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SHORT QUESTIONS-CREDIT
1. What do you mean by CREDIT?
The word credit is derived from Latin word “Credo” meaning I believe. It is usually defined as ones ability to
buy with a promise to pay. From the Bankers point of view, credit is the confidence of the lender on the
ability and willingness of the borrower to repay the debt. Credit is the means of investment made by the bank
to the entrepreneurs and business community. Alternatively this is the way of channeling fund to the deficit
units where various risks and uncertainties are involved.
All lending involves some degree of risk, it is necessary for any bank to develop sound and safe lending
policies & new lending techniques in order to keep the risk to a minimum. The principles of sound lending
may, therefore, be summarized on followings:
1. Safety: Bank mainly uses depositors fund as a means of its earnings & the said funds are being
repayable on demand or after a short notice. So, prior lending, a Banker should consider safety of his
lending.
The repayment of the loan depends upon the borrowers i). capacity to pay & ii). Willingness to pay.
Capacity depends upon his tangible assets & the success of his business.
2. Liquidity: Liquidity is the availability of Bank’s funds on short notice. It is not enough that the
money will come back, it is also necessary that it must come back on demand or in accordance with
agreed terms of repayment.
3. Profitability: A Banker has to see that major portion of the assets owned by the Bank are not only
liquid but also aim at earning a good profit. The working funds of a Bank are collected mainly by
means of deposits from the public and interest has to be paid on these deposits. They have also to
meet their establishment charge and other expenses. They have to make provision for depreciation
of their fixed assets and also for any possible bad or doubtful debts. Interest earned by a bank against
it’s advances is the main source of it’s income.
4. Purpose: A banker would not throw away money for any purpose for which the borrower wants.
The purpose should be productive so that the money not only remains safe but also provides a
definite source of repayment.
5. Security: The security offered for an advance is an insurance or a cushion to fall back upon in case
of need. It should be the expectation of a banker that advance will come back from normal sources
not to recover the same by selling security. Security serves as a safety valves for an unexpected
emergency. An element of risk is always present in every advances & if the securities are not insisted
upon, there are chances that the borrower may raise funds elsewhere by charging them to others and
thereby bankers position is jeopardized.
6. Diversity: The advances must not be in one particular direction or to one particular industry because
any adversity faced by that particular industry will have serious repercussions on the bank. There
should be spread of advances against different securities, industries as well as areas. In a nut shell “all
eggs must not put in one basket” so that risk could be mitigated & diversified.
7. National Interest: Banking industry has significant role to play in the economic development of a
country. Before allowing credit, besides all other principles, Banker must consider national & social
interest of that particular credit. Any kinds of profitable advances, which has bad impact on overall
economic & social sector of the country, must be avoided.
3. Discuss the types loans and advances for the purpose of classification.
a). Continuous Loan: Loans and advances which do not have any set schedule for drawing or repayment on
disbursement but usually have a fixed limit and a terminal date (expiry date) for full adjustment/repayment
are called continuous loan. Such as Overdraft, Cash Credit, Packing Credit, LIM, LTR etc. (CL form -2 is
used for reporting this type of loans).
b). Demand Loan: Loans and advances which are repayable on bank’s claim (through issuance of formal
notice) to the borrower is called demand loan. Such as PAD, FBP, IBP, Forced loan etc. (CL form – 3 used
for reporting this types of loans).
c). Fixed Term Loan: Loans and advances which have a set repayment schedule of some installments within
a fixed term period are called Fixed Term Loan. Fixed Term Loan can be divided into two categories:
i). Term Loan payable within 5 years: The term loan which are payable within a period of 5 years as per
the contractually fixed repayment schedule. Any term loan other than STAC/MC allowed for a period of
5 years should be of this types. (CL form – 4 used for reporting this types of loans).
ii). Term Loan payable in more than 5 years term: The Term loan which are repayable in a period more
than 5 years as per the contractually fixed repayment schedule. Term of this type of loan will be more than 5
years. (CL form – 5 used for reporting this types of loans). 28.06.09 reviewed
Ans. Commercial banks make advances in different forms. All types of credit facilities can be broadly
classified in to two groups:
Overdraft: This is the operative credit facility extended to the client as working capital financing for trading
and manufacturing business and also for finance against work order. Specific limit covering the sanctioned
loan amount is given on clients current account & they are allowed to draw and maintain regular transaction
up to this limit.
Time Loan: Time loan is allowed with a fixed maturity date (up to one year) indicating due date of
repayment in full or in equal installments. Time Loan is disbursed in one or two installments and the same
has to be adjusted within one year by equal installments as per specific repayment schedule.
Term Loan: Generally Term Loan is allowed to large well established business enterprises for financing
capital expenditure, such as for acquisition of machineries to set up a industry, balancing and modernization
of existing plant/machineries for over a period of one year completion
Trust Receipt: This facility is connected with import facility and is provided to very selective only. The
tenure of this facility is 15 – 180 days. Sometime as per earlier arrangement of under compelling situation we
allow our valued clients to retire the L/C documents without adjusting the demand loan or outstanding BLC.
Bill Discounting: This type of loan is provided to the client by discounting bill of exchange favoring the
client. When usance bills are submitted by the client a margin (covering also the interest on the loan) amount
is deducted from the face value of the bill and the rest is provided to the client. At maturity of the bill the
same to be presented to the drawer for full proceeds of the bill through which the loan is adjusted.
Type of credit facility which involves direct commitment of bank on behalf of customer for payment to third
party under some agreed conditions refers to non-funded credit facility. The followings are the non-funded
credit facilities/limits practiced in the Jamuna Bank Limited.
This is an obligation undertaken by the Bank against which the customer imports/procures any permissible
items from both local and foreign sources.
This is acceptance made by the Bank for payment after a certain period against shipping documents (bill) for
import through Usance (DP) L/C. It is an interim arrangement that allows time for the importer to make
payment.
A Bank Guarantee represents an unconditional undertaking of the Bank to pay a specified amount of money
if the party for which the bank is giving the guarantee does not fulfill its contractual obligations.
Commercial Paper:
Commercial Paper (CP) is a money market instrument to meet short-term demand of the fund. CP refers to a
promissory note with a maturity of not less than 30 days and not more than 1 (one) year that is sold at a fixed
rate of interest or discount from face value. To ensure the interest of the bank CP may be backed by
guarantee. CP shall be issued in denominations of BDT.10,00,000.00 and multiplies thereof.
1. Credit Investigation.
3. Loan Structuring
1. Personal interview
2. Internal Bank Source (Loan application form, credit files, account performance etc.)
3. External Bank source (CIB report, confidential report of other Bank, Balance sheet, market report, stock
exchange publications, income tax statement etc.)
9. Define borrower.
Ans. Borrower means a person or group or group of persons or individual associated under a legal entity
whom Bank’s extend their credit facilities.
14. What are the distinctions between General & Special Power of Attorney?
In case of general power of attorney, the person appointing the attorney authorizes him to act on his behalf
for more than one transactions. While special power of attorney authorizes a person to act in a single
transactions.
Ans. Power of attorney as act as general notice for all concerns regarding delegations of authority by the
customer & on the other hand Mandate is only a notice for a particular Banker to allow his nominee to
operate his account.
i). Advance made on the security of tangible assets like goods, building, land, stock exchange securities etc.
ii). Market value of such security must not be less than the amount of loan.
Advance made against which no tangible securities has been attached except personal guarantee of borrower
and other parties are called unsecured advances.
Security means things deposited as a guarantee of an undertaking or loan, to be forfeited in case of default.
Also means document as evidence of a loan, certificate of stock, bonds etc. It is also meant to be an insurance
against an emergency.
Primary security is one which deposited by the borrower & provide the main covers for the advance made.
Primary security are two types: i). Personal security ii). Impersonal security
i). Personal security: Borrower executed/perform promissory note, accepts or endorse bill of exchange,
make personal covenants in mortgage deed. These are called personal security.
ii). Impersonal security: When charge created on borrowers tangible assets like pledge, hypothecation,
mortgage etc. that is called impersonal security.
A collateral security is a security belongs to & deposited by the borrower himself or by any third party to
secure the advance made. Collateral security may be two types. These are :
ii). Economic aspects : a). Marketability. B). Easy ascertainment of value c). Stability of price
d). Easy storability e). Durability f). Transportability g). Cost of consideration h). Yield
21. What do you mean by ‘charge document’ & ‘legal document’ & ‘Other documents’ ?
Charge Document: Charge documents are generally printed documents provided by the Bank for
execution/implementation by the clients. Such as:
i). D.P. Note, ii). Letter of Agreement, iii). Letter of Continuity, iv).Letter of Revival.
ii). Letter of Pledge with Supplementary Agreement iii). Letter of Guarantee, iv). Letter of Trust Receipt, v).
FDR Lien Letter etc.
Legal Documents: Legal documents are legal papers provided by the client certifying the legal status of the
borrower, their borrowing power, title of goods & property and legal deeds and power of attorney connected
with charging of securities. Like as:
ii). Registered Partnership Deed, iii). Trade License, iv). Companies Board Resolution & partners resolution
to borrow, v). All Original property documents including lawyers opinion.
Other Documents: i). Insurance Policy. ii). Govt. Security Transfer Form. iii). Lien on Export L/C (for
packing credit) iv). Duly discharged FDR, Share, Certificates, Govt. Securities etc.
22. What are the use of different types of stamp for different types of loan?
Judicial Stamp: These are for judicial noting in the court. These are not used for loan documentation.
Adhesive: Revenue Stamps & Special Adhesive Stamps (for some documents).
23. What do you mean by Charge? How many type of charge are there?
Charge is a method to create right over the tangible property of the borrowers. There are two types of charge.
These are : i). Fixed Charge ii). Floating Charge.
Fixed charge: A charge is said to be fixed if it is made specifically to cover definite & ascertained assets of a
permanent nature. Such as charge on land & building or heavy machineries.
24. What are the different ways of charging against different securities?
01. Cash Collateral (i.e. FDR, Govt. Securities, Pledge, Lien, Assignment
Shares, Insurance Policies, Receivables)
25. What matter Bank have to consider before determine the methods of charge against any
securities? What are the different method of charging?
iii). The degree of control over the debtors property required by the Bank to secure their exposure.
v). Assignment (Section 130 & 136 of Transfer of Property Act 1882)
26. What do you mean by Hypothecation? What are the features of Hypothecation?
Hypothecation is a charge against movable property for an amount of debt where neither ownership nor
possession is passed to the creditor. Though the borrower is an actual physical possession but the
constructive/useful possession remain with the Bank as per the deed of hypothecation. The borrower hold
the possession not in his own right as the owner of the goods but as the agent of the Bank.
Features of Hypothecation:
“A mortgage is the transfer of interest on an specific immovable property for the purpose of securing
payment of money advanced or to be advanced by way of loan, existing or future debt, or the performance of
an engagement which may give rise to a pecuniary liability”
Characteristics of Mortgage:
The interest on the mortgaged property is re-conveyed to the mortgagor on the repayment of the
amount of the loan with interest thereon.
There are six kinds of mortgages recognized by the Transfer of Property Act. These are:
The loan classification & provisioning may be defined as a process by which the risks, associated with the
loan accounts is identified and quantified to measure the level of reserves to be maintained by the Bank for
providing those risky loans.
Classification means giving each and every loan case a status like UC, SMA, SS, DF, BL through verification
of their transaction and repayment performance on a particular date i.e. reference date.
Provisioning means, setting aside fund from the profit against possible loan loss.
30. What do you mean by provisioning? Define the base for provisioning? Enumerate the
percentages of provisioning against different unclassified & classified credit facilities?
Provisioning: This is the accounting process of setting aside funds from the profit against possible loan loss
according to status of classifications. The worse the classification status, the more the provision requirement
will be. This provision is made gradually, year after year, which help a bank lessen the burden of charging the
loan loss as an expense (Write-off) in a single year.
Base for Provisioning: The base for classification will be computed as under:
Aggregate outstanding amount of classified loan less: The amount in interest suspense. Less: The value of
eligible securities.
1). @ 1% against all unclassified loan (Other than the loans under Small Enterprise and consumer
financing & Special Mentioned Account).
3). @ 5% on the unclassified amount for Consumer financing where it has to be maintained @ 2%
on the unclassified amount for: a). Housing Finance & b). Loans for professionals to set up business under
consumer financing scheme.
4). @ 5% on the outstanding amount of loans kept in the “Special Mentioned Account” after netting
off the amount of interest suspense.
Banks will maintain provision at the following rates in respect of classified Continuous, Demand & Fixed
Term Loans:
Provision in respect of short term agricultural and micro credits is to be maintained at the following
rates:
All credits except Bad/Loss (i.e. “Doubtful”, “Sub-standard” irregular and regular credit
accounts) : 5%
Bad/Loss : 100%
Provision against off Balance Sheet exposure of the Bank (BRPD Circular # 08/07 Dt. 07.08.07):
As per Bangladesh Bank’s BRPD Circular # 08 Dt. 27.04.2005 value of eligible securities are:
i). 100% value of deposit which are under lien against credit.
ii). 100% value of Gold & ornaments pledged with the Banks.
iii). 100% value of under lien Government Bond & Savings Certificate.
v). 50% market value of easily marketable commodities under direct control of Bank.
vii). In case of shares & securities which are in trade at DSE or CSE –50% of last 06(Six) moths average
market value or 50% of face value whichever is lower.
Hypothecation of vehicles
Overdraft (SOD) Sanchaya Patras, NFCD, Shares, Debentures, FDR, Life Insurance Policies,
Work Order.
Cash Credit (CC) Pledge or hypothecation of stock-in-trade, goods, produce and merchandise,
machineries, land and building on which machineries are installed.
a) Lien
Lien is the right of the creditor to retain the goods and securities in his possession, belonging to a
debtor, until the debt due is paid. Lien is the right of one person to retain goods and securities in his
possession belonging to another until certain legal debts due to the person retaining the goods are
satisfied.
b) Hypothecation
The mortgage of movable property is called hypothecation. Charge against property for an amount
of debt where neither ownership nor possession is passed to the creditor.
The mortgage of movable property is called hypothecation. A charge created on property or goods
for the amount of the debt in case of hypothecation. The owner, however, retains his ownership as
well as possession.
c) Pledge
Under section 172 of Contract Act – 1872, pledge is defined as :
‘A bailment of goods as security for payment of a debt or performance of a promise’. The bailor is
here called the “pawnor” and the bailee is called “pawnee”.
In a pledge, goods remain under the possession of the lenders unlike the hypothecation where goods
remain under the possession of the borrowers. In case of pledge, the borrower is to take the
repossession of the goods after paying off the loan within the contracted period.
d) Mortgage
“A mortgage is the transfer of interest on an specific immovable property for the purpose of
securing payment of money advanced or to be advanced by way of loan, existing or future debt, or
the performance of an engagement which may give rise to a pecuniary liability”
e) Assignment
An assignment means transfer of an existing or future right, property or debt by one person to
another person. The person who assigns the right, property or debt is called the assignor. The
person to whom the right, etc. is transferred is called the assignee. It is same as mortgage with the
only difference that in a mortgage there is always a right of redemption but in an assignment it is
provided by a separate agreement.
All good loans are treated as Unclassified and Overdue loans have been classified into 4 categories
01. Special Mention (SM) Account
02. Sub-Standard (SS)
03. Doubtful (DF)
04. Bad & Loss (BL).
Personal deposit 1%
43. Distinguish between Public Ltd. Co. & Private Ltd. Co.
Minimum member two & maximum 50 Minimum member seven & maximum unlimited.
Can commence business on receipt of “Certificate Certificate of incorporation must be obtained but
of Incorporation” without having of “Certificate of Commencement”
could not start activities.
Prohibits any invitation to the public to subscribe It raises it’s capital generally from public issues.
for any share or debenture
Must use the word “Private” as part of it’s name The word “Public” is not added in its name but
“limited” is added as the last word.
Primary documents of a joint stock company define Rules & regulations for the internal administration of
objects of its existence and operations. It may be a company. These determine the rights of members
rightly termed as the charter or the constitutions as such and govern the transfer of shares, conduct of
since it governs the relationship of the company meetings, appointment of directs, method of voting
with the outside world. It gives the object, name, & other day to day matters. Defines the internal
authorized capital, address etc. procedure of the company.
In case of Legal mortgage, the mortgagor transfers In case of an equitable mortgage, the mortgagor
legal title of the mortgage property in favor of the transfers the documents of title to the mortgagee for
mortgagee by a deed. On repayment of the loan the purpose of creating an equitable interest in the
mortgagee transfers the title to the mortgagor. property without passing legal title to the mortgagee
but the mortgagor undertakes, through MOD to
execute a legal mortgage in case he fails to pay the
mortgage money.
In legal mortgage transfer of legal right to the In equitable mortgage no registration charge is
mortgagee involves expenses in the form of stamp required expect a minimum stamp duty for MOD.
duty and registration charges.
Hypothecation Mortgage
Hypothecation refers to movable property and can Mortgage refers to immovable property & may be
be created without registration. created with registration. where mortgagees right to
suit is governed by the Transfer of Property Act.
In hypothecation there is only obligation to repay In mortgage there is transfer of interest in the
money and no transfer of interest. property to the creditor.
In hypothecation, hypothecates right is not Mortgagees right to sue is governed by the Transfer
governed by any statute his reedy is by way of a suit of Property Act.
for sale of the property hypothecated and for
declaration of charge in his favor.
Pledge Hypothecation
01. Pledge created only floating assets 01. Hypothecation created on fixed/floating
02. Possession of the goods held at Bank. assets.
03. It is easy for the bank to dispose off the 02. Possession of the goods held at the party.
goods because goods are held at Bank. 03. It is not easy for the bank to dispose off the
goods because goods are held at party.
04. For any damage bank will be liable. 04. For any damage party will be liable.
05. For auction of goods, court order 05. For auction sale of goods, court order is not
required. required.
SHORT NOTES
1. Pari Passu Charge
The term usually use in consortium/syndicated finance. In case of such lending, number of Bank’s or
financial institutions join together to finance a single borrower in an agreed ratio against a common security.
The securities are charged to all the Bankers/financial institutions without any reference like 1st
charge/second charge etc. The term that institution will have a pari passu charge over the borrowers assets
means that the lenders are entitled to have equal right over the assets as per the agreed share.
2. Working Capital
The capital left to work within running the company’s day to day business i.e. the left over from a
company’s paid up capital and reserves after all its fixed assets have been bought.
3. Micro-Credit
Refers to small credit specially credit for the poor, agriculture, rural development and other types of
credit for poverty alleviation. NGOs in our country are engaged in financing micro-credit needs of
the rural areas.
4. Syndicated/ Consortium Advance
Consortium loan means joint finance by more than one bank to the same party against a common
security. The entire security remains charged to all these banks for the total advances. All the
consortium banks have a Pari Passu charge on the security.
5. Industrial Finance
By ‘industrial finance’ we mean financing money to various industries of the country for meeting
their multifarious needs and requirements. The term ‘project’ for our purpose means the
establishment of a new enterprise or the introduction of something new into an existing product
mix.
7. Net worth
The net worth of a business is calculated by subtracting the current liabilities from the total assets
after deducting fictitious assets.
8. Contingent Liabilities
A contingent liability is a likely or possible liability. These liabilities do not exist at the time of
balance sheet but it may arise in future. It may arise on the occurrence of a particular event and turn
out to be an actual liability. The total contingent liability e.g. liabilities in respect of guarantees given
by the company or demand made by the government but disputed by the company in the Court.
Contingent liabilities not being actual liabilities, are shown by way of a footnote in the balance sheet.
9. Window Dressing
Window dressing means manipulation of accounts to conceal vital facts and present the financial
statements in a way to show a better position than what it actually is. On account of such a situation,
presence of a particular ratio may not be a definite indicator of good or bad management.
11. Leasing
Leasing, in general, is viewed as a method of financing the acquisition of capital equipments. In view
of the nature of technology involved, pace of innovations and change and customs of the trade and
business, lease contracts are structured to suit the convenience of borrowers or lessees. Legally
speaking, a lease is a contract as defined in the Contract Act. 1872, under which the possession and
use of assets vests with user called the ‘Lessee’, whereas the ownership remains with the ‘provider’
called the ‘Lessor’ Leasing is, thus, the mechanism by which a person acquires possession and use of
an asset by paying a pre-determined amount of money called ‘rental’ periodically over a stated period
of time on a mutually agreed upon terms and the lessor remains the legal owner.
14. Factoring
Factoring, receivables factoring or debtor financing, is when a company buys a debt or invoice from
another company. Factoring is also seen as a form of invoice discounting in many markets and is
very similar but just within a different context. In this purchase, accounts receivable are discounted
in order to allow the buyer to make a profit upon the settlement of the debt. Essentially factoring
transfers the ownership of accounts to another party that then chases up the debt.
Improve the banking sector's ability to absorb shocks arising from financial and
economic stress, whatever the source
Improve risk management and governance
Strengthen banks' transparency and disclosures.
It has prepared on the basis of three pillars:
1. Minimum capital requirement
2. Supervisory review process, and
3. Market Discipline
Three types of risks- credit risk, market risk and operational risk- have to be considered under the
minimum capital requirement.
Green Banking is an umbrella term referring to practices and guidelines that make banks sustainable
in economic, environment, and social dimensions. It aims to make banking processes and the use of
IT and physical infrastructure as efficient and effective as possible, with zero or minimal impact on
the environment.
Considering the nature of banking processes and infrastructures, IDRBT offers guidelines for
greening banking in two levels.
1. Making day-to-day business operations, banking products and services greener by following
simple practices and making them environmentally friendly.
2. Making IT infrastructure (including data center) and physical infrastructure (including
buildings) greener and taking initiatives so that a bank could itself generate electricity for its
own consumption.
The product that is manufactured must be technologically viable i.e. whether the technology applied
is updated. The product’s stage in its life cycle must be understood. Technical aspects of the product
must be addressed. The credit Officer/RM must be satisfied with the mitigating factors of technical
and technological risk, associated with the products.
Interest rate risk arises from the movements of interest rate in the market. The interest rate must be
fixed based on different risk factors associated with the type of business such as liquidity risk,
commodity risk, equity risk and loan period risk. In assessing the pricing and profitability, the Credit
officer/RM must consider the income from ancillary business like foreign exchange business, group
business, volume of business etc.