Contents
What is a Syndicated Loan?
1. Arranging bank
2. Agent
3. Trustee
Advantages of a Syndicated Loan
Project Appraisal
Market Appraisal:
Technical Appraisal:
Financial Appraisal:
Economic Appraisal:
Managerial Appraisal:
The Credit Risk Grading
A Financial Sensitivity Analysis
Microcredit Regulatory Authority (MRA)
Microcredit in Bangladesh
Rural Bank Considerations
What Is the Debt-To-Equity Ratio – D/E?
Loan write off
Indicators of problem loan
Difference between Lending Risk Analysis (LRA) and Credit Risk Grading (CRG)\
New notes
1. Define Term Loan
2. Why the private commercial banks discourage to consider long term loans
3. What is Working Capital Loan
4. Distinguish between working capital (W/C) and cash credit (CC) loan
Working Capital Loan
Cash Credit Loan
5. Define Working Capital.
6. Discuss the Significance/Importance of working capital for a firm.
7. Importance of working capital loan for running an agro-industrial project
8. How would you assess the working capital requirement of poultry industry?
9. Explain the factors affecting working capital requirement. (Need Details)
10. Explain different sources of financing working capital.
11. Define permanent working capital and variable working capital.
12. Explain the difference between variable working capital and permanent working capital.
Permanent Working Capital
Temporary Working Capital
13. What do you mean by mortgage, pledge & hypothecation? Dec-2013
Pledge:
Hypothecation:
14. Distinguish between mortgage & pledge?
Mortgage
Pledge
15. As a banker between pledge & hypothecation, which one you will prefer? Justify in favor of your argument. Dec-2013
16. Distinguish between mortgage, pledge & hypothecation
17. Distinguish between term credit and short-term credit
18. Why do the private commercial banks prefer short term lending Or, Advantages of Short-Term Financing
19. What is SME Finance & Agricultural Finance
SME Financing:
Cottage Industry
Agricultural Finance:
20. What is Credit Planning? Dec-2013
21. What factors are to be taken into consideration by a bank while making a credit planning?
22. List down the minimum eligibility criteria to be fulfilled by borrower to obtain loan
23. What is a Project?
25. What do you mean by a project & project appraisal?
26. During appraisal of a project loan proposal what factors does a banker take into consideration?
27. Mr. Abdul Ali, and enterprise of your branch area has applied for a
1. About the applicant:
2. About the enterprise:
3. About the security (calculating maximum credit limit):
4. About the credit needs:
5. About the income and expense i.e. profitability:
6. About the marketing:
7. Recommendation:
28. Difference between Lending Risk Analysis (LRA) and Credit Risk Grading (CRG)
Lending Risk Analysis (LRA)
Credit Risk Grading (CRG)
29. The risks factors those can make an industry sick. How each factor accelerates the sickness?
30. What do you mean by Asset-Liability Management (ALM)?
31. Do you agree that the absence of good ALM of a bank may lead to different crisis to jeopardize the image and soundness of the bank?
33. What do you know about ALCO?
34. Do you think each commercial bank should form ALCO?
35. Roles and responsibilities of Asset-Liability Management Committee (ALCO) of a Bank
36. Define Credit Risk Grading (CRG) Dec-2013
37. Function of Credit Risk Grading
38. What is the uses/ purpose/ importance of CRG? Dec-2013
41. Why core risk management is getting so much highlighted for proper financing of a bank
42. What is provisioning? Discuss the basis of determining the status of classified loans and advances.
Provisioning:
44. It is due to the increase of classified loans of the bank, that they are now facing liquidity problems and the borrower inter-bank call money at very high rate. Justify the viewpoint.
45. Distinguish between loan interest remission and loan write off. Between these two which one is beneficial for that Bank? Discuss.
46. List down the preconditions those required to be fulfilled by a borrower for availing write off consideration
47. Distinguish between Money Market & Capital Market
48. Can increased call money rate influence the capital market? Elaborate with example.
49. What do you mean by SEC?
50. Functions of SEC
51. Do you think that SEC is performing its role properly by monitoring and controlling capital market of our country? Pass your comments.
52. What is Fund Flow
56. Write-Off and Re-scheduling
Write-Off
Definition of 'Debt Rescheduling'
61. Factors affecting while assessing a loan proposal
62. In competitive market, which of the variable and fixed pricing as banker you would advocate?
63. Discuss different types of credit facilities that a commercial bank can provide to its clients.
64. Why credit-worthiness of an applicant is assessed?
65. Credit Facilities Available in Banks.
67. Suppose against a loan proposal of your branch, the head office of the bank has sanctioned a loan of taka 1.00 (one) crore against a mixed farm (Agriculture, poultry, fishery and dairy farm). You were advised by head office to disburse the loan after due documentation.
68. A project loan is treated as a term loan. Discuss why. Discuss the risks you anticipate in such financing.
69. Agricultural Finance
What is a Syndicated Loan?
A
syndicated loan is offered by a group of lenders who work together to provide
credit to a large borrower. The borrower can be a corporation, an individual
project, or a government. Each lender in the syndicate contributes part of the
loan amount, and they all share in the lending risk. One of the lenders act as
the manager (arranging bank), which administers the loan on behalf of the other
lenders in the syndicate. The syndicate may be a combination of various types
of loans, each with different repayment terms that are agreed upon during
negotiations between the lenders and the borrower.
Loan
syndication occurs when a single borrower requires a large loan ($1 million or
more) that a single lender may be unable to provide, or when the loan is
outside the scope of the lender’s risk exposure. The lenders then form a
syndicate that allows them to spread the risk and share in the financial
opportunity that may be too large for their individual capital base. The
liability of each lender is limited to their share of the total loan. The
agreement for all members of the syndicate is contained in one loan agreement.
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Participants
in a Syndicated Loan
Those
who participate in loan syndication may vary from one deal to another, but the
typical participants include the following:
1.
Arranging bank
The
arranging bank is also known as the lead manager and is mandated by the
borrower to organize the funding based on specific agreed terms of the loan.
The bank must acquire other lending parties who are willing to participate in
the lending syndicate and share the lending risks involved. The financial terms
negotiated between the arranging bank and the borrower are contained in the
term sheet.
The
term sheet details the amount of the loan, repayment schedule, interest rate,
duration of the loan and any other fees related to the loan. The arranging bank
holds a large proportion of the loan and will be responsible for distributing
cash flows among the other participating lenders.
2. Agent
The
agent in a syndicated loan serves as a link between the borrower and the
lenders and owes a contractual obligation to both the borrower and the lenders.
The role of the agent to the lenders is to provide them with information that
allows them to exercise their rights under the syndicated loan agreement.
However, the agent has no fiduciary duty and is not required to advise the
borrower or the lenders. The agent’s duty is mainly administrative.
3. Trustee
The
trustee is responsible for holding the security of the assets of the borrower
on behalf of the lenders. Syndicated loan structures avoid granting the
security to the individual lenders separately since the practice would be
costly to the syndicate. In the event of default, the trustee is responsible
for enforcing the security under instructions by the lenders. Therefore, the
trustee only has a fiduciary duty to the lenders in the syndicate.
Advantages of a Syndicated Loan
1.
Less
time and effort involved
The
borrower is not required to meet all the lenders in the syndicate to negotiate
the terms of the loan. Rather, the borrower only needs to meet with the
arranging bank to negotiate and agree on the terms of the loan. The arranger
then does the bigger work of establishing the syndicate, bringing other lenders
on board, and discussing the loan terms with them to know how much credit each
lender will contribute.
2.
Diversification of loan terms
Since
the syndicated loan is contributed by multiple lenders, the loan can be in
different types of loans and currencies. The varying loan types offer different
types of interest such as fixed or floating interest rates, which makes it
flexible for the borrower. Also, borrowing in different currencies protects the
borrower from currency risks resulting from external factors such as inflation
and government laws and policies.
3.
Large amount
Loan
syndication allows borrowers to borrow large amounts to finance
capital-intensive projects. A large corporation or government can borrow a huge
loan to finance large equipment leasing, mergers, and financing transactions in
telecommunications, petrochemical, mining, energy, transportation, etc. A
single lender would be unable to raise funds to finance such projects, and
therefore, bringing several lenders to provide the financing makes it easy to
carry out such projects.
4.
Positive reputation
The
participation of multiple lenders to finance a borrower’s project is a
reinforcement of the borrower’s good market image. Normally, lenders would be
unwilling to lend to a borrower with poor credit history because it exposes
them to higher lending risks. Borrowers that successfully paid syndicated loans
in the past elicit a positive reputation among lenders, which makes it easy for
them to access credit facilities from financial institutions in the future.
Project
Appraisal
Financial
institutions appraise a project from the marketing, technical, financial,
economic and managerial angles. The principal issues considered and the
criteria employed in such appraisal are discussed below in this article.
Market
Appraisal:
The
importance of the potential market and the need to develop a suitable marketing
strategy cannot be over emphasized. Hence efforts are made to:
Examine
the reasonableness of the demand projections by utilizing the findings of
available surveys, industry association projections, Planning Commission
projections, and independent market surveys (which may sometimes be
commissioned).
Assess
the adequacy of the marketing infrastructure in terms of promotional effort,
distribution network, transport facilities, stock levels etc.
Judge
the knowledge, experience, and competence of the key marketing personnel.
Technical
Appraisal:
The
technical review done by financial institutions of focuses mainly on the
following aspects:
1.
Product mix
2.
Capacity
3.
Process
4.
Engineering know-how and technical collaboration
5.
Raw materials and consumables
6.
Location and site
7.
Building
8.
Plant and equipments
9.
Manpower requirements
10.
Break-even point.
The
technical review is done by qualified and experienced personnel available in
the institutions and/or outside experts (particularly where large and
technologically sophisticated projects are involved).
Financial
Appraisal:
The financial appraisal seeks to assess the
following:
Reasonableness
of the Estimate of capital Cost: While assessing the capital cost estimates,
efforts are made to ensure that
(1)
Padding or under-estimation of costs is avoided,
(2)
Specification of machinery is proper,
(3)
Proper quotations are obtained from potential suppliers,
(4)
Contingencies are provided for, and
(5)
Inflation factors are considered.
Reasonableness
of the Estimate of Working Results: The estimate of working results is sought
to be based on (1) a realistic market demand forecast, (2) price computations
for inputs and outputs that are based on current quotations and inflationary
factors, (3) an approximate time schedule for capacity utilization, and (4)
cost projections that distinguish between fixed and variables costs.
Adequacy
of rate of return:
The
general norms for financial desirability are as follows:
Internal
rate of return: 15 percent
Return
on investment: 20-25 per cent after tax
Debt
service coverage ratio: 1.5 to 2.0
In
applying these norms, however, a certain amount of flexibility is shown on the
basis of the nature of the project, the risks inherent in the project, and the
status of the promoter.
Appropriateness
of the Financing Pattern: The institutions consider the following in assessing
the financial pattern.
1.
A general debt equity ratio norm of 1:1
2.
A requirement that promoters should contribute a certain percentage of the
project cost.
3.
Stock exchange listing requirements.
4.
The means of the promoter and is capacity to contribute a reasonable share of
the project finance.
Economic
Appraisal:
The
economic appraisal looks at the project from the larger social point of view.
The methodology adopted by financial institutions for the purpose of economic
evaluation (also referred to as social cost benefit analysis) is labeled as
Partila Little Mirrlees approach. In addition to the calculation of the
economic rate of return as per this approach to the calculation of the economic
rate of return as per this approach, they also look at two other economic
indicators: (1) effective rate of protection, and (2) domestic resources cost.
Admittedly, the economic review done by financial institutions is not very
rigorous and sophisticated. Also, the emphasis placed on this review has
diminished. Now it is hardly done.
Managerial
Appraisal:
In
order to judge the managerial capability of the promoters, the following
questions are raised:
1.
How resourceful are the promoters?
2.
How sound is the understanding of the project by the promoters?
3.
How committed are the promoters?
Resourcefulness:
This is judged in terms of the prior experience of the promoters, the progress
achieved in organizing various aspects of the project, the skill with which the
project is presented and the ability to raise committed capital and unforeseen
shortfall financing.
Understanding:
This is assessed in terms in terms of the credibility of the project plan
(including, interalia, the organization structure, the staffing plan the
estimated costs, the financing pattern, the assessment of various inputs, and
the marketing programs) and the details furnished to the financial
institutions.
The Credit
Risk Grading
Credit
risk is the primary financial risk in the banking system. Identifying and
assessing credit risk is essentially a first step in managing it effectively.
In 1993, Bangladesh Bank as suggested by Financial Sector Reform Project (FSRP)
first introduced and directed to use Credit Risk Grading system in the Banking
Sector of Bangladesh under the caption “Lending Risk Analysis (LRA)”. The
Banking sector since then has changed a lot as credit culture has been shifting
towards a more professional and standardized Credit Risk Management approach.
Credit
Risk Grading system is a dynamic process and various models are followed in
different countries & different organizations for measuring credit risk.
The risk grading system changes in line with business complexities. A more
effective credit risk grading process needs to be introduced in the Banking
Sector of Bangladesh to make the credit risk grading mechanism easier to implement.
Keeping
the above objective in mind, the Lending Risk Analysis Manual (under FSRP) of
Bangladesh Bank has been amended, developed and re-produced in the name of
“Credit Risk Grading Manual”. With the
world moving towards Basle II the need to introduce a RGS for the industry is
essential. In 2003, BB made the Core Risk Management Guidelines (CRMG)
mandatory.
The
Credit Risk Grading Manual has taken into consideration the necessary changes
required in order to correctly assess the credit risk environment in the
Banking industry. This manual has also been able to address the limitations
prevailed in the Lending Risk Analysis Manual.
All
Banks should adopt a credit risk grading system outlined in this manual. Risk
grading is a key measurement of a Bank’s asset quality, and as such, it is
essential that grading is a robust process.
1.1
Introduction
Credit
risk grading is an important tool for credit risk management as it helps the
Banks & financial institutions to understand various dimensions of risk
involved in different credit transactions. The aggregation of such grading
across the borrowers, activities and the lines of business can provide better
assessment of the quality of credit portfolio of a bank or a branch. The credit
risk grading system is vital to take decisions both at the pre-sanction stage
as well as post-sanction stage.
At
the pre-sanction stage, credit grading helps the sanctioning authority to
decide whether to lend or not to lend, what should be the loan price, what
should be the extent of exposure, what should be the appropriate credit
facility, what are the various facilities, what are the various risk mitigation
tools to put a cap on the risk level.
At
the post-sanction stage, the bank can decide about the depth of the review or
renewal, frequency of review, periodicity of the grading, and other precautions
to be taken.
Having
considered the significance of credit risk grading, it becomes imperative for
the banking system to carefully develop a credit risk grading model which meets
the objective outlined above.
The
Lending Risk Analysis (LRA) manual introduced in 1993 by the Bangladesh Bank
has been in practice for mandatory use by the Banks & financial
institutions for loan size of BDT 1.00 corer and above. However, the LRA manual
suffers from a lot of subjectivity, sometimes creating confusion to the lending
Bankers in terms of selection of credit proposals on the basis of risk
exposure. Meanwhile, in 2003 end Bangladesh Bank provided guidelines for credit
risk management of Banks wherein it recommended, interlaid, the introduction of
Risk Grade Score Card for risk assessment of credit proposals.
Since
the two credit risk models are presently in vogue, the Governing Board of
Bangladesh Institute of Bank Management (BIBM) under the chairmanship of the
Governor, Bangladesh Bank decided that an integrated Credit Risk Grading Model
be developed incorporating the significant features of the above mentioned
models with a view to render a need based simplified and user friendly model
for application by the Banks and financial institutions in processing credit
decisions and evaluating the magnitude of risk involved therein.
Bangladesh
Bank expects all commercial banks to have a well-defined credit risk management
system which delivers accurate and timely risk grading. This manual describes
the elements of an effective internal process for grading credit risk. It also
provides a comprehensive, but generic discussion of the objectives and general
characteristics of effective credit risk grading system. In practice, a bank’s
credit risk grading system should reflect the complexity of its lending
activities and the overall level of risk involved.
A
Financial Sensitivity Analysis
What
Is Sensitivity Analysis?
A
sensitivity analysis determines how different values of an independent variable
affect a particular dependent variable under a given set of assumptions. In
other words, sensitivity analyses study how various sources of uncertainty in a
mathematical model contribute to the model's overall uncertainty. This
technique is used within specific boundaries that depend on one or more input
variables.
Sensitivity
analysis is used in the business world and in the field of economics. It is
commonly used by financial analysts and economists, and is also known as a
what-if analysis.
KEY
TAKEAWAYS
A
sensitivity analysis determines how different values of an independent variable
affect a particular dependent variable under a given set of assumptions.
This
model is also referred to as a what-if or simulation analysis.
Sensitivity
analysis can be used to help make predictions in the share prices of
publicly-traded companies or how interest rates affect bond prices.
Sensitivity
analysis allows for forecasting using historical, true data.
How
Sensitivity Analysis Works
Sensitivity
analysis is a financial model that determines how target variables are affected
based on changes in other variables known as input variables. This model is
also referred to as what-if or simulation analysis. It is a way to predict the
outcome of a decision given a certain range of variables. By creating a given
set of variables, an analyst can determine how changes in one variable affect
the outcome.
Both
the target and input—or independent and dependent—variables are fully analyzed
when sensitivity analysis is conducted. The person doing the analysis looks at
how the variables move as well as how the target is affected by the input
variable.
Sensitivity
analysis can be used to help make predictions in the share prices of public
companies. Some of the variables that affect stock prices include company
earnings, the number of shares outstanding, the debt-to-equity ratios (D/E),
and the number of competitors in the industry. The analysis can be refined
about future stock prices by making different assumptions or adding different
variables. This model can also be used to determine the effect that changes in
interest rates have on bond prices. In this case, the interest rates are the
independent variable, while bond prices are the dependent variable.
Investors can also use sensitivity analysis to
determine the effects different variables have on their investment returns.
Sensitivity
analysis allows for forecasting using historical, true data. By studying all
the variables and the possible outcomes, important decisions can be made about
businesses, the economy, and about making investments.
Sensitivity
Analysis
Example
of Sensitivity Analysis
Assume
Sue is a sales manager who wants to understand the impact of customer traffic on
total sales. She determines that sales are a function of price and transaction
volume. The price of a widget is $1,000, and Sue sold 100 last year for total
sales of $100,000. Sue also determines that a 10% increase in customer traffic
increases transaction volume by 5%. This allows her to build a financial model
and sensitivity analysis around this equation based on what-if statements. It
can tell her what happens to sales if customer traffic increases by 10%, 50%,
or 100%. Based on 100 transactions today, a 10%, 50%, or 100% increase in
customer traffic equates to an increase in transactions by 5%, 25%, or 50%
respectively. The sensitivity analysis demonstrates that sales are highly
sensitive to changes in customer traffic.
Microcredit
Regulatory Authority (MRA)
Microcredit
Regulatory Authority (MRA) is the central body to monitor and supervise
microfinance operations of non-governmental organizations of the Republic of
Bangladesh. It was created by the Government of People's Republic of Bangladesh
under the Microcredit Regulatory Authority Act (Act no. 32 of 2006). License
from the Authority is mandatory to operate microfinance operation in Bangladesh
as an NGO.
On
September 28, 2012 at the Alliance for Financial Inclusion's Global Policy
Forum 2012, the bank made a commitment under the Maya Declaration to promote
agent and mobile banking, implement consumer protection initiatives, and
establish a credit bureau for the MFI sector.
Microcredit
in Bangladesh
The
microcredit program in Bangladesh is implemented by NGOs, Grameen Bank,
different types of government-owned banks, private commercial banks, and
specialized programs of some ministries of the Bangladesh Government, etc.
Despite the fact that more than a thousand institutions are operating microcredit
programs, only 10 large Microcredit Institutions (MFIs) and Grameen Bank
represent 87% of total savings of the sector (around BD taka 93 billion) and
81% of total outstanding loans of the sector (around BD taka 157.82 billion).
Nearly two hundred thousand people are employed in MFIs and Grameen Bank.
Around 30 million poor people are directly benefiting from microcredit
programs. Through the financial services of microcredit, these poor people are
engaging themselves in various income generating activities. At present,
financial service of BD taka 160 billion (approx.) is being rendered among 30
million poor people which help them to be self-employed which helps to
accelerate the overall economic development process of the country.
Microcredit
institutions have been providing various social and financial services to the
poor to alleviate poverty within the society for the last three decades.
However, they remained outside any central supervisory system. To bring the
microcredit sector under a regulatory framework, the government of Bangladesh
enacted the “Microcredit Regulatory Authority Act, 2006” on July 16, 2006 with
effect from August 27, 2006. The Microcredit Regulatory Authority has been
established under this Act and is empowered and responsible for monitoring and
supervising the microcredit activities of the MFIs. According to the Act, no
MFI can operate microcredit programs without obtaining a licence from MRA.
Within the stipulated period, 4,236 microcredit institutions applied for a
licence. Among them, 335 microcredit institutions have been licensed until
September 2008. Applications by 438 institutions could not be considered. 2,599
small institutions are advised to fulfil minimum criteria of obtaining a
licence (either minimum balance of outstanding loan at field level BD taka four
million or minimum borrower 1,000) within June 2009.
Rural Bank
Considerations
Providing
affordable credit to the rural population has long been a prime component of
development strategy. Governments and donors have sponsored and supported
supply-led rural finance institutions both to improve growth and equity and to
neutralize or mitigate urban-biased macroeconomic policies. But because of high
risks, heavy transaction costs, and mounting loan losses, many of the programs
have drained state resources to little purpose, reaching only a small part of
the rural population and making little progress toward self-sustainability.
There are, however, a few success stories.
What Is
the Debt-To-Equity Ratio – D/E?
The
debt-to-equity (D/E) ratio is calculated by dividing a company’s total
liabilities by its shareholder equity. These numbers are available on the
balance sheet of a company’s financial statements.
The
ratio is used to evaluate a company's financial leverage. The D/E ratio is an
important metric used in corporate finance. It is a measure of the degree to
which a company is financing its operations through debt versus wholly-owned
funds. More specifically, it reflects the ability of shareholder equity to
cover all outstanding debts in the event of a business downturn.
The
debt-to-equity ratio is a particular type of gearing ratio.
D/E
Ratio Formula and Calculation
The
information needed for the D/E ratio is on a company's balance sheet. The balance
sheet requires total shareholder equity to equal assets minus liabilities,
which is a rearranged version of the balance sheet equation:
These
balance sheet categories may contain individual accounts that would not
normally be considered “debt” or “equity” in the traditional sense of a loan or
the book value of an asset. Because the ratio can be distorted by retained
earnings/losses, intangible assets, and pension plan adjustments, further
research is usually needed to understand a company’s true leverage.
Examples
of the Debt to Equity Ratio
Melissa
Ling {Copyright} Investopedia, 2019.
Because
of the ambiguity of some of the accounts in the primary balance sheet
categories, analysts and investors will often modify the D/E ratio to be more
useful and easier to compare between different stocks. Analysis of the D/E
ratio can also be improved by including short-term leverage ratios, profit
performance, and growth expectations.
Loan write
off
Banks
write off bad debt that is declared non collectable (such as a loan on a
defunct business, or a credit card due that is in default), removing it from
their balance sheets. A reduction in the value of an asset or earnings by the
amount of an expense or loss. Companies are able to write off certain expenses
that are required to run the business, or have been incurred in the operation
of the business and detract from retained revenues.
Indicators
of problem loan
How
a Problem Loan Works
Any
loan that cannot easily be recovered from borrowers is called a problem loan.
When these loans can’t be repaid according to the terms of the initial
agreement—or in an otherwise acceptable manner—a lender will recognize these
debt obligations as problem loans.
A
central piece of credit management is the early recognition and proactive
management of distressed loans, which can protect a lender from exposure to
undue risks. Carrying problem loans on their balance sheets can reduce lenders'
cash flow, disrupting budgets and potentially decreasing earnings. Covering
such losses can reduce the capital lenders have available for subsequent loans.
Lenders
will try to recoup their losses in a variety of ways. If a company is having
trouble servicing its debt, a lender may restructure its loan to maintain cash
flow and avoid having to classify the loan as a problem loan. On a defaulted
loan, a lender might sell any collateralized assets of the borrower to cover
its losses. Banks can also sell problem loans that are not secured by
collateral or when it isn't cost-effective to recover the losses.
Problem loans, which can expose lenders to
risks, can also represent a lucrative business opportunity for companies that
buy loans from financial institutions at a steep discount.
Special
Considerations of Problem Loans
Many
companies see a business opportunity in acquiring problems and nonperforming
loans. Buying these loans from financial institutions at a discount can be a
lucrative business. Companies regularly pay from 1% to 80% of the total loan
balance and become the legal owner (creditor). This discount depends on the age
of the loan, whether an asset is secured or unsecured, the age of the debtor,
personal or commercial debt classification, and place of residency.
The
subprime mortgage meltdown and 2007-2009 recession led to a rise in the number
of problem loans that banks had on their books. Several federal programs were
enacted to help consumers deal with their delinquent debt, most of which
focused on mortgages. These problem loans often resulted in property
foreclosure, repossession, or other adverse legal actions. Many credit
investors who were willing to ride out the mortgage mess are happy today, as
they sometimes were able to acquire assets for pennies on the dollar.
Difference
between Lending Risk Analysis (LRA) and Credit Risk Grading (CRG)
Lending
Risk Analysis (LRA) is a technique by which the loan risk is calculated by
Credit department of a bank that need to analyze it when loan application is
above 1 crore. The ranking of it is total 140, 120 is for total business risk
and another 20 is for total security risk.
In
LRA, following aspects are analyzed: supplies risk, sales risk, performance
risk, resilience risk, management ability, level of managerial teamwork,
management competent risk, management integrity risk, security control risk,
and security covers risk.
Credit
Risk Grading (CRG) is a collective definition based on the pre-specified scale
and reflects the underlying credit risk for a given exposure. It deploys a number/
symbol as a primary summary indicator of risks associated with a credit exposure.
The
proposed CRG scale consists of 8 categories are as: superior, good, acceptable,
marginal, special mention, sub-standard, doubtful, and bad & loss.
New notes
Lending
Operation and Risk Management
1. Define Term Loan
Term loan
refers to asset
based loan payable
in a fixed
number of equal installments over the term of the loan,
usually for 1 to 5 years. Term loans are generally provided as working capital
for acquiring income producing assets like machinery, equipment, inventory that
generate the cash flows for repayment of the loan. Banks have term-loan
programs that can offer small businesses the cash they need to operate from
month to month.
2. Why the private commercial banks discourage
to consider long term loans
Most
of the time the private commercial banks discourage to finance the long term
loans due to some relative risky and problems. These are:
1)
Lower Rates: Long-term loan normally have lower interest rates than short-term
credits.
2)
Slow Cash Inflow: A long-term debt obligation also prevents the faster cash
inflow.
3)
Risk Involvement: Generally, the level of the interest rate is depends upon the
risk involved with making the loan. In case of default, long-term loan includes
a greater span of time.
4)
Credit turn-over loss: The long-term loan will be paid over a loan period. So
the lender get recovered the amount by a long period as the lender has missed
the rapid credit turn over.
5)
Long term debt is often costly to service
6)
The cost of capital is higher in case of long term debt
3. What is Working Capital Loan
A
working capital loan is a loan used by an organization to cover day-to-day
operational expenses. For example, a company is unable to generate the revenue
to meet expenses incurred by day-to-day operations. In such case, company may
apply for a working capital loan. A working capital loan covers only expenses
incurred by existing capital, human resources, etc.
4. Distinguish between working capital (W/C)
and cash credit (CC) loan
Working
Capital Loan
1.
It is
taken for a certain period like 5 years
2.
Repayment
is made by Equal monthly installment basis
3.
If the
fund is required for purchase of capital assets, then the bank gives the
working capital loan
4.
The
loan amount may pay at ones and repayment is made by monthly basis
5.
It may
be secured by personal guarantee or mortgage of any fixed asset
Cash
Credit Loan
1.
It is
for one year and need to renewed every year
2.
Repayment
is made by only interest or any sum of amount
3.
If the
fund is required for meeting the working capital requirement, then the bank
gives the CC limit
4.
The
payment and repayment is made by day basis
5.
It may
be hypothecated and pledged by stock and
receivables
5. Define Working Capital.
Working
capital signifies money required for day-to-day operations of an organization.
No business can run without the provision of adequate working capital. It has
two types:
1.
Gross
working capital that refers to as working capital means the total current assets;
2.
Net
working capital that the differences between current assets and current
liabilities.
6. Discuss the Significance/Importance of
working capital for a firm.
Working
capital is the life blood for running an organization. It is very essential to
maintain smooth running of a business. The main significance or importances of
working capital are as follows:
1.
Supports as initial partial capital: The working capital can helps to adequate
liquidity to developing a business.
2.
Strengthen the Solvency: It helps to operate the smooth flow of production and
business without any financial problem for making the payment of short-term
liabilities.
3.
Enhance the project growth: Sufficient working capital enables to make prompt
payments and helps in creating goodwill.
4.
Easy obtaining finance:
A firm having
adequate working capital,
high solvency and good credit rating can arrange loans from banks in easy
and favorable terms.
5.
Regular supply of raw material: Quick payment of credit purchase of raw materials
ensures the regular supply of raw materials from suppliers.
6.
Smooth business operation:
It maintains a
good shape in
entire developments for a developing project.
7.
Ability to face crisis: In crisis to emergency needs, it enables to meet
working capital requirement for the project.
7.
Importance of working capital loan for running an agro-industrial project
Or,
Importance of working capital loan for running an industrial project Or,
Advantages of Working Capital Loan
Working
capital is the life blood for running an agro/industrial project. It is very
essential to maintain smooth running of a business. The main advantages or
importance of working capital are as follows:
1.
Supports as initial partial capital: The working capital loan can helps to
adequate liquidity to developing agro/industrial project.
2.
Strengthen the Solvency: It helps to operate the smooth flow of production and
business without any financial problem for making the payment of short term
liabilities.
3.
Enhance the project growth: Sufficient working capital enables to make prompt
payments and helps in creating goodwill.
4.
Easy obtaining loan: A firm having adequate working capital, high solvency and
good credit rating can arrange loans from banks in easy and favorable terms.
5.
Regular supply of raw material: Quick payment of credit purchase of raw
materials ensures the regular supply of raw materials from suppliers.
6.
Smooth business operation:
It maintains a
good shape in
entire developments for a developing project.
7.
Ability to face crisis: In crisis to emergency needs, it enables to meet
working capital requirement for the project.
8. How would you assess the working capital
requirement of poultry industry?
Or,
Assessments/ forecast of working capital requirements
The
shortage or surplus of working capital, both are harmful for the organization
especially for poultry industry. So it is important for the assessments of
working capital. The following considerations which is necessary for assessing
the working capital requirement for a poultry industry:
1. The information of estimated production
of poultry business
2. The value of raw material, labor and
overheads for unit or sum of production
3. Time lag in store of raw materials of
poultry product
4. Time lag in production process of
poultry product
5. Stag in the warehouse of finished
product
6. Delivery process of the poultry product
7. Collection period from debtors
8. Credit allowed by suppliers
9. Explain the factors affecting working capital
requirement. (Need Details)
Or,
explain the factors determining the need for working capital.
Or,
describe in brief the various factors which are taken into account in
determining the working capital needs of a firm.
A
firm should have neither low nor high working capital. Low working capital
involves more risk and more returns, high working capital involves less risk
and less returns. The factors determining the needs for of working capital are
below:
1. Nature of the business
2. Size of the business
3. Length of period of manufacture
4. Methods of purchase and sale of
commodities
5. Converting working assets into cash
6. Seasonal variation in business
7. Risk in business
8. Size of labor force
9. Price level changes
10.Rate of turnover
11.State of business activity
12.Business policy
10.
Explain different sources of financing working capital.
The
sources of finance of financing working capital may be four categories. They
are-
1.
Trade
Credit: It is the primary sources that trade credit make up the important source
for a sum of the total working capital.
2.
Bank
Credit: The banks determine the maximum credit based on the margin requirements
of the security. The forms of bank credit are Loan and overdraft arrangement,
cash credit, bills purchase and bills discounted.
3.
Non-bank
Short Term Borrowing: These types of loan are found from relatives, friends,
head office or project office etc.
4.
Long-term
Sources: It comprises equity capital and long-term borrowings.
11. Define
permanent working capital and variable working capital.
Permanent
Working Capital is to carry on business a certain minimum level of working
capital is necessary on a continuous and uninterrupted basis. For all practical
purposes, this requirement will have to be met permanently as with other fixed
assets. This requirement is referred to as permanent working capital.
Temporary
Working Capital is refers to any amount over and above the permanent level of
working capital is temporary, fluctuating or variable working capital. This
portion of the required working capital is needed to meet fluctuations in
demand consequent upon changes in production and sales as result of seasonal changes.
12.
Explain the difference between variable working capital and permanent working
capital.
Permanent
Working Capital
1)
A certain minimum level of level of working capital is necessary to amount
carry the business
2)
It is necessary on a continuous necessity and uninterrupted basis
3)
This requirement will have to necessity be met permanently
4)
The working capital cost and working capital investment is constant
5)
It make the minimum outcome level of firm
as well as growth of the firm
Temporary
Working Capital
1.
Any
amount over and above the permanent level of working capital is needed
2.
Temporarily
required in case of increase of production and sales
3.
The
necessity in on fluctuating or variable position
4.
The
working capital cost and investment is variable
5.
It
make a extra ordinary production outcome of the firm
13. What
do you mean by mortgage, pledge & hypothecation? Dec-2013
Mortgage: Mortgage is a type of charge related to
immovable property. Immovable property shall include land, benefits to arise
out of land and things attached to the earth or permanently fastened to anything
attached to the earth. It does not include standing timber, growing crops or
grass.
Pledge:
Pledge
arises when the lender (pledgee) takes possession of either the goods or bearer
securities for extending a credit facility to the borrower (pledgor). The
pledgee can retain the possession of the goods until the pledgor repays the
entire debt amount and in case of a default, the pledgee has the right to sell
the goods in his possession and adjust its proceeds towards the amount
due.(example Jewel loan).
Hypothecation:
Hypothecation
is a way of creating a charge against the security of movable assets, which is
much similar to pledge.(example purchasing a bike from bank loan). The
possession and the ownership remain with the borrower. Since the possession remains
with the borrower,
he may, at
any time either
create a subsequent charge by way
of pledge over same goods or may sell them. In such cases, the rights of the
pledgee usually super cedes the rights of the person in whose favor the goods
were hypothecated, if the fact of existence of such a charge is not known to
the subsequent pledgee.
14.
Distinguish between mortgage & pledge?
The
differences between a mortgage and a pledge:
Mortgage
1
Mortgaged
is an immovable property
2
The
property is transferred to lender
3
Possession
of property will be with custody
4
Mortgagee
can sell only with the authority to permission of the Court sell property
5
A
mortgagee has the right of foreclosure that restrict the borrower from taking
back the property under certain circumstances
Pledge
1.
Pledged
is a movable property
2.
The
property remains to pledger
3.
Goods
delivered by the pledger will be in lender
4.
Lender
can sell without the intervention of the Court
5.
A
pledgee does not have the right of foreclosure that cannot restrict the pledger
from taking back the property
15. As a
banker between pledge & hypothecation, which one you will prefer? Justify
in favor of your argument. Dec-2013
Hypothecation
is a form of security in which the borrower offers assets owned by him like
stocks, bonds, other movable assets as collateral security for loan without
transferring title to the lender.
However,
the lender gets a right to sell the property in the event of default made by the
borrower.
Pledge
is also a form of security to assure that a person will repay a debt under
contract. In Pledge borrower temporarily gives possession of the property to
the lender that also gets a right to sell the property in the case of default
the loan.
16.
Distinguish between mortgage, pledge & hypothecation
Mortgage:
Mortgage
is a type of charge related to immovable property. Immovable property shall
include land, benefits to arise out of land and things attached to the earth or
permanently fastened to anything attached to the earth. It does not include
standing timber, growing crops or grass.
Pledge:
Pledge arises when the lender (pledgee) takes possession of either the goods or
bearer securities for extending a credit facility to the borrower (pledgor). The
pledgee can retain the possession of the goods until the pledgor repays the entire
debt amount and in case of a default, the pledgee has the right to sell the goods
in his possession and adjust its proceeds towards the amount due.(example
Jewel
loan)
Hypothecation:
Hypothecation is a way of creating a charge against the security of movable
assets, which is much similar to pledge. (Example purchasing a bike from bank
loan). The possession and the ownership remain with the borrower. Since the
possession remains with the borrower, he may, at any time either create a
subsequent charge by way of pledge over same goods or may sell them. In such
cases, the rights of the pledgee usually supersedes the rights of the person in
whose favor the goods were hypothecated, if the fact of existence of such a
charge is not known to the subsequent pledgee.
17.
Distinguish between term credit and short-term credit
Term
Credit
1.
A form
of finance that have a small, mid or
long repayment schedule
2.
1 to 5
years, in some cases it may be 20 years
3.
competitively
marginal or low rate interest rate
4.
Some
complex to lending except complexity
5.
short-term
lending
6.
Marginal
profit
7.
Marginal
or high risk
8.
Loan
limit is more
Short
Term Credit
1.
A form
of finance that have a short repayment
schedule
2.
1 or
less than 1 year
3.
competitively
high rate
4.
Easy
to lending
5.
High
margin of profit Low risk
6.
Small
Loan limit
18. Why do
the private commercial banks prefer short term lending Or, Advantages of
Short-Term Financing
a.
Easier
to provide: Banks can provide short-term credit more easily within the minimum
functionality than long-term credit.
b.
Higher
interest: Banks may impose the higher interest rate due to small amount of
credit with the minimum or security less financing.
c.
Rapid
turn-over of capital: The capital investment is turning over rapidly and it
make chance to further investment
d.
Minimum
cost of capital: Whether, the short-term credit makes the rapid turn-over of
capital investment, thus it may reduce the cost of capital.
e.
Minimum
risks: Due to minimum time frame, the repayment of loan may cover in earlier.
Thus, the risk is lesser than the long term credit.
f.
Easy
control over the customers: Banks can overlook more easily to the short-term
borrowing customers than the long-term borrower.
g.
Flexibility
to lend: It is more flexible in the sense that the banks lends as the borrowers
are needed and repay then in due time.
h.
Minimum
complexity: The maintenance and supports of further credit procedures is simple
than long-term finance.
i.
Fund
availability: In many cases, commercial banks prefer to maximize the fund
availability particularly small enterprises.
19. What
is SME Finance & Agricultural Finance
Or,
Define SME Credit with reference to BB’s given Definition Dec-2013
SME Financing:
SME
finance is the funding of small and medium sized enterprises, and represents a
major function of the general business finance market - in which capital for
different types of firms are supplied, acquired, and priced. Capital is supplied
through the business finance market in the form of bank loans and overdrafts;
leasing and hire-purchase arrangements; equity/corporate bond issues; venture
capital or private equity; and asset-based finance such as factoring and invoice
discounting. SMEs are vital for economic growth and development in both industrialized
and developing countries, by playing a key role in creating new jobs. Small
businesses are particularly important for bringing innovative products or
techniques to the market.
Cottage Industry <0.05
<10
An industry
or enterprise can be treated
as that category
one following a benchmark but the same can fall under
higher category if another benchmark is considered. In that case it will be
treated as higher category industry.
A
woman, who owns a private firm or she holds minimum 51% stake in firm run
jointly or registered, will be treated as women entrepreneur.]
Agricultural Finance:
Agricultural credit is a financial term that refers to loans and other types of
credit extended for agricultural purposes. Agricultural credit systems promote
the expansion and continued survival of farm and livestock operations, covering
the entire agricultural value chain - input supply, production and
distribution, wholesaling, processing and marketing.
Banks
lend to farmers for a variety of purposes, including
(1) Short-term credit to cover operating
expenses;
(2) Intermediate credit for investment in
farm equipment and real estate improvements;
(3) Long-term credit for acquisition of
farm real estate and construction financing; and
(4) debt repayment and refinancing.
20. What is Credit Planning? Dec-2013
A
credit planning is to set out procedures for defining and measuring the
credit-risk exposure within the Group and to assess the risk of losses
associated with credit extended to customers, financial investments and
counterparty risks with respect to derivative instruments. The main aspects of
a credit planning are-
1)
the terms and conditions on credit,
2)
customer qualification criteria,
3)
procedure for making collections, and
4)
steps to be taken in case of customer delinquency.
21. What factors are to be taken into consideration
by a bank while making a credit planning?
Or,
Discuss the important components those are to be taken in consideration in
formulating the lending operational policy of a bank. [Two Answer]
An
effective Credit planning should include the following considerations:
Objectives of the credit function
Opening procedures and obtaining information for new accounts Assessing &
evaluating the proposals
Terms and conditions
Authority levels and responsibilities Invoicing procedures
Monitoring borrowing and paying behavior of customer
Procedure relating to complaints and disputes
Targets, benchmarks, and deadlines for the credit function Defining &
collecting of dues, overdues and bad debts
The
credit planning should be considered by internal and external factors and should
be reviewed on an ongoing process. These are:
Customer’s buying patterns, needs and requests Type of industry
Competitors’ offers
Type of products or services provided to customers Production and warehouse
management
Distribution systems
Credit terms from trade suppliers and the bank’s overdraft limits
Costs of third parties involved, such as factoring, debt collection agencies,
etc.
Answer
Two
The
components that should consider when formulating a lending policy that should
influence to extend credit are discussed below:
A.
Terms of Sale
The
conditions under which a firm sells its goods & services-
1.
The period for which credit is granted: The factors that influence the credit
period are-
a) Predictability
b) Consumer Demand
c) Cost, profitability and standardization
d) Credit risk
e) Size of the account
f)
Completion
2.
The type of credit instrument
3.
Credit Function
a) Running a credit department
b) Chose to contract all or part of credit
to a factor
c) Manage internal credit operations are
insured against default
B.
Credit analysis
Refers
to the process of deciding, it usually involves two steps:
1. Relevant information
a) financial statements
b) credit agency
c) banks credit
d) market good will
2. Credit Worthiness
a) Character
b) Capacity
c) Capital
d) Collateral
3. Credit scoring: The process of
quantifying the probability of default when
granting consumer credit
C.
Collection Policy
Collection
policy is the final factor in
credit policy. Collection policy involves monitory
receivables to spot trouble and obtaining payment on past due accounts.
22. List down the minimum eligibility criteria to be
fulfilled by borrower to obtain loan
1.
Credit-worthiness: These will be treated on behalf of
applicant’s credit history, capacity to repay, collateral value as eligibility
criteria.
2.
Business
and Credit history: The eligibility may be judged by business track records and
also qualifying for the different types of credit history like type of credit
facility, credit limit, repayment records, etc.
3.
Working
capital: The present working capital may be considered that can be thought of
as cash at hand and bank.
4.
Collateral:
Collateral securities which are assets will be evaluated as secured assets and
pledge or hypothecation of inventory.
5.
Keen
money management skills: This includes a solid cash flow, the ability to live,
and skills of keeping accurate and timely financial records.
6.
Earning
power: The earnings of borrower to be given out as loan are some of the
determining factors in granting the loans.
7.
Ability
to repay: The borrower should have to ability to repay the loans from his
business and personal income.
8.
Experience
and character: The borrower should have experience in business to run that
should have business skills and managerial experience.
23. What is a Project?
A
project is refers to that a temporary group of activity designed to produce a
unique product, service or a result.
A
project has defined by following aspects:
1) It is defined a beginning-end schedule
and approach;
2) Uses the resources to allocated works;
3) Achieves the specific goals within an
organized approach;
4) Usually involves a team of workforce.
25. What do you mean by a project & project
appraisal?
A
project is temporary in that it has a defined beginning and end in time, and
therefore defined scope and resources that are ways of organizing resource. It
is a group of individuals who are assembled to perform different tasks on a
common set of objectives for a defined period of time.
A
Project appraisal is refers to the process of assessing, in a structured way,
the case for proceeding with a project that is the effort of calculating a
project's viability.
1.
The processes
of a project
appraisal are-
2.
Initial assessment,
3.
define
problem and long-list,
4.
consult
and short-list,
5.
develop
options, compare and
6.
select
project
26. During appraisal of a project loan proposal what
factors does a banker take into consideration?
Answer
One
The
most important factors to be considered during appraisal of project loan
proposal are as follows:
1. Professional profile: Evaluate the
ability to manage the project that must have the experience, skills,
determination and self-confidence necessary to
successfully carry out the project.
2. Project's viability: It should have a
business plan that is clear, structured and short, but also covers all the
elements of business. It needs to present few years of financial projections as
well as an analysis of market size, market potential and positioning.
3. Financial strength: It will have to know
the personal and business net worth, so bank can judge the ability to meet
financial obligations. Bank will also look at past credit history to gauge the
future.
4. Collateral: Banks often also look for
assets to secure a loan. The collateral ensures the safely lending to the
customer in case of bad-debt arises in future.
Answer
Two
1. Borrower Analysis: Share holding,
reputation, education, experience - success history, net worth, age etc.
2. Industry
Analysis: Position, prospect,
Risk factors, share
in the industry, strength, weakness etc.
3. Supplier/Buyer Risk Analysis
4. Demand Supply position
5. Technical/Infrastructural feasibilities
6. Management Teams Competence
7. Seasonality of demand
8. Debt-Equity Ratio
9. Historical financial analysis Earning,
cash flow, leverage, profitability, etc.
10.Projected Financials Ability to debt
repayment, debt service coverage ratio
11.Allied/ sister concern involved, other
business
12.Pricing: Effective rate of return,
Return on investment.
13.Loan structuring: Amount, tenor,
interest rate, etc.
14.Security: Guarantee/s,
Un-dated/ Post-dated cheque
with IGPA, collateral security, etc.
15.Adherence to Bank’s credit policy &
guidelines
16.Mitigating Factors i.e. risk factors
17.Environmental factor.
18.Employment generation and contribution
to the national economy.
27. Mr. Abdul Ali, and enterprise of your branch
area has applied for a
loan of Tk. 20.00 lac to establish a
nursery project to your branch, Please
write an appraisal report of the loan proposal explaining the following points: 1) About the Applicant,
2) About the enterprise, 3)
About
the security (calculating maximum credit limit), 4) About the credit needs, 5)
About the income and expenses i.e. profitability, 6) About the marketing, and 7) Recommended loan
amount.
1. About
the applicant:
Mr.
Abdul Ali, proprietor of M/S Gomoti Plantations is well experienced having more
than 18 years of experience in this line of business with strong market reputation.
-
Ownership Status : Proprietor
- %
of share holding : 100%
-
Personal Net worth : 150.00 lac
-
Education : Graduate
-
Age : 52 years
2. About
the enterprise:
-
Nature of Business: Agro based production in developing the plantations
and livestock
-
Legal Status : Proprietorship
-
Year of Estd. : 2003
-
Business Address : South Keranigonj, Dhaka
3. About the
security (calculating maximum credit limit):
-
1 (One) Un-dated cheque covering the entire limit
-
Hypothecation over the stocks duly insured covering the risk
-
Registered Mortgage with IGPA of 3.00 katha of land at Dist: Dhaka, P/S:
Keranigonj, Mouza: Keranigonj valued at Tk.40.00 lac (MV) and Tk.30.00 lac (FSV).
4. About
the credit needs:
-
Nature of Facility : Term Loan
-
Amount of Limit : Tk. 20.00 lac
only
-
Purpose : To meet up working
capital requirement in their business
-
Rate of Interest : 18% p.a.
-
Mode of repayment: Equal monthly Installment
-
CIB Status : STD dt. 15/10/2013
5. About the income and expense i.e. profitability:
Financials
in 2012
Ratio
analysis :
6. About the marketing:
7. Recommendation:
·
Sales/Revenue 310.00
·
Net
Profit 22.70
·
Total
Assets 100.68
·
Total
Liabilities/Debt 20.58
·
Debt-Equity
Ratio 0.60
·
Debt-Service
Coverage Ratio 10.08
·
Current
Ratio 1.21
·
Return
on Asset 14.34
·
Return
on Equity 22.99
·
Net
Profit Margin 8.63
Considering
the above facts & analysis, we recommend for approval of the proposed
credit facility as Term Loan of Tk. 20.00 lac for the period of 36 months.
28. Difference
between Lending Risk
Analysis (LRA) and
Credit Risk
Grading (CRG)
Lending Risk Analysis (LRA)
is
a technique by which the loan risk is calculated by Credit department of a bank
that need to analyze it when loan application is above 1 crore. The ranking of
it is total 140, 120 is for total business risk and another 20 is for total
security risk.
In
LRA, following aspects are analyzed: supplies risk, sales risk, performance
risk, resilience risk, management ability, level of managerial teamwork,
management competent risk, management integrity risk, security control risk,
and security covers risk.
Credit Risk Grading (CRG)
is
a collective definition based on the pre-specified scale and reflects the
underlying credit risk for a given exposure. It deploys a number/ symbol as a
primary summary indicator of risks associated with a credit exposure.
The
proposed CRG scale consists of 8 categories are as: superior, good, acceptable,
marginal, special mention, sub-standard, doubtful, and bad & loss.
29. The risks factors those can make an industry
sick. How each factor accelerates the sickness?
The
two categories factors are listed behind that accelerate the industry sickness
are discussed below:
Internal
risk factors:
1. Lack of Experience
2. Poor Management
3. Wrong feasibility / Uneconomic Plant
size
4. Lack of working Capital
5. Obsolete technology
6. Faulty employee appointment
7. Non-cooperation among owners and
employees
8. Marketing Problem
9. Dependence on single financial source
10.Irregular wage payment
11.Poor product quality
External
risk factors:
1. Lack of working Capital
2. Political Unrest
3. Smuggling
4. Trade liberalization
5. Poor infrastructure
6. Global price fluctuate
7. Problems in loan disbursement (already
sanctioned)
8. Bank control over machinery purchase
9. Natural calamities
10.Duty on raw materials /customs problems
11.Non-availability of raw materials
12.Lack of modern technology
13.Long project implementation period
14.Lack of demand for the product
15.High loan interest
Answer
Two
[A.
Internal risks factors]
1.
Lack of Finance: The weak equity, inefficient working capital, absence of
costing & pricing and budgeting, and so on will accelerate the industry
sick.
2.
Inefficient Production Policies: This includes wrong selection of site is
related to production, lack of quality control and standard, research &
development, etc.
3.
Marketing factors: Inefficient planning and product mix, weak market research
and sales promotions are force to industry sickness.
4.
Improper Staffing: It includes bad wages and salary administration, bad labor relation,
conflicts among the employees and workers.
5.
Ineffective Corporate Management: It includes improper corporate planning, lack
of coordination, control and integrity in top management, etc.
B.
External risks factors
1.
Personnel Constraint: Unskilled labor, wages disparity, general labor invested
in the area will accelerate behind make a sickness.
2.
Marketing Issues: The sickness arrives due to liberal licensing policies,
changes in global marketing, excessive
tax policies by govt. and market recession.
3.
Production problem: This arises due to shortage of raw material and its high
prices, shortage of power, import-export restrictions.
4.
Financial Issues: The sickness arises due to credit restrains policy, delay in
loan disbursement, unfavorable investments, etc.]
30. What do you mean by Asset-Liability Management
(ALM)?
Asset
liability management (ALM) is the administration of policies and procedures that
refers to financial risks considering interest rate, exchange rate and other factors
that can affects to company’s liquidity. It manages the risks to acceptable level
by monitoring and sets the competitive prices between assets and liabilities of
a company.
The
ALM functions extend to liquidly risk management, management of market risk,
trading risk management, funding and capital planning and profit planning and
growth projection.
31. Do you agree that the absence of good ALM of a
bank may lead to different crisis to jeopardize the image and soundness of the
bank?
Asset
Liability Management (AML) is the most important aspect to maintain the bank’s
image and soundness. It manages the Balance Sheet Risk, especially for managing
of liquidity risk and interest rate risk.
A
bank would have managed a major portion of its risks by having in place a proper
ALM policy attending to its interest rate risk and liquidity risk. These two
risks when managed properly lead to enhanced profitability and adequate
liquidity. It should be used
strategically for deciding the pricing and structure of assets and liabilities
in such a way that profitability, liquidity and credit exposure is maintained.
Hence one cannot neglect credit risk in the ALM process.
So,
it is essential to form “Asset Liability Management Committee (ALCO)”with the
senior management to control the crises to jeopardize the bank’s image and
soundness.
33. What do you know about ALCO?
Asset-Liability
Management Committee (ALCO) is a risk-management committee in a financial
institution that generally comprises the senior-management levels of the institution.
ALCO are to look after the financial market activities, manage liquidity and
interest rate risk, understand the market position and competition etc.
34. Do you think each commercial bank should form
ALCO?
Asset-Liability Management
Committee (ALCO)
is the core
unit of a
financial institution. So it is the basic need to form an ALCO to
balancing the Asset-Liability Management. The ALCO will set a standard limits
on borrowing in the short-term markets and lending long-term instruments that
controls over the financial risks and external events that may affect the
bank's asset-liabilities position. It manages the risks to acceptable level by
monitoring and sets the competitive prices between assets and liabilities to
maintain the liquidity position of the company. Without an ALCO, a commercial
bank may lose all positive financial opportunities and the bank must be faced
by different types risk as like as financial crisis. So that it shout to be
formed a ALCO for each commercial bank to manage the vulnerable financial
position.
35. Roles and responsibilities of Asset-Liability
Management Committee (ALCO) of a Bank
1.
To assume overall responsibilities of Money Market activities
2.
To manage liquidity and interest rate risk
3.
To comply with the regulations of Bangladesh Bank in respect of statutory
obligations as well as thorough understanding of the risk elements of business
4.
To understand the market position and competition
5.
To provide inputs to the Treasurer regarding market views and updates the
balance sheet movement
6.
Deal with the dealer’s authorized limit
36. Define Credit Risk Grading (CRG) Dec-2013
Credit
Risk Grading (CRG) is a collective definition based on the pre-specified scale
and reflects the underlying credit-risk for a given exposure. CRG deploys a
number/ symbol as a primary summary indicator of risks associated with a credit
exposure. Credit Risk Grading is the basic module for developing a Credit Risk
Management system.
37. Function of Credit Risk Grading
Well-managed
credit risk grading systems promote bank safety and soundness by facilitating
informed decision-making. Grading systems measure credit risk and differentiate
individual credits and groups of credits by the risk they pose. This allows
bank management and examiners to monitor changes and trends in risk levels. The
process also allows bank management to manage risk to optimize returns.
38. What is the uses/ purpose/ importance of CRG?
Dec-2013
The
Credit Risk Grading matrix allows application of uniform standards to credits
to ensure a common standardized approach to assess the quality of an individual
obligor and the credit portfolio as a whole. It measure credit risk and
differentiate individual credits and groups of credits by the risk they pose.
This allows bank management and examiners to monitor changes and trends in risk
levels.
As
evident, the CRG outputs would be relevant for credit selection, wherein either
a borrower or a particular exposure/facility is rated. The other decisions
would be related to pricing (credit spread) and specific features of the credit
facility. Risk grading would also be relevant for surveillance and monitoring,
internal MIS and assessing the aggregate risk profile.
41. Why core risk management is getting so much
highlighted for proper financing of a bank
The
core risk management is so much highlighted that impose to modern banking
system. Due to deregulation and globalization of banking business, banks are
now exposed to diversified and complex risks. As a result, effective management
of such risks has been core aspects of establishing good governance in banking
business in order to ensure sustainable performance.
In
year 2003 and 2004, Bangladesh Bank issued guidelines on the six core risks on Credit,
Asset-Liability, Foreign Exchange, Internal Control & Compliance, Money Laundering,
and ICT risks. These guidelines may help banks to measure and manage their
Liquidity Risk, Interest Risk and Foreign exchange risk and minimize their
losses.
The ICT
guideline helps to
measures to prevent
the unauthorized access, modification, disclosure and
destruction so that now the interest of customer is fully protected. The modern
banking system is more benefited securing by following the core risk management
guidelines imposed by Bangladesh bank and banks is getting so much highlighted
for financing as well as all operation of the bank.
42. What is provisioning? Discuss the basis of
determining the status of classified loans and advances.
Provisioning:
The
Provisioning is a non-cash expense at present for banks to account for future
losses on loan defaults. Banks assume that a certain percentage of loans will
default or become slow-paying. Banks enter a percentage as an expense when
calculating their pre-tax incomes. This guarantees a bank's solvency and
capitalization if and when the defaults occur. The provision allocated each
year increases with the riskiness of the loans a given bank makes.
44. It is due to the increase of classified loans of
the bank, that they are now facing liquidity problems and the borrower
inter-bank call money at very high rate. Justify the viewpoint.
It
is simple understanding that due to increase of classified loans, the bank has faced
to liquidity crisis. However, when loans go bad they have some adverse effects
on the financial health of banks. Banks make adequate provisions and charges
for bad debts which impact negatively on performance. The provisions for bad
loans reduce total loan portfolio of banks and as such affects interest
earnings on such assets. This constitutes huge cost, as it makes a liquidity
crisis for the banks.
On
other hand, when banks will go into liquidity crisis, they try to borrow from
inter-bank call money at a high interest rate.
The inter-bank
call money market
is an overnight
market in meeting
bank’s immediate liquidity needs and reserve deficiencies. Hence, an
important task of the call money market is to facilitate liquidity management
in the inter-bank market. The orderly and stable functioning of the inter-bank
call money market is important to minimize liquidity risk in the banking system
as a whole.
So
that the banks will penetrate to call money at high interest rate to maintain
their adequate liquidity due to loan classification and keeps provision in this
same.
45. Distinguish between loan interest remission and
loan write off. Between these two which one is beneficial for that Bank?
Discuss.
[Need
modify]
Write
off of bad debt of a bank that is declared non-collectable (such as a loan on a
defunct business or a credit card due that is now in default), removing it from
their balance sheets. In course of conducting credit operations by banks the
quality of a portion of their loan portfolio, in many cases, deteriorates and
uncertainty arises in realizing such loans and advances. These loans are
adversely classified as per existing rules and necessary provision has to be
made against such loans.
Writing
off bad loans having adequate provision is an internationally accepted normal
phenomenon in banking business. Owing to the reluctance of banks in Bangladesh
in resorting to this system their balance sheets are becoming unnecessarily and
artificially inflated. In order to avoid possible legal complications in
retaining the claims of the banks over the loans written off section 28 ka has
been incorporated in 2001 in the Bank Company Act, 1991.
46. List
down the preconditions
those required to
be fulfilled by a
borrower for availing write off consideration
[Need
modify]
In
course of conducting credit operations by banks the quality of a portion of
their loan portfolio, in many cases, deteriorates and uncertainty arises in
realizing such loans and advances. These loans are adversely classified as per
existing rules and necessary provision has to be made against such loans.
Writing off bad loans having adequate provision is an internationally accepted
normal phenomenon in banking business. Owing to the reluctance of banks in
Bangladesh in resorting to this system their balance sheets are becoming
unnecessarily and artificially inflated.
In
order to avoid possible legal complications in retaining the claims of the
banks over the loans written off section 28 ka has been incorporated in 2001 in
the Bank Company Act, 1991. In this context the following policies for writing
off loans are being issued for compliance by banks:
1.
Banks
may, at any time, write off loans classified as bad/loss. Those loans which
have been classified as bad/loss for the last 5 years and for which 100% provisions
have been kept should be written off without delay.
2.
Banks
may write off loans by debit to their current year's income account where 100%
provision kept is not found adequate for writing off such loans.
3.
All
out efforts should be continued for realizing written off loans. Banks allowed to
write-off classified loans below Tk. 50,000 without filing any case.
4.
A
separate "Debt Collection Unit" should be set up in the bank for
recovery of written off loans.
5.
In
order to accelerate the settlement of law suits filed against the written off loans
or to realize the receivable written off loans any agency outside the bank can
be engaged.
6.
A
separate ledger must be maintained for written off loans and in the Annual Report/Balance
Sheet of banks there must be a separate "notes to the accounts" containing
amount of cumulative and current year's loan written off.
7.
Inspite
of writing off the loans the concerned borrower shall be identified as defaulter
as usual. Like other loans and advances, the writing off loans and advances
shall be reported to the CIB of Bangladesh Bank.
8.
Prior
approval of Bangladesh Bank shall have to obtain in case of writing off loans
sanctioned to the director or ex-director of the bank or loans sanctioned during
the tenure of his directorship in the bank to the enterprise in which the concerned
director has interest.
9.
[Bangladesh
Bank has relaxed the guidelines for writing off small bad loans as it
considered the litigation cost is sometimes higher than the amount of a loan.
10.
It
allowed the scheduled banks to write-off classified loans below Tk.50,000
without filing any case.
11.
The
banks will, however, have to comply with other guidelines while writing off the
loans, said a circular issued on Thursday.
12.
Earlier,
the banks had to write off any bad loan through filing case and keeping 100%
provision.
The
banks go for writing off a loan when it considers there is no hope to get the
money back.
The
scheduled banks are allowed to write off loans, having been adversely
classified for more than 5 years, by maintaining a 100% provision.]
47. Distinguish between Money Market & Capital
Market
Money
Market
1.
Market
where transactions of money and financial assets are accomplished for short
time Liquidity adjustment
2.
Short-term
(less or equal to 1 year)
3.
Call
money, collateral loans, acceptances, bills of exchange
4.
Due to
short-term period, the risk is small
5.
Commercial
banks are closely regulated
Capital
Market
1.
Market
where transactions of money and financial assets are occurred for a long period
putting long-term capital to work
2.
Long-term
(more than 1 year)
3.
Capital
market are stocks, shares, debentures, bonds, securities
4.
Risk
is more due to long-term period
5.
The
institutions are not much regulated
48. Can
increased call money
rate influence the
capital market? Elaborate with example.
The
capital market has influenced by increasing of call money rates that come
mainly from supply and demand for liquidity in the money market. The periodic
change in liquidity reserve may cause to demand the call money rates that
influence the capital market. The money market rate can also be impacted from
which Bangladesh Bank conducts the open money market operations. The call money
rate is determined by the participants and it depends according to present and
future liquidity condition in the market.
For
instance, the inter-bank call money borrowing rate was reached peaks at 50% in
January 2004, and after that 65.67% in February 2005. So that there is no doubt
that the call money rate influences the capital market.
49. What do you mean by SEC?
The
Securities & Exchange Commission was established in June-1993 and then
changed as Bangladesh Securities and Exchange Commission in December-2012 as
the regulator of
the Bangladesh capital
market that comprising
Dhaka Stock Exchange and Chittagong
Stock Exchange. It defines working process and rules and policies under which
the stock exchanges will operate.
50. Functions of SEC
The
main functions of SEC are as follows:
1.
Regulating
the Stock Exchanges & securities market
2.
Registering &
regulating stock-brokers, merchant
bankers, trustee of
trust deeds, portfolio managers, investment advisers, etc.
3.
Registering,
monitoring & regulating of collective investment scheme of mutual funds
4.
Monitoring
& regulating all authorized self regulatory organizations
5.
Prohibiting
fraudulent & unfair trade practices
51. Do you think that SEC is performing its role
properly by monitoring and controlling capital market of our country? Pass your
comments.
Securities
and Exchange Commission (SEC) is
the regulatory body
of that performing the roles by
monitoring and controlling of Bangladesh capital markets. It defines working
process and rules and policies under which the stock exchanges will operate.
It supervises
the activities of
merchant bankers, stock
brokers, depository companies,
security lenders & borrowers and other market intermediaries.
SEC
manages the issues including monitoring about buy-sell or transfer by the
sponsor/director of the listed companies and monitoring of shareholding
position, price sensitive information,
etc. It monitors
the other activities
and officials functionalities
like AGM & dividend payments.
52. What is Fund Flow
Fund
flow refers to movement of funds in working capital in the normal course of business
transactions. The changes in working capital may be in the form of inflow of
working capital or outflow of working capital. If the component of working
capital results in increase of the fund, it is known as inflow of fund.
Similarly, if the components of working capital effects in decreasing the
financial position it is treated as outflow of fund.
53.
Importance/ Uses/ Purposes of Fund Flow Statement
The
importance to uses of fund flow statement for a bank are as follows:
1)
It highlights the different sources and uses of funds between the two
accounting period.
2)
It brings into light about financial strength and weakness.
3)
It acts as an effective tool to measure the causes of changes in working
capital.
4)
It helps the management to take corrective actions while deviations between two
balance sheets figures.
5)
It also presents detailed information about profitability, operational
efficiency, and so on.
6)
It serves as a guide to the management to formulate its dividend policy, retention
policy and investment policy etc.
7)
It helps to evaluate the financial consequences of business transactions
involvedin operational finance and investment.
8)
It gives
the detailed explanation
about movement of funds from
different sources and uses of
funds.
56. Write-Off and Re-scheduling
Write-Off
A
reduction in an individual's or a company's income as the result of an expense.
For
example, an unplayable credit sale may be a write-off for the creditor, especially
if the debtor declares bankruptcy. The bankruptcy means that the debtor is
unable to pay the debt, which results in a loss of income for the creditor. A
write-off may usually be deducted from one's taxable income.
Write-off
To
take an asset entirely off the books because it no longer has any value. If an accrual
basis taxpayer has taken money into income when bills were sent out to customers,
but then some of the bills became uncollectible, the taxpayer may write off the
uncollectible ones as a deduction against income. Financial institutions are required
to write off loans when they become delinquent by a certain amount.
Accounting
In
business accounting, the term write-off is used to refer to an investment (such
as a purchase of sellable goods) for which a return on the investment is now impossible
or unlikely. The item's potential return is thus canceled and removed from
("written off") the business's balance sheet. Common write-offs in
retail include spoiled and damaged goods.
Banking
Similarly,
banks write off bad debt that is declared non-collectable (such as a loan on a
defunct business or a credit card due that is now in default), removing it from
their balance sheets.
Rescheduled
loans
Bank
loans that are usually altered to have longer maturities in order to assist the
borrower in making the necessary repayments.
Rescheduled
loans
Bank
loans that are usually altered to have longer maturities in order to assist the
borrower in making the necessary repayments.
Rescheduled
Loan
New
loan that replaces the outstanding balance on an older loan, and is paid over a
longer period, usually with a lower installment amount. Loans are commonly rescheduled
to accommodate a borrower in financial difficulty and, thus, to avoid a
default. Also called restructured loan.
Definition of 'Debt Rescheduling'
A
practice that involves restructuring the terms of an existing loan in order to
extend the repayment period. Debt rescheduling may mean a delay in the due
date(s) of required payments or reducing payment amounts by extending the
payment period and increasing the number of payments.
Rescheduling
FI’s
should follow clear guideline for rescheduling of their problem accounts and
monitor accordingly
Rescheduling
of problem accounts should be aimed at a timely resolution of actual or
expected problem accounts with a view to effecting maximum recovery within a
reasonable period of time.
57.
Purposes, cases, modes, and requirements of Rescheduling Purposes for
Rescheduling:
(i)
To provide for borrower’s changed business condition (ii) For better overdue
management
(iii)
For amicable settlement of problem accounts
Cases
for Rescheduling:
Rescheduling
would be considered only under the following cases-
(i)
Overdue has been accumulated or likely to be accumulated due to change in business
conditions for internal or external factors and the borrower is no way able to
pay up the entire accumulated overdue in a single shot.
(ii)
The borrower should be in operation and the assets have a productive value and
life for servicing the outstanding liabilities.
(iii)
The borrower must be capable of and willing to pay as per revised arrangement.
Modes
of Rescheduling:
Rescheduling
can be done through adopting one or more of the following means.
(i)
Extension of financing term keeping lending rate unchanged (ii) Reduction of
lending rate keeping financing term unchanged (iii) Both reduction of lending
rate and extension of financing term (iv) Bodily shifting of payment schedule (v)
Deferment of payment for a short-term period with or without extending the maturity
date (this may be a temporary relief to prevent the inevitable collapse of a company).However,
under any circumstances reschedule period must not exceed economic life of the
asset.
Post
Rescheduling Requirements:
Rescheduling
of a contract must require prior approval of CRM and management
All
rescheduled accounts are to be kept in a separate watch list so that post rescheduling
performance of the accounts can be monitored closely
58.
What is loan pricing?
Loan
pricing is a critically important function in a financial institution's
operations. Loan-pricing decisions
directly affect the
safety and soundness
of financial institutions through
their impact on earnings, credit risk, and, ultimately, capital adequacy. As
such, institutions must price loans in a manner sufficient to cover costs,
provide the capitalization needed to ensure the institution's financial
viability, protect the institution against losses, provide for borrower needs,
and allow for growth. Determining the
effectiveness of loan
pricing is a
critical element in assessing and rating an institution's
capital, asset quality, management, earnings, liquidity, and sensitivity to
market risks.
59.
Discuss the components which are to be taken into account in pricing of loan.
Dec-2013
Or,
Components which are to be taken into account in pricing a loan program
Or,
Factors affecting the Loan Pricing
The
following is a list of factors that institutions should consider in loan
pricing.
1.
Cost of funds: The cost of funds is applicable for each loan product prior to
its effective date, allowing sufficient time for loan-pricing decisions and
appropriate notification of borrowers.
2.
Cost of operations: The salaries & benefits, training, travel, and all
other operating expenses. In addition, insurance expense, financial assistance
expenses are imposed to loan pricing.
3.
Credit risk requirements: The provisions for loan losses can have a material impact
on loan pricing, particularly in times of loan growth or an increasing credit
risk environment.
4.
Customer options and other IRR: The customer options like right to prepay
the loan, interest rate caps, which may
expose institutions to IRR. These risks
must be priced into loans.
5.
Interest payment and amortization methodology: How interest is credited
to a given loan (interest first or
principal first) and amortization considerations
can have a impact on profitability.
6.
Loanable funds: It is the amount of capital an institution has invested in
loans,
which determines the amount an institution
must borrow to fund the loan
portfolio and operations.
7.
Patronage Refunds & Dividends: Some banks pay it to their
borrowers/shareholders
in lieu of lower interest rates. This approach is preferable to lowering
interest rates.
8.
Capital and Earnings Requirements/Goals: Banks must first determine its
capital requirements and goals in order to
determine its earnings needs.
60.
“Proper Pricing is
most essential before
launching a new
loan
product”. Discuss the statement with your
view.
Loan
pricing is a critically important function in a financial institution's
operations.
Loan-pricing decisions
directly affect the
safety and soundness
of financial
institutions
through their impact on earnings, credit risk, and, ultimately, capital
adequacy.
As such, institutions must price loans in a manner sufficient to cover
costs,
provide the capitalization needed to ensure the institution's financial
viability,
protect
the institution against losses, provide for borrower needs, and allow for
growth.
Institutions must have appropriate policy direction, controls, and monitoring
and
reporting mechanisms to ensure appropriate loan pricing. Determining the
effectiveness of
loan pricing is a critical
element in assessing
and rating an
institution's
capital, asset quality, management, earnings, liquidity, and sensitivity to
market
risks.
Loans should
be priced at
a level sufficient
to cover all
costs, fund needed
provisions
to the allowance accounts, and facilitate the accretion of capital. Specific
consideration
should be given to the cost of funds, the cost of servicing loans, costs
of
operations, credit risks, interest rate risks, and the competitive environment.
61. Factors affecting while assessing a loan
proposal
The
major factors that interact to loan proposal assessment are mentioned below:
1.
Credit-worthiness: These
will be treated
on behalf of
applicant’s credit history, capacity to repay, collateral value
as eligibility criteria.
2.
Business
and Credit history: The eligibility may be judged by business track records and
also qualifying for the different types of credit history like type of credit
facility, credit limit, repayment records, etc.
3.
Working
capital: The present working capital may be considered that can be thought of as cash at hand and bank.
4.
Collateral:
Collateral securities which are assets will be evaluated as secured assets and
pledge or hypothecation of inventory.
5.
Keen
money management skills: This includes a solid cash flow, the ability to live,
and skills of keeping accurate and timely financial records.
6.
Earning
power: The earnings of borrower to be given out as loan are some of the determining
factors in granting the loans.
7.
Ability
to repay: The borrower should have to ability to repay the loans from his
business and personal income.
8.
Experience
and character: The borrower should have experience in business to run that
should have business skills and managerial experience.
62. In competitive market, which of the variable and
fixed pricing as banker you would advocate?
A
variable interest rate loan is a loan in which the interest rate charged on the
outstanding balance varies as market interest rates change. As a result, your payments
will vary as well (as long as your payments are blended with principal and interest).
Fixed
interest rate loans are loans in which the interest rate charged on the loan
will remain fixed for that loan's entire term, no matter what market interest
rates do. This will result in your payments being the same over the entire
term. Whether a fixed-rate loan is better for you will depend on the interest
rate environment when the loan is taken out and on the duration of the loan.
When
a loan is fixed for its entire term, it will be fixed at the then prevailing
market interest rate, plus or minus a spread that is unique to the borrower.
Generally speaking, if interest rates are relatively low, but are about to
increase, then it will be better to lock in your loan at that fixed rate.
Depending on the terms of your agreement, your interest rate on the new loan
will remain fixed, even if interest rates climb to higher levels. On the other
hand, if interest rates are on the decline, then it would be better to have a
variable rate loan. As interest rates fall, so will the interest rate on your
loan. This discussion is
simplistic, but the
explanation will not
change in a more
complicated situation. It is important to note that studies have found that
over time, the borrower is likely to pay less interest overall with a variable
rate loan versus a fixed rate loan. However, the borrower must consider the
amortization period of a loan. The longer the amortization period of a loan,
the greater the impact a change in interest rates will have on your payments.
Therefore,
adjustable-rate mortgages are beneficial for a borrower in a decreasing
interest rate environment, but when interest rates rise, then mortgage payments
will rise sharply.
63. Discuss different types of credit facilities
that a commercial bank can provide to its clients.
Different
types of credit facilities by commercial bank are as follows:
1.
Overdraft
Facilities: The depositor in a current account is allowed to draw over and
above his account up to a previously agreed limit. Bank charges interest only
on overdrawn amount.
2.
Cash Credit:
Borrowers will be
allowed to withdraw
small sums of
money according to his requirements, but not exceed credit and he is
required to pay interest only.
3.
Discounting Bills of Exchange: The holder of a bill can get it discounted by
the bank, when he is in need of money.
After deducting its commission, the bank pays the present price of the bill to
the holder.
4.
Money at Call: Bank grant loans for a very short period, not exceeding 7 days
to the dealers or brokers in stock exchange markets against collateral
securities.
5.
Term Loans: Provide loans to trading, industry and agriculture sector with a
period between 1 to 10 years in installment basis. It also provides working
capital funds to the borrowers.
6.
Consortium Finance: Two or more banks may jointly provide large loans to the
borrower against a common security.
7.
Consumer Credit: Grant credit to households in a limited amount to buy some
durable consumer goods or to meet some personal needs.
8.
Miscellaneous: The other forms of loan are packing credits given to exporters,
export bills purchased/discounted, import finance against import bills, finance
to the self-employed, credit to the public sector, credit to the cooperative
sector.
64. Why credit-worthiness of an applicant is
assessed?
Creditworthiness
is an important business and personal asset each person has to manage. This is
an asset which could make or break business relationships and interestingly in
some cases, personal relationships. This is a complex abstract concept that is
evaluated in many ways by different entities. The factors contribute to
creditworthiness is really dependent on the specific evaluation case. This
article explains how one can determine a consumer’s creditworthiness and affordability, in
other words, a
consumer’s ability to
repay debt.
So
what is creditworthiness?
Creditworthiness
Definitions
to summarize creditworthiness have existed for as long as credit has been
extended to individuals and organizations. With the promulgation of the Act,
the standardized definition of creditworthiness has to be taken into
consideration. Any definition of creditworthiness needs to withstand any test
in terms of the NCA.
Any
definition associated with creditworthiness should therefore fall within the
ambit of a consumer’s:
• Affordability
• Credit history
Doing
a proper affordability calculation and credit risk assessment based on the credit
history of the consumer will allow the credit provider to determine the creditworthiness
of the consumer. Doing an investigation into the creditworthiness will also
ensure that credit is not extended recklessly and that the consumer is not over-indebted.
So,
when is a consumer over-indebted?
A
consumer is over-indebted when:
The
consumer will not be able to satisfy the requirements of obligations in terms
of credit agreements; and the consumer will not be able to satisfy those requirements
in a timely manner.
In the
following sections we
are going to
consider how to
assess the creditworthiness of a
consumer in terms of his/her credit history and affordability. A consumer’s
creditworthiness has traditionally been determined by a number of factors, a
few examples include:
·
Record
of payments in the past
·
Income
•
Regular
expenses
•
Current
debt and the repayment of such
•
Employment
When
assessing the creditworthiness of the consumer, the following credit qualities
of the consumer must be investigated:
•
The
payment record of the consumer
•
The
income of the consumer
•
The
current exposure in terms of debt of the consumer
•
The
employment prospects of the consumer
•
The
residence of the consumer
•
The
age of the consumer
•
Marital
status of the consumer
•
The
need for the credit
•
The
influence of any economic variables.
65. Credit Facilities Available in Banks.
• Overdraft: The word overdraft means the
act of overdrawing from the Bank account. In other words, the account holder
withdraws more money from the Current Account than has been deposited in it.
The loan holder can freely
draw
money from this account up to the limit and can deposit money in the account.
The Overdraft loan has an expiry date after which renewal or enhancement is
necessary for enjoying such facility. Any deposit in the overdraft account is
treated as repayment of loan. Interest is charged as balance outstanding on
quarterly basis. Overdraft facilities are generally granted to businesspersons.
• Cash Credit: These are also the facilities
where, like overdrafts, a limit is set
in
the account not exceeding one year. However difference is that a separate “Cash
Credit’ account is opened by the bank where limit is applied instead of
client’s account. Banks lend money against the security of tangible assets or
guarantees in the method. It runs like a current account except that the money
that can be withdrawn from this account is not restricted to the amount
deposited in the account. Instead, the account holder is permitted to withdraw
a certain sum called “limit” or “credit facility” in excess of the amount
deposited in the account. Once a security for repayment has been given, the
business that receives the loan can continuously draw from the bank up to that
certain specified amount. The purpose of cash credit is to meet working capital
need of businesspersons.
• Bill Discounting: Under this type of
lending, Bank takes the bill drawn by borrower on his (borrower’s) customer and
pays him immediately deducting some amount as discount and commission. The Bank
then presents the Bill to
the
borrower’s customer on the due date of the Bill and collects the total amount.
If the bill is delayed, the borrower or his customer pays the Bank a pre-determined
interest depending upon the terms of transaction.
• Term Loan: This type Banks lend money in
this mode when the repayment is sought to be made in fixed, pre-determined
installments. These are the loans
sanctioned for repayment in period more than one year. This type of loan is normally given to the borrowers for
acquiring long-term assets.
• Short Term loan: Term loan extended for
short period usually up to One year is term as STL. This type of loan may or
may not have specific repayment schedule. However, STL with repayment schedule
is preferable.
• Letter of Credit: This is a pre-import
finance, which is made in the form of commitment on behalf of the client to pay
an agreed sum of money to the beneficiary of the L/C upon fulfillment of terms
and conditions of the credit.
Thus
at this stage bank does not directly assume any liability, as such the same is
termed as contingent liability.
• Payment against Documents: Payment against
Documents or simply (PAD) is a post-import finance to settle the properly drawn
import bills received by the bank in case adequate fund is not available in
client’s account. This is a demand loan for interim period and liquidates by
retiring import bills by the client. The bank shall immediately serve a notice
upon the client mentioning arrival of documents with a request to arrange
retirement of the same immediately.
• Loan against Trust Receipt (LTR): This is
also a post-import finance facility awarded to retire import bill directly or
under PAD as the case may be. In this case, bank may or may not realize margin
on the total landed cost, depending upon banker-customer relationship. Here the
possession of the goods remains with the borrower and the borrower executes
‘Letter of Trust Receipt’ in acknowledgement of debt and its repayment along
with interest within agreed period of time.
• Export Finance: Like import finance DBL
advances in export trade at both pre and post shipment stages. In this type of
advance, standing of both opener and beneficiary of export L/C as well as
standing of the L/C issuing bank are of important consideration. The
pre-shipment facilities are usually required to finance the costs to execute
export orders, such as: procuring & processing of raw
materials, packaging and
transportation, payment of various fees and charges including
insurance premium. While post-import facilities are directed to finance
exporter’s various requirements, which are required to be settled immediately
on the backdrop that usually, settlement of export proceeds takes some time to
complete.
• Syndicated Loan: These are the loans
usually involving huge amount of credit and such to reduce a particular bank’s
stake. A number of banks and financial institutions participate in such credit,
known as loan syndication. The bank primarily approached by arranging the
credit is known as the lead or managing banks.
• Lease Finance: These types of finance are
made to acquire the assets selected by the borrower (lessee) for hiring of the
same at a certain agreed terms and conditions with the bank (lessor). In this
case, bank retains ownership of the assets and borrower possesses and uses the
same on payment of rental as per contract. In this case, no down payment is
required and usually purchase option is not permitted.
• Bank Guarantee: Bank Guarantee is one sort
of non-funded facility. Bank Guarantee is an irrevocable obligation of a bank
to pay a pre-agreed amount of money to a third party on behalf of a customer of
a bank. A contract of guarantee is thus secondary contract, the principal
contract being between the beneficiary and creditor and the principal debtor
themselves to which guarantor is not a part. If the promise or the liability in
the principal contract
is
not fulfilled or discharged, only then the liability of guarantor or surety arises.
66.
Agricultural credit plays
a very important
role in economic development of the country
with high GDP growth. Explain this
mentioning the impact
it keeps on
the country’s overall
GDP attainment.
Or, Significance/ Impacts
of Agricultural Credit
in economic developments
Agricultural
credit plays a vital role in economic development with positive GDP growth of a
country. These types of finance may promote to development in agro-economic
sector like agriculture, poultry, fishery, dairy, and livestock. The roles of
agricultural finance are described below:
1.
Agriculture finance assumes vital and significant importance in the
agro-socio-economic development at macro and micro level as well as GDP growth.
2.
It plays a catalytic role in strengthening the agro-business and augmenting the
productivity of scarce resources.
3.
Use of new technological inputs purchased through agro-finance helps to
increase its productivity.
4.
Agricultural finance can also reduce the regional economic imbalances and is
equals to reduce the inter-agro asset and wealth variations.
5.
It is like a lever with both forward and backward linkages to the economic
development at micro and macro level.
6.
As agriculture is still traditional and subsistence in nature, agricultural
finance is needed to
create the supporting
infrastructure for adoption
of new technology.
7.
It promotes to carry out irrigation projects, rural electrification,
installation of fertilizer and pesticide plants, execution of agro-promotional
and poverty alleviation programs in the country.
67. Suppose against a loan proposal of your branch,
the head office of the bank has sanctioned a loan of taka 1.00 (one) crore
against a mixed farm (Agriculture, poultry, fishery and dairy farm). You were
advised by head office to disburse the loan after due documentation.
Please list down the names of the documents
to be obtained from the borrower before disbursement of the loan.
1.
General
Documents
a.
Acceptance
of sanction letter
2.
Charge
Documents
b.
D.P.
Note
c.
Letter
of Disbursement
d.
Letter
of Agreement / Arrangement
e.
Letter
of Undertaking
f.
Letter
of Installment
3.
Hypothecation
of Stock & Receivable
g.
Letter
of Hypothecation on stock of Goods & receivables
h.
Irrevocable
General Power of Attorney (IGPA) to sell hypothecated stock &
2.
Receivable
a.
Letter
of Disclaimer
4.
Lien
& Set-Off
b.
Letter
of Lien
c.
Letter
of Authority to debit the4 customer account
5.
Insurance
Policy
d.
Valid
Original Insurance Policy covering fire risks
e.
Original
receipt of premium
6.
Undertaking
f.
No
liability with any other bank(s) excepting as declared in proposal
g.
The
customer shall deposit Sale proceeds in respective Account
7.
Guarantee
h.
Personal
guarantee, spouse guarantee, third party personal guarantee
8.
Other
Documents
i.
Letter
of Indemnity to be obtained
j.
Undated
and post-dated cheques
k.
Up to
date & Clean CIB report
9.
Legal,
mortgage and security documents
l.
Legal
Opinion, valuation certificate of branch and third party surveyor of the
property
m.
Non-Encumbrance
Certificate
n.
Memorandum
of Deposit of Title Deed
o.
Duplicate
Carbon Receipt, Mutation Khatian
p.
Up to
date Rent/TAX Payment Receipt
q.
Khatian-CS,
SA, RS, BS, DP
r.
Original
title and bia Deeds
s.
Mortgage
Deed duly registered with District/ Sub-Registry Office
t.
Registered
Irrecoverable General Power of Attorney (IGPA) authorizing to sale the Mortgage
Property
68. A project loan is treated as a term loan.
Discuss why. Discuss the risks you anticipate in such financing.
Project
finance transactions typically involve the direct financing of infrastructure
and industrial projects.
The
financing is usually secured by the project assets such that the financial
institution providing the funds will assume control of the project if the
sponsor has difficulties complying with the terms of the transaction.
Project
finance is generally used for large, complex and sizable operations, such as
roads, oil and gas explorations, dams, and power plants. Due to their complexity, size,
and location, these
projects often have
challengingenvironmental and social issues, which may include
involuntary resettlement, loss of biodiversity, impacts on indigenous and/or
local communities, and worker safety, pollution, contamination, and others.
Because these projects generally face high scrutiny from regulators, civil
society, and financiers, the project’s sponsoring companies allocate more
resources to managing environmental and social risks. If not managed properly,
the environmental and social risks can result in disrupting or halting project
operations and lead to legal complications and reputational impacts that
threaten the overall success of the project. Because anticipated project cash
flows typically generate the necessary resources to repay the loan, any
disruption to the project itself, regardless of the financial standing of the
sponsoring companies involved, poses a direct financial risk to the financial institution.
69. Agricultural Finance:
Definition, Nature and Scope A field of work in which
people aim to improve the access of the agriculture industry, including farmers
and all related enterprises, to efficient, sustainable financial services.
AGRICULTURAL
FINANCE Meaning:
Agricultural
finance generally means studying, examining and analyzing the financial aspects
pertaining to farm
business, which is the core
sector of Pakistan. The financial
aspects include money matters relating to production of agricultural products
and their disposal.
Definition
of Agricultural finance:
Murray
(1953) defined agricultural. Finance as “an economic study of borrowing funds
by farmers, the organization and operation of farm lending agencies and of
society’s interest in credit for agriculture.”
Tandon
and Dhondyal (1962) defined agricultural. Finance “as a branch of agricultural economics,
which deals with and financial resources related to individual farm units.”
Nature
and Scope:
Agricultural
finance can be dealt at both micro level and macro level. Macrofinance deals
with different sources of raising funds for agriculture as a whole in the
economy. It is also concerned with the lending procedure, rules, regulations,
monitoring and controlling of different agricultural credit institutions. Hence
macro-finance is related to financing of agriculture at aggregate level.
Micro-finance
refers to financial management of the individual farm business units. And it is
concerned with the study as to how the individual farmer considers various
sources of credit, quantum of credit to be borrowed from each source and how he
allocates the same among the alternative uses with in the farm. It is also
concerned with the future use of funds. Therefore, macro-finance deals with the
aspects relating to total credit needs of the agricultural sector, the terms
and conditions under which the credit is available and the method of use of
total credit for the development of agriculture, while micro-finance refers to
the financial management of individual farm business.
- Loan
Appraisal
- Microcredit
- Agent
Banking
- Discrepant
L/C
- Loan
Right up
- MRA
microcredit regulatory authority
- Portfolio
management
- Women
entrepreneur though microcredit
- Factors
of loan review
- SME
credit identified by BB
- Role
of SME credit
- NPL’s
negative impacts. Legal/Nonlegal aspects
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