E-QUESTION BANK

Loans and Advances

Developed by:

S M Hafizur Rahman
SVP AND Head of Training
ONE Bank Limited
&
Daisy Nilufar Sharmin
Faculty (SPO), Training Institute,
ONE Bank Limited

TRAINING INSTITUTE, ONE BANK LIMITED

House No. 21, Road No. 08, Dhanmondi Residential Area, Dhaka
 Loans and Advances

1. What do you mean by Loans and Advances?

 A formal agreement between lender and borrower to provide an amount of money against some
specific terms and conditions.
 Lending of a sum of money by lender(s) to borrower(s) which to/will be repaid at fixed interest rate
within a certain period of time.
 Loans can also be termed as credit or advance.

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2. What are the general characteristics of bank loans?

1. Parties: Lender (Bank) and 5. Nature of Disbursement: 9. Periodicity of Bank Loan: Short
borrower ( individual/group) Single shot or installment basis term (below 1 yr), Medium term,
based on business requirement. Long Term (5 yr/above)

2. Amount of Loan: Specific 6. Destination of Disbursement: 10. Repayment of Loan:

based on assessment Existing or new account at per One/bullet/single shot or Installment
situation demand. basis (Depend on cash flow stream)

3. Decision: Either 7. Security: Collateral, guarantee, 11. Meeting business

approve/decline/return. other charge documents (demand requirement: Specific.
promissory note)

4. Mode of Loan: Funded or 8. Loan Price: Interest 12. End Use: Confirm end use of
Non-funded. (Conventional banks) or profit sanctioned fund. Etc.
(Islamic banks).

3. What are the different types of Bank Lending?

 Continuous Loan: The loan which is sanctioned without specific repayment schedule but there is a
specific expiry date. Example: Over Draft, Cash Credit, ECC, Packing Credit, LIM, LTR etc.

 An overdraft facility is a formal arrangement with a bank that allows an account holder to draw on
funds in excess of the amount on deposit. This type of financing is most commonly used by
businesses as a way of making their working capital more flexible, although it can also be available
to individuals.

 Cash Credit is a drawing account in the form of Bank‘s Credit extended to the Borrower. It is similar
to that of Overdraft except insofar as Overdraft is allowed against a Current Account. But in case of
Cash Credit separate account is opened in the name of the Borrower and cheque book is issued.
Cash Credit is an operative account subject to the limit sanctioned by the Bank for a specified
period.

 Export Cash Credits are extended to an exporter to facilitate the export of Merchandise for which
there is export Letter of Credit. It is a pre-shipment and short term Credit to buy, process, pack and
ship the Merchandise, which will be adjusted out of the export proceeds which includes negotiation
or purchase of export Documents. This is a form of Packing Credit and normally granted for 180
days.

Interest is calculated and charged on the daily outstanding debit balances on daily product basis.
The borrower can withdraw or deposit any number of times provided the amount overdrawn does not
at any time exceeds the agreed limit. Cash Credit is generally allowed to the Traders, Industrialists,
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Business concerns for meeting their working capital requirements. The Customer can withdraw or
deposit any number of times provided the amount overdrawn does not at any time exceeds the
agreed limit.

Generally the Cash Credit Accounts are secured by Pledge or Hypothecation of Goods /
Merchandise or Plant or Machinery etc. Generally the Cash Credit is allowed to the customer for a
period of one year and continues for years together subject to the satisfactory performance in the
account. The Cash Credit limit may be increased or decreased depending upon the business
requirements of the borrower and time to time review of the account by the Bank. The securities
offered may be in the form of Fixed Deposit Receipt, ICB Unit Certificates, Shares, Debentures,
Immovable Properties, Life Insurance Policies, Goods / Merchandise etc.

 Packing credit is a pre shipment finance given to exporters with a low interest rate to boost exports.
Packing credit is given by authorized bank by the instruction of Central Bank as a government policy
to promote exporters to earn foreign currency to strengthen financial status of a country.

 Loan against a Trust Receipt (LATR): Trust Receipts is an arrangement under which credit is
allowed against Trust Receipts. The imported or exportable Merchandise remain in the custody of
the Importer or Exporter but he is to execute a stamped Trust Receipt in favour of the Bank wherein
a declaration is made that goods imported or bought with the Bank‘s Financial Assistance are held
by him in trust for the Bank.

 Demand Loan: When loan is sanctioned on the basis of repayment depends upon the demand of the
bank then it can be treated as demand loan. Contingent or other liabilities which are converted into
forced loan (for which there is no previous formal approval as regular credit) are also to be treated as
demand loan. Example: PAD, Foreign Bill Purchase, Inland Bill Purchase etc.

 Short Term Agricultural Credit and Micro-Credit: Short Term Agricultural Credit and Micro-
Credit means the credit which are enlisted as short term credit under the Annual Credit Program
announced by Agricultural Credit Department of Bangladesh Bank. Credit in agricultural sector
repayable within 12 months is also included in this category.

 Bills Purchased: Banks purchase Bills whether clean or documentary, inland or foreign from the
Customers and pay cash or credit his account after deducting the necessary charges and margin

Types of Bills Purchased

1 Foreign Bills Purchased (Clean)

i) Foreign Bills Purchased (Clean) US$ (Equivalent Taka)
ii) Foreign Bills Purchased (Clean) Pound Sterling (Equivalent Taka)

2 Foreign Bills Purchased (Documentary)

3 Local Bills Purchased (Clean)

4 Local Bills Purchased (Documentary)

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Documentary Bills: When the Drawer of the Bill of Exchange or the Exporter encloses the necessary
documents relating to the title of Goods (like Bill of Lading, Railway Receipts, Air way Bills, Truck
Receipts, Postal Receipts, Steamer Receipts etc) and approaches his Bank to negotiate the Bill which
will be delivered to the Drawee of the Bill for realizing payment or against acceptance of Bill as the case
may be the Bill is called Documentary Bill.

Clean Bills: In the absence of such Documents the same is termed as Clean Bill. Purchase of Foreign
Currency Demand Draft, Cheque, Cashier‘s Cheque, International Money Order etc. are the examples
of Foreign Clean Bills. Sometimes the Banks purchase cheques drawn by the Government, Semi-
Government, Local Authority or any first class Parties and extends credit to the Customer until clearance
of the instrument this is called Inland / Local Clean Bills Purchased.

In case of Inland / Local Clean Bills Purchased the amount of cheque is credited to the Party‘s account
by debiting Local Bills Purchased (Clean). On receipt of the proceeds of the Cheque the Local Bills
Purchased (Clean) is reversed. Same procedure is followed in case of Foreign Bills Purchased (Clean).

 Discounting of Bills: Usance Bills maturing after 30, 60, 90,180 or 360 days or sight are discounted
by the Bank for approved parties. The borrower is paid an amount after discounting the Bills at a certain
percentage of interest and margin. On maturity the Bank collects the full value of the Bill and any
amount left after adjustment of bank dues is credited to the Borrower‘s account. After discounting the
Bills, they are sent to the drawer or maker for Acceptance.

 Payment against Document: Banks open Letter of Credit in favour of the Importer for importing
Goods / Merchandise from abroad. The Negotiating Bank negotiates the documents as per L/C terms
and debit the NOSTRO Account of the L/C opening Bank and the amount thus becomes an advance on
behalf of the Importer.

On receipt of Documents from the exporter‘s Bank the same is lodged in the books of the L/C opening
Bank and will respond to the Debit Advice originated by its Foreign Correspondent to the debit of
Payment against Document (PAD) and advise the Importer for retirement. The importer retires the
Import Bill by adjusting the PAD outstanding and until the PAD is retired the amount outstanding thereon
is a Credit extended to the Importer. The Letter of Credit Opening Bank is bound to honour its
commitment to pay against Import Bills if these are presented for payment as per Letter of Credit (L/C)
terms.

 Loan against Imported Merchandise (LIM): On receipt of Documents from the exporter‘s Bank the
same is lodged in the Payment against Document (PAD) if the Bill are drawn as per L/C terms. In many
cases the importer does not come forward to retire the Documents in spite of repeated reminders, in that
case the Bank is forced to clear the consignment from the Customs Authority to avoid high demurrage at
the port which adds more to the burden of commitment. Sometimes there may be arrangement of such
facility with the Bank.

When the importer fails to retire the Documents or requests the Bank for clearance of Goods, the
outstanding under PAD along with up to date interest is transferred to Loan against Imported
Merchandise (LIM) Account. The LIM is a loan account and the interest, clearing charges such as
custom duty, sales tax etc are debited in the account.

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After clearance, consignments are taken delivery by the importer on full payment of Bank‘s liability.
Normally, part delivery is not allowed while on LIM account. When the party desires part delivery, the
LIM is converted into Cash Credit retaining proper margin and executing charge documents. The
delivery is effected thereafter on obtaining pro rata payment.

 Hire Purchase Loan: The Banks extend Hire Purchase Loan to the Customers to acquire household
and other commodities like transport vehicles, machinery, Television, Furniture, Refrigerators, Computer
and other Electrical / Electronic appliances etc. The Bank pays the full value of the commodities to the
seller. The borrower has to deposit margin to the Bank, which is the borrower‘s contribution towards the
procurement of the commodity. The borrower has to pay monthly installment throughout the loan period
as fixed by the Bank. Interest is calculated and compounded monthly. Third Party Guarantee and
Hypothecation of the Commodity at the possession of the Borrower is the prime security in the Hire
Purchase Loan.

 Syndicate / Consortium Loans: Syndicate / Consortium Loans mean joint finance by more than one
Bank to the same Party against a common security from the Borrower. All the participating Banks have a
pari passu charge on the security. The Terminology is commonly used to describe a Lending situation
where, typically on the basis of a mandate from the Borrower to a large group of Banks to participate in
the Lending process on agreed terms, conditions through a negotiated deal with the Borrower on shared
basis. When Syndications are formed of a very few participating Banks, these are then known as ―Club
Deals‖.

The Lead Manager(s) may obtain a Mandate from the intending Borrower to raise the required quantum
of Finance from the market. Raising the required quantum of Finance may be on Under-writing basis
that is a commitment to raise Funds; or on Best Efforts basis, which is subject to the Manager‘s ultimate
success in raising the funds / credit facilities from the market.
The initial mandates are normally followed by further negotiations on the broad-based terms and
conditions including Security, pricing, covenants, defaults and the time frame.

 Lease Financing: Lease is a contract between the owner and the user of assets for a certain time
period during which the second party uses an asset in exchange of making periodic rental payments to
the first party without purchasing it.

A lessee is the company using the asset and the company that owns the asset is called the lessor.
Under lease financing, the lessee regularly pays the fixed lease rent over a period of time at the
beginning or at the end of a month, 3 months, 6 months or a year. At the end of the lease contract the
asset reverts to the real owner.

However, in case of long-term lease contracts, the lessee is generally given the option to buy the leased
asset or renew the lease contract. The three major types of leases are the operating lease,
financial/capital lease and the direct financing lease.

 Term Loans: Term Loans include all lending or financial facilities which implicitly or explicitly will have
an original or final maturity of over twelve months or 360 days with a fixed amortization or repayment
schedule spread over a long period. The loans have specific expiry dates for repayment and for which
repayment is scheduled through specific repayment schedule are treated as fixed term loan. Example:
Project Finance, Industrial Finance etc.
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Similarly non-funded exposures such as deferred Payment Letter of Credit or Guarantee are to be
considered as Term Exposure where the parameters of Term Loans apply.

Term Loans with final repayment period of over one year but upto five years are considered as Mid
Term Loans and exceeding five years are considered as Long Term Loans
The securities offered in Term Loans are the mortgage of immovable properties, hypothecation of
building materials, equipment, work-in-progress, finished goods etc. The Term Loans are normally
provided against Project Financing including BMRE, new industrial project etc.

 Credit Card: Credit Card is one of the latest services provided by the Banks. These pieces of plastic
cards have overcome most of the needs of the Customers to carry cash or cheque books and can be
used for the purchase of virtually any sort of Goods or Services. Depending upon the time in the month
when the purchases are made the customer may have several weeks of free credit until repayment is
required. The payment date and the amount are shown on a monthly statement. Even then the whole
balance need not be repaid but the amount left outstanding will be charged at a published rate of
interest. Advances of cash for various reasons may be taken up to an agreed Credit limit or cash may
also be made available from the Automatic Teller Machine (ATM) to meet twenty four hours‘
requirements of the Customers. This type of revolving credit facility is usually more expensive than the
General loans. The Bank receives interest on the amount advanced to the customer, as well as receives
commission from the Merchants accepting the Credit Card against the supply of goods and services. In
Bangladesh the Credit Cards have been introduced by a number of Banks.

 Clean Advance: When any advance is granted to a client without any tangible security that is called
Clean Advance. This sort of advance is generally extended to the existing valued clients taking into
consideration the net liquid resources of the borrower. This type of advance is very risky and in case of
defaults the Bank doesn‘t possess any tangible security to adjust the same. As per Bangladesh Bank
directives Clean Advance is strictly prohibited in any situation.

 Temporary Overdraft: Temporary Overdraft is a form of Clean Advance, which is normally allowed in
the form of allowing drawings in excess of available credit balance in the current accounts against which
no tangible security is available to safeguard the interest of the Bank. To accommodate the temporary
needs of the clients Temporary Overdraft is allowed against the cheques of Bangladesh Bank,
Accountant General of Bangladesh, sector Corporations, autonomous bodies or other Government
bodies etc held by the Bank in the Clearing House. This sort of advance shall not be extended without
prior clearance from Head Office and confirming the genuineness and apparent tenor of the instrument.

 Bridge Financing: Minimizes the gap between the pre-production period to the selling of output.

 Underwriting / Equity Financing: In this case some organizations comes forward to take the
responsibility of floating the equity from the market or takes over the equity until the organization stands
on its foot.
 Short Term Micro-Credit: means the credit which have loan limit less than Tk. 25,000.00 and
repayable within 12 months. Micro credit may be even non-farm credit, self employment credit, loom-
loan or any forms of credit under the own credit program of the banks. It is extended to the poorer
section of the people in small amount so that the small borrowers can earn their livelihood out of that.
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4. What are the general causes of borrowing?

 Short term sales growth (short term financing)

 Long term sales growth (long term financing)

 Slowdown of any component operating cycle and cash conversion cycle (if pattern of slowdown
permanent - long term financing, otherwise short term financing)
 Purchases of fixed assets (long term financing)
 Replacement of fixed assets (long term financing)
 Restructuring of liabilities (loan take over from one bank to another)
 Event of unexpected expenses (created from any contingent liability)

5. What are the basic principles of sound lending?

The loanable Funds of the Bank are invested with the borrower. It is expected that the Funds along with the
interest will be recovered in time. The Bank has to follow some General Principles before extending any
advance to the Client:

 Safety:

Safety is the most important principle of sound lending. The Banker must certain that the money lent must
come back. The Banker must ensure that the money goes to the right type of borrower and utilised in such
a way that it will remain safe throughout serving a useful purpose in the trade or industry where it is
employed, and repaid with interest.

 Liquidity:

Bank Credit is repayable on demand or in accordance with the agreed terms of repayment. So the
borrowed fund should be for Short Term Requirement. The sources of repayment must also be definite.
The reason why the bank put emphasis on Liquidity is that the bulk of Bank‘s deposits repayable on
demand or at short notice.

 Purpose:

The Bank must closely scrutinize the purpose for which the money is required and ensures that the money
borrowed for a particular purpose is applied by the borrower accordingly. It should not be utilized for any
other speculative or anti-social activities. If the borrower deviates from the purpose and diverts the fund for
another purpose, in most cases it is found that the loan becomes stuck up.

 Profitability:

Bank as a commercial organisation must make profit. Its main source of income comes from the difference
in interest paid to the depositors and interest received from the borrowers. While lending to borrowers the
Bank must be sanguine that the borrower is financially sound, commercially viable enough to repay the
debt and it has constant source of Revenue generation and the particular venture itself is profitable from
which the Bank‘s dues may be paid out comfortably.
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 Security:

Although it is told that the man behind the plough i.e. the borrower is the most important factor for lending
yet considering the socio-economic scenario of the sub-continent Security is still considered as an
insurance or a cushion to fall back upon in case of emergency. The branch must carefully scrutinize the
different aspects of an Advance before granting it including the adequacy and acceptability of the Security.
Most of the senior Lawyers and Bankers opines, if the Security is sufficient, unencumbered and properly
discharged in favour of the Bank the Advance will hardly be stuck up. Security serves as a safety value for
an unexpected emergency and refrains the borrower from raising a secured Advance from another source
against the same Security.

 Diversification of Advances:

Diversification of Advances is an important Principle of Lending. Under this principle the bank spreads the
entire Risks involved in Lending over a large number of borrowers, over a large number of Industries and
Areas and over different types of Securities. The primitive theorem ―Do not put all of your eggs in a single
Basket‖ is still proved to be most fruitful in Bank‘s credit operations.

 Selection of Borrower:

On the basis of the above, the Bank has to finance the borrower who is the most important factor in Credit
Operation. The traditional three Cs Character, Capacity and Capital are considered the basic attributes of a
Borrower. In the language of Eastern Bank Limited the same is termed as ―Know your Customer‖ which is
very important in all Credit Operations.

 National Interest

Banks are wheels of the Economy and it has a great role to play in the economic development of the
Country. So the Bank extends its Credit Operations in the fields of Trade, Transport, Small Business,
Constructions, Import, Export, Industry in different areas of the country. It shall not extend any sort of
financing which is conducive to the interest of the Country or of existing Law prevailing in the Country.

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6. What are the attributes of Good Securities?

Security is meant to be an insurance against an emergency when the borrower might not be in a position to
repay the Bank‘s debt. There are certain qualities which a good tangible security should possess:

1 Marketability: Marketability of security offered is the primary concern of the lending Bank. The Bank
prefers those securities which may be realized quickly and without long and undue formalities in times
of urgent need. The primary securities should be easily realizable or saleable. The land or building may
not be a good security, in the event of forced sale there might be hardly any purchaser in time of need
so these should not be accepted as primary securities rather it can be accepted as collateral security.

2 Easy ascertainment of value: The securities must have regular market where their values are quoted
regularly. There might be some items which are rarely quoted and their prices are not easily
ascertainable; those items should not be preferred as primary securities.

3 Less fluctuation in market price: The price of the securities should be such that their values do not
vary much within the short span of time or their prices cannot be manipulated easily by the speculators.

4 Easily be stored: The securities which will be accepted against pledge that should be easily stored in
warehouse or safe custody with minimum cost and space and convenience. The securities such as the
iron ore or coal or timber present peculiar problems of storage and supervision. The commodities like
frozen fish / meat or certain medicine or chemicals cannot be stored without the air conditioner or
refrigerator. The storing of cement needs extra care to save it from humidity, rain or water. The petro-
chemical items, alcohol, sprits, Acids, insecticides etc not only bears considerable risk to itself but also
to other goods stored in same godown / carrier and cannot be good securities. Sometimes the items
have their expiry date or they lose their utility after a certain period and become invalid and obsolete.
So the items which have got the above difficulties they cannot be considered as good securities for
accepting for pledge.

5 Supervision cost: As a lender the Bank prefers securities which require little supervision cost. To keep
the goods in Bank‘s own warehouse or to get a Warehouse-Keeper‘s transferable receipts as security
the bank has to consider the following: the reliability of Warehouse-Keeper, proper condition of storage,
honesty of godown-keeper, custody of keys, display of bank‘s name plate, periodical inspection,
insurance etc.

6 Transportability: A security should be of such a nature that it can be moved from one place to another
without much difficulty.

7 Durability: A security should be reasonably durable. Commodities such as vegetables, fruits, meat are
easily perishable and food grains, chilies, woolen cloths, oil seeds etc are not durable for long period.

8 Title: The Borrower‘s title to the security either in the form of moveable or immovable property shall be
clear and undisputed. The bank must verify whether there is any other interest in the security such as
prior charges or encumbrances thereon. Title shall be accompanied by absolute possession.
Sometimes, it is observed that although the person has the possession of the property but that cannot
be segregated; for example the dwelling house owned by several brother and sisters which is very
difficult to divide and sell a portion of it to repay bank dues.

9 Easy transfer of Title: The transfer of Title of a security should not be difficult in case need arises. For
example, the share certificates accompanied by signed and verified 117 Share transfer form can easily
be transferred in the name of the Bank.
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10 Yield: The marketable shares, Fixed deposit receipts, Sanchayapatra, Unit Certificates etc which will
be accepted as security should have regular reasonable rate of dividend.

11 Margin: In any advance Margin is the contribution of the Borrower in the total requirement. A Bank can
not meet hundred percent requirement of the borrower. The borrower should have some stake in the
Business. Say, a project costs Taka one crore, Bank finances Taka eighty lac and borrower‘s equity
participation is Taka twenty lac so the Margin is twenty percent.

Margin on securities is also maintained as a cushion against fluctuation in the value of securities. In
case of default the total outstanding piles up to a huge amount by adding interest and charges.
Sufficient margin can cover up the interest application and loss on sale / realisation.

In practical situation very few securities possess all the desirable attributes mentioned above and
some sort of defects may exist in the securities, which may be covered by higher margin, insisting on
other collateral and other consideration like the reputation and worth of the borrower etc.

7. What is Credit Risk?

A credit risk is the risk of default on a debt that may arise from a borrower failing to make required payments.
It may also called probability of loss from a debtor's default. Again, credit risk arises if
the borrower is unable to make payment of interest or principal in a timely manner.

Credit risk goes up if a debtor has large number of liabilities and poor cash flow.

8. What is Equated Monthly Installment (EMI)?

EMI is a fixed payment amount made by a borrower to a lender at a specified date of each calendar month.
Equated monthly installments are used to pay off both interest and principal each month, so that over a
specified number of years, the loan is paid off in full.

9. What is Pledge?
Pledge is the bailment of goods as security for payment of a debt or performance of a promise is called
"pledge". The bailor is in this case called the "Pawnor". The bailee is called the "Pawnee" (Section 172 of
The Contract Act-1872).

Bailment is the delivery of goods by one person to another for some purpose, under a contract that the
goods shall, when the purpose is accomplished, be returned or otherwise disposed of according to the
directions of the person delivering them.

Goods kept with the bank‘s custody as security to avail credit is called pledge. Asset placed in trust and
used as collateral for a debt is called pledged property / asset.

Person/institution who pledges his property as security for a loan is called Pledgor / Bailor/ Pawnor.

Person/institution who receives an item as a pledge against a loan is called Pledgee/ Bailee/ Pawnee.

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Pawnee's right of retainer

The Pawnee may retain the goods pledged, not only for payment of the debt or the performance of the
promise, but for the interest of the debt, and all necessary expenses incurred by him in respect of the
possession or for the preservation of the goods pledged (Section 173 of The Contract Act-1872).

10. What is Lien?

Lien is the right of a Lender / creditor to retain goods / securities of the borrower / debtor, until the loan /
debt of the borrower is repaid.

A security interest or legal right acquired in one's property by a creditor. Creditor gets the legal right to
sell the security property of a debtor who fails to meet the obligation of a loan contract. It is also called,
charge over property for turning it as a security against a debt. It is a type of encumbrance. Till the debt
is fully liquidated, the charge is not discharged.

Bailee's particular lien

Where the bailee has, in accordance with the purpose of the bailment, rendered any service involving
the exercise of labour or skill in respect of the goods bailed, he has, in the absence of a contract to the
contrary, a right to retain such goods until he receives due remuneration for the services he has
rendered in respect of them. (The Contract Act 1872, Section-170).

Illustrations
(a) A delivers a rough diamond to B, A jeweller, to be cut and polished, which is accordingly done. B is
entitled to retain the stone till he is paid for the services he has rendered.

(b) A gives cloth to B, a tailor, to make into a coat. B promises A to deliver the coat as soon as it is
finished, and to give a three months' credit for the price. B is not entitled to retain the coat until he is
paid.

11. What is Banker’s Lien or General Lien?

Bankers are entitled to General lien but it also goes a stage further to realize the security. Banker's lien is
equal to implied pledge and can sell the security after reasonable notice to the debtor provided the
property comes into the hands of the Banker in the ordinary course of business. The right of lien to the
Banker is conferred by the Contract Act, as such, no separate agreement or contract is necessary.
However, to be on the safe side, the Bankers take a letter of lien from the Customer mentioning that the
goods are entrusted to the Banker as a security for loan- existing or future-taken from the Banker and that
the latter can exercise the right of lien. The right of lien also can he exercised on goods or other
securities standing in the name of the borrower only and not jointly with others e.g. in case the goods /
security and held in joint names of two or more persons, the Banker cannot exercise his right of general
lien in respect of a debt due from a single person.
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However, the Banker's right of lien is not applicable to the following properties of the Customers, viz.
safe custody deposits i.e. jewelry of documents for safe custody, bills of exchange or other
documents entrusted for special purpose money deposited for special purpose, documents or valuables
left in the hands of Banker's hand inadvertently, amounts not due, trust accounts etc.

Bankers, factors, wharfingers, [advocate of the Supreme Court] and policy-brokers may, in the absence
of a contract to the contrary, retain, as a security for a general balance of account, any goods bailed to
them; but no other persons have a right to retain, as a security for such balance, goods bailed to them,
unless there is an express contract to that effect (The Contract Act 1872, Section – 171).

12. What is negative Lien?

In case of negative lien the bank neither has nor obtains possession of any of the assets of the
borrower. It is simply takes a declaration from the borrower that:

i) The assets mentioned there in are free from any sort of charge or encumbrance.
ii) The borrower shall not dispose them of or create any sort of charge against them without the
permission of the bank

The banker cannot directly realize his debts from such assets. However, on account of the above
restriction the interests of the banker are to a certain extent protected.

13. What is Hypothecation?

Hypothecation is a charge against property for an amount of debt where neither ownership nor
possession is passed to the creditor. Though the borrower is an actual physical possession but the
constructive possession remains with the bank as per the deed of hypothecation. The borrower holds
the possession not in his own right as the owner of the goods but as the agent of the bank.

Hypothecation refers to the practice of pledging an asset as collateral for a loan. Again a type of security
against loan whereby both the ownership and possession of the goods remain with the borrower is
called hypothecation.

Other types of loans also involve hypothecation, where the goods are legally owned by the borrower but
can be seized by the creditor if necessary.

Hypothecation is divided into general and special when the debtor hypothecates to creditor all his estate
and property which he has or may have, the hypothecation is general; when the hypothecation is
confined to a particular estate, it is special.

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14. What is Mortgage?

As per section 58 of Transfer of Property Act 1882, mortgage is transfer of interest in specific immovable
property for the purpose of securing the payment of money advanced or to be advanced by way of loan,
an existing or future debt or the performance of an engagement which may give rise to pecuniary
liability.

Interest in the property:

The mortgagor only parts with the interest in the property and not the ownership. Mortgage is not merely
a contract but it is conveyance of interest in the mortgaged property.

Mortgagor and Mortgagee:

The transferor or the party who borrows the money and gives the mortgage (the debtor) is the
mortgagor; the transferee or the party who pays the money and receives the mortgage (the lender) is
the mortgagee.

Mortgage money and Mortgage deed:

The principal money and the interest of which payment is secured are called the mortgage money and
instrument if any by which the transfer is affected, is called the mortgage deed.

Essential features of mortgages:

(a) Mortgage can be created to cover general balances, existing payment as well as future loans and
advances.
(b) There must be a creditor and debt relationship (or contract of guarantee) between the bank and the
mortgagor at the time of deposit.
(c) Actual existence of the debit is necessary but even an application for debt and its acceptance
establishes this relationship.
(d) A partner cannot mortgage the property of the firm without other partners joining him in doing so.

A mortgage is a debt instrument, secured by the collateral of specified real estate property that the
borrower is obliged to pay back with a predetermined set of payments. Over a period of many years, the
borrower repays the loan, plus interest, until he/she eventually owns the property free and clear.

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15. What are the different types of Mortgage?

a) Simple mortgage: In Section 93 of the Transfer of Property Act 1882 defines mortgages of
various kinds as under: There, without delivering possession of the mortgaged property, the
mortgagor binds himself personally to pay the mortgage-money, and agrees, expressly or
impliedly that in the event of his failing to pay according to his contract, the mortgagee shall
have a right to cause the mortgaged property to be sold and the proceeds of sale to he applied,
so for as may be necessary, in payment of the mortgage-money, the transaction is called a
simple mortgage and the mortgagee a simple mortgagee.

b) Equitable mortgage: is one when a loan of money is secured by the deposit of title deeds" In
this case no legal Transfer of Property takes place. The deposit of title deeds with bankers makes
t he bunkers mortgagee in the eye of equity. In this type of mortgage the requirements are (1)
the debt (2) the deposit of title deeds of the property to be mortgaged and (3) the a security.

c) Mortgage by conditional sale: Where the mortgagor ostensibly sells the mortgaged property on
condition that on default of payment of the mortgage-money on a certain date the sale shall
become absolute, or on condition that on such payment being made the sale shall become void,
or on condition that on such payment being made the buyer shall transfer the property to the
seller, the transaction is called a mortgage by conditional sale and the mortgagee a mortgagee
by conditional sale with an intention of giving the mortgage. Provided that no such transaction
shall be deemed to be a mortgage, unless the condition is embodied in the document which
effects or purports to effect the sale.

d) Usufructuary mortgage: Where the mortgagor delivers possession (or expressly or by

implication binds himself to deliver possession) of the mortgaged property to the mortgagee, and
authorized him to retain such possession until payment of the mortgage-money, and to receive
the rents and profits accruing from the property or any part of interest or in payment of the
mortgage-money, or partly in lieu of interest or partly in payment of the mortgage-money, the
transaction is called an usufructuary mortgage and the mortgagee an usufructuary mortgagee.

e) English mortgage: Where the mortgagor binds himself to repay the mortgage-money on a
certain date, and transfer the mortgaged property absolutely to the mortgagee, but subject to a
provision that he will re-transfer it to the mortgagor upon payment of the mortgage-money as
agreed, the transaction is called an English mortgage.

f) Mortgage by deposit of title deeds: Here a person delivers to a creditor or his agent documents
thereon, the transaction is called a mortgage by deposit of title deeds.

g) Anomalous mortgage: A mortgage which is not a simple mortgage, a mortgage by conditional

sale, an usufructuary mortgage, and English mortgage or a mortgage by deposit of title -deeds
within the meaning of this section is called an anomalous mortgage, such rents a nd profits and to
appropriate the some in lieu of title to immovable property, with intent to create a security.
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16. What are the difference between Funded and Non-Funded facility?
Funded credit facilities are those where there is an actual transfer of funds from the bank to the
borrower. Examples of funded facilities are term loans, cash credit and overdraft.

Non-funded facilities are those which do not involve such a transfer. Examples of non-funded facilities
are letters of credit, bank guarantees, etc.

A non-funded facility may subsequently turn into a funded facility, e.g. where the bank makes payment
pursuant to invocation of a guarantee issued by it.

17. What is Contract of Indemnity and Contract of Guarantee?

Contract of indemnity: As per Section 124 of the Contract Act 1872 is a contract by which one party
promises to save the other from loss caused to him by the conduct of the promisor himself, or by the
conduct of any other person, is called a "contract of indemnity".

Illustration: A contracts to indemnify B against the consequences of any proceedings which C may take
against B in respect of a certain sum of 200 Taka. This is a contract of indemnity.

Indemnity provides compensation for loss. Two parties (Indemnifier and Indemnified) are involved.
Liability arises only on occurrence of a loss. When someone agrees to an indemnity agreement, he/she
agrees to assume all responsibility and liability for any injuries or damages to someone else.
Whenever there is an indemnity contract and one party suffers any losses, the other has the liability to
indemnify for the consequences.

An indemnity is a primary obligation. It is an express obligation to compensate someone for loss or

damage and is independent of the obligations of the party whose covenants are being reinforced by the
provision of the indemnity.

Contract of Guarantee: As per Section 126 of the Contract Act 1872 is a contract to perform the
promise, or discharge the liability, of a third person in case of his default. The person who gives the
guarantee is called the "surety": the person in respect of whose default the guarantee is given is called
the "principal debtor", and the person to whom the guarantee is given is called the "creditor". A
guarantee may be either oral or written.

Guarantee: To give assurance to the creditor in lieu for his money. Three parties (Principal Debtor,
Creditor, Surety) are involved. Fixed legal liability is considered. In sharp contrast to an indemnity, a
guarantee is a promise to answer for debt, default or other financial liability of another. Someone
promise to pay for any damages or default in the event of the principal person refusing to do so or when
he cannot do so.

A guarantee is a secondary obligation. A guarantor will only be liable on a guarantee if the party whose
obligations have been guaranteed has failed to perform its primary obligations.

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18. What are the sources of credit information for proposal analysis?

 Internal Source: Loan application profile/file, face to face discussion/interview the client, business
provided financial statements, bank‘s own record, business/project visit.

 External Source: Credit Information Bureau of Bangladesh Bank, audit firm, external rating company,
different contact point verification (CPV) company etc. Other than individual, information provided by
registrar of Joint Stock Company, other bank‘s records are used.

 For details please visit:

http://wikieducator.org/Sources_of_Credit_Reports/Direct_Sources_of_Credit_Information

19. What is the difference between Accrual Accounting and Cash

Accounting?
 Accrual Accounting where sales includes all sales, cash or credit, and cost of goods sold includes all
costs of the inventory that was sold, whether or not those costs have been paid in cash. Accrual
accounting makes no distinction between cash sales and credit sales. Cash has been collected for the
sale, or paid for the inventory- no effect on the transaction.

 Cash Basis Accounting only recognizes income and expenses when the cash is received or used.

20. What is Working Capital?

Working capital is a financial indicator which represents operating liquidity available to a business,
organization or other entity. Working capital is considered a part of operating capital. Working capital is a
measure of both a company's efficiency and its short-term financial health.

Working capital is calculated as:

Working Capital = Current Assets - Current Liabilities

If current assets are less than current liabilities, an entity has a working capital deficiency, also called a
working capital deficit. Positive working capital is required to ensure that a firm is able to continue it‘s
operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming
operational expenses.

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21. What is Operating Cycle and the steps of Operating Cycle?

Normal operations of a business: the production and sale of goods or services and the collection of
cash from those sales.

An operating cycle is the length of time between the acquisition of inventory and the sale of that inventory
and subsequent generation of profit. The shorter the operating cycle, the business gets it‘s return earlier.

Calculation of Operating Cycle:

Inventory Holding Period + Accounts Receivable Collection Period
Where, Inventory Holding Period = Average Inventory/COGS*365
Accounts Receivable Collection Period = Average Accounts Receivable/Credit Sales *365

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22. Cash Conversion Cycle (CCC) with calculation and example.

The cash conversion cycle (CCC) is one of several measures of management effectiveness. It measures
how fast a company can convert cash on hand into even more cash on hand. The CCC does this by
following - the cash as it is first converted into inventory and accounts payable (AP), production of
inventory (Finished goods), sales and accounts receivable (AR), and then back into cash.

Generally, the lower this number is, the better for the company.

CCC = DIO + DSO – DPO or

CCC = (Inventory Holding Period + Accounts Receivable Collection Period) – Accounts Payable
Days on hand

Days Inventory Outstanding (DIO): How many days it takes to sell the entire inventory. The smaller this
number is, the better.

DIO = Average inventory/COGS per day or Average inventory/COGS*365

Average Inventory = (Beginning Inventory + Ending Inventory)/2

Days Sales Outstanding (DSO): The number of days needed to collect on sales and involves AR. While
cash-only sales have a DSO of zero, people do use credit extended by the company, so this number will
be positive. Again, smaller is better.

DSO = Average AR / Revenue per day or Average AR / Revenue*365

Average AR = (Beginning AR + Ending AR)/2

Days Payable Outstanding (DPO): The company's payment of its own bills or Accounts Payable. If this
can be maximized, the company holds onto cash longer, maximizing its investment potential; therefore, a
longer DPO is better.

DPO = Average AP/COGS per day or Average AP/COGS*365

Average AP = (Beginning AP + Ending AP)/2

DIO, DSO and DPO are all paired with the appropriate term from the income statement, either
revenue or COGS. Inventory and AP are paired with COGS, while AR is paired with revenue.

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Example for Conceptualization

The data below is Company X's financial statements. All numbers are in millions of
Taka.

Item Fiscal Year Fiscal Year 2014

2015
Revenue 9,000 Not needed
COGS (Cost of Goods sold) 3,000 Not needed
Inventory 1,000 2,000
A/R 100 90
A/P 800 900
Average Inventory (1,000 + 2,000) / 2 = 1,500
Average AR (100 + 90) / 2 = 95
Average AP (800 + 900) / 2 = 850

CCC is calculated:
DIO = Tk. 1,500 / (Tk. 3,000 / 365 days) = 182.5 days
DSO = Tk. 95 / (Tk. 9,000 / 365 days) = 3.9 days
DPO = Tk. 850 / (Tk. 3,000 / 365 days) = 103.4 days
CCC = 182.5 + 3.9 - 103.4 = 83 days

No of business cycle/year = 365/CCC = 4.40 [As no of business cycle increases, cash conversion
improves]
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Explanation of Real Scenario

CCC should be used to track a company‘s operating efficiency over time [Time series scenario] and to
compare the company‘s standing to its peer and industry average.

CCC should also be calculated for the same time periods for the company's competitors. For example, for
fiscal year 2015, Company X's competitor Company Y's CCC was 100.9 days (190 + 5 - 94.1). Compared to
company Y, company X is doing a better job at moving inventory (lower DIO), is quicker at collecting what it
is owed (lower DSO) and keeps its own money a bit longer (higher DPO). Remember, however, that CCC
should not be the only metric used to evaluate either the company or the management; return on
equity and return on assets are also valuable tools for determining management's effectiveness.

23. What is the relationship between operating cycle (OC) and Cash
Conversion Cycle (CCC)?
There is positive relationship between operating cycle and cash conversion cycle. Generally, short operating
cycle is preferable to reinvest. Operating Cycle and Cash Conversion Cycle are important components of
working capital management.

24. What are the major components of Balance Sheet?

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Assets = Liabilities + Equity

 Current Assets are to be converted into cash within the 12 months following the financial statement
date. They are listed in order of liquidity. Generally, current assets are used in the operating cycle i.e.
purchasing inventory or converting raw material into inventory - selling goods or services to customers -
collecting payment in cash. Following are examples of current assets:

Accounts receivable - unpaid invoices the company has issued to customers that purchased goods or
services on credit.

Inventory, any prepaid expenses etc.

 Non-current Assets are not expected to be converted to cash within one year from the date of the
balance sheet.

 Intangible Assets cannot be seen, touched, or physically measured. They could be current or
noncurrent assets, but they usually represent long-lived legal rights and competitive advantages acquired
by a business. For example copyrights, patents, trademarks, franchises, processes, legal rights, and
goodwill.
 A company‘s liabilities represent a financial responsibility it owes to others as a result of a past
transaction.

 Current Liabilities - debts due to be paid within one year following the balance sheet date. They are
listed on the balance sheet in order of payment priority. For example:

Notes payable - bank lines of credit.

Accrued expenses - company‘s liability to pay expenses at a future date.

 Noncurrent Liabilities - debts due to be paid more than one year from the balance sheet date. Long-
term loans and capital lease payments due in greater than one year are common noncurrent liabilities.

Most commonly these include long-term debt such as loans from banks, leases, company-issued
debentures, mortgages, and deferred taxes.

 Equity- On a company‘s balance sheet, the amount of the funds contributed by the owners (the
shareholders) plus the retained earnings (or losses). Also equity is called shareholders‘ equity.

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25. What is Authorized Capital?

The amount of capital up to which a limited company is authorized to raise its capital as mentioned in the
Memorandum of Association filed with the Registrar of Joint Stock Companies.

The maximum number of shares a company is allowed to issue. Generally, the company's charter
Specifies the number of authorized shares, but shareholders can increase or decrease it according to
procedures listed in the charter. Typically the number of authorized shares is larger than the required
amount in order to give a company the greatest amount of flexibility. Authorized capital stock or simply
authorized stock.

26. What is Paid-up Capital?

Paid-up capital is the amount of a company‘s capital that has been funded by shareholders. It can be less
than a company‘s total capital because a company may not issue all of the shares that it has been
authorized to sell. Paid-up capital can also reflect how a company depends on equity financing.

It also refers to capital contributed to a company by investors through purchase of stock.

27. Difference between Notes payable and Accounts payable.

 Notes Payable - written promissory note, a loan agreement with the bank that the borrower
must sign before the loan can be granted.
 Accounts Payable - due against the invoice from the supplier for inventory purchases. They
usually don‘t involve a written agreement.

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28. What are the difference between Contingencies and Commitments:

 Contingencies are material events that have an uncertain outcome. For example:
Losses may occur but cannot be estimated now, Pending litigation etc.

 Commitments are performance obligations to which a company has agreed.

For example: Sale commitments.

29. What is Financial Projection?

A projection is a forecast of future performance based on assumptions about economic and industry
conditions and events, management‘s strategy and implication, businesses financial and non-financials
factors etc. Generally for long term loan, projection is required to assess the future repayment capacity of
the borrowers.

30. What do you mean by Credit Terms:

The terms which indicate when payment is due for sales made on account.

“2/10, n/30” means:

2/10, n/30 (‗two ten, net thirty‘) means a 2 percent discount is given if payment is received within 10 days
of invoicing. If payment is not received during the 10 days, it automatically falls due within 30 days, and
no discount is given

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31. What is Lease Financing? What are the different types of Lease?
Lease Financing: Lease is a contract between the owner and the user of assets for a certain time period
during which the second party uses an asset in exchange of making periodic rental payments to the first
party without purchasing it.

A lessee is the company using the asset and the company that owns the asset is called the lessor. Under
lease financing, the lessee regularly pays the fixed lease rent over a period of time at the beginning or at
the end of a month, 3 months, 6 months or a year. At the end of the lease contract the asset reverts to
the real owner.

However, in case of long-term lease contracts, the lessee is generally given the option to buy the leased
asset or renew the lease contract. The three major types of leases are the operating lease,
financial/capital lease and the direct financing lease.

The operating lease: is a short-term lease contract where the lessor bears all operating and repairing
costs of the asset and the lessee pays periodic rental payments to the lessor, and where the lease is
cancelable, and there is no bargain purchase option.

Operating Lease is commonly used to acquire equipment on a short-term basis. These leases are
particularly attractive for a company that needs equipment that changes rapidly with new technology.

 Operating leases are written for a term that is shorter than the expected life of the leased asset.
 May contain a cancellation clause giving the lessee the right to cancel the lease and return the asset
prior to the expiration of the agreement.

Financial/capital lease: is a long-term lease contract where the lessee bears all operating, repairing and
maintenance costs, and makes periodic rental payments to the lessor. The lease is not cancelable and
the lessee has the option for bargain purchase or renewal of lease contract at the end of the original
lease period.

Implication in Financial Statement: When a lease is considered a capital lease, the lessee shows the
asset as a fixed asset on the balance sheet, includes its depreciation in accumulated depreciation, and
shows the lease obligations as a liability.

In a direct financing lease the lessor leases the asset by manufacturing or by purchasing from the
manufacturer to the lessee directly and the lessee makes regular rental payments to the lessor. The
lessor holds the ownership of the asset until the end of the lease period and the lessee holds the
possession of the asset. In addition to these major types, there are some other types of lease such as
sale and lease and leveraged lease.

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32. What are the Inventory Cost Flow (ICF) methods and types.
To determine the cost of inventory that moves from the balance sheet to the income statement (inventory
are available to be sold), accountants may use one of the commonly used inventory cost flow methods:

Specific Identification Method

FIFO (First In First Out)
LIFO (Last In First Out)
Average Cost
In a rising price scenario, LIFO would result in higher cost of goods sold and lower ending inventory than
FIFO.

 Specific Identification Method:

A business using the ―specific identification‖ method keeps track of individual items in inventory and the
cost of each item. When an item is sold, the cost of that specific item is recognized as cost of goods sold.

This method is most often used for unique inventory items such as antiques or custom-made goods, or
when a company has adopted a very sophisticated computerized inventory control and costing system in
which each item has a bar code that can be tracked to the actual cost records.

 First In First Out Method (FIFO):

A business using ―FIFO‖ uses the assumption that the first items added to inventory are the first sold (in a
merchandising concern) or used (in a manufacturing concern).

 Last In First Out Method (LIFO):

A business using ―LIFO‖ uses the assumption that the most recent inventory costs are recognized first as
cost of goods sold.

 Average Cost Method:

A business using the ―average cost‖ method assumes that the cost of the item sold was the average
(simple or weighted) cost paid for this kind of item in inventory.

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33. What are the Generic rules for Cash flow Management?

 Sources of Cash:
There are three ways a business can generate cash:

Decrease in Assets: Decreases in assets except for the cash account (such as the sale of a fixed asset,
or a cash payment from a customer that reduces accounts receivable) will generate cash for a business.

Increase in Liabilities: Increases in liabilities such as borrowing on a note payable clearly generates
cash. Buying inventory on account is also considered a source of cash because it conserves cash - it
frees up the cash that would otherwise have been spent on inventory, and allows the company to use
that cash for other purposes until the account payable comes due.

Increase in Equity: Increases in equity generating profits or increasing the owners‘ investment in the
company are ways of generating cash for a business.

 Uses of Cash:

There are three categories of cash uses:

Increase in Assets: A number of factors can cause a need for cash such as the need to replace or add
to fixed assets, long-term sales growth, build-up in accounts receivable and inventory caused by a
seasonal sales bulge. The longer collection period that results when customers take longer to pay,
Inventory build-up due to a decline in sales.

Decrease in Liabilities: A company is making scheduled payments on long-term debt, Short-term

lenders require a reduction or payout of their loans, suppliers tighten sales terms so they are paid more
quickly than in the past—meaning that the payment period is shorter than it was before.

Decrease in Equity: Owners withdraw cash or the company pays a dividend, Company repurchases
some of its own stock (treasury stock). Company experiences a net loss.

34. What is Environmental Risk Management (ERM)?

Environmental Risk Management means managing risks that arise from environmental concerns. ERM
helps to identify, examine, evaluate and manage the environmental issues and concerns associated with
potential business activities proposed for financing which ultimately improvise the credit risk appraisal
process.

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35. What is EDD checklist? When it is used?
Environmental Due Diligence (EDD) checklists are used to conduct a preliminary environmental risk
review. There is one General EDD checklist and ten (Agri-Poultry, Dairy; Cement, Chemicals-Fertilizers,
Pesticides, Pharmaceuticals; Engineering and basic Metal, Housing, Pulp and Paper, Sugar and
Distilleries, Tannery, Textile and Apparels, Ship breaking) Sector specific EDD checklists. Preliminary,
General EDD checklist is used for all types of business and Sector EDD checklists should additionally be
used if the proposed business falls under in any of the ten sectors. The overall Environment Risk Rating
(EnvRR) is the result of both the outcomes of the General and Sector specific EDD checklists.

36. What do you mean by Loan Covenants?

A covenant is a clause in an agreement between two or more parties.

Affirmative Covenants: Conditions the borrower must create and maintain in future. Such as, maintain
certain types of insurance during the term of the loan, provide financial statements to the institution within
a specified period of time etc.

Negative Covenants: Conditions or actions the borrower must prevent from occurring in the future. For
example, prevent or limit the borrower‘s ability to merge with another company, change management or
ownership without the institution‘s approval etc.

37. What is 'Early Alert/Early Warning Signals (EWS)' and when it is

raised?
It is one of the process of credit risk management and mitigation by which potential risks and weaknesses
of a loan/exposure is called for urgent monitoring, systematic follow-up by the credit officers and
management of lending institutions. EWS is a continuous process which is raised for both internal (weak
cash flow, poor account conduct, irregular repayment, management change of the business, non-
maintenance of loan covenants etc.) and external reasons (industry, economy downturn etc) that may
hamper healthy performance of the business and regular repayment of the loan.

38. What is Ratio Analysis? What are the different types of Ratios?

Ratio Analysis
The Financial Analysis is essentially a methodology, the core of which is the Ratio Analysis. Ratios
relating to two financial data to each other, are used as yardsticks to evaluate the financial condition and
performance of an organization.

Ratio Analysis involves examinations of strategic relationships among items on the Company‘s Financial
Statements by means of Ratios. Ratios examine the Organization in respect of its Liquidity, Profitability,
Activity and Leverages. Ratio is simply the one number expressed in terms of another expressing the
relationship spelt out by dividing one figure into the other.

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Different Types of Ratios:

Liquidity Ratios:

i) Current Ratio = Current Asset

Current Liabilities
ii) Quick or Acid Test Ratio = Current Asset – Current Liability
Current Liabilities
iii) Receivables to Sales Ratio = Sundry Debtors X 100
Sales
iv) Working Capital turnover Ratio= Net Sales
Net Working Capital

Solvency or Leverage Ratios:

v) Debt Equity Ratio = Long term debt or Liability
Tangible Net worth
vi) Debt to Total Assets = Total Debt X 100
Total Assets

vii) Time Interest Earned = Profit before Interest & Taxes

Interest Charges
viii) Debt Service Ratio = Net Profit after Tax + Interest paid + Depreciation
Interest paid+ Short term Loan + Maturing Long Term Debt
in current year
ix) Fixed Assets Coverage Ratio = Fixed Assets - Depreciation
Fixed Assets secured by Long term debt

Activity Ratios:

x) Inventory Turnover Ratio = Sales

Inventory
xi) Average Collection Period = Receivables
Sales per day (Total sales/360)
xii) Fixed Asset Turnover = Sales
Fixed Assets
xiii) Operating Asset Turnover = Sales
Net Operating Assets
xiv) Total Asset Turn over = Sales
Total Assets
xv) Sundry Creditors turnover Ratio = Sundry Creditors + Bills Payables X360
Annual Credit Purchase

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Profitability Ratios:

xvi) Profit Margin on Sales = Net profit before Tax X 100

Sales
xvii) Operating Profit Ratio = Operating profit X 100
Sales
xviii) Return on Total Assets = Net profit before Tax X 100
Total Assets
xix) Return on Operating Assets = Net profit before Tax X 100
Total Operating Assets
xx) Return on total assets = Net profit before Tax X 100
Net Worth

39. Explain what is measured in liquidity ratios?

Liquidity is the ability of a company to generate cash for payment of liabilities. A business can be
considered more liquid if it has a higher percentage of its assets in current assets, especially cash and
accounts receivable than in fixed assets. For exam, some of liquidity measurements are:

Ratio Formula Explanation

Current ratio Current Asset / Current Expresses the excess of current assets over current
Liabilities liabilities. A high or rising current ratio indicates a
good or improving liquidity position and vice versa.
Quick ratio Current Asset-inventory / Expresses the excess of most current assets over
Current Liabilities or current liabilities. Higher the ratio, the higher the
Cash + marketable securities + level of liquidity.
accounts receivable / Current
Liabilities
Working Current Asset - Current How much liquid assets a company has available to
capital Liabilities build its business.

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40. Explain what is measured in Profitability Ratios?

The measurements show the capacity of the company to generate profit from sales:

Ratio Formula Explanation

Gross Profit Gross Profit/Net sales*100 Expresses the spread between a company‘s costs of
Margin producing its product and the sale price. Higher the
ratio, the higher the level of profitability.
Operating Operating Profit/Net sales*100 Amount earned against each Tk. after subtracting
Profit Margin not only the COGS but also all operating expenses
including selling, general and administrative
expenses etc. Higher the ratio, the better the level of
profitability.
Net Profit Net Profit / Net sales*100 The profit that is left after all expenses including
Margin income taxes. Higher the ratio, the higher the level of
profitability.

41. Explain what is measured in case of Leverage Ratios?

The sample of measurements is:

Ratio Formula Explanation

Debt to Total Total Liabilities / Total Assets The extent to which assets are supported by outside
Assets creditors. Higher ratio indicates more risk for the
creditors since owners‘ contribution decreases as
well.
Debt to Net Total Liabilities / Net Worth The extent of outside financing against each Tk.
Worth Investment of owner/s. Higher ratio indicates more
risk for the creditors.

42. Explain what is measured in Efficiency/Activity Ratios?

The sample of measurements is:

Ratio Formula Explanation

Sales to Net Sales / Total Assets Firm‘s ability to generate sales in relation to the level
Assets of its assets. Higher the ratio, the higher the level of
efficiency.
Return on Net Profit before taxes / Firm‘s ability to generate net profit in relation to the
Assets (ROA) Total Asset*100 level of its assets. Higher the ratio, the higher the
level of efficiency to generate profit.
Return on Net Profit before taxes / Firm‘s ability to generate net profit in relation to the
Equity (ROE) Total net worth*100 level of its equity. Higher the ratio, the higher the
level of efficiency to generate profit.

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43. What are the Core Risks in Banking?

1. Asset Liability Management

2. Foreign Exchange Risk Management
3. Credit Risk Management
4. Internal Control and Compliance
5. Money Laundering Prevention
6. IT Risks

44. What are the different types of Lending Risks in Banking?

a. Business Risk
b. Management Risk
c. Financial Risk
d. Security Risk
e. Structural Risk
f. Account Performance Risk
g. Other Risks

a) Business Risks: are Industry environment, Industry Size, Maturity, Production, Distribution,
Vulnerability, Competition, Demand supply issue, Strategic importance for group and factory,
Concentration Market reputation.

The Risk that the Business fails to generate sufficient cash to repay the Loan

Industry Risk: The Risk that the Company fails for external reasons.
i) Supply Risk & ii) Sales Risk

Company Risk: The Company fails for internal reasons.

Company position Risk: i) Performance Risk & ii) Resilience Risk (elasticity in +/- external)

b) Management Risk:

(i) Mgt. Competence Risk & (ii) Mgt. Integrity risk (iii) Experience and back ground (iv) Track record of
Mgt. In various economic cycle (v) Succession (vi) Reputation

c) Financial Risks: Profitability, Liquidity, Debt Management, Post Balance Sheet event, Projections,
Sensitivity Analysis, Peer Group Analysis, Other Bank Credit line, Previous year‘s actual versus
Projected Revenue.

d) Structural Risk Risks: Working Capital requirement identification, Requirement with Asset Conversion
Cycle, Clear cut Bank Facility, Clear cut disbursement policy viz A/c payee cheque or BB Cheque etc.,
Time bound Loan Facilities, Monitoring throughout the term loan period, OD only allowed against
payment of Wages, Salaries and other daily Expenses.

e) Account Performance Risk:

• Credit turnover vs. Stock movement & Sales
• Hard core element or good swing
• Repayment track record of working capital and term loans

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f) Security Risks: The Risk that the realized value of the security does not cover the exposure

– Security Control Risk: The Risk that the Bank fails to realize the Security / Enforceability
– Security Cover Risk: The risk that the realized value is less than the Exposure.
– Perishability
– Force Sale value

g) Other Risks:

• Technological obsolescence
• Budget / Fiscal measures
• Natural and ecological changes
• People‘s motivation and tendency
• International changes vs. globalization
• External and internal competitors
• Close substitutes or by-products
• Opportunity cost
• Disruption in supply of raw material sources

45. What is Credit Risk Grading (CRG)? What are the principal
components of Credit Risk Grading (CRG)?

Credit risk grading is the process which helps the sanctioning authority to decide whether to lend or not to
lend, what should be the lending price, what should be the extent of exposure, what should be the
appropriate credit facility, what are the various facilities, what are the various risk mitigation tools to put a
cap on the risk level. CRG is an important tool for credit risk management as it helps the banks and
financial institutions to understand various dimensions of risk involved in different credit transaction.

It provides detailed and formalized credit evaluation process for risk identification, measurement,
monitoring and control, risk acceptance criteria, credit approval authority, maintenance procedures and
guidelines for portfolio management.

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 Key Parameters & Risk weights of Principal Risk Components:

Risk Key Parameters & their individual risk Risk

Components weight weight
Financial Risk  Leverage 15% 50%
 Liquidity 15%
 Profitability 15%
 Coverage 5%
Business/Industry  Size of Business 5% 18%
Risk  Age of Business 3%
 Business Outlook 3%
 Industry growth 3%
 Market Competition 2%
 Entry/Exit Barriers 2%

Management Risk  Experience 5% 12%

 Succession 4%
 Team Work 3%

Security Risk  Security coverage 4% 10%

 Collateral coverage 4%
 Support 2%

Relationship Risk  Account conduct 5% 10%

 Utilization of limit 2%
 Compliance of covenants 2%
 Personal deposit 1%

Total score 100%

There are 08 categories of Risk Grading (based on assessment) with the frequency of review:

Number Risk Grading Short Review frequency (at least)

1 Superior SUP Annually
2 Good GD Annually
3 Acceptable ACCPT Annually
4 Marginal/ Watch list MG/WL Half yearly
5 Special Mention SM Quarterly
6 Sub-standard SS Quarterly
7 Doubtful DF Quarterly
8 Bad & Loss BL Quarterly

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46. What are the main criterion for classification of loans and advances?
Mention the basis for classification of different types of credit facilities
as per objective criteria. Mention the relationship between percentage of
classification and maximum percentage of large loan of a bank.
Main criterion for classification of loans and advances

a) Objective Criteria
b) Qualitative Judgment

Classification of different types of credit facilities as per objective criteria

Classification Term Loan Continuous Loan Demand Loan

≤ Tk. 10.00 lac > Tk. 10.00 lac
SMA Overdue for a period of 02 (two) months or more
SS Past due Past due installment Past due/overdue Past due/overdue for 03
installment is is equal to or more for 03 (three) (three) months or
equal to or than the amount of months or beyond beyond but not over 06
more than the but less than 06 (six) months from the
amount of installment(s) due (six) months date of expiry or claim by
installment(s) within 03 (three) the bank or from the date
due within 06 months of creation of forced loan
(six) months
DF Past due Past due installment Past due/overdue Past due/overdue for 06
installment is is equal to or more for 06 (six) (six) months or beyond
equal to or than the amount of months or beyond but not
more than the installment(s) due but less than 09 over 09 (nine) months
amount of within 06 (six) (nine) months from the date of expiry or
installment(s) months, claim by the bank or from
due within 09 the date of creation of
(nine) months forced loan.
BL Past due Past due installment Past due/overdue Past due/overdue for 09
installment is is equal to or more for 09 (nine) (nine) months or beyond
equal to or than the amount of months or beyond from the date of expiry or
more than the installment(s) due claim by the bank or from
amount of within 09 (nine) the date of creation of
installment(s) months, forced loan
due within 12
(twelve)
months

Note:

Loans except Short-term Agricultural & Micro-Credit in the "Special Mention Account" and ―Sub-Standard‖
will not be treated as defaulted loan for the purpose of section 27KaKa(3) [read with section 5(GaGa)] of
the Banking Companies Act, 1991. However, Fixed Term Loans amounting up to Tk. 10.00 Lacs in the
―Sub-Standard‖ category will also be treated as defaulted loan for the same purpose.

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Relationship between classification and large loan

Rate of Net Classified Loans Large Loan Portfolio Ceiling against Bank's Total Loans & Advances

Upto 5% 56%

More than 5% but upto 10% 52%

More than 10% but upto 15% 48%

More than 15% but upto 20% 44%

More than 20% 40%

47. What does CAMELS rating stand for?

C – Capital adequacy
A – Asset quality
M – Management quality
E – Earnings ability
L - Liquidity management.
S- Sensitivity to market risks

It is one of the rating systems of Banks and Financial Institutions.

48. What is Operating Leverage?

An industry that has a high proportion of fixed expenses is said to have high operating leverage. Such as
capital intensive manufacturing industry requires huge investments in real estate, plant, machinery,
typically has high operating leverage.

An industry that has a low proportion of fixed expenses and high proportion of variable expenses is said
to have low operating leverage. Such as labor intensive manufacturing and service industries tend to
have lower fixed cost and higher variable costs.

49. What is Factoring?

Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts
receivable to a third party (called a factor) at a discount. A business will sometimes factor its receivable
assets to meet its present and immediate cash needs. Factoring is commonly referred to as accounts
receivable factoring, invoice factoring, and sometimes accounts receivable financing.

There are three parties directly involved: the factor who purchases the receivable, the one who sells the
receivable, and the debtor who has a financial liability that requires him or her to make a payment to the
owner of the invoice

If the factoring transfers the receivable "without recourse", the factor (purchaser of the receivable) must
bear the loss if the account debtor does not pay the invoice amount. If the factoring transfers the
receivable "with recourse", the factor has the right to collect the unpaid invoice amount from the
transferor (seller).
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50. What is a 'Syndicated Loan'?
A syndicated loan is a loan offered by a group of lenders (called a syndicate) who work together to
provide funds for a single borrower. The borrower could be a company or a large project. The loan may
involve fixed amounts, a credit line, or a combination of the two.

Typically there is a lead bank or underwriter of the loan, known as the "arranger", "agent", or "lead
lender". This lender may be putting up a proportionally bigger share of the loan, or perform duties like
dispersing cash flows amongst the other syndicate members and administrative task.

51. What is Stress Testing?

Stress testing is a simulation technique used on asset and liability portfolios to determine their reactions
to different financial situations. Changing factors could include interest rates, lending requirements or
unemployment. Stress testing is a useful method for determining how a portfolio will fare during a period
of financial crisis.

52. What is Zero Coupon Bond

A Zero Coupon Bond (also called a discount bond or deep discount bond) is a bond bought at a
price lower than its face value, with the face value repaid at the time of maturity. It does not make
periodic interest payments, or so-called "coupons," hence the term zero-coupon bond. Investors earn
interest via the difference between the discounted price of the bond and its par (or redemption) value.
Examples of zero-coupon bonds include Bangladesh Government Treasury bills, and long-term zero-
coupon bonds.

53. What is Financial Statements

Financial Statements refers to the Statements prepared by the Accounts Section at the end of a period of
time for a commercial or business organization. They are the Balance Sheet, Statement of Financial
position and Income Statements or Profit & Loss statements including the Profit & Loss statements and
Retained Earning Statement.

54. What is Basel and Basel Accords?

Basel is a city in Switzerland where the Bank for International Settlements (BIS) is situated. After the
name of the city Basel, the supervision rules & regulations set by the BIS is popularly called Basel
standards in short we refer Basel.

Basel Accords is a set of agreements set by the Basel Committee on Banking Supervision (BCBS), which
provides recommendations on banking regulations in regards to capital risk, market risk and operational
risk. The purpose of the accords is to ensure that financial institutions have enough capital on account to
meet obligations and absorb unexpected losses.

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55. What are the three pillars of Basel II?
Basel II is established based on three pillars -

I. Minimum Capital Requirement (MCR)

II. Supervisory review Process (SRP)
III. Market Discipline

Pillar- I: Minimum Capital Requirement (MCR)

According to BASEL-II the CAR1 of the Banking Industry of Bangladesh are as on December:

 2010- 9.31% (required CAR 8%)

 2011- 11.35% (required CAR 10%)
 2012- 10.46%
 2013- 11.52%
 2014- 11.35%
 CRAR2 as on March, June, September & December 2015- 10.73%, 10.27%, 10.53% & 10.84%
respectively (as per Basel-III)
 Leverage Ratio as on March, June, September & December 2015- 5.22%, 4.93%, 5.18% & 5.20%
respectively.

1. CAR: Capital Adequacy Ratio

2. CRAR: Capital to Risk weighted Assets Ratio

Pillar- II: Supervisory Review Process

 Supervisory Review Process of Risk Based Capital Adequacy Framework is intended to ensure that
banks have adequate capital to support all the risks in their business and at the same time to
encourage banks to develop and use better risk management techniques in monitoring and managing
their risks.
 Banks should consider the following risks under SRP:
 Residual risk
 Concentration risk
 Interest rate risk in the banking book
 Liquidity risk
 Reputation risk
 Strategic risk
 Settlement risk etc.

Pillar- III: Market Discipline

 The third pillar of the Basel II framework aims to bolster market discipline through enhanced disclosure
by banks.
 Effective disclosure is essential to ensure that market participants can better understand banks' risk
profiles and the adequacy of their capital positions.
 Necessary action has been taken to ensure public disclosure of information of banks‘ capital structure
through market disclosure which needs more definite illustration.

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56. What are the new facts and concepts added with Basel - III?
a) New Definition of Capital

• According to Basel III, bank capital will be divided into two tiers:
– Tier 1 Capital (going-concern capital)-
• Common Equity Tier 1 ≥ 6.0%
• Additional Tier 1
– Tier 2 Capital (gone-concern capital)

• Common Equity Tier 1 must be at least 4.5% of Risk Weighted Assets (RWA) at all times.
• Total Tier 1 Capital must be at least 6.0% of RWA at all times.
• Total Capital (Tier 1 Capital + Tier 2 Capital) must be at least 10.0% of RWA at all times.
• Tier 3 Capital, defined under Basel II, has been omitted from the definition of capital.

b) Leverage Ratio

In order to avoid building-up excessive on and off-balance sheet leverage in the banking system, a
simple, transparent, non-risk based leverage ratio has been introduced from 2015.

A minimum Tier 1 leverage ratio of 3% is being prescribed both at solo (only Bank) and consolidated
(Bank+ equity interest in other organization) level.
Leverage Ratio as on March, June, September and December 2015- 5.22%, 4.93%, 5.18% & 5.20%
respectively.

c) Capital Conservation Buffer

Banks are required to maintain a capital conservation buffer of 2.5%, comprised of Common Equity Tier
1 capital, above the regulatory minimum capital requirement of 10% which already came in effect from
March 2016 in a ratio with 0.625%.

Common Equity Tier 1 Ratio (CET1) Minimum Capital Conservation Ratio

(expressed as percentage of earnings)
4.50% - 5.125% 100%
5.125% - 5.75% 80%
5.75% - 6.375% 60%
6.375% - 7.00% 40%
>7.00% 00%

d) New Global Liquidity Standard

To bolster banks' resilience, Basel III has provided two liquidity standards.

 Liquidity Coverage Ratio (LCR), which promotes a bank's resilience against a short but severe
period of liquidity stress.
 Net Stable Funding Ratio (NSFR), which is designed to promote sustainable maturity structures of
assets and liabilities at banks.

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e) Countercyclical Capital Buffer

The Countercyclical capital buffer (‗CCB‘) aims to achieve the broader macro prudential goal of
protecting the banking sector from periods of excess aggregate credit growth that have often been
associated with the buildup of system wise risk.

Jurisdictions will be required to monitor credit growth in relation to measures such as GDP and assess
whether growth is excessive and leading to the buildup of system-wise risk. Based on this assessment
a CCB requirement, ranging from 0 to 2.5% of risk weighted assets, may be put in place.

But considering the economy and the capacity of our banking industry the concept of the CCB
is not adopted in our country.

f) Domestic Systemically Important Banks (DSIBs)

A few banks assume systemic importance due to their size, cross-jurisdictional activities, complexity,
lack of substitutability and interconnectedness. The disorderly failure of these banks has the propensity
to cause significant disruption to the essential services provided by the banking system, and in turn, to
the overall economic activity. These banks are considered Systemically Important Banks (SIBs) as their
continued functioning is critical for the uninterrupted availability of essential banking services to the real
economy.
But the concept of the Domestic Systemically Important Banks (‗DSIBs‘) is not also adopted in our
country.

57. What is Project Financing and Project Appraisal?

Project Financing:

A Project may be described as an economic unit undertaken by the Entrepreneurs for exploring,
generating, processing, producing and distributing of goods or services for the society.

Project Financing is financing of a particular economic unit (project) sponsored by the Entrepreneurs as
a strategic initiative, in which a lender is satisfied to look initially to the Earnings and Cash-Flows as the
source of fund (for debt amortization and debt servicing) and to the assets of the unit as a collateral
(second way out) for the loan.

Since most of the Project financing are on term basis either medium or long term, the Guidelines in the
chapter ‗Term loan‘ shall be applied as cross reference in this chapter.

Project Appraisal:

Project Appraisal means critically examination of an Investment Project with a view to determining its
market, technical, and financial feasibility, economic viability and social desirability before undertaking the
same.

Project Evaluation is used for post assessment of the existing or founded project.

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58. What is Feasibility of viable Industrial Projects?
The integrated in-depth Techno-commercial analysis for feasible Project Financing should take into
consideration the following fundamental risk factors:

Technical or Technological Analysis:

The analysis includes the study of product pattern, product mix, process selection, equipment, plant size,
plant layout, normal and maximum attainable production capacity, anticipated life of the project, state of
technological development and possibility of technological obsolescence. Sources of raw material
required, residual or salvage value of the project etc. Civil engineering works including construction of
building, structure, design, layout etc. Project implementation period ------- Gantt Chart, PERT etc.

Infrastructure Analysis:
Infrastructure Analysis includes the study of Transportation and Communication facilities, basic utilities
etc. Ideal Location of Project would be defined as one having all basic Infra-structure.

Economic Feasibility:

Marketing: Includes the study of market demand, supply gap analysis, the taste and fashion of
consumers, present and prospective users, raw material survey, transportation and distribution facility,
pricing, promotional and distributional strategies etc.

Economic: Prospects of domestic or foreign market, comparative production costs, threats of

competition, substitute and by-products, interest and exchange rate structure, taxation policy and overall
state of economy etc.

Financial Feasibility:
Includes analyzing Capital- Cost estimates, measuring Working Capital requirement, estimating Pay Back
period, internal rate of return, net present value, Cost-benefit ratio, Break-even analysis, estimating Sales
Revenue and Operating Costs, establishing Earnings estimates, measuring Earnings Prospects in
adversity or sensitivity analysis, estimating the Cash Flow and fund flow, Project Capitalization,
anticipated debt repayment capacity of the Project, Projected Balance Sheet, probable sources of
Financing etc.

Managerial Feasibility:
Managerial Feasibility includes the judgment of the Management‘s capability of proper implementation,
coordinating, managing and utilization of available resources of the Project including motivating the
unorganized work forces to come under routine systems and procedures. Technical experts should be
there to run the project effectively.
The factors include Organizational structure and setup.
Management Organogram ------ Management hierarchy, responsibility, authority, qualification and
experience of technical experts.
Management competency and integrity.

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Legal and Political Analysis
Includes the Statutory Framework and Regulatory control, compliance of banking laws and other
regulations, type of Government, attitude of the Government towards the Investment, Government
Incentives or lack of patronization, possibility of change of Government or their policy etc.

Social / Economic and Demographic Analysis

Includes the Social values / norms, religious / ethnic sentiments, Level of Education and Skills, Labor
relations and mobility of Labor, externalities and social cost-benefit analysis of the project, Foreign
exchange earnings or savings, Contribution to employment and GDP, Backward and forward linkage,
analysis of economic rate of return etc.

59. What are the Characteristics of a Viable Project?

1 The inherent financial, technical and economical viability of the project must be proven beyond a
reasonable degree of doubt.
2 The cash flow throughout the project life supported by conservative forecasted earnings shall be
assured by the Independent Feasibility Study.
3 The availability of Raw materials at a cost consistent with the inputs are assured throughout the
project life.
4 Similarly, guaranteed supply of energy or power over the life of the Loan, at a cost consistent with the
inputs shall be available.
5 Manpower of all categories including Technical and Management personnel of operating expertise
must be readily available to manage the project. If the project sponsors are short on Technical and
Management personnel, the project is in suspect.
6 The sponsors must have available experience or expertise to run such a Facility. A clear start-up
situation where the sponsors lack the necessary expertise or knowledge of the process and have
embarked on the project fully dependent upon hired external expertise may fail to achieve the
required success.
7 The project is not a new technology. The reliability of the process of production – manufacturing or
processing and the plant and equipment to be used must be of standard quality and well established.
The technical reliability and commercial viability o0f the project must be well established. If a new
technology or idea or product is involved, more than a lending risk is inherent. In this case the
―Supplier‘s Installation and Initial Operation of Plants‖ contract may lessen the lending risk.
8 The location of the project should be ideal from the logistical support point of view. The Infrastructure
should be present and adequate to serve the project needs. ―Green-field‖ investment (i.e. investments
involving development of the basic infrastructure) always entails much more than normal lending risks
and should be handled with extra caution.
9 The sponsors must make an equity contribution consistent with their capability, interest in the project
and degree of risk in the project.
10 The sponsors should have proven financial means to provide additional funds to cover any cost over-
run and contingencies. In the event such cost over-run takes place due to any unforeseen reasons
like inflation, price-hike of capital assets, devaluation of local currency, worldwide inflationary
pressure, breaking out of war, delay in project implementation etc.
11 The credentials, both financial and technical, of the project contractors (civil, mechanical and
engineering) and suppliers of the plant, machinery and equipment must be well established. This
feature is most important in capital intensive complex projects where the entire project is being
supplied on a Turn-key basis.
The Purchase contracts for supplying plant, machinery and equipment shall be made with reputed,
reliable, financially and otherwise solid parties. The documentation regarding Purchase contracts or
off-take Agreement shall contain sufficient details like the name of manufacturer, model and date of
manufacture, country of origin, mode of shipment, partial shipment allowed or not, last date of
shipment, installation details, details of spares, training of personnel etc.

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12 Market for the project products must be assured at a price consistent with the financial projections.
Sales contracts shall be made with the reliable, financially sound parties with good market reputation
upon which the success of the project mostly depends.
13 The assets including Land, Building, Plant and Machinery etc being financed must have proven value
as collateral.
14 The assets must also be insured against all standard risks and policies shall be endorsed to the
Bank. Adequate insurance cover should also be available during the construction phase.
15 Regulatory clearance is an essential pre-condition of most projects. All regulatory approvals from the
Government agencies like Ministry of Industries, Ministry of Commerce, Ministry of Environment and
Forest, Board of Investment, National Board of Revenue, local Authority etc shall be obtained prior to
the initiation of the project
16 The socio-economic environment of the project location must be favourable and political conditions
should be stable.

60. What are the Causes for Project Failure?

In Bangladesh many promising projects becomes sick resulting in stuck up of Bank loans. The following
factors are considered by the Lending Banks responsible for Project Failure:

1 Delay in completion of the Project resulting in consequent delay in the contemplated Revenue and
Cash Flow.
2 Project Capital cost exceeded due to increase in financing cost, especially, if such costs are met from
borrowed capital.
3 Performance failure on the part of the supplier of Plant, Machinery and Equipment if particularly, the
supply, erection and installation is on a Turn-key basis.
4 Performance failure on the part of the Building, Plant, Machinery and Equipment contractor or sub-
contractors.
5 Technical failure in the form of failure to obtain source of power or raw material supply or procuring
the right equipment etc.
6 Shortage of raw material or unexpected increase in the price of raw materials.
7 Technical obsolescence of the Plant or design / model obsolescence of the product.
8 Loss of market or loss of competitive position in the market.
9 Poor management or unskilled labour force leading to poor quality of product.
10 Unexpected changes in fiscal regulations or Government interference
11 Universal loss arising from fire, accidents or work force casualty.
12 Over-optimistic projections due to due under stated cost of capital goods or raw material / inputs or
over stated profit or cash flow.
13 Increased financial cost burden by way of heavy external borrowing and low capital contribution.

The above are by no means an exhaustive list of probable causes leading to a failure by the project in
meeting debt-amortization and debt servicing. The Branch Manager, Credit Manager / Officers should be
constantly alert to identify any unique situation as pertaining to any specific project.

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Short Questions

61. What is the purpose of Certificate of Commencement of Business?

A document issued by the Registrar of Joint Stock Companies permitting a public limited company to
commence its business. Such certificate is not required by the private limited company.

62. What is Certificate of Incorporation?

A certificate of incorporation is a legal document relating to the formation of a limited company. It is a
license to form a company issued by the Registrar of Joint Stock Companies (RJSC).

63. What do you mean by 'Pari-passu' Charge

In finance, the term pari-passu refers to loans, bonds or classes of shares that have equal rights of
payment, or equal seniority. In addition, secondary issues of shares that have equal rights with existing
shares rank pari-passu. Wills and trusts can assign an in pari-passu distribution where all of the assets
will be equally divided between the named parties.

Pari-passu is a Latin phrase meaning "equal footing" that describes situations where two or more assets,
securities, creditors or obligations are equally managed without any display of preference. An example of
pari-passu occurs during bankruptcy proceedings when a verdict is reached, all creditors can be
regarded equally, and will be repaid at the same time and at the same fractional amount as all other
creditors. Treating all parties the same means they are pari-passu.

64. How many days are allowed to file charge with RJSC upon execution of
hypothecation/Registered Mortgage (Limited Company)?

21 days.

65. With which account, interest of a Non-Performing loan is kept in?

Interest Suspense Account.

66. At which stage charging of interest is stopped?

When the loan turns to Bad Loan.

67. What is common size income statement?

Express each expense/expense category as a percentage of sales. To calculate, Expenses/sales*100.

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68. What is common size balance sheet?
Express each asset or liability or equity as a percentage of total assets. To calculate, each asset /Total
assets*100.

69. Why common size (income statement, balance sheet) financial

statement analysis is used?

 Monitor changes in expenses in proportion to sales, changes in asset or liability or equity as a

percentage of total assets from year to year (Financial Projection and Trend analysis).
 Compare one company‘s financial standing to other companies or industry average.

70. Why term loans, cash credit etc. are funded facilities? And why
bank guarantees, letter of credits etc. are non-funded facilities?
Since actual transfer of funds from the bank to the borrower is occurred in case of term loan, cash credit,
overdraft etc. that is why they are called funded facilities.

Bank guarantees, letter of credits are non-funded facilities since there is no actual transfer of funds from
the bank to the borrower. In these cases the Bank stands as security for payment to the Creditor/
Beneficiary, if the prime purchaser of LC or LG fails to repay; until then it is non-funded exposure.

71. Which report issued by Bangladesh Bank, provides credit

information/history of borrower?
Credit Information Bureau (CIB) Report. This is external source of credit information.

72. Why accounts receivables, inventory are called current assets?

Accounts receivable and inventory are to be converted into cash within a shortest possible time following
the balance sheet date.

73. For any exposure with “HIGH” Environment Risk Rating (EnvRR),
approval authority is:
After assessing and determining the project risk status in terms of environmental impact and aspects, if
EnvRR stands ―High‖ then approval authority is Board of Directors /Executive Committee.

74. What are the major areas of Cash flow Statement?

 Operating Activities
 Investing Activities
 Financing Activities

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75. What are the functions Asset Liability Committee (ALCO)?
a) To receive and review reports on liquidity risk, market risk and capital management as covered in this
report.
b) To identify balance sheet management issues like balance sheet gaps, interest rate gap/profiles etc.
that are leading to under-performance.
c) To review deposit pricing strategy for the local market
d) Review liquidity contingency plan for the bank

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