly maintaining the mortgage property and utilizing the borrowing money. The bank should benchmark the monitoring techniques practiced by the successful and established banks in Bangladesh. It should take the counseling service from the experienced expatriate to further improve the monitoring techniques. Furthermore it should also aware of the monitoring techniques adopted by the established banks around the world.

In case of mortgage, care must be taken to accept collateral on second charge.

In case of assignment the bank must ensure that the assignment debtor has given undertaking.

Reporting of all loans should be periodically made to Bangladesh Bank

Loan monitoring is a continuous task and requires expert manpower. Therefore it is suggested that Prime Bank should set up a separate loan monitoring cell, which will be responsible for monitoring its total loan portfolio with special care to the problem loan.


During 2005, the entire economy’s growth was increased to 5.5%, which helped the banking industry to widen their business at different sectors. The success of banks depends on how effectively they can deliver their services to the customers and earn maximum amount of profit. Hence, to achieve the objective of credit services the monitoring techniques should be updated and the assessment financial information provided by the customers should be done carefully.

Profile for Md Papon

Credit facilities of prime bank limited  

One of the two primary functions of a commercial bank is to extend credit to the deficit economic unit that comprises borrowers of all types...

Credit facilities of prime bank limited  

One of the two primary functions of a commercial bank is to extend credit to the deficit economic unit that comprises borrowers of all types...

Profile for md.papon
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