Credit facilities of Prime Bank Limited
One of the two primary functions of a commercial bank is to extend credit to the deficit economic unit that comprises borrowers of all types. Bank credit is a catalyst of economic development. Without adequate finance, there can be no growth in the economy. Bank lending is important for the economy in the sense that it can simultaneously finance all of the sub-sectors of financial arena, which comprises agricultural, commercial and industrial activities of a nation. Therefore, a bank is supposed to distribute its loanable fund among economic agent-in-deficit in a manner that it will generate sufficient income for it and at the same time benefit the borrower to overcome his/her deficit.
What is Credit?
The word “CREDIT” is derived from the Latin word “credo” meaning ‘I believe’. In general, credit means granting of a period of time by a creditor to a debtor at the expiration of which the latter must pay the debt. From a banker’s point of view, credit is the confidence of the lender on the ability and willingness of the borrower to repay the debts at a future date.
Moreover, it can be defined broadly or narrowly. Broadly speaking, credit is the finance made available by one party (lender, seller, shareholder/owner) to another (borrower, buyer, corporate or non-corporate firm). The former may be a pure lender (a financial institution or a private money-lender), a seller supplying goods against the buyer’s promise of future payment, or a shareholder/ owner of a corporate/non-corporate making funds available to the firm viewed as a separate entity.
More specifically, the term credit is used narrowly for only debt finance. To define in this way, credit is simply the opposite of debt. It is a stock-flow variable and should be carefully distinguished from money.
Kinds of credit
Credit is not one homogeneous good or asset. It is various kinds. To understand the nature, scope and complexity of credit and its problems, we look at the several kinds of credit. But there is no unique way to classify credit. It can be and need to be classified in more than one way, each one specializing in only one aspect or dimension of credit. Thus we classify credit from five different angles:
· Source,
· End-use,
· Users,
· Term,
· Cost.
Source of credit
Nowadays credit is provided by a wide variety of sources. These sources may be conveniently classified in the following figure:
Source of Credit
Credit facilities of Prime Bank Limited:
Prime Bank Motijheel Branch provides two types of Credit to its customers. These are :
· Direct Credit Facility
· Indirect Credit Facility
Direct Credit Facility: Direct Credit Facility pertains to Bank’s direct fund involvement. It is popularly known as funded Credit facility.
Indirect Credit Facility: Indirect Credit Facility does not associate Bank’s monitory involvement. It is widely known as non-funded Credit facility.
Both direct and indirect credit of Prime Bank is presented in the following chart.
Different Credits offered by PBL
Lending Principles of Prime Bank Limited:
Bank is the custodian of public money and as such it must be judicious, careful and selective while lending out its loanable fund to ensure timely recovery. The deciding factors for recovery of loans are selection of right type of borrowers, end-use of credits and effective follow-up and proper supervision and considering these factors, Prime Bank Limited has set its lending principles that are as follows:
a) Judicious selection of Customers
b) Purpose
c) Safety
d) Security
e) Liquidity
f) Adequate return (Profitability)
g) Supervision
h) National/Social interest
i) Credit guidelines of Bangladesh Bank
Judicious Selection of Customer
Prime Bank Limited believes that the credit facility extended after judicious evaluation of creditworthiness of the customer can never result in any mishap to the bank. So, bank considers this as its most important lending principle. And while lending, this is strictly followed.
Purpose:
The bank should not lend money for any purpose for which a borrower wants. So Prime Bank Limited studies the purpose for which the loan is required and also the resources from which the borrower is expected to make repayment. Loans may be required for various purposes such as trading, agricultural, transport, self-employment purpose and the like. The purpose of the loan should be productive. It helps the bank to determine its course of action as regards to lending. Funds borrowed, obviously for a productive purpose may be spent on unproductive or speculation purpose. Bank, therefore, take follow-up measures to ensure the end use of fund exactly for the same purpose for which it is borrowed.
Safety:
The very survival of a bank depends on loans and advances. The ideal position of loans and advances refers to the situation that all the loans and advances stand fully secured. Thus Prime Bank Limited considers safety of the advances important among the principles of lending. Now the question is how to ensure safety to lending? To ensure the safety of lending bank judges the following most essential elements of the borrower:
Four Cs M= Man
Five Cs M= Management
Five Ms M= Money
Five Rs M= Materials
C= Character / conduct M= Market
C= Capacity / capability
C=Capital/Credit worthiness R= Reliability
C= Condition R= Responsibility
P= Person R= Resources
P= Purpose R= Respectability
P= Product (s) R= Returns
P= Place
P= Profit
Liquidity:
The banker while making advances must see that the money lent is not going to be locked up for a long time. Because, liability of the bank is payable either on demand or after short notice. So the banker should be sure that loan would be liquid. Thus liquidity of money lent is another important principle of lending. Liquidity means availability or readiness of bank funds on short notice. The liquidity of advance means its repayment on demand on due date or after a short notice. The loan must have fair chances of repayment according to repayment schedule. Otherwise, the liquidity position of a bank may be threatened. Liquidity also means conversion of assets into cash without loss.
Security:
The security offered by a borrower for an advance is insurance to the banker. It serves as the safety value for an unforeseen emergency. So another principle of sound lending is the security against lending. Security offered against loan may be of various types. The securities may vary from gold and silver to goods of various types and also movable and immovable properties.
Profitability:
PBL obtain funds from shareholders and if dividend is to be paid on such shares it can only be paid by earning profits. Even in the case of public sector banks although they work on service motive they also have to justify their existence by earning profits. This is not possible unless funds are employed profitably. In other words banking is essentially a business, which aims at earning a good profit.
Spread / Dispersal /Diversification:
The advances should be as much broad based as possible and must be in conformity with the deposit structure. The advances should not be in one particular direction / industry / activity or one or few borrowers because any adversity faced by that particular industry will have serious adverse affect on the bank. Again, advances should not be given in one area alone. There should be spread of advances against different securities, industries / activities, borrowers, areas etc. which will enable the banker to spread the risks and considerably look into the safety of advances. Here the principle is “Do not put all the eggs in the same basket”.
National interest / social benefit:
Bank has a significant role in the economic development process of a country. They should keep in mind the national developmental plan / programs while going for lending but maintaining safety, liquidity and profitability.
Credit guidelines of Bangladesh Bank:
As Bangladesh Bank is the competent authority to monitor Loans and Advances of all Commercial Banks, while lending its fund, PBL strictly follows all the guide line provided by Bangladesh Bank.
Modern Concept of Lending Principles
Modern concept of lending presupposes a well-developed loan proposal / loan case / project. It will cover as many as six pertinent factors like Managerial, Organizational, Technical, Marketing, Financial and Economic / Socio economic factor etc. These are technically known as feasibility or viability study of a loan proposal. By studying all these six factors if a banker is satisfied about the viability of a loan proposal, then he / she can finance it i.e., go for lending otherwise not.
Techniques of Project Appraisal:
“Project appraisal” means pre-investment analysis of an investment project with a view to determine its commercial and socio-economic feasibility. It is an essential tool for judicious investment decision and project selection. It is the prime steps in the process of decision-making in respect of sanctioning any loan by financial institutions.
The under mentioned appraisals should be conducted while evaluating an investment proposal:
· Management appraisal.
· Market appraisal
· Technical appraisal
· Financial appraisal
· Economic appraisal
Management appraisal
A good project may fail if the management is incompetent. It is necessary to evaluate the following managerial aspects:
· Overall background of the promoters.
· Academic qualifications.
· Business and industrial experience.
· Past performance & market reputation.
Market appraisal
Market appraisal is concerned primarily with two questions:
· Consumption trends in the past and the present consumption level
· Past and present supply position
· Production possibilities and constraints
· Imports and exports
· Structure of competition
· Cost structure
· Elasticity of demand
· Consumer behavior, intentions, motivations, attitudes, preferences and requirements
· Distribution channel and marketing policies in use.
TECHNICAL APPRAISAL
The importance of technical appraisal in project evaluation is beyond any question. Technical appraisal of a project broadly involves a critical study of the following:
· Location and Site
· Raw material supplies
· Transportation facilities
· Power and fuel supply
· Water
· Manpower
· Nature and climate.
· Size (Plant capacity): The size of the plant or scale of operation is an important factor that determines the economic and financial viability of a project.
Financial appraisal
Financial appraisal seeks to ascertain whether the proposed project will be financially viable in the sense of being able to meet the burden of servicing debt and whether the proposed project will satisfy the return expectations of those who provide capital. The aspects looked into while conducting financial appraisal are:
· Investment outlay and cost of the project
· Means of financing
· Cost of capital
· Projected profitability
· Break-even point
· Cash flows of the project
· Level of risk
The following different techniques are applied to assess the financial viability of a project:
· Capital Budgeting:
· Payback Period
· Total Investment
· Payback Period
· Annual Cash Inflow
The payback period provides an indication of a project’s risk and liquidity. The shorter the payback period the better the project is judged to be.
· Net Present Value (NPV)
· Internal Rate of Return (IRR)
· Profitability Index
Economic appraisal
Economic appraisal, also referred to as social cost benefit analysis, is concerned with judging a project from the larger social point of view.
Opportunity Cost: The opportunity cost is the cost of the best alternative forgone due to a particular course of action.
Shadow Prices: The prices of inputs and outputs of the project should be suitably corrected to reflect the real cost, if the market prices are characterized by distortions of any time. The outputs and inputs of a project are classified into (i) traded goods and services, (ii) non-traded goods and services, and (iii) labor.
Procedure for Giving Advance:
The potential borrower will submit application to PBL for loan by filling up of a specific Application form.
· The Application form (Request for Credit Limit) contains following particulars:
· Name of the Borrower——
· A/C No.——-
· Business address (with telephone no.) [Residential address and Permanent address]
· Introducer’s name, A/C no. & address—–
· Date of establishment/ incorporation—–
· Trade license number, date and expiry date (Photocopy of trade license enclosed)—
· GIR/ TR no. & amount of income tax paid last year—-
· Constitution/ Status (Mention whether sole proprietorship/ partnership/ Public Ltd. company/ Private Ltd. company)—–
· Particulars of Individual/ Proprietor/ Partners/ Directors (Name & Designation, Father’s/ Husband’s name, present & permanent address with Telephone no., % of shares held)—-
· Experience and background of Individual/ Proprietors/ Partners/ Directors—-
· Full particulars of assets in the personal name of Individual/ Proprietor/ Partners/ Directors with valuation—–
· Names of Subsidiaries/ Affiliates, percentage of share holding and nature of business—-
· Nature and details of business/ products (for which credit facility is applied for), Markets (Present market price per unit, Factory price), Estimated sales for next one year——
· Credit facilities required (type, amount, period, purpose and mode of adjustment)—-
· Details of securities offered with estimated value (Primary security, Collateral security, market value of the security)——-
· Details of liabilities in the name of the client or in the name of any other partners/ Directors or Subsidiaries/ Affiliates with PBL and other banks, if any (Name of the Bank, A/C no., Nature of advance, amount, security and validity of limit)—–
· Balance Sheet/ Income Statement or Statement of Accounts of the following years attached (Preferably last 3 years)—-
· Other relevant information——
· Proposed debt/ equity ratio—-
· Signature of the Applicant—-
· After receiving the loan application form, PBL sends a letter to Bangladesh Bank for obtaining a report from there. This report is called CIB (Credit Information Bureau) report. This report is essential if the loan amount exceeds Tk.50 Lac. But PBL usually collects this report if the loan amount exceeds Tk.10 Lac. The purpose of this report is to being informed that whether the borrower has taken loan from any other bank; if ‘yes’, then whether these loans are classified or not.
· After receiving CIB report if the Bank thinks that the prospective borrower will be a good borrower, then the bank will scrutinize the documents. In this stage, the Bank will look whether the documents are properly filled up and signed.
Then comes processing stage. In this stage, the Bank will prepare a Credit Proposal.
The Initial Loan Interview
The initial interview is generally held at the officer’s bank or, on occasion, at the client’s business. The objective of an initial loan interview is to ascertain whether the loan request warrants further consideration (and the additional time and expense) that is entailed in a credit investigation, follow-up interviews and financial statement analysis.
The beginning of a loan interview sets the tone for all that follows. The credit officer of PBL should establish a relaxed but businesslike atmosphere. The credit officer should greet the client with a warm handshake, introduce himself or herself by name and ask the client fell ill-at-ease, which can hinder communication during the interview. A small amount of light conversation before the interview can be helpful. There is, however, a distinction between being friendly and being unprofessional. Referring to a client using a flip term such as buddy may perhaps be well intentioned, but it is certainly unprofessional.
Questions Pertaining to Specific Areas:
Questions for the client and the company:
What is the client’s name?
Is the company a corporation, S corporation, proprietorship, or partnership?
Where is the company located?
How long have you been in business?
How long has this company been in operation?
What are your company’s products or services?
Who are the principal owners and how many shares do each own?
Is management separate from ownership? If so, who are the
Principal Managers?
What is the experience of management?
How many employees are there?
Are the workers unionized?
What is your company’s position in the industry?
Is the company profitable?
Is the company well capitalized?
Will personal assets be pledged as security for the loan?
Who are the major suppliers and customers and what are there addresses?
What are the normal terms of trade?
Are any contracts or franchises involved?
Are any items currently in dispute or litigation?
Questions regarding the loan request:
How much money do you want?
How much does the client need?
How did you arrive at the amount of the loan request?
Has the client accurately projected financing needs?
What terms are you requesting?
Are the terms reasonable based on the nature of the loan-for example, within the useful and depreciable life of the asset being financed?
How did you decide which terms were best for you?
Are the terms based on the client’s ability to pay or on good financial planning?
How will you use the proceeds of the loan?
Is the purpose of the loan compatible with bank policy?
Questions regarding the client’s ability to repay the loan:
How will you repay the loan?
How much cash is the company generating from the operating cycle?
Can the client provide a specific source of repayment based on reasonable assumptions?
What is your secondary source of repayment if the primary source fails?
Are there guarantors?
If there are guarantors, what is their relation to the client?
What is the financial strength of the guarantors?
Questions regarding collateral:
What collateral do you intend to pledge?
Who owns the collateral?
Where is the collateral located?
How liquid is the collateral?
Is the collateral controllable and resoluble?
Are any special permits required to take title to or to sell the collateral?
Questions regarding the client are banking relationships:
What banks do you currently use?
Have you approached other banks with the loan request?
How does this loan fit into the company’s total banking and lending picture?
Why is the client coming to this bank?
Do you have loans outstanding with other creditors?
What is the nature and extent of these loans?
After these and other questions have been answered, the credit officer decides whether to continue with the loan request, reject it, or direct the client to other potential sources of financing.
Credit Investigation:
If, after the initial interview, the commercial credit officer decides that the loan request meets basic bank lending criteria, the next step is to conduct a more in-depth investigation, relying upon the documents obtained from the client and from in-bank and outside sources.
One of the important functions of a PBL is to channelize funds for meeting the credit needs of genuine borrowers engaged in economic activities of the country. study the integrity and reliability of the borrower. Credit investigation is an essential part of every lending decision for the simple reason that companies have grown more complex in structure and diversified in their operations. It is the rare credit officer who can consistently make accurate appraisals of creditworthiness and risk based on an interview alone.
Purpose of Credit Investigation
Credit investigations vary among banks. In smaller banks, credit officer s investigates their own loans. The contribution from bank staff is limited to clerical assistance, such as typing credit inquires, maintaining credit files, or spreading financial statements for review and analysis by the credit officer. In many larger banks, the division of responsibility is more specialized, with the credit investigation and loan analysis function separated from the lending function.
Interview
Once the major questions have been identified, the credit officer should decide whether each question warrants the time and expense necessary to arrive at an answer. Many banks have standardized forms that list types of information that should be acquired during loan interviewing and credit investigation. Of course, the amount, nature and detail of the information varies depending on the circumstances of the loan request and it is usually left to the credit officer to determine the extent of the information-gathering process.
Proforma for obtaining information for compilation of credit report of Sole Proprietor or partnership concern:
(Proforma – 1)
· Name
· .Address
· Date of compilation .
· Nature of the firm
· Nature of business
· Investment in the business:
· Allied of subsidiary,
· Brief history regarding
· Sales
· Annual income
· Market reputation
· Means
· Bank account and it to the bank. Whether they enjoy credit facilities, if so, state the experience regarding the operation of the account.
· Names of other bankers,:
Preparation and signing of credit report:
Branch Managers will have a very fair idea of the assets, means and the credit position of their borrower constituents. They may depute Credit Investigator to collect credit information but branch managers should make independent inquiries to establish veracity of credit checking made by their branches. Credit report should be signed jointly by the Manager and the Credit Investigator.
Revision of credit report: Every credit report should be revised intelligently and properly at least once in six months. It is, of course, understood that if at any time an adverse report or damaging information is received on a constituent or a major change is noticed in regard to the assets and means of a party, immediate steps should be taken to review and revise the credit lines make available to him. It is also necessary that whenever a new credit proposal or renewal of an existing credit line is recommended, the report on the party concerned is checked up and revised.
Proforma for obtaining information for compilation of
Credit report of Limited Company
(Proforma –II)
· Name of the Company with
· Complete address
· Date of compilation of
· the report
· Nature of the Company
· Authorized capital,
· Name of directors
· Nature of business
· Nature of allied concerns,
· Subsidiary concerns, if any
· Obtain a copy of the
· Verification of prior charges:
· Bank account and own
· Experience
· Other bankers, if any
· Market reputation
· Preparation and signing
· Revision of Credit report
Credit Line Proposal:
· In this step of the term loan the branch sends a credit line proposal to the head office for approval of the term loan. The credit line proposal contains the following particulars:
· Fresh/Renewal/Revision of the term loan
· Borrowers name
· Types of business
· Capital structure
· Particulars of previous transaction
· Existing vis-à-vis proposed credit limits
· Movement of the accounts
· Liabilities of sister concerns
Process of handling loans:
Security:
Security is a Cover against loans and advances. It ensures recovery of loans and advances. Though now-a-days greater emphasis is put on the purpose of the loan rather than securities, nevertheless the securities play an extremely important role to take a decision.
Types of Security
The types of securities offered vary from place to place. In metropolitan cities, it may be Govt. bonds / share / assignment of Book debt / Bills receivable etc. whereas, in the industrial area raw materials & finished goods etc. may be offered as securities. Again agricultural produce is the principal securities in the agricultural centers. Further, a bank also accepts moveable & immovable properties, life insurance policy etc. as securities.
Securities can be classified into primary security & collateral security:-
Primary security means the security offered by the borrower himself as cover for the loan. It refers to the asset , which has been bought with the help of the bank. Such as when a machinery or some goods have been bought with the help of the bank the machinery and goods constitute the primary security.
Collateral security: All other additional security other than the primary securities such as land / Building etc. are considered as collateral securities which may be offered / deposited by the borrower or , by any other third party.
Good collateral security must have the following characteristics:
o Tangible
o Transferable / negotiable
o Easily marketable
o Price stability
o Durability (not perishable)
o Ascertain ability of market value
o Genuineness of title (free from encumbrance)
Valuation of Security
Valuation of security is very important for the lending banker. Therefore valuation of security must be done with careful verification of sources, in respect of nature of procurement, quality , quantity and considering possible risks.
Margin:
Margin is a cushion against any possible shortage. It is a portion of borrower’s contribution. The fixation of margin depends on the nature and type of security and the financial stability of the customer and also keeping in view the restrictions imposed by the Bangladesh Bank / Head Office from time to time. In case of goods and produce , reasonable margin should be retained for covering any shortage due to shrinkage, fluctuation of rate, fall in prices and charging of bank interest.
In case of advance allowed against merchandise imported through bank, the amount of margin fixed should be deducted from the landed cost of the goods. For allowing advances against goods in trade locally purchased the amount of margin fixed should be deducted from the invoice value or ex- factory prices, as the case may be.
Modes of Creation of Charges on Securities
‘Charge’ in a transaction for value means that the creditor(Bank) shall have the right to take the property on which charge is created, available to him as security for payment of a debt, by an order of court of law. A charge may be classified as:
i) Fixed Charge
A charge is said to be fixed if it is made specifically to cover definite and ascertained assets of a permanent nature e.g.; charge on land and building or heavy machinery. It precludes the company from dealing with the property charged without the consent of the charge holder.
ii) Floating Charge:
It is a charge on the property which is constantly changing, e.g; stock. The company can deal with such property in normal course of its business until it becomes fixed on the happening of an event. Thus it is a charge on the assets of the company in general.
Mortgage
Mortgage has been defined in section 58 of Transfer of Property Act 1882. It is the transfer of interest on the property by way of charging immovable property for the security of loan amount. Therefore, for the purpose of securing loan amount when an immovable property is charged for transfer interest on the property is known as mortgage.
Classification of mortgage:
On the basis of transfer of title in the mortgaged property mortgage can be classified as i) Simple/Registered Mortgage and ii) Equitable Mortgage.
i) Simple / Registered Mortgage:
In a legal mortgage the legal title to the property is transferred in favor of the mortgagee (Bank) by mortgage deed duly vetted by legal adviser / retainer. The deed is registered in the Registrar / Sub-Registrar’s office. This method is expensive as it involves registration charge & stamp duty. After adjustment of the loan the title of the property is to be redeemed.
ii) Equitable mortgage:
An equitable mortgage is affected by mere delivery of documents of title of property to the mortgagee (Bank).It does not require registration.
Lien
Lien is the right to retain the asset of the borrower until the debt is paid. Lien differs from other forms of charges in respect that it does not arise out of an implied or express agreement. The right of lien arises in law out of business dealings between the parties.
The conditions for right of exercise of lien are :(a) Creditors possession of goods /securities in the ordinary course of business (b) the debtor has a lawful debt due to discharge to creditor (c) there must not be any contract to the contrary.
Types of lien
Particular Lien: A particular lien arises, where goods can be retained by the creditor in respect of a particular debt only. For example a tailor has a particular lien for his charges on the shirt made for his customer.
General Lien:
Under section 171 of the Contract Act, 1872, bankers, factors (mercantile agents), Wharfingers (port authority), attorneys of High Court and policy brokers can in the absence of contract to the contrary, exercise lien and retain security for a general balance of account any goods bailed to them. So general lien confers a right to retain goods and securities not only in respect of a particular debt but in respect of the general balance due by owner of the goods and securities.
Pledge
Pledge is the bailment of goods as security for payment of a debt or performance of a promise.
Bailment is “the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, to returned or otherwise disposed of according to the direction of the person delivering them.” The person delivering the goods is called the ‘bailor’ and the person to whom the goods are delivered is called the bailee.
Pledge has got the following properties:
The ownership of the goods remains with the pledgor. Delivery is necessary in order to complete a pledge. This delivery may be symbolic, as for instance when the key of a warehouse in which the goods are kept or documents of the title relating to the goods are delivered. Possession of the goods may be changed by agreement without any physical change in their position.Right to sell-If the pledgor makes a default in the payment of the debt by the stipulated time , pledgee may either file a suit for the debt and retain the property pledged as security or he may, after reasonable notice, sell the property. If there is deficit the pledgor is bound to make it good to the pledgee and if there is a surplus the pledgee must account for the same to the pledgor.
Hypothecation
Hypothecation is a mode of creating an equitable charge against a property for payment of a debt which continues to be in the possession of the debtor. It is different from pledge because the asset under pledge remains in the possession of the lender. However the hypothecation deed usually provides that the banker will have the power to take the goods hypothecated in its possession if the need arises.
Hypothecation is particularly useful in those cases where it is almost impossible or impracticable to give possession of the goods to the lender. For example where money is to be borrowed on the basis of goods lying in a retail showroom or on the security of motor vehicle which is to be used by the client for the purpose of his business or stock or raw materials etc., it will not be at all advisable to pledge them to the banker because it may be difficult to run the business without these assets. In such a case hypothecation is the only choice.
Precautions to be taken by a banker while loan or advance is allowed against hypothecation of goods:
Granting of loans on the basis of hypothecation of goods/assets is quite risky. This is because the borrower may fail to give possession of hypothecated goods/assets when demanded by the bank or he may sell the asset without paying the money to the bank. In order to safeguard itself against all such risks, a banker should take the following steps:
Assignment
An assignment means a transfer by one person of a right, property or debt (existing or future) to another person. The person who assigns the right, property or debt is called the assignor. The person to whom the rights etc are assigned is called the assignee.
In banking, the usual subject of assignment is “actionable claims”. Actionable claim means a claim to any debt other than a debt secured by mortgage of immovable property or hypothecation or pledge of moveable property or to any beneficial interest in moveable property not in the possession either actual or constructive of the claimant which the civil court recognized as affording grounds for relief, whether such debt, or beneficial interest be existent accruing, conditional or contingent. In other words, an actionable claim is an unsecured claim to money which is actionable i.e; for recovery of which an action may be brought in court.
Documentation against Bank Credit:
Documentation is one of the major aspects of credit functions of a Commercial Bank. The principal income generating activity of a Bank in Bangladesh is providing credit services to customers preferably on a secured basis. The charge on securities against credit facilities is created through execution of relevant documentation formalities and as such the Bank can largely at a future date fall back the securities held for recovery of the dues besides documents are the physical embodiment of liability. In is to be ensured that documents should be prepared and executed according to the law of the land and should not confront with the rules and practice of Banking. Consequently documents should be drafted and executed under the supervision of Professional lawyer / legal retainer.
Document
Document is the written statement of facts or evidence in regard to a particular transaction, which on placement may bind the parties answerable and liable to the court of law.
From the above discussion the following characteristics of documents are found: –
· It should be written statement of facts.
· The fact should cover legal aspects.
· It must be an evidence of certain transactions.
· It should be signed by the persons having authority and legal power.
Importance of Documentation:
Documentation formalities against loans and advances should be properly completed prior to extension of the facility to safeguard the Bank’s interest. Complete and correct documentation enables the Banker to take legal recourse against the borrower in case of non-realization of dues.
Purpose of Documentation:
Documentation is necessary for acknowledgement of debt by the borrower and for charging of securities to the Bank against loans and advances.
Types of Documents
Documents related to securing loans and advances are classified into the following 2 (Two) categories:
Charge documents are preformatted and printed required to create charge on securities against loans and advances and the documents are provided by the Bank to the client for execution.
Legal documents are legal papers provided by the client certifying the legal status of the borrower, borrowing power, title to goods and property; legal deeds and power of attorney related to creation of charge on securities.
Basic Charge Documents
Documents common to all sorts of loans and advances are specified below.
Demand Promissory Note: D.P. Note is an unconditional written promise made by the borrower to the Bank to repay the amount of loans / advances at a fixed or determinable future date along with interest at a stated rate.
Letter of arrangement: The borrower acknowledges the Bank’s right to cancel the facility allowed at any time without assigning any reason and with or without prior notice.
Letter of continuity: The borrower undertakes to remain liable on the D.P. Note and other loan documentation even if the liabilities are fully or partially adjusted during the tenure of the credit facility and even through the account may show credit balance from time to time.
Letter of revival: The document refers to the law of limitation whereby documents become time barred after 3 years from the date of execution. The period of limitation within which a sent for recovery of the overdue loans / advances to be filed the ordinary period of 3 (Three) years from the date on which the facility was extended. The limitation period for mortgage is 12 years beginning on the date of the mortgage deed the borrower through “Letter of revival” confirms having precluded enforcement of limitation law, and also confirms to remain liable on Promissory Note and other documents executed notwithstanding the law.
Other Charge Documents
· Letter of Hypothecation with Supplementary Agreement.
· Letter of pledge with Supplementary Agreement.
· Letter of Guarantee.
· Letter of Trust Receipt.
· Letter of Lien.
· Letter of disclaimer.
· General letter of Counter Guarantee.
· Letter of indemnity.
· Credit Sanction advice accepted by the borrower.
Legal Documents
· Memorandum and Articles of Association (Limited Company).
· Registered partnership deed (Partnership firm).
· Trade License.
· Board resolution covering corporate borrowing power and execution of security documents (Limited Company).
· Resolution of the partners for availing of credit facility and for execution of security documents.
Steps of Documentation
· Obtaining of the instruments / documents.
· Stamping.
· Execution.
· Witnessing.
· Registration.
· Preservation.
Obtaining Documents
The documents to be obtained depend upon 3 (Three) factors:
· Legal status of the borrower
· Type of facility
· Nature of security
Stamping of Documents:
According to the provisions of stamp Act 1899, all documents chargeable with duty shall have to be stamped adequately and, properly before or at the time of execution. An unstamped and insufficiently stamped document cannot be admitted in evidence or cannot form the basis of a legal suit.
Types of stamps are:
· Judicial
· Non Judicial
· Adhesive
· Embossed
Execution of Documents:
Documents must be executed (signed) by the person(s) concerned competent to do so either in official capacity or in personal capacity as the case may be. In other words, execution of documents must be done by the borrower authorized representative.
Witnessing:
The following documents are required to be mandatorily attested by at least 2 (Two) witnesses.
· Mortgage deed
· Sale deed
· Gift deed
· Assignment of life insurance policy
· Will.
Registration of Documents:
Registration is not applicable for all the documents. In the following few cases registration of documents is necessary to give legal effect to the instruments.
The assignment of an insurance policy to be registered with the respective insurance company. The mortgage deed vetted by the legal retainer to be registered with the office of the Sub – Registrar. Fixed and floating charges on the assets of a limited company to be registered with the Registrar of Joint Stock Company.
Preservation of Documents:
Upon completion of all the documentation formalities “documentation checklist” to be prepared consisting of the list of documents.
The checklist should be examined and signed by an authorized officer.
Documents should be kept in safe custody preferably in the Vault.
Separate files to be maintained for each customer.
Documents movement Register should be maintained under the supervision and signature of an authorized officer.
In case of loan:
· Letter of Disbursement.
· Letter of Authority (if required)
· Letter of Hypothecation (when goods are hypothecated as security)
· Insurance Policy (if required).
· Any other document as stated in Sanction Advice.
In case of overdraft:
· Letter of Continuity.
· Letter of Authority (if required)
· Letter of Hypothecation (when goods are hypothecated as security)
· Insurance Policy (if required).
· Any other document as stated in Sanction Advice.
In case of cash credit
· Letter of Continuity
· Letter of Authority (if required)
· Letter of Pledge/Hypothecation.
· Insurance Policy under Bank’s Mortgage clause.
· Letter of disbursement incase of renewed warehouse.
· Any other document as stated in Sanction Advice.
· Advance against lien of FDR/Insurance Policy etc:
Transport Loan:
· Letter of Hypothecation of vehicles (in separate form)
· Photocopy of blue book
· Photocopy of route permit
· Insurance policy under Bank’s mortgage clause
· Any other documents stated in Sanction Advice
Legal Mortgage:
· Mortgage deed (certified copy)
· Registration receipt in original
· Chain of documents for title (original if available)
· C.S, S.A and R.S parcha
· Up to date Rent Receipt
· Non-encumbrance certificate
· Power of Attorney (if asked for)
· Legal opinion
· Valuation Certificate
· Location plan etc. /Site plan etc
Credit Disbursement:
Having completely and accurately prepare the necessary loan documents, the loan officer ready to disburse the loan to the borrower’s loan account. After disbursement, the loan needs to be monitored to ensure whether the terms and conditions of the loan fulfilled by both bank and client or not.
Types of advances made by Prime Bank Limited:
As a first growing commercial bank in Bangladesh, Prime Bank Limited has devised an excellent advance mix which has settled it in the highest echelon of prosperity within a very short time. Since its inception in 1995, it is dominating the banking sector of Bangladesh through diversified advance products. Prime Bank’s advance mix comprises:
· Unsecured Advance and
· Secured Advance.
Unsecured Advances
Sometimes bank makes advances to its valued customers taking no security. In this case bank only holds different charge documents duly signed and stamped by the customer. In the pure banking term, this type of credit is defined as unsecured or clean advance. So we can term the Unsecured or Clean Advance as the credit facility extended to a customer without obtaining any security subject to restrictions imposed from time to time by Bangladesh Bank or any other competent authority. Prime Bank Limited grants two types of Unsecured Advances to its customers that are:
1) Clean Overdrafts and
2) Clean Loans.
A customer is not ordinarily permitted to overdraw his account without security. However, Prime Bank, Motijheel Branch provides an unsecured advance facility in exceptional circumstances, only for a short period, with definite repayment arrangement, subject to restrictions imposed by Bangladesh Bank or any other competent authority, with prior approval of Head Office, to a customer on the basis of his/her personal credit worthiness, standing and reliability. It is not granted unless the Sanctioning Authority, “The Credit Committee” of Head Office has full confidence in the ability and reputation of the customer to repay it, on demand, or at its maturity if it is a loan. Definite arrangements for repayment, whether by installments or otherwise, is, as a rule, made.
Secured Advances
While making advances, bank needs to make itself sure that it will not be classified and will not ultimately result in a loss for the bank. Though not desired, if it happens banker will have no way to recover the fund. To be secured in such a situation, bank takes some security against advance and advances so secured are said to be “Secured Advance”. In the language of banking, “Secured Advance” is the credit facility that is extended to the customer taking some security subject to the restrictions imposed from time to time by Bangladesh or any other competent authority. Prime Bank, Motijheel Branch extends the following type of secured advances may be allowed against tangible securities subject to margin restrictions:
a) Loan (General)
b) House Building Loan
c) Other Loans to Staff
d) Cash Credit (Hypothecation)
e) Cash Credit (Pledge)
f) Hire-Purchase
g) Lease Financing
h) Consumers’ Credit
i) SOD (Export)
j) SOD (Others)
k) PAD
l) LIM
m) LTR
n) IBP
o) Packing Credit
p) FDBP (Foreign)
q) FDBP (Local)
r) FBP
These advances are allowed against the following securities:
a) Advance against Term Deposit Receipts (FDR and MTDR)
b) Advances against different types Sanchaya Patrayas.
c) Advance against Life Insurance Policies.
d) Advance against Shares (Loans and Overdrafts)
e) Advances (Loans & Overdrafts) against Personal Guarantees.
f) Advances (Loans, Overdrafts & Cash Credits) against Pledge of goods/stocks.
g) Advances (Overdrafts & Cash Credits) against Hypothecation of Goods/Stocks.
h) Advances (Loans) against Hypothecation of Cars, Buses, Trucks, Scooters & Water Crafts, and Capital Machinery etc.
i) Advances for Execution of Work orders.
j) Inland Bills Purchase (IBP / FDBP)
k) Advances against Import Bills (PADs)
l) Loans against Imported Merchandise (LIM)
m) Loans against Trust Receipts (LTR)
n) Packing Credit (P.C)
o) Foreign Bill Purchase (Clean / Documentary)
p) Advances to Foreign Nationals.
Interest Rates Charged by PBL:
| Types of advances | Interest Rate | Features |
| Secured Overdraft (SOD) | 11.25%-16% | Continuous advance facility given for one year but can be renewed after the expiry of the time. Given against I.C.B. unit, FDR, Sanchaypatras and Work Orders. |
| Loan (General) | 12%-16% | Given against Personal guarantee, Hypothecation of goods and land and building. |
| House Building Loan (General) | 12.75%-16% | Given against Personal guarantee, land and building. |
| Transport Loan | 15% | Given against personal guarantee and hypothecation of vehicles. |
| Demand Loan | 7%-14.5% | Given against personal guarantee and cash collateral securities. |
| Industrial Credit | 12.5%-16% | Given against land and building along with machinery, personal guarantee of Directors and hypothecation of raw materials. |