Q37. What do you mean surveying a branch area.
Why it is so important in preparing a
Loan Pricing , CRG and LRA
Q1. Explain why core risk management is getting so much high-lighted for proper financing of
a bank. -4
Q2. Define Lending Risk Analysis (LRA) and Credit Risk Grading (CRG). -4
Or, Distinguish between Lending Risk Analysis (LRA) and Credit Risk Grading (CRG)
Q3.Write down the components/risk components of CRG or, What are the Principal Risk
Components of CRG.. How to Compute Credit Risk Grading. What are functions of CRG.
Mention the importance of CRG. What is the purpose of applying Credit Risk Grading? -4-6
Q4. List down the risk factors/Causes those can make an industry sick. Explain how each
factor/causes accelerates the sickness.-6-7
Q5.Write down the expected minimum of CRG requirements for extending credit. Explain
with example. Or, Wrirte down the NUMBER AND SHORT NAME OF GRADES USED IN
THE CRG and Explian its.-8-10
Q6. Components which are to be taken into account in pricing of loan and loan program. Or,
Factors affecting the Loan Pricing.-10
Q7
that statement.-11
Q8.In competitive market, which of the variable and fixed pricing as banker you would
advocate?-11
SME and Agriculture Credit/finance/loan
Q9
the booster sectors financed under SME scheme. -12
Q10. Define Agricultural credit. Discuss the role of Agricultural credit in Bangladesh.-12-13
Q11. Agricultural credit plays a very important role in economic development of the country
GDP attainment.-13-14
Q12. Mention the rationale for agriculture credit in Bangladesh-14
Q13. SME is considered as employment Generating Machine- Explain?-14-15
Q14.Discuss the roll of SMEs in the economic development of Bangladesh.-15-16
Q15. Difference between Agricultural credit and SME Financing.-16
Q16. Bangladesh Bank has of late made some changes as regards providing of SME loans, but
some banks are reported to have been measuring the revised concept through unfair
conversion of some other loans to SME loans. Give your opinion on the matter. -16
Q17. Do you think that all banks should give top priority in financing this sector for creating
employment, reduction of poverty and overall economic development of the country? Justify
your answer.-16-17
Q18. Do you think that the credit delivery under the SME scheme is given due importance by
the credit Banks and financial institutions from the view point of national interest. Justify
your arguments. -17
PROJECT AND PROJECT APPRAISAL
Q19. Define Sensitivity analysis. State necessity/importance/advantages of Sensitivity analysis
of a project.-17-18
Q20. Define project and Project appraisal-18
1 3
Q21. Methods of Project Appraisal Explained-18-19
Q22. Explain different aspects (technical, financial and commercial) of a project appraisal to
help the management to take proper decision. Also elaborate the points to be considered in
technical report.-20-23
Q23. What are the documents required by bank to appraise a project. What kinds of help
from Project appraisal as a manager.-23
Q24. During appraisal of a project loan proposal, what factors does a banker take into
consideration? Please explain. -24
Q25. a) Mr. Abdul Ali, an enterprise of your branch area applied for a loan of Tk. 20.00 lacs
to establish a nursery project (to ensure green banking)/SME business to your branch. Please
write an appraisal report explaining the following points: -24-25
i. About the applicant/entrepreneur;
i. About the enterprise (nursery);
ii. About the security, calculating maximum credit limit (MCL);
iii. About the credit needs;
iv. About the income & expenses i.e. profitability;
v. managerial ability
vi. About marketing;
vii. Recommend loan amount considering the above analysis
Q26. A Project loan is treated as a term loan, Discuss why. Discuss the risk you anticipate in
such financing.-26-27
Q27. List down the cost component of a rice mill project (capital cost).-27-28
Q28. Discuss the details of non-performing loan(NPL) recovery processes on both legal and
non-legal aspect.28-29
Q29. Discuss the adverse/Negative effects/impacts of Non-Performing Loan in Bangladesh and
Causes of Non-Performing Loan in Bangladesh.-29-31
Money market and capital market, SEC
Q30. Distinguish between money market and capital market. Can increased call money rate
influence the capital market? Elaborate with example.-31-32
Q31. What do you mean by SEC? Elaborate its functions. Do you think that SEC is
performing its role properly in monitoring and controlling capital market especially stock
market of our country? Please pass your comments. -32-33
Q32. Do you suggest any amount of investment in capital market by commercial bank? Justify
your answer.-33
Asset Liability Management (ALM) & Portfolio Management
Q33.Define portfolio Management. Highlight the role and responsibilities of a branch
manager in identifying a borrower, loan processing and appraisal of the loan proposal. -34
Q34. What do you know about ALM? List down the role and responsibilities of ALM of a
bank. Do you agree that the absence of Asset Liability Management (ALM) of a bank may
lead to different crises to jeopardize the image and soundness of the bank? Elaborate your
answer. -34-35
Q35. What do you know about ALCO? Do you think each commercial bank should form
ALCO? List down the role and responsibilities of ALCO of a bank. State Formation/Structure
of ALCO of your bank.-35-36
Q36. Prepare typical balance sheet of your bank.-37-38
2 4
business plan of a branch.-38-39
Q38. It is due to the increase of classified loans of the bank that they now facing liquidity
problems and borrower interbank call money at very high rate. Justify the view point. 39-40
Q39. Define Loan Write Off and Loan rescheduling. Or, Difference between Loan Write Off
and Loan rescheduling. Difference between Loan Write Off and interest remission.-40
Q40. Discuss loan write-off rules set by Bangladesh Bank. Before sending a loan write off
proposal to head office, list down the pre-conditions to be fulfilled for the loanee to be eligible
ance sheet? Explain.-41
Q41. Do you think present system should be changed? Do you have any suggestion of the
present system of provisioning against regular loans and advances? Explain the reason. Or,
Discuss the Limitations and suggestions on the existing Loan Classification & Provisioning
System: -42-43
Q42. Discuss the basis of determining the classification status of classified loans and advances
and provisioning rules given by Bangladesh Bank.-43-45
Q43. What is prospective borrower? In selecting borrower whats point to be taken in
consideration?-45-46
Q44. What qualities does a field officer (Who appraises loan proposal) should posses? Please
elaborate your answer.-46
Others
Q45. Explain term loan. Distinguish between term credit and short term credit. Which one is
preferred by bank and why. Or, Advantages of Short-Term Financing. or, Why do the private
commercial banks prefer short term lending. -46-48
Q46. Why do the private commercial banks prefer short term lending and discourage term
credit? -48
Q47. Discuss different types of credit that a commercial bank can provide to its clients. -48
Or, Discuss the different types of credit facilities those a banker extends to clients.
Q48. What is Credit Planning? What factors are to be taken into consideration by a bank
while making a credit planning?-48-50
Or, Discuss the important components those are to be taken in consideration in formulating
the lending operational policy of a bank.
Q49. List down the minimum eligibility criteria to be fulfilled by borrower to obtain loan.-50
Q50. Define Security. Discuss different types of securities that a banker usually takes at
disbursement of credit. Or, Discuss different types of securities documents those a bank
usually obtain at the time disbursement of credit from borrower.-50-51
Q51. Discuss the required documents for loan.-52
Loan Pricing , CRG and LRA
Q1. Explain why core risk management is getting so much high-lighted for proper financing of
a bank.
The core risk management is so much highlighted that impose to modern banking system. Due to
deregulation and globalization of banking business, banks are now exposed to diversified and
complex risks. As a result, effective management of such risks has been core aspects of establishing
good governance in banking business in order to ensure sustainable performance. In year 2003 and
2004, Bangladesh Bank issued guidelines on the six core risks on Credit, Asset-Liability, Foreign
Exchange, Internal Control & Compliance, Money Laundering, and ICT risks. These guidelines
may help banks to measure and manage their Liquidity Risk, Interest Risk and Foreign exchange
risk and minimize their losses. The ICT guideline helps to measures to prevent the unauthorized
access, modification, disclosure and destruction so that now the interest of customer is fully
protected. The modern banking system is more benefited securing by following the core risk
management guidelines imposed by Bangladesh bank and banks is getting so much highlighted for
financing as well as all operation of the bank.
Q2. Define Lending Risk Analysis (LRA) and Credit Risk Grading (CRG). Or,
Distinguish between Lending Risk Analysis (LRA) and Credit Risk Grading (CRG)
Distinguish between Lending Risk Analysis (LRA) and Credit Risk Grading (CRG):
Lending Risk Analysis (LRA): The Lending Risk Analysis (LRA) manual introduced in 1993 by
the Bangladesh Bank has been in practice for mandatory use by the banks and financial institutions
for loan size of BDT 1.00 crore and above. However, the LRA manual suffers from a lot of
subjectivity, sometimes creating confusion to the lending bankers in terms of selection of credit
proposals on the basis of risk exposure. Meanwhile in 2003 end, Bangladesh Bank provided
guidelines for credit risk management of banks wherein it recommended, interalia. The introduction
of Risk Grade Score Card for risk assessment of credit proposals
Credit Risk Grading: Credit Risk Grading is an important tool for credit risk management as it
helps the banks and financial institutions to understand the risk involved in a different credit
transaction. The aggregation of such grading across the borrowers, activities and the lines of
business can provide better assessment of the quality of credit portfolio of a bank or a branch.
Credit risk grading is the process which helps the sanctioning authority to decide whether to lend or
not to lend, what should be the lending price, what should be the extent of exposure, what should be
the appropriate credit facility, what are the various facilities, what are the various risk mitigation
tools to put a cap on the risk level.
Q3.Write down the components/risk components of CRG or, What are the Principal Risk
Components of CRG.. How to Compute Credit Risk Grading. What are functions of CRG.
Mention the importance of CRG. What is the purpose of applying Credit Risk Grading?
Components of Credit Risk Grading:
Financial risk:
management refers to the practices used by corporate finance managers and accountants to limit and
risk of loss from unexpected changes in the prices of currencies, interest rates, commodities, and 3. Smuggling
equities. 4. Trade liberalization
5. Poor infrastructure
Business/Industry risk: The risk related to the inability of the firm to hold its competitive position 6. Global price fluctuate
and maintain stability and growth in earnings. It is generally measured by the variability of the 7. Problems in loan disbursement (already sanctioned)
8. Bank control over machinery purchase
9. Natural calamities
Management Risk: The risks associated with ineffective destructive or under-performing 10. Duty on raw materials /customs problems
management, which hurts shareholders and the company or fund being managed. 11. Non-availability of raw materials
12. Lack of modern technology
Security risk: Risk that the bank might be exposed due to poor quality or strength of the security in 13. Long project implementation period
case of default. This may entail strength of security and collateral, location of collateral and support. 14. Lack of demand for the product
15. High loan interest)
Relationship risk: Relationship risk mainly based on supplier and customer relation to the
entrepreneur. If the entrepreneur can make a good relation to the customer or supplier he or she also Or,
get the loan at a lower rate.
The different types of industrial sickness in Small Scale Industry fall under two important
categories. They are as follows:

Risks involve in CRG: Internal causes/factors for sickness

Financial Risks: Risk that occurs for loan clients due to financial distress, This typically entails 1. Lack of Finance: The weak equity, inefficient working capital, absence of costing & pricing and
analysis of financials.Financial risks are- Leverage (15%), Liquidity(15%), Profitability (15%), budgeting, and so on will accelerate the industry sick.
Coverage (5%) 2. Inefficient Production Policies: This includes wrong selection of site is related to production, lack
of quality control and standard, research & development, etc.
Business or Industry Risk- Unfavorable condition or adverse business situation will affect 3. Marketing factors: Inefficient planning and product mix, weak market research and sales
borrower capacity to meet the obligation. It includes-Size of Business (5%), Age of Business (3%), promotions are force to industry sickness.
Business outlook (3%), Industry Growth (3%), Market Competition (2%), Entry or Exit Barriers 4. Improper Staffing: It includes bad wages and salary administration, bad labor relation, conflicts
(2%) among the employees and workers.
5. Ineffective Corporate Management: It includes improper corporate planning, lack of coordination,
Management Risk: It represents poor management condition and also includes-Experience (5%), control and integrity in top management, etc.
Succession (4%), Team Work (3%)
External causes for sickness
Security Risk: Risk that occurs due to poor quality or strength of security in case of loan non
repayment. It includes: Security Coverage (4%), Collateral Coverage (4%), Support (2%) a) Personnel Constraint: The first for most important reason for the sickness of small scale
industries are non availability of skilled labour or manpower wages disparity in similar industry and
Relationship Risk: It includes: Account Conduct (5%), Utilization of Limit (2%), Compliance of general labour invested in the area.
loan conditions (2%), Personal Deposit (1%)
b) Marketing Constraints: The sickness arrives due to liberal licensing policies, restrain of purchase
How to Compute Credit Risk Grading by bulk purchasers, changes in global marketing scenario, excessive tax policies by govt. and
market recession.
1. Identify all the Principal Risk Components.
2. Allocate weight to Principal Risk Components. c) Production Constraints: This arises due to shortage of raw material, shortage of power, fuel and
3. Establish the Key Parameters under each risk components. high prices, import-export restrictions.
4. Assign a weight to each of the key parameters.
5. Add all the weight of the key parameters to have an overall score. d) Finance Constraints: This arises due to credit restrains policy, delay in disbursement of loan by
6. Assign a grade based on the total weights. The grading method assumes the simple weighted govt., unfavorable investments, fear of nationalization.
average addition of the risk criteria.

5 7

FUNCTIONS OF CREDIT RISK GRADING Q5.Write down the expected minimum of CRG requirements for extending credit. Explain
Well-managed credit risk grading systems promote bank safety and soundness by facilitating with example. Or, Wrirte down the NUMBER AND SHORT NAME OF GRADES USED IN
informed decision-making. Grading systems measure credit risk and differentiate individual credits THE CRG and Explian its.
and groups of credits by the risk they pose. This allows bank management and examiners to monitor
changes and trends in risk levels. The process also allows bank management to manage risk to NUMBER AND SHORT NAME OF GRADES USED IN THE CRG:
optimize returns. as
follows:
Importance of Credit Risk Grading:
GRADING SHORT NAME NUMBER
1. Well-managed credit risk grading systems promote bank safety and soundness by facilitating Superior SUP 1
informed decision-making. Good GD 2
Acceptable ACCPT 3
2. Grading systems measure credit risk and differentiate individual credits and groups of credits by
Marginal/Watchlist MG/WL 4
the risk they pose. This allows bank management and examiners to monitor changes and trends in
Special Mention SM 5
risk levels.
Sub standard SS 6
3. The process also allows bank management to manage risk to optimize returns. Doubtful DF 7
Bad & Loss BL 8
Use/purposes of Credit Risk Grading:
CREDIT RISK GRADING DEFINITIONS
A clear definition of the different categories of Credit Risk Grading is given as follows:
common standardized approach to assess the quality of individual obligor, credit portfolio of a unit, Superior - (SUP) - 1
line of business, the branch or the Bank as a whole. Credit facilities, which are fully secured i.e. fully cash covered.
Credit facilities fully covered by government guarantee.
borrower or a particular exposure/facility is rated. The other decisions would be related to pricing Credit facilities fully covered by the guarantee of a top tier international Bank.
(credit-spread) and specific features of the credit facility. These would largely constitute obligor Good - (GD) - 2
level analysis. Strong repayment capacity of the borrower
internal MIS and assessing The borrower has excellent liquidity and low leverage.
the aggregate risk profile of a Bank. It is also relevant for portfolio level analysis. The company demonstrates consistently strong earnings and cash flow.
Borrower has well established, strong market share.
Q4. List down the risk factors/Causes those can make an industry sick. Explain how each Very good management skill & expertise.
factor/causes accelerates the sickness. All security documentation should be in place.
( - The two categories factors are listed behind that accelerate the industry sickness are Credit facilities fully covered by the guarantee of a top tier local Bank.
discussed below: Aggregate Score of 85 or greater based on the Risk Grade Score Sheet
Internal risk factors: Acceptable - (ACCPT) - 3
1. Lack of Experience These borrowers are not as strong as GOOD Grade borrowers, but still demonstrate consistent
2. Poor Management earnings, cash flow and have a good track record.
3. Wrong feasibility / Uneconomic Plant size Borrowers have adequate liquidity, cash flow and earnings.
4. Lack of working Capital Credit in this grade would normally be secured by acceptable collateral (1st charge over
5. Obsolete technology inventory / receivables / equipment / property).
6. Faulty employee appointment Acceptable management
7. Non-cooperation among owners and employees Acceptable parent/sister company guarantee
8. Marketing Problem Aggregate Score of 75-84 based on the Risk Grade Score Sheet
9. Dependence on single financial source Marginal/Watchlist - (MG/WL) - 4
10. Irregular wage payment This grade warrants greater attention due to conditions affecting the borrower, the industry or the
11. Poor product quality economic environment.
External risk factors: These borrowers have an above average risk due to strained liquidity, higher than normal
1. Lack of working Capital leverage, thin cash flow and/or inconsistent earnings.
2. Political Unrest Weaker business credit & early warning signals of emerging business credit detected.
The borrower incurs a loss
6 8
 Loan repayments routinely fall past due
Account conduct is poor, or other untoward factors are present.
Credit requires attention
Aggregate Score of 65-74 based on the Risk Grade Score Sheet
Special Mention - (SM) - 5
uncorrected, these weaknesses may result in a deterioration of the repayment prospects of the
borrower.
Severe management problems exist.
Facilities should be downgraded to this grade if sustained deterioration in financial condition is
noted (consecutive losses, negative net worth, excessive leverage),
An Aggregate Score of 55-64 based on the Risk Grade Score Sheet.
Substandard - (SS) - 6
Financial condition is weak and capacity or inclination to repay is in doubt.
These weaknesses jeopardize the full settlement of loans.
Bangladesh Bank criteria for sub-standard credit shall apply.
An Aggregate Score of 45-54 based on the Risk Grade Score Sheet.
Doubtful - (DF) - 7
Full repayment of principal and interest is unlikely and the possibility of loss is extremely high.
However, due to specifically identifiable pending factors, such as litigation, liquidation
procedures or capital injection, the asset is not yet classified as Bad & Loss.
Bangladesh Bank criteria for doubtful credit shall apply.
An Aggregate Score of 35-44 based on the Risk Grade Score Sheet.
Bad & Loss - (BL) - 8
Credit of this grade has long outstanding with no progress in obtaining repayment or on the verge
of wind up/liquidation.
Prospect of recovery is poor and legal options have been pursued.
Proceeds expected from the liquidation or realization of security may be awaited. The
continuance of the loan as a bankable asset is not warranted, and the anticipated loss should have
been provided for.
This classification reflects that it is not practical or desirable to defer writing off this basically
valueless asset even though partial recovery may be affected in the future. Bangladesh Bank
guidelines for timely write off of bad loans must be adhered to. Legal procedures/suit initiated.
Bangladesh Bank criteria for bad & loss credit shall apply.
An Aggregate Score of less than 35 based on the Risk Grade Score Sheet.
Alternative Answer:
Diverse Credit Risk Grading (CRG) under:
A reasonable meaning of the diverse classes of Credit Risk Grading is given as takes after:
Superior (SUP) 1; Good-(GD)=2; Acceptable (ACCPT)- 3; Marginal/Watchlist-(MG/WL)- 4;
Special Mention-(SM)- 5; Substandard (SS)- 6; Doubtful (DF)- 7; Bad/Loss (BL)- 8
9 11
Credit Risk Grading Score:
Fully cash secured, secured by Government/International
SUP
Bank Guarantee
Good 85+
Acceptable 75-84
Marginal/Watchlist 65-74
Special Mention 55-64
Substandard 45-54
Doubtful 35-44
Bad & Loss <35
Loan pricing: Loan pricing means determining the interest rate for granting loan to creditors, be it
individuals or business firms. It is one of the most important, however difficult task in lending funds
to business firms & other customers. Because it is always very difficult to exactly know what the
actual loan risk a particular loan application is. Generally the lender wants to charge a high enough
rate to make sure that the loan will be profitable as well as it will covers enough compensation
against the default risk. On the other hand loan price must be set low enough that helps the
customers to find it easy for successful repayment of loan.
Q6. Components which are to be taken into account in pricing of loan and loan program. Or,
Factors affecting the Loan Pricing.
The following is a list of factors that institutions should consider in loan pricing.
1. Cost of funds: The cost of funds is applicable for each loan product prior to its effective date,
allowing sufficient time for loan-pricing decisions and appropriate notification of borrowers.
2. Cost of operations: The salaries & benefits, training, travel, and all other operating expenses. In
addition, insurance expense, financial assistance expenses are imposed to loan pricing.
3. Credit risk requirements: The provisions for loan losses can have a material impact on loan
pricing, particularly in times of loan growth or an increasing credit risk environment.
4. Customer options and other IRR: The customer options like right to prepay the loan, interest rate
caps, which may expose institutions to IRR. These risks must be priced into loans.
5. Interest payment and amortization methodology: How interest is credited to a given loan (interest
first or principal first) and amortization considerations may have a impact on profitability.
6. Loan-able funds: It is the amount of capital an institution has invested in loans, which determines
the amount an institution must borrow to fund the loan portfolio and operations.
7. Patronage Refunds & Dividends: Some banks pay it to their borrowers/shareholders in lieu of
lower interest rates. This approach is preferable to lowering interest rates.
8. Capital and Earnings Requirements / Goals: Banks must first determine its capital requirements
and goals in order to determine its earnings needs.
10
Q7.
that statement.
Loan pricing is a critically important function in a financial institution's operations. Loan-pricing
decisions directly affect the safety and soundness of financial institutions through their impact on
earnings, credit risk, and, ultimately, capital adequacy. As such, institutions must price loans in a
manner sufficient to cover costs, provide the capitalization needed to ensure the institution's
financial viability, protect the institution against losses, provide for borrower needs, and allow for
growth. Institutions must have appropriate policy direction, controls, and monitoring and reporting
mechanisms to ensure appropriate loan pricing. Determining the effectiveness of loan pricing is a
critical element in assessing and rating an institution's capital, asset quality, management, earnings,
liquidity, and sensitivity to market risks.
Loans should be priced at a level sufficient to cover all costs, fund needed provisions to the
allowance accounts, and facilitate the accretion of capital. Specific consideration should be given to
the cost of funds, the cost of servicing loans, costs of operations, credit risks, interest rate risks, and
the competitive environment.
Q8.In competitive market, which of the variable and fixed pricing as banker you would
advocate?
A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance
varies as market interest rates change. As a result, your payments will vary as well (as long as your
payments are blended with principal and interest).
Fixed interest rate loans are loans in which the interest rate charged on the loan will remain fixed for
that loan's entire term, no matter what market interest rates do. This will result in your payments
being the same over the entire term. Whether a fixed-rate loan is better for you will depend on the
interest rate environment when the loan is taken out and on the duration of the loan.
When a loan is fixed for its entire term, it will be fixed at the then prevailing market interest rate,
plus or minus a spread that is unique to the borrower. Generally speaking, if interest rates are
relatively low, but are about to increase, then it will be better to lock in your loan at that fixed rate.
Depending on the terms of your agreement, your interest rate on the new loan will remain fixed,
even if interest rates climb to higher levels. On the other hand, if interest rates are on the decline,
then it would be better to have a variable rate loan. As interest rates fall, so will the interest rate on
your loan.
This discussion is simplistic, but the explanation will not change in a more complicated situation. It
is important to note that studies have found that over time, the borrower is likely to pay less interest
overall with a variable rate loan versus a fixed rate loan. However, the borrower must consider the
amortization period of a loan. The longer the amortization period of a loan, the greater the impact a
change in interest rates will have on your payments.
Therefore, adjustable-rate mortgages are beneficial for a borrower in a decreasing interest rate
environment, but when interest rates rise, then mortgage payments will rise sharply.
SME and Agriculture Credit/finance/loan
Q9.
the booster sectors financed under SME scheme.
SME Financing: SME finance is the funding of small and medium sized enterprises, and represents
a major function of the general business finance market in which capital for different types of
firms are supplied, acquired, and priced. Capital is supplied through the business finance market in
the form of bank loans and overdrafts; leasing and hire-purchase arrangements; equity/corporate
bond issues; venture capital or private equity; and asset-based finance such as factoring and invoice
discounting.
SMEs are vital for economic growth and development in both industrialized and developing
countries, by playing a key role in creating new jobs. Small businesses are particularly important for
bringing innovative products or techniques to the market.
[According to Bangladesh Bank (SMESPD Circular No.1 dated 19 June, 2011), the cottage, micro
& SME is newly defined the industry/enterprise:
An industry or enterprise can be treated as that category one following a benchmark but the same
can fall under higher category if another benchmark is considered. In that case it will be treated as
higher category industry. A woman, who owns a private firm or she holds minimum 51% stake in
firm run jointly or registered, will be treated as women entrepreneur.]
Booster Sectors of SME: Booster Sectors in Bangladesh The Ministry of Industries, Government
of Bangladesh has identified the following booster sectors: For promotional support SME policy
Strategies 2005 has identified the following 11 booster sectors: (1) Electronics and electrical; (2)
Software development; (3) Light engineering and metal-working; (4) Agro-processing/agri-
business/ plantation agriculture/ specialist farming/tissue-culture and related business; (5) Leather-
making and leather goods; (6) knitwearmaking and leather goods; (7) Plastics and other synthetics;
(8) Healthcare and diagnostics; (9) Educational services; (10) Pharmaceuticals/cosmetics/toiletries;
and (11) Fashion-rich personal effects, wear and consumption goods.
Q10. Define Agricultural credit. Discuss the role of Agricultural credit in Bangladesh.
Agricultural credit : Agricultural credit refers to short-term, intermediate term and long term credit
disbursed to meet the specific financial needs of farmers which are determined by planting,
harvesting & marketing cycles. Another way it can be said that agricultural credit refers to the
12
amount of money that the farmers borrow to meet their production requirements as well as their
current consumption needs
Role of Agricultural credit in Bangladesh: Agricultural credit plays a vital role in economic
development with positive GDP growth of a country. These types of finance may promote to
development in agro-economic sector like agriculture, poultry, fishery, dairy, and livestock. The
roles of agricultural finance are described below:
1. Agriculture finance assumes vital and significant importance in the agro-socio-economic
development at macro and micro level as well as GDP growth.
2. It plays a catalytic role in strengthening the agro-business and augmenting the productivity of
scarce resources.
3. Use of new technological inputs purchased through agro-finance helps to increase its
productivity.
4. Agricultural finance can also reduce the regional economic imbalances and is equals to reduce the
inter-agro asset and wealth variations.
5. It is like a lever with both forward and backward linkages to the economic development at micro
and macro level.
6. As agriculture is still traditional and subsistence in nature, agricultural finance is needed to create
the supporting infrastructure for adoption of new technology.
7. It promotes to carry out irrigation projects, rural electrification, installation of fertilizer and
pesticide plants, execution of agro-promotional and poverty alleviation programs in the country.
Q11. Agricultural credit plays a very important role in economic development of the country
GDP attainment.
Agricultural credit plays a vital role in economic development with positive GDP growth of a
country. These types of finance may promote to development in agro-economic sector like
agriculture, poultry, fishery, dairy, and livestock.
Agricultural credit has turned as an indispensable input in agricultural development. The provision
of high yielding modern agriculture may remain unreachable to poor and marginal farmer as use of
improved inputs require huge capital investment.
Agriculture sector contributes almost 19.21% to the national GDP of Bangladesh which comprises
almost one-
of the country, trend of agricultural production should be maintained. The disbursement of
agricultural credit on crop production is increased up to Tk. 71.31 billion in 2014 from Tk.33.19
billion in 2010. Subsequently, the disbursement of agricultural credit on purchase and installation of
irrigation equipment is increased upto Tk. 3.29 billion in 2012 from Tk.0.52 billion in 2010. The
amount has decreasing slightly in 2013 and 2014. The disbursement of agricultural credit on crop
production is increased up to Tk. 19.96 billion in 2014 from Tk.4.08 billion in 2010. The
disbursement of agricultural credit on marketing of agricultural goods is increased upto Tk.2.75
billion in 2012 from Tk.0.62 billion in 2010. The amount has decreasing slightly in 2013 and 2014
due to developed communication facilities. The disbursement of agricultural credit on fisheries is
increased up to Tk. 13.78 billion in 2014 from Tk.3.99 billion in 2010. The disbursement of
agricultural credit on poverty alleviation is increased up to Tk. 18.64 billion in 2014 from Tk.13.61
billion in 2010. The disbursement of agricultural credit on other agricultural activities is increased
up to Tk. 32.62 billion in 2014 from Tk.26.77 billion in 2010. The disbursement of agricultural loan
13
over time indicates that bank plays on a significant role on agricultural development in Bangladesh.
Several research works supports the positive association between agricultural credit and agricultural
production.
Q12. Mention the rationale for agriculture credit in Bangladesh
The rationale for agriculture credit in Bangladesh can be stated under the following three
broad lines:
1. Agriculture sector contributes almost 19.21% to the national GDP of Bangladesh which
comprises almost one- DP growth as well as economic
development of the country, trend of agricultural production should be maintained. To this end,
proper concentration should be devised so that farmer can get accessibility to different sources of
agricultural credit that might help them to a smooth continuation to agricultural production. In fact,
availability of agricultural credit has a positive impact on agricultural productivity which has
already been proved in research works of various researchers.
2. Farmers of Bangladesh are generally resource poor. Small and marginal farmers constitute 80
percent of the farming population in Bangladesh. But only 17 percent of the small farmers have
direct access to institutional credit. 96 Percent of farmer in all size categories reported their need for
agricultural credit to meet purchase cost of agro inputs . Agricultural credit scenario, especially
institutional credit coverage should be improved so that the poor section of the farmer gets adequate
access to agricultural credit in order to ensure on time production.
3. Convenient access to agricultural credit ensures agricultural productivity and therefore growth in
the sector continues to rise. In case of Bangladesh, disbursement of agricultural credit to sustain
agricultural growth is important also from food security perspective. The people involved with
agriculture are mainly poor and subsistence farmer who depend solely on their production for the
food supplies throughout the year. If access to agricultural inputs of these farmers is impaired due to
capital shortage, production will be hampered and then food security of them as well as the nation
will be in a vulnerable situation.
Q13. SME is considered as employment Generating Machine- Explain?
SME is considered as employment Generating Machine for the following reason:
SME sector is the largest provider of employment in most countries, especially of new jobs.
SMEs tend to employ poor and low -income Workers.
SMEs are sometimes the only source of employment in poor regions and rural areas.
There are approximately six million SMEs in Bangladesh, which include enterprises with up
to 100 workers employing a total of 31 million people equivalent to 40 per cent of the
population of Bangladesh aged 15 years and above.
SME has huge Employment generation potential due to labor intensive nature of most of the
SME activities. Between 1986 and 2006, the labor force grew by nearly 3 percent while
employment grew by 2.6 percent. In the small enterprises, employment grew by 4.8 percent
14
during 1978-1991 and by 5.5 percent during 1991-2001. Employment growth in the medium
enterprises is estimated at 9.6 percent during 1988-2003. SEDF reports that between 80
percent and 85 percent of the total industrial employment and 23 percent of the country
overall employment is accounted for by the SMEs.
Q14.Discuss the roll of SMEs in the economic development of Bangladesh.
Small & Medium Enterprise (SME) plays a pivotal role in the economic growth and development of
Bangladesh. Actually, SME works as the platform for job creation, income generation, and
development of forward and backward industrial linkages and fulfillment of local social needs.
SMEs occupy a unique position in the economy of Bangladesh. Mainly private sector development
depends on them.
In view of present economic development effort in Bangladesh the SME sector plays an important
role. These are reflected in the following performance /activities of this sector:
SME contributions to value addition in manufacturing is in the range of 20 to 25 percent of
GDP
There are approximately six million SMEs, which include enterprises with up to 100 workers
employing a total of 31 million people equivalent to 40 per cent of the population of our
country aged 15 years and above. Some private survey also found that the industrial structure
of SMEs consisted of primarily wholesale, retail trade and repairs (40 per cent), agricultural
goods (22 per cent), services (15 per cent) and manufacturing (14 per cent).
During the Fourth Five year plan, a total of 0.35 million jobs were created against the target
of 0.4 million.
SME sector help alleviate poverty, increase income level of rural people and promote agro-
industrial linkage in Bangladesh.
SME sector requires lower energy supply, lower infrastructure facilities and this sector
imposes less environmental risk.
They contribute towards better utilization of local resources and skills that might otherwise
remain unutilized.
Small industries being labor oriented are capable of generating more employment.
They are necessary to maintain and retain traditional skills and handicrafts.
They are the only medium for diversification of rural economy and for peaceful and
concurrent socio-economic development of all classes of people
To put it simply, SMEs are the heart of the industrial sector of the country, employs the bulk of the
working population and are owned by Bangladeshi entrepreneurs. They provide a huge range of
goods and services to the Bangladeshi population, especially in the rural areas, alon gside providing
vital support in the production chain to large industries. From the above discussion, we can say that
SMEs are playing an important role in our economy in various ways.
15
Q15. Difference between Agricultural credit and SME Financing.
Agricultural credit : Agricultural credit refers to short-term, intermediate term and long term credit
disbursed to meet the specific financial needs of farmers which are determined by planting,
harvesting & marketing cycles. Another way it can be said that agricultural credit refers to the
amount of money that the farmers borrow to meet their production requirements as well as their
current consumption needs
Agricultural credit plays a vital role in economic development with positive GDP growth of a
country. These types of finance may promote to development in agro-economic sector like
agriculture, poultry, fishery, dairy, and livestock.
SME Financing: SME finance is the funding of small and medium sized enterprises, and represents
a major function of the general business finance market in which capital for different types of
firms are supplied, acquired, and priced. Capital is supplied through the business finance market in
the form of bank loans and overdrafts; leasing and hire-purchase arrangements; equity/corporate
bond issues; venture capital or private equity; and asset-based finance such as factoring and invoice
discounting.
SMEs are vital for economic growth and development in both industrialized and developing
countries, by playing a key role in creating new jobs. Small businesses are particularly important for
bringing innovative products or techniques to the market.
Q16. Bangladesh Bank has of late made some changes as regards providing of SME loans, but
some banks are reported to have been measuring the revised concept through unfair
conversion of some other loans to SME loans. Give your opinion on the matter.
When a loan is given by the bank becomes NPA(non performing asset), in other words when a
person avail loan from the bank and not repaid the loan amount within certain time, bank has to
manage this money(loss amount) from other income. Setting aside of money from income to
compensate the loss caused by lending a loan is called provisioning in banking. Under provisioning,
banks have to set aside or provide funds to a prescribed percentage of their bad assets. Provisioning
Classification and provisioning rules will be relaxed for loans going to small and medium
enterprises in order to encourage banks to lend more to SMEs. Currently, Bangladesh Bank declare
to maintain a provision of 0.25 percent against SME loans whereas it is 1 percent for other sectors.
Of the 25 percent SME loan, a minimum 10 percent will have to go to women entrepreneurs.
Q17. Do you think that all banks should give top priority in financing this sector for creating
employment, reduction of poverty and overall economic development of the country? Justify
your answer.
Small and medium-sized enterprises (SMEs) are the backbone of the national economy in
Bangladesh. This sector is playing an important role to develop the economy of our country. The
role of SMEs sectoris immense to alleviate the poverty from the country as well. Small and Medium
enterprises are particularly suitable for the densely populated countries like Bangladesh where SME
sector can provide huge employment opportunity with much lower investment. They are expected to
create jobs, reduce poverty, and drive a resilient national economy. The International Monetary
16
Fund (IMF) Country Report (2012)1indicated that SMEs in Bangladesh accounted for more than
99% of private sector industrial establishments and created job opportunities for 70% 80% of the
nonagricultural labor force.
The Industry sector plays an important role in the socio-economic development of Bangladesh.
According to BBS estimates (base year: 2005-06), the contribution of the broad industry sector to
real GDP stood at 29 percent in FY 2012-13, which increased to 29.61 percent in FY 2013-14.
Among the fifteen sectors of GDP, the broad industry sector includes four sectors namely mining
and quarrying; manufacturing; electricity and gas and water supply; and construction. The
contribution of the manufacturing sector is the highest in GDP. In FY 2012-13, the contribution of
manufacturing sector in GDP was 19 percent which reached to 19.45 percent in FY 2013-14
Q18. Do you think that the credit delivery under the SME scheme is given due importance by
the credit Banks and financial institutions from the view point of national interest. Justify
your arguments.
Small and medium-sized enterprises (SMEs) are the backbone of the national economy in
Bangladesh. This sector is playing an important role to develop the economy of our country. The
small and medium enterprise (SME) loan means financing provided by financial institutions in
small and medium industries. Financial institutions provide loans to small and medium industries
for arrangement of working capital, business expansion and capital machinery procurement. In order
to take forward the SME sector in Bangladesh and implement SME loan management and special
initiatives in this sector, Bangladesh Bank introduced a new division named SME and Special
Programme Division on 31-12-2009. The SME and Special Programme Division has taken a
number of schemes, programmes and policy initiatives for the development and expansion of small
and medium enterprises.
Bangladesh Bank and SME Foundation have taken a number of schemes and programmes to ensure
facilities including funding for the development and expansion of SME institutions. Various
commercial banks and financial institutions are coming forward to fund SME institutions. It has
been playing a significant role in raising economic growth, employment generation, creating new
business sectors, reducing poverty, reducing rich-poor divide and regional discrimination, ensuring
equality of women and empowering them.
The importance of small and medium industries in the development of a developing country like
Bangladesh is immense. Currently, most industries in the country are covered by the SME sector. In
addition, to achieve the ability to produce import substitute products, its role is also increasing
rapidly.
PROJECT AND PROJECT APPRAISAL
Q19. Define Sensitivity analysis. State necessity/importance/advantages of Sensitivity analysis
of a project.
Sensitivity analysis: Sensitivity analysis is a good technique for forecasting the attention of
management on critical variable and showing where additional analysis may be beneficial before
finally accepting a project. It does not directly measure risk and it is limited by only being able to
examine the effect of a change in one variable, while the others remaining constant, an unlikely
occurrence in practice.
17
Necessity of Sensitivity analysis of a project:
*Sensitivity Analysis helps in identifying the different variables having effect on the NPV of a
proposal.
*It helps in establishing the sensitivity or vulnerability of the proposal to a given variable and
showing areas where additional analysis maybe undertaken before a proposal is finally selected.
*Sensitivity analysis seeks to determine the range of variations in the coefficients over which the
solution will remain optimal.
* Sensitivity analysis is used in determination of risk factor in capital budgeting decisions.
*It aids in identifying the most sensitive factor that may cause the error in estimation.
*Sensitivity analysis tells about the responsiveness of each
* A sensitivity analysis determines how different values of an independent variable affect a
particular dependent variable under a given set of assumptions.
* Sensitivity analysis can be used to help make predictions in the share prices of publicly-traded
companies or how interest rates affect bond prices.
Q20. Define project and Project appraisal
Project: A project is defined as an effort to create or modify a specific product or service. Projects
are temporary work efforts with a clear beginning and end. Projects can be completely contained
within a specific unit or department, or include other organizations and vendors. A work effort may
be considered a project if it meets the criteria established by the organization.
Project appraisal: Project appraisal is an important activity to evaluate the key factor of the project
to check the viability of a project proposal. Project appraisal means a pre-investment analysis of
project to determine whether the project should be implemented or not.
Project appraisal is defined to provide a base technical, economic, and commercial for an
investment decision about any project. It covers a wide range of analysis of the alternative
approaches for selecting the optimum solution in respect of location, technology, size of a project,
engineering and organizational set-up, market size, financial cost-benefit, economic and social
aspects of the project and various other relevant issues. It may either market oriented or based on
materials inputs, that is derives its initiative from an assumed or existing demand or from available
material inputs such as raw materials, or energy. Thus project appraisal is not an end in itself, but
only a means to arrive at an investment decision that need not agree with the conclusions of the
feasibility study.
Q21. Methods of Project Appraisal Explained
Some of the methods of project appraisal are as follows:
1. Economic Analysis:
Under economic analysis, the project aspects highlighted include requirements for raw material,
level of capacity utilization, anticipated sales, anticipated expenses and the probable profits. It is
18
said that a business should have always a volume of profit clearly in view which will govern other
economic variables like sales, purchases, expenses and alike.
It will have to be calculated how much sales would be necessary to earn the targeted profit.
Undoubtedly, demand for the product will be estimated for anticipating sales volume. Therefore,
demand for the product needs to be carefully spelled out as it is, to a great extent, deciding factor of
feasibility of the project concern.
2. Financial Analysis:
Finance is one of the most important pre-requisites to establish an enterprise. It is finance only that
facilitates an entrepreneur to bring together the labour of one, machine of another and raw material
of yet another to combine them to produce goods.
3. Market Analysis:
Before the production actually starts, the entrepreneur needs to anticipate the possible market for the
product. He/she has to anticipate who will be the possible customers for his product and where and
This is because production has no value for the producer unless it is sold. It is said that if the proof
of pudding lies in eating, the proof of all production lies in marketing/ consumption. In fact, the
potential of the market constitutes the determinant of probable rewards from entrepreneurial career.
4. Technical Feasibility:
While making project appraisal, the technical feasibility of the project also needs to be taken into
consideration. In the simplest sense, technical feasibility implies to mean the adequacy of the
proposed plant and equipment to produce the product within the prescribed norms. As regards
know-how, it denotes the availability or otherwise of a fund of knowledge to run the proposed
plants and machinery.
5. Management Competence:
Management ability or competence plays an important role in making an enterprise a success or
otherwise. Strictly speaking, in the absence of managerial competence, the projects which are
otherwise feasible may fail.
On the contrary, even a poor project may become a successful one with good managerial ability.
Hence, while doing project appraisal, the managerial competence or talent of the promoter should be
taken into consideration.
19
Q22. Explain different aspects (technical, financial and commercial) of a project appraisal to
help the management to take proper decision. Also elaborate the points to be considered in
technical report.
Project Appraisal is broadly divided into following four aspects:
oTechnical
oEconomic
oMarket
oFinancial
0Commercial Feasibility
0Ecological Analysis
0Socio economic appraisal
Technical Appraisal/Analysis: Analysis of the technical and engineering aspects of a project needs
to be done continually when a project is formulated. This analysis is done to ensure whether good
choices have been made with respect to location, size and process etc. this analysis provided the
following information.
.
Whether the preliminary tests and studies to been done or not?
Whether the raw materials, power and other inputs are available or not?
Whether the selected scale of operation is optimal?
Whether the production process chosen is suitable?
Whether the equipments and machines chose are appropriate?
Whether the proposed layout of the site buildings and plant is sound?
Whether the technology proposed to be employed is appropriate from the social point of view
Economic appraisal/analysis:- This is also referred to as social cost benefit analysis. This is
concerned with judging a project from the larger social point of view. In such an evaluation the
focus is on the social cost and benefits of a project which may be different from monetary costs and
benefits. This type of analysis was primarily used for evaluating public investment projects but
nowadays. This is done for both public and private projects.
This appraisal provides information on:
Impact of project on employment generation.
Impact of project on improving consumption pattern.
Impact of project on GNP.
Impact of project on the distribution of income in the society.
Impact of project on the level of savings and investment in the society
Market Appraisal: A market appraisal, the purpose of a market appraisal is to identify the market
for the product, to identify who the customers are and to find out the quantum of demand and also
the nature of demand, whether it is a static demand, whether it is a fluctuating demand, are there any
seasonal considerations in demand and these kinds of issues which are very relevant there.
Market analysis provided a wide variety of information e.g.
Consumption trends on the past and the present consumption level
Past and present supply position
Production possibilities and constraints
20
 Imports and exports 7.Structure and civil works: Technical analysis of a project for buildings, structures and civil
Structure of completion works involves preparation and development of site which includes:
Cost structure
* grading and leveling of land
Elasticity of demand *demolition of existing structures
Consumer behavior, intentions, motivations, atitudes, preferences and requirements. * relocation of pipeline, cables, roads
Distribution channels and marketing polices in use. * reclamation of sewers and drainage
Administrative, technical and legal constraints. *connections of utilities
*arranging for electricity, water etc.
Financial Appraisal/analysis:- This analysis is done to ascertain whether the proposed
project will be financially viable or not? Whether the proposed project will satisfy the return 8.Projects charts and layouts: Once the project manager has sufficient data related to market size,
expectations of those who provide the capital. This analysis provides the following information: plant capacity, production technology, machineries and equipment, buildings etc. he prepares charts
Means of financing and layouts for the proposed project.
Cost of capita
Projected profitability Q23. What are the documents required by bank to appraise a project. What kinds of help
Break-even point from Project appraisal as a manager.
Cash flows of the project Supporting Documents required by Financial Institution to appraise a project:
Level of risk
Projected financial position. 1) Completed Input Form in their format
2) Company Profile, Promoters Profile
Commercial Feasibility: Appraisal of the project proposal may be done on the basis of
commercial feasibility also. For that, testing of marketing capabilities of the final product is 3) Past audited accounts for three years of the company and associated entities
essential. Following points should be considered for appraisal of commercial feasibility.
4) Copies of J.V. / Technical Collaboration, if any
1. The position of demand-supply of the product in the markets.
5) Organization Chart
2. Size of the market and possibilities of future development.
3. Nature of competition. 6) Profile of Key Staff Members
4. Marketing strategy.
5. Price policy and future prices in comparison to types of products. 7) List of machineries procured / to be procured
6. The position of imports and their prices in the country, if the product is the imported 8) Contracts / Arrangement to procure various raw materials
substitute.
7. Sale arrangements for the product ability of sales staff. 9) Market Survey Report from reputed Consultants / Surveyors
8. Marketing surveys may be conducted to forecast future demands.
10) Marketing material prepared, catalogues
Ecological Analysis:- In recent years, environment concerns is becoming very important. 11) Financial Projections, Cash flows, Fund flows, Break-Even Point Analysis
Ecological analysis us done particularly for major projects which have significant ecological
implications (like power pants and irrigation schemes) and environment polluting industries (like 12) Licenses, Clearances for the project
bulk drugs, chemical and leather processing). The ecological analysis provide the following 13) Title deeds of land, Approvals to start construction
information:
What is the likely damage caused by the project to the environment? 14) In principle arrangement for Working Capital Facility from Banks, etc
What is the cost of restoration measures required to ensure that the damage to
Project appraisal helps project managers to:
the environment is contained within acceptable limits?
*Be consistent and objective in choosing projects
* Makesure their program benefits the organization
Socio economic appraisal: A socio economic appraisal in a project is generally concerned with
*Provide documentation to meet financial and audit requirements and to explain decisions to all the
issues which are affecting the society at large. Setting up of a hydel project for instance could
stake holders and auditors.
displace a large number of people from their homes. So there is a social cost associated with that. A
project of this nature could also result in redistribution of income among the society. So we have to
be concerned about those issues and it is essentially an evaluation on the shadow costs which is
relevant in the socio economic appraisal.

21 23

Elaborate the points to be considered in technical report: Analysis of the technical and
engineering aspects of a project needs to be done continually when a project is formulated. This
analysis is done to ensure whether good choices have been made with respect to location, size and
process etc. this analysis provided the following information.
. The most important factors to be considered during appraisal of project loan proposal are as follows:
Whether the preliminary tests and studies to been done or not?
Whether the raw materials, power and other inputs are available or not?
Whether the selected scale of operation is optimal?
Whether the production process chosen is suitable?
Whether the equipments and machines chose are appropriate?
Whether the proposed layout of the site buildings and plant is sound?
Whether the technology proposed to be employed is appropriate from the social point of view
Technical analysis of a project is concerned primarily with:
1. Material inputs and utilities
2. Manufacturing process/technology
3. Product Mix
4. Plant capacity
5. Location and site development
6. Machineries and equipment
7. Structure and civil works
8. Projects charts and layouts
1. Material inputs and utilities: It involves defining the requirements for materials and utilities,
specifying their properties and setting up a supply channel.
2. Manufacturing process/technology: Taking a decision on manufacturing process and
technology to be used is one of the most important decisions in technical analysis of a project. There
are various options and alternatives available for manufacturing a product or service. It is the task of
the project manager to select that process or technology that is easy to acquire, appropriate for the
project and feasible with budget and technical requirements of the proposed project.
3. Product Mix: An important aspect in technical analysis of a project is product mix decision. It is
essential to choose an effective product mix as different customers have different taste, preferences
and needs. The choice of product mix is usually guided by market requirements. A project manager
must keep in mind the quality of products and flexibility in production while taking product mix
decisions.
4. Plant capacity: It refers to the volume or no. of units that can be manufactured during given time
period. It is also known as production capacity. It is the task of the project manager to determine the
feasible normal capacity and nominal maximum capacity for the project.
5. Location and site development: Location refers to a broad area within the city and while site
means a specific piece of land where project would be set up.
6. Machineries and equipment: Machineries and equipment requirement depends upon the
production technology and plant capacity of the proposed project.
Q24. During appraisal of a project loan proposal, what factors does a banker take into
consideration? Please explain.
[Two Answers]
Answer One
1. Professional profile: Evaluate the ability to manage the project that must have the experience,
skills, determination and self-confidence necessary to successfully carry out the project.
2. Project's viability: It should have a business plan that is clear, structured and short, but also
covers all the elements of business. It needs to present few years of financial projections as well as
an analysis of market size, market potential and positioning.
3. Financial strength: It will have to know the personal and business net worth, so bank can judge
the ability to meet financial obligations. Bank will also look at past credit history to gauge the
future.
4. Collateral: Banks often also look for assets to secure a loan. The collateral ensures the safely
lending to the customer in case of bad-debt arises in future.
Answer Two
1. Borrower Analysis: Share holding, reputation, education, experience success history, net
worth, age etc.
2. Industry Analysis: Position, prospect, Risk factors, share in the industry, strength, weakness etc.
3. Supplier/Buyer Risk Analysis
4. Demand Supply position
5. Technical/ Infrastructural feasibilities
6. Management Teams Competence
7. Seasonality of demand
8. Debt-Equity Ratio
9. Historical financial analysis Earning, cash flow, leverage, profitability, etc.
10. Projected Financials Ability to debt repayment, debt service coverage ratio
11. Allied/ sister concern involved, other business
12. Pricing: Effective rate of return, Return on investment.
13. Loan structuring: Amount, tenor, interest rate, etc.
14. Security: Guarantee/s, Un-dated/ Post-dated cheque with IGPA, collateral security, etc.
credit policy & guidelines
16. Mitigating Factors i.e. risk factors
17. Environmental factor.
18. Employment generation and contribution to the national economy.
Q25. a) Mr. Abdul Ali, an enterprise of your branch area applied for a loan of Tk. 20.00 lacs
to establish a nursery project (to ensure green banking)/SME business to your branch. Please
write an appraisal report explaining the following points:
i. About the applicant/entrepreneur;
i. About the enterprise (nursery);
ii. About the security, calculating maximum credit limit (MCL);
iii. About the credit needs;
iv. About the income & expenses i.e. profitability;
v. managerial ability
vi. About marketing;
vii. Recommend loan amount considering the above analysis

22 24
 4. Feedstock Risks
Ans: 1. Lack of firm volume, price and term commitments from off-takers
1. About the applicant: 2. Poor contractual compensation for termination
Mr. Abdul Ali, proprietor of M/S Gomoti Plantations is well experienced having more than 18 3. Unstable feedstock supply
years of experience in this line of business with strong market reputation.
- Ownership Status : Proprietor 5. Operations Risks
- % of share holding : 100% 1. Poor track-record and financial creditworthiness of the O&M Contractor
- Personal Net worth : 150.00 lac 2. Lack of familiarity with the technology used
- Education : Graduate 3. Unscheduled mechanical shutdowns due to poor maintenance strategy
- Age : 52 years 4. Environmental non-compliance
2. About the enterprise: 5. Poor health and safety performance
- Nature of Business : Agro based production in developing the plantations and livestock
- Legal Status : Proprietorship Q27. List down the cost component of a rice mill project (capital cost).
- Year of Estd. : 2003
- Business Address : South Keranigonj, Dhaka List down the cost component of a rice mill project (capital cost).
3. About the security (calculating maximum credit limit):
- 1 (One) Un-dated cheque covering the entire limit Cost component of a rice mill project:
- Hypothecation over the stocks duly insured covering the risk 1. Cost of land and site development
- Registered Mortgage with IGPA of 3.00 katha of land at Dist: Dhaka, P/S: Keranigonj, Mouza: - Cost Of Land
Keranigonj valued at Tk.40.00 lac (MV) and Tk.30.00 lac (FSV). - Cost Of Leveling/Development
4. About the credit needs: - Cost Of Approach Road
- Nature of Facility : Term Loan - Cost Of Compound Wall
- Amount of Limit : Tk. 20.00 lac only 2. Cost of Building & Civil Work
- Purpose : To meet up working capital requirement in their business - Factory building
- Rate of Interest : 18% p.a. - Raw material go down
- Mode of repayment : Equal monthly Installment - Finished goods storage & packing
- CIB Status : STD dt. 15/10/2013 - Administrative building
5. About the income and expense i.e. profitability: - Conference hall
Financials in 2012 : Sales/Revenue 310.00 - Generator room & workshop
Net Profit 22.70 - Watchmen Cabin
Total Assets 100.68 - Electricity Chamber
Total Liabilities/Debt 20.58 3. Cost of plant & machinery
Ratio analysis : Debt Equity Ratio 0.60 - Milling section
Debt Service Coverage Ratio 10.08 - Paddy bar-boiling/steaming plant
Current Ratio 1.21 - Steam boiler
Return on Asset 14.34 - Excuse Duty & Other Taxes
Return on Equity 22.99 4. Others fixed assets costs
Net Profit Margin 8.63 - Office furniture & fixtures
6. About the marketing: - Computer
7. Recommendation: Considering the above facts & analysis, we recommend for approval of the - Electrification &fire fightingequipments
proposed credit facility as Term Loan of Tk. 20.00 lac for the period of 36 months. - Air compressor
- Vehicle (truck)
Q26. A Project loan is treated as a term loan, Discuss why. Discuss the risk you anticipate in - Other machineries tools & tackles
such financing. 5. Preoperative Expenses
6. Margin Money For Working Capital
Project loan is treated as a term loan: A term loan is a monetary loan that is repaid in regular - Raw material
payments over a set period of time. Term loans usually last between one and ten years, but may last - Electricity charges
as long as 30 years in some cases. A term loan usually involves an unfixed interest rate that will add - Salary & wages
additional balance to be repaid. - Stores & spares

25 27

Project loan/finance is the long-term financing of infrastructure, industrial projects, and public - Overhead & packing
services using a non-recourse or limited recourse financial structure. The debt and equity used to - Stock of finished goods & goods in process
finance the project are paid back from the cash flow generated by the project. Project finance is the
financial analysis of the complete life-cycle of a project. Typically, a cost-benefit analysis is used to Q28. Discuss the details of non-performing loan(NPL) recovery processes on both legal and
determine if the economic benefits of a project are larger than the economic costs. The analysis is non-legal aspect
particularly important for long-term projects. From the above discussion we can say that Project
loan is treated as a term loan. Non Legal Aspect:

Risk of project financing: The four main risk categories to be considered, amongst others, when *Defaulted clients are being continuously pursued through letters, phone calls, visits to their
financing a project through Project Finance include: business places and residences.
* of Head office and Heads of Respective
Figure 2. Key Risk Categories Branches has been formed for recovery of classified loans of the Bank. They keep reviewing the
status of the non-performing loans.
*Considering the clients financial position, long drawnlegal procedures are se. An amount is set,
which should be paid against the non-performing loan.
* WAIVER OF INTEREST ON LOANS
* INTEREST CONCESSION PROPOSAL.
* RESTRUCTURING OF LOANS.
* Serving notice in case of borrower failure & does not adjust the accounts as expected. It is
advisable to serve notice through bank messenger.
*
* Consult guarantor/ 3 rd party who has given security.
*Consult close relatives: father/mother/wife/joint family member/father in-law.
Each risk category consists of various risks, which are listed below. This is not a comprehensive list, *If any advances allowed against the request/recommendation of influential person(s) then contact
there are many other risks to be considered when evaluating a project financing. him/them.
* Sought help from respectable persons of the locality where the borrower resides-School Teacher,
1. Country Risks Imam Saheb at all.
1. Risk of expropriation, confiscation and nationalization * Contact without fail on the next commitment date (no chance for excuse).
2. Potential for civil wars and domestic unrest *Place the matter with request to local business forum /Bazaar Committee.
3. Currency risks due to depreciation or exchange restrictions *Apply political influence if possible.
4. Key personnel safety and security risks *If there is a scope, sought help from OC/DC.
*If possible consult with ex-sanctioning /disbursing authority & query about actual business
2. Pre-Construction Risks /security location, side business etc.
1. Technology selection risk * In case of unscrupulous borrower make appointment along with Regional /Area Chief
2. Design risk
3. Environmental and regulatory permitting requirements Legal Aspect: Moreover, legal actions were also initiated by the bank for collection and recovery
4. Social and community related risks from NPL loans. The adopted measures were legal notice, filling suit under N.I. Act-1881 & Money
5. Inadequate financing strategy Loan Court Act, auction sale of mortgaged property under Section 12(3) of Artha Rin Adalat Ain-
2003 etc.
3. Construction Risks
1. Lack of pre-completion guarantees in the form of Letter of Credits, Bonds,
* Artha Rin Adalat Ain-2003 (Money Loan Court Act) : All suits relating to the realization of loan
Performance Guarantees, etc.
of a financial institution including Mortgage Suit for foreclosure and sale and even public demand
2. Poor EPC Contractor performance, including completion delays and cost over-runs
3. Inadequate allowance for contingency of more than Tk. 50,000.00 (Taka fifty thousand) are exclusively triable by the Artha Rin Adalat. A
4. Social and environmental disturbances Financial Institution cannot file a Mamla before the Adalat accusing its employees
5. Unproven technology *Bankruptcy Act and the PDR Act-1997: The Bankruptcy Act of 1997 was formulated in order to
6. Inadequate Liquidated Damages assist the recovery environment and to enable speedy recovery of NPLs in Bangladesh. This act are
7. Inappropriate Contract Strategy (e.g., Lump Sum vs. Reimbursable)
used when loan is under 5.00( Five lack).

26 28
N.I. Act-1881: Every negotiable instrument shall be governed by the provisions of this Act, and no
usage or custom at variance with any such provision shall apply to any such instrument
Q29. Discuss the adverse/Negative effects/impacts of Non-Performing Loan in Bangladesh and
Causes of Non-Performing Loan in Bangladesh.
Adverse/Negative effects of Non-Performing Loan in Bangladesh:
Reduce Capacity to Provide New Loans: Honest borrowers are deprived of getting the new and
adequate amount of loans as NPL reduces the investable funds of the bank.
Shrinking Profits: NPL reduces interest income with the principal amount of loan. Again banks
need to maintain the provision for NPL which ultimately reduces net income.
Rise in Lending Rates: Due to NPL banks lose interest income, but they need to maintain
operating costs to run their business smoothly. As an incidence of that bank
further increases lending rates for new loans.
Deteriorate Economic Growth: Non-performing loan requires provision and to meet this
requirement banks have to cut off their profit with a vast amount of provisioning requirement. Due
to huge profit cuts and the rising cost of capital resulting from NPL the
investment opportunity of banks decreases, therefore, upsets the economic development.
Decreases Reinvestment of Fund: NPL blocks the money of banks by the defaulters and restrains
the bank from reinvesting that fund that they could have invested in the more profitable sector.
Credit Crunch: This situation arises when due to the increase of NPL bank failed to provide
sufficient fund at the previous interest rate to new loans.
Hampers Performing Loans: It also negatively affect the performing loans. From the bad
experience of NPL, banks forced to follow the restrictive lending policy which ultimately adversely
affects the performing loans also.
Disruption in Money Cycle: Due to NPL banks failed to provide the adequate amount of return to
its depositors resulting in the withdrawal of funds by the depositor that ultimately cause the shortage
of funds. Thus disruption in money cycle emerged due to NPL.
Decreases Employment Opportunity: Due to huge NPL, banks face difficulties to expand their
business hence decreases the employment opportunity. Due to this problem prospective businesses
also shrink their
Increase the Cost of Banks: As banks need to perform several NPL management strategies, more
supervision and strong monitoring required which in turns increases
the overall costs of the bank.
29
Reduce the Capital Adequacy Ratio: NPL decreases the capital by reducing profit and also the
increasing NPL leads in increasing risk-weighted assets thus eventually ruin the capital adequacy
ratio.
Root Causes of Non-Performing Loan in Bangladesh: The non-performing loan has become the
main concern for the banking industry in recent time. Many economist and analyst found that the
main reason behind recent bank failure, continuous loss of SCBs and banking scams all arises from
the adverse impact of NPL. In order to find the solution to the problem the study discover some of
the root causes of NPL in the banking industry which are discussed below:
Corruption: One of the major reasons behind increasing the NPL in the banking industry is the
involvement of the corrupted person in sanctioning and disbursing loans.
Lack of Monitoring: Sometimes performing loan becomes defaulted due to lack of monitoring. If
the monitoring system was good, and proper action was taken from the beginning period when the
bank comes to know about the loan to be defaulted, the NPL amount
now.
Borrower Selection: A loan is considered as a bad loan from the beginning if it is provided to the
wrong borrower without correctly evaluating their information. There are many borrowers who take
the loan from banks by using false documents.
Political Influences: It works in two ways- Firstly, while bank is sanctioning the loans and
secondly interfering when the bank takes steps against the bad loan.
Lengthy Recovery Procedure: If the recovery procedure through releasing collateral becomes
difficult and legal process consume more time then banks have no choice but to keep the NPL
forcefully in the loan portfolio.
Repetition of Rescheduling: Rescheduling of loans is not the ultimate solution of NPL problem. It
rather increases NPL when the bank applies it repeatedly for the non deserving loan which
ultimately encourages the default culture.
Lending above the Exposure Limit: Crossing lending exposure above the prescribed limit by BB
to a single borrower create huge NPL as the client become defaulter thus ruin the loan portfolio as
well.
Recapitalization Facility: When any state-owned bank faces financial difficulties and capital
shortage, government help them through injecting capital from
de-motivated the govt. banks to earn money on their own as they think
govt. will always be there for them supporting at the time of distress all the time.
Unskilled Personnel: In our banking industry many bankers have a little knowledge about the risk
assessment factors that they should apply while measuring the risk associated with loans and
advances.
Failure of Business of the Borrower: Due to lack of business knowledge, experience in the field of
business makes them unable to repay the
loan to the banks.
30
Willful Default by the Borrower: Most of the people of our country tend repaying the money as
late as possible. When this type of borrower borrows money from the bank they have the intension
not to repay the loan at all or to pay as late as possible.
Poor Management Quality of Borrowers: If the management quality of the borro
found to be weak, the risk of loan default increases.
Lack of Proper Action Taken against Defaulters: In our country loans are hardly monitored in
due time as a result banks remain unaware of the defaulted loan, even if they come to know it.
Delay in taking action or proper legal action against borrower keep the defaulted loan in
portfolio for a long time results from an increase in the aggregate NPL.
Adverse Economic Conditions: Some borrowers are not willful defaulters rather they fail to repay
loans for some adverse economic factors that affect their business such as recession, political
instability, increasing inflation, etc.
Fund Diversion: Sometimes borrower takes the loan for one purpose but uses them for another
purpose causing extra risk for banks. Regular monitoring of the loan is thus essential to ensure their
proper utilization.
Delay in Assessing and Distributing Loans: Due to delay in assessing or disbursing loan banks
failed to provide money to business enterprises at the time when they need it most. As a result, the
business fails as they suffer from the shortage of funds.
Improper Documentation: When the loan becomes defaulted, the bank fails to track the borrower
as they he beginning of loan contact thus make it difficult
to take proper action against the defaulters.
Lack of Applicability of Regulation: There are several regulation and guidelines for managing
nonperforming loan such as The Bankruptcy Act, Money Loan Court Act, etc. but in practice, they
are not followed entirely and efficiently.
Money market and capital market, SEC
Q30. Distinguish between money market and capital market. Can increased call money rate
influence the capital market? Elaborate with example.
Short-term securities are traded in money markets whereas long-term securities are traded in
capital markets
Capital markets are well organized whereas money markets are not that organized
Liquidity is high in the money market whereas liquidity is comparatively low in capital
markets
Due to high liquidity and low duration of maturity in money markets, Instruments in money
markets are a low risk whereas capital markets are the comparatively high risk
A central bank, commercial banks and non-financial institutions are majorly work in money
markets whereas stock exchanges, commercial banks, and non-banking institutions work in
capital markets
31
Money markets are required to fulfill the capital needs in the short-term especially the
working capital requirements and capital markets are required to provide long-term financing
and a fixed capital for purchasing land, property, machinery, building, etc.
Money markets provide liquidity in the economy where capital markets stabilize the
economy due to long-term financing and mobilization of savings
Capital markets generally give higher returns whereas money markets give a low return on
investments
2nd Part:
The capital market has influenced by increasing of call money rates that come mainly from supply
and demand for liquidity in the money market. The periodic change in liquidity reserve may cause
to demand the call money rates that influence the capital market. The money market rate can also be
impacted from which Bangladesh Bank conducts the open money market operations. The call
money rate is determined by the participants and it depends according to present and future liquidity
condition in the market. For instance, the inter-bank call money borrowing rate was reached peaks
at 50% in January 2004, and after that 65.67% in February 2005. So that there is no doubt that the
call money rate influences the capital market
Q31. What do you mean by SEC? Elaborate its functions. Do you think that SEC is
performing its role properly in monitoring and controlling capital market especially stock
market of our country? Please pass your comments.
SEC: The Securities and Exchange Commission, also known as the SEC, is a regulatory body
that was established as a result of the Securities Act of 1934. Founded after the stock market crash
of 1929, the SEC is the federal agency responsible for the oversight and enforcement of laws
pertaining to the securities industry.
The Securities and Exchange Commission is an independent government agency responsible for
regulating the securities industry in the United States. In this capacity, it pursues a three-part
mission: to protect investors, to maintain the fairness and safety of securities markets, and to
facilitate capital formation.
The Bangladesh Securities and Exchange Commission (BSEC) was established on 8th June, 1993 as
f the Securities and Exchange
Commission Act 1993. Through an amendment of the Securities and Exchange Commission Act,
1993, on December 10, 2012, its name has been changed as Bangladesh Securities and Exchange
Commission from previous Securities and Exchange Commission.
The Commission's main functions are:
Regulating the business of the Stock Exchanges or any other securities market.
Registering and regulating the business of stock-brokers, sub-brokers, share transfer agents,
merchant bankers and managers of issues, trustee of trust deeds, registrar of an issue,
underwriters, portfolio managers, investment advisers and other intermediaries in the
securities market
32
 Registering, monitoring and regulating of collective investment scheme including all forms
of mutual funds.
Monitoring and regulating all authorized self regulatory organizations in the securities
market.
Prohibiting fraudulent and unfair trade practices relating to securities trading in any securities
market.
ion and providing training for intermediaries of the securities
market.
Prohibiting insider trading in securities.
Regulating the substantial acquisition of shares and take-over of companies.
Undertaking investigation and inspection, inquiries and audit of any issuer or dealer of
securities, the Stock Exchanges and intermediaries and any self regulatory organization in
the securities market.
Conducting research and publishing information.
Do you think that SEC is performing its role properly in monitoring and controlling capital
market especially stock market of our country? Please pass your comments.
Securities and Exchange Commission (SEC) is the regulatory body of that performing the roles by
monitoring and controlling of Bangladesh capital markets. It defines working process and rules and
policies under which the stock exchanges will operate. It supervises the activities of merchant
bankers, stock brokers, depository companies, security lenders & borrowers and other market
intermediaries. SEC manages the issues including monitoring about buy-sell or transfer by the
sponsor/director of the listed companies and monitoring of shareholding position, price sensitive
information, etc.
Key Roles and Responsibilities of the ALM : The ALM desk is responsible for day to day
management of the, market risk and liquidity risk of the bank. The broad responsibilities of the
ALM desk are as follows:
1.To oversee the growth and sustainability of assets and the liabilities.
2.To manage and oversee the overall activities of Money Market.
3.To manage liquidity and market risk of the bank.
4.To understand the market dynamics i.e. competition, potential target markets etc. for expansion of
the business.
5.To Provide inputs regarding market views and to suggest proper balance sheet movement (expand
or shrink) to cope with the changing situation in the market or in the economy.
6.To keep records of ALCO meetings, to monitor the implementation status of the action taken in
ALCO meetings etc.
Soundness of the Bank: Asset Liability Management (AML) is the most important aspect to
managing of liquidity risk and interest rate risk.
A bank would have managed a major portion of its risks by having in place a proper ALM policy
attending to its interest rate risk and liquidity risk. These two risks when managed properly lead to
enhanced profitability and adequate liquidity. It should be used strategically for deciding the pricing
and structure of assets and liabilities in such a way that profitability, liquidity and credit exposure is
maintained. Hence one cannot neglect credit risk in the ALM process. So, it is essential to form

Q32. Do you suggest any amount of investment in capital market by commercial bank? Justify
your answer.
Since banking sector is the mainstay of the financial landscape of Bangladesh, the recent
It can destabilise the capital mark -price to
hike and create bubble. On the other hand, it may lower the credit supply to the private sector,
which will in turn lower private investment and thus overall economic growth.
Many researche
the private sector. We estimate the size of the impact
stock market leads to about 0.006- ate sector credit
disbursement. This result is robust to controlling for Bank Fixed Effect and time trend.
The extent of investment in capital market and its impact on private sector credit critically depends
nd capital markets. Therefore, the rules and regulations
for separating a scheduled bank from investment banking should be streamlined. From policy point
of view, it is important to note that not only the investment in capital market but also its impact on
capital market. Some banks may have higher investment in capital market with very low crowing-
out effect or even higher crowding-in effect.
to jeopardize
(In addition, ALM deals with aspects related to credit risk as this function is also to manage the
impact of the entire credit portfolio (including cash, investments, and loans) on the balance sheet.
The credit risk, specifically in the loan portfolio, is handled by a separate risk management
function and represents one of the main data contributors to the ALM team.)
So, it can be said undoubtedly that absence of good/effective ALM of a bank may lead it to different
crisis jeopardizing image and foundation of the bank
Q35. What do you know about ALCO? Do you think each commercial bank should form
ALCO? List down the role and responsibilities of ALCO of a bank. State Formation/Structure
of ALCO of your bank.
Asset and Liability Committee (ALCO): The Asset and Liability Committee (ALCO) is
responsible for balance sheet risk management. Managing the assets and liabilities to ensure
maximum level of structural balance sheet stability and optimum profitability is an important
responsibility of the ALCO.
LCO is the group primarily responsible for the asset liability and risk management of a bank.
run and to monitor and manage its interrelated risk exposures on a daily basis. As a consequence,

33 35

Asset Liability Management (ALM) & Portfolio Management ing

objectives.
Q33.Define portfolio Management. Highlight the role and responsibilities of a branch
manager in identifying a borrower, loan processing and appraisal of the loan proposal. Should form ALCO: Asset-Liability Management Committee (ALCO) is the core unit of a
financial institution. So it is the basic need to form an ALCO to balancing the Asset-Liability
Portfolio Management: Portfolio management is the selection, prioritisation and control of an Management. The ALCO will set a standard limits on borrowing in the short-term markets and
lending long-term instruments that controls over the financial risks and external events that may
Portfolio Management implies tactfully managing an investment portfolio, by selecting the bes t
affect the bank's asset-liabilities position. It manages the risks to acceptable level by monitoring and
investment mix in the right proportion and continuously shifting them in the portfolio, to increase
sets the competitive prices between assets and liabilities to maintain the liquidity position of the
the return on investment and maximize the wealth of the investor. Here, portfolio refers to a range
of financial products, i.e. stocks, bonds, mutual funds, and so forth, that are held by the investors. company. Without an ALCO, a commercial bank may lose all positive financial opportunities and
the bank must be faced by different types risk as like as financial crisis. So that it shout to be formed
Portfolio management involves deciding about the optimal portfolio, matching investment with the a ALCO for each commercial bank to manage the vulnerable financial position.
objectives, allocation of assets and balancing risk.
Role and Responsibilities of ALCO
Role of branch manager: In appraising a loan process, the selection of the prospective borrower is #Ensure
the most vital point. The borrower is the real actor and must be in position to achieve the purpose he degrees of liquidity and
for which the loan has been requested. In selecting ideal borrower, the branch manager thus assumes market risk.
the greatest r
given loan in proportion to this own investment as working capital. As a general rule a bank should
not sanction loan more than the investment of the borrower. Then t
capacity whether the borrower can utilize the funds or not. Of all the qualifications of a #Decide on the major aspects of balance sheet structure,
prospective borrower, character is undoubtedly the greatest. While the capacity and capital are the
factors upon which depends his ability to repay the money advanced, the character of the borrower
indicates his intention to repay the loan.
To select the ideal borrower the following points have to consider:
a) Branch records: The manager may have first hand information on a prospective borrower by
#Review maturity profile and
a reference to his records, if the banks with him. The turnover of his financial dealings is reflected in
the ledger folios of his branch.
b) The prospective borrower may be advised to submit his books of
accounts balance sheet etc. for examination by the manager. These financial tools reflect the
position of his assets and liabilities and a fair idea about the capital and capacity of the borrower.
c) Personal Enquires: As an individual the borrower must be a desirable person in the society.
He must have integrity. There are some factors such as the sobriety, the promptness of payment #Review deposit-pricing strategy,
goods habits personality, the ability and the willingness to carry a project
#Review liquidity contingency plan for the bank
Q34. What do you know about ALM? List down the role and responsibilities of ALM of a
bank. Do you agree that the absence of Asset Liability Management (ALM) of a bank may
lead to different crises to jeopardize the image and soundness of the bank? Elaborate your
answer.

Asset liability management (ALM): Asset liability management (ALM) is a financial technique
that can help companies to manage the mismatch of asset and liability and/or cash flow risks. The
mismatched risks are due to different underlying factors that cause the assets and liabilities to move
in different directions with different magnitudes. Asset-liability risk is a leveraged form of risk. The

percentage changes in assets or liabilities can translate into large percentage changes in capital.

34 36
Formation/Structure of ALCO of your bank According to the American Congress on Surveying and Mapping (ACSM),

Surveying is the science and art of making all essential measurements to determine the relative
position of points or physical and cultural details above, on, or beneath the surface of the Earth, and
to depict them in a usable form, or to establish the position of points or details.

Surveying also includes the technique of establishing points by predetermined angular and linear
measurements. From the plans, sections, and maps prepared by surveying, the area and volume of a
particular plot of land can be calculated. A map represents the horizontal projection of the area
surveyed and not the actual area. But the vertical distance can be represented more correctly by
drawing sections.

During a survey, surveyors use various tools to do their job successfully and accurately, such as
total stations, GPS receivers, prisms, 3D scanners, radio communicators, digital levels, dumpy level
and surveying software etc.

To understand the full scope of surveying, you can watch the following youtube video.

Importance of Surveying
Q36. Prepare typical balance sheet of your bank.
The knowledge of surveying is advantageous in many phases of engineering. Surveying is of vital
Liabilities Assets importance in any engineering project. Some of the basic importance of Surveying is discussed
1. Share Capital 1. Cash below.
2. Reserve Fund 2. Balances with the Central Bank and other
The first necessity in surveying is to prepare a plan and a section of an area to be covered by
banks.
the project. From these prepared maps and sections the best possible alignment, amount of
3. Deposits 3. Money at call and Short-Notice earthwork and other necessary details depending upon the nature of the project can be
4. Borrowings from other banks 4. Bills Discounted and Purchased. calculated.
5. Bills Payable 5. Investments The planning and design of all Civil Engineering projects such as railways, highways,
6. Bills for collection 6. Loans, Advances, Cash Credits and tunneling, irrigation, dams, reservoirs, waterworks, sewerage works, airfields, ports, massive
Overdrafts. buildings, etc. are based upon surveying measurements.
7. Acceptances. Endorsements and other 7. Liabilities of Customer for Acceptances. During execution of the project of any magnitude is constructed along the lines and points
obligations Endorsements and other Obligations. established by surveying.
8. Contingent Liabilities 8. Property, Furniture, Fixtures less The measurement of land and the fixation of its boundaries cannot be done without
Depreciation surveying.
9. Profit and Loss 9. Profit and Loss. The economic feasibility of the engineering feasibility of a project cannot be properly
ascertained without undertaking a survey work.
The execution of hydrographic and oceanographic charting and mapping requires.
Surveying is used to prepare a topographic map of a land surface of the earth.

Q38. It is due to the increase of classified loans of the bank that they now facing liquidity
problems and borrower interbank call money at very high rate. Justify the view point.

It is simple understanding that due to increase of classified loans, the bank has faced to liquidity
crisis. However, when loans go bad they have some adverse effects on the financial health of banks.
Banks make adequate provisions and charges for bad debts which impact negatively on
performance. The provisions for bad loans reduce total loan portfolio of banks and as such affects
interest earnings on such assets. This constitutes huge cost, as it makes a liquidity crisis for the
banks.

37 39

On other hand, when banks will go into liquidity crisis, they try to borrow from inter-bank call
money at a high interest rate. The inter-bank call money market is an overnight market in meeting
Balance Sheet of a Commercial Bank mediate liquidity needs and reserve deficiencies. Hence, an important task of the call
money market is to facilitate liquidity management in the inter-bank market. The orderly and stable
functioning of the inter-bank call money market is important to minimize liquidity risk in the
Liabilities Assets banking system as a whole.

a. Share Capital a. i. Cash in Hand So that the banks will penetrate to call money at high interest rate to maintain their adequate
liquidity due to loan classification and keeps provision in this same.
b. Reserve Funds ii. Cash with the Central Bank (RBI)
c. Deposits iii. Cash with the other banks Q39. Define Loan Write Off and Loan rescheduling. Or, Difference between Loan Write Off
and Loan rescheduling. Difference between Loan Write Off and interest remission.
i. Fixed Deposits b. Money at short
ii. Saving Deposits c. Bills and securities discounted Loan Write Off: Writing off bad loans having adequate provision is an internationally accepted
normal phenomenon in the banking business. Banks may, at any time, write off loans classified as
iii.Current Deposits d. Investment of bank bad/loss. Those loans which have been classified as bad/loss for the last five years and for which
iv. Other Deposits e. Loans and Advances given 100% provisions have been kept should be written off without delay. After issuance of this circular
the process of writing off all other loans classified as bad/loss should be started immediately. Under
d. Borrowings f. Other Assets the process the oldest bad/loss classified loans should be considered first for writing off. Banks may
write off loans by debit to the
e. Other liabilities found adequate for writing off such loans. All out efforts should be continued for realizing written
off loans

Loan rescheduling: Loan rescheduling means stretching out of time over a longer period for
payment of principal and /or interest. In certain rare situations, the borrower may find itself in a
period of temporary financial distress. Loan rescheduling may be an appropriate way of handling
the problem loan situation, but only if the bank is fairly certain that the borrower is able to fulfill the
rescheduled terms of the contract. In no way bank should go for rescheduling if significant doubt is

Loan Write Off and interest remission: When a borrower is not able to pay his full loan dues, in
certain genuine cases, banks may waive/remiss a certain portion or percentage of loan interest dues
provided the borrower is ready to close the loan in one lump sum. The bank may also allow one or
two installments to clear the loan dues in selected cases. The purpose of loan interest
remission/waiver is see that the NPAs are closed so that the balance sheet of the bank looks clean.
By allowing certain percentage of waiver, the banks are in a way attracting the borrowers to close
their NPAs. These waivers may be in the form of waiver of interest, or providing interest
concession. But the principal amount has to be paid. Here, the bank may lose some amount but the
loan will be closed. The banks follow the principle

Q37. What do you mean surveying a branch area. Why it is so important in preparing a
business plan of a branch.
What is Surveying?
Surveying is the technique of determining the relative position of different features on, above or
beneath the surface of the earth by means of direct or indirect measurements and finally
representing them on a sheet of paper known as plan or map.
38
When all the genuine efforts of loan recovery fails and the borrower is not in a position to pay the
outstanding loan dues to the bank due to reasons beyond his control like floods, earthquake,
drought,etc., then considering the genuine situation, the bank may write off the full loan dues of the
borrower. This write off is extended only to genuine borrowers who are not able to pay the loan
dues due to reasons beyond their control. Writing off bad loans having adequate provision is an
internationally accepted normal phenomenon in the banking business. Banks may, at any time, write
off loans classified as bad/loss.
40
Q40. Discuss loan write-off rules set by Bangladesh Bank. Before sending a loan write off
proposal to head office, list down the pre-conditions to be fulfilled for the loanee to be eligible
to get the write off facilities.
List down the pre-conditions to be fulfilled by a borrower for availing write off consideration.
Writing off bad loans having adequate provision is an internationally accepted normal phenomenon
in banking business. Owing to the reluctance of banks in Bangladesh in resorting to this system their
balance sheets are becoming unnecessarily and artificially inflated. In this context the following
policies for writing off loans are being issued (BRPD02/2003&BRPD13/2013) for compliance by
banks:
1.Banks may, at any time, write off loans classified as bad/loss for which 100% provisions have
been kept and cases have been filed in the court of law. However, banks may write-off default loans
below Tk 50,000 without filing suit against the borrowers. Under the process the oldest bad/loss
classified loans should be considered first for written off.
2.Banks may write off loans by debit to their current year's income account where 100% provision
kept is not found adequate for writing off such loans.
3.All out efforts should be continued for realizing written off loans. Cases must be filed in the court
of law before writing off any loan for which no legal action has been initiated earlier.
4.A separate "Debt Collection Unit" should be set up in the bank for recovery of written off loans.
5. In order to accelerate the settlement of law suits filed against the written off loans or to realize the
receivable written off loans any agency outside the bank can be engaged.
6.A separate ledger must be maintained for written off loans and in the Annual Report/Balance
Sheet of banks there must be a separate "notes to the accounts" containing amount of cumulative
and current year's loan written off.
7.Inspite of writing off the loans the concerned borrower shall be identified as defaulter as usual.
Like other loans and advances, the writing off loans and advances shall be reported to the Credit
Information Bureau (CIB) of Bangladesh Bank.
8. Prior approval of Bangladesh Bank shall have to obtained in case of writing off loans sanctioned
to the director or ex-director of the bank or loans sanctioned during the tenure of his directorship in
the bank to the enterprise in which the concerned director has interest (as per explanation contained
in section 27(2) of the Bank Company Act, 1991).
Effect in balance sheet:
Outstanding of loan & advances is shown on the assets side of Balance sheet. When any loan &
count is closed from it ledger book and cannot be
shown on the balance sheet. But write off does not mean waiver or forgiveness. As usual course of
action to recover the write off loan to be continued. So, bank maintain a separate ledger book for
balance sheet.
41
Q41. Do you think present system should be changed? Do you have any suggestion of the
present system of provisioning against regular loans and advances? Explain the reason. Or,
Discuss the Limitations and suggestions on the existing Loan Classification & Provisioning
System:
1. The classification time frame for every loan else the short term agriculture and micro credit loan
is same as per the circular, i.e., all loans, indifferent to the size and nature of the loans, are classified
as SS/DF/BL after being overdue for 3/6/9 months. This 'one size fits all' policy should not be
applicable for all types of loans in any country. All loans must not be classified in the same way.
Loans should be categorized according to their size, nature, industry, target group, priority sector
etc. There should be a customization window for a loan to be classified considering their basic
elements. There could be different classification regime for different type of and different sized
industries.
2. It is not a positive sign for the country to change such sensitive policy (on loan classification and
provisioning) again and again without adequate and proper analysis. It gives pain to the users when
the policy is changed instantly after they are set with the former one. So there should be an
extensive research work and analysis of after effect before issuing circulars on the important
banking and financial issues like loan classification and provisioning.
3. As per the circular, loans also could be classified based on qualitative judgment. Points made
under this criterion are so subjective that banks are found to be evasive to classify their loans on
these given qualitative parameters. Bank can make wrong practice with it.
4. The section of 'Accounting of the Interest of Classified Loans' has outlined the accounting
treatment of different classified category. It is instructed that if any loan or advance is classified as
'Sub-standard' and 'Doubtful', interest accrued on such loan will be credited to Interest Suspense
Account, instead of crediting the same to Income Account. But there is a loophole. It does not
precisely instruct about the amount which has already been transferred to income account while it
was unclassified as it is mentioned in RBI policy of India. Meaning that, some banks reverse their
income account to interest suspense while the account gets classified but some do not.
5. Banks are required to maintain General Provision @ 0.25% against all unclassified loans of
Small and Medium Enterprise (SME) and @ 1% against all other unclassified loans (other than
loans under Consumer Financing, Loans to Brokerage House, Merchant Banks, Stock dealers etc.,
Special Mention Account as well as SME Financing.) Most of the banks are found to take advantage
of the privilege of SME financing provisioning. Banks get the opportunity to define a loan as SME
as the SME definition is not much clear to all.
6. Items mentioned in the circular as 'Eligible Collateral' in determining base for provision are very
small in number. There should be an exhaustive list under 'Eligible Collateral'.
7. There is no detailed and elaborated 'Valuation Policy' for determining the market value of
'Eligible Collateral'. The existing policy does not cover many important aspects of the valuation
policy that are internationally practiced. Bangladesh Bank may take necessary initiative to formulate
a collateral valuation policy.
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8. Loans are named as Investment in Islamic Financing and their mode of operation differs
significantly from the conventional banking. There must be a customized Loan Classification &
Provisioning policy for Islamic Banking. Tax treatment on Islamic finance differs significantly and
this issue may also be taken into consideration.
Q42. Discuss the basis of determining the classification status of classified loans and advances
and provisioning rules given by Bangladesh Bank.
All loans and advances will be grouped into 4(four) categories for the purpose of classification,
namely-
Continuous Loan: The loan Accounts in which transactions may be made within certain limit and
have an expiry date for full adjustment will be treated as Continuous Loans. Examples are: CC, OD
etc.
Demand Loan: The loans that become repayable on demand by the bank will be treated as
Demand Loans. If any contingent or any other liabilities are turned to forced loans (i.e. without any
prior approval as regular loan) those too will be treated as Demand Loans. Such as: Forced LIM,
PAD, FBP, and IBP etc.
Fixed Term Loan: The loans, which are repayable within a specific time period under a specific
repayment schedule, will be treated as Fixed Term Loans.
Short-term Agricultural Credit: This will include the short-term credits as listed under the
Annual Credit Program issued by the Agricultural Credit Department of Bangladesh Bank. Credits
in the agricultural sector repayable within less than 12 months will also be included herein. Short-
term Micro-Credits will include any micro-credits for less than Tk.25,000/= and repayable within
less than 12 months, be those termed in any names such as Non-agricultural credit, Self-reliant
Basis of loan classification :
1) Objective criteria
2) Qualitative Judgment
The basis of loan classification under objective criteria:
2.1. Any Continuous Loan if not repaid/renewed within the fixed expiry date for repayment or after
the demand by the bank will be treated as past due/overdue from the following day of the expiry
date. Any Demand Loan if not repaid within the fixed expiry date for repayment or after the demand
by the bank will be treated as past due/overdue from the following day of the expiry date. Whereas,
In case of any installment(s) or part of installment(s) of a Fixed Term Loan is not repaid within the
fixed expiry date, the amount of unpaid installment(s) will be treated as past due/overdue after six
months of the expiry date.
2.2. A Continuous Loan, Demand Loan, Fixed Term Loan or any installment(s)/part of
installment(s) of a Fixed Term Loan which will remain past due/overdue for a period of 03 (three)
months or beyond but less than 09 (nine) months, the entire loan will be put into the "Sub-standard
(SS)".
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2.3. A Continuous Loan, Demand Loan, Fixed Term Loan or any installment(s)/part of
installment(s) of a Fixed Term Loan which will remain past due/overdue for a period of 09 (nine)
months or beyond but less than 12 (twelve) months, the entire loan will be put into the "Doubtful
(DF)".
2.4. A Continuous loan, Demand loan, Fixed Term Loan or any installment(s)/part of installment(s)
of a Fixed Term Loan which will remain past due/overdue for a period of 12 (twelve) months or
beyond, the entire loan will be put into the "Bad/Loss (B/L)".
2.5 The Short-term Agricultural and Micro Credit will be considered irregular if not repaid within
the due date as stipulated in the loan agreement. If the said irregular status continues, the credit will
an agreement.
2) Qualitative Judgment:
If any uncertainty or doubt arises in respect of recovery of any Continuous Loan, Demand
Loan or Fixed Term Loan, the same will have to be classified on the basis of qualitative
judgment be it classifiable or not on the basis of objective criteria.
If any situational changes occur in the stipulations in terms of which the loan was extended
or if the capital of the borrower is impaired due to adverse conditions or if the value of the
securities decreases or if the recovery of the loan becomes uncertain due to any other
unfavorable situation, the loan will have to be classified on the basis of qualitative judgment.
Besides, if any loan is illogically or repeatedly re-scheduled or the norms of re-scheduling
are violated or instances of (propensity to) frequently exceeding the loan-limit are noticed or
legal action is lodged for recovery of the loan or the loan is extended without the approval of
the proper authority, it will have to be classified on the basis of qualitative judgment.
other reasons, if there exists any hope for change of the existing condition by resorting to
proper steps, the loan, on the basis of qualitative jud -
-out
effort, there exists no chance of -
qualitative judgment.
Maintenance of Provision:
a) General Provision: Banks will be required to maintain General Provision in the following way :
(1) @ 0.25% against all unclassified loans of Small and Medium Enterprise (SME) as defined by
the SME & Special Programmes Department of Bangladesh Bank from time to time and @ 1%
against all unclassified loans (other than loans under Consumer Financing, Loans to Brokerage
House, Merchant Banks, Stock dealers etc., Special Mention Account as well as SME Financing.)
(2) @ 5% on the unclassified amount for Consumer Financing whereas it has to be maintained @
2% on the unclassified amount for (i) Housing Finance and (ii) Loans for Professionals to set up
business under Consumer Financing Scheme.
(3) @ 2% on the unclassified amount for Loans to Brokerage House, Merchant Banks, Stock
dealers, etc. (4) @ 5% on the outstanding amount of loans kept in the 'Special Mention Account'.
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(5) @1% on the off-balance sheet exposures. (Provision will be on the total exposure and amount of
cash margin or value of eligible collateral will not be deducted while computing Offbalance sheet
exposure.)
b) Specific Provision: Banks will maintain provision at the following rates in respect of classified
Continuous, Demand and Fixed Term Loans:
(1) Sub-standard : 20%
(2) Doubtful : 50%
(3) Bad/Loss : 100%
c) Provision for Short-term Agricultural and Micro-Credits:
(1) All credits except 'Bad/Loss' (i.e. 'Doubtful', 'Sub-standard', irregular and regular credit
accounts) : 5%
(2) 'Bad/Loss' : 100%
Q43. What is prospective borrower? In selecting borrower whats point to be taken in
consideration?
Prospective borrower: Prospective borrower means which borrower has 'Five C of credit' quality.
The five C's of credit is a system used by lenders to gauge the creditworthiness of potential
borrowers. The system weighs five characteristics of the borrower and conditions of the loan,
attempting to estimate the chance of default. The five C's of credit are character, capacity, capital,
collateral and conditions.
Character: Sometimes called credit history, the first C refers to a borrower's reputation or track
record for repaying debts. This information appears on the borrower's credit reports. credit reports
contain detailed information about how much an applicant has borrowed in the past and whether he
has repaid his loans on time.
Capacity: Capacity measures a borrower's ability to repay a loan by comparing income
against recurring debts and assessing the borrower's debt-to-income (DTI) ratio. In addition to
examining income, lenders look at the length of time an applicant has been at his job and job
stability.
Capital: Lenders also consider any capital the borrower puts toward a potential investment. A large
contribution by the borrower decreases the chance of default.
Collateral: Collateral can help a borrower secure loans. It gives the lender the assurance that if the
borrower defaults on the loan, the lender can repossess the collateral. For example, car loans are
secured by cars, and mortgages are secured by homes.
Conditions: The conditions of the loan, such as its interest rate and amount of principal, influence
the lender's desire to finance the borrower. Conditions refer to how a borrower intends to use the
money.
Role & responsibilities of a branch manager in identifying a prospective borrower and processing
his loan proposal:
1. Marketing
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2. Customer hunting
3.Product offering to the proposed customer
4.Customer Analysis
5.Selecting
6.Risk Grading
7. Processing Loan application
Q44. What qualities does a field officer (Who appraises loan proposal) should posses? Please
elaborate your answer.
Ans: Qualities of Loan proposal appraisal officer
1. Active Listening - Giving full attention to what other people are saying, taking time to
understand the points being made, asking questions as appropriate, and not interrupting at
inappropriate times.
2. Speaking - Talking to others to convey information effectively.
3. Reading Comprehension - Understanding written sentences and paragraphs in work related
documents.
4. Judgment and Decision Making - Considering the relative costs and benefits of potential
actions to choose the most appropriate one.
5. Critical Thinking - Using logic and reasoning to identify the strengths and weaknesses of
alternative solutions, conclusions or approaches to problems.
6. Service Orientation - Actively looking for ways to help people.
7. Social Perceptiveness - Being aware of others' reactions and understanding why they react as
they do.
8. Complex Problem Solving - Identifying complex problems and reviewing related information
to develop and evaluate options and implement solutions.
9. Coordination - Adjusting actions in relation to others' actions.
10. Monitoring - Monitoring/Assessing performance of yourself, other individuals, or
organizations to make improvements or take corrective action.
11. Time Management - Managing one's own time and the time of others.
12. Management of Personnel Resources - Motivating, developing, and directing people as they
work, identifying the best people for the job.
Others
Q45. Explain term loan. Distinguish between term credit and short term credit. Which one is
preferred by bank and why. Or, Advantages of Short-Term Financing. or, Why do the private
commercial banks prefer short term lending.
Term loan: A term loan is a lump sum from a lender that a borrower receives for a specific amount
and for which the borrower pays back through a specified repayment schedule. The interest charged
on a term loan can either be a floating or fixed one. Term loans come in several varieties, usually
reflecting the lifespan of the loan.
1. Short Term Loans
2. Medium Term Loans
2. Medium Term Loans
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Difference between Short Term Loan and Long Term Loan
Short Term Loan Long Term Loan
In case of long term loan, duration of loan
Loan is sanctioned for short period not
may exceed above 12 months, upto 30
exceeding 12 months.
years.
Easier to qualify as they are less risky for Not easy as they are more risky as loan
lender due to short tenure. amount is big to be paid in longer duration.
Low credit score may lead to rejection of
Low credit score acceptable
loan application.
In short term loan, interest rates are higher as
Low interest rate
compared to long term.
Loan amount is small. High loan amount
Limited paper work Comprehensive paper work
Purpose of long term loan may be for
Purpose of loan may be in case minor repair purchase of car, home, start a business,
of car, home, unexpetced bill payments etc. renovation, purchase of immovable assets
etc.
Private commercial banks prefer short term lending because of the following reason.
There are various advantages of short term financing and this is why private commercial banks
prefer short term lending. Those advantages of short term financing are given below with detail -
1. Easier to provide: Banks can provide short term credit more easily within the minimum
functionality than long-term credit.
2. Higher interest: Banks may impose the higher interest rate due to small amount of credit with
the minimum or security less financing.
3. Rapid turn-over of capital: The capital investment is turning over rapidly and it make chance to
further investment.
4. Minimum cost of capital: Whether, the short-term credit makes the rapid turn-over of capital
investment, thus it may reduce the cost of capital.
5. Minimum risks: Due to minimum time frame, the repayment of loan may cover in earlier. Thus,
the risk is lesser than the long term credit.
6. Easy control over the customers: Banks can overlook more easily to the short-term borrowing
customers than the long-term borrower.
7. Flexibility to lend: It is more flexible in the sense that the banks lends as the borrowers are
needed and repay then in due time.
8. Minimum complexity: The maintenance and supports of further credit procedures is simple than
long-term finance.
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9. Fund availability: In many cases, commercial banks prefer to maximize the fund availability
particularly small enterprises.
Q46. Why do the private commercial banks prefer short term lending and discourage term
credit?
Most of the time the private commercial banks discourage to finance the long term loans due
to some relative risky and problems. These are:
1) Lower Rates: Long-term loan normally have lower interest rates than short-term credits.
2) Slow Cash Inflow: A long-term debt obligation also prevents the faster cash inflow.
3) Risk Involvement: Generally, the level of the interest rate is depends upon the risk involved with
making the loan. In case of default, long-term loan includes a greater span of time.
4) Credit turn-over loss: The long-term loan will be paid over a loan period. So the lender get
recovered the amount by a long period as the lender has missed the rapid credit turn over.
5) Long term debt is often costly to service
6) The cost of capital is higher in case of long term debt
Q47. Discuss different types of credit that a commercial bank can provide to its clients.
Or, Discuss the different types of credit facilities those a banker extends to clients.
Different types of credit facilities by commercial bank are as follows:
1. Overdraft Facilities: The depositor in a current account is allowed to draw over and above his
account up to a previously agreed limit. Bank charges interest only on overdrawn amount.
2. Cash Credit: Borrowers will be allowed to withdraw small sums of money according to his
requirements, but not exceed credit and he is required to pay interest only.
3. Discounting Bills of Exchange: The holder of a bill can get it discounted by the bank, when he is
in need of money. After deducting its commission, the bank pays the present price of the bill to the
holder.
4. Money at Call: Bank grant loans for a very short period, not exceeding 7 days to the dealers or
brokers in stock exchange markets against collateral securities.
5. Term Loans: Provide loans to trading, industry and agriculture sector with a period between 1 to
10 years in installment basis. It also provides working capital funds to the borrowers.
6. Consortium Finance: Two or more banks may jointly provide large loans to the borrower against
a common security.
7. Consumer Credit: Grant credit to households in a limited amount to buy some durable consumer
goods or to meet some personal needs.
8. Miscellaneous: The other forms of loan are packing credits given to exporters, export bills
purchased/discounted, import finance against import bills, finance to the self employed, credit to the
public sector, credit to the cooperative sector.
Q48. What is Credit Planning? What factors are to be taken into consideration by a bank
while making a credit planning?
Or, Discuss the important components those are to be taken in consideration in formulating
the lending operational policy of a bank.
Credit Planning: A credit planning is to set out procedures for defining and measuring the credit-
risk exposure within the Group and to assess the risk of losses associated with credit extended to
customers, financial investments and counterparty risks with respect to derivative instruments. The
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main aspects of a credit planning are- 1) the terms and conditions on credit, 2) customer Non-personal Security: Non-personal security refers to movable and immovable tangible
qualification criteria, 3) procedure for making collections, and 4) steps to be taken in case of properties against which loans are granted. This type of security may include land, building,
customer delinquency. commodities etc. Non-personal security is safer than personal security.

[Two Answer] There are four types of non-personal security. such as-
Answer One 1. Lien.
An effective Credit planning should include the following considerations: 2. Pledge.
Objectives of the credit function 3. Mortgage.
Opening procedures and obtaining information for new accounts 4. Hypothecation.
Assessing & evaluating the proposals
Terms and conditions 1. Lien: Lien is legally enforceable claim on the property of another as a result of a debt or
Authority levels and responsibilities obligation.
Invoicing procedures 2. Pledge: Pledge is the possession of assets that go to the bank or loan provider, but the owner
Monitoring borrowing and paying behavior of customer is to the borrower.
Procedure relating to complaints and disputes 3. Mortgage: It is an interest in property created as security for a loan or payment of debt and
Targets, benchmarks, and deadlines for the credit function terminated on payment of the loan or debt.
Defining & collecting of dues, overdues and bad debts 4. Hypothecation: Hypothecation is pledged to secure an obligation without delivery of title
The credit planning should be considered by internal and external factors and should be reviewed on or possession.
an ongoing process. These are:
Collateral Security: When the lender feels the security provided by the borrower is not sufficient
Type of industry or it may be difficult to recover the dues smoothly, the lender may ask for additional security to be
provided by the borrower himself or by others on behalf of the borrower. In case of any default by
Type of products or services provided to customers the borrower, the collateral securities will come in hand to service and recover the loan. There are
Production and warehouse management some usual types of collateral securities that banks acquire at the time of lending money.
Distribution systems
1. Shares and securities
Costs of third parties involved, such as factoring, debt collection agencies, etc. 2. Commodities/export documents
Answer Two a. Export documents
The components that should consider when formulating a lending policy that should b. Commodities
influence to extend credit are discussed below: i. Export commodities
The conditions under which a firm sells its goods & services- ii. Import commodities
1. The period for which credit is granted: The factors that influence the credit period iii. Other commodities pledged or hypothecated
area) 3. Machinery/fixed assets (excluding land, building/flat)
Predictability 4. Real estate
b) Consumer Demand a. Residential Real estate
c) Cost, profitability and standardization b. Commercial Real estate
d) Credit risk 5. Financial obligations
e) Size of the account 6. Guarantee of individuals (personal guarantee)
f) Completion 7. Guarantee of institutions (corporate guarantee)
2. The type of credit instrument a. Guarantee of bank or NBFI
3. Credit Function b. Other corporate guarantee
a) Running a credit department 8. Miscellaneous
b) Chose to contract all or part of credit to a factor a. Hypothecation of crops
c) Manage internal credit operations are insured against default b. Other

B. Credit analysis
Refers to the process of deciding, it usually involves two steps:
1. Relevant information
a) financial statements
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b) credit agency Q51. Discuss the required documents for loan.

c) banks credit
d) market good will General Documents: In general, required papers and documents to be obtained / maintained
2. Credit Worthiness irrespective of type of borrower, loan and security are:
a) Character 1. Demand Promissory Note
b) Capacity 2. Letter of Authority
c) Capital 3. Letter of Arrangement
d) Collateral 4. Letter of Disbursement
3. Credit scoring: The process of quantifying the probability of default when 5. Letter of Revival
granting consumer credit 6. Personal Net Worth Statement
C. Collection Policy 7. Copy of National ID
Collection policy is the final factor in credit policy. Collection policy involves 8. Credit Approach in Business Pad of the Borrower
monitory receivables to spot trouble and obtaining payment on past due accounts. 9. Credit Application in prescribed format duly filled in
10. Photograph of the Borrower
Q49. List down the minimum eligibility criteria to be fulfilled by borrower to obtain loan
11. Photograph of the business/inventory
1. Credit-worthiness:
repay, collateral value as eligibility criteria. 12. Photograph of the mortgaged property
2. Business and Credit history: The eligibility may be judged by business track records and also 13. Up to date CIB Report
qualifying for the different types of credit history like type of credit facility, credit limit, repayment 14. Credit report of the Borrower/Supplier
records, etc. 15. Liability Declaration of the borrower along with an Undertaking that they have no liability
3. Working capital: The present working capital may be considered that can be thought of as cash with any bank or financial institution except as declared.
at hand and bank. 16. Undertaking stating that, they will not avail any credit facility from any other bank or financial
4. Collateral: Collateral securities which are assets will be evaluated as secured assets and pledge institution without prior consent of the bank.
or hypothecation of inventory. 17. Undertaking stating that customer does not have any relationship as Director or Sponsor with
5. Keen money management skills: This includes a solid cash flow, the ability to live, and skills of the bank.
keeping accurate and timely financial records. 18. Undertaking stating that customer shall not sell or transfer the ownership of the
6. Earning power: The earnings of borrower to be given out as loan are some of the determining
business/factory/shop until all amounts due to the bank are fully paid or without NOC of the
factors in granting the loans.
bank.
7. Ability to repay: The borrower should have to ability to repay the loans from his business and
personal income. 19. Credit Risk Grading Score Sheet (CRGS)
8. Experience and character: The borrower should have experience in business to run that should 20. Post-dated cheque covering the credit facility
have business skills and managerial experience. 21. Acceptance by the Borrower of the Sanction Letter 22. Proper Stamping

Q50. Define Security. Discuss different types of securities that a banker usually takes at
disbursement of credit. Or, Discuss different types of securities documents those a bank
usually obtain at the time disbursement of credit from borrower.

Security: Security is what the borrower puts up to guarantee payment of the loan. Moreover
security means immovable & chattel or personal asset or assets to which a lender can have recourse
if the borrower defaults in the loan payment. It may include tangible, intangible assets or even a
personal guarantee.

Types of Securities for Bank Credit:

Personal Security: Personal security refers to the guarantee given by the borrower or by a third
party in the lead of pledging a tangible asset. The character, integrity, financial solvency, and social
status are important factors that are looked into before sanctioning of loan against personal security.

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