Fareast Finance & Investment Limited (FFIL)

Fareast Finance & Investment Limited (FFIL)

Chapter-1

Introduction

1. SYNOPSIS

Non-bank financial institutions (NBFI) are financial intermediaries that accumulate funds by borrowing from the general public and from commercial banks and lend the same to meet specialized financing needs, but are prohibited to accept such deposits payable either on demand or by cheque, draft, etc and operate checking accounts for which their liabilities are not a part of the money supply.

A sound and well-functioning financial system helps mobilize savings, allocate resources, exert corporate control, and facilitate risk management and ease trades and contracts by solving market frictions. Efforts have been continued in FY08 to establish a sound financial system in the country. Despite the stronger growth of some major macroeconomic indicators, Bangladesh economy faced some challenges originating from price hike of oil and petroleum products and some major imported commodities in the international market causing fluctuations in real sector and foreign exchange market in FY08. As a result, the financial market was a little bit volatile in the second half of FY08.

Except these temporary fluctuations in the financial market, the overall market was sound functioning in FY08. With a view to establishing a healthy, sound, well functioning and dynamically evolving financial system, a series of reform measures were initiated in FY08.

In this modern age of the developed society where economic growth is significantly reflected by the financial markets of an economy, it is essential to have the expertise about how market players of these markets are actually performing. The domestic financial market players, whether in capital or money market, are nationalizing their services and gradually convincing potential customers with creative financial instruments. Depository institutions, non depository institutions such as leasing companies, insurance companies are the key market players assuring flow of resources among participants such as individuals, households, public or private businesses. Fareast Finance and Investment Limited (FFIL), a non-bank financial institution (NBFI) has been chosen for the purpose of assessing its financial performances. It was planned to gather the information related to the study. And accordingly, information will be composed.

Financial institutions (FIs) represent one of the most important segments of the financial system in Bangladesh and play a very important role in mobilizing and channeling resources in Bangladesh. In the last half of the FY 2008, the financial sector experienced multifarious problems. Due to political unrest, demand for obtaining credit facilities declined resulting in excess liquidity in the economy.

1.1 Origin of the study

The project has been prepared for fulfilling the requirement of the internship program (MBA, 9^th batch). Duration of the internship program was for 12 weeks, This project was approved by Dr. Sadia Shermeen (Assistant Professor, Department of Marketing, University of Dhaka, Bangladesh).

1.2 Objectives

The objectives of the research are,

• To examine about the financial activities of FFIL.
• To examine about the financial position of FFIL under study over eight years since it’s setting up.
• To study the financial position of FFIL in the light of the financial position of a few other leasing companies.
• To compare the banking financial institutions (BFI) and non-banking financial institutions (NBFI).

1.3 Scope of the study

The scope of the study is limited to Fareast Finance and Investment Limited (FFIL). But for the sake of a comparative analysis five other leasing companies and some other banks of Bangladesh have come under the fold of this study.

This report initially describes the company profile and financial activities of FFIL then focuses on comparative analysis among different Non-banking Financial Institution (NBFI) and lastly it evaluates a conceptual debate: Bank Vs NBFI.

1.4 Rationale of the study

“Survival of the fittest”- this adage works with the open market economy of Bangladesh. This present study, as the researcher believes, will envision the current state of FFIL. So, management of FFIL is likely to be in a point to ascertain its current status that might aid it to improve the company’s arrangement.

Secondly, it will help the researcher in understanding the financial stipulation of FFIL and its different financial actions such as term finance, lease finance, syndicate finance, and club finance.

Thirdly, leasing market is getting very cutthroat. There are thirty leasing companies in Bangladesh. So, it will help managers locate their company’s weaknesses and strengths compared to other leasing companies. As a result, it might help managers to defend their current position in the leasing market. Also this research will help in raising their activity area.

Fourthly, industries need financial support. This research will help borrowers to inform with financing companies. Also potential investors will be able to know about the leading financing companies.

The research will discuss a conceptual issue on BFI and NBFI. Finally, it will encourage further study in this area.

1.5 Sources of Information

The researcher has utilized both primary and secondary sources to gather relevant information.

For smooth and accurate study every one have to follow some rules & regulation. The study impute were collected from two sources:

Primary sources

· Practical desk work

· Face to face conversation with the officer

· Direct observations

· Face to face conversation with the client

Secondary sources

· Annual report of FFIL

· Files & Folders

· Memos & Circulars

· Daily diary (containing my activities of practical orientation in FFIL) maintained by me,

· Various publications on Financial Institution.

· Websites,

· Different circulars sent by Head Office and Bangladesh Bank.

To accomplish the first objective, the researcher has used Secondary information available with the company. Information from top ranking officers of the company under study has also been used.

The researcher has used annual reports of six leasing companies for the achievement of the objective of the study.

1.6 Methodology

Inhabitants for the present study are limited to thirty leasing companies of Bangladesh. The study concentrates on Fareast Finance and Investment Limited (FFIL). This leasing company is one of the total thirty leasing companies of Bangladesh. But for the purpose of a comparative analysis out of twenty-nine leasing companies exclusive of the one where the researcher has been working as an intern, five other leasing companies have been selected randomly. Obviously, the population for the study in the present context is limited to thirty companies of Bangladesh and the sample size is limited to five leasing companies exclusive of the one, which has accepted the researcher as its intern.

1.7 Analysis Of Information

The raw data being collected by interviewer and then, the spreadsheet program EXCELL (2008) is used to analyze it. Excel program also used for the table & graphical presentation. Besides these, the universal report writing software MICROSOFT WORD (2008) is used to process all necessary research writing, table, charts & graphs from documents and survey research.

Limitations

• There may be some other factors such as cultural, ethical or regulatory issues which although may have an impact on the company’s performances have not been considered in this study.
• For the sake of company’s secrecy all the information cannot be availed by the researcher.
• In spite of the best efforts of the researcher, there might have crept in some mistakes because of his lack of experience in the field of research.

Chapter-2

An overview of FFIL

Synopsis

In this chapter researcher shows the company under study related information such as its mission, vision, objectives, financing areas, sector-wise investment etc. The researcher has used company’s related documents and annual reports to collect this chapter’s information.

2.1 Introducing the company

Fareast Finance and investment Limited (FFIL) was incorporated in Bangladesh as a public limited company with limited liability and authorized capital of TK. 500,000,000, on June 21, 2001 under the Companies Act, 1994. The company was also permitted to commence business in Bangladesh as per certificate of commencement on the same date. Subsequently, the company received license from Bangladesh Bank as a Non-bank Financial Institution under the Financial Institution Act, 1993 to operate as leasing and financing company as provided under the relevant law. Company’s paid up capital is TK.195.75 million as on December 31, 2008.

2.2 Signposts of the firm

The signposts of the company are as follows:

Events	Date
Incorporation of the Company	June 21, 2001
Commencement of business	June 21, 2001
License from Bangladesh Bank	July 03, 2001
Signing of first term finance agreement	October 17, 2001
Formal commercial operation	January 01, 2002
Signing of first lease agreement	January 21, 2002
First participation in syndicated lease agreement	May 21, 2002
First participation in syndicated short term Finance agreement	October 14, 2004
First agreement of syndicated lease agreement	October 31, 2004

Table # 2.1: Signpost of FFIL

2.3 Mission

Company’s mission is to maximize the effectiveness derived by each constituency through its friendly association with company, in a manner that reflects high moral values and responsibility, and adds value to the wealth of the nation. Management feels to grow with healthy and diversified portfolio and believe that, each of company’s activities must provide satisfaction to customers, as also to the employees.

2.4 Objectives

The objectives of FFIL are as follows:

1. To provide capital finance for various small and medium enterprises aiming at poverty alleviation and creating employment opportunities. In case of large finance, policy decision is to go in for syndication with other financial institutions.

2. To provide lease finance for various agricultural equipments namely tractors, power tillers and power pumps to promote mechanization of agriculture in the country.

3. To provide lease finance to commercial vehicles particularly buses for urban transportation and inter-district communication.

4. To enable enterprising doctors to procure various medical equipment, apparatus etc. to provide improved services to patients.

5. To enable professionals in research work for having various research instruments on easy installment basis.

6. To provide lease finance to the fixed income group people in order to enable them to improve their standard of living by using various durable households.

7. To invest in the secondary capital market.

2.5 Organizational Chain of Command

To understand proper responsibility of the organization’s personnel we should depict organization’s structure. It will also help us to understand the delegation of the power, form of communication and reporting about performance.

2.6 Organizational structure of FFIL:

Figure #2.1: Organ gram of FFIL

2.7 Activity area

The company concentrates its activities for leasing, term financing, import financing, working capital financing, work order financing, lease syndication and sale & lease back financing for business expansion.

The company eventually seeks to broaden its leasing and financing services by entering into vendor programs with assets suppliers, underwriters, brokers, leveraged leases, lease syndications and sale and lease back financing for expansions and temporarily financed assets.

The company may extend guarantees for lease/finance obligations to other institutions/ companies subject to the laws and rules of the Government of the People’s Republic of Bangladesh.

The company extends lease finance for all types of machinery, equipment, household durables including vehicle for the purpose of industrial, commercial and personal use in Bangladesh and also term finance to its clients within the edge of the Law. The company also offers Deposit Scheme with flexible repayment style.

2.8 Assistance

One can get assistance from FFIL through the following ways:

· Lease Finance

· Term Finance

· Short Term Finance

· Consumer Finance

· Import Finance

· Bond Discounting

· Bridge Finance

· Syndicated Finance

· Deposit Scheme with flexible repayment style.

· Factoring

· Work Order Finance

All the services are fund based. Other than above, FFIL management is ready for providing fee-based services like guaranty for opening of Letter of Credit (L/C) etc.

Lease Finance

A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payment the right to use an asset for an agreed period of time. Lease finance is the core business of FFIL.

Term Finance

The second main business of FFIL is to provide term finance, which means to advance loan for more than one year.

Short Term Finance

FFIL extend short-term finance that meant to advance loan for short period of time.

Consumer Finance

Consumer credit scheme or Consumer Financeprovides finance facilities to the consumer to meet their demand of the household for maintaining a higher standard of living, procuring the durable goods and for fulfillment of their sudden necessities. Generally its repayment period is less than two years. Over the period, the borrower pays back the principal along with interest by monthly installments. It may be secured or unsecured.

Bond Discounting

Bond Discounting is a facility by which finance are made to the bond holder against the face value of the bond which is normally lower than the face value of the bond. It may be noted that face value is the price given to a bond when it is issued.

FFIL offers this facility to the Government bonds or bonds acceptable to the stock exchanges or private bonds acceptable to FFIL.

Bridge Finance

It is a method of funding used for a short duration of time until permanent financing is put in place. Sometimes an individual or a company is assured to get a finance facility from any financial institution or bank or public through Initial Public Offering to meet his specific requirement and actual receipt of the fund. In those cases, Bridge Finance is the solution.

Work Order Finance

FFIL provide finance against work orders from reputed multinational companies, local blue chip companies, large NGOs and Government institutions. One can meet his delivery/performance deadlines specified in the work order by mobilizing funds from FFIL.

2.9 Financing Areas & sector-wise distribution

For industry, enterprise, business and household, consumer may select the following items through leasing or term financing:

· Capital machinery for industry

· Construction equipments

· Medical equipments

· Commercial vehicle

· Taxi cab

· Lift

· Generator

· Boiler

· Office equipment

· Household durable

· Construction, renovation and decoration of building

· Working capital for processing, manufacturing trade and commerce

The company under study has made investment in different sectors. This has been shown below:

	Sector wise distribution of portfolio as on December 31, 2007
SL #	Sector/Sub sector	Taka	Percentage (%)
01	Textiles	240,269,933	19.08
02	Garments and Accessories	112,410,564	8.92
03	Transport (Including Marine Transport)	285,807,637	22.69
04	Chemicals and Pharmaceuticals	84,597,684	6.72
05	Iron, Steel and Engineering	50,275,651	3.99
06	Agricultural Equipments and Agro Industries	29,570,299	2.35
07	Power and Energy	58,736,440	4.66
08	Electronics and Electrical	6,663,829	0.53
09	Information Technology (IT)	5,211,394	0.41
10	Paper Printing and Packaging	4,218,976	0.33
11	Plastic	16,539,352	1.31
12	Telecommunications	0	0.00
13	Real Estate and Housing	74,810,176	5.94
14	Food and Beverage	66,840,067	5.31
15	Consumer Durable	49,369,223	3.92
16	Glass and Ceramics	19,222,664	1.53
17	Services	72,687,278	5.77
18	Others	82,335,064	6.54
	Total	1,259,566,231	100.00

Table # 2.2: Sector-wise investments of FFIL (as on Dec.31, 2008)

The above tabular shows that FFIL highest investment (19.08%) is in textile while the company’s lowest investment (0.33%) is in paper printing & packaging.

2.10. Funding

The main sources of funding of the company are commercial banks. In the mid of the year 2004, shareholders infused new capital of Tk.87.50 million which helped a lot in reducing the cost of borrowed funds. Also in 2004, the management of FFIL contacted with Agricultural Credit and Special Programs Department of Bangladesh Bank to avail low cost fund. Besides that, management of FFIL is seeking for alternative sources of fund like issuance of debenture and bond for keeping the pace of growth

The following graph shows the sources and uses of fund by FFIL:

Figure # 2.2: Graphical presentation of sources and uses of fund

The above figure is the reflection of FFIL’s different sources and uses of funds. FFIL obtains its fund from two sources- owned sources and borrowed sources. The owned sources of FFIL are paid up capital, reserve capital and retained earnings. The main source of borrowed fund of FFIL is commercial banks of Bangladesh. FFIL gets fixed deposit which is it’s another source. On the other hand, FFIL uses fund to procure fixed assets, maintain statutory reserve with Bangladesh Bank and also to perform lease and term financing.

Chapter-3

Financial Activities of FFIL

Synopsis

The purpose of this chapter is to get familiar with the financial activities performed by FFIL. The focus is essentially on lease financing, term financing, syndicate financing, and club financing. Information accumulated for this part is mostly secondary in nature. Some of the primary information has been collected through interview with managers. A questionnaire has been used to conduct interview.

3.1. Lease

Leasing generally was associated with real estate-land machineries and buildings. Today, however, it is possible to lease virtually any kind of fixed asset. Leasing involves economic and legal relations arising from the implementation of the leasing agreement regarding acquisition of the leasing object. A lease is an agreement between a lessor and lessee that allows lessee to use specific property (or properties) for certain period and in return lessee pays to lessor.

3.1.1. Leasing Process of FFIL

To obtain a lease facility from FFIL, lessee has to follow some step-by-step procedures. Also lessee has to stand for some terms and conditions. Lessee can not sublease the leased assets to anywhere. At the expiry of lease period and after fulfillment of all obligations to FFIL, lessee may reschedule the lease on a year-to-year basis at a predetermined lower rental or return the equipment to FFIL or purchase the equipment at a reasonable negotiated price. Normally this varies from 0.50% to 1% of acquisition amount. FFIL is fully flexible regarding the security. Depending of the type of investment and credit risk, this will be finalized with lessee. The total procedure of lease financing from applying for lease to disbursement of lease is described below:

3.1.1.1. Lease application

The lessee has to apply for lease to the Managing Director of FFIL to get the facility of lease finance. The amount of lease and its purpose have to be mentioned in the official notebook of the lessee.

3.1.1.2. Analyze the application

The Managing Director (MD) analyzes the purpose to reach a decision whether to invest in it. The operation and marketing officer then deals with the client if the MD feels the purpose is worth to be invested.

3.1.1.3. Discussion with the client

The operation and marketing officer then carries an informal discussion with the lessee about the prospect of lessee’s business. The officer also visits the client’s business and reports the information to the MD.

3.1.1.4. Sending offer letter to the lessee

If the officer is convinced with the situation, an offer letter is issued to the lessee stating a few details about the lease including interest rate, finance period and amount and the like. A sample of offer letter will be enclosed in the appendices.

3.1.1.5. Collection of necessary documents

If the lessee accepts the conditions of the offer letter, the firm then asks the client to provide the following documents:

· Nature of the business

· Name of sister concern(s) (if any)

· Photocopy of Memorandum and Article of association attested by Managing Director

· Audited Financial reports for last 2 years of lessee’s organization

· Audited Financial reports for last 2 years of sister concern (if any)

· List of Major shareholders or Directors and the their percentages

· Curriculum Vita of Managing Director, Directors of organization

· Details of applied lease items and units

· Information about credit facilities availed from banks

· Detail of the security

· Attested photocopy of TIN, VAT and Trade license

· CIB undertaking

3.1.1.6. Letter to Credit Information Bureau (CIB)

Credit Information Bureau (CIB) is a wing of Bangladesh Bank which maintains a database of institutions and individuals about credit facilities. FFIL sends a letter to the bureau to confirm whether its client has taken any credit facilities from any bank or financial institutions. CIB confirms whether the client is unclassified or classified to the Bangladesh Bank. The client has to be unclassified in CIB. Beside that the status of sister concern(s) must be also Unclassified.

3.1.1.7. Submission of proposal to Managing Director / Board of Directors

A proposal is then prepared by the officer. If the lease amount exceeds Tk.2 million, the proposal is presented to the Board of Directors. If not, the MD justifies the proposal for its approval. In the proposal, the marketing and operation officer mentions the following things:

Sl.#	Point	Sl.#	Point
1	Introduction	18	Management evaluation
2	Purpose of the facility		a) Government & regulatory policies
3	Company profile		b) Adherence to company’s credit risk policies
4	Terms and condition		c) Facility structure
5	Corporate Guarantor’s Profile		d) Historic financial analysis
6	Description of the Assets to be leased		e) Financial performance analysis
7	Security Arrangement		f) Control on applicant’s cash flow
8	The Directors lllll		g) Management changes or succession issue
9	Background of the company		h) Credit risk grade
10	Net investment of business		i) Risk analysis: 1. Business risk 2. Financial risk 3. Ratio analysis 4. Management risk 5. Structural risk 6. Security risk 7. Performance risk 8. Economic risk
11	Existing exposure with FFIL
12	Credit facility of the company	19	Exit option
13	Industry analysis	20	Declaration
14	Business market status	21	Management recommendation
15	The group
16	Inspection report
17	Credit status

Table # 3.1: FFIL’s proposal

3.1.1.8. Sanction letter to lessee

If the CIB’s report shows the client unclassified and the Managing Director or Board of Directors approve the lease application, a sanction letter is issued against the lessee by the marketing executive. The terms and conditions of the lease are described in the letter in details. If the party agreed in all the terms and conditions then the lessee will sign the duplicate letter and send back to the lessor and then the further lease process is progressed.

3.1.1.9. Selection of the supplier

The client provides a quotation from the supplier of lease asset to FFIL. The firm then verifies the quotation by comparing it with another quotation collected from another supplier. Some of the assets are needed to be imported from abroad. In such case, the lessee has to carry the all paper works required to import the asset.

3.1.1.10. Documentations

FFIL prepares the documents which are needed to be signed by the authorized signatory of the lessee.

· Lease Finance Agreement

· Demand Promissory Note

· Personal Guaranty

· Corporate Guaranty

· Post Dated Cheques

· Letter of Authority

· Trust Receipts

3.1.1.11. Purchase order

FFIL issues a purchase order to the supplier. The lessee collects the asset from the supplier.

3.1.1.12. Disbursement

When supplier place the leased assets and install it to the lessor, then FFIL disburse the amount to the supplier.

3.1.1.13. Monitoring

The lessee is regularly monitored by FFIL whether they are using the asset as per promise in sanction letter. To assure regular rental payments and take proper care of leased assets by the clients, FFIL keeps eye on the client. Monitoring policies have been mentioned at below:

· Discussion Through telephone with client as soon as the default occurs.

· Letter to lessee and invite for discussion if lessee fails to pay 2 or more rentals.

· Visit lessee’s office to assess the problem and state of business.

· If lessee fails to pay 4 or more rentals, strong letter send to lessee.

· If the situation does not improve, invites lessee to discuss with top management.

· If lessee fails to pay 6 or more, invites lessee to attend Board Audit Committee (BAC) Meeting.

· If lessee fails to fulfill agreement demand, FFIL goes to court to liquidate mortgage property.

3.2. Term loan

Term loans are designed to fund long and medium-term business investments, such as the purchase of equipment or the construction of physical facilities, covering a period longer than one year. 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 installments. (Often payments are made every quarter or even monthly). Term loans normally are secured by fixed assets (e.g. Plant or equipment) owned by the borrower.

3.2.1. Procedures of term finance

The procedures of term financing of FFIL are almost similar to those of lease financing. The difference is FFIL does not have to procure asset for the client’s use, rather FFIL provides capital to the client. So, FFIL does not need to issue any purchase order.

3.3. Syndicate loan

Syndication means joint financing by more than one NBFIs or Banks to the same clients against a common security. This is done basically, to spread the risk. It also provides a scope for an independent evaluation of risk and focused monitoring by the Agent/Lead Arranger.

In syndication financing, NBFIs also enter into an agreement that one of the lenders may act as Lead

Arranger. In such cases, Lead Arranger has to co-ordinate the activities at various stages of handling the proposal i.e. appraisal, sanction, documentation, sharing of security, disbursement, inspection, follow-up, recovery etc. It may also call meetings of syndication members, whenever necessary to finalize any decision.

For instance, GMG Airlines (GMG) requires a lease amount of TK.200 million and applied for it to FFIL. The firm arranges a syndicate loan from other finance companies. In this case, FFIL will be the lead arranger and will co-ordinate and handle different stages of financing.

Figure # 3.1: Syndicate loan

3.4. Club Financing

Like syndicate financing more than one bank or financial institutions attain club financing program to reduce their individual risk. In this type of financing the borrower will attain his borrowed amount from different FI or Banks and will be held liable to pay to each organization. In case of, club financing GMG Airlines (GMG) itself collects the loan amount from different lease companies. Here, GMG is liable to each different financer.

Figure # 3.2: Club financing

3.5. Risks face by Non Banking Financial Institutions

3.5.1. Credit risk

The credit risk is the risk to earning and capital that an obligator will fail to pay to meet the terms of any contract with the financial institutions, or other wise fail to perform as agreed. Credit risk is the primary cause of bank or financial institution’s failure in recent years, and it is the most visible risk facing by bank or other finance institutions mangers.

Credit risk is the possibility that borrowers or counter party will fail to meet agreed obligations. Globally, more than fifty percent of total risk elements in banks and financial institutions alone. In case of lease/term finance borrower may not pay rental/ principal amount/ or interest.

3.5.2. Interest rate risk

Interest rate risk arises due to change in overall market interest rate structure both on borrowing and lending. Interest rate risk arises due to reduction of interest rate on lending form time to time on several occasions. The company has to reduce several occasions to attract more clients and to compete with the competitors. Interest rate borrowing affects profitability of an organization and desired margin to the shareholders.

3.5.3. Market risk

The financial institutions also face significantly market risk. The losses financial institutions may suffer due to adverse changes in interest rates, security prices, and currency prices. Financial institutions may severely make loss due to change of interest rate or foreign exchange rate.

3.5.4. Operational risk

Operational risk could be occur due to possible break downs in quality control, inefficiencies in delivering services, simple errors in judgment by management. The changes can adversely affect a financial institutions revenue flows, its operating costs, and the value of the owner’s investment in financial institutions.

Chapter-IV

Treasury Function

4.1.1 Task of treasurer

The main function of the treasury division is fund management. Basically every function of this division is concerning fund management. Fund management means proper management of inflow and outflow of required fund.

Treasurer watches carefully the expected inflow of fund will take place in a day and what the required outflow has to be made. If required outflow seems higher than expected inflow then deliberation of treasure starts. The treasurer then goes for gap analysis considering various internal and external changes.

Maintaining proper balance of fund is a tough job. The sources of fund are available but not always cost effective. Because of market fluctuation, changes in economic conditions, competition among existing firms, threats of new entrants, competitive and lucrative offer by existing firm, market virtually turn very competitive and flexible. Profit of financial institution is the difference between the interest rate at which fund is invested and at which it is acquired.

Figure # 4.1: Task of treasurer

From the above figure we perceive that operation’s and marketing effort has no use if the treasurer could not manage the cost effective funds.

Another important thing is to arrange the fund for client on time. This is one of the reasons to choose NBFI rather than Banks. Clients always look for immediate disbursement. The promptness in collecting fund made treasury function more difficult and challenging.

4.1.2. Sources of fund

At this instant we will observe the sources of fund for a financial institution like FFIL.

4.1.3 Credit Line Facility

This facility is the contractual right of a firm with a bank. The firms attain that right get a certain amount of money allotted for that firm and it can withdraw its required money at different time.

Different nationalized and private commercial banks are the main sources of fund for NBFI. To finance their clients, financial institutions keep sources of fund usable to supply fund on time. For instance, FFIL have the benefit of credit line facility of Tk. 10 crore from Ducth-Bangla Bank Ltd. That means FFIL can withdraw Tk. 10 crore at a time or Tk. 5 crore each time at two ‘slices’. This ‘slices’ are called Draw Down in financial jargon. Observing successive growth of FFIL different banks got themselves involved in providing credit line facility to FFIL.

4.1.4 Over Draft Facility

It is also a contractual right to get money from commercial banks for short term. But as a NBFI, FFIL only offers corporate guarantee against this facility.

4.1.5 Fixed Deposit Receipt (FDR)

It refers to deposit made by the general public and different companies for a fixed period of time with a right to get interest at a stipulated rate upon maturity.

FFIL is committed to serving the future and maximizing returns on hard-earned savings of the depositor through giving them best possible rates on their deposits, offering attractive rate of return.

4.1.6 Conditions:

· Minimum tenure is one (1) year.

· Scheme will be governed by The Financial Institution Act, 1993 and circulars issued or to be issued by Bangladesh Bank from time to time in this regard.

· Regulation of The Income Tax Ordinance 1984 is also applicable for the scheme.

4.1.7 Call Loan Finance

It is the loan taken over call with implied condition to pay when it is called for. This usually called over the phone.

4.1.2.1. External sources of fund

· The external sources of fund are:

· Term Liability

· Short term Loan

· FDR

· Call Loan

4.1.2.2. Internal sources of fund

The internal sources of fund and there position is given below:

· Paid up capital

· Retained earnings

· Current years’ profit

· Statutory Reserve

4.1.3. Gap analysis

One of the important tasks of the treasurer is to monitor:

· There is no deficit of fund.

· There is no idle or unused fund.

If fund faces shortfall frequently when it is required to provide a client, will create a bad perception about the organization. On the other way, the idle funds also bring financial loss as these fund collected at cost. Both of these are expensive.

To overcome this problem, treasurer’s way out is to do Gap Analysis. Here he shows what is to be paid within next month and what is to be received at the same period. If there is a shortfall he tries to fill up the circumstances. And if there is idle fund he ensure to proper use of the fund.

The tools of Gap Analysis are

· Sources of fund

· Ground of use of fund.

4.1.4 Source of funds of FFIL

· Term Loan

· FDR

· Call Loan

· Probable collection of Lease and Term Finance

· Bank’s free balance

4.1.4. Environmental impact on fund management

Both internal and external environmental factors fund management. Internally fund management got troubled when there is high requirement of fund than typical. It is a good signal for the business as it indicates the prospect. But it might create bad intuition if this happens frequently.

The external factors that affect the management of fund are:

· Agitated political situation– It creates difficulties for the investors to roll up their fund and also affect the payment of the credit facilities to the financer.

· Rapid expansion of cost of fund–As the financial banks are the main sources of NBFI’s is the bank.

Accounting Function

4.2. Accounting system of lease Operation

Realigning the substantial growth of the leasing operation, International Accounting Standard Board (IASB) the successor of International Accounting Standard Committee (IASC) has come up with a distinctive accounting standard (International Accounting Standard-17) relating to leasing operation to facilitate the smooth recording and presentation.

4.2.1. Classification of lease

Two type of lease can be distinguished: a) Operating Lease b) Financial Lease. Sale-and-lease-back is a special financial lease arrangement.

a) Operating lease

Short-term, cancellable lease agreement are called operating lease. Convenience and instant services are the hall-marks of operating lease. For example, a tourist renting a car, lease contract for a computer, etc. the lessor is generally responsible for maintenance and insurance of the assets.

b) Financial lease

Long-term, non-cancellable lease contracts are known as financial lease. Examples are plant, land, building etc. the lessor buys the assets identified by the lessee from the manufacturer and signs a contract to lease it out to the lease.

Sale-and-lease-back

Sometimes, a user may sell an (existing) asset owned by him to the lessor (leasing company) and lease it back from him. This sale-and-lease-back arrangement may provide substantial tax benefits.

4.2.2 Practical example of recording

Now we will see practical example of recording lease and term finance transactions

4.2.3 Recording for lease finance

Greenland Garment Limited (GGL) has been sanction of Taka 5.50 million after completion of all formalities.

The amount is to be paid with 36 installments with a discount rate 15.50%. The installments are to be paid on beginning basis. IDCP is 6 months and the rate of IDCP is 15.50% and this interest is payable at quarterly rest. Transfer price is Taka5000. A documentation fee is Tk.27500.

1. Receipt of documentation fees from client, GGL of Tk. 27500 in cash

Bank Account 27,500.00

Other Operational income 27,500.00

2. Advance rental received through A/c Payee cheque

Bank Account 189,560.00

Advance rental on contract 189,560.00

3. Disbursement made to the supplier Tk.2,524,500 on different date

Received against leased asset 2,524,500.00

Bank Account 2,524,500.00

4. Opening of letter of credit and deposit margin

L/C Margin Account 2935196.00

Bank Account 2935196.00

5. On clearing of document against L/C

Receivables against leased assets 2935196.00

L/C Margin 2935196.00

In case of recording IDCP client can either pay it in cash or to capitalize it with the rental. This client wants to pay off the IDCP interest in cash. So journal for all IDCP was taka 308377.00.

6. To record IDCP

Bank Account 268073.00

Advance against leasing assets 40304.00

Other operational income 308377.00

According to IAS-17 the lessor should record Gross investment in the lease which is the aggregate of the minimum lease payment. In our example Gross investment is

Interest during construction period (advanced portion) 40,304.00

Different disbursement 5,459,696.00

Total capitalized amount 5,500,000.00

Discount rate 15.50%

No. of rental 36

Mode of repayment is beginning basis.

Using PMT method we find the rental is Taka189,560.00

So Gross receivables (189,560×36) = 6,824,160.00

7. To record execution of lease

Gross receivables 6,824,160.00

Advance against leasing asset 5,500,000.00

Unearned lease income 1,324,160.00

8. To record lease rental

Advance lease rental 189,560.00

Advance rental on execution 189,560.00

9. To record receive of first rental

Bank account 189,560.00

Gross receivables 189,560.00

10. To record the lease income we must resort to amortization schedule to find how much of the rental is lease income and how much is finance amount. To record lease income

Unearned lease income 68,593.00

Lease income earned 68,593.00

4.2.4 Recording for term finance

Now let us see the recording system and presentation of term finance.

FFIL make an advance of Taka 20.00 million to Anudip Cab Limited with an interest rate of 18.00% p.a. for 24 months. This contract executed on June 30, 2006. So the first payment will start from July 31, 2006.

The term finance schedule is given below:

No. of installment	Beginning Balance	Interest	Principal	Installment	Ending Balance
1	20,000,000	300,000	698,482	998,482	19,301,518
2	19,301,518	289,523	708,959	998,482	18,592,559
3	18,592,559	278,888	719,594	998,482	17,872,965
4	17,872,965	268,094	730,388	998,482	17,142,577
5	17,142,577	257,139	741,343	998,482	16,401,234
6	16,401,234	246,019	752,464	998,482	15,648,771
7	15,648,771	234,732	763,750	998,482	14,885,020
8	14,885,020	223,275	775,207	998,482	14,109,813
9	14,109,813	211,647	786,835	998,482	13,322,979
10	13,322,979	199,845	798,637	998,482	12,524,341
11	12,524,341	187,865	810,617	998,482	11,713,724
12	11,713,724	175,706	822,776	998,482	10,890,948
13	10,890,948	163,364	835,118	998,482	10,055,830
14	10,055,830	150,837	847,645	998,482	9,208,186
15	9,208,186	138,123	860,359	998,482	8,347,826
16	8,347,826	125,217	873,265	998,482	7,474,562
17	7,474,562	112,118	886,364	998,482	6,588,198
18	6,588,198	98,823	899,659	998,482	5,688,539
19	5,688,539	85,328	913,154	998,482	4,775,385
20	4,775,385	71,631	926,851	998,482	3,848,534
21	3,848,534	57,728	940,754	998,482	2,907,780
22	2,907,780	43,617