An Insight into The Credit Operation of Premier Bank Limited

RAB 8 Barisal

Chapter – 1: Introduction

 

A Bank not only accepts money or deposits, but it also lends money and creates its own credit, Crowther has defined a bank as “a dealer in debts- his own and of other people.” Sawyers states, “We can define a bank as an institution whose debts (bank deposits) are widely accepted in settlement of other peoples debts to each other”.

 

CREDIT is an extremely important function of the bank. Credit is a facility offered by the bank, for a certain purpose–, borrowing for a certain period of time. The principal repayment of credit is outlined at the onset. This involves repayment of certain interest, fees or charges. This may require certain margin coverage or be at nil margins. This may also require certain security or be at nil security and finally may comprise certain terms and conditions.

Credit Management is the primary financial operation in the banking system. During the last couple of years, the management of credit has experienced some crucial changes with the enactment of some important rules, regulation and laws like Artho Rin Adalat, Money laundering prevention act, Registration act, etc. further the most important guidelines on “Managing Core Credit Operation in Banking” developed by the focus group under the auspices of Bangladesh bank already implemented within the given deadline, have made new dimension in the whole banking arena. Following implementation of guidelines on credit operation, entire credit management has been streamlined with maintaining separate demarcation among the department under credit operation management.

Scope of the Report

Credit operation held in the financial Institutions is much talked about the issue in the recent literature on economic development. This area is a vast one for any study especially for the aspect of credit management on banking sectors inBangladesh. The study would focus on the following areas:

  • The study is limited to only one Bank- the Premier Bank Limited, which finances the different sectors for helping the economic development inBangladesh.
  • A short insight into the portfolio management of Premier Bank Limited for providing Credit.
  • An insight into the overall credit administration of the Premier Bank Limited.

Objectives

The study has been undertaken with the following objectives:

To analysis the pros and cons of the conventional ideas about credit operation of a Bank.

To have better orientation on credit management activities specially credit policy and practices, credit appraisal, credit-processing steps, credit management, financing in various sector and recovery, loan classification method and practices of Premier Bank Limited (PBL).

To compare the existing credit policy of Premier bank limited with that of best practices guideline given by Bangladesh Bank, the central bank of Bangladesh.
To get an overall idea about the performance of Premier Bank Ltd.

To fulfill the requirement of the internship program under MBA program

Methodology

 Sources of Data:

The nature of this report is descriptive, so instead of doing any survey or using sampling method, observation method is used to complete this qualitative research. Most of the necessary information has been collected by face to face interview with the employees working in this department, personal investigation with bankers, and maintaining daily diary which contains all the activities that has been observed in the bank.

The study is based on both primary and secondary sources of information. Interviewing the managers and officers of the bank, talking to the customers has provided the primary sources of information. Furthermore, different publications of the bank, annual reports, and the bank website were the secondary sources of data.

 Primary Sources:

Guidelines and suggestions, information circular from Premier Bank limited.

Interviewing with the bank officials, specially the principal officer of’ Credit of Premier Bank Ltd, Mohakhali Branch.

PERSONAL Experience gained by visiting different desk.
Secondary Sources:

Annual report of Premier Bank Ltd.

Published Booklet of Premier Bank Ltd.

Various published documents of other competing banks.

Different “Procedure Manual” published by Premier Bank Ltd.

Publications of Newspaper

Methods of Collecting Data:

 For the purpose of the study two methods of techniques used:

a)                  Observation

b)                  Interview

Tools of Analysis:

Pie chart

Bar Diagram

Line Diagram

Limitations of the Study:

I have tried my best to provide with all necessary information about Premier Bank Limited (Mohakhali Br.) supplied by the manager’s and employees best abilities; but due to the exhaustive nature of this study most secret & strategic ethics could not be brought in this study. As having the status of an empirical study, this research is subject to following limitations:

Time was a major limiting factor while preparing the study. The study had to be prepared in 45days of my Internship period.

There were scarcity of written documents about the facilities and other related things.

A worthwhile study requires the analysis of as much data as possible covering various aspects of the study. But I did not have easy access to the various types of information about Credit Mgt. of whole Premier Bank limited rather than the respective branch only. So, I had to accomplish my study only based on the information of Mohakhali Branch of Premier Bank Limited where I was assigned as an internee of my MBA program.

Some of the data for statement preparation were not available in the computer-records of their standard practices and therefore it was difficult to draw inferences and had to execute manually.

Much information couldn’t be gathered for the reason of confidentiality. The study was limited to the Premier Bank Ltd and paper documents.

 

Chapter-2: Theoretical Development

 

 Theoretical Development

 

The basic objectives of this chapter is to define and focus on different kinds of credit, credit related documents, credit appraisal systems, principles, different kinds of collaterals and loans, overdrafts liens , hypothecation etc.

 

Credit:

 

The word credit is derived from the Latin word “credo” which means “I believe” and is usually defined as the ability to buy with a promise to pay. It consists of actual transfer and delivery of goods and services in exchange for a promise to pay in future. It is simply the opposite of debt. Diversification of banking service has accelerated the use of credit in the expansion of business operation. It is a fundamental precept of banking everywhere that advances are made to customers in reliance on his promise to pay rather than the security held by the banker.

[Reference: L.R. Chowdrury, “Credit Investigation”, National Bank Training Institute]

Types of Credit

Credit may be classified with reference to elements of time, nature of financing and provision base.

Classification on the basis of time: 

On the basis of elements of time, bank credit may be classified into three heads, viz.

Continuous loans:

These are the advances having no fixed repayment schedule but have a date at which it is renewable on satisfactory performance of the clients. Continuous loan mainly includes “Cash credit both hypothecation and pledge” and “Overdraft”.

Demand loan: In opening letter of credit (L/C), the clients have to provide the full L/C amount in foreign exchange to the bank. To purchase this foreign exchange, bank extends demand loan to the clients at stipulated margin. No specific repayment date is fixed. However, as soon as the L/C documents arrive, the bank requests the clients to adjust their loan and to retire the L/C documents. Demand loans mainly include “Payment against Documents,” “Loan against imported merchandise (LIM)” and “Later of Trust Receipt”.

Term loans: These are the advances made by the bank with a fixed repayment schedule. Terms loans mainly include “Consumer credit scheme”, “Lease finance”,” Hire purchase”, and “Staff loan”. The term loans are defined as follows:

 

• Short term loan: Up to 12 months.

• Medium term loan: More than 12 months & up to 36 months

• Long term loan: More than 36 month

Classification on characteristics of financing:

                                    Table: 1

        Funded            Non-funded
       Overdraft      Letter of Credit
       Loan      Consumer Credit      Bank Guarantee
     LTR
     PAD
     Cash Credit (Pledge &  Hypo)
     Soft loan
     Term Loan
      Packing

The varieties of credit used by Premier Bank Limited are briefly described below with the common terms and condition. Banks generally offer different kinds of credit facilities to the customers. The credit facilities of Premier Bank limited may be broadly classified into five categories. They are as follows:

Loans

Cash Credit

Overdraft

Bills purchased and discounted

Consumer Credit/ personal loan

They are discussed below accordingly.

 Loan: In case of loan the banker advances a lump sum for a certain period at an agreed rate of interest. The entire amount is paid on an occasion either in cash or by crediting in his current account, which he can draw at any time. The interest is charged for the full amount sanctioned whether he withdraws the money from his account or not. The loan may be repaid in installments or at expiry of a certain period. Loan may be demand loan or a term loan.

Eligibility: loans are normally allowed to those parties who have either fixed source of income or who desire to pay it in lum sum. Interest Rate: 14%-19% per annum

Cash Credit

In Cash credit, banker specifies a limit called the cash credit limit, for each customer, up to which the customer is permitted to borrow against the security of tangible assets or guarantees.  Cash credit is given through the cash credit account. The purpose of cash credit is to meet working capital need of traders, farmers and industrialists. Cash credit in true sense is against pledge of goods. Cash credit is also allowed against hypothecation of goods. In case of hypothecation the ownership and possession of the goods remain with the borrower. By virtue of the hypothecation agreement bank can take possession of the goods hypothecated, if the borrower defaults. Rate of Interest: 12%-14%.Renew System: it is renewed in periodic basis (yearly).

Overdraft

Overdraft is those drawings which are allowed by the banker in excess of the balance in the current account up to a specified amount for definite period as arranged for. These advances are secured The loan holder can freely draw money from this account up to the limit and can deposit money in the account off course, this loan has an expiry date after which renewal or enhancement is necessary for enjoying such facility.  Any deposit in the OD account is treated as repayment of loan. Interest is charged as balance outstanding on quarterly basis. Overdraft facilities are generally granted to businessmen for expansion of their business, against the securities of stock-in-trade, shares, debenture, Government promissory notes, fixed deposit, life insurance policies etc.

Principles of Credit:

A prudent Banker should always adhere to the following general principles of lending funds to his customers.

Background, Character and ability of the borrowers

Purpose of the facility,

Term of facility,

Safety,

Security,

Profitability,

Source of repayment,

Diversity.

 

Bank should never put “All its eggs in one basket”. It should be note that selection of appropriate borrowers proper follow-up and end-use supervision through constant close contact with the borrowers, are the corner stones for timely recovery of credit.

[Reference: Qureshi A A, “Higher Management in Banks”, 1st edition, The Pioneer Printing press Ltd, 1997]

Factors of Credit Policy:

 

Credit policy of all banks cannot be developed on same lines because of differences in their operational needs and resource structures. In designing a credit policy, considerations should be given to following:

v      Total deposit resources of the bank and rate of fluctuation of resources.

v      Deposit structure on tenurial basis and ownership.

v      Trend of growth in deposit and economic growth rate of the country.

v      Capital fund and other reserves. Large bank’s capital fund and secondary reserve in investment can permit its loan policy to be liberal in respect of its limit of lending in high risk-high returns loans while a relatively new small bank would stress more on liquid and highly secured loans at lower interest in its policy.

v      Capability of loan administration shall have to be given due weight in the credit policy. A large bank is able to hire numbers of highly skilled specialists/experts in different areas to advise the bank in loan making but smaller banks relying on usual credit managers cannot venture into sectors that require expert appraisal of loan applications and also that requires intensive post implementation monitoring of large and complex industrial loans.

v      Investment size of the bank and its nature.

[Reference: Qureshi A A, “Higher Management in Banks”, 1st edition, The Pioneer Printing press Ltd, 1997]

Credit Analysis:

When a customer requests a loan, bank officers analyse all available information to determine whether the loan meets the bank’s risk-return objectives. Credit analysis is essentially default risk analysis in which a loan officer attempts to evaluate a borrower’s ability and willingness to repay. The banker has to identify three distinct areas of commercial risk analysis related to the following questions:

1.   What risks are inherent in the operations of the business?

2.   What have managers done or failed to do in mitigating those risks?

3.   How can a lender structure and control its own risks in supplying funds?

The first question forces the banker to generate a list of factors that indicate what could harm a borrower’s ability to repay. The second recognizes that repayment is largely a function of decision made by a borrower. Is management aware of the important risks and has it responded? The last question forces the banker to specify how risks can be controlled so that bank can structure an acceptable loan agreement.

Therefore, Bankers look into key risk factors or Qualitative analysis which has been classified according to the five Cs of credit:

 

1. Character:

Character refers to the borrower’s honesty and trustworthiness. A banker must asses the borrower’s integrity and subsequent intent to repay. If there are any serious doubts, the loan should be rejected.

2.  Capital:

Capital refers to the borrower’s wealth position measured by financial soundness and market standing. It helps cushion loses and reduces the likelihood of bankruptcy.

 

3.  Capacity:

Capacity involves both borrower’s legal standing and management’s expertise in maintaining operations so the firm or individual can repay its debt obligations. Under capacity an individual must be able to generate income to repay the cash.

 

4. Condition:

A condition refers to the economic environment or industry specific supply, production and distribution factors influencing a firm’s operations. Repayment sources of cash often vary with the business cycle or consumer demand.

5. Collateral:

Collateral is the lender’s secondary source of repayment or security in the case of default. Having an asset that the bank can seize and liquidate when a borrower defaults reduces loss, but does not justify lending proceeds when the credit decision is originally made.

[Reference: S. Scott Macdonald, “Bank Management”, 4th Edition 2000]

Collateral:

Collateral is the lender’s secondary source of repayment or security in the case of default. Having an asset that the bank can seize and liquidate when a borrower defaults reduces loss, but does not justify lending proceeds when the credit decision is originally made.

Different Kinds of Collateral:

 

Secure loans have a pledge of some of the borrower’s property behind them (such as home or an automobile) as collateral that may have to be sold if the borrowers have no other way to repay the bank. Some of the most popular collaterals are:

1.   Account Receivable: The banks take a security in the form of a stated percentage of the borrower’s balance sheet. When the borrowers credit customers send in cash to retire their debts this cash payments are applied to the balance of borrowers loans. The bank may agree to lend more money as new receivable arise from the borrowers sells to its customers thus allowing the loan to continue as long as the borrower has need for credit and continuous to generate and adequate volume of sales

2.  Factoring:  Bank can purchase a borrowers account receivable based upon some percentage of the book value because the bank takes over the ownership of the receivable, it will inform the borrowers customers that hey should send their payments to the purchasing bank.

3.  Inventory: A bank will lend only a percentage of the estimated market value of a borrower’s inventory in order to leave a substantial cushion in case the inventories value begins to decline. The inventory pledged may be controlled completely by the borrower using a so-called floating line approach.

4.  Real Property:A bank may take a security interest in land and / or improvements on land own by the borrower and records its clime-a mortgage-with a government agency in order to define against successful claim by others.

5.  Personal Property:  Bank takes a security in jewellery, securities and other forms of personal property owned by a borrower.

  1. 6.    Personal Guarantees: A pledge of the stock deposits or other personal assets held by the major stock holders or owners of a company may be required as collateral to secured a business loan

[Peter. S. Rose, “Commercial Bank Management”, Fourth Edition 1999]

 

Characteristics of Good Collateral:

The following five items determine the suitability of items for use as collateral. The suitability depends in varying on standardization, durability, identification, marketability and stability of value.

 

Standardization:

The standardization leaves no ambiguity between the borrower and the lender as to the nature of the asset that is being used as collateral.

 

Durability:

Durability refers to the ability of the assets to withstand wear. or it can refer to its useful life. Durable goods make better collateral than non-durable.  Stated otherwise crushed rocks make better collateral than fresh flowers.

 

Identification:

Certain types of assets are readily identified because they have definite characteristics or serial numbers that cannot be removed. Two examples are a large office building and an automobile that can be identified y make, model and serial number.

 

Marketability:

In order for collateral to be of value to the bank, the collateral must be marketable. That is the borrower must be able to sell it. Specialized equipment is not as good as collateral as are dump trucks, which have multiple uses.

 

Stability of value:

Bankers prefer collateral whose market values are not likely to decline dramatically during the period of the loan such as common stock.

[Reference: Donald R. Fraser, “Commercial Banking”, 5th Edition 2002]

Lending Risk Analysis (LRA)

Lending Risk analysis (LRA) is simply a loan processing manual and has done when the amount of loan is above 1 core. By going through this manual the lending bankers can asses the creditworthiness of their prospective borrowers.

Therefore, LRA is such an instrument which is definitely and directly related with lending information to analyze the borrower’s financial, marketing, managerial and organizational aspects subjectively and objectively. It also facilitates the analyst to know the security risk of the credit.

 

Lending risk Analysis involves assessing the likelihood of repayment of loans to the bank as per agreement on the basis of analysis of certain risks. To analyze these risks bankers will need to fill-up a 16-page LRA form. The form leads to scoring various risk factors involved in lending. LRA has divided the various risks into two groups namely, Business Risk and Security Risk.

1) Business Risk:

Business Risk is concerned with whatever the borrowing company would fail to generate sufficient cash out of business to repay the loan Business Risk, the main component of lending risk, consists of the Industry Risk and the company Risk

A. Industry Risk:

Due to some external reasons a business may fail and the risk which arrives from external reasons of the business is called Industry Risk. It has two components:

i) Supplies Risk: 

When the business fails due to disruption in the supply of inputs, the consequent risk which would arise is known as Supply Risk

ii) Sales Risk:  

When the business fails for disruption in sales, this type of risk would generate.

B. Company Risk: 

Company Risk is shown for some internal reasons of the business. It has also two main components and four sub-components

i) Company position Risk:

Each and every company holds a position within an industry. This position is very much competitive. Due to weakness in the company’s position in its industry, a company may fail and the risk of failure is called Company Position Risk. It depends on-

(a) Performance Risk:

If a company fails to perform well enough to repay the loan because of its weakness under given expected external conditions, the company is said to suffer from performance risk.

(b) Resilience Risk: 

When a company fails due to lack of its resilience to unexpected external conditions, the resilience risk is generated.

ii) Management Risk:

If the management of a company fails to exploit the company’s position effectively, the company can fail and this risk of failure is called management Risk. It can be subdivided further-

(a) Management Competence Risk:

Management competence risk is the risk that the company fails because the management is incomplete

(b) Management Integrity Risk:

Management integrity risk is the risk that the company fails to repay its loan due to lack of management integrity.

A) Security Risk:

Security risk is the risk that the realized value of the security does not cover the exposure of loan. Exposure means principal plus outstanding interest. Security risk can be divided into two parts:

 

(a) Security Control Risk:

Security control Risk is the Risk that the bank fails to realize the security because of lack of bank’s control over the security offered by the borrowers.

 

(b) Security Cover Risk:

Security cover risk is the risk that the realized security value may not cover the full exposure of loans.

[Reference: MD. Saidur Rahman, “Implementation of Lending Risk Analysis (LRA) in lending operation of Banks”, Bangladesh Bank Porikrama, BIBM]

 

Loan Review:

 

In a bank the purpose of loan review is to minimize loan losses by reviewing outstanding loans in order to

1.   Identify potential problems with specific loans.

2.   Identify weaknesses in procedures or personnel in general

3. Quantify the repayment risk in the loan portfolio by estimating how much cash borrowers can generate under current market conditions from operations and collateral.

Performance & Rating of Banks  

Performance of the banking sector under CAMEL framework, which involves analysis, and evaluation of the five crucial dimensions of banking operations. The five indicators used in the rating system are:

(i) Capital adequacy,

(ii) Asset quality,

(iii) Management soundness,

(iv) Earnings,

(v) Liquidity

Performance indicators of the banking industry depict a trend similar to that of the state-owned banks, which is understandable due to their predominant market share. Ratings done on the basis of the various indicators indicate that financial performance of the PCBs and FCBs in general has been better than that of the industry average. Bangladesh Bank strengthened the supervision and monitoring of the scheduled banks since 1990. Reporting formats required for CAMELS rating of scheduled banks have been revised.

 

Chapter -3 :Administration of Credit

Credit Management in Premier Bank Limited (PBL)

In performing the review of the proposal, the credit analyst of the Premier Bank Limited amongst other things will study the financials, the management of the borrowing company, the credit standing of the borrower, the market economic conditions surrounding the type of business, and the financial guidelines imposed by the central bank. Credit management is a dynamic field where a certain standard of long-range planning is needed to allocate the fund in diverse field and to minimize the risk and maximizing the return on the invested fund. Continuous supervision, monitoring and follow-up are highly required for ensuring the timely repayment and minimizing the default. Actually the credit portfolio is not only constituted the banks asset structure but also a vital factor of the bank’s success. The overall success in credit management depends on the banks credit policy, portfolio of credit, monitoring, supervision and follow-up of the loan and advance.  Therefore, the credit analyst of PBL clearly outlines of the ‘purpose’ of the loan considerably. What is the business or commercial customer going to do with the borrowed money? Is the borrowing in line with the lending norms of the bank? What ‘sector of business activity’ is the fund going to be utilized in? The bank has a certain percentage of its funds allocated for lending to customers in different sectors of activity –for example, manufacturing of garments, textile, cement, construction, pharmaceuticals, food, dairy, aquaculture, agriculture, fertilizers, toiletries, industrial & household appliances, shipping, steel, etc.

Credit Policy of Premier Bank Limited

One of the most important ways, a bank can make sure that its loan meet organizational and regulatory standards and they are profitable is to establish a loan policy. Such a policy gives loan management a specific guideline in making individual loans decisions and in shaping the bank’s overall loan portfolio. In Premier Bank Limited there is a credit written policy.

Credit Principles

In the feature, credit principles include the general guidelines of providing credit by branch manager or credit officer. In Premier Bank Limited they follow the following guideline while giving loan and advance to the client.

Credit advancement shall focus on the development and enhancement of customer relationship. All credit extension must comply with the requirements of Bank’s Memorandum and Article of Association, Banking Company’s Act, Bangladesh Bank’s instructions, other rules and regulation as amended from time to time.

Loans and advances shall normally be financed from customer’s deposit and not out of temporary funds or borrowing from other banks. The bank shall provide suitable credit services for the markets in which it operates. It should be provided to those customers who can make best use of -them. The conduct and administration of the loan portfolio should contribute with in defined risk limitation for achievement of profitable growth and superior return on bank capital. Interest rate of various lending categories will depend on the level of risk and types of security offered.

Global Credit Portfolio limit of Premier Bank Limited

The features which deals with how much total deposits would be used as lending the proportion of long term lending, customer exposure, country exposure, proportion of unsecured facility etc. the most notable ones are:

The aggregate of all cash facility will not be more than the 80% of the customers deposit
Long term loan must not exceed 20% of the total loan portfolio. Facilities are not allowed for a period of more than 5 (Five) years. Credit facilities to any one customer group shall not normally exceed 15% of the capital fund or TK. 100 crores

Credit Ratification Authority of Premier Bank Limited

Credit decisions are heart of all credit works. Generally branch manager and the credit in-charge of a branch are held responsible for appraising of a loan proposal. The customer request for credit limit and the credit officer prepares a credit memo and send it to the head office, credit division. After taking all the relevant information from the branch the head office credit division sent the credit memo to the credit committee. Credit committee of Premier Bank limited is comprised of Managing Director and other top-level executives, that is, DMDs and EVPs. If credit committee is convinced about the merit of the proposal then it is sent the broad of directors. The board is final authority to approve or decline a proposal. The whole process takes a month or more.  In Premier Bank Limited broad meeting occurs once in every week.

Credit Evaluation Principles followed by PBL

Some principles or standards of lending are maintained PBL in approving loans in order to keep credit risk to a minimum level as well as for successful banking business. The main principles of lending are given below:

Liquidity:

Liquidity means the availability of Bank funds on short notice. The liquidity of an advance means it repayment on demand on due date or after a short notice. Therefore, the banks must have to maintain sufficient liquidity to repay its depositors and trade off between the liquidity and profitability is must.

Safety:

Safety means the assurance of repayment of distributed loans. Bank is in business to make money but safety should never be sacrificed for profitability, to ensure the safety of loan. The borrower should be chosen carefully. He should be a person of good character & capacity as well as bank must have to maintain eligible number of security from borrower.

Profitability:

Banking is a business aiming at earning a good profit. The difference between the interest received on advances and the interest paid on deposit constitutes a major portion of the bank income, besides, foreign exchange business is also highly remunerative. The bank will not enter into a transaction unless a fair return from it is assured.

Intent:

Banks sanction loans for productive purpose. No advances will be made by bank for unproductive purposes though the borrower may be free from all risks.

Security:

The security offered for an advance is an insurance to fall bank upon incases of need. Security serves as a safety value for an unexpected emergency. Since risk factors are involved, security coverage has to be taken before a lending.

National interest:

Banking industry has significant roll to play in the economic development of a country. The bank would lend if the purpose of the advances can contribute more to the overall economic development of the country.

Pre-disbursement Compliance

When the credit proposal are approved the credit officer must have to be ensured that the disbursement of the credit facilities must comply with the directions written in the credit policy and circular made by time to time along with checking all the following terms and conditions.

The officer of Loan Administration must collect the acceptance of the customer’s of the terms and conditions on the duplicate copy of the sanctioned advice.

They will thoroughly examine and ensure that the subject credit facility does not contradict to any law, rules and regulation of the country, Bangladesh Bank and Deed of the Mortgage and power of the Attorney to be drafted and executed under the Supervision of the Bank’s Legal Advisor.

Lawyers certificate to the effect that all the legal formalities (Equitable/ Registered Mortgaged) has been properly created on the land and building in favor of the bank & bank has acquired the effective title of the property.

Registered power of attorney has been collected form the borrower (contractor) assigning the work order favoring the Premier Bank Limited and the power of attorney has been registered with the work order given agency and they have agreed that they will issue all the cheques favoring PBL.

Documentation of the Loan:

Documentation is obtaining such agreement where all the terms and condition and securities are written and signed by the borrower. It specifies rights and liabilities of both the banker and the borrower. In documentation each type of advances requires a different set of documents. It also differs with the nature of securities. The documents should be stamped according to the stamp Act. There are no hard and fast rules of documentation and it varies from bank to bank. Generally, the documents are taken in the case of a secured advance by Premier Bank limited:

  1. Demand promissory note: Here the borrower promises to pay the loan as and when demand by bank to repay the loan.
  2. Letter of arrangement.
  3. Letter of continuity.
  4. Letter of hypothecation of goods and capital machinery.
  5. Stock report: This report is used for OD and CC. In this report, information about the quality and quantity of goods hypothecated is furnished.
  6. Memorandum of deposit of title deed of property duly signed by the owners of the property with resolution of Board of Directors of the company owning the landed.
  7. Personal guarantee of the owners of the property.
  8. Guarantee of all the directors of the company.
  9. Resolution of the board of directors to borrow fund to execute documents and completes other formalities
  10. For filling charges with the register of joint stock companies under relevant section.
  11. Letter of Revival
  12. Letter of lien for advance against FDR

Security against Advances:

The different types of securities that may be offered to a banker are as follows:

(a) Immovable property

(b) Movable property: It includes the following –

Pratiraksha Sanchaya Patra, Bangladesh Sanchaya Patra, ICB unit certificate, wage earner development bond.

Fixed Deposit Receipt

Shares quoted in the Dhaka Stock Exchange and Chittagong Stock Exchange.

Pledge of goods

Hypothecation of goods, produce and machinery

Fixed assets of manufacturing unit.

Shipping documents.

 

Relation between Advances with the Security

Table: 2

Types of advance                                         Securities
Loans Lien or various kinds of Sanchaya patras, Govt. Securities, FDR, Collateral of immovable property, shares quoted in stock exchange
Overdraft Pledge or hypothecation of machinery, land and building on which machinery are installed, stock in trade, goods products and merchandise.
Bills purchased Bills itself

Modes of Charging Security:

A wide range of securities is offered to banks as coverage for loan. In order to make the securities available to banker, in case of default of customer, a charge should be created on the security. Creating charge means making it available as a cover for advance. The following modes of charging securities are applied in the Premier Bank Limited.

 

Lien

A lien is right of banker to hold the debtor’s property until the debt is discharged. Bank generally retains the assets in his own custody but sometimes these goods are in the hands of third party with lien marked. When it is in the hand of third party, the third party cannot discharge it without the permission of bank. Lien gives banker the right to retain the property not the right to sell. Permission from the appropriate court is necessary. Lien can be made on moveable goods only such as raw materials, finished goods, shares debentures etc.

 

Pledge

Pledge is also like lien but here bank enjoys more right. Bank can sell the property without the intervention of any court, incase of default on loan, But for such selling proper notice must be given to the debtor. To create pledge, physical transfer of goods to the bank is must.

Hypothecation

In this charge creation method physically the goods remained in the hand of debtor. But document

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