Report on Investment Analysis of Exim Bank (Part-2)
Subject: Economics, Finance

4.1LENDING FACILITIES RESTRICTIONS

The bank establishes a specific industry sector exposure cap by preparing a sector wise loan budget in order to avoid over concentration in any one-industry sector. The budget is approved by the Board in the month of January every year and includes the following points:

Total Facilities: The aggregated of all cash facilities is kept at 80% of customer’s deposits. It is also governed by the statutory and liquidity reserve requirement of Bangladesh Bank.

Term Facilities: Aggregated long-term facilities are restricted to 20% of the total loan portfolio and are not allowed for a period more than 5 (five) year.

Unsecured Facilities: Aggregate bank loans to corporate or individual customers who are not secured by collateral and are allowed on the strength of customer’s personal integrity and financial standing or the corporate customer’s balance sheet, with or without hypothecation of stock is restricted to 30% of the total loan portfolio.

Sector-wise Allocation: Sector-wise allocation of loan budget is made in the month of January of each year with the approval of Executive Committee/Board of Directors. This is reviewed from time to time.

Security:   Security accepted against loan facilities is properly valued and is affected in accordance with the laws of the country in which the security is held. An appropriate margin of security is taken to reflect such factors as the disposal cost or potential price movement of the underlying assets.

4.2     INVESTMENT FACILITIES NOT PROVIDED FOR BUSINESS TYPES

The Bank does not provide loan facilities to the following businesses:

Military Equipment/Weapon Finance.

Highly Leveraged Transactions.

Finance of Speculative Loans.

Logging, Mineral Extraction/Mining, or other activity that is ethically of Environmental sensitive.

Lending to companies listed on CIB black list or known defaulters.

Counter parties in countries subject to UN sanctions.

Share lending.

Taking an equity stake in Borrowers.

Lending to Holding Companies.

Bridge Loans relying on equity/debt issuance as a source of repayment.

Tannery Finance.

Izara Bill Baia (HB-residential) who has no other business with the Bank.

4.3      GENERAL LENDING PRINCIPLES OF EXIM BANK

Lending of funds to the traders, businesses and industrial enterprises constitutes the main business of the bank. A major part of the bank’s income is earned from interest and discount on the funds so lent. The business of lending, nevertheless, is not without certain inherent risks. Largely depending on the borrowed funds, a banker cannot afford to take

Undue risks in lending. While lending its fund, the bank, therefore, follows a very cautious policy and conducts its business on the basis of the well-known principles of sound lending in order to minimize the risks. The bank usually follows the following lending principles in its credit management operations:

Safety: As the bank lends the funds entrusted to it by the depositors, the first and foremost principle of lending is to ensure the safety of the funds lent. By safety it is meant that the borrower is in position to repay the loan, along with interest, according to the terms of the loan contract. The bank takes utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one and the borrower is capable of carrying it out successfully and is a person of integrity, good character and reputation.

Purpose: The bank does not grant loan for each and every purpose.  Bank has its own policy regarding the purpose for which it provides loans. Loans are normally provided for productive purposes only such as working capital, trading, agricultural, transport, export-import etc. The bank does not grant loans for purely speculative purposes, unproductive purpose such as social functions or holiday or for repayment of prior loans and business having negative net-worth if it is not covered by cash/quasi cash securities with adequate margin.

Profitability: Since the bank is a profit-earning institution, it employs its funds profitability so as to earn sufficient income out of which to pay interest to the depositors, salaries to staff and to meet various other establishment expenses and distribute dividend to shareholders. The bank usually considers high yielding, short-term, and self-liquidating with ancillary business/compensating deposits and prefers quality advances. The bank keeps a spread of lending rate over its expenses that include deposit interest payment and other operating and overhead expenses. The bank is free to determine its interest rates.

Liquidity: Bank lends funds for short periods. The loans are, therefore, largely payable on demand. The bank ensures that the borrower is able to repay the loan on demand or within a short period. The bank grants loans on the security of assets, which are easily marketable without much loss.

Dispersal/Diversification: The bank keeps its investment portfolio as much broad based as possible and in conformity with the deposit structure. The bank does not provide investments in one Particular direction/industry/activity or one or few borrowers because any adversity faced by that particular industry will have serious adverse affect on the bank.  Again, investments are not concentrated in one area alone. The bank spreads its loans against different securities, industries/activities, borrowers, areas, etc. This way the bank diversifies its risks.

National interest/social benefit: The Bank grants loan if the purpose of the investment is for overall plans necessitating flow of credit to priority sector in the larger national interest. National interest for financing in some areas, especially in advances to agriculture, small industries, export oriented industries, and assuming great importance. The bank also looks at the social and environmental implication of the project or business that it is financing.

4.4     BORROWER/GROUP LIMITS/SYNDICATION:

 Bank may allow investment facilities to a single customer/Group (Funded & non funded) up to its 50% of total capital out of which funded facilities must not exceed 25% of total capital. All proposal submitted to Head Office will also be required to indicate the extent of the Bank’s global exposure to that customer group.

Group exposure shall be deemed to include the total investment facilities as detailed below:

Investment facility in the name of the borrower.

Investment facility in the name of the firms & companies in which the borrower or its partner or its director is the proprietor or a partner or a Director.

Investment facility in the name of any firm of company in which the borrower or its partner or its director owns 20% or more share even if not a Director.

Any Investment facility guaranteed by the borrower or its partner, or its Director.

However, definition of group exposure given by Bangladesh Bank shall be followed regardless of the above definition.

GroupYear: 2010Year: 2009
AKH Group4,222,300,0002,030,900,000
MASCO Group3,604,000,0001,612,100,000
Badsha Group2,689,300,000
Pretty Group2,670,000,000
S. Alam Group1,898,900,000
Comfit Composite Ltd.1,852,200,000
ABA Group1,706,200,000
Legacy Fashion Ltd.1,670,800,000971,000,000

4.5     INVESTMENT INVESTIGATION

Lending is one of the most important functions of a bank. Therefore, it is of paramount importance that the bank chooses a reliable borrower. For this the bank places the kind of mechanism(s) that helps it identify the borrower who can be creditworthy. This section deals with some of the mechanisms that the bank employs for this end.

Investment Application form: A investment application form usually contains information pertaining to the name of the concern, constitution, nature and place of business, year of establishment, borrower’s experience in the line, particulars of assets and liabilities, purpose of advance, amount required, period of advance required for, nature of security offered, sources of repayment, names of present bankers with detailed borrowing and other facilities. This is the first step of knowing about the borrower.

Personal Interview: The bank arranges interview with the borrower to know more about his specific requirements, the prospects of his employing the funds prudently, his capacity to repay and the suitability of the security offered.  The main points that are covered in the interview are: his business, all legal documents required for operation of his business (Memorandum and Article of Association, trade and import license), his capital with reference to working capital, his experience in the business, results of financial statements of at least three years, amount of investment and period, purpose of advance, source of repayment, terms of payment, security documents that are offered, types of charge available. The bank officials who conduct the interview try to analyze and judge for themselves the correctness or otherwise of the various statements and documents of the prospective borrower and to arrive at a balanced opinion regarding the acceptability or otherwise of the proposal.

After the initial interview, if  the commercial credit officer found that the loan request meets basic bank lending criteria, the next step will be to conduct a more in-depth investigation, relying upon the documents obtained from the client and from bank’s own and outside sources.

4.6     INVESTMENT RECOVERY

The bank has a Recovery Unit (RU) under CRM. It directly manages account with sustained deterioration (a Risk Rating of Sub Standard (6) or worse).

The RU’s primary functions are:

Determine Account Action Plan/Recovery Strategy.

Pursue all options to maximize recovery.

Ensure adequate and timely investment loss provisions are made based on actual and expected losses.

Regular review of grade 6 or worse account

All PIs are assigned to an Account Manager within the RU, who is responsible for coordinating and administering the action plan/recovery of the account, and serves as the primary customer contact after the account is downgraded to substandard.

5.1     Types of classified investment

Loan classification is required to have a real picture of the loan and advances provided by the Bank. It helps to monitor and take appropriate decision regarding each loan account. All types of loans fall into following four scales:

Categories of investments and advances of a bank:

Un-classified: The repayment of investment and advances are regular.

Sub-standard: The repayment of investment and advances are irregular but has reasonable prospect of improvement.

Doubtful debt: It is unlikely to be repaid but special collection efforts may result in partial recovery.

Bad/loss:  There is little chance of recovery of investments and advances.

5.2     Basis for loan Classification

There are two ways loans are classified: 1) Objective Criteria, 2) Qualitative Criteria.

Objective Criteria

Continuous investment: A continuous loan will be treated as irregular/overdue if the advance has not been renewed, that is expiration date is passed. Criterions for loan classification are given in table.

Sub-standardDoubtfulBad/loss
Irregular for 3 months or more but less than 6 months.Irregular for 6 months or more but less than 12 months.Irregular for 12 months or above.

Term investment:

If any installment of a term loan is not repaid within as per repayment schedule the unpaid amount will be treated as overdue installment.

Sub standardDoubtfulBad/loss
If the amount of overdue installment stands equal or more than the amounts which is repayable 6 monthsIf the amount of overdue installment stands equal or more than the amounts which is repayable 12 months If the amount of overdue installment stands equal or more than the amounts which is repayable 18 months.

Qualitative Criteria

The investment (continuous, demand, and term loan) are classified by the bank whenever it has reason to believe the borrower may not be able to repay the loan due to change is the circumstances under which the loan was originally sanctioned.

The investment is classified as sub-standard on the basis of qualitative judgment, if there is a possibility to change the present situation by taking appropriate steps, although there is a possibility to become loss of the investment. When the loans are categorized as sub- standard it means the repayment of investment and advances are irregular but has reasonable prospect of improvement. But if there is no possibility of recovery of loan after taking adequate steps, then the loan is treated as doubtful.

But if it is not possible to recovery the loan even after taking all out efforts then the loan is treated as bad/loss.

Recovery Units ensure that the followings are carried out when an account is classified as Sub Standard or worse:

Facilities are withdrawn or repayment is demanded as appropriate. Any drawings or loans are restricted, and only approved after careful scrutiny and approval.

CIB reporting is updated according to Bangladesh Bank Guidelines and the borrower’s Risk Grade is changed as appropriate.

Investment loss provisions are taken based on Forced Sale Value (FSV).

Investments are only rescheduled in conjunction with the Large Loan Rescheduling guidelines of Bangladesh Bank. Any rescheduling is based on projected future cash flows and is strictly monitored.

Prompt legal action is taken if the borrower is uncooperative.

5.3     RATIO ON INVESTMENT, CLASSIFIED INVESTMENT AND ASSET

Particular Year: 2010Year: 2009
Ratio on investments and deposits98.26%92.92%
Ratio on classified investments and total investments1.99%2.68%

Ratio on investment, classified investment and asset is given below. The lower ration on classified investment and total investment is better.

5.4     CLASSIFIED INVESTMENT

YearSubstandardDoubtfulBad/lossTotal Classified Loan
2010162,742,636365,019,3631,327,483,5951,855,245,594
2009770,207,791220,610,822848,872,4541,839,691,067

Status of investment is one of the criterions of judging the performance of a bank. In case of classified or unsound investment EXIM Bank’s performance has not been so quite impressive. With the increase of investment disbursement the amount of classified investment, especially bad investment, has increased quite fast in 2010. In 2010 doubtful loan also increased than previous year.

YearSub-standard Investmentas % of TCLDoubtful Investmentas % of TCLBad/Loss Investmentas % of TCL
201092071
2009421246

FINDINGS

The share of bad/loss loan, which has no possibility of recovery other than legal measures, is very high in 2010 compare to 2009. This indicates banks flexibility regarding credit facility or poor performance of credit department and recovery system.  Also doubtful loan has risen quite sharply this year.  This year of 2010 EXIM Bank has 71% bad loan. But the proportion of substandard loan decreased this year.

5.5     INDUSTRY WISE INVESTMENT

Industry

  2010

2009

Garments

10,349.13

11,166.65

Textile

4,527.13

4,383.78

Agro Based Industry

3,302.30

2,828.20

Other industry ( Housing, Transportation)

9,202.64

9,050.20

Trading

65,915.43

41,181.06

Sector wise loans and advancesTable-7 Amount in million

FINDINGS

It is particularly important to monitor whether the increase in loans in the economy is concentrated in sectors that are vulnerable to shifts in economic activity. Investment concentration in a specific economic sector or activity (measured as a share of total loans) makes banks vulnerable to adverse developments in that sector or activity. Hence, the quality of a financial institution’s investment portfolios is closely related to the financial health and profitability of its borrowers.

Table shows that the most of the loans of 2010 & 2009 are concentrated in trading sector about 65,915.43 million taka which is about 71% of total in 2010 and about 41,181.06 million taka which is about 60% of total of sector wise loan in 2009. So it’s clear than bank prefers mostly trading sector. When it increased investment for trading sector in 2010, investment for garment sectors decreased at 11% which was 16% in 2009. As usual the bank allocates lowest amount of its loans for agro based industry about 3% which was 4% in 2009, but amount increased in 2010.

5.6     DIVISION WISE CLASSIFICATION

DivisionYear: 2010 ( Amount in million)Year: 2009 ( Amount in million)
Dhaka Division69,217.6149,829.99
Chittagong Division18,983.5515,050.66
Khulna Division1,216.42911.11
Rajshahi Division2,091.841,628.69
Barisal Division44.808.58
Sylhet Division1,287.741,180.84
Rangpur Division454.650

FINDINGS

From above table and column chart one can easily understand the investment practice of EXIM Bank in terms of division. Here I found out that EXIM Bank invested mostly in Dhaka division and secondly in Chittagong. In 2010 proportion of investment for Dhaka, Chittagong, Khulna, Rajshshi, Barisal, Sylhet and Rangpur is 74%, 20%, 1%, 2%, 0.2%, 2% and 0.8% respectively. There are some reasons behind the percentage of Dhaka division. Major Group or high rated individual has bank account in Dhaka division. Another reason is than EXIM Banks has more branches in Dhaka compare to any other division. In 2010 this bank sanctions 69,217.61 million taka in Dhaka division which is larger than previous year.

5.7     MATURITY WISE CLASSIFICATION OF INVESTMENTS

Maturity periodYear: 2010 ( Amount in million)Year: 2009 ( Amount in million)
Repayable on demand2,453.191,706.06
Not more than 3 months17,779.4213,600.29
Over 3 months but not more than 1 year39,764.2826,266.50
Over 1 year but not more than 5 year13,204.7610,259.64
More than 5 year20,094.9816,777.39

FINDINGS

Under this classification I found out that “Over 3 months but not more than 1 year” represents greater volume than any other in the year of 2009 and also in 2010. Bank normally gave less concentration on “Repayable on demand” because it generated less investment income. In 2010 Proportion of Repayable on demand, not more than 3 months, Over 3 months but not more than 1 year, Over 1 year but not more than 5 year & More than 5 year is 3%, 19%, 43%, 14% & 21% respectively. In 2009 Proportion of Repayable on demand, not more than 3 months, Over 3 months but not more than 1 year, Over 1 year but not more than 5 year & More than 5 year was 3%, 20%, 38%, 15% & 24% respectively.

5.8 GEOGRAPHICAL LOCATION WISE CLASSIFICATION OF INVESTMENT

LocationYear: 2010 Year: 2009
In Rural Areas4,058.952,626.90
In Urban Areas89,237.6965,982.99

FINDINGS

Allocation of investment is same this year of 2010 for rural and urban areas as of 2009. Actually production activities are performed mainly in rural areas and financial activities are performed in urban areas.

5.9  INCOME FROM INVESTMENT

YearInvestment Income [In million Tk.]
20109,606.18
20098,147.11

FINDINGS

As EXIM Bank increases its investments from year to year, so it is logical that it income from sanctioning investments are more. The bank has achieved the highest profit in 2010 from any other previous year though it has highest amount of bad loan this year erstwhile. So performance of providing investments of the bank is satisfied.

 5.10 DEPOSIT MOBILIZATION AND INVESTMENT DISBURSEMENT

A bank exists mainly on the deposit resources and loan disbursement. Day by day the deposits generation is becoming harder due to immense competition in this sector, changes in people saving motive as well as government rules and regulation. The bank introduced some deposit schemes with attractive return for depositors in recent years to increase deposits.  As Loans and advances are major revenue-generating assets for any bank, the performance of the bank depends very much on these assets. Table shows the state of deposit and Investment of the bank of 2010 & 2009. Deposits stand at Tk. 94,949.40 million in 2010 & Tk. 73,835.46 million in 2009. Investments stand at Tk. 99,309.51 million in 2010 from Tk. 70,799.45 million in 2009.

YearDeposit (Tk. in million) Investment (Tk. in million)
201094,949.4099,309.51
200973,835.4670,799.45

FINDINGS

From the above figure it can be concluded that deposit was higher from investment in year of 2009 but investment is higher than deposit in year of 2010. Which can create liquidity crisis, but ultimately bank was successful to generate more income.

6.1     DEFINITION OF CRG

The Credit Risk Grading (CRG) is a collective definition based on the pre-specified scale and reflects the underlying credit-risk for a given exposure.

A Credit Risk Grading deploys a number/ alphabet/ 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.

6.1.1 USE OF CRG

The Credit Risk Grading matrix allows application of uniform standards to credits to ensure a common standardized approach to assess the quality of individual obligor, credit portfolio of a unit, line of business, the branch or the Bank as a whole.  

As evident, the CRG outputs would be relevant for individual 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. These would largely constitute obligor level analysis.

Risk grading would also be relevant for surveillance and monitoring, internal MIS and assessing the aggregate risk profile of a Bank. It is also relevant for portfolio level analysis.

6.1.2 HOW TO COMPUTE CRG

The following step-wise activities outline the detail process for arriving at credit risk grading.

Credit risk for counterparty arises from an aggregation of the following:

Financial Risk

Business/Industry Risk

Management Risk

Security Risk

Relationship Risk

Each of the above mentioned key risk areas require be evaluating and aggregating to arrive at an overall risk grading measure.

Evaluation of Financial Risk:

Risk that counterparties will fail to meet obligation due to financial distress. This typically entails analysis of financials i.e. analysis of leverage, liquidity, profitability & interest coverage ratios. To conclude, this capitalizes on the risk of high leverage, poor liquidity, low profitability & insufficient cash flow.

Evaluation of Business/Industry Risk:

Risk that adverse industry situation or unfavorable business condition will impact borrowers’ capacity to meet obligation. The evaluation of this category of risk looks at parameters such as business outlook, size of business, industry growth, market competition & barriers to entry/exit. To conclude, this capitalizes on the risk of failure due to low market share & poor industry growth.

Evaluation of Management Risk:

Risk that counterparties may default as a result of poor managerial ability including experience of the management, its succession plan and team work.

Evaluation of Security Risk:

Risk that the bank might be exposed due to poor quality security in case of default. This may entail strength of security & collateral, location of collateral and support.

Evaluation of Relationship Risk:

These risk areas cover evaluation of limits utilization, account performance, conditions/covenants compliance by the borrower and deposit relationship.

According to the importance of risk profile, the following weight ages are proposed for corresponding principal risks.

Principal Risk Components                       Weight

Financial Risk                                     50%

Business/Industry Risk                       18%

Management Risk                               12%

Security Risk                                       10%

Relationship Risk                                10%

Principal Risk Components Key Parameters
Financial RiskLeverage, Liquidity, Profitability & Coverage ratio
Business/Industry RiskSize of Business, Age of Business, Business Outlook, Industry Growth, Competition & Barriers to Business
Management RiskExperience, Succession & Team Work.
Security RiskSecurity Coverage, Collateral Coverage and Support.
Relationship RiskAccount Conduct, Utilization of Limit, Compliance of covenants/conditions & Personal Deposit.
Loans & Advances Criteria Of Export Import Bank Of Bangladesh Ltd.
Criteria                                    Weight

Parameter

Score

A. Financial Risk                          50%
1. Leverage:                                (15%)

Less than 0.25×

15

Debt Equity Ratio (×) – Times

0.26× to 0.35 x

14

Total Liabilities to Tangible Net worth

0.36× to 0.50 x

13

0.51× to 0.75 x

12

All calculations should be based on

0.76× to 1.25 x

11

annual financial statements of the

1.26× to 2.00 x

10

borrower (audited preferred)

2.01× to 2.50 x

8

2.51× to 2.75 x

7

More than  2.75×

0

2. Liquidity:                               (15%)

Greater  than 2.74×

15

Current Ratio (×) –Times

2.50× to 2.74 x

14

Current Assets to Current Liabilities

2.00× to 2.49 x

13

 

Loans & Advances Criteria Of Export Import Bank Of Bangladesh Ltd.
   
Criteria                                    Weight

Parameter

Score

A. Financial Risk                          50%

1. Leverage:                                (15%)

Less than 0.25×

15

Debt Equity Ratio (×) – Times

0.26× to 0.35 x

14

Total Liabilities to Tangible Net worth

0.36× to 0.50 x

13

 

0.51× to 0.75 x

12

All calculations should be based on

0.76× to 1.25 x

11

annual financial statements of the

1.26× to 2.00 x

10

borrower (audited preferred)

2.01× to 2.50 x

8

 

 

2.51× to 2.75 x

7

More than  2.75×

0

2. Liquidity:                               (15%)

Greater  than 2.74×

15

Current Ratio (×) –Times

2.50× to 2.74 x

14

Current Assets to Current Liabilities

2.00× to 2.49 x

13

 

 

 

 

 

 

1.50× to 1.99 x

12

1.10× to 1.49 x

11

0.90× to 1.09 x

10

0.80× to 0.89 x

8

0.70× to 0.79 x

7

Less than  0.70×

0

3. Profitability:                           (15%)

Greater  than 25%

15

Operating Profit Margin (%)

20% to 24%

14

(Operating Profit/Sales) X 100

15% to 19%

13

 

 

 

 

 

10% to 14%

12

7% to 9%

10

4% to 6%

9

1% to 3%

7

Less than 1%

0

4.  Coverage:                                (5%)

Interest Coverage Ratio (×) – Times

Earning before interest & tax (EBIT)

More than 2.00×

5

Interest on debt

More than 1.51× Less than 2.00×

4

 

 

More than 1.25× Less than 1.50×

3

More than 1.00× Less than 1.24×

2

Less than 1.00×

0

Total Score- Financial Risk

50

 

 

B. Business/ Industry Risk            18%

1. Size of Business (Amount in Crore)

> 60.00

5

 

30.00 – 59.99

4

The size of the borrower’s business

10.00 – 29.99

3

measured by the most recent year’s

5.00 – 9.99

2

Total sales. Preferably audited numbers.

2.50 – 4.99

1

 

< 2.50

0

2. Age of Business

> 10 Years

3

 

> 5 – 10 Years

2

The number of years the borrower

2 – 5 Years

1

engaged in the primary line of business

< 2 Years

0

3. Business Outlook

Favorable

3

Critical assessment of medium term

Stable

2

prospects of industry, market share

Slightly Uncertain

1

And economic factors.

Cause for Concern

0

4. Industry Growth

Strong (10%+)

3

 

 

 

Good (>5% – 10%)

2

Moderate (1%-5%)

1

No Growth (<1%)

0

5. Market Competition

Dominant Player

2

 

 

Moderately Competitive

1

Highly Competitive

0

6. Entry/Exit Barriers

Difficult

2

 

 

Average

1

Easy

0

Total Score- Business/Industry Risk

18

 

C. Management Risk                   12%

1. Experience

More than 10 years in the related line of business

5

Quality of management based on total

5–10 years in the related line of business

3

 No of years of experience of the senior

1–5 years in the related line of business

2

Management in the Industry.

No experience

0

2. Second Line/ Succession

Ready Succession

4

 

Succession within 1-2 years

3

 

Succession within 2-3 years

2

After risk identification & weight age assignment process (as mentioned above), the next steps will be to input actual parameter in the score sheet to arrive at the scores corresponding to the actual parameters.

The following is the proposed Credit Risk Grade matrix based on the total score obtained by an obligor.

Number Risk GradingShort Name Score
1SuperiorSUP100% cash coveredGovernment guarantee

International Bank guarantees2GoodGD85+3AcceptableACCPT75-844Marginal/Watch listMG/WL65-745Special MentionSM55-646Sub-standardSS45-547DoubtfulDF35-448Bad & LossBL<35

 

Some More Parts-

Report On Investment Analysis Of Exim Bank (Part-1)

Report On Investment Analysis Of Exim Bank (Part-2)

Report On Investment Analysis Of Exim Bank (Part-3)

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