IMPORTANT QUESTIONS & ASNWERS

ON

BANK CREDIT
 “BANK CREDIT”
Q. What do you mean by CREDIT?

Ans. The word credit is derived from Latin word “Credo” meaning I believe. It is usually
defined as ones ability to buy with a promise to pay. From the Bankers point of view, credit is
the confidence of the lender on the ability and willingness of the borrower to repay the debt.
Credit is the means of investment made by the bank to the entrepreneurs and business
community. Alternatively this is the way of channeling fund to the deficit units where various
risks and uncertainties are involved.

Q. What are the principles of sound lending?

Ans. All lending involves some degree of risk, it is necessary for any bank to develop sound and
safe lending policies & new lending techniques in order to keep the risk to a minimum. The
principles of sound lending may, therefore, be summarized on followings:

Safety: Bank mainly uses depositors fund as a means of its earnings & the said funds are being
repayable on demand or after a short notice. So, prior lending, a Banker should consider safety of
his lending. Safety should never be compromised for profitability. Once the confidence of the
depositors is shaken, the banker cannot carry on Banking business. It should be remain in mind
of a Banker that advances should be expected to come back in the normal course i.e. the bank
may not have to resort legal action or to sell the securities to liquidate the advance.
The repayment of the loan depends upon the borrowers i). capacity to pay & ii). Willingness to
pay.
Capacity depends upon his tangible assets & the success of his business.
Willingness to pay depends upon honesty and character of the borrower.

Liquidity: Liquidity is the availability of Bank’s funds on short notice. It is not enough that the
money will come back, it is also necessary that it must come back on demand or in accordance
with agreed terms of repayment.
Liquidity also signifies that the assets should be saleable without any loss. Concept of liquidity
has twin aspects, namely, quick sale ability or convertibility of the assets and the absence of risk
of loss in such conversion.
A sizeable portion of bank advances are therefore, granted to meet the working capital
requirement of the borrower rather than to meet fixed capital requirement, i.e. construction of
building or purchase of fixed assets.

Profitability: A Banker has to see that major portion of the assets owned by the Bank are not
only liquid but also aim at earning a good profit. The working funds of a Bank are collected
mainly by means of deposits from the public and interest has to be paid on these deposits. They
have also to meet their establishment charge and other expenses. They have to make provision
for depreciation of their fixed assets and also for any possible bad or doubtful debts. Interest
earned by a bank against it’s advances is the main source of it’s income.

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The difference between the interest received on advances and the interest paid on deposits
constitutes a major portion of banker’s income. So, the banker will not enter in to a transaction
unless a fair return is assured.

Purpose: A banker would not throw away money for any purpose for which the borrower
wants. The purpose should be productive so that the money not only remains safe but also
provides a definite source of repayment.

Loans are not advanced for speculative and unproductive purposes like social functions and
ceremonies or for pleasure trips or for the repayments of a prior loan. A banker must ensure the
purpose for which the credit is going to extend because proper utilization of fund & in time
repayment of the loan fully dependent on that.

Security: The security offered for an advance is an insurance or a cushion to fall back upon in
case of need. It should be the expectation of a banker that advance will come back from normal
sources not to recover the same by selling security. Security serves as a safety valves for an
unexpected emergency. An element of risk is always present in every advances & if the
securities are not insisted upon, there are chances that the borrower may raise funds elsewhere
by charging them to others and thereby bankers position is jeopardized.
Security taken by banks can be classified in to two broad categories, such as , Primary security
& collateral security.
Primary Security: Primary security may be either personal security or impersonal security or
both. Personal security is given by a borrower by way of duly executed promissory note,
acceptance/endorsement on a bill of exchange and personal covenants in mortgage deeds or
loan agreements. Impersonal security is given when a charge is created by way of
pledge/hypothecation/mortgage over the borrowers tangible assets such as goods, commodity,
fixed assets, bills receivables, book debts etc.
Collateral Security: Collateral security may be direct or indirect. Collateral security obtained
from the borrower himself to secure his own account is known as direct collateral security. For
example, advance against hypothecation of stock in trade is strengthen by equitable mortgage
of the title deeds of house property of the borrower. Indirect collateral security means any form
of security given by a third person to secure a customers account. A guarantee given by a third
party is an indirect collateral security.

Diversity: The advances must not be in one particular direction or to one particular industry
because any adversity faced by that particular industry will have serious repercussions on the
bank. There should be spread of advances against different securities, industries as well as
areas. In a nut shell “all eggs must not put in one basket” so that risk could be mitigated &
diversified.

National Interest: Banking industry has significant role to play in the economic development of
a country. Before allowing credit, besides all other principles, Banker must consider national &
social interest of that particular credit. Any kinds of profitable advances, which has bad impact
on overall economic & social sector of the country, must be avoided.
In the changing concept of banking, national interest for financing in some areas, specially in
advances to agriculture, small & medium entrepreneurs, small but prospective export oriented
industries etc. are assuming great importance.
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Q. What are the different types/forms of Credit ?

Ans. Commercial banks make advances in different forms. All types of credit facilities
can be broadly classified in to two groups:
a. Funded Credit b. Non- funded Credit.

Q. What do you mean by funded & non-funded Credit?

Ans. Funded Credit: Any types of credit facility which involve direct outflow of bank’s
fund on account of borrower is termed as funded credit facility. Funded facility may be
classified into four major types: i). Loans ii). Cash Credit iii). Overdraft iv). Bill
purchased & discounted.

Non-funded Credit: Any types of credit facility against which Bank’s direct fund are
not primarily involve is termed as non-funded credit facility. Though these types of
facilities are non- funded in nature but at times it may turn into funded facilities. As
such these types of facilities are also termed as “contingent liability”. The major
facilities are : i). Letter of Credit (L/C) ii). Bid Bond iii). Performance Bond iv). Advance
Payment Guarantee v). Foreign counter Guarantee.

Q. For the purpose of classification loans and advances divided into different types,
please discuss?
a). Continuous Loan: Loans and advances which do not have any set schedule for
drawing or repayment on disbursement but usually have a fixed limit and a terminal
date (expiry date) for full adjustment/repayment are called continuous loan. Such as
Overdraft, Cash Credit, Packing Credit, LIM, LTR etc. (CL form -2 is used for reporting
this type of loans).
b). Demand Loan: Loans and advances which are repayable on bank’s claim (through
issuance of formal notice) to the borrower is called demand loan. Such as PAD, FBP,
IBP, Forced loan etc. (CL form – 3 used for reporting this types of loans).
c). Fixed Term Loan: Loans and advances which have a set repayment schedule of some
installments within a fixed term period are called Fixed Term Loan. Fixed Term Loan
can be divided into two categories:
i). Term Loan payable within 5 years: The term loan which are payable within a period
of 5 years as per the contractually fixed repayment schedule. Any term loan other than
STAC/MC allowed for a period of 5 years should be of this types. (CL form – 4 used for
reporting this types of loans).
ii). Term Loan payable in more than 5 years term: The Term loan which are repayable
in a period more than 5 years as per the contractually fixed repayment schedule. Term
of this type of loan will be more than 5 years. (CL form – 5 used for reporting this types
of loans). 28.06.09 reviewed
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Q. Discuss different types of funded credit?
Ans. Overdraft: This is the operative credit facility extended to the client as working
capital financing for trading and manufacturing business and also for finance against
work order. Specific limit covering the sanctioned loan amount is given on clients
current account & they are allowed to draw and maintain regular transaction up to this
limit. Specific repayment dates are given within which client has to adjust their
overdrawn amount. The overdraft facility is basically secured by hypothecation of
stocks, assignments of bill receivables and collaterally secured by mortgage of
properties.
Time Loan: Time loan is allowed with a fixed maturity date (up to one year) indicating
due date of repayment in full or in equal installments. Time Loan is disbursed in one or
two installments and the same has to be adjusted within one year by equal installments
as per specific repayment schedule.
Term Loan: Generally Term Loan is allowed to large well established business
enterprises for financing capital expenditure, such as for acquisition of machineries to
set up a industry, balancing and modernization of existing plant/machineries for over a
period of one year completion

Trust Receipt: This facility is connected with import facility and is provided to very
selective only. The tenure of this facility is 15 – 180 days. Sometime as per earlier
arrangement of under compelling situation we allow our valued clients to retire the
L/C documents without adjusting the demand loan or outstanding BLC.

Bill Discounting: This type of loan is provided to the client by discounting bill of
exchange favoring the client. When usance bills are submitted by the client a margin
(covering also the interest on the loan) amount is deducted from the face value of the
bill and the rest is provided to the client. At maturity of the bill the same to be
presented to the drawer for full proceeds of the bill through which the loan is adjusted.
Other funded facilities:
i). Against import Bills (BLC)
ii). Against Import Merchandise (LIM)
iii). Against Export bill purchased/discounts (FBP)
iv). Against work order.
v). Against other securities.
vi). Against Inland bills purchased/discounted (IBP).

Q. What are the stages of credit processing?

1. Credit Investigation.
2. Appraisal & Assessment
3. Loan Structuring
4. Sanctioning, Documentation & Disbursement
5. Recovery, Follow-up & supervision.

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Q. What are the sources of credit investigation?
1. Personal interview 2. Internal Bank Source (Loan application form, credit files,
account performance etc.) 3. External Bank source (CIB report, confidential report of
other Bank, Balance sheet, market report, stock exchange publications, income tax
statement etc.)
Q. Define borrower?
Ans. Borrower means a person or group or group of persons or individual associated
under a legal entity whom Bank’s extend their credit facilities.

Q. What are the five C’s for borrower analysis?

Ans. Character = Trust & confidence
Capital = Financial solvency & strength
Capability = Ability to manage, adjust & adopt.
Condition= under which the credit to be allowed.
Collateral= Offering by the client to secure the loan.

Q. What are the five R’s for borrower analysis?

Ans. Responsibility, Reliability, Respectability, Resources, Returns.

Q. What are the five P’s of business analysis?

Ans. Person, Purpose, Products, Place, Profit.

Q. What are the five M’s of business?
Ans. Man, Money, Materials, Market, Management.
Q. What are the important analysis to be made for taking lending decisions?
Ans. a. Borrower analysis: Assessment of Majority shareholder, management team &
other affiliated companies (if any). Lack of management depth, complicated ownership
structure etc.
b. Industry analysis: SWOT analysis.
c. Supplier/Buyer analysis: Analysis on concentration of supplier or buyer with their future
prospect.
d. Historical financial analysis: Analysis on minimum 3 years financial statements including
profitability, leverage, cash flow etc.
e. Projected financial performance analysis: Borrowers projected future financial performance
to be analyzed properly.
f. Account conduct analysis: Analysis of trade payments, cheques, interest & principal
payments from account statement.
g. Adherence to Lending guideline: Credit application do not adhere to the bank’s lending
guideline.
h. Mitigating factors: Margin sustainability or volatility, high debt load(leverage/gearing),
overstocking or debtor issue, rapid growth, acquisition or expansion, new business line,
management changes or succession issue etc. 29.06.2008 reviewed thorough

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Q. How we can assess risk of a particular credit?
Ans. By analyzing following risk factors:
 Business/Industry Risk: SWOT analysis.
 Financial Risk:
- Profitability
- Liquidity
- Debt management
 Management Risk:
- Experience/Track Record
- Succession
- Reputation
 Structural Risk:
- Working capital need
- Loan structuring
 Security Risk:
- Perishability risk
- Enforceability
- Forced sale value
 Account performance risk

Q. What do you mean by Executors and Administrators?

Ans. Executor: An Executor is a person named in the will to execute the will of a
person after his death. His powers and authorities are vested therein. He has to act
according to the directions given in the will but he is required to obtain official
confirmation of the will, technically called a “Probate” from the court of law. The
executor should be permitted to operate the account after he has obtained the
probate from the court.

Administrator: The Administrator is appointed by the court in those cases where the
deceased has not given the name of executor in his will or a person named as
executor has died or refuse to act. He disposes of the assets and makes payments of
the liabilities of the deceased as per the directions given in the will or in its absence
in the “Letter of Administration” issued by the court appointing him as
administrator and empowering him to administer the estate of the deceased.
Executors or Administrators cannot normally delegate their powers to third parties. Any
power of attorney or authority if given to a third party must be scrutinized and legal
advise must be obtained. If an administrator or executor misapplies money belonging to the
deceased with the Bank’s knowledge, the bank will be held responsible. It may, as a matter
of caution, be stated that borrowings by administrator, executor should not be considered
as routine advances and ordinarily entertained. 02.07.2009 reviewed

Q. What do you mean by Agents and Attorneys?

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Ans. An Agent is a person employed to do any act for another or to represent another in
dealings with a third person. An agent must be a major and of sound mind, so as to be
responsible to his principal. The person from whom such act is done or who is so
represented, is called principal.
When a person(Agent) borrows on behalf of another(Principal), the bank will insist on a
regularly executed power of attorney or a proper authority in the agents favor. The power
may be general or special.
Q. What is a Mercantile Agent?
Ans. A Mercantile agent means an agent who, in the customary course of his business as
such agent, has authority to sell goods, or to consign goods for the purpose of sale, or to buy
goods or to raise money on the security of goods. A broker, a factor or an auctioneer having
such an authority may be covered by the definition of a mercantile agent.

Q. Define “Eligible Security” as per Bangladesh Bank guideline?

Ans. As per Bangladesh Bank’s BRPD Circular # 08 Dt. 27.04.2005 value of eligible
securities are:
i). 100% value of deposit which are under lien against credit.
ii). 100% on the present market value of Gold & ornaments.
iii). 100% value of under lien Government Bond & Savings Certificate.
iv). 100% value of Guarantee provided by the GOB or Bangladesh Bank.
v). 50% market value of easily marketable commodities under direct control of Bank.
vi). Highest 50% market value of mortgaged land & building.
vii). In case of shares & securities which are in trade at DSE or CSE 50% of face value
whichever is lower.

Q. What do you mean by “easily marketable” commodities?

Ans. As per Bangladesh Bank’s BRPD Circular # 08 Dt. 27.04.2005, easily marketable
commodities means – Pledged goods which are under complete control of the Bank,
which are easily encashable/saleable. It is the regular routine work of Bank Official to
ensure either these goods are useable, within the validity, readily insured with up to date
document.
Q. Define “under one obligor” concept?
Ans. I). Credit extended to any Corporation/Company, partnership or other business entity
in which the borrower owns a direct interest of 50% or more.
ii). Credits extended to any business entity in which the borrower owns an indirect interest
of 50% or more, provided a). the borrower exercises a degree of management control, either
directly or indirectly b). or if the fortunes of the indirectly owned units are affected by the
business of the borrower or by the entities owned directly by him.

iii). In case of credits extended to entities with less than 50% (direct or indirect) ownership of
the borrower, if the control and or business dealings of the borrower are of such impact as to
influence the credit worthiness of the borrowers in the group.
iv). All obligors related to the borrower as a result of guarantees, endorsement or other
agreements/arrangements in favor of the Bank.
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 v). All obligors related as a result of common parent. 05.07.09 reviewed
Q. How credit worthiness of a borrower can be judged?
Ans. Credit worthiness of a borrower can be judged on following General principles:
i). The integrity of the borrower: He should be a respectable & honorable man who can be
relied on to keep his promise.
ii). The ability to repay the advance: This ability will depend on his financial resources,
which is meant not only his income but also the property or capital that he possesses or will
possess.
iii). The purpose for which the advance is required: The bank should ensure that the
purpose of the loan is such as to make the advance suitable as a matter of banking business.
iv). The source of repayment of the advance: We should ensure that the product which the
borrower has been manufacturing/dealing with, has a good demand in the market.
v). The period for which the advance is required: An advance to a manufacturer to enable
him to buy raw materials to fulfill a profitable short term contract is an advance of
temporary character promising sound banking business.

Q. What are the distinguish between Loans & Advances?

Ans. Though Loans & Advances apparently indicate a common synonyms but in details,
Advance used in macro sense & Loan used in micro sense. Bank’s fund deployed in
different forms of credit are termed as advance & on the other hand when an advance is
made in a lump sum repayable either in fixed monthly installments or in lump sum and no
subsequent disbursement is allowed is called a loan.
Q. What are the distinguish between OD & CC?
Ans. Basically nature of OD & CC are almost same but in some cases they differ from each
other. Overdraft is a kind of advance always allowed on a current account, with a certain
limit upon which a borrower can overdraw his current account through cheque within a
stipulated time. Overdraft facilities are generally granted to businessmen for expansion of
their business against the securities of stock in trade, shares, debentures, Govt. promissory
note, FDR, life policies, gold & gold ornaments etc. OD may be clean or unclean.

On the other hand Cash credit is the favorite mode of borrowings by traders, industrialist,
agriculturists etc for meeting their working capital requirement with an elastic forms
because limits increase or decrease on the basis of volume of goods. This type of facility is
always allowed against pledge or hypothecation of goods.

The most significant difference between OD & CC is that a cash credit is used for long term
by commercial and industrial concerns doing regular business while Overdraft is supposed
to be a form of bank credit to be made use of occasionally and for shorter period of
time.06.07.09 reviewed

Q. What precautions Bank should take prior opening of Account or considering any credit
proposal of Minor?
Ans. Under the contract act the contract entered in to by a Minor is void i.e. neither he can sue
or he can be sued. So, following precautions to be taken while opening of account or allowing
credit to minor:
i). The Guardian of a minor can make a contract for the minor if it is within the guardian
competence & for the benefit of minor & for his necessity.
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ii). A minor can not be compelled for the money borrowed by him except those which were
borrowed for his benefit & necessary for life.
iii). Any securities pledged by minor is invalid but if it is given by third party will be
chargeable.
iv). Any third party guarantee for minor will not be supported by law because as the minor is
not liable as principal debtor, the original agreement is void & thus ancillary agreement will
also be void.
v). A minor can not be liable on a bill or a cheque although the bill, or cheque is not invalid
merely be reason of having been drawn by the minor.
vi). A minor can accept benefit and can be a transferee although a sale or mortgage of his
property is void but minor is competent to sue possession of the property conveyed through a
deed of sale.
vii). If an overdraft is granted to minor even by mistake or unintentionally, the banker has no
legal remedy to recover the amount form the minor.

Q. What precautions to be taken prior allowing credit to a sole proprietorship?

Ans. Banker should take a declaration from the owner that he is the sole proprietors and no
other person has any interest in the business as partner or otherwise. He should also state that
as the sole proprietor, he will be personally liable for all dealings and obligations in the name of
business.

Q. In which circumstances, a married woman can bind her husband in respect of her availed
loans & advances?
Ans. i). Where the wife acts as the agent of her husband and obtains loans.
ii). Where she obtains a loans for the purpose of purchasing necessaries for herself or for
the household.
Q. What precautions Bank should take prior allowing credit to joint account?
Ans. i). A clear & specific authority from the joint holders in regard to overdrawing the account,
taking and advance or changing a security by one or more to them.
ii). Any advance must have approval from all otherwise only those who signs will are liable.
iii). Loan request letter to be signed by all joint account holders.
iv). Bank can claim a right of set off against the credit balance in the private accounts of the
parties or joint account of any two of them against an advance in joint account.
v). In the case of death or insolvency of any of the joint account holders, it is advisable to stop
the account if it is in debit. 07.07.09 reviewed

Q. Distinguish between “Agent” & “Trustees” ?

Ans. An agent is a person employed to act for another or to represent another in dealings with
third party. An agent is to be a major & of sound mind, so as to be responsible to his principal.

A Trustee is a person in which confidence is imposed. He is given control of an estate, usually

of the deceased person, for the purpose of the benefit of certain person. The person reposing the
trust is called trust author.
Q. What are the distinguish between “General & Special Power of Attorney”?

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Ans. In case of general power of attorney, the person appointing the attorney authorizes him
to act on his behalf for more than one transactions. While special power of attorney authorizes
a person to act in a single transactions.

Q. What is the distinguish between “Power of Attorney” & “Mandate” ?

Ans. Power of attorney as act as general notice for all concerns regarding delegations of
authority by the customer & on the other hand Mandate is only a notice for a particular Banker
to allow his nominee to operate his account.

Q. Who is a liquidator?
Ans. A liquidator is a person appointed at the time of winding up of a company to realize it’s
assets & to collect sums, if any from it’s share holders and to apply these funds in paying off
companies liabilities.
Q. Distinction between “Act” & “Ordinance”?
Ans. An Act is one which passed through parliament & an Ordinance is one which passed by
Presidential order in absence of parliament.
Q. Define “Partnership” & what are the basic ingredients of Partnership?
Ans. As per section of 04 of partnership Act 1932 :
Partnership is “relation between persons who have agreed to share profits of a business
carried by all or any of them acting for all”
Essential ingredients of partnership are:
i). There must be an agreement (Written, verbal or implied) between the persons concerned.
ii). The agreement must be to share the profit of a business.
iii). The business to be operated by all of them or any of the persons concerned acting all.

Q. What are the consequence of non registration of a partnership firm?

Ans. a). No suit to enforce a right arising from a contract or conferred by the partnership act
1932, can be instituted in any court by on behalf of any person suing as partner in a firm against
the firm unless the firm is registered.
b). No suit to enforce a right arising from a contract can be instituted in any court by on behalf
of a firm against any third party unless the firm is registered & person suing against name
shown in the registrar of firm as partner. Sample
c). No right of set off could be claimed. reviewed

Q. What do you mean by secured & unsecured advances?

Ans. Secured advance means:
i). Advance made on the security of tangible assets like goods, building, land, stock exchange
securities etc.
ii). Market value of such security must not be less than the amount of loan.
Unsecured advance means:
Advance made against which no tangible securities has been attached except personal
guarantee of borrower and other parties are called unsecured advances.

Q. Distinguish between Public Ltd. Co. & Private Ltd. Co.

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Ans.
PRIVATE LTD. CO. PUBLIC LTD. CO.
Minimum member two & maximum 50 Minimum member seven & maximum
unlimited.
Restrict to transfer the shares Shares are transferable.
Can commence business on receipt of Certificate of incorporation must be obtained
“Certificate of Incorporation” but without having of “Certificate of
Commencement” could not start activities.
Prohibits any invitation to the public to It raises it’s capital generally from public
subscribe for any share or debenture issues.
Must use the word “Private” as part of it’s The word “Public” is not added in its name
name but “limited” is added as the last word.

Q. Distinguish between Memorandum of Association & Articles of Association ?

Ans.
MEMORANDUM OF ASSOCIATION ARTICLES OF ASSOCIATION
Primary documents of a joint stock company Rules & regulations for the internal
define objects of its existence and operations. administration of a company. These determine
It may be rightly termed as the charter or the the rights of members as such and govern the
constitutions since it governs the transfer of shares, conduct of meetings,
relationship of the company with the appointment of directs, method of voting &
outside world. It gives the object, name, other day to day matters. Defines the internal
authorized capital, address etc. procedure of the company.

Q. What do you mean by Security?

Ans. Security means things deposited as a guarantee of an undertaking or loan, to be forfeited
in case of default. Also means document as evidence of a loan, certificate of stock, bonds etc. It
is also meant to be an insurance against an emergency.
Q. What do you mean by Primary security?
Ans. Primary security is one which deposited by the borrower & provide the main covers for
the advance made. Primary security are two types: i). Personal security ii). Impersonal security
i). Personal security: Borrower executed/perform promissory note, accepts or endorse bill of
exchange, make personal covenants in mortgage deed. These are called personal security.
ii). Impersonal security: When charge created on borrowers tangible assets like pledge,
hypothecation, mortgage etc. that is called impersonal security.
Q. What do you mean by collateral security?
Ans. A collateral security is a security belongs to & deposited by the borrower himself or by any
third party to secure the advance made. Collateral security may be two types. These are :
i). Direct collateral security & ii). Indirect collateral security.

Q. What are the attributes of a good security?

Ans.
i). Legal Aspects: a). Ascertainment of title b). Validity of title.
ii). Economic aspects : a). Marketability. B). Easy ascertainment of value c). Stability of price
d). Easy storability e). Durability f). Transportability g). Cost of consideration h). Yield

Q. When a bank call back it’s credit facility?

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Ans. i). If the borrower fails to renew the documents
sufficiently before the expiry.
ii). If there is a material deterioration in the value of the security.
iii). If the borrower fails to maintain adequate margin with the bank in spite of constant
requests.
iv). If the borrower refuses to lodge with the banker additional security to cover the amount
withdrawn in excess of the limit.
v). If the borrower is guilty of misconduct or fraud causing serious damage to his credibility.
vi). If there is a change in the policy of the bank, Central bank or Government making necessary
recalling the advance.

Q. What do you mean by ‘Document’ & ‘Documentation’?

Ans. Document: A document is a written statements of fact of proof or evidence arising out of
particular transaction which on placement may bind the parties there to answerable and liable
to the court of law for satisfaction of the charge in question.
Documentation: The execution/completing of document in proper form and according to the
requirements of law is known as documentation. Documentation is, therefore necessary for the
acknowledgement of debt by the borrower and charging of securities to the Bank by him.

Q. Write down the steps of documentation?

Ans. 1. Obtaining of instruments (Documents). osewr
2. Stamping.
3. Execution.
4. Witness.
5. Registration.

Q. What are the factors against which documentation is dependent?

Ans. The types of documentation depend in the following factors:
1. Legal status of the borrower (Proprietorship, Partnership or Limited company etc.)
2. Type of securities.
3. Type of loan. 14.07.09 reviewed

Q. What do you mean by ‘charge document’ & ‘legal document’ & ‘Other documents’ ?
Ans. Charge Document: Charge documents are generally printed documents provided by the
Bank for execution/implementation by the clients. Such as:
i). D.P. Note, ii). Letter of Agreement, iii). Letter of Continuity, iv).Letter of Revival.
Other charge documents: i). Letter of Hypothecation with Supplementary Agreement.
ii). Letter of Pledge with Supplementary Agreement iii). Letter of Guarantee, iv). Letter of Trust
Receipt, v). FDR Lien Letter etc.

Legal Documents: Legal documents are legal papers provided by the client certifying the legal
status of the borrower, their borrowing power, title of goods & property and legal deeds and
power of attorney connected with charging of securities. Like as:
i). Memorandum & Articles of Association of the company,

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ii). Registered Partnership Deed, iii). Trade License, iv). Companies Board Resolution &
partners resolution to borrow, v). All Original property documents including lawyers opinion.
vi). Reg. Power of Attorney to sell the mortgaged property.

Other Documents: i). Insurance Policy. ii). Govt. Security Transfer Form. iii). Lien on Export
L/C (for packing credit) iv). Duly discharged FDR, Share, Certificates, Govt. Securities etc.

Q. What are the use of different types of stamp for different types of loan?
Ans. Judicial Stamp: These are for judicial noting in the court. These are not used for loan
documentation.
Non-Judicial : Deed, Agreement, Undertaking, Power of Attorney etc.
Adhesive: Revenue Stamps & Special Adhesive Stamps (for some documents).
Embossed or imposed: Seal of Notary Public, Organization stamps etc.

Q. For which documents ‘Registration’ is necessary & why?

Ans. After obtaining of documents & completing the formalities of stamping, execution,
witnessing, the question of registration arises. All documents do not require registration. The
following are the cases where registration is necessary to give legal effects the instruments:
a). The Assignment on the body of an Insurance policy.
b). A Mortgage Deed.
c). In case of advance to a limited company, charges are to be registered with the concerned
Registrar of Companies.
d). Power of Attorney to sell immovable mortgaged property.

DIFFERENT METHODS FOR CREATING CHARGE OVER SECURITIES

Q. What do you mean by Charge? How many type of charge are there?
Ans. Charge is a method to create right over the tangible property of the borrowers. There are
two types of charge. These are : i). Fixed Charge ii). Floating Charge.
Fixed charge: A charge is said to be fixed if it is made specifically to cover definite & ascertained
assets of a permanent nature. Such as charge on land & building or heavy machineries.

Floating charge: It is a charge on property which is constantly changing such as stock.

Q. What are the different ways of charging against different securities?
Ans.
Sl No. Security Way of charging the securities
01. Cash Collateral (i.e. FDR, Govt. Securities, Pledge, Lien, Assignment
Shares, Insurance Policies, Receivables)
02. Movable stocks of goods Pledge, Hypothecation
03. Immovable Property Equitable & Registered Mortgage
04. Goodwill & Trust Execution of Personal Guarantee &
LTR

Q. Write short notes on the following:

Ans. a). Pari Passu Charge: The term usually use in consortium/syndicated finance. In case of such
lending, number of Bank’s or financial institutions join together to finance a single borrower in an agreed

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ratio against a common security. The securities are charged to all the Bankers/financial institutions
without any reference like 1 st charge/second charge etc. The term that institution will have a pari passu
charge over the borrowers assets means that the lenders are entitled to have equal right over the assets as
per the agreed share.
b). Second charge: A creditor holding second charge as mortgagee, is entitled to the proceeds after the
first is met. Second charge holder, prior creation of charge, must have to inform the first mortgagee
regarding creation of second charge & have to obtain his “NOC” as because the first mortgagee can not
part with the proceeds or title of the property if he has notice of the second charge.
c). Charging over securities: Charging over securities means making a security available as a cover for
an advance. In order to Bank may obtain different form of securities from the borrower. Some of them are
moveable, some of them are immovable, possession & control of the immovable security may or may not
be remain with the Bank but it has be make sure that, in case of default, security remain available to the
Bank to cover the exposure. It is mentionable here that whatever form the charge may be created,
Banker does not become the absolute or exclusive owner of the property, he will be able to apply his
right in case of default only & his right will remain valid till full adjustment of liability. So, the
manner by which some articles or commodities or properties are made available to a Bank as security is
known charging of security.
Q. What matter Bank have to consider before determine the methods of charge against any securities?
What are the different method of charging?

Ans. Charging of security depends on the following :

i). The type of security to be charged.
ii). Nature of advance
iii). The degree of control over the debtors property required by the Bank to secure their exposure.
Different methods of charging are : i). Lien (Section 171 of Indian Contract Act 1872) ii). Pledge (Section
172 of Indian Contract Act 1872 (iii). Hypothecation (Section 30 of Sale of Goods Act 1930) iv). Mortgage
(Section 58 of Transfer of Property Act 1882) v). Assignment (Section 130 & 136 of Transfer of Property
Act 1882) vi). Set off .

Q. What do you mean by Lien? What are the essential conditions of Lien? Briefly discuss the
different types of Lien.

Ans. Lien is the right of one person(Creditor) to retain goods and securities in his possession
belongs to other until certain legal debts due to the person(Creditor) retaining the goods are
satisfied. Lien does not give power to sale but to retain the goods or property.

Three essential condition of the Lien are:

i). The goods/securities/ properties over which Lien to be exercised must be in possession of
the creditor who will exercise it.
ii). There must be a lawful debt due to the person in possession of the goods by the owner of
goods.
iii). There must not be any contract on the contrary.

There are three types of lien. These are: i). Possessory Lien ii). Equitable Lien & iii). Maritime
Lien.
i). Possessory Lien: A possessory lien can be exercised only by the person who in possession of
the goods/securities. Prerequisite of possessory lien is that the possession should be rightful,
continuous & not for any specific purpose. Possessory lien may be lost:
* By loss of possession. * When due is paid * Substitution of securities. * When right of lien is
waived.
Possessory lien are two types, these are: i). Particular Lien & ii). General Lien
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  Particular Lien: Particular lien is that lien which confers/give the right to retain that
particular commodity against which the debt arose. For example: A radio repairer has
particular lien on the radio repaired.

 General Lien: A general lien confers right to retain goods and securities not only in
respect of a particular debt but in respect of the general balance due by the owner of the
goods and securities to the person in possession of them. The right of general lien is
specially given by law to : i). The Banker ii). The solicitor iii). Brokers iv). Wharfingers
v). Ware house keepers.

ii). Equitable Lien: An equitable lien is an equitable/fair right conferred by law to a right upon
the movable or immovable properties of another until certain specific claims are satisfied. The
instances of equitable lien are:

 Where the banker releases the pledged goods to the borrower under a trust receipt that
sale proceeds of the goods will be deposited to the loan account. The goods are under
equitable lien to the Bank.
 An unpaid vendor of immovable property has an equitable right over the property in
full or part until the actual money is paid.

 A partner who pays partnership debt on dissolution, has an equitable lien on the
property of the partnership.

iii). Maritime Lien: Maritime lien is a right specially binding a ship, her furniture, machinery,
cargo and freight for the payment of claim based upon maritime law. It is given by law to:
 The Master of the ship for seamen’s wages.
 The salvors on the salvaged property.
 To the persons who have suffered losses as a result of collision due to ships negligence.
It can be enforced by a legal process by arresting the ship or by proceeding against in
the Admiralty court. The lien subsists even if the ship has been sold for valuable
consideration to a third party.

Q. “Bankers lien implied pledge” discuss briefly.

Ans. As a general rule, the of lien does not give the person exercising the right, any power of
right to sell or dispose off the security retained. But in case of Bankers, it is otherwise. In case of
Banker, lien is implied pledge as because through lien Bankers not only get the right to retain
the goods but also to sell the goods or securities after reasonable notice for full adjustment of
liability, provided the property comes in to his hands in the ordinary course of business.
Section 171 of Contract Act lays down that a bankers can be implied if:
i). The property in the hands of the bankers is as capacity of his customers banker.
ii). The instrument of the money or goods with the bankers are not for a specific purpose
inconsistent with lien.
iii). The possession of the instrument or goods has been obtained by banker in a lawful manner.
iv). No contract is available on the contrary.

Q. Which situations are not covered by bankers lien?

Ans. i). It does not extend to securities which do not belong to customer & if the banker aware of it.
ii). Articles of goods deposited by the owner for safe custody.

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iii). Securities of valuables lying in safe deposit locker.
iv). Securities deposited for sale, collection of interest, dividend etc. Though he will not be able to
exercise his right of lien on Government Promissory Notes and shares, but he is entitled to do so for any
interest earned and the dividend collected.
v). A banker has no lien on it’s fully paid up shares but on partly paid up shares.
vi). A banker has no lien on insurance policy pledged as security for loan as soon as debt is repaid.
vii). Where a bankers discount bill, he does not have lien on the current account balance of the said
account of his customer.
viii). Conveyance of land is not subject to this lien but title of deeds left without a Memorandum of
Deposit are subject to such lien.
ix). Fixed deposit for collection of interest from other Bank, In the case, interest collected will fall under
his right of lien.
x). Security deposit upon a particular trust.
xi). Any security left in bankers hand to cover a proposed advance which is subsequently declined.
xii). Securities left inadvertently with the Bank by the owner.
xiii). A Banker cannot forfeit share in satisfaction of debt due by shareholders.
xiv). A bank does not have lien over the credit balance lying in a customers account. The banker’s right in
such case is a right of set off.

Q. What do you mean by Negative Lien?

Ans. The Banker sometimes asks a borrower to execute a letter declaring that his assets are free
from encumbrance/burden at the time of advance is made. The borrower also undertakes that
the assets stated in the said letter shall not be encumbered or disposed of without the banks
permission in writing so long as the advance continues. The undertaking is called “Negative
Lien”.

Q. What are the distinguish between Lien & other charges?

Ans. Lien is differentiating from other charges while it is a creation of law under certain
circumstances without any agreement whatsoever between the parties & on the contrary all
other charges originated as a result of agreement between the parties. Lien is a defensive right
not enforceable at a court of law, while others are positive right.

Q. What do you mean by Pledge? What are the essential characteristics/features of

“bailment”? Who can create a pledge?
Ans. Pledge means “bailment of goods as security for payment of a debt or performance of a
promise”. Bailment is the delivery of goods by one person to another for some purpose, under
contract that the goods shall, when the purpose is accomplished, be returned or otherwise
disposed of, according to the direction of the persons delivering them. So, pledge means:
* Bailment of goods
* Bailment must be by or on behalf of the debtor or intending debtor.
* Must be the intention of the parties that the goods will serve as security for a debt or
performance of a promise.
Essential characteristics/features of “Bailment”:
 Bailment always based upon contract.
 Delivery of goods is essential for a contract of bailment. Delivery means transfer of
possession, actual or constructive from one person to another person.
 Ownership remains with the pledgor (Borrower).

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  Possession retains with pledgee (Banker).
Who can create a pledge?
Ans. 1. The owner of the goods himself.
2. Mercantile Agent (Section 178 of contract act 1872)
3. Joint owner with consent of other co-owner.
4. If a buyer leaves the goods or documents of title of after sale in the possession of seller,
the latter may make a valid pledge of the goods provided by the pledgee acts in goods
faith and he has no notice of the sale of goods to the buyer.
5. A pledgee can himself re-pledge the goods.

Q. Write down the rights & obligations of “pledger”

Ans. Right s of the pledger:
i). To claim back the security pledged on repayment of the debt with interest and other charges.
ii). To receive reasonable notices in case the pledgee intends to sell the goods.
iii). In case of sale, the pledger is entitled to receive from the pledgee any surplus after debt is
completely paid off.

iv). Any loss caused to the goods, because of mishandling or negligence on the part of the
pledgee, the pledger has the right to claim the same.

Obligations of the pledger:

i). A pledger must disclose the any material faults or extra ordinary risk involved in the goods.
ii). Pledger is responsible to meet the expenditure for the preservation of the goods.
iii). Where the pledgee has exercised his right of the sale of goods the pledger is liable to make
good the shortfall, if there be any.
iv). The pledger is liable for any loss caused to the pledgee because of defect in his (pledgor)
title to the goods.

Q. Write down the right & obligations of pledgee?

Ans. Right s of the pledgee:
i). The pledgee has a right to retain the goods pledged to him by the pledger till the debt,
together with interest due thereon and the expenses for preservations of the goods are fully
repaid by the pledger. (Section 173 of contract act 1872).
ii). The pledgee has no right to retain his possession over the goods pledged for any debt or
promise other than the debt for which they were pledged, unless otherwise provided for, by a
contract (Section 174)

iii). The pledgee can claim any extra ordinary expenses incurred by him for preservation of the
goods.
iv). In case of default by the pledger to make payment of the debt, the pledgee has the right
either:
a). To file a suit against the pldger for the amount due and retain the goods as a collateral security.
b). To sell the goods pledged after giving the pledger reasonable notice of sale (Se. 176)

obligation/ duty of the pledgee:

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i). The pledgee must take the proper preservation of the goods pledged to him.
ii). The pledgee can not make unauthorized use of the pledged goods.
iii). The pledgee is bound to return the goods on payment of the debts.
iv). The pledgee will pay the pledger any benefit accrued from the pledged goods.
v). The pledgee is to refund to the pledger the surplus of the sale proceeds of the securities after
fulfillment of the debt against which the said securities were pledged.

Q. What do you mean by “Actual” and “Constructive” delivery?

Ans. Actual Delivery: When the pledger hands over the physical possession of the goods to the
pledgee as security that is called “Actual Delivery”
Constructive Delivery: When the pledger does something with the intention of placing the
pledge in possession of the goods that is called “Constructive Delivery”.

Q. What are the documents required for pledge?

Ans. i). Basic Charge Document ii). General Letter of Pledge with Supplementary Agreement
iii). Letter of Lien iv). Letter of Set Off v). Borrowers Personal Guarantee vi). Insurance Policy
covering all risks vi). Invoice of goods pledged vii). Latest stock report vii). Any other document
as per Head Office sanction advice.

Q. What do you mean by Hypothecation? What are the features of Hypothecation?

Ans. Hypothecation is a charge against movable 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/useful possession remain with the Bank as per the deed of
hypothecation. The borrower hold the possession not in his own right as the owner of the goods
but as the agent of the Bank.

Features of Hypothecation:
 Charge against an immovable property for an amount of debt.
 Goods remains in the possession of the borrower.
 In case of L/C, equitable it is an equitable charge to the Bank.
 Borrower bind himself to give possession of the hypothecated goods to the Bank when
called upon to do so.
 It is a floating charge.
 It is rather precarious.

Q. What precautions Bank should take before granting loan against hypothecation?

Ans. i). The facility should be given only to the person or business houses of high reputation &
sound financial strength.
iii). Only fresh, easily saleable and marketable goods should be advanced.
iii). Bank must periodically inspect the hypothecated goods with borrowers ledger.
iv). Periodical stock report to be obtained by the Bank.
v). An undertaking should be obtained that he will not charge the same goods to some other
Bank or persons.

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vi). Stock should be fully insured against fire & other risk.
vii). A name plate of the Bank must be displayed at a prominent place of the business premises
or godown of the borrower for public notice.
Q. Under which circumstances Banker lose his right over the hypothecated goods?
Ans. a). If the borrower, in possession of the goods, sells them to a bonafide purchaser for value
without notice of hypothecation, the purchaser gets a goods title to the goods and the
hypothecate can not proceed against them.

b). If the hypothecator, in possession of goods, makes a valid pledge of goods and the pledger
has no notice of the hypothecation, the claim of the hypothecate will be postponed to that of
pledgee.

Q. What steps to be taken regarding allowing credit against hypothecation of joint stock
company?
Ans. i). A search report to be obtained from Registrar of Joint Stock companies regarding any
previous charge already created with any Bank or other parties on the stocks.
ii). Bank charge must be registered with the Registrar of Joint Stock Companies within a period
of 21 days of the creation of the charge. In case, it is not registered within this period, it become
void against the liquidator and or any other creditor of the company.

Q. What are the documents required for Hypothecation?

Ans. i). Basic Charge Document ii). General Letter of Hypothecation with Supplementary
Agreement iii). Notarized Irrevocable General Power of Attorney to sell the hypothecated stock
iv). Borrowers Personal Guarantee v). Insurance Policy covering all risks vi). Latest stock report
vii). Certificate of Registration of charge (Ltd. Co.) viii). Mortgage property as collateral security
ix). Any other document as per Head Office sanction advice.

Q. What is Mortgage? What are the basic characteristics of Mortgage?

Ans. As per section 58 of Transfer of Property Act 1882 defines:
“A mortgage is the transfer of interest on an specific immovable property for the purpose of
securing payment of money advanced or to be advanced by way of loan, existing or future debt,
or the performance of an engagement which may give rise to a pecuniary liability”
Characteristics of Mortgage:
 Mortgage relates to specific immovable properties.
 It’ s a transfer of an interest in the specific immovable property means that the owner
transfers some of the rights of ownership to the mortgagee & retains the remaining
rights with himself but he can not sell the mortgaged property without the consent of
the mortgagee.
 In case of more than one owner, every co-owner is entitled to mortgage his share in the
property.
 The object of transfer of interest in the property must be to secure a loan or to ensure the
performance of an engagement which results in monetary obligation.
 Actual possession of the property need not always be transferred to mortgagee.
 The interest on the mortgaged property is re-conveyed to the mortgagor on the
repayment of the amount of the loan with interest thereon.

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Q. What are the different types of Mortgage?
Ans. There are six kinds of mortgages recognized by the Transfer of Property Act. These are:
i). Simple Mortgage.
ii). Mortgage by conditional sale
iii). English Mortgage
iv). Usufructuary Mortgage
v). Equitable Mortgage or Mortgage by deposit of title deeds.
vi). Anomalous Mortgage.
On the basis of transfer of title, Mortgage can be classified in to two categories:
i). Legal Mortgage ii). Equitable Mortgage

Q. Discuss briefly different types of Mortgage?

Ans. i). Simple Mortgage: In a simple mortgage, the mortgagor binds himself personally to pay
the mortgage amount without delivering possession of mortgaged property. The mortgagor
however, agrees expressly or impliedly that in the event of his failure to pay the mortgage the
debt, the mortgagee shall have a right to cause the mortgaged property to be sold and the
proceeds of sale to be applied towards discharge of mortgage debt.
The word “cause the mortgaged property to be sold” mean that the mortgagee shall have to
seek the intervention/involvement of the court for selling the mortgaged property & he directly
cannot sell the property. As the possession of the property not remain with mortgagor, this is
also called non-possessory mortgage.

Note: Banks do not prefer to make advances against this types of mortgage because of a
number of obligations on Banks which are difficult to discharge.

ii). Mortgage by conditional sale: In this type of mortgage, the mortgagor ostensibly sells the
mortgaged property to the mortgagee under any one of the following conditions:
i). That on default of payment of the mortgage money on a certain date, the sale shall become
absolute.
ii). That on such payment being made, the sale shall become void or
iii). That on such payment being made, the mortgagee shall transfer the mortgaged property to
the mortgagor.
Characteristics of this types of mortgage:
a). It is an ostensible sale and not a real sale.
b). The ostensible sale is subject to few conditions.
c). The possession of the property continues with the mortgagor.
d). The mortgagor does not have any personal liability except the ostensible mortgage.

Note: This types of mortgage is not usually taken by the bankers as there is no personal
covenant/agreement for repayment of debt.

iii). English Mortgage: According to the Transfer of Property Act, an English Mortgage is a
transaction in which “the mortgagor binds himself to repay the mortgage money on a certain
date and transfers the mortgaged property absolutely to the mortgagee, subject to the provision
that the mortgagee will re transfer it to the mortgagor upon payment of the mortgaged money
as agreed”

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Essential features:
i). It provides for personal promise to repay the mortgage money on a specific date.
ii). The property mortgaged is transferred to the mortgagee absolutely. The mortgagee
therefore, is entitled to take immediate possession of the property.
iii). Such an absolute transfer of the property is subject to the provision that the property shall
be re-conveyed to the mortgagor in the event of the repayment of the mortgage money.

iv). Usufructuary Mortgage: In this mortgage the possession of the property is delivered to the
mortgagee who is entitled to recover the rents and profits of the property and appropriates the
same to the principal and interest sum due. The mortgagor is not personally liable to pay the
debt and cannot be sued.
Essential Features:
i). Transfer of possession over the mortgaged property to the mortgagee who is entitled to
receive income and to appropriate the same towards the payment of the mortgage money. Or
interest thereon. The liability of the mortgagor is thus gradually reduced.

Note: Due to uncertainty regarding full recovery of mortgage money, Bank’s hardly entertain
advance proposal of this type.

v). Equitable Mortgage/Mortgage by deposit of title deed: Where a debtor delivers to the
creditors or his agent documents of title to immovable property with interest to create a security
thereon, the transaction is called Equitable Mortgage or Mortgage by deposit of title deed.
Under this mortgage, the right of ownership, or of possession and of absolute power of disposal
are not transferred to the mortgagee, only an equitable interest in the property is passed on to
the mortgagee as security for the debt.

Important factors:
i). There must be delivery of the title deeds to the creditor.
ii). There must be an intention in writing to make the title deeds as security for the loan.
iii). The mortgage must be created in cities and such other towns and urban areas specified by
notification in the official gazette by the Government.

vi). Anomalous Mortgage: A mortgage which does not come within any of the above classes is
called an anomalous mortgage. A mortgage containing a mixture of the characteristics of the
different types mentioned above comes within the category of anomalous mortgage.

Note: Such mortgages are not generally accepted by banks as a security for advances.
Q. What are the distinctions between English Mortgage & Mortgage by way of conditional
sale?
Ans.
English mortgage Mortgage by conditional sale
In English Mortgage there is an undertaking In a mortgage by conditional sale, there is no
or some personal liability by the mortgagor personal liability to pay, the sale is ostensible
to pay the debt and the property should be and is to be perfected in to an absolute sale on
conveyed failure of the payment of mortgage money.
In an English mortgage the ownership is In conditional mortgage the creditor acquires a
wholly transferred to the creditor which is, qualified ownership which can ripen into an
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 however, liable to be taken back on payment absolute one on failure of the mortgagor to
of the loan on certain date. repay.
Mortgagee under the English mortgage has A conditional mortgage has necessarily no
the right to enter into immediate possession such right.
of the property

Q. What do you mean by Legal mortgage? Write down the procedure of legal mortgage?
What are the distinguish between Equitable Mortgage & Legal Mortgage?
Ans. In legal mortgage, the mortgagor transfer his legal title in respect of the mortgaged
property to the mortgagee by a deed. The mortgagee gets a legal estate in the property and he is
endowed with all sorts of rights & remedies which can be exercised, if required without seeking
co-operation of a mortgagor. Legal mortgage is a perfect form of security.

Procedure of legal mortgage:

i). An instrument mortgaging the property is executed, It is signed by the mortgagor and two
witnesses.
ii). If the principal money secured is Tk. 100 or more, the instrument must be registered.
iii). The mortgage is complete as soon as the deed is registered but it will be effective from the
date of execution.
Note: In case the instrument is not duly attested and registered where it is so required, the
mortgage will be void.
Distinguish between Legal Mortgage & Equitable Mortgage:

Legal Mortgage Equitable Mortgage

In case of Legal mortgage, the mortgagor In case of an equitable mortgage, the
transfers legal title of the mortgage property mortgagor transfers the documents of title to
in favor of the mortgagee by a deed. On the mortgagee for the purpose of creating an
repayment of the loan mortgagee transfers equitable interest in the property without
the title to the mortgagor. passing legal title to the mortgagee but the
mortgagor undertakes, through MOD to
execute a legal mortgage in case he fails to pay
the mortgage money.
In legal mortgage transfer of legal right to the In equitable mortgage no registration charge is
mortgagee involves expenses in the form of required expect a minimum stamp duty for
stamp duty and registration charges. MOD.
Q. Write down the rights of Mortgagor & Mortgagee?
Ans.
Rights of Mortgagor:
i). Right of Redemption/release: The mortgagor has a right of redeem the mortgaged property. The right
of redemption is indivisible/undividable. The mortgaged property cannot be redeemed in part. This right
can not be declared void because otherwise a mortgage would cease to be a mortgage and become an
absolute transfer. (Sec. 60)
ii). Transfer to third party: The mortgagor can ask the mortgagee to transfer to a third party the
mortgaged property instead of re-transference to the mortgagor. This right has been included so that the
mortgagor may find a financier in times of difficulty and save himself from the mortgagee. (Sec.61)
iii). Inspection & production of documents: The mortgagor with the right of redemption can inspect &
make copies of all documents of title which are in the mortgagees custody or power. (Sec. 60B)

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iv). Additions to property: Where the mortgaged property is in the possession of the mortgagee and he
has made some additions to or improvements in the property, the mortgagor on redeeming the property,
is entitled to all such additions or improvements, in the absence of any contract in the contrary.

Rights of the Mortgagee:

i). Right to foreclosure: Foreclosure means debarring the mortgagor from exercising his right of
redemption. After amendment of Artha Rin Adalat Law in 2003, now Bank can sale the
mortgaged property with the power provided them by mortgagor through execution of
Registered Power of Attorney to sell the mortgaged property.
ii). Right of suit for sale: The mortgagee may bring a suit for sale in place of a decree for
foreclosure.
iii). Right to sell without courts intervention: The mortgagee may sell the mortgaged property
without intervention of the court by the power provided them by mortgagor through execution
of Registered Power of Attorney to sell the mortgaged property.
iv). Right to sue for mortgage money: In certain circumstances, mortgagee may sue the
mortgagor for mortgage money.
v). Right to spend money: A mortgagee may spend money on the mortgaged property for
preservation, to protect from forfeiture/penalty, to insure the property etc.
vi). Right of accession to property: In the absence of any contract on the contrary, the
mortgagee, for the purposes of security, is entitled to any additions to the mortgaged property.
vii). Right of possession: In case the mortgagee as per terms of the mortgage deed is entitled to
the possession of the, he must get such possession.

Q. Write short notes on the following:

Ans. Second Mortgage: If the mortgaged property of the mortgagor is mortgaged again to
another person as security for further borrowing, such a mortgage is called second mortgage.
So, mortgagor, after giving a first mortgage, can thereafter legally create a second and even
subsequent mortgage on the same property. The second mortgage will rank in priority after the
first, the third after the second and so on.
Sub-Mortgage: A sub-mortgage is the mortgage of a mortgage. If the mortgagee mortgages his
interest in the mortgaged property wholly or partly by way of security, it is called sub-
mortgage.
Priority of mortgage: In case of two or more mortgages on the same property, the mortgage
first executed takes priority over other mortgages executed subsequently. It is to be noted that
priority is by the time of execution and not by the time of registration of documents.

Q. What do you mean by “Assignment” ? What do you mean by “Actionable Claim”? What
are the different types of Assignment?
Ans. An assignment means transfer of an existing or future right, property or debt by one
person to another person. This is a method of charging under which borrower may assign any
of his rights, properties or debts to the banker to secure a loan from the latter.

In Banking an actionable claim is the subject of assignment. It is permissible under section 130 &
136 of the Transfer of property Act,1882 to assign actionable claim to anyone except to a judge, a
legal practioner or officer of any court of justice. An actionable claim is an unsecured claim to
money which is actionable i.e. for recovery of which an action may be brought in the court of

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law. In Banking business, a borrower may assign to the banker i). The book debts ii). Money
due from Govt. department or semi Govt. organization and iii). Life insurance policies.

Assignments may be two types. These are i). Legal Assignments & ii). Equitable Assignments.
i). Legal Assignments: As per section 130 of the Transfer of Property Act, an assignment is one
where:
 Assignment Deed us un writing duly signed by the assignor and the intention to pass by
assignment is clear.
 The Transfer of actionable claim is absolute.
 The Assignee informs the assignors debtor about the assignment and also gets the
confirmation of the notice and the debt.
ii). Equitable Assignment: An equitable assignment is one which does not fulfill any of the
above requirements.

Q. What are the common types of assignments? Distinguish between legal & equitable
assignment?
Ans. The most common types of assignments are:
a). Book debts
b). Contract money due from Govt. & Semi Govt. Organizations.
c). Supply bills.
d). Life insurance policies.

Distinguish between legal & equitable assignment:

Legal Assignment Equitable Assignment
In a legal assignment, assignee can sue in his In an equitable assignment, assignee can not
own name. sue in his own name
A legal assignee can give a valid discharge An equitable assignee can not give a valid
for the debt without the concurrence of the discharge for the debt without the
assignor. concurrence of the assignor.

Q. Write down the value of assignment as security? What precautionary measures bank
should follow before considering assignment?
Ans. Assignment is not good security for following reasons:
a). Value of the assignment depends on the integrity and credit worthiness of assignor and his
debtor.
b). In case assignor’s debtor exercise right of set off, Assignees position become vulnerable.
Assignee can not have better rights than those which the assignor possessor.

c). Right of assignee may be repudiated by breach of contract between assignor and his debtor.

Necessary precautions for the Bank:

1. Assignor to give irrevocable letter to debtor to pay debt to Bankers.
2. Banker must get assignment acknowledged by debtor.
3. Banker must get clear notice of prior assignment.
4. Banker must send notice of assignment to debtor to prevent subsequent assignment.
5. Constant follow up necessary.
6. Assignment for whole.

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Q. What is the distinguish between Mortgage & Assignment?
Ans. In a mortgage, there is always a right of redemption for the mortgagor but in an
assignment, it is provided by a separate agreement.

Q. What do you mean by Set-off? What are the essential features of set-off? When ‘Automatic
right of set off ‘is implemented?
Ans. The right of set off enables the Bankers to adjust wholly or partially as circumstances
permit, a debit balance in a customers account with any balance lying at his credit. Both these
claim must however be for known amounts in the same right and due immediately.
Set-off arises when a debtor or his creditor wishes to arrive at the net figure owing between
them when separate accounts or debt are involved.
Essential features of set-off:
a). Mutual debts for sums certain.
b). Debts must be immediately.
c). Debts must be in the same right.
d). No agreement to the contrary.

Under the following cases ‘Automatic Right of set off’ is implemented:

a). On the death, insanity or insolvency of the customer.
b). On the insolvency of a partner of a firm.
c). On the winding up of a company.
d). On receipt of a Garnishee order.
e). On receipt of a notice of assignment of the credit balance of the customer.
f). On receipt of an information of a second mortgage over the security which is charged to the Bank.

Q. Write short notes on :

i). Notice of set off: As already stated the right of set-off accrues to the banker as a result of banker
customer relationship. When a customer open two or more accounts it may be his intention to keep them
separate. So his different accounts can not be arbitrarily combined without proper notice to the customer.
Under such situation, it is advisable to take prior letter of set off so that a banker can combine them at its
discretion without giving the customer any notice. It also serves as a proof that the bankers right of set off
exists and the customer has not waived it. However, in actual practice the bank sends a notice to the
customer as soon as the right of set off is exercised.
ii). Automatic right of set off: The following are the situations where the bankers right of set off
automatically accrues and no notice of set off is necessary:
1. On the death, insanity or insolvency of the customer.
2. On the insolvency of a partner of a firm.
3. On receipt of a garnishee order.
4. On the winding up a company.
5. On receipt of notice of assignment of the credit balance of the customer.
iii). Bankers right of set off: In following cases branch can exercise the right of set off:
1. To combine two or more accounts of the same customer in the same branch of a bank.
2. To combine two or more accounts of a customer maintained in different branches of the same
banks.
3. To adjust the surplus amount of the sale proceeds or realization of the securities held as cover for
one particular debt for liquidation of any other debt after realization of that particular debt.

Q. What are the distinguish between Lien & other charges?

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Ans. Lien is differentiating from other charges while it is a creation of law under certain
circumstances without any agreement whatsoever between the parties & on the contrary all
other charges originated as a result of agreement between the parties. Lien is a defensive right
not enforceable at a court of law, while others are positive right.

Q. What are the distinguishes between Pledge & Hypothecation?

Ans.
Pledge Hypothecation
Possession & control of goods remain with Possession & control of the goods remain with
the Bank. the borrower.
Reasonable notice to be served to the pledger No such notice is required.
prior sell the goods.
No decree of the court order required for sell Suit required to file to obtain court ‘s decree
or dispose off the goods. for sale of the hypothecated goods.

Q. What are the distinguishes between Hypothecation & Mortgage?

Ans.
Hypothecation Mortgage
Hypothecation refers to movable property Mortgage refers to immovable property & may
and can be created without registration. be created with registration. where mortgagees
right to suit is governed by the Transfer of
Property Act.
In hypothecation there is only obligation to In mortgage there is transfer of interest in the
repay money and no transfer of interest. property to the creditor.
In hypothecation, hypothecates right is not Mortgagees right to sue is governed by the
governed by any statute his reedy is by way Transfer of Property Act.
of a suit for sale of the property hypothecated
and for declaration of charge in his favor.

Q. What are the distinguishes between Mortgage & Charge?

Ans.
Mortgage Charge
Creation of Mortgage indicates existence of a Creation of charge does not necessarily imply
debt. the existence of a debt.
In a mortgage there is a transfer of interest in In a charge repayment of debt is secured out of
specific property. It’s a right created against that property. No such right is created in the
the property. case of a charge.
A mortgage gives rise to right in rem. Charge gives rise of right in personam
Mortgage is created by act of the parties. Charge arise on account of operation of law.
A mortgage is usually for a fixed time A charge may be perpetual.

Q. What are the general principles to consider prior granting advances on the basis of
securities?
Ans. i). Immovable Properties ii). Movable Properties.

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Movable properties: a). Goods, b). Documents of title of goods c). Stock exchange securities
d). Life insurance policies e). Fixed deposit receipts f). Book debts g). Supply bills

General Principles:
1. Adequacy of margin: Margin implies the excess of the market value of the security over
the advance granted against it. In order to determine margin, there are various factors
to be consider: * Fluctuation in market price * Financial soundness * Reserves Bank
control
2. Ready marketability: Security should be easily marketable.
3. Documentation: In order to avoid all future disputes, documentation should be verified
carefully.
4. Realization of advances: The Bank has to monitor that the loans and advances are
realized on their expiry.
5. Continuing security clause: The banker should get continuing clause in the loan
agreement.

Q. Why bank obtain margin while grating loans?

Ans. a). The market value of the security is subject to fluctuations. In case of a fall in the value
of the security, the interests of the bank are safe if there is an adequate margin.
b). The security remains the same while advance against the borrower may go on increasing on
account of non-payment of interest, charges etc.

Q. For which reasons bank do not prefer to advance money on the security of immovable
security? What precaution should follow prior allowing credit against immovable security?

Ans. i). Difficulty in ascertaining the title of property ii). Not readily realizable iii). Restrictive
laws. iv). Valuation problem v). Legal formalities.
Precautionary measures:
i). Borrower should be financially sound & the business for which money is borrowed should be
economically viable.
ii). The borrower should have a clear title over the property to be given as security. It should be
free from any encumbrance.
iii). The property should be properly valued. (Value depends on Ownership right, location of the
property, type of construction, size & structure layout, rental value etc. )
iv). Proper margin should be kept.

Q. What are the precautionary measures prior allowing advance against goods?
Ans. i). Selection of borrower: Three “C” s should be ensured.

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ii). Selection of the commodities: Commodities should have fairly stable price.
iii). Charging the securities: Which method would be proper for charging securities.
iv). Storage of goods: Storage facility should be safe & easily reachable.
v). Conduct of the account: Account performance of the borrower.
vi). Legal requirements: to be followed properly.
Q. What are the risks involved for granting advances against documents of title?
Ans. i). Possibility of frauds ii). Non-negotiability nature iii). Obtaining delivery on the basis of
indemnity bond.

Q. What are the classification of Stock Exchange Securities?

Ans. i). Government Securities: They include securities issued by the Central Governments.
ii). Semi-Government Securities: They include securities issued by semi –government institutions like
port trust, improvement trust.
ii). Corporate Securities: They include securities issued by public limited companies.

Q. What are the merits & demerits of stock exchange securities?

Ans. Merits: i). Reliability: Tangible, better in comparison to personal guarantee & easier for banker to
verify the title of the borrower.
ii). Liquidity: Stock exchange securities & Govt. & Semi-Government securities are more easily
realizable as compared to stock, land, buildings etc.
iii). Price stability: Good stock exchange securities do not have much fluctuations in their prices. Hence
a banker can be more sure of recovering his funds.
iv). Easier valuation: Since the securities are quoted on the stock exchange, the banker can ascertain
their value quite easily.
v). Transferrability: The ownership of stock exchange securities can be easily transferred as compared
to other partially negotiable securities such as land, building etc. Moreover, in time of need the banker
may also obtain funds on the basis of these securities.
vi). Regular recovery: The dividend of interest which is received from time to time on these securities
can be used for recovery of interest due on the loan or repayment of the principal itself.
Demerits: i). Liability to pay in case of partly up shares: In case partly paid shares have been
transferred in the bankers name and the company makes a call, the banker will have to make payment of
such a call. So, Banker should not accept partly paid up shares as security.
ii). Companies Lien: The articles of companies generally provide that the company will have right of
lien on its shares for any call due on them or any money due by the shareholder to the company. However
this right of lien will not be available to the company against such debt which the company might have
contracted after receipt of notice of pledge from the bank. But in case the bank fails to give notice or there
are already large debts outstanding against the debtor in favor of the company, the bankers interest will be
adversely affected.
iii). Forgery: The bank may suffer loss on account of forgery committed by the borrower, i.e. the
transferor signatures may have been forged or the original as well as duplicate copy of the same
certificate might have been pledged with different bankers by the borrower. In case the shares have been
registered in the name of the bank on the basis of forged signatures of the transferor, the banker is liable
to the company for any loss suffered by it.

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iv). Fluctuations in prices: The bank may have to suffer loss in case there are violent fluctuations in the
value of the securities and it has not kept adequate margin.

Q. What precautions banker should take prior granting advances against Stock Exchange
Securities?
Ans. 1. Selection of securities: The task of the selection of corporate securities is performed by the Head
Office of the Bank. While selecting such securities for inclusion in the list, the following factors are
considered: a). Nature of companies business b). Companies management c). Past working results d).
Market trends in values of the shares of the company.
2. Valuation of securities: The valuation of corporate securities dealt on stock exchange can be done on
the basis of daily stock exchange quotations. However, the bank should also calculate the break up value
of the shares. While valuing these securities in case they are quoted cum-dividend or cum-interest, the
amount of dividend or interest included in the price should be subtracted.
3. Creation of Charge: The banker should finally get the securities charged in its favor & the charge can
be created in either of the two ways:
i). By giving a legal title & ii). By creating an equitable title.

Q. Write down the procedure to create charge on stock exchange securities?

Ans. Charge can be created on stock exchange securities in following two ways:
i). By giving a legal title: in case of legal title the securities are transferred by the borrower to the bank in
its name. The name of the banks or its nominee replaces the name of the borrower in the companies
records. The borrower may not prefer to a legal mortgage for following reasons:
 The transfer and retransfer of securities involve costs in terms of stamp duty which has to be
borne by the borrower.
 The reputation of the borrower is lowered because the fact of charging the security becomes
public.
 The borrower is deprived of voting and other rights attached to the securities for the period they
stand in the name of the bank. In case the borrower was holding directorship of a company on the
basis of these shares, he may lose that also.

ii). By giving an equitable title : In case of an equitable charge the borrower transfers the equitable title
of the securities in favor of the bank by depositing the securities with it. The securities continue to stand
in the borrowers name in companies records/ The equitable charge may be created by any of the
following ways:

 By mere deposit of securities: Mere deposit of securities with the banker with the intention of
creating a charge in favor of the bank is not very popular with the banks on account of likely
complications that may arise in the absence of any written document.
 By memorandum of deposit: The bank may obtain from the borrower a memorandum stating
that:
i). Securities mentioned therein have been deposited by the borrower as security for the loan
obtained from the bank.
ii). The bank will be entitled to sell the securities in the event of failure of the borrower to make
repayment as per terms of agreement.
iii). The banker will be entitled to debit the borrower’s account with any amount that it might
have to pay towards payment of call on securities (in case of partly paid up securities)
 By Blank transfer: The customer may be required to deposit with the bank together with blank
transfer forms duly signed by him. The advantage of such a transfer is that the bank may at any
time fill its own name or that of any other person to whom it has sold the securities for recovering
the loan.

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  By power of Attorney: The bank may get executed from their customers in respect of securities
deposited, special power of attorney either in its own favor or in favor of its nominees.

Q. What are the risks in case of equitable charge? Which conditions are to be satisfied prior accept
of equitable charge on securities?
Ans. i). Existence of prior equitable title: An equitable charge becomes defective by a prior equitable
charge or a subsequent legal charge.
ii). Companies right of lien: In case the articles give the company right of lien on its shares, it will have
an adverse effect on banker’s right of equitable charge.
iii). Absence of information to the Bank: Since the borrower continues to be the registered holder of
shares, he gets every information regarding issue of bonus shares, companies meetings, issue of right
shares etc. The borrower may gets the bonus shares and may sell them directly. Thus, the bankers security
is reduced.
Conditions are to be satisfied prior accepting of equitable charge on securities:
i). The customer is of a high integrity.
ii). The advance is not of a high amount.
iii). The advance is for a temporary period.
iv). The constituents of the shares deposited change frequently.

Q. What do you mean by “Equity shares” & “Preference Shares”?

Ans. Equity Shares: Equity shares (also known as ordinary shares) are those which carry no special
rights in respect of annual dividend and the return of capital if the company is wound up. They are not
given any guarantee of dividend on their investment in the company. They are entitled to receive such
dividend as are determined by the Board of Directors and approved at the Annual General meeting of the
company. Dividend among the equity shareholders of a company is distributed out of the net profits of the
company, i.e. after all the fixed charges have been met and preference shareholders have been paid fixed
rate of dividend on their shares. Equity shareholders have been called “residual claimants”. Equity
shareholders are those who provide “venture or sponsor capital” for the company without insisting on any
special conditions for the safety of their capital.

Preference Shares: Preference shares of a company are those shares which carry certain preferential
rights for its holders over those of equity shareholders. Preference shares carry a prescribed rate of
dividend, which the company share have to pay before any dividend can be distributed to the equity
shareholders.

Preference shares may be either cumulative or non-cumulative. In cumulative preference shares,

the dividend due on them is to be paid every year. If there be no profit for a few years, the dividend due
for those years on the cumulative preference shares will have to be paid out of the profits of the position
to pay the same. Till the dividend due on this kind of share is paid in full for all the years, no dividend
will be paid to equity shareholders. Non cumulative preference share do not carry this privilege. Their
dividend depends upon divisible profit of each separate year. If the fixed dividend for any year cannot be
fully paid, it is not made up out of the redeemable or non-redeemable.

Q. What are the procedure of forced sale of shares?

Ans. In case the bank decides to close the account by selling the securities, due notice should be given to
the borrower. A lawyers notice would be preferable. The securities should be sold after the expiry of the
notice. It would be better if the bank obtains an authority from the borrower to sell them. It should be
carefully noted that the Bank should sell only so much of the securities that would be required to adjust
the debit balance of the account. The sale should be arranged through a respectable broker only under a
recognized stock exchange & the party kept informed in writing of the sale of the securities from time to
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time. After the account is adjusted in full, the balance of the securities should be returned to the borrower
unless the bank can, under an agreement, exercise its lien thereon in respect of any other indebt ness.

Q. What are the documents required for allowing credit against shares?
Ans. 1. Application for advance.
2. Demand Promissory Note.
3. Letter of Continuity (For Overdraft)
4. Letter of General Lien
5. Original share script with blank transfer deeds signed by the shareholder duly witnessed but undated (If
the shares are not transferred in the name of the bank).
6. Letter of Guarantee of the shareholder.
7. Irrevocable letter of mandate in duplicate for collection of dividend, bonus etc. addressed to relative
companies by the shareholder (a copy thereof should be sent to the company concerned under cover of a
forwarding letter).
8. Notice of pledge by the shareholder to the related companies.
9. Declaration of pledge by the shareholder to the related companies.
10. In case of renewal of documents in addition to full set of documents, letter of acknowledgement of
debt should be obtained.

Q. What do you mean by Debenture? Briefly discuss different types of debenture?

Ans. A debenture is a document issued by a company usually under its common seal acknowledging the
indebtness of the company either to the bearer or to the registered holder of the document. Debenture is a
loan to a limited company bearing fixed rate of interest. Interest is payable whether the company makes a
profit or not.

Debenture may be secured either by a fixed charge or floating charge on companies assets. If there is no
charge, debentures are clean or unsecured, these are sometimes called naked debentures. In case of
winding up of a company, the secured debenture holders can have recourse to the property
charged. If unsecured they will rank with ordinary creditors.

Different types of debentures:

i). Debenture to bearer: Debenture is payable to bearer, with or without power for the bearer to have
them register or to have them at any time withdrawn from it. These are transferable and have been
recognized as negotiable instrument transferable by delivery.
ii). Registered Debenture: This debenture is payable to a registered holder. Any transfer must be
registered with the company.
iii). Simple or Naked debenture: Those where no security is given for payment of interest or repayment
of principal.
iv). Mortgage Debenture: Any debenture secured by a charge, whether specific or floating, on the whole
or part of the assets of the company, is called a mortgage debenture.
v). Redeemable or irredeemable Debenture: Redeemable debenture indicate that the company agrees to
pay money lent at a stipulated time or after a certain period of notice. Irredeemable debenture have no
date of for repayment.
Q. What are the documents required for financing against Debentures?
Ans. 1. Application for advance.
2. Demand Promissory Note.
3. Letter of Continuity (For Overdraft)
4. Letter of Lien
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5. Irrevocable letter of mandate for collection of interest etc. addressed to relative companies by the
debenture holder.
6. Letter of Authority given by the borrower to sell the debenture in default of borrower in repaying the
advance.

Q. Define “Life insurance policy”? Discuss different types of policies?

Ans. Life Insurance Policy: A life insurance policy is a contract in which one party (the insurer) agrees
to give a certain sum upon the happening of a certain event contingent upon the duration of human life, in
consideration of the immediate payment of a smaller sum or certain periodical payments by another (i.e.
the insured).
Different types of Life insurance policy:
1. The whole life policy: Under this policy the premiums are payable throughout the life time of the life
assured.
2. Endowment policy: Under this policy, the insured amount is payable to the insured on his attaining a
specific age or on the predetermined date.
3. Joint life policy: Where two or more lives are insured jointly, such a policy is issued.
4. With or without profit policy: A with profit policy is one, the holder of which is entitled to take
benefit or bonuses declared out after a certain period of time. In case of without profit policy this benefit
is not available.

Q. What are the merits & demerits of granting advances against life insurance policy?
Ans. Merits: i). Valuation can be done easily.
ii). Security requires no supervision & expenses except keep watching on premium payment.
iii). Assignment can be affected simply & perfect title easily obtained.
iv). Value steadily increases.
v). Surrender value can be easily ascertained. (Surrender value: A life policy has a certain value even
before it matures. Such a value is called the surrender value).

Demerits: i). They are contract of the utmost good faith & requires utmost accuracy and trust from the
proposer.
ii). Risk of non payment of premium by the borrower.
iii). The persons claiming under any policy of insurance must have insurable interest in the life assured
otherwise the contract is void.

Q. What do you mean by ‘Surrender Value’?

Ans. A Life policy has a certain value even before it matures. Such a value is called the ‘Surrender
Value’. Surrender value is thus the amount which the company is prepared to refund on a policy should
the policy holder wish not to continue the policy. Normally a policy acquires surrender value after
complete three years premiums has been paid.

Q. What do you mean by ‘Real Estate’? What are demerits to consider credit against ‘Real Estate’?
Ans. The term ‘Real Estate’ indicates all types of immovable property which are attached or unattached to
land or forming part of land. Thus it includes such tangible assets as land, buildings, factory premises, etc.

Demerits to consider credit against real estate :

i). Title of the owner.
ii). Difficulty in valuation of property.

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iii). Legal formalities and time consuming.
iv). Absence of ready realization.
v). Legal bar.

Q. What are the disadvantages of credit against ‘supply bills’? How the disadvantages may be
overcome?
Ans. Followings are the disadvantages:
i). The collection of supply bills takes time specially from Government Offices.
ii). Despite the assignment of debts to the bank, the department still has a right of set off against the
supply bill amount for any amount due to it.
iii). Unless the Registered assignment, possibility of bill could be paid direct to the creditor.
iv). Since the goods are already supplied, the bank has not other security other than the supply bill
furnished by the contractor.
v). The amount claimed by the supplier may be reduced due to short or defective supply.

Precautions to overcome the disadvantages:

i). Supplier must be confined to first class who is not only honest but also have enough business
experiences.
ii). Original contract paper should be scrutinized carefully & attested copy of the same should be retained
at bank’s custody.
iii). Registered Irrevocable Power of Attorney should be obtained from the borrower in favor of the bank
to collect the bills receivable.
iv). Bill must be accompanied with the inspection notes or challans.
v). Appropriate margin to be retained by the bank.

Q. What are the disadvantages of credit against ‘Book Debts? How the disadvantages may be
overcome?

Ans. Followings are the disadvantages:

i). It is by nature an unfavorable from Bankers point of view due to clean credit facility.
ii). The realization of book debts is not so easy job and is risky.
iii). In the case of book debts, the banker is placed in the position of a debt collector.
iv). If the book debts are subject to a prior charge or a counter claim of the debtor, the banker will not be
able to get the full benefits of the book debts.

Precautions to overcome the disadvantages:

i). Solvency of the debtor must be ascertained.
ii). Legal Assignment to be effected by execution of an instrument in writing.
iii). The banker should give notice of assignment to the debtor.
iv). The debtor should acknowledge receipt of notice and to confirm the debt.
v). The borrower must authorize the bank to receive the debt of the party by executing a power of
attorney.
vi). The assignment should be of whole debt not for part one.

Q. Write short notes on the following:

Ans. a). Average Clause: Under the ‘average clause’ if the property is under insured, the assured shall be
considered to be his own insurer for the difference between the market value of the property and the
amount of insurance. Similarly uninsured goods should not be left
with insured goods. In the event of loss, the insurance company will not compensate the loss to the full
extent as it would have done, had the property been insured for the full value, the company will

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compensate only rate ably. Thus this average clause will reduce bank’s claim as uninsured or
underinsured goods will be including in calculating the actual loss.

b). Bank/Mortgage Clause: It provides that inter alia notice in all matters shall be given to the bank by
the insurance company, all claims shall be paid to the bank whose receipt shall be a valid and complete
discharge, and the bank can settle or compromise the claim with insurer without reference to the
borrower.

BILLS PURCHASED & DISCOUNTED

Q. Define Bill of Exchange? Discuss different types of Exchange?

Ans. As per section 5 of negotiable Instrument Act 1881, a bill of exchange is “an instrument in writing
containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of
money only to, to the order of a certain person or to the bearer of the instrument”
Different types of bill:
i). Demand bill: When a bill is payable “at sight” or “on demand” or “on presentation” it is called
Demand bill.
ii). Usance bill: When a bill is payable on maturity, say after 30, 60 or 90 days or after sight it is called
Usance bill.
iii). Clean bill: When a bill is not accompanied with documents of title is called Clean bill.
iv). Documentary bill: When the drawer of a bill encloses the documents of title of goods, such as,
Railway Receipt, or Bill of lading, the bill is called a documentary bill. Such as bill may D/A (Document
against acceptance) bill or D/P (Document against payment) bill.

Q. What are the advantage & disadvantage of purchase & discounting?

Ans. Advantages:
a). Certainty of payment: In case the banker takes due precautions in selecting his customers, he is
almost certain of getting the payment of bills on the due dates.
b). Safety of funds: The safety of banks fund are safe because of double security. Drawee is liable to pay
the bill & in case his failure, banker can recover the money from customer.
c). Employment of funds for a definite period: Since the bill are drawn for a definite period, the baker
by making a judicious selection of bills can invest his surplus funds for the period he considers
appropriate.
d). Refinance facility: The banker can obtain refinance facility from the approved financial institutions
of the country in respect of bills discounted & purchased.
e). No fluctuation in price: Bills are better than other securities because they do not fluctuate in their
value.
f). Higher yield/return: The discounting of bills gives a higher rate of return than loans and cash credits
even when the rate of interest is uniform.

Disadvantages:
i). There are risk of fake bills having been issued.
ii). Parties may helps each other by accommodation bill.
iii). In case of clean bill, there is possibility of failure to realize money.

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 LOAN CLASSIFICATION & PROVISIONING
Setting
Q. What do you mean by Loan classification & Provisioning?
Ans. The loan classification & provisioning may be defined as a process by which the risks, associated
with the loan accounts is identified and quantified to measure the level of reserves to be maintained by the
Bank for providing those risky loans.
Classification means giving each and every loan case a status like UC, SMA, SS, DF, BL through
verification of their transaction and repayment performance on a particular date i.e. reference date.
Provisioning means, setting aside fund from the profit against possible loan loss.

Q. What are the objectives of loan classification & provisioning?

Ans.
* To regularize follow up & monitoring activities.
 To strengthen credit discipline.
 To improve recovery position.
 To raise a fund (reserve for provision) gradually which may help the Bank to lessen the burden of
loan loss in a single year.
 To comply with central bank’s instruction.
 To consolidate & provide necessary data/information which help the concerned authority of the
Bank as well as the government and Bangladesh bank in formulating and activating necessary
policy.
Q. What are the different circulars issued by Bangladesh Bank for loan classification &
provisioning?
Ans. BCD Circular # 34/1989, 20/1994
BRPD Circular # 16/1998, 02/2005, 08/2005 & 09/2005,
BRPD Circular # 05/2006 Dt. 05.06.2006 (Latest one)
BRPD Circular # 08/2007 Dt. 07.08.2007 (for provision of off balance sheet items).

Q. For the purpose of classification loans and advances divided into different types, please discuss?
a). Continuous Loan: The loan accounts in which transaction may be made within certain limit and have
an expiry date for full adjustment will be treated as continuous loan. Such as Overdraft, Cash Credit,
Packing Credit, LIM, LTR etc. (CL form -2 is used for reporting this type of loans).
b). Demand Loan: The Loan that become repayable on demand by the bank will be treated as Demand
Loan. If any contingent or any other liabilities are turned to forced loans (i.e. without any prior approval
as regular loan) those too will be treated as Demand Loan. Such Forced LIM, PAD, FBP & IBP etc. (CL
form – 3 used for reporting this types of loans).
c). Fixed Term Loan: Loans and advances which have a set repayment schedule of some installments
within a fixed term period are called Fixed Term Loan. Fixed Term Loan can be divided into two
categories:
i). Term Loan payable within 5 years: The term loan which are payable within a period of 5 years as per
the contractually fixed repayment schedule. Any term loan other than STAC/MC allowed for a period of
5 years should be of this types. (CL form – 4 used for reporting this types of loans).
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ii). Term Loan payable in more than 5 years term: The Term loan which are repayable in a period more
than 5 years as per the contractually fixed repayment schedule. Term of this type of loan will be more
than 5 years. (CL form – 5 used for reporting this types of loans).
d). Short Term Agricultural Credit: Will include the short term credits as listed under the annual credit
programme issued by the Agricultural credit & special programs Department (ACSPD) of Bangladesh Bank. Credit
in the agricultural sector repayable within 12 months will also be included herein.
Short term Micro Credit will include any micro credits not exceeding Tk. 25,000/= and repayable within
12(Twelve) months , be those termed in any names such as non-agricultural credit, self reliant credit, Weavers
credit or Bank’s individual project credit. (CL form – 6 used for reporting this types of loans).

Q. What are the basis for classification of loan?

Ans. a). Objective Criteria b). Qualitative judgment.

Q. What do you mean by Special Mentioned Account? What are objectives to identify a loan as
Special Mentioned Account? What are the treatment of interest for this loans?
Ans. A continuous loan, Demand loan or a Term Loan which will remain overdue for a period of
90(Ninety) days or more, will be put in to the “Special Mentioned Account (SMA)”
By treating such loan as “Special Mentioned Account (SMA)” will help banks to look at accounts with
potential problems in a focused manner and it will capture early warning signals for accounts showing
first sign of weakness.
Interest accrued on “Special Mentioned Account (SMA)” will be credited to Interest suspense account ,
instead of crediting the same to income account.
Q. What is the implication/suggestion of “Special Mentioned Account (SMA)” ?
Ans. Loans in the “Special Mentioned Account (SMA)” will have to be reported to the credit information
bureau (CIB) of Bangladesh Bank. However it is reiterated/repeat that loans in the “Special Mentioned
Account (SMA)” will not be treated as defaulted loan for the purpose of section 27KaKa(3) of the Bank
Company Act, 1991.

Q. Write down the objective criteria of Pastdue/Overdue loan under different categories?
Ans. i). Any continuous loan if not repaid/renewed within the dixed expiry date for repayment will be
treated as past due/overdue from the following day of the expiry date.
ii). Any Demand loan if not repaid/rescheduled within the fixed expiry date for repayment will be treated
as past due/overdue from the following day of the expiry date.
iii). In case of any installments(s) or part of installment(s) of a fixed term loan (Not over 5 years) is not
repaid within the fixed expiry date, the amount of unpaid installments will be treated as past due/overdue
from the following day of the expiry date.
iv). In case of any installments or part of installments of a Fixed Term Loan (Over 5 years) is not repaid
within the fixed expiry date, the amount of unpaid installments will be treated as past due/overdue after
six
months of the expiry date.

agricultural credit and Micro credit if not repaid within the fixed expiry date for repayment will be
considered past due/overdue after six months of the expiry date.

Q. What are the classification segments for different categories of loan?

Ans. a). Any continuous loan will be classified as:
 ‘Sub-standard’ if it is past due/overdue for 6(Six) months or more but less than 09(Nine)
months.

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  ‘Doubtful’ if it is past due/ overdue for 09(Nine) months or more but less than 12(Twelve)
months.
 ‘Bad/Loss’ if it is past due/overdue for 12(Twelve) months or more.
b). Any Demand Loan will be classified as:
 ‘Sub-standard’ if it is past due/overdue for 6(Six) months or more but less than 09(Nine) months
from the date of claim by the bank or from the date of creation of forced loan.
 ‘Doubtful’ if it is past due/ overdue for 09(Nine) months or more but less than 12(Twelve)
months
from the date of claim by the bank or from the date of creation of forced loan.
 ‘Bad/Loss’ if it is past due/overdue for 12(Twelve) months or more from the date of claim by the
bank or from the date of creation of forced loan.
c). In case of any installments or part of installments of a Fixed Term Loan is not repaid within due
date, the amount of unpaid installments will be termed as “defaulted installment”.
c). i). In case of Fixed Term Loans which are repayable within maximum five years of time:
 If the amount of ‘defaulted installment’ is equal to or more than the amount of installments due
within 06(six) months, the entire loan will be classified as “Sub-standard”.
 If the amount of ‘defaulted installment’ is equal to or more than the amount of installments due
within 12(Twelve) months, the entire loan will be classified as “Doubtful”.

 If the amount of ‘defaulted installment’ is equal to or more than the amount of installments due
within 18(eighteen) months, the entire loan will be classified as “Bad/Loss”.
c). ii). In case of Fixed Term Loans, which are repayable in more than five years of time:
 If the amount of ‘defaulted installment’ is equal to or more than the amount of installments due
within 12(Twelve) months, the entire loan will be classified as “Sub-standard”.
 If the amount of ‘defaulted installment’ is equal to or more than the amount of installments due
within 18(Eighteen) months, the entire loan will be classified as “Doubtful”.

 If the amount of ‘defaulted installment’ is equal to or more than the amount of installments due
within 24(Twenty four) months, the entire loan will be classified as “Bad/Loss”.

d). The Short Term Agricultural and Micro Credit will be considered irregular if not repaid within the
due date as stipulated in the loan agreement. If the said irregular status continues, the credit will be
classified as “Sub-standard” after a period of 12(Twelve) months, as “Doubtful” after a period of
36(thirty six) months and as “Bad/Loss” after a period of 60(Sixty) months from the stipulated due date
as per loan agreement.

Q. What are the basis for classification of loan under “Qualitative Judgment”?
Ans. If any uncertainty or doubt arises in respect of recovery of any continuous loan, demand loan or
fixed term loan, the same will have be classified on the basis of qualitative judgment be it is classifiable
or not on the basis of objective criteria. If any situational changes occur in the stipulations in terms of
which the loan was extended or if the capital of the borrower is impaired due to adverse conditions or if
the value of the securities decreases or if the recovery of the loan becomes uncertain due to any other
unfavorable situation, the loan will have to be classified on the basis of qualitative judgment

Besides if any loan is illogically or repeatedly re-scheduled or the norms of rescheduling are violated or
instances or frequently exceeding the loan limit are noticed or legal action is lodged for recovery of the
loan or the loans is extended without the approval of the competent authority, it will have to be classified
on the basis of qualitative judgment.
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Q. What are the criteria to classify loan under “Qualitative Judgment” ?
Ans. i). If there exists any hope for change of the existing condition by restoring to proper steps, the loan,
on the basis of qualitative judgment, will be classified as “Sub-Standard”.
ii). Even if after restoring to proper steps, there exists no certainty of total recovery of the loan, it will be
classified as “Doubtful”

iii). Even after exerting the all out effort, there exists no chance of recovery, it will be classified as
“Bad/Loss” on the basis of qualitative judgment.

Note: The concerned bank will classify on the basis of qualitative judgment and can declassify the
loans if qualitative improvement does occur.

Q. What is the procedure to declassify a loan at Branch level?

Ans. A loan only can be declassified by the approval of the Board of Directors of concern Bank. The
Bank will have to inform such declassification to the Department of Banking Inspection (DBI)/ concerned
offices of Bangladesh Bank within 15(Fifteen) days of such decision taken by the Board of Directors.
Q. Write down the treatment of interest of different types of classified loan?
Ans. If any loan or advance is classified as “Sub-standard” and “Doubtful”, interest accrued on such loan
will be credited to Interest suspense account instead of crediting the same to income account. In case of
rescheduled loans the interest, if any, will be credited to interest suspense account, instead of crediting the
same to t income account.
As soon as any loan or advance is classified as “Bad/Loss”, charging of interest in the same account will
cease. In case of filing a law suit for recovery of such loan, interest for the period till filing of the suit can
be charged in the loan account in order to file the same for the amount of principal plus interest. But
interest this charged in the loan account has to be preserved in the “Interest suspense” account. If any
interest is charged on any Bad/Loss account for any other special reason, the same will be preserved in
the “interest Suspense” account. If classified loan or part of it is recovered i.e. real deposit is effected
in the loan account, first the interest charged and not charged is to be recovered from the said
deposit and the principal to be adjusted afterwards.
Q. Write down the steps of realization in case of recovery of a classified loan?
Ans. If a classified loan is adjusted or a partial amount of the same is recovered, the adjustment procedure
will maintain following order for application of recovered funds:
i). To interest in suspense.
ii). To interest currently due or overdue, oldest amount first
iii). To overdue principal, oldest amounts first.
iv). To principal currently due.
That is, in any given period for a classified loan, repayments are first applied against existing amount of
interest in suspense. If repayments cover all suspended interest remaining amounts are applied to
currently due interest and so forth through the order given herein above.
Q. What do you mean by provisioning? Define the base for provisioning? Enumerate the
percentages of provisioning against different unclassified & classified credit facilities?
Ans. Provisioning: This is the accounting process of setting aside funds from the profit against possible
loan loss according to status of classifications. The worse the classification status, the more the provision
requirement will be. This provision is made gradually, year after year, which help a bank lessen the
burden of charging the loan loss as an expense (Write-off) in a single year.

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Base for Provisioning: The base for classification will be computed as under:
Aggregate outstanding amount of classified loan less: The amount in interest suspense. Less: The value of
eligible securities.
Provisioning against unclassified Loans:
Banks will be required to maintain General Provision in the following way:
1). @ 1% against all unclassified loan (Other than the loans under Small Enterprise and consumer
financing & Special Mentioned Account).
2). @ 2% on the unclassified amount for Small Enterprise financing.
3). @ 5% on the unclassified amount for Consumer financing where it has to be maintained @ 2%
on the unclassified amount for: a). Housing Finance & b). Loans for professionals to set up business
under consumer financing scheme.
4). @ 5% on the outstanding amount of loans kept in the “Special Mentioned Account” after
netting off the amount of interest suspense.
Provisioning against classified Loans:
Banks will maintain provision at the following rates in respect of classified Continuous, Demand & Fixed
Term Loans:
a). Sub-Standard: 20%
b). Doubtful: 50%
c). Bad/Loss: 100%
Provision in respect of short term agricultural and micro credits is to be maintained at the
following rates:
 All credits except Bad/Loss (i.e. “Doubtful”, “Sub-standard” irregular and regular credit
accounts) : 5%
 Bad/Loss : 100%
Provision against off Balance Sheet exposure of the Bank (BRPD Circular # 08/07 Dt. 07.08.07):
i). @ 0.50% provision effective from December 31, 2007

ii). @ 1.00% provision effective from December 31, 2008

Q. Define “Eligible Security” as per Bangladesh Bank guideline?

Ans. As per Bangladesh Bank’s BRPD Circular # 08 Dt. 27.04.2005 value of eligible securities are:
i). 100% value of deposit which are under lien against credit.
ii). 100% value of Gold & ornaments pledged with the Banks.
iii). 100% value of under lien Government Bond & Savings Certificate.
iv). 100% value of Guarantee provided by the GOB or Bangladesh Bank.
v). 50% market value of easily marketable commodities under direct control of Bank.
vi). Highest 50% market value of mortgaged land & building.
vii). In case of shares & securities which are in trade at DSE or CSE –50% of last 06(Six) moths average
market value or 50% of face value whichever is lower.

Q. Write down Bangladesh Bank’s guide line regarding “Market value of Eligible Security”?
Ans.

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a). Easily marketable goods will mean pledged, easily encashable/saleable goods that remain under full
control of the Bank. However, while the concerned bank branch official will conduct periodic inspection
to verify as to whether issues such as the suitability of goods for use, expiry period, appropriateness of
documentary evidences, up to date insurance cover, same will have to assessed by the professional
assessor from time to time.
b). For land and building, banks will have to ensure whether title of documents are in order and concerned
land and building will have to valued by the professional valuation firm along with completion of proper
documentation in favor of the bank. In absence of professional valuation firm certificate in favor of such
valuation will have to be collected from the specialized engineer. Nevertheless, temporary houses
including tin shed structure shall not be shown as building.
Note: Banks are also advised to maintain complete statement of eligible securities on a separate sheet
in the concerned loan file. Information such as description of eligible securities, their assessment by
recognized firm, marketability of the commodity, control of the Bank and reasons for considering
eligible securities etc. will have to included in that sheet.
Q. Write down the reporting method of different CL statement?
Ans. i). CL-1 is the summary of 5 other forms.
ii). CL-2 is for reporting loan classification of continuous loan
iii). CL-3 is for reporting loan classification of Demand loan.
iv). CL-4 is for reporting loan classification or term loans which are repayable within maximum
05(Five)
years.
v). CL-5 is for reporting loan classification of term loan of over 05(Five) years.
vi). CL-6 is for reporting loan classification of Short Term Agricultural & Micro Credit.

CREDIT POLICY MANUAL OF TRUST BANK LTD.

Q. What are the discouraged business areas of Trust Bank Ltd.?
Ans. Bank will not grant any facilities to the following business types:
i). Bridge loan relying on equity/debt issuance as a source of repayment.
ii). Counter parties in counties subject to UN sanctions.
iii). Finance of speculative investments.
iv). Finance of military equipments/weapons.
v). Highly leveraged Transactions.
vi). Lending to holding companies.
vii). Lending to slow moving items.
viii). Logging, Mineral extraction/mining or other activity that is ethically or environmentally
sensitive.
ix). Lending to companies listed by CIB as defaulters or known defaulter/habitual defaulter.
x). Highly perishable goods stored in godown.
xi). Share lending.
xii). Taking an equity state in borrower etc.

Q. What do you mean by cross border risk?

Ans. Borrower of a particular country may be unable or unwillingly to fulfill principle and
interest obligations. Difficulty may be raised in following situations:
i). Suspension of external payments.
ii). Synonymous with political & sovereign risk.
iii). Third world debt crisis, for example, export documents negotiated for countries like Nigeria.
Q. What are the sectoral cap of Trust Bank’s credit port folio?

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Ans. a). Large Industries : 30% of total port folio.
b). Small & medium industries : 15% of total port folio.
c). Trading sector : 30% of total port folio.
d). Real estate sector : 10% of total port folio.
e). Service sector : 10% of total port folio.
f). Others including consumer : 05% of total port folio.
& personal loan
Q. How many departments under CRM (Credit Risk Management) ?
Ans. There are 05(Five) departments & these are:
a). Credit processing Department
b). Credit Approval Department
c). Credit Monitoring & control Department.
d). Credit Recovery Department.
e). Legal Department.
CONTRACT OF INDEMNITY & GUARANTEE

GUARANTEE:
As per section 126 of the Indian Contract Act 1872, “A contract of guarantee 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 ‘surety’ or ‘guarantor’. The person in respect of
whose default the guarantee is given called the ‘principal debtor’ & the person to whom the
guarantee is given called ‘creditor’ or ‘beneficiary’.

A contract of guarantee thus a secondary contract, the principal contract being between the
creditor and the principal debtor themselves to which guarantor is not a part. If the promise or
liability in the principal contract is not fulfilled or discharged, only than the liability of the
guarantor arises.

From Banks point of view Guarantee may be two kinds:

i). Guarantee taken by the bank as security against the advance.
ii). Guarantees required by customers from banks in the course of their normal trading.

In other sense Guarantee may be two kinds:

i). Specific guarantee: Specific guarantee means a guarantee for one specific transaction.
ii). Continuing guarantee: A continuing guarantee is that which extends to a series of
transactions. (Sec.129)

INDEMNITY:
As per section 124 of the Indian Contract Act 1872, indemnity 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”
Rights of indemnity holder:
1. Indemnity holder is entitled to recover all damages.
2. Indemnity holder is entitled to recover all costs.
3. Indemnity holder is entitled to recover all sums paid under any compromise.

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Banks & letter of indemnity:
i). Loss of Term Deposit Receipt.
ii). Issue of a duplicate draft.
iii). Loss of Travelers Cheque.
iv). Loss of safe custody receipt.
v). Loss of gift cheque.

Revocation of continuing guarantee:

i). By Notice: A continuing guarantee may at any time revoked by the guarantor as to future
transactions, by giving a distinct notice to the creditor.
ii). By death: Death of the guarantor will operate as a revocation of the continuing guarantee
with regard to the future transactions unless the contract provides otherwise.

Q. When Guarantee will be invalid? What are the distinguish between ‘Guarantee’ &
‘Indemnity’?
Ans. a). Guarantee given by misinterpretation/misunderstanding.
b). Guarantee obtained by concealment.
c). In cases co-surety does not join.

Distinguish between ‘Guarantee’ & ‘Indemnity’:

GUARANTEE INDEMNITY
There Are three parties to the contract of There are two parties to the contract of
guarantee, namely, the debtor, the creditor indemnity, namely, the indemnifier & the
and the guarantor indemnified.
Liability under guarantee, principal debtor has Under indemnity, indemnified is primarily &
primary liability. If he fails than surer have to independently liable if the loss occurs.
fulfill his obligation.
In the case of guarantee, there is an existing
In a contract of indemnity, the liability of the
debt or obligation, the performance of whichindemnified arises only on the happening of a
is guaranteed by the surety. contingency.
Guarantors undertakes his obligation at the Indemnity is given or obligation is undertaken
request of the third person(Principal debtor).
without any request, expressed or implied of
the debtor.
A guarantor can file a suit in his own name The indemnified cannot sue third parties in his
against the debtor, if he pays the debt or own name unless there is the assignment.
perform the obligation.

Q. What are the essential elements for a contract of guarantee?

Ans. i). Oral or in writing: A contract of guarantee may be either oral or written. Banks
invariably like to have a written contract of guarantee to avoid uncertainty in future and to bind
the security by his words.
ii). Implied guarantee: A contract of guarantee is sometimes implied from the circumstances or
nature of the transactions.
iii). Consideration: A guarantee must be supported by lawful consideration between parties. i.e.
Creditor, Principal Debtor and surety.

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iv). Not a contract of utmost good faith: As a general rule, a guarantee is not a contract of
utmost good faith. The banker is therefore no obligation to disclose to the surety the past conduct
of the debtor or full facts relating to his state of affairs.
v). Effect of misinterpretation or concealment of material facts: Since a guarantee is not
contract of utmost good faith, there is no duty upon the bank to disclose the details relating to the
customers account. But if the prospective guarantor asks for some specific information, the
banker is under obligation to make statements which are accurate and not capable of being
misconstrued.

FINANCIAL STATEMENT ANALYSIS

When a borrower approaches a banker for a loan, the banker usually take the five “Ps” into
account. These are People, Purpose, protection, Prospects & Payment.
People: Caliber of the people can be judged with reference to their know how of their business
as reflected in their production, purchase, sales, financial & personal policies.
Purpose: Can be ascertained by interviewing the borrower.
Prospects: Prospects of the borrowing concern can be judged by looking to both the person and
future profitability of the concern.
Payment: The capacity of payment has to be judged on the basis of present & prospective
liquidity of the concern.
Protection: Protection has to be judged on the basis of the tangible asset backing which the
company enjoys.

Analysis of financial statements greatly helps a baker in studying particularly the last three “Ps”
i.e. Prospects, Payment & Protection.

Financial Statements: Financial statements show the financial position of the entity at the time
of the report and also the operating results by which the entity arrived at this position. The basic
purpose of financial statements is to assist decision makers in evaluating the financial strength,
profitability and future prospects of a business entity.
Income Statement: This is also termed as profit & loss statement. The purpose of income
statement is to determine the operating result or net income of a business entity for a specific
period of time. Net income is equal to revenue minus expenses.
Balance Sheet: A balance sheet consists of the assets, liabilities and the owners equity of a
business entity. A fundamental characteristics of a balance sheet is ASSET=LIABILITIES
+OWNERS EQUITY. The purpose of balance sheet is to show the financial position of a
business entity at a specific time.
Q. What are the basic nature of financial statements?

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Ans. a). Recorded facts: The terms recorded facts means facts which have been recorded in the
accounting books.
b). Accounting conventions: Accounting conventions imply certain fundamental accounting
principles which have been sanctified by long usage.
c). Personal judgment: Personal judgments have also an important bearing on the financial
statements.
Q. What things bankers wants to find out by interpretation & analysis of financial
statements?
Ans. i). Financial strength & weakness of the company.
ii). Status of Sales or production.
iii). Companies profitability & earning position.
iv). Companies liquidity.
v). Credit policy of the company.
vi). Extent of profit retained.
vii). Companies long term loan.
viii). Extent of over trading.

Q. What are the distinguish between “Analysis” & “Interpretation” ?

Ans. The term ‘Analysis’ means methodical classification of the data given in the financial statements.
The figures given in the financial statements will not help one unless they are put in a simplified form.
The term ‘interpretation’ means explaining the meaning and significance of the data so simplified.

Both ‘Analysis’ & ‘interpretation’ are complimentary to each other. Interpretation requires analysis, while
analysis is useless without interpretation. Most of the authors have used term ‘Analysis’ only to cover the
meaning of both analysis and interpretation, since analysis is largely a study of the relationship among the
various financial factors in a business as disclosed by a single set of statement and study of the trend of
these factors as shown in a series of statements.

Q. What are the limitations of financial statements?

Ans. 1. Financial statements are essentially interim reports.
2. Accounting concepts and conventions.
3. Influence of personal judgment.
4. Disclose only monetary facts.

Q. What do you mean by common size financial statements?

Ans. Common size financial statements are those in which figures reported are converted into percentages
to some common base. In the income statement the sale figure is assumed to be 100 and all figures are
expressed as a percentage of this total.

Q. What is cash flow statement? What are the major parts of cash flow statement? What are the
purposes of cash flow statement?
Ans. The statement of cash flows reports the cash receipts, cash payments and net changes in cash
resulting from the operating, investing and financing activities of an enterprise during a period in a format
the reconciles the beginning and ending cash balances.
The cash flow classifies cash receipts and cash payments from following three activities:
a). Operating activities: Include the cash effects of transactions that create revenues and expenses and
thus enter into the determination of net income. Generally operating activities involve income
determination (Income statement) items.

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b). Investing activities: Include- i). acquiring and disposing of investments and productive long lived
assets, and ii). Lending money and collecting the loans. Generally investing activities involve cash flows
resulting from changes in investment and long term asset items.
c). Financing activities: Include – i). Obtaining cash from issuing debt and repaying the amounts
borrowed, and ii). Obtaining cash from stock holders and providing them with a return on their
investment. Generally financing activities involve cash flows resulting from changes in long term liability
and stock holders equity items.
Purposes of cash flow statement:
The information in a statement of cash flows should help investors, creditors and others assess various
aspects of the firms financial position:
 The entities ability to generate future cash flows.
 The entities ability to pay dividends and meet obligations.
 The reason for the difference between net income and net cash provided by operating activities.
 The cash investing and financing transactions during the period.

Q. What do you mean by Fund flow statement? What are the benefits of fund flow statement?

Ans. The fund flow statement is a report that shows how the activities of the business have been financed
and the financial resources have been generated during a particular period.
Benefits of fund flow statement:

i). The fund flow estimate helps a banker to fix up a well timed repayment schedule. If in the earlier years
funds accrual is less, a higher installment can not be stipulated.
ii). Fund flow statement helps to know whether there is need for funds for operation of the business.
iii). It informs the banker the investing and financing policies pursued by the company in the year under
review.
iv). In details it shows why the company is not in a position to meet the obligations such as taxes, wages,
bonus, dividend etc. in spite of profits. It also suggests the ways in which the position of working capital
can be improved.
v). It indicates how dividends are distributed in excess of current earning i.e. whether dividends are paid
out of profits or out of capital itself or borrowed funds.
vi). Fund flow helps the banker to know how the borrowing have been repaid. From the existing behavior,
bankers may able to receive an overall idea on client’s repayment behavior.

Q. What are the distinguish between ‘Fund flow’ & ‘Cash flow’ statement?
Ans. Fund flow analysis reveals/disclose the changes in working capital position. It tells us about the
sources from which the working capital was obtained and purposes for which it was used. It brings out the
open the changes which have been taken place behind the Balance Sheet. Working capital being the life
blood of the business, such an analysis is extremely useful.
Cash flow analysis tells about the sources and application of cash. It emphasis is on short term liquidity
of the firm.

Q. What do you mean by ‘capital budgeting’ & ‘capital structuring’?

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Ans. Capital Budgeting: The process of planning & managing of a companies long term investment is
called capital budgeting. Loosely speaking this means that the value of cash flow exceeds the cost of that
assets.
Capital Structuring: A firms capital structuring or financial structuring is the specific mixture of long
term debt and equity the firm uses to finance it’s operation.

Q. Write short notes on the followings:

a). Corporation: A business created as a distinct/separate legal entity composed of one or more
individuals on entities. A corporation is a legal ‘person’ separate & distinct from its owners and it has
many of the rights, duties & privileges of an actual person.
b). Agency problem: The possibility of conflict between stockholders & management is called agency
problem.
c). Agency cost: Agency cost refers to the cost of the conflict of interest between stock holders &
management.
d). Stakeholder: Stakeholder is someone other than a stockholder who potentially has a claim on the cash
flow of the firm. Employees, Customers, Suppliers & even a Government all have a financial interest in
the firm.

Q. Write down the classification of credit needs in a business?

Ans. The credit needs of a business can broadly be classified into two categories. These are:
i). Short term credit needs: They are for meeting the working capital requirement of a business. They are
usually meant for a period up to one year. Such advances may be in the form of loans, cash credit,
overdrafts, bills discounted & purchased.
ii). Medium term credit needs: It includes credit needs for a period between one year and five years.
iii). Long term credit needs: It includes credit needs for a period exceeding five years.

Q. What is working capital? What are the different categories of working capital? What do you
mean by operating cycle?

Ans. The term working capital means capital required by a business to carry out its day to day operations
in particular to complete the operating cycle of the business. In the course of running a business,
payments have to made for raw materials, wages, manufacturing and other expenses. However, money on
account of sale for goods or services is not immediately realized. It may take time depend upon the credit
terms prevailing in the business. The business must have sufficient fund for this period.

Working Capital can be divided into two categories on the basis of time. These are:
i). Permanent working capital: This refers to that minimum amount of investment in all current assets
which is required at all times to carry out minimum level of business activities. This is also known as
‘core current capital’. (Characteristics: i). Amount of permanent working capital remains in the business
in one form or another ii). It also grows with the size of the business).

ii). Temporary working capital: The amount of such working capital keeps on fluctuating from time to
time on the basis of business activities. In other words, it represents additional current assets required at
different times during the operating year.

Operating cycle: In the course of running a business, payments have to made for raw materials, wages,
manufacturing and other expenses. However, money on account of sale for goods or services is not
immediately realized. It may take time depend upon the credit terms prevailing in the business. From the
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above it is clear that working capital is required because of the time gap between the sales & their actual
realization in cash. This time gap is technically termed as Operating cycle of the business.

CREDIT RISK GRADING MANUAL

Q. Under which changes is going on? GLCDC

Ans.
- Globalization
- Liberalization
- Consolidation
- Disintermediation
- Competition.
Q. what are the steps of CRM to select good credit risk? IAGPM
Ans.
- Risk identification
- Risk assessment
- Risk grading
- Risk pricing
- Risk monitoring

Q. What are the factors of risk identification?

Ans.
a). Risk factors internal banks and financial institutions.
b). Risk factors external on account of borrower.

a). Risk factors internal banks and financial institutions: PEMFM

- Risk in planning
- Risk in execution/implementation
- Marketing risk
- Financial risk
- Managerial risk
b). Risk factors external on account of borrower:
- Input/Utility availability
- Govt. policies
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 - Natural calamities
- Technological obsolescence
- Political situation
Q. Write down the definitions of Credit Risk Grading?
Ans.
 Credit risk grading is a collective definition based on pre specified scale and reflects the
underlying credit risk for a given exposure.
 A credit risk grading deploys/arrange a number/alphabet/symbol as a primary summary
indicator of risks associated with a credit exposure.
 Credit risk grading is the basic module to develop a credit risk grading management.

Q. What are the functions of credit risk grading?

Ans. Credit risk grading system promote bank safety & soundness by facilitating informed decision
making. It helps us to differentiate individual credit & group credit on the basis of risk they possess. This
helps banks management to monitor changes and trends in risk level. The process also helps the
management to manage risk & optimize return.

Q. Write down number & names of grade used in the CRG?

Ans.

GRADING SHORT NAME NUMBER SCORE

SUPERIOR SUP 1 FULLY SECURED
GOOD GD 2 85 OR MORE
ACCEPTABLE ACCPT 3 75-84
MARGINAL/WATCHLIS MG/WL 4 65-74
T
SPECIAL MENTION SM 5 55-64
SUB-STANDARD SS 6 45-54
DOUBTFUL DF 7 35-44
BAD & LOSS BL 8 LESS THAN 35

Q. Define different categories of credit risk grading?

Ans.
Credit Grade Definition
Superior (sup) – 1 Fully secured credit by cash collateral or by the
guarantee from Govt. or Int’l bank.
Good (GD) – 2 Strong repayment capacity of the borrower with
excellent liquidity & leverage.
Acceptable (Accpt) – 3 Consistent earnings, cash flow with good track record,
adequate liquidity and earnings.
Marginal/Watchlist (MG/WL) – 4 Greater attention required & have an above average risk
due to strained liquidity, higher than normal leverage &
thin cash flow.
Special Mention (SM) – 5 Potential weaknesses deserve management close
attention, if left uncorrected, these may result in a
deterioration of the repayment prospect.
Sub Standard (SS) – 6 Weak financial condition
Doubtful (DF) – 7 Full repayment is unlikely & possibility of loss is
extremely high.
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 Bad & Loss (BD) – 8 Long outstanding with no progress & prospect of
recovery is poor & legal option have been pursued.

Q. Write down the distribution of weight age of risk components?

Broad Risk head Sub Risk areas with % Total weighted %
Financial Risk Leverage – 15%, Liquidity – 15%, Profitability – 15%, 50%
coverage -5%
Business Risk Size of business-5%, Age of business- 3%, Business 18%
outlook-3%, Industry growth-3%, Market competition –
2%, Barriers in business-2%
Management Risk Experience – 5%, Succession – 4%, Team work – 3% 12%
Security Risk Security coverage – 5%, Collateral coverage -3%, Support 10%
– 2%
Relationship Risk Account conduct-5%, Limit Utilization – 2%, Compliance 10%
of covenants-2%, Personal deposit – 1%

Q. What are the papers required to consist with during credit risk grading ?
Ans. All credit proposals whether new, renewal or specific facility should consists of a) Data collection
checklist b). Limit utilization form c). Credit risk grading score sheet and d). Credit Risk Grading Form.

Q. What do you mean by Early Warning Signals? Which categories of risk grading may fall into
Early Warning Signals?

Ans. Early Warning Signals: Early Warning Signals indicates risks or potential weaknesses of an
exposure requiring monitoring, supervision, or close attention by management. If these weaknesses are
left uncorrected, they may result in deterioration of the repayment prospect in the banks assets at some
future date with a likely prospect of being downgraded to classified assets.

Irrespective of credit score obtained by any obligor as per the proposed risk grade score sheet, the grading
of the account highlighted as Early Warning Signals (EWS) accounts shall have the following risk
symptoms:

a). Marginal/Watchlist (MG/WL-4):

 If any loan is past due/overdue for 60 days and above.
 Frequent drop in security value or shortfall in drawing power exists.

b). Special Mention (SM – 5):

 Any loan is past due/overdue for 90 days and above.
 Major document deficiency prevails
 A significant petition or claim is lodged against the borrower.

Q. What are the exceptions of credit risk grading?

Ans.
 Head of CRM may also down grade/classify an account in the normal course of inspection of a
branch or during the periodic port folio review.
 Recommendation for upgrading of an account has to be well justified by the recommending
officers. Essentially complete removal of the reasons for downgrade should be basis of any
upgrading.

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  Marginal/Special mention/Unacceptable credit risk may be accepted if additional collateral exists
– Exceptionally approved by the appropriate authority.
 Independent assessment of CRG may be conducted by the head of CRM or Internal Auditor.
 Bank may exercise option to continue with own CRG if equivalent or stricter.
Q. What are the prescribed period for credit risk grading review?
Ans.

Risk Grading Frequency of Review

Superior Annually
Good Annually
Acceptable Annually
Marginal/Watchlist Quarterly.
Special mention Quarterly
Sub Standard Quarterly.
Doubtful Quarterly.
Bad & Loss Quarterly.
FINANCIAL TERMS
Q. What are the difference between Primary versus Secondary markets?
Ans. Primary Markets: In a primary market transaction, the corporation is the seller, and the transaction
raises money for the corporation. Corporation engage in two types of primary market transactions: Public
Offering and private placements. A public offering, as the name suggests, involves selling securities to
the general public, whereas a private placement is a negotiated sale involving a specific buyer.
Secondary market: A secondary market transaction involves one owner or creditor selling to another. It
is therefore the secondary markets that provide the means for transferring ownership of corporate
securities.
Balance sheet: Financial Statement showing a firms accounting value on a particular date.
Income Statement: Financial statement summarizing a firms performance over a period of time.
Non cash items: Expenses charged against revenues that do not directly affect cash flow such as
depreciation.
Average Tax Rate: Total taxes paid divided by total taxable income.
Marginal Tax Rate: Amount of Tax payable on the next dollar earned.
Operating cash flow: Cash generated from a firms normal business activities.
Cash flow to creditors: A firms interest payment of creditors less net new borrowings.
Cash flow of stockholders: Dividends paid out by firm less net new equity raised.
Financial Ratio: Relationships determined from a firms financial information and used for comparison
purposes.

i). Current Ratio = Current Asset/Current Liability (Ideal ratio = 2:1)

ii). Quick or Acid Test Ratio = Current Assets-Inventory/Current Liabilities (Ideal Ratio = 1:1)
iii). Cash or other liquidity Ratio = Cash/Current liabilities
iv). Net Working capital to total Assets = Net Working Capital/Total Assets
v). Total Debt Ratio = Total Assets-Total Equity/Total Assets.

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vi). Debt Equity Ratio = Total debt/Total equity
vii). Times interest earned = EBIT/Interest
viii). Cash coverage ratio = EBIT + Depreciation/Interest
ix). Inventory turnover Ratio = Cost of goods sold/Inventory
x). Days sales in Inventory = 365 days/Inventory turnover
xi). Receivable turnover = Sales/Accounts Receivable
xii). Days sales in receivables = 365 days/Receivable turnover
xiii). Profit margin = Net Income/Sales
xiv). Return on Assets = Net Income/Total Assets
xv). Return on Equity = Net Income/total equity

Q. What do you mean by Leverage? What is financial leverage?

Ans. Leverage: Leverage means risk associated relationship between debt & equity.
Financial leverage: Financial Leverage refers to the extent to which a firm relies on debt. The more debt
financing a firm uses in its capital structure, the more financial leverage it employs/use.

CONTRACT OF INDEMNITY & GUARANTEE(Continuation of previous chapter)

* Types of Guarantors:
 Minor, person of unsound mind and insolvents: A minor has no capacity to contract. A
guarantee given by him is void. He cannot even ratify such a contract after attaining majority.
Person of unsound mind or an un-discharged insolvent cannot give valid guarantee.
 Guarantee by married woman: It should always be borne in mine that the guarantee of a married
woman can only be enforced against her separate estate. It does not bind her husband. In case of
obtaining guarantee from a woman it must be ensured that:
 She has separate estate.
 A confirmation must be obtained separately, if possible through her solicitor that the nature of
the liability she is assuming has been explained to her and she has signed the guarantee on her
own will and without compulsion.
 Husband/Wife: A guarantee given by wife in respect of her husbands debt is valid, but a court of
law scrutinizes such case more closely and ascertain whether the wife has exercised a will on her
own or alternatively, received independent legal advice before she executed the guarantee. In
such cases banker should carefully explain the nature of the transaction to avoid the plea of
influence.
 Joint or several Guarantors:
i). Release of any one of the joint and several guarantors should not release the other from
that liability.
ii). Notice by sureties or in the event of death of one or more of them, notice by the surviving
guarantors, along with the legal representatives of the deceased guarantors, is necessary before
guarantee can be determined.

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 In case of joint guarantee, the banker would have to sue guarantors jointly and obtain a decree
against them in order to make them responsible, because if he chooses one or two in the first
instances and fails to get satisfaction for the whole debt out of the decree, he cannot sue the others
for the balance.
 Guarantee by Partners:
A partner has no implied authority to bind his co-partners by guarantee. As such any guarantee
executed by the operating partner is not binding on the firm. The operating partner can bind the
firm upon a guarantee only in case when the giving of guarantee is part of normal business of the
firm and when the co-partners definitely authorizes him to give such a guarantee.

While obtaining guarantee from partnership firm, it should in order to avoid the risk of any future
trouble, be signed by all partners individually and in the name of the firm and thereby
undertaking liability jointly and severally. In case of death, insolvency or retirement of any of the
partners, admission of a new partner, the advance account which is guaranteed should be closed
and a new account to be opened.

 Limited company as Guarantors: Before a guarantee executed by a public limited company is

accepted by a banker, it is necessary to examine its Memorandum & Articles of Association to
verify whether it has specific authority to enter into a contract of guarantee. The implied power to
borrower in the case of a trading company does not extend to giving of guarantees. Where the
Memorandum & Articles of Association permit the company to give a guarantee, resolution
should be passed by the Board of Directors of the company authorizing the giving of the specific
guarantee by the company. The guarantee should be signed by the persons authorized by the
resolution on behalf of the company under its seal.
 Directors personal guarantee in the case of advances to limited company: Bank should obtain
such guarantee on their standard form duly executed by the directors on their personal capacity.

Q. What are the liabilities of guarantors? What are the rights of the guarantors?
Ans. Liabilities of the Guarantors:
i). Extent of the liability: The liability of a surety or guarantor is co-extensive with that of the
principal debtor, unless otherwise provided by the contract. (Section 128). Liability of the
guarantors cannot, in any circumstances, exceed that of the principal debtor.
ii). The time liability arises: The liability of the guarantor arises as soon as the principal debtor
defaults. If the liability become due, it is not necessary for him to proceed against the debtor first.
He may sue the guarantor without suing the principal debtor.
iii). Liability of co guarantors: In case more than one person guarantee a debt, all of them
called co guarantors and are liable to pay the debt of the principal debtor.

Rights of the guarantors:

i). Against the Principal debtor:
a). Right of subrogation: when the principal debtor has committed default in fulfilling his
promise and the guarantor meets his liability to the creditor, the guarantor steps into the shoes of
creditor, and acquires all rights of the creditor against the principal debtor. This right is called
the “right of subrogation”
b). Right to claim indemnity: In every contract of guarantee, there is an implied/indirect
promise by the principal debtor to indemnify the guarantor and the guarantor is entitled to
recover from the principal debtor.
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c).Right to revoke continuing guarantee: The guarantor has the right to revoke at any time a
continuing guarantee by giving a notice of such revocation to the creditor. The guarantor may
revoke a continuing guarantee as future transaction only, he remains liable in respect of
transactions which have already taken place.
ii). Against the creditor: A surety is entitled to the benefit of every security which the creditor
has against the principal debtor at the time when the contract of surety ship is entered into,
whether the surety knows of the existence of such surety or not and, if the creditor loses or
without the consent of the surety, parts with such security, the surety is discharged to the extent
of the value of the benefit of the security.
iii). Against the co sureties:
a). Co sureties liable to contribute equally. B). Liability of co sureties bound in different sums.

Q. When Guarantor discharge from his liability?

Ans.
i). By notice of death.
ii). Variations in the terms of the original contract between the principal debtor and the creditor
without the consent of the guarantor.
iii). If principal debtor is released by the creditor.
iv). If there is any act or omission on the part of the creditor, the legal consequences of which
discharge of the principal debtor.
v). Compounding by creditor with the principal debtor.
vi). If the creditor does act which is inconsistent with the rights of the guarantor.
vii). A contract of guarantee becomes invalid if guarantee was obtained by fraud or concealment
etc.
viii). Loss of security.

Q. What are the precautions to be taken by the bank prior accepting of guarantees?
Ans. i). The guarantor should be high creditworthy.
ii). Financial position of the guarantor must be ascertained.
iii). Borrower would approach any person to be his guarantor not the bank.
iv). The guarantee should always be taken on the banks approved form in the presence of a bank official.
v). In case of joint or several guarantee, no advance should be made until all the proposed guarantors sign
the letter of guarantee.
vi). Periodical confirmation of guarantee to be obtained from the guarantor to avoid the guarantee
becoming time barred.
vii). The suit against the guarantor must be instituted within three years from the date of execution of the
guarantee.

Q. When a guarantee is terminated/finished?

Ans. A guarantee is terminated and cease to apply to future transactions on the happening of any of the
following points:
i). Death of the principal debtor.
ii). Death of guarantor.
iii). Change in the constitution of the borrower.
iv). Change in the creditors constitution.
v). Demand by creditor.
vi). Notice by guarantor.

CREDIT RISK MANAGEMENT

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Q. What is Credit risk Management?
Ans. Credit Risk Management is a robust process to enables banks to proactively manage it’s loan port
folios in order to minimize losses and earn an acceptable return for it’s shareholders.
Q. What are the objectives of Credit risk Management guideline?
Ans. The purpose of credit risk management guideline is to provide directional guideline to the banking
sector that will improve the risk management culture, establish minimum standards for segregation of
duties and responsibilities, and assist in the ongoing improvement of the banking sector in Bangladesh.
Q. How many sections in Credit risk Management guideline?
Ans. The Credit risk Management guideline categorized into three broader categories. These are:
a). Policy Guideline b). Preferred organizational structure & c). procedural guideline.
a). Policy Guideline: LCASI
1.1. Lending guideline.
1.2. Credit assessment & Risk grading.
1.3. Approval Authority.
1.4. Segregation of Duties.
1.5. Internal Audit.
b). Preferred organizational structure:
2.1. Preferred Organizational Structure.
2.2. Key Responsibilities.
c). Procedural Guideline: ACCC
Approval process.
Credit Administration.
Credit Monitoring.
Credit Recovery.
a). Policy guideline:
1.1. Lending Guideline: The lending guideline should provide the key foundations for Account
Officers/Relationship Manager (RM) to formulate their recommendations for approval and should include
the following:
 Industry & business segment focus.
 Type of loan facilities.
 Single Borrower/Group Limits/Syndication
 Lending caps
 Discouraged business types.
 Loan facility parameter.
 Cross Border risk.

1.2. Credit Assessment & Risk Grading: A thorough credit & risk assessment to be conducted prior to
the granting of loans and annually thereafter for all facilities. It is essential that RM’s know their
customers and conduct the diligence on new borrowers, principals and guarantors to ensure such parties
are in fact who they represents themselves. Following Risk areas should be addressed:

BISHPAMLSN
i). Borrower Analysis: Majority shareholder, management team and affiliate companies.
ii). Industry Analysis: SWOT analysis of the particular industry.
iii). Supplier/Buyer analysis: Concentration on particular seller or buyer

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iv). Historical financial analysis: Analysis of minimum 3 years historical financial statement.

v). Projected Financial Performance: Borrowers projected financial performance should be provided.

vi). Account conduct: Historic performance in meeting repayment obligations should be assessed.

vii). Adherence to lending guidelines: Credit should be in adherence with the bank’s lending guidelines.

viii). Mitigating factors: Margin sustainability/volatility, high debt load(leverage/gearing), overstocking

or debtor issues, repaid growth, acquisition of expansion, new business line/product expansion,
management changes or succession issues, customer or supplier concentration, and lack of transparency
or industry issues.

ix). Loan Structure: Amount and tenors of proposed should be justified based on the project repayment
ability and loan purpose.

x). Security: Current valuation of collateral should be obtained & assessed. Adequate insurance coverage
should be assessed.

xi). Name lending: Credit should not be influenced by an over reliance on the sponsoring principals
reputation.

Risk Grading: All banks already introduced Credit Risk Grading as per Bangladesh Bank’s prescribed
guideline.

1.3. Approval Authority: The authority to sanction/approve loan must be clearly delegated to senior
credit executives by M.D./CEO & Board based on the Executives knowledge & experience. An Executive
charged with approving loans should have followings:

- At least 5 years experience in working in Corporate/Commercial banking as a

relationship manager or account executive.
- Training & experience in financial statement, cash flow and risk analysis.
- A through working knowledge of accounting.
- A good understanding of the local industry/market dynamics.
- Successfully completed an assessment test demonstrating adequate knowledge on the
following areas:
 Introduction of accrual accounting.
 Industry/Business Risk Analysis.
 Borrowing clause.
 Financial Reporting and full disclosure.
 Financial Statement Analysis.
 The Asset conversion/Trade Cycle.
 Cash Flow analysis.
 Projections.
 Loan Structure & Documentation.
 Loan Management.
1.4. Segregation of Duties: Segregate the following lending functions:
- Credit Approval/Risk Management.
- Relationship management/marketing.
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 - Credit Administration.

2.1. Preferred Organizational Structure:

Managing Director/CEO
Head of CRM Head of Corporate/Commercial Banking Other Direct Reports
(Internal Audit, etc.)

Credit Administration. Relationship Management/Marketing (RM)

Credit Approval. Business Development.

Monitoring/Recovery

2.2 Key Responsibilities:

2.2. 1. Responsibility of CRM:
 Oversight/mistake of the bank’s credit policies, procedures and controls relating to all credit risks
arising from corporate/commercial/institutional banking, personal banking & treasury operations.
 Oversight of the banks asset quality.
 Directly manage all Sub-Standard, Doubtful & Bad and Loss accounts to maximize recovery and
ensure that appropriate and timely loan loss provision have been made.
 To approve or decline, within delegated authority, credit applications recommended by RM.
Where borrower exposure is in excess of approval limits, to provide recommendation to
MD/CEO for approval.
 To provide Advice/Assistance regarding all credit matters to line management/RMs.
 To ensure that lending executives have adequate experience and or training in order to carry out
job duties. Effectively.

2.2. 2. Responsibility of Credit Administration:

 To ensure that all security documentation complies with the terms of approval and is enforceable.
 To monitor insurance coverage to ensure appropriate coverage is in place over assets pledged as
collateral and is properly assigned to the bank.
 To control loan disbursements only after all terms and conditions of approval have been met and
all security documentation is in place.
 To maintain control over security documentation.

 To monitor borrowers compliance with covenants and agreed terms and conditions, and general
monitoring or account conduct/performance.

2.2.3 Responsibility of Relationship Management/marketing (RM):

 To act as the primary bank contact with borrowers.
 To maintain through knowledge of borrowers business and industry through regular contact,
factory/warehouse inspections etc. RM’s should proactively monitor the financial performance
and account conduct of borrowers.
 To be responsible for the timely and accurate submission of credit applications for new proposals
and annual reviews, taking into account the credit assessment requirements.
 To highlight any deterioration in borrowers financial standing and amend the borrowers risk
grade in a timely manner. Changes in risk Grades should be advised to approved by CRM.

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  To seek assistance/advice at the earliest from CRM regarding the structuring of facilities,
potential deterioration in accounts or for any credit related issues.

2.2.3 Responsibility of Credit Monitoring:

 Past due principal or interest payments, past due trade bills, account excesses and breach of loan
covenants.
 Loan terms and conditions are monitored, financial statements are received on a regular basis, and
any covenant breaches or expectations are referred to CRM and the RM team for timely follow
up.

 Timely corrective action is taken to address findings of any internal, external or regular
inspection/audit.
 All borrower relationships/loan facilities are reviewed and approved through the submission of a
credit application at least annually.

Q. What do you mean by Loan facility parameters?

Ans.
- Maximum size, maximum tenor, covenant and security requirements.
- Banks should not grant facilities where the banks security position is inferior to that of
any other financial institutions.
- Valuations of property taken as security should be performed prior to loans being
granted. A recognized 3rd party professional valuation firm should be appointed to
conduct valuations.

Q. What do you mean by Cross border risk?

Ans. Borrowers of a particular country may be unable or unwilling to fulfill principal and interest
obligations. Distinguished from ordinary credit risk because the difficulty arises from a political event,
such as suspension of external payments.

Q. What do you mean by custodial duties?

Ans.
- Loan disbursements and the preparation and storage of security documents should be
centralized in the regional credit centers.

- Appropriate insurance coverage is maintained (and renewed on a timely basis) on assets

pledged as collateral.
- Security documentation is held under strict control, preferably in locked fireproof
storage.
Q. What is compliance requirements?
Ans.
 All required Bangladesh Bank returns are submitted in the correct format in a timely manner.
 Bangladesh Bank circulars/regulations are maintained centrally, and advised to all relevant
departments to ensure compliance.

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  All third party service providers (valuers, lawyers, insurer, CPAs etc.) are approved and
performance reviewed on an annual basis. Banks are referred to Bangladesh Bank circular
outlining approved external audit firms that are acceptable.
Q. What are the discouraged business areas as per Credit Risk Manual?
Ans.
- Military equipments/Weapons Finance.
- Highly leveraged Transactions.
- Finance of speculative investments.
- Logging, Mineral Extraction/Mining, or other activity that is ethically or environmentally
sensitive.
- Lending to companies listed on CIB black list or known defaulters
- Counterparties in countries subject to UN sanctions.
- Share lending.
- Taking an equity state in borrowers.
- Lending to holding companies.
- Bridged Loans relying on equity/debt issuance as a source of repayment.

Q. What is Early Alert Account? Write down different stages of early alert signals?
Ans. An early alert account is one that has risks or potential weaknesses of a material nature requiring
monitoring, supervision, or close attention by management. If these weaknesses left uncorrected, they
may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at
some future date with a likely prospect of being downgraded to classified as “Special Mentioned
Account” within the next twelve months.
Different stages of early alert signals:
EA 1: Industry & competition: Position within industry rapidly eroding & industry in a cyclical downturn.
EA 2: Ownership/Management: Inability of management & lack of commitment to support business
Operation
EA 3: Balance sheet: Continued weakness, deteriorating working capital cycle, highly geared etc.
EA 4: Cash flow/repayment source: Liquidity strained, cash flow is unlikely to cover debt service.
EA 5: Performance: Interest & or principal remain overdue.
EA 6: Expired limit/Incomplete documents: Facilities expired & documentation pending after 30 days.

MERCHANT BANKING
Q. Define Merchant Banking? What is the distinguish between merchant banking & commercial
banking?
Ans. Securities & Exchange commission defines Merchant Banking as :
“ Merchant banking means a person who is engaged in the business of issue management either making
necessary arrangements regarding selling, buying, underwriting, or subscribing to the securities
underwriter, manager, consultant, adviser or rendering corporate advisory services in relation to such
issue management.”

Distinguish between merchant banking & commercial banking:

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Commercial bankers are financiers but merchant bankers are engineers or architects. A commercial
banker strives most of his time on his financial muscle. A merchant banker has to strain his grey cells and
has to think of new ideas in order to anticipate & innovate. The activity of merchant banking is equity and
equity related finance or more broadly funds raised through money & capital markets.

Q. What are the different areas of merchant banking?

Ans. i). Issue Management.
ii). Underwriting/Placement.
iii). Portfolio Management.
i). Issue Management: Issue management function of merchant banking helps capital market to increase
the supply of securities. The securities & exchange commission stipulates that the issuer must float the
shares/debentures through a separate institution licensed by them(SEC) as issue manager or merchant
banker. The bank being a licensed merchant banker has an ample opportunity to operate in this area.
ii). Underwriting Operation: Underwriting operation is one of the important functions of a merchant
banker by which it can increase the supply of stock/shares and debentures in the market. It is an
arrangement whereby the underwriter undertakes to subscribe the un-subscribed portion of
shares/debentures offered by any public limited company. This encourages the prospective issuers to offer
shares/debentures to the public for subscription and they can raise funds from the public for
implementation of their undertakings.
iii). Portfolio Management Service: The two broad function outlined above are from the supply side of
capital market. A merchant banker has also the responsibility of creating demand for securities. Through
portfolio management this task can be accomplished. Bank being a merchant banker and portfolio
manager wants to build an institutional investors base by managing portfolio of investment in shares and
debentures on behalf of individual & institutions.

Merchant Banking wing of Jamuna Bank Ltd.

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