Lending Operation and Risk Management

1.   Define Term Loan
Term  loan  refers  to  asset  based  loan  payable  in  a  fixed  number  of  equal installments over the term of the loan, usually for 1 to 5 years. Term loans are generally provided as working capital for acquiring income producing assets like machinery, equipment, inventory that generate the cash flows for repayment of the loan. Banks have term-loan programs that can offer small businesses the cash they need to operate from month to month.
2.   Why the private commercial banks discourage to consider long term
    loans
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
3.   What is Working Capital Loan
A working capital loan is a loan used by an organization to cover day-to-day operational expenses. For example, a company is unable to generate the revenue to meet expenses incurred by day-to-day operations. In such case, company may apply for a working capital loan. A working capital loan covers only expenses incurred by existing capital, human resources, etc.
4.   Distinguish between working capital (W/C) and cash credit (CC) loan
 
Sl.
1

2

3

4

5
 
Working Capital Loan
It is taken for a certain period like 5 years
Repayment is made by Equal monthly installment basis
If the fund is required for purchase of capital assets, then the bank gives the working capital loan
The loan amount may pay at ones and repayment is made by monthly basis It may be secured by personal
guarantee or mortgage of any fixed asset
 
Cash Credit Loan
It is for one year and need to renewed every year
Repayment is made by only interest or any sum of amount
If the fund is required for meeting the working capital requirement, then the bank gives the CC limit
The payment and repayment is made by day basis
It may be  hypothecated and pledged by stock and receivables
 

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5.   Define Working Capital.
Working  capital  signifies  money  required  for  day-to-day  operations  of  an
organization. No business can run without the provision of adequate working
capital.
It has two types:
1) Gross working capital that refers to as working capital means the total current
assets;
2) Net working capital that the differences between current assets and current liabilities.

6.   Discuss the Significance/Importance of working capital for a firm.
Working capital is the life blood for running an organization. It is very essential to maintain smooth running of a business. The main significance or importances of working capital are as follows:
1. Supports as initial partial capital: The working capital can helps to adequate
    liquidity to developing a business.
2. Strengthen the Solvency: It helps to operate the smooth flow of production
    and business without any financial problem for making the payment of short-
    term liabilities.
3. Enhance the project growth: Sufficient working capital enables to make
    prompt payments and helps in creating goodwill.
4. Easy  obtaining  finance:  A  firm  having  adequate  working  capital,  high
    solvency and good credit rating can arrange loans from banks in easy and
    favorable terms.
5. Regular supply of raw material: Quick payment of credit purchase of raw
    materials ensures the regular supply of raw materials from suppliers.
6. Smooth   business   operation:   It   maintains   a   good   shape   in   entire
    developments for a developing project.
7. Ability to face crisis: In crisis to emergency needs, it enables to meet working
    capital requirement for the project.
7.   Importance of working capital loan for running an agro-industrial
    project
Or, Importance of working capital loan for running an industrial project Or, Advantages of Working Capital Loan
Working capital is the life blood for running an agro/industrial project. It is very essential to maintain smooth running of a business. The main advantages or importance of working capital are as follows:
1. Supports as initial partial capital: The working capital loan can helps to adequate liquidity to developing agro/industrial project.
2. Strengthen the Solvency: It helps to operate the smooth flow of production and business without any financial problem for making the payment of shortterm liabilities.
3. Enhance the project growth: Sufficient working capital enables to make prompt payments and helps in creating goodwill.

4. Easy obtaining loan: A firm having adequate working capital, high solvency
and good credit rating can arrange loans from banks in easy and favorable
terms.
5. Regular supply of raw material: Quick payment of credit purchase of raw materials ensures the regular supply of raw materials from suppliers.
6. Smooth   business   operation:   It   maintains   a   good   shape   in   entire developments for a developing project.
7. Ability to face crisis: In crisis to emergency needs, it enables to meet working capital requirement for the project.

8.   How would you assess the working capital requirement of poultry
    industry?
Or,  Assessments/ forecast of working capital requirements
The shortage or surplus of working capital, both are harmful for the organization especially for poultry industry. So it is important for the assessments of working capital. The following considerations which is necessary for assessing the working capital requirement for a poultry industry:
1. The information of estimated production of poultry business
2. The value of raw material, labor and overheads for unit or sum of production
3. Time lag in store of raw materials of poultry product
4. Time lag in production process of poultry product
5. Stag in the warehouse of finished product
6. Delivery process of the poultry product
7. Collection period from debtors
8. Credit allowed by suppliers

9.   Explain  the  factors  affecting  working  capital  requirement.    (Need
Details)
Or,  Explain the factors determining the need for working capital.
Or, Describe in brief the various factors which are taken into account in
    determining the working capital needs of a firm.
A firm should have neither low nor high working capital. Low working capital involves more risk and more returns, high working capital involves less risk and less returns. The factors determining the needs for of working capital are below:
1. Nature of the business
2. Size of the business
3. Length of period of manufacture
4. Methods of purchase and sale of commodities
5. Converting working assets into cash
6. Seasonal variation in business
7. Risk in business
8. Size of labor force
9. Price level changes
10.Rate of turnover
11.State of business activity
12.Business policy

10. Explain different sources of financing working capital.
The sources of finance of financing working capital may be four categories. They
are-
1. Trade Credit: It is the primary sources that trade credit make up the important
    source for a sum of the total working capital.
2. Bank Credit: The banks determine the maximum credit based on the margin
    requirements of the security. The forms of bank credit are Loan and overdraft
    arrangement, cash credit, bills purchase and bills discounted.
3. Non-bank Short Term Borrowing: These types of loan are found from relatives,
    friends, head office or project office etc.
4. Long-term Sources: It comprises equity capital and long-term borrowings.

11. Define permanent working capital and variable working capital.
Permanent Working Capital is to carry on business a certain minimum level of working capital is necessary on a continuous and uninterrupted basis. For all practical purposes, this requirement will have to be met permanently as with other fixed assets. This requirement is referred to as permanent working capital.
Temporary Working Capital  is  refers  to  any  amount  over  and  above  the
permanent level of working capital is temporary, fluctuating or variable working
capital. This portion of the required working capital is needed to meet fluctuations
in demand consequent upon changes in production and sales as result of seasonal
changes.
12. Explain the difference between variable working capital and
    permanent working capital.
 
Particulars    Permanent Working Capital
1) Required    A certain minimum level of
level of    working capital is necessary to
amount    carry the business
2) Level of    It is necessary on a continuous
necessity    and uninterrupted basis

3) Pattern of    This requirement will have to
necessity    be met permanently
4) Nature of    The working capital cost and working capital investment is constant
5) Outcome    It make the minimum outcome
level of firm     as well as growth of the firm
 
Temporary Working Capital
Any amount over and above the permanent level of working capital is needed
Temporarily required in case of increase of production and
sales
The necessity in on fluctuating or variable position
The working capital cost and investment is variable
It make a extra ordinary
production outcome of the firm
 

13. What do you mean by mortgage, pledge & hypothecation? Dec-2013 Mortgage:  Mortgage  is  a  type  of  charge  related  to  immovable  property. Immovable property shall include land, benefits to arise out of land and things attached to the earth or permanently fastened to anything attached to the earth. It does not include standing timber, growing crops or grass.


Pledge: Pledge arises when the lender (pledgee) takes possession of either the goods or bearer securities for extending a credit facility to the borrower (pledgor). The pledgee can retain the possession of the goods until the pledgor repays the entire debt amount and in case of a default, the pledgee has the right to sell the goods in his possession and adjust its proceeds towards the amount due.(example Jewel loan). 

 
Hypothecation: Hypothecation is a way of creating a charge against the security of movable assets, which is much similar to pledge.(example purchasing a bike from bank loan). The possession and the ownership remain with the borrower. Since the possession  remains  with  the  borrower,  he  may,  at  any  time  either  create  a subsequent charge by way of pledge over same goods or may sell them. In such cases, the rights of the pledgee usually super cedes the rights of the person in whose favor the goods were hypothecated, if the fact of existence of such a charge is not known to the subsequent pledgee.

14. Distinguish between mortgage & pledge?
The differences between a mortgage and a pledge:
 
Sl.    Particulars    Mortgage
1    Property    Mortgaged is an immovable property
type in
Security
2    Property    The property is transferred to lender
ownership
3    Property    Possession of property will be with
custody    borrower
4    Legal    Mortgagee can sell only with the
authority to    permission of the Court sell property
5    Rights to    A mortgagee has the right of
foreclosure    foreclosure that restrict the borrower
from taking back the property under certain circumstances
 
Pledge
Pledged is a movable property

The property remains to pledgor
Goods delivered by the
pledgor will be in lender
Lender can sell without the intervention of the Court

A pledgee does not have the right of foreclosure that
cannot restrict the pledgor
from taking back the property
 

15. As a banker between pledge & hypothecation, which one you will
    prefer? Justify in favor of your argument. Dec-2013
(Need to explain)
Hypothecation is a form of security in which the borrower offers assets owned by him like stocks, bonds, other movable assets as collateral security for loan without transferring title to the lender.
However, the lender gets a right to sell the property in the event of default made by
the    borrower.
Pledge is also a form of security to assure that a person will repay a debt under contract.
In Pledge borrower temporarily gives possession of the property to the lender that also gets a right to sell the property in the case of default the loan.


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16. Distinguish between mortgage, pledge & hypothecation
Mortgage:  Mortgage  is  a  type  of  charge  related  to  immovable  property. Immovable property shall include land, benefits to arise out of land and things attached to the earth or permanently fastened to anything attached to the earth. It does not include standing timber, growing crops or grass.
Pledge: Pledge arises when the lender (pledgee) takes possession of either the
goods or bearer securities for extending a credit facility to the borrower (pledgor).
The pledgee can retain the possession of the goods until the pledgor repays the
entire debt amount and in case of a default, the pledgee has the right to sell the
goods in his possession and adjust its proceeds towards the amount due.(example
Jewel loan)
Hypothecation: Hypothecation is a way of creating a charge against the security of movable assets, which is much similar to pledge. (example purchasing a bike from bank loan). The possession and the ownership remain with the borrower. Since the possession remains with the borrower, he may, at any time either create a subsequent charge by way of pledge over same goods or may sell them. In such cases, the rights of the pledgee usually super cedes the rights of the person in whose favor the goods were hypothecated, if the fact of existence of such a charge is not known to the subsequent pledgee.
17. Distinguish between term credit and short-term credit
 
Particulars    Term Credit
A form of finance that have a
1. Definition    small, mid or long repayment
schedule
2. Maturity    1 to 5 years, in some cases it may
period    be 20 years
3.
Competitive    competitively marginal or low rate interest rate
4. Lending    Some complex to lending except
complexity    short-term lending
5. Profitability    Marginal profit
6.  Risk    Marginal or high risk
7. Loan limit    Loan limit is more
 
Short Term Credit
A form of finance that  have a short repayment schedule

1 or less than 1 year

competitively high rate

Easy to lending
High margin of profit Low risk
Small Loan limit
 

18. Why do the private commercial banks prefer short term lending Or, Advantages of Short-Term Financing
8. Easier to provide: Banks can provide short-term credit more easily within the
    minimum functionality than long-term credit.
9. Higher interest: Banks may impose the higher interest rate due to small
    amount of credit with the minimum or security less financing.
10.   Rapid turn-over of capital: The capital investment is turning over rapidly
    and it make chance to further investment
11.   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.



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12.   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.
13.   Easy control over the customers: Banks can overlook more easily to the
    short-term borrowing customers than the long-term borrower.
14.   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.
15.   Minimum complexity: The maintenance and supports of further credit
    procedures is simple than long-term finance.
16.   Fund availability: In many cases, commercial banks prefer to maximize the
    fund availability particularly small enterprises.

19. What is SME Finance & Agricultural Finance
Or, Define SME Credit with reference to BB’s given Definition Dec-2013
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:
Criteria    Fixed assets excluding land &
building    No. of manpower
(Tk. in crore)
Sectors    Medium    Small    Micro    Medium    Small    Micro
Manufacturing    10-30    0.5-10    0.05-0.5    100-250    25-99    10-24
Trade    1-15    0.05-1    <0.05    50-100    10-25    <10
Service    1-15    0.05-1    <0.05    50-100    10-25    <10

Cottage Industry    <0.05    <10
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.]
Agricultural Finance: Agricultural credit is a financial term that refers to loans
and other types of credit extended for agricultural purposes. Agricultural credit
systems promote  the expansion and continued survival of farm and livestock


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operations, covering the entire agricultural value chain - input supply, production and distribution, wholesaling, processing and marketing.
Banks lend to farmers for a variety of purposes, including (1) short-term credit to
cover operating expenses; (2) intermediate credit for investment in farm equipment
and real estate improvements; (3) long-term credit for acquisition of farm real
estate and construction financing; and (4) debt repayment and refinancing.

20. What is Credit Planning? Dec-2013
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 main aspects of a credit planning are- 1) the terms and
conditions on credit, 2) customer qualification criteria, 3) procedure for making
collections, and 4) steps to be taken in case of customer delinquency.

21. 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. [Two Answer]
Answer One
An effective Credit planning should include the following considerations:  Objectives of the credit function
 Opening procedures and obtaining information for new accounts  Assessing & evaluating the proposals
 Terms and conditions
 Authority levels and responsibilities  Invoicing procedures
 Monitoring borrowing and paying behavior of customer
 Procedure relating to complaints and disputes
 Targets, benchmarks, and deadlines for the credit function  Defining & collecting of dues, overdues and bad debts

The credit planning should be considered by internal and external factors     and
should be reviewed on an ongoing process. These are:
 Customer’s buying patterns, needs and requests  Type of industry
 Competitors’ offers
 Type of products or services provided to customers  Production and warehouse management
 Distribution systems
 Credit terms from trade suppliers and the bank’s overdraft limits
 Costs of third parties involved, such as factoring, debt collection agencies, etc.

Answer Two
The components that should consider when formulating a lending policy that should influence to extend credit are discussed below:

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A. Terms of Sale
The conditions under which a firm sells its goods & services-
1. The period for which credit is granted: The factors that influence the credit period
    are-
a) Predictability
b) Consumer Demand
c) Cost, profitability and standardization
d) Credit risk
e) Size of the account
f)  Completion
2. The type of credit instrument
3. Credit Function
a) Running a credit department
b) Chose to contract all or part of credit to a factor
c) Manage internal credit operations are insured against default
B. Credit analysis
Refers to the process of deciding, it usually involves two steps:
1. Relevant information
a) financial statements
b) credit agency
c) banks credit
d) market good will
2. Credit Worthiness
a) Character
b) Capacity
c) Capital
d) Collateral
3. Credit scoring: The process of quantifying the probability of default when
    granting consumer credit

C. Collection Policy
Collection  policy  is  the  final  factor  in  credit  policy.  Collection  policy  involves
monitory receivables to spot trouble and obtaining payment on past due accounts.
22. List down the minimum eligibility criteria to be fulfilled by borrower
    to obtain loan
1. Credit-worthiness:  These  will  be  treated  on  behalf  of  applicant’s  credit
    history, capacity to repay, collateral value as eligibility criteria.
2. Business and Credit history: The eligibility may be judged by business track
    records and also qualifying for the different types of credit history like type of
    credit facility, credit limit, repayment records, etc.
3. Working capital: The present working capital may be considered that can be
    thought of as cash at hand and bank.
4. Collateral: Collateral securities which are assets will be evaluated as secured
    assets and pledge or hypothecation of inventory.
5. Keen money management skills: This includes a solid cash flow, the ability
    to live, and skills of keeping accurate and timely financial records.

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6. Earning power: The earnings of borrower to be given out as loan are some of
    the determining factors in granting the loans.
7. Ability to repay: The borrower should have to ability to repay the loans from
    his business and personal income.
8. Experience and character: The borrower should have experience in business
    to run that should have business skills and managerial experience.

23. What is a Project?
A project is refers to that a temporary group of activity designed to produce a unique product, service or a result.
A project has defined by following aspects:
1) It is defined a beginning-end schedule and approach;
2) Uses the resources to allocated works;
3) Achieves the specific goals within an organized approach;
4) Usually involves a team of workforce.

24. List down the cost components of a Rice Mill project (capital cost)
1. Cost of land and site development
-  Cost Of Land
-  Cost Of Leveling/Development
-  Cost Of Approach Road
-  Cost Of Compound Wall
2. Cost of Building & Civil Work
-  Factory building
-  Raw material godown
-  Finished goods storage & packing
-  Administrative building
-  Conference hall
-  Generator room & workshop
-  Watchmen Cabin
-  Electricity Chamber
3. Cost of plant & machinery
-  Milling section
-  Paddy bar-boiling/steaming plant
-  Steam boiler
-  Excuse Duty & Other Taxes
4. Others fixed assets costs
-  Office furniture & fixtures
-  Computer
-  Electrification & fire fighting equipments
-  Air compressor
-  Vehicle (truck)
-  Other machineries tools & tackles
5. Preoperative Expenses
6. Margin Money For Working Capital
-  Raw material
-  Electricity charges

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-  Salary & wages
-  Stores & spares
-  Overhead & packing
-  Stock of finished goods & goods in process

25. What do you mean by a project & project appraisal?
A project is temporary in that it has a defined beginning and end in time, and therefore defined scope and resources that are ways of organizing resource. It is a group of individuals who are assembled to perform different tasks on a common set of objectives for a defined period of time.

A Project appraisal is refers to the process of assessing, in a structured way, the
case for proceeding with a project that is the effort of calculating a project's
viability.  The  processes  of  a  project  appraisal  are-  Initial  assessment,  define
problem and long-list, consult and short-list, develop options, compare and select
project
26. During appraisal of a project loan proposal what factors does a
    banker take into consideration?
[Two Answers]
Answer One
The most important factors to be considered during appraisal of project loan proposal are as follows:
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.

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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.
15.Adherence to Bank’s credit policy & guidelines
16.Mitigating Factors i.e. risk factors
17.Environmental factor.
18.Employment generation and contribution to the national economy.

27. Mr. Abdul Ali, and enterprise of your branch area has applied for a
    loan of Tk. 20.00 lac to establish a nursery project to your branch,
    Please write an appraisal report of the loan proposal explaining the
    following points: 1) About the Applicant, 2) About the enterprise, 3)
    About the security (calculating maximum credit limit), 4) About the
    credit needs, 5) About the income and expenses i.e. profitability, 6)
    About the marketing, and 7) Recommended loan amount.
1.    About the applicant:
Mr. Abdul Ali, proprietor of M/S Gomoti Plantations is well experienced having
more than 18 years of experience in this line of business with strong market
reputation.
-  Ownership Status    : Proprietor
-    % of share holding : 100%
-  Personal Net worth : 150.00 lac
-  Education    : Graduate
-  Age    : 52 years
2.    About the enterprise:
-  Nature of Business : Agro based production in developing the plantations and
livestock
-  Legal Status    : Proprietorship
-  Year of Estd.    : 2003
-  Business Address    :  South Keranigonj, Dhaka
3.    About the security (calculating maximum credit limit):
-    1 (One) Un-dated cheque covering the entire limit
-  Hypothecation over the stocks duly insured covering the risk
-  Registered Mortgage with IGPA of 3.00 katha of land at Dist: Dhaka, P/S:
Keranigonj, Mouza: Keranigonj valued at Tk.40.00 lac (MV) and Tk.30.00 lac
(FSV).
4.    About the credit needs:
-  Nature of Facility    : Term Loan
-  Amount of Limit    : Tk. 20.00 lac only
-  Purpose    : To meet up working capital requirement in their
business
-  Rate of Interest    : 18% p.a.
-  Mode of repayment: Equal monthly Installment
-  CIB Status    : STD dt. 15/10/2013

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5. About the income and expense i.e. profitability:
 
Financials in 2012



Ratio analysis    :





6. About the marketing:
7. Recommendation:
 
: Sales/Revenue    310.00
Net Profit    22.70
Total Assets    100.68
Total Liabilities/Debt    20.58
Debt-Equity Ratio    0.60
Debt-Service Coverage Ratio 10.08
Current Ratio    1.21
Return on Asset    14.34
Return on Equity    22.99
Net Profit Margin     8.63
 
Considering the above facts & analysis, we recommend for approval of the
proposed credit facility as Term Loan of Tk. 20.00 lac for the period of 36
months.
28. Difference  between  Lending Risk Analysis  (LRA)  and  Credit  Risk
    Grading (CRG)
Lending Risk Analysis (LRA) is a technique by which the loan risk is calculated by Credit department of a bank that need to analyze it when loan application is above 1 crore. The ranking of it is total 140, 120 is for total business risk and another 20 is for total security risk.
In LRA, following aspects are analyzed: supplies risk, sales risk, performance risk,
resilience risk, management ability, level of managerial teamwork, management
competent risk, management integrity risk, security control risk, and security covers
risk.
Credit Risk Grading (CRG) is a collective definition based on the pre-specified
scale and reflects the underlying credit risk for a given exposure. It deploys a
number/ symbol as a primary summary indicator of risks associated with a credit
exposure.
The proposed CRG scale consists of 8 categories are as: superior, good, acceptable, marginal, special mention, sub-standard, doubtful, and bad & loss.
29. The risks factors those can make an industry sick. How each factor
    accelerates the sickness?
Or, Factor behind/responsible industrial sickness [Two Answers]
Answer One
The two categories factors are listed behind that accelerate the industry sickness are discussed below:
Internal risk factors:
1. Lack of Experience
2. Poor Management
3. Wrong feasibility / Uneconomic Plant size
4. Lack of working Capital

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5. Obsolete technology
6. Faulty employee appointment
7. Non-cooperation among owners and employees
8. Marketing Problem
9. Dependence on single financial source
10.Irregular wage payment
11.Poor product quality

External risk factors:
1. Lack of working Capital
2. Political Unrest
3. Smuggling
4. Trade liberalization
5. Poor infrastructure
6. Global price fluctuate
7. Problems in loan disbursement (already sanctioned)
8. Bank control over machinery purchase
9. Natural calamities
10.Duty on raw materials /customs problems
11.Non-availability of raw materials
12.Lack of modern technology
13.Long project implementation period
14.Lack of demand for the product
15.High loan interest

Answer Two
[A. Internal risks factors
1. Lack of Finance: The weak equity, inefficient working capital, absence of costing
    & pricing and budgeting, and so on will accelerate the industry sick.
2. Inefficient Production Policies: This includes wrong selection of site is related to
    production, lack of quality control and standard, research & development, etc.
3. Marketing factors: Inefficient planning and product mix, weak market research
    and sales promotions are force to industry sickness.
4. Improper Staffing: It includes bad wages and salary administration, bad labor
    relation, conflicts among the employees and workers.
5. Ineffective Corporate Management: It includes improper corporate planning, lack
    of coordination, control and integrity in top management, etc.
B. External risks factors
1. Personnel Constraint: Unskilled labor, wages disparity, general labor invested in
    the area will accelerate behind make a sickness.
2. Marketing Issues: The sickness arrives due to liberal licensing policies, changes
    in global marketing, excessive tax policies by govt. and market recession.
3. Production problem: This arises due to shortage of raw material and its high
    prices, shortage of power, import-export restrictions.
4. Financial Issues: The sickness arises due to credit restrains policy, delay in loan
    disbursement, unfavorable investments, etc.]


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30. What do you mean by Asset-Liability Management (ALM)?
Asset liability management (ALM) is the administration of policies and procedures
that refers to financial risks considering interest rate, exchange rate and other
factors that can affects to company’s liquidity. It manages the risks to acceptable
level by monitoring and sets the competitive prices between assets and liabilities of
a company.
The ALM functions extend to liquidly risk management, management of market risk, trading risk management, funding and capital planning and profit planning and growth projection.

31. Do you agree that the absence of good ALM of a bank may lead to
    different crisis to jeopardize the image and soundness of the bank?
Asset Liability Management (AML) is the most important aspect to maintain the bank’s image and soundness. It manages the Balance Sheet Risk, especially for 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 “Asset Liability Management Committee (ALCO)”with the senior management to control the crises to jeopardize the bank’s image and soundness.



























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32. Prepare a typical balance sheet for a bank


























33. What do you know about ALCO?
Asset-Liability Management Committee (ALCO) is a risk-management committee in a financial institution that generally comprises the senior-management levels of the institution. ALCO are to look after the financial market activities, manage liquidity and interest rate risk, understand the market position and competition etc.

34. Do you think each commercial bank 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 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 affect the bank's asset-liabilities position. It manages the risks to
acceptable level by monitoring and sets the competitive prices between assets and
liabilities to maintain the liquidity position of the 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
a ALCO for each commercial bank to manage the vulnerable financial position.





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35. Roles and responsibilities of Asset-Liability Management Committee
    (ALCO) of a Bank

1. To assume overall responsibilities of Money Market activities
2. To manage liquidity and interest rate risk
3. To comply with the regulations of Bangladesh Bank in respect of statutory
    obligations as well as thorough understanding of the risk elements of business
4. To understand the market position and competition
5. To provide inputs to the Treasurer regarding market views and updates the
    balance sheet movement
6. Deal with the dealer’s authorized limit

36. Define Credit Risk Grading (CRG) Dec-2013

Credit Risk Grading (CRG) is a collective definition based on the pre-specified scale and reflects the underlying credit-risk for a given exposure. CRG deploys a number/ symbol as a primary summary indicator of risks associated with a credit exposure. Credit Risk Grading is the basic module for developing a Credit Risk Management system.

37. Function of Credit Risk Grading

Well-managed credit risk grading systems promote bank safety and soundness by
facilitating informed decision-making. Grading systems measure credit risk and
differentiate individual credits 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 optimize
returns.

38. What is the uses/ purpose/ importance of CRG? Dec-2013
The Credit Risk Grading matrix allows application of uniform standards to credits to
ensure a common standardized approach to assess the quality of an individual
obligor and the credit portfolio as a whole. It measure credit risk and differentiate
individual credits and groups of credits by the risk they pose. This allows bank
management and examiners to monitor changes and trends in risk levels.
As evident, the CRG outputs would be relevant for credit selection, wherein either a borrower or a particular exposure/facility is rated. The other decisions would be related to pricing (credit spread) and specific features of the credit facility. Risk grading would also be relevant for surveillance and monitoring, internal MIS and assessing the aggregate risk profile.







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39. Write down the expected minimum CRG requirements for extending
    credit. Explain with example. Dec-2013
Or, Definition of Numbers of Credit Risk Grading
A clear definition of the different categories of Credit Risk Grading is given as follows:
 
Risk     Grade Rating
1
Superior -
Low Risk

2

Good -
Satisfactory
Risk


3

Acceptable -
Fair Risk


4

Marginal -
Watch list



5
Special
Mention


6


Substandard
 
Definition

•     Facilities are fully secured by cash deposits
•     Government bonds or a counter guarantee from a top tier
international bank.
•     All security documentation should be in place.
•     The repayment capacity of the borrower is strong.
•     The  borrower  should  have  excellent  liquidity  and  low
leverage.
•     The   company   should   demonstrate   consistently   strong
earnings and cash flow.
•     All security documentation should be in place.  Aggregate
Score of 95 or greater based on the Risk Grade Scorecard.
•     Adequate financial condition though may not be able to
sustain any major or continued setbacks.
•     These borrowers are not as strong as Grade 2 borrowers,
but should still demonstrate consistent earnings, cash flow
and have a good track record
•     An Aggregate Score of  75-94 based  on the  Risk Grade
Scorecard.
•     Grade 4 assets warrant greater attention due to conditions
affecting   the   borrower,   the   industry   or   the   economic
environment.
•     These borrowers have an above average risk due to strained
liquidity, higher than normal leverage, thin cash flow and/or
inconsistent earnings.
•     Aggregate   Score   of    65-74   based   on   the   Risk   Grade
Scorecard.
•     Grade  5  assets  have  potential  weaknesses  that  deserve
management’s close attention.
•     If  left  uncorrected,  these  weaknesses  may  result  in  a
deterioration of the repayment prospects of the borrower
•     An Aggregate Score of  55-64 based  on the  Risk Grade
Scorecard.
•     Financial condition is weak and capacity or inclination to
repay is in doubt
•     Loans should be downgraded to 6 if loan payments remain
past due for 60-90 days
•     Not yet considered non-performing as the correction of the
deficiencies  may  result  in  an  improved  condition,  and interest can still be taken into profits.
 


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•    An Aggregate Score of    45-54 based  on the  Risk Grade
Scorecard.
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 Loss.
Doubtful    •    The  adequacy  of  provisions  must  be  reviewed  at  least
and Bad    quarterly on all non-performing loans, and the bank should
(non-    pursue legal options to enforce security to obtain repayment
performing)    or negotiate an appropriate loan rescheduling.
•    In all cases, the requirements of Bangladesh Bank in CIB
reporting,  loan  rescheduling  and  provisioning  must  be
followed.
•    An Aggregate Score of    35-44 based  on the  Risk Grade
Scorecard
8    •    Assets graded 8 are long outstanding with no progress in
obtaining repayment (in excess of 180 days past due) or in
the late stages of wind up/liquidation.
Loss    •    The prospect of recovery is poor and legal options have
(non-    been pursued.
performing)    •    The proceeds expected from the liquidation or realization of
security may be awaited.  The continuance of the loan as a
bankable asset is not warranted
•    An Aggregate Score of 35 or less based on the Risk Grade
Scorecard

40. Different aspects of Credit Risk Grading (CRG) with grading points Or, Write down the components of CRG. Dec-2013
Or, Number and Short Name of Grades Used In the CRG
Number and Short Name of Grades used in the CRG:
Grading    Short Name    Number
Superior    SUP    1
Good    GD    2
Acceptable    ACCPT    3
Marginal/Watch list    MG/WL    4
Special Mention    SM    5
Sub standard    SS    6
Doubtful    DF    7
Bad & Loss    BL    8
Superior:
-  Credit facilities, which are fully secured i.e. fully cash covered.
-  Credit facilities fully covered by government guarantee.
-  Credit facilities fully covered by the guarantee of a top tier international Bank.
Good:
-  Strong repayment capacity of the borrower


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-  The borrower has excellent liquidity and low leverage.
-  The company demonstrates consistently strong earnings and cash flow.
-  Borrower has well established, strong market share.
-  Very good management skill & expertise.
-  All security documentation should be in place.
-  Credit facilities fully covered by the guarantee of a top tier local Bank.
-  Aggregate Score of 85 or greater based on the Risk Grade Score Sheet Acceptable:
-  These  borrowers  are  not  as  strong  as  GOOD  Grade  borrowers,  but  still
    demonstrate consistent earnings.
-  Borrowers have adequate liquidity, cash flow and earnings.
-  Credit in this grade would normally be secured by acceptable collateral (1st
    charge over inventory / receivables / equipment / property).
-  Acceptable management
-  Acceptable parent/sister company guarantee
-  Aggregate Score of 75-84 based on the Risk Grade Score Sheet Marginal/Watch list:
-  This grade warrants greater attention due to conditions affecting the borrower,
    the industry or the economic environment.
-  These borrowers have an above average risk due to strained liquidity, higher
    than normal leverage, thin cash flow and/or inconsistent earnings.
-  Weaker business credit & early warning signals of emerging business credit
    detected.
-  The borrower incurs a loss
-  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:
-  This  grade  has  potential  weaknesses  that  deserve  management’s  close
    attention. If left 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:
-  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:
-  Full repayment of principal and interest is unlikely and the possibility of loss is
    extremely high.



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-  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:
-  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.

41. Why core risk management is getting so much highlighted 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.
42. What is provisioning? Discuss the basis of determining the status of
    classified loans and advances. Dec-2013
Provisioning: The Provisioning is a non-cash expense at present for banks to account for future losses on loan defaults. Banks assume that a certain percentage of loans will default or become slow-paying. Banks enter a percentage as an expense when calculating their pre-tax incomes. This guarantees a bank's solvency and capitalization if and when the defaults occur. The provision allocated each year increases with the riskiness of the loans a given bank makes.


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43. Basis of determining the status of classified loans and advances. Dec-
    2013 [No Answer]

44. It is due to the increase of classified loans of the bank, that they are
    now  facing  liquidity  problems  and  the  borrower  inter-bank  call
    money at very high rate. Justify the viewpoint. Dec-2013
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.
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  bank’s immediate 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 banking system as a whole.
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.
45. Distinguish  between  loan  interest  remission  and  loan  write  off.
    Between these two which one is beneficial for that Bank? Discuss.
[Need modify]
http://www.lawyersnjurists.com/articles-reports-journals/bank-and-financial-
institutes/loan-operations-analysis-evaluation-bangladesh-shilpa-bank/

Write off of bad debt of a bank that is declared non-collectable (such as a loan on a defunct business or a credit card due that is now in default), removing it from their balance sheets.
In course of conducting credit operations by banks the quality of a portion of their
loan portfolio, in many cases, deteriorates and uncertainty arises in realizing such
loans and advances. These loans are adversely classified as per existing rules and
necessary provision has to be made against such loans. 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 order to avoid possible legal complications in retaining the claims of the banks
over the loans written off section 28 ka has been incorporated in 2001 in the Bank
Company Act, 1991.

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46. List  down  the  preconditions  those  required  to  be  fulfilled  by  a
    borrower for availing write off consideration
[Need modify]
In course of conducting credit operations by banks the quality of a portion of their
loan portfolio, in many cases, deteriorates and uncertainty arises in realizing such
loans and advances. These loans are adversely classified as per existing rules and
necessary provision has to be made against such loans. 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 order to avoid possible legal complications in retaining the claims of the banks over the loans written off section 28 ka has been incorporated in 2001 in the Bank Company Act, 1991. In this context the following policies for writing off loans are being issued for compliance by banks:
1. Banks may, at any time, write off loans classified as bad/loss. Those loans which
    have been classified as bad/loss for the last 5 years and for which 100%
provisions have been kept should be written off without delay.
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. Banks allowed
    to write-off classified loans below Tk. 50,000 without filing any case.
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 CIB of Bangladesh Bank.
8. Prior approval of Bangladesh Bank shall have to obtain 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.
[Bangladesh Bank has relaxed the guidelines for writing off small bad loans as it considered the litigation cost is sometimes higher than the amount of a loan.
It allowed the scheduled banks to write-off classified loans below Tk.50,000 without filing any case.
The banks will, however, have to comply with other guidelines while writing off the loans, said a circular issued on Thursday.
Earlier, the banks had to write off any bad loan through filing case and keeping 100% provision.

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The banks go for writing off a loan when it considers there is no hope to get the money back.
The scheduled banks are allowed to write off loans, having been adversely classified for more than 5 years, by maintaining a 100% provision.]

47. Distinguish between Money Market & Capital Market
 

Particulars

1. Definition

2. Basic Role
3. Lending &
borrowing
Period
4. Credit
Instruments

5. Risk
6. Market
regulation
 

Money Market
Market where transactions of money and financial assets are accomplished for short time
Liquidity adjustment

Short-term (less or equal to 1 year)

Call money, collateral loans,
acceptances, bills of exchange
Due to short-term period, the risk is small
Commercial banks are closely regulated
 

Capital Market
Market where transactions of money and financial assets are occurred for a long period
Putting long-term capital to work

Long-term (more than 1 year)

Capital market are stocks, shares, debentures, bonds, securities
Risk is more due to long-term period
The institutions are not much regulated
 

48. Can   increased   call   money   rate   influence   the   capital   market?
    Elaborate with example.
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.

49. What do you mean by SEC?
The Securities & Exchange Commission was established in June-1993 and then changed as Bangladesh Securities and Exchange Commission in December-2012 as the  regulator  of  the  Bangladesh  capital  market  that  comprising  Dhaka  Stock Exchange and Chittagong Stock Exchange. It defines working process and rules and policies under which the stock exchanges will operate.





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50. Functions of SEC
The main functions of SEC are as follows:
1. Regulating the Stock Exchanges & securities market
2. Registering  &  regulating  stock-brokers,  merchant  bankers,  trustee  of  trust
    deeds, portfolio managers, investment advisers, etc.
3. Registering, monitoring & regulating of collective investment scheme of mutual
    funds
4. Monitoring & regulating all authorized self regulatory organizations
5. Prohibiting fraudulent & unfair trade practices

51. Do you think that SEC is performing its role properly by monitoring
    and controlling capital market of our country? 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.  It  monitors  the  other  activities  and  officials functionalities like AGM & dividend payments.

52. What is Fund Flow
Fund flow refers to movement of funds in working capital in the normal course of business transactions. The changes in working capital may be in the form of inflow of working capital or outflow of working capital. If the component of working capital results in increase of the fund, it is known as inflow of fund. Similarly, if the components of working capital effects in decreasing the financial position it is treated as outflow of fund.

53. Importance/ Uses/ Purposes of Fund Flow Statement
The importances to uses of fund flow statement for a bank are as follows:
1) It highlights the different sources and uses of funds between the two accounting
    period.
2) It brings into light about financial strength and weakness.
3) It acts as an effective tool to measure the causes of changes in working capital.
4) It helps the management to take corrective actions while deviations between
    two balance sheets figures.
5) It also presents detailed information about profitability, operational efficiency,
    and so on.
6) It serves as a guide to the management to formulate its dividend policy,
    retention policy and investment policy etc.
7) It helps to evaluate the financial consequences of business transactions involved
    in operational finance and investment.
8) It  gives  the  detailed  explanation  about  movement  of  funds  from  different
    sources and uses of funds.

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54. Distinguish between Cash Flow and Fund Flow statement.
The points of distinction between cash flow and funds flow statement are as below:
 
Sl.
1
2
3

4

5
 
Cash flow statement
Useful in short term analysis and cash planning
It prepared on cash basis
It ascertains the changes in
balance of cash in hand and bank
Analyses the reasons for changes in
balance of cash in hand and bank
It shows the inflows and outflows
of cash
 
Funds flow statement
Useful in long-term analysis of financial planning
It prepared on accrual basis
It ascertains the changes in financial
position between two accounting periods
Analyses the reasons for change in financial
position between two balance sheets
It reveals the sources and application of
finds
 
55.    Write a sample of a cash flow statement of your bank
 
XYZ Bank Ltd.
 
Cash Flow Statement
 
For the year ended 31 December 2013
 
Particulars    Tk.
 
A    Cash flow from operating activities
Interest received
Interest paid
Cash Paid to employees Others Expense
Other Income
Cash generated from operating activities

Loans and advances
Other assets
Deposits and other funds Other liabilities

Net cash received from operating activities

B    Cash flow from financing activities
Investments
Additions to tangible fixed assets
Sales proceeds of tangible fixed assets
Net cash outflow from investing activities

C    Cash flow from financing activities
Share capital borrowings from banks and foreign
institutions
Capital and other reserves
Net cash/ (Outflow) from financing activities

D    Net increase in cash and cash equivalents


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(A+B+C)
E   Operating cash and cash equivalents
F   Cash and bank balance at the end of the period

56. Write-Off and Re-scheduling

Write-Off
A reduction in an individual's or a company's income as the result of an expense.
For example, an unplayable credit sale may be a write-off for the creditor, especially if the debtor declares bankruptcy. The bankruptcy means that the debtor is unable to pay the debt, which results in a loss of income for the creditor. A write-off may usually be deducted from one's taxable income.

Write-off
To take an asset entirely off the books because it no longer has any value. If an
accrual basis taxpayer has taken money into income when bills were sent out to
customers, but then some of the bills became uncollectible, the taxpayer may write
off the uncollectible ones as a deduction against income. Financial institutions are
required to write off loans when they become delinquent by a certain amount.

Accounting
In business accounting, the term write-off is used to refer to an investment (such as a purchase of sellable goods) for which a return on the investment is now
impossible or unlikely. The item's potential return is thus canceled and removed from ("written off") the business's balance sheet. Common write-offs in retail include spoiled and damaged goods.

Banking
Similarly, banks write off bad debt that is declared non-collectable (such as a loan on a defunct business or a credit card due that is now in default), removing it from their balance sheets.

Rescheduled loans
Bank loans that are usually altered to have longer maturities in order to assist the borrower in making the necessary repayments.

Rescheduled loans
Bank loans that are usually altered to have longer maturities in order to assist the borrower in making the necessary repayments.

Rescheduled Loan
New loan that replaces the outstanding balance on an older loan, and is paid over a longer period, usually with a lower installment amount. Loans are commonly
rescheduled to accommodate a borrower in financial difficulty and, thus, to avoid a default. Also called restructured loan.



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Definition of 'Debt Rescheduling'
A practice that involves restructuring the terms of an existing loan in order to extend the repayment period. Debt rescheduling may mean a delay in the due date(s) of required payments or reducing payment amounts by extending the payment period and increasing the number of payments.

Rescheduling
FI’s should follow clear guideline for rescheduling of their problem accounts and monitor accordingly
Rescheduling of problem accounts should be aimed at a timely resolution of actual or expected problem accounts with a view to effecting maximum recovery within a reasonable period of time.
57. Purposes, cases, modes, and requirements of Rescheduling Purposes for Rescheduling:
(i) To provide for borrower’s changed business condition (ii) For better overdue management
(iii) For amicable settlement of problem accounts

Cases for Rescheduling:
Rescheduling would be considered only under the following cases-
(i) Overdue has been accumulated or likely to be accumulated due to change in
business conditions for internal or external factors and the borrower is no way able to pay up the entire accumulated overdue in a single shot.
(ii) The borrower should be in operation and the assets have a productive value and life for servicing the outstanding liabilities.
(iii) The borrower must be capable of and willing to pay as per revised arrangement.

Modes of Rescheduling:
Rescheduling can be done through adopting one or more of the following means.
(i) Extension of financing term keeping lending rate unchanged (ii) Reduction of lending rate keeping financing term unchanged (iii) Both reduction of lending rate and extension of financing term (iv) Bodily shifting of payment schedule
(v) Deferment of payment for a short-term period with or without extending the
maturity date (this may be a temporary relief to prevent the inevitable collapse of a
company).
However, under any circumstances reschedule period must not exceed economic life of the asset.
Analysis  of  Rescheduling  Case  and  decision  on  different  modes  of rescheduling:
An account, which has been going through liquidity crisis, may be considered for
rescheduling after identifying symptoms, causes and magnitude of the problem. For


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rescheduling an account, the criteria mentioned in Bangladesh Bank guideline, if any has to be followed strictly.

Post Rescheduling Requirements:
Rescheduling of a contract must require prior approval of CRM and management
    All rescheduled accounts are to be kept in a separate watch list so that post
rescheduling performance of the accounts can be monitored closely

58. What is loan pricing? Dec-2013
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.  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.
59. Discuss the components which are to be taken into account in pricing
    of loan. Dec-2013
Or, Components which are to be taken into account in pricing a 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
    can have a impact on profitability.
6. Loanable 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.

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8. Capital and Earnings Requirements/Goals: Banks must first determine its
    capital requirements and goals in order to determine its earnings needs.
60. “Proper  Pricing  is  most  essential  before  launching  a  new  loan
    product”. Discuss the statement with your view.
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.

61. Factors affecting while assessing a loan proposal
The major factors that interact to loan proposal assessment are mentioned below:
1. Credit-worthiness:  These  will  be  treated  on  behalf  of  applicant’s  credit
    history, capacity to repay, collateral value as eligibility criteria.
2. Business and Credit history: The eligibility may be judged by business track
    records and also qualifying for the different types of credit history like type of
    credit facility, credit limit, repayment records, etc.
3. Working capital: The present working capital may be considered that can be
    thought of as cash at hand and bank.
4. Collateral: Collateral securities which are assets will be evaluated as secured
    assets and pledge or hypothecation of inventory.
5. Keen money management skills: This includes a solid cash flow, the ability
    to live, and skills of keeping accurate and timely financial records.
6. Earning power: The earnings of borrower to be given out as loan are some of
    the determining factors in granting the loans.
7. Ability to repay: The borrower should have to ability to repay the loans from
    his business and personal income.
8. Experience and character: The borrower should have experience in business
    to run that should have business skills and managerial experience.
62. In competitive market, which of the variable and fixed pricing as
    banker you would advocate? Dec-2013
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).

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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.
63. Discuss different types of credit facilities that a commercial bank can
    provide to its clients. Dec-2013
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.


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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.

64. Why credit-worthiness of an applicant is assessed? Dec-2013
Creditworthiness is an important business and personal asset each person has to
manage. This is an asset which could make or break business relationships and
interestingly in some cases, personal relationships. This is a complex abstract
concept that is evaluated in many ways by different entities. The factors contribute
to creditworthiness is really dependent on the specific evaluation case.
This article explains how one can determine a consumer’s creditworthiness and
affordability,  in  other  words,  a  consumer’s  ability  to  repay  debt.  So  what  is
creditworthiness?
Creditworthiness
Definitions to summarize creditworthiness have existed for as long as credit has been extended to individuals and organizations. With the promulgation of the Act, the standardized definition of creditworthiness has to be taken into consideration. Any definition of creditworthiness needs to withstand any test in terms of the NCA.
Any definition associated with creditworthiness should therefore fall within the ambit of a consumer’s:
•    Affordability
•    Credit history
Doing a proper affordability calculation and credit risk assessment based on the
credit history of the consumer will allow the credit provider to determine the
creditworthiness of the consumer. Doing an investigation into the creditworthiness
will also ensure that credit is not extended recklessly and that the consumer is not
over-indebted.
So, when is a consumer over-indebted?
A consumer is over-indebted when:
The consumer will not be able to satisfy the requirements of obligations in terms of credit agreements; and The consumer will not be able to satisfy those requirements in a timely manner.
In   the   following   sections   we   are   going   to   consider   how   to   assess   the creditworthiness of a consumer in terms of his/her credit history and affordability. A consumer’s creditworthiness has traditionally been determined by a number of factors, a few examples include:
•    Record of payments in the past •    Income
•    Regular expenses
•    Current debt and the repayment of such •    Employment
When assessing the creditworthiness of the consumer, the following credit qualities of the consumer must be investigated:
•    The payment record of the consumer •    The income of the consumer

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•    The current exposure in terms of debt of the consumer •    The employment prospects of the consumer
•    The residence of the consumer
•    The age of the consumer
•    Marital status of the consumer •    The need for the credit
•    The influence of any economic variables.

65. Credit Facilities Available in Banks. Dec-2013
•     Overdraft: The word overdraft means the act of overdrawing from the Bank
account. In other words, the account holder withdraws more money from the
Current Account than has been deposited in it. The loan holder can freely
draw money from this account up to the limit and can deposit money in the
account. The Overdraft loan has an expiry date after which renewal or
enhancement is necessary for enjoying such facility. Any deposit in the
overdraft account is treated as repayment of loan. Interest is charged as
balance outstanding on quarterly basis. Overdraft facilities are generally
granted to businesspersons.
•     Cash Credit: These are also the facilities where, like overdrafts, a limit is set
in the account not exceeding one year. However difference is that a separate “Cash Credit’ account is opened by the bank where limit is applied instead of client’s account. Banks lend money against the security of tangible assets or guarantees in the method. It runs like a current account except that the money that can be withdrawn from this account is not restricted to the amount deposited in the account. Instead, the account holder is permitted to withdraw a certain sum called “limit” or “credit facility” in excess of the amount deposited in the account. Once a security for repayment has been given, the business that receives the loan can continuously draw from the bank up to that certain specified amount. The purpose of cash credit is to meet working capital need of businesspersons.
•     Bill Discounting: Under this type of lending, Bank takes the bill drawn by
borrower on his (borrower’s) customer and pays him immediately deducting
some amount as discount and commission. The Bank then presents the Bill to
the borrower’s customer on the due date of the Bill and collects the total
amount. If the bill is delayed, the borrower or his customer pays the Bank a
    pre-determined interest depending upon the terms of transaction.
 • Term Loan: This type Banks lend money in this mode when the repayment
    is sought to be made in fixed, pre-determined installments. These are the
    loans sanctioned for repayment in period more than one year. This type of
    loan is normally given to the borrowers for acquiring long-term assets.
 • Short Term loan: Term loan extended for short period usually up to One
    year is term as STL. This type of loan may or may not have specific
    repayment schedule. However, STL with repayment schedule is preferable.
•    Letter of Credit: 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.


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Thus at this stage bank does not directly assume any liability, as such the same is termed as contingent liability.
•     Payment against Documents: Payment against  Documents  or simply
(PAD) is a post-import finance to settle the properly drawn import bills received by the bank in case adequate fund is not available in client’s account. This is a demand loan for interim period and liquidates by retiring import bills by the client. The bank shall immediately serve a notice upon the client mentioning arrival of documents with a request to arrange retirement of the same immediately.
•     Loan against Trust Receipt (LTR): This is also a post-import finance
facility awarded to retire import bill directly or under PAD as the case may be. In this case, bank may or may not realize margin on the total landed cost, depending upon banker-customer relationship. Here the 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 of time.
•     Export Finance: Like import finance DBL advances in export trade at both
pre and post 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 are of important consideration. The pre-shipment facilities are usually required to finance the costs to execute export orders, such as: procuring & processing  of  raw  materials,  packaging  and  transportation,  payment  of various fees and charges including insurance premium. While post-import facilities are directed to finance exporter’s various requirements, which are required to be settled immediately on the backdrop that usually, settlement of export proceeds takes some time to complete.
•     Syndicated Loan: These are the loans usually involving huge amount of
credit and such to reduce a particular bank’s stake. A number of banks and financial institutions participate in such credit, known as loan syndication. The bank primarily approached by arranging the credit is known as the lead or managing banks.
•     Lease Finance: These types of finance are made to acquire the assets
selected by the borrower (lessee) for hiring of the same at a certain agreed
terms and conditions with the bank (lessor). In this case, bank retains
ownership of the assets and borrower possesses and uses the same on payment of rental as per contract. In this case, no down payment is required and usually purchase option is not permitted.
•     Bank Guarantee: Bank Guarantee is one sort of non funded facility. Bank
Guarantee is an irrevocable obligation of a bank to pay a pre-agreed amount
of money to a third party on behalf of a customer of a bank. A contract of
guarantee is thus secondary contract, the principal contract being between
the beneficiary and creditor and the principal debtor themselves to which
guarantor is not a part. If the promise or the liability in the principal contract
is not fulfilled or discharged, only then the liability of guarantor or surety
arises.



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66. Agricultural   credit   plays   a   very   important   role   in   economic
    development of the country with  high GDP growth. Explain this
    mentioning  the  impact  it  keeps  on  the  country’s  overall  GDP
    attainment.
Or,   Significance/   Impacts   of   Agricultural   Credit   in   economic developments
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.
67. Suppose against a loan proposal of your branch, the head office of
    the bank has sanctioned a loan of taka 1.00 (one) crore against a
    mixed farm (Agriculture, poultry, fishery and dairy farm). You were
    advised by head office to disburse the loan after due documentation.
    Please list down the names of the documents to be obtained from the
    borrower before disbursement of the loan.
1. General Documents
-  Acceptance of sanction letter
2. Charge Documents
-  D.P. Note
-  Letter of Disbursement
-  Letter of Agreement / Arrangement
-  Letter of Undertaking
-  Letter of Installment
3. Hypothecation of Stock & Receivable
-  Letter of Hypothecation on stock of Goods & receivables
-  Irrevocable General Power of Attorney (IGPA) to sell hypothecated stock &
    Receivable
-  Letter of Disclaimer

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4.    Lien & Set-Off
-  Letter of Lien
-  Letter of Authority to debit the4 customer account
5.    Insurance Policy
-  Valid Original Insurance Policy covering fire risks
-  Original receipt of premium
6.    Undertaking
-  No liability with any other bank(s) excepting as declared in proposal
-  The customer shall deposit Sale proceeds in respective Account
7.    Guarantee
-  Personal guarantee, spouse guarantee, third party personal guarantee
8.    Other Documents
-  Letter of Indemnity to be obtained
-  Undated and post-dated cheques
-  Up to date & Clean CIB report
9.     Legal, mortgage and security documents
-  Legal Opinion, valuation certificate of branch and third party surveyor of the
    property
-  Non-Encumbrance Certificate
-  Memorandum of Deposit of Title Deed
-  Duplicate Carbon Receipt, Mutation Khatian
-  Up to date Rent/TAX Payment Receipt
-  Khatian-CS, SA, RS, BS, DP
-  Original title and bia Deeds
-  Mortgage Deed duly registered with District/ Sub-Registry Office
-  Registered Irrecoverable General Power of Attorney (IGPA) authorizing to
    sale the Mortgage Property
68. A project loan is treated as a term loan. Discuss why. Discuss the
    risks you anticipate in such financing.
Project finance transactions typically involve the direct financing of infrastructure and industrial projects.
The financing is usually secured by the project assets such that the financial institution providing the funds will assume control of the project if the sponsor has difficulties complying with the terms of the transaction.
Project finance is generally used for large, complex and sizable operations, such
as roads, oil and gas explorations, dams, and power plants. Due to their
complexity,   size,   and   location,   these   projects   often   have   challenging
environmental and social issues, which may include involuntary resettlement,
loss of biodiversity, impacts on indigenous and/or local communities, and worker
safety, pollution, contamination, and others. Because these projects generally
face high scrutiny from regulators, civil society, and financiers, the project’s
sponsoring companies allocate more resources to managing environmental and
social risks.
If not managed properly, the environmental and social risks can result in
disrupting or halting project operations and lead to legal complications and
reputational impacts that threaten the overall success of the project. Because

anticipated project cash flows typically generate the necessary resources to repay the loan, any disruption to the project itself, regardless of the financial standing of the sponsoring companies involved, poses a direct financial risk to the financial institution.

69. Agricultural Finance: Definition, Nature and Scope A field of work in which people aim to improve the access of the agriculture industry, including farmers and all related enterprises, to efficient, sustainable financial services.

AGRICULTURAL FINANCE Meaning:
Agricultural finance generally means studying, examining and analyzing the financial  aspects  pertaining  to  farm  business,  which  is  the  core  sector  of Pakistan. The financial aspects include money matters relating to production of agricultural products and their disposal.

Definition of Agricultural finance:
Murray (1953) defined agricultural. Finance as “an economic study of borrowing funds by farmers, the organization and operation of farm lending agencies and of society’s interest in credit for agriculture.”
Tandon and Dhondyal (1962) defined agricultural. Finance     “as a branch of agricultural economics, which deals with and financial resources related to individual farm units.”

Nature and Scope:
Agricultural finance can be dealt at both micro level and macro level. Macrofinance deals with different sources of raising funds for agriculture as a whole in the economy. It is also concerned with the lending procedure, rules, regulations, monitoring and controlling of different agricultural credit institutions. Hence macro-finance is related to financing of agriculture at aggregate level.

Micro-finance refers to financial management of the individual farm business units. And it is concerned with the study as to how the individual farmer considers various sources of credit, quantum of credit to be borrowed from each source and how he allocates the same among the alternative uses with in the farm. It is also concerned with the future use of funds. Therefore, macro-finance deals with the aspects relating to total credit needs of the agricultural sector, the terms and conditions under which the credit is available and the method of use of total credit for the development of agriculture, while micro-finance refers to the financial management of individual farm business.