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Short-Term Loans of Eastern Bank Ltd. 2010

Introduction

Origin of the Report

As a part of our study curriculum in BBA course, we have been assigned to conduct a study

on Low and Practice of Banking (F-309) by the course teacher. This report is prepared to

comply with the instructions of our course teacher. Our report is about the implication of

short-term lending procedures in real life scenario under Eastern Bank Limited. The purpose

of this guide is to match up our academic knowledge to the practical world. The required

study suggests developing, constructing and interpreting the banking scenario of a country.

After assigning the required term paper our group of members become interested to make a

clear conscious view of the short-term lending system of Eastern Bank Limited.

Purpose of Report

The purpose of this report is to provide an overview of short-term lending procedures

maintained by Eastern Bank Limited. In fact, the report has a number of objectives, which

are reflected in the chapter headings and contents.

To fulfill the partial requirement of our course of Low and Practice of Banking course.To find out similarities between theoretical and practical knowledge.To expand the domain of knowledge about the Practice of Banking.To achieve deep knowledge about short-term lending process of Eastern Bank

Limited.

To focus on the short-term loan granting requirements of Eastern Bank Limited.To understand and interpret the short-term loan default scenario of Eastern Bank

Limited.

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Methodology

After getting the assigned task at first we have accomplished a work plan involving the

contents of our report, design and distribution of the duty and responsibility of each member

of group. We selected Eastern Bank Limited by our judgments. Primarily, we strive for

gathering more accurate, concrete, feasible and complying information related with the

short-term lending condition of Eastern Bank Limited. We all are inquisitive to gather a lot of

information from the available websites. After gathering the sufficient information the

essential data are organized in a systematic manner. We were also influenced by

instructions and information given by our course teacher time to time. Above all, all theinformation provided in this term paper is pre-planned and well-organized.

Duration

The duration of the study was not convenient to work with a huge topic. It was very hard for

us to complete the report with elaborated information. So we had to complete this report

facing a little bit time pressure.

Limitations of the Report

The main problem faced in preparing this report was the in adequacy and lack of availability

of required data. Companies do not want to bring out their negative aspects in public.

Moreover the accuracy of the data that has been collected is not guaranteed by the sources.

The time given is not sufficient to work on such huge topic. With all of its limitations, we tried

our level best to make it as better as possible. As we are students, not professionals; users

of this report are requested to consider these limitations during reading, checking and

justifying any part of our report.

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Overview ofEastern Bank Limited

The emergence of Eastern Bank in the private sector is an important event for the banking

industry in Bangladesh. In 1991, when the Bank of Credit and Commerce International

(Overseas) BCCI had collapsed internationally, the operation of this bank had been closed

down in Bangladesh. Taking into account, the welfare of the BCCI employees and its

depositors interest, the Bangladesh Bank, under the Reconstruction Scheme, then gave

permission to form a bank named Eastern Bank Limited, which would take over all the

assets, cash and liabilities of BCCI in Bangladesh, with effect from 16 th August 1992. Thus

Eastern Bank Limited started functioning as a public limited company on August 8, 1992 with

the objective to carry out banking business in and outside of Bangladesh.

It started its business as a scheduled bank with only four branches, which included Principal

Branch and Motijheel Branch in Dhaka, Agrabad Branch in Chittagong and another branch

in Khulna.In July1993, when the bank got its Authorized Dealership from Bangladesh Bank,

then it started its expansion of branches. Six and three new branches were opened in 1994

and 1995 respectively. The very next year they inaugurated two more branches. At present,

it has thirty five branches, which are scattered, all over the major cities of the country in

major business areas.

It started its operational activities initially with an authorized capital of TK 1000 million,

divided into 10 million shares of TK 100 each and paid up capital of Tk. 310 million. At 2002,

the paid up capital stood at TK 720 million but the authorized capital remained unchanged at

Tk 1000 million. The general public held 83.42 % of its shares while institutional investors

held the rest. At present EBL is one of the fastest growing commercial banks in the country

and the largest capital based bank in Bangladesh. As of December 2005 its paid up capital

was TK 828 million. At present the authorized capital is Tk.3300 million and paid up capital is

Tk.2921 million,

The initial shareholders were the National Commerical Banks, various government agencies

and some of the depositors who had agreed to accept shares in the new bank in lieu of their

deposits. The first Board of Directors of EBL constituted under government supervision,

consisted of seven directors from various business and professions. Eastern Bank Limited

was under government control until the end of 2000 and therefore there were alot ofPage | 3

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deficiencies in management. In 2001, the board of directors bought in new professional

management from various foreign banks who have been trying to modernize the bank ever

since. At present Mr. Mohd. Noor Ali and Mr. Ali Reza Iftekhar are heading Eastern Bank

Limited as the Chairman and Managing Director respectively.

Divisions ofEBL

All policy formulations and its execution are carried out at the head office. There are eleven

major divisions in EBL, which are the following:

a) Corporate Banking Division

b) Credit Risk Management and Administration

c) Consumer Banking Division

d) Brand Management Division

e) Trade Services Division

f) International Division

g) Human Resources Division

h) Information Technology Division

i) Audit and Compliance Division

j) Finance and accounts Division

k) Special Asset Management Division

l) Administration

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and an acceptable rate of return. Interest rates may be fixed for the term of the loan,

or adjusted to reflect changing market conditions. A credit contract may adjust rates

daily, annually, or at intervals. Floating rates are tied to some market index and are

adjusted regularly.

4. Security: Assets pledged as security against loan loss are known as collateral.

Credit backed by collateral is secured. In many cases, the asset purchased by the

loan often serves as the only collateral. Lenders prefer collateral that has a life, or

duration, closely matched to the term of the loan. Liquid current assets, such as

accounts receivable and inventory, are the most preferred collateral. The terms of the

loan usually include a percentage advance of 30% to 100% of the book value of the

collateral that then constitutes the principal amount of the loan. The interest charged

is typically higher than on unsecured loans because of the greater risk of default and

higher costs of negotiating and administering a secured loan. Collateral reduces the

risk of loss in case of default, but does not change the risk of default. In other cases

the borrower puts other assets, including cash, aside as collateral. Unsecured debt

relies on the earning power of the borrower.

Types of Short Term Loan

There are a number of types of short-term debt, and a number of related elements.

1. Accounts receivable financing

2. Factoring

3. Inventory financing

4. Floor planning

5. Revolving credit

6. Zero-balance accounts

7. Lines of credit

8. Credit cards

9. Compensating balances

Accounts Receivable Financing: This is an excellent form of short-term financing that

assists the company in its cash flow management. It involves using part or all of accounts

receivable as collateral for short-term loans. The collateral might include only specific

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invoices if some of the invoices are over 90 days old or if some customers credit is not of

high quality.(If the latter is true, maybe these customers shouldnt be given credit at all.) By

refusing to lend against these invoices, the bank is protecting itself from lending against the

receivables of low-credit-rated customers. At the same time, it is giving the company some

sound advice regarding dealings with these customers. With accounts receivable financing,

the company retains the credit risk if its customers do not pay, and the company is

responsible for collecting on its customers accounts. Repayment schedules for this type of

financing are highly negotiable. The company should make certain that undesirable

inflexibilities are not built into the repayment terms. There are critical shades of gray

between financial discipline and bank-imposed restriction. Banks and other lenders will

typically create a line of credit equal to between 70 and 90 percent of qualified accounts

receivable.

Factoring: In this financing alternative, the company actually sells its qualified accounts

receivable to the bank or an independent factoring company at a discount from the face

value. The company receives immediate cash for its invoices. The invoices will direct the

customers to pay the funds directly to the bank or factoring company (the factor).

This form of financing is expensive compared with alternative forms. In addition, it may lead

customers to misjudge the financial position of the company and conclude that it is having

financial difficulties. The factor may have the right to take the initiative and call overdue

accounts directly.

Factoring can cost between 2 and 5 percent per month. This could significantly cut into

margins, especially if the borrower is in a low-margin business. However, if the terms of sale

are currently 2/10, n/30, factoring may be a desirable alternative. Selling on terms of 2/10,

n/30 means that the customer can take a 2 percent discount off the invoice amount if the

invoice is paid within 10 days of the invoice date, and in any event payments are expected

within 30 days. With these terms, customers will either take the 2 percent discount or delay

payment for up to 30 days. If factoring can be accomplished at 2 percent and the company

can get its cash immediately, factoring is an attractive alternative.

Accounts receivable can be sold to a factor with or without recourse. If the sale is without

recourse, the buyer of the accounts receivable (the factor) assumes the full credit risk . If the

customer does not pay, the factor loses the money. If the sale is with recourse, the company

assumes ultimate responsibility for credit losses if the customer does not pay. Selling without

recourse is very expensive. Because only very high-quality receivables qualify for this formPage | 7

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of financing, there is rarely a credit loss. So selling without recourse rarely pays. Companies

can actually buy credit insurance that protects them against credit loss.

Inventory Financing: Usually only finished goods and raw materials inventory qualify as a

form of collateral. There is no market for work in process. Lenders will usually provide

financing in the amount of one-half of the collateral that qualifies. This is a good form of

financing to cover the cost of fulfilling a very large order from a high-quality customer, or

perhaps, in a seasonal business, to cover a period of high cash needs that will be followed

by a period of high cash inflows. Using inventory as collateral requires fairly sophisticated

inventory control methods, including systems support. This imposes corporate self-discipline,

which the company should have anyway.

Floor Planning:Floor planning is a special form of inventory financing that is very commonin the retail sale of very high priced products, such as boats, cars, and appliances. With this

form of financing, it is the vendor and its products that must be credit-qualified. The lender

buys the products from the manufacturer and places them in the retailers store and

supporting warehouse, in effect lending them to the retailer.

The lender retains title to the products. When the product is sold by the retail dealer, the

dealer must first pay the lender in order to get title, which it can then transfer to the

purchasing customer. This may be a simultaneous transaction, so that the retailer justreceives the difference between the selling price and the loan amount.

Floor planning is often provided by a finance company owned by the manufacturer. The

manufacturer and its associated finance company will provide various bargains to induce

the retailer to overload on inventory. This smooth out the manufacturing process and places

a lot of product in the dealers showroom, which presumably will help sales. Slow-moving

product is often provided to the dealer at zero financing cost as a way for the manufacturer

to handle excess inventory.

As a business lesson, count the number of cars in a dealers lot, calculate the estimated

value of those cars(maybe the number of cars _ $20,000),and multiply that by 1 percent per

month (the interest the dealer has to pay on the loan). You can get an idea of how many

cars a dealer must sell each month just to cover its floor plan interest expense.

Revolving Credit: This is basically a working capital loan with accounts receivable and

inventory as collateral. The maximum amount of the loan is based on a formula tied to high

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quality inventory and accounts receivable. For example, the maximum amount might be 75

percent of accounts receivable less than 60 days old and 50 percent of finished goods and

raw materials inventory less than 60 days old. This formula forces the company to make

regular payments and reduce the outstanding debt when the inventory is used and the

receivables are collected. Because of the pressure to repay and the constant monitoring of

working capital, it would be very dangerous for a company to use this form of funding to

support long-term projects. Some banks require what is known as a cleanup period. This

means that for some period of time, perhaps one month per year, the loan balance must be

zero.

Zero-Balance Accounts:This type of account may very well be required by another loan

agreement. In a regular loan, the borrower collects funds from its customers, deposits the

funds in the company checking account, and makes some sort of payment to the lender for

principal and interest on the loan. With a zero balance feature, the loan and the checking

account are connected. When customer payments are deposited in the checking account,

the funds are automatically used to reduce the loan balance and pay the interest that is due.

Since the account balance is therefore zero, when the company writes checks, these checks

increase the loan balance.

This feature is very similar, conceptually, to the overdraft privileges attached to individuals

checking accounts(although individuals usually decide how much of the funds they deposit

should be used to reduce the loan balance, subject to a minimum monthly payment). This

feature can be very beneficial to the company because float is reduced to zero. Customer

payments automatically reduce the loan balance. The interest rate may also be

advantageous because the bank knows that as the company receives payments from its

customers, the loan will be repaid. Also, the company borrows only the exact amount it

requires.

Lines of Credit:A line of credit is not a loan, it is a very favorable method of securing a

loan. The cliche describing this arrangement is borrow when you dont need it so that you

will have it when you do.

Suppose that a company is considering expansion plans or a major expenditure, to take

place sometime within the next six months. The companys balance sheet is strong, and its

need for the loan is uncertain, or at least not immediate. The company can go to the bank

and arrange for a line of credit. This is an advance reservation that makes funds available, to

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The advantages of a line of credit are:

The loan is arranged at the timing of the borrower.

The funds are available; they can be used or not, at the choice of the borrower.

The company is in a position to make major purchase commitments knowing that this and

maybe other financing options are available. It provides considerable purchase price

bargaining power. Interest payments do not begin until the funds are actually needed.

The company will pay a reservation fee, probably in the range of 1 percent of the total line.

Payment terms, interest, and other fees and collateral requirements will be the same as

those on any other loan and are always negotiable. This is conceptually the same as a

homeowners equity line of credit.

Credit Cards: More and more customer orders are being placed by phone or by computer

over the Internet. Allowing the customer to pay by credit card accomplishes a number of

things: It eliminates accounts receivable, thus eliminating the wait for the money and the

associated paperwork. The customers creditworthiness need not be evaluated. There will be

no overdue receivables. The customers can take as much time as they want to pay. For

smaller orders, waiting for customer payments and making the often inevitable collection

phone calls eliminates the profit. Although the company must pay the credit card fee, which

is approximately 2 percent, accepting credit cards will make small orders profitable.

Compensating Balances: Requiring compensating balances is a bank strategy that

increases the effective cost of borrowing money without increasing the stated interest rate. A

compensating balance means that the borrower is required to keep a certain minimum

balance in the checking account at all times.

If a company borrows $1,000,000 for one year at 10percent, the interest rate is obviously 10percent. If, however, a 10 percent compensating balance is required, the borrower has the

effective use of only $900,000. This results in an effective rate of 11 percent. If the borrower

really needs $1.0 million, it must borrow approximately $1.1 million.

Along with loan origination fees, collateral audit fees, search fees, and other such charges,

compensating balances are a cost of borrowing and can be negotiated.

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Short Term Loans ofEBL

Eastern Bank Limited Lends for both short term and long term. But the maximum lending

activities of the Eastern Bank is for short term. Eastern Bank helps export import. So it gives

loan to the businessmen for the smooth functioning. The tenure of the short term loan is

maximum one year. So the borrower has to pay the loan within one year.

Eastern Bank Provides Following types of Short term loans:

LIST OF SHORT TERM LOAN PRODUCTS OF EBL

NAME DESCRIPTION PURPOSE RISK

FACTOR

TENOR

/

VALIDI

TY

Interest

Rate

PAD Payment Against

Document.

Advance

Against

Sight L/C

Forced Loan.

Recourse

on Title to

Import

Document.

21Da

ys per

Banglad

esh

Bank.

13%

CC

(HYPO)

*Cash Credit Against

Hypothecation of

Inventory and Book

Debts.

To Finance

Inventory.

Other Business

Operations.

General

Purposes.

Recourse

on Sales.

Ever Green.

12

Month.

13%

CC

(PLEDG

E)

Cash Credit Against

Pledge of Inventory

and Hypothecation of

Inventor.

To Finance

Pledge Inventory.

Recourse

on Pledge

Inventory.

High

Monitory Risk.

Ever Green

12Mo

nths.

13%

ACCEPT

ANCE

Acceptance Against

ULC.

To Finance

Assets throughu

Bankers

Recourses

on Sales.

12Mo

nths.

13%

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Acceptance.

OAP Own Acceptance

Purchase.

To Refinance

Banks

Acceptance.

Forced Loan.

No

Recourse

CleanFinance.

Ever Green.

12Mo

nths.

13%

LBPD Local Bill

Purchased.

To

Purchase/Discoun

t Against .Loan.

Upfront Interest

to be Realized.

Recourses

on Banks thru

Acceptance.

Residual on

Client.

45/18

0Days.

13%

LAFBD Loan Against

Foreign Bill

Documentary.

To

Purchase/Discoun

t Export Doc,

Against Export

Contract Sight/

Usance.

Upfront Interest

to be Realized

(diff in FX Rate).

Recourse

on export Doc.

Payment risk

Residual on

Client.

45/18

0Days.

13%

SLC Sight Letter of

Credit.

For Importation. Recourse

on Title to

Import

Document.

12Mo

nths.

13%

ULC Usance Letter of

Credit.

For importation. Recourse

on Sales.

12Mo

nths

13%

LG

*L

etter of Guarantee.

For Contractual

Obligation.

*Performance

Risk.

*Ever Green.

*Specifi

c

Period.

*Open

Ended.

13%

PC Packing Credit

Against Export L/C&

Export Order.

To Finance

Export L/C.

Preshipment

Finance.

Performanc

e Risk.

Lien on

Export L/C.

180

Days.

7%

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SOD Secured Overdraft. General

Purposes.

100% Cash

Covered.

*No Credit

Risk.

Ever Green.

12

Months.

13%

OD Overdraft Against

Other Collateral

General

purposes

High Credit

Risk

Recourse

on Sales

Ever green

12

months

13%

Import

Loan

(Hypo)

Import Loan Against

Hypothecation

Inventory and Book

Debts

To Finance

Import L/C or

Against Contract.

Recourse

on Sales.

180

Day.

13%

Import

Loan

(Pledge)

Import loan Against

Imported Merchandise

Pledged and

Hypothecation of Book

Debts.

To Finance

Import L/C

Merchandise

under Pledged.

Recourse

on Pledge

Inventory.

High

Monitory Risk.

180

Days.

13%

DemandLoan

(Hypo)

Demand LoanAgainst Hypothecation

of Inventory and Book

Debts.

To FinanceInventory Procure

Locally.

To Finance

Duty/Tax.

Recourseon Sales.

180Days.

13%

Demand

Loan

(Pledge)

Demand Loan

Against Pledge

Inventory Procedure

Locally andHypothecation of Book

Debts.

To Finance

Inventory Procure

Locally under

Pledge.

Recourse

on Pledge

Inventory.

HighMonitory Risk.

180

Days.

13%

Time

Loan

Time Loan Against

Foreign Bill-Clean

To Finance

Export Contract

Clean

Finance

Performance

Risk.

120

Days

13%

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BCP

(Foreign)

Bankers ChequePurchase (Foreign)

To Purchase

/Discount Foreign

Currency.

..Drafts/Payment

Order.

Upfront Interest

to be Realized.

Recourse

on Banks.

Residual on

Client.

30

Days.

13%

BCP

(Local)

Bankers Cheque

Purchase (Local).

To Purchase

/Discount Bank

Draft /Pay Order.

Upfront Interest

to be Realized.

Recourse

on Banks.

Residual on

Client.

30

Days.

13%

Fwd FX Forward Contract. Cover

Exchange Risk

Against Letters of

Credit.

Performanc

e Risk.

180

Days.

13%

Secured Overdrafts (SOD):

It is a continuous advance facility. By this agreement, the banker allows his customer to

overdraft his current account up to his credit limits sanctioned by the bank. The interest is

charged on the amount, which he withdraws, not on the sanctioned amount. The processes

of extending SOD are as follows

The party must have a current A/C with the branch.

If the ownership of the firm is proprietorship, then a trade license must be submitted

and in case of a limited company, all the documents required to open a current A/c

should be submitted. The financial statements of the concerned firm should also be

submitted.

The party must maintain a good transaction with the branch and have a good

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The party will apply to the officer in charge of credit department (SME) of the branch

for SOD arrangement.

The concerned officer will prepare a Credit Memorandum (CM), where he writes

about the business concern, details of proprietors/ directors of the concern,management structure, the existing credit facilities, the particulars about the facilities

that asked for-such as margin limit, date of expiry, details of security, and any other

relevant information. Then the proposal is sent to the Head Office for approval.

The credit risk management (CRM) department analyzes the proposal and

scrutinizes all the factors regarding this proposal. If they are satisfied then they

approves the proposal. The proposal is declined if this department thinks the

applicant is not worthy to get loans. They sometimes approve the proposal with someadditional conditions.

Then the head office approval is sent to credit Administration department and this

department is supposed to do the formalities regarding security documentation which

are to be kept under banks custody.

After all necessary documentation, this department issues two copies of sanction

letter, one is given to client and another is kept with the Credit Admin department In

both the sanction letter the client signs after accepting all the terms and conditions.

If the client accepts all the conditions of the sanction letter and likes to avail the

facility, then the amount sanctioned is loaded in a separate OD account. Now the

client can avail this overdraft facility anytime from the bank.

Cash Credit (CC):

Cash Credit (CC) is an arrangement by which a banker allows his customer to borrow

money up to a certain limit. It is operated like overdraft account. Depending on the needs of

the business, the borrower can draw on his cash credit account at different time and when

he gets money can adjust the liability. Depending on charging security there are 2 forms of

cash credit-

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Cash Credit

CC (Hypothecation) CC (Pledge)

Fig: Types of Cash Credit (CC)

Cash Credit (Hypothecation):

The mortgage of movable property for securing loan is called hypothecation. Hypothecation

is a legal transaction whereby goods are made available to the lending banker as security

for a debt without transferring either the property in the goods or either possession. The

banker has only equitable charge on stocks, which practically means noting. Since the

goods always remain in the physical possession of the borrower, there is much risk to the

bank. So, it is granted to parties of undoubted means with the highest integrity.

Cash Credit (Pledge):

Pledge is the bailment of goods as security for payment of a debt or performance of a

promise. Bailer in this case of called the Pawnor and the bailee is called the Pawnee. In a

contract of pledge, pawnor must deliver the goods pledged to the Pawnee either actually or

constructively. Transfer of possession in the judicial sense, is essential in the valid pledge. In

case of pledge, the bank acquire the possession of the goods or a right to hold goods until

the repayment of credit with a special right to sell after due notice to the borrower in the even

of non-repayment. The legal framework in this regard is the Contract act-1872.

Processes of opening a CC A/C are shown in the following flow chart-

The interested party must have a current account and good transaction with the

branch.

Applies for cc hypothecation or cc pledge arrangement.

The concerned officer prepares a Credit Proposal detailing all relevant information.

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After getting the cash credit arrangement, the banker will issue a cheque-book for

withdrawing cash from account. Whenever the CC account holder wants to withdraw cash

from the account, the cash officer will scrutinize the amount of cheque in order to make sure

that the total drawing does not exceed the sanctioned limit.

The charge documents required for opening a CC account are as follows-

Demand Promissory Note (DP Note)

Letter of Agreement

Revival Letter

Letter of Continuity

Letter of Hypothecation/Pledge

Letter of Guarantee

Memorandum of Deposit of Title Deed (in case of CC hypothecation arrangement)

Stock Report

Letter of Disclaimer

Purchases & Discount of Bills:

Purchase and Discount of Bills is also a special form of advances, MBL normally purchase

demand bills of exchange that are called Drafts accompanied by documents of title to

goods such as Bill of Lading, Railway or Truck Receipt. The purchase of bills of exchange

drawn at an issuance, i.e., for a certain period maturing on a future date and not payable on

demand or sight is termed as discounting a bill and the charge recovered by Bank for this is

called Discount.

GUARANTEE:

The branch offers three types of Guarantee that are as follows:-

Tender or Bid Bond Guarantee:

The tender guarantee assures the tenderee that tenders shall uphold the conditions of his

tender during the period of the offer as binding and that he / she will also sign the contract in

the event of the order being granted.

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Legal fee: Examination and technical assistance fee (in case of project).

Loan Processing Time:

It varies with the nature of loan - Trade finance - 1-2 weeks-Loan Proposals require BOD

approval-3 weeks-Secured overdraft (SOD) - IF a third party issue the financial instrument

than it may take more time. Otherwise, within a day by the manager .In case of a big

amount of short term finance, if requires BOD approval and so, it may take even a month to

sanction.

Paper/ Documents Required:

Security documentation includes Accepted sanction letter, Letter of continuity, Letter of

Revival, Demand promissory note, Personal guarantee of the client, Letter of authority,

Letter of lien, Trade license, Tax identification number, Business plan, Cash flow statement,

Fund flow statement, Balance sheet, Income statement, etc.

Criteria ofShort Term Loan

Tenure: maximum One year

Profit Rate : 13% pa. But changes with the level of the risk

Security: Security is Mandatory

Profit Compounding: Profit is not compounded in case of repayment of the

loan.

Profit Calculation: Loan Amount Profit rate (365/360)

Account with the Bank: Account with the bank is mandatory.

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Procedures for Giving Advances

EBL usually follows these steps for sanctioning any kind of advances as available with the

branch-

First step:

The prospective borrower will submit a request letter to the branch for loan.

Second step:

After receiving the request letter, EBL sends a letter to Bangladesh Bank for obtaining a

report from CIB (Credit Information Bureau). The purpose of the report is to being informed

that whether the borrower has taken loan from any other bank(s); and if taken, whether

these loans are classified or not.

Third step:

After receiving CIB report, if the bank thinks that the prospective borrower will be a good

borrower, then the bank will scrutinize the document. In this stage, the Bank will look

whether the documents are properly filled up and signed.

Fourth step:

This is the processing stage. The branch will prepare a Proposal. The proposal contains

following relevant information-

1. Borrowers name

2. Business Address

3. Factory address

4. Country of Incorporation:

5. Sector / Code:

6. Operating CASA Acc No:Page | 21

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7. Company Established:

8. Relationship Since:

9. Group position

10. Purpose of request:

11. Purpose of facility

12. Repayment source

13. Collateral / security/ support

14. Terms & conditions:

15. Declaration:

All procedures in respect of opening of Account have been complied with.

All necessary documents establishing the borrower's legal entity have beenobtained.

Existing Securities / Banking documentations and collaterals with their valuation

have been checked and they are in order.

Documents establishing that proposed facility is within authorization and

borrowing powers of the applicant have been obtained.

All Assets offered as security / collateral have been verified to be free from all

encumbrances.

Security documents as prescribed have been obtained along with complete set of

borrowing documents.

The borrower is a Director / Shareholder of our Bank.

The borrower is a Director / Shareholder of other Bank. If yes, which Bank.

The borrower is a Director of any Non Bank Financial Institution (NBFI). If yes,

which Financial Institution

CIB report dated __/__/____ from Bangladesh Bank is satisfactory and is in file.

17. Board of directors/ partners/ sole proprietor:

18. Management:

19. Legal status & company background (include the locations of the

Business, project, factory, machinery details):

20. Management evaluation, risk & mitigants:

21. Industry / line of business:

22. Major competitors/ competitive position / risk & mitigants:Page | 22

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(market share, revenue & margin comparison with the competitors to be provided)

23. Status of the borrower with competitor banks n/a

24. Relationship history, profitability and account strategy: new account

25. Financial evaluation:

26. Analysis of sources of repayment (financial, security, collateral etc):

27. Borrower/ obligor risk grading: n/a

28. Issues/ exceptions relating to documents, securities and terms/ conditions &

covenants:

29. Justification of limit, facility structure & recommendation:

The branch has to send the proposal to the head Office. Head Office will prepare a minute

and submit it before the Credit committee.

Fifth step:

After receiving the sanction advice, the branch will collect necessary documents. These

documents are:

1. Joint promissory note

2. Single promissory note

3. Letter of undertaking

4. Loan disbursement letter

5. Debit figure confirmation sheet

6. Letter of continuity

7. Letter of authority

8. Letter of revival

9. Right of recall the loan

10. Letter of guarantee

11. Letter of indemnity

12. Trust receipt

13. Hypothecation of goods

14. Hypothecation of vehicles

15. Counter guarantee

16. Letter of lien

17. Letter of lien

18. Letter of lien in case of advance against FDR

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19. Letter of lien and authority of advances to third parties against

fixed deposit/call deposit/special deposit or margin or margin

deposit

20. Letter of authority to encash FDR

21. Letter of agreement for packing credit

22. Letter of guarantee for opening L/C

23. Charges over bonds or certificates or shares etc. By third party

to secure specific and general liability

24. Memorandum of deposit of title deeds

25. Hypothecation of goods to secure a demand cash credit or

overdraft/loan amount Guarantee by third party.

Sixth step:

After verifying all the documents the branch disburses the loan to the borrower. A Loan

Repayment Schedule is also prepared by the branch and is given to borrower.

Seventh step:

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

Constant Supervision, Monitoring & Follow-up.

Working Capital assessment.

Stock report.

Break Even analysis

Ensure end use and utilization of investment for appropriate purpose

Submission of monthly statement of overdue accounts 9 having two or more

overdue) to Head Office within 10th of subsequent month on the following format:

Page | 24

SL

Cu

sto

mer

N

am

e

Disbursed

Amount

Expiry

Date

Cumulative due

for Recovery

Cumulative

recovery

Cumulative

overdue

Remark

s

No. of

Ins.

Amount No. of

Ins.

Amount No. of

Ins.

Amount

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Eighth step:

The loans are repaid in installments. These installments are according to bank directives.

Some loans are repaid all at a time. If any loan is not repaid the notices are served to the

customer. Sometimes legal actions are also taken for recover the loan.

Charging Security

EBL charges the following two types of securities-

1. Primary security

2. Collateral security

The modes of charging securities usually followed by the branch are as follows

a. Pledge

b. Hypothecation

c. Lien

d. Mortgage

e. Assignment

f. Set-off

Lien:

Lien is the right to retain possession and not right of ownership. Banks lien is general lien

over its own financial obligation to clients. Property under line cannot be realized / sold and

proceeds thereof cannot be appropriated without notice to the owner and sometimes without

courts order.

Hypothecation:

This is mortgage of movables by an agreement and here neither possession nor ownership

is transferred. Hypothecated goods cannot be sold out/disposed of off without notice and

courts order. However, if a special power of attorney is taken in that case it can be disposed

off without going to the court.

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Pledge:

Pledge is the bailment of goods as security of payment of debt or performance or promise.

Here, title and ownership are not transferred. Pledge goods may be sold out and proceedsthereof may be appropriated towards adjustment of Liability in case of failure of the borrower

to repay of fulfill the terms and conditions. EBL has no charge of this type.

Mortgage:

Mortgage is the transfer of interest of immovable property to secure the repayment of money

advanced. Ownership remains with the mortgagor. In case of equitable mortgage, courts

order is necessary and in case of registered mortgage courts order is not necessary for

sale/disposal of the mortgaged property for adjustment of advance. the legal framework in

this regard is the Transfer of Property Act-1982.

Assignment:

Assignment means the transfer of any existing or future right, properly or debt by one person

to another. The person who assigns the property is called the assignor and the person to

whom it is transferred is called the assignee. This charge is applicable to Book Debts,

Insurance Polity etc.

Set-Off:

Set-off means the total or partial merging of a claim of one person against another in a

counter claim by the latter against the former. Set-off arises when a debtor or his creditor

wishes to arrive at the figure owing between them when separate accounts or debt are

involved.

Case Study : One (Regular)

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Md. Ala-Uddin is a businessman . He is the owner of Soberzon Printing &

Media, Noyabazar, Dhaka. He took a loan from Eastern Bank Limited,

Motijheel Branch, for his business to fulfill the working capital need, on

October 5, 2009.

Loan amount was Tk. 12,00,000

Loan Type: Cash Credit (Hypo)

Mark up profit rate was 13% per annum.

Security: Two Printing machines with a market value of Tk.21,50,000

So profit for 1 year is = 1200000 0.13 (365/360)

= 158166

Bank Debited his account with the amount, Tk. ( 1200000+158166)

= Tk.13,58,166

On January 4, 2010 he repaid the loan.

His interest was for 90 days = 1200000 0.13 (28/360)

= 12,133

He repaid total amount of tk.12,12,133

Bank again credited residual amount of Tk.( 1358166 1212133)= Tk.

146033

Ledger of This loan is given below

Date Particulars Debit Credit Closing Balance

05/10/2009 Loan 1200000 -1200000

11/10/2009 Profit 158166 -1358166

08/11/2009 Repayment 1212133 -146033

08/11/2009 Rebate Profit 146033 0

Case Study: Two (Default Loan)

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Md. Abul Bashar is a businessman . He is the owner of Bashar Light

Fittings, Jatrabari, Dhaka. He has taken a loan from Eastern Bank

Limited of amount Tk. 300000 on 10/05/2009.

The purpose of the loan was to purchase lighting systems and electrical

wires.

Mark up profit rate is 13% per annum.

The Loan term was for 180 days.

He kept 4.31 decimal land in Demra as collateral.

So profit for 180 days was = 300000 0.13 (180/360) = 19500

Bank Debited his account with the amount Tk. ( 300000+19500)

= Tk.319500

On 06/11/2009 he paid Tk.110000.

Defaulted amount = 319500 110000 = Tk. 209500

Ledger of This loan is given below

Date Particulars Debit Credit Closing

Balance10/05/2009 Loan 300000 -300000

10/06/2009 Profit 19500 -31950006/11/2009 Repayment 110000 -209500

Steps Taken:

Persuasion & Pressure are continuing. The loan was rescheduled.

Decision about collateral: The collateral will not be liquidated soon, because there

is a lengthy and cost worthy procedure to liquidate the collateral. So bank will

continue persuasion and pressure.

Conclusion

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The lending function of a bank needs to add value to the bank. The lending function

comprises organizations, funding, monitoring and servicing of loan. This process is an

ongoing one that beings when a loan application is made and screened and continues until

the loan is repaid. Now unpaid loans are incomplete transactions for lenders. These

incomplete transactions will not add rather destroy value. The primary danger in granting

loan or credit is the possibility that the transaction may remain incomplete or in other words,

the borrower may not repay the loan on a timely basis, which is properly known as credit risk

or default the loan on a timely basis, which is properly known as credit risk or default risk.

Proper and prudent management of default risk is the way to create value in the lending

function. Excessive credit risk manifests itself in the form of excessive non-performing loans

and loan loss provisions, which destroy bank value. Therefore, the value creation objective

on the part of banks can be achieved by emphasizing the prevention of potential non-

performing loans and identification and resolution of existing problem loans.

The question of loan default is related with (non) recovery / repayment of loans. When a

borrower cannot repay interest and/or installment on a loan after it has become due, then it

is qualified as default loan or non-performing loan. It is known as non-performing, because

the loan cases to perform or generate income for the bank. The default/non-performing loan

is not a uni-class, rather a multi-class concept. It implies that the default/non-performing

loans can be classified into different groups usually based on the length of overdue of the

said loans. The international standard classification terminologies are sub-standard, doubtful

and bad/loss loans. The prudential guidelines also call for making adequate provisions

against classified loans in order to protect the financial health of the banks. The economic

implications of the non-performing / default loans are not only stoppage of creating new

loans but also the erosion of banks profitability, liquidity and solvency, which might

sometimes lead towards collapse of the banking financial system. It has, therefore become

essential for policy makers to study the loan default scenario of the banking sector on a

routine basis for estimating classified loan, making appropriate provisioning, adoptingeffective recovery strategy and thus ensuring soundness and efficiency of the banking

sector.

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References

Introduction to Financial Management Charles p. Jones

Financial management and policy- James C Vanhorne

www.ebl.com.bd

http://finweb.com

www.investopedia.com

Mr. M. Nazeem A.Chowdhury, Senior Executive, EBL Motijheel Branch,

Dhaka

http://www.referenceforbusiness.com/small/Inc-

Mail/Loans.html#ixzz0nFcQSm8j

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http://www.ebl.com.bd/http://finweb.com/http://www.investopedia.com/http://www.referenceforbusiness.com/small/Inc-Mail/Loans.html#ixzz0nFcQSm8jhttp://www.referenceforbusiness.com/small/Inc-Mail/Loans.html#ixzz0nFcQSm8jhttp://www.ebl.com.bd/http://finweb.com/http://www.investopedia.com/http://www.referenceforbusiness.com/small/Inc-Mail/Loans.html#ixzz0nFcQSm8jhttp://www.referenceforbusiness.com/small/Inc-Mail/Loans.html#ixzz0nFcQSm8j

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Appendix

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