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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Short-Term Loans of Eastern Bank Ltd.

2010

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 the information 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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Short-Term Loans of Eastern Bank Ltd.

2010

Overview of Eastern 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 of

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Short-Term Loans of Eastern Bank Ltd.

2010

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 of EBL
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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Short-Term Loans of Eastern Bank Ltd.

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The structures and functions of each of these divisions of EBL are described below: -

Short-Term Loan
A short-term bank loan is a business loan from a commercial bank that will be repaid within one year. Short-term bank loans are an important source of negotiated short-term financing for many firms. Whenever firms have short-term need for funds that cant be satisfied with trade credit and internally generated funds, they often turn first to bank credit, which also serves as a financing reserve. Short-term loan is a single-purpose special commitment loan with a maturity of less than one year. Its purpose is to cover cash shortages resulting from a one-time increase in current assets, such as a special inventory purchase, an unexpected increase in accounts receivable, or a need for interim financing. Trade credit is another type of short-term loan. It is extended by a vendor who allows the purchaser up to three months to settle a bill. In the past it was common practice for vendors to discount trade bills by one or two percentage points as an incentive for quick payment.

Characteristics of Short-Term Loans

Short-term Loans have the following distinguishing characteristics:

1. Time to maturity: Time to maturity describes the length of the loan contract. Maturity
of short-term loan is upto 12 months.

2. Repayment Schedule: Payments may be required at the end of the contract or at

set intervals, usually on a monthly or semi-annual basis. The payment is generally comprised of two parts: a portion of the outstanding principal and the interest costs. The borrower pays interest on the principal loan amount and is expected to retire the principal at the end of the contract through a balloon payment or through refinancing.

3. Interest: Interest is the cost of borrowing money. The interest rate charged by
lending institutions must be sufficient to cover operating costs, administrative costs,

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Short-Term Loans of Eastern Bank Ltd.

2010

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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Short-Term Loans of Eastern Bank Ltd.

2010

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 form

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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 common in 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 just receives 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 be used only if and when they are needed.

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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 10 percent. 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 of EBL

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 21Da to ys esh Bank. 12 Month. per Banglad

Interest Rate

PAD

Payment Document.

Against Advance Against Sight L/C Forced Loan.

Recourse on Title Import Document.

13%

CC (HYPO)

*Cash Credit Hypothecation Inventory Debts. and

Against To of Inventory.

Finance Recourse on Sales.

13%

Book Other Business Ever Green. Operations. General

CC (PLEDG E)

Purposes. Cash Credit Against To Finance Recourse Pledge Inventor. of Inventory Pledge Inventory. on High Monitory Risk. Ever Green Finance Recourses throughu on Sales. and Hypothecation of Inventory.

12Mo

13%

Pledge nths.

ACCEPT ANCE

Acceptance Against To ULC. Assets Bankers

12Mo nths.

13%

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Acceptance. OAP Own Purchase. Acceptance To Banks Acceptance. Forced Loan. LBPD Local Purchased. Bill To Purchase/Discoun t Against .Loan. to be Realized. Against To Bill Purchase/Discoun t Export Against Contract Usance. Upfront Interest to SLC Sight Credit. Letter be Realized Recourse on Title Import ULC Usance Credit. LG etter of Guarantee. Letter of For importation. Document. Recourse 12Mo nths *Specifi c Period. *Open PC Packing Export Order. Credit To Finance Performanc e Risk. Lien Export L/C. on Ended. 180 Days. 7% 13% 13% 12Mo to nths. 13% (diff in FX Rate). of For Importation. Refinance No Recourse Clean Finance. Ever Green. Recourses Acceptance. Client. Recourse on export Doc. on 45/18 13% 12Mo nths. 13%

on Banks thru 0Days.

Upfront Interest Residual on LAFBD Loan Foreign Documentary. 45/18 0Days. 13%

Doc, Payment risk Export Residual Sight/ Client.

on Sales. *L For Contractual *Performance Obligation. Risk. *Ever Green.

Against Export L/C& Export L/C. Preshipment Finance.

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Short-Term Loans of Eastern Bank Ltd.

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100% Cash 12 Covered. *No Risk. Ever Green. Credit Months. 13%

SOD

Secured Overdraft.

General Purposes.

OD

Overdraft

Against General purposes

High Credit 12 Risk Recourse on Sales Ever green Finance Recourse months

13%

Other Collateral

Import Loan (Hypo) Import Loan (Pledge)

Import Loan Against To Hypothecation Inventory and Import

180 Day.

13%

L/C

or on Sales.

Book Against Contract. To Finance Recourse L/C on High 180 Days. 13% Inventory. 180 13%

Debts Import loan Against Pledged Debts. Demand

Imported Merchandise Import and Merchandise

Pledge Days.

Hypothecation of Book under Pledged. Demand Loan (Hypo) Loan To

Monitory Risk. Finance Recourse

Against Hypothecation Inventory Procure on Sales. of Inventory and Book Locally. Debts. To Finance Duty/Tax. Loan To Finance Recourse Pledge Inventory Procure on Procedure Locally and Pledge. High Monitory Risk. Finance Clean Finance Performance Risk. under Inventory.

Demand Loan (Pledge)

Demand Against Inventory Locally

180

13%

Pledge Days.

Hypothecation of Book Time Loan Debts. Time Loan Against To Foreign Bill-Clean

120 Days

13%

Export Contract

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Short-Term Loans of Eastern Bank Ltd.

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Purchase Recourse 30 Days. 13%

BCP (Foreign)

Bankers

Cheque To

Purchase (Foreign)

/Discount Foreign on Banks. Currency. ..Drafts/Payment Order. Upfront Interest Residual on Client.

BCP (Local)

Bankers

to be Realized. Cheque To Purchase Recourse /Discount Bank on Banks. Draft /Pay Order. Upfront Interest Residual on to be Realized. Cover Exchange Credit. Against Letters of Client. Performanc

30 Days.

13%

Purchase (Local).

Fwd FX

Forward Contract.

180 Days.

13%

Risk e Risk.

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 turnover rate.

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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 some additional 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) Fig: Types of Cash Credit (CC)

CC (Pledge)

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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Performance Guarantee:
A Performance guarantee expires on completion of the delivery or performance. Beneficiary finds that as a guarantee, the contract will be fulfilled in every respect and can retain the guarantee as per provision for loan time. This can be counteracted by including a clause stating that the supplier can claim under the guarantee, by presenting an acceptance certificate signed by the buyer.

Payment Guarantee:
This makes guarantee that the party will make payment after completion of the work.

Loan Programs/ Schemes:

The Bank provides Loans and Advance to Individual, Business entities group, Industries etc. It provides loan to both Trading and Manufacturing concern on Hypothecation and Pledge basis. Industrial loan also extended by the bank on Hire Purchase basis. Loan also provided by the bank for Foreign trade against imported materials and Confirmed L/C. Bank has two types of loan programs:

Loans:
LOAN: Loan in the form of revolving credit and frequent Repayment and Adjustment. ADVANCES: Loan in one shot disbursement and at a time repayment. The bank allows advanced on secured basis. Security and Collateral in the node of cash, quasi-cash and goods /real estates are taken by bank commonly.

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Basic Information of Loan:

Type(s) of Loan: Trade Finance, Finance against work order, Individual loans against security, Purchase of bills/Bill discounting, Letter of credit. Amount of Loan: requirement. Rate of Interest (Floating rate): Rate range from 11% to 13%. Normal client 13% Special or valued client - 11%. (Computed interest is charged on daily product basis and interest realized quarterly). Term of Loan: 1-12 months, Loan can be adjusted earlier. No minimum amount is fixed up. Amount is fixed on the basis of

Mode of Repayment:
Loans: Repayment is made any time in case of revolving credit. Advances: The entire receivables including interest is repaid and adjusted at the end of term loan. No debit balance should be in the account. Security/Collateral: Hypothecation / Pledge of raw materials, Stocks, Hypothecation of furniture, Fixture and machinery and other goods, Building and other immovable properties and DP note.

Loan Processing Cost:

Application fees: No fee. Documentation fee: Actual basis. Appraisal fee: 5% - 1% of the total loan sanctioned.

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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 sanction. 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

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 of Short 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. Page | 20

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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 information1. 2. 3. 4. 5. 6. Borrowers name Business Address Factory address Country of Incorporation: Sector / Code: Operating CASA Acc No:

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7. 8. 9. 10. 11. 12. 13. 14.

Company Established: Relationship Since: Group position Purpose of request: Purpose of facility Repayment source Collateral / security/ support Terms & conditions: Declaration:

15.

All procedures in respect of opening of Account have been complied with. All necessary documents establishing the borrower's legal entity have been obtained. 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. 18. 19. 20. 21. 22.

Board of directors/ partners/ sole proprietor: Management: Legal status & company background (include the locations of the Business, project, factory, machinery details): Management evaluation, risk & mitigants: Industry / line of business: Major competitors/ competitive position / risk & mitigants:

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(market share, revenue & margin comparison with the competitors to be provided) 23. 24. 25. 26. 27. 28. 29. Status of the borrower with competitor banks n/a Relationship history, profitability and account strategy: new account Financial evaluation: Analysis of sources of repayment (financial, security, collateral etc): Borrower/ obligor risk grading: n/a Issues/ exceptions relating to documents, securities and terms/ conditions & covenants: 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. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.

Joint promissory note Single promissory note Letter of undertaking Loan disbursement letter Debit figure confirmation sheet Letter of continuity Letter of authority Letter of revival Right of recall the loan Letter of guarantee Letter of indemnity Trust receipt Hypothecation of goods Hypothecation of vehicles Counter guarantee Letter of lien Letter of lien 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. 21. 22. Letter of authority to encash FDR Letter of agreement for packing credit 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:
Cu sto SL mer N am e Disbursed Amount Expiry Date Cumulative due for Recovery No. of Amount Ins. Cumulative recovery No. of Amount Ins. Cumulative overdue No. of Amount Ins. Remark s

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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 securities1. 2. Primary security 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 proceeds thereof 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 05/10/2009 11/10/2009 08/11/2009 08/11/2009 Particulars Loan Profit Repayment Rebate Profit Debit 1200000 158166 1212133 146033 Credit Closing Balance -1200000 -1358166 -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
= Tk.319500 Bank Debited his account with the amount Tk. ( 300000+19500)

On 06/11/2009 he paid Tk.110000. Defaulted amount = 319500 110000 = Tk. 209500 Ledger of This loan is given below
Date 10/05/2009 10/06/2009 06/11/2009 Particulars Loan Profit Repayment Debit 300000 19500 110000 Credit Closing Balance -300000 -319500 -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 nonperforming 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, adopting effective 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/IncMail/Loans.html#ixzz0nFcQSm8j

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Appendix

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