Sheet – 01 & Lecture – 01

Question: Lending Management or lending policy

Answer: Lending Management or lending policy and proud we the main instrument towards
achieving mission and vision of a Bank. As mentioned in the memorandum and articles of
association of the Bank it is committed to invest in industrial and business enterprises by
developing projects of national importance, including the small and medium enterprise (SME)
consumer loan, capital market separation, lease financing, trade financing are also the eligible
Banking business as defied on the Banking companies act 1991.

The leading policy / management outlines the general principles and procedure which are
designed to be followed by the Bank official, associated with all kinds of Banking i.e. funded
and non funded financing activities.

The guidelines contained herein indicate management’s views on business development

priorities and the terms and conditions that are to be adhered to which approving credit facilities.

Definition of leading, loan, advance, credit and debit.

Leading, the term is action involved in many lending on interest making loan:

Loan : Permission to use something lead.

Advance : Pay before hand to implement the specific purpose.
Credit : The term refers to reputation of having wealth roe ability in limit debit.
Extension of credit in made under per-determined structural.
Debit : Something in question of money term which it due from one person / limit
to another person / limit.

Leading Policy / Management provides the guideline prepared in line in Bank’s Memorandum
and articles of association in memorandum with which relationship with credit officers/ Branch
Managers of the Bank will forward credit proposal along with their recommendation for
approval. The guidelines focus on the following :-

(i) Industry and Business segment

(ii) Green Banking
(iii) Types of loan facilities
(iv) Maximum Exposer: Single Borrower / Group Limit / Syndication
(v) Lending Caps
(vi) Discouraged Sectors
(vii) Thrust Sector
(viii) Loan Portfolio Management
(ix) Loan Facility Parameter
(x) Cross Border Risk.

Industry and Business segment

Bank’s lending activities are confined in the following broad areas :

(a) Industrial loan with emphasis in syndicated arrangements.
(b) Public Private partnership (PPP) Project
(c) Small and Medium Enterprise (SME)
(d) Trade and commerce both local and international
(e) Consumer Credit
(f) Lease Facilities
(g) Real estate business (including loan)
(h) Agro based venture

(a) Industrial Loan

- Long term / capital financing in the form of term loan
- Working capital
- Small and medium industries
Term Loan financing toward sitting up of new industrial units or balancing, modern
units (Small, Medium and Large) is consider of major lending activity of a Bank,
Generally Bank prefers syndicated / consortium arrangements for term loan of large
quantum for industrial projects.

Working capital financing for industrial units of all types is also core lending activity
of a Bank. Operational performance of industrial units, track record, Credit
worthiness of the entrepreneurs and reasonable security coverage (mainly in the form
of readily marketable inventories and covered by collateral of fixed assets small form
the basis of such financing working capital financing is subject to careful assessment
of viability, cash flow prospects entrepreneurial competence and conforming basis
worms of financing as stipulated in the lending policy of central Bank as well as
particular Bank.

(b) Public Private Partnership (PPP) Project.

PPP initiatives our usually long term (15-30 Years) in nature. Development of
infrastructure through private sector participation provides a boost on every sector of
economy. Infrastructure development especially power and energy, communication
telecommunication, port development tourism information technology housing etc.
are the major areas to be developed under PPP scheme. Bank extends credit facilities
to the project ot be implemented under Public Private partnership as per guidelines
oo GOB.

(c) Small and Medium Enterprise (SME) financing

Small entrepreneurs of special expertise’s with limited capability to establish and
operate and enterprise in an efficient way. The purpose of financing is to meet their
basis capital needy in an effort to accommodate them in a comfortable manner
without being burdened disposes debts. Small enterprise financing constitute smooth
sources of fund flow which the enterprise requires. In such financing Bank follows
policy guidelines already formulated by Bangladesh Bank and practical by Banks all
over the country.
 Continuation from previous lectures

(2) Trade and Commerce:

Financing “Trade and Commerce” encompasses large business houses dealing with
imported consumer stems, medium and small business houses trading in similar lines and
distributed, whole sellers retailers, shoppers and small manufactures scattered throughout
the country.

Leading facilities under the category comprises of trade finance and foreign trade finance
within the prevailing guide lines of Bangladesh Bank (BB) import policy, SRO etc. The
activity under the trade & commerce is classified as under:
- Cash Credit / Working Capital (Hypothecation/ Pledge)
- Letter of Credit (L/C) local and foreign.
- Back to Back L/C
- LTR (Loan against Trust Receipt)
- Packing Credit
- Over Draft
- LDBP (Local Documentary Bill Purchased)
- FDBP (Foreign Documentary Bill Purchased)
Lending activities in the above areas are carried on set guidelines and small-client
relationship built up through interaction and past trade record.

(E) Consumer Credit:

Consumer financing in to help the people of in an effort to accommodate themselves in a
comfortable manner without being burdened by disproportionate debt. The following:
(i) Auto Loan,
(ii) Consumer durable loans and loan for professions
(iii) Credit may be extended only if the Bank could inadequately understand and
manage the risk involved.
(iv) Common sense and past experience in conjunction with thorough evaluation
and analyses to be used.
(v) Not rely solely on customer’s reputation and accepted practice, sometimes
other lender’s risk assessment and recommendation of other officials are to be
considered while taking decision for such financing.
(vi) The desk officials are to be proactive to identify and manage Credit risk.
(vii) Be delegate in ensuring credit exposure and activities in compliance to the
requirements as set in the product program.

(F) Leaving Financing:

Under the scheme owner ship of financed assets is retained by the loan giving agency.
This sort of financing is considered to be suitable and effective for procurement of
machinery, equipments etc. for Balancing, Modernization, Replacement and Extension
(BMRE) of existing industries including that of Clinic, Pathological Laboratories,
Construction Equipments, Lease Financing yields higher rate of return than any other
traditional mode of finance. Bank / Financial Institutions infuse fund in productive sector
in more efficient and effective way, diversify its portfolio and satisfy customers need by
way of lease financing.
(G) Real Estate Financing
Real Estate including Development of Land, Construction of Commercial Building,
Apartment Building Housing loan etc. The financing has become very viable and
potential sector.

(H) Agro Based Ventures

Financing agriculture and agro based industries including Hatchery, Rice Mill, Poultry,
Diary, Export Oriented Shrimp Culture, Fish Processing Unit and Cold Storage has
become priority sector. The financing may be done directly or through other developing
agencies.
 Date : 05.02.2011
Continuation from previous lectures delivered on 28.01.2011

CREDIT INVESTIGATION
Without undertaking methodical credit investigation on the loan applicants hardly there is any
scope for finalization of loan proposal for approval. Two core objectives are attended through
credit investigation:- (i) Proper identification of the applicants (ii) Determination of their ability
and willingness to abide by their agreement with the Bank. The task of organized credit
investigation seeks answers to the following questions:-
(a) Who are the applicants?
(b) What are their present profession and recognized integrity?
(c) Are they persons of proven honesty and recognized integrity?
(d) Are they qualified to borrow?
(e) What is the extent of their financial worth?
(f) How much they are willing to invest from their own resources?
(g) How far they are capable of implementing the running the
enterprises?

Replies to the above mentioned questions are to be arranged in reporting form for compilation of
in-depth and dependable credit reports incorporating theirin proper and unbiased assessment on
the proposed borrowers the credit investigator is to procure, assemble analyze and interpret the
credit data.

The credit investigator should treat individual cases on their own merits, depending upon the
status of the applicants. Past dealings with the Bank, general prospect for the type of business,
quantum of loan, type of security offered the credit investigator will complete evaluation for
Bank’s consumption. The applicants for small loans for remote areas with adequate collateral
security call for limited investigation. In the cases where the applicants are new in the field or
with whom the Bank does not have any experience thorough investigation is necessary. The
credit investigator is to be cautions about the applicants who seem to put forward an outwardly
attractive situation. Under no circumstances he should know his judgment to be influenced by
talks of high connections or imaginary affluence of an applicant.

In the investigation process the officer will need about the character (honesty and integrity)
capital (properties and possession), capacity (entrepreneurial and managerial ability) liquidity
(cash and near cash assets). There are several methods like written requests, telephone
conversations, meeting informally at society gathering as far as possible. The usual source for
collection of informative particulars and data about the applicants are broadly divided into
internal sources, and external sources.

Internal sources
Analysis of past repayment performance, data of existing loan portfolios such as amount, date of
sanction, amount repaid, amount outstanding and ever dues together with comments on aspects
like replacement, moratorium etc.

External sources
- Credit Information Bureau Report (CIB)
- Interview with the applicants
- Financial statements, deeds, statutory documents
- Inspection of applicants, place of business and immovable properties.
 EARNING STATEMENT

Sales Revenue Tk. 53,000/-

Cost of the Goods Sold Tk. 32,000/-
Gross Profit Tk. 21,000/-
Administrative and Marketing expenses Tk. 3,000/-
Profit before Tax and interest Tk. 18,000/-
Financial expenses Tk. 5,000/-
Net Operating Profit Tk. 13,000/-

COMPUTATION OF SALES REVENUE

Gross Sales Revenue Tk. 56,000/-

Less Sales Returns Tk. 2,000/-
Less Sales Discount Tk. 1,000/-
Net Sales Revenue Tk. 53,000/-

WORKING OUT CASE OF GOODS SOLD

Beginning Merchandising Inventory Tk. 2,000/-

Purchase Tk. 29,000/-
Freight In Tk. 5,000/-
Goods available for Sale Tk. 36,000/-
Ending Merchandising Inventory Tk. 4,000/-
Cost of the Goods Sold Tk. 32,000/-

COMPUTATION OF OPERATING EXPENSES

Selling Expenses:
Sales Salaries Tk. 500/-
Fright Out Tk. 200/-
Advertising Tk. 300/-
Deprecation Tk. 300/-
Total Selling Expenses Tk. 1,200/-

GENERAL AND ADMINISTRATIVE EXPENSES

Office Salaries Tk. 1,100/-

Insurance Tk. 300/-
Office Supplies Tk. 100/-
Deprecation on Office Equipment & Furniture Tk. 300/-
Total General and Administrative Expenses Tk. 1,800/-
Total Operating Expenses Tk. 3,000/-

WORKING OUT FINANCIAL EXPENSES

Interest on Term Loan Tk. 2,500/-

Interest on Working Capital Loan Tk. 2,000/-
Bank Charges Tk. 500/-
Total Financial Expenses Tk. 5,000/-
 Date : 05.02.2011
Continuation from previous lectures delivered on 28.01.2011

Cash Credit / Working Capital:

This credit facilities are required both for means factoring unit as well as business house.

Assessment of working capital for Shinning Mill:-

Component of working capital are as under

Tide up Period Amounts
Raw Cotton (Imported) 90 Days 150,000.00
Packing Materials (Local) 30 Days 6,000.00
Work-in-Process 3 Days 5,000.00
Receivables at cost 15 Days 20,000.00
Finished Goods Stock 10 Days 15,000.00
Stores and Spares 90 Days 3,000.00
Others Lumpsum 2,000.00

30% is to be contributed by the Sponsors, 70% may be Bank’s Loan (Maximum Limit)

Cash Credit (Hypothecation):- This facility is made available to the clients against primary
security of Hypothecated inventory / stock of finished goods, raw materials, machinery etc. as
per Bangladesh Bank’s Policy guidelines. As the primary security remains at the disposed of the
borrower and the same remain beyond control of the lending institution. In this case Bank may
used for collateral security, criteria of such eligible security shall be as per stipulated guide lines
from Bank’s Head Office.

Cash Credit (Pledge):-

Cash Credit (Pledge) in the shape of working capital finance is extended to the borrower. The
primary security ie hypothecated inventory of finished goods, raw material etc. against the
facility is to be under strict control, supervision and monitoring of the Bank.

Trade / Foreign Trade Finance

In order promote trade including foreign trade Banks shall extend following facility.
(ii) Export Cash Credit: This facility including Back to Bank L/C made
available as pre-shipment finance. An exported avails of the facility for procurement of
raw materials to be exported as processed / finished goods. As the financing has inherent
risk, the Bank shall require assignment of collateral security in addition to export order.
Insurance coverage and additional security if collateral security appears inadeque are to
be obtained.

(iii) Packing Credit: This facility also relates to financing at pre-shipment

stage. Bank shall provide such facility against export orders under stipulated guidelines
of Bangladesh Bank.

(iv) Purchase of Local & Foreign Documentary Bills: This facilities relate
to financing at the post shipment stage to help and exporter to have access to fund under
strict condition.