Banks are the principal source of credit for borrowers. Banks provide loanable funds for millions of households (individuals and families), for most local units of government and for agricultural, commercial and industrial activities of a nation. Worldwide, banks grant more installments loans to consumers than any other financial institution. Bank credit is a catalyst for bringing about economic development. Without adequate finance there can be no growth or maintenance of a stable output. Bank lending is important to the economy, for it makes possible the financing of different sectors. At the same time, a bank will, therefore, distribute its funds among various assets in a manner as to derive sufficient income. But as liquidity and profitability are conflicting considerations. BASIC Bank Ltd., as a bank, while employing the funds pays due regard to both profitability and liquidity.
Credit Policy of BASIC Bank Limited
The credit policy of any banking institution is a combination of certain accepted time tested standards, and some other dynamic factors determined by the realities of varying and changing situations in the market place.
Credit policy lays down the basic principles and broad parameters of the lending operations. The key is to a sound, healthy and profitable credit operation, however, lies in the quality of judgment and sense of proportion of the officers making lending decisions, and their knowledge of the borrowers and the market place.
Basic Principles of Loans and Advances
Basic principles of loans and advances are as follows-
- Aggregate loans and advances shall not exceed ten times the Bank’s net worth or 65% of customers’ deposits whichever is lower (excluding loans and advances covered by specific counter-finance arrangements).
- Within the aggregate limit of loans and advances as mentioned in (1) above, 50% of lending will be to small industry sector in accordance with prescribed norms of the Government and the Central Bank in terms of the Bank’s objectives with 50% to the commercial sector.
- No term loans will be approved for the commercial sector. Exceptions will be rare and will require approval of the Executive Committee.
- All lending will be adequately secured with acceptable security and margin requirements as laid down by the Head Office Credit Committee.
- The Bank shall not incur any uncovered foreign exchange risk (currency exposure) in the lending of funds.
- The Bank shall not incur any risk of exposure in respect of unmatched rates of interest on funding of loans and advances beyond 15% of outstanding loans and advances.
- End-use of working capital facilities will be closely monitored to ensure lending user for the purpose for which they were advanced.
- Country risk in loans and advances will be accurately identified and shall be within the country limits if any approved for the Bank. The same treatment will be given to country risk arising out of contingent liabilities relating to Letters of Credit and Letters of Guarantee.
- Loans and advances shall be normally funded from customers’ deposits of a permanent nature, and not out of short term temporary funds or borrowings from other banks or through short term money market operations.
- The aggregate outstanding loans and advances (excluding loans and advances covered by specific counter-finance arrangements) shall be dispersed according to the following guidelines (subject to item 2 above whereby 50% of lending being to small industry section):
(a) Short term commercial lending (to include self liquidating and other short term finance to retail and wholesale business clients to finance their usual domestic and international trade/shipping of goods). This category to include working capital to hotel and tourism.
(b) Facilities to Shipping and Transport (facilities for the purchase and construction of ships/vessels and other modes of transport both by land and air).
- Spreads over cost of funds on loans and advances and commissions and fees on other transactions should be commensurate with the rating of the borrower, quality of risk and the prevailing market conditions.
- Credit evaluation will include:
a) Prevalent credit practices in the market place.
b) Credit worthiness, background and track record of the borrower.
c) Financial standing of the borrower supported by financial statements and other documented evidence.
d) Legal jurisdiction and implications of applicable laws.
e) Effect of any applicable regulations and laws.
f) Purpose of the loan/facility.
g) Tenure of the loan/facility.
h) Viability of the business proposition.
i) Cash flow projections.
j) Quality and adequacy of security, if available.
k) Risk taking capacity of the borrower.
l) Entrepreneurship and managerial capabilities of the borrower.
m) Reliability of the sources of repayment.
n) Volume of risk in relation to the risk taking capacity of the Bank or company concerned.
o) Profitability of the proposal to the Bank or company concerned.
- No credit shall be extended to a Customer Entity that exceeds in total commitment more than 10% of the Bank’s capital and free reserves.
- Exception will require approval of the Board of Directors.
Loans and Advances offered by BASIC Bank with Little Elaboration
A. Overdraft (OD): It is a continuous advance facility. By this agreement, the banker allows his customer to overdraft his current account up to his credit limits sanctioned by the bank. The interest is charged on the amount, which he withdraws, not on the sanctioned amount. OD is of two types practiced in BASIC Bank Mirpur branch. These are as follows-
1. Secured Overdraft (SOD): Branch sanctions SOD against different securities like FDR, Sanchaypatras and Work Orders.
2. Temporary Overdraft (TOD): It is given to the valued customers only. It is not that much secured. Usually it forwards without any security or sometimes exercise lien against the instrument, deposited in the bank. It is given by the branch manager discretionary power. Though it is given, but it never desirable.
The processes of extending SOD are as follows –
i) The party must have a current A/C with the branch
ii) If the ownership of the firm is proprietorship, then a trade license must be submitted and in case of a limited company, all the documents required to open a current A/C, should be submitted. The financial statements of the concerned firm should also be submitted.
iii) The party must maintain a good transaction with the branch and have a good turnover rate.
iv) The party will apply to the officer in charge of credit department of the branch for SOD arrangement
v) The concerned officer of the branch will give him a Credit Application Form and the party will have to fill up this form. In this form he discloses all the information about his concern, purpose of the loan, description of security, etc.
vi) The concerned officer will prepare a ‘Credit Line Proposal’, where he writes about the business concern, details of proprietors/directors of the concern, management structure, the existing credit facilities, the particulars about the facilities that asked for – such as margin limit, date of expiry, details of security, and any other relevant information. Then the proposal is sent to the Head Office, General Advances Division for approval.
vii) The responsible Department of the General Advances Division will appraise the proposal and if it seems to a viable then the loan will be sanctioned.
viii) After the loan is sanctioned, the branch will issue two copies of a sanction advice, where all the terms and conditions set by the bank is mentioned. The borrower is advised to write, “accepted” on the original copy if he is satisfied with the terms and conditions of the bank and retain the duplicate one as record.
Showing loans and advances offered by BASIC as on November 30, 2001
|Credit Facilities Offered By-||Outstanding Amount in Lac. Tk.(Mirpur Br.)|
|BASIC Bank Ltd.||BASIC Mirpur Branch|
|A. Commercial & Working Capital Loan|
|B. Industrial Loan|
|01. Term Loan|
|01. Term Loan|
|02. Working Capital|
|02. Working Capital|
Source: Mirpur Branch, BASIC Bank Ltd.
B. Cash Credit (CC): By this arrangement, a banker allows his customer to borrow money up to a certain limit. CC is a favorite mode of borrowing by traders, industrialists, etc. for meeting their working capital requirements. It is operated like overdraft account. Depending on the needs of the business, the borrower can draw on his cash credit account at different time and when he gets money can adjust the liability. BASIC Bank charges interest on the daily balance of the account. Based on charging securities, there are two (02) forms of cash credit –
1. Cash Credit (Hypothecation): Hypothecation is a legal transaction whereby goods are made available to the lending banker as security for a debt without transferring either the property in the goods or possession. The banker has only equitable charge on stocks, which practically means nothing. It is given against Registered mortgage of land and building, hypothecation of goods and personal guarantee of Directors.
2. Cash Credit (Pledge): Pledge is the bailment of goods as security for payment of a debt or performance of a promise. Transfer of possession is the judicial sense. In case of pledge goods the bank acquire the possession of the goods or a right to hold goods until the repayment for credit with a special right to sell after due notice to the borrower in the event of non-repayment. It is not applicable in Mirpur branch.
The processes of opening a CC a/c are as follows–
- The interested party must have a current A/C and good transaction with the branch;
- Applies for CC pledge or hypothecation arrangement;
- Fills up the ‘Credit Application Form’ as provided by the respective officer;
- The concerned officer prepares a ‘Credit Line Proposal’ (CLP) detailing all relevant information;
- Sends the CLP to the Head Office, General Advances Division for necessary action;
- Head Office, General Advances Division examines the proposal and if finds it viable then sanctions it and sends it to the branch;
- The branch issues tow copies of ‘Sanction Advice’, one for its own record and the other for the party to keep.
After getting the cash credit arrangement, the banker will issue a cheque book for withdrawing cash from the account. Whenever the CC account holder wants to withdraw cash from the account, the cash officer will scrutinize the amount of cheque in order to make sure that the total drawings does not exceed the sanctioned limit.
C. Loan (General); It is given against Personal guarantee, hypothecation of goods and land & building.
D. Staff Loan: Mirpur branch provides advances to the staff for purchasing house building, Sanchaypatras, and meeting up certain requirements like family medical, personal medical, wedding purposes. Bank provides this facility under installments. Loanble amount varies on the basis of purpose.
E. Bills Portfolio: Mirpur branch purchases demand bills of exchange that are called ‘Draft’ accompanied by documents of title to goods such as bill of lading, railway receipt, truck receipt. The purchase of bill of exchange drawn at an issuance, i.e. for a certain period maturing on a future date and not payable on demand or sight.
F. Term Loan: BASIC bank is advancing both short and medium term credit to the commercial sector on the basis of their capital structure, constitution and liquidity consideration. Interest rate is 12% for SSI and 13% for MSI. It is given against land and building along with machinery, personal guarantee of Directors and hypothecation of raw materials.
Showing different types of Lending offered by BASIC with Revised Interest Rate effected from November 05, 2001
|Types of Lending|
a. Primary Products
|2) Industrious Term Lending|
a. Term Loan-SSI
b. Term Loan-MSI
|3) Working Capital|
|Types of Lending|
|5) Commercial Lending|
a. International Trade/Import Finance
|6) OD against|
2% above FDR rate subject to a minimum of 11.25%
|7) Others (Transport, Construction, etc.)|
General procedure for Loans and Advances
The following procedure is applicable for giving loans to the customer. These are-
1 : Duly fill-up First Information Sheet (FIS)
2 : Application for Credit Line
3 : Collecting CIB report from Bangladesh Bank
4 : Making credit line proposal
5 : Project appraisal
6 : Head office approval
7 : Sanction letter
8 : Documentation
9 : Disbursement
10 : Monitoring
11 : Recovery
First Information Sheet (FIS):
First Information Sheet (FIS) is the prescribed form provided by the respective branch that contains basic information of the borrower. It contains following particulars
- Name of the concern with its factory location, Office address and Tel No.
- Name of the main sponsors with their educational qualification.
- Business experience of the sponsors, details of past and present business, its achievement and failures, name of all the concerns wherein the sponsors have involvement.
- Income tax registration no. with the amount of tax paid for the last three years.
- Details of unencumbered assets (movable & immovable) personally owned by the sponsors.
- Details of liabilities with other banks and financial institutions including securities held there against.
- Purpose of loan sought from BASIC Bank
- Estimated cost of the project & means of finance.
Application for Credit Line:
After receiving the first information sheet from the borrower Bank official verifies all the information carefully. He also checks the account maintains by the borrower with the Bank. If the official become satisfied then he gives application for credit line form to the prospective borrower. The Application for Credit Lines Contain the following particulars:
- Name, address, telephone, telex no. & cable address.
- Date & place established/ incorporated, status/ constitution.
- Names of major shareholders (in excess of 5%). State relationship between shareholders.
- Names and net worth of directors/partners/owners with background & relationship with each other (Net worth statement of each person to be attached as per format).
- Capital structure & how the capital is deployed in business.
- Details of properties/assets of the applicant, with valuation against each type of property/assets and details of charges against them.
- Names and addresses of subsidiaries/affiliates/allied concerns, stating relationship with applicant, nature of business and borrowings from banks against each (including BCCI)
- Nature & details of business.
- Latest audited/ un-audited balance sheet and profit & loss statement attached will be submitted by:
- Management structure (Including their experience and qualification).
- Names & address of other bankers, sanctioned facilities & liabilities outstanding with details of securities there-against.
- Type, extent and period of credit facilities required.
- Purpose of facility, repayment arrangement (with dates and amount), sources of repayment;
- Details of securities offered & any other relevant information.
Collecting CIB Report from Bangladesh Bank:
After receiving the application for credit line, BASIC Bank sends a letter to Bangladesh Bank for obtaining a report from there. This report is called CIB (Credit Information Bureau) report. Basically branch seeks this report from the head office for all kinds of loans. The purpose of this report is to being informed that whether the borrower has taken loan from any other bank; if ‘yes’, then whether the party has any overdue amount or not.
Making Credit Line Proposal (CLP):
If the officer thinks that the project is feasible then he will prepare a Proposal. BASIC Bank prepares the proposal in a specific from called credit line proposal. It contains following relevant information:
- Date established, constitution;
- Main sponsor/ director with background;
- Capital structure, address;
- Account opening date, introduced by, type of business, particulars of previous sanctions;
- Existing vis-à-vis proposed credit limits;
- Particulars of proposed/additional facilities;
- Security (Existing & Proposed/ Additional);
- Movement of accounts;
- Components on the conduct of the account;
- Details of deposit, liabilities of allied concerns, liabilities with other banks;
- CIB report;
- Stock position (Pls. Provide St. report);
- Rated capacity of the project(Item wise);
- Production/purchase during the period;
- Sales during the period;
- Business received for the period (Last three years);
- Earning received for the period;
- Associated lending/business risk (s);
After fulfilling the previous particulars, the officer places the CLP to the BCC (Branch Credit Committee). BCC is then find out the right borrower by considering the following 5 C’s. These are character, capital, capacity, collateral, condition (*economic).
Selection of right borrower: The borrower has to be creditworthy and competent enough to run the proposed industry. Following are the considerations-
- Preference given for educated / knowledgeable sponsors, who know about their business concern, have technically know-how and expertise in the field of proposed industry;
- Who have own land and building for running the project;
- Client with innovative ideas;
- Client must have net worth more than 2.5 times of the equity required for investment in the project;
- Who have good dealings with the bankers /outside parties and has social contacts and standings;
- Have an a/c with BASIC Bank Mirpur Branch;
After approving the proposal by BCC, branch then sends the CLP to the respective division in Head Office. In Head Office there are two divisions of credit department. One is Industrial Credit Division (ICD) and another is Commercial Credit Division. After receiving the CLP with application for credit line, resolution copy made in the special meeting of the BCC, branch investigation report on borrowers real estate, statement of stock and bank statement (statement of account), the respective divisions then divide the loan proposals into SSI (Small-scale industries) and MSI (Medium scale industries) according to the limit. For SSI the limit is up to 10 crore and for MSI it is 10 crore and above. Then the respective officer goes for project appraisal.
It is the pre-investment analysis done by the officer before approval of the project. Project appraisal in the banking sector is needed for the following reasons:
i) To justify the soundness of an investment
ii) To ensure repayment of bank finance
iii) To achieve organizational goals
iv) To recommend if the project is not designed properly
Basically Head Office is engaged in appraising the following projects:
a) Proposal for sanctioning a term loan.
b) Proposal for sanctioning a working capital.
c) Proposal for sanctioning a term loan and working capital.
d) Proposal for renewal of advance limit.
e) Proposal for enhancement of advanced limit.
f) Proposal for enhanced renewal of advanced limit.
g) Proposal for extension of repayment period.
Techniques of Project Appraisal In ICD
An appraisal is a systematic exercise to establish that the proposed project is a viable preposition. The appraising officer checks the various details submitted by the promoter in first information sheet, application for credit line and CLP. BASIC Bank considers the following aspects in appraising a proposal:
- Technical viability
- Commercial viability
- Financial viability
- Economic viability
The Head Office (HO) mainly checks the technical, commercial and financial viability of the project. For others HO is dependent on branch’s information. But when the loan size is big, then the HO verifies the authenticity of information physically.
It implies the assessment of various requirement of actual production process. It involves a critical study of following factors:
Location or site of the project:
- Selection of the optimum location, therefore, revolves around the joint consideration and evaluation of the following factors-
- Raw materials supplies
- Transportation facilities
- Power, water and fuel supply
- Natural and climatic factors
Plant, machinery and equipment:
The study should consider some important technological factors with regard to plant and equipment, viz.:
- Adequacy and suitability of the machinery and equipment and their specification
- Plant layout
- Balancing of different sections of the plant
- Reputation of the machinery supplies, etc.
It includes details of finished products by using the raw materials.
Management and Organizational Viability:
It is very much important for the success of a project. So it is necessary to evaluate the following:
- Overall background of the promoter, and their
- Academic qualification
- Business and industrial experience.
- Past performance.
This study indicates evaluation of a project’s feasibility in terms of market. The market analysis contains:
- Analysis of past and present demand
- Analysis of past and present supply
- Analysis of demand and supply gap
- Determination of pricing per unit
- Estimates project’s share in the market
- Marketing channel for the product should be accessible to the entrepreneur.
Analysis of financial viability is an essential part of project appraisal. The financial analysis focuses the following for judging this viability:
Cost of the project and means of finance: It is necessary to make a preliminary assessment of the project and the means of the financing it. If the cost of the project is too high that it is not possible to mobilize the resources of that magnitude through the available resources, the project is out of question.
Debt-equity ratio: It is the ratio that shows the relationship between capital contributed by the creditors and that contributed by the owners. A low ratio indicates greater long-term financial safety.
Comparison with similar projects: If the proposed project is similar to other projects, financed earlier by BASIC Bank, then it is only done.
Working Capital Assessment: If the borrower proposes for working capital, then the bank does the assessment. It is done for the raw material (imported), raw material (local), work-in-process and finished goods. The tied-up period for imported raw material is generally 90 days, for local raw material 30 days, for work-in-process 7-10 days and for finished goods 3-7 days. Ultimately tied-up period depends on the nature of the goods. It is calculated by-
Requirement of fund: It includes allowable bank borrowing and proposed limit by the credit committee on the basis of 70% of RM, WIP & FG and imported raw materials (if any). CC (H), LTR and in case of imported materials L/C the bank offers such facilities.
Earning forecast: It includes capacity utilization (%), sales revenue, cost of goods sold, gross profit, total operating expenses and operating profit. It is done for 3 years only. For new projects, capacity utilization is 60%, 70%, 80% for year 1, 2, 3 respectively. Cost of goods sold is around 70% of sales revenue.
Operating results: Mainly it deals with various ratios like gross profit to sales, operating profit to sales, debt-service coverage ratio, internal rate of return (IRR), break even point (sales), BEP (efficiency).
Debt-service coverage ratio: It is the ratio by which the service covered by profit. For BMRE (Balancing, Modernizing, rehabilitation and Expansion) project, the ratio is expected to be more i.e. around 3 and for new project it is expected to around 2. Rule of thumb is that it must be greater than 1. It is calculated by-
Internal Rate of Return (IRR): IRR is a discount factor where summation of cash inflow and cash outflow of a project equals to zero. In 1st year cash outflows for project implementation. So it is always negative. In subsequent years cash inflows to the project to make it viable. Normally economic life of a project is considered 10 years. When sum of cash inflow and outflow is zero, project will operate at break even point. When it is more than zero project will be profitable. Otherwise project will incur loss. The standard IRR value is considered 20% to 35%. Respective officer does it by trial and error method.
Break Even Point: Break even point of an enterprise/firm is a point where total revenue/sales proceeds/sale or output equals total cost. It indicates that level of output/ sale proceeds at which the firm recovers all its costs. It neither earns profit nor incurs any loss. In other words, this is a point of zero profitability.
It is done in two ways, namely BEP (sales) and BEP (capacity). Both are calculated by the following formulas
Financial ratio wise standard normal values applicable for BASIC Bank.
|Ratios||Normal standard value|
|Gross profit to sales||Around 20% for 1st year and will be more in subsequent years.|
|Operating profit to sales||Around 10% for 1st year and will be more in subsequent years.|
|Debt-service coverage ratio||Slightly over 2. If it is <1.5 or >3, project is not viable.|
|Internal rate of return (IRR)||20% to 35%|
|Break even point (sales)||— units|
|BEP (efficiency).||Around 30%Source: ICD, HO, BASIC Bank Ltd.|
Sensitivity Analysis: It is normally done in two ways
a) Lowering capacity utilization by 10%
b) Lowering selling price by 10%
The analysis is done to see that the project can absorb both the shocks and to determine the project is more sensitive to one over another. Here also both earning forecast and operating results are calculated in the aforesaid two cases.
Lending Risk Analysis (LRA): Usually experienced bank officials do the critical and crucial job. LRA involves two types of risk aspects.
- Business risk and
- Security risk.
Business risk is again divided into two parts.
a) Industry risk which involves supply risk and sales risk.
b) Company risk which involves performance risk, resilience risk, management competence risk and management integrity risk.
Again there are two elements of security risk.
a) Security control risk and
b) Security cover risk.
LRA is done in the head office, it is not given due weight in case of loan disbursement. They think it is not such a helpful method to judge the client because of its subjectivity. Even after they did it when the loan amount is more than Tk. 5 Lac.
Decision matrix from LRA
From the LRA sheet we can calculate the following numbers and plotting them into the matrix to get the decision. The calculated result criteria is as under-
13 – 19
20 – 26
27 – 34
-20 ~ -15
-14 ~ 0
0 ~ 10
Based on raw materials supply and selling of finished products and also demand supply gap, bank officials determine the industry risk. And company risk is determined by repayment behavior of the sister concern and by the competent management Security risk is determined by creating the charges, taking charge documents against registered mortgage of lands and others. LRA is a four-scale rating.
The project should ensure benefit to the national economy and create sufficient opportunity in the following areas:
- Generation of employment;
- Income distribution;
- Self reliance;
- Development of small scale industries & ancillary business;
- Improvement of quality of life and well-being;
- Environmental issues;
- Opportunity cost.
Head Office Approval:
The respective officer of Head Office appraises the project by preparing a summary named “Top Sheet” or “Executive Summary”. Then he sends it to the Head Office Credit Committee (HOCC) for the approval of the loan. The Head Office Credit Committee (HOCC) considers the proposal and takes decision whether to approve the loan or not. If the loan is approved by the HOCC, the HO sends the approval to the concerned branch with some conditions. These are like:
- Drawing will not exceeds the amount of bill receivables.
- The tern over in the account during the tenure of the limit should not be less than four times of the credit limit.
- All other terms and conditions, as per policy and practice of the bank for such advance to safeguard the banker’s interest shall also be applicable for this sanction also.
- Bank may charge/ alter/ cancel any clause (s) of the sanction without assigning any reason whatsoever and that shall be binding upon the client unconditionally.
- Branch shall not exceed the sanctioned limit.
- Required charge documents with duly stamped should be obtained.
- Drawing shall be allowed only after completion of mortgage formalities and other security arrangement.
After getting the approval from the HO, the branch issues the sanction letter to the borrower. A sanction letter contains the following particulars amongst other details:
a) Name of borrower.
b) Managing partner
c) Nature of Facility
f) Rate of interest
i) Other terms and conditions: Other terms and conditions are like-
i) Before availing the loan all documentation formalities must be completed.
ii) Registered power of attorney in favor of BASIC bank to sell the mortgaged property without the consent of the court or owner of the lender.
iii) DP note and other usual charge documents/ undertakings etc. duly stamped must be signed and submitted to the authority before the disbursement of loan.
iv) The loan shall be governed by all other terms and conditions as per policy and practices of the bank which will be applicable for the sanction to safe guard interest of the bank.
v) The bank reserves the right to amend, modify or withdraw any or all the terms of the loan at any time without assigning any reason whatsoever or to terminate/ call back the loan facility at any time for which bank or its official cannot be held responsible for any loss (s) for such cancellation of the loan.
The borrower receives the letter and returns a copy of this letter duly signed by him as a token of having understood and acceptance of the terms and conditions above.
Documentation of loans and advances:
In spite of the fact that banker lends credit to a borrower after inquiring about the character, capacity and capital of the borrower, he must obtain proper documents executed from the borrower to protect him against willful defaults. Moreover, when money is lent against some security of some assets, the document must be executed in order to give the banker a legal and binding charge against those assets. Documents contain the precise terms of granting loans and they serve as important evidence in the law courts if the circumstances so desire. That is why all approval procedure and proper documentation shall be completed before the disbursement of the facilities. The documents for loans and advances can be classified into two (02) categories, namely Charge documents & Security documents.
Mode of Charging Securities
BASIC Bank Mirpur branch practices these two types of securities.
1. Primary securities – Cash or cash equivalent that is easily liquidated or convertible into cash. Example–FDR, Sanchaypatra, DP Notes, etc.
2. Secondary securities – These securities are tangible securities which can be realized from sale proceeds or transfer of property. Example– immovable properties like land, buildings, etc.
The modes of charging securities are as follows-
Lien: Lien is the right to retain possession and not right of ownership. Bank’s lien is general lien over its own financial obligation to clients. Property under lien cannot be realized/sold and proceeds thereof cannot be appropriated without notice to the owner and sometimes without court’s order.
Hypothecation: This is mortgage of movables by an agreement and here neither possession nor ownership is transferred. Hypothecated goods cannot be sold out/disposed off without notice and court’s order. However, if a special power of attorney is taken in that case can be disposed off without going to the court.
Pledge: Pledge is the bailment of goods as security for payment of a debt or performance or promise. Here, title and ownership are not transferred. Pledge goods may be sold out and proceeds thereof may be appropriated towards adjustment of Liability in case of failure of the borrower to repay or fulfill the terms and conditions.
Mortgage: Mortgage is the transfer of interest in immovable property to secure the repayment of money advanced. Ownership remains with the mortgagor. In case of equitable mortgage, Court Order is necessary and in case of registered mortgage court’s order is not necessary for sale/disposal of the mortgaged property for adjustment of advance.
Category Wise Documents
All securities are not suitable for all types of advances. There is common type of charge documents for all types of advances. These are as follows:
- Demand promissory note
- Letter of arrangement
- Letter of disbursement
- Letter of continuity
- Letter of revival (Form-1&2).
Other documents are required for following types of advances
Overdraft/ Loan (General)
- Letter of partnership in case of partnership firm or Board resolution in case of limited companies.
- Letter of pledge/ Letter of hypothecation.
- Letter of lien for ownership transfer of shares.
- Letter of lien for packing credit.
- Letter of lien in case of advance against F D R
- Copy of sanction letter mentioning details of terms and condition duly acknowledge by the borrower
Cash credit (Hypothecation)
- Letter of hypothecation
- Letter of authority empowering the bank to inspect the goods and take possession of the goods in case of duly drafted by the lawyer of the bank.
- Stock report duly signed by the borrower on fortnightly basis or after every deposit in the loan account or before realizing fund against limit.
- Letter of declaration duly signed by the party clearly stating that the goods hypothecated are not in any case encumbered elsewhere.
- Sufficient insurance cover inserting the name of the Bank as mortgage with bank mortgage clause.
- Letter of Disclaimer signed by owner of the godown in case of 3rd party godown. Third party Guarantee if required as per sanction advice.
- Statements of other immovable property of the borrower stating those are not encumbered.
- Certificate from pourasava authority that the concerned property is situated within pourasava area.
- Original title deed of property.
- Latest CS, RS parcha along with latest rent receipt of land, tax, wasa, gas, electric bills, etc.
- Bia-deeds/ parcha showing chain of transfer of title.
- Letter of guaranty in case of 3rd party ‘s property
- Non-encumbrance certificate by engineer and branch manager.
- Lawyer’s certificate regarding genuineness of title on the property of the mortgage and stating in clear term weather the property can be accepted as security against advances to be allowed.
- Letter of guarantee of the owner of the property in case of third party property.
- Memorandum of title deed of property.
- Registered irrevocable power of attorney duly drafted by bank’s lawyer and executed by the owner of the property.
- Registration certificate is required;
- Valuation certificate (by engineer and branch manager forced sale value to be considered.
Branch shall take note of the following points while accepting a property as a security
- Land should be situated within municipality area, sub-urban area of city and industrial or commercial important areas.
- Rural property, pond and low lying area shall not be taken.
- Vacant land shall not be taken. It the land is protected by the boundary wall and the ownership is clearly identified, the same may however be accepted.
- Land must be owned by the borrower/owner of the project/firm/company and/or member(s) of the land shall be obtained duly attested.
- Property owned jointly (‘Ejmali’ property) shall not be accepted.
- Original title deed and bia-deed, Khatian, Parcha, Mutation, certificate, non-encumbrance certificate, upto date rent receipt shall be obtained and duly checked by the credit officer, branch manager and the lawyer.
- The value of the property shall be at least twice the amount of loan.
Branch-in-charge shall personally ensure properly mortgaged of property and retain the documents in safe custody. Original mortgage deed should be obtained from the registration office in time.
- Hire-purchase agreement for hypothecation of the vehicle (STAMPED and duly NOTARISED)
- Purchased documents.
- Registration of the vehicle in the joint name of bank and borrower (copy of the blue book to be retained in the branch)
- Road permits jointly in the name of bank and borrower.
- Insurance cover against all possible perils inserting name of bank as Mortgage with bank mortgage clause.
- Certificate signed by the borrower that he has received the vehicle in good condition and that he will exercise due care for maintenance of the vehicle.
- Letter of installment.
- Undertaking by the party that he will keep the vehicle always ready for inspection by bank officials.
- Bank’s name must be written in the body of the vehicle in BOLD LETTERS.
- Balance Conformation Slip
- Letter of Disbursement
- Bangladesh SanchayPatra/ Pratirakhaya Sanchaya Patra duly discharged
- Identity Slip.
- Letter of encashment.
- Letter of lien (first party or third party, as the case may be).
- Registered partnership deed.
- Resolution along with Memorandum & Article of Association in case of limited company & in case of Corporations, resolution of the Board along with charter.
- Letter of Authority for encashment of Certificates on prescribed form.
- A conformation regarding marking of lien for issuing authority.
- Personal Guarantee of Directors (expecting nominated directors by Govt./Conformations)
After verifying all the documents the branch disburses the loan to the borrower. A loan repayment schedule also prepared by the bank and given to the borrower.
After the disbursement of the loan bank officials’ time to time monitor the loan by physical observation of the activities of the party. It is done in the following manner:
- Constant supervision
- Working Capital Assessment.
- Stock Report analysis.
The loan classification procedure for all types of loan is governed by the guidelines contained in BRPD Circular no 16 dated 06.12.98 issued by Bangladesh Bank and subsequently revised partially through BRPD Circular no 9 and 10 dated 14.05.2001, According to this circular If any borrower fails to repay his amount or installment within the following time period then it will fall under the following classification status.
Table-: Showing Loan Classification Categories
Types of loan
|Agricultural short term||Continuous||Demand||Term (Up to 5 years)||Term (> 5 years)|
|Unclassified||12 months or below||Less than 6 months||Less than 6 months||Less than 6 months||Less than 12 months|
|Substandard||>12 months but <= 36 months||6 months to < 9 months||6 months to < 9 months||6 months or more||12 months or more|
|Doubtful||> 36 months but <= 60 months||9 months to < 12 months||9 months to < 12 months||12 months or more||18 months or more|
|Bad loan||More than 60 months||12 months or more||12 months or more||18 months or more||24 months or more|
Source: BRPD circular no.16 dated 06.12.1998 and no.9 & 10 dated 14.05.2001
In general the loans are repaid in installment according to bank’s direction. Some loans are repaid all at a time. If any loan is not repaid then notices are send to the customer with the consent of HO. HO has a separate credit recovery wing. It advises the branch to take all necessary actions against the loanee. Sometimes legal actions may require recovering the loan. All types of loans a Bank fall into following four categories:
- Unclassified: Repayment is regular.
- Substandard: Repayment is irregular but has reasonable prospect of improvement.
- Doubtful Debt: Unlikely to be repaid but special collection efforts may result in partial recovery.
- Bad/Loss: Very little chance of recovery.
Provision is also made under the same circular which is as follows-
|Types of Classification|
|(1) Agricultural short term loans|
Unclassified, Substandard, Doubtful
|(2) All other loans|
Source: BRPD circular no.16 dated 06.12.1998
Legal Framework For Loan Recovery
After being classified, bank goes for loan recovery by legal action. Head office appoints legal advisers and advises to the branch to file a suit against the defaulted loanee. BASIC Bank generally suits files under the Artha Rin Adalat 1990. Besides, other loan recovery acts are as follows though these are not applicable in BASIC Bank.
- Public Demand Recovery Act-1913.
- Bankruptcy Act-1997.
- Negotiable Instrument Act-1881 section 138 for insufficient fund (In case of term loan).
Tender or Bid Bond Guarantee: The tender guarantee assures the tenderee that tenders shall uphold the conditions of his tender during the period of the offer as binding and that he /she will also sign the contract in the event of the order being granted.
Performance Guarantee: A Performance guarantee expires on completion of the delivery or performance. Beneficiary finds that as a guarantee, the contract will be fulfilled in every respect and can retain the guarantee as per provision for long time. Including a clause stating that the supplier can claim under the guarantee, by presenting an acceptance certificate signed by the buyer can counteract this.
Advanced Payment Guarantee (APG): This type of guarantee is given against work order. For example, before the beginning of Jamuna Bridge construction, the Government collected money from different sources to pay the contractors in advance. But there was a risk for the Government that the contractors might not do there construction work even they were paid in advance. So the Government asked Bank Guarantee from them. Then they contractors submitted Bank Guarantee to the Government. This type of Guarantee is called Advanced Payment Guarantee.