Credit Department of One Bank Ltd

Credit Department

Credit Facility

One of the primary functions of commercial banks is sanctioning of credit to the potential borrowers. Bank credit is an important catalyst for bringing about economic development in a country. Without adequate finance, there can be no growth or maintenance of a stable economy. Bank lending is important for the economy, because it makes possible the financing of agriculture, commercial and industrial activities of a nation. At the same time, a bank will, therefore, distribute its funds among various sectors in a manner as to derive sufficient incomes.

Loans & advances comprise the most important asset as well as the primary source of earning for the banking/financial institutions. However lending money is exposed to risk and uncertainties. So a prudent banker should always try to make an appropriate balance between the risk and return involved in the loan portfolio management. The lending banker has to take into account various consideration which relates to bank itself, the borrower, the proposal, the socio economic factors etc. An unregulated financial institution might be burdened with innumerable and unmanageable risk while lending money to the people for maximizing potential gains. So the bank should be prudent, farsighted and efficient while deploying its funds.

ONE Bank limited, being one of the largest private commercial bank of the country, provides funds to agriculture, industry and commerce sector for strengthening the economic base of the country. Hence, it is very clear that, ONE Bank plays an important role to move the economic wheel of the country.

What is Loan?

When an advance is made in a lump sum repayable either in fixed monthly installments or in lump sum and no subsequent debit is ordinarily allowed except by way of interest and incidental charges. Etc, it is called a Loan. Loan is allowed for a single purpose where the entire amount may be required at a time or in a number of installments within a period of short span. After disbursement of the entire loan amount, there will be repayment by the borrower in installment. A loan once repaid in full or in part cannot be drawn by the borrower. Entire amount of loan is debited to the loan account in the name of the customer and is paid to him/her through his/her SB/CD/Loan account. Some times loan amounts are disbursed in cash.

Purposes of Loan

For purchasing bus, trucks, launches, for construction of building and for capital financing of industrial projects, export finance, import finance, import finance etc. Now a day, commercial banks, specially the nationalized commercial bank, in our country, are to make loans under different schemes viz. Agricultural Loans, and loans under self-employment scheme etc. Depending upon the purpose, loans may be repayable within a few months or the repayment period may extend upon a few years. Agricultural loans are generally repayable within a period of 3(three) months to 1(one) year. But repayment of transport loans & house building loans may take longer period comprising a number of years.

Lending principles followed by ONE Bank

The Principle of lending is a collection of certain accepted time tested standards, which ensure the proper use of loan fund in a profitable way and its timely recovery. Different authors describe different principles for sound lending.

OBL follows the following five principles in its lending activity:

Safety
Security
Liquidity
Adequate yield
Diversity
Productive purpose
National interest

1. Safety

Safety should get the prior importance in the time of sanctioning the loan. At the time of maturity the borrower may not will or may unable to pay the loan amount. Therefore, in the time of sanctioning the loan adequate securities should be taken from the borrowers to recover the loan. Banker should not sacrifice safety for profitability.

ONE Bank Ltd. exercises the lending function only when it is safe and that the risk factor is adequately mitigated and covered. Safety depends upon:

The security offered by the borrower; and

The repaying capacity and willingness of the debtor to repay the loan with interest.

2. Liquidity

Banker should consider the liquidity of the loan in time of sanctioning it. Liquidity is necessary to meet the consumer need.

3. Security

Banker should be careful in the selection of security to maintain the safety of the loan. Banker should properly evaluate the proper value of the security. If the estimated value is less than or equal to loan amount, the loan should be given against such securities. The more the cash near item the good the security. In the time of valuing the security, the Banker should be more conservative.

4. Adequate Yield

As a commercial origination, Banker should consider the profitability. So banker should consider the interest rate when go for lending. Always Banker should fix such an interest rate for its lending which should be higher than its savings deposits interest rate. To ensure this profitability Banker should consider the prospect of the project.

5. Diversity

Banker should minimize the portfolio risk by putting its fund in the different fields. If Bank put its entire loan able fund in one sector it will increase the risk. Banker should distribute its loan able fund in different sectors. So if it faces any problem in any sector it can be covered by the profit of another sector.

6. A Productive Purpose

ONE Bank exercises its lending function only on productive purpose.

7. National or social interest

ONE Bank also considers national aspect of any project while financing. They take utmost care so that the project cannot be detrimental to the society as well as to the nation.

Different Types of Loans and Advances

The different types of loans and advances that ONE Bank offers are as follows:

Overdraft
Cash Credit
Term Loan
Import finance
Export Finance
Commercial Lending
Consumer credit schemes
House building loan
Transportation Loan
Working capital

Inland bills purchased (IBP) / discounted (IBD)

Staff car loan

Overdraft

The overdrafts are generally allowed on a Current account operated upon by cheques. The customer may be allowed a certain limit up to which he can overdraw within a stipulated period of time. In an overdraft account withdrawals & deposits can be made any number of times within the limit and prescribed period. Interest is calculated and charged only on the actual debit balances on daily product basis or may be decided by the competent authority.

There are three types of Over Drafts available:

Temporary Over Draft (TOD)

Clean Over Draft (COD)

Secured Over Draft (SOD)

Temporary Over Draft (TOD)

TOD is allowed to honor an important cheque of a valued client without any prior arrangement. As this facility is allowed for a very short period, it is called Temporary Overdraft. ONE Bank does not practice TOD.

Clean Over Draft (COD)

Sometimes Overdrafts are allowed with no other security except the personal guarantee of the borrowers. These types of overdrafts are called Clean Over Draft. ONE Bank also does not practice COD

Secured Over Draft (SOD)

It is a continuous advance facility. When Overdrafts are allowed against securities they are called Secured Overdrafts. Overdrafts are generally granted to contractors & supplies for carrying on construction works and supply orders and to businessmen for expansion of their business. SOD is generally allowed against securities of fixed & term deposits shares/debentures, PSP, Insurance Policy, real estates, etc: depending on the nature & purpose of advance. By this agreement, the banker allows his customer to overdraft his current account up to his credit limits sanctioned by the bank. The interest is charged on the amount, which he withdraws, not on the sanctioned amount.

Cash Credit

Cash Credit is allowed to the businessmen, traders and industrialists etc. for meeting their working capital requirements. Cash Credit is always allowed against hypothecation or pledge of goods.

Hence, Cash Credits are of two types:

a) Cash Credit (Hypothecation)

b) Cash Credit (Pledge).

Cash Credit (Hypothecation)

Cash Credit allowed against hypothecation of goods is known as Cash Credit (Hypo) limit. In cash of hypothecation, the borrower retains the ownership & possession of goods on which charge of the lending bank is created. Hypothecation is a legal transaction whereby goods are made available to the lending banker as security for a debt without transferring either the property in the goods or either possession. The banker has only equitable charge on stocks, which practically means nothing. Since the goods always remain in the physical possession of the borrower, there is much risk to the bank. So, it is granted to parties of undoubted means with the highest integrity.

The documents which cerate charges of the lending Bank on the hypothecated goods is called letter of hypothecation. By signing this letter hypothecation, the borrower binds himself to give possession of the hypothecated goods to the lending Bank when called upon to do so. As the hypothecated goods remain under the possession of the borrower, such advance is more or less clean.

As such, the banker should take the following precaution:

The Banker should carefully verify the stocks of hypothecated goods and their market price.

Periodical statement of stock duly signed by the borrower should be obtained.

Stocks should be duly insured against fire, burglary.

Banker should try to obtain sufficient collateral security.

The borrower should be trustworthy & prudent customer.

The goods are readily saleable and have good demand in the market.

The price of the goods, offered as security, is to be calculated as per following principle. Purchase price or market price whichever is lower.

The prices of the goods are steady etc.

Cash Credit (Pledge)

Cash Credit allowed against pledge of goods known as Cash Credit (Pledge) limit. In cash of Cash Credit (Pledge) limit, the borrower pledges his goods to the Banker as Security against the credit facility; Pledge has been defined as “a bailment of goods as security for payment of a debt or performance of a promise”. The ownership of the pledged goods remains with the pledge.

Banks retain the effective control of the pledged goods. Pledged goods may be stored in a go down of the borrower but under lock and key of the bank. Bank’s guards are posted round the clock to protect the Godown. Sometimes, pledge goods are stored in Bank’s Godown. Bank makes delivery of the pledged goods to the party against payment.

Following points should be taken into consideration when allowing Cash Credit (Pledge) limit:

The quantity of the goods is ascertained.

The goods are readily saleable and have a constant & effective demand in the market.

The quality of the goods is ensured. The goods are not perishable and will not deteriorate in quality as a result of long short duration storage.

Goods are stored in such a Godown where they will not be deteriorated.

Guard them against risks of pilferage.

The borrower has as absolute title to the goods.

The prices of goods should be steady and are not subject to violent changes.

The valuation of the goods should be made very carefully. Ex: mill price/purchase price/market price/whole sale price “whichever is lower” is the general principal for assessing the valuation of the goods.

The goods should be stored in the presence of a responsible bank official.

The goods are insured against all risks, such as fire, theft etc. and the insurance policy bears “Bank Mortgage Clause”.

The stock report is obtained duly signed by the borrower.

Stocks must be inspected regularly by the Branch-in-charge.

Stock cards are indicating the quantity of stocks, their value and rate is placed in the go down.

The locks of the go down are sealed and keys are deposited in the branch

Charge documents to be obtained (in Loan, OD, and Cash Credit)

D.P. Note. (ii) DP Note Delivery Letter.

Letter of Disbursement (In case of loan)

Letter of Arrangement

Letter of Continuity (for OD & CC)

Letter of Hypothecation for Cash Credit (Hypo)

Letter of Pledge for Cash Credit (Pledge)

Letter OF Partnership along with Registered Partnership Deed and personal guarantees from the partners in case of Partnership Account.

Resolution along with Memorandum & Articles of Association and the personal Guarantees from the Directors in case of Limited Co.

Other documents to be obtained depending upon the nature of securities offered.

Any other document as per rule or the competent authority desires.

Term Loan

These are the loans sanctioned for repayment in period more than one year.

This type of loan is again sub-divided as follows in consideration of sector of finance:

a) Term loan- industrial

These are the term loans awarded to the large industrial concerns. This facility is usually provided to set up a new industrial project or to modernize and restructure an existing one. Since the time frame of this type of lending do not correspond to the duration of bank’s prime source of funding, generally bank predetermines the optimum extent of global exposure in this sector. As such, consideration of bank’s existing policies and positions in this sector are of great importance in considering a credit request in this sector.

b) Term loan- Cottage industries

These are the term loans made to other than industrial concerns, specially the small and cottage industries. It this case also, a through analysis is required.

c) Term loan- Agriculture

These are the term loans made to the agricultural sector, especially to the primary producers and agricultural input traders and fertilizer dealers.

Import finance

Banks also undertakes import finance both in the form of pre-import and post-import finance. Since in pre-import finance bank’s is not involved, it is not included in the total loans and advances position of the bank and conversely as bank’s fund is involved in post-import finance, the same is included in the over all loans and advances position of the bank.

These two categories of import finances include:

i) Letter of credit (L/C)

This is a pre-import finance, which is made in the form of commitment on behalf of the client to pay an agreed sum of money to the beneficiary of the L/C upon fulfillment of terms and conditions of the credit. Thus at this stage bank does not directly assume any liability, as such the same is termed as contingent liability. For this type of facility credit worthiness of both the importer and supplier, estimation of total landed cost as well as selling price of the merchandise, ready marketability of the merchandise etc. are of great importance. In granting this type of credit it shall be invariably decided whether the client will require any post import finance and if so same shall be ascertained and decided beforehand.

Financing of commercial imports under this category demands credit personnel’s through knowledge about the marketing aspects of the commodity specially evaluated in terms of its demand, domestic as well as county’s import situation of the same.

Besides the anticipated demand-supply situation, another thing should be evaluated, which is, at the estimated date(s) the imported merchandise is expected to reach the market for sale.

For L/Cs usually bank retains margin in respect of value of the credit and the same is fixed depending on the banker- customer relationship as well as the nature of item. Usually 100% margin is retained in cash of importation of perishable items.

ii) Loan against trust receipt (LTR)

This is also a post- import finance facility awarded to retire import bills directly or under PAD as the case may be. In this case, bank may or may not realize margin on the total lender cost, ending upon banker customer relationship. However, in this category of finance possession of the goods remains with the borrower and the borrower executes’ letter of trust receipt’ in acknowledgement of debt and its repayment along with interest within agreed period in acknowledgement of debt and its repayment along with interest within agreed period of time.

Since goods are held in trust, any misappropriation of the same will entail the borrower to be liable for initiating ‘criminal’ charge against him.

iii) L I M (Loan against Imported Merchandise)

Advances allowed for retirement of shipping documents and release of goods imported through L/C taking effective control over the goods by pledge fall under this type of advance. When the importer failed to pay the amount payable to the exporter against import L/C, then ONE Bank gives loan against imported merchandise to the importer. The importer will bear all the expenses i.e. the Godown charge, insurance fees, etc. and the ownership of the goods is retain to the bank. This is also a temporary advance connected with import, which is known as post import finance. L I M is not performed by ONE Bank.

Export Finance

Like importing trade, DBL advances in export trade at both pre and posting shipment stages. In this type of advance, standing of both opener and beneficiary of export L/C as well as standing of the L/C issuing bank etc. is of important consideration. The terms of export L/C are examined very carefully so as to ascertain the terms of the finance.

The pre-shipment facilities are usually required to finance the costs to execute export orders, such as: processing and processing of raw materials, packaging and transportation, payment of various fees and charges insurance premium etc. While post-shipment facilities are directed to finance exporter’s various requirements that are required to be settled immediately on the back drop that usually, settlement of export proceeds takes some time to complete. The facilities under both the categories are:

i) Back to Back letter of credit (BBL/C)

BBL/ C is a type of pre-shipment finance by way of opening L/C in favor of a local or foreign supplier for purchase of raw materials or the finished merchandise, as the case may be, to execute export order. This type of L/C is only opened on the strength of an export order received by way of an L/C or firm contract with or without realization of case margin or collateral security depending upon banker-customer relationship.

Since for opening BBL/C, no fund of the bank is immediately involved, the same is not included in the total loans and advances position of the bank. This type of credit is usually opened on identical terms of the export L/C are retired from the export proceeds of the relevant exports usually within 180 days from the date of credit.

In awarding this type of facility particular care shall be taken to see that there remains adequate time to process the raw materials / intermediary or finished products imported under BBL/C to execute the work order.

ii) Packing Credit (PC)

To execute export orders under L/C or firm contract the bank awards packing credit facility to meet client’s working capital requirement. In this case also bank may or may not retain collateral security depending upon banker -customer relationship. The facility is to be adjusted, usually, within 180 days from the date of disbursement from the relevant export proceeds.

iii) Foreign Document Bills Purchased (FDBP)

This is a post-shipment finance allowed to the customer through the purchase/negotiation of foreign documentary bills adjustable from the relevant export proceeds. This type of finance made out to purchase foreign clean bills such as foreign currency draft, cheque etc. Bills that are drawn as per the L/C terms accompanied by all the required documents shall only be taken consideration. No discrepant bills are purchased.

The facility is generally allowed to a very well known client with good standing save in the case of encashment of Traveler’s chares.

Usually commission and other charges are realized on FBP and no interest is charged.

iv) Inland documentary bills purchased (IDBP)

This facility is accommodated both for export and local trade. The payments made by negotiation/purchase of documentary bills against sale of goods to local export oriented industries which are deemed as exports and which are denominated in local or foreign currency are included in this category. Besides local documentary bills purchased in respect of sale to a local purchaser is also included in this category of financing. Bills that are drawn as per the L/C terms accompanied by all the required documents shall only be taken into consideration. No discrepant bills are purchased.

Commercial Lending

For providing finance for commercial purposes, apart from borrower’s stake at the proposal his creditworthiness, resourcefulness etc. are thoroughly determined. An extensive analysis is made to ascertain different aspects of the proposed credit such as: borrower’s experience, managerial ability, that the proposed route/purpose has adequate room for the proposed entrant etc. In this type also the repayment period and terms including development period should reflect the reality of the finance.

Mainly the jute traders and other commercial business organizations take this type of loans.

Consumer credit Schemes

This type of facility is extended to finance purchase of consumer durables, usually at a certain margin. In this sector also bank usually have a set level of warranted global exposure. This scheme is aimed to attract consumers from the middle & upper middle class population with limited income. The borrower should have an account (SB or CD) with the bank. Minimum 25% of the purchase cost of the product is to be deposited by the borrower with the bank as equity before the disbursement of the loan. The rest 75% is to be kept as cash collateral (FDR, Sancheypatra etc.) with the bank. The purchased items are hypothecated with the bank. The disbursement of the loan is effected by debiting time loan / term loan account to be opened in the name of the borrower. Loan amount is disbursed through A/C payee pay order / Demand Draft directly to the seller after submission of the indent, deposit of client equity & completion of documentation formalities. The bank obtains post dated A/C payee checks drawn in favor of the bank for the monthly installments covering the lending period from the borrower & the loan amount is adjusted on the due date of installments.

Officials of government, semi- government, autonomous, semi-autonomous, reputed multinational corporations, locally reputed private organizations, banks and other financial institutions etc. are eligible to avail the facilities under the scheme. However in extending credit, the approving authority should exercise the discretion very creatively so as to assure proper monitoring and repayment. The standing of the organization the official belongs to, be of great importance in extending credit under the scheme.

House building loan

These loans are alternative of term loan and are the loans made to finance those who require house-building loans for both commercial and non-commercial purposes. Being a variant of term loan, in this cash too, banks usually have predetermined optimum exposure level, which shall always be kept in mind in considering financing under this category. Besides borrower’s standing is thoroughly checked and only fairly cleared clients are entertained.

House building finance for commercial purposes shall ideally be liquidated, within the time frame of repayment, through the income to be generated from the project. However, client’s resourcefulness is of paramount importance, the sector being highly sensitive to economic shocks.

Entire location, nature of the property whether freehold or lease hold (if lease hold, conditions of lease as well as confirmation of up to date payment of installment etc. shall be considered), estimated cost vis-à-vis borrower’s stake, suitability of building’s proposed use, duly passed plan/clearance from the competent authority etc. Like industrial term loan, the repayment schedule and moratorium carry a great weight in this type of finance. These types of loans are again sub-divided into two categories in respect of the borrower’s identity:

Transport loan

This type of loan is made to facilitate purchase of all types such as: road transports, watercrafts, aircrafts etc. However, commonly financed transports are road transports. Only brand-new and 100% reconditioned transports are eligible for financing. In cash of importation of the vehicle total borrowed cost is to be calculated and retirement arrangements shall be determined before hand. This category of finance may be of short term or long term depending upon the nature of particular advance. Nevertheless, in this sector also, bank usually has a predetermined global level of stake to be under taken.

Working Capital

Loans allowed to the manufacturing units to meet their working capital requirement, irrespective of their size big, medium or large, fall under the category. But the main applicants of this type of loan are the jute industries.

Inland bills purchased (IBP) / discounted (IBD)

This type of finance is used to purchase/discount local clean bills such as local currency drafts, cheque, trade bills etc. Again this type of facility is generally to a very well known client with good standing. The prime concern in this type of advance is client’s integrity and resourcefulness. Unless the bank is satisfied that the borrower will liquidate the liabilities with interest from his own resources in the event of dishonor of the bill, the facility should not be awarded.

Usually trade bills are discounted which are interest bearing. In case of discounting of such bill interest is first computed on the principal amount of the bill and than discount is computed on the amount resulting from the principal amount of the bill plus interest.

For IBP generally commission, charges etc. are realized and for IBD bank collects discounts at a prescribed rate to reimburse them to cover the cost of fund. In both the cases suitable collection charges are recovered.

Staff loan

The employees of the bank get a special credit facility along with the house-building loan and it is the car loan. They can borrow money from the Bank in a low interest rate and buy automobiles.

Selection Process of borrower

Selection of borrower is vitally important step for sanction loan. Due to lack of information and moral hazard, banks have to suffer a lot for the classified loans and advances. If the selection of borrower is correct, that is, the borrower is of good character, capital and capacity or of reliability, resourceful and responsible the bank can easily get the return from the lending.

Consequently, monitoring is making much easier for the banker. From this point of view, ONE Bank Ltd. follows the following procedures:

A. Studying past track record

After getting an application for a loan, an OBL Official studies the past track record of the applicant. Generally the study includes:

Account balances and the past transactions;

Credit report from other banks;

Information of the Industry by studying market feasibility;

Financial statements (balance sheet, cash flow statement, and income statement).

B. Report from Bangladesh bank

Report from Credit Information Bureau (CIB) of Bangladesh Bank is need.

C. Borrower analysis

Borrower analysis is done from the angle of 4-C (character, capital, capacity, and collateral), 3-R (reliability, resourcefulness, responsibility) and purpose. It follows that the bank forms a rational judgment about the integrity of the borrower, which should be undoubted. The human skill, conceptual skill, operational skill is qualitatively analyzed.

D. Business analysis

Business analysis is done from two angles-terms, conditions, and collateral securities.

Procedure for giving Advance

The General Advances Department of ONE Bank Satkhira Branch usually follows the below-mentioned procedures and steps for sanctioning any kind of advances as available with the branch:

First, step The prospective borrower has to apply to ONE Bank for loan by filling up of a specific Application form. The Application form (Request for Credit Limit) contains following particulars –

a) Name of the Applicant

Firm/company

b) Address:

i) Present

ii) Permanent

iii) Factory/Show Room

c) Nature of A/C and No

d) Telephone/Fax No

i) Office

ii) Resident

iii) Factory / Show Room

e) Particular of Proprietor’s/partners’/directors’ name, Father’s/Husband’s/

Mother’s Name, permanent Address, age, Designation.

f) Nature of Business/Industry

g) Date of Establishment/ Incorporation

h) Nature and Amount of Limit

i) Purpose

j) Period

k) Mode of Repayment

l) Trade license number, date and expiry date (Photocopy of trade license enclosed)

Securities

Value of Stock of Pledge/Hypo —– Tk.

Value of Work Order ——————Tk.

Value of Construction/Purchase (For HBL /Transport loan)

Financial Obligation (FO) in the form of FDR/ Sanchay Patra)

Margin

Collateral

Area of land

Name and address of the owner of the property with father/husband and mother’s name.

Valuation of the property by any professional value.

Name and address of the guarantor with father’s/husband’s/mother’s name:

i) Present address

i) Permanent address

ii) Telephone number

Second step

After receiving the loan application forms, Satkhira Br. Sends a letter to Bangladesh Bank for obtaining a report from there. This report is called CIB (Credit Information Bureau) Report. The purpose of this report is to being informed that whether the borrower has taken loan from any other bank or not if ‘yes’, then whether these loans are classified or not.

CIB report contains the following contents:

a) Name of the Borrower

b) Fathers name

c) Permanent address

d) City

e) Sector code

f) Nature of ownership

Third step

After receiving CIB report if the Bank thinks that the prospective borrower will be a good borrower, then the bank will scrutinize the documents. In this stage, the branch will look whether the documents are properly filled up and signed.

Fourth step

Then comes processing stage. In this stage, the Bank will prepare a proposal. A proposal contains following relevant information:

Branch Manager has to give attention to the following matters:

The interest rate of the loan must not be less than 15.5% and

The borrower must maintain 20% margin based on banker’s customer’s relationship.

Except this case, the branch has to send the proposal to the Head Office. Head Office will prepare a minute and submit it before the Executive Committee (EC). The minute has to be passed by EC.

Fifth step

After getting the approval of Bangladesh Bank, it will again come to the Head Office. After the sanction advice, Bank will collect necessary documents (Charge documents). These documents are:

Joint Promissory Note

Single Promissory Note

Letter of Undertaking

Loan Disbursement Letter

Debit Figure Confirmation Sheet

Letter of Continuity

Letter of Authority

Letter of Revival

Right of Recall the Loan

Letter of Indemnity

Trust Receipt

Hypothecation of Goods

Hypothecation of Vehicles

Counter Guarantee

Letter of Lien

Letter of Lien in case of advance against FDR

Letter of Lien And Authority for advances to third parties against Fixed Deposit/ Call Deposit/ Special Deposit or margin or margin deposits

Letter of Authority to Ancash FDR

Letter of Agreement for Packing Credit

Letter of Guarantee for opening L/C

Charges over Bonds or Certificates or Shares etc. by third person, firm or company to secure specific and general liability

Memorandum of Deposit of Title Deeds

Hypothecation of goods to secure a Demand Cash Credit or Overdraft/ Loan amount

Guarantee by Third party.

Sixth step

Documents and documentation

Documentation is a very important aspect of loans and advances. It may be described as the process or technique of obtaining the relevant documents/papers for securing advances. A banker must obtain proper documents to be executed by the borrower to protect the Bank’s interest. Moreover, when money is lent against security of some assets, the document must be got executed in order to give to the banker a legal and binding charge against those assets. The documents for loans and advances can be classified into the two categories namely charge documents and security documents. Charge Documents are a set of printed and prescribed forms, which are executed by the borrowers to protect Bank’s interest while bank is providing loan/advances. Different types of advances are allowed to the customers against different types of securities.

Charge documents as required by the different types of advances are mentioned bellow:

A) Loan (General)

D P NOTE signed on revenue stamp;

Letter of arrangement;

Letter of disbursement;

Letter of partnership (partnership farm) or Board of resolution (limited companies)

Letter of pledge;

Letter of hypothecation;

Letter of lien and ownership / share transfer form (in case of advance against share);

Letter of lien for packing credit;

Letter of lien (in case of advance against F D R);

Letter of lien and transfer authority. (In case of advance against FDR, B S P);

Legal documents for mortgage of property (As draft by legal adviser);

Copy of sanction letter mentioning details of terms and condition duly acknowledge by the borrower;

Trust receipt;

B) Overdrafts

D P Note.

Letter of partnership

Letter of arrangement.

Letter of continuity

Letter of lien

Letter of lien and ownership /share transfer form (in case of advance against share)

Letter of lien and transfer authority

Legal documents for mortgage of property

C) Cash Credit (Pledge)

Letter of pledge;

Letter of authority empowering the bank to deduct/realize godown, staff salary and other incidental expenses for inspection, maintenance of the goods etc;

Letter of declaration handing over the possession of goods stored/ to be stored in the godown against the facility;

Letter of Disclaimer in case of Hired godown signed by the owner of the godown.

Sufficient insurance cover inserting the name of the Bank as mortgage with bank mortgage clause.

Invoice /cost memo of the goods pledged;

Stock report duly signed by the borrower;

D) Cash credit (Hypothecation)

Letter of hypothecation;

Letter of authority empowering the bank to inspect the goods and take possession of the goods in case of duly drafted by the lawyer of the bank.;

Stock report duly signed by the borrower on fortnightly basis or after every deposit in the loan account or before realizing fund against limit;

Letter of declaration duly signed by the party clearly stating that the goods hypothecated are not in any case encumbered elsewhere;

Sufficient insurance cover inserting the name of the Bank as mortgage with bank mortgage clause;

Letter of Disclaimer signed by owner of the godown in case of 3^rd party godown. Third party Guarantee if required as per sanction advice;

Statements of other immovable property of the borrower stating those are not encumbered

E) Mortgage

Mortgage is the ‘’transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, existing or future debt or the performance of an engagement which may give rise to a pecuniary liability”. In this case the mortgagor dose not transfer the ownership of the specific immovable property to the mortgagee only transfers some of his rights as an owner. The banker exercises the equitable mortgage.

Equitable mortgage

Certificate from pourosava authority that the concerned property is situated within pourasava area;

Original title deed of property;

Memorandum of title deed of property;

Registered irrevocable power of attorney duly drafted by bank’s lawyer and executed by the owner of the property;

Latest CS, RS, SA, parcha together with latest receipt showing payment of land, tax wasa , gas, electric bills etc.

Bia-deeds/ parcha showing chain of transfer of title

Non-encumbrance certificate by Engineer and branch manager. Forced sale value is acceptable;

Lawyer’s certificate regarding genuineness of title on the property of the mortgage and stating in clear term weather the property can be accepted as security against advances to be allowed;

Letter of guarantee of the owner of the owner of the property in case of third party property;

Legal mortgage

Mortgage deed duly drafted by bank’s legal advisor and registered with competent authority duly stamped.

Original title deed of property;

Letter of guaranty in case of 3^rd party ‘s property;

Latest CS, RS, SA, parcha land revenue /tax payment, gas, wasa, electric bill payment;

Receipt, bia /chain deeds site map duly approved plan in case of building;

Non encumbrance certificate for last 12 years;

Valuation certificate (by engineer and branch manager forced sale value to be considered;

Lawyer’s certificate regarding valid title of the property and acceptability of the property, as security in clear terms .No vague opinion should be accepted.

Letter stating relation of the owner of the property with the borrower (in case of 3rd party property) (in case of rural property HOMESTEAD up to one standard bigha not acceptable).

F) Against transport

Hire-purchase agreement for hypothecation of the vehicle (STAMPED and duly NOTARISED);

Purchased documents;

Registration of the vehicle in the joint name of bank and borrower (copy of the blue book to be retained in the branch);

Road permits jointly in the name of bank and borrower;

Insurance cover against all possible perils inserting name of bank as Mortgage with bank mortgage clause;

Certificate signed by the borrower that he has received the vehicle in good condition and that he will exercise due care for maintenance of the vehicle;

Letter of installment;

Undertaking by the party that he will keep the vehicle always ready for inspection by bank officials;

Bank’s name must be written in the body of the vehicle in BOLD LETTERS;

G) Bills Purchased

DP Note;

Letter of partnership. (In case of partnership farm) or Board of resolution (in case of limited company);

Letter of arrangement;

Letter of acceptance, where it calls for acceptance by the drawee;

Letter of hypothecation of bill;

Seventh step

For withdrawing the loan amount, the customer creates a CD account and the loan is transferred to the CD A/C. Afterwards, the customer can withdraw the money.

Eighth step

Credit disbursement

After verifying all the documents, the branch disburses the loan to the borrower. The loan officer disburses the loan to the borrower’s loan account .A “Loan Repayment Schedule” is also prepared by the branch and is given to borrower.

Ninth step

After the disbursement of the loan the bank follows the borrower in the following manner

Constant supervision.

Working Capital assessment.

Stock report.

Break Even analysis

Rescheduling of repayment.

Tenth step

The loans are repaid in installment. This installment is according to bank directives. Some loans are repaid all at a time. If any loan is not repaid then notices are served to the customer. Sometimes legal actions are also taken for recover the loan.

Classification of loans and advances

Loans may be classified in three categories

1) Substandard

2) Doubtful

3) Bad and loss

After six month loan become Substandard, after 12 month loan becomes doubtful, after 24 month loan becomes bad and loss

Criteria for Classification

1) Over due period

2) Required payment

3) Legal action

4) Limit over drawn

5) Qualitative judgment

1) Over due period:

If the gap between expiry date and reference date is over 5 month then the mode of classification will e substandard, if over 11 month then it will be doubtful, if over 23 month then mode will pad and loss

2) Required payment

Either the time period 6 month or the gap between reference date and Expiry date the closest one is chosen. The credit summation for a certain time period (say 3 month) is worked out and is converted into one year time period. If this worked outbalance is higher the Highest debit balance then the loans unclassified and if it is lower than the highest debit balance then the loan is said to be classified.

Legal action

The classified is considered on the basis of illegal transaction

3) Limited over drawn:

When the borrower with draws money from his loan A/C and the withdrawn amount exceeds the actual sum granted, then loan becomes classified. In this case 45 days are considered for repayment and after 45 days. The loan becomes classified.

4) Qualitative judgment:

The classification decision is taken on the basis of the qualitative nature of the loan.

Bank Guarantee

Bank Guarantee is the best way to earn profit without any cost. The exporter pays the payment of the imported goods on behalf of the importer through a bank guarantee. If the importer fails to make the fulfill payment at the moment the bank will remain liable to the exporter until and unless the importer pays the money of the imported goods.

Types of Guarantee

ONE Bank offers three types of Guarantee, which are as follows:

1) Tender or Bid Bond Guarantee

The tender guarantee assures the tender that tenders shall uphold the conditions of his tender during the period of the offer as binding and that he /she will also sign the contract in the event of the order being granted.

2) Performance guarantee (PG)

A Performance guarantee expires on completion of the delivery or performance. Beneficiary finds that as a guarantee, the contract will be fulfilled in every respect and can retain the guarantee as per provision for long time. Including a clause stating that the supplier can claim under the guarantee, by presenting an acceptance certificate signed by the buyer can counteract this.

3) Advanced payment guarantee (APG)

This type of guarantee is given against work order. This idea can be made clear with the help of an example. Before the beginning of Jamuna Bridge construction, the Government collected money from different sources to pay the contractors in advance. But, there was a risk for the Government that the contractors might not do there construction work even they were paid in advance. So, the Government asked Bank Guarantee from them. Then the contractors submitted Bank Guarantee to the Government. This type of Guarantee is called Advanced Payment Guarantee.

Issuance Procedure of Guarantee

Bank guarantee is a contractual relationship between the account (client) and the beneficiary. For issuing Bank Guarantee, a customer has to apply to NCCBL in his or her own pad. Normally the bank prepares the format of the guarantee.

The proposal for Bank Guarantee contains the following particulars:

Name of the Borrower with address

Nature of Facility

Extent of Facility

Purpose

Security

Margin

Commission

Validity

Beneficiary

Liability position of the Borrower

Nature of Facility