Credit Management of Dhaka Bank Ltd
Introduction:
Banking business is associated with risks. In order to remove or minimize risks, banks follow some rules and regulations. Rules and policies are adopted to ensure less risk for every banking business. Dhaka Bank is a fast growing private sector bank. One of the strongest sides of Dhaka Bank is that it has a big market share of loans and advances. This means, this bank gives or sanctions a big amount of loans to corporate and retail customers each year. Before sanctioning loans, bank does proper judgment of the customer. Dhaka Bank takes every measure to minimize risks. But, many loans become classified every year. Bangladesh Bank has imposed some rules and regulations of credit, which must be maintained by every bank. Bangladesh bank is very eager to bring discipline in the banking sector and improve the loan quality of every bank. Dhaka Bank also has its own credit policy which helps the bank to maintain quality of loans.
Credit:
The word “Credit” is derived from Latin word “Credo”, which means, “I believe”. It is usually defined as one’s ability to buy with a promise to pay. 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.
Banks charge a higher interest for loans than the deposit rate given to customers. The difference in rates is the profit for a bank. 80% of a banks profit comes from the interests. Loans and advances comprise a large portion of banks assets and this is the backbone of a bank’s structure. The strength of a bank is primarily judged by the soundness of its loans and advances. So, the loan and credit department is a very important department of a bank. Credit policy is very important. If a bank takes very strict credit policy, then the amount of loan will be less. If the credit polity is flexible, then the amount of loan will be much. But strict credit policy leads to lesser bad loans. Sometimes, credit policy cannot prevent customers bad intention of not adjusting loans. This is why, strict credit policy is very necessary for every banks for the safety of their investments.
Principles of Lending:
Banks invest and earn profits in many ways. At the same time, there is a risk of default loans. This is why, banks are required to follow certain principles of lending. The principles of lending are:
- Safety;
- Liquidity;
- Profitability;
- Purpose, and
- Supervision.
The importance of Securities in Credit:
Securities play a vital role in sanctioning credit. Security means things deposited as a guarantee of the undertaking or loan to be forfeited in case of failure to repay the same. The customer/ guarantor should own it. In other words, the assets against which banks allow credits are called Securities. Good and strong securities help a bank to take decision about sanctioning credit. It also minimizes the risk. The type of securities offered may be, Government bonds, share, assignment of book debt or bills receivables, raw material and finished goods, fixed deposit receipts, land, factory building and other movable and immovable assets of the borrower. If a borrower becomes unable to adjust his loan, then bank can recover the loan amount by selling securities. That is why the role of securities is very important in credit system.
Classification of Credit Facilities:
Credit or loans can be classified broadly into two categories:
? Funded Credit Facilities;
Non Funded Credit Facilities.
Funded Credit facilities:
All type of credit facility which involve direct outflow of Bank’s fund on account of the borrower, is termed as funded credit facility. Funded credit facility can be classified into four categories-
a) Loans:
When a lender lends money to a borrower imposing interest for the lended money, for a given time period and which is repayable in fixed monthly installments is called loan. Loan is allowed for a single purpose where the entire amount may be recovered at a time or in a number of installments within a period of short span. After disbursement of the entire loan amount, there will be only repayment by the borrower. A loan once repaid in full or in part, cannot be drawn again by the borrower.
Types of Bank Loans:
Every bank has a credit portfolio. Banks can give loans and invest according to the limit of portfolio. Banks can lend half or more of their total assets and about half to two third of their revenues. Risks in banking tend to be concentrated in the loan portfolio. When a bank gets into serious financial trouble, its problems usually spring from loans that have become uncollectible due to mismanagement, illegal manipulation of loans, ineffective lending policies or an unexpected economic down turn. The banks make a wide variety of loans to a wide variety of customers for many different purposes- for purchasing automobiles, buying new furniture, taking dream vacations, constructing homes and for other corporate and project loans. Bank loans may be divided into the following broad categories of loans, delineated by their purpose:
1. Term Loans: this type of loan is sanctioned for more than one year and designed to fund longer term business investments, such as the purchase of equipment or the construction of new physical facility. Term is allowed for one to five years. Usually, the borrowing firm applies for a lump-sum loan based on the budgeted cost of its proposed project and then pledges to repay the loan in a series of installment. This loan is given for capital expenditure such as construction of factory building, purchase of new machineries, modernization of plant, etc.
2. Commercial and industrial Loans: This type of loan is granted to industries to cover such expenses as purchasing inventories, plant and equipment, paying taxes, meeting payrolls and other operating expenses
.
3. Syndication Loan: To finance a project, a big amount of money is needed. It may not be possible for a bank to finance cent percent of it. Then this amount is taken from several banks. These banks are called a Syndicate and this loan is called a Syndication loan. There is a percentage on equity for sanctioning of loans. For that reason, not all the banks can give same amount of loans. This is according to the banks reserve and equity. Every bank has the equal right to get the money back irrespective of the loan amount sanctioned. Priority does not work here.
4. Loan against Work Order: Sometimes, govt. development work like road construction, bridge construction, setting of sewerage line, setting of underground pipeline takes place. Govt. invites tender and the lowest rate giver wins the work order. But the contractor needs money to start the work on. Then the contractor submits his work order to a bank and takes loan against of that.
5. Demand Loan: Demand loan is payable on demand which is allowed for a short period to meet short term working capital need. This type of loan can take only banks existing clients, with whom bank has a good relation and maintains good transaction over his account
6. Consumer loans: this loan is given to individual customers for the purchase of automobiles, homes, electrical appliances, for vacation and for other personal purposes, which is extended directly to the individual.
7. Working Capital Loan: This type of loan is given to industries ranging from small to medium for the time span of one year. This type of loan is most often used to fund the purchase of inventories, raw material, etc. Working capital loan is designed to cover seasonal peaks in the business customer’s production levels and credit needs
.
8. Lease financing: Under this loan scheme, bank buys equipment or vehicles and leases them to its customers. Customers pay the loan installments and after full adjusting the loan, bank gives the ownership of the vehicle or asset to the respective customer.
9. Asset based Loans: this kind of loan is secured by a business firm’s assets, particularly stocks, inventories and accounts receivables.
10. Other Loans: other loans in the funded loan category are Real Estate Loans, Financial institutions loans, agricultural loans, installment loans, etc.
b) Cash Credit:
Cash Credit facilities are allowed against pledge or hypothecation of goods. Under this arrangement the borrower can borrow any time within the agreed limit and can deposit money to adjust whenever he does have surplus cash in hand. All the nationalized banks allow cash credit both hypothecation and pledge facilities.
c) Overdraft: Overdraft is withdrawing money from an account even if the account holder does not have that much amount of balance in his account. Bank gives this money as loans. This is a credit facility against any securities. The customer of the bank who have any savings account or DPSin the bank, can get overdraft facilities from the bank against these securities. The customer can withdraw a certain limit of amount within a fixed period of time. The interest amount is calculated on the actual debit balance.
d) Bills Discounted and purchased:
Discount: Banks allow advances to the clients by discounting bill of exchange or promissory note which matures after a fixed tenure. This way, the bank calculates and realizes the interest at a prefixed rate and credit the amount after deducting the interest from the amount of instrument.
Purchase of Bill: Banks also make advances by purchasing bills, instead of discounting, which are accompanied by documents of the title of goods such as bill of lading or railway receipts, etc. In this case the bank becomes the purchaser of such bills which are treated as security for the advance. This allowed primarily relying on the credit worthiness of the client.
Non Funded Credit Facilities:
Though these types of credit facilities are primarily non funded in nature but at times it may turn into funded facilities. As such, liabilities against this type of credit facilities are termed as contingent liabilities. The facilities are:
- Letter of credit;
- Bid Bond;
- Performance bond;
- Back to Back L/C;
- Advance payment Guarantee;
- Foreign counter Guarantee.
What does Credit Department do?
Sanctioning loans is the most important and sensitive part of every banks. Interest from credits is the big income of a bank. Loans and advances comprise a large portion of bank’s total assets. The strength of a bank is primarily judged by the soundness of its loans and advances. So, credit department is the most important department of a bank.
The main functions of this department are:
o To manage the credit portfolio of Dhaka Bank Ltd;
o Receive credit proposal from retail or corporate customers;
o Processing of the proposal and approval from head office;
o Monitor and follow up of the loans and advances;
o Takes necessary steps to recover classified and default loans;
o Time to time adjustment of the rates of loans and advances;
o Prepare various statements to submit to Bangladesh Bank;
o Makes part and full adjust of loans;
o Gives balance outstanding statements to customers.
Credit department is fully responsible for analyzing and making recommendations on the fate of most loan applications. Banks need income from business. But at the same time, bank must ensure the safety of the invested amount, which is done by this department. Before sanctioning credits to customers, banks must consider some of the following things:
The Creditworthiness of the borrower:
The credit department must assess and analyze that whether the customer will be able to give installments after taking the loans. To assess this, credit department must consider the following things:
¯ Character: very genuine purpose for loan request and serious intention to repay.
¯ Capacity: proper authority to request for loan and legal standing to sign agreement.
¯ Cash: ability to generate enough cash flow in the customer’s business.
¯ Collateral: assets of the customer or business given as security.
¯ Conditions: borrowers present activity and economic condition.
¯ Control: ability of borrower to meet any unexpected circumstance in favor of bank.
Loan quality: Credit department must ensure that the loan is properly structured and documented in order to protect respective bank. The drafting of a loan agreement that meets the borrower’s needs for funds with a comfortable repayment schedule. The borrower must be able to comfortably handle any required loan payments, because the bank’s success depends fundamentally on the success of its customers. If any borrower gets into trouble, the bank may find itself in serious trouble as well. So the credit department must play the role of a financial counselor to customers. A properly structured loan agreement must also protect the bank by imposing certain restrictions on the borrower’s activities when these activities could threaten the recovery of the bank funds. So, this department must ensure the good loan quality in terms of the smoothness of loan recovery.
Proper Security: Keeping proper security is a very important task for this department. Security or collateral minimizes risk of the bank. If the borrower cannot pay the loan, the collateral gives the lender the right to seize and sell those assets using the proceeds of sale to cover what the borrower did not pay. It also gives the lender a psychological advantage
over the borrower. If the borrower don’t repay, his assets will be seized. That is why, the borrower will try heart and soul to repay the loan anyhow. He will avoid loosing his valuable asset. The most popular assets pledged as collateral for bank loans are, Real property, Personal guarantee, Third party guarantee, Inventory, Accounts Receivable, etc.
That is why, credit department must take steps very carefully in case of sanctioning loans, meeting the benefit of customers and obviously, reserving the benefit and security of the bank.
Credit Policy of Dhaka Bank Ltd:
Loans and advances is an important function of every commercial bank. Banks earn a big amount of interest from sanctioning and creating loans. So Credit Department is the most important department of a bank. The surplus money, specially the deposit of individuals is invested to the deficit sector. And the difference between these two interest rates is the profit of banks. Credit policy is very important. A strict credit policy can lead to lesser amount loan disbursed and low rate of bad loan. Again a flexible credit policy can lead to high amount of loan default and high amount of loan disbursed. Credit policy is like a guiding light of every loans and advances. A wise and prudent credit policy creates healthy loan, earns money and provide safety of the invested money. Dhaka Bank also has credit policy. Credit policy of DBL generally aims at:
1) Sanctioning healthy loan assets to ensure interest earning of the Bank.
2) Ensuring safety through judicious selection of banks.
The credit policy of Dhaka Bank Ltd. has been formulated of the plan of “All New loans to be Good Loans” The plan was taken on the basis of the following objectives:
ª To gain satisfactory return on investment;
ª Credits to be available to viable borrowers at a reasonable cost;
ª Maximizing the profit of the bank by making sound lending;
ª Assisting the social and economic development of the country.
Dhaka Bank Sanctions Credit based on three most essential elements of the borrower:
§ Character: This is the most important element of three factors. It includes integrity of purpose, reputation for honesty, promptness in paying debts and fulfilling contracts. Record of past performances and antecedent connections, etc.
§ Capacity: It refers to borrower’s business ability, particularly profit making records and his acumen to avoid loss.
§ Capital: this is the real measure of a borrower’s strength. It helps the borrower to recover any loss in the business. It is the financial strength to cover risk.
Procedures for Sanctioning Credit in Dhaka Bank Ltd.:
Loans and Advances is the major business of every bank. Banks collects deposit from surplus area and invests this amount as loans. An interest is charged against loans. Credit sanctioning is a task of huge responsibility. Every sanction of credit has risks involved. So, level of risk is to be identified first. The area of consideration also involves the sector of loans applied, bank’s profit from this sanction, etc. So, every steps of sanctioning credit is very important and to be accomplished very carefully. Every branch managers are given authority to sanction loans upto a certain limit. But if any branch receives any loan application beyond that limit, then the proposal must be sent to the head office for the approval of that loan. The steps for sanctioning loan are discussed below:
1. Application for loan:
Customer applies for loan at bank’s prescribed form. Branch will obtain loan application’s duplicate from the customer. The form must be signed by the proprietor or partners or directors. Both corporate and retail customers can apply for loan. All the branches of Dhaka bank, Personal Banking Division and local office receives loan application and gives loan. In conformity with the loan application, each customer must have a bank account is Dhaka Bank. All required documents, papers mentioned in the application form have to submit. Some general principal must be followed in order to maintain good lending quality:
a) Safety;
b) Liquidity;
c) Purpose;
d) Profitability;
e) Security, and
f) National interest.
- CIB form fill up:
Bangladesh Bank established a new department, “Credit Information Bureau” in 1992 to procure information on default borrowers and also to streamline credit information of the banking systems. When a person or a company applies for a loan, then the credit department of the bank send a CIB report to the Bangladesh Bank including all the information of the applicant.
CIB forms are very important. It is to be ensured that all the columns of form are properly filled in, particulars and information furnished are completed and correct. The forms of CIB that a retail or corporate customer must fill up to give information to Bangladesh Bank are:
a) Form: CIB 01 (Borrower information)
Form: CIB 02 ,,
Form: CIB 03 ,,
Form: CIB 04 ,,
Form: CIB 05 (Guarantor information)
b) Form: CIB 1A (Inquiry form)
Form: CIB 2A (Owner Information)
Form: CIB 3A (Information of group)
c) CIB undertaking: Contains Name, Address, and Sister Concern of borrower.
d) Form SC 8.
e) Form: CIB 01 (Segment 5)
f) Company Letterhead form.
g) Form (XII): This form contains the information of all the directors of the company. This form is needed to submit at the time of enlistment as a limited company at RJSC (Register of Joint Stock Companies). But in case of giving loan to customers this form is essentially kept by bank for the purpose of getting director’s information and reporting to CIB. Through this form, bank can get the information- who are the directors, number of directors, etc. If any director resigns and any new director joins in, then this information must be submitted by the company to the bank within two weeks.
h) Schedule (X): This form contains the information about the sponsor shareholders of a firm. Directors can also hold shares of the company. So, this form informs, who the shareholders are, if any director is holding shares, what percentage of share a director is holding of the total share, etc. This information helps the respective bank to take any decision about that company in the future. If the company fails to repay the loan, bank will claim money to all the directors according to the percentage of their shares.
3. Report to Bangladesh Bank:
Bank sends all the CIB forms to Bangladesh Bank in order to inform Bangladesh Bank about the borrower. Along with the forms, Bank sends soft copy of the information of the borrower. Bank sends the soft copy in four formats prescribed by Bangladesh Bank:
a) Owner;
b) Debtor;
c) Guarantor;
d) Matrix.
At the same time, bank urges CIB of Bangladesh Bank to inform them about that borrower whether, there is any report about that borrower.
4. Response from Bangladesh Bank:
Credit Information Bureau of Bangladesh Bank informs the respective bank about the borrower. If the borrower has taken any loan from any bank previously, then CIB will be able to provide information regarding that borrower. There is a form, called Response Form, through which CIB provides all the information about that borrower. If the borrower has taken loan from a bank and adjusted it, then his report will be clean. If he has taken loan from a bank but did not adjusted his loan within the prescribed period, then his report will be adverse and the borrower will be unable to obtain loan from the respective bank.
There is another way of obtaining information about a client. Information can also be obtained by Confidential Opinion. This is an inter bank confidential report and cannot be published in general. At the time of interview of the customer, bank officials ask informally to the client whether he is having any credit facilities from any bank. If the client tells the name of the banks from where he is having credit facilities, then the bank officials take a note of the name of the banks. Then the bank official issues letters to those banks requesting to supply credit information about that customer. Then those banks give information on credit outstanding about that customer. This report is called confidential opinion. Each Bank also informs to other banks and all their branches about the loan defaulters by this confidential opinion.
5. Credit Risk Grading:
If the credit amount is Taka 1 Crore or above, Credit Risk Grading is to be done according to the prescribed format supplied by Bangladesh Bank. If the loan amount is below of Taka 1 Crore, then CRG is essential. Loan is disbursed only after reporting to CIB. In that case, bank takes the Balance Sheet of previous three years of the company. If the CRG is good, then the company is not risky and bank takes the decision to sanction loan to that company. In that case, proposal is sent to Head Office. CRG is to be forwarded along with the proposal. But if the CRG proves that the company is risky, then the branch itself rejects the application and do not send any proposal.
But recently, Dhaka Bank has revised their decision about doing CRG. Previously, it was amount 1 Crore or more for doing CRG. But now, CRG will be done in the following way:
| Category of Loans | Loan Amount for CRG |
| Personal Loan | 10 Lac |
| Corporate Loan | 10 Lac |
| SME | 10 Lac |
The above table shows that bank has taken decision to do CRG if the loan amount is above 10 Lac. This decision reflects the consciousness to make every loan of the bank secured. It will help the bank to raise the quality of loans. After this decision, all the categories of loans will fall under one category, that is, CRG must be done on 10 lac loan amount.
6. Company Visit:
The purpose of visiting a company is to find out the actual position or scenario of the company. In other words, the purpose of company visit is to find out whether there are similarities or dissimilarities between the said position and the actual position of the firm. Senior executives of bank usually go for company visit. The executives scrutinize every single aspect of the company. They tries to find out whether the company really exists or not, what type of company is that (Manufacturing/ Service/ Production)? , how much is the stock of Raw Material and inventory. If the loan is house building loan, then what is the position of land, how much the borrower have invested from his own pocket in the construction of that building, etc. When the officers go for a visit, the team carries all the necessary equipments with them. They use still camera and video camera also for recording the scenario of the project at that time for future reference. Visit report includes the following:
- Name of Visitors;
- Date of visit;
- Company location;
- Nature of project;
- Land and building;
- Machinery;
- Raw material;
- Existing manpower; and
- Overall observation.
7. Proposal to Head Office:
Every branch managers are given authority to sanction loans upto a certain limit. Managers have some discretionary power, over which they can take some decision. Managers can take decision about sanctioning loans against F.D.R, D.P.S, loan against securities, personal and third party guarantee. That is why, head office approval is not required for all types of loans. Sometimes, big loan like project loan application comes in and managers cannot take decision alone in these cases. Head office approval is must for large loans.
A proposal is sent to head office along with Credit Risk Grading and visit report. Respective branch also recommends for sanctioning of loans. A proposal includes:
p Proposed Limit: Branch recommendation for the client or by client’s requirement.
p Security: The agreed security that will be kept against loan by the borrower.
p Company Profile: the directors, shareholders, capital, machinery of the company.
p Annual production: The annual production capacity of the company.
p Share holding position: the sponsor shareholders and the shares of the directors.
p Existing credit facilities with other banks: whether the company enjoys credit facilities with other banks, categories and the position of those credits.
p CIB report: report sent by CIB about that company or the directors of company.
p Credit Risk Grading: the overall riskiness of the company.
p Visit Report: The report of visit at the company by the senior executives.
p Branch Recommendation: the view of the branch about the customer and the proposed loan. Branch will recommend whether the bank will be profitable or not from the deal and from the client relationship.
8. Head Office sanction of Proposal:
The executive committee of head office sanctions loans and takes decisions regarding credit of Dhaka Bank Ltd. The Executive Committee considers the following things before sanctioning credit to a prospective client:
w Credit risk grading is good of the company;
w The company has given proper security to the bank;
w CIB report is clean;
w The company in not badly liable to other financial institutions;
w The company possess good repayment capacity;
w Company has given other personal and third party guarantee;
w The interest rate and terms of payment is in banks favor.
The sanction limit of bank is guided by the Central Bank. Every commercial and private banks set up this limit according to the rules of Bangladesh bank. The sanction limits to various types of loans are:
- In general, a corporate or retail customer can get loan:
| Type of loan | Maximum limit |
| Funded loan | 15% of Bank’s Equity. |
- For 100% export oriented company:
| Type of loan | Maximum limit |
| Funded loan | 15% of Bank’s equity |
| Non funded loan | 35% of Bank’s equity |
Total= 50% of Bank’s equity.
- For purely domestic company:
| Type of loan | Maximum limit |
| Funded loan | 20% of Bank’s Equity. |
If all the criteria satisfy the Executive committee, then the committee sanctions credit. The credit sanction letter includes:
§ Name of the Borrower;
§ Nature of facility;
§ Extent of limit;
§ Purpose of Credit;
§ Interest on funded facility;
§ Margins;
§ Commissions;
§ Mode of disbursement;
§ Mode of adjustment;
§ Validity;
§ Security details; and
§ Other conditions.
This sanction letter is for branch use stored for future reference. Then the branch issues another letter called Offer letter. This offer letter includes interest rate, mode of disbursement, mode of repayment, securities and all other conditions of sanctioning loans. The party is given the original copy and keeps the duplicate of that letter. If the party agrees all the terms and conditions, then signs in the offer letter. This is the final agreement between the party and the bank. According to the agreement, loan is disbursed, party receives the loan amount and repays at the prescribed time schedule.
9. Mortgage:
Mortgage is very essential for large loans. Without mortgage, loan is not sanctioned. It is a security to the bank against the loan amount. If the amount of mortgaged asset is higher than the loan amount, then the bank feels quite safe. Bank becomes the owner of the mortgaged asset and holds the ownership upto the full adjustment of loans. If the loan is fully adjusted, then bank returns the ownership of the mortgaged asset to the borrower through registration. The main purpose of mortgage is, if the party becomes unable or do not adjust the loan willingly, then bank can recover the loan amount by selling the mortgaged asset. Different types of asset are kept mortgage against different types of loans. These are given below:
| Types of loans | Assets Mortgaged |
| Project loans | Land, Building, Factory building, machinery, stock of inventory. |
| Corporate loans | Building, Land. |
| Lease finance | Machinery, Vehicle. |
| Personal loan | Land, Building, Gold, Insurance Policy. |
10. Signing of Charge Documents:
Charge documents play a very important role in loan documentation. Charge document is the means by which bank can sue and take legal action against the borrower in case of loan default. Charge documents must be signed by the borrower before loan disbursement. There are various charge documents. Appropriate charge documents are signed for a particular loan. This charge documents has legal acceptability to the court and is a useful tool for taking legal action against the loan defaulter. Govt. stamps are attached to each document. This is how charge documents get acceptability to the Government and bank gets priority to the Govt. in case of loan recovery. These charge documents are very important documents for bank and kept in the vault of the bank safely, in case of future need. Various charge documents for different types of loans are given below:
v Promissory note;
v Counter guarantee;
v Debit balance confirmation slip;
v Letter of revival;
v Loan disbursement letter;
v Right to recall the loan;
v Trust receipt;
v Letter of authority to debit account;
v Letter of continuity;
v Letter of guarantee for opening L/C;
v Hypothecation of Vehicles;
v Hypothecation of Goods;
v Letter of guarantee;
v Third party guarantee;
v Letter of authority to mark lien and appropriate proceeds;
v Memorandum of deposit of title deeds;
v Letter of authority for lien and encashment (Third party);
v Letter of authority to encashment of FDR/ SPS/ ICB unit certificates/ WES bonds;
v Request for credit limit;
v Limit input form;
v Letter of disclaimer.
11. Loan Disbursement:
After completing all the documentation, security deposit and other formalities, bank disburse the loan amount. The mode of disbursement is pre agreed by both the parties. But bank do not disburse the loan amount by cheque. Bank transfers this amount to the account of the customer. In case of corporate loan or project loan, it is disbursed through the CD account of the customer. In case of retail customer, loan in disbursed through the customers Savings account. And then both the corporate and retail customers withdraw money from their respective accounts.
These are the steps by which a customer can obtain loan from Dhaka Bank. Though the process is very lengthy, but it is good for both the parties. Bank must ensure safety for its lended amount. On the other hand, customer must agree the terms and conditions imposed by bank. When the time for loan adjustment arrives, customer deposit the installment amount in their respective account and loan account is adjusted automatically. If any loan installment becomes overdue, after a certain period it becomes classified. This is a continuous process. Retail customers adjust their loan. In case of corporate loan, party takes a loan, adjusts it and then again takes loan. So, in case of corporate customers, the process never stops. Corporate customers enjoy multiple credit facilities from Dhaka Bank. They maintain bank account, takes loan, open L/Cs, have PAD, etc. That is why, big customers build relationship with a bank, which can provide a wide range of products and services to them. And Dhaka Bank is one of the banks of first choice among the large corporate customers.
Different types of loan guided by the Policy of Dhaka Bank Ltd:
There are various type of loans offered by Dhaka Bank Ltd. Each loan has its own characteristic which is guided by the policy of Dhaka Bank. Each loans are launched aiming to serve customers. At the same time, the security of the invested amount and bank’s profit are also considered. Description of some of these type of loans are given below:
Overdraft:
Overdraft is the facility by which a customer can withdraw money over his credit balance in his current account upto an agreed limit. This loan is sanctioned occasionally and for short time duration. This loan is given only when there is enough security in banks hand against this loan. This facility is renewable after expiry. The interest is charged only for the total amount overdrawn, but not for the amount sanctioned. The overdraft facility is provided on the CD account of the customer. In an overdraft account, withdrawals and deposits can be made any number of times within the limit and prescribed period. Interest is calculated and charged only on the actual debit balances and daily product basis.
Overdraft against pledge of goods:
Pledge of goods is one of the ways of sanctioning overdraft to a customer. It may be provided to the borrowers against pledge of raw materials for finished goods as security. The borrower surrenders the physical possession of the goods under effective control of the bank. The ownership of the goods however, remains with the borrower. If the borrower fails to repay the loaned amount in prescribed period, then bank can realize the lended amount with interest by selling the pledged goods. In this case, bank must inform the borrower before attempting to sell those goods.
Overdraft against hypothecation of goods:
Overdraft facility is also extended against hypothecation of goods or stocks. In this case, both the ownership and physical possession of the goods remain under the borrower’s authority. The borrower must surrender the hypothecated goods to the bank when he is told to do so. The bank only acquires a right over the goods. Overdraft facility against hypothecation of goods is allowed only to trustworthy and prudent customers.
The following criteria must be taken in consideration by the bank/ branch before sanctioning overdraft against hypothecation of goods/ stocks:
ª The value of goods (quantity) must exceed the overdrawn amount.
ª The goods must be easily salable;
ª The goods must have a stable demand in the market.
ª The borrower has an absolute title of the goods.
ª The goods must be kept in regular supervision of the bank.
Cash Credit:
Cash credit is instant cash supply as credit to customer. This facility is allowed against pledge or hypothecation of goods. This facility allows a customer to borrow within the agreed limit and can deposit money to adjust whenever he can. This credit is sanctioned to those customers who need instant cash loan to meet the working capital requirement for their business. This credit is sanctioned against hypothecation or pledge of goods. There are two types of Cash Credit:
Cash Credit (Hypothecation):
In cash credit hypothecation, a customer is given loan against the stocks or inventory that is present is the customer’s business place. These are kept as security. The borrower retains the ownership and possession of goods. The documents which creates charge of the lending bank on the hypothecated goods is called letter of hypothecation. By signing this letter of hypothecation, the borrower binds himself to give possession of the hypothecated goods to the lending bank when he is told to do so.
Cash Credit (Pledge):
In this type of credit facility, the borrower pledge his goods to the banker as a security against the credit facility. The ownership of the pledged goods remains with the pledgor. Bank reserves the authority of effective control of the pledged goods. The goods may be stored in Go downs of the borrower but bank will keep it locked and will keep the keys of the locks. Bank’s guards guard the Go down for safety of the goods. Some times pledged goods are stored in bank’s go downs. The goods are insured against all risk under Banks mortgage clause. Go down keeper and security guards are posted in the go downs as per rules of the Bank. The insurance is to be effected for full value of the goods plus 10% extra irrespective of the mount of advance. The policy must always be in the possession of the Bank. It should be regularly renewed by the Bank. The Manager must also verify that the description of the Property in the policy is correct and that the terms of the policy are rigidly complied with so that no claim may be disputed by the insurance company.
Loan against Trust Receipt (LTR):
The trust receipt is a document which creates the banker’s lien on goods and practically amounts to hypothecation of the proceeds of sale in discharge of lien. Advances against a trust receipt obtained from the clients are allowed when the documents covering an import shipment are given without prior payment. This type of facility is given only to known and reliable clients. The customer holds the goods or their sale proceeds in trust for the bank till the loan allowed against Trust Receipt is fully paid off. In that moment, the documents of title of goods are delivered by the banker to the importer against trust receipts. This is done in exceptional cases to valued customers. By signing this receipt, the importer undertakes to hold the goods and the proceeds of any sale of them as a trustee for the banker who holds lien over them until the dues are paid by him. If the importer fails to hand over to the banker, the proceeds of the goods sold, he is liable for criminal offence as breach of trust. It has been noticed that sometimes the banker delivers the sales tax on the other. The period of Trust Receipt may be 30,45,60,90 days. The loan is adjustable within the period. Sale proceeds of goods held in trust must be deposited in the bank by the borrower irrespective of the period of the trust receipt.
The Trust Receipt must be adjusted within 30 days. Branch must insist the customer to adjust the LTR within the prescribed period. If the party fails to adjust the LTR within a reasonable period of time, branch should go for legal action against the customer for recovery of bank dues.
Loans against Imported Merchandise (LIM):
Importers usually take this loan from bank. Importers who are in shortage of fund to retire the import bills and unable to clear the goods from the port authority, can avail this loan from Dhaka Bank. This loan can also be said as an advance made to the importers for clearance of the imported merchandise. Loan against the merchandise imported through bank may be allowed pledge of goods retaining margin prescribed on their landed cost. The branch shall also obtain letter of undertaking and indemnity from the customer before getting goods cleared through LIM account. Clearing should be taken by approved clearing agent of the bank. Merchandise should be insured with specific risk factors.
LIM on Importers request:
This is one of the ways of opening LIM account. Importer may request the bank to open a LIM account to the bank. Upon receipt of the importer’s application, the import department will prepare a LIM proposal by considering some points to arrive at the total landed cost of the consignment. Efforts should be made so that at least 25% margin of the landed cost may be realized from the importer. Realization of margin will depend on the banker customer relationship and also on the marketability of goods. After approval of the proposal, the required charge documents should be obtained and after clearance, the goods are usually being stored in bank’s or in importers Godown under bank’s supervision. The particulars of the goods to be entered in the LIM register. At the same time insurance and other miscellaneous charges in connection with the LIM account will be paid by debiting to party’s LIM account.
Forced loan for LIM:
The cargo ship arrives at the port containing the goods but the importer do not come forward to the bank to retire the documents even after. This sort of situation sometimes occurs in bank. In that circumstance, it is a duty for the branch to arrange clearance of the goods by creating forced LIM to save the consignment from incurring demurrage or auction from port customs. Bank then creates a forced loan against the LIM account of that customer and his account is credited for the amount which was needed to clear those goods from the port authority. It is important that before arranging forced clearance of any consignment, the landed cost as well as market value of the goods are to be ascertained carefully so that further involvement of bank may be helpful in reducing the existing liability in PAD; if not, bank should not go for forced clearance of the goods. Rather, bank should go for legal action straight for realization of bank’s dues as banker deals in credit, not in goods. It may be noted that clearance of consignment is not legally binding on the banker’s side. No further L/C facility to be extended to such parties who will fail to take delivery of the goods cleared under forced LIM or against whom bank had to go for legal action for recovery of PAD dues unless on acceptable arrangement is made by the importer.
LIM Adjustment:
The LIM liability should be adjusted within 30 days from the date of storage. If the importer fails to take the goods within the specific period, final notice shall be issued to the importers giving 15 days of time for repayment. If the importer give no response
even then, legal notice shall be served to the parties giving another 15 days for repayment. For disposal of goods under auction, a notice is being published in two national dailies. If then the party comes forward with the prayer for time extension of adjustment of loan, an appropriate arrangement may be made by the bank for recovery of the lended amount to that customer within a maximum time of 30 days.
Bank Guarantee:
Bank guarantee is an assurance for a person or company to a third party. It is nothing but giving a guarantee to an organization by bank on behalf of its client stating that if the client of the bank fails to perform certain contractual obligation, the bank will meet all the liability of the client to that organization. When a contractor gets work order, the government wants assurance that the contractor firm’s financial position is sound and is able to perform the work with success. Then the contractor receives the help of bank. The contractor gives this assurance to govt. through a bank guarantee. Bank guarantee is non funded. In real terms, bank gives no money as loan to that client. Or the client gives no deposit amount to bank for that. If the contractor fails to finish or fulfill any part of the work, then bank gives demurrage to govt. Afterwards, bank recover the money from that contractor.
Each bank guarantee requires mortgage of land as security. A limit is sanctioned against this mortgage to the OD limit and BG limit of that client. The party can take bank guarantee to that limit. In other words, the existing clients can take bank guarantee from bank. Bank also gives bank guarantee without any security, if the bank is given 100% cash margin. There is less risk in this case. Bank receives an amount as commission in Bank guarantee. Client can extend the validity of bank guarantee if the guarantee is expired if the client needs guarantee further. Client can also take back the security from bank when the necessity of bank guarantee is finished and after the expiration of that Bank Guarantee.
Under Bank guarantee, there are various types of guarantee, which is required by various customers for their various types of business requirements. The various types of bank guarantee is given below:
Bid Bond Guarantee:
In many times, for govt. work tender is asked and a specific amount is required for submitting along with the tender schedule as security. The money of this security is submitted in the form of bid bond. This guarantee is issued by the bank on behalf of bank’s client favoring the beneficiary. Bid bond guarantee is required for the purpose of public tender, govt. contracts and to secure payment of guarantee amount. In case of default of the tender at whose request the guarantee is extended the beneficiary may en cash the same. The validity of this guarantee is usually three to six month.
Performance Guarantee:
This guarantee ensures the ability and experience of the contractor to the Govt. sometimes, Govt. asks the contractor to submit performance guarantee before starting a govt. work. On request of the client, bank issues a performance guarantee favoring the beneficiary. Performance guarantee is given to Govt. or any other corporation on behalf of the contractor, undertaking to make payment of penalty in the event of non-fulfillment of the performance of the contractor according to the contract, supply of goods as per contract or any breach of contract or discrepancy in between the actual performance and the contracted performance. Contractors and local suppliers may also use performance guarantee, which must be referred to Head office along with the copy of guarantee for necessary approval. The purpose of this guarantee is to pay the beneficiary the guaranteed amount when the supplier/ seller/ contractor have not fulfilled his contractual obligations.
Advance Payment Guarantee:
This guarantee ensures that a supplier/ contractor will supply or do specified work to the buyer within the specified time period. It is an undertaking issued by a bank or insurance company at the request of the supplier of goods or service or other contractor to repay a stated sum of money to the buyer within its validity period in the event of default by the principal to fulfill the terms of the contract. Its purpose is to ensure repayment of advance made to supplier by the buyer for purchase of raw materials, production costs, etc. The guarantee is issued for the period up to completion of the performance. This is more risky than a payment guarantee. If it is found that customer is diverting the money and not using the same money in the work in which it was supposed to, then the branch must inform the Head office about it and further drawing of this facility will not be given to that client. Total amount of APG must be received directly by the bank and credited to customers account. Withdrawal should be watched and regulated on the basis of understanding with the customer.
Shipping Guarantee:
This guarantee is issued in case of non receipt of original shipping documents, while the ship has arrived and the goods have been incurring demurrage or the original shipping documents have been lost after retirement from bank. These guarantees are limited to the bill amount but not exceeding the letter of credit value and for the period till receipt of original bill of lading. The guarantee is signed by the importer in favor of shipping company and counter signed by the banker. Full guarantee value must be retained as margin for issue of such guarantee. The goods can also be kept in bank’s custody. As soon as the original shipping documents are received, these shall be sent to clearing agents to facilitate return of original guarantee. In the alternative way, custom authority’s confirmation regarding cancellation shall be obtained.
Guarantee on account of Foreign Correspondent:
Foreign correspondent guarantee is required to be issued at the request and on behalf of the clients of foreign correspondents in favor of beneficiaries in Bangladesh in the form of Bid/ Earnest money guarantee or Performance bond. Counter guarantee is required for issuing this guarantee. The authorized dealer of branches will handle this guarantee only.
Personal Loan:
Personal loan is one of the strengths of Dhaka Bank Ltd. Dhaka Bank has created a separate division for this, called, “Personal Banking”. This division is involved in marketing of personal loan products. This division also processes the loan application and sanctions all the personal loan. Dhaka Bank offers various personal loan products. Any Bangladeshi citizen can apply for this loan. The minimum age of an applicant must be 21 years and maximum age must be 52 years. The minimum monthly income of an applicant must be 15,000 Taka. Self employed professionals, salaried employees, business man can apply for this loan. After completion of all the documentations, the papers are sent to the head office. Head office sanctions the loan and send sanction letter to the branch. The branch then disburses the loan to that customer. After two months, the installment for loan repayment starts. The monthly installment will be debited from the client savings account with Dhaka Bank against the post dated cheques or auto debit instructions obtained at the time of loan disbursement. Early settlement of the loan is allowed after six months pre payments. Partial pre payment of the loan is not allowed.
Personal installment loan:
This loan is mostly taken by the retail customers. Dhaka Bank has a wide range of personal loan products. Customers can purchase household appliances, electronic goods, computers, can use it for the purpose of marriage, medical treatment, etc. The maximum loan amount for this kind of loan is BDT 5 lac and the minimum of BDT 25 thousand. The loan amount is disbursed through the savings account of the customer. The loan amounts have to be repaid in the monthly installments of 12, 24, 36 and 40.
Car Loan:
Car loan is sanctioned to an individual borrower for the purpose of personal use. The car has to be unregistered reconditioned or brand new. The vehicle has to be registered in the bank’s name and the bank will issue a letter of Authority in favor of the borrower for using that vehicle.Maximum 70% of the value of the vehicle will be sanctioned by the bank or in amount, maximum BDT 35 Lac to minimum 5 Lac. Registration and all other costs will have to be incurred by the borrower.Vehicles will have to be purchased from any of the bank’s enlisted Dealers. The repayment terms are 12, 24, 36, 48 and 60 monthly installments. The borrowers have to choose one of the payment terms. The installments will be according to the tenure of the repayment.
Home Loan:
Any Bangladeshi individual can take home loan from Dhaka Bank for the purpose of purchasing, construction, renovation or extension of house or apartment. The maximum amount for this loan is Tk. 5 million or 70% of the price of the home, apartment or office space. And 80% of the cost of repair, construction or extension is given maximum to a customer. Installment is determined based on loan amount and tenure. Retail customers pay on monthly installments basis but Corporate and developer finance customers pay on quarterly basis also. Security is kept against this loan. The purchased home or the repaired house is kept as security and mortgaged to the bank.
Documentation for different kind of loans:
Document is the acknowledgement of the parties concerned their involvement in the credit transaction. It is the acknowledgement of debt and confirmation to repay from the part of a borrower/ mortgagor/ owner of the security, to be liable in the court of law and can be enforced by the court of law.
The whole process of completion of the documents to secure the credit is called documentation. It is necessary for acknowledgement of the debit by the borrower / guarantor/ mortgagor and for charging of securities in favor of the bank by them. Documentation must be proper and correct for the safety of credit. Proper documentation is essential to safeguard Bank’s interest. It is made covering its all legal aspects.
Basic Charge documents:
µ Promissory note,
µ Letter of Revival,
µ Letter of Undertaking,
µ Letter of Continuity,
µ Letter of Guarantee,
µ Right to recall the loan,
µ General loan and collateral agreement.
Basic supporting papers:
µ Letter of authority to debit account,
µ Loan disbursement letter,
µ Account balance confirmation slip.
Legal Documents:
µ Memorandum and Article of Association;
µ Registered Partnership deed;
µ Board resolution covering corporate borrowing power and execution of security documents;
µ Resolution of the partners for availing of credit facilities and for execution of security documents.
Steps of documentation: The steps of documentations are given below-
µ Obtaining of document or instrument form the borrower/ guarantor/ mortgagor.
µ Execution;
µ Stamping (stamp duty rate enclosed);
µ Filing of document;
µ Registration.
µ Signature verification;